@GUSTpdf Cost Accounting A Managerial Emphasis Fifteenth Edition Charles T. Horngren Stanford University Srikant M. Datar Harvard University Madhav V. Rajan Stanford University Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montréal Toronto Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo Editor in Chief: Donna Battista Manager, Rights and Permissions: Acquisitions Editor: Ellen Geary Samantha Graham Editorial Project Manager: Nicole Sam Cover Photo: © JOHN KELLERMAN/Alamy Editorial Assistant: Christine Donovan Editorial Media Project Manager: James Bateman Marketing Manager: Alison Haskins Production Media Project Manager: John Cassar Managing Editor: Jeff Holcomb Full-Service Project Management and Composition: Project Manager: Roberta Sherman Integra Manufacturing Buyer: Carol Melville Printer/Binder: Courier/Kendallville Senior Art Director: Anthony Gemmellaro Cover Printer: Lehigh-Phoenix Color/Hagerstown Cover Designer: Liz Harasymczuk Text Font: 10/12 Sabon Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on appropriate page within text (or on page 938). 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Rajan, Stanford University.—Fifteenth edition. pages cm Includes bibliographical references and index. ISBN 978-0-13-342870-4 1. Cost accounting. I. Datar, Srikant M. II. Rajan, Madhav V. III. Title. HF5686.C8H59 2015 658.15’11—dc23 2013047266 10 9 8 7 6 5 4 3 2 1 ISBN-10: 0-13-342870-2 ISBN-13: 978-0-13-342870-4 Brief Contents 1 The Manager and Management Accounting 2 2 An Introduction to Cost Terms and Purposes 28 3 Cost–Volume–Profit Analysis 66 4 Job Costing 106 5 Activity-Based Costing and Activity-Based Management 150 6 Master Budget and Responsibility Accounting 196 7 Flexible Budgets, Direct-Cost Variances, and Management Control 248 8 Flexible Budgets, Overhead Cost Variances, and Management Control 288 9 Inventory Costing and Capacity Analysis 328 10 Determining How Costs Behave 370 11 Decision Making and Relevant Information 424 12 Strategy, Balanced Scorecard, and Strategic Profitability Analysis 472 13 Pricing Decisions and Cost Management 516 14 Cost Allocation, Customer-Profitability Analysis, and Sales-Variance Analysis 550 15 Allocation of Support-Department Costs, Common Costs, and Revenues 592 16 Cost Allocation: Joint Products and Byproducts 632 17 Process Costing 664 18 Spoilage, Rework, and Scrap 706 19 Balanced Scorecard: Quality and Time 734 20 Inventory Management, Just-in-Time, and Simplified Costing Methods 764 21 Capital Budgeting and Cost Analysis 802 22 Management Control Systems, Transfer Pricing, and Multinational Considerations 840 23 Performance Measurement, Compensation, and Multinational Considerations 874 iii Contents 1 The Manager and Management Total Costs and Unit Costs 36 Accounting 2 Unit Costs 36 Use Unit Costs Cautiously 37 iTunes Variable Pricing: Downloads Are Down, Business Sectors, Types of Inventory, Inventoriable but Profits Are Up Costs, and Period Costs 38 Financial Accounting, Management Accounting, Manufacturing-, Merchandising-, and Service-Sector and Cost Accounting 3 Companies 38 Strategic Decisions and the Management Accountant 5 Types of Inventory 38 Value-Chain and Supply-Chain Analysis and Key Commonly Used Classifications of Manufacturing Success Factors 6 Costs 38 Value-Chain Analysis 6 Inventoriable Costs 39 Supply-Chain Analysis 7 Period Costs 39 Key Success Factors 8 Illustrating the Flow of Inventoriable Costs and Period Concepts in Action: Trader Joe’s Recipe for Cost Costs 40 Leadership Manufacturing-Sector Example 40 Decision Making, Planning, and Control: The Five-Step Recap of Inventoriable Costs and Period Costs 44 Decision-Making Process 10 Prime Costs and Conversion Costs 45 Key Management Accounting Guidelines 13 Concepts in Action: Cost Structure at Nordstrom