The Complete CFO Handbook

Table of contents

1. Copyright
2. Dedication
3. Preface
   1. Acknowledgment
4. About the Authors
5. 1. The Changing Role of the CFO: From Accounting to Accountable
   1. SOX Act of 2002 and the CFO
   2. Expanded Responsibilities of the CFO
      1. Compliance: tax, legal, and regulatory
      2. Communications
      3. Strategic planning
      4. Performance Evaluation
      5. Risk Management
      6. Fiduciary Duty
   3. Our Agenda
   4. Endnotes
6. 2. Capital Structure Decisions
   1. Debt Versus Equity
   2. Concept of Leverage
      1. Leverage and operating Risk
      2. Leverage and Financial Risk
   3. Capital Structure and Financial Leverage
   4. Financial Leverage and Risk
      1. Leverage Effect
      2. Leverage and Financial Flexibility
      3. Governance value of Debt Financing
   5. Capital Structure and Taxes
      1. Interest Deductibility and Capital Structure
      2. Interest Tax Shield
      3. Unused Tax Shields
   6. Capital Structure and Financial Distress
      1. Costs of Financial Distress
      2. Role of limited liability
      3. Bankruptcy and bankruptcy Costs
      4. Financial Distress and Capital Structure
   7. Cost of Capital
   8. Agency Relationship
      1. Problems with the Agency Relationship
      2. Costs of the Agency Relationship
      3. Agency Relationship and Capital Structure
   9. Optimal Capital Structure: Theory and Practice
      1. Capital Structures among Different Industries
      2. Capital Structures within Industries
      3. Other Possible Explanations
   10. A Capital Structure Prescription
   11. Bottom Line
   12. Appendix: Capital Structure Theory—the Modigliani‐Miller Theory and Beyond
       1. M&M Irrelevance Proposition
   13. M&M with Tax Deductibility of interest Paid on Debt
       1. Capital Structure Theory and Costs of Financial Distress
   14. Endnotes
7. 3. Types of Debt Financing
   1. General Features of Debt Obligations
   2. Term Loans
   3. Syndicated Bank Loans
   4. Notes and Bonds
      1. Issuance of new Bonds
      2. Features and Provisions of a Bond Issue
         1. Denomination
         2. Term to Maturity
         3. Interest
         4. Security
         5. Seniority
         6. Debt Retirement
      3. Hybrid Securities
         1. Convertible Securities
         2. Trust‐Preferred Securities
      4. Designing a Bond Issue
      5. Fixed‐Rate versus Floating‐Rate
      6. Medium‐Term note
   5. Short‐Term Financing
      1. Unsecured Financing
         1. Trade Credit
         2. Bank Financing
         3. Commercial Paper
         4. Bankers' Acceptances
      2. Secured Financing
         1. Accounts Receivable
         2. Inventory
      3. Loan‐to‐Value for Secured Financing
   6. Off‐Balance‐Sheet Financing
      1. Fin 46
      2. Section 401(a) of the Sarbanes‐Oxley Act of 2002
   7. Bottom Line
   8. Notes
8. 4. Equity Funding
   1. Common Stock
      1. Privately Held versus Publicly Held Shares
      2. Classifed Stock
      3. Dividends
         1. Dividend Reiavestment Plens
         2. Stock Distributions
      4. Dividend Policy
         1. The Dividend Irrelevance Theory
         2. The “Bird in the Hand” Theory
         3. The Tax‐Preference Explanation
         4. The Signaling Explanation
         5. The Agency Explanation
         6. Summing Up: To Pay Dividends or Not
      5. Stock Repurchases
   2. Preferred Stock
      1. Features of Preferred Stock
         1. Par and Liquidation Values
         2. Dividends
         3. Cumulative versus Noncumulative Dividends
         4. Participating versus Nonparticipating
         5. Convertibility
         6. Callability
         7. Voting Rights
         8. Sinking Funds
         9. Packaging Features
      2. Corporate Use of Preferred Stock
   3. Bottom Line
   4. Notes
9. 5. Structured Financing: Asset Securitization and Structured Notes
