Management and Cost Accounting

by Drury, Colin

• ISBN13: 9781844800285
• ISBN10: 1844800288
• Edition: 6th
• Format: Paperback
• Copyright: 2004-05-13
• Publisher: Cengage Learning EMEA

Summary

The market-leading European text on management accounting and comprehensive authority on all aspects of the subject has been streamlined and substantially redesigned in its 6th edition to make it even more suitable for the needs of today’s student. The aim of the new edition is to explain the principles involved in the design and evaluation of management and cost accounting information systems. The emphasis in the book is on management accounting systems that will be used for internal decision-making purposes within an organisation, however, cost accounting systems for external reporting are also comprehensively covered. It has been brought up to date with the latest developments in the subject. Having been made stronger pedagogically with the addition of the answers to the questions and more real-world mini cases, the text brings home the relevance of the subject matter to the real world of business.

Table of Contents

Preface and walk-through tour	xxi
PART 1 Introduction to Management and Cost Accounting	3	(52)
Introduction to management accounting	5	(24)
The users of accounting information	6	(1)
Differences between management accounting and financial accounting	7	(1)
The decision-making process	8	(4)
Changing competitive environment	12	(1)
Changing product life cycles	13	(1)
Focus on customer satisfaction and new management approaches	13	(3)
The impact of information technology	16	(2)
International convergence of management accounting practices	18	(1)
Functions of management accounting	18	(2)
A brief historical review of management accounting	20	(1)
Summary of the contents of this book	21	(1)
Guidelines for using this book	22	(1)
Summary	22	(2)
Note	24	(1)
Key terms and concepts	24	(1)
Key examination points	25	(2)
Assessment material	27	(2)
An introduction to cost terms and concepts	29	(26)
Cost objects	30	(1)
Direct and indirect costs	30	(2)
Period and product costs	32	(1)
Cost behaviour	32	(5)
Relevant and irrelevant costs and revenues	37	(1)
Avoidable and unavoidable costs	38	(1)
Sunk costs	38	(1)
Opportunity costs	39	(1)
Incremental and marginal costs	39	(1)
Job costing and process costing systems	40	(1)
Maintaining a cost database	40	(2)
Summary	42	(1)
Key terms and concepts	43	(1)
Recommended reading	43	(1)
Key examination points	43	(2)
Assessment material	45	(10)
PART 2 Cost Accumulation for Inventory Valuation and Profit Measurement	55	(206)
Cost assignment	57	(54)
Assignment of direct and indirect costs	58	(1)
Different costs for different purposes	58	(2)
Cost--benefit issues and cost systems design	60	(1)
Assigning direct costs to cost objects	61	(1)
Plant-wide (blanket) overhead rates	61	(2)
Cost centre overhead rates	63	(1)
The two-stage allocation process	64	(1)
An illustration of the two-stage process for a traditional costing system	64	(8)
An illustration of the two-stage process for an ABC system	72	(3)
Extracting relevant costs for decision-making	75	(2)
Budgeted overhead rates	77	(1)
Under-and over-recovery of overheads	77	(1)
Maintaining the database at standard costs	78	(1)
Non-manufacturing overheads	79	(1)
Summary	80	(2)
Appendix 3.1: Inter-service department reallocations	82	(5)
Appendix 3.2: Other allocation bases used by traditional systems	87	(2)
Key terms and concepts	89	(1)
Recommended reading	90	(1)
Key examination points	90	(1)
Assessment material	91	(20)
Accounting entries for a job costing system	111	(42)
Materials recording procedure	112	(1)
Pricing the issues of materials	112	(2)
Control accounts	114	(1)
Recording the purchase of raw materials	115	(3)
Recording the issue of materials	118	(1)
Accounting procedure for labour costs	119	(1)
Accounting procedure for manufacturing overheads	120	(1)
Non-manufacturing overheads	121	(1)
Accounting procedures for jobs completed and products sold	122	(1)
Costing profit and loss account	123	(1)
Interlocking accounting	123	(1)
Accounting entries for a JIT manufacturing system	124	(2)
Contract costing	126	(5)
Work in progress valuation and amounts recoverable on contracts	131	(1)
Summary	132	(2)
Key terms and concepts	134	(1)
Recommended reading	134	(1)
Key examination points	134	(1)
Assessment material	135	(18)
Process costing	153	(44)
