Giáo trình managerial accounting 2nd by balakrishnan

MANAGERIAL
A C C O U NT I NG
S e c on d E dition



MANAGERIAL
AC C O U N T I N G
S e c on d Edition

RAMJI BALAKRISHNAN
The University of Iowa

K . S I VA R A M A K R I S H N A N
Rice University

G E O F F R E Y B. S P R I N K L E
Indiana University

John Wiley & Sons, Inc


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Dedication

Ramji Balakrishnan
To my parents, Usha, Vasu and Uma

K. Sivaramakrishnan
To my father, my sisters Viji and Parvathi, my wife Devika,
my daughter Vidya, and in loving memory of my mother

Geoffrey B. Sprinkle
To Shari, Jason, Jack, and Scott



About the Authors
Ramji Balakrishnan is the Harry B. Carlson-KPMG Professor of Accounting at
the University of Iowa. Ramji has a B.Sc. in Statistics from the University of Madras
in 1977, an MBA from the Indian Institute of Management, Ahmedabad, in 1979,
and a Ph.D. from Columbia University in 1986. He is a Certified Management
Accountant and is a recipient of the Robert Beyer Bronze Medal. A top-rated teacher,
he has taught managerial accounting at the undergraduate, graduate and doctoral
levels. He joined the University of Iowa in 1986 and has been there since except for
a year at Georgia State University. He has published widely in top-tier journals, with
several of his papers being recognized as “Outstanding Contributions.” He serves
on several editorial boards and is the Editor of the Journal of Management Accounting
Research. A sought after speaker, he has delivered workshops in Asia, Europe and
North America. He was the President of the Management Accounting Section of
the American Accounting Association for 2005-2006

Konduru “Shiva” Sivaramakrishnan is the Henry Gardiner Symonds Professor
in Accounting at the Jesse H. Jones Graduate School of Business, Rice University.
He received his B. Tech in Engineering from the Indian Institute of Technology,
Madras in 1977, an MBA from Xavier Institute, Jamshedpur, India, in 1982, and a
Ph.D. in Accounting and Information Systems from the Kellogg Graduate School
of Management at Northwestern University in 1989. Prior to his current position,
he has held tenured faculty positions at Carnegie Mellon University, Texas A&M
University, and the University of Houston. Most recently, he held the Peggy Pittman
Eminent Scholar Chair at the Mays Business School, Texas A&M University. Dr.
Sivaramakrishnan has significant research and teaching accomplishments. His

research has appeared in premier journals such as The Accounting Review, Journal
of Accounting Research, Contemporary Accounting Research, Management Science, Journal
of Management Accounting Research, Accounting Horizons, Journal of Accounting and
Economics, and Review of Financial Studies. He has won numerous awards for teaching
excellence at both undergraduate and graduate levels.

Geoffrey B. Sprinkle Geoffrey B. Sprinkle is a Professor of Accounting and
Whirlpool Corporation Faculty Fellow at the Kelley School of Business at Indiana
University. Geoff received his B.S. in Accounting and Master of Accountancy
degrees from Arizona State University and his Ph.D. from The University of Iowa.
He earned the Gold Medal in the state of Arizona on the May, 1989 CPA exam
and the Elijah Watts Sells award nationally. Geoff teaches in the areas of cost and
managerial accounting and has received numerous teaching awards. His work
has appeared in journals such as The Accounting Review, The American Economic
Review, Accounting, Organizations and Society, Behavioral Research in Accounting, Games
and Economic Behavior, the Journal of Management Accounting Research, and Issues in
Accounting Education.



Preface

Executive Summary
Compared to existing books on the market, we believe
our book offers several advantages and unique features. Below, we summarize the key attributes of our
text. In the pages following the summary, we provide
a richer discussion of our approach and pedagogy.
• We provide an easy to understand integrated
framework that links topics into a seamless
whole. In the early chapters, we introduce two

ideas: More costs and benefits become relevant
as a decision’s horizon expands, and all decisions involve a cycle of planning and control. We
implement the first idea by organizing the text
into modules corresponding to short-term and
long-term decisions. We then address planning
and control decisions within each horizon. We
are pleased to report that our colleagues and
we have received outstanding student feedback
on the tightly integrated nature of our text—
students and instructors report that chapters
follow naturally from one to the next, with
everything “fitting” together.
• Both the overall structure of the book and individual chapters emphasize using accounting
information for decision making. Across chapters,
we use the time-based template to emphasize the
links among the various decisions that managers make, enabling students to see the linkages
among seemingly unrelated decisions. Before
each module, we use a part-opener to remind
students about the relations among organizational decisions, and to place forthcoming topics
in the appropriate context. Within each chapter,
we maintain the focus on decision making by

exploring a specific business problem. Each
chapter also uses the same four-step approach
to solving business problems.
• Both the chapter text and end-of-chapter
materials provide a balanced coverage of
manufacturing and service sectors. Examples
considered in the chapters include a gym, a
caterer, a hospital, a consulting firm, a copy

center, and a call center. Moreover, every
chapter contains numerous exercises and
problems relating to service and nonprofit
settings. We have received rave reviews from
instructors and students about both the breadth
and depth of our end-of-chapter materials.
• The book is student friendly. Our initial
drafts used a conversational tone and everyday examples to illustrate concepts. We then
subjected these drafts to several rounds of
review by English editors, undergraduate students, and faculty to increase accessibility and
impact. In addition to the standard exhibits, we
include “Check It!” boxes of mini-worksheets that
students can use to verify and fine-tune their
understanding of the material.
• We maintain the integrity of the framework while
allowing instructors the flexibility to modify coverage to best suit their individual needs. We help
instructors by presenting several sample syllabi
that show alternate sequencing of topics (please
see Section 5 in this Preface for further details).
The primary flexibility lies in whether, after covering basic terminology and cost flows, instructors
choose to cover product costing or to plunge
directly into short-term decisions.


x Preface

1. Introduction
Managerial accounting facilitates planning and control decisions. Planning decisions relate to choices
about acquiring and using resources to deliver products and services to customers (e.g., which products
and services to offer, their prices, and the resources

needed, such as materials, labor, and equipment).
Control decisions concern how much to delegate,
as well as how to motivate, measure, evaluate, and
reward performance.
Current managerial accounting textbooks generally
group product costing, cost management (ABC/ABM),
short-term decisions, and performance evaluation practices into four separate modules. This grouping allows
students to gain a working knowledge of current managerial accounting practices. However, while each book
may provide solid coverage on one or more important
dimensions, none offers a satisfactory, overarching
theme. The average student walks away with a collection of concepts and techniques but with little idea of
why things work the way they do. Armed with only the
“what” and the “how” but not the “why,” students have
no framework that lets them see the principles that drive
practice or helps them adapt to novel or changing
circumstances.
We provide instructors and students with a unifying,
problem-solving framework. We believe that the framework itself must be the key takeaway from any introductory managerial accounting course. By virtue
of its logic and internal consistency, the framework
allows students to:
• Understand the big picture.
• Examine new ideas and concepts and their
relation to existing practice.
• See how accounting information helps manage
a complex entity.
At the core of our framework is the one feature
common to all decisions—every decision involves a
cost-benefit trade-off. The decision could be personal
(should I eat out or make dinner?) or organizational
(should we continue using traditional performance

