(eBook PDF) Accounting for Decision

Making and Control 9th

Go to download the full and correct content document:
https://ebooksecure.com/product/ebook-pdf-accounting-for-decision-making-and-cont
rol-9th/
More products digital (pdf, epub, mobi) instant
download maybe you interests ...

(eBook PDF) Accounting for Decision Making and Control

10th Edition

http://ebooksecure.com/product/ebook-pdf-accounting-for-decision-
making-and-control-10th-edition/

(eBook PDF) Cost Accounting for Managerial Planning,

Decision Making and Control Sixth Edition

http://ebooksecure.com/product/ebook-pdf-cost-accounting-for-
managerial-planning-decision-making-and-control-sixth-edition/

(eBook PDF) Financial Accounting: Tools for Business

Decision Making, 9th Edition

http://ebooksecure.com/product/ebook-pdf-financial-accounting-
tools-for-business-decision-making-9th-edition/

(eBook PDF) (AUCM) Accounting For Decision Making 2e

http://ebooksecure.com/product/ebook-pdf-aucm-accounting-for-
decision-making-2e/
(eBook PDF) (AUCM) Accounting For Decision Making, 3rd
Edition

http://ebooksecure.com/product/ebook-pdf-aucm-accounting-for-
decision-making-3rd-edition/

(eBook PDF) Accounting Business Reporting for Decision

Making 6th

http://ebooksecure.com/product/ebook-pdf-accounting-business-
reporting-for-decision-making-6th/

(eBook PDF) Financial Accounting Tools for Business

Decision Making 8th

http://ebooksecure.com/product/ebook-pdf-financial-accounting-
tools-for-business-decision-making-8th/

(eBook PDF) Managerial Accounting Tools for Business

Decision Making 4th

http://ebooksecure.com/product/ebook-pdf-managerial-accounting-
tools-for-business-decision-making-4th/

(eBook PDF) Accounting: Business Reporting for Decision

Making 7th Edition

http://ebooksecure.com/product/ebook-pdf-accounting-business-
reporting-for-decision-making-7th-edition/
 Preface vii

Acknowledgments
William Vatter and George Benston motivated my interest in managerial accounting. The
genesis for this book and its approach reflect the oral tradition of my colleagues, past
and present, at the University of Rochester. William Meckling and Michael Jensen stimu-
lated my thinking and provided much of the theoretical structure underlying the book, as
anyone familiar with their work will attest. My long and productive collaboration with
Ross Watts sharpened my analytical skills and further refined the approach. He also fur-
nished most of the intellectual capital for Chapter 3, including the problem material. Ray
Ball has been a constant source of ideas. Clifford Smith and James Brickley continue to
enhance my economic education. Three colleagues, Andrew Christie, Dan Gode, and Scott
­Keating, ­supplied particularly insightful comments that enriched the analysis at critical
junctions. Valuable comments from Anil Arya, Ron Dye, Andy Leone, Dale Morse, Ram
Ramanan, K. Ramesh, Shyam Sunder, and Joseph Weintrop are gratefully acknowledged.
This project benefited greatly from the honest and intelligent feedback of n­ umerous
instructors. I wish to thank Mahendra Gupta, Susan Hamlen, Badr Ismail, Charles Kile,
Leslie Kren, Don May, William Mister, Mohamed Onsi, Ram Ramanan, Stephen Ryan,
Michael Sandretto, Richard Sansing, Deniz Saral, Gary Schneider, Joe Weber, and
­William Yancey. This book also benefited from two other projects with which I have been
involved. Writing Managerial Economics and Organizational Architecture (McGraw Hill
Education, 2016) with James Brickley and Clifford Smith and Management Accounting
in a Dynamic Environment (Routledge, 2016) with Cheryl McWatters helped me to better
understand how to present certain topics.
To the numerous students who endured the development process, I owe an enormous
debt of gratitude. I hope they learned as much from the material as I learned teaching them.
Some were even kind enough to provide critiques and suggestions, in particular Jan Dick
Eijkelboom. Others supplied, either directly or indirectly, the problem material in the text.
The able research assistance of P. K. Madappa, Eamon Molloy, Jodi Parker, Steve Sand-
ers, Richard Sloan, and especially Gary Hurst, contributed amply to the manuscript and
problem material. Janice Willett and Barbara Schnathorst did a superb job of editing the
manuscript and problem material.
The very useful comments and suggestions from the following reviewers are greatly
appreciated:

Urton Anderson William M. Cready Steven Huddart

Howard M. Armitage James M. Emig Robert Hurt
Vidya Awasthi Gary Fane Douglas A. Johnson
Kashi Balachandran Anita Feller Lawrence A. Klein
Da-Hsien Bao Tahirih Foroughi Thomas Krissek
Ron Barden Ivar Fris A. Ronald Kucic
Howard G. Berline Jackson F. Gillespie Daniel Law
Margaret Boldt Irving Gleim Chi-Wen Jevons Lee
David Borst Jon Glover Suzanne Lowensohn
Eric Bostwick Gus Gordon James R. Martin
Marvin L. Bouillon Sylwia Gornik-Tomaszewski Alan H. McNamee
Wayne Bremser Tony Greig Marilyn Okleshen
David Bukovinsky Susan Haka Shailandra Pandit
Linda Campbell Bert Horwitz Sam Phillips
viii Preface

Frank Probst Richard Saouma Clark Wheatley

Kamala Raghavan Arnold Schneider Lourdes F. White
William Rau Henry Schwarzbach Paul F. Williams
Jane Reimers Elizabeth J. Serapin Robert W. Williamson
Thomas Ross Norman Shultz Peggy Wright
Harold P. Roth James C. Stallman Jeffrey A. Yost
P. N. Saksena William Thomas Stevens S. Mark Young
Donald Samaleson Monte R. Swain
Michael J. Sandretto Heidi Tribunella

To my wife Dodie and daughters Daneille and Amy, thank you for setting the right
priorities and for giving me the encouragement and environment to be productive. Finally,
I wish to thank my parents for all their support.
Jerold L. Zimmerman
University of Rochester
 Brief Contents

1 Introduction 1
2 The Nature of Costs 22
3 Opportunity Cost of Capital and Capital Budgeting 85
4 Organizational Architecture 127
5 Responsibility Accounting and Transfer Pricing 161
6 Budgeting 216
7 Cost Allocation: Theory 280
8 Cost Allocation: Practices 327
9 Absorption Cost Systems 392
10 Criticisms of Absorption Cost Systems: Incentive to Overproduce 448
11 Criticisms of Absorption Cost Systems: Inaccurate Product Costs 483
12 Standard Costs: Direct Labor and Materials 538
13 Overhead and Marketing Variances 575
14 Management Accounting in a Changing Environment 609

Solutions to Concept Questions 655

Glossary 665
Index 675

ix
 Contents

1 Introduction  1
A. Managerial Accounting: Decision Making and Control   2
B. Design and Use of Cost Systems   4
C. Marmots and Grizzly Bears   8
D. Management Accountant’s Role in the Organization   9
E. Evolution of Management Accounting: A Framework for Change   12
F. Vortec Medical Probe Example   15
G. Outline of the Text   18
H. Summary  18

2 The Nature of Costs   22

A. Opportunity Costs  23
1. Characteristics of Opportunity Costs   24
2. Examples of Decisions Based on Opportunity Costs   24
B. Cost Variation  29
1. Fixed, Marginal, and Average Costs   29
2. Linear Approximations  31
3. Other Cost Behavior Patterns   33
4. Activity Measures  33
C. Cost–Volume–Profit Analysis  35
1. Copier Example  35
2. Calculating Break-Even and Target Profits   36
3. Limitations of Cost–Volume–Profit Analysis   39
4. Multiple Products  41
5. Operating Leverage  42
D. Opportunity Costs versus Accounting Costs   45
1. Period versus Product Costs   46
2. Direct Costs, Overhead Costs, and Opportunity Costs   46
E. Cost Estimation  48
1. Account Classification  49
2. Motion and Time Studies   49
F. Summary  49
Appendix: Costs and the Pricing Decision   50

3 Opportunity Cost of Capital and Capital Budgeting   85

A. Opportunity Cost of Capital   86
B. Interest Rate Fundamentals   89
1. Future Values  89
2. Present Values  90
x
Contents xi

