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Horngren’s
Cost AccoUnting
A Managerial Emphasis
HORNGREN
DATAR
RAJAN
MAGUIRE
TAN
3rd Edition
Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2018—9781488612640—Horngren/Cost Accounting: A Managerial Emphasis 3e
CONTENTS vii
CVP analysis in service and not-for-profit Problem for self-study 248

organisations150 Decision points 250
Contribution margin versus gross margin 151 Terms to learn 251
Appendix 6.1: Break-even points in variable costing
Problem for self-study 152 and absorption costing 251
Decision points 153
Assignment material 253
Terms to learn 154
Collaborative learning problems 268
Appendix 4.1: Decision models and uncertainty 154 TRY IT solutions 269
7 Target
Collaborative learning problem 170
TRY IT solutions 171
costing, managing
activities and managing
5 Estimating the costs of

producing services 175
capacity275
Setting target prices and target costs
Life-cycle budgeting and costing
276
286
Building blocks of costing systems 177
Systems for estimating the costs of outputs 182 Sustainability in action: Qantas’s environmental
improvement strategy: the role of continuous
Concepts in action: Hybrid costing for Under Armour’s improvement and innovation 288
3D-printed shoes 185
Managing capacity and estimating its cost 289
Designing a system for estimating the costs of services 188
Case: Parsons & Partners 189 Concepts in action: The impact of capacity on the
airline industry 290
Sustainability in action: It’s back to the future for
the aviation industry 193
Selecting a capacity concept that is fit-for-purpose 293
Other applications of capacity concepts 299
Concepts in action: Wicked Wolf 193
Problem for self-study 299
Symptoms and potential consequences
Decision points 301
of a failing costing system 195
Terms to learn 302
Problem for self-study 197 Assignment material 302
Decision points 198 Collaborative learning problem 313
Terms to learn 198 TRY IT solutions 314
8 Activity-based management
and activity-based costing 317
6 Estimating the costs of

products and inventory 208
Why might the managers of an organisation need a
sophisticated costing system?
Managing activities
318
319
A system for estimating the costs of products 209 Estimating the costs of activities 320
Case: Robinson Ltd 209
Concepts in action: General Motors: harnessing
Journal entries 216 ABC across the supply chain 321
Disposing of under- and over-allocated indirect
costs at the end of the reporting period 218 Comparing activity-based costing with
traditional costing 324
Process costing 221
Designing an activity-based costing system 325
Sustainability in action: Sustainable surfing? 221
Concepts in action: Mayo Clinic uses time-driven
Concepts in action: Equivalent units at Buderim Ginger 227 activity-based costing (TDABC) to reduce costs and
Methods used in process costing 227 improve care 329
Hybrid and operation-costing systems 234 Evaluating an activity-based costing system 329
The cost of inventory: comparing variable costing and Case: Plaslenz Ltd 330
absorption costing 237 Sustainability in action: Managing environmental
Concepts in action: Lean manufacturing helps Boeing work costs339
through its backlog 238
Variable costing versus absorption costing: operating Decision points 344
profit and income statements 240 Terms to learn 346
Absorption costing and performance measurement 245 Assignment material 346
A comparison of variable and absorption Collaborative learning problem 362
inventory-costing methods 247 TRY IT solutions 364
viii CONTENTS
9 Pricing and customer Sustainability in action: Budgeting for the environment 467
profitability 367 Advantages of budgets 468

Developing an operating budget 470
A framework for pricing decisions 368 Steps in developing an operating budget 470
Market-based pricing 373 Financial planning models and sensitivity analysis 480
Sustainability in action: Carbon tax and pricing policy 374 Concepts in action: Budgeting with ERPs 481
Cost-based pricing 375 Budgeting and responsibility accounting 482
Customer profitability 378 Human aspects of budgeting 485
Concepts in action: Delta flies from frequent flyers Kaizen budgeting 486
to big spenders 379 Budgeting for reducing carbon emissions 487
Analysing and reporting on customer profitability 384 Budgeting in multinational companies 487
Concepts in action: Amazon Prime and customer profitability 387 Problem for self-study 488
Activity-based operating profit statement 388 Decision points 488
Terms to learn 490
Decision points 392 Appendix 11.1: The cash budget 490
Terms to learn 393 Assignment material 495
APPENDIX 9.1: Fully allocated customer profitability 393 Collaborative learning problem 511
12
Collaborative learning problems 407
Flexible budgets, direct cost
variances and management
10 Decision making and relevant

information412
control516
The use of variances 517
Information and the decision process 413 Sustainability in action: Small changes equal big savings
The concept of relevance 413 for the environment 518
An illustration of relevance: choosing output levels 416 Standard costs 519
Short-run pricing decisions 419 Static budgets and static-budget variances 521
Insourcing-versus-outsourcing and make-versus-buy Flexible budgets 523
decisions420 Flexible-budget variances and sales-volume variances 524
Sustainability in action: The challenge—integrating Price variances and efficiency variances
sustainability considerations in decision making 423 for direct cost inputs 526
Opportunity costs and outsourcing 423 Implementing standard costing 534
Management uses of variances 534
Concepts in action: The changing benefits and costs
of ‘offshoring’ 424 Concepts in action: Hospitals use variance analysis to
provide more efficient, better-quality healthcare 536
Product-mix decisions with capacity constraints 428
Theory of constraints 429 Variance analysis and activity-based costing 537
Customer profitability, activity-based costing Benchmarking and variance analysis 539
and relevant costs 432 Problem for self-study 540
Irrelevance of past costs and equipment-replacement Decision points 542
decisions437 Terms to learn 542
Decisions and performance evaluation 438 Appendix 12.1: Further variances: sales and substitutable inputs 543
Problem for self-study 440 Assignment material 550
Decision points 441 Collaborative learning problem 566
Terms to learn 442 TRY IT solutions 567
Appendix 10.1: Linear programming 443
Assignment material
Collaborative learning problem
TRY IT solutions
446
460
461
13 Flexible budgets, overhead cost
variances and management
control569
11 Budgeting, management control Planning of variable and fixed overhead costs 570
Standard costing at Webb Ltd 571
and responsibility accounting 464
Developing budgeted variable overhead cost rates 571
Benefits of budgeting 465 Developing budgeted fixed overhead rates 572
Budgets and the budgeting cycle 465 Variable overhead cost variances 573
CONTENTS ix
Sustainability in action: Cleaner production 5 Evaluating the balanced scorecard 683

overhead savings 577 Applying the five-step guide to making strategic
Fixed overhead cost variances 578 decisions 684
Production-volume variance 579 Sustainability and the balanced scorecard 685
Concepts in action: Variance analysis and standard Problem for self-study 688
costing help Sandoz manage its overhead costs 582 Decision points 692
Journal entries for fixed overhead costs and variances 583 Terms to learn 693
Integrated analysis of overhead cost variances 584 Appendix 15.1: Productivity measurement 693
Production-volume variance and sales-volume variance 587 Assignment material 696
Variance analysis and activity-based costing 589 Collaborative learning problem 705
Overhead variances in non-manufacturing and service TRY IT solutions 706
settings593
16
Financial and non-financial performance measures 594
Quality, time and the balanced
Problem for self-study 595 scorecard711
Decision points 596
Terms to learn 597 Quality as a competitive tool 712
Sustainability in action: Environmental, social and
Collaborative learning problem 610 economic costs 713
The financial perspective of quality 714
14
Non-financial measures and methods 717
Allocation of support-
Evaluating quality performance using
department costs, common benefit–cost analysis 721
costs and revenues 612 Concepts in action: From improving customer service to
Allocating costs of a support department to operating transforming customer experience at Telstra 724
departments613 Time as a competitive tool 724
Sustainability in action: The Qantas Group and resource Concepts in action: Netflix works to overcome
consumption (water, electricity and waste diverted internet bottlenecks 727
directly to landfill) 619 Balanced scorecard and time-related measures 731
Allocating costs of multiple support departments 620
Allocating common costs 628 Decision points 733
Cost allocations and contracts 629 Terms to learn 733
Concepts in action: Cost allocations at Australia Post 630 Assignment material 734
Revenue allocation and bundled products 630
Revenue-allocation methods 631
17
Decision points 636 Inventory management,
Terms to learn 637 just-in-time and simplified
Assignment material 638 costing methods 746
TRY IT solutions 649 Inventory management in retail organisations 747
15
Concepts in action: Just-in-time live concert recordings 752
Strategy formation, strategic Estimating inventory-related relevant costs and
control and the balanced their effects 753
scorecard655 Just-in-time purchasing 755
Forming strategy 658 Sustainability in action: Sustainable supply
chain management 760
The four levers of control 661
Strategy maps 662 Inventory management and MRP 761
Designing and applying a balanced scorecard 666 Inventory management and JIT production 762
Backflush costing 765
Sustainability in action: Strategy for sustainability at Qantas 671
Problems for self-study 772
Strategic analysis of operating profit: evaluating the
Decision points 774
formation of strategy and its implementation 672
Terms to learn 775
Concepts in action: Operating income analysis reveals Assignment material 775
strategic challenges at Best Buy 680 Collaborative learning problem 782
Strategies relating to unused capacity 681 TRY IT solutions 783
x CONTENTS
18 Capital budgeting and Choosing the time period of the performance

measures: step 2 876
cost analysis 788
Choosing appropriate definitions for performance
Two dimensions of cost analysis 789 measures: step 3 876
Stages of capital budgeting 790 Choosing bases for performance measures: step 4 877
Discounted cash flow 791 Choosing target levels of performance: step 5 880
Sensitivity analysis 796 Choosing the timing of feedback: step 6 881
Payback method 797 Performance measurement in multinational
companies881
Sustainability in action: Qantas passengers are investing in
sustainability projects worldwide 798 Concepts in action: Rise and fall of Australian dollar
challenges exporters and importers 882
Accrual accounting rate of return method 800
Evaluation of managers and goal-congruence issues 801 Distinction between managers and organisation
Relevant cash flows in discounted cash units884
flow analysis 802 Performance measures at the individual activity
Managing the project 808 level886
Strategic considerations in capital Executive performance measures and
budgeting809 compensation887
Sustainability in action: Is it really fair? 888
Concepts in action: International capital budgeting at Disney 809
Problems for self-study 812 Problem for self-study 889
Decision points 814 Decision points 890
Terms to learn 815 Terms to learn 891
Assignment material 815 Assignment material 891
Collaborative learning problem 824 Collaborative learning problem 900
Answers to exercises in compound interest (Exercise 18.17) 824 TRY IT solutions 901
19 Management control systems,

transfer pricing and multinational
21 Measuring and reporting
sustainability903
considerations828 Definition of sustainability 904
Sustainability in action: What sustainability means for
Management control systems 829 Qantas905
Organisation structure and decentralisation 830 Sustainability and maximising the social good 908
Sustainability in action: Qantas: an integrated approach to Externalities909
sustainability834 Internalising externalities: the emissions trading
Transfer pricing 834 scheme (ETS) 911
An illustration of transfer pricing 836 Reporting sustainability: external reporting
Market-based transfer prices 838 frameworks911
Cost-based transfer prices 840 Environmental management systems 916
Hybrid transfer prices 843 The business case for sustainability 919
A general guideline for transfer pricing 845 Concepts in action: Environmental innovation
Multinational transfer pricing and tax implications 847 at Mercedes Benz 920
Concepts in action: Using transfer pricing to minimise tax 848 Strategy for sustainability 921
Life-cycle analysis 923
Problem for self-study 850 Management accounting tools for sustainability 926
Decision points 852
Terms to learn 853 Problems for self-study 927
Assignment material 853 Decision points 935
Collaborative learning problem 863 Terms to learn 936
TRY IT solutions 864 Assignment material 937
20 Performance measurement, TRY IT solutions 943