measures or switch to the balanced scorecard?). The
decision could relate to planning (how should we
price this product?) or control (where should we set
the sales quota?). The theme of systematically measuring costs and benefits to make effective decisions
runs throughout our text.
The first outgrowth of this theme, indicated by
the titles of the modules, is our emphasis on a
decision’s horizon. Time influences whether a cost

or benefit is relevant for decision. The costs of the
production plant and equipment are not relevant to
many short-term decisions. Thus, there is no need to
allocate these fixed costs to make effective short-term
decisions. In the long term, however, a firm can manage capacity costs by shrinking or expanding its investment in plant and equipment. Thus, to make effective
long-term decisions, a firm needs to identify variations in resource consumption patterns and create
allocation mechanisms that capture the cost impact of
these variations. Ultimately, when confronted with a
decision problem, the successful manager knows what
costs and benefits to include in the decision, and how
to measure these costs and benefits.
A second important aspect of our framework is an
integrated treatment of planning and control decisions. Planning and control are two sides of the same
coin. Diagnostic and feedback measures inform organizations of how well they implemented the plan,
thereby providing input for the next plan. Similarly,
performance evaluation and incentive schemes arise
in response to strategic aspects of the planning process. An integrated treatment highlights these links,
permitting students to perceive planning and control
decisions as part of the same framework.
PEDAGOGY
Students learn best from simple examples. Once

students understand the basic issues at an intuitive
level, it is easier for them to understand similar issues
in other business contexts. We therefore begin each
chapter with an example that students can readily
comprehend and to which they could relate. We then
walk students through the issues and use the vignette
as a springboard to more advanced settings.
In addition to linking topics across chapters, we
tightly integrate topics within a chapter. To this end,
each chapter tells a story. The opening vignette
serves to raise pertinent questions, and the chapter
answers these questions. In this fashion, the student
perceives the concepts as being interrelated and not
disjointed.
We note three other important features:
• We made a strategic decision to collaborate
on one chapter at a time; although more timeconsuming, this team-based approach ensures
that we choose the best among the many ways
of presenting the same material. This approach
ensures that the book speaks with one voice.


Preface
• We have tried to make the text extremely accessible. This allows instructors, after ensuring that
students understand the basics, to devote some
class time to higher-order learning and explore
conceptual and qualitative issues. As detailed in
Section 4, the end-of-chapter materials contain

xi

thought questions that instructors can use to initiate such discussions.
• We hope to surprise you with both the breadth and
depth of our end-of-chapter materials. We have
devoted substantial efforts to ensuring that the
problems and solutions are of the highest quality.

2. Audience
The typical student has limited exposure to business,
even though she may have taken courses in financial accounting and microeconomics. Accordingly,
the key task is both to explain the many kinds of
decisions needed to operate a successful business
and to communicate how managers use cost information in these decisions. It is not enough to know
prevalent practice. It is vital that the student understand whether and why a certain practice has merit
in a given situation. This understanding requires
a sound framework. In line with the adage about

teaching a man to fish, we believe that the average
student will appreciate our framework for decision
making.
The focus on using cost data for decision making
makes our book well suited for a course that employs
a user-perspective. We believe that such a userfocus is particularly appropriate for the introductory
course. It also is consistent with the widespread
move to change the curriculum from a technicalaccounting perspective to a business-oriented, or
process, perspective.

3. Organization of Content
Module I: INTRODUCTION
AND FRAMEWORK

Our first module contains three chapters. In Chapter
1, we illustrate a four-step framework for decision
making, and we distinguish how individuals make
decisions from how organizations make decisions. We
next introduce two important classes of organizational
decisions—planning decisions and control decisions.
We then discuss how organizations use managerial
accounting information for both planning and control.
We conclude Chapter 1 by examining the role of ethics
in decision making, and discussing how societal and
professional standards shape organizational decisions.
Making a decision requires that we identify what
costs and benefits to measure, and then estimate
them. Chapters 2 focuses on the principles that
help us accomplish these two tasks. We begin with
two principles, controllability and relevance, that

determine which costs and benefits to measure. Using
these principles, we offer an approach for grouping
business decisions per their horizon. This grouping
of decisions forms the basis for the modular approach
that unfolds. We next discuss the principles that are
fundamental to estimating costs and benefits: variability and traceability. Finally, we extend the principle of
variability to develop a hierarchy of costs, which helps
to increase the accuracy of estimated costs.
We conclude this introductory module with a
chapter on cost terminology and an overview of
how accounting systems record the flow of costs.
This chapter begins by discussing cost flows in a service environment such as a health club, where the
accounting and cost flows are somewhat intuitive.

We next move to cost flows in merchandising firms
to introduce the concept of an inventory account.
Finally, we consider manufacturing organizations.


xii Preface
Module II: SHORT-TERM PLANNING AND
CONTROL: MAXIMIZING CONTRIBUTION
We define the short term as a period over which organizations cannot change capacity costs arising from
long-term commitments related to property, plant,
equipment, and personnel. These costs, which we
often term fixed costs, are therefore not relevant for
short-term decisions. Accordingly, the goal for shortterm decisions is to maximize contribution margin,
which is revenue less variable costs.
We begin Module II with a discussion of how to
estimate relevant costs for short-term decisions. The
key here is to identify fixed and variable costs, leading us to discuss techniques such as account classification, the high-low method, and regression analysis.
We end this chapter by showing how a contribution margin statement helps managers organize the
resulting information to make effective short-term
decisions.
We devote Chapters 5 and 6 to planning decisions.
In Chapter 5, we introduce Cost-Volume-Profit (CVP)
analysis, a natural outgrowth of the contribution margin statement studied in the previous chapter. The
CVP relations among costs, volume, and profit provide
a convenient tool for profit planning. Following this,
we apply the CVP relation to evaluate decision options
and, in the process, illustrate how managers could use
the CVP relations to evaluate operating risk.
While CVP analysis is useful for overall profit planning, it is not suitable for many localized decision
problems that arise because of the temporary mismatch between the supply and demand for capacity

resources. Specifically, most organizations invest in
capacity resources such as plant, equipment, and personnel based on expectations of long-term demand.
Actual demand rarely equals anticipated demand,
however. In some periods, actual demand falls short
of expectations, meaning that managers must find
ways to utilize idle resources gainfully. At other times,
actual demand exceeds available capacity, changing the manager’s problem to one of extracting the
maximum benefit from available resources. In either
instance, organizations cannot fix the mismatch by
changing capacity because they cannot control capacity levels and costs in the short term. In Chapter 6,
we discuss two approaches—the incremental and
totals—to frame and solve such decision problems.
We illustrate these approaches in several contexts
such as make-or-buy, accepting a special order, and
allocating a scarce resource.
Chapter 7 examines operating budgets. Budgets
incorporate planning decisions on how and where to
use resources. Budgets also serve as the benchmark
for evaluating actual results, a control decision. In
this way, budgets bridge the planning and control

dimensions. We emphasize the tension between
the planning and control roles for budgets in our
discussion of both the mechanics of budgeting and
the budgeting process.
Chapter 8 focuses on short-term control decisions.
We begin by introducing the concept of a variance,
which is the deviation between a budgeted and actual
result. We then present the mechanics of variance
analysis, with a focus on using variances to reconcile

budgeted and actual profit. Finally, we emphasize the
link back to planning decisions by discussing how to
construct and interpret a profit reconciliation statement to determine possible corrective actions.

