month in review • LOCAL VOICES
Price takers
Chinese
companies are
cushioning
consumers
from increasing
input prices –
but how long
can they hold
out?
A
s the cost of raw materials and labor creeps
steadily upwards, many Chinese companies are finding they have nowhere to run.
With the government pressuring companies to
keep prices stable or capping them outright, margins can only shrink so far before businesses start
to topple.
Among the companies interviewed by China
Economic Review, some did report price hikes,
but none said they raised prices enough to offset
the increase in costs. This should be a worrying
trend: Despite China’s reverence for Lei Feng, the
Communist Party’s answer to Robin Hood, no
one makes cooking oil as a public service. Management responses suggest many companies will
report slimmer profits this spring, and some could
even be shuttering their businesses.
Mr. Wang, vice president of Jiangsu Huada
Group, a plastics manufacturer with more
than 1,000 employees
The prices of our primary materials have increased
about 30%, mainly due to the rising price of oil,
and we’ve had to raise salaries by about 20%. We’ve
increased our prices about 5-6% in response, about
the same as our competitors. The increase in costs
has been a big shock for us, and our profits have
fallen a lot. However, our relationship with our
customers hasn’t changed, since we have fixed
partnership agreements. Stable oil prices would be
the best fix for us, but the government obviously
can’t control that – it can only offer oil subsidies or
some preferential policies.
Li Tong, director of ShiMin Software, an
outsourcing software development company with 60 employees
As a software company, our major cost is human
resources, and that has increased dramatically. For
a junior level engineer, for example, the salary has
gone up more than 10%. Human resources account for around 50-60% of our total costs, so our
gross margin is definitely shrinking. However, we
haven’t transferred the increase in cost to consumers, because competition is too intense. In the outsourcing industry, suppliers tend to be small and
have similar products, so they have little bargaining power with big purchasers.
Du Jiang, business manager at Shanghai
China Coal, a division of China Resources
Power Holdings with about 30 employees
The price of coal has gone up about 7% from last
year – a fairly mild increase – and we’ve raised
prices about 2-3%. Most of our customers are
power plants, so we’ve seen basically no change in
our business. Electricity is tightly controlled by the
government, and there have been no price increases. But there is a chance prices will increase slightly
in the future. I think the government should use
some indirect methods to tighten liquidity, like allocating resources more fairly, adjusting the interest rate, and controlling the foreign exchange rate.
The coal industry is already closely supervised by
the government, so there’s no need for additional
oversight.
GETTING HIGH: Lifting
retail gas prices
14
China Economic Review • May 2011
Phototex
A marketing manager at Jeanswest, the
mainland China flagship of Glorious Sun Enterprises
We’ve heard the term “inflation expectations” for
almost one year. I think it’s no longer an expectation, it’s a reality. The price of food and cooking oil
has obviously gone up. The price of our main raw
materials, like cotton and down, goes up every year
but the increase has been especially strong in the
past two years – the price of cotton went up 50%
last year. Because the cost of raw materials and
labor has risen, we’ve had to make some changes
to our prices to maintain our quality. But
we’ve been able to absorb much of the
cost increase internally, which gives us
an advantage over other casual clothing
brands.
Yu Kai, marketing director for Baihui, a subsidiary of PC Stars focused
on cloud computing development
with about 50 employees
As a software company, our raw materials
are mostly intangible. Our direct costs are
mostly for buying servers and providing
the necessary bandwidth for our service,
and these costs haven’t grown much. We
haven’t needed to increase prices yet, and
we’ve actually seen a dramatic increase in
sales during the past few months. Costs
are growing for almost every industry,
and companies are balancing their spending with less expensive information systems. This makes the advantages of cloud
computing more obvious – companies
can use it when they need it, pay flexibly
and save on procurement, software setup
and IT. So we see continuing increases in
input prices as more of a market opportunity than a threat.
“We see continuing
increases in input prices
as more of a market
opportunity than a
threat”
YU KAI, MARKETING DIRECTOR,
BAIHUI
A sales manager at Nanjiren Textile Development, a Shanghaibased company with more than 100
employees
The cost of our main materials, like spandex, polyester and acrylic, has gone up
about 50-60%, while the price of cotton yarn has jumped 80%. We have
to pass some of that on to consumers.
