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Cost Accounting, Horngren, et al., 11th Edition Christensen

Chapter 1 The Accountants Role in the Organization

1. Describe how cost accounting supports management accounting and financial accounting Who is the customer? What is cost management?2.

Understand how management accountants affect strategic decisions.

Strategy (e.g., low cost, product differentiation) tries to match capabilities with market opportunities Management accounting identifies a companys resources and capabilities3. Distinguish between the planning and control decisions of managers Planning (e.g., budgeting) Control (e.g., variance analysis)4. Distinguish among the problem-solving, score-keeping, and attention-directing roles of a management

accountant

Score keeping (e.g., historical reports) Attention directing (e.g., variance analysis) Problem solving (e.g., comparing alternatives) Filling all three roles simultaneously can be tricky5. Identify four themes managers need to consider for attaining success See Exhibit 1-3 Customer focus Value Chain (Exhibit 1-4) and Supply chain (Exhibit 1-5) Key success factors (cost, quality, time, innovation) Continuous improvement and benchmarking6. Describe the set of business functions in the value chain.7. Describe three ways management accountants support managers Cost-benefit analysis (CBA) Behavioral and technical considerations (e.g., motivation) Different costs for different purposes (e.g., treatment of R&D)8. Understand how cost accounting fits into an organizations structure See Exhibit 1-6 CFO responsibilities include controllership, treasury, tax, internal audit, and information systems Controller responsibilities include financial and management accounting9. Understand what professional ethics mean to management accountants Institute of Management Accountants (IMA) and the Certified Management Accountant (CMA) Standards of Ethical Conduct for Management Accountants (Exhibit 1-7) Resolution of Ethical Conflict (Exhibit 1-8)


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Chapter 2 - An Introduction to Cost Terms and Purposes

1. Define and illustrate a cost object Cost: A resource sacrificed or forgone to achieve a specific objective Cost object: Anything for which a separate measurement of cost is desired (See Exhibit 2-1)

Costs first accumulate, and are then assignedto cost objects

2. Distinguish between direct costs and indirect costs Direct costs can be traced a cost object in an economically feasible way Indirect costs cannot be traced to a cost object in an economically feasible way Direct costs are tracedand indirect costs are allocatedto a cost object The distinction can depend on the cost object3. Explain variable costs and fixed costs Variable costs change in totalas the driver changes Fixed costs do not change in totalas the driver changes (See Exhibits 2-3, 2-4) A cost driveris any factor that causally affects costs What are the assumptions in classifying costs this way?4. Interpret unit costs with caution Fixed costs per unit are variable; variable cost per unit are fixed Unitized fixed costs may be misinterpreted as variable5. Distinguish among service-sector, merchandising-sector, and manufacturing sector companies6. Describe the three categories of inventories commonly found in many manufacturers

Direct Materials

Inventory

Work in Process

Inventory

Finished Goods

Inventory

Purchases DM DM CGM CGM CGSDLMO

Total Manufacturing Costs = Direct Material + Direct Labor + Manufacturing Overhead Prime Costs = Direct Material + Direct Labor Conversion Cost = Direct Labor + Manufacturing Overhead7. Differentiate between inventoriable costs and period costs8.

Explain how different ways of computing product costs are appropriate for different purposes

Different costs for different purposes (Exhibit 2-9) Costs can be classified many ways (Exhibit 2-10)


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Chapter 3 - Cost-Volume-Profit Analysis

1. Understand the basic cost-volume-profit (CVP) assumptions Units of output is the only driver Total costs can be divided between fixed and variable components Linearity in the relevant range Price, unit variable cost, and fixed costs are known and constant The sales mix is constant There is no time value of money2. Explain the essential features of CVP analysis3. Determine breakeven point and output to achieve target operating income Given total cost = a + bx, and total revenue = px, then x = (profit + a) / (p -b) Breakeven volume (xbe) = a / (p-b) Breakeven dollars = pxbe = a / ((p-b)/p) New terms: Contribution margin, Contribution margin ratio, Gross margin4. Understand how income tax affect CVP analysis Profit before taxes = Profit after taxes / (1 - tax rate)5. Explain the use of CVP analysis in decision making and how sensitivity analysis helps managers cope withuncertainty Electronic spreadsheets facilitate sensitivity analysis6. Use CVP analysis to plan variable and fixed costs Managers can compute indifference points between pairs of alternatives (See Exhibit 3-5)7. Apply CVP analysis to a company producing multiple products If the sales mix changes, the breakeven point and operating income may change8. Adapt CVP analysis to situations in which a product has more than one cost driver9. Distinguish between contribution margin and gross margin Gross margin = Total revenue Cost of goods sold Contribution margin = Total revenue Total variable costs

TR = px

TC = a + bx

a

x

$

x

$ TC

TR


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Chapter 4 Job Costing

1. Describe the building-block concept of costing systems Why are costing systems necessary? Cost object, direct cost, indirect cost, cost tracing, cost allocation,

Indirect cost pool, indirect cost allocation base

2. Distinguish between job costing and process costing See Exhibit 4-1 Job order costing: unique product or service Process costing: masses of similar or identical units of product or service3. Outline a seven-step approach to job costing (See Exhibit 4-2)4. Distinguish actual costing from normal costing.

