Part One: Introduction to Management and Cost Accounting — p. 1
1 Introduction to management accounting — p. 3
The users of accounting information — p. 4
Differences between management accounting and financial accounting — p. 5
The decision-making process — p. 5
Changing competitive environment — p. 10
Changing product life cycles — p. 11
Focus on customer satisfaction and new management approaches — p. 11
The impact of the changing environment of management accounting systems — p. 14
Functions of management accounting — p. 15
Summary of the contents of this book — p. 17
Summary — p. 19
Key terms and concepts — p. 19
2 An introduction to cost terms and concepts — p. 21
Cost objects — p. 21
Direct and indirect costs — p. 22
Period and product costs — p. 24
Cost behaviour — p. 24
Relevant and irrelevant cost and revenues — p. 28
Avoidable and unavoidable costs — p. 29
Sunk costs — p. 29
Opportunity costs — p. 30
Incremental and marginal costs — p. 30
Job costing and process costing systems — p. 31
Maintaining a cost database — p. 31
Summary — p. 35
Key terms and concepts — p. 35
Review problems — p. 36
Questions — p. 38
Part Two: Information for Decision-making — p. 43
3 Cost–volume–profit analysis — p. 45
The economist's model — p. 46
The accountant's cost–volume–profit model — p. 49
Application to longer-term time horizons — p. 51
A mathematical approach to cost–volume–profit analysis — p. 52
Margin of safety — p. 56
Constructing the break-even chart — p. 56
Alternative presentation of cost–volume–profit analysis — p. 57
Multi-product cost–volume–profit analysis — p. 59
Cost–volume–profit analysis assumptions — p. 62
Cost–volume–profit analysis and computer applications — p. 64
Summary — p. 67
Key terms and concepts — p. 67
Review problems — p. 68
Questions — p. 72
4 Measuring relevant costs and revenues for decision-making — p. 81
The meaning of relevance — p. 82
Importance of qualitative factors — p. 82
Special pricing decisions — p. 83
Product-mix decisions when capacity constraints exist — p. 88
Replacement of equipment – the irrelevance of past costs — p. 90
Outsourcing and make or buy decisions — p. 92
Discontinuation decisions — p. 96
Determining the relevant costs of direct materials — p. 97
Determining the relevant costs of direct labour — p. 98
A comprehensive example — p. 99
Summary — p. 105
Key terms and concepts — p. 105
Review problems — p. 105
Questions — p. 110
5 Cost assignment — p. 121
Assignment of direct and indirect costs — p. 122
Different costs for different purposes — p. 123
Cost–benefit issues and cost systems design — p. 124
Assigning direct costs to cost objects — p. 125
Plant-wide (blanket) overhead rates — p. 126
The two-stage allocation process — p. 127
An illustration of the two-stage process for a traditional costing — p. 130
Extracting relevant costs for decision-making — p. 135
Budgeted overhead rates — p. 135
Under- and over-recovery of overheads — p. 136
Maintaining the database at standard costs — p. 137
Non-manufacturing overheads — p. 138
Summary — p. 141
Key terms and concepts — p. 141
Review problems — p. 142
Questions — p. 146
6 Activity-based costing — p. 153
The role of a cost accumulation system in generating relevant cost information for decision-making — p. 154
Types of cost systems — p. 155
A comparison of traditional and ABC systems — p. 156
The emergence of ABC systems — p. 158
Volume-based and non-volume-based cost drivers — p. 159
An illustration of the two-stage process for an ABC system — p. 161
Designing ABC systems — p. 164
Activity hierarchies — p. 166
Activity-based costing profitability analysis — p. 168
Resource consumption models — p. 170
Cost versus benefits considerations — p. 172
Periodic review of an ABC database — p. 173
ABC in service organizations — p. 174
ABC cost management applications — p. 175
Summary — p. 179
Key terms and concepts — p. 179
Recommended reading — p. 180
Review problems — p. 180
Questions — p. 183
7 Pricing decisions and profitability analysis — p. 189
Economic theory — p. 190
Difficulties with applying economic theory — p. 194
The role of cost information in pricing decisions — p. 194
A price setting firm facing short-run pricing decision — p. 195
A price setting firm facing long-run pricing decision — p. 196
A price taker firm facing short-run product-mix decision — p. 201
A price taker firm facing long-run product-mix decision — p. 202
Cost-plus pricing — p. 204
Pricing policies — p. 206
Customer profitability analysis — p. 207
Summary — p. 211
Key terms and concepts — p. 211
Recommended reading — p. 212
Review problem — p. 212
Questions — p. 215
8 Decision-making under conditions of risk and uncertainty — p. 221
Risk and uncertainty — p. 222
Probabilities — p. 222
Probability distributions and expected value — p. 223
Measuring the amount of uncertainty — p. 225
Attitudes to risk by individuals — p. 227
Decision-tree analysis — p. 228
Buying perfect and imperfect information — p. 230
Maximin, maximax and regret criteria — p. 231
Portfolio analysis — p. 232
Summary — p. 235
Key terms and concepts — p. 235
Recommended reading — p. 235
Review problems — p. 235
Questions — p. 238
9 Capital investment decisions — p. 243
The opportunity cost of an investment — p. 244
Compounding and discounting — p. 245
The concept of net present value — p. 247
Calculating net present values — p. 248
The internal rate of return — p. 249
Relevant cash flows — p. 252
Timing of cash flows — p. 253
Comparison of net present value and internal rate of return — p. 253
Techniques that ignore the time value of money — p. 255
Payback method — p. 255
Accounting rate of return — p. 258
The effect of performance measurement on capital investment decision — p. 259
