Fundamentals of Cost Accounting

752 Pages·2010·15.825 MB·English

by  William Lanen, Shannon Anderson, Michael Maher

Fundamentals of
Cost Accounting
3e
William N. Lanen
University of Michigan
Shannon W. Anderson
Rice University
Michael W. Maher
University of California at Davis
FUNDAMENTALS OF COST ACCOUNTING
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Library of Congress Cataloging-in-Publication Data
Lanen, William N.
Fundamentals of cost accounting / William N. Lanen, Shannon W. Anderson,
Michael W. Maher. — 3rd ed.
p. cm.
Includes index.
ISBN-13: 978-0-07-352711-6 (alk. paper)
ISBN-10: 0-07-352711-4 (alk. paper)
1. Cost accounting. I. Anderson, Shannon W. II. Maher, Michael, 1946- III. Title.
HF5686.C8M224 2011
657'.42—dc22
2009044025
www.mhhe.com
Dedication
To my wife, Donna, and my children, Cathy and Tom, for
encouragement, support, patience, and general good cheer
throughout the years.
Bill
I dedicate this book to my husband Randy, my children
Evan and David, and my parents, Max and Nina Weems.
Your support and example motivate me to improve. Your
love and God’s grace assure me that it isn’t necessary.
Shannon
I dedicate this book to my children, Krista and Andrea, and
to my extended family, friends, and colleagues, who have
provided their support and wisdom over the years.
Michael
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William Lanen is Professor of Accounting at the
University of Michigan Business School. He holds
degrees in economics from the University of
California, Berkeley, and Purdue University and
earned a PhD in accounting from the Wharton
School of the University of Pennsylvania.
Bill teaches management accounting in both the BBA
and MBA programs at the University of Michigan. He
also teaches management accounting in Global MBA
Programs and Executive Education Programs in Asia,
Europe, and Latin America. Before coming to the
University of Michigan, Bill was on the faculty at the
Wharton School of the University of Pennsylvania,
where he taught various fi nancial and managerial
accounting courses at the undergraduate, MBA, and
Executive MBA levels. He has received teaching
awards at both the University of Michigan and the
Wharton School.
Bill is an Associate Editor of Management
Science and serves on the Editorial Boards of The
Accounting Review and the Journal of Management
Accounting Research. He has published in Journal
of Accounting Research; Journal of Accounting and
Economics; Accounting, Organizations and Society;
and The Accounting Review. Bill is past-president of
the Management Accounting Section of the American
Accounting Association.
iv
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Shannon Anderson is an Associate Professor of Michael Maher is a Professor of Management at the
Management at the Jones Graduate School of Busi- University of California-Davis. He previously taught
ness at Rice University and a Principle Fellow at the at the University of Michigan, the University of
University of Melbourne. She previously taught at Chicago, and the University of Washington. He also
the University of Michigan and worked as an engi- worked on the audit staff at Arthur Andersen & Com-
neer at General Motors Corporation. She received a pany and was a self-employed fi nancial consultant for
doctorate and master’s degree in business economics small businesses. He received his BBA from Gonzaga
at Harvard University and a BSE in civil engineer- University, which named him Distinguished Alumnus
ing with a concentration in operations research at in 1989, and his MBA and PhD from the University of
Princeton University. Washington, and he earned the CPA from the state of
Washington.
Shannon’s research, which focuses on the design and
implementation of performance measurement and Michael is a past-president of the Management
cost control systems, spans the fi elds of management Accounting Section of the American Accounting
accounting and operations research. Her research Association and has served on the editorial boards of
on activity-based costing won the 2006 American The Accounting Review, Accounting Horizons,
Accounting Association’s Notable Contribution Journal of Management Accounting Research, and
Award and the 2003 AAA Management Account- Management Accounting. He is coauthor of two
ing Section’s Notable Contribution to the Literature leading textbooks, Principles of Accounting and Mana-
Award. She and Bill won the 2006 AAA Management gerial Accounting. Maher has coauthored
Accounting Section’s Notable Contribution to the several additional books and monographs, including
Literature Award for their study of the performance Internal Controls in U.S. Corporations and Manage-
impact of electronic data interchange (EDI) systems. ment Incentive Compensation Plans, and published
articles in many journals, including Management
Shannon currently serves as an Editor of the Account-
Accounting, The Journal of Accountancy, The
ing Review and on the Editorial Boards of Account-
Accounting Review, Journal of Accounting Research,
ing, Organizations and Society; Production and
Financial Executive, and The Wall Street Journal.