Actual costing Normal costing

Direct costs Actual rate Actual rateIndirect costs Actual rate Budgeted rate

Budgeted rates are usually used because they are more timely, and less affected by short-run fluctuations5. Track the flow of costs in a job-costing system (See Exhibit 4-5)

Direct MaterialsInventory

Work in ProcessInventory

Finished GoodsInventory

Purchases DM DM CGM CGM CGSDLMOA

Manufacturing OverheadControl

Actual MO MO Applied

Under-applied: Actual MO > MO Applied Over-applied: Actual MO < MO Applied6. Account for end-of-period under-allocated or over-allocated indirect costs using alternative methods Use the actual rate Prorate over WIP, FG, and CGS Write-off the amount to CGS7. Apply variations of normal costing Some companies use budgeted rates for direct costs as well as for indirect costs


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Chapter 6 Master Budgeting and Responsibility Accounting

1. Understand what a master budget is and explain its benefits What is a budget? Timing (short-term, long-term) Techniques (comprehensive versus incremental; rolling) Innovations (PPBS, Zero-based budgeting, Activity-based budgeting, Kaizen budgeting)2. Describe key advantages of budgets Planning, control, communication, coordination, motivation3. Prepare the operating budget and its supporting schedules See Exhibit 6-2 The revenue budget is critical Use t-accounts to develop the production and purchases budgets4. Use computer-based financial planning models in sensitivity analysis Spreadsheets were developed for such applications See Concepts in Action (p. 188) for example of web-based-budgeting5. Explain kaizen budgeting and how it is used for cost management Continuous improvement Often used in conjunction with target costing6. Prepare an activity-based budget In ABC, costs are determined as rate x actual consumption In ABB, budgets are determined as rate x planned consumption ABB is useful for control costs before they are incurred or committed7. Describe responsibility centers and responsibility accounting A part, segment, or sub-unit of an organization whose manager is accountable for a specified set of activities Four types of responsibility centers:

Cost center CostRevenue center RevenueProfit center ProfitInvestment center Return on Investment, Residual Income

Factors that influence the effectiveness of a MCSOrganizational structureOrganizational cultureParticipation in budget preparation

8. Explain how controllability relates to responsibility accounting Controllability is the degree of influence that a manager has over costs and revenues Budgets affect people and people affect budgets Budgetary slack


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Chapter 7 Flexible Budgets, Variances, and Management Control: I

1. Distinguish a static budget from a flexible budget Why is a flexible budget flexible? The static budget is used for planning; the flexible budget is used for control

2. Develop flexible budgets and compute flexible budget variances and sales-volume variances See Exhibits 7-1, 7-2, and 7-33. Explain why standard costs are often used in variance analysis A standardis a budgeted amount per unit. Standards are set for budgeting, control, record keeping, cost

assignment, pricing, and bidding

Standards can exclude past inefficiencies and take into account changes expected to occur in the budget period4. Compute price variances and efficiency variances for direct cost categories

DM: AQp x AP AQp x SP AQu x SP SQa x SPDL: AH x AR AH x SR SHa x SR

DM price variance = AQp (SP - AP) andDM efficiency variance = SP(SQa AQu) DL rate variance = AH (SR AR) andDL efficiency variance = SR (SHa AH) The flexible budget variance equals the price plus efficiency variances5. Explain why purchasing performance measures should focus on more factors than just price variances Do not interpret variances in isolation; other factors include quality and on-time delivery Efficiency versus effectiveness6. Integrate continuous improvement into variance analysis Why investigate a variance?

When should a variance be investigated?

