Step 1- Choose one topic from below list.Job Order CostingProcess CostingAbsorption Cost SystemsJIT: Just-In-Time production systemsABC: Activity-Based CostingABM: Activity-Based ManagementTQM: Total Quality ManagementSix SigmaLean ProductionBalanced ScorecardStep 2- Write a four (4) – five (5) page double spaced paper in APA format discussing the findings on your specific topic in your own words. Note – paper length does not include cover page or References page.Structure your paper as follows:a. Cover pageb. Overview describing the importance of the research topic in your own wordsc. Purpose of Research of the article in your own wordsd. Review of the Literature summarized in your own wordse. Conclusion in your own wordsf. Personal Thoughtsg. ReferencesPlease Note: The research must be conducted using peer-reviewed trade or academic journals. You are expected to research and write paper summarizing in your own words what you have found on current topics from academic journals and book attached.Please Note: Plagiarism will not be tolerated. The paper must be written in your own words.§ Content & Structure : All of the requested components are completed as assigned; content is on topic and related to managerial accounting, critical thinking is clearly demonstrated (no direct quotes – a short definition is allowed); scholarly research is demonstrated; topics and concepts gained from the assigned reading and/or from research is evident.§ APA Formatting : Cover page, headings, in-text citations, page citations (page number citations required for specific information such as dates, years, list of items from article, names, numbers, statistics, and other specific information), and references are properly formatted.§ Articles: Articles used are current (published within last five (5) years and are from peer-reviewed journal article publications.§ Effective Communication: Communication is clear, concise, and well presented; scholarly writing is demonstrated; grammar, sentence structure, writing in third person, and word choice is used correctly.
Information Technology Impact on Managerial Accounting
Student Name
Assignment Week #1: Article Research Paper
BAOL 531: Managerial Accounting
Professor: Dr. Thomas Seiler
Date
1
Information Technology Impact on Managerial Accounting
Overview
Information technology has soared within the past couple decades. Today, individuals
live in a technological era in which they are constantly connected, whether it be through cellphones, laptops, IPads, etc. As one can imagine, this new technology has also brought about
change and opportunity for the accounting industry. Think back to when financial statements
and tax returns were prepared by hand, to now where just about everything is done
electronically. Instead of sifting through paper documents, one can easily retrieve information
with a few clicks of their computer mouse. Needless to say, information technology has had a
tremendous impact on both financial and managerial accounting.
Purpose of Research
The general purpose of this research was to study how far information technology has
advanced and how current information technology has impacted the managerial accounting
profession.
Review of Literature
According to Warren Jr., Moffitt, and Byrnes (2015), in 2000 approximately 25% of
accounting information was stored electronically, whereas today, roughly 98% of information is
stored electronically (p. 397). That is a vast increase in 15 years and a perfect example of how
technology has significantly impacted the accounting industry. The research conducted by
Warren Jr. et al., focused on Big Data, which is various forms of datasets such as video, images,
social media, websites, etc. and how all of this information can be collected, analyzed and used
to improve financial and managerial accounting (pp. 400-401).
2
Warren Jr. et al. (2015) provided that managerial accounting is “the use of information
generated from accounting records to help managers carry out their duties” (p. 400). Thus,
information technology has increased the amount of data available for managers to analyze.
However, Bredmar, Ask, Frisk and Magnusson (2014) believed that the key to information
technology is that managers must develop accounting systems that measure and/or pull the data
that is relevant and useful to the manager. In other words, the amount of information available is
almost endless, thus, managers need to develop a plan or a goal and build the management
system from there (p. 126). An idea suggested by Warren Jr. et al. is for managers to leverage
the Balanced Scorecard management control system to identify behaviors in both a financial and
nonfinancial measure; Big Data can identify the behaviors outlined in the Balanced Scorecard
and provide important information to the manager (p. 400). For example, telephone usage can
track productivity, email can be used to track internal processes, client service, etc. (pp. 400401).