Module III: PLANNING AND CONTROL
OVER THE LONG TERM: MAXIMIZING
PROFIT
Over the long term, organizations can control most
costs considered fixed in the short term. That is, organizations can alter capacity levels over this horizon.
Thus, the goal for long-term decisions is to maximize profit, which is revenue less variable costs less
capacity costs. However, it often is difficult to estimate
the controllable costs for many long-term decisions
that pertain to individual products or customers.
The difficulty arises because products and customers
typically share capacity resources, meaning that organizations cannot trace capacity costs to individual
products and customers. In the language of Chapter
2, capacity costs are indirect costs. Consequently,
while performing a detailed account analysis to
estimate controllable capacity costs is the economically correct approach, it is not cost effective. Thus,
as a practical matter, firms use cost allocations to
approximate the change in capacity costs.
We devote Chapter 9 to cost allocations, a tool
that firms employ to estimate costs over the long
term. We begin by describing how a firm might use
allocations in a common decision problem—setting
prices. We note that firms allocate costs not just
for decision making but for other reasons as well,
including reporting income to external parties such
as shareholders and the IRS, justifying cost-based
reimbursements, and influencing behavior within

the organization. Accordingly, we discuss these uses
of cost allocations and how an allocation’s intended
purpose guides the choice of an allocation procedure. In this way, the chapter provides an integrated
discussion of the various demands for cost allocations
within an organization.
We focus Chapter 10 on activity-based costing
(ABC) and management. At its core, ABC is a
refined methodology for allocating capacity costs.
We examine how ABC can lead to better decisions


Preface
by improving estimates of controllable capacity costs.
We then discuss the steps associated with designing
product-costing systems and symptoms that might
help organizations decide if they need to update
the current costing system. We end by highlighting
some of the costs and benefits of implementing
ABC. ABC exploits the linkages among resources,
activities, and products to provide more accurate
measures of product profitability than traditional
allocation systems do. Thus, after describing the
mechanics of ABC, we discuss how to use ABC data
to improve profitability by managing products,
customers, and resources. Customer Profitability
Analysis allows organizations to identify profitable
and unprofitable customers, and suggests ways to
increase profit by managing customer relationships.
We refer to this and other uses of activity-based costing information to manage profit as activity-based
management, or ABM.

Despite their widespread use, allocations have two
limitations when used to make decisions: (1) They do
not consider the time value of money; and (2) they do
not consider the lumpy nature of capacity resources.
These limitations are of particular concern when the
firm is considering a large expenditure on a longlived resource. For such expenditures, organizations
routinely engage in capital budgeting, the focus of
Chapter 11. As operational budgets do for short-term
decisions, capital budgets provide the link between
long-term planning and control decisions. In particular, capital budgets provide an economic basis for
analyzing expenditures on capacity resources, and
control decisions focus on the effective use of these
resources.
Chapter 12 examines control decisions over the
long term. Most organizations delegate decisions over
the use of resources to managers lower in the organizational hierarchy. Decentralization leads to a conflict arising from the lack of goal congruence among
different levels in the organization. Accordingly, we
begin the chapter by discussing the benefits and
costs associated with decentralizing decision making.
We describe common forms of decentralization in
organizations and highlight the critical role of performance evaluation systems in these environments.
We discuss the principles that govern performance
measurement in organizations, and apply them to
measure and evaluate the performance of different
responsibility centers.
In Chapter 13, we discuss how an organization’s
strategy affects its cost structure and defines the
business and operational constructs that require
measurement. We also introduce and present the
balanced scorecard as a means of effectively integrating an organization’s strategy with its control

xiii

system. We begin with value chain analysis and
strategic planning. We introduce strategy and, using
real-world examples, highlight the critical linkages
between the value chain, strategy, and cost structure. We next discuss the impact of strategy on key
organizational processes. In each instance, our aim
is to show why the process configuration follows
naturally from the strategic choice and provides a
coms, 460–464
real options analysis in, 478
strategic impact of projects, 477–478
and taxes, 473–476
Cash budgets, 278–284
defined, 278
determining financing needs with,
283–284
inflow from operations, 277
net cash flow from operations, 282
outflow from operations, 277
special items, 283
Cash flows:
in capital budgeting, 464–469
and depreciation, 474
and IRR, 469
for operations, 277–280
present value of, 459, 477–479
Caterpillar, 87, 560, 592
Centralized decision-making, 264

Century Link, 375
Century 21 (company), 10
CEO, see Chief executive officer
Certified Financial Manager (CFM), 21
Certified Internal Auditor (CIA), 22
Certified Management Accountant
(CMA), 21
Certified Public Accountants (CPAs),
21–22
CFM (Certified Financial Manager), 21
CFO, see Chief financial officer
Charles Schwab, 561
Chicago Cubs, 30
Chicago Sun-Times, 210
Chief executive officer (CEO), 21
Chief financial officer (CFO), 21
Chief internal auditor (CIA), 21
Chipotle, 458
Chrysler, 177, 477
CIA, see Certified Internal Auditor; Chief
Internal Auditor
Cigna, 39
Citibank, 413, 425
Citigroup, 177, 509
Citizen Watch, 379
CMA (Certified Management
Accountant), 21
Coca-Cola Company, 516
Code of Ethics (IMA), 16, 23–24
Coefficients, regression, 127

COGM, see Cost of goods manufactured
COGS, see Cost of goods sold
Colorado Avalanche, 30
Common costs, 54
Compaq, 549
Competitive landscape, 549–550

Contexant, 576
Continental Airlines, 560
Contracts, 378–380
Contribution margins, 133
budgeted unit, 318
incremental, 210–212
maximizing, per unit of capacity,
223–225
in multiproduct CVP analysis, 177–183
unit, 162
Contribution margin ratio, 167
Contribution margin statements,
116–120
cost estimation with, 116–120
in decision-making, 117–121
defined, 116, 117
estimating cost structure with, 118–120
partial, 222. See also Gross approach
segmented, 132–133
Control:
with budgets, 312–313
budgets for, 260, 260–261, 312, 3313
nonfinancial, 329–332

variance analysis for, 325–327
Control accounts, 85, 597
computing total amount in, 606
zeroing, 606
Control decisions, 11–12
Controllable costs and benefits, 49
relevant, 44–45
and time horizon, 46–49
Controllable performance measures, 506
Controller, 21
Conversion costs, 85, 632
Coordination:
budgets for, 261
of decentralized decisions, 509
Core competency, 548
Costs, 78–80
“above the line,” 79
actual input, 322, 324
allowable, 559
avoidable fixed, 232
batch-level, 56
“below the line,” 79
capacity, see Capacity costs
common, 54
controllable, 47
conversion, 85, 632
current, 559
of decentralization, 503–504
direct, 54
direct labor, 84

direct materials, 84
estimating, see Cost estimation
facility-level, 57
fixed, 51, 231–232
hierarchical structure of, 54–57
identifying, 43
incremental, 206–215
indirect, 54
inventoriable, 85
joint, 229–230
labor, 84, 593
marginal, 52
materials, 93, 583–584
measurement of, 6–7