We’ve increased our prices around 25%
from last year and all of our competitors
have raised prices by a similar amount.
Of course this has had some impact on
our business, but nothing too serious.
We’ve limited the impact both through
our sales policies, like offering promotions and activities, and management, by
controlling costs and increasing quality.
The rising price of goods has reduced
company earnings, but at the same time
employees are demanding higher salaries. This is a contradiction that can’t be
reconciled.
Alice, an assistant at a leading buffet restaurant chain with roughly
4,500 employees
Our materials range from dairy, poultry
and fish to fruit, and the prices for some
of these products have increased lately.
However, we have long-term fixed price
contracts with our suppliers, so their sales
price has not increased. Prices are actually a bit lower now and business is slower
compared with the peak Spring Festival
season, but that’s quite normal for our
industry. We have no immediate plan
to raise prices. As far as I know, none of
our competitors have increased prices yet
either. But if PPI continues to rise, our
operations will definitely be impacted.
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China Economic Review • May 2011
15
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Accounting for Management Decision Making
Week 6 Weekly Briefing
Welcome to Week 6! In Week 5, you studied standard costs and variances and their relationship
to decision making. You analyzed the results of the direct labor and direct materials variances
and discussed possible causes for the variances. All of these terms were added to your
accounting vocabulary.
In Week 6, you will continue to build your accounting vocabulary as you study sunk costs,
opportunity costs, accounting costs, and break-even analysis.
This week:
In terms of the specific Learning Objectives, you will:
•
•
•
•
•
Analyze the impact on the organization of sunk costs, opportunity costs, and
accounting costs
Determine the impact of cost decisions
Apply appropriate accounting processes to determine break-even points
Evaluate break-even points
Utilize break-even point assessment for decision making In
terms of course-level Learning Outcomes, you will:
•
•
•
•
•
•
Evaluate various accounting measures and their relevance to a wide range of
stakeholders
Analyze various types of budgets, strategic planning, and forecasting
Employ managerial accounting approaches and information to make effective
decisions
Demonstrate effective communication skills to present accounting information to
stakeholders
Assess managerial accounting tools and their usefulness to organizational leaders
Apply accounting principles ethically and appropriately to personal and
professional contexts
Sunk Costs, Opportunity Costs, and Accounting Costs
In order to analyze sunk, opportunity, and accounting costs, you must first understand their
meanings in the language of business. Sunk costs are costs that have been incurred previously and
present or future decisions will not change that fact (Weygandt, Kimmel, & Kieso, 2010). They
cannot be recovered. For example, a machine in your department was repaired two months ago
and it cost $750. You are currently trying to decide which of two new machines you should buy
to replace that machine. The $750 is a sunk cost and should not affect your decision. Even though
sunk costs cannot be
Page 1 of 4
recovered and should not be considered in deciding between alternatives, they do have value
with respect to accountability. As you studied last week, managers should be held accountable
for past actions and expenditures.
Opportunity costs are the benefits forgone from choosing one alternative over another
(Zimmerman, 2014). If your department has a machine that is capable of making both
product A and product B, and it is being used to make product A, the benefit of making
product B is lost. Another example pertains to hiring an employee for $50,000. The
opportunity cost is that the money is no longer available for other opportunities such as
advertising, equipment purchases, etc.
Accounting costs are the actual historical costs incurred for a product or service and are
recorded by the accounting system in monetary units (Zimmerman, 2014). In this course, the
dollar is the unit of measure. If an organization buys some land for
$2,000,000 with the intent of developing it, the $2,000,000 is the accounting cost of the land.
If the organization is considering two alternative uses for the land, the opportunity cost will be
the benefit forgone when it chooses one alternative over the other.
Using Accounting Data to Make Decisions
Managers use accounting costs to make decisions regarding how much it costs to make or buy
a product or produce a service, and these costs are often used to determine the price to charge
for the product or service. For example, if the average cost of producing one unit of Product M
for ABC Company is $200 and the organization wants a markup of 30%, the selling price of
Product M would be $200 + ($200 x 30%) or $260. This is termed cost-plus pricing. Many
organizations use this method as it is relatively easy to compute (Zimmerman, 2014).