Organizations can also use information technology for budgeting (Warren Jr. et al.,
2015). Managers can analyze historical data and look for trends or seasonal business activity to
forecast financial information. Warren Jr. et al. believed Big Data and information technology
will allow managers to use other useful information such as climate, performance evaluations
and labor to produce budgets (p. 401). In other words, some companies are moving past the
traditional budget in which only financial data is used, and are incorporating multiple datasets
into the budget. Bredmar et al. (2014) also believed that organizations can utilize information
technology to develop rules and calculations to create budgets and define specifically what those
budgets are to be used for.
3
Conclusion
The research suggests that information technology has and will continue to significantly
impact accounting. It is astounding how much information is available to individuals every
single day. With information technology and advanced accounting systems, businesses can
collect, analyze and produce financial information that is relevant, useful and likely more
accurate than in the past. The research conducted by Warren Jr. et al. (2015) provided an
excellent indication of how information technology will positively contribute to the managerial
accounting profession. The research explained that information technology will help improve
management control systems, budgeting and other nonfinancial reporting such as client
satisfaction and employee productivity (p. 405). Bredmar et al. (2014) also indicated that as
times change, and so too do performance measures and reporting requirements. Thus, it is both
appropriate and important to utilize information technology to learn, grow and adapt in the
accounting profession. For example, as performance metrics change, companies should adapt
their systems in order to meet the needs of the new goals of the company (p. 135). In summary,
information technology will assist managers in adapting to the constantly evolving accounting
world.
Personal Thoughts
I am always in awe with the technology today. Especially when I speak with Partners at
the firm I work for and they remind me that they used to prepare tax returns with a pen and
paper, some of those tax returns were 200 pages long! All that to say, it is amazing how far
technology has come throughout the years. I imagine companies are able to perform much more
detailed analyses today versus in the past. Mainly because they probably did not have the
information or resources available to perform such complex calculations. Thus, not only has
4
information technology assisted companies in analyzing data more efficiently but it has also
provided business leaders with more useful information; more informed business leaders would
hopefully result in better business decisions and economic growth. In addition, information
technology has been instrumental in delivering useful information to investors. Therefore, I’m
sure investors and stakeholders are thrilled with the amount of information made available to
them because they can use that information to try and invest their funds wisely.
One thing that I think is very important to keep in mind is “Garbage In – Garbage Out.”
In other words, business entities first need to confirm and verify that the data going into their
systems is good data. The company then needs to verify that their information systems and
reports are collecting all the necessary information, because if one key element is left out, the
results become useless. The point I am trying to make is because there is so much data available,
it is important for managers to distinguish what is relevant data versus what is not relevant data
and then build their analysis and reporting around that. Essentially, companies should not get
lost in all the data or produce reports that are too complex, vast or difficult to understand. The
goal should be to collect, analyze and report the most useful information in logical manner.
5
References
Bredmar, K., Ask, U., Frisk, E., & Magnusson, J. (2014). Accounting information systems
implementation and management accounting change. Business Systems Research, 5(2),
125-138. doi:10.2478/bsrj-2014-0015
Warren, J. D., Moffitt, K. C., & Byrnes, P. (2015). How big data will change accounting.
Accounting Horizons, 29(2), 397-407. Retrieved from
http://aaajournals.org/doi/pdf/10.2308/isys-51580
Ninth Edition
Accounting for
Decision Making
and Control
Jerold L. Zimmerman
University of Rochester
ACCOUNTING FOR DECISION MAKING AND CONTROL, NINTH EDITION
Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2017 by McGraw-Hill
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Library of Congress Cataloging-in-Publication Data
Names: Zimmerman, Jerold L., 1947- author.
Title: Accounting for decision making and control / Jerold L. Zimmerman,
?? University of Rochester.
Description: Ninth edition. | New York, NY : McGraw-Hill Education, [2017]
Identifiers: LCCN 2015043326 | ISBN 9781259564550 (alk. paper)
Subjects: LCSH: Managerial accounting.