www.downloadslide.net
Index
mixed, 51
noncontrollable, 47, 217
opportunity, 6–7
overhead, 364, 378. See also Capacity costs
period, 78
prime, 85
product, 78, 412–414
product-level, 56, 57
relevant, 44–46
selling and administration, 85
step, 54
sunk, 46–47

traceability of, 54, 594
unallocated activity, 417
unit-level, 56
of unused capacity, 417–418, 427
variability of, 51
variable, 51
Cost accounting systems, see Job costing;
Process costing
Cost allocations, 89–95, 360–381
for activity-based costing, 407–408
based on activities, see Activity-based
costing
controllability and traceability as drivers
of, 380, 381
in decision making, 93–94, 362–370
defined, 88
direct method, 657–659
drawbacks to, for long-lived resources,
469–471
dual-rate, 664–665
excluding costs from, 373
to influence behavior, 377–380
to justify prices and reimbursements,
375–377
in long-term decision making, 362–370
with multiple cost pools and cost drivers,
367–369
with predetermined overhead rates,
663, 664
reciprocal method, 661–663

for reporting income, 370–374
step-down method, 659–661
of support activities, 656–664
two-factor, 665. See also Dual-rate cost
allocations
two-step procedure for, 88–91
Cost-based transfer prices, 520, 521
Cost centers, 285, 505
discretionary, 508
engineered, 508
performance measurement in, 506–507
Cost drivers:
for activity-based costing, 408–409
defined, 88
for dual-rate cost allocations, 647
multiple, 361–363
selection of, in cost allocation, 89–91
Cost estimation, 49–53, 110–131
account classification method of,
116–118
assumptions of, 127
with contribution margin statements,
112–116
high-low method of, 118–123
learning curves in, 132–133

with regression analysis, 123–128
with segmented contribution margin
statements, 128–130
selecting method for, 126–128

traceability in, 52–53
variability in, 50–52
Cost flows:
assumptions of, 79, 282–284
for job costing, 580–591
in manufacturing organizations, 81–87
in merchandising organizations, 78–81
in service organizations, 77–78
for support activities, 637–639, 642
Cost gaps, 545
Cost hierarchy, 53–56
Costing:
absorption, see Absorption costing
activity-based, see Activity-based costing
direct, 365
job, see Job costing
normal, 587
process, see Process costing
standard, 620–621
target, 544–546
variable, 365, 367–368, 376–379
Cost leadership strategies, 536–538, 541–542
Cost objects, 88–91
Cost of capital, 451, 453, 454
Cost of goods manufactured (COGM), 85
in job costing, 588–589
in process costing, 614–617, 620, 621
variable cost of goods manufactured
budget, 264–265
Cost of goods sold (COGS), 79, 85

charging overhead to, 592–594
in job costing, 589–591
variable cost of goods sold budget,
265–268
Cost planning strategies, 542–546
life-cycle analysis, 542–544
target costing, 544–546
Cost pools, 90
for activity-based costing, 404–407
for dual-rate cost allocations, 647
multiple, 361–363
for process costing, 616–618
Cost structures, 115–117
Cost-Volume-Profit (CVP) analysis, 160–184
assumptions underlying, 183–184
creating CVP relation, 162–164
decision making with, 170–172
evaluating operating risk with, 172–177
multiproduct analysis, 177–183
profit planning with, 164–169
CPAs, see Certified Public Accountants
Credit policies, 289
Credit scoring, 130
Critical success factors (CSFs), 331,
560–565
defined, 560
operational vs. strategic, 562
properties of, 562–563
Crossover volume, 175
Cross-subsidization, 436

CSFs, see Critical success factors
Culture (organizational), 16
Current costs, 559, 572

687

Current value, 511
Customer-level activities, 413
Customer perspective (balanced
scorecard), 566
Customer planning, 424–427
Customers, unprofitable, 425
CVP analysis, see Cost-Volume-Profit analysis
CVS Pharmacy, 594
D
Daimler, 560
DCF techniques, see Discounted cash flow
techniques
Decentralization, 502
Decentralized decision making, 256,
502–506
benefits of, 503–504
and budgeting, 280–282
and cost allocation rates, 656
costs of, 503–504
responsibility centers in, 504–506
Decisions, 4
control, 11–12
make-versus-buy, 218–220
planning, 10–12

short-term, see Short-term decisions
time horizons for, 49–52
Decision Framework, 4–8, 15
Decision making, 2–18
about price, 168–170
accounting in, 12–15
with activity-based costing, 428–429
centralized, 270
choosing the highest value option, 7–8
contribution margin statements in,
117–118
cost allocations in, 93–94, 366–374,
656–657
with Cost-Volume-Profit analysis,
171–173, 183–185
decentralized, see Decentralized decision
making
ethics in, 15–17
framework for, 4–8
identifying options in, 5
measuring benefits and costs in, 6–7
in organizations, 8–10
for planning and control, 10–12
specifying problems in, 4–5
Decline stage (product life cycle), 558, 559
Defense Working Capital Fund
(DWCF), 607
Delegation, 284–285, 522
Deloitte, 593
Dell Computers, 46, 51, 549, 550, 554, 563

Delta, 10
Deluxe Checks, 56
Demand:
seasonal, 211
and supply, 210–211
Denominator volume, 91, 416–420. See also
Allocation volume
Departmental rate (cost pools), 369
Department of Defense (DoD), 375, 607
Depreciation:
and cash flows, 453
considerations of, in ROI, 499


www.downloadslide.net
688 Index
Depreciation tax shield, 473
Des Moines Register, 428
Development stage (product life cycle),
555. See also Target costing
Differential method (of cost analysis), 236.
See also Relevant cost analysis
Direct benefits, 52, 53
Direct costs, 54
Direct costing, 371
Direct estimation, of capacity costs,
363–364
Direct labor, 82, 585
Direct labor budgets, 262–263
Direct labor price variances, see Labor rate

variances
Direct materials costs, 82
Direct materials purchase budget, 272–273
Direct materials usage budget, 260–262
Direct method (of cost allocation),
639–641
Discounted cash flow (DCF) techniques,
454–459, 462–463
Discount factor, 455
Discounting (term), 448–449
Discount rate, 453–456
Discretionary cost centers, 496
Dish Network, 263
Disney, 536
Doctors without Borders, 28
DoD, see Department of Defense
Dollars for Scholars, 107
Doubling approach, 132
Dow Chemical, 504
Downsizing staff, 357
DreamWorks, 50
Dual-rate cost allocations, 646–647
Duke Children’s Hospital, 552
DuPont, 629
DuPont model (of ROI), 501, 502
DWCF (Defense Working Capital Fund), 593
E
E-Trade, 561
Earnings before interest and taxes (EBIT),
504

Earnings per share (EPS), 504
EBay, 255
EBIT (earnings before interest and taxes),
504
Economic value added (EVA), 503–506
Electrical utilities, 644
Electronics recycling program, 45
Eli Lilly, 478, 516
Emmy Awards, 593
Employees:
delegation to, 276–277, 491
empowerment of, by decentralization, 491
influencing behavior of, with cost allocation, 371, 372–373
involvement of, in budgeting, 278–279
Ending finished goods inventory, 266
Engineered cost centers, 496
Enron, 10
Environments (production), 578–580
EPS (earnings per share), 504
Ernst & Young, 593
Equipment, replacement of, 466

