Horngren’s Cost Accounting: A Managerial Emphasis, Global Edition 16th 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 a ccounting provides key data to managers for planning and controlling, as well as costing products, services, and 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 describes the special challenges of budgeting in multinational companies while Chapter 23 discusses the challenges of evaluating the performance of divisions located in different countries. Chapter 22 examines the importance of transfer pricing in minimizing the tax burden faced by multinational companies. The Concepts in Action for Chapter 16 explains the importance of joint-cost allocation in creating a trade war between poultry farms in the United States and South Africa. 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 great 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 uses an example based on a seller of sunglasses. Chapter 21 incorporates a 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 achieving cost leadership at Trader Joe’s (Chapter 1), using activity-based costing to reduce the costs of health care delivery at the Mayo Clinic (Chapter 5), reducing fixed costs at Twitter (Chapter 2), and analyzing operating income performance at Best Buy (Chapter 12) and webbased budgeting at 24 Hour Fitness (Chapter 6).

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 2, 4, 6, 10, 13, 15, and 21, contain material that stress themes of recognizing and accounting for environmental costs, energy independence and the smart grid, setting stretch targets to motivate greater carbon reductions, using cost analysis, carbon tax, and cap-andtrade auctions to reduce environmental footprints, and constructing “green” homes in a costeffective manner.

Focus on Innovation

We discuss the role of accounting concepts and systems in fostering and supporting innovation and entrepreneurial activities in firms. In particular, we discuss the challenges posed by recognizing R&D costs as period expenses even though the benefits of innovation accrue in later periods. In Chapter 6, we describe how companies budget for innovation expenses and develop measures to monitor success of the innovation efforts delinked from operational performance in the current period. Chapter 11 presents the importance of nonfinancial measures when making decisions about innovation. Chapter 13 stresses that innovation starts with understanding customer needs while Chapter 19 discusses process innovations for improving quality.

New Cutting-Edge Topics

The pace of change in organizations continues to be rapid. The sixteenth 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 and business goals. • We describe ideas based on academic research regarding the weights to be placed on performance measures in a balanced scorecard. We have also added a new section on methods to evaluate strategy maps such as the strength of links, differentiators, focal points, and trigger points. • 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 have added new material around recent trends in big data and data analytics in predicting costs and when making demand forecasts.

Opening Vignettes

Each chapter opens with a vignette on a 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 surf wear company Q uiksilver was driven into bankruptcy by the relatively high proportion of fixed costs in its operations. Chapter 5 explains the use of activity-based costing by General Motors to evaluate its suppliers. Chapter 9 highlights the use of lean manufacturing by Boeing to work through its backlog of orders and reduce its inventory costs. Chapter 14 shows how Delta made changes to its frequent flyer program to reward its most profitable customers, who drive a disproportionate share of Delta’s revenues. Chapter 18 shows the impact on Honda of the rework costs associated with recalling millions of cars with defective airbags. Chapter 23 describes the misalignment between performance measurement and pay at Viacom, whose CEO has since been forced to step down.

Concepts in Action Boxes

Found in every chapter, these boxes cover real-world cost accounting issues across a variety of industries, including defense contracting, entertainment, manufacturing, retailing, and sports. New examples include: • Cost–Volume–Profit Analysis Makes Subway’s $5 Foot-Long Sandwiches a Success but Innovation Challenges Loom (Chapter 3) • Can Chipotle Wrap Up Its Materials-Cost Variance Increases? (Chapter 7) • H&M Uses Target Pricing to Bring Fast Fashion to Stores Worldwide (Chapter 13) • Amazon Prime and Customer Profitability (Chapter 14) • Hybrid Costing for Under Armour 3D Printed Shoes (Chapter 17) • Netflix Works to Overcome Internet Bottlenecks (Chapter 19)

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. We received positive feedback for the reorganization of Chapters 12 through 16 in the fifteenth edition and have maintained that order in the sixteenth edition. 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. C hapter 16 discusses joint cost allocation. Other examples of streamlined presentations can be found in: • Chapter 2 on the discussion of fundamental cost concepts and the managerial framework for decision making. • Chapter 6, where the appendix ties the cash budget to the chapter example. • 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.

Try It! Examples
Found throughout the chapter, Try It! interactive questions give students the opportunity to apply the concept they just learned. Linking in the eText will allow students to practice in Pearson MyLab Accounting© without interrupting their interaction with the eText.

Brief Contents
1 The Manager and Management Accounting 21 2 An Introduction to Cost Terms and Purposes 48 3 Cost–Volume–Profit Analysis 86 4 Job Costing 127 5 Activity-Based Costing and Activity-Based Management 172 6 Master Budget and Responsibility Accounting 217 7 Flexible Budgets, Direct-Cost Variances, and Management Control 269 8 Flexible Budgets, Overhead Cost Variances, and Management Control 308 9 Inventory Costing and Capacity Analysis 349 10 Determining How Costs Behave 392 11 Decision Making and Relevant Information 446 12 Strategy, Balanced Scorecard, and Strategic Profitability Analysis 497 13 Pricing Decisions and Cost Management 544 14 Cost Allocation, Customer-Profitability Analysis, and Sales-Variance Analysis 579 15 Allocation of Support-Department Costs, Common Costs, and Revenues 621 16 Cost Allocation: Joint Products and Byproducts 663 17 Process Costing 695 18 Spoilage, Rework, and Scrap 738 19 Balanced Scorecard: Quality and Time 768 20 Inventory Management, Just-in-Time, and Simplified Costing Methods 798 21 Capital Budgeting and Cost Analysis 838 22 Management Control Systems, Transfer Pricing, and Multinational C onsiderations 876 23 Performance Measurement, Compensation, and Multinational C onsiderations 911