Flow of production and costs in a process costing system	154	(1)
Process costing when all output is fully complete	154	(8)
Process costing with ending work in progress partially complete	162	(3)
Beginning and ending work in progress of uncompleted units	165	(4)
Partially completed output and losses in process	169	(1)
Process costing for decision-making and control	170	(1)
Batch/operating costing	171	(1)
Surveys of practice	172	(1)
Summary	172	(2)
Appendix 5.1: Losses in process and partially completed units	174	(5)
Key terms and concepts	179	(1)
Key examination points	180	(1)
Assessment material	181	(16)
Joint and by-product costing	197	(32)
Distinguishing between joint products and by-products	198	(1)
Methods of allocating joint costs	198	(8)
Irrelevance of joint cost allocations for decision-making	206	(2)
Accounting for by-products	208	(2)
By-products, scrap and waste	210	(1)
Summary	210	(1)
Key terms and concepts	211	(1)
Recommended reading	211	(1)
Key examination points	212	(1)
Assessment material	213	(16)
Income effects of alternative cost accumulation systems	229	(32)
External and internal reporting	230	(1)
Variable costing	231	(2)
Absorption costing	233	(1)
Variable costing and absorption costing: a comparison of their impact on profit	234	(2)
A mathematical model of the profit functions	236	(1)
Some arguments in support of variable costing	237	(1)
Some arguments in support of absorption costing	238	(1)
Alternative denominator level measures	239	(3)
Summary	242	(2)
Appendix 7.1: Derivation of the profit function for an absorption costing system	244	(1)
Key terms and concepts	245	(1)
Key examination points	245	(2)
Assessment material	247	(14)
PART 3 Information for Decision-making	261	(326)
Cost--volume--profit analysis	263	(50)
The economist's model	264	(3)
The accountant's cost--volume--profit model	267	(2)
Application to longer-term time horizons	269	(1)
A mathematical approach to cost--volume--profit analysis	269	(5)
Margin of safety	274	(1)
Constructing the break-even chart	274	(2)
Alternative presentation of cost--volume--profit analysis	276	(2)
Multi-product cost--volume--profit analysis	278	(3)
Cost--volume--profit analysis assumptions	281	(3)
Cost--volume--profit analysis and computer applications	284	(1)
Separation of semi-variable costs	284	(1)
Summary	285	(1)
Appendix 8.1: CVP analysis applied to absorption costing	286	(3)
Key terms and concepts	289	(1)
Key examination points	289	(2)
Assessment material	291	(22)
Measuring relevant costs and revenues for decision-making	313	(56)
The meaning of relevance	314	(1)
Importance of qualitative factors	315	(1)
Special pricing decisions	315	(5)
Product-mix decisions when capacity constraints exist	320	(2)
Replacement of equipment -- the irrelevance of past costs	322	(2)
Outsourcing and make or buy decisions	324	(4)
Discontinuation decisions	328	(2)
Determining the relevant costs of direct materials	330	(1)
Determining the relevant costs of direct labour	331	(2)
Misconceptions about relevant costs	333	(1)
Summary	334	(1)
Appendix 9.1: The theory of constraints and throughput accounting	335	(5)
Key terms and concepts	340	(1)
Recommended reading	340	(1)
Key examination points	340	(3)
Assessment material	343	(26)
Activity-based costing	369	(42)
The need for a cost accumulation system in generating relevant cost information for decision-making	370	(1)
Types of cost system	371	(1)
A comparison of traditional and ABC systems	372	(2)
The emergence of ABC systems	374	(1)
Volume-based and non-volume-based cost drivers	374	(3)
Designing ABC systems	377	(4)
Activity hierarchies	381	(2)
Activity-based costing profitability analysis	383	(1)
Resource consumption models	384	(3)
Selecting the cost driver denominator level	387	(2)
Cost versus benefits considerations	389	(1)
Periodic review of an ABC data base	389	(1)
ABC in service organizations	390	(1)
ABC cost management applications	391	(1)
Pitfalls in using ABC information	392	(1)
Summary	393	(3)
Key terms and concepts	396	(1)
Recommended reading	396	(1)
Key examination points	396	(1)
Assessment material	397	(14)
Pricing decisions and profitability analysis	411	(40)
Economic theory	412	(4)
Calculating optimum selling prices using differential calculus	416	(1)
Difficulties with applying economic theory	417	(1)
The role of cost information in pricing decisions	418	(1)
A price setting firm facing short-run pricing decisions	418	(1)
