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
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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
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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. Price and Quantity Variances 588 2. Mix and Sales Variances 589
D. Summary 591
14 Management Accounting in a Changing Environment 609 A. Integrative Framework 610
1. Organizational Architecture 611 2. Business Strategy 612 3. Environmental and Competitive Forces Affecting Organizations 615 4. Implications 615
B. Organizational Innovations and Management Accounting 616 1. Total Quality Management (TQM) 616 2. Just-in-Time (JIT) Production 621 3. Six Sigma and Lean Production 624 4. Balanced Scorecard 626
C. When Should the Internal Accounting System Be Changed? 632 D. Summary 633
Solutions to Concept Questions 655 Glossary 665 Index 675
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Chapter One
Introduction
Chapter Outline
A. Managerial Accounting: Decision Making and Control
B. Design and Use of Cost Systems C. Marmots and Grizzly Bears D. Management Accountant’s Role in the