compensation and multinational
considerations867 Appendix: Notes on compound interest and
interest tables 945
Financial and non-financial performance measures 868 Glossary953
Choosing among different performance measures: step 1 869 Index963
About the Australian authors
William Maguire is Adjunct Senior Lecturer in Management Accounting at the
Tasmanian School of Business and Economics, University of Tasmania. William holds a
Bachelor of Commerce and a Certificate in the Theory of Accountancy from the University
of Natal at Durban, a Master of Business Leadership from the University of South Africa
and a PhD from the University of Cape Town. He is a chartered accountant with more than
40 years of experience as an accounting academic, prior to which he worked in professional
accounting, commerce and industry. He has held posts at nine tertiary institutions, including
four visiting appointments. William’s teaching, research and consulting activities span strategy,
capacity management, management control systems, and revenue and costing systems at
undergraduate and postgraduate levels. He has published in a number of journals, including
Accounting & Finance, Integrated Manufacturing Systems, Journal of Cost Management,
Qualitative Research in Accounting & Management, Managerial Auditing Journal, South
African Journal of Accounting Research and South African Journal of Business Management,
and has presented at many conferences, both academic- and practitioner-oriented. He has
co-authored two other textbooks and a book on revenue management. William received an award
for innovation in teaching at the University of Auckland and is a past editor of the New Zealand
Journal of Applied Business Research.
Rebecca Tan, FCPA, CA, is a Senior Lecturer in Accounting at the Research School
of Accounting of the Australian National University (ANU). She received her PhD from
Murdoch University. Rebecca has taught financial and management accounting courses at both
undergraduate and postgraduate level since starting in academia at the ANU in 2003. Her
research focuses on teamwork in accounting education, accounting policy choices in the financial
accounting and reporting area, sustainability reporting and organisational behaviour research.
Her publications have appeared in journals such as Accounting, Auditing & Accountability
Journal, International Journal of Accounting, Australian Accounting Review and Asian Review
of Accounting. Rebecca is also co-author of Accounting and has authored and co-authored 16
MYOB Accounting Practice Sets.
xi
About the US authors
Srikant M. Datar is the Arthur Lowes Dickinson Professor of Business Administration
at the Harvard Business School, Faculty Chair of the Harvard University Innovation Labs
and Senior Associate Dean for University Affairs. A graduate with distinction from the
University of Bombay, he received gold medals upon graduation from the Indian Institute
of Management, Ahmedabad, and the Institute of Cost and Works Accountants of India.
A chartered accountant, he holds two master’s degrees and a PhD from Stanford University.
Datar has published his research in leading accounting, marketing and operations
management journals, including The Accounting Review, Contemporary Accounting Research,
Journal of Accounting, Auditing and Finance, Journal of Accounting and Economics, Journal
of Accounting Research and Management Science. He has served as an associate editor and on
the editorial board of several journals and has presented his research to corporate executives
and academic audiences in North America, South America, Asia, Africa, Australia and
Europe. He is a co-author of two other books: Managerial Accounting: Making Decisions
and Motivating Performance and Rethinking the MBA: Business Education at a Crossroads.
Cited by his students as a dedicated and innovative teacher, Datar received the George Leland
Bach Award for Excellence in the Classroom at Carnegie Mellon University and the Distinguished
Teaching Award at Stanford University. Datar is a member of the board of directors of Novartis
A.G., ICF International, T-Mobile US and Stryker Corporation, and Senior Strategic Advisor to
HCL Technologies. He has worked with many organisations, including Apple Computer, Boeing,
DuPont, Ford, General Motors, Morgan Stanley, PepsiCo, Visa and the World Bank. He is a
member of the American Accounting Association and the Institute of Management Accountants.
Madhav V. Rajan is the Robert K. Jaedicke Professor of Accounting at Stanford University’s

Graduate School of Business (Stanford GSB). He is also Professor of Law (by courtesy) at Stanford
Law School. From 2010 to 2016, he was Senior Associate Dean for Academic Affairs and head
of the MBA program at Stanford GSB. In 2017, he will receive the Davis Award for Lifetime
Achievement and Service to Stanford GSB.
Rajan received his undergraduate degree in commerce from the University of Madras, India,
and his MS in accounting, MBA, and PhD degrees from Carnegie Mellon University. In 1990, his
dissertation won the Alexander Henderson Award for Excellence in Economic Theory.
Rajan’s research focuses on the economics-based analysis of management accounting issues,
especially as they relate to internal control, capital budgeting, supply-chain and performance
systems. He has published his research in a variety of leading journals, including The Accounting
Review, Journal of Accounting and Economics, Journal of Accounting Research, Management
Science and Review of Financial Studies. In 2004, he received the Notable Contribution to
Management Accounting Literature award. He is a co-author of Managerial Accounting:
Making Decisions and Motivating Performance.
Rajan has served as the Departmental Editor for Accounting at Management Science as
well as associate editor for both the accounting and operations areas. From 2002 to 2008, Rajan
served as an editor of The Accounting Review. He has twice been a plenary speaker at the AAA
Management Accounting Conference.
Rajan has received several teaching honours at Wharton and Stanford, including the
David W. Hauck Award, the highest undergraduate teaching award at Wharton. He teaches
in the flagship Stanford Executive Program and is co-director of Finance and Accounting for
the Nonfinancial Executive. He has participated in custom programs for many companies,
including Genentech, Hewlett-Packard and nVidia, and is faculty director for the Infosys
Global Leadership Program. Rajan is a director of Cavium, Inc. and iShares, Inc., a trustee of
the iShares Trust and a member of the C.M. Capital Investment Advisory Board.
xii
Preface
Studying management accounting is one of the best business investments a student can make,
because managers of all organisations—whether profit-seeking (ranging from a small corner
store in Darwin to a large multinational corporation like BHP Billiton) or not-for profit—need
to use management accounting concepts, information and practices. Management accounting
provides key data to managers that enable them to plan, control and estimate the costs of outputs
(products and services) and other cost objects like customers. We focus on how management
accounting helps managers to make better decisions because management accountants are
integral members of their organisations’ decision-making teams. This textbook provides a
decision-making framework and demonstrates how the analytical tools that students will learn
prepare them to contribute to an organisation’s success. As future management accountants and
informed managers, they will provide data, perform analyses and estimate the effects on revenue
and costs.
Notwithstanding his contributions to other areas, Charles T. (Chuck) Horngren’s biggest
imprint was on management accounting.1 Before the 1960s, cost accounting textbooks had
placed primary emphasis on calculating the cost of inventory for financial reporting, with
little emphasis on managers’ uses of accounting information. Credited with ‘pioneering
modern-day management accounting’ and described as ‘a champion of innovation and
change’, Horngren published his own Cost accounting: a managerial emphasis in 1962. This
broke with traditional texts of the time and almost on its own changed the emphasis of the
discipline. Horngren’s objective was to demonstrate to university teachers and students alike
‘how the most important role of accounting within an organization was as a management
tool for making wiser decisions. The book soon became one of the most respected and widely
used textbooks in the field, used throughout the world.’ The sixteenth US (global) edition is
in press at the time of writing and continues to focus on management accounting information
that informs managers and managers’ decisions in changing organisations within a changing
environment. Although Horngren himself moved from cost accounting to the broader ambit
of management accounting, the title of his original text has been retained because it is firmly
connected with his work in this area.
Among other major issues, an organisation’s successful strategy, development and
implementation depend on sound decisions. By focusing on basic concepts, analyses, uses and
procedures instead of procedures alone, we recognise management accounting as a managerial
tool for business strategy and implementation. Increasingly, organisations are concerned with
the social and environmental impacts of their decisions, and the management accountant
has a role to play in recognising and measuring those impacts. Rapidly changing social,
environmental and economic conditions present opportunities and threats. To be economically
sustainable, organisations must recognise and manage the interrelationships between social,
environmental and economic performance.
The first Australian edition was a response to feedback from Australian academics who
called for a book to which their students could relate and with which they could readily engage.
The second edition improved on this theme, and the third edition continues in the same vein,
presenting the best of both worlds. The authors are among world leaders in the development of
contemporary management accounting and illustrate their ideas with Australian examples that
1
This paragraph is based largely on Castillo, C. 2011, ‘The Stanford GSB Experience School news & history. Charles
T. Horngren, Management Accounting Pioneer: 1926–2011’, <https://www.gsb.stanford.edu/stanford-gsb-experience/
news-history/charles-t-horngren-management-accounting-pioneer-1926-2011>; the quoted material is extracted from
that piece.
xiii
xiv Preface
make the textbook come alive for students. Every chapter features stories about Australian and
international organisations, including their efforts to improve sustainability to demonstrate the
connection between sustainability and cost and management accounting concepts.
The third Australian edition largely maintains the structure and emphasis of the two
previous editions. In preparing the current edition, we have noted the comments of reviewers
and users of the second Australian edition, the fifteenth and sixteenth US editions and our own
experience of teaching management accounting. While responding to the need for a strong
Australian context, we recognise that many organisations operate in a global context and that
many of our students are from other countries. The third edition accordingly maintains an
Australian flavour within a global context.
Hallmark features of Horngren’s Cost

accounting: a managerial emphasis
■ Exceptionally strong emphasis on managerial uses of cost information.
■ Clarity and understandability.
■ Aimed at preparing students for the rewards and challenges they might face in the
professional management accounting world of today and tomorrow, through the
development of analytical skills and the values and behaviours that make management
accountants effective in the workplace.
■ Excellent integration of cutting-edge and well-established topics.
■ Emphasis on and integration of sustainability: from its introduction in chapter 1, through
illustrating its connection with management accounting via real-world features drawn
from various organisations and contexts throughout the book, to comprehensive coverage
in chapter 21, the final chapter of the book.
■ Emphasis on behavioural implications.
■ Extensive use of real-world examples, both Australian and international.
■ Ability to teach chapters in different sequences.
■ Excellent quantity, quality and range of assignment material.
■ Streamlined presentation.
■ Try It interactive questions to give students the opportunity to apply a concept they have
just learned.
Features retained from the first two

Australian editions
■ The five-step guide to decisions, which appears throughout.
■ The modular, flexible organisation that permits a unit to be custom-tailored and to
facilitate diverse approaches to teaching and learning.
■ Vignettes that open each chapter.
■ Concepts in action features.
■ Sustainability in action features.
■ As in the second edition, ‘Determining how costs behave’ (chapter 3) precedes ‘Cost–
volume–profit analysis’ (chapter 4) to provide a foundation for cost behaviour before
dealing with it.
preface xv
Revised chapter sequence

■ Chapters 5–9 present a cohesive focus on managing processes, activities and capacity
and estimating costs and prices for outputs (whether services or products) and other cost
objects, as well as activity-based costing.
■ Chapters 11–13 similarly focus on management control, responsibility accounting,
budgeting, standard costing and variance analysis.
■ Chapters 15–20 extend management control to strategic control and performance
evaluation.
■ Chapter 21 (previously chapter 14) consolidates the Sustainability in action features and
provides a basis for evaluating social and environmental issues in the context of strategic
and operational dimensions addressed throughout the text. This material appears at the
end of the text to facilitate the holistic approach described above. In response to feedback,
the chapter also focuses more tightly on management accounting issues.
■ Chapter 10, ‘Decision making and relevant information’, has again been moved in the
current edition—so that pricing is added to students’ knowledge acquired from earlier
chapters and is available to students to apply to decisions in chapter 10.
■ ‘Allocation of support-department costs, common costs and revenues’ (chapter 14; previously
chapter 13) has been moved to facilitate the flow of earlier chapters.
Revised chapter content