A price setting firm facing long-run pricing decisions	419	(6)
A price taker firm facing short-run product-mix decisions	425	(1)
A price taker firm facing long-run product-mix decisions	425	(2)
Cost-plus pricing	427	(5)
Pricing policies	432	(1)
Customer profitability analysis	433	(2)
Summary	435	(3)
Note	438	(1)
Key terms and concepts	438	(1)
Recommended reading	438	(1)
Key examination points	438	(1)
Assessment material	439	(12)
Decision-making under conditions of risk and uncertainty	451	(42)
A decision-making model	452	(1)
Risk and uncertainty	453	(1)
Probabilities	454	(1)
Probability distributions and expected value	455	(1)
Measuring the amount of uncertainty	456	(3)
Attitudes to risk by individuals	459	(1)
Decision-tree analysis	460	(2)
Cost--volume--profit analysis under conditions of uncertainty	462	(1)
Buying perfect and imperfect information	463	(1)
Maximin, maximax and regret criteria	463	(2)
Portfolio analysis	465	(1)
A more complex illustration	466	(3)
Summary	469	(1)
Appendix 12.1: Cost--volume--profit analysis under conditions of uncertainty	470	(4)
Note	474	(1)
Key terms and concepts	474	(1)
Recommended reading	474	(1)
Key examination points	474	(3)
Assessment material	477	(16)
Capital investment decisions: 1	493	(48)
Objectives of capital budgeting	494	(1)
The opportunity cost of an investment	495	(1)
Compounding and discounting	496	(2)
The concept of net present value	498	(1)
Calculating net present values	499	(2)
The internal rate of return	501	(3)
Relevant cash flows	504	(1)
Timing of cash flows	504	(1)
Comparison of net present value and internal rate of return	504	(4)
Profitability index	508	(1)
Techniques that ignore the time value of money	509	(1)
Payback method	509	(2)
Accounting rate of return	511	(3)
The effect of performance measurement on capital investment decisions	514	(1)
Qualitative factors	515	(1)
The capital investment process	516	(4)
Summary	520	(2)
Note	522	(1)
Key terms and concepts	522	(1)
Recommended reading	523	(1)
Key examination points	523	(2)
Assessment material	525	(16)
Capital investment decisions: 2	541	(46)
The evaluation of mutually exclusive investments with unequal lives	542	(2)
Capital rationing	544	(2)
Taxation and investment decisions	546	(3)
The effect of inflation on capital investment appraisal	549	(3)
Calculating risk-adjusted discount rates	552	(4)
Calculating the required rates of returns on a firm's securities	556	(1)
Weighted average cost of capital	556	(1)
Traditional methods of measuring risk	557	(5)
A summary of risk measurement techniques	562	(4)
Summary	566	(1)
Notes	567	(1)
Key terms and concepts	568	(1)
Recommended reading	568	(1)
Key examination points	568	(1)
Assessment material	569	(18)
PART 4 Information for Planning, Control and Performance Measurement	587	(354)
The budgeting process	589	(54)
Stages in the planning process	590	(3)
The multiple functions of budgets	593	(2)
Conflicting roles of budgets	595	(1)
The budget period	595	(1)
Administration of the budgeting process	596	(1)
Stages in the budgeting process	597	(3)
A detailed illustration	600	(3)
Sales budget	603	(1)
Production budget and budgeted stock levels	604	(1)
Direct materials usage budget	605	(1)
Direct materials purchase budget	605	(1)
Direct labour budget	606	(1)
Factory overhead budget	606	(1)
Selling and administration budget	607	(1)
Departmental budgets	607	(1)
Master budget	608	(1)
Cash budgets	609	(1)
Final review	610	(1)
Computerized budgeting	610	(1)
Activity-based budgeting	611	(4)
The budgeting process in non-profit-making organizations	615	(3)
Zero-based budgeting	618	(3)
Summary	621	(2)
Note	623	(1)
Key terms and concepts	623	(1)
Recommended reading	623	(1)
Key examination points	623	(2)
Assessment material	625	(18)
Management control systems	643	(52)
Control at different organizational levels	644	(1)
Different types of controls	644	(4)
Cybernetic control systems	648	(1)
Feedback and feed-forward controls	649	(1)
Harmful side-effects of control	650	(2)
Advantages and disadvantages of different types of controls	652	(1)
Management accounting control systems	652	(1)
Responsibility centres	653	(2)
The nature of management accounting control systems	655	(1)
The controllability principle	656	(5)
Setting financial performance targets	661	(4)
Participation in the budgeting and target setting process	665	(3)
Side-effects arising from using accounting information for performance evaluation	668	(2)
Summary	670	(2)
