Table Of Content

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BRiEF CONTENTS PART ONE PART FOUR introduction to management information for planning, control and cost accounting 2 and performance measurement 366 1 Introduction to management accounting 4 15 The budgeting process 368 2 An introduction to cost terms 16 Management control systems 403 and concepts 22 17 Standard costing and variance analysis 1 432 18 Standard costing and variance analysis 2: PART TWO further aspects 469 Cost accumulation for inventory 19 Divisional financial performance valuation and profit measurement 42 measures 494 20 Transfer pricing in divisionalized 3 Cost assignment 44 companies 525 4 Accounting entries for a job costing system 82 5 Process costing 104 PART FiVE 6 Joint and by-product costing 132 Strategic performance and cost 7 Income effects of alternative cost management and challenges for accumulation systems 149 the future 558 21 Strategic performance management 560 PART THREE 22 Strategic cost management and information for decision-making 170 value creation 590 23 Challenges for the future 626 8 Cost–volume–profit analysis 172 9 Measuring relevant costs and revenues for decision-making 197 PART SiX 10 Pricing decisions and profitability The application of quantitative analysis 230 methods to management 11 Activity-based costing 255 12 Decision-making under conditions accounting 644 of risk and uncertainty 285 24 Cost estimation and cost behaviour 646 13 Capital investment decisions: appraisal 25 Quantitative models for the planning methods 308 and control of inventories 671 14 Capital investment decisions: the impact 26 The application of linear programming of capital rationing, taxation, inflation to management accounting 694 and risk 338 iii Copyright 2018 Cengage Learning. 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CONTENTS Preface IX The cost and management accounting informa- About the author XIV tion system 36 Acknowledgements XV PART TWO PART ONE Cost accumulation for introduction to management inventory valuation and profit and cost accounting 2 measurement 42 1 introduction to management 3 Cost assignment 44 accounting 4 Assignment of direct and indirect costs 45 The users of accounting information 5 Different costs for different purposes 46 Differences between management accounting Cost-benefit issues and cost systems and financial accounting 6 design 47 The decision-making, planning and control Assigning direct costs to cost objects 48 process 6 Plant-wide (blanket) overhead rates 48 The impact of the changing business environ- The two-stage allocation process 49 ment on management accounting 10 An illustration of the two-stage process for a Focus on customer satisfaction and new man- traditional costing system 51 agement approaches 14 An illustration of the two-stage process for an Functions of management accounting 16 ABC system 56 Summary of the contents of this book 17 Extracting relevant costs for Guidelines for using this book 18 decision-making 60 Budgeted overhead rates 61 2 An introduction to cost terms Under- and over-recovery of overheads 62 and concepts 22 Non-manufacturing overheads 63 Cost assignment in non-manufacturing Cost objects 22 organizations 64 Manufacturing, merchandising and service The indirect cost assignment process 66 organizations 23 Appendix 3.1: Inter-service department Direct and indirect costs 23 reallocations 68 Period and product costs 26 Cost behaviour 28 4 Accounting entries for a job Relevant and irrelevant costs and revenues 31 costing system 82 Avoidable and unavoidable costs 32 Sunk costs 32 Materials recording procedure 83 Opportunity costs 33 Pricing the issues of materials 84 Incremental and marginal costs 34 Control accounts 85 iV Copyright 2018 Cengage Learning. 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CONTENTS V Recording the purchase of raw materials 86 PART THREE Recording the issue of materials 88 information for Accounting procedure for labour costs 89 decision-making Accounting procedure for manufacturing 170 overheads 91 Non-manufacturing overheads 92 8 Cost–volume–profit analysis 172 Accounting procedures for jobs completed and Curvilinear CVP relationships 173 products sold 92 Linear CVP relationships 174 Costing profit and loss account 93 A numerical approach to cost–volume–profit Job-order costing in service organizations 93 analysis 175 Interlocking accounting 93 The profit–volume ratio 178 Accounting entries for a JIT manufacturing Relevant range 179 system 94 Margin of safety 179 Constructing the break-even chart 180 5 Process costing 104 Alternative presentation of cost–volume–profit Flow of production and costs in a process analysis 181 costing system 105 Multi-product cost–volume–profit analysis 182 Process costing when all output is fully Operating leverage 184 complete 106 Cost–volume–profit analysis assumptions 187 Process costing with ending work in progress The impact of information technology 188 partially complete 111 Beginning and ending work in progress of 9 Measuring relevant costs and uncompleted units 114 revenues for decision-making 197 Partially