Management Accounting for Business, Eighth Edition
Colin Drury and Mike Tayles
CONTENTS
In memoriam xi
Preface xii
About the authors xix
PART ONE Introduction to management and
cost accounting 2
1 Introduction to management accounting 4
The users of accounting information 5
Differences between management accounting and financial accounting 6
The decision-making, planning and control process 7
The impact of the changing business environment on management
accounting 11
Focus on customer satisfaction and new management approaches 18
Functions of management accounting 21
Summary of the contents of this book 22
Summary 25
Key terms and concepts 26
Assessment material 28
2 An introduction to cost terms and concepts 29
Cost objects 30
Manufacturing, merchandising and service organizations 30
Direct and indirect costs 31
Period and product costs 34
Cost behaviour 36
Relevant and irrelevant costs and revenues 40
Avoidable and unavoidable costs 41
Sunk costs 42
Opportunity costs 43
Incremental and marginal costs 44
The cost and management accounting information system 46
Summary 47
Key terms and concepts 48
Assessment material 49
PART TWO Information for decision-making 52
3 Cost–volume–profit analysis 54
Curvilinear CVP relationships 55
Linear CVP relationships 56
A numerical approach to cost–volume–profit analysis 58
The contribution margin ratio 62
Relevant range 63
Margin of safety 63
Constructing the break-even or CVP chart 64
Alternative presentation of cost–volume–profit analysis 65
Multi-product cost–volume–profit analysis 68
Operating leverage 70
Cost–volume–profit analysis assumptions and limitations 72
The impact of information technology 74
Separation of costs into their fixed and variable elements 75
Summary 77
Key terms and concepts 78
Assessment material 79
4 Measuring relevant costs and revenues for decision-making 84
Identifying relevant costs and revenues 85
Importance of qualitative/non-financial factors 86
Special pricing decisions 86
Product mix decisions when capacity constraints exist 91
Replacement of equipment – the irrelevance of past costs 94
Outsourcing and make-or-buy decisions 97
Discontinuation decisions 101
Determining the relevant costs of direct materials 103
Determining the relevant costs of direct labour 103
Incorporating risk and uncertainty into the decision-making process 104
Summary 107
Key terms and concepts 108
Assessment material 109
5 Pricing decisions and profitability analysis 114
The role of cost information in pricing decisions 115
A price-setting firm facing short-run pricing decisions 115
A price-setting firm facing long-run pricing decisions 116
A price-taking firm facing short-run product mix decisions 122
A price-taking firm facing long-run product mix decisions 122
Surveys of practice relating to pricing decisions 125
Limitations of cost-plus pricing 126
Reasons for using cost-plus pricing 127
Pricing policies 128
Customer profitability analysis 130
Summary 134
Key terms and concepts 136
Assessment material 136
6 Capital investment decisions: Appraisal methods 141
The opportunity cost of an investment 142
Compounding and discounting 144
The concept of net present value 147
Calculating net present values 148
Internal rate of return 151
Relevant cash flows 154
Timing of cash flows 154
Comparison of net present value and internal rate of return 155
Techniques that ignore the time value of money 156
Payback method 157
Accounting rate of return 161
The effect of performance measurement on capital investment
decisions 162
Qualitative factors 163
Weighted average cost of capital 165
Taxation and investment decisions 165
Summary 167
Key terms and concepts 168
Assessment material 170
PART THREE Cost assignment 176
7 Cost assignment 178
Assignment of direct and indirect costs 179
Different costs for different purposes 181
Cost–benefit issues and cost system design 181
Plant-wide (blanket) overhead rates 182
The two-stage allocation process 185
An illustration of the two-stage process for a traditional
costing system 186
Extracting relevant costs for decision-making 191
Budgeted overhead rates 192
Under- and over-recovery of overheads 193
Non-manufacturing overheads 195
Cost assignment in non-manufacturing organizations 196
Summary 198
Key terms and concepts 200
Assessment material 201
8 Activity-based costing 206
Comparison of traditional and ABC systems 207
Volume-based and non-volume-based cost drivers 210
An illustration of the two-stage allocation process for ABC 212
Designing ABC systems 218
Activity hierarchies 220
Cost versus benefit considerations 223
