CIMA’S Official Learning System Managerial Level Management Accounting – Decision Management Colin Wilks Louise Burke CIMA Publishing is an imprint of Elsevier Linacre House, Jordan Hill, Oxford OX2 8DP, UK 30 Corporate Drive, Suite 400, Burlington, MA 01803, USA First edition 2008 Copyright © 2008 Elsevier Ltd 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 the prior written permission of the publisher Permissions may be sought directly from Elsevier’s Science & Technology Rights Department in Oxford, UK: phone (ϩ44) (0) 1865 843830; fax (ϩ44) (0) 1865 853333; e-mail: permissions@elsevier.com Alternatively you can visit the Science and Technology Books website at www.elsevierdirect.com/rights for further information Notice No responsibility is assumed by the publisher for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use or operation of any methods, products, instructions or ideas contained in the material herein British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library 978-0-7506-8958-8 For information on all CIMA publications visit our website at www.elsevierdirect.com Typeset by Charontec Ltd., A Macmillan Company (www.macmillansolutions.com) Printed and bound in Italy 07 08 09 10 10 Working together to grow libraries in developing countries www.elsevier.com | www.bookaid.org | www.sabre.org Contents The CIMA Learning System Acknowledgements How to use your CIMA Learning System Guide to the Icons used within this Text Study technique Management Accounting – Decision Management Syllabus Transitional arrangements Revision of Basic Aspects, Classifications and Approaches to Cost Accounting Learning Outcome 1.1 Introduction 1.2 What is meant by cost? 1.3 Cost units 1.3.1 Composite cost units 1.4 Cost centres 1.5 Classification of costs 1.5.1 Classification of costs according to their nature 1.5.2 Classification of costs according to their purpose 1.5.3 Other examples of cost classification 1.6 Cost behaviour 1.6.1 Fixed cost 1.6.2 Variable cost 1.6.3 Semi-variable cost 1.6.4 Analysing semi-variable costs 1.6.5 Using historical data 1.7 The elements of cost 1.8 Summary Absorption Costing, Activity-based Costing and Marginal Costing 2.1 2.2 2.3 2.4 2.5 2.6 Learning Outcome Introduction Overhead allocation and apportionment Overhead absorption Applying the overhead absorption rate Selecting the most appropriate absorption rate Predetermined overhead absorption rates 2.6.1 Under- or over-absorption of overheads 2.6.2 The reasons for under- or over-absorption iii xi xi xi xii xiii xv xix 3 4 5 6 7 10 10 13 13 14 15 17 17 17 18 18 19 20 20 21 MANAGEMENT ACCOUNTING – DECISION MANAGEMENT P2 2.6.3 2.6.4 CONTENTS iv 2.7 2.8 2.9 2.10 2.11 2.12 2.13 2.14 2.15 Accounting for under- or over-absorbed overheads The problems caused by under- or over-absorption of overheads Illustrative example Recent developments in absorption costing methods 2.8.1 The criticisms of the traditional approach 2.8.2 Activity-based costing The difference between marginal costing and absorption costing Marginal costing and contribution Preparing profit statements using marginal costing and absorption costing 2.11.1 Profit statements using marginal costing 2.11.2 Profit statements using absorption costing Reconciling the profit figures 2.12.1 Reconciling the profits given by the different methods 2.12.2 Reconciling the profits for different periods 2.12.3 Profit differences in the long term Should marginal costing or absorption costing be used? A comprehensive example of ABC Summary Breakeven Analysis 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12 3.13 3.14 Learning Outcomes Introduction Breakeven or cost–volume–profit analysis 3.2.1 Calculating the breakeven point The margin of safety The contribution to sales (C/S) ratio Drawing a basic breakeven chart The contribution breakeven chart The profit–volume chart 3.7.1 The advantage of the profit–volume chart The limitations of breakeven (or CVP) analysis The economist’s breakeven chart Using costs for decision-making 3.10.1 Short-term decision-making Evaluating proposals Multi-product CVP analysis