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 profit 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 reflects 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 financial world 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 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 Front cover image: © Getty Images CVR_WEET8451_02_SE_CVR.indd Management Accounting Pauline Weetman second edition Weetman 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 first time second edition Management Accounting 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 www.pearson-books.com 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 l l Multiple choice questions to help test your learning Extensive links to valuable resources on the web 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.) Managerial accounting I Title HF5657.4.W415 2010 658.15′11—dc22 2010000671 10 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 Preface Publisher’s acknowledgements Part Chapter DEFINING, REPORTING AND MANAGING COSTS What is management accounting? Real world case 1.1 Learning outcomes 1.1 1.2 1.3 1.4 1.5 Chapter xiv xvi xvii Introduction Meeting the needs of internal users Management functions Role of management accounting Judgements and decisions: case study illustrations 14 17 Real world case 1.2 Real world case 1.3 18 23 1.6 1.7 1.8 23 24 25 The language of management accounting What the researchers have found Summary References and further reading Questions Case studies Notes 26 26 30 30 Classification of costs 31 Real world case 2.1 Learning outcomes 31 32 2.1 2.2 2.3 2.4 33 33 33 34 Definition of a cost The need for cost classification The meaning of ‘activity’ and ‘output’ Variable costs and fixed costs Real world case 2.2 39 2.5 2.6 2.7 39 41 43 Direct costs and indirect costs Product costs and period costs Cost classification for planning, decision making and control Real world case 2.3 46 vi Contents Chapter Chapter Chapter 2.8 Cost coding 2.9 Cost selection and reporting 2.10 Summary 47 48 49 References and further reading Questions Case studies 49 50 53 Materials and labour costs 54 Real world case 3.1 Learning outcomes 54 55 3.1 3.2 3.3 3.4 56 57 60 63 Introduction Accounting for materials costs Costs when input prices are changing Accounting for labour costs Real world case 3.2 Real world case 3.3 64 66 3.5 3.6 66 67 What the researchers have found Summary References and further reading Questions Case studies Note 67 67 69 69 Overhead costs 70 Real world case 4.1 Learning outcomes 70 71 4.1 72 Introduction Real world case 4.2 73 4.2 4.3 4.4 74 85 94 Production overheads: traditional approach Activity-based costing (ABC) for production overheads Comparing traditional approach and ABC Real world case 4.3 95 4.5 4.6 96 97 What the researchers have found Summary References and further reading Questions Case studies Notes 98 98 103 104 Absorption costing and marginal costing 105 Real world case 5.1 Learning outcomes 105 106 5.1 5.2 107 107 Introduction A note on terminology: marginal or variable? Contents 5.3 5.4 5.5 5.6 Chapter Chapter Illustration of absorption and marginal costing Over- and under-absorbed fixed overheads Case study Why is it necessary to understand the difference? 107 110 113 116 Real world case 5.2 117 5.7 5.8 5.9 117 119 119 Absorption costing in financial accounting Arguments in favour of absorption costing Arguments in favour of marginal costing Real world case 5.3 120 5.10 What the researchers have found 5.11 Summary 121 121 References and further reading Questions Case studies Note 122 122 126 126 Job costing 127 Real world case 6.1 Learning outcomes 127 128 6.1 6.2 129 130 Introduction Job cost records: an illustration Real world case 6.2 134 6.3 6.4 135 140 Job costing: applying the accounting equation to transactions Moving forward Real world case 6.3 141 6.5 6.6 141 142 What the researchers have found Summary References and further reading Questions Case studies 142 143 146 Recording transactions in a job-costing system 147 Real world case 7.1 Learning outcomes 147 149 7.1 7.2 7.3 7.4 149 150 150 152 Introduction Types and titles of cost ledger accounts The flow of entries in a job-costing system Recording transactions for a job-costing system Real world case 7.2 157 7.5 7.6 7.7 7.8 157 165 168 174 The use of control accounts and integration with the financial accounts Contract accounts Illustration of contract accounting What the researchers have found Real world case 7.3 175 7.9 