7. Perform variance analysis in ABC systems ABC systems often classify the costs of activities into a cost hierarchy Regardless of the level in the hierarchy, the basic procedures of variance analysis are the same The key idea is to focus the flexible budget quantity computations at the appropriate level of the cost hierarchy8. Describe benchmarking and how it can be used in cost management Benchmarking involves measuring output against the best level of performance A variance is a treasure; it represents an opportunity for improvement


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Chapter 8 Flexible Budgets, Variances, and Management Control: II

1. Explain in what ways the planning of variable overhead (VO) costs and planning of fixed overhead(FO) costs are similar and in what ways they differ

VO can be reduced by (1) eliminating NVA costs and (2) reducing consumption of cost drivers FO can be reduced by (1) eliminating NVA cost and (2) planning the appropriate capacity levels2. Identify the key features of a standard costing system Costs are assigned to cost objects using the standard inputs allowed for output achieved Every cost is recorded at standard, thus simplifying record-keeping3. Compute variable overhead spending and efficiency variances

VO: AH x AR AH x SR SHa x SR

Spending variance = AH (SR AR) andEfficiency variance = SR (SHa AH) The flexible budget variance equals the spending plus the efficiency variances4. Explain how the efficiency variance (EV) for variable indirect costs differs from the (EV) for direct

costs

For direct costs, the EV is the difference between actual and standard hours allowed For indirect costs, the EV is based on the efficiency with which the cost-allocation base is used5. Compute the budgeted fixed overhead rate FO rate = Budgeted FO / Budgeted Allocation Base

Fixed Overhead Flexible Budget Variance = Budgeted FO Actual FO Production Volume Variance (PVV) = FO rate ( Denominator SHa)6. Explain two concerns when interpreting the PVV as a measure of the economic cost of unused

capacity

Management may have maintained excess capacity as a buffer to uncertain demand The PVV focuses only on costs; it does not account for price changes that may increase demand and

the need for unused capacity

7. Explain how a 4-variance analysis approach reconciles the actual overhead incurred with theoverhead amounts allocated during the period

See Exhibit 8-3 The 8 variances are not independent8. Illustrate how the flexible-budget variance approach can be used in ABC ABC systems classify the costs of activities in a cost hierarchy The basic concepts and procedures for variance analysis are the same, regardless of the level of the

cost


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Chapter 9 Inventory Costing and Capacity Analysis

1. Identify what distinguishes variable costing from absorption costing. Variable costing: DM + DL + VMO (FMO is a period expense) Absorption costing: DM + DL + MVO + FMO (FMO is included in inventory)

2. Prepare income statements using absorption costing and variable costing See Exhibit 9-1 Contribution Margin is not the same as Gross Margin When standard costing is used, the CGS at standard is adjusted to CGS (See Exhibit 9-2)

3. Explain the differences in operating income (OI) under absorption costing and variable costing See Exhibit 9-3 When Production > Sales, OIAC > OIVC When Production < Sales OIAC < OIVC OIAC OIVC = FMOEI FMOBI In JIT, there is no difference

4. Understand how absorption costing can provide undesirable incentives for managers There is an incentive to over-produce (See Exhibit 9-4)

5. Differentiate throughput costing from variable costing and from absorption costing In throughput costing, only DM is variable; DL and MO are fixed See Exhibit 9-5

6. Describe the various capacity concepts that can be used in absorption costing Theoretical capacity = upper limit; no maintenance; supply based Practical capacity = allows for some down time for unavoidable interruptions; supply based Normal capacity = long-term customer demand Master budget = one-period customer demand7. Understand the major factors management considers in choosing a capacity level to compute the budgeted fixed

overhead cost

Potential effects on product costing, performance evaluation, and financial statements Regulatory requirements Difficulties in forecasting the denominator8. Describe how attempts to recover fixed costs of capacity may lead to a downwarddemand spiral Companies with high fixed costs and unused capacity may encounter ongoing and increasingly greaterreductions in demand if they continue to raise selling prices to fully recover costs from a declining sales base9. Explain how the choice of the denominator level affects the production volume variance PVV = FMO rate x (denominator in output units Actual output units)


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Chapter 10 - Determining How Costs Behave

Question: Why estimate a cost function (y = f(x))?

1. Explain two assumptions frequently used in cost-behavior estimation

Single driver Linearity2. Describe linear cost functions and three common ways in which they behave y = f(x) Three common patterns: ways: fixed, variable, mixed (Exhibit 10-1) Key factors in cost estimation: cost object, time span, relevant range (Exhibit 10-2) Correlation is not causation3. Understand the various approaches to cost estimation (note: these are not mutually exclusive) Industrial engineering (aka "bottoms-up" or "work measurement")

Conference Account analysis Quantitative

High-low: easy but only uses two data pointsRegression analysis: y = a + b1x1 + b2x2 + . . . + bnxn + e (See the Appendix to this chapter)

4. Outline six steps in estimating a cost function based on current or past cost relationships Chose the dependent variable, identify the driver, collect the data, plot the data, estimate the function, evaluate

the function

5. Describe three criteria to evaluate and choose cost drivers

Economic plausibility (does it make sense?) Goodness of fit (coefficient of determination (R-square)) Slope of regression line (b) See Exhibit 10-196. Explain and give examples of nonlinear cost functions Step (Exhibit 10-9) Learning curve (Exhibit 10-10)7. Distinguish between the cumulative and incremental learning curve models (skim)8. Be aware of data problems encountered in estimating cost functions Time periods for x and y differ Fixed costs allocated as if they are variable Data not uniformly reliable Outliers No causal relationship between driver and cost (causation versus correlation) Non-stationarities (e.g., technological innovation) Inflation