Using the C/S ratio–an example Summary Revision Questions Solutions to Revision Questions Relevant Cost and Short-term Decisions 4.1 4.2 Learning Outcomes Introduction Relevant costs 4.2.1 Non-relevant costs 21 22 22 24 24 24 28 28 29 30 30 31 31 32 32 33 33 44 45 47 47 47 47 48 49 50 52 52 53 54 55 55 56 56 58 60 61 63 67 73 75 75 75 75 MANAGEMENT ACCOUNTING – DECISION MANAGEMENT Revision Questions Solutions to Revision Questions Linear Programming Learning Outcomes 5.1 Introduction 5.2 Basic linear programming 5.2.1 Formulating the mathematical model 5.2.2 The graphical method of solving linear programming models 5.2.3 Further examples of the construction and graphing of constraints 5.2.4 Multiple solutions 5.2.5 Slack and surplus 5.2.6 Shadow prices and opportunity costs 5.3 The Simplex method 5.3.1 Formulating the problem 5.3.2 Interpreting the solution 5.4 Worth and relative loss 5.5 Summary Revision Questions Solutions to Revision Questions Pricing 6.1 6.2 6.3 6.4 Learning Outcomes Introduction Demand and the product life cycle 6.2.1 Price elasticity of demand 6.2.2 The product life cycle 6.2.3 The profit-maximisation model 6.2.4 Limitations of the profit-maximisation model Pricing strategies based on cost 6.3.1 Total cost-plus pricing 6.3.2 Marginal cost-plus pricing Other pricing strategies 6.4.1 Premium pricing 77 77 78 78 78 78 78 79 80 80 80 83 85 91 93 101 109 111 111 111 112 113 117 119 121 123 124 124 125 126 128 129 133 139 141 141 141 141 146 148 150 150 150 153 154 154 CONTENTS 4.3 Opportunity costs 4.3.1 Examples of opportunity costs 4.3.2 Notional costs and opportunity costs 4.4 Avoidable, differential and incremental costs 4.4.1 Avoidable costs 4.4.2 Differential/incremental costs 4.4.3 Using incremental costs 4.4.4 Incremental revenues 4.4.5 Minimum price quotations for special orders 4.5 Limiting factor decision-making 4.5.1 Decisions involving a single limiting factor 4.6 Further decision-making problems 4.6.1 A practical example 4.7 Summary v MANAGEMENT ACCOUNTING – DECISION MANAGEMENT P2 6.4.2 Market skimming 6.4.3 Penetration pricing 6.4.4 Price differentiation 6.4.5 Loss leader pricing 6.4.6 Product bundling 6.4.7 Pricing with additional features 6.4.8 Using discounts in pricing 6.4.9 Controlled pricing 6.5 Summary CONTENTS vi Revision Questions Solutions to Revision Questions Risk and Uncertainty Learning Outcomes 7.1 Introduction 7.2 Probability 7.2.1 The probabilistic model and expected value 7.2.2 Examples of expected value calculations 7.3 Decision trees 7.3.1 Method and applications 7.3.2 The value of perfect information 7.4 Uncertainty in investment appraisal 7.5 Standard deviations to measure risk and uncertainty 7.6 Maximin, Maximax and Regret Criteria 7.6.1 A practical example 7.6.2 The maximin approach 7.6.3 The maximax approach 7.6.4 The minimax regret approach 7.7 Simulation 7.8 Summary Revision Questions Solutions to Revision Questions Investment Appraisal Learning Outcomes 8.1 Introduction 8.2 The different appraisal methods 8.2.1 Introduction 8.2.2 Net present value (NPV) 8.2.3 Payback (PB) 8.2.4 Discounted payback (DPB) 8.2.5 Discounted payback index (DPBI) or profitability index 8.2.6 Internal rate of return (IRR) 8.2.7 Multiple IRRs 8.2.8 Modified internal rate of return (MIRR) 8.2.9 Accounting rate of return (ARR) 154 155 155 156 156 157 159 159 160 161 165 169 171 171 171 171 173 176 176 180 181 182 183 183 184 184 184 187 187 189 193 199 201 201 201 201 203 205 206 207 208 209 211 212 MANAGEMENT ACCOUNTING – DECISION MANAGEMENT 8.4 8.5 Revision Questions Solutions to Revision Questions The Value Chain – TQM 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 9.10 9.11 Learning Outcomes Introduction Continuous improvement Kaizen costing Value analysis Functional analysis The value chain Just-in-time concept Total quality management (TQM) 9.8.1 Quality as a concept 9.8.2 Measuring the cost associated with delivering quality 9.8.3 TQM in practice 9.8.4 Accounting for quality 9.8.5 Criticisms of TQM 9.8.6 Conclusion Business process re-engineering Gain sharing arrangements Summary