Management and Cost Accounting 11th Edition by Colin Drury

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. 6 The impact of the changing business environment on management accounting — p. 10 Focus on customer satisfaction and new management approaches — p. 16 Functions of management accounting — p. 18 Summary of the contents of this book — p. 20 Guidelines for using this book — p. 20 2 An introduction to cost terms and concepts — p. 26 Cost objects — p. 26 Manufacturing, merchandising and service organizations — p. 27 Direct and indirect costs — p. 27 Period and product costs — p. 30 Cost behaviour — p. 32 Relevant and irrelevant costs and revenues — p. 35 Avoidable and unavoidable costs — p. 36 Sunk costs — p. 36 Opportunity costs — p. 37 Incremental and marginal costs — p. 38 The cost and management accounting information system — p. 39 PART TWO Cost accumulation for inventory valuation and profit measurement — p. 48 3 Cost assignment — p. 50 Assignment of direct and indirect costs — p. 51 Different costs for different purposes — p. 52 Cost–benefit issues and cost systems design — p. 53 Assigning direct costs to cost objects — p. 54 Plant-wide (blanket) overhead rates — p. 54 The two-stage allocation process — p. 55 An illustration of the two-stage process for a traditional costing system — p. 57 An illustration of the two-stage process for an ABC system — p. 62 Extracting relevant costs for decision-making — p. 66 Budgeted overhead rates — p. 67 Under- and over-recovery of overheads — p. 68 Non-manufacturing overheads — p. 69 Cost assignment in non-manufacturing organizations — p. 70 The indirect cost assignment process — p. 72 Appendix 3.1: Inter-service department reallocations — p. 74 4 Accounting entries for a job costing system — p. 88 Materials recording procedure — p. 89 Pricing the issues of materials — p. 90 Control accounts — p. 91 Recording the purchase of raw materials — p. 92 Recording the issue of materials — p. 94 Accounting procedure for labour costs — p. 95 Accounting procedure for manufacturing overheads — p. 97 Non-manufacturing overheads — p. 98 Accounting procedures for jobs completed and products sold — p. 98 Costing profit and loss account — p. 99 Job-order costing in service organizations — p. 99 Interlocking accounting — p. 99 Accounting entries for a just-in-time manufacturing system — p. 101 5 Process costing — p. 111 Flow of production and costs in a process costing system — p. 112 Process costing when all output is fully complete — p. 113 Process costing with ending work in progress partially complete — p. 118 Beginning and ending work in progress of uncompleted units — p. 121 Partially completed output and losses in process — p. 126 Process costing in service organizations — p. 126 Batch/operating costing — p. 126 Appendix 5.1: Losses in process and partially completed units — p. 128 6 Joint and by-product costing — p. 138 Joint products and by-products — p. 139 Methods of allocating joint costs — p. 139 Irrelevance of joint cost allocations for decision-making — p. 145 Accounting for by-products — p. 146 7 Income effects of alternative cost accumulation systems — p. 156 External and internal reporting — p. 157 Variable costing — p. 159 Absorption costing — p. 160 Variable costing and absorption costing: a comparison of their impact on profit — p. 161 Some arguments in support of variable costing — p. 162 Some arguments in support of absorption costing — p. 164 Alternative denominator-level measures — p. 165 Appendix 7.1: Derivation of the profit function for an absorption costing system — p. 168 PART THREE Information for decision-making — p. 176 8 Cost–volume–profit analysis — p. 178 Curvilinear CVP relationships — p. 179 Linear CVP relationships — p. 180 A numerical approach to CVP analysis — p. 182 The contribution margin ratio — p. 183 Relevant range — p. 184 Margin of safety — p. 186 Constructing the break-even or CVP chart — p. 186 Alternative presentation of CVP analysis — p. 187 Multi-product CVP analysis — p. 189 Operating leverage — p. 191 CVP analysis assumptions and limitations — p. 192 The impact of information technology — p. 195 9 Measuring relevant costs and revenues for decision-making — p. 204 Identifying relevant costs and revenues — p. 205 Importance of qualitative/non-financial factors — p. 205 Special pricing decisions — p. 206 Product mix decisions when capacity constraints exist — p. 210 Replacement of equipment – the irrelevance of past costs — p. 213 Outsourcing and make-or-buy decisions — p. 214 Discontinuation decisions — p. 218 Determining the relevant costs of direct materials — p. 220 Determining the relevant costs of direct labour — p. 220 Appendix 9.1: The theory of constraints and throughput accounting — p. 222 10 Pricing decisions and