management accounting 2nd ed.- p. weetman (pearson, 2010)

Management Accounting Pauline Weetman second edition Front cover image: © Getty Images Pauline Weetman’s innovative text expertly guides students through the fundamentals of management accounting and provides a solid foundation across the introductory stages and a strong basis for further 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. The second edition provides: Comprehensive coverage of management accounting topics. • Provides a number of unique case studies complete with innovative ideas for • interactive teaching sessions, as well as engaging real-life commentaries. Excellent business focus shows students how management accounting techniques • can be applied in real business situations. Relevant research is outlined to link teaching to current developments. • Extensive coverage of service and not for prot sectors as well as manufacturing. • Practical and imaginative pedagogy includes group discussions and activities, a • management accounting consultant which helps bring topics alive, as well as a wealth of examples, questions and problems throughout. Innovative full colour design brings key issues and essential topics to life. • Fully reects CIMA terminology.• Additional questions based on CIMA examination questions, with worked solutions • and commentary. Up-to-date real world cases to relate topics to the nancial world.• 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 degrees. The text is also suitable for professional courses where management accounting is introduced for the rst time. Pauline Weetman BA, BSc (Econ), PhD, CA, FRSE, is Professor of Accounting at the University of 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 Distinguished Academic Award of the British Accounting Association in 2005. She has convened the examining board of the Institute of Chartered Accountants of Scotland and was formerly Director of Research at ICAS. www.pearson-books.com Management Accounting second edition Weetman Fully supported by a comprehensive suite of student and lecturer resources, including cases with teaching notes, questions and multiple choice questions, PowerPoint slides, lecture notes, graded questions, and solutions to questions in the book. To utilise this excellent online resource visit: www.pearsoned.co.uk\weetman. 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 published 2006 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 10987654321 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 Contentsvi 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 Contentsviii 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 budgeting 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 [...]... illustrations of management situations where management accounting will have a contribution to make The case studies are uncomplicated so that the management accounting applications are intuitively obvious After each case study outline there is a comment on the management accounting aspects You will then meet Fiona McTaggart, a management accounting consultant, who explains how she sees the management accountant’s... developments in management accounting A contingency approach is adopted which emphasises that the selection of management accounting techniques is conditional on management s purpose To meet this purpose, the management accountant performs the roles of directing attention, keeping the score and solving problems Strategic management accounting is emphasised from the outset so that students are aware that management. .. contingency theory of management accounting describes the process of creating a control system for a given set of purposes This is sometimes described in terms of a ‘contingency theory’ of management accounting The management accounting approach is conditioned by (‘contingent upon’) the situation The idea for thinking about management accounting in terms of contingency theory comes from a study of management. .. of management accounting 23 1.7 What 1.7.1 1.7.2 1.7.3 1.7.4 24 24 24 25 25 1.8 Summary the researchers have found Reinventing the management accountant How operations managers use accounting information Perceptions of managers and accountants compared Management accounting in the wider organisation 6 1.3.3 Definition Explain how the definition of accounting represents the subject of management accounting. .. accounting represents the subject of management accounting l Explain the needs of internal users of accounting information l Describe the management functions of planning, decision making and control, and show how these are related within a business activity l Describe the roles of management accounting in directing attention, keeping the score and solving problems l Analyse simple cases where management. .. 8 Process costing Chapter 1 What is management accounting? Real world case 1.1 What is management accounting? Management accounting combines accounting, finance and management with leading edge techniques needed to drive successful businesses It combines technical skills with business management skills Management accountants: l l l l l l advise managers about the financial implications of projects;... Chapter 1 What is management accounting? Contents Introduction 1.1.1 Applying the definition 1.1.2 A contingency approach 1.1.3 Strategic management accounting 4 4 5 6 1.2 Meeting the needs of internal users 6 1.3 Management functions 1.3.1 Planning 1.3.2 Decision making 1.3.3 Control 1.3.4 An organisation chart 1.3.5 Illustration of the interrelationships 7 7 8 10 11 12 1.4 Role of management accounting. .. responsibility for the careful management of the assets and operations of the organisation The way in which the managers of an organisation use financial information is very much contingent on the purpose for which the information is intended Management accounting is a specialist area of study within accounting more generally Ideally, management accounting and financial accounting would coalesce if the... Discussion points 1 Would a critic be justified in saying that management accounting is holding back progress with developing renwable energy? 2 What are the non -accounting benefits of a wind farm that could be set against the accounting costs? 3 Are there any non -accounting costs of setting up a wind farm? Chapter 1 What is management accounting? There are a number of unique real world cases throughout... decisions, and hence different approaches to identifying, measuring and communicating accounting data The following chapters will explain management accounting techniques that have been developed to meet particular needs in making judgements and decisions 1.1.3 Strategic management accounting The traditional approach to management accounting has been to regard internal decision makers as inward looking This . Library Library of Congress Cataloging-in-Publication Data Weetman, Pauline. Management accounting / Pauline Weetman. – 2nd ed. p. cm. ISBN 97 8-0 -2 7 3-7 184 5-1 (pbk.) 1. Managerial accounting. I. Title. HF5657.4.W415. 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. A contingency approach is adopted which emphasises that the selection of management accounting techniques is conditional on management s purpose. To meet this purpose, the management accountant performs