Revision Questions Solutions to Revision Questions 10 Activity-based Approaches 10.1 10.2 Learning Outcomes Introduction The overhead problem 213 215 215 215 216 217 220 221 221 225 226 228 231 231 233 234 237 237 239 247 261 263 263 263 264 264 265 265 266 269 269 270 271 272 272 273 273 273 275 277 279 285 287 287 287 CONTENTS 8.3 8.2.10 Example comparing ARR and NPV 8.2.11 Summary of the four investment appraisal methods Making the cash flows and NPV model more realistic 8.3.1 Using the annuity rate 8.3.2 Unequal lives 8.3.3 Asset replacement cycles 8.3.4 Capital rationing 8.3.5 The discount rate 8.3.6 Sensitivity analysis 8.3.7 Risk 8.3.8 Inflation 8.3.9 Incorporating the effect of taxation Post-completion appraisal 8.4.1 The investment cycle 8.4.2 Benefits of post-completion appraisal 8.4.3 Project abandonment 8.4.4 Role of post-appraisal in project abandonment Summary vii MANAGEMENT ACCOUNTING – DECISION MANAGEMENT P2 CONTENTS viii 10.3 10.4 10.5 11 10.2.1 Cost behaviour 10.2.2 Absorption costing 10.2.3 Direct product profitability (DPP) Activity-based costing (ABC) 10.3.1 Activity-based costing and activity-based management 10.3.2 Activity-based management: cost management of activities 10.3.3 Costing objects other than products 10.3.4 Activity-based management: customer profitability analysis 10.3.5 Distribution channel profitability 10.3.6 Activity-based management: strategic activity management 10.3.7 Using ABC in service industries and activities 10.3.8 Problems with implementing ABC Pareto analysis 10.4.1 The rule 10.4.2 Uses of Pareto analysis Summary Revision Questions 287 288 289 292 292 293 294 295 297 298 299 299 300 300 301 304 305 Solutions to Revision Questions 313 Learning and Experience Curves Learning Outcome 11.1 Introduction 11.2 The learning curve 11.2.1 Introduction 11.2.2 The nature of the learning curve 11.2.3 Uses of the learning curve 11.2.4 Deriving the learning rate using logs 11.2.5 Learned behaviour 11.2.6 Experience curves 11.3 Summary Revision Questions Solutions to Revision Questions 12 Costing Systems 12.1 12.2 12.3 12.4 Learning Outcomes Introduction Costing systems and manufacturing philosophy 12.2.1 Introduction 12.2.2 Traditional manufacturing philosophy 12.2.3 Modern manufacturing philosophy 12.2.4 Volume versus variety Accounting for pull systems – backflush accounting Throughput accounting 12.4.1 The theory of constraints (TOC) 12.4.2 Throughput accounting (TA) 12.4.3 Throughput cost control and effectiveness measures 12.4.4 Summary of throughput accounting 327 329 329 329 329 329 333 334 335 335 338 339 341 345 347 347 347 347 348 350 350 352 355 355 356 360 361 MANAGEMENT ACCOUNTING – DECISION MANAGEMENT 12.6 12.7 Cost planning and reduction over the life cycle 12.5.1 Target costing: a strategic profit management system 12.5.2 Using target costing in the concept and design stages 12.5.3 Target costing for existing products 12.5.4 Target costing support systems Life cycle costing 12.6.1 Life cycle costing – introduction 12.6.2 Product life cycle costing 12.6.3 Customer life cycle costing Summary Revision Questions Solutions to Revision Questions Preparing for the Examination Revision technique Planning Getting down to work Tips for the final revision phase Format of the examination Structure of the paper Revision Questions Solutions to Revision Questions 362 362 364 365 365 367 367 367 370 371 373 379 383 385 385 386 386 387 387 389 441 November 2007 Examinations 535 Index 567 CONTENTS 12.5 ix MANAGEMENT ACCOUNTING – DECISION MANAGEMENT 570 INDEX Breakeven charts, 50–1, 54, 66, 70, 71 Britax Wingard, 269 Budgeting, capital budgeting, 201, 202, 367, 370 Bundling, 156–7 Business process re-engineering, 273 C/S see Contribution to sales (C/S) ratio CAD see Computer aided design (CAD) CAE see Computer aided engineering (CAE) CAM see Computer aided manufacturing (CAM) Capacity: linear programming, 124–6 proposal evaluation, 56 Capital budgeting, 201, 202, 367, 370 Capital investment appraisals, 253, 255, 493, 513 see also Investment appraisals Capital rationing, 220–1 Cash flows: discounted