175 Summary vii viii Contents Chapter Reference and further reading Questions Case studies 175 176 180 Process costing 181 Real world case 8.1 Learning outcomes 181 182 8.1 8.2 183 184 Introduction Allocation of costs to products in a process industry Real world case 8.2 191 8.3 192 Joint product costs and by-products Real world case 8.3 196 8.4 8.5 8.6 196 197 198 Decisions on joint products: sell or process further What the researchers have found Summary References and further reading Questions Case studies Part Chapter Chapter 10 199 199 203 DECISION MAKING Short-term decision making 206 Real world case 9.1 Learning outcomes 206 207 9.1 9.2 9.3 9.4 9.5 9.6 208 208 213 216 219 220 Introduction Cost behaviour: fixed and variable costs Break-even analysis Using break-even analysis Limitations of break-even analysis Applications of cost–volume–profit analysis Real world case 9.2 221 9.7 222 Cases in short-term decision making Real world case 9.3 226 9.8 Estimating fixed and variable costs 9.9 What the researchers have found 9.10 Summary 227 228 229 References and further reading Questions Case studies 230 230 236 Relevant costs, pricing and decisions under uncertainty 237 Real world case 10.1 Learning outcomes 237 238 Contents Chapter 11 Chapter 12 10.1 Introduction 10.2 Relevant costs and revenues 239 239 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 10.5 What the researchers have found 10.6 Summary 247 254 255 References and further reading Questions Case studies 256 256 261 Capital investment appraisal 263 Real world case 11.1 Learning outcomes 263 264 11.1 Capital project planning and decisions 11.2 Payback method 11.3 Accounting rate of return 265 267 269 Real world case 11.2 271 11.4 Net present value method 11.5 Internal rate of return 271 277 Real world case 11.3 280 11.6 Which methods are used in practice? 11.7 What the researchers have found 11.8 Summary 280 281 282 References and further reading Questions Case studies Appendix: table of discount factors 283 283 286 287 Capital budgeting applications 289 Real world case 12.1 Learning outcomes 289 290 12.1 Introduction 12.2 Capital rationing 12.3 Cash flows for discounting calculations 291 291 295 Real world case 12.2 299 12.4 Control of investment projects: authorisation and review 12.5 Advanced manufacturing technologies 300 301 Real world case 12.3 303 12.6 What the researchers have found 12.7 Summary 304 305 References and further reading Questions Case studies 305 306 311 ix www.downloadslide.com 578 Index cost driver rates 85, 91–2 cost drivers 85, 86, 89 cost leadership 487 cost-plus pricing (full cost pricing) 243–4, 244 –5, 254 cost pools 85, 86, 89–90, 94 cost of quality 46, 496–7 cost savings 500 cost system complexity 96 cost–volume–profit analysis 208–13 applications 220–7 Costigan, M.L 452 costing absorption see absorption costing for competitive advantage 488–93 job costing see job-costing system marginal see marginal costing process see process costing costs 4, 20 –1 average cost 61–3 avoidable/unavoidable 413 behaviour in the short term 208–13 classification of 31–53, 208 for control 45 for decision making 43–4 labour costs 65 materials costs 60 to meet changing circumstances 45 – need for 33 for planning 43, 44 controllable/non-controllable 48, 412–13, 440 customer-driven 494–5 definition 33 direct see direct costs e-business 500 fixed see fixed costs flow of 135, 136 hierarchy of 493–4 incremental 196–7, 239–42 indirect see indirect costs labour see labour costs materials see materials costs period 33, 41–3, 166–7, 169 product see product costs relevant 43, 195, 239–42, 254, 255 selection and reporting 48–9 semi-variable 37, 38 standard see standard costs step 37–8 total cost 35 – 6, 208–12, 227–8 variable see variable costs costs of holding inventory 470, 473–4 costs of ordering inventory 470–1, 473–4 Covidien 484 creditors 462, 464, 465, 467 creditors budget 318, 331 creditors (suppliers) payment period 465, 468 critical factor (in budgeting) 321 Crown Prosecution Service (CPS) 95, 97 current assets 462, 462–4, 466, 466–8 current liabilities 462, 464–6, 466–8 current ratio 468 currently attainable standards 373 customer-driven costs 494–5 customer order processing 498 customer perspective 421, 422, 423 customer profiling 490 customer profitability analysis 489 customer satisfaction 420, 498 customers collection period 463, 468 dairy farming 31 data migration 501 Davis, S 428–9 De Meyer, A 497 debtors 330, 462, 463–4, 467 debtors budget 318, 