Management 3. The Four Functions of Management 4. Strategic Management
and the Strategic Emphasis in Cost Management 6. Types of Organizations 6.
IF
A Strategic Emphasis
Sixth Edition
University of North Carolina at Chapel Hill Kenan-Flagler Business School
Youngstown State University Williamson College of Business Administration
Pail E. Jmiras Babson College Accountancy and Law Division
Strategist, Performance Management Solutions SASI Worldwide Strategy
n t: Walkthrough
viii
PART OWE INTRODUCTION TO STRATEGY, COST MANAGEMENT, AND COST SYSTEMS 1 Chapter! Cost Management and Strategy 2 Management Accounting and the Role of Cost Management 3 The Four Functions of Management 4 Strategic Management and the Strategic Emphasis in Cost Management 6 Types of Organizations 6 The Contemporary Business Environment 7 The Global Business Environment 7 Lean Manufacturing 8 Use of Information Technology, the Internet, and Enterprise Resource Management 8 Focus on the Customer 9 Management Organization 9 Social, Political, and Cultural Considerations 10 The Strategic Focus of Cost Management 10 Contemporary Management Techniques: The Management Accountant's Response to the Contemporary Business Environment 10 The Balanced Scorecard (BSC) and Strategy Map 11 The Value Chain 12 Activity-Based Costing and Management 12 Business Intelligence 12 Target Costing 12 Life-Cycle Costing 13 Benchmarking 13 Business Process Improvement 13 Total Quality Management 13 Lean Accounting 14 The Theory of Constraints 14 Sustainability 14 Enterprise Risk Management 14 How a Firm Succeeds: The Competitive Strategy 15 Developing a Competitive Strategy 16 Cost Leadership 16 Differentiation 16 Other Strategic Issues 17 The Five Steps of Strategic Decision Making 17 The Professional Environment of Cost Management 19 Professional Organizations 19 Professional Certifications 21 Professional Ethics 22
Summary 23 Key Terms 24 Comments on Cost Management in Action Self-Study Problem 25 Questions 26 Brief Exercises 26 Exercises 27 Problems 29 Solution to Self-Study Problem 33
24
Chapter 2 Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map 35 Strengths-Weaknesses-Opportunities-Threats (SWOT) Analysis 36 Execution 37 Value-Chain Analysis 39 Value-Chain Analysis in Computer Manufacturing 41 The Five Steps of Strategic Decision Making for CIC Manufacturing 42 The Balanced Scorecard and Strategy Map 43 The Balanced Scorecard 43 The Strategy Map 46 Expanding the Balanced Scorecard and Strategy Map: Sustainability 48 Summary 51 Key Terms 51 Comments on Cost Management in Action 51 Self-Study Problems 51 Questions 52 Brief Exercises 53 Exercises 53 Problems 55 Solutions to Self-Study Problems 65
Chapter 3 Basic Cost Management Concepts 67 Costs, Cost Drivers, Cost Objects/and Cost Assignment 67 Cost Assignment and Cost Allocation: Direct and Indirect Costs 68 Cost Drivers and Cost Behavior 71 Activity-Based Cost Drivers 71 Volume-Based Cost Drivers 72 Structural and Executional Cost Drivers 76 Cost Concepts for Product and Service Costing 78 Product Costs and Period Costs 78 Manufacturing, Merchandising, and Service Costing 78 A ttributes of Cost Information 81 Periodic and Perpetual Inventory Systems 82
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Contents
Summary 83 . Key Terms 83 Comments on Cost Management in Action Self-Study Problem 84 Questions 84 Brief Exercises 85 Exercises 85 Problems 92 Solution to Self-Study Problem 95
Steps in Developing an Activity-Based Costing System 135 83
Benefits of Activity-Based Costing 137 A Comparison of Volume-Based and Activity-Based Costing 138 Volume-Based Costing 139 Activity-Based Costing 139 The Five Steps of Strategic Decision Making for Haymarket BioTechlnc. 141