cash flow, 205, 216, 221 product life cycles, 271, 380, 466 Change: breakeven analysis, 47–50 costs, 157 manufacturing philosophy, 347–51 total quality management, 269–73 Committed costs, 76 Committees, 272, 367 Competitive advantages, 266 Complementary products, price elasticity, 146 Composite cost units, Computer aided design (CAD), 269, 366 Computer aided engineering (CAE), 366 Computer aided manufacturing (CAM), 269, 348 Computer systems see Information technology (IT) Computeractive magazine, 156 Conformance costs, 282 Constraints: graphical solutions, 137 linear programming, 136 specifying, 113 see also Limiting factors Continuous improvement, 263 Contribution: breakeven analysis, 47, 49, 52 concepts, 28–9, 52 limiting factors, 80, 82, 153 linear programming, 111 marginal costing, 28 Contribution to sales (C/S) ratio, 49–50 Controllable costs, Controlled prices, 159–60 Cooper, Robin, 294 Corporation tax, investment appraisals, 228 Cost accounting: classifications, 5–6 concepts, 3–6 elements of cost, 13–14 fixed costs, 7–8 high–low method, 11–12 scattergraph method, 12–13 semi-variable costs, 10–13 variable costs, Cost behaviour, 7–13 Cost buckets see Cost pools Cost centres, Cost drivers, 24, 28, 25, 36, 294, 299, 302 Cost objects, 24 Cost of capital, 204 Cost of Quality Report, 272 Cost-plus pricing, 150–2 Cost pools, 25 Cost units, Cost-volume-profit (CVP) analysis, 47–8 see also Breakeven analysis Costing systems: absorption costing, 24–6 activity-based costing, 24–6 change, 157 customer life cycle costing, 370–1 just-in-time system, 266 life cycle costing, 367–71 manufacturing philosophy, 347–8 product life cycle costing, 368–71 pull systems, 267–9 standard costing, 366 target costing, 363 see also Marginal costing Costs: activity-based management, 292–3 batch sizes, 279, 348, 376, 461 behaviour, 7–13 changes, 157 classification, 5–6 concepts, 3–6 decision-making, 55–6 drivers, 25, 294, 299, 302 economies of scale, 55, 60, 147, 168, 381, 382 elements, 13–14 INDEX DCF see Discounted cash flow (DCF), concepts Decision-making: absorption costing, 33 breakeven analysis, 47 capital budgeting, 202, 367, 370 decision-maker types, 172 information, 13 limiting factors, 80–3 linear programming, 124–6, 356 Pareto analysis, 301–2 post-completion appraisals, 231–7 short-term, 56, 75–6, 488 total quality management, 269–73 Decision trees: concepts, 176 considerations, 179–80 Decision variables, linear programming, 113 Demand: elasticities, 141–6, 152 pricing, 141–6 product life cycles, 146–8 Depreciation, 76, 96, 212 Differential costs, 78 Differentiated products, 146 Direct costs, attributable fixed costs, 77 labour, 8, 9, 19, 34, 288, 333, 398, 409 materials, 8, 20 wages cost percentage, 20 Direct product profitability (DPP): concepts, 289–91 historical background, 289 Discount rates, investment cash flow, 532 Discounted cash flow (DCF), concepts, 238 Discounted payback (DPB), 206–7 Discounted payback index (DPBI), 207–8 Discounts, 159 Disposable income, price elasticity, 146 Distribution channel profitability, 297 DPB see Discounted payback (DPB) DPBI see Discounted payback index (DPBI) DPP see Direct product profitability (DPP) Economies of scale, 55, 60, 168, 381, 382 Economists: breakeven chart, 55 profit maximisation issues, 359 Effectiveness measures, throughput accounting, 360–1 Efficiencies, 279, 294, 468 EFTPOS, 291 Elasticities of demand, 141–6 Employee empowerment, 271 EPOS, 269, 291 Examinations: format/paper structure, 387 preparation, 385–7 revision questions, 389–440 revision technique, 385–6 solutions to revision questions, 441–534 Expected values, 174, 182 Experience curves, 335–8 External failure cost, 270, 282 Extra features, pricing, 157–9 Facility level activities, 26 Feasible region, linear programming, 114, 125 Fixed costs: breakeven analysis, 47–52 overhead problem, 287–8 MANAGEMENT ACCOUNTING – DECISION MANAGEMENT experience curves, 330–5 mark-ups, 150–2 minimisation, 116–17 nature classification, 5–6 non-relevant, 6, 55, 75–6 overhead allocation, 17–18 pricing strategies, 150–4 product variety issues, 350–1 