We have introduced many new vignettes and Concepts in action features while retaining the
best of the rest.
■ New end-of-chapter questions, exercises and problems have been added to all chapters and
most of those that have been retained have been revised.
■ Chapter 1 has been broadened and extended to the examination of strategic issues.
■ Absorption costing and its impact on reported profit have been moved from chapter 2 in
the second edition to the latter part of chapter 6. Students are likely to assimilate this topic
more readily at that point, after an in-depth examination of costing issues in chapter 5 and
in earlier sections of chapter 6.
■ A new chapter (chapter 5) has been added on estimating the costs of services, extending
the emphasis on services introduced in the second edition. It includes the purposes of
and criteria for allocating costs, and the symptoms of a failing costing system, which had
appeared in chapter 6 of the second edition (now chapter 8). The material presented in
chapter 5 also applies to chapter 6 and serves as an appropriate lead-in to chapter 8.
■ Chapter 6 itself has been extended to include estimation of the cost of inventory and profit
earned.
■ Chapters 7 and 8 have both been restructured and rewritten, with extensive revision of the
language of activity-based costing.
There is ample text and assignment material in the textbook’s 21 chapters for a two-semester
course, while the first 13 chapters provide the essence of a one-semester course with the
opportunity to add chapters as required. This textbook can be used immediately after a
student has completed an introductory course in financial accounting, or it can build on an
introductory course in managerial accounting.
Key features of the Australian
edition
Learning objectives open each chapter and
outline the key concepts to be covered. They are
Management accounting
in context 1 then signposted in the margins to indicate where
a particular objective is covered.
All organisations are concerned about revenues and costs in the pursuit of their Learning ObjectiveS
mission. Whether their outputs are management services, fast food, the latest
designer fashions or outcomes from a not-for-profit endeavour, managers must 1 describe management
accounting and explain its role.
understand the influence of revenues and costs on their operations or risk losing
2 describe the constituents of the
value chain, how the value chain
control. Managers use management accounting information to make decisions
relates to the supply chain, and
related to strategy, budgeting, production planning and pricing, among others. the dimensions of performance
Of the many candidates for this opening vignette, Sundrop Farms stands out as that customers expect.
an illustration of many of the themes that run through this book. 3 describe planning, control and
decisions.
4 explain the meaning of

strategy and the way in which
innoVAtion in tHe AUstRALiAn oUtBAcK: management accounting might
influence strategic decisions.
tRAnsFoRMinG seAWAteR AnD sUnLiGHt into
HiGH-VALUe oUtpUts 5 describe and apply the five-step
guide to decisions.
In June 2016, Coles Supermarkets took delivery of its first consignment of truss 6 explain the way in which
accounting organisations
tomatoes from Sundrop Farms, situated in Port Augusta, South Australia. Sundrop influence management
accountants’ conduct and
Farms represents an investment of $180 million to $200 million on exhausted farm-land, effectiveness and, given the
with little potential for traditional agriculture. After early experimentation and a four- context, apply the code of ethics.
year pilot project not far from the current site, Sundrop Farms attracted $100 million in
funding from KKR (Kohlberg Kravis Roberts), a global private equity company, which it
added to funding from the Saumweber family (Philipp Saumweber is the Chief Executive
Officer [CEO] of Sundrop Farms) and others, including
$6 million from the South Australian government. Starting with
four employees, Sundrop Farms now employs 150 people,
operates at full capacity and produces 350 tonnes of truss
tomatoes per week, the demand for which is estimated
to increase at an annual rate of 15–20%. It sells all of its
production to Coles Supermarkets, according to the terms of
a 10-year contract signed with Coles in 2014.
Sundrop Farms transforms seawater and sunlight into
high-value truss tomatoes—one product and one variety.
Although the investment is high, giving rise to high fixed
costs, Saumweber estimates that the depreciation of the
investment amounts to less than 50% of the amount that
would be spent on fossil fuels were it not for the solar
installation. According to Leigh Oliver, director of KKR in
Australia: ‘This is an agricultural investment without the
CHAPTER 1 ManageMent accounting in context 23
traditional risks. The highly cyclical nature of natural effects Patryk Kosmider/Shutterstock
them to be flexible and change course midstream. In step 5, the learning component is critical.
Sources: Neales, S. 2016, ‘Desal and solar prove the perfect tomato sauce’, The Australian, 11 June, <http://www.theaustralian.com.au/national-affairs/desal-and-solar-prove-the- How have the uncertainties evolved and what do managers need to do to respond to these
perfect-tomato-source/news-story/9972772591dd39cbf4a774a0ee93555b>, accessed 16 December 2016; Neales, S. 2016, ‘This is the future of farming’, The Weekend Australian changing circumstances?
Magazine, no date, <http://www.theaustralian.com.au/life/weekend-australian-magazine/this-is-the-future-of-farming/news-story/99fd0a207d8b6aa0768c32fd61b3d00e>,
accessed 15 December 2016; Sundrop Farms ABC Landline coverage, YouTube, <https://www.youtube.com/watch?v=KCup_B_RHM4#t=213.079941>, accessed 17 December Planning and control for sustainability is equally challenging. What should the Daily News
2016; ABC, A Taste of Landline, series 2, episode 4, <http://iview.abc.net.au/programs/taste-of-landline/RA1603Q004S00>, accessed 17 December 2016; Thieberger, V. 2015, ‘The do about energy consumption in its printing presses, the recycling of newsprint, and pollution
company that’s growing food in the desert’, Business Spectator, 20 November, <http://www.theaustralian.com.au/business/the-company-thats-growing-food-in-the-desert/news-
story/8ad288c3f55d7759b434a4e6ca6c11be>, accessed 16 December 2016. prevention? Among the uncertainties that managers face is whether customers will reward
1 the Daily News for these actions with loyalty and whether investors will react favourably to
managers spending resources on sustainability. Information to gauge customer and investor
sentiment is not easy to obtain. Predicting how sustainability efforts might pay off in the long
run is far from certain. Even as managers make decisions, the sustainability landscape will
M01_HORN2640_03_LT_C01.indd 1 9/6/17 7:20 PM doubtlessly change in regard to environmental regulations and societal expectations, requiring
managers to learn and adapt. The challenges do not imply that planning and control systems
should not be used for these initiatives. Many companies find value in using the systems to
manage innovation and sustainability. We return to the themes of innovation and sustainability
at various points in the book.
Two final points: first, managers use information to help implement their strategies.
For example, action plans often include targets. Although budgets are primarily financial,
managers use both financial and non-financial information for market share, quality, new
product development and employee satisfaction. When exercising control, managers compare
actual and targeted non-financial measures as well as financial measures, and take corrective
Decision points are included action. Second, a plan must be flexible enough that managers can seize sudden opportunities
unforeseen at the time the plan was formulated. Control should not lead managers to cling
to a plan when unfolding events indicate that actions not encompassed by that plan would
throughout the chapters so that offer better results for the company. Think about this in the context of the Daily News. An Decision
unexpected and sensational news story, such as a major fraud in the public service, may break; PoInt 5
if the managers wish to maximise the value of this story and beat competing newspapers to it, How do managers apply
the five-step guide to
students can check their progress

they need to spend more money on reporting than they had expected before the story broke.
decisions and how does
Through spending more money to cover the story, there is an opportunity to improve results it relate to management
for the Daily News by selling more newspapers. accounting?
towards achieving the learning The influence of professional accounting

organisations on management accounting
Learning
Objective 6
objectives. The IFAC has 175 members and associates from 130 countries, representing almost 3 million
accountants. Among these are a number of professional accounting organisations that are
explain the way in which
influence management
well known in Australia, particularly those in the UK, USA, New Zealand and Australia itself. accountants’ conduct
Many of these organisations have a significant international presence, such as the Chartered and effectiveness and,
given the context, apply
Institute of Management Accountants (CIMA), the Association of Chartered Certified the code of ethics.
Accountants (ACCA) and CPA Australia. A relatively recent development is associations of
these organisations across countries, and even closer arrangements such as that between the
American Institute of CPAs (AICPA) and CIMA, which jointly awards the Chartered Global
Management Accountant (CGMA) designation, and the merger of the Institute of Chartered
20 HoRngRen’S coSt accounting Accountants in Australia (ICAA) and the New Zealand Institute of Chartered Accountants
(NZICA) to form Chartered Accountants of Australia and New Zealand (CAANZ). All of
Learning
Objective 5 The five-step guide to decisions
Most managers are likely to find that an established approach or framework is useful in
these organisations specify entry criteria, set and administer examinations, specify continuing
education requirements and apply codes of ethics.
Although professional accounting organisations have always stipulated standards of
Describe and apply guiding their decision making. We suggest and apply a five-step guide to a strategic decision
the five-step guide to ethical professional conduct, corporate scandals over the past two decades like Enron, Arthur
decisions. facing the Daily News, a city newspaper. We do not imply that it is the only guide that might Andersen, Storm Financial and One.Tel have seriously eroded the public’s confidence in
be useful, nor do we guarantee that it will be fully applicable in all situations. However, the corporations. All employees in a company, whether in line management or staff management,
guide might be useful for many of the decision situations in this book, either in its present must comply with the society’s expectations of ethical behaviour.
form or modified as required. Accountants have special ethical obligations, given that they are responsible for the
integrity of the financial information provided to internal and external parties. The
Sarbanes–Oxley Act 2002 in the USA, passed in response to a series of corporate scandals,
Case: the Daily News
The Daily News is a newspaper published in Australia that differentiates itself from its
competitors. It focuses on in-depth and well-researched news; employs highly qualified and
experienced journalists; has developed a website to deliver up-to-the-minute news, interviews
and analyses; has an automated, computer-integrated, state-of-the-art printing facility; has a M01_HORN2640_03_LT_C01.indd 23 9/6/17 7:20 PM
web-based information technology infrastructure; and uses a distribution network that is one
of the best in the newspaper industry.
Felicity Fawcett, the CEO of the Daily News, is well aware that profits fell last year, these
having plateaued in the immediately preceding years. She turns to the five-step framework to
guide her decision.
1. Identify the problem. The immediate problem is that profits have fallen and may continue
to do so. The underlying problem may be that the premium earned from differentiation
has been eroded by increasing costs without a commensurate increase in prices or in the
volume of revenues, which may be attributable to Daily News operations, demand in the
market, the actions of competitors or something else. Part of the problem is the level of
uncertainty; Felicity does not know how any action that she might take is likely to affect
profits.
2. Gather relevant information. Felicity decides to gather information to clarify the problem
and diminish the uncertainties. She asks Tony Hall, the management accountant, to
provide details of revenues and costs over the past few years; the marketing manager
to survey representative readers to gauge how they might react to an increase in the
newspaper’s selling price; and the advertising sales manager to talk to current and
potential advertisers to get a better understanding of the advertising market. Tony Hall
provides information about past increases and decreases in prices and the effect on
readership, and about past increases and decreases in advertising rates and their effect
on advertising revenues. He also collects and analyses information on advertising rates
charged by competing media outlets, including other newspapers.
3. Identify and evaluate potential courses of action. Felicity and the other managers
thoroughly review and analyse the information gathered. The management team identifies
three potential courses of action, which are not mutually exclusive: (1) reduce operating
costs; (2) increase the selling price per newspaper; and (3) increase the rate per page A framework for decision making in the
charged to advertisers. They conclude from their evaluation that: (1) a major cost-cutting
exercise might undermine the differentiation strategy by compromising the very features
that justify a premium; (2) readers might be upset if management were to increase the
price of the Daily News, with a consequent decrease in readership and reduction in
form of a five-step guide to decisions
revenue from this source; and (3) there is likely to be a market-wide increase in advertising
rates in the near future, in which case an increase in Daily News advertising rates would
have little effect on the number of pages of advertising sold.
features in chapter 1 and in most of the
subsequent chapters. It illustrates the way
Felicity recognises that considerable judgement is required when considering the
consequences of the contemplated actions. She feels that gathering information, careful
analysis and in-depth discussion within the management team should go a long way
in which managers might use management

towards eliminating biased thinking. Nevertheless, she ponders the conclusion that the
management team has reached. Have members of the team correctly judged readers’
sentiments or has their thinking been overly influenced by anticipation of all the negative
accounting information for various decisions.

xvi
M01_HORN2640_03_LT_C01.indd 20 9/6/17 7:20 PM
Key features of the Australian edition xvii
Real company vignettes open each

chapter. The vignettes engage the
Different costs for different
purposes 2 reader in a business situation, or a
dilemma, illustrating why and how the
What does the word cost mean to you? Is it the price you pay for something of Learning ObjectiveS concepts in the chapter are relevant in
value, like a tablet? A cash outflow, like monthly rent? Something that affects
1
business.
define and illustrate a cost object.
profitability, like salaries? Organisations, like individuals, deal with different
types of cost. They incur costs to generate revenues. Unfortunately, when times 2 distinguish between direct costs
and indirect costs.
get tough, companies may find that they are unable to cut costs fast enough,
3 explain variable costs and fixed
costs.
leading to bankruptcy. This was the case with surf-wear company Quiksilver in
the USA. 4 interpret unit costs with caution.
5 distinguish between inventoriable

costs and period costs.
HiGH FiXeD costs BAnKRUpt QUiKsiLVeR 6 explain why product costs are
calculated in different ways for
different purposes.
Cost cutting is a term that is mentioned in the media a lot. It is especially prominent in
times of credit crunching and economic downturns. In Australia, the wealth management 7 describe a framework for
cost accounting and activity
sector is one of those being paralysed by high fixed costs (such as from office leases) management.
pushing companies to cut costs. Recently, Morgan Stanley undertook a major overhaul
of its Australian operations, targeting millions of dollars of fixed-cost savings to achieve a
sustainable position.
In 2015, surf-wear company Quiksilver announced that it had filed for Chapter
11 bankruptcy in the USA (excluding its European and Asia–Pacific operations). The
company’s high fixed costs—costs that did not decrease as the number of boardshorts
and hoodies sold declined—had crippled the company. In the 1990s and early 2000s,
Quiksilver rode the wave of young shoppers emulating the cool lifestyle of surfers,
Concepts in action
skateboarders and snowboarders to financial success and opened hundreds of retail
stores worldwide, many in expensive areas such as Times 582 horngren’s cost accounting
Square in New York. This expansion saddled the company
features cover real-

with a huge amount of debt. When sales rapidly declined in
2015, the company collapsed under the weight of its high
fixed operating costs—like long-term leases and salaries— concEpTs Variance analysis and standard costing help
and massive debt-servicing payments. After declaring
bankruptcy, Quiksilver began rapidly selling off its non-core
world cost accounting in AcTion Sandoz manage its overhead costs
brands and closing many retail stores.
The car industry, which has high fixed costs that
issues across a variety of