Cost–Benefit Approach 13 Spurs Growth Behavioral and Technical Considerations 13 Measuring Costs Requires Judgment 46 Different Costs for Different Purposes 13 Measuring Labor Costs 46 Organization Structure and the Management Overtime Premium and Idle Time 47 Accountant 14 Benefits of Defining Accounting Terms 47 Line and Staff Relationships 14 Different Meanings of Product Costs 48 The Chief Financial Officer and the Controller 14 A Framework for Cost Accounting and Cost Management Accounting Beyond the Numbers 15 Management 49 Professional Ethics 16 Calculating the Cost of Products, Services, and Other Institutional Support 17 Cost Objects 50 Typical Ethical Challenges 17 Obtaining Information for Planning and Control and Performance Evaluation 50 Problem for Self-Study 19 | Decision Points 20 | Analyzing the Relevant Information for Making Terms to Learn 21 | Assignment Material 21 | Decisions 50 Questions 21 | Exercises 21 | Problems 24 Problem for Self-Study 51 | Decision Points 53 | 2 An Introduction to Cost Terms Terms to Learn 54 | Assignment Material 54 | and Purposes 28 Questions 54 | Exercises 55 | Problems 59 High Fixed Costs Bankrupt Twinkie Maker Costs and Cost Terminology 29 3 Cost–Volume–Profit Analysis 66 Direct Costs and Indirect Costs 30 How “The Biggest Rock Show Ever” Turned a Big Cost Allocation Challenges 31 Profit Factors Affecting Direct/Indirect Cost Essentials of CVP Analysis 67 Classifications 31 Contribution Margin 68 Cost-Behavior Patterns: Variable Costs and Fixed Expressing CVP Relationships 70 Costs 32 Cost–Volume–Profit Assumptions 72 Cost Drivers 34 Breakeven Point and Target Operating Concepts in Action: Zipcar Helps Twitter Reduce Income 73 Fixed Costs Breakeven Point 73 Relevant Range 35 Target Operating Income 74 Relationships Between Types of Costs 36 Target Net Income and Income Taxes 76 iv CONTENTS v Using CVP Analysis for Decision Making 77 5 Activity-Based Costing and Decision to Advertise 77 Activity-Based Management 150 Decision to Reduce the Selling Price 78 LG Electronics Reduces Costs and Inefficiencies Determining Target Prices 78 Through Activity-Based Costing Sensitivity Analysis and Margin of Safety 79 Broad Averaging and Its Consequences 151 Cost Planning and CVP 80 Undercosting and Overcosting 151 Alternative Fixed-Cost/Variable-Cost Structures 80 Product-Cost Cross-Subsidization 152 Operating Leverage 82 Simple Costing System at Plastim Corporation 152 Concepts in Action: Cost–Volume–Profit Analysis Design, Manufacturing, and Distribution Makes Megabus a Mega-Success Processes 153 Effects of Sales Mix on Income 84 Simple Costing System Using a Single Indirect-Cost CVP Analysis in Service and Not-for-Profit Pool 154 Organizations 86 Applying the Five-Step Decision-Making Process at Contribution Margin Versus Gross Margin 87 Plastim 155 Problem for Self-Study 88 | Decision Points 89 Refining a Costing System 157 Reasons for Refining a Costing System 157 APPENDIX: Decision Models and Uncertainty 90 Guidelines for Refining a Costing System 157 Activity-Based Costing Systems 158 Terms to Learn 93 | Assignment Material 93 | Plastim’s ABC System 158 Questions 93 | Exercises 94 | Problems 98 Cost Hierarchies 161 Implementing Activity-Based Costing 162 4 Job Costing 106 Implementing ABC at Plastim 162 Job Costing and “Green” Home Construction Comparing Alternative Costing Systems 166 Building-Block Concepts of Costing Systems 107 Considerations in Implementing Activity-Based Costing Job-Costing and Process-Costing Systems 108 Systems 167 Job Costing: Evaluation and Implementation 110 Benefits and Costs of Activity-Based Costing Time Period Used to Compute Indirect-Cost Systems 167 Rates 111 Behavioral Issues in Implementing Activity-Based Normal Costing 112 Costing Systems 168 General Approach to Job Costing