Organizations do not operate in a vacuum and consideration must be given to the pricing
strategies of the competition. If there are many competitors who are selling very similar
products, the market will determine the selling price of Product M not ABC Company. In this
situation, ABC Company, which is called a price taker, must determine if it can still make a
profit when it sells Product M at the market price. It will need to determine if the profit that
can be realized by producing and selling Product M at the market price is worth the risk
involved in making the product without knowing specifically how many units will be sold.
Another factor to be considered is market price itself. How will changes in the market price
affect the organization? If the market price of product M is $20.00 and the average cost to
make the product is $17.00, will ABC Company be satisfied with a profit of $3.00 per unit?
What if the market price drops to $18.00 per unit? Will ABC Company be satisfied with a
profit of $1.00 per unit? Management must weigh the risks associated with production,
carrying inventory, and possibly selling at a loss when making the decision to produce Product
M.
Although price takers have no market power, some organizations do have market power. An
organization has market power if no perfect substitute exists for its products (Zimmerman,
2014). For example, Coach, Inc. sells handbags and other items at high prices because it has
Page 2 of 4
market power. If a woman wants a Coach handbag, there is no perfect substitute. Coach has to
make a decision concerning how many handbags it wants to sell each year. If it raises the price, it
will sell fewer handbags, and if it lowers the price, it will sell more handbags. The challenge is to
determine the number of handbags to sell and the price to charge per handbag to optimize
profitability.
Break-Even Analysis
One method that is helpful in determining profitability is break-even analysis. At the break-even
point, sales revenue is exactly equal to total expenses and there is no profit or loss (Davis &
Davis, 2012). The formula used to determine the break-even point is:
PQ – VCQ – FC = 0 where P is a constant sales price, Q is the output (quantity), VC are the
variable costs and FC are the fixed costs.
Before you can proceed, you need to know how to determine which costs are variable and which
are fixed. Variable costs are costs that vary directly with a change in the activity level
(Weygandt, et al. 2010). A variable cost remains the same per unit at every level of activity. For
example, Dulce Company makes candy bars and each bar requires 2 ounces of chocolate and 3
ounces of crushed peppermint. If the company makes 10 bars, 20 ounces of chocolate and 30
ounces of peppermint will be needed. If it makes 20 bars, 40 ounces of chocolate and 60 ounces
of peppermint will be used.
Fixed costs remain the same in total regardless of the activity level. Examples include rent,
property taxes, supervisory salaries, and depreciation on buildings and equipment.
If Dulce Company sells its candy bars for $2.00 each, variable costs are $1.50 each, and fixed
costs are $50,000, how many candy bars must the company sell to break even? Using the breakeven formula:
$2Q – $1.50Q – $50,000 = 0
$0.50Q – $50,000 = 0
$0.50Q = $50,000
Q = $50,000/$0.50
Q = 100,000 candy bars
Therefore, Dulce Company knows that it will not make a profit until it sells at least 100,001
candy bars. Perhaps, Dulce Company wants to know how many candy bars it must sell to earn a
profit of $70,000. In this case, simply substitute $70,000 for the break-even point.
$2Q – $1.50Q – $50,000 = $70,000
$0.50Q = $120,000
Q = 240,000 candy bars
A very important concept in break-even analysis is contribution margin. Contribution margin is
Page 3 of 4
the amount of sales revenue left after deducting variable expenses. It is available to cover fixed
costs and to contribute to profits. It can be expressed in terms of total sales revenue and total
variable expenses or per unit revenue and expenses. Dulce Company’s per unit contribution
margin is $2.00 – $1.50 which is $0.50.
Contribution margin per unit is used to determine the break-even point in units. The formula is:
Total fixed expenses/contribution margin per unit
$50,000/$0.50 = 100,000 candy bars
The break-even point in total sales dollars can be determined using the formula:
Total fixed costs/contribution margin ratio
The contribution margin ratio is computed by dividing the contribution margin by sales revenue.
This can be computed by using either total amounts or per unit amounts.
$0.50/$2.00 = .25 contribution margin ratio
$50,000/.25 = $200,000 in sales dollars required to break even
In summary, making decisions regarding pricing, costs, and sales volume can be assisted by
break-even analysis, but also should take into consideration environmental factors, competition,
tax rates, etc. Accounting measures can provide quantifiable data, but should be only a part of
the decision making process. Good management decisions will include quantitative as well as
qualitative information.