Consider a global leader in the rapidly growing generic and the absorption trend is deemed to be permanent.
cannot be easily changed, is another feeling the crunch. medicines industry, Sandoz Australia, part of the Novartis Plant management uses absorption analysis as a compass
The competitiveness of companies such as General Motors Group. Market pricing pressure means that Sandoz, to determine whether they are on budget and have an
Alphapharm and other generic manufacturers operate on razor- appropriate capacity level to satisfy the needs of their
in the Australian car market is drastically affected by the
industries in Australia and

thin margins. As a result, along with an intricate analysis of customers efficiently.
fixed costs—costs that do not change with the number direct cost variances, Sandoz must also tackle the challenge of Manufacturing overhead variances are examined at the work
of cars made. Holden, Toyota and Ford will all cease accounting for overhead cost variances. Sandoz (specifically centre level. These variances help determine when equipment is
manufacturing in Australia due to the high costs and low Sandoz US) uses variance analysis and standard costing to not running as expected, which leads to repair or replacement.
levels of local car sales. Richard Levine/Alamy Stock Photo
internationally. manage its overhead costs.
Each year, Sandoz prepares an overhead budget based on a
detailed product production plan, planned overhead spending
Variances also help in identifying inefficiencies in processing
and set-up and cleaning times, which leads to more efficient
ways to use equipment. Sometimes, manufacturing overhead
Sources: Khouri, A. 2015, ‘Wipeout: Quiksilver files for Chapter 11 bankruptcy in U.S.’, Los Angeles Times, 9 September, <www.latimes.com/business/la-fi-quiksilver- and other factors, including inflation, efficiency initiatives variance analysis leads to the review and improvement of the
bankruptcy-20150909-story.html>, accessed 19 September 2016; Belgum, D. 2015, ‘Oaktree Capital working on buying Quiksilver’, California Apparel News, 3 November, and anticipated capital expenditures and depreciation. Sandoz
<www.apparelnews.net/news/2015/nov/03/oaktree-capital-working-buying-quiksilver/>, accessed 18 September 2016; Bennet, M. & White, A. 2016, ‘Morgan Stanley takes axe standards themselves—a critical element in planning the level
to adviser pay in revamp’, 27 May, <www.theaustralian.com.au/business/financial-services/morgan-stanley-takes-axe-to-adviser-pay-in-revamp/news-story/3309dd5d054beefc2bd then uses activity-based costing techniques to assign budgeted of plant capacity. Management reviews current and future
a8b402bbc0d4b>, accessed 18 September 2016; Dowling, J. 2015, ‘Holden’s pot-holed history: How it came to this’, 13 September, <www.news.com.au/technology/innovation/ overhead costs to different work centres (e.g. mixing, blending, capacity use on a monthly basis, using standard hours entered
motoring/holdens-potholed-history-how-it-came-to-this/news-story/2aee8de7bb8019ead16b59122fee4119>, accessed 19 September 2016.
tableting, testing and packaging). Finally, overhead costs are into the Enterprise Resource Planning system. The standards
37 assigned to products based on the activity levels required by are a useful tool in identifying capacity constraints and future
each product at each work centre. The resulting standard capital needs.
product cost is used in product profitability analysis and As the US plant controller remarked: ‘Standard costing
for pricing decisions. The two main focal points in Sandoz’s at Sandoz produces costs that are not only understood by
M02_HORN2640_03_LT_C02.indd 37 8/25/17 12:57 PM performance analyses are overhead absorption analysis and management accountants and industrial engineers, but by
manufacturing overhead variance analysis. decision makers in marketing and on the production floor.
Each month, Sandoz uses absorption analysis to compare Management accountants at Sandoz achieve this by having
actual production and actual costs to the standard costs of a high degree of process understanding and involvement.
processed inventory. The monthly analysis evaluates two key The result is better pricing and product-mix decisions, lower
trends: waste, process improvements and efficient capacity choices—
1. Are costs in line with the budget? If not, the reasons are all contributing to overall profitability.’ With continued price
examined and the accountable managers notified. pressures on generic pharmaceuticals, Sandoz’s focus on
2. Are production volume and product mix conforming to overhead cost variances will be critical to maintain profitability
plan? If not, Sandoz reviews and adjusts machine capacities and growth.
Sources: Conversations with, and documents prepared by, Eric Evans and Erich Erchr (of Sandoz US) on 20 March 2004 and 28 May 2004; Conversations with,
44 HornGren’s cost AccountinG
feature on page 43 describes how a car-sharing service offers companies the opportunity to
Found throughout each and documents prepared by, John Niedermayer (pharmaceutical consultant) on 31 August 2007.
convert the fixed costs of owning corporate cars into variable costs while simultaneously
reducing their environmental impact.
A particular cost item could be variable with respect to one level of activity and fixed with
chapter, Try it interactive
questions give students
respect to another. Consider annual registration and licence costs for a fleet of planes owned
try it!
Sanjana Company makes watches. For 2018, the company expected fixed overhead
by an airline company. Registration and licence costs would be a variable cost with respect to 13.2 costs of $648 000. Sanjana uses direct labour-hours to allocate fixed overhead and
the number of planes owned. But registration and licence costs for a particular plane are fixed anticipates 21 600 hours during the year for an expected output of 540 000 units. An
Decision
the opportunity to apply
with respect to the kilometres flown by that plane during a year. equal number of units are budgeted for each month.
Point 3 Some costs have both fixed and variable elements and are called mixed or semi-variable During October, 48 000 watches were produced and $52 000 was spent on fixed
How do managers
costs. For example, a company’s telephone costs may have a fixed monthly payment and a overhead.
decide whether a cost
charge per phone-minute used. We discuss mixed costs and techniques to separate out their
a concept they have just

is a variable or a fixed
cost? fixed and variable components in chapter 3. Required
Calculate the following:
learned. Solutions are given

a. the fixed overhead rate for 2018
tRy it!
PepsiCo Beverages uses trucks to transport bottles from the warehouse to different
2.1 retail outlets. This problem focuses on the cost of operating a truck. Fuel costs are b. the fixed overhead spending variance for October
$0.15 per kilometre driven. Insurance costs are $6 000 per year. c. the production-volume variance for October.
Required
Calculate the total costs and the cost per kilometre for fuel and insurance if the truck is at the end of each chapter.
driven (a) 20 000 kilometres per year or (b) 30 000 kilometres per year.
M13_HORN2640_03_LT_C13.indd 582 8/28/17 2:19 PM

Cost drivers
A cost driver is a variable, such as the level of activity or volume, that causally affects costs
over a given time span. That is, there is a cause-and-effect relationship between a change in
the level of activity or volume and a change in the level of total costs. For example, if product
design costs change with the number of parts in a product, the number of parts is a cost driver
of product design costs. Similarly, kilometres driven is often a cost driver of distribution costs.
The cost driver of a variable cost is the level of activity or volume for which change causes
proportionate changes in the variable cost. For example, the number of vehicles assembled is
the cost driver of the total cost of tyres. If set-up workers are paid an hourly wage, the number
of set-up hours is the cost driver of total (variable) set-up costs.
Costs that are fixed in the short run have no cost driver in the short run but may have a
cost driver in the long run. Consider the costs of testing, say, 0.2% of the colour printers at
Hewlett-Packard. These costs consist of Testing Department equipment and staff costs that
are difficult to change and, hence, are fixed in the short run with respect to changes in the
volume of production. In this case, volume of production is not a cost driver of testing costs in
the short run. In the long run, however, Hewlett-Packard will increase or decrease the Testing
Department’s equipment and staff to the levels needed to support future production volumes. CHAPTER 2 Different costs for Different purposes 43
In the long run, volume of production is a cost driver of testing costs.
Costing systems that identify the cost of each activity, such as testing, design, or set-up, are capacity. Supervisors on the X6 line could have supervised the production of 60 000 X6s but
called activity-based costing systems. will supervise only 55 000 X6s because of the lower demand. However, BMW must pay for the
unused line supervision capacity because the cost of supervision cannot be reduced in the short
Relevant range run. If demand is even lower—say only 50 000 X6s—line supervision costs will not change;
Relevant range is the band of normal activity level or volume in which there is a specific they will continue to be $2 000 000 and idle capacity will increase.
relationship between the level of activity or volume and the cost in question. For example, a Unlike variable costs, fixed costs of resources (such as for line supervision) cannot be quickly
fixed cost is fixed only in relation to a given wide range of total activity or volume (at which and easily changed to match the resources needed or used. Over time, however, managers can
the company is expected to operate) and only for a given time span (usually a particular budget take actions to reduce fixed costs. For example, if the X6 line needs to be run for fewer hours
period). Suppose that BMW contracts with Linfox Logistics (LL) to transport X6s to dealers. because of low demand for X6s, BMW may lay off supervisors or move them to another
LL rents two trucks for annual fixed rental costs of $40 000 each. The maximum annual usage production line. Companies may also choose to rent their software from a service provider
of each truck is 120 000 kilometres. In the current year (2018), the predicted combined total rather than buying it to reduce fixed costs, as shown in the Concepts in action feature opposite.
hauling of the two trucks is 170 000 kilometres. Do not assume that individual cost items are inherently variable or inherently fixed.
Figure 2.3 shows how annual fixed costs behave at different levels of kilometres of hauling. Consider labour costs. Labour costs can be purely variable with respect to units produced
Up to 120 000 kilometres, LL can operate with one truck; from 120 001 to 240 000 kilometres, when workers are paid on a unit basis. For example, some garment workers are paid on a per-
it operates with two trucks; from 240 001 to 360 000 kilometres, it operates with three trucks. garment-sewed basis. In contrast, the labour costs at a plant in the coming year are sometimes
appropriately classified as fixed. For instance, a labour union agreement might set annual
salaries and conditions, contain a no-lay-off clause and severely restrict a company’s flexibility
to assign workers to any other plant that has demand for labour. Japanese companies have,
M02_HORN2640_03_LT_C02.indd 44 8/25/17 12:57 PM for a long time, had a policy of lifetime employment for their workers. Although such a policy
entails higher labour costs, particularly in economic downturns, the benefits are increased
loyalty and dedication to the company and higher productivity. The Sustainability in action
SUStainabiLitY
in Action
How car sharing is helping reduce business
transportation costs Sustainability in action
Rising petrol prices, high insurance costs and hefty parking
fees have forced many businesses to reconsider the ownership
transportation, overhead and fringe benefits costs. This has
resulted in lower or no fleet expenses for private companies
features show how integral
of company or fleet cars. In Sydney and Melbourne, car-
sharing businesses, such as Flexicar, GoGet CarShare and
Charter Drive, have emerged as an attractive alternative. These
using car-sharing services. In the USA, Twitter managers use
Zipcar’s fleet of Mini Coopers and Toyota Priuses to meet
venture capitalists and partners in Silicon Valley or when
sustainability issues are
businesses provide an on-demand option for city businesses and travelling far away from its headquarters. In 2015, research
individuals to rent a car by the day or even the hour. Basically,
members make a reservation by telephone or internet, go to
where the car is located (usually on foot or by public transport),
found that Zipcar’s business program eliminated the need for
roughly 33 000 cars across North America.
From a business perspective, car sharing allows companies
to cost and management
accounting.
swipe an electronic card over a sensor that unlocks the door, to convert the fixed costs of owning a company car to variable
and then just climb in and drive away. Rental fees usually costs. If business slows, or a car isn’t required, car-share
include fuel, insurance, maintenance and cleaning. customers are not burdened with the fixed costs of car
Car sharing offers an environmentally friendly, low-cost ownership. Such an arrangement is also attractive to those keen
and no-hassle alternative for companies. Many small businesses on reducing carbon emissions or companies with core values of
own a company car or two for getting to meetings, making employing sustainable practices, as research has shown that one
deliveries and other errands. Similarly, large companies may car-sharing vehicle can replace up to 10 privately owned cars on
own a fleet of cars to shuttle visiting executives and clients back the road. Several councils are putting their support behind car
and forth from appointments, business lunches and the airport. sharing by providing dedicated car-share parking spaces.
Traditionally, companies had no other option but to own these Car sharing is a practical and creative concept that
cars, which involves very high fixed costs, including buying helps solve the problem of congestion on major city roads.
the asset (car) and the costs of maintenance and insurance In addition, car-sharing businesses that are conscious about
for multiple drivers. Now, companies can use car-sharing the environment can choose to operate hybrid or small fuel-
businesses for on-demand transportation while reducing their economical cars in their fleet.
Sources: Anon. 2008 ‘Share a car and fight congestion’, Sydney Morning Herald, 28 May; Hutton, J. 2008, ‘Share exchange—Covering corporate car share and
outsourced fleet service’, Business Review Weekly, 5 June; Keegan, P. 2009, ‘Zipcar—The best new idea in business.’ Fortune, 27 August, <http://money.cnn.
com/2009/08/26/news/companies/zipcar_car_rentals.fortune/>, accessed 3 December 2012; Olsen, E. 2009, ‘Car sharing reinvents the company wheels’, New
York Times, 7 May, <www. nytimes.com/2009/05/07/business/businessspecial/07CAR.html>, accessed 3 December 2012; Zipcar, Inc. 2012, ‘Zipcar for business
case studies’, <www.zipcar.com/business/is-it/case-studies>, accessed 3 December 2012; Zipcar, Inc. 2015, ‘New research finds business use of Zipcar reduces
personal car ownership’, press release, 27 July, <www.zipcar.com/press/releases/z4breducescarownership>, accessed 25 September 2016.
M02_HORN2640_03_LT_C02.indd 43 8/25/17 12:57 PM
xviii Key features of the Australian edition
MyLab Accounting for Horngren’s Cost accounting: a managerial emphasis, 3e