3. Present Value of a Cash Flow Stream   91

4. Perpetuities  92
5. Annuities  93
6. Multiple Cash Flows per Year   94
C. Capital Budgeting: The Basics   96
1. Decision to Acquire an MBA   96
2. Decision to Open a Day Spa   97
3. Essential Points about Capital Budgeting   98
D. Capital Budgeting: Some Complexities   99
1. Risk  99
2. Inflation  100
3. Taxes and Depreciation Tax Shields   102
E. Alternative Investment Criteria   104
1. Payback  104
2. Accounting Rate of Return   105
3. Internal Rate of Return (IRR)   107
4. Methods Used in Practice   110
F. Summary  110

4 Organizational Architecture  127
A. Basic Building Blocks   128
1. Self-Interested Behavior, Team Production, and Agency Costs   128
2. Decision Rights and Rights Systems   133
3. Role of Knowledge and Decision Making   134
4. Markets versus Firms   135
5. Influence Costs  137
B. Organizational Architecture  139
1. Three-Legged Stool  139
2. Decision Management versus Decision Control   143
C. Accounting’s Role in the Organization’s Architecture   145
D. Example of Accounting’s Role: Executive Compensation Contracts   147
E. Summary  148

5 Responsibility Accounting and Transfer Pricing   161

A. Responsibility Accounting  162
1. Cost Centers  163
2. Profit Centers  165
3. Investment Centers  166
4. Economic Value Added (EVA®)  170
5. Controllability Principle  173
B. Transfer Pricing  175
1. International Taxation  175
2. Economics of Transfer Pricing   177
3. Common Transfer Pricing Methods   181
4. Reoragnization: The Solution if All Else Fails   186
5. Recap  186
C. Summary  188
xii Contents

6 Budgeting  216
A. Generic Budgeting Systems   219
1. Country Club  219
2. Large Corporation  222
B. Trade-Off between Decision Management and Decision Control   226
1. Communicating Specialized Knowledge versus Performance
Evaluation  226
2. Budget Ratcheting  227
3. Participative Budgeting  229
4. New Approaches to Budgeting   230
5. Managing the Trade-Off   232
C. Resolving Organizational Problems   233
1. Short-Run versus Long-Run Budgets   233
2. Line-Item Budgets  235
3. Budget Lapsing  236
4. Static versus Flexible Budgets   236
5. Incremental versus Zero-Based Budgets   239
D. Summary  241
Appendix: Comprehensive Master Budget Illustration   242

7 Cost Allocation: Theory   280

A. Pervasiveness of Cost Allocations   281
1. Manufacturing Organizations  283
2. Hospitals  284
3. Universities  284
B. Reasons to Allocate Costs   286
1. External Reporting/Taxes  286
2. Cost-Based Reimbursement  287
3. Decision Making and Control   288
C. Incentive/Organizational Reasons for Cost Allocations   289
1. Cost Allocations Are a Tax System   289
2. Taxing an Externality   290
3. Insulating versus Noninsulating Cost Allocations   296
D. Summary  299

8 Cost Allocation: Practices   327

A. Death Spiral  328
B. Allocating Capacity Costs: Depreciation   333
C. Allocating Service Department Costs   333
1. Direct Allocation Method   335
2. Step-Down Allocation Method   337
3. Service Department Costs and Transfer Pricing of Direct
and Step-Down Methods   339
4. Reciprocal Allocation Method   342
5. Recap  344
D. Joint Costs  344
Contents xiii

1. Joint Cost Allocations and the Death Spiral   346

2. Net Realizable Value   348
3. Decision Making and Control   352
E. Segment Reporting and Joint Benefits   353
F. Summary  354
Appendix: Reciprocal Method for Allocating Service Department Costs   354

9 Absorption Cost Systems   392

A. Job Order Costing   394
B. Cost Flows through the T-Accounts   396
C. Allocating Overhead to Jobs   398
1. Overhead Rates  398
2. Over/Underabsorbed Overhead  400
3. Flexible Budgets to Estimate Overhead   403
4. Expected versus Normal Volume   406
D. Permanent versus Temporary Volume Changes   410
E. Plantwide versus Multiple Overhead Rates   411
F. Process Costing: The Extent of Averaging   415
G. Summary  416
Appendix A: Process Costing   416
Appendix B: Demand Shifts, Fixed Costs, and Pricing   422

10 Criticisms of Absorption Cost Systems:

Incentive to Overproduce   448
A. Incentive to Overproduce   450
1. Example  450
2. Reducing the Overproduction Incentive   453
B. Variable (Direct) Costing   454
1. Background  454
2. Illustration of Variable Costing   454
3. Overproduction Incentive under Variable Costing   457
C. Problems with Variable Costing   458
1. Classifying Fixed Costs as Variable Costs   458
2. Variable Costing Excludes the Opportunity Cost of Capacity   460
D. Beware of Unit Costs   461
E. Summary  463

11 Criticisms of Absorption Cost Systems: Inaccurate

Product Costs  483
A. Inaccurate Product Costs   484
B. Activity-Based Costing  488
1. Choosing Cost Drivers   489
2. Absorption versus Activity-Based Costing: An Example   495
C. Analyzing Activity-Based Costing   499
1. Reasons for Implementing Activity-Based Costing   499
2. Benefits and Costs of Activity-Based Costing   501
3. ABC Measures Costs, Not Benefits   503
D. Acceptance of Activity-Based Costing   505
E. Summary  509
xiv Contents

12 Standard Costs: Direct Labor and Materials   538

A. Standard Costs  539
1. Reasons for Standard Costing   540
2. Setting and Revising Standards   541
3. Target Costing  545
B. Direct Labor and Materials Variances   546
1. Direct Labor Variances   546
2. Direct Materials Variances   550
3. Risk Reduction and Standard Costs   554
C. Incentive Effects of Direct Labor and Materials Variances   554
1. Build Inventories  555
2. Externalities  555
3. Discouraging Cooperation  556
4. Mutual Monitoring  556
5. Satisficing  556
D. Disposition of Standard Cost Variances   557
E. The Costs of Standard Costs   559
F. Summary  561

13 Overhead and Marketing Variances   575

A. Budgeted, Standard, and Actual Volume   576
B. Overhead Variances  579
1. Flexible Overhead Budget   579
2. Overhead Rate  580
3. Overhead Absorbed  581
4. Overhead Efficiency, Volume, and Spending Variances   581
5. Graphical Analysis  585
6. Inaccurate Flexible Overhead Budget   587
C. Marketing Variances  588
1. Price and Quantity Variances   588
2. Mix and Sales Variances   589
D. Summary  591

14 Management Accounting in a Changing Environment   609

A. Integrative Framework  610
1. Organizational Architecture  611
2. Business Strategy  612
3. Environmental and Competitive Forces Affecting Organizations   615
4. Implications  615
B. Organizational Innovations and Management Accounting   616
1. Total Quality Management (TQM)   616
2. Just-in-Time (JIT) Production   621
3. Six Sigma and Lean Production   624
4. Balanced Scorecard  626
C. When Should the Internal Accounting System Be Changed?   632
D. Summary  633
Solutions to Concept Questions   655
Glossary  665
Index  675
Chapter One

Introduction
Chapter Outline
A. Managerial Accounting: Decision Making
and Control
B. Design and Use of Cost Systems
C. Marmots and Grizzly Bears
D. Management Accountant’s Role in the
Organization
E. Evolution of Management Accounting:
A Framework for Change
F. Vortec Medical Probe Example
G. Outline of the Text
H. Summary