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Chapter 11 Decision Making and Relevant Information

Decision problems described in this chapter: special order, product mix, outsourcing

1. Describe a five-step sequence in the decision process See Exhibit 11-1

Models dont make decisions; people do. Decision models often simplify reality2. Differentiate relevant costs and revenues from irrelevant costs and revenues in any decision situation Relevant costs occur in the future and differ between alternatives Relevant revenues occur in the future and differ between alternatives Sunk costs are past costs that are unavoidable because they cannot be changed no matter what action is taken3. Distinguish between quantitative factors and qualitative factors in decisions (See Exhibit 11-3) Accounting data is only one input; in many cases, non-economic factors dominate4. Beware of two potential problems that should be avoided in relevant-cost analysis All variable costs are not relevant; all fixed costs are not irrelevant Unit fixed costs can be misleading5. Explain the opportunity cost concept and explain why it is used in decision making The benefit forgone by not using the next-best alternative6. Know how to choose which products to produce when there are capacity constraints Maximize contribution margin per unit of constraining resource When there are multiple constraints, use linear programming (See Appendix)7. Discuss factors managers must consider when adding or discontinuing customers and segments Focus on how costs differ across alternatives8. Explain why the book value of equipment is irrelevant in equipment replacement decisions Past costs are not relevant9. Explain how conflicts can arise between the decision model used by a manager and the performance model used

to evaluate the manager

Rewarding based on metrics (e.g., ROI) not used in the decision model (e.g., NPV) Rewards based on short run outcomes, rather than long-run outcomesDiscussion problems: Rent versus buy

Expected Value of Perfect Information (EVPI)


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Chapter 12 Pricing Decisions and Cost Management

1. Discuss the three major influences on pricing decisions Customers (determine demand), competitors and cost(influence supply)2. Distinguish between short-run and long-run pricing decisions

Short run decisions focus on periods less than one year, e.g., special orderFixed manufacturing costs and marketing may not be relevantSet-up costs may be significant and are probably not driven by volume

The timing horizon dictates which costs are relevant to pricingLong-run costs previously ignored include those related to environmentABC should be used for long-run cost build-upFull product costs cover entire value chain

Market-based versus cost-based pricingCustomer-driven external focus versus internal focusStiff competition versus less competition with no observable market prices

3. Price products using the target-costing approach Tries to control costs before they are locked in

Target costing often employs value engineering and ABC The role of cost accounting is to estimate cost of alternative designs4. Apply the concepts of cost incurrence and locked-in costs See Exhibit 12-4 Ex-ante cost control versus ex postcost control5. Price products using the cost-plus approach See survey of company practices6. Use life-cycle product budgeting and costing when making pricing decisions Spans a products or projects entire life cycle GAAP stipulates that pre and post production costs are expensed7. Describe two pricing practices in which non-cost factors are important when setting prices Price discrimination charging different customers different prices for the same product Peak-load pricing charging higher prices when demand approaches capacity8. Explain the effects of anti-trust laws on pricing Anti-trust laws apply to manufacturers, not service providers Price discrimination is permissible if based on cost differences and intent is to not destroy competition Predatory pricing (prices below cost) is illegal, but an appropriate measure of cost is not defined Collusive pricing is illegal


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Chapter 13 Strategy, Balanced Scorecard, and Strategic Profitability Analysis

1. Recognize which of two generic strategies a company is using. Strategy describes how an organization matches its capabilities with its opportunities In formulating strategy, a company considers competitors, potential entrants into the market, equivalent

products, bargaining power of customers, and bargaining power of input suppliers.

Product differentiation is an organizations ability to offer superior and unique products relative to itscompetitors products

Cost leadership is an organizations ability to achieve lower costs through productivity and efficiencyimprovements, elimination of waste, and tight cost control

2. Identify what comprises re-engineering. Re-engineeringis the fundamental rethinking and redesign of business processes to achieve improvements in

critical measures of performance, such as cost, quality, service, speed, and customer satisfaction.

3. Present the four perspectives of the balanced scorecard. (See Exhibits13-1 and 13-2) The balanced scorecardlinks a companys strategy to key financial and non-financial metrics, organized along

four perspectives: (1) financial, (2) customer, (3) internal business processes, and (4) learning and growth.

Employees have learned that what is measured is important. The act of collecting and reporting a numbermakes it important. Employees will try to maximize the performance measure.