A guided tour for students and educators
Test and assignments:

Each MyLabTM comes with
preloaded assignments, all
of which are automatically
graded and include select
end-of-chapter questions
and problems from the
textbook.
Unlimited practice:
Many Study Plan and
Instructor-assigned
exercises contain algorithms
to ensure that students
get as much practice as
they need. As students
work through Study Plan
or Homework exercises,
instant feedback and tutorial
resources guide them
towards understanding.
Key features of the Australian edition xix
MyLab Accounting www.pearsonmylabandmastering.com
Learning resources:
To further reinforce
understanding, Study Plan
and Homework problems
link to additional learning
resources:
•Step-by-step guided
solutions
•Graphing tool
•eText linked to sections for
Study Plan questions.
Study Plan:
A Study Plan is generated
from each student’s results
on quizzes and tests.
Students can clearly see
which topics they have
mastered and, more
importantly, which they
need to work on.
Acknowledgements
The dedicated contributions of many individuals helped make this book a reality. As with
the second edition, an impressive cast of reviewers provided us with feedback on their use or
impressions of the second edition. Reviewers included:
Dr Gary R. Oliver, The University of Sydney

Dr Ranjith Appuhami, Macquarie University
Dr Kenneth Ke, Curtin University
Robyn Alcock, CQU
Dr Hermann Frick, The University of Queensland
Dr Vijaya Murthy, The University of Sydney
Ms Jennifer Waters, The University of Queensland
Dr Natasja Steenkamp, Central Queensland University
Claire Beattie, University of Southern Queensland
The authors and publisher are extremely appreciative and thankful for the work undertaken
by chapter contributor Robyn Alcock. We would also like to thank David Joy (University of
Adelaide) for carrying out a technical edit of the text.
We thank the people at Pearson Australia for their hard work and dedication, including
Senior Portfolio Manager Jo Hobson, Development Editor Anna Carter, Editorial & Design
Production Manager Bernadette Chang, Rights and Permissions Editors Liz McShane and
Claire Gibson, and Lead Editor/Copy Editor Teresa McIntyre.
William Maguire, Rebecca Tan
xx
Management accounting
in context 1
All organisations are concerned about revenues and costs in the pursuit of their Learning Objectives
mission. Whether their outputs are management services, fast food, the latest
designer fashions or outcomes from a not-for-profit endeavour, managers must 1 Describe management
accounting and explain its role.
understand the influence of revenues and costs on their operations or risk losing
2 Describe the constituents of the
value chain, how the value chain
control. Managers use management accounting information to make decisions
relates to the supply chain, and
related to strategy, budgeting, production planning and pricing, among others. the dimensions of performance
Of the many candidates for this opening vignette, Sundrop Farms stands out as that customers expect.
an illustration of many of the themes that run through this book. 3 Describe planning, control and
decisions.
4 Explain the meaning of

strategy and the way in which
Innovation in the Australian outback: management accounting might
influence strategic decisions.
transforming seawater and sunlight into
high-value outputs 5 Describe and apply the five-step
guide to decisions.
In June 2016, Coles Supermarkets took delivery of its first consignment of truss 6 Explain the way in which
tomatoes from Sundrop Farms, situated in Port Augusta, South Australia. Sundrop influence management
accountants’ conduct and
Farms represents an investment of $180 million to $200 million on exhausted farm-land, effectiveness and, given the
with little potential for traditional agriculture. After early experimentation and a four- context, apply the code of ethics.
year pilot project not far from the current site, Sundrop Farms attracted $100 million in
funding from KKR (Kohlberg Kravis Roberts), a global private equity company, which it
added to funding from the Saumweber family (Philipp Saumweber is the Chief Executive
Officer [CEO] of Sundrop Farms) and others, including
$6 million from the South Australian government. Starting with
four employees, Sundrop Farms now employs 150 people,
operates at full capacity and produces 350 tonnes of truss
tomatoes per week, the demand for which is estimated
to increase at an annual rate of 15–20%. It sells all of its
production to Coles Supermarkets, according to the terms of
a 10-year contract signed with Coles in 2014.
Sundrop Farms transforms seawater and sunlight into
high-value truss tomatoes—one product and one variety.
Although the investment is high, giving rise to high fixed
costs, Saumweber estimates that the depreciation of the
investment amounts to less than 50% of the amount that
would be spent on fossil fuels were it not for the solar
installation. According to Leigh Oliver, director of KKR in
Australia: ‘This is an agricultural investment without the
traditional risks. The highly cyclical nature of natural effects Patryk Kosmider/Shutterstock
Sources: Neales, S. 2016, ‘Desal and solar prove the perfect tomato sauce’, The Australian, 11 June, <http://www.theaustralian.com.au/national-affairs/desal-and-solar-prove-the-
perfect-tomato-source/news-story/9972772591dd39cbf4a774a0ee93555b>, accessed 16 December 2016; Neales, S. 2016, ‘This is the future of farming’, The Weekend Australian
Magazine, no date, <http://www.theaustralian.com.au/life/weekend-australian-magazine/this-is-the-future-of-farming/news-story/99fd0a207d8b6aa0768c32fd61b3d00e>,
accessed 15 December 2016; Sundrop Farms ABC Landline coverage, YouTube, <https://www.youtube.com/watch?v=KCup_B_RHM4#t=213.079941>, accessed 17 December
2016; ABC, A Taste of Landline, series 2, episode 4, <http://iview.abc.net.au/programs/taste-of-landline/RA1603Q004S00>, accessed 17 December 2016; Thieberger, V. 2015, ‘The
company that’s growing food in the desert’, Business Spectator, 20 November, <http://www.theaustralian.com.au/business/the-company-thats-growing-food-in-the-desert/news-
story/8ad288c3f55d7759b434a4e6ca6c11be>, accessed 16 December 2016.
1
on agriculture and unexpected floods and fires are avoided. With the effect of 300 days of sunlight
a year, harnessed by 24 000 mirrors focused on a tower 127 metres tall, which in turn channels the
energy into four greenhouses with a combined area of 20 hectares, safeguarding 440 000 tomato
vines and ensuring their access to abundant sunlight, opportunities for expansion are considerable.
First, the farm currently produces only one variety of tomato and capsicums are suited to this
process, with research continuing with other produce. Potential locations in other parts of the world
include the Middle East, Portugal and California.’
Learning
Objective 1 Management accounting and its role
‘Management accounting is the sourcing, analysis, communication and use of decision-relevant
Describe management financial and non-financial information to generate and preserve value for organisations’.1
accounting and explain
its role. Managers seek information to help them to carry out their responsibilities. Information
resides in various disciplines, including management accounting information systems,
marketing and others. For managers in the world of practice, the boundaries of these disciplines
are blurred. Management accounting serves managers by meeting their information needs. It
affects and is affected by other relevant variables, and operates in context. The dictionary
definition of context is ‘the circumstances that form the setting of an event, statement or idea’
and the word ‘context’ derives from the Latin: contextus, a combination of con ‘together’ and
textere ‘to weave’.2 We emphasise ‘context’ in this book because management accounting is
interwoven with the factors or variables that are relevant to the decisions that need to be taken.
Although it is beyond the scope of this chapter to elaborate on and apply the global
management accounting principles, the principles are consistent with the philosophy and
approach that we have adopted in this book and you are encouraged to visit the CGMA
(Chartered Global Management Accountant) website. Notice that value is centre-stage,
consistent with the definition of management accounting that precedes Figure 1.1. Note
carefully the four quadrants that surround value, and that communication is prominent among
them. It does not matter how good your technical knowledge is, or how accurately you can
answer multiple-choice and short-answer questions—without clear communication you will
FIGURE 1.1
COMMUNICATION INFORMATION IS
The Global Management PROVIDES INSIGHT RELEVANT
Accounting Principles THAT IS INFLUENTIAL Help organisations plan for
Source: AICPA and CIMA. 2014,
Drive better decisions and source the information
Global Management Accounting about strategy and its needed for creating
Principles. Effective management execution at all levels strategy and tactics
accounting: Improving decisions for execution
and building successful organisations,
<http://www.cgma.org/Resources/
Reports/Pages/GlobalManagement
AccountingPrinciples.aspx?utm_
VALUE
source=cimaglobal&utm_medium=
principles-page&utm_campaign= STEWARDSHIP IMPACT ON
principles2014>, p. 9, accessed BUILDS TRUST VALUE IS
17 December 2016. © 2017, ANALYSED
Association of International Certified Actively manage
Professional Accountants. Used by relationships and resources Simulate different scenarios
permission. so that the financial and non-financial that demonstrate the cause-and-
assets, reputation and value of the effect relationships between inputs
organisation are protected and outcomes
1
AICPA and CIMA. 2014, Global Management Accounting Principles. Effective management accounting: Improving decisions
and building successful organisations, <http://www.cgma.org/Resources/Reports/Pages/GlobalManagementAccountingPrinciples.
aspx?utm_source=cimaglobal&utm_medium=principles-page&utm_campaign=principles2014>, p. 8, accessed 17 December 2016.
2
Stevenson, A. & Waite, M., editors. 2011, Concise Oxford English Dictionary, 12 ed., Oxford University Press, Oxford.
2
CHAPTER 1 Management accounting in context 3
have limited or no impact as a management accountant or Chief Financial Officer (CFO).