Operations Management; and Management Account-
ing Research. She has also served on numerous com- For his research on internal controls, Michael was
mittees for the American Accounting Association and awarded the American Accounting Association’s
the Management Accounting Section of the American Competitive Manuscript Award and the AICPA
Accounting Association. Her research, which has been Notable Contribution to Literature Award. He also
funded in part by competitive grants from the AICPA, received the award for the Outstanding Tax
the Institute of Internal Auditors, and the Institute of Manuscript. He received the Annual Outstanding
Management Accountants, has been published by the Teacher Award three times from his students at
Accounting Review, Accounting Organizations and the University of California’s Graduate School of
Society, Production and Operations Management, Management and has twice received a special award
Management Science, and the Journal of Manage- for outstanding service. Maher’s current research
ment Accounting Research. She is also coauthor of includes studies in health care costs and corporate
the award-winning book, Implementing Management corruption.
Innovations.
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For a student, taking a cost
accounting course can be like
fi nding yourself in tall grass: s urrounded
by dense concepts and far from the
path to mastery. Fundamentals of Cost
Accounting gives students a clear view
by lifting them above the overgrowth. By
focusing on the fundamental concepts
that students will need and employing
a conversational writing style that keeps
them engaged throughout the course,
Fundamentals focuses students on
comprehension rather than memorization
and provides a context for their learning.
The material is presented from both a
preparer and a user perspective, a llowing
instructors to provide both accounting
majors and nonmajors with an e ffective
and relevant understanding of cost
accounting topics. In this third edition, the
text continues to provide the following
core features:
Well written, clear and concise. . . . Gives students the
basics but eliminates a lot of the in-depth material that
tends to confuse students and have them lose sight of the
important concepts. The Critical Analysis and discussion
questions at the end of the chapter are excellent discussion
points for either in-class discussion or written take-home
problems.
Michael Fedoryshyn
St. John Fisher College
vi
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Fundamentals of Cost Accounting con-
tinues to be praised as one of the most
readable texts on the market. Lanen, Each chapter of Fundamentals of Cost
Anderson, and Maher employ a conver- Accounting opens with a real dilemma
sational writing style that students can faced by a manager in a variety of ser-
understand, making concepts and topics vice and manufacturing companies. The
more accessible. Throughout the text, Debrief feature links the topics in the
exhibits and i llustrations provide visuals chapter to the decision dilemma faced
to further assist students in understand- by the manager in the opening vignette.
ing how c omplex topics fi t together in a In Action boxes in the text highlight
logical way. related issues reported in the business
press and the authors’ own experiences
CCoonncciisseenneessss with companies where they have worked
or conducted research.
Short, readable chapters that focus on
NEW to this edition, the authors have
core cost accounting concepts give Lanen,
tied the chapter opening vignette to an In
Anderson, and Maher a leg up on the
Action box to demonstrate the relevance
competition. While other texts tend to tack
of cost accounting to the real world.
on topics and fi t concepts into chapters in
seemingly arbitrary ways, Fundamentals
of Cost Accounting presents basic topics in
a coherent sequence, helping students to
see the integration of the concepts quickly
and easily.
. . . an excellent text for instructors who are looking for
a cost accounting text to follow a fi nancial accounting
text. It provides coverage of traditional methods &
techniques and has great explanations of measurement and
interpretation issues.
Roy Regel
University of Montana—Missoula
. . . [A] great text that shows many different ways to view
cost accounting—not just a number-crunching text.
Terry Elliott
Morehead State University
vii
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5
Cost Estimation
Chapter Five
LEARNING OBJECTIVES
After reading this chapter, you should be able to:
L.O.1 Understand the reasons for estimating fi xed and variable costs.
L.O.2 Estimate costs using engineering estimates. Ith’vreo uregha dd esceivseiorna l abnoaolykssi so pnr ocbolsetm asn ainly ssoism aen odf wmoyr kceold- aInb oAuctt,i oonf aitlel tmhi n“gTsh,e t hVea crioasbtlse oCf otesxtt omf eas sTaegxitn Mg e[ssesea gthee”
L.O.3 Estimate costs using account analysis. liezeg et hcalat stsheesr.e N woaws thoante I iomwpno rmtayn ot wthnin bgu sthinaet sIs ,a Ilw reaayls- aonb leth eco nsetsx t opfa sgeen].d Tinhge taerxtitc mlee tsaslkaegde as baonudt tthhee liomwp vliacari--
took for granted in doing those problems. We were al- tions for pricing services. Although I am in a different
L.O.4 Estimate costs using statistical analysis. ways given the data. Now I know that doing the analy- industry, the basic principles still apply.
sis once you have the data is the easier part. How are
L.O.5 Interpret the results of regression output. the costs determined? How do I know if they are fi xed Charlene Cooper owns Charlene’s Computer Care (3C), a
or variable? I am trying to decide whether to open a network of computer service centers located throughout the
L.O.6 Identify potential problems with regression data. new store and I need answers to these questions. South. Charlene is thinking about opening a new center and
I thought about the importance of being able to de- has asked you to help her make a decision. She especially
termine fi xed and variable costs after reading an article wants your help estimating the costs to use in the analysis.
