INTRODUCTION
Origins of Cost Management Systems
The Scientific Management Movement
Management Control for Diversified Organizations
From Cost Management to Cost Accounting
Recent Developments in Manufacturing and Service Companies
Contemporary Management Accounting Developments
Summary
UNDERSTANDING COST BEHAVIOR
The Role of Management Accounting
Understanding Cost Behavior
An Example of Cost Structure
Deriving the Total Cost Function
Determining the Cost per Unit ofService Provided
Handling Indirect (Common) Costs
Computing the Cost of Unused Capacity
Cost-Volume-Profit Analysis
Summary 27 ?Problems
SHORT-TERM BUDGETING, RESOURCE ALLOCATIONS, AND
CAPACITY COST
The Example
Short-Term Planning and Budgeting
Activities, Resource Use, and Costs
Optimizing the Use of Short-Term Resources
Equal Sales Objective
Total Sales Objective
Short-Run Profit Objective
Opportunity Costs, Capacity Costs, and the Theory of Constraints
The Issue of Multiple Resources
Effects of Reengineering and Continuous tmprovement on
Profitability
The Role of Cost Information in Allocating Short-Term Resources
Budgeting Operations
Production and Resource Use
Cash Flows
Summary Problems Cases: Choosing a Product Mix
California Products Corporation: Analyze Product Profitability with
Machine Constraints and Committed and Flexible Costs
ASSIGNING RESOURCE COSTS TO PRODUCTION COST
CENTERS
Why Assign Service Department Costs?
Measuring Costs of Using Service Departments
Avoid Estimates and Allocations for Cost Control
A Fundamental Cost Accounting Equation
Assigning Service Department Costs
Service Departments Not Directly Supporting Production Output
Primary and Secondary Activities
The Nature and Problems of Reciprocal Services
Fall River Company: A Numerical Example
The Economic Insights'of the Reciprocal Method
The Treatment ofCommitted Costs
Make-or-Buy Decisions and Cost Assignments
Special Case for Arbitrary Allocations
Summary Appendix 3.1: The Reciprocal Cost Procedure
Problems Case: Seligram, Inc.: Electronic Testing Operations
ACTIVITY-BASED COST SYSTEMS
Assigning Service Department Costs to Activities
Identifying Activities and Mapping Resource Costs to Activities
Estimates or Allocations?
Assigning Service Department Costs: Some Pixed and Some Variable
Activity Cost Drivers
Selecting Activity Cost Drivers
Designing the Optimal System
Summary Cases: The Classic Pen Company Western Dialysis
Clinic Paisley tnsurance Company: Activity-Based Costing in a
Service Industry Bedford Mining The Rossford Plant
The Portables Group John Deere Component Works (A)
ACTIVITY-BASED MANAGEMENT
The Product Profitability Whale Curve
Pricing
Demand Curve Estimation
Short-Term Pricing
ABC Costing For a New Order
Determining Profit Margins
Using ABC for Analyzing Customer Profitability
Product Substitution
Redesign Products
Improve Processes and Operations Strategy
Technology Investment
Eliminate Products
Activity-Based Management: A Summary Problems Cases:
Price Leadership in an Oligopoly Siemens Electric Motor Works (A)
Kanthal (A) Indianapolis: Activity-Based Costing of City
Services (A) The Co-operative Bank John Deere
Component Works (B)
COST BASED DECISION MAKING
Target Costing
Customer Orientation
The Target Costing Process
Target Costing in Action: Toyota Motors
Tear-Down Analysis
Quality Funetion Deployment
Value Engineering
Reengineering
Kaizen Costing
Target Costihg: A Comprehensive Example
Value Engineering
Functional Analysis
Reengineerering
Life Cycle Costing
Other Costing Tools
Quality Cost
Taguchi Cost
Environmental, Salvage, and Disposal Costs
Conclusion Problems Cases: PiedmontExpress Forms:
Process Analysisfor Strategic Decision Making Activity-based
Management at Stream International MosCo, Inc.