Classification: LCC HF5657.4 .Z55 2017 | DDC 658.15/11—dc23
LC record available at http://lccn.loc.gov/2015043326
The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does
not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not
guarantee the accuracy of the information presented at these sites.
www.mhhe.com
About the Author
Jerold L. Zimmerman
Jerold Zimmerman is Professor Emeritus at the William
E. Simon Graduate School of Business, University of
Rochester. He holds an undergraduate degree from the
University of Colorado, Boulder, and a doctorate from
the University of California, Berkeley.
While at Rochester, Dr. Zimmerman has taught
a variety of courses spanning accounting, finance,
and economics. Accounting courses include nonprofit
accounting, intermediate accounting, accounting theory,
and managerial accounting. A deeper appreciation of
the challenges of managing complex organizations was
acquired by serving as the Simon School’s Deputy Dean
and on the board of directors of several public corporations.
Professor Zimmerman publishes widely in accounting on topics as diverse as cost
allocations, corporate governance, disclosure, financial accounting theory, capital markets,
and executive compensation. His paper “The Costs and Benefits of Cost Allocations” won
the American Accounting Association’s Competitive Manuscript Contest. He is recognized for developing Positive Accounting Theory. This work, co-authored with colleague
Ross Watts, at the Massachusetts Institute of Technology, received the American Institute
of Certified Public Accountants’ Notable Contribution to the Accounting Literature Award
for “Towards a Positive Theory of the Determination of Accounting Standards” and “The
Demand for and Supply of Accounting Theories: The Market for Excuses.” Both papers
appeared in the Accounting Review. Professors Watts and Zimmerman are also co-authors
of the highly cited textbook Positive Accounting Theory (Prentice Hall, 1986). Professors Watts and Zimmerman received the 2004 American Accounting Association Seminal Contribution to the Literature award. Professor Zimmerman’s textbooks also include
Managerial Economics and Organizational Architecture with Clifford Smith and James
Brickley, 6th ed. (McGraw-Hill, 2016) and Management Accounting in a Dynamic Environment with Cheryl McWatters (Routledge UK, 2016). He is a founding editor of the
Journal of Accounting and Economics, published by Elsevier. This scientific journal is one
of the most highly referenced accounting publications.
He and his wife Dodie have two daughters, Daneille and Amy. Jerry has been known
to occasionally engage friends and colleagues in an amicable diversion on the links.
iii
Preface
During their professional careers, managers in all organizations, profit and nonprofit, rely
on their accounting systems. Sometimes managers use the accounting system to acquire
information for decision making. At other times, the accounting system measures performance and thereby influences their behavior. The accounting system is both a source of
information for decision making and part of the organization’s control mechanisms—thus,
the title of the book, Accounting for Decision Making and Control.
The purpose of this book is to provide students and managers with an understanding and appreciation of the strengths and limitations of an organization’s accounting
system, thereby allowing them to be more intelligent users of these systems. This book
provides a framework for understanding accounting systems and a basis for analyzing
proposed changes to these systems. The text demonstrates that managerial accounting is an i­ntegral part of the firm’s organizational architecture, not just an isolated set of
computational topics.
Changes in the Ninth Edition
Feedback from reviewers and instructors using the prior editions and my own teaching
experience provided the basis for the revision. In particular, the following changes have
been made:
• Each chapter has been revised to further enhance readability and remove redundancy.
• References to actual company practices have been updated.
• Users were uniform in their praise of the problem material. They found it challenged
their students to critically analyze multidimensional issues while still requiring
­numerical problem-solving skills.
• The end-of-chapter problem material was revised by adding 45 new problems—
including some related to health care and knowledge-based service firms—and
­removing outdated problems.
• The ninth edition is a more concise revision that presents the same ­fundamental concepts, learning objectives, and challenging critical thinking end-of-chapter materials as
in prior editions.
