Accounting for decision making and control

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cover Accounting for Decision Makingand Control About the Author Preface Acknowledgments Brief Contents Contents 1 Introduction A. Managerial Accounting: Decision Making and Control B. Design and Use of Cost Systems C. Marmots and Grizzly Bears D. Management Accountant’s Role in the Organization E. Evolution of Management Accounting: A Framework for Change F. Vortec Medical Probe Example G. Outline of the Text H. Summary 2 The Nature of Costs A. Opportunity Costs 1. Characteristics of Opportunity Costs 2. Examples of Decisions Based on Opportunity Costs B. Cost Variation 1. Fixed, Marginal, and Average Costs 2. Linear Approximations 3. Other Cost Behavior Patterns 4. Activity Measures C. Cost–Volume–Profit Analysis 1. Copier Example 2. Calculating Break-Even and Target Profits 3. Limitations of Cost–Volume–Profit Analysis 4. Multiple Products 5. Operating Leverage D. Opportunity Costs versus Accounting Costs 1. Period versus Product Costs 2. Direct Costs, Overhead Costs, and Opportunity Costs E. Cost Estimation 1. Account Classification 2. Motion and Time Studies F. Summary Appendix: Costs and the Pricing Decision 3 Opportunity Cost of Capital and Capital Budgeting A. Opportunity Cost of Capital B. Interest Rate Fundamentals 1. Future Values 2. Present Values 3. Present Value of a Cash Flow Stream 4. Perpetuities 5. Annuities 6. Multiple Cash Flows per Year C. Capital Budgeting: The Basics 1. Decision to Acquire an MBA 2. Decision to Open a Day Spa 3. Essential Points about Capital Budgeting D. Capital Budgeting: Some Complexities 1. Risk 2. Inflation 3. Taxes and Depreciation Tax Shields E. Alternative Investment Criteria 1. Payback 2. Accounting Rate of Return 3. Internal Rate of Return (IRR) 4. Methods Used in Practice F. Summary 4 Organizational Architecture A. Basic Building Blocks 1. Self-Interested Behavior, Team Production, and Agency Costs 2. Decision Rights and Rights Systems 3. Role of Knowledge and Decision Making 4. Markets versus Firms 5. Influence Costs B. Organizational Architecture 1. Three-Legged Stool 2. Decision Management versus Decision Control C. Accounting’s Role in the Organization’s Architecture D. Example of Accounting’s Role: Executive Compensation Contracts E. Summary 5 Responsibility Accounting and Transfer Pricing A. Responsibility Accounting 1. Cost Centers 2. Profit Centers 3. Investment Centers 4. Economic Value Added (EVA®) 5. Controllability Principle B. Transfer Pricing 1. International Taxation 2. Economics of Transfer Pricing 3. Common Transfer Pricing Methods 4. Reoragnization: The Solution if All Else Fails 5. Recap C. Summary 6 Budgeting A. Generic Budgeting Systems 1. Country Club 2. Large Corporation B. Trade-Off between Decision Management and Decision Control 1. Communicating Specialized Knowledge versus Performance Evaluation 2. Budget Ratcheting 3. Participative Budgeting 4. New Approaches to Budgeting 5. Managing the Trade-Off C. Resolving Organizational Problems 1. Short-Run versus Long-Run Budgets 2. Line-Item Budgets 3. Budget Lapsing 4. Static versus Flexible Budgets 5. Incremental versus Zero-Based Budgets D. Summary Appendix: Comprehensive Master Budget Illustration 7 Cost Allocation: Theory A. Pervasiveness of Cost Allocations 1. Manufacturing Organizations 2. Hospitals 3. Universities B. Reasons to Allocate Costs 1. External Reporting/Taxes 2. Cost-Based Reimbursement 3. Decision Making and Control C. Incentive/Organizational Reasons for Cost Allocations 1. Cost Allocations Are a Tax System 2. Taxing an Externality 3. Insulating versus Noninsulating Cost Allocations D. Summary 8 Cost Allocation: Practices A. Death Spiral B. Allocating Capacity Costs: Depreciation C. Allocating Service Department Costs 1. Direct Allocation Method 2. Step-Down Allocation Method 3. Service Department Costs and Transfer Pricing of Direct and Step-Down Methods 4. Reciprocal Allocation Method 5. Recap D. Joint Costs 1. Joint Cost Allocations and the Death Spiral 2. Net Realizable Value 3. Decision Making and Control E. Segment Reporting and Joint Benefits F. Summary Appendix: Reciprocal Method for Allocating Service Department Costs 9 Absorption Cost Systems A. Job Order Costing B. Cost Flows through the T-Accounts C. Allocating Overhead to Jobs 1. Overhead Rates 2. Over/Underabsorbed Overhead 3. Flexible Budgets to Estimate Overhead 4. Expected versus Normal Volume D. Permanent versus Temporary Volume Changes E. Plantwide versus Multiple Overhead Rates F. Process Costing: The Extent of Averaging G. Summary Appendix A: Process Costing Appendix B: Demand Shifts, Fixed Costs, and Pricing 10 Criticisms of Absorption Cost Systems: Incentive to Overproduce A. Incentive to Overproduce 1. Example 2. Reducing the Overproduction Incentive B. Variable (Direct) Costing 1. Background 2. Illustration of Variable Costing 3. Overproduction Incentive under Variable Costing C. Problems with Variable Costing 1. Classifying Fixed Costs as Variable Costs 2. Variable Costing Excludes the Opportunity Cost of Capacity D. Beware of Unit Costs E. Summary 11 Criticisms of Absorption Cost Systems: Inaccurate Product Costs A. Inaccurate Product Costs B. Activity-Based Costing 1. Choosing Cost Drivers 2. Absorption versus Activity-Based Costing: An Example C. Analyzing Activity-Based Costing 1. Reasons for Implementing Activity-Based Costing 2. Benefits and Costs of Activity-Based Costing 3. ABC Measures Costs, Not Benefits D. Acceptance of Activity-Based Costing E. Summary 12 Standard Costs: Direct Labor and Materials A. Standard Costs 1. Reasons for Standard Costing 2. Setting and Revising Standards 3. Target Costing B. Direct Labor and Materials Variances 1. Direct Labor Variances 2. Direct Materials Variances 3. Risk Reduction and Standard Costs C. Incentive Effects of Direct Labor and Materials Variances 1. Build Inventories 2. Externalities 3. Discouraging Cooperation 4. Mutual Monitoring 5. Satisficing D. Disposition of Standard Cost Variances E. The Costs of Standard Costs F. Summary 13 Overhead and Marketing Variances A. Budgeted, Standard, and Actual Volume B. Overhead Variances 1. Flexible Overhead Budget 2. Overhead Rate 3. Overhead Absorbed 4. Overhead Efficiency, Volume, and Spending Variances 5. Graphical Analysis 6. Inaccurate Flexible Overhead Budget C. Marketing Variances 1. Price and Quantity Variances 2. Mix and Sales Variances D. Summary 14 Management Accounting in a Changing Environment A. Integrative Framework 1. Organizational Architecture 2. Business Strategy 3. Environmental and Competitive Forces Affecting Organizations 4. Implications B. Organizational Innovations and Management Accounting 1. Total Quality Management (TQM) 2. Just-in-Time (JIT) Production 3. Six Sigma and Lean Production 4. Balanced Scorecard C. When Should the Internal Accounting System Be Changed? D. Summary Solutions to Concept Questions Glossary Index