DECENTRALIZATION
Why Decentralize
The Environment ofthe Firm
Information Specialization
Timeliness ofResponse
Conservation ofCentral Management Time
Computational Complexity
Trainingfor Local Managers
Motivationfor Local Managers
Summary
Organization of Decentralized Units
Standard Cost Centers
Revenue Centers
Discretionary Expense Centers
Profit Centers
Investment Centers
Developing a Perfonnance Measure for Decentralized Operating Units
Problems ofGoal Congruence
Problems of Externalities
Overconsumption of Perquisites
Summary Problems Cases: Pinnacle Mutual Life Insurance
Company Wattie Frozen Foods, Ltd.: A New Zealand Case Study in
Management Accounting and Extreme Decentralization Industrial
Chemicals Company BP America: Cost Centers and Profit Centers
Empire Glass Company
THE BALANCED SCORECARD: MEASURING TOTAL BUSlNESS
UNIT PERFORMANCE
The Balanced Scorecard
Financial Perspective
Customer Perspective
Internal Business Process Perspective
Learning & Growth Perspective
Summary ofBalanced Scorecard Perspective
Linking Multiple Scorecard Measures to a Single Strategy
Cause and Effect Relationships
Performance Drivers
Diagnostic Versus Strategic Measures
Four Perspectives: Are They Sufficient?
Summary Cases: Chadwick, Inc.: The Balanced Scorecard
Chemical Bank: Implementing the Balanced Scorecard United Way
of Southeastern New England (UWSENE) MobilUSM&R(Al)
Mobil USM&R (A2) Mobil USM&R (B): New England Sales
and Distribution Mobil USM&R (C): Lubricants Business Unit
Mobil USM&R (D): Gasoline Marketing
FINANCIAL MEASURES OF PERFORMANCE
The Nature of Finaricial Control
Control in the Aggregate Using Financial Measures
Control in the Small Using Nonfinancial Measures
Operations Control and Management By Exception Using Variance
Analysis
An Example: Jersey River Book Puhlishing Company
The Role of Variance Analysis
The Planning Variance
The Flexible Budget Variance
Flexihle Budget Variancesfor Unit-Related Costs-Price and
Quantity Effects
Flexihle Budget Variancesfor Batch-Related Costs-Batch Size and
Batch Cost Effects
Flexible Budget Variancesfor Product-Related Costs
Facility-Sustaining Costs
summary
Organization Control Using Profit Measures
Using Profits to Assess Organization Unit Performance
Choosing a Prqfit Index
Short Run Operating Margin
Controllable Contribution
Divisional Segment Margin
Divisional Profit Before Taxes
Common Revenues
Transfer Pricing
Market Prices
Using Marginal Cost Transfer Prices
Using Activity-Based Costsfor Transfer Pricing
Full Costs
Dual-Rate Transfer Prices
Negotiated Market-Based Price
Transfer Pricing-A Summary ofPractice
Domestic Versus International Transfer Pricing
Other Measures of Performance
Productivity Measures
Return on Investment
Material Yield
Labor Yield
Equipment Yield
Summary Problems Cases: Transfer Pricing in an
Automobile Dealership-Shuman Automobiles, Inc. Transfer
Pricing Among Related Businesses-Kirkpatrick Associates, Incorporated
Transfer Pricing in a Multinational Corporation-Del Norte Paper
Company (A) Managing Profit Center Performance-Wilkinson
Transport (B) Internal Transfer Pricing With an Outside Market-
The New Brunswick Company
FINANCIAL MEASURES OF PERFORMANCE: RETURN
ON INVESTMENT (ROI) AND ECONOMIC VALUE ADDED(EVA)
Retating Profits to Assets Employed
A Historical Perspective
The Matsushita Intemal Capital System
The Danger of ROI Control
A Simple Example
Technical Shortcomings of the ROI Measure
Economic Value Added (Residual Income)
Expense Versus Capitalize
Leased Assets
Price-Level Adjustments
Depreciation Method
Summary of Technical Adjustments to ROI and EVA Calculations
Linking ABC to Economic Value Added: Assigning Assets
Summary Problems Cases: Using EVA andMVA at
Outsowce, Inc. Purity Steel Corporatiorn, 1995 Western
Chemical Corporation: Divisional Performance Measurement
MEASURING CUSTOMER, INTERNAL BUSINESS PROCESS, AND
EMPLOYEE PERFORMANCE
Customer Perspective
Market and Account Share
Customer Retention
Customer Acquisition
Customer Satisfaction
Customer Profitability
Beyond the Core: Meeting Customer' s Expectations
Intemal Business Perspective: Operations and Innovation Processes
Operational Excellence: Time, Quality, and Cost
Measurements
Innovation Measures
Employee Capabilities
Core Employee Measurement Group
Strategic Job Coverage
Summary and Conclusion Problems Cases: Draper
Instruments Texas Instruments: Materials and Control Group
INVESTING TO DEVELOP FUTURE CAPABILITIES
TECHNOLOGY
Is a New Theory Needed?