330 debtors (customers) collection period 463, 468 decision making 8–10 capital investment 266–7 capital rationing 292 case studies of judgements and decisions 17–23 cost classification for 43–4 e-business 500–1 interrelationships with planning and control 12–14 under risk and uncertainty 247–54 decision-relevant approach 239–42 decision rules capital rationing 292 IRR 280 NPV 273–4 decision trees 251–2 defence contracts 372 delivery costs 495 delivery note 58 Delphi Corporation 491 Delta Air Lines 226 demand for activities 85, 91 depreciation 269, 270, 271, 282, 299 design innovations 301 Deutsche Telekom 198 digital services 500 direct costs 33, 39–41, 56, 72–3, 328 see also direct labour costs; direct materials costs direct labour budget 318, 332 www.downloadslide.com Index direct labour costs 56, 65 cost control account 159–62 job costing 129, 130, 132, 135, 137, 154, 154–5 direct labour variances 377–8, 384–6, 392–3 efficiency variance 377, 378, 385, 392–3 rate variance 377, 378, 385, 392–3 direct materials budget 318, 331–2 direct materials costs 56, 60 cost control account 159, 160 job costing 129, 130, 132, 135–7, 150, 153 direct materials variances 375–7, 383–4, 392 price variance 376, 377, 383, 384, 392 usage variance 376, 377, 383, 384, 392 directing attention 14–15, 16, 397 discount factor tables 272–3, 287–8 discount rate 272, 274 IRR 277–9 sensitivity to changes in 294–5 discounted cash flow methods 271–80, 281 see also internal rate of return (IRR); net present value (NPV) discounting 272 cash flows for discounting calculations 295 –9 divisible projects 292 divisional performance 436–58 economic value added 450–1, 452 management accounting approach 439– 40 residual income 441–2 return on investment 440–1 return on investment vs residual income 443 – transfer pricing 446–50, 452–3 divisionalisation 438–40 divisions 438 Dixon, R 198 Drickhamer, D 477 Driving Standards Agency (DSA) 427 Drury, C 96 Dugdale, D 353 Dunk, A.S 490 e-business 499–502 e-commerce 499–502 economic factors, in pricing 243 economic order quantity (EOQ) 472–4, 477 economic value added (EVA) 450–1, 452 economist’s view contribution analysis 229 of cost 208, 209–10 pricing decisions 254 economy 426 effectiveness 426, 501 efficiency 426 Eggleton, I.R.C 363 Ekholm, B.-G 362–3 electricity pricing 237 employer’s labour costs 63 employment services business 496 energy crop projects 303 enterprise resource planning (ERP) 301–2, 304 environmental resources 121 equivalent units of output 184, 185, 186, 188, 190 Europe investment appraisal methods 281 job costing 142 Evans, G.E 340 Everaert, P 489 ex ante standards 373 ex post standards 373 execution technologies 302 executive agencies 427, 429–30 expected cost 250, 251 external capital rationing 291 external failure costs 497 external reporting 116 facility-sustaining activities 86–7 failure costs 496–7 fairness 14, 15–16 favourable variance 354–5, 375, 383–4, 387 feed forward control 410 feedback 352 feedback control 410–11 filters 389–90 finance director 11, 12 finance function 11–12 finance plan 318 financial accounting 116, 149 absorption costing in 117–19 control accounts and integration with 157–65 integrated system 150 financial controller 11, 12 financial management 460–83 banker’s perspective 477 business plans 475–6 current assets 462, 462–4, 466, 466–8 current liabilities 462, 464–6, 466–8 just-in-time purchasing 46, 302, 474–5, 477–8 planning and controlling inventory 463, 470–5 small businesses 476 types of business 477 working capital see working capital 579 www.downloadslide.com 580 Index financial perspective 421, 422, 423 financial reporting standards 117–19 finished goods 462, 463 cost control account 163, 165 job costing 135, 136, 138, 139, 152, 155, 156 first-in-first-out (FIFO) 61–3, 187 First ScotRail 242 fixed assets fixed costs 33, 36 –7, 38–9, 43–4 labour 65 materials 60 short-term decision making 208–13 break-even analysis and change in 219 break-even analysis and covering 217 estimating fixed costs 227–8 see also fixed overhead costs fixed overhead cost variances 379–81, 387, 393 expenditure variance 380, 381, 387, 393 volume variance 380, 381, 387, 393 fixed overhead costs 84–5, 118 over- and under-absorbed 110–13, 113 –15 flexible budgets performance evaluation and reporting 414 –17 variance analysis 354–6, 390–5 flexible manufacturing systems (FMS) 302 flow of costs 135, 136 Flying Brands 206 focused factory 302 forecasts 319, 362 sales forecasts 317–18 France 429 free gifts