1
2 Chapter 1

A. Managerial Accounting: Decision Making and Control

Managers at Hyundai must decide which car models to produce, the quantity of each
model to produce given the selling prices for the models, and how to manufacture the
automobiles. They must decide which car parts, such as headlight assemblies, Hyundai
should manufacture internally and which parts should be outsourced. They must decide
not only on advertising, distribution, and product positioning to sell the cars, but also the
quantity and quality of the various inputs to use. For example, they must determine which
models will have leather seats and the quality of the leather to be used. Similarly, in decid-
ing which investment projects to accept, capital budgeting analysts require data on future
cash flows. How are these numbers derived? How does one coordinate the activities of
hundreds or thousands of employees in the firm so that these employees accept senior
management’s leadership? At Hyundai, and at other organizations small and large, manag-
ers must have good information to make all these decisions and the leadership abilities to
get others to implement the decisions.
Information about firms’ future costs and revenues is not readily available but must be
estimated by managers. Organizations must obtain and disseminate the knowledge to make
these decisions. Organizations’ internal information systems provide some of the knowledge
for these pricing, production, capital budgeting, and marketing decisions. These systems
range from the informal and the rudimentary to very sophisticated, electronic management
information systems. The term information system should not be interpreted to mean a
single, integrated system. Most information systems consist not only of formal, organized,
tangible records such as payroll and purchasing documents but also informal, intangible bits
of data such as memos, special studies, and managers’ impressions and opinions. The firm’s
information system also contains nonfinancial information such as customer and employee
satisfaction surveys. As firms grow from single proprietorships to large global corporations
with tens of thousands of employees, managers lose the knowledge of enterprise affairs
gained from personal, face-to-face contact in daily operations. Higher-level managers of
larger firms come to rely more and more on formal operating reports.
The internal accounting system, an important component of a firm’s information
system, includes budgets, data on the costs of each product and current inventory, and
periodic financial reports. In many cases, especially in small companies, these accounting
reports are the only formalized part of the information system providing the knowledge
for decision making. Many larger companies have other formalized, nonaccounting–based
information systems, such as production planning systems. This book focuses on how
internal accounting systems provide knowledge for decision making.
After making decisions, managers must implement them in organizations in which
the interests of the employees and the owners do not necessarily coincide. Just because
senior managers announce a decision does not necessarily ensure that the decision will be
implemented.
Organizations do not have objectives; people do. One common objective of owners of
the organization is to maximize profits, or the difference between revenues and expenses.
Maximizing firm value is equivalent to maximizing the stream of profits over the organiza-
tion’s life. Employees, suppliers, and customers also have their own objectives—usually
maximizing their self-interest.
Not all owners care only about monetary flows. An owner of a professional sports
team might care more about winning (subject to covering costs) than maximizing profits.
Nonprofits do not have owners with the legal rights to the organization’s profits. ­Moreover,
nonprofits seek to maximize their value by serving some social goal such as education or
health care.
Introduction 3

No matter what the firm’s objective, the organization will survive only if its inflow of
resources (such as revenue) is at least as large as the outflow. Accounting information is
useful to help manage the inflow and outflow of resources and to help align the owners’
and employees’ interests, no matter what objectives the owners wish to pursue.
Throughout this book, we assume that individuals maximize their self-interest. The
owners of the firm usually want to maximize profits, but managers and employees will do
so only if it is in their interest. Hence, a conflict of interest exists between owners—who,
in general, want higher profits—and employees—who want easier jobs, higher wages, and
more fringe benefits. To control this conflict, senior managers and owners design systems
to monitor employees’ behavior and incentive schemes that reward employees for generat-
ing more profits. Not-for-profit organizations face similar conflicts. Those people responsi-
ble for the nonprofit organization (boards of trustees and government officials) must design
incentive schemes to motivate their employees to operate the organization efficiently.
All successful firms must devise mechanisms that help align employee interests with
maximizing the organization’s value. All of these mechanisms constitute the firm’s control
system; they include performance measures and incentive compensation systems, promo-
tions, demotions, and terminations, security guards and video surveillance, internal audi-
tors, and the firm’s internal accounting system.1
As part of the firm’s control system, the internal accounting system helps align the
interests of managers and shareholders to cause employees to maximize firm value. It
sounds like a relatively easy task to design systems to ensure that employees maximize
firm value. But a significant portion of this book demonstrates the exceedingly complex
nature of aligning employee interests with those of the owners.
Internal accounting systems serve two purposes: (1) to provide some of the knowledge
necessary for planning and making decisions (decision making) and (2) to help motivate
and monitor people in organizations (control). The most basic control use of accounting is
to prevent fraud and embezzlement. Maintaining inventory records helps reduce employee
theft. Accounting budgets, discussed more fully in Chapter 6, provide an example of both
decision making and control. Asking each salesperson in the firm to forecast his or her sales
for the upcoming year is useful for planning next year’s production (decision making).
However, if the salesperson’s sales forecast is used to benchmark performance for compen-
sation purposes (control), he or she has strong incentives to underestimate those forecasts.
Using internal accounting systems for both decision making and control gives rise to
the fundamental trade-off in these systems: A system cannot be designed to perform two
tasks as well as a system that must perform only one task. Some ability to deliver knowl-
edge for decision making is usually sacrificed to provide better motivation (control). The
trade-off between providing knowledge for decision making and motivation/control arises
continually throughout this text.
This book is applications oriented: It describes how the accounting system assembles
knowledge necessary for implementing decisions using the theories from microeconomics,
finance, operations management, and marketing. It also shows how the accounting system
helps motivate employees to implement these decisions. Moreover, it stresses the continual
trade-offs that must be made between the decision making and control functions of a­ ccounting.

1
Control refers to the process that helps “ensure the proper behaviors of the people in the organization.
These behaviors should be consistent with the organization’s strategy,” as noted in K. Merchant, Control in
Business Organization (Boston: Pitman Publishing Inc., 1985), p. 4. Merchant provides an extensive ­
discussion of control systems and a bibliography. In Theory of Accounting and Control (Cincinnati,
OH: South-Western Publishing Company, 1997), S. Sunder describes control as mitigating and resolving
­conflicts among ­employees, owners, suppliers, and customers that threaten to pull organizations apart.
4 Chapter 1

A survey of senior-level executives (chief financial officers, vice presidents of finance,

controllers, etc.) asked them to rank the importance of various goals of their firm’s account-
ing system. Eighty percent of the respondents reported that cost management (controlling
costs) was a significant goal of their accounting system and was important to achieving
their company’s overall strategic objective. Another top priority of their firm’s account-
ing system, even higher than cost management or strategic planning, is internal reporting
and performance evaluation. These results indicate that firms use their internal accounting
system both for decision making (strategic planning, cost reduction, financial manage-
ment) and for controlling behavior (internal reporting and performance evaluation).2
The firm’s accounting system is very much a part of the fabric that helps hold the
organization together. It provides knowledge for decision making, and it provides informa-
tion for evaluating and motivating the behavior of individuals within the firm. Being such
an integral part of the organization, the accounting system cannot be studied in isolation
from the other mechanisms used for decision making or for reducing organizational prob-
lems. A firm’s internal accounting system should be examined from a broad perspective,
as part of the larger organization design question facing managers.
This book uses an economic perspective to study how accounting can motivate and
control behavior in organizations. Besides economics, a variety of other paradigms also are
used to investigate organizations: scientific management (Taylor), the bureaucratic school
(Weber), the human relations approach (Mayo), human resource theory (Maslow, ­Rickert,
Argyris), the decision-making school (Simon), and the political science school (Selznick).
Behavior is a complex topic. No single theory or approach is likely to capture all the
­elements. However, understanding managerial accounting requires addressing the behav-
ioral and organizational issues. Economics offers one useful and widely adopted framework.

B. Design and Use of Cost Systems

Managers make decisions and monitor subordinates who make decisions. Both manag-
ers and accountants must acquire sufficient familiarity with cost systems to perform their
jobs. Accountants (often called controllers) are charged with designing, improving, and
operating the firm’s accounting system—an integral part of both the decision-making and
performance evaluation systems. Both managers and accountants must understand the
strengths and weaknesses of current accounting systems. Internal accounting systems,
like all s­ ystems within the firm, are constantly being refined and modified. Accountants’
responsibilities include making these changes.
An internal accounting system should have the following characteristics:
1. Provide the information necessary to assess the profitability of products or
­services and to optimally price and market these products or services.
2. Provide information to detect production inefficiencies to ensure that the
­proposed products and volumes are produced at minimum cost.
3. When combined with the performance evaluation and reward systems, create
incentives for managers to maximize firm value.
4. Support the financial accounting and tax accounting reporting functions. (In some
instances, these latter considerations dominate the first three.)
5. Contribute more to firm value than it costs.