   1. Asset Securitization
      1. Illustration of an Asset Securitization Transaction
      2. Reasons for Using a Securitization Transaction
         1. Potential for Reducing Funding Costs
         2. Diversifying Funding Sources
         3. Accelerating Earnings for Financial Reporting Purposes
         4. What Rating Agencies Look at in Rating Asset‐Backed Securities
            1. Credit Quality of the Collateral
            2. Quality of the Seller/Servicer
            3. Cash Flow Stress and Payment Structure
      3. Credit Enhancement
         1. Third‐Party Guarantees
         2. Overcollateralization
         3. Senior‐Subordinate Structure
         4. Reserve Funds
   2. Structured Notes
      1. Motivation for Investors
      2. Creating Structured Notes
      3. Two Examples of Structured Notes
         1. Interest‐Rate Linked Structured Notes
         2. Equity‐Linked Structured Notes
   3. Bottom Line
   4. Endnotes
10. 6. Strategy and Financial Planning
    1. Strategy and Value
       1. Comparative and Competitive Advantages
       2. Strategy and Adding Value
    2. Financial Planning and Budgeting
    3. Importance of Financial Planning
    4. Budgeting Process
    5. Sales Forecasting
       1. Forecasting with Regression Analysis
       2. Market Surveys
       3. Management Forecasts
    6. Seasonal Considerations
    7. Budgeting
       1. Cash Budget
    8. Pro Forma Financial Statements
       1. Analysis of Accounts
       2. Percent‐of‐Sales Method
    9. Long‐Term Financial Planning
    10. Financial Modeling
    11. Performance Evaluation
        1. Economic Value Added
           1. Economic Profit/Economic Value Added
           2. Market Value Added
        2. Balanced Scorecard
           1. The Process
           2. The Measures
           3. How Do Companies Use the Balanced Scorecard?
           4. Scorecard for the Balanced Scorecard
    12. Strategy and Value Creation
        1. Role of the CFO
        2. Sources of Value Creation
    13. Bottom Line
    14. Endnotes
11. 7. Basics of Corporate Taxes and Tax Risk Management
    1. Tax Management
    2. Tax Risk
       1. Transactional Risk
       2. Operational Risk
       3. Compliance Risk
       4. Financial Accounting Risk
       5. Portfolio Risk
       6. Management Risk
       7. Reputational Risk
    3. U.S. Tax Law and Taxation of Corporations
       1. Federal Corporate Tax Rates
       2. Corporate Taxable Income
          1. Dividends‐Received Deduction
          2. Interest Expense Deduction
          3. Depreciation for Tax Purposes
          4. Capital Gains
       3. Tax Credits
          1. Tax Credit versus Tax Deduction
       4. Net Operating loss Carrybacks and Carryovers
    4. State and Local Taxes
    5. Non‐U.S. Taxes
       1. Corporate Income Tax Rates
       2. Determining Taxable Income
          1. Interest Expense
          2. Intercompany Transactions and Transfer Prices
    6. Bottom Line
    7. Notes
12. 8. Corporate Risk Management
    1. Risk Defined
    2. Enterprise Risk Management
       1. Defnitions of ERM
       2. ERM Process
       3. Themes of ERM
       4. Specifying the Firm's Risk Policy
    3. Managing Risks
       1. Retained Risk and Risk Finance
       2. Risk Neutralization
       3. Risk Transfer
    4. Risk Transfer
       1. Traditional Insurance
       2. Derivatives
          1. Futures Contracts
             1. Mechanics of a Futures Contract
             2. How Futures Are Used to Manage Risk
          2. Forward Contracts
          3. Options
             1. Exchange‐Traded versus OTC Options
             2. Differences between Options and Futures Contracts
          4. Swaps
             1. Interest Rate Swap
             2. Currency Swaps
             3. Commodity Swaps
          5. Cap and Floor Agreements
          6. Credit Derivatives
             1. Credit Default Swaps
