Cost Accounting, Global Edition 15th Edition

Book Preface

Studying Cost Accounting is one of the best business investments a student can make. Why? Because success in any organization—from the smallest corner store to the largest multinational corporation—requires the use of cost accounting concepts and practices. Cost accounting provides key data to managers for planning and controlling, as well as costing products, services, even customers. This book focuses on how cost accounting helps managers make better decisions, as cost accountants are increasingly becoming integral members of their company’s decision-making teams. In order to emphasize this prominence in decision making, we use the “different costs for different purposes” theme throughout this book. By focusing on basic concepts, analyses, uses, and procedures instead of procedures alone, we recognize cost accounting as a managerial tool for business strategy and implementation. We also prepare students for the rewards and challenges they face in the professional cost accounting world of today and tomorrow. For example, we emphasize both the development of analytical skills such as Excel to leverage available information technology and the values and behaviors that make cost accountants effective in the workplace.
New to This Edition Deeper Consideration of Global Issues Businesses today have no choice but to integrate into an increasingly global ecosystem. Virtually all aspects, including supply chains, product markets, and the market for managerial talent, have become more international in their outlook. To illustrate this, we incorporate global considerations into many of the chapters. For example, Chapter 6 talks about the special challenges of budgeting in multinational companies while Chapter 23 discusses the challenges of evaluating the performance of divisions located in different countries. The opener for Chapter 17 highlights the differences in the way process flows are accounted for under U.S. and international accounting rules and the impact of these differences on companies’ margins and after-tax income. Chapter 22 examines the importance of transfer pricing in minimizing the tax burden faced by multinational companies. Several new examples of management accounting applications in companies are drawn from international settings.

Increased Focus on Merchandising and Service Sectors In keeping with the shifts in the U.S. and world economy, this edition makes greater use of merchandising and service sector examples, with corresponding de-emphasis of traditional manufacturing settings. For example, Chapter 10 illustrates linear cost functions in the context of payments for cloud computing services. Chapter 20 highlights inventory management in retail organizations and has a revised example based on a seller of sunglasses. Chapter 21 now incorporates a new running example that looks at capital budgeting in the context of a transportation company. Several Concepts in Action boxes focus on the merchandising and service sectors, including the use of activity-based costing to reduce the costs of health care delivery (Chapter 5), the structure of SGA costs at Nordstrom (Chapter 2), and an analysis of the operating income performance of Best Buy (Chapter 12).
Greater Emphasis on Sustainability This edition places significant emphasis on sustainability as one of the critical managerial challenges of the coming decades. Many managers are promoting the development and implementation of strategies to achieve long-term financial, social, and environmental performance as key imperatives. We highlight this in Chapter 1 and return to the theme in several subsequent chapters. Chapter 12 discusses the benefits to companies from measuring social and environmental performance and how such measures can be incorporated in a balanced scorecard. Chapter 23 provides several examples of companies that mandate disclosures and evaluate managers on environmental and social metrics. A variety of chapters, including Chapters 4, 10, and 15, contain vignettes that stress themes of energy independence, using cost analysis to reduce environmental footprints, and constructing “green” homes in a cost-effective manner.
New Cutting-Edge Topics The pace of change in organizations continues to be rapid. The fifteenth edition of Cost Accounting reflects changes occurring in the role of cost accounting in organizations.

● We have introduced sustainability strategies and the methods companies use to implement sustainability with business goals.

● We have added ideas based on academic research regarding the weights to be placed on performance measures in a balanced scorecard.

● We have provided details on the transfer pricing strategies used by multinational technology firms such as Apple and Google to minimize income taxes.

● We discuss current trends in the regulation of executive compensation.

● We describe the evolution of enterprise resource planning systems and newer simplified costing systems that practice lean accounting.

● We discuss the role of accounting concepts and systems in fostering and supporting innovation and entrepreneurial activities in firms.
Opening Vignettes Each chapter opens with a vignette on a real company situation. The vignettes engage the reader in a business situation or dilemma, illustrating why and how the concepts in the
chapter are relevant in business. For example, Chapter 2 describes how Hostess Brands, the maker of Twinkies, was driven into liquidation by the relatively high proportion of fixed costs in its operations. Chapter 4 explains the importance of job costing for “green” homebuilders such as KB Home. Chapter 8 examines Tesla Motors’ understanding of fixed and variable overhead costs for planning and control purposes. Chapter 12 shows how Volkswagen’s Brazilian subsidiary used the balanced scorecard to guide its journey out of the global financial crisis. Chapter 15 shows the impact of two alternative methods of cost allocation considered by the U.S. government for charging customers for the costs of developing “Smart Grids” for power. Chapter 23 describes the historical misalignment between performance measurement and pay at AIG and the recent changes to the compensation plans for its executives.
Concepts in Action Boxes Found in every chapter, these boxes cover real-world cost accounting issues across a variety of industries, including automobile racing, defense contracting, entertainment, manufacturing, and retailing. New examples include:

● Flexible Budgets at Corning (Chapter 7)

● What Does It Cost AT&T to Send a Text Message (Chapter 10)

● Are Charitable Organizations Allocating Joint Costs in a Misleading Way? (Chapter 16)

● Avoiding Performance-Measurement Silos at Staples (Chapter 23)
Streamlined Presentation We continue to try to simplify and streamline our presentation of various topics to make it as easy as possible for students to learn the concepts, tools, and frameworks introduced in different chapters. A major change in this edition is the reorganization of Chapters 12 and 13. Chapter 13 in the fourteenth edition, “Strategy, Balanced Scorecard, and Strategic Profitability Analysis,” has been moved to Chapter 12, and Chapter 12 in the fourteenth edition, “Pricing Decisions and Cost Management,” has been moved to Chapter 13. As a result of the switch, Chapter 13 is the first of four chapters on cost allocation.

We introduce the purposes of cost allocation in Chapter 13 and discuss cost allocation for long-run product costing and pricing. Continuing the same example, Chapter 14 discusses cost allocation for customer costing. Chapter 15 builds on the Chapter 4 example to discuss cost-allocation for support departments. Chapter 16 discusses joint cost allocation. As a result of the reorganization, we have also made major revisions in the structure and writing of each of these chapters as we discuss in detail in the next section. Other examples of more streamlined presentations can be found in:

● Chapter 2 on the discussion of fundamental cost concepts and the managerial framework for decision making.

● Chapter 6, which has a revised appendix that ties together the chapter example and the cash budget.

● Chapter 8, which has a comprehensive chart that lays out all of the variances described in Chapters 7 and 8.