References
Davis, C. E., & Davis, E. (2012). Managerial Accounting. Hoboken, NJ: John Wiley & Sons.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2010) Managerial accounting: Tools for
decision making (5th ed.). Hoboken, NJ: John Wiley & Sons.
Zimmerman, J. L. (2014). Accounting for decision making and control (8th ed.). New York, NY:
McGraw-Hill.
Page 4 of 4
Page 5 of 4
Week 6 Assignment
Kendall Lane is planning to make a unique toy that promises to keep small children entertained
for hours. Kendall believes that parents everywhere will want to buy this toy. With a selling
price of $25, Kendall now needs to determine the costs and the required number of toys needed
to be sold before earning a profit, the break-even point.
After researching the costs to produce the toy, the following two locations with associated costs
have been determined:
•
•
The rent for the small facility will be $2,600 per month, insurance $600 per month, and
other fixed costs are estimated at $1,500 per month. This facility has a capacity to
produce 200 toys per month at a variable cost for each toy of $5.00.
The rent for a larger facility will be $5,000 per month, insurance $800 per month, and
other fixed costs are estimated at $2,000 per month. This facility has a capacity to
produce 450 toys per month at a variable cost for each toy of $5.00.
Break Even Analysis Small Facility
Price
Break Even Analysis Large Facility
Variable Costs
Fixed Costs
Rent
Insurance
Other
Price
Variable
Costs
Fixed Costs
Rent
Insurance
Other
Break-even Quantity
Break-even Quantity
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Seventh Edition
Accounting for
Decision Making
and Control
Jerold L. Zimmerman
University of Rochester
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To: Conner, Easton, and Jillian
ACCOUNTING FOR DECISION MAKING AND CONTROL, SEVENTH EDITION
Published by McGraw-Hill, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas,
New York, NY 10020. Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Previous
editions © 2009, 2006, and 2003. No part of this publication may be reproduced or distributed in any form or by
any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill
Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or
broadcast for distance learning.
Some ancillaries, including electronic and print components, may not be available to customers outside the United States.
This book is printed on acid-free paper.
1 2 3 4 5 6 7 8 9 0 DOW/DOW 1 0 9 8 7 6 5 4 3 2 1 0
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MHID
978-0-07-813672-6
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Vice President & Editor-in-Chief: Brent Gordon
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Sponsoring Editor: Dick Hercher
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Cover Designer: Studio Montage, St. Louis, Missouri
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Printer: R. R. Donnelley-Willard
All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.
Library of Congress Cataloging-in-Publication Data
Zimmerman, Jerold L., 1947Accounting for decision making and control / Jerold L. Zimmerman.—7th ed.
p. cm.
Includes bibliographical references and index.
ISBN-13: 978-0-07-813672-6 (acid-free paper)
ISBN-10: 0-07-813672-5 (acid-free paper) 1. Managerial accounting. I. Title.
HF5657.4.Z55 2010
658.15’11—dc22
2009049120
www.mhhe.com
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About the Author
Jerold L. Zimmerman
Jerold Zimmerman is Ronald L. Bittner Professor 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 a complex organization was acquired by spending four years as Deputy Dean of the Simon School.
Professor Zimmerman publishes widely in accounting on topics as diverse as cost allocations, Sarbanes-Oxley Act, 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). More recently, 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,
5th ed. (McGraw-Hill/Irwin, 2009); and Management Accounting: Analysis and Interpretation with Cheryl McWatters and Dale Morse (Pearson Education Limited UK, 2008). He is
a founding editor of the Journal of Accounting and Economics, published by North-Holland.
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
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Page iv
Preface
During their professional careers, managers in all organizations, profit and nonprofit, interact with 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 thinking about 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.
Distinguishing Features
Conceptual
Framework
This book differs from other managerial accounting texts in several ways. The most important
difference is that it offers a conceptual framework for the study of managerial accounting.
This book relies on opportunity cost and organizational architecture as the underlying
framework to organize the analysis. Opportunity cost is the conceptual foundation underlying
decision making. While accounting-based costs are not opportunity costs, in some circumstances accounting costs provide a starting point to estimate opportunity costs. Organizational
architecture provides the conceptual foundation to understand how accounting is employed as
part of the organization’s control mechanism. These two concepts, opportunity costs and
organizational architecture, provide the framework and illustrate the trade-offs created when
accounting systems serve both functions: decision making and control.
