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MANAGEMENT ACCOUNTING BEST PRACTICES A Guide for the Professional Accountant STEVEN M. BRAGG JohnWiley&Sons,Inc. Management Accounting Best Practices A Guide for the Professional Accountant MANAGEMENT ACCOUNTING BEST PRACTICES A Guide for the Professional Accountant STEVEN M. BRAGG JohnWiley&Sons,Inc. Thisbookisprintedonacid-freepaper.(cid:1)1 Copyright#2007byJohnWiley&Sons,Inc.Allrightsreserved. PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey. PublishedsimultaneouslyinCanada. WileyBicentennialLogo:RichardJ.Pacifico Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedin anyformorbyanymeans,electronic,mechanical,photocopying,recording,scanning,or otherwise,exceptaspermittedunderSection107or108ofthe1976UnitedStatesCopyright Act,withouteitherthepriorwrittenpermissionofthePublisher,orauthorizationthrough paymentoftheappropriateper-copyfeetotheCopyrightClearanceCenter,Inc.,222 RosewoodDrive,Danvers,MA01923,978-750-8400,fax978-646-8600,oronthewebat www.copyright.com.RequeststothePublisherforpermissionshouldbeaddressedtothe PermissionsDepartment,JohnWiley&Sons,Inc.,111RiverStreet,Hoboken,NJ07030, 201-748-6011,fax201-748-6008. LimitofLiability/DisclaimerofWarranty:Whilethepublisherandauthorhaveusedtheir besteffortsinpreparingthisbook,theymakenorepresentationsorwarrantieswithrespect totheaccuracyorcompletenessofthecontentsofthisbookandspecificallydisclaimany impliedwarrantiesofmerchantabilityorfitnessforaparticularpurpose.Nowarrantymay becreatedorextendedbysalesrepresentativesorwrittensalesmaterials.Theadviceand strategiescontainedhereinmaynotbesuitableforyoursituation.Youshouldconsultwitha professionalwhereappropriate.Neitherthepublishernorauthorshallbeliableforanyloss ofprofitoranyothercommercialdamages,includingbutnotlimitedtospecial,incidental, consequential,orotherdamages. Forgeneralinformationonourotherproductsandservices,ortechnicalsupport,please contactourCustomerCareDepartmentwithintheUnitedStatesat800-762-2974,outside theUnitedStatesat317-572-3993orfax317-572-4002. Wileyalsopublishesitsbooksinavarietyofelectronicformats.Somecontentthatappears inprintmaynotbeavailableinelectronicbooks. LibraryofCongressCataloging-in-PublicationData: ISBN:978–0471–74347–7 PrintedintheUnitedStatesofAmerica 10 9 8 7 6 5 4 3 2 1 To the crew at Wiley, with whom I have worked since the previous century: Sheck, John, Judy, Natasha, Helen, and Brandon. Contents Preface xi About the Author xiii Free Online Resources bySteve Bragg xv 1 BudgetingDecisions 1 HowDoesthe System of Interlocking Budgets Work? 1 What Doesa Sample Budget Look Like? 10 HowDoesFlexBudgetingWork? 28 What Best PracticesCanI Apply tothe Budgeting Process? 29 HowCan I Integratethe Budget into the Corporate ControlSystem? 35 HowDo ThroughputConceptsImpactthe Budget? 37 2 Capital Budgeting Decisions 44 HowDoesa ConstrainedResource Impact Capital Budgeting Decisions? 44 What Isthe True Cost ofa CapacityConstraint? 45 HowDo IIdentifya ConstrainedResource? 47 When Should I Investina ConstrainedResource? 49 Should IIncrease Sprint Capacity? 49 HowCloselyShould ILink Capital Expenditures toStrategy? 50 What Format Should I Use for a Capital Request Form? 51 Should IJudge Capital Proposals Based onTheir Discounted Cash Flows? 51 HowDo ICalculate the CostofCapital? 54 When Should I Use the Incremental Cost of Capital? 58 HowDo IUse Net Present Value inCapital Budgeting? 60 What Proposal Form Should IRequire for aCash FlowAnalysis? 62 Should IUse the PaybackPeriod inCapital Budgeting? 64 HowCan a Post-CompletionAnalysis Help Me? 65 What Factors Should IConsider for a Site Selection? 67 3 Credit and Collection Decisions 69 HowDo ICreate and Maintain a CreditPolicy? 70 When Should I Require aCreditApplication? 72 HowDo IObtain Financial Information About Customers? 73 HowDoesa Credit Granting System Work? 74 What Payment Terms Should IOfferto Customers? 76 vii