Overview of Content
Chapter 1 presents the book’s conceptual framework by using a simple decision context
regarding accepting an incremental order from a current customer. The chapter describes
why firms use a single accounting system and the concept of economic Darwinism, among
other important topics. This chapter is an integral part of the text.
iv
Preface
v
Chapters 2, 4, and 5 present the underlying conceptual framework. The importance
of opportunity costs in decision making, cost–volume–profit analysis, and the difference
between accounting costs and opportunity costs are discussed in Chapter 2. Chapter 4
­employs the economic theory of organizations and organizational architecture as the conceptual foundation to understand the role of the accounting system as part of the organization’s control mechanism. Chapter 5 describes the crucial role of accounting as part of the
firm’s organizational architecture. Chapter 3 on capital budgeting extends opportunity costs
to a multiperiod setting. This chapter can be skipped without affecting the flow of later
material. Alternatively, Chapter 3 can be assigned at the end of the course.
Chapter 6 applies the conceptual framework and illustrates the trade-off managers
face between decision making and control in a budgeting system. Budgets are a decisionmaking tool to coordinate activities within the firm and are a device to control behavior.
This chapter provides an in-depth illustration of how budgets are an important part of an
organization’s decision-making and control apparatus.
Chapter 7 presents a general analysis of why managers allocate certain costs and the
behavioral implications of these allocations. Cost allocations affect both decision making
and incentives. Again, managers face a trade-off between decision making and control.
Chapter 8 continues the cost allocation discussion by describing the “death spiral” that
can occur when significant fixed costs exist and excess capacity arises. This leads to an
analysis of how to treat capacity costs—a trade-off between underutilization and overinvestment. Finally, the chapter describes several specific cost allocation methods such as
service department costs and joint costs.
Chapter 9 applies the general analysis of overhead allocation in Chapters 7 and 8 to the
specific case of absorption costing in a manufacturing setting. The managerial implications
of traditional absorption costing are provided in Chapters 10 and 11. Chapter 10 analyzes
variable costing, and activity-based costing is the topic of Chapter 11. Variable costing is
an interesting example of economic Darwinism. Proponents of variable costing argue that
it does not distort decision making and therefore should be adopted. Nonetheless, it is not
widely practiced, probably because of tax, financial reporting, and control considerations.
Chapter 12 discusses the decision-making and control implications of standard labor
and material costs. Chapter 13 extends the discussion to overhead and marketing variances. Chapters 12 and 13 can be omitted without interrupting the flow of later material.
Finally, Chapter 14 synthesizes the course by reviewing the conceptual framework and
applying it to various organizational innovations, such as total quality management, just in
time, six sigma, lean production, and the balanced scorecard. These innovations provide an
opportunity to apply the analytic framework underlying the text.
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vii
Preface
Acknowledgments
William Vatter and George Benston motivated my interest in managerial accounting. The
genesis for this book and its approach reflect the oral tradition of my colleagues, past
and present, at the University of Rochester. William Meckling and Michael Jensen stimulated my thinking and provided much of the theoretical structure underlying the book, as
anyone familiar with their work will attest. My long and productive collaboration with
Ross Watts sharpened my analytical skills and further refined the approach. He also furnished most of the intellectual capital for Chapter 3, including the problem material. Ray
Ball has been a constant source of ideas. Clifford Smith and James Brickley continue to
enhance my economic education. Three colleagues, Andrew Christie, Dan Gode, and Scott
­Keating, ­supplied particularly insightful comments that enriched the analysis at critical
junctions. Valuable comments from Anil Arya, Ron Dye, Andy Leone, Dale Morse, Ram
Ramanan, K. Ramesh, Shyam Sunder, and Joseph Weintrop are gratefully acknowledged.
This project benefited greatly from the honest and intelligent feedback of n­ umerous
instructors. I wish to thank Mahendra Gupta, Susan Hamlen, Badr Ismail, Charles Kile,
Leslie Kren, Don May, William Mister, Mohamed Onsi, Ram Ramanan, Stephen Ryan,
Michael Sandretto, Richard Sansing, Deniz Saral, Gary Schneider, Joe Weber, and
­William Yancey. This book also benefited from two other projects with which I have been
involved. Writing Managerial Economics and Organizational Architecture (McGraw Hill
Education, 2016) with James Brickley and Clifford Smith and Management Accounting
in a Dynamic Environment (Routledge, 2016) with Cheryl McWatters helped me to better
understand how to present certain topics.