Equivalent units, 614–615
Ethics, 15–17
EVA, see Economic value added
Excel, creating regression lines in,
123–125
Excess capacity, 202–205, 211–212
Excess demand, 202–205, 212–214
Excess supply, 202–205. See also Excess

capacity
Expedia, 563
Experian, 126
ExxonMobil, 27, 629
F
Facebook, 363
Facility-level activities, 420, 421
Facility-level costs, 56, 57
Famous Footwear, 356–357
FASB, see Financial Accounting Standards
Board
Favorable (F) variances, 318–319
FBI, 565
Federal Energy Regulatory Commission, 219
Federal Reserve Bank, 378
FedEx, 561
Feedback, 260, 334
FG inventory account, see Finished goods
inventory account
FIFO (First-In-First-Out), 80
Financial accounting, 12–14
Financial Accounting Standards Board
(FASB), 13, 14, 77, 437
Financial budgets, 258, 259
Financial measures, 561
Financial perspective (balanced scorecard), 566, 567
Financing, determining need for, 279–280
Finished goods (FG) inventory account,
85, 86, 88
in job costing, 604–605

prorating overhead to, 610
First-In-First-Out (FIFO), 80
FirstUSA, 431
Fixed costs, 51
avoidable, 228–229
estimating, see Cost estimation
Fixed cost spending variance, 324, 325
Fixed manufacturing overhead, 601
Fixed overhead, 84
Flexibility, of investments, 482
Flexible budgets, 320–322
Flexible budget cost, 325, 326, 328
Flexible budget quantity, 325, 328
Flexible budget variances, 320–328
defined, 322
fixed cost spending variance in, 324, 325
graphing, 322, 323
sales price variance in, 324
variable cost variances, 325–328
Florida Keys, 250
Ford Fusion, 178
Ford Motor Company, 83–84, 188, 481
Ford Mustang, 178
Foreign Corrupt Practices Act of 1977,
15, 16
Forrest Gump (film), 91
Foxconn, 599

Frigidaire, 53
Full costing, 387. See also Absorption costing

Functional analysis, 572
Future value, calculating, 485–489
F variances, see Favorable variances
G
GAAP, see Generally Accepted Accounting
Principles
Game Theory, 228
Gap, 55, 607
Gates Foundation, 135
Gateway, 52, 53
General Electric, 520
General Electric Corporation, 9, 147
Generally Accepted Accounting Principles
(GAAP), 13, 14, 458
and absorption costing, 384, 385
for cost of unused capacity, 451
income statements using, 78–79
matching principle of, 79, 398
for research and development, 532
General Mills, 653
General Motors, 9, 124, 377, 474, 526
Georgetown Cupcake, 166
Georgia Pacific, 534, 535
GlaxoSmithKline, 520
Global sourcing, 83
Goals:
aligning, 9–10, 346
and budgets, 290–291
and decentralization, 524
individual, 4–5

organizational, 8–9
Goldratt, Eli, 226
Google, 9, 52, 580
Grants (research), 124
Graphing:
historical cost data, 120–122
sales volume and flexible budget
variances, 332, 333
Greens fees, 212
Greyhound, 54
Gross approach (to cost analysis), 218–220
Gross book value, 527
Gross margin, 78, 79
Gucci, 564, 591
H
Habitat for Humanity, 9
Hard measures, 555
Heinz, 629
Heritage Farms, 229–230
Hewlett-Packard (HP), 46, 211, 502
High-low method (of cost estimation), 122
assumptions of, 129
calculating, 129
defined, 127
error in, 127
true cost line in, 139
Hilton Hotels, 565
Honda, 477
Hoover, 330
HP, see Hewlett-Packard

Human Resources Departments, 67, 270
Hurdle rate, 477
Hyundai, 84


www.downloadslide.net
Index
I
IBM, 9, 49, 461, 555, 549
IIA, see Institute of Internal Auditors
IMA, see Institute of Management
Accountants
Incentives, 374–380
Income reporting:
cost allocations for, 380–384
with variable costing vs. absorption
costing, 383–386
Income statements:
absorption costing, 380–386
budgeted, 276, 279
and cost allocations, 91–92
GAAP for, 143
of manufacturing firms, 83
of merchandising firms, 83
product-level, 125
of service firms, 79–80
with two-pool allocated costs, 367
variable costing, 371
Incremental approach, to
budgeting, 288

Incremental contribution margin, 215
Incremental costs, 215
Incremental method (of cost analysis), 214.
See also Relevant cost analysis
Incremental profit, 234–240
Incremental revenues, 215
Indirect benefits, 52–53
Indirect costs, 52
Indirect labor, 74, 595
Informativeness principle, 506
Infosys, 51, 555
Initial outlay, 460, 461
Innovation and learning perspective
(balanced scorecard), 567
Input efficiency variances, see Input
quantity variances
Input price variances, 322
Input quantity variances, 323
Institute of Internal Auditors (IIA), 17, 22
Institute of Management Accountants
(IMA), 16, 23, 423
Institutional sales, 218
Intel, 136, 554
Intercept, of regression line, 152
Internal business perspective (balanced
scorecard), 567
Internal markets, 264
Internal rate of return (IRR), 458
assumptions in, 466
defined, 443

net present value vs., 457
Internal Revenue Service (IRS), 519
International Accounting Standards
Board, 13
International Paper, 629
Intra-company business transactions, see
Transfer pricing
Introduction and growth stage (product
life cycle), 547, 556
Inventoriable costs, 85
Inventory:
beginning, 620
beginning finished goods, 87
ending finished goods, 87

equation for, 87
finished goods, see Finished goods
inventory account
layers of, 269
materials inventory account, 294
for merchandising firms, 89
in production budgets, 267
in service firms, 80
Investment centers, 285, 504
IRR, see Internal rate of return
IRS, see Internal Revenue Service
iSuppli, 86
J
JC Penney, 81
JetBlue, 79

Job costing, 593
cost flows for, 595
and cost of goods manufactured, 595
and cost of goods sold, 595
labor costs in, 595
manufacturing overhead in, 599
materials in, 599
and overapplied/underapplied
overhead, 605
predetermined overhead rates in, 605
process costing vs., 593
Job shop, 593
John Deere, 380, 505, 518
Johnson & Johnson, 28, 133, 190, 504, 510
Joint costs, 229
Joint processes, 229
Joint products, 229
JPMorgan Chase, 81, 177
K
Kaizen, 508
Kauffman Foundation, 122
Kellogg Company, 593
Key performance indicators (KPIs), 560
KPIs (key performance indicators), 547
KPMG, 593
Kroger, 81, 267, 460, 553
L
Labor:
in cash budgets, 306
direct, 324

direct labor budget, 270
indirect, 365
in job costing, 593
Labor efficiency variances, 327
Labor quantity variances, see Labor
efficiency variances
Labor rate variances, 342
Lagging measures (lag measures), 570
Last-In-First-Out (LIFO), 82
Launch (product), 571
Leading measures, 563
Learning curves (cost estimation), 119
Let’s Make a Deal! (television show), 5
Lever Brothers, 478
LG, 277
Life-cycle analysis, 547
Life expectancy (of assets), 462
LIFO (Last-In-First-Out), 82
Line activities, 652