Short Time Horizon
Excessively High Discount Rates
Risk Adjustments
Alternatives to New Investment
Incremental versus Global Analysis
Front-End Investment Costs
Benefits Invisible Using Traditional Cost Systems
Measuring All The Benefits from the New Process
Reduced Inventory Levels
Less Floor Space
Quality Improvements
More-Accurate, Less-Precise Estimates
The Difficult-to-Quantify Benefits
Investing in Organizational Capabilities
External Integration: Linking Design to the Customer
Internal Integration: Connecting Functions Within the
Organization
Flexibility: Responsiveness to Change
Experimentation: Achieving Continuous Improvement
Cannibalization: Achieving Radical Improvement
Summary on Building Organizational Capabilities The
Bottom Line Problems Cases: Othello Corporation (A):
Capital Equipment Planning and Control Wilmington Tap
and Die Stermon Mills Incorporated Burlington
Northern: The ARES Decision (A) Burlington Nvrthern: The
ARES Decision (B)
INCENTIVE AND COMPENSATION SYSTEMS
The Expectancy View of Behavior
Intrinsic and Extrinsic Rewards
Tying Rewards to Performance
Rewards Based on Financial Performance
Rewards Based on Group or Individual Performance
Rewards Based on Nonfinancial Measures of Performance
Executive Compensation
Incentive Compensation and the Principal-Agent Relationship
Important Attributes of Compensation Systems
Rolefor Bonus and Incentive Contracts
Types oflncentives
Specific Forms Assumed by Monetary Compensation Plans
Evaluating Accounting-Based Incentive Compensation Schemes
Short-Term versus Long-Term Performance Measures
Are Chief Executives Overpaid?
Rewarding Other Organization Member
Gainsharing
Piecerate Systems
Labor-Related Plans
Bonus Systems
Summary Problems Cases: McDonald's Corporation:
Designing an Incentive System Analog Devices, Inc. (A)
The Charles River Company RKO Warner Video, Inc.: Incentive
Compensation Plan Duckworth Industries, Inc.-Incentive
Compensation Programs
FORMAL MODELS IN BUDGETING AND INCENTIVECONTRACTS
Issues and Terms in Formal Incentive Models
Wealth Leisure and Risk Attitudes
Individual Honesty and the Role ofContract Monitoring
Choosing the Right Manager and the Role of Information
Balancing Incentive and Return Considerations
Problems of Obtaining Information for Standards and Budgets
Using Information for Rewards and Control-The Moral Hazard
Problem
Moral Hazard and Information Impactedness
The Agency Model
The Setting
The Motivational Problem: Why a Flat Wage Will Not Do
The Principal's Problem: How to Tie Reward to Performance
Eliciting Honest Revelation of Privately Held Beliefs
The Role of Uncertainty in the Soviet Incentive Model
Limitations ofthe Truth-Inducing Budget Scheme
Truth-Inducing Schemesfor Resource Allocation Decisions
The Role of Insurance
Summary Problems
INDEX
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