Management accounting

617 Pages·2010·5.668 MB·English

by  Pauline Weetman

second
Pauline Weetman’s innovative text expertly guides students through the fundamentals of management
edition
accounting and provides a solid foundation across the introductory stages and a strong basis for further
Management Accounting
specialist study. The text is clear, well structured and brings an imaginative approach to student learning
with its emphasis on allowing students to practice the application of theory. M
second edition
a Pauline Weetman
n
The second edition provides:
• Comprehensive coverage of management accounting topics. a
• Provides a number of unique case studies complete with innovative ideas for
g
interactive teaching sessions, as well as engaging real-life commentaries.
e
• Excellent business focus shows students how management accounting techniques
can be applied in real business situations. m
• Relevant research is outlined to link teaching to current developments.
• Extensive coverage of service and not for profit sectors as well as manufacturing. e
• Practical and imaginative pedagogy includes group discussions and activities, a
n
management accounting consultant which helps bring topics alive, as well as a
wealth of examples, questions and problems throughout. t

• Innovative full colour design brings key issues and essential topics to life.
A
• Fully reflects CIMA terminology.
• Additional questions based on CIMA examination questions, with worked solutions c
and commentary. c
• Up-to-date real world cases to relate topics to the financial world. o
u
n
Fully supported by a comprehensive suite of student and lecturer resources, including cases
with teaching notes, questions and multiple choice questions, PowerPoint slides, lecture t
notes, graded questions, and solutions to questions in the book. To utilise this excellent online i
n
resource visit: www.pearsoned.co.uk\weetman.
g

Management Accounting provides continuity of study over the introductory stages in specialist
accounting programmes while preserving the generality of coverage that is suitable for business studies
W
degrees. The text is also suitable for professional courses where management accounting is introduced for
the first time. e
e
Pauline Weetman BA, BSc (Econ), PhD, CA, FRSE, is Professor of Accounting at the University of t
m
Edinburgh, and has extensive experience of teaching at undergraduate and postgraduate level, with
previous chairs held at Stirling, Heriot-Watt, Strathclyde and Glasgow Universities. She received the a
Distinguished Academic Award of the British Accounting Association in 2005. She has convened the n
examining board of the Institute of Chartered Accountants of Scotland and was
formerly Director of Research at ICAS.

www.pearson-books.com
Front cover image: © Getty Images
CVR_WEET8451_02_SE_CVR.indd 1 12/5/10 13:57:48
Management Accounting
Visit the Management Accounting Companion Website at
www.pearsoned.co.uk/weetman to find valuable student
learning material including:
l Multiple choice questions to help test your learning
l Extensive links to valuable resources on the web
l An online glossary to explain key terms
We work with leading authors to develop the strongest
educational materials in accounting, bringing cutting-edge
thinking and best learning practice to a global market.
Under a range of well-known imprints, including
Financial Times Prentice Hall, we craft high quality print and
electronic publications which help readers to understand
and apply their content, whether studying or at work.
To find out more about the complete range of our
publishing, please visit us on the World Wide Web at:
www.pearsoned.co.uk
Management Accounting
SECOND EDITION
PAULINE WEETMAN
Professor of Accounting, University of Edinburgh
To my parents,
Harry and Freda Weetman
Pearson Education Limited
Edinburgh Gate
Harlow
Essex CM20 2JE
England
and Associated Companies throughout the world
Visit us on the World Wide Web at:
www.pearsoned.co.uk
First published2006
Second edition published 2010
© Pearson Education Limited 2006, 2010
The right of Pauline Weetman to be identified as author of this work
has been asserted by her in accordance with the Copyright, Designs
and Patents Act 1988.
All rights reserved. No part of this publication may be reproduced, stored
in a retrieval system, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording or otherwise, without either the prior
written permission of the publisher or a licence permitting restricted copying
in the United Kingdom issued by the Copyright Licensing Agency Ltd,
Saffron House, 6–10 Kirby Street, London EC1N 8TS.
All trademarks used herein are the property of their respective owners.
The use of any trademark in this text does not vest in the author or
publisher any trademark ownership rights in such trademarks,
nor does the use of such trademarks imply any affiliation with or
endorsement of this book by such owners.
ISBN: 978-0-273-71845-1
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library

Library of Congress Cataloging-in-Publication Data
Weetman, Pauline.
Management accounting / Pauline Weetman. – 2nd ed.
p. cm.
ISBN 978-0-273-71845-1 (pbk.)
1. Managerial accounting. I. Title.
HF5657.4.W415 2010
658.15′11—dc22
2010000671
10 9 8 7 6 5 4 3 2 1
14 13 12 11 10
Typeset in 9.5/12pt Palatino by 35
Printed and bound by Rotolito Lombarda, Italy
The publisher’s policy is to use paper manufactured from sustainable forests.
Contents
Guided tour xiv
Preface xvi
Publisher’s acknowledgements xvii
Part 1 DEFINING, REPORTING AND MANAGING COSTS
Chapter 1 What is management accounting? 2
Real world case 1.1 2
Learning outcomes 3
1.1 Introduction 4
1.2 Meeting the needs of internal users 6
1.3 Management functions 7
1.4 Role of management accounting 14
1.5 Judgements and decisions: case study illustrations 17
Real world case 1.2 18
Real world case 1.3 23
1.6 The language of management accounting 23
1.7 What the researchers have found 24
1.8 Summary 25
References and further reading 26
Questions 26
Case studies 30