Chapter 4 Job Costing 97 Costing Systems
97
Cost Accumulation: Job or Process Costing? 98 Cost Measurement: Actual, Normal, or Standard Costing? 98 Overhead Application under Normal Costing: Volume-Based or Activity-Based? 98
The Strategic Role of Costing 99 Job Costing: The Cost Flows 99
Calculating the Cost of Capacity in ABC Activity-Based Management 142 What Is Activity-Based Management? Activity Analysis 143 Value-Added Analysis 144
142
143
Real-World Activity-Based Costing/Management Applications 145 ABC/M Application in Manufacturing: Industrial Air Conditioner Units 145 ABCIM Applications in Government 148
Direct and Indirect Materials Costs 100 Direct and Indirect Labor Costs 102 Factory Overhead Costs 102
Customer Profitability Analysis
The Application of Factory Overhead in Normal Costing 103 Cost Drivers for Factory Overhead Application Applying Factory Overhead Costs 104 Departmental Overhead Rates 105 Disposition of Underapplied and Overapplied Overhead 105 Potential Errors in Overhead Application 106
103
Customer Cost Analysis 149 Customer Profitability Analysis Customer Lifetime Value 152
149 151
Implementation Issues and Extensions
153
Multistage Activity-Based Costing 154 Resource Consumption Accounting (RCA) 155 Time-Driven Activity-Based Costing (TDABC) 155
Job Costing in Service Industries; Project Costing 107 Operation Costing 109 Summary 111 Appendix: Spoilage, Rework, and Scrap in Job Costing 112
Key Terms 113 Comments on Cost Management in Action Self-Study Problem 114 Questions 115 Brief Exercises 115 Exercises 116 Problems 120 Solution to Self-Study Problem 128
Step 1: Identify Resource Costs and Activities 136 Step 2: Assign Resource Costs to Activities 136 Step 3: Assign Activity Costs to Cost Objects 137
113
Summary 157 Key Terms 157 Comments on Cost Management in Action Self-Study Problem 158 Questions 158 Brief Exercises 159 Exercises 159 Problems 165 Solution to Self-Study Problem 174
ChapterG Process Costing
157
176
Characteristics of Process Costing Systems Equivalent Units 177 Flow of Costs in Process Costing Steps in Process Costing 178 Process Costing Methods 180
177^
178
Chapter 5 Activity-Based Costing and Customer Profitability Analysis 131
Illustration of Process Costing
The Strategic Role of Activity-Based Costing Role of Volume-Based Costing 132 Activity-Based Costing 133
Comparison of Weighted-Average and FIFO Methods 191 Process Costing with Multiple Departments 191
131
Resources, Activities, Resource Consumption Cost Drivers, and Activity Consumption Cost Drivers 133 What Is Activity-Based Costing? 133 The Two-Stage Cost Assignment Procedure 134
180
Weighted-Average Method 180 First-In, First-Out (FIFO) Method
185
Transferred-In Costs 191 Weighted-Average Method 192 The FIFO Method 194
Journal Entries for Process Costing
196
Contents
Implementation and Enhancement of Process Costing
197
Activity-Based Costing and the Theory of Constraints Just-in-Time Systems and Backflush Costing 198 Normal and Standard Process Costing 199
197
The Five Steps of Strategic Decision Making for Hurrah's 278
Implementation Problems: Nonlinearity 278 Time-Series and Cross-Sectional Regression 279 Summary 279 Appendix: Learning Curve Analysis 280 Regression Analysis Supplement (available online only at www.mhhe.com/blocher6e)
Chapter 7 Cost Allocation: Departments, Joint Products, and By-Products 223 The Strategic Role and Objectives of Cost Allocation The Ethical Issues of Cost Allocation 225 Cost Allocation to Service and Production Departments 225
224
First Phase: Trace Direct Costs and Allocate Indirect Costs to All Departments 227 Allocation Phases Two and Three 228 Implementation Issues 233
238