profitability analysis — p. 238 The role of cost information in pricing decisions — p. 239 A price-setting firm facing short-run pricing decisions — p. 239 A price-setting firm facing long-run pricing decisions — p. 240 A price-taking firm facing short-run product mix decisions — p. 244 A price-taking firm facing long-run product mix decisions — p. 245 Surveys of practice relating to pricing decisions — p. 247 Limitations of cost-plus pricing — p. 247 Reasons for using cost-plus pricing — p. 248 Pricing policies — p. 248 Customer profitability analysis — p. 250 Appendix 10.1: Calculating optimal selling prices using differential calculus — p. 255 11 Activity-based costing — p. 265 The need for a cost accumulation system in generating relevant cost information for decision-making — p. 266 Types of cost system — p. 267 A comparison of traditional and ABC systems — p. 267 The emergence of ABC systems — p. 269 Volume-based and non-volume-based cost drivers — p. 270 Designing ABC systems — p. 273 Activity hierarchies — p. 275 ABC profitability analysis — p. 277 Cost versus benefits considerations — p. 279 Time-driven ABC — p. 280 Resource consumption models and unused capacity — p. 283 Periodic review of an ABC database — p. 285 ABC cost management applications — p. 285 12 Decision-making under conditions of risk and uncertainty — p. 297 Risk and uncertainty — p. 298 Probability distributions and expected value — p. 300 Measuring the amount of risk — p. 301 Attitudes to risk by individuals — p. 302 Decision tree analysis — p. 304 Buying perfect and imperfect information — p. 306 Maximin, maximax and regret criteria — p. 307 Risk reduction and diversification — p. 308 13 Capital investment decisions: appraisal methods — p. 320 The opportunity cost of an investment — p. 322 Compounding and discounting — p. 323 The concept of net present value — p. 325 Calculating net present values — p. 326 The internal rate of return — p. 328 Relevant cash flows — p. 331 Timing of cash flows — p. 331 Comparison of net present value and internal rate of return — p. 332 Techniques that ignore the time value of money — p. 334 Payback method — p. 334 Accounting rate of return — p. 338 The effect of performance measurement on capital investment decisions — p. 339 Qualitative factors — p. 340 14 Capital investment decisions: the impact of capital rationing, taxation, inflation and risk — p. 351 Capital rationing — p. 351 Taxation and investment decisions — p. 353 The effect of inflation on capital investment appraisal — p. 356 Calculating risk-adjusted discount rates — p. 358 Risk-adjusted discount rates and the weighted average cost of capital — p. 362 Sensitivity analysis — p. 363 Initiation, authorization and review of projects — p. 365 PART FOUR Information for planning, control and performance measurement — p. 380 15 The budgeting process — p. 382 The strategic planning, budgeting and control process — p. 383 The multiple functions of budgets — p. 386 Conflicting roles of budgets — p. 387 The budget period — p. 387 Administration of the budgeting process — p. 388 Stages in the budgeting process — p. 389 A detailed illustration — p. 391 Computerized budgeting — p. 400 Activity-based budgeting — p. 401 The budgeting process in non-profit-making organizations — p. 403 Zero-based budgeting — p. 404 Criticisms of budgeting — p. 406 16 Management control systems — p. 419 Control at different organizational levels — p. 420 Different types of control mechanism — p. 420 Feedback and feed-forward controls — p. 422 Harmful side-effects of controls — p. 423 Management accounting control systems — p. 424 Responsibility centres — p. 425 The nature of management accounting control systems — p. 427 The controllability principle — p. 428 Setting performance targets and determining how challenging they should be — p. 432 Determining how much influence managers should have in setting targets — p. 433 Different approaches that managers use to evaluate budgetees’ performance — p. 434 Contingency theory — p. 435 Alternative uses of management accounting information — p. 436 17 Standard costing and variance analysis 1 — p. 450 Operation of a standard costing system — p. 451 Establishing cost standards — p. 453 Purposes of standard costing — p. 457 A summary of variance analysis for a variable costing system — p. 458 Material variances — p. 458 Labour variances — p. 463 Variable overhead variances — p. 464 A generic routine approach to variance analysis for variable costs — p. 465 Fixed overhead expenditure or spending variance — p. 466 Sales variances — p. 466 Reconciling budgeted profit and actual profit — p. 469 Standard absorption costing — p. 470 Reconciliation of budgeted and actual profit for a standard absorption costing system — p. 474 Appendix 17.1: A generic routine approach to variance analysis — p. 477 18 Standard costing and variance analysis 2: further aspects — p. 488 Recording standard costs in the accounts — p. 488 Direct materials mix and yield variances — p. 493 Sales mix and sales quantity variances — p. 497 Distinguishing between planning and operating variances — p. 498 The investigation of variances — p. 500 The role of standard costing when ABC has been implemented — p. 501 19 Divisional financial performance measures — p. 513 Divisional organizational structures — p. 514 Advantages and disadvantages of divisionalization — p. 515 Prerequisites for successful divisionalization — p. 516 Distinguishing between the managerial and economic performance of the division — p. 518 Alternative divisional profit measures — p. 518 Surveys of practice — p. 519 Return on investment — p. 520 Residual income — p. 521 Economic value added (EVA(TM)) — p. 522 An illustration of the calculation of EVA(TM) — p. 523 Determining which assets should be included in the investment base — p. 526 The impact of depreciation — p. 527 The effect of performance measurement on capital investment decisions — p. 528 Addressing the dysfunctional consequences of short-term financial performance measures — p. 530 20 Transfer pricing in divisionalized companies — p. 545 Purpose of transfer pricing — p. 546 Alternative transfer pricing methods — p. 547 Market-based transfer prices — p. 548 Cost plus a mark-up transfer price — p. 549 Marginal/variable cost transfer prices — p. 551 Full cost transfer prices without a mark-up — p. 552 Negotiated transfer prices — p. 552 Marginal/variable cost plus opportunity cost transfer prices — p. 553 Comparison of cost-based transfer pricing methods — p. 554 Proposals for resolving transfer pricing conflicts — p. 555 Domestic transfer pricing recommendations — p. 558 International transfer pricing — p. 559 Appendix 20.1: Economic theory of transfer pricing — p. 563 Part Five Strategic performance and cost management, value creation and challenges for the future — p. 580 21 Strategic performance management — p. 582 The performance management framework — p. 583 Strategy and strategic positioning — p. 583 Performance measurement and performance management systems — p. 585 Alternative performance management frameworks — p. 585 The balanced scorecard — p. 585 Linking performance evaluation with the balanced scorecard — p. 596 Benefits and limitations of the balanced scorecard approach — p. 597 22 Strategic cost management and value creation — p. 616 Cost management and the value chain — p. 617 Life cycle cost management — p. 620 Target costing — p. 621 Kaizen costing — p. 626 Activity-based management — p. 627 Benchmarking — p. 631 Business process reengineering — p. 632 Just-in-time systems — p. 632 Quality cost management — p. 638 23 Challenges for the future — p. 658 A brief historical review of management accounting — p. 659 Globalization and management accounting practices — p. 660 Environmental and sustainability issues — p. 661 Focus on ethical behaviour — p. 666 Information technology and digitalization — p. 668 Intellectual capital and the knowledge-based economy — p. 673 Integrated reporting — p. 675 Implications for management accounting — p. 676 Part six Addendum: The application of quantitative methods to management accounting — p. 686 24 Cost estimation and cost behaviour — p. 688 General principles applying to estimating cost functions — p. 689 Cost estimation methods — p. 690 Tests of reliability — p. 696 Relevant range and non-linear cost functions — p. 697 A summary of the steps involved in estimating cost functions — p. 698 Cost estimation when the learning effect is present — p. 699 Estimating incremented hours and incremental cost — p. 702 Appendix 24.1: Multiple regression analysis — p. 704 25 Quantitative models for the planning and control of inventories — p. 712 Why do firms hold inventories? — p. 713 Relevant costs for quantitative models under conditions of certainty — p. 713 Determining the economic order quantity — p. 714 Assumptions of the eoq formula — p. 716 Application of the eoq model in determining the optimum batch size for a production run — p. 717 Quantity discounts — p. 718 Determining when to place the order — p. 719 Uncertainty and safety stocks — p. 719 The use of probability theory for determining safety stocks — p. 720 Control of inventory through classification — p. 722 Other factors influencing the choice of order quantity — p. 723 Materials requirement planning — p. 724 Just-in-time (jit) purchasing arrangements — p. 724 26 The application of linear programming to management accounting — p. 733 Linear programming — p. 734 Graphical method — p. 735 Simplex method — p. 740 Uses of linear programming — p. 743