Clear communication includes the ability to listen, the ability to converse clearly and the
ability to write clear and coherent reports. Related to this is the ability to select and present
relevant information. While the availability of data can be an issue, the current over-abundance
of data is perhaps a bigger challenge. The ability to analyse and demonstrate cause-and-effect
relationships to identify impacts on value emphasises the focus on value and strengthens the
previously mentioned principles; and trust underlies all.
We refer repeatedly in this book to the basic business model identified in the CGMA
publication3 (see Figure 1.2). An ability to focus on the physical characteristics of an organisation’s
activities will facilitate the design and operation of management accounting systems and enhance
your understanding of concepts. For example, cost as an abstract concept is bound to be elusive.
A well-known management accounting academic is renowned to have said: ‘I have never seen a
cost walk into a room, have you?’ You haven’t met a cost, because ‘cost’ is an abstract concept.
Managers manage the activities that underlie costs; they do not manage costs directly.
Accounting systems process data relating to economic events and transactions, such
as sales and purchases of materials, and transform them into information that is useful for
reporting to external users and internal users. Among the latter, the information is helpful to
managers, sales representatives, production supervisors and others. Management accountants
collect, categorise, summarise and analyse data. For example, they collect costs by category,
such as materials, labour and shipping, and summarise the detail to determine total costs by
month, quarter or year. They analyse the results to highlight, for example, how costs have
changed relative to revenues from one period to the next.
They also provide the information found in the income statement, the balance sheet,4
the statement of cash flows, and performance reports, such as the cost of operating a factory
or of providing a service. Managers use management accounting information to: choose,
communicate and implement strategy; coordinate product design, production and marketing
decisions; evaluate performance; administer the activities, businesses or functional areas they
oversee; and coordinate these activities within the framework of the organisation. This book
focuses on how management accounting assists managers in these tasks.
Management accounting information is governed by the key questions: (1) how will this
information help managers do their jobs better?; and (2) do the benefits of producing this
information exceed the costs? The reports do not have to follow set principles or rules.
Managers with different responsibilities often require the information in an accounting
system to be presented or reported in different ways. For example, a sales manager, a
distribution manager and a production manager would have quite different interests in sales
order information. A sales manager may be interested in the total dollar amount of sales, to
determine the commissions to be paid; a distribution manager may be interested in the sales
order quantities by geographical region and by customer-requested delivery dates, to ensure
FIGURE 1.2
Outcomes
The basic business model:
inputs–process–outputs–
Inputs Process Outputs
outcomes
Activities
3
See footnote 1.
4
These terms for financial statements will be used throughout the book because they are commonly understood and widely used.
However, the official terms are ‘statement of comprehensive income’ and ‘statement of financial position’ according to a 2009
revision to AASB 101.
4 HORNGREN’S COST ACCOUNTING
timely deliveries; and a production manager may be interested in the quantities of various
products and their desired delivery dates, to enable scheduling of production.
An ideal database—sometimes called a data warehouse or infobarn—consists of small,
detailed pieces of information that can be used for multiple purposes. For instance, the sales
order database will contain detailed information about product, quantity ordered, selling price
and delivery details (place and date) for each sales order. The database stores information in a
way that allows managers to access the information they need. Many companies are building
their own enterprise resource planning (ERP) systems, single databases that collect data and
feed it into applications that support the company’s business activities, such as purchasing,
production, distribution and sales.
Three guidelines
Three guidelines that help management accountants provide value to their companies in
strategic and operational decisions are: (1) analyse benefits and costs; (2) give full recognition
to behavioural and technical considerations; and (3) use different costs for different purposes.
Benefit–cost analysis
Management accountants continually face resource allocation decisions, such as whether
to purchase a new software package or hire a new employee. A benefit–cost analysis is
appropriate for these decisions because resources should be used only if the expected benefits to
the company exceed the expected costs. Do not be put off when expected benefits and costs are
difficult to quantify; it is better to recognise them and make an estimate than to ignore them.
Think about a company that conducts its business with historical record-keeping and little
formal planning. Its management team thinks that it may be time for its first budgeting system.
A budgeting system compels managers to plan ahead, to compare actual with budgeted
information and to take corrective action. This is a major benefit of a budgeting system. The
budgeting system entails investments in physical assets, in training managers and others, and
in ongoing operations. These are the major costs. Once the budgeting system is in place, the
new information can be expected to lead to different decisions that create more profits than the
decisions that would have been made using the historical system. The expected benefits of the
new budgeting system thus exceed the expected costs.
Behavioural and technical considerations

The benefit–cost criterion assists managers in deciding whether, say, to install a proposed
budgeting system instead of continuing to use a historical system. Consider the human
(the behavioural) side of the decision to use budgeting. Budgets induce a different set of
decisions within an organisation because of better collaboration, planning and motivation.
A management accounting system has two simultaneous missions—one technical and the
other behavioural. The technical considerations help managers make wise economic decisions
by providing them with the desired information (e.g. costs in various value-chain categories)
in an appropriate format (e.g. actual results versus budgeted amounts) and at the preferred
frequency (e.g. weekly versus monthly). Appropriate attention to behavioural issues motivates
managers and other employees to aim for the goals of the organisation.
Managers and management accountants are aware that management is not confined to
technical matters. It is primarily a human activity that should focus on how to help individuals
do their jobs better, for example by helping them to understand the activities that add value and
those that do not. Moreover, when workers underperform, behavioural considerations suggest
that managers should do more than send them a report highlighting their underperformance;
they should also personally discuss with the workers ways to improve performance.
Different costs for different purposes

As in many other domains, ‘one size fits all’ does not apply to management accounting.
Different costs serve different purposes. A cost concept used for external accounting reports
may not be appropriate for internal reporting to managers.
Another random document with
no related content on Scribd:
The evidences of pre-historic and fossil men in the Old World are
too numerous and well-known to need elucidation here; we shall
confine our attention to Australian records.
Some years ago a specimen was submitted to me for identification
which had been found in Pleistocene (or Pliocene?) gravels S.S.E. of
the Tennant’s Creek district. It was so completely petrified and
“stony” looking that the organic origin was doubted, but a thin section
viewed under the microscope revealed the true structure of bone.
After cleaning the fragment thoroughly, I recognized it as portion of a
human skull, viz. the posterior half of the left parietal. The anterior
fracture is vertical and at about the centre of the parietal eminence;
the thin squamous edge is also broken away. The lambdoidal border
is still quite characteristic and shows the complex nature of the
parieto-occipital suture. Both the external and internal surfaces are
rough and pitted through exposure, age, and mineral precipitations,
but the temporal ridge is still discernible and can be traced
posteriorly right up to the parieto-occipital suture. There is no
indication of a parietal foramen. The bone is thick about the posterior
inferior angle, but the groove of the lateral sinus has broken away.
The specimen, when struck, has a clear metallic ring, like that of
earthenware or porcelain. When treated with acid, the surfaces as
well as the “bone-substance” effervesced briskly, proving that a
thorough intermolecular substitution of organic matter by mineral
was in progress. This calvarium, fragmentary though it is, is of
considerable importance from a prehistory point of view, since it
gives us another definite link in the somewhat meagre chain of
evidence which has been established in connection with the
geological antiquity of man in Australia.
The most important find of an extinct Australian type was made at
Talgai, in south-eastern Queensland, as far back as 1884, in the
shape of a fairly well preserved skull; but it was not until a few years
ago that a description of it was published by Dr. S. A. Smith.
Although no other bones were discovered in association with the
skull, numerous remains of extinct creatures like the Diprotodon, the
Nototherium, and horny reptiles have been unearthed not many
miles remote from the site of the interesting discovery. Dr. Smith
sums up his observations as follows: “This fossil human skull of a not
yet adult Proto-Australian presents the general picture of a cranium
similar in all respects to the cranium of the Australian of to-day,
combined with a facial skeleton of undoubtedly Australian type, in
the palate and teeth of which there are to be found, in conjunction
with the most primitive characters found in modern skulls, certain
characters more ape-like than have been observed in any living or
extinct race, except that of Eoanthropus.”
Other less convincing discoveries have been recorded in the
shape of human and dingo bones from the Wellington Caves, human
remains and artefacts from beneath the basalts of Victoria, and the
fossil footprints of an aboriginal in the upper Tertiary beds of
Warrnambool.
It would seem, therefore, that sufficient facts have been
forthcoming to prove that man was in existence at any rate in late
Tertiary times; and since he was then perfectly developed, it would
not seem unreasonable to assign to him a very much greater
antiquity.
During these long ages, tectonic forces, and the ever active
denuding agents of the atmosphere, in all their phases, have
wrought considerable transfigurations in the surface of the globe.
Some portions of the earth’s crust have been swallowed by the
ocean, whilst others have been wrenched from the depths by
upheaving processes. Thus the geography of our present world
would be a terra incognita to the earliest progenitors of the human
kind, who lived in the dim dawn of man’s ascending tendencies,
while, on the other hand, we would require a new army of intrepid
explorers to pave the way for civilization if we were suddenly placed
back into the world as it stood in the beginning of primeval days.
Old land connections then existed between entities which now are
parted by abysmal depths. Such evidence of once-existing
continental links is afforded by what has been termed a “biological
consanguinity” between organic creations on both sides of gaps now
occupied by ocean water.
There is no novelty about all this. Our best scientists have long
recognized that such connections have existed beyond all doubt.
They become evident when one enquires into the present
geographical distribution of botanical and zoological species, and
when one correlates geological strata in different parts of the world,
on the basis of palæontological evidence contained in them.
The same principles apply when we consider the probable original
home of man, and the subsequent migrations and racial evolutions
of the pristine hordes, which followed.
That once a chain of land linked together the shores of Australia,
South Africa, and India seems certain. The continental masses,
which in past eras supplied this link, zoologists have christened
Lemuria, while geologists refer to the lost land as Gondwana. It is
somewhere within the area once occupied by this submerged
continent, perhaps not far remote from Australia, that we must look
for the cradle of the species Homo. Although most of the evidence
has been irretrievably lost to scientific investigation, much might yet
be expected from any of the contiguous continents or islands in this
region, upon which occur Tertiary or later sedimentary formations.
The discovery of the oldest fossil, which appears to be human—the
Pithecanthropus erectus—in Java, was by no means accidental.
Professor Dubois, before leaving for that island to undertake a fossil-
hunting expedition there, declared that in all probability he would
discover the remains of a primitive creature related to man.
From some point, then, upon this ancient, vanished continent,
perhaps no great distance north of our present Australia, we believe
migrations of the earliest representatives of the human species took
place. The directions in which these migrations took place would be
governed according to the lie of the land as it was then determined
by the impassable waters of the ocean. In all probability, the families
or groups wandered in various directions, at first keeping more or
less in contact and on friendly terms with each other, but as time,
and eventually ages, wore on, these migratory groups, by selective
culture, environment, climate, and, maybe, sundry other causes,
became differentiated into peculiarly distinct strains, all of which we
are nowadays able to reduce to three fundamental races.
One of these migrations was along a western course, which led
the wandering groups into the region now represented by the
continent of Africa. This established the Negroid element.
Another strain moved northwards and spread itself, like the rays of
a rocket, across the land now known as Asia. Some of these “rays”
reached what is now Lapland, while others found their way, via the
region of modern Esquimaux Land, across to what we now call North
America. This march evolved the Mongoloids.
Yet another body of primitive hunters, who interest us most,
worked their way north-westwards, on a course between the former
two, and took possession of any portions of the dry land of the globe,
the present relics of which are India, south-western Asia, and
Europe.
Then came the catastrophe! The exact period is not determined. It
must have happened since the advent of the “human” type, but there
the evidence fails. Upheavals or subsidences of land usually take an
age to make themselves noticeable. It is scientifically established
that the close of the Triassic period was characterized throughout the
world by great tectonic changes. Beds of rock were faulted to lofty
heights on one side, and to dizzy depths on the other. The height of
the Blue Mountains plateau of New South Wales is evidence of such
upheaval, whilst the broken coastline, with its “drowned” rivers and
myriads of islands along the north-west of Australia, together with
the coastal fringe of coral reefs along the north, are all evidences of
comparatively recent subsidence en bloc.
By these processes Australia was gradually isolated from its
former land-connections, but, being near to the original home of
man, it is only natural to suppose that the land was peopled.
From that time on Australia remained, whether as an island
continent or a group of associated islands does not concern us here,
isolated from the rest of the world. The original inhabitants whiled
away their time in comparative ease. They had nothing to fear. Their
former companions who had, through their nomadic migrations, been
so far removed from them, would, no doubt, have now posed as
formidable rivals, if the barriers had not come between. Until the
recent arrival of the European explorers and settlers, and the
periodic visitations to the north coast by Malay bêche-de-mer fishers,
this great Southern Land had remained the undisputed property of
the comparatively sparse progeny of the first primitive possessors.
There were no ferocious animals to molest these early prehistoric
Australians. Apart from a few dangerous, but usually non-
aggressive, reptiles, the large animals were almost without exception
of the ancient marsupial order, and, although perfectly harmless,
offered excellent opportunity for the chase.
Thus it happened that the primitive hordes could roam at large in a
congenial climate, and under peculiar conditions, which were
everywhere much the same; and, in their subsequent wanderings,
they met only with people of their own descent and inclinations. In
consequence, they were spared many of the bloody brawls and
conflicts, which the competitive waves of culture continually
showered upon the other hordes that were struggling northwards
under decidedly more adverse conditions of climate.
The great struggle for existence did not make itself felt so keenly
to the ancient Australians because they were strictly insulated, and
thus kept outside the sphere of exotic influence and interference;
their only troubles amounted to an individual club-duel, or
occasionally an inter-tribal warfare, which evoked more irate words
than actual blood drawn by their sharply-pointed spears.
So the Australian has remained just what he was ages ago. And
on that account the evolution of his pristine contemporaries, who
were seized by the flood wave of culture, becomes the more
comprehensible, when we measure the differences, but recognize
the affinities, existing between the extremes. A line drawn across the
map of the world indicating, so far as it is at this stage possible, the
areas whose populations show, or before their extinction showed,
the strongest affinities with him will represent roughly the direction of
migration and incidentally of evolution of the Australoid strain.
This line of anthropological relationship connects the Australian
(including the Proto-Australian) with the Veddahs and Dravidians of
India, and with the fossil men of Europe, from whom the Caucasian
element has sprung. In other words, the Australian aboriginal stands
somewhere near the bottom rung of the great evolutional ladder we
have ascended—he the bud, we the glorified flower of human
culture.
In the living Australian then, we see the prototype of man as he
appeared in Europe in the Stone Age. Australia has upon other
occasions proved to be extraordinary in a scientific sense. The
kangaroo is known only in the petrified condition in the Tertiary
deposits in other parts of the world. The Zamia, which is still found
living in Australia, is a conspicuous plant of the coal-measures in
every other country. The ornamental mollusc, known as Trigonia, had
been regarded as extinct until it was re-discovered in Australia. Most
of the great river systems of central Australia have had their day;
they have flourished in the past; yet, occasionally, after a prolific
downpour, their dry courses swell temporarily to majestic streams.
And, lastly, we see in the aboriginal yet another palæontological
overlap—a living fossil man—the image of ourselves, as we
appeared many ages before we learned to record the history of our
progress, and of the world in general.
When one wades more deeply into the subject, only skimmed
above, the following points suggest themselves to one: Our line of
racial development was very early dissociated from the Mongoloid
and Negroid lines; and geographically it ran between the latter two.
There are considerable racial differences between the other races
and the Australoids, the most highly specialized and cultured division
of which is now represented by the modern Caucasian. The last-
named deductions are entirely supported by the shallowness of the
pigmentation in the aboriginal’s skin, and by the fair hair of children
found among certain tribes of central Australia. In fact, the colour
question, so far as the Australian aboriginal is concerned, is a
relative conception, the difference in the amounts of pigment in his
skin and in the “white” man’s being in all probability due to climatic
influences extending over long periods of time. It is doubtful whether
the primitive Australoid or the Proto-Australian possessed a skin so
dark as that of the present-day Australian. We may now understand
why it is that the quarter-blooded progeny derived from the union of
a half-blooded aboriginal woman with a European father is always
lighter in colour than its mother, and the octoroon lighter still. Unions
further on the European side produce children practically white; and
no case is on record where the colour in a later generation reverted
to the darker again. The latter, we know, happens only too often
when there is a taint of Negroid blood running in a family, even
though the mixing of race took place generations back.
Apart from its great scientific significance, this matter is of
considerable social and national interest to citizens of Australia, and
we might well ask ourselves: “Are we justified in referring to the half-
blooded aboriginal, with European parentage on one side, as a half-
caste, or in even stigmatizing him as a bastard?”
CHAPTER X
AN ABORIGINAL’S BIRTH
Recognition of pending maternity—Peculiar beliefs in connection with the cause of

