CIMA Official Learning System Management Accounting Decision Management, Fifth Edition (CIMA Managerial Level 2008)

605 Pages·2008·3.01 MB·English

by  Jo Avis

CIMA’S Offi cial
Learning System
Managerial Level
Management
Accounting – Decision
Management
Colin Wilks
Louise Burke
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First edition 2008
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Contents
The CIMA Learning System xi
Acknowledgements xi
How to use your CIMA Learning System xi
Guide to the Icons used within this Text xii
Study technique xiii
Management Accounting – Decision Management Syllabus xv
Transitional arrangements xix
1 Revision of Basic Aspects, Classifi cations and
Approaches to Cost Accounting 1
Learning Outcome 3
1.1 Introduction 3
1.2 What is meant by cost? 3
1.3 Cost units 4
1.3.1 Composite cost units 4
1.4 Cost centres 5
1.5 Classifi cation of costs 5
1.5.1 Classifi cation of costs according to their nature 6
1.5.2 Classifi cation of costs according to their purpose 6
1.5.3 Other examples of cost classifi cation 6
1.6 Cost behaviour 7
1.6.1 Fixed cost 7
1.6.2 Variable cost 8
1.6.3 Semi-variable cost 10
1.6.4 Analysing semi-variable costs 10
1.6.5 Using historical data 13
1.7 The elements of cost 13
1.8 Summary 14
2 Absorption Costing, Activity-based Costing
and Marginal Costing 15
Learning Outcome 17
2.1 Introduction 17
2.2 Overhead allocation and apportionment 17
2.3 Overhead absorption 18
2.4 Applying the overhead absorption rate 18
2.5 Selecting the most appropriate absorption rate 19
2.6 Predetermined overhead absorption rates 20
2.6.1 Under- or over-absorption of overheads 20
2.6.2 The reasons for under- or over-absorption 21
iii
iv MANAGEMENT ACCOUNTING – DECISION MANAGEMENT P2
S 2.6.3 Accounting for under- or over-absorbed overheads 21
T
N
E 2.6.4 The problems caused by under- or over-absorption
T
N of overheads 22
O
C 2.7 Illustrative example 22
2.8 Recent developments in absorption costing methods 24
2.8.1 The criticisms of the traditional approach 24
2.8.2 Activity-based costing 24
2.9 The difference between marginal costing and absorption costing 28
2.10 Marginal costing and contribution 28
2.11 Preparing profi t statements using marginal costing
and absorption costing 29
2.11.1 Profi t statements using marginal costing 30
2.11.2 Profi t statements using absorption costing 30
2.12 Reconciling the profi t fi gures 31
2.12.1 Reconciling the profi ts given by the different methods 31
2.12.2 Reconciling the profi ts for different periods 32
2.12.3 Profi t differences in the long term 32
2.13 Should marginal costing or absorption costing be used? 33
2.14 A comprehensive example of ABC 33
2.15 Summary 44
3 Breakeven Analysis 45
Learning Outcomes 47
3.1 Introduction 47
3.2 Breakeven or cost–volume–profi t analysis 47
3.2.1 Calculating the breakeven point 47
3.3 The margin of safety 48
3.4 The contribution to sales (C/S) ratio 49
3.5 Drawing a basic breakeven chart 50
3.6 The contribution breakeven chart 52
3.7 The profi t–volume chart 52
3.7.1 The advantage of the profi t–volume chart 53
3.8 The limitations of breakeven (or CVP) analysis 54
3.9 The economist’s breakeven chart 55
3.10 Using costs for decision-making 55
3.10.1 Short-term decision-making 56
3.11 Evaluating proposals 56
3.12 Multi-product CVP analysis 58
3.13 Using the C/S ratio–an example 60
3.14 Summary 61
Revision Questions 63
Solutions to Revision Questions 67
4 Relevant Cost and Short-term Decisions 73
Learning Outcomes 75
4.1 Introduction 75
4.2 Relevant costs 75
4.2.1 Non-relevant costs 75
MANAGEMENT ACCOUNTING – DECISION MANAGEMENT v