             2. Credit‐Linked Notes23
       3. Alternative Risk Transfer
          1. Insurance‐Linked Notes
          2. Captives
          3. Finite Insurance
          4. Multiline Insurance
          5. Contingent Insurance
    5. Bottom Line
    6. Notes
13. 9. Financial Ratio Analysis
    1. Ratios and their Classification
    2. Return‐on‐Investment Ratios
       1. Recap: Return‐on‐Investment Ratios
       2. DuPont System
    3. Liquidity
       1. Operating Cycle
       2. Measures of Liquidity
       3. Recap: Liquidity Ratios
    4. Profitability Ratios
       1. Recap: Profitability Ratios
    5. Activity Ratios
       1. Inventory Management
       2. Accounts Receivable Management
       3. Overall Asset Management
       4. Recap: Activity Ratios
    6. Financial Leverage Ratios
       1. Component Percentage Ratios
       2. Book Value Versus Market Value
       3. Coverage Ratios
       4. Recap: Financial Leverage Ratios
    7. Common‐Size Analysis
    8. Using Financial Ratio Analysis
    9. Illustration: Pfizer, Inc., 1990–2005
       1. Company Description, Industry, and Major Factors
       2. Financial Ratios
          1. Liquidity
          2. Activity
          3. Profitability
          4. Financial Leverage
          5. Return and the DuPont Analysis
          6. Other Factors
          7. Common‐Size Analysis
       3. Limitations from the Use of Accounting Data
          1. Use of Historical Costs
          2. Different Methods of Accounting
             1. Changes in Accounting Principles
             2. Eextraordinary and Special Items
             3. The Difficulty in Classifying “Fuzzy” Items
             4. Restatements
       4. Selecting and Interpreting Ratios
       5. Choosing a Benchmark
       6. Using Ratios in Forecasting
    10. Bottom Line
    11. Endnotes
14. 10. Cash Flow Analysis
    1. Difficulties with Measuring Cash Flow
    2. Cash Flows and the Statement of Cash Flows
    3. Free Cash Flow
    4. Calculating Free Cash Flow
    5. Net Free Cash Flow
    6. Usefulness of Cash Flows in Financial Analysis
       1. Ratio Analysis
       2. Using Cash Flow information
    7. Bottom Line
    8. Notes
15. 11. Decentralized Operations and Responsibility Accounting
    1. Introduction
    2. Organization Structures and Concepts
    3. Examples of Types of Organization Structure and Responsibility Reporting
       1. Functional Approach
       2. Product Approach
       3. Geographical Approach
    4. Decentralization Problems
       1. Advantages of Decentralization
       2. Cost of Decentralization
    5. Responsibility Accounting
       1. Responsibility Accounting Defined
       2. Essentials of Control
       3. Organization Structure
       4. Responsibility Centers
       5. Responsibility Accounting System
          1. Level 1: Departments
          2. Level 2: Plants
          3. Level 3: Vice Presidents
          4. Level 4: President
       6. Responsibility Accounting Reports
          1. Level 1: Assembly Department Supervisor
          2. Level 2: Plant Manager—Plant C
          3. Level 3: Vice President—Manufacturing
          4. Level 4: President
    6. Controllable Costs
    7. Costs of Service Departments
    8. Executive Incentive Compensation Plans and Dysfunctional Decision Making
       1. Theoretical Overview—Principal‐Agency Theory
       2. Executive Incentive Compensation Plans
          1. Example 1
          2. Example 2
       3. Some Conclusions
    9. Bottom Line
    10. Endnotes
16. 12. Responsibility Center Performance Evaluation
    1. Basis for Comparison
    2. Cost Center Performance Evaluation
    3. Cost Center Decision Making
    4. Profit Center Performance Evaluation
       1. Cost Allocation
    5. Profit Center Decision Making
    6. Investment Center Performance Evaluation
       1. Return on Investment
          1. Investment Turnover and Earnings Ratio (Margin)
