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