4.3 Opportunity costs 77 C
O
4.3.1 Examples of opportunity costs 77 N
T
4.3.2 Notional costs and opportunity costs 78 EN
T
4.4 Avoidable, differential and incremental costs 78 S
4.4.1 Avoidable costs 78
4.4.2 Differential/incremental costs 78
4.4.3 Using incremental costs 78
4.4.4 Incremental revenues 79
4.4.5 Minimum price quotations for special orders 80
4.5 Limiting factor decision-making 80
4.5.1 Decisions involving a single limiting factor 80
4.6 Further decision-making problems 83
4.6.1 A practical example 85
4.7 Summary 91
Revision Questions 93
Solutions to Revision Questions 101
5 Linear Programming 109
Learning Outcomes 111
5.1 Introduction 111
5.2 Basic linear programming 111
5.2.1 Formulating the mathematical model 112
5.2.2 The graphical method of solving linear programming models 113
5.2.3 Further examples of the construction and graphing of constraints 117
5.2.4 Multiple solutions 119
5.2.5 Slack and surplus 121
5.2.6 Shadow prices and opportunity costs 123
5.3 The Simplex method 124
5.3.1 Formulating the problem 124
5.3.2 Interpreting the solution 125
5.4 Worth and relative loss 126
5.5 Summary 128
Revision Questions 129
Solutions to Revision Questions 133
6 Pricing 139
Learning Outcomes 141
6.1 Introduction 141
6.2 Demand and the product life cycle 141
6.2.1 Price elasticity of demand 141
6.2.2 The product life cycle 146
6.2.3 The profi t-maximisation model 148
6.2.4 Limitations of the profi t-maximisation model 150
6.3 Pricing strategies based on cost 150
6.3.1 Total cost-plus pricing 150
6.3.2 Marginal cost-plus pricing 153
6.4 Other pricing strategies 154
6.4.1 Premium pricing 154
vi MANAGEMENT ACCOUNTING – DECISION MANAGEMENT P2
S 6.4.2 Market skimming 154
T
N
E 6.4.3 Penetration pricing 155
T
N 6.4.4 Price differentiation 155
O
C 6.4.5 Loss leader pricing 156
6.4.6 Product bundling 156
6.4.7 Pricing with additional features 157
6.4.8 Using discounts in pricing 159
6.4.9 Controlled pricing 159
6.5 Summary 160
Revision Questions 161
Solutions to Revision Questions 165
7 Risk and Uncertainty 169
Learning Outcomes 171
7.1 Introduction 171
7.2 Probability 171
7.2.1 The probabilistic model and expected value 171
7.2.2 Examples of expected value calculations 173
7.3 Decision trees 176
7.3.1 Method and applications 176
7.3.2 The value of perfect information 180
7.4 Uncertainty in investment appraisal 181
7.5 Standard deviations to measure risk and uncertainty 182
7.6 Maximin, Maximax and Regret Criteria 183
7.6.1 A practical example 183
7.6.2 The maximin approach 184
7.6.3 The maximax approach 184
7.6.4 The minimax regret approach 184
7.7 Simulation 187
7.8 Summary 187
Revision Questions 189
Solutions to Revision Questions 193
8 Investment Appraisal 199
Learning Outcomes 201
8.1 Introduction 201
8.2 The different appraisal methods 201
8.2.1 Introduction 201
8.2.2 Net present value (NPV) 203
8.2.3 Payback (PB) 205
8.2.4 Discounted payback (DPB) 206
8.2.5 Discounted payback index (DPBI) or profi tability index 207
8.2.6 Internal rate of return (IRR) 208
8.2.7 Multiple IRRs 209
8.2.8 Modifi ed internal rate of return (MIRR) 211
8.2.9 Accounting rate of return (ARR) 212
MANAGEMENT ACCOUNTING – DECISION MANAGEMENT vii
8.2.10 Example comparing ARR and NPV 213 C
O
8.2.11 Summary of the four investment appraisal methods 215 N
T
8.3 Making the cash fl ows and NPV model more realistic 215 EN
T
8.3.1 Using the annuity rate 215 S
8.3.2 Unequal lives 216
8.3.3 Asset replacement cycles 217
8.3.4 Capital rationing 220
8.3.5 The discount rate 221
8.3.6 Sensitivity analysis 221
8.3.7 Risk 225
8.3.8 Infl ation 226
8.3.9 Incorporating the effect of taxation 228