Notes	672	(1)
Key terms and concepts	673	(1)
Recommended reading	673	(1)
Key examination points	673	(2)
Assessment material	675	(20)
Contingency theory and organizational and social aspects of management accounting	695	(30)
An overview of contingency theory	696	(2)
The impact of contingent factors on management accounting information systems	698	(7)
Types of controls in relation to the transformation process and output measurement	705	(1)
Scorekeeping and uncertainty	706	(2)
Programmed and non-programmed decisions	708	(1)
Accounting information, decision-making and uncertainty	709	(2)
Purposes of management accounting	711	(5)
Summary	716	(2)
Key terms and concepts	718	(1)
Recommended reading	718	(1)
Key examination points	719	(2)
Assessment material	721	(4)
Standard costing and variance analysis 1	725	(52)
Operation of a standard costing system	726	(3)
Establishing cost standards	729	(3)
Types of cost standards	732	(3)
Variance analysis	735	(1)
Material variances	735	(2)
Material price variances	737	(2)
Material usage variance	739	(1)
Joint price usage variance	740	(1)
Total material variance	740	(1)
Labour variances	741	(1)
Wage rate variance	741	(1)
Labour efficiency variance	742	(1)
Total labour variance	742	(1)
Variable overhead variances	743	(1)
Variable overhead expenditure variance	743	(1)
Variable overhead efficiency variance	744	(1)
Similarities between materials, labour and overhead variances	744	(1)
Fixed overhead expenditure or spending variance	745	(1)
Sales variances	746	(1)
Total sales margin variance	746	(1)
Sales margin price variance	747	(1)
Sales margin volume variance	747	(1)
Difficulties in interpreting sales margin variances	748	(1)
Reconciling budgeted profit and actual profit	748	(1)
Standard absorption costing	748	(2)
Volume variance	750	(1)
Volume efficiency variance	751	(1)
Volume capacity variance	752	(1)
Summary of fixed overhead variances	753	(1)
Reconciliation of budgeted and actual profit for a standard absorption costing system	754	(1)
Performance reports	754	(3)
Summary	757	(1)
Key terms and concepts	758	(2)
Key examination points	760	(1)
Assessment material	761	(16)
Standard costing and variance analysis 2: further aspects	777	(60)
Direct materials mix and yield variances	778	(4)
Sales mix and sales quantity variances	782	(4)
Recording standard costs in the accounts	786	(7)
Accounting disposition of variances	793	(2)
Ex post variance analysis	795	(3)
Variance analysis and the opportunity cost of scarce resources	798	(3)
The investigation of variances	801	(1)
Types of variances	802	(1)
Simple rule of thumb cost investigation models	803	(1)
Statistical models not incorporating costs and benefits of investigation	804	(2)
Decision models with costs and benefits of investigation	806	(2)
Quantity variances	808	(1)
Criticisms of standard costing	809	(3)
The future role of standard costing	812	(3)
Summary	815	(2)
Notes	817	(1)
Key terms and concepts	818	(1)
Recommended reading	818	(1)
Key examination points	818	(1)
Assessment material	819	(18)
Divisional financial performance measures	837	(46)
Functional and divisionalized organizational structures	838	(2)
Profit centres and investment centres	840	(1)
Advantage of divisionalization	840	(1)
Disadvantages of divisionalization	841	(1)
Pre-requisites for successful divisionalization	841	(1)
Distinguishing between the managerial and economic performance of the division	842	(1)
Alternative divisional profit measures	842	(3)
Return on investment	845	(1)
Residual income	846	(2)
Economic value added (EVA™)	848	(2)
Determining which assets should be included in the investment base	850	(1)
The impact of inflation	851	(1)
The impact of depreciation	851	(2)
The effects of performance measurement on capital investment decisions	853	(2)
Determining the divisional cost of capital charge	855	(1)
Addressing the dysfunctional consequences of short-term financial performance measures	856	(2)
Summary	858	(2)
Appendix 20.1: Reconciling short- and long-term residual income/EVA(™) measures	860	(5)
Notes	865	(1)
Key terms and concepts	865	(1)
Recommended reading	866	(1)
Key examination points	866	(1)
Assessment material	867	(16)
Transfer pricing in divisionalized companies	883	(58)
Purposes of transfer pricing	884	(1)
Alternative transfer pricing methods	885	(1)
Market-based transfer prices	886	(4)
Marginal cost transfer prices	890	(1)
Full cost transfer prices	891	(1)