Features of a good balanced scorecard design include(1) Each metric is linked to company strategy(2) Each metric communicates the strategy(3) In for-profit companies, financial metrics are included(4) The number of metrics is limited(5) The metrics highlight sub-optimal tradeoffs when operational and financial metrics are not considered

together

Pitfalls to avoid when implementing a balanced scorecard include:(1) Dont assume the cause-and-effect linkages to be precise(2) Dont seeks improvements across all of the measures all of the time(3) Dont use only objective measures in the scorecard(4) Dont fail to consider both costs and benefits of initiatives(5) Dont ignore non-financial metrics

4. Analyze changes in operating income to evaluate strategy Divide change in operating income into growth, price-recovery, and productivity components

- Growth (similar to the Sales Volume Variance): changes in revenues minus costs without changes in prices,efficiencies, or capacities

- Price recovery: (similar to Price and Spending Variances) changes and revenues and costs due to pricechanges only

- Productivity (similar to Efficiency Variances) decreases in costs using fewer inputs and from reducingcapacity

A company is successful in implementing strategy when changes in operating income align closely with thestrategy

5. Distinguish engineered costs from discretionary costs (See Exhibit 13-4) Engineered costs (e.g., DM, Conversion) result from a cause-and-effect relationship between output and

resources used

Discretionary costs (e.g., R&D, training) have no measurable cause-and-effect relationship between output andresources used

6. Identify unused capacity and how to manage it Unused capacity can be eliminated (via downsizing) or the company can attempt to grow Finding the right mix of management and technical people is critical for successful downsizing


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Chapter 14 Cost Allocation, Customer Profitability Analysis, and Sales-Variance Analysis

1. Identify four purposes for allocating costs to cost objects (Exhibit 14-1) Different costs for different purposes (See pp. 483) Why allocate corporate and other support costs? See Survey of Company Practice, p. 488)

Purpose ExamplesEconomic decisions Make or buy; continue or discontinue; pricingMotivation Reduce throughput time; reduce partsCost reimbursement Government contractsFinancial reporting Inventory; taxes

2. Describe cost allocation decisions using appropriate criteria (Exhibit 14-2) Cause and effect; Benefits received; Fairness or equity; Ability to bear3. Discuss decisions faced when collecting costs in indirect cost pools What indirect costs should be included? How many pools should be used?4. Discuss why a companys revenues can differ across customers purchasing the same product Revenue can differ due to differences in the quantity purchased and the price discounts given5. Apply the concept of cost hierarchy to customer costing Categories include customer output unit-level costs, customer batch-level costs, customer-sustaining costs,

distribution-channel costs, and corporate sustaining costs

6. Discuss why customer-level costs differ across customers Different customers place different demands on a companys resources (See Exhibit 14-5)


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Chapter 14 continued

7. Provide additional information about the sales-volume variance by calculating the sales mix variance and salesquantity variance (skim)

Example: Product BP BQ Bmix AP AQ AmixApples 1.10 3 3/10 1.00 6 6/12Oranges 1.50 7 7/10 1.70 6 6/12

Budgeted Sales - Actual Sales = Sales Budget Variance13.80 16.20 = 2.40 F

Analysis of SBV:Actual Flexible Bud Static Bud

AQ x AP AQ x BP BQ x BPApples 6 x 1.00 6 x 1.10 3 x 1.10

6.00 6.60 3.300.60 U 3.30 FFBV SVV

Oranges 6 x 1.70 6 x 1.50 7 x 1.5010.20 9.00 10.50

1.20 F 1.50 UFBV SVV

Both 0.60 F 1.80 FFBV SVV

Analysis of SVV:Flexible Budget Static Budget

TAQ x Amix x BP TAQ x Bmix x BP TBQ x Bmix x BPApples 12 x 6/12 x 1.10 12 x 3/10 x 1.10 10 x 3/10 x 1.10

6.60 3.96 3.302.64 F 0.66 FSMV SQV

Oranges 12 x 6/12 x 1.50 12 x 7/10 x 1.50 10 x 7/10 x 1.509.00 12.60 10.50

3.60 U 2.10 FSMV SQV

Both 15.60 16.56 13.800.96 U 2.76 FSMV SQV

8. Provide additional information about the sales quantity variance by calculating the market share variance (skim)


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Chapter 15 Allocation of Support Department Costs, Common Costs, and Revenues

1. Differentiate the single rate from the dual rate cost allocation method. In the dual rate method, separate rates are prepared for variable and fixed costs to support better decision

making

2. Understand how the uncertainty managers face is affected by budgeted and actual allocation rates Budgeted rates reduce the uncertainty of cost allocations to receiving departments3. Allocate support department costs using the direct, step, and reciprocal methods See Kaplan/Atkinson (1998) and Christensen (2000) The direct method is easiest, but least accurate (no recognition of reciprocal services) The step method is more difficult than the direct method, and partially recognizes department dependencies The reciprocal method is the most difficult, the most accurate (full recognition of reciprocal services), and

supports outsourcing decisions.