Using Normal Activity-Based Management 169 Costing 112 Pricing and Product-Mix Decisions 169 Concepts in Action: The Job Costing “Game Plan” Cost Reduction and Process Improvement at the New Cowboys Stadium Decisions 169 The Role of Technology 117 Design Decisions 170 Concepts in Action: Home Depot Undergoes an Planning and Managing Activities 170 Inventory Management “Fix-It” Activity-Based Costing and Department Costing Actual Costing 118 Systems 171 A Normal Job-Costing System in ABC in Service and Merchandising Companies 172 Manufacturing 120 Concepts in Action: Hospitals Use Time-Driven General Ledger 121 Activity-Based Costing to Reduce Costs and Explanations of Transactions 122 Improve Care Subsidiary Ledgers 123 Problem for Self-Study 173 | Decision Points 176 | Nonmanufacturing Costs and Job Costing 127 Terms to Learn 177 | Assignment Material 177 | Budgeted Indirect Costs and End-of-Accounting-Year Adjustments 127 Questions 177 | Exercises 178 | Problems 186 Underallocated and Overallocated Indirect Costs 127 6 Master Budget and Responsibility Adjusted Allocation-Rate Approach 128 Accounting 196 Proration Approach 128 “Scrimping” at the Ritz: Master Budgets Writeoff to Cost of Goods Sold Approach 130 Budgets and the Budgeting Cycle 198 Choosing Among Approaches 131 Strategic Plans and Operating Plans 198 Variations from Normal Costing: A Service-Sector Budgeting Cycle and Master Budget 199 Example 132 Advantages and Challenges of Implementing Budgets 199 Problem for Self-Study 133 | Decision Points 135 | Promoting Coordination and Communication 199 Terms to Learn 136 | Assignment Material 136 | Providing a Framework for Judging Performance Questions 136 | Exercises 137 | Problems 143 and Facilitating Learning 200 vi CONTENTS Motivating Managers and Other Employees 201 Continuous Improvement 266 Challenges in Administering Budgets 201 Financial and Nonfinancial Performance Developing an Operating Budget 201 Measures 266 Time Coverage of Budgets 202 Benchmarking and Variance Analysis 267 Steps in Preparing an Operating Budget 202 Problem for Self-Study 268 | Decision Points 270 | Financial Planning Models and Sensitivity Analysis 213 APPENDIX: Mix and Yield Variances for Substitutable Concepts in Action: Web-Enabled Budgeting Inputs 270 and Hendrick Motorsports Budgeting and Responsibility Accounting 215 Terms to Learn 274 | Assignment Material 274 | Organization Structure and Responsibility 216 Questions 274 | Exercises 275 | Problems 279 Feedback 216 Responsibility and Controllability 217 8 Flexible Budgets, Overhead Cost Human Aspects of Budgeting 218 Variances, and Management Budgetary Slack 218 Stretch Targets 219 Control 288 Kaizen Budgeting 220 Planning Fixed and Variable Overhead Costs at Tesla Budgeting in Multinational Companies 221 Motors Planning of Variable and Fixed Overhead Costs 289 Problem for Self-Study 222 | Decision Points 223 | Planning Variable Overhead Costs 289 APPENDIX: The Cash Budget 224 Planning Fixed Overhead Costs 290 Standard Costing at Webb Company 290 Terms to Learn 230 | Assignment Material 230 | Developing Budgeted Variable Overhead Questions 230 | Exercises 230 | Problems 235 Rates 291 Developing Budgeted Fixed Overhead Rates 291 7 Flexible Budgets, Direct-Cost Variable Overhead Cost Variances 293 Variances, and Management Flexible-Budget Analysis 293 Control 248 Variable Overhead Efficiency Variance 293 Variable Overhead Spending Variance 295 Going for the (Other) Green: Reducing Standard Journal Entries for Variable Overhead Costs and Costs Variances 296 Static Budgets and Variances 249 Fixed Overhead Cost Variances 297 The Use of Variances 249 Production-Volume Variance 298 Static Budgets and Static-Budget Variances 250 Interpreting the Production-Volume Variance 299 Flexible Budgets 252 Journal Entries for