Cost-plus a mark-up transfer prices	892	(1)
Negotiated transfer prices	893	(1)
Marginal cost plus opportunity cost	894	(1)
An illustration of transfer pricing	895	(3)
Proposals for resolving transfer pricing conflicts	898	(6)
Domestic transfer pricing recommendations	904	(1)
International transfer pricing	904	(3)
Economic theory of transfer pricing	907	(6)
Summary	913	(2)
Appendix 21.1: Economic analysis of transfer pricing	915	(5)
Notes	920	(1)
Key terms and concepts	920	(1)
Recommended reading	920	(1)
Key examination points	921	(2)
Assessment material	923	(18)
PART 5 Cost Management and Strategic Management Accounting	941	(92)
Cost management	943	(48)
Life-cycle costing	944	(1)
Target costing	945	(5)
Kaizen costing	950	(1)
Activity-based management	951	(5)
Business process re-engineering	956	(1)
Cost of quality	957	(4)
Cost management and the value chain	961	(4)
Benchmarking	965	(1)
Environmental cost management	965	(2)
Just-in-time systems	967	(4)
Summary	971	(2)
Key terms and concepts	973	(1)
Recommended reading	973	(1)
Key examination points	974	(1)
Assessment material	975	(16)
Strategic management accounting	991	(42)
What is strategic management accounting?	992	(5)
Surveys of strategic management accounting practices	997	(2)
The balanced scorecard	999	(4)
The balanced scorecard as a strategic management system	1003	(1)
Benefits and limitation of the balanced scorecard approach	1003	(1)
Establishing objectives and performance measures	1004	(1)
The financial perspective	1004	(2)
The customer perspective	1006	(3)
The internal business perspective	1009	(4)
The learning and growth perspective	1013	(1)
Performance measurement in service organizations	1014	(3)
Summary	1017	(2)
Note	1019	(1)
Key terms and concepts	1019	(1)
Recommended reading	1019	(1)
Key examination points	1019	(2)
Assessment material	1021	(12)
PART 6 The Application of Quantitative Methods to Management Accounting	1033	(114)
Cost estimation and cost behaviour	1035	(40)
General principles applying to estimating cost functions	1036	(2)
Cost estimation methods	1038	(7)
Multiple regression analysis	1045	(2)
Factors to be considered when using past data to estimate cost functions	1047	(1)
Relevant range and non-linear cost functions	1048	(1)
A summary of the steps involved in estimating cost functions	1049	(2)
Cost estimation when the learning effect is present	1051	(2)
Estimating incremented hours and incremental cost	1053	(1)
Learning curve applications	1054	(1)
Cost estimation techniques used in practice	1055	(1)
Summary	1056	(1)
Appendix 24.1: Tests of reliability	1057	(7)
Key terms and concepts	1064	(1)
Recommended reading	1064	(1)
Key examination points	1064	(1)
Assessment material	1065	(10)
Quantitative models for the planning and control of stocks	1075	(32)
Why do firms hold stocks?	1076	(1)
Relevant costs for quantitative models under conditions of certainty	1076	(1)
Determining the economic order quantity	1077	(3)
Assumptions of the EOQ formula	1080	(1)
Application of the EOQ model in determining the optimum size for a production run	1081	(1)
Quantity discounts	1082	(1)
Determining when to place the order	1083	(1)
Uncertainty and safety stocks	1084	(1)
The use of probability theory for determining safety stocks	1085	(2)
Control of stocks through classification	1087	(1)
Other factors influencing the choice of order quantity	1088	(1)
Materials requirement planning	1089	(2)
Just-in-time purchasing arrangements	1091	(1)
Summary	1091	(2)
Note	1093	(1)
Key terms and concepts	1093	(1)
Recommended reading	1093	(1)
Key examination points	1093	(2)
Assessment material	1095	(12)
The application of linear programming to management accounting	1107	(40)
Single-resource constraints	1108	(1)
Two-resource constraints	1108	(1)
Linear programming	1109	(2)
Graphical method	1111	(5)
Simplex method	1116	(4)
Interpreting the final matrix	1120	(1)
Opportunity cost	1120	(1)
Substitution process when additional resources are obtained	1121	(1)
Uses of linear programming	1122	(3)
Summary	1125	(1)
Appendix 26.1: The application of linear programming to capital budgeting	1126	(2)
Notes	1128	(1)
Key terms and concepts	1128	(1)
Key examination points	1128	(3)
Assessment material	1131	(16)
PART 7 Case studies	1147	(18)
Bibliography	1165	(22)
Appendices
Appendix A	1174	(4)
Appendix B	1178	(4)
Appendix C	1182	(1)
Appendix D	1183	(1)
Appendix E	1184	(3)
Answers to Review problems	1187	(86)
Index	1273