689

Lions Club, 580
Lions Eye Bank, 580
London School of Business, 576
Los Angeles Lakers, 210
Lowe’s, 170
Loyalty programs, 416
Lucent Technologies, 548
Lufthansa, 561

Lumpy resources, 488
M
McDonald’s, 10, 31, 593
McKinsey Consulting, 504
MACRS (Modified Accelerated Cost
Recovery System), 475
Macy’s, 166, 267, 330, 458
“Make-to stock” production, 593
Make-versus-buy decisions, 219
Management:
activity-based, see Activity-based
management
cost allocations in, 364
open-book, 15
styles of, and budgeting, 286
supply chain, 83
Managerial accounting, 13
Manufacturing firms, 83
cost flows in, 81–87. See also Job costing;
Process costing
cost terminology for, 83
defined, 81
income statements from, 85–87
production process in, 83–85
Manufacturing overhead, 100
in cash budgets, 273–274
fixed, 585
Manufacturing overhead cost budget,
263–264
Marginal costs, 52. See also Variable costs

Margin of safety, 173
Market-based transfer prices, 520
Marketing and administrative costs:
budget, 248
in cash budget, 261
Market research, 571
Market segments, 424
Market share variance, 318
Market size variance, 318
Market value, 461
Marriott, 79
Massachusetts General Hospital, 375
Master budgets, 318
budgeted income statements in, 268–269
defined, 259
and direct labor budget, 270
and direct materials usage budget, 270
flexing, 316
and manufacturing overhead cost
budget, 271
and marketing/administrative costs
budget, 274
and production budget, 280
and revenue budget, 286
and variable cost of goods manufactured
budget, 290
and variable cost of goods sold budget,
290

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690 Index
Matching principle (of GAAP), 381
Materials, costs for, 594
Materials efficiency variances, 343
Materials inventory account, 83, 87
Materials price variances, 323
Mattel, 331
Mattress Firm, 360
Maturity stage (product life cycle), 547
Maximum transfer price, 527
Maytag, 17
Measurement:
of benefits and costs, 6–7
of critical success factors, 331
of performance, 494–510, 546–547
Medicaid, 39
Medicare, 38, 39
Membership clubs, 408
Mercedes, 424
Merchandising firms, 77
cost flows in, 80
income statements for, 81
inventory equation for, 80
Mergers, 535
Metropolitan Museum of Art, 28
Miami Heat, 30
Microsoft, 28, 122
MidAmerican Energy, 430
Minimum transfer price, 524

Mining industry, 452
Mission statements, 9
Mitsubishi, 63
Mixed costs:
defined, 50
estimating, see Cost estimation
MNCs (multi-national corporations), 521
Modified Accelerated Cost Recovery
System (MACRS), 475
Modified payback method (of capital
budgeting), 488
Monsanto, 85
Morale, employee, 127
Morningstar, 507
Motorola, 425, 520
Movie industry, 90
Multi-national corporations (MNCs), 521
Multiproduct CVP analysis, 176
about, 171–172
weighted contribution margin ratio
method, 178
weighted unit contribution margin
method, 178
Municipal budgeting, 287
Mutual fund performance, 482
N
National Car Company, 416
National Cristina Foundation, 46
National Geographic Society, 28
National Institutes of Health, 122

National Science Foundation, 122
Navy SEALs, 27
Negotiated transfer prices, 520
Neiman Marcus, 561
Nestle, 277
Net book value, 475
Net operating profit after taxes (NOPAT),
516

Net present value (NPV), 534
assumptions in, 467
defined, 464
internal rate of return vs., 469
sensitivity analysis with, 466
New York Yankees, 576
Nike, 50
Nikon, 551
Nintendo, 86
Nissan Motor Company, 359, 373
Noncontrollable benefits, 47
Noncontrollable costs, 47
Nonfinancial measures, 311
Non-value-adding activities, 428
NOPAT (net operating profit after taxes),
516
Nordstrom, 267
Normal costing, 592
Not-for-profit organizations, 28
Novartis, 47
NPV, see Net present value

O
Office Depot, 81
Office Gallery, 82, 83, 132, 133, 177
Olympus, 536
Open-book management, 15
Operating budgets, 262–264
Operating cash flows, 461, 462, 468
Operating leverage, 175–177
Operating risk, 172–174
Operations costing, 593
Opportunity costs, 6–8
for excess demand/capacity, 213
of money, 458–463
and transfer pricing, 519
Organization, 8
Organization chart, 20
Outliers (data points), 120
Outsourcing, 177
Overapplied overhead, 605
Overhead, 52, 84–85
and absorption costing, 378
applied, 599
in cash budgets, 271–272
correcting, at year end, 606, 608
fixed, 85
fixed manufacturing, 599
manufacturing, 84, 271, 273, 599
manufacturing overhead cost budget,
271–273
overapplied and underapplied, 605–608

variable, 85
zeroing control accounts, 598, 606
Overhead costs, 364, 385. See also Capacity
costs
Overhead rates, 89. See also Allocation rate
defined, 364
predetermined, 601
of support activities, 654, 655
Overstock.com, 263
P
Palladium Group, 565
Paramount Pictures, 92
Partial contribution margin statements,
222

Participative budgeting, see Bottom-up
budgeting
Payback method (of capital budgeting),
460, 463
Payback period, 469–472
Pebble Beach, 212
“Peel the onion” approach, 225
PepsiCo, 592
Performance evaluation:
with budgets, 264
for goal congruence, 10
relative, 506
variances in, 330
Performance measurements, 506–518,
563–565. See also Balanced scorecard;

Critical success factors
controllability of, 506
in cost centers, 507–509
economic value added, 510–511
informativeness principle of, 506
in investment centers, 510, 512, 517
long-term, 508–510
in profit centers, 507–508
residual income, 510–511
return on investment, 510–511
and transfer pricing, 518–519
Period costs, 78–79
Pfizer, 629
Pharmaceutical industry:
joint ventures in, 469
sunk costs in, 46
PIER cycle (of planning and control), 11,
265
Pioneer, 63
Planning decisions, 11
Plantwide rate (cost pools), 369
Polaroid, 577
Porsche, 424, 550
Portfolio (of products), 177
Porto Alegre, 287
Practical capacity, 417
Predetermined overhead rates:
defined, 601
of support activities, 656, 657
Present value (of future cash flows), 459, 471

Prices and pricing:
budgeting for changes in materials
prices, 282–284
input price variance, 322, 324, 327
justifying, with cost allocations, 378
materials price variance, 323
purchase price variance, 334
sales price variance, 320
and sales volume, 170–171
transfer, see Transfer pricing
PricewaterhouseCoopers, 593
Price-gouging, 221
Prime costs, 85
Principal Financial Group, 380
Process control charts, 330, 331
Process costing, 629–639
allocations in, 630
with beginning inventory, 632–634
job costing vs., 592–594
with many cost pools, 632–633
with standard costs, 638, 639
weighted average, 635–636


www.downloadslide.net
Index
Process-costing reports, 631
Process maps, 428
Process shops, 593, 594
Procter & Gamble, 478, 505, 506, 594, 629