pregnancy—Larrekiya legend and maternal dietary—Maiyarra’s
accouchement—Birth—Twin births—After-treatment—Artificial termination of
pregnancy—Preparing the new-born—Children’s lot decided by peculiar
group-relationships—Parents’ affection—Children unclothed—How they are
kept warm and reared—Different methods of carrying and nursing children.
It had been talked among the old men for some time past that the
lubra Maiyarra was giving cause for suspicion. Her husband Pitjala
agreed; to his knowledge there had been no occasion for her to
leave his camp for some moons past. His mother, old Indarrakutta,
had told him that when she and Maiyarra were gathering roots down
by the Womma waterhole, many of the gum trees were covered with
manna and they partook freely of the sweet meal, which, as he
knew, does not often come to their district. The old woman had
cautioned the girl and growled at her when she did not obey,
because she knew Maiyarra was of the Yalliadni clan and should not
be allowed to eat the manna. This disobedient gin had, however, not
eaten much before she became sick and was obliged to lie in the hot
sand of the creek where the bullrushes stand. Indarrakutta had stood
aghast, Pitjala explained to the old men, when unexpectedly
disturbing a snake from the bullrushes, she observed that the
creature, in gliding over the ground, touched the body of Maiyarra
with its tail and, in its great haste to disappear, had left portion of its
glossy slough beside her. “Yakai,” gasped the men, as if from a
single mouth, “then it is clear the ever wakeful spirit of Womma has
caught the neglectful Maiyarra sleeping and it is certain she is with
child.”
Such was the history of the case as narrated to us. It corroborated
previous observations from central and northern tribes. The
recognition of maternity is not connected primarily with any conjugal
liberties a husband or number of tribal husbands may be privileged
to enjoy, but more with the recollection of any accidental contact with
an object by which it is supposed a spirit child can enter the body of
a woman. The spiritual ingress may take place in a variety of ways,
but as often as not it is believed to be by means of a hollow object of
some description. In the present instance it was a snakeskin. On the
Victoria River the gins have a dread of the whirlwind, thinking that if
such should pass over one of them, a spirit child would immediately
enter the woman. In the Cambridge Gulf country, young women very
reluctantly go into a water hole in which lilies are growing, fearing
that as they step over the leaves, which are hollow, a similar fate
may overtake them.
In the ancestral days of the Larrekiya in the Port Darwin district, for
instance, it is believed that a baby boy was once seen to spring from
the burrow of a rabbit bandicoot; whence he had come no one knew.
He was invited to come to the Larrekiya camp and live with them, but
he refused. Some time after, when the boy had become a man, he
was again met by the tribe, who once more invited him to their camp;
but he declined as before. Thereupon the men became angry and
dragged him to a waterhole, and threw him in. The stranger
immediately sank, and five bubbles of air rose to the surface as he
disappeared. The men sat down and watched the water, when
suddenly the man’s face reappeared. The Larrekiya hurled a spear
at him, and he was killed because they knew he had no father and
no mother and was the accomplice of the evil spirit, who, it is
asserted by the Wogait, makes a big fire, from the smoke of which
he takes an infant and places it, at night, into the womb of a lubra;
and she must then give birth to the child.
In the same district, when it becomes known that a happy event is
pending, the husband goes out with his lubra and kills a certain
animal or collects certain vegetable products, which he hands to the
woman to eat, believing that these articles when swallowed will
ensure a successful birth.
To return to our story: Maiyarra was groaning with pains in the
abdomen. She was alone with the old woman Indarrakutta, who was
her mother-in-law, well beyond hearing distance from the main
camp. A small fire was burning sluggishly by their side and throwing
a thin column of bluish white smoke into the air. Maiyarra was sitting
upon a small patch of ground cleared of the burrs, with her legs
stretched before her. She was propping her writhing body, sloping
slightly backwards, with her arms against the ground. The old
woman sat closely behind, with her arms thrown around Maiyarra’s
waist, and with her lower limbs, bent in the knee, enclosing and
pressing against the younger woman’s buttocks on either side.
Occasionally the old woman would relinquish her hold and make for
the fire, over which she warmed her hands to subsequently massage
the patient’s abdomen. Now and then she might even rub warm
ashes over it. Then the two sat in patient expectation, and, whenever
there came a pain, the old woman would tighten her grip, while she
spoke encouragingly to the parturient Maiyarra. This method is very
generally employed, except that when the final stage has arrived, the
Arunndta and other neighbouring tribes in central Australia request
the gin to squat on her toes, with her buttocks resting over her heels.
The event is almost invariably spontaneous. In my experience I
have very rarely seen complications, and then usually when the
lubra has been living under civilized conditions.
Twins are very exceptionally seen; we do not mean to imply,
however, that multiple births do not occur more often than one sees
or hears of. No authentic observations are available to satisfy our
curiosity in regard to this point. We have been repeatedly assured
that when twins are born, one has arrived as the result of the evil
spirit’s witchcraft. The child, one is informed, will do no good for
itself, and, on account of the evil within it, it will contaminate others
with whom it comes into contact, and, if it were allowed to grow up, it
would be in league with the evil spirit, whom it would look upon as a
brother, and to whom it would betray all the tribal secrets. The evil
spirit would carry this information to the enemy and their tribe would
surely be wiped out of existence. In consequence of all this, the
suspected one of the two infants is destroyed, usually by one of the
old women in attendance, who places a red-hot coal in its mouth or
smothers it with sand.
The placenta is waited for, and then the umbilical cord is severed
two or three inches from the child’s abdomen in one of the following
ways: It may be twisted off, cut with a sharp fragment of shell or
splinter of rock, or pinched off with the finger-nails, or even bitten off
with the teeth. Another method is to batter it through with a stone,
after which the small remaining portion is packed with warm ashes.
When it falls off, it is tied around the child’s neck with a piece of fur-
string, where it is worn for a while as an amulet. The placenta is
either burned or buried.
Intentional interferences with pregnancy are rare among the
unsophisticated tribes, but rather frequent when the natives are living
under more civilized conditions. At Fowler’s Bay a gin, who wishes to
rid herself of prospective motherhood, collects a number of black
beetles, known as “yarralyi,” which she roasts and reduces to
powder. Of the powder she rubs some into her armpits, and some
over her breasts and pubes.
PLATE VIII
Old Kai-Kai, the leading medicine man of the western Arunndta.
“The medicine man is not so much an individual who has the knowledge of
medicinal values of herbs and surgical practices as one who is the recognized
sorcerer....”
(Note also the emu-feather skull cap, light-wood shield, and “Kutturu.”)
The newly-born infant, as it lies upon the sand, is rubbed all over
and dried with ashes; then it is usually transferred to a sheet of bark
or a trough-shaped bark food-carrier, in which it is carried about
during the first few months of its existence, the mother, at feeding
time and other odd moments, taking it up into her arms. On Sunday
Island the bark food-carrier, there known as “oladda,” is used as a
cradle; one often might see a busy mother, attending to duties which
occupy her hands, putting her child to sleep by simultaneously
rocking the receptacle containing it with her foot (Plate XI).
The Aluridja smear ochre, ashes, and fat over the body to protect
it against the hot wind and the flies. Some of the south-eastern
tribes, now practically extinct, did likewise.
Among the Kolaias near Cambridge Gulf the common practice is
to apply mother’s milk to the infant’s body and sprinkle it with
charcoal. In their endeavour to make a young mother’s breast as
productive as possible, the Aluridja and Arunndta burn sticks of the
mulga and stroke the breast with the charred ends.
The Arunndta singe the infant’s hair with a fire-stick and rub the
skin over with charcoal to bring about a darkening of the colour as
speedily as possible.
In the same way as girl-piccaninnies are assigned to their tribal
husbands before even they are born, according to certain group-
relationships, so are the boys of the Port George IV district
apportioned by the same law to the old men, whom they must obey,
when called upon, throughout the term of the elders’ lives.
An aboriginal gin is often charged with callousness towards her
offspring. Such an accusation, apart from proving the informant’s
ignorance, amounts to a slanderous injustice. The aboriginal mother
is as fondly attached to her babe as most white women are to theirs,
and the way she can endear herself to it is pathetic. The men, too,
exercise a chivalrous and honourable guardianship over the
innocents of their tribe as well as over the children of any white
settlers, who happen to reside in their district. Those who have lived
among the Australian natives, like the northern squatters, know only
too well that under ordinary circumstances their children could not be
in safer custody than when entrusted to the care of the aborigines.
An infant is never clothed. On Sunday Island a single strand of
human hair-string is tied around its hips and pubes. Such is, of
course, in the first place to decorate the body, and secondly to charm
away the evil-bringing spirits which may surround it.
To bring warmth to an infant during the night, it is cuddled by its
mother or other near relative; during the day, when the mother’s
hands are otherwise occupied, a piccaninny is often kept snug in its
bark-cradle by bedding it upon, and sprinkling it with, warm ashes.
A child is not weaned until it is at least three or four years old; at
times it is kept at the breast for even a year or more longer.
Nevertheless, a mixed diet is offered the suckling very early in life;
one often sees a baby, but a month or two old, vigorously sucking
the smooth head-end of a big bone and apparently thoroughly
enjoying the treat.
Different methods have been devised to assist the gins in carrying
their infants with as little inconvenience as possible when on the
march.
When the babe is very young, the bark-carrier is indispensable; it
is either carried under the arm or cleverly balanced upon the head.
In the latter case a circular cushion or ring-pad is first placed on the
head to steady the weight.
One precaution is constantly preached to young mothers, namely,
not to allow the child’s legs to hang over the edge of the wooden
carrier lest they grow crooked.
The tribes north of the Great Australian Bight swing the infants in
skins or plaited vegetable fibre mats over their backs, the corners of
the receptacles being tied in front of the mother’s neck. The nearly
extinct tribes of the lower River Murray and surrounding districts, as
far as western Victoria, used to adopt the same method.
When the child attains a riper age it sits in the bag-shaped
receptacle, its head being the only exposed part of its body which is
visible. The natives maintain that they originally learned this dodge
from the kangaroo, which carries its young in a pouch.
When the child is a little older and has arrived at the toddling
stage, it is allowed to ride pick-a-back style upon its mother’s back,
where it secures its position by catching hold of the gin’s shoulders,
neck, or breasts. Another favourite method is for the gin to straddle
the child upon one of her hips and hold it there with her arm.
Occasionally the child sits upon either parent’s shoulders and
hangs on to the elder’s head or hair. More for the excitement created
than as a recognized way of transport, the parent, usually the father,
may seat the child upon his head and hold both his arms up for the
rider to clasp. After a short run with its father in this position, the child
usually asks to be let down again.
The most peculiar custom is that in vogue among the
Wongapitcha of the Tomkinson and other associated ranges in
central Australia. The child is laid across the small of the mother’s
back, face forwards, and is kept in a horizontal position by partly
lying upon the gin’s buttocks; it is supported by the mother’s arms,
one of which is held beneath its neck, the other beneath its knees.
By adopting this method of carrying, the gin has both her hands free.
The same method is adopted during the transport of a favourite dog,
the women maintaining that it is a very comfortable occupation in the
cold weather because the animals help to keep them warm (Plate
XVI, 1).
When off duty, that is when not on the tramp, hunting, or wood-
collecting, a gin will carry, rock, and caress her offspring much like a
European mother does, by tenderly clutching it in both her arms.
If work permits, the mother often sits on the ground and lays her
offspring across her lap; by lifting her thighs towards her body, she
forms a trough, in which the babe lies most comfortably.
On the north coast one might occasionally see a gin swinging her
babe upon an aerial root or branch of a tree, or upon the flexible
stalk of a tropical climbing plant.
PLATE IX
1. Men of Kolaia tribe, Cambridge Gulf, wearing the hair tied at the
back around a pad of emu feathers.
2. Wongapitcha men wearing ornamental wooden hair-pins known