production run costs, 349 purpose classification, relevant, 6, 55, 75–6 semi-variable, 10 short-term decision making, 56 stock holding costs, 349 theory of constraints, 355–6 throughput accounting, 357–8 total quality management, 270–1 variable, 6, 8–10 volumes, 47, 55, 141–2 see also Fixed costs; Marginal costing; Overhead costs Cox, J., 355 Creditworthiness checks, 362, 372 Cross-elasticity of demand, 141–6 Customer service Customers: activity-based costing, 24–5, 292, 293 life cycle costing, 370–1 Pareto analysis, 301 CVP see Cost-volume-profit (CVP) analysis 571 MANAGEMENT ACCOUNTING – DECISION MANAGEMENT 572 INDEX Fixed costs: (continued) per unit, short-term decision making, 56, 488 throughput accounting, 356 Fixed-overhead absorption rates, 20 Fixed overheads, 76 Flexible manufacturing systems (FMS), 348 Functional analysis, 265 Future costs, 76 Gain sharing arrangements, 273–5 Galloway, David, 356 Garrett Automotive, 349 Genka kikaku, 502 Goldratt, Eli, 355, 356 Grocery trade, 289 Grundig, 363 Heijunka principle, 269 Hewlett-Packard, 369–70 High–low method, 11–12 Historical cost depreciation, 76 Historical data, semi-variable costs, 10–13 Human resources: direct labour, 19, 21 target costing, 264, 362 Idle time, 401 Income: elasticity of demand, 141–6 price elasticity, 141, 146 Incremental costs, 78 Incremental revenues, 79 Indifference point, 222 Indirect costs, Inefficiencies, 279, 294 Inflation, 226–7 breakeven analysis, 47–72 semi-variable costs, 10–13 Information: activity-based costing, 24–5, 292 perfect information, 180–1 pricing decisions, 142–6 Information technology (IT): direct product profitability, 289–91 linear programming, 124–6 Simplex method, 124–6 Internal failure costs, 270, 282 Internal rate of return (IRR), 208–9, 211 concepts, 209 multiple IRRs, 209–11 usage statistics, 208–9 Investment appraisals: abandonment considerations, 234–7 benefit types, 233–4 corporation tax, 228 inflation, 226 post-completion, 231–7 return on investment, 212–13 sensitivity analysis, 221–4 taxation, 228 uncertainty, 181 see also Net present value (NPV) IRR see Internal rate of return (IRR) IT see Information technology (IT) Japan, 263, 264, 318, 319, 349, 362, 366, 461, 502 Joint products, 90 Just-in-time (JIT) system, 266–9 concepts, 266–9 production, 281 purchasing, 267 suppliers, 268 total quality management, 269–73 Kaizen costing, 264 Kanbans, 268, 280 Kaplan, R, 294 Kato, 362, 366 Kinked demand curve, 145, 146 Knowledge see Information Labour: absorption costing, 24, 33, 288–9, 292, 318, 344, 488 linear programming, 111–28 Lead times, 268, 361 Learned behaviour, 335 Learning curves: concepts, 329 definition, 329 formula, 332 uses, 333 Ledger accounts, backflush accounting, 352–4 Life cycle costing: concepts, 367, 466 product life cycle costing, 367–70 Limiting factors, 41 linear programming, 111 short-term decision making, 80–3 INDEX Machine hour rate, 19, 21, 28 Management: activity-based, 292–300 by walking about, 360 project management, 366 strategic activity, 298 see also Planning; Total quality management (TQM) Management Today, 269 Manufacturing: cost hierarchy, 25 lead time, 268, 361 philosophy changes, 350 Margin of safety, 48 Marginal cost-plus pricing, 153–4 Marginal costing, 17–31 absorption costing, 24, 28, 29, 33 contribution, 28–9 historical background, 359 marginal revenues, 148, 161 profit statements, 30 Marginal revenues, 148, 161 Mark-ups, 150–2 Market shares, product life cycles, 271, 347, 380, 466 Market skimming pricing strategies, 154–5 Materials: absorption costing, 288 linear programming, 111–28 Maximised profit issues, 148, 153 Minimum price quotations, 56, 80 Modified internal rate of return (MIRR), 211–12 Monetary cost of capital, 226 Monte Carlo techniques, 187 Multiple IRRs, 209–11 Multiple solutions, linear programming, 119–21 Multi-product CVP analysis, 58–60 Net present value (NPV): asset replacement cycles, 217 capital rationing, 220–1 concepts, 203–4 discount rates, 221 indifference point, 222, 461, 479 inflation, 226 realistic approaches, 233 sensitivity analysis, 221–2 taxation, 228–31 unequal