2
Ernst & Young and IMA, “State of Management Accounting,” www.imanet.org/pdf/SurveyofMgtAcctingEY
.pdf, 2003.
 Introduction 5

FIGURE 1–1
Taxing Board of
The multiple role of Regulation
Authorities Directors
accounting systems

IRS & Foreign Regulatory Senior Management

Tax Authorities Authorities Compensation Plans

External Debt
Shareholders SEC/FASB Bondholders
Reports Covenants

Accounting
System

Internal
Reports

Control of
Decision
Organizational
Making
Problems

Figure 1–1 portrays the functions of the accounting system. In it, the accounting
system supports both external and internal reporting systems. Examine the top half of
Figure 1–1. The accounting procedures chosen for external reports to shareholders and
taxing authorities are dictated in part by regulators. In the United States, the Securities
and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB)
regulate the financial statements issued to shareholders. The Internal Revenue Service
(IRS) administers the a­ ccounting procedures used in calculating corporate income taxes. If
the firm is involved in international trade, foreign tax authorities prescribe the accounting
rules applied in c­ alculating foreign taxes. Regulatory agencies constrain public utilities’
and financial institutions’ ­accounting procedures.
Management compensation plans and debt contracts often rely on external reports.
Senior managers’ bonuses are often based on accounting net income. Likewise, if the firm
issues long-term bonds, it agrees in the debt covenants not to violate specified accounting-
based constraints. For example, the bond contract might specify that the debt-to-equity
ratio will not exceed some limit. Like taxes and regulation, compensation plans and debt
covenants create incentives for managers to choose particular accounting procedures.3
As firms expand into international markets, external users of the firm’s financial state-
ments become global. No longer are the firm’s shareholders, tax authorities, and regula-
tors domestic. Rather, the firm’s internal and external reports are used internationally in a
variety of ways.
The bottom of Figure 1–1 illustrates that internal reports are used for decision making
as well as control of organizational problems. As discussed earlier, managers use a vari-
ety of sources of data for making decisions. The internal accounting system provides one

3
For further discussion of the incentives of managers to choose accounting methods, see R. Watts and
J. Zimmerman, Positive Accounting Theory (Englewood Cliffs, NJ: Prentice Hall, 1986).
6 Chapter 1

Managerial Multiple accounting systems are confusing and can lead to errors. An extreme example
Application: of this occurred in 1999 when NASA lost its $125 million Mars spacecraft. Engineers
Spaceship at Lockheed Martin built the spacecraft and specified the spacecraft’s thrust in English
Lost Because pounds. But NASA scientists, navigating the craft, assumed the information was in
Two Mea- metric newtons. As a result, the spacecraft was off course by 60 miles as it approached
sures Used Mars and crashed. When two systems are being used to measure the same underlying
event, people can forget which system is being used.
SOURCE: A. Pollack, “Two Teams, Two Measures Equaled One Lost Spacecraft,” The New York Times. October 1, 1999, p. 1.

i­mportant source. These internal reports are also used to evaluate and motivate (control)
the behavior of managers in the firm. The internal accounting system reports on manag-
ers’ performance and therefore provides incentives for them. Any changes to the internal
accounting system can affect all the various uses of the resulting accounting numbers.
The internal and external reports are closely linked. The internal accounting system
affords a more disaggregated view of the company. These internal reports are generated
more frequently, usually monthly or even weekly or daily, whereas the external reports
are provided quarterly for publicly traded U.S. companies. The internal reports offer costs
and profits by specific products, customers, lines of business, and divisions of the com-
pany. For example, the internal accounting system computes the unit cost of individual
products as they are produced. These unit costs are then used to value the work-in-process
and ­finished goods inventory, and to compute cost of goods sold. Chapter 9 describes the
details of product costing.
Because internal accounting systems serve multiple users and have several purposes,
the firm employs either multiple systems (one for each function) or one basic system that
serves all three functions (decision making, performance evaluation, and external report-
ing). Firms can either maintain a single set of books and use the same accounting methods
for both internal and external reports, or they can keep multiple sets of books. The decision
depends on the costs of writing and maintaining contracts based on accounting numbers,
the costs from the dysfunctional internal decisions made using a single system, the addi-
tional bookkeeping costs arising from the extra system, and the confusion of having to
reconcile the different numbers arising from multiple accounting systems.
Inexpensive accounting software packages and falling costs of information technol-
ogy have reduced some of the costs of maintaining multiple accounting systems. However,
confusion arises when the systems report different numbers for the same concept. For
example, when one system reports the manufacturing cost of a product as $12.56 and
another system reports it at $17.19, managers wonder which system is producing the
“right” number. Some managers may be using the $12.56 figure while others are using
$17.19, causing inconsistency and uncertainty. Whenever two numbers for the same con-
cept are produced, the natural tendency is to explain (i.e., reconcile) the differences.
­Managers involved in this reconciliation could have used this time in more productive
ways. Also, using the same accounting system for multiple purposes increases the
­credibility of the financial reports for each purpose.4 With only one accounting system,
the ­external auditor monitors the internal reporting system at little or no additional cost.

4
A. Christie, “An Analysis of the Properties of Fair (Market) Value Accounting,” in Modernizing U.S.
S­ ecurities Regulation: Economic and Legal Perspectives, K. Lehn and R. Kamphuis, eds. (Pittsburgh, PA:
­University of Pittsburgh, Joseph M. Katz Graduate School of Business, 1992).
 Introduction 7

Historical “. . . cost accounting has a number of functions, calling for different, if not inconsistent,
Application: information. As a result, if cost accounting sets out, determined to discover what the
Different cost of everything is and convinced in advance that there is one figure which can be
Costs for found and which will furnish exactly the information which is desired for every pos-
Different sible purpose, it will necessarily fail, because there is no such figure. If it finds a figure
Purposes which is right for some purposes it must necessarily be wrong for others.”
SOURCE: J. Clark, Studies in the Economics of Overhead Cost. (Chicago: University of Chicago Press, 1923), p. 234.

Interestingly, a survey of large U.S. firms found that managers typically use the same
accounting procedures for both external and internal reporting. More than 80 percent of
chief financial officers (CFOs) report using the same accounting methods and report the
same earnings internally and externally. In other words, most firms use “one number” for
both external and internal communications. One CFO stated, “We make sure that every-
thing that we have underneath—in terms of the detailed reporting—also rolls up basically
to the same story that we’ve told externally.”5 Nothing prevents firms from using separate
accounting systems for internal decision making and internal performance evaluation
except the confusion generated and the extra data processing costs.
Probably the most important reason firms use a single accounting system is it allows
reclassification of the data. An accounting system does not present a single, bottom-line num-
ber, such as the “cost of publishing this textbook.” Rather, the system reports the components
of the total cost of this textbook: the costs of proofreading, typesetting, paper, binding, cover,
and so on. Managers in the firm then reclassify the information on the basis of different attri-
butes and derive different cost numbers for different decisions. For example, if the publisher
is considering translating this book into Chinese, not all the components used in calculating
the U.S. costs are relevant. The Chinese edition might be printed on different paper stock with
a different cover. The point is, a single accounting system usually offers enough flexibility for
managers to reclassify, recombine, and reorganize the data for multiple purposes.
A single internal accounting system requires the firm to make trade-offs. A system
that is best for performance measurement and control is unlikely to be the best for decision
making. It’s like configuring a motorcycle for both off-road and on-road racing: Riders on
bikes designed for both racing conditions probably won’t beat riders on specialized bikes
designed for just one type of racing surface. Wherever a single accounting system exists,
additional analyses arise. Managers making decisions find the accounting system less useful
and devise other systems to augment the accounting numbers for decision-making purposes.

Concept Q1–1 What causes the conflict between using internal accounting
Questions systems for decision making and control?
Q1–2 Describe the different kinds of information provided by the
internal accounting system.
Q1–3 Give three examples of the uses of an accounting system.
Q1–4 List the characteristics of an internal accounting system.
Q1–5 Do firms have multiple accounting systems? Why or why not?