● Chapter 9, which uses a single two-period example to illustrate the impact of various inventory costing methods and denominator level choices.
Selected Chapter-by-Chapter Content Changes Thank you for your continued support of Cost Accounting. In every new edition, we strive to update this text thoroughly. To ease your transition from the fourteenth edition, here are selected highlights of chapter changes for the fifteenth edition. Chapter 1 has been rewritten to include greater discussion of sustainability and why this issue has become increasingly critical for managers. It also includes more material on the importance of ethics, values, and behaviors as well as the role of the Sarbanes–Oxley act in improving the quality of financial reporting. Chapter 2 has been updated and revised to make it easier for students to understand core cost concepts and to provide a framework for how cost accounting and cost management help managers make decisions. Chapter 3 now includes greater managerial content, using examples from real companies to illustrate the value of cost–volume–profit analysis in managerial decision making. Chapter 4 has been revised with the addition of substantial new material to the section discussing end-of-period adjustments for the difference between Manufacturing Overhead Control and Manufacturing Overhead Allocated. The chapter also now discusses criteria for allocating costs and relates them to real examples to highlight why managers need allocated cost information to make decisions. Chapter 5 has been reorganized with a new section on first-stage allocation to help students understand how costs from the standard accounting classifications (salaries, depreciation, rent, and so on) are allocated to activity-cost pools. The discussion of behavioral considerations in implementing activity-based costing has been moved to a new section and integrated with other material in the chapter. There is also new material on the tradeoffs related to allocating facility-sustaining costs to products or not allocating them at all because these costs do not have good cost drivers. Chapter 6 has been significantly rewritten with the addition of more managerial content. In addition, the appendix has been completely reworked to tie together the chapter example and the cash budget. In Chapter 7, the appendix on market-share and market-size variances has been replaced with one on mix and yield variances, which provide a natural extension of efficiency variances to settings with substitutable inputs. Chapter 8 now provides a revised comprehensive summary of the variances in both Chapters 7 and 8 via an innovative new exhibit. Chapter 9 has been simplified substantially by a change in the integrated example from three to two periods. This retains the pedagogical value of the example while making it much easier for students to read and understand. Exhibit 9-4 and the material around it have been simplified further, and the self-study problem has also been revised. Chapter 10 provides a practical guide to the use of various cost estimation techniques with many illustrative examples. The opening vignette has been revised, and we include a new discussion of the difference between correlation and causation, as well as a more streamlined description of inference and hypothesis testing when using regression analysis. Chapter 11 has been revised substantially; the material on “Theory of Constraints and Throughput Contribution Margin” from Chapter 19 has now been incorporated into a new section in this chapter. The text and numbers have been rewritten to link with the Power Recreation problem already in Chapter 11 (and the chapter appendix). The chapter has been made easier for students to follow by replacing paragraphs with tables. Throughout, there is greater emphasis on understanding why relevant costs and revenues are important when making decisions. The new Chapter 12 (on the balanced scorecard) has been rewritten with a completely new section on using the balanced scorecard to achieve environmental and social goals. This section describes the motivations for companies to focus on sustainability goals (such as the concept of shared value), sustainability strategies, and the methods companies use to implement sustainability with business goals. There is also a new exhibit extending the Chipset balanced scorecard to include environmental and social objectives and measures. The new Chapter 13 focuses on cost allocation for long-run pricing decisions. The material on short-run costing and pricing (from Chapter 12 in the fourteenth edition) has been moved to Chapter 11. Chapter 14 has been completely rewritten. It continues the same example of Astel Computers from Chapter 13 but switches the context from cost allocation for pricing to cost allocation for customer profitability. The order of presentation, the content, the examples, and the exhibits are all new. The chapter now starts with customer profitability based on customer-level costs and discusses the hierarchical operating income statement. It then motivates why corporate, division, and distribution channel costs need to be allocated and the criteria that can be used to allocate them. The chapter closes with sales variances and market-share and market-size variances (moved here from Chapter 7). The example is new and builds on the Astel Computers example that is used throughout Chapters 13 and 14. Chapter 15 is also heavily revised, with new content, examples, and exhibits. It continues the example of Robinson Company from Chapter 4 but adds more issues around cost allocation—single rate, dual rate, and support-department cost allocations using direct, step-down, and reciprocal methods. Using the same example helps link and integrate normal costing and support department cost allocation. Chapter 16 now provides an in-depth discussion of the rationale for joint-cost allocation and the merits and demerits of various joint-cost allocation methods. It also uses realworld examples to highlight the preferred method of joint-cost allocation in various settings. Chapters 17 and 18 present actual costing with the material on standard costing discussed in the appendix. We have added a discussion of managerial issues when estimating equivalent units and choosing between the FIFO and weighted-average costing methods. Chapter 18 emphasizes the importance of reducing spoilage and scrap and more generally the theme of striving for a sustainable production and service environment. As a result of moving material on the theory of constraints to Chapter 11, Chapter 19 now focuses on quality and time. We use the same Photon example throughout the chapter to discuss both quality and time-based competition. This helps to integrate and streamline the chapter. Chapter 20 contains revised content and presentation comparing traditional and justin-time purchasing (and a changed Exhibit 20-5). The sections on supplier evaluation, relevant costs of quality, and timely deliveries have also been rewritten, as well as the material on enterprise resource planning systems and lean accounting. Chapter 21 has been completely redone with an entirely new example and a set of revised (and clearer) exhibits. The focus has shifted from a manufacturing setting to a transportation firm evaluating the purchase of a new hybrid-engine bus.

Brief Contents
1 The Manager and Management Accounting 24 2 An Introduction to Cost Terms and Purposes 50 3 Cost–Volume–Profit Analysis 88 4 Job Costing 128 5 Activity-Based Costing and Activity-Based Management 172 6 Master Budget and Responsibility Accounting 218 7 Flexible Budgets, Direct-Cost Variances, and Management Control 270 8 Flexible Budgets, Overhead Cost Variances, and Management Control 310 9 Inventory Costing and Capacity Analysis 350 10 Determining How Costs Behave 392 11 Decision Making and Relevant Information 446 12 Strategy, Balanced Scorecard, and Strategic Profitability Analysis 494 13 Pricing Decisions and Cost Management 538 14 Cost Allocation, Customer-Profitability Analysis, and Sales-Variance Analysis 572 15 Allocation of Support-Department Costs, Common Costs, and Revenues 614 16 Cost Allocation: Joint Products and Byproducts 654 17 Process Costing 686 18 Spoilage, Rework, and Scrap 728 19 Balanced Scorecard: Quality and Time 756 20 Inventory Management, Just-in-Time, and Simplified Costing Methods 786 21 Capital Budgeting and Cost Analysis 824 22 Management Control Systems, Transfer Pricing, and Multinational Considerations 862 23 Performance Measurement, Compensation, and Multinational Considerations 896