          2. Strengths and Weaknesses of ROI
          3. Illustration of ROI and a Lack of Goal Congruence
       2. Residual Income
       3. Valuation and Allocation of Controllable Assets
       4. Investment Center Decision Making
    7. Bottom Line
    8. Appendix: Gross Profit Analysis
       1. Change in Gross Profit
       2. Analyzing Change in Gross Profit
       3. Multiple Products
       4. Management Analysis
    9. Endnotes
17. 13. Transfer Pricing
    1. Transfer Pricing Methods
       1. Comprehensive Illustration
          1. Cost
          2. Cost Plus
          3. Negotiated Price
          4. Market Price
    2. Dual Transfer Pricing System
    3. International Transfer Pricing
    4. Bottom Line
    5. Endnotes
18. 14. Capital Budgeting and Cash Flow Analysis
    1. The Investment Problem
       1. Investment Decisions and Owners' Wealth Maximization
    2. Capital Budgeting
       1. Classifying Investment Projects
          1. Classification According to Economic Life
          2. Classification According to Risk
          3. Classification According to Dependence on Other Projects
    3. Cash Flow From Investments
       1. Incremental Cash Flows
       2. Investment Cash Flows
          1. Asset Acquisition
          2. Asset Disposition
             1. Disposition of New Investment
             2. Disposition of Existing Asset(s)
       3. Operating Cash Flows
          1. Change in Revenues
          2. Change in Expenses
          3. Change in Taxes
          4. Change in Working Capital
             1. Classifying Working Capital Changes
       4. Putting it All Together
       5. Net Cash Flows
       6. Simplifcations
    4. Bottom Line
    5. Appendix 14.A: Expected Cash Flows From the Disposition of an Asset
       1. Case 1: Sell the asset for $8,000 [Original cost > Expected sales price > Tax basis]
       2. Case 2: Sell the asset for $12,000 [Expected sales price > Original cost > Tax basis]
       3. Case 3: sell the asset for $1,000 [tax basis > expected sales price]
    6. Appendix 14.B: Expansion of the Williams 5 & 10
       1. The Problem
       2. The Analysis
    7. Endnotes
19. 15. Capital Budgeting Techniques
    1. Evaluation Techniques
       1. Cost of Capital, Required Rate of Return, and Discount Rate
    2. Net Present Value
       1. Calculating the net present value
       2. Investment Profile
          1. Solving for the Cross‐Over Rate
    3. Profitability index
    4. Internal Rate of Return
       1. IRR and Mutually Exclusive Projects
       2. IRR and Capital Rationing
       3. Multiple Internal Rates of Return
    5. Modified Internal Rate of Return
       1. Calculating the Modified Internal Rate of Return
    6. Payback Period
    7. Discounted Payback Period
       1. Calculating the Discounted Payback Period
    8. Issues in Capital Budgeting
       1. Scale Differences
          1. Mutually Exclusive Projects
          2. Capital Rationing
       2. Unequal Lives
    9. Comparing Techniques
    10. Capital Budgeting Techniques in Practice
    11. Conflicts With Responsibility Center Performance Evaluation Measures
    12. Capital Budgeting and the Justification of New Technology
    13. Bottom Line
    14. Endnotes
20. 16. Capital Budgeting and Risk
    1. Project Risk
       1. Different Types of Project Risk
    2. Measurement of Project Risk
       1. Range
          1. Standard Deviation
          2. Coeffcient of Variation
       2. Tools That Can Be Used to Evaluate Total Risk
    3. Measuring a Project's Market Risk
       1. Market Risk and Financial Leverage
          1. Using a Pure‐Play
       2. Adjusted Present Value
    4. Incorporating Risk in the Capital Budgeting Decision
       1. Risk‐Adjusted Rate
          1. Project's Cost of Capital Based on the CAPM Method
          2. Adjusting the Company's Cost of Capital
    5. Real Options