Notes 30
Chapter 2 Classification of costs 31
Real world case 2.1 31
Learning outcomes 32
2.1 Definition of a cost 33
2.2 The need for cost classification 33
2.3 The meaning of ‘activity’ and ‘output’ 33
2.4 Variable costs and fixed costs 34
Real world case 2.2 39
2.5 Direct costs and indirect costs 39
2.6 Product costs and period costs 41
2.7 Cost classification for planning, decision making and control 43
Real world case 2.3 46
vi Contents
2.8 Cost coding 47
2.9 Cost selection and reporting 48
2.10 Summary 49
References and further reading 49
Questions 50
Case studies 53
Chapter 3 Materials and labour costs 54
Real world case 3.1 54
Learning outcomes 55
3.1 Introduction 56
3.2 Accounting for materials costs 57
3.3 Costs when input prices are changing 60
3.4 Accounting for labour costs 63
Real world case 3.2 64
Real world case 3.3 66
3.5 What the researchers have found 66
3.6 Summary 67
References and further reading 67
Questions 67
Case studies 69
Note 69
Chapter 4 Overhead costs 70
Real world case 4.1 70
Learning outcomes 71
4.1 Introduction 72
Real world case 4.2 73
4.2 Production overheads: traditional approach 74
4.3 Activity-based costing (ABC) for production overheads 85

4.4 Comparing traditional approach and ABC 94
Real world case 4.3 95
4.5 What the researchers have found 96
4.6 Summary 97
References and further reading 98
Questions 98
Case studies 103
Notes 104
Chapter 5 Absorption costing and marginal costing 105
Real world case 5.1 105
Learning outcomes 106
5.1 Introduction 107
5.2 A note on terminology: marginal or variable? 107
Contents vii
5.3 Illustration of absorption and marginal costing 107
5.4 Over- and under-absorbed fixed overheads 110
5.5 Case study 113
5.6 Why is it necessary to understand the difference? 116
Real world case 5.2 117
5.7 Absorption costing in financial accounting 117
5.8 Arguments in favour of absorption costing 119
5.9 Arguments in favour of marginal costing 119
Real world case 5.3 120
5.10 What the researchers have found 121
5.11 Summary 121
References and further reading 122
Questions 122
Case studies 126
Note 126
Chapter 6 Job costing 127
Real world case 6.1 127
Learning outcomes 128
6.1 Introduction 129
6.2 Job cost records: an illustration 130
Real world case 6.2 134
6.3 Job costing: applying the accounting equation to transactions 135
6.4 Moving forward 140
Real world case 6.3 141
6.5 What the researchers have found 141
6.6 Summary 142
References and further reading 142
Questions 143
Case studies 146

Chapter 7 Recording transactions in a job-costing system 147
Real world case 7.1 147
Learning outcomes 149
7.1 Introduction 149
7.2 Types and titles of cost ledger accounts 150
7.3 The flow of entries in a job-costing system 150
7.4 Recording transactions for a job-costing system 152
Real world case 7.2 157
7.5 The use of control accounts and integration with the financial accounts 157
7.6 Contract accounts 165
7.7 Illustration of contract accounting 168
7.8 What the researchers have found 174
Real world case 7.3 175
7.9 Summary 175
viii Contents
Reference and further reading 175
Questions 176
Case studies 180
Chapter 8 Process costing 181
Real world case 8.1 181
Learning outcomes 182
8.1 Introduction 183
8.2 Allocation of costs to products in a process industry 184
Real world case 8.2 191
8.3 Joint product costs and by-products 192
Real world case 8.3 196
8.4 Decisions on joint products: sell or process further 196
8.5 What the researchers have found 197
8.6 Summary 198
References and further reading 199
Questions 199
Case studies 203
Part 2 DECISION MAKING
Chapter 9 Short-term decision making 206
Real world case 9.1 206
Learning outcomes 207
9.1 Introduction 208
9.2 Cost behaviour: fixed and variable costs 208
9.3 Break-even analysis 213
9.4 Using break-even analysis 216
9.5 Limitations of break-even analysis 219

9.6 Applications of cost–volume–profit analysis 220
Real world case 9.2 221
9.7 Cases in short-term decision making 222
Real world case 9.3 226
9.8 Estimating fixed and variable costs 227
9.9 What the researchers have found 228
9.10 Summary 229
References and further reading 230
Questions 230
Case studies 236
Chapter 10 Relevant costs, pricing and decisions under uncertainty 237
Real world case 10.1 237
Learning outcomes 238
Contents ix
10.1 Introduction 239
10.2 Relevant costs and revenues 239
Real world case 10.2 242
10.3 Pricing decisions 243
Real world case 10.3 246
10.4 Decision making under risk and uncertainty 247
10.5 What the researchers have found 254
10.6 Summary 255
References and further reading 256
Questions 256
Case studies 261
Chapter 11 Capital investment appraisal 263
Real world case 11.1 263
Learning outcomes 264
11.1 Capital project planning and decisions 265
11.2 Payback method 267
11.3 Accounting rate of return 269
Real world case 11.2 271
11.4 Net present value method 271
11.5 Internal rate of return 277
Real world case 11.3 280
11.6 Which methods are used in practice? 280
11.7 What the researchers have found 281
11.8 Summary 282
References and further reading 283
Questions 283
Case studies 286
Appendix: table of discount factors 287
Chapter 12 Capital bud geting applications 289
Real world case 12.1 289
Learning outcomes 290
12.1 Introduction 291
12.2 Capital rationing 291
12.3 Cash flows for discounting calculations 295
Real world case 12.2 299
12.4 Control of investment projects: authorisation and review 300
12.5 Advanced manufacturing technologies 301
Real world case 12.3 303
12.6 What the researchers have found 304
12.7 Summary 305
References and further reading 305
Questions 306
Case studies 311