lives, 216–17 usage statistics, 203 Network diagrams, theory of constraints, 355–6 Non-controllable costs, Non-financial factors, 56, 86, 87 Non-linear variable costs, 54 Non-negativity conditions, 113 Non-relevant costs, 6, 75–6 Normal costs, Notional costs, 76, 78 NPV see Net present value (NPV) OARs see Overhead absorption rates (OARs) Objective functions, 112 Objective variables, 112 Operating gearing, 60–1 Operating leverage, 60–1 Opportunity costs: linear programming, 111–28 short-term decision making, 80–3 Optimum defects level, 272 Over-absorption, 20, 21, 31, 32 Overhead absorption rates (OARs), 20–1 predetermined, 20 Overhead costs, 20 absorption costing, 288–9 activity-based costing, 24–8 allocation, 17–18 apportionment, 17–18 MANAGEMENT ACCOUNTING – DECISION MANAGEMENT Linear programming, 111–28 airline industry, 127 concepts, 111 constraints, 117–19, 136 decision variables, 113 formulation of model, 112–13 graphical solutions, 113–17 limiting factors, 111 manufacturing industry, 128 multiple solutions, 119–21 non-negativity conditions, 113 nutritionists, 128 opportunity costs, 123–4 relative loss, 126–8 shadow prices, 123–4 Simplex method, 124–6 slack and surplus, 121–2 specifying constraints, 113 throughput accounting, 355–62 worth, 126–8 Linear variable costs, 8, Loss leaders, 156 573 MANAGEMENT ACCOUNTING – DECISION MANAGEMENT 574 INDEX Overhead costs (continued ) concepts, 17, 18 over- or under-absorption, 291, 466 Pareto analysis, 300 problems, 287–91 short-term decision making, 56, 80–3 P/V see Profit-volume (P/V) ratio Pareto analysis, 300 activity-based costing (ABC), 292 concepts, 300 uses, 301–2 Past costs, 75 Pay-off, decision trees, 177 Payback (PB), 205–6 concepts, 205 Penetration pricing, 155 Perfect information, 180–1 Planning, 364, 385–6 see also Management Post-completion appraisals, 231–7 abandonment considerations, 234–7 benefits, 516 Post-completion audits, 233, 234, 515 Predetermined overhead absorption rates, 20–2 Premium pricing, 154 Prevention costs, 270–1, 282 Price elasticity of demand, 141–6 concepts, 143 influencing factors, 146 product life cycles, 146–8 Price stickiness, 145 Pricing, 150–4 bundling strategies, 156–7 controlled prices, 159–60 cost-plus pricing, 150–2 demand, 155 differentiation, 155–6 discounts, 159 experience curves, 335–8 extra features, 157 learning curves, 329–5 loss leaders, 156 mark-ups, 150–2 market skimming strategies, 154–5 penetration pricing, 155 premium pricing, 154 price differentiation, 155–6 product life cycles, 146–8, 347, 380 profit maximisation issues, 359 psychological considerations, 144 regulating bodies, 159 skimming strategies, 154 target costing, 264, 362 Prime cost percentage, 20 Privatisations, 159 Probabilities: calculation examples, 171–6 decision trees, 176–81 expected values, 171–6 Processing time, 268 Product contribution, Pareto analysis, 302 Product costing, 20, 43, 292, 293, 361, 362, 408 Product level activities, 26 Product life cycles, 146–8, 347, 380 cash flow management, 369 concepts, 147 costing, 150 design costs, 369 price elasticity of demand, 155–6 returns maps, 369, 370 target costing, 264, 362 time to market issues, 369 Product-specific fixed costs, 77 Production: absorption costing, 288–9 costs, 43 just-in-time system, 266 lead times, 268 plans, 80, 360 run costs, 43, 349 Products: bundling, 156–7 differentiation, 155–6 direct product profitability, 289–91 experience curves, 335–8 extra features, 157–9 returns per minute, 357 variety explosion, 349, 351 see also Pricing Profit sharing see Gain sharing arrangements Profit statements, costing, 29, 30 Profit-volume (P/V) ratio, 49 Profitability index, 207, 220 Profits: breakeven analysis, 222 concepts, 47 constraints, 47–8 customers, 295 direct product profitability, 289–91 life cycle costing, 367 INDEX Quality issues, 282 absorption costing, 288–9 concept, 269 premium pricing, 154 see also Total quality management (TQM) Rate per unit, 19 Raw and in progress accounts (RIPs), 353 Real cost of capital, 238, 532 Reconciliation, profits, 31 Rectification costs, 270 Regulating bodies, 