       1. Options on Real Assets
       2. Real Options: An Example
       3. Challenges
    6. Certainty Equivalents
    7. Assessment of Project Risk in Practice
    8. Bottom Line
    9. Endnotes
21. 17. Leasing
    1. How Leasing Works
    2. Types of Equipment Leases
       1. Nontax‐Oriented Leases
       2. Tax‐Oriented True Leases
          1. Single‐Investor Leases versus Leveraged Leases
    3. Full‐Payout Leases Versus Operating Leases
    4. Reasons for Leasing
       1. Cost
       2. Conservation of Working Capital
       3. Preservation of Credit Capacity by Avoiding Capitalization
       4. Risk of Obsolescence and Disposal of Equipment
       5. Restrictions on Management
       6. Impact on Cash Flow and Book Earnings
    5. Types of Lessors
    6. Lease Brokers and Financial Advisers
    7. Lease Programs
    8. Financial Reporting of Lease Transactions by Lessees
       1. Classification of Leases
       2. Accounting for Operating Leases
       3. Accounting for Capital Leases
    9. Leveraged Lease Fundamentals
       1. Parties to a Leveraged Lease
          1. Lessee
          2. Equity Participants
          3. Loan Participants or Lenders
          4. Owner Trustee
          5. Indenture Trustee
          6. Manufacturer or Contractor
          7. Packager or Broker
          8. Guarantor
       2. Structure of a Leveraged Lease
       3. Closing the Transaction
          1. Participation Agreement
          2. Other Key Documents
          3. Indemnities by the Lessee
       4. Cash Flows During the Lease
       5. Debt for Leveraged Leases
    10. Federal Income Tax Requirements for True Lease Transactions
    11. Synthetic Leases
    12. Valuing a Lease: The Lease or Borrow‐to‐Buy Decision
        1. Direct Cash Flow from Leasing
        2. Valuing the Direct cash Flow from Leasing
        3. Concept of an Equivalent Loan
        4. Comparison of Alternative Leases
        5. Another Approach to Lease Valuation
        6. Tax Indemnifcation for Future Changes in Tax Law
        7. Need for a Financial Adviser
        8. Steps in Structuring, Negotiating, and Closing a Leveraged Lease
    13. Bottom Line
    14. Endnotes
22. 18. Managing Short‐Term Assets
    1. Cash Management
       1. Monitoring Cash Needs
       2. Reasons for Holding Cash Balances
       3. Costs Associated with Cash
       4. Determining the Investment in Cash
          1. Other Considerations
       5. Cash Management Techniques
          1. Lockbox System
          2. Current Advances in Lockboxes
       6. Controlled Disbursements
       7. How Much Cash Do Companies Really Hold?
    2. Marketable Securities
       1. Marketable Securities and Risk
       2. Types of Marketable Securities
    3. Receivables Management
       1. Reasons for Extending Credit
       2. Costs of Credit
       3. Credit and the Demand for a Firm's Goods and Services
       4. Credit and Collection Policies
       5. Monitoring Accounts Receivable
       6. Eestablishing and Changing Credit Policies
       7. Accounts Receivable Management in Practice
    4. Inventory Management
       1. Reasons for Holding Inventory
       2. Costs Associated with Inventory
       3. Models of Inventory Management
          1. The Economic Order Quantity Model
          2. Just‐in‐Time Inventory
          3. Other Considerations
       4. Monitoring Inventory Management
       5. Inventory Management in Practice
    5. Bottom Line
    6. Endnotes
23. 19. Classifying Costs
    1. Elements of a Product
       1. Materials
       2. Labor
       3. Factory Overhead
       4. An Example of Production Costs
    2. Relationship to Production
    3. Relationship to Volume
       1. Variable Costs
       2. Fixed Costs
       3. Mixed Costs
          1. Semivariable Cost
          2. Step Cost
    4. Ability to Trace
    5. Department Where Incurred
    6. Functional Areas
    7. Period Charge in Income