of products 120 frequency of budgeting 340 of performance reporting 411–12 Fulcrum Lighting 141 full cost pricing (cost-plus pricing) 243–4, 244 –5, 254 full costing see absorption costing functional strategic planning further processing costs 193–4 decision 196–7 General Motors 64 GlaxoSmithKline 120 Go-Ahead 117 González-Benito, J 477 government departments 359, 360 Govindarajan, V 396 Greasley, A 97 grocery retailing 228–9 Groth, J.C 229 group effects 352–3 Guilding, C 254, 304 Hansen, S.C 362 Hart, S.J 487–8 Hayward, C 174 healthcare resource groups (HRGs) 121 hierarchy of costs 493–4 high-low method 227–8 HM Revenue and Customs 63 Holweg, M 497 Hopper, T 496 Hoque, A 477 hospital trusts 121 hospitals 140 hourly rate 63, 64, 65 hours worked 64, 65, 83 house building 395 household running costs 46 Howorth, C 476 human resource management (HRM) 25 ICAEW 362 ideal standard 373 IDS Scheer 395 imposed budget 322 imputed interest 442 in-house activity vs bought-in services 221–2, 226–7 incentive pay schemes 63–4, 66–7 incomplete contracts 165–6 incremental analysis 239–42 incremental budgets 356, 357–8 incremental costs 198–9, 239–42 incremental revenues 196–7, 239–42 indirect costs 33, 39–41, 56, 72, 73 allocating and apportioning to cost centres 74–6 see also indirect labour costs; indirect materials costs indirect labour costs 56, 65 cost control account 159–62 job costing 135, 137, 154 indirect materials costs 56, 60 cost control account 159, 160 job costing 135–6, 137, 150, 153, 153–4 inflation 297–8 information system, quality of 490 Innes, J 25 inputs changing input prices 60–3 input-based budget systems 356, 357–8 quality of 420 integrated system 150 www.downloadslide.com Index interest charges 299 internal business perspective 421, 422, 423 internal capital rationing 291, 292 internal failure costs 496–7 internal rate of return (IRR) 277–80, 281, 282, 293 decision rule 280 renewable energy technologies 303 internal reporting 6–7 internal users 6–7 International Accounting Standards Board 117–18 internet grocery retailing 228–9 interpolation 278–9 intuition 389 inventory (stock) 63, 462–3, 497 absorption costing and marginal costing 108, 109 falling levels 109–10, 115, 116 rising levels 110, 115, 116 cost control accounts 159, 160 finished goods see finished goods job costing 135, 135–6, 150, 151, 153, 156 planning and controlling 463, 470–5 raw materials see raw materials return to a supplier 153 stock budget 318, 331 stockholding period 463 valuation 117–19, 397 work-in-progress see work-in-progress working capital 467, 468 investigation of variances 389–90 investment appraisal see capital investment appraisal investment centres 48–9, 410, 411, 439 invoices 58, 465 inward focus 14, 15 items remaining at the end of the accounting period 167, 169–70 job cost 56 job cost records 20–1, 59, 129–30, 130–3 information for 130–2 presentation 132–3 job-costing system 127–82 applying the accounting equation to transactions 135–9 book production 141–2 contract accounts 165–74 European perspective 142 flow of entries 150–2 recording transactions 152–6 spreadsheet analysis 138–9 use of control accounts and integration into financial accounts 157–65 job satisfaction 363 joint probabilities 250–1 joint products 184, 192 costs 192–5, 198 decisions 196–7 judgements 5, 17–23, 389 just-in-time purchasing 46, 302, 474–5, 477–8 kaizen costing 490 Kaplan, R.S 86 keeping the score 14, 15–16, 397 Kerry Foods 436 key performance indicators (KPIs) 407–8, 420 labour costs 56, 63–6 cost control account 159–2 direct see direct labour costs indirect see indirect labour costs job costing 135, 136, 137, 150–1, 154–5, 156 outsourcing labour services 66–7 recording 65 labour hours 64, 65, 78, 83 landfill gas projects 303 Langfield-Smith, K 66–7 language 23–4 Languell, J 490 last-in-first-out (LIFO) 61–3 lead time 471 lean accounting 491, 492 learning and growth perspective 421, 422, 423 ledger acccounts contract ledger accounts 168, 172–4 flow of entries in a job-costing system 150–2 recording transactions for a job-costing system 152–6 types and titles of cost ledger accounts 150 use of control accounts and integration with the financial accounts 157–65 Leong, M.K.C 363 liabilities, current 462, 464–6, 466–8 library budget process 340 life-cycle costing 489–90 limiting factors 221, 224–5 Lin, T.W 489 line of best fit 228 line item budgets 356, 357 line managers, negotiating budgets with 321–2, 323, 328–9 Liu, L 97 liquid ratio 468 Llewellyn, S 121, 