5
Dichev, I.D., Graham, J.R., Campbell, H., and Rajgopal, S., 2013. “Earnings quality: evidence from the
field,” Journal of Accounting and Economics, 56 (2–3), pp. 1–33.
8 Chapter 1

C. Marmots and Grizzly Bears

Managers often criticize accounting’s usefulness for making pricing or outsourcing deci-
sions. Accounting data are based on historical costs rather than current values, and hence
contain stale information. Why then do managers persist in using (presumably inferior)
accounting information?
Before addressing this question, consider the parable of the marmots and the grizzly
bears.6 Marmots are small groundhogs that are a principal food source for certain bears.
Zoologists studying the ecology of marmots and bears observed bears digging and moving
rocks in the autumn in search of marmots. They estimated that the calories expended
searching for marmots exceeded the calories obtained from their consumption. A zoologist
relying on Darwin’s theory of natural selection might conclude that searching for marmots
is an inefficient use of the bear’s limited resources and thus these bears should become
­extinct. But fossils of marmot bones near bear remains suggest that bears have been search-
ing for marmots for tens of thousands of years.
Because the bears survive, the benefits of consuming marmots must exceed the costs.
Bears’ claws might be sharpened as a by-product of the digging involved in hunting for
marmots. Sharp claws are useful in searching for food under the ice after winter’s hiberna-
tion. Therefore, the benefit of sharpened claws and the calories derived from the marmots
offset the calories consumed gathering the marmots.
What does the marmot-and-bear parable say about why managers persist in using
apparently inferior accounting data in their decision making? As it turns out, the marmot-
and-bear parable is an extremely important proposition in the social sciences known as
economic Darwinism. In a competitive world, if surviving organizations use some oper-
ating procedure (such as historical cost accounting) over long periods of time, then this
­procedure likely yields benefits in excess of its costs. Firms survive in competition by
selling goods or services at lower prices than their competitors while still covering costs.
Firms cannot survive by making more mistakes than their competitors.7

Terminology: Benchmarking is defined as a “process of continuously comparing and measur-

Benchmark- ing an organization’s business processing against business leaders anywhere in the
ing and world to gain information which will help the organization take action to improve its
Economic performance.”
Darwinism Economic Darwinism predicts that successful firm practices will be imitated.
Benchmarking is the practice of imitating successful business practices. The practice
of benchmarking dates back to 607, when Japan sent teams to China to learn the best
practices in business, government, and education. Today, most large firms routinely
conduct benchmarking studies to discover the best business practices and then imple-
ment them in their firms.
SOURCE: Society of Management Accountants of Canada, Benchmarking: A Survey of Canadian Practice (Hamilton,
Ontario, Canada, 1994).

6
This example is suggested by J. McGee, “Predatory Pricing Revisited,” Journal of Law & Economics.
XXIII (October 1980), pp. 289–330.
7
See A. Alchian, “Uncertainty, Evolution and Economic Theory,” Journal of Political Economy. 58
(June 1950), pp. 211–21.
 Introduction 9

Economic Darwinism suggests that in successful (surviving) firms, things should not
be fixed unless they are clearly broken. Currently, considerable attention is being directed
at revising and updating firms’ internal accounting systems because many managers
believe their current accounting systems are “broken” and require major overhaul. Alter-
native internal accounting systems are being proposed, among them activity-based costing
(ABC), balanced scorecards, economic value added (EVA), and Lean accounting ­systems.
These systems are discussed and analyzed later in terms of their ability to help managers
make better decisions, as well as to help provide better measures of performance for man-
agers in organizations, thereby aligning managers’ and owners’ interests.
Although internal accounting systems may appear to have certain inconsistencies with
some particular theory, these systems (like the bears searching for marmots) have survived
the test of time and therefore are likely to be yielding unobserved benefits (like claw sharp-
ening). This book discusses these additional benefits. Two caveats must be raised concern-
ing too strict an application of economic Darwinism:
1. Some surviving operating procedures can be neutral mutations. Just because a
system survives does not mean that its benefits exceed its costs. Benefits less
costs might be close to zero.
2. Just because a given system survives does not mean it is optimal. A better system
might exist but has not yet been discovered.
The fact that most managers use their accounting system as the primary formal infor-
mation system suggests that these accounting systems are yielding total benefits that
exceed their total costs. These benefits include financial and tax reporting, providing infor-
mation for decision making, and creating internal incentives. The proposition that surviv-
ing firms have efficient accounting systems does not imply that better systems do not exist,
only that they have not yet been discovered. It is not necessarily the case that what is, is
optimal. Economic Darwinism helps identify the costs and benefits of alternative internal
accounting systems and is applied repeatedly throughout the book.

Historical The well-known Italian Medici family had extensive banking interests and owned tex-
Application: tile plants in the fifteenth and sixteenth centuries. They also used sophisticated cost
Sixteenth- records to maintain control of their cloth production. These cost reports contained
Century detailed data on the costs of purchasing, washing, beating, spinning, and weaving the
Cost Records wool, of supplies, and of overhead (tools, rent, and administrative expenses). Modern
costing methodologies closely resemble these fifteenth-century cost systems, suggest-
ing they yield benefits in excess of their costs.
SOURCE: P. Garner, Evolution of Cost Accounting to 192. (Montgomery, AL: University of Alabama Press, 1954), pp.
12–13. Original source R de Roover, “A Florentine Firm of Cloth Manufacturers,” Speculu. XVI (January 1941), pp. 3–33.

D. Management Accountant’s Role in the Organization

To better understand internal accounting systems, it is useful to describe how firms orga-
nize their accounting functions. No single organizational structure applies to all firms.
­Figure 1–2 presents one common organization chart. The design and operation of the
internal and external accounting systems are the responsibility of the firm’s chief financial
­officer. The firm’s line-of-business or functional areas, such as marketing, manufacturing,
10 Chapter 1

FIGURE 1–2
Board of Directors
Organization
chart for a typical
corporation
President and Chief
Executive Officer (CEO)

Operating Human Chief Financial

Legal Other
Divisions Resources Officer (CFO)

Controller–
Internal
Operating Treasury Controller
Audit
Divisions

Financial Cost
Tax
Reporting Accounting

and research and development, are combined and shown under a single organization, “oper-
ating divisions.” The remaining staff and administrative functions include human resources,
chief financial officer, legal, and other. In Figure 1–2, the CFO oversees all the financial
and accounting functions in the firm and reports directly to the president. The CFO’s three
major functions include controllership, treasury, and internal audit. Controllership involves
tax administration, the internal and external accounting reports (including statutory filings
with the Securities and E­ xchange Commission if the firm is publicly traded), and the plan-
ning and control systems (including budgeting). Treasury involves short- and long-term
financing, banking, credit and collections, investments, insurance, and capital budgeting.
Depending on their size and structure, firms organize these functions differently. F
­ igure 1–2
shows the internal audit group reporting directly to the CFO. In other firms, internal audit
reports to the controller, the chief executive officer (CEO), or the board of directors.
The controller is the firm’s chief management accountant and is responsible for data
collection and reporting. The controller compiles the data to prepare the firm’s balance
sheet, income statement, and tax returns. In addition, this person prepares the internal
reports for the various divisions and departments within the firm and helps the other man-
agers by providing them with the data necessary to make decisions—as well as the data
necessary to evaluate these managers’ performance.
Usually, each operating division or department has its own controller. For example, if
a firm has several divisions, each division has its own division controller, who reports to
both the division manager and the corporate controller. In Figure 1–2, the operating divi-
sions have their own controllers. The division controller provides the corporate controller
with periodic reports on the division’s operations. The division controller oversees the
division’s budgets, payroll, inventory, and product costing system (which reports the cost
of the division’s products and services). While most firms have division-level controllers,
some firms centralize these functions to reduce staff so that all the division-level controller
functions are performed centrally out of corporate headquarters.
The controllership function at the corporate, division, and plant levels involves assist-
ing decision making and control. The controller must balance providing information to
other managers for decision making against providing monitoring information to top exec-
utives for use in controlling the behavior of lower-level managers.
Another random document with
no related content on Scribd:
Some four or five weeks had passed quietly over the heads
of our friends since the events recorded in our last chapter.

Master Fleming had returned to London, carrying with him

the thanks and blessings of all the poor in Bridgewater, and
of all whom he had led into the knowledge of the Scriptures
and the way of life. Dame Barbara continued her school,
now as large as she could manage.

Jack had made more than one journey to Holford to visit his
uncle and Arthur, between whom and himself had grown up
a warm and intimate friendship. This friendship, though
approved by Sir John, was not viewed with altogether
favorable eyes either by my lady or Master Lucas. My lady,
though she acknowledged the obligations of the family to
Jack, nevertheless thought it rather beneath her son's
dignity to be so familiar with the son of a citizen; and
Master Lucas, who was fully as proud in his way as my lady
was in hers, did not like to have Jack visit at a house where
he was likely to be looked upon as a presumptuous intruder.

However, Arthur's mother was inclined to treat her son with

every indulgence, so long as he continued in his present
weak state, and, though she gently mourned over the
degeneracy of the times which made such a friendship
possible, and was sometimes more condescending in her
kindness to Jack than was altogether pleasant, still she was
kind, and, moreover, acknowledged that the young man had
parts and breeding which would not disgrace any station.