Key Terms 283 Comments on Cost Management in Action Self-Study Problems 284 Questions 286 Brief Exercises 287 Exercises 288 Problems 293 Solutions to Self-Study Problems 302
241
284
Chapter 9 Short-Term Profit Planning: Cost-Volume-Profit (CVP) Analysis 307 Cost-Volume-Profit Analysis
Methods for Allocating Joint Costs to Joint Prpducts
Summary 245 Appendix: By-Product Costing 245 Key Terms 248 Comments on Cost Management in Action Self-Study Problem 248 Questions 249 Brief Exercises 249 Exercises 250 Problems 254 Solution to Self-Study Problem 261
Regression Analysis 269 An Example: Using Regression to Estimate Maintenance Costs 274 A Second Example: Using Excelfor Regression Analysis 276
Illustration of the Use of Regression Analysis in the Gaming Industry 277
Summary 200 Appendix: Spoilage in Process Costing 200 Key Terms 204 Comments on Cost Management in Action 204 Self-Study Problems 204 Questions 205 Brief Exercises 205 Exercises 206 Problems 209 Solutions to Self-Study Problems 218
Cost Allocation in Service Industries Joint Product Costing 241
307
Contribution Margin and Contribution Income Statement 309
Strategic Role of CVP Analysis 310 CVP Analysis for Breakeven Planning
311
Breakeven in Units, Q 311 Breakeven in Dollars 312 Short-Cut Formulas 313 CVP Graph and the Profit- Volume Graph 313
248
CVP Analysis for Profit Planning
315
Revenue Planning 315 Cost Planning 315 Including Income Taxes in CVP Analysis
319
CVP Analysis for Activity-Based Costing (ABC) Dealing with Risk and Uncertainty 322
PLANNING AND DECISION MAKING Chapters Cost Estimation
263
264
Strategic Role of Cost Estimation
264
Using Cost Estimation to Predict Future Costs 265 Using Cost Estimation to Identify Cost Drivers 265
Six Steps of Cost Estimation
266
Step 1: Define the Cost Object to Be Estimated 266 Step 2: Determine the Cost Drivers 266 Step 3: Collect Consistent and Accurate Data 266 Step 4: Graph the Data 267 Step 5: Select and Employ the Estimation Method 267 Step 6: Assess the Accuracy of the Cost Estimate 267
Cost Estimation Methods
267
An Illustration of Cost Estimation High-Low Method 267
267
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319
What-If Analysis of Sales: Contribution Margin and Contribution Margin Ratio 322 Decision Tables/Decision TreeslExpected Value Analysis 323 Monte Carlo Simulation 323 Margin of Safety (MOS) 324 Operating Leverage 324 The Five Steps of Strategic Decision Making for CVP Analysis 326
CVP Analysis with Two or More Products/Services Weighted-Average Contribution Margin Ratio (CMR) 328 Weighted-Average Contribution Margin per Unit "Sales Basket" Approach 330 Value Stream Accounting and CVP 330
CVP Analysis for Not-for-Profit Organizations
330
331
327
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Contents
Assumptions and Limitations of CVP Analysis Linearity, the Relevant Range, and Step Costs
Summary 332 Key Terms 333 Comments on Cost Management in Action Self-Study Problem 333 Questions 334 Brief Exercises 334 Exercises 334 Problems 339 Solution to Self-Study Problem 349
331
331
333
Chapter 10 Strategy and the Master Budget Role of Budgets 350 Strategy and the Master Budget
Chapter 111 Decision Making with a Strategic Emphasis 409 The Five Steps of the Decision-Making Process Relevant Cost Analysis 410
350
352
Relevant Cost Information 410 Batch-Level Cost Drivers 413 Fixed Costs and Depreciation 413 Other Relevant Information 413
Is TTS Now Operating at Full Capacity? 416 Excessive Relevant Cost Pricing 417 Other Important Strategic Factors 417
Value Stream Accounting and the Special Order Decision 417 Make, Lease, or Buy Decisions 418 Relevant Cost Analysis 418 Lease vs. Purchase 419
Strategic Analysis
420
Decisions to Sell Before or After Additional Processing
421