Products:
adding/dropping lines of, 230
joint, 228–229
launching, 573
life cycles of, 556–558
recalls of, 334
Product costs, 78, 79, 418, 420
Production budget, 267–270
Product-level activities, 413
Product-level costs, 56, 57
Product mix, 178
assumptions about, 183
for scarce resource, 222–225
Product planning, 424
Profit(s):
estimation of, using CVP relation, 163–164
incremental, 214–216
predicting, from sales forecasts, 126
target, 168–169
Profit after taxes, 169
Profit before taxes, 132, 134, 162, 163
equation for, 162
and margin of safety, 176, 177
as performance measurement, 506
with weighted contribution margin ratio,
181
with weighted unit contribution margin,
178–179
Profit centers, 285, 505, 507, 510
Profit margin, 363, 410, 411

Profit planning, 164
breakeven revenues, 167
breakeven volume, 164–166
target profit, 168–169
Promotions, 218
Purchase price variances, 334
p-values (of regression coefficients), 128
Q
Qwest, 368
R
Radio City Music Hall, 211
R&D, see Research and development
Real options, 226
Real options analysis, 478
Real-time feedback, 330
Rebates, 218
Recalls, product, 332
Reciprocal method (of cost allocation),
657–659
“Reciprocity in consumption,” 655
Recycling programs, 160
Red Cross, 9
Regression analysis, 126–131
assumptions of, 128
coefficients in, 128
by credit rating agencies, 129
with Excel, 126–127
p-values for, 128
R-square in, 128
Relative performance evaluation, 506

Relative values, of decision options, 48
Relevant cost analysis, 214, 216

Relevant costs and benefits, 43–46
Relevant range, 131
Replacement value, 511
Reported income, 371, 373, 374
Research, market, 571
Research and development (R&D):
business strategy focused on, 548–549
expenses from, 275
GAAP for, 516
Residual income (RI), 512, 514, 515
Resources, scarce, 222–225
Resource planning, 427–428
Responsibility accounting, 285, 286
Responsibility centers, 285, 504–506
Return on investment (ROI), 510-514, 517,
518
advantages and disadvantages of, 512
depreciation and, 511
DuPont model of, 513, 514
Revenues, 162
incremental, 215–217
and sales volume, 51
Revenue budget, 266
RI, see Residual income
Risk:
of capital projects and payback method,
472

and cost of capital, 465
operating, 172–174
Rockefeller Foundation, 308
Rockwell Collins, 375, 593
ROI, see Return on investment
Rotary Foundation, 192
R-square (regression analysis), 127
S
Safeway, 267, 553
Saks Fifth Avenue, 548
Sales-leaseback arrangements, 461
Sales mix variances, 337–339
Sales price variance, 320
Sales quantity variance, 337–339
Sales volume:
and cost classification, 55
and price, 170–172
relation to cost and profit, see CostVolume-Profit analysis
and variability in costs/benefits,
51–52
Sales volume variance, 318
Salvage values, 461–463, 475
Samsung, 83
Sam’s Club, 548
Sapling Foundation, 122
Sarbanes-Oxley Act of 2002 (SOX), 16
Scarce resources, 222–225
Seagate, 554
Sears, 81, 505, 550
Seasonal demand, 211

SEC, see U.S. Securities and Exchange
Commission
Segmented contribution margin
statements, 132–133
product-level, 132
region- and customer-level, 133
Segment (product) margin, 132–133
Self-consumption, 656

691

Selling and administration costs, 85
Sequential allocation method, 660. See also
Step-down method
Service firms:
cost flows in, 79–80
inventory in, 82
Shareholder value, 9
Short-term decisions, 210–235
about adding/dropping product lines,
234–235
about promotions, 221–222
about scarce resources, 224–228
about special orders, 215–221
calculations of value for, 216-218, 221
and gross approach (to cost analysis),
220–222
involving joint costs, 232–233
make-versus-buy, 222, 223
qualitative and long-term implications

of, 228–230
reasons for, 212–215
relevant cost analysis for, 219, 221
Siemens, 369, 380, 506, 516
SKF Bearings, 593, 594
Slope (of regression line), 127
Snow removal, 317
Society of American Florists, 31
Soft measures, 551
Sony, 63, 86, 506, 551
Southwest Airlines, 550
SOX (Sarbanes-Oxley Act of 2002), 16
Special orders, 211–217
calculations of value for, 212, 214, 217
gross approach (to cost analysis),
216–217
relevant cost analysis for, 214, 217
Spending variance, 320, 321
Split-off point, 229, 230
SPX, 516
Stage 1 allocations, 415
Stage 2 allocations, 418–420
Standard and Poor’s, 130
“Standards for Ethical Conduct of
Members,” 22–24
Standard process costing, 630–637
Staples (company), 81
The Staples Center, 210
Starbucks, 458
Statistical control charts, 344

Step costs, 54–56
Step-down method (of cost allocation),
659–661
Stern Stewart & Company, 515
Strategic plans, 262, 263, 459
Strategies (business), 550–572
and balanced scorecard, 567–571
cost leadership, 552-554, 557, 558
for cost planning, 558–562
defined, 550
determinants of, 550–552
implementing, 562–567
and value chain, 555–557
value differentiation, 552–554, 556–558
Structure (organizational):
and budgeting, 284–286
for decentralized organization,
500–501


www.downloadslide.net
692 Index
Subaru, 599
Subsidies, 160
Sunk costs, 46–47
Sun Microsystems, 46
Supply, and demand, 210–213
Supply chain management, 82
Support activities, 654–664
Sustainability, of business strategy, 552

T
T-Mobile, 561
Target (company), 507, 564
Target costing, 560–562, 573–575
Target profit, 168–169
Tata Consultancy Services, 555
Taxes:
and capital budgets, 473–476
in CVP analysis, 167
depreciation tax shield, 474
and not-for-profit organizations, 377
and salvage value, 474–476
and transfer pricing, 521, 523
Tax planning, 273
TD Ameritrade, 561
The TB Alliance, 130
Teardown analysis, 86
T.G.I. Friday’s, 166
Theory of Constraints (TOC), 224
Throughput margin, 224
Time:
allocations of, 220–223
and controllability of benefits/costs,
47–50
in NPV analysis, 462
“Time value of money,” 181, 456–457
Timkin, 84
T-Mobile, 562
TOC (Theory of Constraints), 224
TOMS, 179

Toll Brothers, 86
Top-down budgeting, 284, 285
Toro Corporation, 210
Toshiba, 63, 84
Totals approach (to cost analysis), 214
Total manufacturing costs charged to
production, 86
Total profit variances, 312–314
Toyota Motors, 471, 549
Toys R Us, 229
Traceability:
of benefits, 53–54
and cost allocations, 380
of costs, 52–53, 580
Transfer price, 520
Transfer pricing, 520–523
activity-based costing vs., 513
approaches to, 523, 524
conflict in, 524–528
cost-based, 524, 525
economically optimal, 526–527
international, 521
market-based, 521
negotiated, 521
reasons to use, 518–519
and taxes, 518, 519
Travelocity, 575
Treasurer, 19, 20