To the numerous students who endured the development process, I owe an enormous
debt of gratitude. I hope they learned as much from the material as I learned teaching them.
Some were even kind enough to provide critiques and suggestions, in particular Jan Dick
Eijkelboom. Others supplied, either directly or indirectly, the problem material in the text.
The able research assistance of P. K. Madappa, Eamon Molloy, Jodi Parker, Steve Sanders, Richard Sloan, and especially Gary Hurst, contributed amply to the manuscript and
problem material. Janice Willett and Barbara Schnathorst did a superb job of editing the
manuscript and problem material.
The very useful comments and suggestions from the following reviewers are greatly
appreciated:
Urton Anderson
Howard M. Armitage
Vidya Awasthi
Kashi Balachandran
Da-Hsien Bao
Ron Barden
Howard G. Berline
Margaret Boldt
David Borst
Eric Bostwick
Marvin L. Bouillon
Wayne Bremser
David Bukovinsky
Linda Campbell
William M. Cready
James M. Emig
Gary Fane
Anita Feller
Tahirih Foroughi
Ivar Fris
Jackson F. Gillespie
Irving Gleim
Jon Glover
Gus Gordon
Sylwia Gornik-Tomaszewski
Tony Greig
Susan Haka
Bert Horwitz
Steven Huddart
Robert Hurt
Douglas A. Johnson
Lawrence A. Klein
Thomas Krissek
A. Ronald Kucic
Daniel Law
Chi-Wen Jevons Lee
Suzanne Lowensohn
James R. Martin
Alan H. McNamee
Marilyn Okleshen
Shailandra Pandit
Sam Phillips
viii
Preface
Frank Probst
Kamala Raghavan
William Rau
Jane Reimers
Thomas Ross
Harold P. Roth
P. N. Saksena
Donald Samaleson
Michael J. Sandretto
Richard Saouma
Arnold Schneider
Henry Schwarzbach
Elizabeth J. Serapin
Norman Shultz
James C. Stallman
William Thomas Stevens
Monte R. Swain
Heidi Tribunella
Clark Wheatley
Lourdes F. White
Paul F. Williams
Robert W. Williamson
Peggy Wright
Jeffrey A. Yost
S. Mark Young
To my wife Dodie and daughters Daneille and Amy, thank you for setting the right
priorities and for giving me the encouragement and environment to be productive. Finally,
I wish to thank my parents for all their support.
Jerold L. Zimmerman
University of Rochester
Brief Contents
1
Introduction
1
2
The Nature of Costs
3
Opportunity Cost of Capital and Capital Budgeting
4
Organizational Architecture
5
Responsibility Accounting and Transfer Pricing
6
Budgeting
7
Cost Allocation: Theory
8
Cost Allocation: Practices
327
9
Absorption Cost Systems
392
22
85
127
161
216
280
10
Criticisms of Absorption Cost Systems: Incentive to Overproduce
448
11
Criticisms of Absorption Cost Systems: Inaccurate Product Costs
483
12
Standard Costs: Direct Labor and Materials
13
Overhead and Marketing Variances
14
Management Accounting in a Changing Environment
Solutions to Concept Questions
Glossary 665
Index 675
538
575
609
655
ix
Contents
1
Introduction??1
A.
B.
C.
D.
E.
F.
G.
H.