completed output and losses in Identifying relevant costs and revenues 198 process 119 Importance of qualitative/non-financial Process costing in service organizations 119 factors 198 Batch/operating costing 119 Special pricing decisions 199 Appendix 5.1: Losses in process and partially Product mix decisions when capacity completed units 121 constraints exist 203 Replacement of equipment – the irrelevance of 6 Joint and by-product costing 132 past costs 206 Joint products and by-products 133 Outsourcing and make-or-buy decisions 207 Methods of allocating joint costs 134 Discontinuation decisions 210 Irrelevance of joint cost allocations for Determining the relevant costs of direct decision-making 139 materials 213 Accounting for by-products 140 Determining the relevant costs of direct labour 213 7 income effects of alternative Appendix 9.1: The theory of constraints and cost accumulation systems 149 throughput accounting 215 External and internal reporting 150 10 Pricing decisions and profitability Variable costing 152 analysis 230 Absorption costing 153 Variable costing and absorption costing: a The role of cost information in pricing comparison of their impact on profit 154 decisions 231 Some arguments in support of variable A price-setting firm facing short-run pricing costing 155 decisions 231 Some arguments in support of absorption A price-setting firm facing long-run pricing costing 157 decisions 232 Alternative denominator-level measures 158 A price-taking firm facing short-run product mix Appendix 7.1: Derivation of the profit decisions 236 function for an absorption costing A price-taking firm facing long-run product mix system 161 decisions 236 Copyright 2018 Cengage Learning. 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Vi CONTENTS Surveys of practice relating to pricing Techniques that ignore the time value of decisions 238 money 321 Limitations of cost-plus pricing 239 Payback method 321 Reasons for using cost-plus pricing 239 Accounting rate of return 325 Pricing policies 240 The effect of performance measurement Customer profitability analysis 242 on capital investment decisions 326 Appendix 10.1: Calculating optimal selling Qualitative factors 327 prices using differential calculus 246 14 Capital investment decisions: 11 Activity-based costing 255 the impact of capital rationing, taxation, inflation and risk 338 The need for a cost accumulation system in generating relevant cost information for Capital rationing 338 decision-making 256 Taxation and investment decisions 340 Types of cost system 257 The effect of inflation on capital A comparison of traditional and ABC investment appraisal 343 systems 257 Calculating risk-adjusted discount rates 345 The emergence of ABC systems 259 Weighted average cost of capital 349 Volume-based and non-volume-based cost Sensitivity analysis 349 drivers 260 Initiation, authorization and review of Designing ABC systems 263 projects 352 Activity hierarchies 265 Cost versus benefits considerations 267 Time-driven ABC 267 PART FOUR Activity-based costing profitability analysis 270 information for planning, Resource consumption models 272 control and performance Periodic review of an ABC database 274 measurement ABC cost management applications 274 366 12 Decision-making under 15 The budgeting process 368 conditions of risk and The strategic planning, budgeting and control uncertainty 285 process 369 Risk and uncertainty 286 The multiple functions of budgets 371 Probability distributions and expected Conflicting roles of budgets 372 value 288 The budget period 373 Measuring the amount of risk 289 Administration of the budgeting process 373 Attitudes to risk by individuals 290 Stages in the budgeting process 374 Decision tree analysis 292 A detailed illustration 377 Buying perfect and imperfect information 293 Computerized budgeting 386 Maximin, maximax and regret criteria 295 Activity-based budgeting 386 Risk reduction and diversification 296 The budgeting process in non-profit-making organizations 388 13 Capital investment decisions: Zero-based budgeting 389 appraisal methods 308 Criticisms of budgeting 391 The opportunity cost of an investment 310 16 Management control Compounding and discounting 311 systems 403 The concept of net present value 312 Calculating net present values 313 Control at different organizational levels 404 The internal rate of return 315 Different types of control mechanism 404 Relevant cash flows 318 Feedback and feed-forward controls 406 Timing of cash flows 319 Harmful side-effects of controls 407 Comparison of net present value and internal Management accounting control systems 408 rate of return 319 Responsibility centres 409 Copyright 2018 Cengage Learning. 