Chapter Opening Vignettes
Do your students sometimes wonder how Why Estimate Costs?
the course connects with their future? W hen managers make decisions, they need to compare the costs (and benefi ts) among
alternative actions. Therefore, managers need to estimate the costs associated with each
Each chapter opens with a vignette where
alternative. We saw in Chapter 4 that good decisions require good information about
a decision-maker needs cost accounting costs; the better these estimates, the better the decision managers will make. In this
chapter, we discuss how to estimate the cost data required for decision making. Cost es-
information to make a better decision. This timates can be an important element in helping managers make decisions that add value
to the company.
sets the stage for the rest of the chapter and
encourages students to think of concepts in
a business context.
The Debrief Debrief
Do your students understand how
After considering the cost estimates in Exhibit 5.8, Charlene Although there is a range in the estimates, all of
to apply the concepts in each
commented: the estimates are below my expected revenues.
This exercise has been very useful for me. First, I This means I am not going to spend more time on chapter to become better decision
reconciling the cost estimates because I know that
learned about different approaches to estimating
the cost of a new center. More important, I learned regardless of which estimate I think is best, my de- makers? All chapters now end with
cision will be the same.
about the advantages and disadvantages of each
a Debrief feature that links the
approach.
When I look at the numbers in Exhibit 5.8, I have topics in the chapter to the decision
confi dence in my decision to open a new c enter.
problem faced by the manager in
the opening vignette.
viii
Cost-Volume-Profi t Analysis and Airline Pricing In Action
In Action
Do your students Cost-volume-profi t analysis helps managers evaluate the im- The Sabre study showed that when planes are
pact of alternative product pricing strategies on profi ts. It can 62 percent full, Aloha’s costs are $50 per seat,
need help con- also be useful for evaluating competitors’ pricing strategies Hawaiian’s are $55, and go!’s are $67.
necting theory to and efforts to grow market share, as in the following exam- However, managers at the parent company of go! (Mesa
application? The In ples: Airlines) disputed the estimates with a CVP analysis of their
Action examples are Aloha Airlines CEO David Banmiller and C. Thomas own:
dpthroear waarunyt hfjrooourmsr’n ocaolwsn nate nemdx -- Nebl$o5xrusep0ilHnat,lya gka,ai w nscem ecavtohnoieinaairnodent r wiy t nAhv hgwieicer ihlterinon e a pepnaisrr l aelts,ih nnstAeueiedlydo sm eyhs an eaucrtl s eolAf to mi ni6crrtl2m hiemn arpiesiarsessgrlr kaieoacen nne$tdeidnn5 d ttg0g ic f buopakly!enel . atdrAs r sle osbe aheealaaleto cstwoh, Jyisftuoe eclnsnl.otagemterhdera saan yrt eo Ot hahranbistso tAauelitiorn l$hi,n 4aMe0’s.e wHcshaoee’s sstn ace tihdshite eigm fpo eal!ax’tsene seec xsuap traieevr enew s o8aef0ysfi coppefeefr r,rwc spehaaneidstn -
periences and illus- Airlines. Note: Aloha Airlines is no longer in business.
“Why would somebody come in and charge $19, and
trate how to apply $29, and $39 when their costs were substantially higher? Source: Rick Daysog, “Below-Cost Fares Puzzle Aloha Airlines
Why would somebody do it?” said Banmiller. CEO,” Honolulu Advertiser, December 21, 2006.
cost accounting
methods and tools.
Critical Analysis and Discussion Questions
End-of-Chapter Material
13-7. “Preparing a budget is a waste of time. The strategic plan is what we work to accomplish.”
How would you respond to this comment?
13-8. In the In Action feature, “Using the Budget to Help Manage Cash Flow,” smaller fi rms were Being able to assign end-of- chapter
more likely to fi nd the budget “extremely or very important” than larger fi rms. Why might material with confi dence is important.
this be the case?
13-9. W hat are the advantages and disadvantages of starting the budgeting process early in the The authors have tested the end-of-
year versus later in the year prior to the budget year?
13-10. Would the budgeting plans for a company that uses a just-in-time (JIT) inventory system be chapter material over time to ensure
different than those for a company that does not? Why?
13-11. Government agencies are limited in spending by budget categories, not just by an overall quality and consistency with the
spending limit. What purpose does this serve? What problems does it create?
13-12. What is the difference between the planning and the control functions of the budget? What chapter content.
problems do these differences create?
13-13. When might the master budget start with a forecast of something other than sales, for ex-
ample, production? Why?