8.4 Post-completion appraisal 231
8.4.1 The investment cycle 231
8.4.2 Benefi ts of post-completion appraisal 233
8.4.3 Project abandonment 234
8.4.4 Role of post-appraisal in project abandonment 237
8.5 Summary 237
Revision Questions 239
Solutions to Revision Questions 247
9 The Value Chain – TQM 261
Learning Outcomes 263
9.1 Introduction 263
9.2 Continuous improvement 263
9.3 Kaizen costing 264
9.4 Value analysis 264
9.5 Functional analysis 265
9.6 The value chain 265
9.7 Just-in-time concept 266
9.8 Total quality management (TQM) 269
9.8.1 Quality as a concept 269
9.8.2 Measuring the cost associated with delivering quality 270
9.8.3 TQM in practice 271
9.8.4 Accounting for quality 272
9.8.5 Criticisms of TQM 272
9.8.6 Conclusion 273
9.9 Business process re-engineering 273
9.10 Gain sharing arrangements 273
9.11 Summary 275
Revision Questions 277
Solutions to Revision Questions 279
10 Activity-based Approaches 285
Learning Outcomes 287
10.1 Introduction 287
10.2 The overhead problem 287
viii MANAGEMENT ACCOUNTING – DECISION MANAGEMENT P2
S 10.2.1 Cost behaviour 287
T
N
E 10.2.2 Absorption costing 288
T
N 10.2.3 Direct product profi tability (DPP) 289
O
C 10.3 Activity-based costing (ABC) 292
10.3.1 Activity-based costing and activity-based management 292
10.3.2 Activity-based management: cost management of activities 293
10.3.3 Costing objects other than products 294
10.3.4 Activity-based management: customer profi tability analysis 295
10.3.5 Distribution channel profi tability 297
10.3.6 Activity-based management: strategic activity management 298
10.3.7 Using ABC in service industries and activities 299
10.3.8 Problems with implementing ABC 299
10.4 Pareto analysis 300
10.4.1 The rule 300
10.4.2 Uses of Pareto analysis 301
10.5 Summary 304
Revision Questions 305
Solutions to Revision Questions 313
11 Learning and Experience Curves 327
Learning Outcome 329
11.1 Introduction 329
11.2 The learning curve 329
11.2.1 Introduction 329
11.2.2 The nature of the learning curve 329
11.2.3 Uses of the learning curve 333
11.2.4 Deriving the learning rate using logs 334
11.2.5 Learned behaviour 335
11.2.6 Experience curves 335
11.3 Summary 338
Revision Questions 339
Solutions to Revision Questions 341
12 Costing Systems 345
Learning Outcomes 347
12.1 Introduction 347
12.2 Costing systems and manufacturing philosophy 347
12.2.1 Introduction 347
12.2.2 Traditional manufacturing philosophy 348
12.2.3 Modern manufacturing philosophy 350
12.2.4 Volume versus variety 350
12.3 Accounting for pull systems – backfl ush accounting 352
12.4 Throughput accounting 355
12.4.1 The theory of constraints (TOC) 355
12.4.2 Throughput accounting (TA) 356
12.4.3 Throughput cost control and effectiveness measures 360
12.4.4 Summary of throughput accounting 361
MANAGEMENT ACCOUNTING – DECISION MANAGEMENT ix
12.5 Cost planning and reduction over the life cycle 362 C
O
12.5.1 Target costing: a strategic profi t management system 362 N
T
12.5.2 Using target costing in the concept and design stages 364 EN
T
12.5.3 Target costing for existing products 365 S
12.5.4 Target costing support systems 365
12.6 Life cycle costing 367
12.6.1 Life cycle costing – introduction 367
12.6.2 Product life cycle costing 367
12.6.3 Customer life cycle costing 370
12.7 Summary 371
Revision Questions 373
Solutions to Revision Questions 379
Preparing for the Examination 383
Revision technique 385
Planning 385
Getting down to work 386
Tips for the fi nal revision phase 386
Format of the examination 387
Structure of the paper 387
Revision Questions 389
Solutions to Revision Questions 441
November 2007 Examinations 535
Index 567