398 581 www.downloadslide.com 582 Index location of customers 495 decisions 12–13 long-range planning 316, 317 Lovata, L 452 Lowson, R.H 255 Lucas, M 254 Lyne, S 353 machine hours 78 Major, M 496 make or buy decisions 20–1, 221–2, 225–6 Malaysia 398 management inward and outward focus 14, 15 managers’ and accountants’ perceptions compared 25 separation of ownership and operation 304 use of performance measurement 424–8 management accounting 2–30 comparison of management accountants’ and managers’ perceptions 25 contingency approach 5–6 cycle of profit planning and control 16 –17 definition 4–5 judgements and decisions 17–23 language of 23–4 meeting needs of internal users 6–7 operations managers’ use of accounting information 24–5 reinvention of management accountant 24 role of 14–17 ABC 88 absorption costing vs marginal costing 116 capital investment appraisal 265 process businesses 183–4 standard costing 397 strategic 6, 15, 484–93 tasks and skills 24 in the wider organisation 25 management control system 10 management functions 7–14 absorption costing vs marginal costing 116 control see control cost classification 43–5 decision making see decision making interrelationships 12–14 organisation chart 11–12 planning see planning variance analysis and 397 Manchester United football club 477 manufacture and assembly process design 301 manufacturing businesses 6, 56, 74 make or buy decisions 20–1, 221–2, 225–6 product costs and period costs 42–3 standard costing 398 manufacturing resource planning (MRPII) 301–2 margin of safety 212, 218 margin of safety percentage 218 marginal cost pricing 245 transfer pricing 447, 449–50 marginal costing 105–26 arguments in favour 119–20 importance of understanding difference from absorption costing 116 over- and under-absorbed fixed overheads 110–13, 113–15 mark-up percentages 243, 244–5 market-based transfer price 447 market domination 498 marketing 487–8, 501 marketing expense budget 318, 333 master budget 318, 321, 333–5 matching 15 materials costs 56, 57–60 changing input prices 60–3 cost control account 159, 160 direct see direct materials costs indirect see indirect materials costs job costing 135–7, 139 separate analysis of materials and conversion costs in process costing 189–91 materials handling and control documentation 58–9 procedures 57 materials received note 58 materials requirements planning (MRP) 301–2 maximum level of inventory 471, 472 McCosker, P 477 mental health patients 359 merit pay 64 Metro Group, The 450–1 Miller, J.A 495 minimum level of inventory 471, 472 Modarress, B 490 monitoring 324 monopoly 243 Monster 127 mortgage interest payments 46 most likely outcome 247–9 motivation 351–2, 425–6 Moussatche, H 490 www.downloadslide.com Index multiple-period capital rationing 292 multiple products, break-even analysis for 219 mutually exclusive projects 292–3 My.N 157 National Health Service (NHS) 23, 105 absorption costing 121 National Reference Costing Exercise 398 NHS Trusts 357 Private Finance Initiative 304–5 Programme Budgeting 359–60 national insurance contributions 63 needs 352, 425 negotiated transfer price 447 negotiation of budgets 321–2, 323, 328–9 Nelson, D 491 net cash from operating activities 407 net operating profit after tax (NOPAT) 451 net present value (NPV) 271–7, 280, 281, 293 caution against using in public sector evaluation 281–2 changes in discount rate 294–5 decision rule 273–4 impact of uncertainty 277 Network Rail 263 New Zealand 191 Newman, M 304 non-controllable costs 48, 412–13, 440 non-divisible projects 292 non-financial performance measures 327, 419–21 non-profit-making organisations 359, 361 normal level of activity 113, 118, 119 ‘normal’ mark-up 245 Northcott, D 121, 398 notional sales value at the point of separation 194 Novartis 120 ntl Incorporated 280 objective probabilities 249 objectives 316, 317, 320–1, 328 O’Dea, T 25 Office of Gas and Electricity Markets (Ofgem) 237 official document service 428 offshore wind projects 18, 303 oligopoly 243 onshore wind projects 303 opening work-in-progress 184–5 process costing with 187–9 process costing without 185–7 operating costs 500 operational budgets 318, 321 operational excellence 408 operational planning 7, 8, 9, 16, 17, 362 operations managers 24–5 opportunity cost 239, 240 organisation chart 11–12 organisational performance 25 organisational politics 354 outcomes analysis and decision making 247–54 e-business and effective outcomes 501 range of 247–9 output 34 level to be used in setting