Cost Management: Accounting and Control, 6th Edition

865 Pages·2007·13.12 MB·English

by  Don R. Hansen

Experience Cost Accounting
Real World
in the with
No
New Videos!
additional cost
when packaged
with a
new book!
Developed by Dan Heitger of Miami
University, new videos in the Experience
Accounting Video Series showcase
Accounting success! Get an inside look into
the unique decision-making procedures of
top companies to better understand how
accounting information is used.
These brief videos demonstrate how today’s
companies incorporate basic costing techniques
to fuel better business performance. Students
are exposed to a wide variety of high-profile
companies to better visualize manufacturing
and service examples.
After each video, students can respond
to 5 questions online at www.academic
.cengage.com/accounting/eav. There is also
an instructor video integration guide posted
on the companion website at www.academic
.cengage.com/accounting/hansen.
Washburn Guitar — Job Order Costing
Cold Stone Creamery — Activity-Based Costing
The Experience Accounting Video Series
features top companies, such as:
■ BP — Process Costing
■ Washburn Guitar — Job Order Costing
■ Hard Rock Café — Capital Investments
■ Cold Stone Creamery — Activity-Based Costing
■ High Sierra — Budgets and Profit Planning
■ Boyne Resorts — Cost-Volume-Profit Analysis
Boyne Resorts — Cost-Volume-Profit Analysis
■ Navistar — Relevant Costs
■ Zingerman’s Deli — Cost Behavior
To access the videos To package Hansen/Mowen/Guan’s Cost
and to see a demo, visit: Management: Accounting & Control, 6e with an
www.academic.cengage.com/accounting/eav. Experience Accounting Video Series access card
at no extra charge, please use ISBN 0-324-67390-6.
Cost Management
Accounting & Control
Sixth Edition
Don R. Hansen
Oklahoma State University
Maryanne M. Mowen
Oklahoma State University
Liming Guan
University of Hawaii at Manoa
Cost Management: Accounting and Control, 6th Edition © 2009, 2006 South-Western, a part of Cengage Learning
Hansen Mowen
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To Our Parents
Lindell and Leola Wise
John L. Myers and Marjorie H. Myers
Jingtai and Wen Guan
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P R E F A C E
Over the past twenty years, changes in the business environment have profoundly
affected cost accounting and cost management. A few examples of these changes
are an increased emphasis on providing value to customers, total quality manage-
ment, time as a competitive element, advances in information and manufacturing tech-
nology, globalization of markets, service industry growth, deregulation, and heightened
awareness of ethical and environmental business practices. These changes are driven by
the need to create and sustain a competitive advantage. For many firms, the information
required to realize a competitive advantage can no longer be derived from a traditional
cost management system. The traditional system relies on functional-based costing and
control. In a functional-based system, costing and control are centered on organizational
functions. Unfortunately, this functional-based approach often fails to provide informa-
tion that is detailed, accurate, and timely enough to support the requirements of this new
environment. This has resulted in the emergence of an activity-based cost management
system. Typically, an activity-based cost management system is more detailed and more
accurate than a functional-based cost management system and, thus, more costly to
operate. Furthermore, the need to add a formal guidance mechanism to the new activity-
based system has created a demand for strategic-based cost management. Thus, the new
cost management system might be more accurately referred to as an activity- and strategic-
based cost management system. The adoption of activity- and strategic-based cost man-
agement in many firms therefore suggests that in many cases the benefits of this more
sophisticated system outweigh its costs. On the other hand, the continued existence and
reliance on functional-based systems suggests the opposite for other firms.
The coexistence of functional-based systems with activity- and strategic-based cost
management systems necessitates the study of both systems, thus providing flexibility and
depth of understanding. In creating a text on cost management, we had to decide how to
design its structure. We believe that a systems approach provides a convenient and logical
framework. Using a systems framework allows us to easily integrate the functional- and
activity-based approaches in a way that students can easily grasp. Integration is achieved by
developing a common terminology—a terminology that allows us to define each system and
discuss how they differ. Then the functional and activity-based approaches can be compared
and contrasted as they are applied to costing, control, and decision making. We believe this
integration will allow students to appreciate the differences that exist between functional-
and activity-based approaches. This integration is especially useful in the decision-making
chapters, as it allows students to see how decisions change as the information set changes.
For example, how does a make-or-buy decision change as we move from a functional-based,
traditional cost management system to the richer, activity-based cost management system?
Compared to the 5th edition, this text has been streamlined by combining and
eliminating some materials. Notably, the coverage of environmental costs in Chapter 16
is reduced and combined with Chapter 14. A new Chapter 16, on lean accounting, is
instituted for this edition. The end-of-chapter exercises are also streamlined.
v
vi Preface
AUDIENCE
This text is written primarily for students at the undergraduate level. The text presents
a thorough treatment of traditional and contemporary approaches to cost management,
accounting, and control and can be used for a one- or two-semester course. In our opinion,
the text also has suffi cient depth for graduate level courses. In fact, we have successfully
used the text at the graduate level.