4.

Allocate common costs using either the stand-alone method or the incremental method

The stand-alone method uses information about each user of the cost object to allocate common costs The incremental method ranks the users and allocates in order5. Explain the importance of an explicit agreement on cost-reimbursement contracts6. Understand how bundling products gives rise to revenue recognition issues7. Allocate revenues of a bundled package to the individual products in that package The stand-alone method uses product-specific (e.g., price, cost) info to allocate the revenue The incremental method allocates revenue in a specific order


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Chapter 16 Cost Allocation: Joint Products and Byproducts

1. Identify the split-off point in a joint-cost situation Joint costs are the costs of a production process that yields multiple products simultaneously The split-off point is the juncture in a joint production process when two or more products become separate Separable costs are all costs incurred after the split-off point that are assignable to the separate products2. Distinguish joint products from byproducts Joint products have high sales value3. Explain why joint costs are allocated to individual products (see p. 558) To support external reporting requirements To support cost-reimbursement arrangements or insurance claims To facilitate internal performance evaluations To support some litigation cases To support rate regulation4. Allocate joint costs using four different methods Sales value at split-off Net realizable value Constant gross margin percentage Physical measures (e.g., weight, volume)5. Explain why the sales value at split-off method is preferred when allocating joint costs Use the sales value at split-off method when selling price data are available6. Explain why joint costs are irrelevant in a sell-or-process-further decision Joint costs are the same whether or not further processing occurs.7. Account for byproducts using two different methods (skim)


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Chapter 17 - Process Costing

1. Identify the situations in which process costing systems are appropriate The key characteristic is masses of similar or identical units See Survey of Process Costing in Different Industries (p. 587)2. Describe five key steps in process costing Summarize the physical flow of units Compute equivalent units Compute cost per equivalent units Summarize total costs to account for Compute cost of units remaining and cost of units transferred out3. Calculate and use equivalent units By example, 100 units that are 50% complete equals 50 equivalent units The percentage is an estimate that reflects the condition of all incomplete units The percentage can vary by materials, labor, and indirect support added Conversion cost = Direct Labor and manufacturing overhead costs4. Prepare journal entries for process-costing systems Understand the flow of cost through t-accounts (Exhibit 17-3)5. Use the weighted-average method of process costing Assumes every unit in process requires the same amount of effort to complete Best learned by example6. Use the FIFO method of process costing Assumes that beginning inventory work in process takes less effort to compete These methods are best learned by example7. Incorporate standard costs simply process costing (skim)8. Apply process costing methods to cases with transferred-in costs Add a column for costs transferred in from prior departmentsAppendix: Operation costing (skim)

Every costing system should be tailored to the production system A hybrid-costing system has features of job-order costing and process costing An operation is a standardized method that is performed on batches In operation costing, DM costs are traced to each batch as in job-order costing, and conversion costs are traced

to each operation and then allocated to each unit passing through the operation as in process costing

All units passing through an operation are assumed to consume the same amount of conversion costs of thatoperation


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Chapter 18 - Spoilage, Rework, and Scrap

1. Distinguish among spoilage, reworked units, and scrap Spoilage refers to unacceptable units that are discarded or sold for net disposal proceeds Reworked units refers to unacceptable units that are reworked and sold as good units Scrap refers to a product with minimal sales value2. Describe the accounting procedures for normal and abnormal spoilage Question: Should any spoilage be considered normal or acceptable? The costs of normal spoilage are part of the costs of good units The costs of abnormal spoilage is written off as a loss in the current period3. Account for spoilage in process costing using the weighted-average method4. Account for spoilage in process costing using the FIFO method Review process costing before reading this section Assume that spoilage occurs at the inspection point and is a percentage of good units Under FIFO, assume that spoiled units come from units started Finished Goods is debited for cost of good units and normal spoilage Loss from Abnormal Spoilage is debited for abnormal spoilage5. Account for spoilage in process using the standard costing method6. Account for spoilage in job costing If spoilage is normal to process, charge to overhead If spoilage is specific to a job, charge to that job7. Account for reworked units in job costing (skim)8. Account for scrap (skim)


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Chapter 19 - Quality, Time, and the Theory of Constraints

1. Explain four cost categories in a cost of quality program (See Exhibits 19-1, 19-2) The cost of quality includes prevention, appraisal, internal failure, and external failure Can anything less than zero defects be optimal?2.