standards 373–4 output-based budgeting 356–7, 359–61 outsourcing 66–7, 497 outward focus 14, 15 over-absorbed fixed overhead 111–12, 113–15 overarching technologies 302 overdrafts 464–5 overhead cost recovery 78–81, 82 under-recovery and over-recovery 82–4 overhead costs 40, 41–2, 56, 70–104, 243 absorption see absorption over- and under-absorbed fixed overheads 110–13, 113–15 overestimating 83–4 predetermined rates 82, 85 production overhead costs see production overhead costs underestimating 83 over-recovered fixed overhead cost 83–4 overstocking 470 overtrading 468–70 ownership-management separation 304 Oyelere, P.B 453 Parker, L 24 participation 352 participative budget 321–2 pay schemes bonus schemes 63, 452 incentive pay schemes 63–4, 66–7 types of 63 payback method 267–9, 281 payback period 268 payments on account of progress 166 penalties 424, 425–6 penalty clauses 300 percentage mark-up on cost 243, 244–5 Perera, S 452 perfectly competitive markets 243 583 www.downloadslide.com 584 Index performance, standards and 373 performance evaluation 16–17, 362, 407–35 Balanced Scorecard 421–4, 428–9, 487 behavioural aspects 413–14 benchmarking 46, 418–19, 424 budgets and 327 criticisms of performance targets in public service 429–30 divisional performance see divisional performance French tableau de bord 429 how to report 412–13 management use of 424–8 non-financial performance measures 327, 419 –21 preparing performance reports 411–12 variance analysis and 398 what to measure 412 performance management corporate 429 public sector 426–8 performance-related pay (PRP) 63–4 performance reports 411–12, 414–17 period costs 33, 41–3 contract accounts 166–7, 169 pharmaceutical companies 120 physical flows 184–5, 186, 188, 190 physical measure-based joint costs 192–3 Pierce, B 25 planning 7– 8, budgets and 324–5 business plans 475–6 capital investment projects 265–7 cost classification for 43, 44 e-business 499–500 interrelationships with decision making and control 12–14 long-range 316, 317 operational 7, 8, 9, 16, 17, 362 variance analysis and integrating costs into 398 planning and control techniques 301–2 planning programming budgeting systems (PPBS) 359–60 plant-wide cost rates 84 police 73 custody system 97 politics, organisational 354 Porter, M.E 491 post-completion audit 265, 300–1 predetermined fixed overhead cost rate 85 predetermined overhead cost rates 82 prediction 247, 255 prepayments 464 present value 272–3 prevention costs 496–7 price break-even analysis and change in selling price 218 costs and changing input prices 60–3 variations and variance analysis 398 pricing decisions 17–19, 243–6 economist’s view 254 range of prices 245–6 variance analysis and integrating costs into 398 primary care trusts (PCTs) 360 primary records 58–9 prime cost of production 41–2, 56, 129, 130 principal–agency relationship 304 Private Finance Initiative (PFI) 304–5 probability analysis 249–51 problem solving 14, 16, 397 process costing 181–201 allocation of costs to products 184–91 by-products 184, 192, 194–5 decisions on joint products 196–7 joint costs 192–5, 198 process costs, standard costs and ABC 197–8 process quality 420 product costs 33, 41–3, 93 total product cost 41, 56, 129, 130 product differentiation 245, 487 product life cycle 245–6, 489 life-cycle costing 489–90 product profitability 488–9 product-sustaining activities 86 production production cost budget 333, 338 production cost centres 74–8 apportioning service department costs over 76–8 production overhead budget 318, 332 production overhead costs 41–2, 56, 70–104 ABC 85–94 comparing traditional approach and ABC 94–6 cost control account 162–3 job costing 129, 130, 132, 135, 136, 137–8, 151–3, 154, 155, 156 traditional approach 74–85 production plan 8, 318, 321, 330 production volume 328 profit accounting rate of return 269–71 break-even analysis and desired level of 217 www.downloadslide.com Index profit (continued) comparison of absorption costing and marginal costing 107–9, 115–16 contract accounting 168, 170, 171–2, 173, 174 cycle of profit planning and control 16 –17 divisional performance 439–40 over-recovered and under-recovered overhead 84 profit controllable by the division 439– 40 reconciliation of budgeted and actual profit 382, 387–8, 394 profit centres 48, 410, 411 profit and loss statements based on absorption costing 107, 108, 109, 110, 111, 112 based on marginal costing 108–9, 110, 112 budget profit and loss account 318, 334, 335 profit margins profit–volume