KEY FEATURES
We feel that the text offers a number of distinctive and appealing features—features that
should make it much easier to teach students about the emerging themes in today’s business
world. One of our objectives was to reduce the time and resources expended by instructors
so that students can be more readily exposed to today’s topics and practices. To help you
understand the text’s innovative approach, we have provided a detailed description of its
key features.
STRUCTURE
The text’s organization follows a systems framework and is divided into four parts:
1. Part 1: Foundation Concepts. Chapters 1 through 4 introduce the basic concepts
and tools associated with cost management systems.
2. Part 2: Fundamental Costing and Control. Chapters 5 through 10 provide thor-
ough coverage of product costing, planning, and control in both functional-based
and activity-based costing systems.
3. Part 3: Advanced Costing and Control. Chapters 11 through 16 present the key
elements of the new cost management approaches. Examples of the topics cov-
ered in this section include activity-based customer and supplier costing, strategic
cost management, activity-based budgeting, activity-based management, process
value analysis, target costing, kaizen costing, quality costing, environmental cost
management, productivity, the Balanced Scorecard, and lean manufacturing and
accounting.
4. Part 4: Decision Making. Chapters 17 through 21 bring the costing and control
tools together in the discussion of decision making.
This edition’s structure permits integrated coverage of both the traditional and activity-
based costing systems. In this way, students can see how each system can be used for
costing, control, and decision making and can evaluate the advantages and disadvantages
of each system. This approach helps students to see how cost management is applied to
problems in today’s world and to understand the richness of the approaches to business
problems.
CONTEMPORARY TOPICS
The emerging themes of cost management are covered in depth. We have provided a
framework for comprehensively treating both functional-based and activity-based topics. A
common terminology links the two approaches; however, the functional- and activity-based
approaches differ enough to warrant separate and comprehensive treatments. The nature
and extent of the coverage of contemporary topics is described below. As this summary
reveals, there is suffi cient coverage of activity- and strategic-based topics to provide a course
that strongly emphasizes these themes.
Preface vii
Historical Perspective
Chapter 1 provides a brief history of cost accounting. The historical perspective allows
students to see why functional-based cost management systems work well in some settings
but no longer work for other settings. The forces that are changing cost management
practices are described. The changing role of the management accountant is also covered
with particular emphasis on why the development of a cross-functional expertise is so
critical in today’s environment.
Accounting and Cost Management Systems
In Chapter 1, the accounting information system and its different subsystems are defi ned.
Distinctions are made between the fi nancial accounting and the cost management systems
and the differing purposes they serve. The cost management system is broken down into
the cost accounting system and the operational control system. The differences between
functional-based and activity-based cost management systems are defi ned and illustrated.
The criteria for choosing an activity-based system over a functional-based system are also
discussed.
Cost Assignment Methods
In Chapter 2, three methods of cost assignment are delineated: direct tracing, driver
tracing, and allocation. Activity drivers are also defi ned. Once the general cost assignment
model is established, the model is used to help students understand the differences between
functional-based and activity-based cost management systems. A clear understanding of
how the two systems differ is fundamental to the organizational structure that the text
follows.
Value Chain Analysis
The provision of value to customers is illustrated by the internal value chain, which is fi rst
introduced in Chapter 1 and defi ned and illustrated more completely in Chapter 2. Chapter
11 provides a detailed discussion of value chain analysis and introduces the industrial value
chain. Value chain analysis means that managers must understand and exploit internal and
external linkages so that a sustainable competitive advantage can be achieved. Exploitation
of these linkages requires a detailed understanding of the costs associated with both
internal and external factors. This edition expands the treatment of value chain analysis
by introducing, defi ning, and illustrating activity-based supplier costing and activity-based
customer costing. The costing examples developed show how the value chain concepts can
be operationalized—a characteristic not clearly described by other treatments. Thus, we
believe that the operational examples are a signifi cant feature of the text.
Activity Costs Change as Activity Usage Changes
Chapter 3 is a comprehensive treatment of cost behavior. First, we defi ne variable, fi xed, and
mixed activity cost behavior. Then, we discuss the activity resource usage model and detail
the impact of fl exible and committed resources on cost. Finally, we describe the methods
of breaking out fi xed and variable activity costs. The chapter on cost behavior analysis
is more general than usual chapters that treat the subject. Traditional treatment usually
focuses on cost as a function of production volume. We break away from this pattern and
focus on cost as a function of changes in activity usage with changes in production activity
as a special case. The activity resource usage model is used to defi ne activity cost behavior
(in terms of when resources are acquired) and is defi ned and discussed in Chapter 3. This
resource usage model plays an important role in numerous contemporary applications. It