Use three methods that companies use to identify quality programs (See Exhibits 19-3,19-4, 19-5)

Control charts, Pareto diagrams, and cause and effect diagrams3. Identify the relevant costs and benefits of quality improvements The relevant costs are the incremental costs The benefits are cost savings and increase in contribution margin4. Provide examples of non-financial quality measures of customer satisfaction and internal performance Customer satisfaction: customer complaints, on-time delivery Internal performance: product defects, process yield5. Use both financial and non-financial measures of quality Financial measures: evaluate trade-offs among different categories of costs of quality Non-financial measures: identify problem areas, highlight leading indicators of future performance A company needs a balanced score-card (Kaplan, and Norton, HBR, Jan 1996)6. Describe customer-response time, and explain the reasons for and the cost of lines and delays (skim) The time between customer order and product delivery Uncertainty about customer orders and limited capacity lead to lower revenues and higher inventory carrying

costs

How is time a competitive weapon? Companies need to measure time in order to manage it properly. Customer response time is the amount of time from when a customer places an order to when the order is

delivered to the customer. It can include time process an order, make, and deliver the product.

A time driveris any factor that causes a change in the speed an activity is undertaken Is it a coincidence that a bottleneckis usually at the top of the bottle?7. Apply the three main measurements in the theory of constraints (TOC) The objective of TOC is to maximize throughput contribution while minimizing investments

- Throughput contribution = Sales Revenue Direct Materials- Investments = DM + WIP + FG + R&D + PPE

TOC assumes a short-run time horizon and defines all costs except DM as fixed. TOC is consistent with the management accounting concept of maximizing CM per unit of constraining

resource.

8. Manage bottlenecks Recognize that the bottleneck determines throughput contribution for the entire plant Search and find the bottleneck Keep the bottleneck working at capacity and subordinate all non-bottleneck resources to the bottleneck

resource.

Increase bottleneck efficiency and capacity


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Chapter 20 Inventory Management, Just-In-Time, and Backflush Costing

Cost management of materials is pivotal in many organizations

For manufacturers, these costs often exceed 50% of total manufacturing costs For retailers, materials these costs often exceed 70% of total costs1. Identify five categories of costs associated with goods for sale Purchasing cost of goods acquired, including freight Ordering costs of preparing and issuing orders, including receiving, inspection, and payment costs Carrying costs of storing inventory, including opportunity cost, space rental, insurance, and spoilage Stockout costs of running out of inventory when its wanted, included customer ill will and lost CM Quality costs of not meeting customer needs or specifications2. Balance ordering and carrying cost using the EOQ decision model EOQ = (2DP/C)1/2, where D = demand in units, P = Cost per order, C = Carrying cost per unit This formula ignores purchasing, stockout, and quality costs, and assumes no quantity discounts. See Exhibit 20-1 for the tradeoff between ordering and carrying costs Reorder point = number of units sold per unit of time x PO lead time Safety stock is a buffer against unexpected increases in demand or lead time3. Identify and reduce conflicts that can arise between the EOQ model and models used for performance

evaluation

If carrying costs are excluded when evaluating the performance of a purchasing manager, the manager mayorder excessive amounts of inventory.

4. Use a supply chain approach to inventory management See Survey of Company Practice, p. 6965. Differentiate materials requirements planning (MPR) systems from JIT systems for manufacturing Push versus pull6. Identify the major features of a just-in-time production system Features include manufacturing cells, multi-skilled workers, TQM, reduced lead time and setup time, strong

supplier relationships

Benefits include: lower inventory costs, higher quality, higher flexibility, reduced costing problems7. Use backflush costing8. Describe different ways backflush costing can simplify job costing systems Backflush costing is used with JIT It does not track costs with the physical sequence of purchases and production Trigger points (e.g., purchases, completion of FG, Sale of FG) define when costs are recorded For journal entries, see Exhibits 20-7 and 20-8


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Chapter 21 Capital Budgeting and Cost Analysis

1. Recognize the multi-year focus of capital budgeting Projects often last many years2. Understand the six stages of capital budgeting for a project

Identification, search, information acquisition, selection, financing, implementation and control

3. Use and evaluate the two main discounted cash flow methods (NPV and IRR) NPV = NCFt / (1 + i)t, where NCF = net cash flow, t = time, i = discount rate 0 = NCFt / (1 + IRR)t Interpretation Conflicting signals can occur when cash flow patterns differ, or when project lives are unequal NPV is a better metric because it is in dollars; IRR has a fallacious re-investment assumption, and may have

multiple-roots

4. Use and evaluate the payback method Often used in conjunction with discounted cash flow metrics An ad-hoc adjustment for risk5. Use and evaluate the accrual accounting rate-of-return (AARR) method Dont use it in capital budgeting decisions Also known as ROI6. Identify and reduce conflicts from using DCF metrics for capital budgeting and AARR for performance

evaluation

7. Identify relevant cash inflows and outflows for capital budgeting decisionsCapital Budgeting and Inflation (Appendix)

Be consistent: Use a real rate on real dollars, and a nominal rate on nominal dollars Nominal rate = real rate + inflation rate + real rate x inflation rateCapital Rationing (not in text)