chart 215–16 profit–volume ratio 215, 216 profitability 440, 498 customer profitability analysis 489 target costs and product profitability 488 –9 profitability index 292, 293 profits warnings 340 programme budgeting 359–60 progressive change 496 project accountant 11, 12 project selection 267 promotion costs 495 proxy statements 452 public benefit organisations 361 public sector 56 capital rationing 291 criticisms of performance targets in public service 429–30 NPV in public-sector evaluation 281–2 performance management in 426–8 standard costing 398 see also National Health Service (NHS) Punch Taverns 271, 418 purchase order 58 purchase requisition 58 purchases budget 318, 331 purchasing manager 54 quality 495 cost of quality 46, 496–7 performance measures 420 TQM 302, 496–7 quality teams 498 quantity-based performance measures 419–20 quarterly budgets 336–40 raw materials 463 converting into work-in-progress 135, 137, 153 reconciliation of budgeted and actual profit 382, 387–8, 394 recovered costs 79 see also overhead cost recovery regressive change 496 relative sales values 193 relevant costs 43, 195, 239–42, 254 establishing 255 relevant revenues 239–42 renewable energy 18, 303 Renewables Obligation (RO) 303 re-order level 471, 472 re-order quantity 471, 472 repeated distribution method 76, 78 research and development 452 residual income (RI) 441–2 selection between ROI and 443–6 residual value 274 resource allocation 354 responsibility centres 48, 410, 411 see also cost centres; investment centres retention of title 465 return (in relation to investment) 19–20 return on investment (ROI) 440–1 selection between residual income and 443–6 revenues 4, 152 accountant’s view 211–12 e-business 499–500 economist’s view 209–10 incremental 196–7, 239–42 relevant 239–42 review of budgets 323–4 cycle of review and corrective action 412 post-completion audit 265, 300–1 rewards 424, 425–6 Riceman, S.S 452 Ring, L.J 228–9 risk, decision making under 247–54 risk aversion 247 risk neutrality 247 risk seekers 247 robotics 302 Roslender, R 487–8 rounding errors 275 Royal Dutch/Shell 221, 407–8 585 www.downloadslide.com 586 Index SAGE job costing software 175 salary 63, 65 see also labour costs; wages sale-or-return 465 sales 4, 495 break-even analysis and change in selling price 218 job costing and selling costs 135, 138, 151, 152, 155, 156 joint costs allocation based on notional sales value at the point of separation 194 by relative sales value 193 planning sales budget 318, 321, 330 quarterly budgets 337 sales forecast 317–18 sales margin pricing 244 sales variances 381–2, 387, 393 margin volume variance 381–2 price variance 381–2 sales volume 328 Scapens, R 496 schedule of payments to suppliers 338, 339, 340 Schniederjans, M.J 477–8 score keeping 14, 15–16, 397 Scottish Executive 281–2 Scottish Prison Service 281–2 scrap 59 Searcy, D.L 496 security 501 semi-variable costs 37, 38 sensitivity analysis 252–4 service businesses 6, 56, 74 in-house activity vs bought-in services 221– 2, 226 –7 product costs and period costs 42, 43 quantity-based performance measures 419–20 service cost centres 74–5 apportioning costs across production cost centres 76–8 set-up costs 500 Sharman, P 197–8 Shell 221, 407–8 short-term decision making 206–36 abandonment decisions 220–1, 223–4 break-even analysis 213–19 cost–volume–profit analysis 208–13, 220 –7 estimating fixed and variable costs 227–8 existence of limiting factors 221, 224–5 in-house activity vs bought-in services 221–2, 226 –7 make or buy decision 20–1, 221–2, 225–6 research and contribution analysis 228–9 special orders 220, 222–3 short-term finance 466 single-period capital rationing 292 Six Sigma 426 slack, budget 353–4 Slagmulder, R 488 small businesses 476 e-commerce 501–2 Smith, D 66–7 Soin, K 96–7, 495–6 Solomons, D 396 solving problems 14, 16, 397 special orders 220, 222–3 spreadsheets EOQ 472–3 job costing 138–9 SSAP 118, 119 standard costs 60, 197–8, 369–406 backflush accounting 475 control process 374–5 flexible budgets 390–6 level of output to be used 373–4 purpose of using 372–3 use in manufacturing industry 398 use in the public sector 398 variance analysis see variance analysis standard hour 378 standards of performance 424, 425 Stark, A 282 statements (from suppliers) 465 statistical process control (SPC) 301–2 step costs 37–8 step method 76, 77 Stern Stewart 450, 453 stock see inventory stockholding period 463, 468 stores requisition 58 strategic management accounting 6, 15, 