    8. Relationship to Planning, Controlling, and Decision Making
       1. Standard and Budgeted Costs
       2. Controllable and Noncontrollable Costs
       3. Committed and Discretionary Fixed Costs
       4. Relevant and Irrelevant Costs
       5. Differential Costs
       6. Opportunity Costs
       7. Shutdown Costs
    9. Techniques for New Product Cost Estimation
       1. Basics of Cost Estimation
       2. Cost Estimation Techniques
    10. Bottom line
    11. Endnotes
24. 20. Costing and Control of Materials, Labor, and Factory Overhead
    1. Materials (Stores)
       1. Accounting for Materials
          1. Purchase of Materials
             1. Purchase Requisition
             2. Purchase Order
             3. Receiving Report
       2. Issuance of Materials
          1. Systems of Accounting for Materials Issued to Production and Ending Materials Inventory
             1. Accounting by the Periodic Inventory System
             2. Accounting by the Perpetual Inventory System
       3. Control Procedures
    2. Labor
       1. Costs Included in Labor
       2. Accounting for Labor
          1. Timekeeping
          2. Computation of Total Payroll
          3. Allocation of Payroll Costs
       3. Special Problems Relating to the Accounting for Labor
          1. Employee Taxes
          2. Employer Taxes and Fringe Beneft Costs
          3. Shift Premiums
          4. Overtime Premium
          5. Idle Time
          6. Guaranteed Wage and Incentive Plans
    3. Factory Overhead Costs
       1. Actual Versus Normal Costing of Factory Overhead
       2. Estimated Level of Production
          1. Comparison of Productive Capacities
          2. Idle Capacity and Excess Capacity
       3. Estimated Factory Overhead Costs
       4. Determination of Factory Overhead Application Rates
          1. Units of Production
          2. Direct Materials Cost
          3. Direct Labor Cost
          4. Direct Labor Hours
          5. Machine Hours
       5. Single Plantwide Versus Multiple Departmental Factory Overhead Application Rates
          1. Separate Variable and Fixed Factory Overhead Application Rates
       6. Applied Factory Overhead Cost
       7. Actual Factory Overhead Costs
       8. Accounting for Actual Factory Overhead Costs
       9. Journalizing Factory Overhead
       10. Analysis of Underapplied or Overapplied Factory Overhead
       11. Accounting for the Difference Between Applied and Actual Factory Overhead
    4. Activity‐Based Costing
       1. Implementation of an Activity‐Based Costing System
          1. Steps Involved in Application
       2. Traditional Cost Allocation System Versus ABC System
       3. Example of Activity‐Based Costing
    5. Bottom Line
    6. Endnotes
25. 21. Job Order and Process Costing
    1. Comparison of Job Order and Process Cost Accumulation Systems
    2. Job Order Costing
       1. Purchase of Materials
       2. Issuance of Materials
       3. Labor Cost
          1. Factory Overhead
          2. Job Order Cost Sheet
    3. Operation Costing
    4. Project Costing
    5. Process Costing
       1. Objectives of Process Costing
       2. Characteristics of a Process Cost System
       3. Production by Department
          1. System Flow
       4. Constant‐Flow Manufacturing
       5. Procedures: Direct Materials, Direct Labor, and Factory Overhead
          1. Direct Materials
          2. Direct Labor
          3. Factory Overhead
       6. Cost of Production Report
          1. Department A: Cost of Production Report
          2. Department B: Cost of Production Report
          3. Direct Materials Added after the First Department
          4. Beginning Work‐In‐Process Inventories
    6. Backflush Costing
    7. Bottom Line
    8. Appendix: Spoiled Units, Defective Units, Scrap Material, and Waste Material in Job Order and Process Costing Systems