Ranking may not always identify the optimal mix of projects in capital rationing Mathematical programming should be used:

Maximize NPVi Xi

Subject to Costi Xi Budget Ceiling, where Xi = 0 or 1 for all projects


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Chapter 22 Management Control Systems, Transfer Pricing, and Multi-national Considerations

1. Describe a management control system (MCS) and its three key properties A MCS gathers and uses information for planning and control purposes Financial, non-financial, internal, and external data are needed There are formal and informal control systems To be effective, the MCS should fit the organizationsstrategy, structure, and culture Goal in-congruence is a common problem when the MCS does not fit2. Describe the benefits and costs of decentralization The essence of decentralization is thefreedom for managers at lower levels to make decisions Benefits include greater responsiveness, quicker decisions, improved motivation, and learning Costs include potentially sub-optimal decisions, duplication of activities, increased monitoring Decentralization creates the need for responsibility centers with differentperformance metrics and transfer

pricing

3. Explain transfer prices and four criteria used to evaluate them A transfer price is the price one sub-unit changes for a product or service supplied to another sub-unit of the

same organization

Ideally, a transfer price should promotegoal congruence and autonomy Other criteria include management effort and sub unit performance evaluation4. Calculate transfer prices using three different general methods

Market: Appropriate when output is sold to external customers.Market prices for intermediate goods may not exist.

Total cost: Another form of cost allocation. Fosters costs visibility,but may lead to inefficiencies among supplying divisions.

Variable cost: Appropriate when supplying division has idle capacity

Negotiated: Appropriate when market prices are volatile and changeoccurs frequently

5. Explain how market-based transfer prices generally promote goal congruence in perfectly competitive markets Market prices in perfect competition are optimized by supply and demand Maximizing individual performance also maximizes total performance Transacting internally like transacting externally6. Avoid making sub-optimal decisions when transfer prices are based on full cost plus a markup Cost-based prices are used when market prices are not available, inappropriate, or too costly to obtain Charging full cost plus markup may cause buyers to consider all costs transferred as variable and buy from

external sources

7. Understand the range over which two divisions generally negotiate the transfer price when there is excesscapacity

The minimum is the incremental cost to the seller, allowing all profit to buyer The maximum is the external price, allowing all profit to seller But autonomous divisions in a company buyers and sellers may not share information necessary to set a range8. Construct a general guideline for determining a minimum transfer price There is no silver bullet; however, the author recommends that a good minimum is the incremental cost up to

the point of transfer, plus the opportunity cost to supplying division

9. Recognize income tax considerations in multi-national transfer pricing (skim)


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Chapter 23 - Performance Measurement, Compensation, and Multi-national Considerations

1. Measure performance from a financial and non-financial See Survey of Company Practice, p. 7922. Design an accounting-based performance measure

Choose and clearly define the metrics that measure the right goals Chose the frequency of measurement Establish controls over the reliability of the metrics (omitted by authors) Establish targets3. Analyze profitability using the DuPont method Return on Investment (ROI) = Income / Investment = (Income / Revenue) x (Revenue / Investment) Return on Sales (ROS) = Income / Revenue Capital Turnover = Revenue / Investment Investment is variously defined as TA available, TA employed, Working Capital, or SE4. Use the residual-income (RI) measure and recognize its advantages Residual Income (RI) = Income (Required rate of return x Investment)5. Describe the economic value added (EVA) method EVA = OI after tax [WACC x (TA CL)] EVA is a special form of RI, where WACC is the required rate of return and investment is TA-CL WACC is the after tax weighted average cost of capital Since TA-CL=LTL+SE, investment is defined as funds invested for the long-term6. Contrast current-cost, and historical-cost asset measurement methods7. Indicate the difficulties that arise when comparing the performance of divisions operating in different countries8. Understand the role of salaries and incentives in compensation arrangements Performance based compensation is often used in decentralized organizations Managers will focus on areas that are being measured and rewarded Linking rewards to results is the incentive, but uncontrollable factors related to results creates risk9. Describe the management accountant's role in helping organizations provide better incentive systems Mangers should be evaluated on factors for which they are responsible Rewarding quantity without rewarding quality has caused problems Rewarding performance that is inconsistent with goals or mission of organization has caused problems

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