159 Relative loss, linear programming, 126–8 Relevant costs, 75–7 decision making, 55–6 short-term decision making, 75–91 Research and development (R&D): target costing, 465–6 value chain, 265–6 Resource cost drivers, 24 Resources see Constraints Retailers: activity-based costing, 24–8 direct product profitability, 289 Return on investment (ROI), 212–13 Returns: accounting rate of return, 212–13 internal rate of return, 208–9 maps, 369, 370 per time period ratio, 356 product returns per minute, 357 Revenues, 79 expected values, 174, 188, 530 life cycle costing, 367 marginal revenues, 148, 161 product life cycles, 146–8 short-term decision making, 75–91 see also Profits Revision technique, 385–6 RIPs see Raw and in progress accounts (RIPs) Risk, 171 breakeven analysis, 222 concepts, 171 decision-maker types, 176 investment appraisals, 181 standard deviations, to measure, 182 see also Uncertainty ROI see Return on investment (ROI) Routines, 237, 335, 386 Sales: breakeven analysis, 222 volume interactions, 141–2 Sanyo, 294 Scattergraph method, 12–13 Segmentation, 155 Selling costs, 32, 149 Semi-variable costs, analysis, 10–13 Sensitivity analysis, 179, 221 concepts, 221–2 definition, 221 Sequential tracking systems, 352 Services: activity-based costing, 24–8 direct product profitability, 289–91 Shadow prices, 123–4 Short-term decision making, 75–91 accept/reject order decision, 83 closure decision, 87 incremental revenues, 79 limiting factors, 80–3 minimum price quotations, 80 opportunity costs, 77–8 Simplex method, 124–6 Simulations, 187 Skimming pricing strategies, 154–5 Slack, linear programming, 121–2 Split-off point, 90 Spreadsheets, 223 Standard costing, 280, 362, 364, 365 Standard deviations, 182 Stepped fixed costs, 7, MANAGEMENT ACCOUNTING – DECISION MANAGEMENT mark-ups, 150–2 maximisation, 359 pricing, 150–2, 154 product life cycles, 146–8 reconciliation, 31 return on investment, 212–13 strategic issues, 360 target costing, 264, 362 see also Revenues Projects: abandonment considerations, 234–7 investment appraisals, 236 management, 366 post-completion, 231–7 Proposal evaluation, 56–8 Psychological considerations, price changes, 144 Pull system, 266, 267, 268, 352 Purchasing, just-in-time system, 267, 280 Push system, 267 575 MANAGEMENT ACCOUNTING – DECISION MANAGEMENT 576 INDEX Stock: breakeven analysis, 222 holding costs, 281, 320, 349 just-in-time system, 267 Pareto analysis, 301–4 Strategic activity management, 293, 298 Strategic issues, 360 Strict equalities, 114, 118 Sunk costs, 75, 90, 153, 250 Suppliers, just-in-time system, 268, 280 Support systems, target costing, 365–6 Surplus, linear programming, 121–2 TA see Throughput accounting (TA) Target costing, 264, 362 breakdown, 265, 355 concepts, 362 existing products, 365 planning, 362, 364 support systems, 365–6 Taxation, investment appraisals, 228 Teams, 271 Theory of constraints (TOC), 355–6 Throughput accounting (TA), 355–7 concepts, 355–7 effectiveness measures, 360–1 limiting factors, 357 product costing, 20, 43, 292, 362 Time value of money, 179 TOC see Theory of constraints (TOC) Total cost-plus pricing, 150–2 Total quality management (TQM), 269–73 costs, 291 criticisms, 272–3 just-in-time system, 266 practice, 271–2 quality concept, 269 value chain, 265–6 Toyota, 267, 349 TQM see Total quality management (TQM) Travel expenses, 85 Uncertainty, 171–87 concepts, 171 investment appraisals, 181 perfect information, 180 reduction techniques, 362–4 standard deviations, to measure, 182 see also Risk Under-absorption, 21, 22, 32, 466 Uniform costing see Absorption costing Unit level activities, 25 Unit variable costs, 54, 163 United States of America (USA), 319, 355, 356 Utility theory, 172 Value analysis (VA), 264–5 Value chains, 265–6, 268 Value engineering (VE), 366 Variable costs, 472 breakeven analysis, 222 per unit, 8, 56, 163 short-term decision making, 75–91 Variances, 466 Variety explosion, products, 349, 351 VE see Value engineering (VE) Volume interaction: pricing, 150–2, 154 sales, 141–2 variety, cost relationship, 351 Waldron, David, 356 WCM see World-class