       1. Accounting for Spoiled Units
          1. Normal Spoilage
          2. Abnormal Spoilage
       2. Accounting for Defective Units
          1. Normal Defective Units
          2. Abnormal Defective Units
       3. Accounting for Scrap Material
          1. Accounting for Waste Material
    9. Endnotes
26. 22. Joint Product and By‐Product Costing
    1. Joint Products
       1. Joint Costs and the Split‐Off Point
       2. Accounting for Joint Products
          1. Physical Output Method
          2. Market Values at Split‐Off Method
          3. Net Realizable Value Method
    2. By‐Products
       1. Accounting for By‐Products
          1. Category 1: By‐Products Recognized When Sold
          2. Category 2: By‐products Recognized When Produced
    3. Effects of Joint Cost Allocation Upon Decision Making
    4. Bottom Line
    5. Endnotes
27. 23. Master Budget
    1. Conventional Master Budget System
       1. Zero‐Based Budget System
       2. Program Planning and Budget System
       3. Developing the Master Budget
    2. Budgeted Schedules
       1. Sales Budget
       2. Production Budget
       3. Cost of Manufacturing Budgets
          1. Direct Materials Purchases Budget
          2. Direct Materials Usage Budget
          3. Direct Labor Budget
          4. Factory Overhead Budget
          5. Ending Inventories Budget
          6. Cost of Goods Sold Budget
       4. Selling and Administrative Budgets
          1. Selling Expenses Budget
          2. Administrative Expenses Budget
       5. Cash Budget
    3. Budgeted Summaries
       1. Budgeted Income Statement
       2. Budgeted Statement of Cash Flows
       3. Budgeted Balance Sheet
    4. Bottom Line
28. 24. Standard Costing
    1. Actual, Normal, and Standard Costing
    2. Uses of Standard Costs
       1. Cost Control
       2. Inventory Costing
       3. Budgetary Planning
       4. Product Pricing
       5. Record‐Keeping
    3. Types of Standards
    4. Establishment of Standards
       1. Direct Materials Standards
          1. Direct Materials Price (Rate) Standards
          2. Direct Materials Efficiency (Usage) Standards
       2. Direct Labor Standards
          1. Direct Labor Price Standards
          2. Direct Labor Efficiency Standards
       3. Factory Overhead Standards
       4. Establishing Standards for a Process Cost and Job Order Cost System
       5. Quality and Quality Costs
       6. Defnitions of Quality
       7. Zero Defects
       8. Policies and Objectives of Quality Control
       9. Quality Costs
    5. Just‐in‐Time Philosophy and Cost Accounting
       1. Strategies for Reducing Waste Time
    6. Variance Analysis
       1. Direct materials Variances
          1. Direct Materials Price Variance
          2. Direct Materials Efficiency (Quantity or Usage) Variance
       2. Effect of Efficiency on the Direct Materials Price Variance
       3. Direct Labor Variances
          1. Direct Labor Price (Rate) Variance
          2. Direct Labor Efficiency Variance
          3. Factory Overhead Variances
          4. One‐Factor Analysis of Factory Overhead Variance
          5. Two‐Factor Analysis of Factory Overhead Variances
          6. Three‐Factor Analysis of Factory Overhead Variances
    7. Disposition of All Variances
    8. Bottom line
    9. Endnotes
29. 25. Direct and Absorption Costing
    1. Meaning of Direct Costing
    2. Direct Costing Versus Absorption Costing
       1. Cost of Goods Manufactured Statement
       2. Income Statement
       3. Balance Sheet
       4. Direct Costing and External Financial Statements
       5. Advantages of Direct Costing
       6. Operations Planning
       7. Break‐Even or Cost‐Volume‐Profit Analysis
       8. Management Decisions
       9. Product Pricing
       10. Management Control
    3. Disadvantages of Direct Costing
    4. Adjusting Financial Statements for External Reports
    5. Bottom Line