13-14. In some organizations (fi rms, universities, government agencies), spending appears to in-
crease as the end of the budgeting period approaches, even if there are no seasonal differ-
ences. What might cause this?
13-15. “Our cash budget shows a surplus for the quarter, so we do not have to think about arrang-
ing any bank fi nancing.” Comment on this statement.
Exercises
accounting
13-16. Estimate Sales Revenues (L.O. 3)
SVI is a large securities dealer. Last year, the company made 150,000 trades with an average com- S
mission of $60. Because of the general economic climate, SVI expects trade volume to decline
by 15 percent. In addition, employees at a local manufacturing plant have historically constituted
10 percent of SVI’s volume. The plant just closed and all employees have closed their accounts.
O ffsetting these factors is the observation that the average commission per trade is likely to
increase by 15 percent because trades are expected to be larger in the coming year.
Required
Estimate SVI’s commission revenues for the coming year.
Integrative Cases Integrative Cases
Cases can generate classroom 8-49. Show Cost Flows: FIFO Method, Over- or Underapplied Overhead (L.O. 5)
discussion or be the basis for good team V ermont Company uses continuous processing to produce stuffed bears and FIFO process costing
to account for its production costs. It uses FIFO because costs are quite unstable due to the vola-
projects. These integrative cases, which tile price of fi ne materials it uses in production. The bears are processed through one department.
Overhead is applied on the basis of direct labor costs, and the application rate has not changed over
rely on cost accounting principles from the period covered by the problem. The Work-in-Process Inventory account showed the following
balances at the start of the current period:
previous chapters as well as the current
chapter, ask students to apply the Direct materials . . . . . . . . . . . . . . . . . $131,000
Direct labor . . . . . . . . . . . . . . . . . . . . . 260,000
different techniques they have learned Overhead applied . . . . . . . . . . . . . . . . 325,000
to a realistic situation.
These costs were related to 52,000 units that were in process at the start of the period.
ix
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Chapter 1 Cost Accounting: Information for
Decision Making

TThhiirrdd • Enhanced development of the role of the
iinn tthhee value chain in value creation.
• Updated In Action items, including discussion
of ethical issues.
EEddiittiioonn?? • New material on lean accounting.
• New end-of-chapter material on the role of
cost accounting in decision making.
Chapter 2 Cost Concepts and Behavior
• New In Action item discussing how the
Our primary goal in the third edition remains economic climate affects the decision about
the same as in the previous two editions––to where to locate manufacturing sites.
offer a cost accounting text that lets the student • Two new critical analysis assignments.
see the development of cost accounting
• Five new exercises and problems.
tools and techniques as a natural response to
decision making. We emphasize the intuition Chapter 3 Fundamentals of Cost-Volume-
behind concepts and work to minimize the Profi t Analysis
need to “memorize.” We believe that students • New In Action item illustrating CVP analysis in
who develop this intuition will, fi rst, develop a service industry (airlines).
an appreciation of what cost accounting is • New Integrative Case.
about and, second, will have an easier time • Eight new exercises and problems.
understanding new developments that arise
Chapter 4 Fundamentals of Cost Analysis for
during their careers. Each chapter clearly
Decision Making
establishes learning objectives, highlights
numerous real-world examples, and identifi es • New In Action item on decision making in a
where ethical issues arise and how to think about small business.
these issues. Each chapter includes at least one • Two new Integrative Cases.
integrative case that illustrates the links among • Eight new questions, exercises, and problems
the topics. in end-of-chapter material.
We present the material from the perspective Chapter 5 Cost Estimation
of both the preparer of information as well as • New In Action items involving text messaging
those who will use the information. We do this so and major league baseball.
that both accounting majors and those students
• Revised discussion of using Microsoft Excel to
planning other careers will appreciate the issues estimate regression (updated for Offi ce 2007).
in preparing and using the information. The
• Revised questions, exercises, and problems in
opening vignettes now tie to one of the In Action
end-of-chapter material.
features in the chapter to highlight the relevance
of cost accounting to today’s business problems. Chapter 6 Fundamentals of Product and
As in the second edition, all chapters end with a Service Costing
Debrief that links the topics in the chapter to the • New Integrative Case.
decision problem faced by the manager in the • New and updated questions, exercises, and
opening vignette. problems in end-of-chapter practice material.
The end-of-chapter material has increased by Chapter 7 Job Costing
over 10 percent, and more than 50 percent of • New In Action items on cost allocation and
the material retained from the second edition has government contracts, including ethical
been revised. Throughout the revision process, implications.
we have retained the clear writing style that is • New Integrative Case.
frequently cited as a strength of the text.
• Eight new questions, exercises, and problems
in end-of-chapter material.
x