2
Managerial Accounting: Decision Making and Control?? 2
Design and Use of Cost Systems?? 4
Marmots and Grizzly Bears?? 8
Management Accountant’s Role in the Organization?? 9
Evolution of Management Accounting: A Framework for Change?? 12
Vortec Medical Probe Example?? 15
Outline of the Text?? 18
Summary??18
The Nature of Costs?? 22
A. Opportunity Costs??23
1. Characteristics of Opportunity Costs?? 24
2. Examples of Decisions Based on Opportunity Costs?? 24
B. Cost Variation??29
1. Fixed, Marginal, and Average Costs?? 29
2. Linear Approximations??31
3. Other Cost Behavior Patterns?? 33
4. Activity Measures??33
C. Cost–Volume–Profit Analysis??35
1. Copier Example??35
2. Calculating Break-Even and Target Profits?? 36
3. Limitations of Cost–Volume–Profit Analysis?? 39
4. Multiple Products??41
5. Operating Leverage??42
D. Opportunity Costs versus Accounting Costs?? 45
1. Period versus Product Costs?? 46
2. Direct Costs, Overhead Costs, and Opportunity Costs?? 46
E. Cost Estimation??48
1. Account Classification??49
2. Motion and Time Studies?? 49
F. Summary??49
Appendix: Costs and the Pricing Decision?? 50
3
Opportunity Cost of Capital and Capital Budgeting?? 85
A. Opportunity Cost of Capital?? 86
B. Interest Rate Fundamentals?? 89
1. Future Values??89
2. Present Values??90
x
xi
Contents
C.
D.
E.
F.
4
3. Present Value of a Cash Flow Stream?? 91
4. Perpetuities??92
5. Annuities??93
6. Multiple Cash Flows per Year?? 94
Capital Budgeting: The Basics?? 96
1. Decision to Acquire an MBA?? 96
2. Decision to Open a Day Spa?? 97
3. Essential Points about Capital Budgeting?? 98
Capital Budgeting: Some Complexities?? 99
1. Risk??99
2. Inflation??100
3. Taxes and Depreciation Tax Shields?? 102
Alternative Investment Criteria?? 104
1. Payback??104
2. Accounting Rate of Return?? 105
3. Internal Rate of Return (IRR)?? 107
4. Methods Used in Practice?? 110
Summary??110
Organizational Architecture??127
A. Basic Building Blocks?? 128
1. Self-Interested Behavior, Team Production, and Agency Costs?? 128
2. Decision Rights and Rights Systems?? 133
3. Role of Knowledge and Decision Making?? 134
4. Markets versus Firms?? 135
5. Influence Costs??137
B. Organizational Architecture??139
1. Three-Legged Stool??139
2. Decision Management versus Decision Control?? 143
C. Accounting’s Role in the Organization’s Architecture?? 145
D. Example of Accounting’s Role: Executive Compensation Contracts?? 147
E. Summary??148
5

Responsibility Accounting and Transfer Pricing?? 161
A. Responsibility Accounting??162
1. Cost Centers??163
2. Profit Centers??165
3. Investment Centers??166
4. Economic Value Added (EVA®)??170
5. Controllability Principle??173
B. Transfer Pricing??175
1. International Taxation??175
2. Economics of Transfer Pricing?? 177
3. Common Transfer Pricing Methods?? 181
4. Reoragnization: The Solution if All Else Fails?? 186
5. Recap??186
C. Summary??188
xii
Contents
6
Budgeting??216
A. Generic Budgeting Systems?? 219
1. Country Club??219
2. Large Corporation??222
B. Trade-Off between Decision Management and Decision Control?? 226
1. Communicating Specialized Knowledge versus Performance
Evaluation??226
2. Budget Ratcheting??227
3. Participative Budgeting??229
4. New Approaches to Budgeting?? 230
5. Managing the Trade-Off?? 232
C. Resolving Organizational Problems?? 233
1. Short-Run versus Long-Run Budgets?? 233
2. Line-Item Budgets??235
3. Budget Lapsing??236
4. Static versus Flexible Budgets?? 236
5. Incremental versus Zero-Based Budgets?? 239
D. Summary??241
Appendix: Comprehensive Master Budget Illustration?? 242
7
Cost Allocation: Theory?? 280
A. Pervasiveness of Cost Allocations?? 281