Fixed Overhead Costs and Flexible-Budget Variances and Sales-Volume Variances 300 Variances 253 Concepts in Action: Variance Analysis and Sales-Volume Variances 253 Standard Costing Help Sandoz Manage Flexible-Budget Variances 254 Its Overhead Costs 301 Concepts in Action: Flexible Budgets Integrated Analysis of Overhead Cost Variances 303 at Corning 4-Variance Analysis 303 Standard Costs for Variance Analysis 256 Combined Variance Analysis 305 Obtaining Budgeted Input Prices and Budgeted Input Production-Volume Variance and Sales-Volume Quantities 256 Variance 305 Price Variances and Efficiency Variances for Direct-Cost Variance Analysis and Activity-Based Costing 307 Inputs 258 Flexible Budget and Variance Analysis for Direct Price Variances 258 Labor Costs 308 Efficiency Variance 259 Flexible Budget and Variance Analysis for Fixed Setup Journal Entries Using Standard Costs 261 Overhead Costs 310 Implementing Standard Costing 263 Overhead Variances in Nonmanufacturing Concepts in Action: Starbucks Reduces Direct-Cost Settings 312 Variances to Brew a Turnaround Financial and Nonfinancial Performance Management’s Use of Variances 264 Measures 312 Multiple Causes of Variances 264 When to Investigate Variances 265 Problem for Self-Study 313 | Decision Points 315 | Using Variances for Performance Measurement 265 Terms to Learn 316 | Assignment Material 316 | Organization Learning 266 Questions 316 | Exercises 316 | Problems 321 CONTENTS vii 9 Inventory Costing and Capacity 10 Determining How Costs Analysis 328 Behave 370 Lean Manufacturing Helps Companies Cisco Understands Its Costs While Helping Reduce Inventory and Survive the the Environment Recession Basic Assumptions and Examples of Cost Variable and Absorption Costing 329 Functions 371 Variable Costing 329 Basic Assumptions 371 Absorption Costing 330 Linear Cost Functions 372 Comparing Variable and Absorption Review of Cost Classification 373 Costing 330 Identifying Cost Drivers 374 Variable vs. Absorption Costing: Operating Income and The Cause-and-Effect Criterion 374 Income Statements 331 Cost Drivers and the Decision-Making Comparing Income Statements for One Process 375 Year 331 Cost Estimation Methods 376 Comparing Income Statements for Multiple Industrial Engineering Method 376 Years 333 Conference Method 377 Variable Costing and the Effect of Sales and Account Analysis Method 377 Production on Operating Income 336 Quantitative Analysis Method 378 Absorption Costing and Performance Concepts in Action: What Does It Cost Measurement 337 AT&T Wireless to Send a Text Concepts in Action: Absorption Costing and the Message? Bankruptcy of U.S. Automakers Estimating a Cost Function Using Quantitative Undesirable Buildup of Inventories 339 Analysis 379 Proposals for Revising Performance High-Low Method 381 Evaluation 340 Regression Analysis Method 383 Comparing Inventory Costing Methods 341 Evaluating and Choosing Cost Drivers 384 Throughput Costing 341 Cost Drivers and Activity-Based Costing 387 A Comparison of Alternative Inventory-Costing Concepts in Action: Activity-Based Costing: Methods 342 Identifying Cost Drivers Denominator-Level Capacity Concepts and Fixed-Cost Nonlinear Cost Functions 388 Capacity Analysis 343 Learning Curves 389 Absorption Costing and Alternative Denominator- Cumulative Average-Time Learning Model 390 Level Capacity Concepts 343 Incremental Unit-Time Learning Model 391 Effect on Budgeted Fixed Manufacturing Cost Incorporating Learning-Curve Effects into Prices Rate 344 and Standards 392 Choosing a Capacity Level 345 Data Collection and Adjustment Issues 393 Product Costing and Capacity Management 345 Problem for Self-Study 395 | Decision Points 397 | Pricing Decisions and the Downward Demand Spiral 346 APPENDIX: Regression Analysis 398 Performance Evaluation 347 External Reporting 