as “elenba.” Note charcoal rubbed over the foreheads.
CHAPTER XI
CHILDHOOD
Much freedom given to children—Entertained and amused by parents—Taught

songs and dances—Drawing tracks in the sand—Importance of learning to
track—Playing with sand, mud, and water—Sliding and mud-balling—
Tobogganing—Tree-climbing practice—Chasing wind-driven objects—
Spearing moving targets—“Hand-ball”—“Catch-ball”—“Tip-cat”—Throwing
contests—“Hide and Seek”—Toys—Playing at “Father and Mother”—“Dolls”—
Fireless cooking—Toy throwing-sticks—Sham-fights and hunts—Emu game—
Toy boomerang—Toy raft—The “Kukerra”—Spinning tops—“Cratch-cradle”—
Children rarely attend ceremonies—Discipline and obedience—Girls trained
by mothers—Boys taught how to make and use weapons—Girls’ stick
practices—Spartan principles—Animal and bird pets.
So soon as the child is able to walk and run, independently of its

mother, it is allowed every freedom, but never far away from the
watchful eye of its parent; quite occasionally, however, one might
meet with a toddler roaming about the bush all alone, and miles
away from the main camp. Recently we saw a little chap near
Running Waters on the Finke River, who would wander away from
camp and spend days alone in the sandhills. The only nourishment
he could find during his absence was a handful of small bulbs, which
grew along the sandy banks of the Finke. It must be mentioned that
this little fellow was an orphan, and nobody seemed to take much
notice of his absence for the first day or so, after which a near
relative would set out, pick up the wanderer’s track, and bring him
back to camp.
Parents devote much of their time to the entertainment and
amusement of their children; but the economical side of play is never
forgotten. If during a game, a practical wrinkle can be taught, which
will prove useful when the playful moments are left behind and the
more serious stage of life is entered, the opportunity is never missed.
Much time is spent in the evenings teaching the younger
generation songs and dances, which allude to ancestral traits, to the
tricks of the chase, and to the damage the evil spirits can do. The
notes and calls of the different wild animals and birds, with which the
tribe has daily to do, are cleverly imitated and explained,
disregardless of the numerous repetitions, which are begged, to
satisfy the childish curiosity. For instance, the plover is by the
Western Arunndta called “kurreke tata,” which is softly and musically
rendered in imitation of the bird’s familiar cry. The plover is described
as a rain-maker, which is able to bring the water from a cloud
whenever it desires. Even the European settler often refers to this
bird as a “rainpiper”; the connection between the species and rain no
doubt having arisen from the fact that plover usually follow up
showers and remain in the vicinity of any pools which collect upon
the ground. During any rain-making ceremonies the plover is
frequently mimicked. Another of their favourite items is the imitation
of a whining and howling dingo, which they accomplish with
wonderful accuracy.
The dances, too, are largely imitative. One of the most popular of
the Arunndta repertoire is the frog-dance. The child adopts a sitting
attitude and passes its arms from the outside, behind the knees, and
forwards to the ground. In this position, it moves about on “all fours,”
with a peculiar hopping motion, adding greatly to the hilarity of the
meeting.
Great pleasure is evinced by the beaming young faces when an
adult prepares to draw pictures in the sand. A small circular patch of
ground is cleared by the entertainer, and the children seat
themselves around it. Having smoothed the surface with the palm of
his hand, he proceeds to “draw” by scratching the design into the
sand with a small pointed stick. Although the pictures are crude, and
often nothing short of puzzles to the European, the artist talks all the
while to the children in such a convincing way that, even assuming
their eye incapable of comprehension, their interest is excited or
persuaded to such an extent as to almost render the few lines in the
sand a living reality. “Here is the man,” explains the artist, as he
draws a vertical line, “walking about” (a number of small holes are
tapped into the sand), “he sees a lizard” (a longer line on a slope
crossed by two shorter bars at right angles), “away it runs” (pairs of
taps slantingly opposite to each other), “the man after it” (single taps
between the former pairs), “he throws a boomerang” (the familiar
shape of the weapon is outlined), “the lizard goes down a hole” (a
hole is scratched into the ground), “the Kurdaitcha take it, it is gone!”
(he slaps the spot with the flat of his hand). “Yerrai! What is that? A
snake!” (emerging from the hole he draws a curved line), “the man
has lost his boomerang but he hits the snake with his waddy” (the
curved line is smacked several times with the small drawing stick the
artist holds in his hand). “I, i, i! he has finished (i.e. killed) it.” And so
the narration might go on for a considerable time.
Commendable pains are taken by the adults in imitating the tracks
of all the animals of chase, and the children are invited to compete in
reproducing them. For instance, an “emu track” is obtained by
pressing the inner surfaces of the index finger and thumb, held at an
angle of about forty-five degrees, into a smooth patch of sand; then,
without lifting the index finger, the thumb is moved to the opposite
side and there pressed into the sand, at about the same angle as
before. Often the impression of the “pad” of the bird’s foot is
indicated by dabbing the round point of the thumb into the sand
immediately behind the intersection of the three “toes.”
A kangaroo track is simple, and is made by imprinting a finger or
big toe twice in the sand, an inch or two apart, so that the resulting
marks are two parallel grooves supposed to represent the
impressions of the long central toes of the marsupial. A shorter mark
is made at the centre of either of these, at an angle of about forty-
five degrees, to indicate the lateral toes, when the track is complete.
At times a small scratch or hole is made at the end of each of the
“toes,” to suggest the claw-marks.
A dog track is made with the fingers alone. The tip of the thumb
makes an imprint, which is to represent the pad, whilst the finger-tips
supply those of the four toes, ranged in a semi-circle about the
former. The claw-marks are added in the same way as described of
the kangaroo track.
A human track is imitated by imprinting the outer edge of a half-
closed hand, the left hand being used for the left foot and the right
for the right. This impression will give the ball, the outer surface, and
the heel of the required track; the toe-marks are dabbed in with the
finger-tips.
Where the camel is known, its track is reproduced. A piccaninny is
momentarily sat upon a smooth patch of sand and lifted away again;
the imprint of its stern supplies the outline for the required track. The
lower half of ridge left in the sand by the cleft between the child’s
buttocks is obliterated, when the “track” is ready for the never-failing
applause. Occasionally the upper angles, representing the camel’s
toes, are improved by making them more acute and deepening them
to show where the claws are supposed to have cut into the ground.
The study of animal-spoors in all their specific and various
intricacies, and especially the art of individualizing the human foot-
print, rank among the most important and earliest occupations of the
aboriginal child’s mind. Parents are required by law to see that the
children receive constant instruction and exercise in this department.
It is a common thing for a mother to purposely slip away from her
child and not to respond to the imploring wail, which follows when
her absence is discovered. The only sympathy some relatives or
friends might proffer is to direct the child’s notice to its mother’s
tracks and at the same time urging it to follow them up.
Whereas the average European can distinguish between the
tracks of a dog and a cat, it is a decidedly more difficult matter for
him to discriminate between those of a mastiff and a wolf on the one
hand and, say, those of a sheep-dog and a fox or jackal on the other.
The aboriginal, however, learns to recognize not only the class, or
species, or variety, as they are known to us, by the spoors, but can
particularize each single individual. By looking at a track, for
instance, which we can only describe as a “dog track,” an aboriginal
can immediately tell us whether it is that of a “wild-dog” or of a
“whitefellow-dog,” whether the animal is young or old, male or
female, and whether it passed over the ground sometime to-day,
yesterday, the day before, or a week ago; finally, he will tell us

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CVP analysis in service and not-for-profit Problem for self-study 248

5 Estimating the costs of

6 Estimating the costs of

profitability  367 Advantages of budgets 468

10 Decision making and relevant

Sustainability in action: Cleaner production 5 Evaluating the balanced scorecard 683

18 Capital budgeting and Choosing the time period of the performance

19 Management control systems,

20 Performance measurement, TRY IT solutions 943

Madhav V. Rajan is the Robert K. Jaedicke Professor of Accounting at Stanford University’s

Hallmark features of Horngren’s Cost

Features retained from the first two

Revised chapter sequence

Revised chapter content

4 explain the meaning of

students can check their progress

towards achieving the learning The influence of professional accounting

in which managers might use management

accounting information for various decisions.

Real company vignettes open each

5 distinguish between inventoriable

features cover real-

issues across a variety of

industries in Australia and

a concept they have just

learned. Solutions are given

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M02_HORN2640_03_LT_C02.indd 43 8/25/17 12:57 PM

MyLab Accounting for Horngren’s Cost accounting: a managerial emphasis, 3e

Test and assignments:

MyLab Accounting www.pearsonmylabandmastering.com

Dr Gary R. Oliver, The University of Sydney

William Maguire, Rebecca Tan

4 Explain the meaning of

have limited or no impact as a management accountant or Chief Financial Officer (CFO).

Behavioural and technical considerations

Different costs for different purposes

Recognition of pending maternity—Peculiar beliefs in connection with the cause of

Old Kai-Kai, the leading medicine man of the western Arunndta.

2. Wongapitcha men wearing ornamental wooden hair-pins known

Much freedom given to children—Entertained and amused by parents—Taught

So soon as the child is able to walk and run, independently of its

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