It may be guessed that Jack and Arthur never wanted for

topics of conversation. Arthur had lived a roving and
somewhat wild life for two or three years after he went
abroad, till he at last fell dangerously ill at Antwerp. Alone
in a strange place, without money and without friends, he
was likely to fare badly; when he was found out by those
two eminent saints and confessors, Frith and Lambert, then
engaged in distributing and preaching the Word of God
among their own countrymen abroad. By them Arthur was
fed and nursed and cared for till he recovered his health,
and by them was he led to see what was the root of all his
troubles, to renounce the errors in which he had been
brought up, and to profess the truth.

Arthur had naturally a quick and strong mind and a warm

heart. He studied eagerly and earnestly, and by the time he
was able to be about again, he was fully grounded in the
new doctrines. He was desirous of undertaking some useful
work to show his thankfulness and sincerity, and taking with
him a package of Testaments and tracts, he travelled from
city to city and from village to village distributing the seed
of truth, especially among his own countrymen.

Moved by the arguments and solicitations of his friend Frith,

he at last became convinced that it was his duty to return
and make his submission to his father; and he determined
to do so, though sorely in doubt about his reception, for his
father was a proud man, and it was a boast of the Brydges
that no heir of the family had ever brought disgrace upon it.

It was at Brussels, on his way home, that Arthur Brydges

was betrayed by one who had come to him pretending to be
in want of an English Testament. This man had been in
trouble, himself, as a Lutheran, had abjured his so-called
errors, and was now endeavoring to atone for them by
making himself serviceable as a spy. His former connection
with English Protestants enabled him to assume the
character to perfection, and perhaps Arthur in his zeal was
not so careful as he should have been.
At any rate, he fell into the trap, went as he supposed with
his new friend to a secret assembly of Protestants, and
found himself in a dungeon of the Inquisition, from which
he hardly escaped with life, by the connivance of an English
priest who was not yet lost to all feeling of humanity or
patriotism.

"The base hound—the infamous, cowardly traitor!"

exclaimed Master Lucas when he heard the story. "Did he
betray his own countryman to death, and that under the
guise of friendship? I would go all the way to Bristol on foot
to see him hanged."

"There have been worse cases than this," said Arthur;

"cases in which the brother has literally betrayed the
brother to death, and the father the son. Nay, I knew of one
in which a brother informed against his own twin sister, and
believed he was doing God service."

"Such things seem impossible," said Master Lucas. "I

wonder what his parents said."

"They may have approved," said Anne, bending closely over

her work as she spoke. "If the sister were an heretic and a
blasphemer, the brother's duty to the Church—"

"Tell me not of duty to the Church!" interrupted the baker.

"I say the man was a villain, unfit to live, not worthy of the
name of hound, since even brutes know the ties of affection
and friendship. Why, the very old cat there, thief that she is,
would fight to the death for her kittens. But here I am
growing as hot as one of mine own ovens," said he, wiping
his forehead and smiling at his own vehemence. "Only,
Anne, thou shouldst not vex thine old father by taking the
contrary side."
After Arthur had gone, the story of his adventures was
talked over at the table, and Master Lucas again vented his
indignation against the cowardly spy who had betrayed
Arthur, and against spies and traitors in general.

"If it had been my son who had done such a thing, I would
never see him more."

"Suppose it were your own son who was a heretic?" said

Anne.

"That is a different matter," replied the baker. "It would be a

great misfortune, and much to be deplored, but it would not
be a base and traitorous action like the other. Nay, I could
forgive heresy—the wildest heresy—in a man, sooner than
treachery."

"I do not see the treachery," said Anne. "If he warned his
sister beforehand what he was going to do, in case she
persisted in her error as you call it, she had no cause of
complaint. His duty as a Christian stood before his duty to
his family, or any other carnal and fleshly ties. I think he did
right," said Anne, flushing as she spoke. "I do not see how
he could do otherwise."

"Would you, then, do so?" asked Sister Barbara.

"I would," replied Anne. "I should think it my duty."

"Then wouldst thou never again enter thy father's door or

receive his blessing!" exclaimed Master Lucas, striking the
table with his fist so that the dishes jingled. "Never would I
see again a child capable of playing such a villainous part.
My curse—"

"Dear father!" exclaimed Jack, laying his hand entreatingly

on his father's arm. "My dear good father, do not be angry
with Anne. She would never do anything to forfeit your
blessing, I am sure."

"I beg, Jack, that you will not interfere," said Anne, who
seemed bent upon raising a storm. "It does not become you
to meddle. Let my father say his will."

"My will is to bid thee hold thy tongue, for a malapert

contrary wench as thou art, and not provoke thy old father
to make a fool of himself, or bring on a fit of apoplexy," said
Master Lucas, making an effort to control himself and speak
in his usual pleasant tone. "Reach me a cup of cool water,
my son. It was an evil day that I sent my daughter to a
nunnery to learn to despise the honest and natural ties of
blood and childly duty among a parcel of fantastic and
bigoted old maids—craving your pardon, madam," he
added, turning to Sister Barbara. "But it is enough to make
a man a heretic in spite of himself, to hear one's own child
upholding such notions to one's face. I verily believe more
heretics are made by the priests than by any one else."

"I wonder what my lady says to Arthur's new notions," said

Sister Barbara. "She used to be very strict lady about such
matters."

"She was greatly grieved and shocked at first," said Jack;

"but she is becoming more reconciled of late, and, I believe,
she has never shown Arthur any unkindness in respect of
them."

"Well, I don't wish Master Arthur any ill, but I wish he and
our Jack were not so intimate," remarked Cicely. "The next
thing we shall have Jack, himself, infected with Lutheran
notions. They say Father William has come round to be an
out-and-out Gospeller, and is all for having folk read the
Scripture for themselves. Not that I see why the Gospellers
are to be blamed for that," added Cicely simply. "Because,
of course, if it were the true Bible, the more they read it,
the more devout Catholics they would be."

Jack and Sister Barbara both smiled.

"Father William has been nothing else but a heretic this long
time," said Anne angrily. "I am glad if he has at last had
honesty enough to confess it."

"Heretic or not, he is one of the best men that ever

breathed," said Master Lucas. "One cannot but think there
must be something in these new doctrines, since such men
as he are carried away by them. Jack, are you for riding out
to the Priory Mills with me? I have some business with the
miller there, and the afternoon is fine."

Jack accepted the invitation with alacrity, thinking he saw

an opening for the confidential conversation he had been
longing to hold with his father for some days past. The
burden of secrecy had been troubling him more and more,
of late, and he had determined at last, that, come of it what
would, he would bear it no longer. He hastened to make
himself ready, and, as he was descending the stairs, he was
beckoned by Sister Barbara.

"Jack," said she, "I cannot but think I am playing a deceitful

part by your good father. I cannot think it is right to go on
so. I shall grieve to leave the shelter of this roof where I
have been so happy—where I have first learned the
meaning of the word home," said the good lady, her eyes
filling with tears; "but it is not right to expose your father to
the dangers which may arise from harboring a heretic. I
must leave you, though I know not whither I can go."

"Do nothing hastily, dearest sister," said Jack. "I myself

shall open my heart to my father this afternoon, and we will
see what is to be done. I trust all may yet be well."

"All will yet be well," returned Sister Barbara. "It cannot but
be well if we are only faithful; but I doubt we shall see
terrible times first. Let us pray for one another that our
faith fail not in the fiery trial."

In the course of their ride, Jack opened his heart to his

father, as he proposed. He found Master Lucas not
unprepared for the disclosure, and though much disturbed
yet not inclined to be angry.

"I have been suspecting as much, this long time," said he.
"Ever since your return from Holford, I could not but see
that you were greatly changed and improved—yes, I will
say improved. But to think that you should have heard all
this from Uncle Thomas. Truly, one never knows where
danger lies. Had I been told to select a safe place for a lad,
I could not have thought of a better one."

"Did you not, then, know the story of his father?" asked
Jack.

"I do remember hearing something of it, but the matter

happened long before my time, and was hushed up as much
as might be. And then, who would think that Uncle Thomas,
who could not have been more than fifteen at the time,
would have remembered and held fast his father's teachings
all these years, and after all he has gone through? It is truly
wonderful!"

"It is, indeed," said Jack. "You would be astonished to see

how much he remembers of what he learned when he was a
little lad. But, dear father, I am so glad you are not angry
with me. I feared you would be so, but yet I felt that I could
not keep a secret from you any longer. You have been so
good and kind to me, that it made me feel like a traitor to
know that I had any concealment from you."