1. Manufacturing Organizations??283
2. Hospitals??284
3. Universities??284
B. Reasons to Allocate Costs?? 286
1. External Reporting/Taxes??286
2. Cost-Based Reimbursement??287
3. Decision Making and Control?? 288
C. Incentive/Organizational Reasons for Cost Allocations?? 289
1. Cost Allocations Are a Tax System?? 289
2. Taxing an Externality?? 290
3. Insulating versus Noninsulating Cost Allocations?? 296
D. Summary??299
8
Cost Allocation: Practices?? 327
A. Death Spiral??328
B. Allocating Capacity Costs: Depreciation?? 333
C. Allocating Service Department Costs?? 333
1. Direct Allocation Method?? 335
2. Step-Down Allocation Method?? 337
3. Service Department Costs and Transfer Pricing of Direct
and Step-Down Methods?? 339
4. Reciprocal Allocation Method?? 342
5. Recap??344
D. Joint Costs??344
Contents
xiii
1. Joint Cost Allocations and the Death Spiral?? 346
2. Net Realizable Value?? 348
3. Decision Making and Control?? 352
E. Segment Reporting and Joint Benefits?? 353
F. Summary??354
Appendix: Reciprocal Method for Allocating Service Department Costs?? 354
9
Absorption Cost Systems?? 392
A. Job Order Costing?? 394
B. Cost Flows through the T-Accounts?? 396
C. Allocating Overhead to Jobs?? 398
1. Overhead Rates??398
2. Over/Underabsorbed Overhead??400
3. Flexible Budgets to Estimate Overhead?? 403
4. Expected versus Normal Volume?? 406
D. Permanent versus Temporary Volume Changes?? 410
E. Plantwide versus Multiple Overhead Rates?? 411
F. Process Costing: The Extent of Averaging?? 415
G. Summary??416
Appendix A: Process Costing?? 416
Appendix B: Demand Shifts, Fixed Costs, and Pricing?? 422
10
Criticisms of Absorption Cost Systems:
Incentive to Overproduce?? 448
A. Incentive to Overproduce?? 450
1. Example??450
2. Reducing the Overproduction Incentive?? 453
B. Variable (Direct) Costing?? 454
1. Background??454
2. Illustration of Variable Costing?? 454
3. Overproduction Incentive under Variable Costing?? 457
C. Problems with Variable Costing?? 458
1. Classifying Fixed Costs as Variable Costs?? 458
2. Variable Costing Excludes the Opportunity Cost of Capacity?? 460
D. Beware of Unit Costs?? 461
E. Summary??463
11
Criticisms of Absorption Cost Systems: Inaccurate
Product Costs??483
A. Inaccurate Product Costs?? 484
B. Activity-Based Costing??488
1. Choosing Cost Drivers?? 489
2. Absorption versus Activity-Based Costing: An Example?? 495
C. Analyzing Activity-Based Costing?? 499
1. Reasons for Implementing Activity-Based Costing?? 499
2. Benefits and Costs of Activity-Based Costing?? 501
3. ABC Measures Costs, Not Benefits?? 503
D. Acceptance of Activity-Based Costing?? 505
E. Summary??509
xiv
Contents
12
Standard Costs: Direct Labor and Materials?? 538
A. Standard Costs??539
1. Reasons for Standard Costing?? 540
2. Setting and Revising Standards?? 541
3. Target Costing??545
B. Direct Labor and Materials Variances?? 546
1. Direct Labor Variances?? 546
2. Direct Materials Variances?? 550
3. Risk Reduction and Standard Costs?? 554
C. Incentive Effects of Direct Labor and Materials Variances?? 554
1. Build Inventories??555
2. Externalities??555
3. Discouraging Cooperation??556
4. Mutual Monitoring??556
5. Satisficing??556
D. Disposition of Standard Cost Variances?? 557
E. The Costs of Standard Costs?? 559
F. Summary??561
13
Overhead and Marketing Variances?? 575
A. Budgeted, Standard, and Actual Volume?? 576
B. Overhead Variances??579
1. Flexible Overhead Budget?? 579
2. Overhead Rate??580
3. Overhead Absorbed??581
4. Overhead Efficiency, Volume, and Spending Variances?? 581
5. Graphical Analysis??585
6. Inaccurate Flexible Overhead Budget?? 587
C. Marketing Variances??588
1. Pric