Relevant Cost Analysis 421 Strategic Analysis 422 Product-/Service-Line Profitability Analysis 422 Profitability Analysis: Keep or Drop a Product (or Service) Line 422 Strategic Analysis
424
Profitability Analysis: Service and Not-for-Profit Organizations 425 Multiple Products and Limited Resources 425 Case 1: One Production Constraint 426 Case 2: Two or More Production Constraints 427
370
What-If Analysis 371 Sensitivity Analysis 371 Scenario Analysis 373 Budgeting in Service Companies 373 Budgeting in Service Industries 373 Alternative Budgeting Approaches 375 Zero-Base Budgeting (ZBB) 375 Activity-Based Budgeting (ABB) 375 Time-Driven Activity-Based Budgeting 377 Kaizen (Continuous-Improvement) Budgeting 378 Behavioral Issues in Budgeting 379 Budgetary Slack 379 Goal Congruence 379 Authoritative or Participative Budgeting? 379 Difficulty Level of the Budget Target 380 Linkage of Compensation and Budgeted Performance Summary 383 Key Terms 383
409
Strategic Analysis 414 Special Order Decisions 415 Relevant Cost Analysis 415 Strategic Analysis 416
Importance of Strategy in Budgeting 352 Strategic Goals and Long-Term Objectives 352 Short-Term Objectives and the Master Budget 353 The Budgeting Process 354 Budget Committee 354 Budget Period 354 Budget Guidelines 354 Negotiation, Review, and Approval 354 Revision 354 Comprehensive Budgeting Example: Kerry Window Systems, Inc. (KWS) 355 The Five Steps of Strategic Decision Making for Kerry Window Systems, Inc. 356 Master Budget 356 Sales Budget 357 Manufacturing Budgets 358 Merchandise Purchases Budget 362 Selling and Administrative Expense Budget 364 Cash Receipts (Collections) Budget 364 Cash Budget 366 Budgeted Income Statement 368 Budgeted Balance Sheet 369
Uncertainty and the Budgeting Process
Self-Study Problems 384 Questions 385 Brief Exercises 385 Exercises 386 Problems 400 Solutions to Self-Study Problems 406
Behavioral and Implementation Issues
380
429
Consideration of Strategic Objectives 429 Predatory Pricing Practices 429 Replacement of Variable Costs with Fixed Costs 430 Proper Identification of Relevant Factors 430 Summary 431 Appendix: Linear Programming and the Product-Mix Decision 431 Key Terms 433 Comments on Cost Management in Action 433 Self-Study Problems 434 Questions 435 Brief Exercises 435 Exercises 436 Problems 440 Solutions to Self-Study Problems 452
Contents
Chapter 12 Strategy and the Analysis of Capital Investments 454
» | |
Strategy and the Analysis of Capital Expenditures 455 Underlying Nature of Capital Expenditures 455 Chapter Overview—Where Are We Headed? 455 The Role of Accounting in the Capital-Budgeting Process 456 Linkage to the Master Budget 456 Linkage to Strategy and to the Balanced Scorecard (BSC) 456 Generation of Relevant Financial Data for Decision-Making Purposes 458 Conducting Post-Audits 458 The Five Steps of Strategic Decision Making: Cost-Benefit Analysis of a Hospital Bar-Code Technology Investment 459 Identification of Relevant Cash Flow Data for Capital-Expenditure Analysis 460 Why Focus on Cash Flows? 460 Cash Flows—A Framework for Analysis 460 Sample Data Set: Mendoza Company—Equipment-Purchase Decision 461 Determining After-Tax Cash Flows for Capital-Investment Analysis 462 Recap—After-Tax Cash Flow Information for the Mendoza Company Investment Proposal 467 Discounted Cash Flow (DCF) Capital-Budgeting Decision Models 468 Types of Capital-Budgeting Decision Models 468 DCF Models: Specifying the Discount Rate 469 Estimating the WACC 469 Net Present Value (NPV) Decision Model 471 Internal Rate of Return (IRR) Decision Model 473 The Modified Internal Rate of Return (MIRR) 474 Comparison of NPV and IRR Methods: Which to Use? 475 Structuring an Asset-Replacement Decision Problem 475 Uncertainty and the Capital-Budgeting