"Your secret has not been so well kept but I have had a
shrewd guess at it," said his father, smiling somewhat
sadly; "but I waited till you should tell it me yourself, as I
felt quite sure you would do, sooner or later. But, my son,
have you counted the cost? You know to what all this may
lead."

"Yes, father, I know it well, and have thought it over many

times. If it were only myself on whom the danger and the
disgrace were like to fall, I should care less; but that I
should bring this trouble upon you, who have ever been the
best and kindest—" Jack's voice was choked, and he turned
his head away.

"Nay, dear son, be not grieved for that," said his father
kindly. "I see not but a man must follow his conscience
wherever it leads. Neither can I see why the priests should
so angrily oppose the reading of the Scripture."

"If you should read it yourself, you would see," replied Jack.
"There is not one word in the whole New Testament about
the worship of the Holy Virgin, nor of purgatory, nor vows of
chastity, nor a hundred other things which the priests teach
us to believe. St. Peter himself was married, and so were
St. James, and St. Philip."

"But the priests say this Lutheran Gospel is not the true
Scripture," remarked his father.

"I know they do, and for that reason they discourage with
all their might the Greek learning that is spreading so much
at the universities. But, father, the Greek Testament is the
very same."
"And nothing about purgatory or about the masses for the
dead, either?" asked his father. "Art sure, Jack?"

"Not a word, father."

"Then a deal of good money has been thrown away," was

the next reflection of the business-like master baker. "I
myself paid more than three hundred marks for masses for
your mother, who was as good a woman as ever lived,
barring her little peevish tempers; and twice as much for
my father and mother. And the priests have robbed poor
Dame Higby of almost the last penny to sing for the soul of
her husband. But how have we been befooled if these
things are true!"

"Only read for yourself, dear sir, and you see," said Jack.

"Nay, I am no scholar, as you know," returned his father.

"But how as to Madam Barbara? I have sometimes
suspected that she was in the same boat. If so, it is like to
go hard with her, having been a nun."

Jack told his father, as she had desired him, the story of
Sister Barbara. Perturbed in mind as he was, Master Lucas
was considerably amused.

"Poor Anne! She little thought what a wolf in sheep's

clothing she was bringing into the fold when she spent such
a time in trimming up her altar in Madam Barbara's room. I
have seen, this long time, that there was no great
confidence between them. But what we are to do, I cannot
guess; for the outcry against heresy grows louder every
day. I think, Jack, you had best go abroad for a time."

"But, dear father, how can I leave you?"

"It would be very hard," said Master Lucas sadly; "hard to
lose both my children, for I doubt I shall have no more
comfort with Anne. But it were better for me to know you
safe in Germany or the Low Countries than to see you in
prison or worse. Truly, I am fallen on evil times in, mine old
age which I thought to spend so quietly."

"I think I could bear all, if I had it to bear alone," said Jack.
"It is that which has made the cross so heavy to me. But,
father, you would not have me false to my conscience, and
traitor to my friends, like the man Arthur told us of?"

"God forbid!" returned his father solemnly. "Better a

thousand deaths than that. But we will not anticipate evil,"
he added. "Some say our gracious prince favors the new
gospel."

"I fear there is not much to be expected in that quarter,"

returned Jack; "but as you say, we will not borrow trouble. I
have breathed more freely ever since Father Barnaby went
away. I think him a most dangerous man. He has gone to
Rome, as they tell me, where I hope, as Father John of
Holford says, they will make him bishop of some place on
the other side of the world."

"But as to Madam Barbara," said Master Lucas after they

had gone on a little way in silence.

"Well, dear father."

"My son, I cannot help having great fears for her. I would
she were in some place of safety. I should miss her sorely
from the house, that is the truth, for she is like sunshine
itself."

"I have sometimes thought," said Jack slyly, "that if Madam

Barbara were not a nun—"
"That you might have a step-dame some of these fine days,
you rogue," returned his father, laughing. "What would you
say to that?"

"I should rejoice heartily," said Jack eagerly; "for I am sure

she would make a good wife, and I love her dearly already.
Besides, I should be pleased with anything which made you
happy."

"Well, well! There is no question of that matter now," said

his father, who was obviously not displeased with the idea.
"We must not forget that madam is a born lady, though she
condescends so kindly to become one of ourselves. But the
question is now not of marriage, but of saving from
hanging."

"I will talk to Father William about the matter," said Jack. "I
will go to him this very evening. Dear father, I am so glad I
have told you all, and that you are not angry with me."

"I could not be angry, son Jack, though I do not deny that I
am greatly grieved. I would fain spend the remnant of my
days in peace. Not but I would gladly see the Church
reformed, and especially some order taken with all these
lazy monks and begging friars, who eat honest, industrious
folks out of house and home, and carry off silly girls to
convents; but I fear your friends are too sweeping. I cannot
bring myself to believe that so much we have been taught
to receive as Gospel truth is no more than men's invention."

"Only read for yourself, father, and you will see."

"Well, well, perhaps I may, if only to put my head in the

same halter with yours. One word more, Jack, because we
may have company home and no chance to speak further.
How much of all this does Anne know?"
Jack repeated to his father what the reader has heard
already.

"I cannot think that Anne would betray me, for all she
says," he added.

"I do not know," said Master Lucas, shaking his head. "Anne
is a true nun. She thinks all family affections are carnal and
fleshly ties, and to be trampled under foot. I cannot—I will
not think of your mother's daughter, that she would do such
a deed, but I hope she may not be tried. But after all, we
may be borrowing trouble. Father William makes no secret
of his new ideas, nor does Arthur Brydges of his, and I hear
my Lord Harland is as open, and he is very great with the
bishop. Anyhow, I wish we were well out of the scrape."

CHAPTER XIX.

A SORROWFUL PARTING.

That evening Jack went, as he had proposed, to consult

Father William about Sister Barbara.

Father William had lately made full profession of his faith,

and preached the reformed doctrines openly in his church
by the waterside, whither hundreds flocked to hear him—
some urged by personal affection, for Father William was by
far the most popular priest in Bridgewater; some from
curiosity, to hear what was beginning to make such a noise
and stir; and a few moved by earnest desire to hear and
understand the truth. As yet, no disturbance had arisen in
consequence of his preaching.

The other priests, indeed, were furious, and the preaching

friars thundered unsparing denunciations against the heretic
and all who heard demonstrating to their own satisfaction,
at least, that he was possessed with ten devils, and would
certainly be torn in pieces by them some day. The priest of
St. Mary's was an infirm, easy-going old man, of the same
school as Father John of Holford, and the prior of the
convent was engaged in an active warfare with another
convent concerning certain tan-yards and mills which they
owned in common. Moreover, it was pretty well-known that
the bishop of the diocese was, if not in reality a favorer of
the gospel, yet nowise inclined to interfere with those who
were.

Under all these favoring circumstances, Father William

remained unmolested for the present, and he improved the
time by preaching every day in his own church, and
instructing in the truth those persons—and they were many
—who came to unburden their minds and consciences to
him.

Jack found him sitting at his frugal supper table, not eating,
but leaning back in his chair; and he could not but remark
how worn and thin the good man looked.

"You are killing yourself with this constant labor, dear

father," said he; "you must take some rest."

"I must work the work to which I am sent, while it is yet

day," said Father William. "The night cometh apace, in
which no man can work. Unless I am greatly mistaken, this
calm which we now enjoy is like to be of short duration, and
I must use it diligently to win souls to my Master, and plant
seed which may spring and grow when I am laid low.
Besides," he added, with a sorrowful smile, "why should I
save the body for the hangman or the stake? I should
esteem myself blessed, indeed, if I might but die at my
work. But what can I do for you, my dear son?"

Jack briefly opened his business.

"The danger is imminent, as you say," said priest when he

had heard the story. "It would be certain death for the lady
to return to the convent, and she may be called to do so
any day—especially if she be suspected of heresy."

He mused a little while, and Jack almost thought he had

forgotten the subject of conversation, when he roused
himself from his abstraction.

"I think I see my way," said he. "I know a gentleman's

family among the hills, yonder, where I think she would be
welcome, both for her own sake and the gospel's. It is a
wild and rocky nook—they say the sun is scarce seen there
in winter, for the height of the hills which surround it—and
there are abundance of places where, if need were, an army
might be concealed. I shall be going that way tomorrow,
and will see the lady and break the matter to her."