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CONTENTS Vii The nature of management accounting Pre-requisites for successful divisionalization 497 control systems 411 Distinguishing between the managerial and The controllability principle 413 economic performance of the division 497 Setting performance targets and determining Alternative divisional profit measures 498 how challenging they should be 416 Surveys of practice 500 Determining how much influence managers Return on investment 500 should have in setting targets 417 Residual income 501 Different approaches that managers use to Economic value added (EVA(™)) 502 evaluate budgetees’ performance 418 An illustration of the calculation of EVA(™) 503 Contingency theory 419 Determining which assets should be included Alternative uses of management accounting in the investment base 506 information 420 The impact of depreciation 507 The effect of performance measurement on 17 Standard costing and variance capital investment decisions 508 analysis 1 432 Addressing the dysfunctional consequences of short-term financial performance Operation of a standard costing system 433 measures 511 Establishing cost standards 435 Purposes of standard costing 438 20 Transfer pricing in divisionalized A summary of variance analysis for a variable costing system 439 companies 525 Material variances 441 Purpose of transfer pricing 526 Labour variances 444 Alternative transfer pricing methods 527 Variable overhead variances 445 Market-based transfer prices 527 A generic routine approach to variance analy- Cost plus a mark-up transfer price 529 sis for variable costs 447 Marginal/variable cost transfer prices 531 Fixed overhead expenditure or spending Full cost transfer prices without a mark-up 532 variance 447 Negotiated transfer prices 532 Sales variances 447 Marginal/variable cost plus opportunity cost Reconciling budgeted profit and actual transfer prices 533 profit 451 Comparison of cost-based transfer pricing Standard absorption costing 451 methods 533 Reconciliation of budgeted and actual profit for Proposals for resolving transfer pricing a standard absorption costing system 455 conflicts 534 Appendix 17.1: A generic routine approach to Domestic transfer pricing variance analysis 458 recommendations 538 International transfer pricing 538 18 Standard costing and variance Appendix 20.1: Economic theory of analysis 2: further aspects 469 transfer pricing 542 Recording standard costs in the accounts 469 Direct materials mix and yield variances 474 PART FiVE Sales mix and sales quantity variances 478 Distinguishing between planning and operating Strategic performance and cost variances 479 management and challenges for The investigation of variances 480 the future 558 The role of standard costing when ABC has been implemented 482 21 Strategic performance 19 Divisional financial performance management 560 measures 494 The performance management framework 561 Divisional organizational structures 495 Strategy and strategic positioning 561 Advantages and disadvantages of Performance measurement and performance divisionalization 496 management systems 562 Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Viii CONTENTS Alternative performance management A summary of the steps involved in estimating frameworks 562 cost functions 656 The balanced scorecard 564 Cost estimation when the learning effect is Linking performance evaluation with the present 657 balanced scorecard 573 Estimating incremented hours and incremental Benefits and limitations of the balanced cost 660 scorecard approach 575 Appendix 24.1: Multiple regression analysis 662 22 Strategic cost management and value creation 590 25 Quantitative models for the planning and control Life cycle cost management 591 of inventories 671 Target costing 592 Kaizen costing 597 Why do firms hold inventories? 672 Activity-based management 598 Relevant costs for quantitative models under Benchmarking 602 conditions of certainty 672 Business process reengineering 603 Determining the economic order Just-in-time systems 603 quantity 673 Quality cost management 608 Assumptions of the EOQ formula 675 Cost management and the value chain 613 Application of the EOQ model in determining the optimum batch size for a production 23 Challenges for the future 626 run 676 Quantity discounts 677 A brief historical review of Determining when to place the order 678 management accounting 627 Uncertainty and safety stocks 678 Environmental and sustainability issues 628 The use of probability theory for determining Focus on ethical behaviour 633 safety stocks 679 Information technology 634 Control of inventory through Globalization and management accounting classification 681 international practices 636 Other factors influencing the choice of order Intellectual capital and the knowledge base quantity 682 economy 637 Materials requirement planning 683 Integrated reporting 638 Just-in-time (JIT) purchasing arrangements 683 PART SiX 26 The application of linear The application of quantitative programming to management methods to management accounting 694 accounting 644 Linear programming 695 Graphical method 696 24 Cost estimation and cost Simplex method 701 behaviour 646 Uses of linear programming 704 General principles applying to estimating cost Bibliography 716 functions 647 Glossary 725 Cost estimation methods 648 Appendices 736 Tests of reliability 654 Answers to review problems 739 Relevant range and non-linear cost Credits 832 functions 655 Index 834 Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.