Process 476 Sensitivity Analysis 477 Real Options 480 Other Capital-Budgeting Decision Models 484 Payback Period 484 Accounting (Book) Rate of Return 486 Behavioral Issues in Capital Budgeting 488 Common Behavioral Problems: Cost Escalation, Incrementalism, and Uncertainty Intolerance 488 Goal-Congruency Issues 488 Addressing the Goal-Congruency Problem 489 Summary 490 Appendix A: Spreadsheet Templates for Conducting a DCF Analysis of an Asset-Replacement Decision 493 Appendix B: DCF Models: Some Advanced Considerations 495 Appendix C: Present Value Tables 497 Key Terms 499 Comments on Cost Management in Action 499 Self-Study Problem 499
Questions 500 Brief Exercises 501 Exercises 502 Problems 510 Solution to Self-Study Problem
xxiii
517
Chapter 13 Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing 521 Target Costing 523 Value Engineering 524 Target Costing and Kaizen 526 An Illustration: Target Costing in Health Product Manufacturing 527 An Illustration Using Quality Function Deployment (QFD) 528 Benefits of Target Costing 530 The Theory of Constraints 530 The Use of the Theory of Constraints Analysis in Health Product Manufacturing 531 Steps in the Theory of Constraints Analysis 532 The Five Steps of Strategic Decision Making for Speed and Efficiency in the Fashion Industry 536 Theory of Constraints Reports 537 Activity-Based Costing and the Theory of Constraints 537 Life-Cycle Costing 538 The Importance of Design 538 The Use of Life-Cycle Costing in a Software Firm 540 Strategic Pricing Using the Product Life Cycle 540 Pricing Using the Cost Life Cycle 541 Strategic Pricing for Phases of the Sales Life Cycle 542 Strategic Pricing: Analytical and Peak Pricing Methods 543 Summary 544 Appendix: Using the Flow Diagram to Identify Constraints 544 Key Terms 545 Comments on Cost Management in Action 545 Self-Study Problem 546 Questions 547 Brief Exercises 547 Exercises 547 Problems 552 — Solution to Self-Study Problem 561
OPERATIONAL-LEVEL CONTROL 562 Chapter 14 Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial Performance Measures 563 Management Accounting and Control Systems 564 Developing an Operational Control System: The Five Steps of Strategic Decision Making for Schmidt Machinery 564 Short-Term Financial Control 565
xxiv
Contents
Flexible Budgets and Profit-Variance Analysis
566
Overhead Cost Variances in Traditional ABC Systems 635
The Flexible Budget 566 Sales Volume Variance and the Total Flexible-Budget Variance 569
Standard Costs
ABC-Based Flexible Budgets for Control 635 Flexible-Budget Analysis under Traditional ABC When There Is a Standard Batch Size for Production Activity 638 Extension of ABC Analysis: GPK and RCA 639
580
Standard Costs versus a Standard Cost System Types of Standards 580 Standard-Setting Procedures 581 Establishing Standard Costs 582 Standard Cost Sheet 583
580
Investigation of Variances
Summary 642 Appendix: Variance-Investigation Decisions under Uncertainty 644 Key Terms 647 Comments on Cost Management in Action 647 Self-Study Problems 647 Questions 649 Brief Exercises 649 Exercises 650 Problems 656 Solutions to Self-Study Problems 666
Recording Cost Flows and Variances in a Standard Cost System 584 Direct Materials Cost 584 Direct Labor Cost 585 Completion of Production 586
The Strategic Role of Nonfmancial-Performance Indicators 587 Limitations of Short-Term Financial-Performance Indicators 587 Business Processes 588 Operating Processes 588 Just-in-Time (JIT) Manufacturing 589
Summary 592 Key Terms 593 Comments on Cost Management in Action Self-Study Problems 594 Questions 595 Brief Exercises 595 Exercises 596 Problems 602 Solutions to Self-Study Problems 611
Chapter 16 Operational Performance Measurement: Further Analysis of Productivity and Sales 670