Qualitative factors — p. 261
Taxation and investment decisions — p. 261
Weighted average cost of capital — p. 263
Summary — p. 265
Key terms and concepts — p. 266
Recommended reading — p. 266
Review problems — p. 266
Questions — p. 269
Part Three: Information for Planning, Control and Performance Measurement — p. 277
10 The budgeting process — p. 279
Stages in the planning process — p. 280
The multiple functions of budgets — p. 283
Conflicting roles of budgets — p. 285
The budget period — p. 286
Administration of the budgeting process — p. 286
Stages in the budgeting process — p. 287
A detailed illustration — p. 291
Sales budget — p. 291
Production budget and budgeted stock levels — p. 294
Direct materials usage budget — p. 295
Direct materials purchase budget — p. 295
Direct labour budget — p. 296
Factory overhead budget — p. 296
Selling and administration budget — p. 297
Departmental budgets — p. 298
Master budget — p. 298
Cash budgets — p. 300
Final review — p. 300
Computerized budgeting — p. 301
Activity-based budgeting — p. 301
Zero-based budgeting — p. 305
Summary — p. 307
Key terms and concepts — p. 308
Recommended reading — p. 308
Review problems — p. 308
Questions — p. 310
11 Management control systems — p. 317
Control at different organizational levels — p. 318
Different types of controls — p. 318
Cybernetic control systems — p. 322
Feedback and feed-forward controls — p. 322
Harmful side-effects of controls — p. 323
Advantages and disadvantages of different types of controls — p. 325
Management accounting control systems — p. 326
Responsibility centres — p. 326
The nature of management accounting control systems — p. 328
The controllability principle — p. 330
Setting financial performance targets — p. 334
Participation in the budgeting and target setting process — p. 337
Side-effects arising from using accounting information for performance evaluation — p. 339
Summary — p. 343
Key terms and concepts — p. 344
Recommended reading — p. 345
Review problems — p. 345
Questions — p. 349
12 Standard costing and variance analysis — p. 357
Operation of a standard costing system — p. 358
Establishing cost standards — p. 360
Types of cost standards — p. 364
Variance analysis — p. 366
Material variances — p. 368
Material price variances — p. 368
Material usage variance — p. 370
Total material variance — p. 371
Labour variances — p. 372
Wage rate variance — p. 372
Labour efficiency variance — p. 373
Total labour variance — p. 373
Variable overhead variances — p. 374
Variable overhead expenditure variance — p. 374
Variable overhead efficiency variance — p. 375
Similarities between materials, labour and overhead variances — p. 375
Fixed overhead expenditure or spending variance — p. 376
Sales variances — p. 377
Total sales margin variances — p. 377
Sales margin price variance — p. 378
Sales margin volume variance — p. 378
Difficulties in interpreting sales margin variances — p. 379
Reconciling budgeted profit and actual profit — p. 379
Performance reports — p. 379
Summary — p. 383
Key terms and concepts — p. 384
Review problems — p. 384
Questions — p. 387
13 Divisional financial performance measures — p. 397
Functional and divisionalized organizational structures — p. 398
Profit centres and investment centres — p. 400
Advantage of divisionalization — p. 400
Disadvantages of divisionalization — p. 401
Pre-requisites for successful divisionalization — p. 401
Distinguishing between the managerial and economic performance of the division — p. 402
Alternative divisional measures — p. 402
Return on investment — p. 405
Residual income — p. 406
Economic value added (EVA™) — p. 407
Determining which assets should be included in the investment base — p. 408
The impact of depreciation — p. 409
The effect of performance measurement on capital investment decisions — p. 410
Addressing the dysfunctional consequences of short-term financial performance measures — p. 413
Summary — p. 417
Key terms and concepts — p. 418
Recommended reading — p. 418
Review problem — p. 418
Questions — p. 420
14 Transfer pricing in divisionalized companies — p. 425
Purposes of transfer pricing — p. 426
Alternative transfer pricing methods — p. 427
Market-based transfer prices — p. 429
Marginal cost transfer prices — p. 432
Full-cost transfer prices — p. 434
Cost-plus a mark-up transfer prices — p. 434
Negotiated transfer prices — p. 434
An illustration of transfer pricing — p. 436
Proposals for resolving transfer pricing conflicts — p. 439
Domestic transfer pricing recommendations — p. 442
International transfer pricing — p. 442
Summary — p. 445
Key terms and concepts — p. 445
Review problem — p. 446
Questions — p. 449
Part Four: Cost Management and Strategic Management Accounting — p. 453
15 Cost management — p. 455
Life-cycle costing — p. 456
Target costing — p. 456
Kaizen costing — p. 461
Activity-based management — p. 462
Business process re-engineering — p. 465
Cost of quality — p. 466
Cost management and the value chain — p. 468
Benchmarking — p. 469
Just-in-time systems — p. 470
Summary — p. 475
Key terms and concepts — p. 476
Recommended reading — p. 477
Review problem — p. 477
Questions — p. 480
16 Strategic management accounting — p. 485
What is strategic management accounting? — p. 485
Establishing objectives and performance measures — p. 495
The financial perspective — p. 495
The customer perspective — p. 496
The internal business perspective — p. 498
The learning and growth perspective — p. 501
Performance measurement in service organizations — p. 503
Summary — p. 507
Key terms and concepts — p. 507
Recommended reading — p. 508
Review problem — p. 508
Questions — p. 511
Bibliography — p. 517
Appendices — p. 522
Case study problems — p. 531