ABC cost management applications 223
Summary 226
Key terms and concepts 227
Assessment material 228
PART FOUR Information for planning, control and
performance measurement 234
9 The budgeting process 237
The strategic planning, budgeting and control process 237
The multiple functions of budgets 241
Conflicting roles of budgets 242
The budget period 243
Administration of the budgeting process 244
Stages in the budgeting process 245
A detailed illustration 248
Computerized budgeting 256
Activity-based budgeting 258
Zero-based budgeting 260
Criticisms of budgeting 262
Summary 266
Key terms and concepts 268
Assessment material 269
10 Management control systems 275
Control at different organizational levels 276
Different types of controls 277
Feedback and feed-forward controls 279
Harmful side-effects of controls 280
Management accounting control systems 283
Responsibility centres 283
The nature of management accounting control systems 285
The controllability principle 287
Setting performance targets and determining
how challenging they should be 291
Determining how much influence managers should
have in setting targets 293
Alternative uses of management accounting information 294
Summary 296
Key terms and concepts 297
Assessment material 299
11 Standard costing and variance analysis 305
Operation of a standard costing system 306
Establishing cost standards 309
Purposes of standard costing 314
A summary of variance analysis for a variable costing system 315
Material variances 316
Labour variances 320
Variable overhead variances 321
A generic routine (or columnar) approach to variance analysis 323
Fixed overhead expenditure or spending variance 323
Sales variances 325
Reconciling budgeted profit and actual profit 327
Dealing with change – planning and operational variances 328
Summary 330
Appendix 11.1: A generic routine (or columnar) approach to variance
analysis 333
Key terms and concepts 335
Assessment material 336
12 Divisional financial performance measures 340
Divisional organizational structures 341
Advantages and disadvantages of divisionalization 343
Prerequisites for successful divisionalization 343
Distinguishing between the managerial and economic performance
of the division 344
Alternative divisional profit measures 345
Surveys of practice 346
Return on investment 348
Residual income 349
Economic value added (EVA(™)) 350
Addressing the dysfunctional consequences of short-term
financial performance measures 354
Summary 358
Key terms and concepts 360
Assessment material 360
13 Transfer pricing in divisionalized companies 366
Purpose of transfer pricing 367
Alternative transfer pricing methods 368
Market-based transfer prices 369
Cost plus a mark-up transfer prices 370
Marginal/variable cost transfer prices 373
Full cost transfer prices without a mark-up 374
Negotiated transfer prices 374
Marginal/variable cost plus opportunity cost transfer prices 375
Comparison of cost-based transfer pricing methods 376
Proposals for resolving transfer pricing conflicts 377
International transfer pricing 380
Summary 383
Key terms and concepts 384
Assessment material 384
PART FIVE Strategic performance and cost management,
value creation and challenges for the future 390
14 Strategic performance management 392
The performance management framework 393
Strategy and strategic positioning 394
Performance measurement and performance management systems 395
Alternative performance management frameworks 396
The balanced scorecard 397
Linking performance evaluation with the balanced scorecard 407
Benefits and limitations of the balanced scorecard approach 409
Summary 414
Key terms and concepts 416
Assessment material 417
15 Strategic cost management and value creation 423
Cost management and the value chain 424
Life cycle cost management 427
Target costing 428
Activity-based management 435
Benchmarking 439
Business process reengineering 440
Just-in-time systems 441
Quality cost management 446
Summary 452
Key terms and concepts 455
Assessment material 456
16 Challenges for the future 462
A brief historical review of management accounting 462
Globalization and management accounting practices 464
Environmental and sustainability issues 465
Focus on ethical behaviour 472
Information technology and digitalization 475
Intellectual capital and the knowledge-based economy 482
Integrated reporting 484
Implications for management accounting 485
Summary 489
Key terms and concepts 490
Assessment material 491
Bibliography 494
Appendices 499
Answers to review problems 503
Glossary 548
Index 559