593
The Strategic Role of the Flexible Budget in Analyzing Productivity and Sales 671 Analyzing Productivity 672 Partial Productivity 674 Total Productivity 678
Analyzing Sales: Comparison with the Master Budget 680
Chapter 15 Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management 615 Standard Overhead Costs: Planning versus Control Variance Analysis for Manufacturing Overhead Costs 617
615
Variable Overhead Cost Analysis 618 Interpretation and Implications of Variable Overhead Variances 619 Fixed Overhead Cost Analysis 620 Interpretation of Fixed Overhead Variances 625 Alternative Analyses of Overhead Variances 626 Summary of Overhead Variances 627 Supplementing Financial Results with Nonfinancial Performance Indicators 629
Recording Standard Overhead Costs
629
Journal Entries and Variances for Overhead Costs
End-of-Period Disposition of Variances
629
631
Variance Disposition 631 The Effects on Absorption Costing Income of DenominatorLevel Choice in Allocating Fixed Overhead 633
Standard Costs in Service Organizations
640
Causes and Controllability 640 Role of Control Charts 641
634
Sales Volume Variance Partitioned into Sales Quantity and Sales Mix Variances 681 Sales Quantity Variance Partitioned into Market Size and Market Share Variances 684 The Five Steps of Strategic Decision Making for Schmidt Machinery 688
Analyzing Sales: Comparison with Prior Year Results 689 Analysis of Variances Analysis of Analysis of
Selling Price and Volume 689 Mix and Quantity Variances 690 Variable Cost Variances 691
Summary 692 Key Terms 693 Comments on Cost Management in Action 693 Self-Study Problems 693 Questions 694 Brief Exercises 695 Exercises 696 Problems 699 Solutions to Self-Study Problems 706
Contents xxv
Chapter 17 The Management and Control of Quality 711 The Strategic Importance of Quality 711 Baldrige Quality Award 711 ISO 9000 and ISO 14000 712 Quality and Profitability: Conceptual Linkage 712 Accounting's Role in the Management and Control of Quality 713 The Five Steps of Strategic Decision Making: Improving Quality in Pharmaceutical and Medical-Product Companies 714 Comprehensive Framework for Managing and Controlling Quality 715 The Meaning of Quality 715 Knowledge of Business Processes 717 Role of the Customer 717 Financial Component 717 Nonfinancial Performance Indicators 717 Feedback Loops 718 Relevant Cost Analysis of Quality-Related Spending and Investments 718 Link to Operations Management 718 Breadth of the System 718 Alternative Approaches to Setting Quality-Related Expectations 719 Setting Quality Expectations: A Six Sigma Approach 719 Setting Quality Expectations: Goalpost versus Absolute Conformance Standards 721 Goalpost Conformance 721 Absolute Quality Conformance 722 Goalpost or Absolute Conformance? 722 Taguchi Quality Loss Function 723 Financial Measures and Cost of Quality (COQ) 726 Relevant Cost Analysis: Decision Making 726 Cost-of-Quality (COQ) Reporting 727 COQ Reports 729 COQ and Activity-Based Costing (ABC) 731 Nonfinancial Quality Indicators 732 Internal Nonfinancial Quality Metrics 732 External (Customer Satisfaction) Quality Metrics 732 Role of Nonfinancial Performance Measures 733 Detecting and Correcting Poor Quality 734 Detecting Poor Quality 734 Taking Corrective Action 735 Lean Manufacturing and Accounting for Lean 739 Lean Manufacturing 739 Accounting for Lean 740 The Strategic Role of Lean Accounting 742 Summary 743 Key Terms 743 Self-Study Problems 743
Questions 744 Brief Exercises 745 Exercises 746 Problems 754 Solutions to Self-Study Problems
761