Sir William was as good as his word, and in two or three

days, he told Jack the result of his mission. The lady was
overjoyed at the thought of having such a companion in her
solitude and such a teacher for her daughters, and the
squire was ready to afford succor to any one who came to
him in the name of the gospel.

"They are but rustic folk," said the priest, "and, though of
gentle blood, far behind our town burghers in refinement
and luxury. Sister Barbara must be content to rough it not a
little, but that is a small matter. Any home, however rude, is
better than a prison."

The result of these negotiations was communicated to Sister

Barbara. At first she was distressed at the thought of
leaving her school and her new friends, but a little
consideration showed her that flight was the best course.

"I care nothing for roughing it," she said; "the good father
well says that any home is better than a prison, and
doubtless I can find ways to make myself useful to the lady
and her daughters."

"And if this storm blows over, as I still hope it may, you will
return to us, dear madam," said Master Lucas. "Truly the
house will seem empty and dreary without you. Meantime,
let no word of this matter be dropped in the household—
before Anne, least of all."

"I cannot make up my mind to distrust Anne," said Jack.

"No person is to be trusted whose mind and conscience are

wholly in the keeping of another," said Master Lucas. "I pray
you, let me manage the matter my own way."

"So Madam Barbara is going to leave us," said Cicely, a few

days afterward. "Father William has discovered some friends
of hers off among the hills who desire a visit from her, and
she is to go to them. We shall miss her more than a little."

"I hope to return, one of these days," said Madam Barbara.

"I am sure I shall never find a happier home than this or a
kinder friend than you are, dear Cicely, if I go over the
world to look for them; but this lady is very lonely, and she
has daughters to educate, and, moreover, there are other
reasons which make my going desirable."
"Well, well; every one knows his own business best, and
blood is blood—I don't deny that," said Cicely, "and I can't
but think one's own relations were meant to be nearer than
other folks, for all Anne says about it. But it must be a wild,
dreary place—especially in winter."

"The more need for sunshine in the house, and I am sure

Madam Barbara carries that with her wherever she goes,"
said Jack.

Anne heard of the intended departure of Sister Barbara with

little regret. There had, of late, been no sympathy between
them. Anne felt that Sister Barbara wholly disapproved of
her conduct to her father and brother; and dead as she
believed herself to be to all earthly things, she could not
endure even an intimation of that blame she was so ready
at all times to bestow on others. Moreover, she was jealous.
It was impossible to live with Sister Barbara and not love
her, and though Anne did not and would not take any pains
to make herself agreeable or beloved, yet it angered her to
the soul, to see another taking the place which belonged of
right to herself.

Anne's life, at this time, was one of sheer inconsistency. She

was fighting in behalf of a faith in which she, in her heart,
scarcely preserved a shadow of belief; she was determined
to crush out all earthly ties, and at the same time she was
able to endure the thought of not being first in her father's
house; and though she had told her brother that she should
feel perfectly justified in betraying him, she was yet fiercely
indignant at him for withholding his confidence from her. All
this inward conflict did not tend to make her the more
amiable, and while she revenged upon herself by renewed
penances any failure in "holy humility," she was deeply hurt
and indignant if any one in the least degree reproved or
resented her bursts of temper.
She asked no questions as to Sister Barbara's plans, and
hardly returned her expressions of affection at parting, yet
she stood at the door watching the party as far as she could
see them, and then, going up to her room, she wept long
and bitterly—partly over the parting, partly over the
disappointment of the hopes with which she had welcomed
her former friend, and a good deal, it must be confessed,
from mere hysterical fatigue consequent upon fasting and
watching for sixteen or eighteen hours.

Jack and his father rode with Madam Barbara to within

some ten miles of her destination, when they were met by
Mr. Hendley, who gave the lady a hearty welcome, and to
her friends an equally hearty invitation to come and see him
and his wife, and stay any number of days or months.

Then, seeing the lady mounted on a pillion behind her

protector, they took their leave of her, and turned their
faces homeward. Taking advantage of a late moon, they had
set out long before day to avoid any prying observations or
questions from the neighbors, and it was still early when
they returned home. As they turned into their own street,
Jack uttered a vehement exclamation of surprise, at the
sight of a stout elderly gentleman, in a cassock, descending
with apparent pain and difficulty from his mule.

"What now?" asked his father.

"It is Father John, from Holford, as sure as you live, father!"

exclaimed Jack. "What miracle or earthquake can have
brought him so far from home?"

"We shall soon hear," replied his father.

"Yes, if the poor man have any breath left to speak," said
Jack, as he threw himself hastily from his own beast. "I
should think that doubtful."
"Well, we must give him all the welcome and refreshment in
our power," said the master baker, dismounting more
leisurely. "Your reverence is heartily welcome to my poor
dwelling," he added, addressing the poor old priest, who
had dropped exhausted on the first seat. "I would we had
been at home to receive you in more fitting form. I pray you
to walk into the parlor."

The old man rose with some difficulty, and, accepting the
support of Master Lucas's arm, he made out to walk into the
sitting-room. Jack ran before to bring forward the easiest
seat and place a footstool before it, and then to bring a cup
of ale, which Father John drank without a word.

Then turning a lack-lustre and piteous eye upon his

cupbearer, he ejaculated—

"Alack, my dear son!"

"I trust nothing unpleasant has chanced to bring you so far

from home, father," said Jack, fearing he knew not what. "It
must have been a toilsome journey for your reverence."

"Alack, you may well say so. I did not believe I should ever
ride so far again—and it is all for your sake. I would I were
safe home again, that is all. These vile footpads would as
soon rob a priest as a layman, I believe, and I am shaken to
a very jelly."

"Your reverence must not think of returning to Holford to-

night," said Jack.

He was dying to learn the good man's business, but he

knew by experience that to try to hurry him was only to
throw his brains into a hopeless confusion.
"I am sure my father will not be willing to have you leave us
so suddenly, now that you have honored us with a visit."

"No, indeed, good father!" said Master Lucas heartily. "You

must sup with us, and give me time to thank you for all
your kindness to my boy."

"Tut, tut! That was nothing," returned Father John. "The

young rogue! I could find it in my heart to wish I had never
seen him, for he hath so wound himself round my heart as I
could not have believed possible."

"Is my good uncle well, sir?" asked Jack.

"Well—why, yes, for aught I know," replied the priest, rather

hesitatingly; "and yet—Is any one within hearing? I must
speak to you in private."

Jack went out of the room and presently returned to say

that Cicely and Anne had gone to evensong, that Simon was
busy in the bakehouse, and he had set little Peter, the
'prentice, to watch the shop door.

"It is well," said Father John; "but yet we will speak low. My
business is this: Father Barnaby has returned from his
travels somewhat suddenly, and, it is said, with
extraordinary powers from the Cardinal, to search out
heretical books, and apprehend the owners thereof."

Jack looked at his father in dismay.

"Now I know not that this concerns you, my dear son,"

continued the priest, laying his hand on Jack's arm, and
looking earnestly at him. "I hope, with all my heart, that it
does not, and that for many reasons; but I know you are
intimate with Arthur Brydges who makes no secret of his
opinions, and there are other reasons: Father Barnaby is a
hard man, and especially bitter against heresy; and I would
not, to be made Abbot of Glastonbury, have any harm
happen to you."

"And you have taken this long journey to give me warning,"

said Jack, much affected, and kissing the old man's hand.
"Truly, I know not how to thank you, dear father."

"But you must not say so, for the world, my dear son," said
Father John hastily. "Remember, I am not supposed to know
anything of this matter, and have come to consult your
father on the investing of certain moneys left me by my
brother, lately dead. I would not hear a word—supposing
there were any such thing to hear—lest I should be called
on to testify. Do you understand?"

"We both understand, reverend sir, and feel your kindness,"

said Master Lucas. "Believe me, I shall never forget it—"

"Tilly-vally, tilly-vally!" interrupted the priest. "It is naught!

I have lived, I fear, a selfish life, and I would fain do some
good before I die. I love not these new-fangled ways better
than Father Barnaby himself. I am sure a parish priest's life
is hard enough as it is, and they say the Lutherans are for
having sermons every Sunday, and Scripture readings, and
what not. No, I love no new fancies in religion, but I do not
hold with all these burnings and imprisonments and the
like. I think kindness and good treatment far more likely to
bring men back to the truth."

"Why, there was Father Thomas, the librarian at

Glastonbury; in his youth he was greatly taken with such of
these new notions as were current—Lollardism, men called
it then—and some of the brethren were for having him
hardly dealt by."