348 Terms to Learn 407 | Assignment Material 407 | Tax Requirements 351 Questions 407 | Exercises 408 | Problems 414 Planning and Control of Capacity Costs 351 Difficulties in Forecasting Chosen Denominator-Level 11 Decision Making and Relevant Concept 351 Difficulties in Forecasting Fixed Manufacturing Information 424 Costs 352 Relevant Costs, JetBlue, and Twitter Nonmanufacturing Costs 352 Information and the Decision Process 425 Activity-Based Costing 352 The Concept of Relevance 426 Relevant Costs and Relevant Revenues 426 Problem for Self-Study 353 | Decision Points 355 | Qualitative and Quantitative Relevant APPENDIX: Breakeven Points in Variable Costing Information 427 One-Time-Only Special Orders 428 and Absorption Costing 356 Potential Problems in Relevant-Cost Terms to Learn 358 | Assignment Material 358 | Analysis 430 Questions 358 | Exercises 358 | Problems 364 Short-Run Pricing Decisions 431 viii CONTENTS Insourcing-Versus-Outsourcing and Make-or-Buy Productivity Component of Change in Operating Decisions 432 Income 491 Outsourcing and Idle Facilities 432 Further Analysis of Growth, Price-Recovery, and Strategic and Qualitative Factors 434 Productivity Components 493 International Outsourcing 434 Applying the Five-Step Decision-Making Framework The Total Alternatives Approach 435 to Strategy 494 Concepts in Action: The LEGO Group Concepts in Action: Operating Income The Opportunity-Cost Approach 436 Analysis Reveals Strategic Challenges Carrying Costs of Inventory 438 at Best Buy Product-Mix Decisions with Capacity Constraints 440 Downsizing and the Management of Processing Bottlenecks, Theory of Constraints, and Throughput- Capacity 496 Margin Analysis 441 Engineered and Discretionary Costs 496 Customer Profitability and Relevant Costs 444 Identifying Unused Capacity for Engineered and Relevant-Revenue and Relevant-Cost Analysis of Discretionary Overhead Costs 497 Dropping a Customer 445 Managing Unused Capacity 497 Relevant-Revenue and Relevant-Cost Analysis of Problem for Self-Study 498 | Decision Points 502 | Adding a Customer 446 Relevant-Revenue and Relevant-Cost Analysis of APPENDIX: Productivity Measurement 502 Closing or Adding Branch Offices or Business Divisions 447 Terms to Learn 505 | Assignment Material 505 | Irrelevance of Past Costs and Equipment-Replacement Questions 505 | Exercises 506 | Problems 508 Decisions 448 Decisions and Performance Evaluation 450 13 Pricing Decisions and Cost Problem for Self-Study 451 | Decision Points 453 | Management 516 Fair and Square: Not What J. C. Penney Customers APPENDIX: Linear Programming 454 Wanted Terms to Learn 458 | Assignment Material 458 | Major Factors that Affect Pricing Decisions 517 Questions 458 | Exercises 458 | Problems 464 Customers 517 Competitors 517 Costs 517 12 Strategy, Balanced Scorecard, and Weighing Customers, Competitors, and Costs 518 Strategic Profitability Analysis 472 Costing and Pricing for the Long Run 518 The Balanced Scorecard at Volkswagen do Brasil Calculating Product Costs for Long-Run Pricing What Is Strategy? 473 Decisions 519 Building Internal Capabilities: Quality Improvement Alternative Long-Run Pricing Approaches 521 and Reengineering at Chipset 475 Market-Based Approach: Target Costing for Target Strategy Implementation and the Balanced Pricing 522 Scorecard 476 Understanding Customers’ Perceived The Balanced Scorecard 476 Value 523 Strategy Maps and the Balanced Scorecard 477 Competitor Analysis 523 Implementing a Balanced Scorecard 480 Implementing Target Pricing and Target Different Strategies Lead to Different Costing 523 Scorecards 481 Concepts in Action: Extreme Target Pricing Environmental and Social Performance and Cost Management at IKEA and the Balanced Scorecard 482 Value Engineering, Cost Incurrence, and Locked-In Features of a Good