MANAGEMENT-LEVEL CONTROL 763 Chapter 18 Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard 764 Performance Measurement and Control 765 Operational Control versus Management Control 766 Objectives of Management Control 766 Employment Contracts 767 Design of Management Control Systems for Motivation and Evaluation 769 Informal Control Systems 770 Formal Control Systems 770 Strategic Performance Measurement 771 Decentralization 771 Types of Strategic Business Units 772 The Balanced Scorecard 772 Cost Centers 773 Strategic Issues Related to Implementing Cost Centers 773 Implementing Cost Centers in Departments 774 Outsourcing or Consolidating Cost Centers 776 Cost Allocation 776 Revenue Centers 777 Profit Centers 778 Strategic Role of Profit Centers 778 The Contribution Income Statement 780 Strategic Performance Measurement and the Balanced Scorecard 784 Implementing the Balanced Scorecard and the Strategy Map for Performance Evaluation 785 Implementing Strategy Using the BSC: Six Steps to Maximize the Value of Nonfinancial Measures 786 Management Control in Service Firms and Not-for-Profit Organizations 786 Summary 788 Key Terms 788 Comments on Cost Management in Action 789 Self-Study Problem 789 Questions 790 Brief Exercises 790 Exercises 791 Problems 798 Solution to Self-Study Problem 809
xxvi
Contents
Chapter 19 Strategic Performance Measurement: Investment Centers 811 Five Steps in the Evaluation of the Financial Performance of Investment Centers in an Organization 811
Part One: Financial-Performance Indicators for Investment Centers 813 Return on Investment 813 Return on Investment (ROI) Equals Return on Sales (ROS) Times Asset Turnover (AT) 813 Illustration of Evaluation Using ROI 814 Return on Investment (ROI): Measurement Issues 815 Strategic Issues Regarding the Use of ROI 820
Residual Income
823
Time Period of Analysis: Single versus Multiperiod Perspective 824 Limitations of Residual Income (RI) 824
Economic Value Added
826
Estimating EVA® 826 Alternative Approaches to Estimating EVA9 NOPAT and EVA® Capital 827
Using Average Total Assets 828 Part Two: Transfer Pricing 828 When Is Transfer Pricing Important? Objectives of Transfer Pricing 829 Transfer-Pricing Methods 830
Part One: Management Compensation 860 Types of Management Compensation 861 Strategic Role and Objectives of Management Compensation 861 Design the Compensation Plan for Existing Strategic Conditions 862 Risk Aversion and Management Compensation 862 Ethical Issues 862 Objectives of Management Compensation 863
Bonus Plans
864
Bases for Bonus Compensation 864 Bonus Compensation Pools 866 Bonus Payment Options 866
Tax Planning and Financial Reporting 867 Management Compensation in Service Firms Part Two: Business Analysis and Business Valuation 870 Business Analysis 871
835
Income-Tax Planning Opportunities: International Transfer Pricing 836 Other International Considerations 838 Advance Pricing Agreements 838
Summary 838 Key Terms 839 Comments on Cost Management in Action Self-Study Problems 840 Questions 840 Brief Exercises 840 Exercises 841 Problems 846 Solutions to Self-Study Problems 859
839
868
The Balanced Scorecard 871 Financial Ratio Analysis 872
Business Valuation 829
Choosing the Right Transfer-Pricing Method: The Firmwide Perspective 831
General Transfer-Pricing Rule 834 International Issues in Transfer Pricing
Chapter 20 Management Compensation, Business Analysis, and Business Valuation 860
874
The Discounted Cash Flow Method 875 Multiples-Based Valuation 877 Enterprise Value 877 An Illustration of the Five Steps of Strategic Decision Making in the Valuation of a Fashion Retailer 877
Summary 878 Key Terms 879 Comments on Cost Management in Action Self-Study Problems 879 Questions 880 Brief Exercises 881 Exercises 881 Problems 885 Solution to Self-Study Problems 895
Glossary
879
896
Index 908
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