Trek, 54

True cost line, 121
Two-factor cost allocations, 663. See also
Dual-rate cost allocations
Tyson Foods, 576
U
U-Haul, 99
Unallocated activity cost, 419–420
Underapplied overhead, 606
Unfavorable (U) variances, 318–319
Unilever, 28
Unit contribution margin, 158, 322
United Airlines, 47–48, 552, 5617
United Parcel Service (UPS), 9, 419, 429,
447, 563
United Way, 33
U.S. Army Rangers, 28
U.S. Professional Golf Association, 564–565
U.S. Securities and Exchange Commission
(SEC), 14, 16
United States Marine Corps, 10
United States Steel, 334
Unit-level activities, 418–420
Unit-level costs, 55–57
Unit variable cost, 122
University of Chicago, 576
University of Missouri-Columbia, 513
University of Texas-Austin, 530
UPS, see United Parcel Service
Usage budgets, 270–274
U variances, see Unfavorable variances

V
Value, 6–7
in absorption costing, 374, 375
of depreciable fixed assets, 513
future, 485–489
negative, 46
present, 462–463, 485–489
relative, 45
salvage, see Salvage values
shareholder, 9
for special orders, 216–218, 221
Value-adding activities, 434
Value chain, 554–556
and cost leadership strategies, 555–556
defined, 553
and value differentiation strategies,
554–556
Value differentiation strategies, 550–552,
554–556
Value engineering, 572
Value proposition, 550
Variability, of costs and benefits, 51–53
Variable costing, 375, 377–378
Variable cost of goods manufactured
budget, 270–271
Variable cost of goods sold budget,
275–278
Variable costs:
defined, 51
estimating, see Cost estimation

Variable cost variances, 325–328
Variable overhead, 84
Variances, 308–333
analysis of, 330–332, 334
calculating, 318–328

control decisions from, 332–333
defined, 318
direct labor price, see Labor rate
variances
favorable, 318–319
fixed cost spending variance, 324, 325
flexible budget, 320–328
input efficiency, see Input quantity
variances
input price, 326–328
input quantity, 327–328
labor efficiency, 327, 328
labor quantity, see Labor efficiency
variances
labor rate, 327, 328
market size and market share, 339–340
materials efficiency, 327
materials price, 327
nonfinancial controls vs., 333–336
as performance measurement, 510
purchase price, 338
in sales for multiproduct firms, 341–343
sales mix, 341–343
sales price, 324

sales quantity, 341–343
sales volume, 322–323
spending, 324, 325
total profit, 318–320
unfavorable, 318–319
variable cost variances, 325–328
Vera Wang, 599
Verizon Wireless, 87, 576
Volume, crossover, 177
Vulcan Forge, 88–90, 93, 94
W
WACC (weighted average cost of capital),
516
Wall Street Journal, 507, 576
Walmart, 83, 330, 425, 548, 550
Warner Bros., 92
Waste Electrical and Electronic Equipment
(WEEE) Directive, 46
Web sites, 428
Weighted average cost of capital (WACC),
516
Weighted average process costing, 640–641
Weighted contribution margin ratio, 180–181
Weighted unit contribution margin, 178–180
Wells Fargo, 367
West Point, 16
Western Digital, 554
Whale curve, 425
Wharton School, 576
Whirlpool Corporation, 17, 330

Whole Foods, 553
WIP inventory account, see Work-in-process
inventory account
Wipro, 509, 555
Work-in-process (WIP) inventory account,
85, 86, 89
in job costing, 594
in process costing, 628–631, 634, 635
prorating overhead to, 608
Z
Zappos, 263


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Equations in Select Chapters
Chapter 5 (CVP Analysis)
Breakeven volume

Fixed costs
_______________________

Breakeven volume (multiproduct)

Fixed costs
_______________________________

Breakeven revenue

Fixed costs

________________________

Breakeven revenue (multiproduct)

Fixed costs
________________________________

Contribution margin

Revenue Ϫ Total variable costs

Contribution margin ratio

Unit contribution margin/Price

Unit contribution margin
Weighted unit contribution margin
Contribution margin ratio
Weighted contribution margin ratio

Contribution margin/Revenue
Margin of safety

(Revenue Ϫ Breakeven revenue)/Revenue
(Sales in units Ϫ Breakeven volume)/Sales in units

Operating leverage

Fixed costs/Total costs

Profit before taxes

[(Price Ϫ Unit variable cost) ϫ Sales volume in units]
Ϫ Fixed costs
(Unit contribution margin ϫ Sales volume in units)
Ϫ Fixed costs
Contribution margin Ϫ Fixed costs
Contribution margin ratio ϫ Revenue Ϫ Fixed costs

Profit after taxes

Profit before taxes ϫ (1Ϫ Tax rate)

Unit contribution margin

Price Ϫ Variable cost per unit
(Revenue Ϫ Variable costs)/Units sold

Weighted unit contribution margin

⌺(% of sales in units ϫ Unit contribution margin)

Weighted contribution margin ratio

⌺(% of revenues ϫ Contribution margin ratio)

Chapter 8 (Variance Analysis)
Actual input cost

Actual input quantity ϫ Actual cost per unit of input

Flexible budget cost

Flexible budget quantity ϫ Budgeted cost per unit
of input

Flexible budget quantity

Actual sales quantity ϫ Quantity of input budgeted
for 1 unit of sales

Flexible budget variance

Actual profit Ϫ Flexible budget profit

Input price variance

(Budgeted price per unit of input Ϫ Actual price per
unit of input) ϫ Actual input quantity

Input quantity variance

(Flexible budget quantity of input Ϫ Actual quantity
of input) ϫ Budgeted price per unit of input
(Continued)


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Chapter 8 (Variance Analysis) (continued)

Market share variance

Actual market size ϫ (Actual market share
Ϫ Budgeted market share) ϫ Budgeted unit
contribution margin

Market size variance

(Actual market size Ϫ Budgeted market size)
ϫ Budgeted market share ϫ Budgeted unit
contribution margin

Sales mix variance

Actual total sales ϫ (WUCMflexible budget
Ϫ WUCMmaster budget)

Sales price variance

(Actual sales price Ϫ Budgeted sales price) ϫ Actual
sales quantity

Sales quantity variance

(Actual total sales Ϫ Budgeted total sales)
ϫ WUCMmaster budget

Sales volume variance

Flexible budget profit Ϫ Master budget profit

(Actual sales quantity Ϫ Budgeted sales quantity)
ϫ Budgeted unit contribution margin

Total profit variance

Actual profit Ϫ Master budget profit

Chapter 11 (Capital Budgeting)
Accounting rate of return

Average annual income/Average annual investment

Depreciation tax shield

Depreciation expense ϫ Tax rate

Future value of $1

(1 + r)n

Future value of an annuity of $1 in arrears

(1 + r) – 1
__________
n

Present value of $1
Present value of an annuity of $1 in arrears

r

1/(1 + r)n
1 – (1 + r)–n
___________
r

Chapter 12 (Performance Evaluation)
Asset turnover

Sales/Investment

Economic value added (EVA)

Net operating profit after taxes Ϫ [Weighted average
cost of capital ϫ (Invested capital Ϫ Current
liabilities)]

Profit margin

1 Ϫ (Operating expenses/Sales)

Residual income (RI)

Profit Ϫ (Required return ϫ Investment)

Return on investment (ROI)

Profit/Investment

Minumum transfer price acceptable to selling

division (TPMIN)

Variable cost of transfer ϩ Selling division’s
opportunity cost of capacity

Maximum transfer price the buying divisions is
willing to pay (TPMIN)

Buying division’s opportunity cost