484–93 competitive position 486–7 costing for competitive advantage 488–93 strategic planning 7–8, strategy 16, 17, 316–17, 486 Balanced Scorecard and 421–2 budgeting and strategy formation 362 communicating 320–1 Strischek, D 477 student expense budget 369 subjective probabilities 249 Sucralose 299 sugar beet processing 181 Sulaiman, M 398 summary statement of variances 391 www.downloadslide.com Index sunk costs 239, 240 supplier’s invoice 58, 465 suppliers payment period 465, 468 supply and delivery costs 495 sustainable development 408 synergistic relationships 488 systems accountant 11, 12 tableau de bord 429 targets budget targets 327, 351–2 performance targets in the public sector 427, 428 criticisms of 429–30 target costing 488–9 Tate and Lyle 299 tax havens 446 tax incentives 296–7 taxation 296–7 Tayles, M 96 Taylor, P 281–2 technology AMTs 301–2 types of new technology 301–2 Tesco 289, 477 three-level analysis 247–9 Tigert, D.J 228–9 time value of money 269, 271, 272–3 timeliness 14 timing cash flows 266 tax payments 296–7 top-down budget process 322 total accounts 157–65 total cost 35 – activity level and 208–12 estimating fixed and variable costs 227–8 total divisional profit 439–40 total product cost 41, 56, 129, 130 total quality management (TQM) 302, 496 –7 total shareholder return 407 total work-in-progress record 133 Toyota 64 trade creditors 156, 331, 464, 465 trade debtors 463 –4 traditional approach to overhead costs 74 – 85, 87, 88, 92 comparing with ABC 94–6 train operating company 428 transfer price 446 –50, 452–3 Transport for London 314 Transport Scotland 242 treatment protocol 140 Trenchard, P.M 198 Turner, J.D 453 UAW 64 unavoidable costs 413 uncertainty capital investment appraisal 269, 277 decision making under 247–54 under-absorbed fixed overhead 112–13, 113–15 under-recovered fixed overhead cost 83 understocking 470 unit activity 86 unit cost 35–6, 78 United States of America Balanced Scorecard 429 Department of Defence 360 EVA 452 PPBS in Florida 359 standard costing 372 unsecured creditors 465 vaccines 120 value chain 486, 491 analysis 491–3 value of work completed to date 166 Van der Stede, W.A 362 Van der Veeken, H.J.M 24–5 variable costing see marginal costing variable costs 33, 35–6, 38–9, 43–4, 118 labour 65 materials 60 short-term decision making 208–13 break-even analysis and change in 218 estimating 227–8 variable overhead cost variances 379, 386–7, 393 efficiency variance 379, 386–7, 393 rate variance 379, 386, 393 variance 354–6, 371 variance analysis 375–98 broader view of applications 397–8 direct labour variances 377–8, 384–6, 392–3 direct materials variances 375–7, 383–4, 392 fixed overhead variances 379–81, 387, 393 flexible budgets 354–6, 390 – investigating variances 389–90 performance evaluation 413–14, 414–17 reconciling budgeted and actual profit 382, 387–8, 394 sales variances 381–2, 387, 393 usefulness of 396–7 variable overhead variances 379, 386–7, 393 variance reports 355, 356, 394–5, 397 587 www.downloadslide.com 588 Index Vikas, K 197–8 vision statement 316, 317, 328 wages 63, 64 cost control account 159–62 job cost records 150, 151, 154, 156 see also labour costs; salary Walker, C 141–2 walking 314 Wallin, J 362–3 warranty costs 495 waste 59 water costs, domestic 39 wedding cakes 134 weighted average cost of capital (WACC) 451 weighted average method 187–9 Wembley Stadium 174 Westhead, P 476 Westrup, C 304 wind farms 18, 303 Wolseley plc 445 wood waste, burning 191 work-in-progress 462 cost control account 163, 164 job costing 135, 136, 137, 138, 139, 151, 152, 153, 154–5, 156 process costing 184–5 with opening work-in-progress 187–9 without opening work-in-progress 185–7 total work-in-progress record 133 working capital 8, 462, 466–70 cycle 467, 468, 477 requirements 295 small businesses and managing 476 targets 329 worst outcome 247–9 Wouters, M.J.F 24–5 Wu, N.L 141–2 Yazdifar, H 24 zero-based budgeting (ZBB) 356, 358 www.downloadslide.com www.downloadslide.com www.downloadslide.com www.downloadslide.com ... Process costing Chapter What is management accounting? Real world case 1.1 What is management accounting? Management accounting combines accounting, finance and management with leading edge techniques... 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... Congress Cataloging-in-Publication Data Weetman, Pauline Management accounting / Pauline Weetman – 2nd ed p cm ISBN 978-0-273-71845-1 (pbk.) Managerial accounting I Title HF5657.4.W415 2010 658.15′11—dc22