Trade-Offs
This text emphasizes that there is no “free lunch”; improving an accounting system’s
decision-making ability often reduces its effectiveness as a control device. Likewise, using
an accounting system as a control mechanism usually comes at the expense of using the
system for decision making. Most texts discuss the importance of deriving different estimates of costs for different purposes. Existing books do a good job illustrating how
accounting costs developed for one purpose, such as inventory valuation, cannot be used
without adjustment for other purposes, such as a make-or-buy decision. However, these
books often leave the impression that one accounting system can be used for multiple
purposes as long as the users make the appropriate adjustments in the data.
What existing texts do not emphasize is the trade-off between designing the accounting system for decision making and designing it for control. For example, activity-based
costing presumably improves the accounting system’s ability for decision making (pricing
and product design), but existing texts do not address what activity-based costing gives up
in terms of control. Accounting for Decision Making and Control emphasizes the trade-offs
managers confront in an organization’s accounting system.
iv
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Preface
v
Economic
Darwinism
A central theme throughout this book is economic Darwinism, which simply implies that
accounting systems that survive in competitive industries must be yielding benefits that are
at least as large as their costs. While newer accounting innovations such as the balanced
scorecard are described, the text also indicates through a series of company histories that
many elements of today’s modern costing systems can be traced back to much earlier times.
It is useful to understand that today’s managers are struggling with the same accounting issues as their predecessors, because today’s students will also be struggling with the same
problems. These problems continue to exist because they involve making trade-offs, usually between systems for decision making (e.g., product pricing and make-or-buy decisions) versus control (e.g., performance evaluation).
Accounting systems differ across firms and change as firms’ circumstances change.
Today’s students will be making these trade-offs in the future. The current rage in managerial accounting texts is to present the latest, most up-to-date accounting system innovations.
While recent innovations are important to discuss, they should be placed in their proper
perspective. Traditional absorption costing systems have survived the test of time for hundreds of years. Accounting system innovations are new, not necessarily better. We certainly
do not know if they will survive.
Logical Sequence
Another meaningful distinction between this text and other books in the field is that the
chapters in this text build on one another. The first four chapters develop the opportunity
cost and organization theory foundation for the course. The remaining chapters apply the
foundation to analyzing specific topics such as budgets and standard costs. Most of the
controversy in product costing involves apportioning overhead. Before absorption, variable,
and activity-based costing are described, an earlier chapter provides a general analysis of
cost allocation. This analysis is applied in later chapters as the analytic framework for
choosing among the various product costing schemes. Other books emphasize a modular,
flexible approach that allows instructors to devise their own sequence to the material, with
the result that these courses often appear as a series of unrelated, disjointed topics without
any underlying cohesive framework. This book has 14 chapters, compared with the usual
18–25. Instead of dividing a topic such as cost allocation into three small chapters, most
topics are covered in one or at most two unified chapters.
End-of-Chapter
Material
The end-of-chapter problem material is an integral part of any text, and especially important in Accounting for Decision Making and Control. The problems and cases are drawn
from actual company applications described by former students based on their work experience. Many problems require students to develop critical thinking skills and to write short
essays after preparing their numerical analyses. Good problems get students excited about
the material and generate lively class discussions. Some problems do not have a single correct answer. Rather, they contain multiple dimensions demanding a broad managerial perspective. Marketing, finance, and human resource aspects of the situation are frequently
posed. Few problems focus exclusively on computations.
Changes in the Seventh Edition
Based on extensive feedback from instructors using the six editions and from my own
teaching experience, the seventh edition focuses on improving the book’s readability and
accessibility. In particular, the following changes have been made:
• Each chapter has been updated and streamlined based on student and instructor
feedback. More intuitive, easier-to-understand numerical examples have been
added.
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Preface
• Additional actual company practices have been integrated into the text.
• Sixteen new problems and cases supplement the existing problems. 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 problemsolving skills. Further problems and cases to complement this selection have been
added.
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.
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 summarizes recent advances in the theory of organizations and 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
must make between decision making and control in a budgeting system. Budgets are a
decision-making 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 a significant
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. Thus, there is again the 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, several specific cost allocation methods such as service department costs and joint
costs are described.
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. Chapter 13 can be omitted without interru