Balanced Scorecard 485 Costs 525 Pitfalls in Implementing a Balanced Scorecard 486 Value-Chain Analysis and Cross-Functional Evaluating the Success of Strategy and Teams 526 Implementation 487 Achieving the Target Cost per Unit for Provalue 526 Strategic Analysis of Operating Income 487 Cost-Plus Pricing 529 Growth Component of Change in Operating Cost-Plus Target Rate of Return on Income 489 Investment 529 Price-Recovery Component of Change in Operating Alternative Cost-Plus Methods 530 Income 490 Cost-Plus Pricing and Target Pricing 531 CONTENTS ix Life-Cycle Product Budgeting and Costing 531 15 Allocation of Support-Department Life-Cycle Budgeting and Pricing Decisions 532 Costs, Common Costs, and Managing Environmental Costs 533 Revenues 592 Customer Life-Cycle Costing 533 Non-Cost Factors In Pricing Decisions 534 Cost Allocation and the Future of “Smart Grid” Price Discrimination 534 Energy Infrastructure Peak-Load Pricing 534 Allocating Support Department Costs International Pricing 535 Using the Single-Rate and Dual-Rate Antitrust Laws and Pricing Decisions 535 Methods 593 Single-Rate and Dual-Rate Methods 594 Problem for Self-Study 536 | Decision Points 538 | Allocation Based on the Demand for (or Usage of) Terms to Learn 539 | Assignment Material 539 | Materials-handling Services 595 Questions 539 | Exercises 540 | Problems 544 Allocation Based on the Supply of Capacity 596 Advantages and Disadvantages of Single-Rate 14 Cost Allocation, Customer- Method 597 Profitability Analysis, and Advantages and Disadvantages of Dual-Rate Sales-Variance Analysis 550 Method 598 Budgeted Versus Actual Costs and the Choice of Starwood Hotels: Not All Guests Are the Same Allocaton Base 598 Customer-Profitability Analysis 551 Budgeted Versus Actual Rates 599 Customer-Revenue Analysis 551 Budgeted Versus Actual Usage 599 Customer-Cost Analysis 552 Fixed-Cost Allocation Based on Budgeted Rates Customer-Level Costs 553 and Budgeted Usage 599 Customer Profitability Profiles 556 Fixed-Cost Allocation Based on Budgeted Rates Presenting Profitability Analysis 557 and Actual Usage 600 Concepts in Action: How Pandora Radio Allocating Budgeted Fixed Costs Based on Actual Made Its Unprofitable Customers Usage 600 Profitable Allocating Costs of Multiple Support Using the Five-Step Decision-Making Departments 601 Process to Manage Customer Direct Method 604 Profitability 559 Step-Down Method 605 Cost Hierarchy-Based Operating Income Reciprocal Method 606 Statement 560 Overview of Methods 609 Criteria to Guide Cost Allocations 562 Calculating the Cost of Job WPP 298 610 Fully Allocated Customer Profitability 564 Allocating Common Costs 611 Implementing Corporate and Division Cost Stand-Alone Cost-Allocation Method 612 Allocations 564 Incremental Cost-Allocation Method 612 Issues in Allocating Corporate Costs to Divisions Cost Allocations and Contract Disputes 613 and Customers 568 Contracting with the U.S. Government 613 Using Fully Allocated Costs for Decision Fairness of Pricing 614 Making 569 Bundled Products and Revenue Allocation Sales Variances 569 Methods 614 Static-Budget Variance 570 Bundling and Revenue Allocation 614 Flexible-Budget Variance and Sales-Volume Concepts in Action: Contract Disputes over Variance 571 Reimbursable Costs for the U.S. Department Sales-Mix Variance 572 of Defense Sales-Quantity Variance 572 Stand-Alone Revenue-Allocation Market-Share and Market-Size Variances 573 Method 616 Market-Share Variance 574 Incremental Revenue-Allocation Market-Size Variance 574 Method 617 Problem for Self-Study | 576 Decision Points 577 | Problem for Self-Study 619 | Decision Points 621 | Terms to Learn 578 | Assignment Material 578 | Terms to Learn 621 | Assignment Material 622 | Questions 578 | Exercises 579 | Questions 622 | Exercises 622 | Problems 626 Problems 583