manufacturing (WCM) WDA see Writing-down allowances (WDA) Wealth distribution, 300 Wedgwood, Josiah, 155 World-class manufacturing (WCM), 266 Worth, linear programming, 126–8 Writing-down allowances (WDA), 228 May 08 Q&A To access the May 08 Q&A for the book you have bought please follow these instructions: Go to http://cimapublishing.com/QandA Follow the step-by-step instructions on the site Fill in the registration form Download the PDF for immediate access to Q&As Get 10% Discount off your next order Quote ATP8 when ordering or add it to the offer code box online Order Form Post this form to: For CIMA Official Study Materials for 2008 Exams QTY PAPER TITLE ISBN-13 PRICE TOTAL CIMA Official 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Name: Signature: Date: Better Exam Results CIMA: Pass First Time! A Guide for Business and Accounting Students David Harris 2nd Edition Sam Malone Shows CIMA students how to make the best use of valuable study time to pass exams first time Explains how to organise study, make notes, read faster and more effectively and improve your memory for maximising performance in the exam room Leading training consultant provides study and exam tips for success, particularly in CIMA exams but also for wider business exams and lifelong learning ISBN-13: 978 07506 63571 : Price:£12.99 Get the most out of your study time, and maximum marks at exam time – this book shows you how to work smarter, not harder Written by a CIMA Examiner and Tutor, this study buddy shows you exactly what the examiner is looking for Illustrations, mind-maps and cartoons cool your nerves and show you how to plan and write your answer succinctly and successfully ISBN-13: 978 07506 83968 : Price:£12.99 Give CIMA Publishing Your Feedback and Win a Prize Win your choice of further Learning Systems or an iPod Feedback form: CIMA Official Learning Systems 2008 Editions How did you use your CIMA Official Learning System? □ Self-study (book only) □ On a full course? 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If so, please elaborate below CIMA’s Official Learning Systems Q&As with examiners’ answers CIMA research reports CIMA eSuccess CDs CIMA Revision cards Related accountancy and management books News and critical deadline remnders from CIMA Prize draws and competitions NEW Revision Resource on CD ● The only CBA preparation software and question bank endorsed by CIMA ● Questions written by the CIMA Faculty ● Assess your readiness for the CBA ● Identify areas you need to prioritise in your revision ● Increase your mark with the e-tutorials and feedback C1 CIMA eSuccess Fundamentals of Management Accounting 978 7506 8181 £24.99 C2 CIMA eSuccess Fundamentals of Financial Accounting 978 7506 8180 £24.99 C3 CIMA eSuccess Fundamentals of Business Maths 978 7506 8178 £24.99 C4 CIMA eSuccess Fundamentals of Business Economics 978 7506 8182 £24.99 C5 CIMA eSuccess Fundamentals of Ethics, CG and Law 978 7506 8179 £24.99 Complete eSuccess CD 978 7506 8183 £99.99 Self Review Mode Progress questions to help you test and develop your knowledge Receive immediate marking on your answer, with full workings to explain the correct one Self Test Mode A timed test to simulate the CBA At the end you will receive a report showing your overall mark and areas of strength and weakness Order Today and receive 10% off Quote ATP8 when ordering or add it to the offer code box online PHONE: +44 (0)1865 474 014 ONLINE: www.cimapublishing.com/esuccess www.cimapublishing.com ... group of questions relate THE CIMA LEARNING SYSTEM Management Accounting – Decision Management Syllabus xv THE CIMA LEARNING SYSTEM xvi MANAGEMENT ACCOUNTING – DECISION MANAGEMENT P2 Section B –... factor decision- making 4.5.1 Decisions involving a single limiting factor 4.6 Further decision- making problems 4.6.1 A practical example 4.7 Summary v MANAGEMENT ACCOUNTING – DECISION MANAGEMENT. .. Students who have passed the Management Accounting – Decision Making paper under the Beyond 2000 syllabus will be given a credit for the Management Accounting – Decision Management paper under the