Management Accounting for Decision Makers

Front Cover
Half Title
Title Page
Copyright Page
Brief contents
Contents
Preface
How to use this book
Acknowledgements
1 Introduction to management accounting
	Introduction
	Learning outcomes
	What is the purpose of a business?
	How are businesses organised?
	How are businesses managed?
		Establish mission, vision and objectives
		Undertake a position analysis
		Identify and assess the strategic options
		Select strategic options and formulate plans
		Perform, review and control
	The changing business landscape
	What is the financial objective of a business?
	Balancing risk and return
	What is management accounting?
	How useful is management accounting information?
	Providing a service
	Weighing up the costs and benefits
	Management accounting as an information system
	It's just a phase
	What information do managers need?
	Reporting non-financial information
	Influencing managers' behaviour
	Reaping the benefits of information technology
	From bean counter to team member
	Reasons to be ethical
	Management accounting and financial accounting
	Summary
	Key terms
	References
	Further reading
	Critical review questions
	Exercises
2 Relevant costs and benefits for decision making
	Introduction
	Learning outcomes
	Cost–benefit analysis
	What is meant by 'cost'?
	Relevant costs: opportunity and outlay costs
	Irrelevant costs: sunk costs and committed costs
	Sunk cost fallacy
	Determining the relevant cost of labour and materials
		Labour
		Materials
	Non-measurable costs and benefits
	Summary
	Key terms
	Further reading
	Critical review questions
	Exercises
3 Cost–volume–profit analysis
	Introduction
	Learning outcomes
	Cost behaviour
	Fixed cost
	Variable cost
	Semi-fixed (semi-variable) cost
		Analysing semi-fixed (semi-variable) costs
	Finding the break-even point
	Contribution
		Contribution margin ratio
	Margin of safety
	Achieving a target profit
	Operating gearing and its effect on profit
	Profit–volume charts
	The economist's view of the break-even chart
	The problem of breaking even
	Weaknesses of break-even analysis
	Using contribution to make decisions: marginal analysis
		Pricing/assessing opportunities to enter contracts
		The most efficient use of scarce resources
		Make-or-buy decisions
		Closing or continuation decisions
	Summary
	Key terms
	Further reading
	Critical review questions
	Exercises
4 Full costing
	Introduction
	Learning outcomes
	What is full costing?
	Why do managers want to know the full cost?
	Single-product businesses
		Process-costing problems
	Multi-product businesses
		Direct and indirect cost
		Job costing
		Full costing and cost behaviour
		The problem of indirect cost
	Overheads as service renderers
		Job costing: a worked example
		Selecting a basis for charging overheads
		Segmenting the overheads
		Dealing with overheads on a cost centre basis
		Batch costing
		Non-manufacturing overheads
		Full (absorption) costing and estimation errors
		Full (absorption) costing and relevant costs
	Full (absorption) costing versus variable costing
		Which method is better?
	Summary
	Key terms
	Reference
	Further reading
	Critical review questions
	Exercises
5 Costing and cost management in a competitive environment
	Introduction
	Learning outcomes
	Cost determination in the changed business environment
		Costing and pricing: the traditional way
		Costing and pricing: the new environment
	Cost management systems
		The problem of overheads
		Taking a closer look
	Activity-based costing
		Assigning overheads
		ABC and the traditional approach compared
		ABC and service industries
		Benefits and costs of ABC
		ABC in practice
	Managing costs over the product life cycle
		Total life-cycle costing
		Target costing
		Kaizen costing
	Other approaches to managing costs in the modern environment
		Value chain analysis
		Benchmarking
		Total quality management
		Managing quality costs
		An alternative view
	Summary
	Key terms
	Reference
	Further reading
	Critical review questions
	Exercises
6 Budgeting
	Introduction
	Learning outcomes
	How budgets link with strategic plans and objectives
		Exercising control
	Time horizon of plans and budgets
	Budgets and forecasts
	Periodic and continual budgets
	Limiting factors
	How budgets link to one another
	How budgets help managers
	The budget-setting process
		Step 1: Establish who will take responsibility
		Step 2: Communicate budget guidelines to relevant managers
		Step 3: Identify the key, or limiting, factor
		Step 4: Prepare the budget for the area of the limiting factor
		Step 5: Prepare draft budgets for all other areas
		Step 6: Review and coordinate budgets
		Step 7: Prepare the master budgets
		Step 8: Communicate the budgets to all interested parties
		Step 9: Monitor performance relative to the budget
	Using budgets in practice
	Incremental and zero-base budgeting
	Preparing budgets
		The cash budget
		Preparing other budgets
	Activity-based budgeting
	Non-financial measures in budgeting
	Budgets and management behaviour
	Problems with budgets
	Beyond conventional budgeting
	The future of budgeting
	Summary
	Key terms
	References
	Further reading
	Critical review questions
	Exercises
7 Accounting for control
	Introduction
	Learning outcomes
	Budgeting for control
	Types of control
	Variances from budget
		Flexing the budget
		Sales volume variance
		Sales price variance
		Materials variances
		Labour variances
		Fixed overhead variance
	Reconciling the budgeted profit with the actual profit
	Reasons for adverse variances
	Variance analysis in service industries
	Non-operating-profit variances
	Investigating variances
	Variance analysis in practice
	Compensating variances
	Standard quantities and costs
	Setting standards
		Who sets the standards?
		How is information gathered?
		What kind of standards should be used?
	The learning-curve effect
	Other uses for standard costing
	Some problems
	The new business environment
	Making budgetary control effective
	Behavioural issues
		Failing to meet the budget
		Budgets and management autonomy
	Types of management control
		Direct control
		Indirect control
	Summary
	Key terms
	Reference
	Further reading
	Critical review questions
	Exercises
8 Making capital investment decisions
	Introduction
	Learning outcomes
	The nature of investment decisions
	Investment appraisal methods
	Accounting rate of return (ARR)
		ARR and ROCE
		Problems with ARR
	Payback period (PP)
		Problems with PP
	Net present value (NPV)
		Why does time matter?
		Interest lost
		Risk
		Inflation
		What should managers do?
		Dealing with the time value of money
		Calculating the net present value
		Using present value tables
		The discount rate and the cost of capital
	Why NPV is better
		NPV and economic value
	Internal rate of return (IRR)
		Problems with IRR
	Some practical points
	Investment appraisal in practice
	Investment appraisal and strategic planning
	Managing investment projects
		Stage 1: Determine investment funds available
		Stage 2: Identify profitable project opportunities
		Stage 3: Evaluate the proposed project
		Stage 4: Approve the project
		Stage 5: Monitor and control the project
	Summary
	Key terms
	References
	Further reading
	Critical review questions
	Exercises
9 Managing risk
	Introduction
	Learning outcomes
	Dealing with risk
	Assessing the level of risk
		Sensitivity analysis
		Strengths and weaknesses of sensitivity analysis
		Scenario analysis
		Expected values
		Reacting to the level of risk
	Summary
	Key terms
	Further reading
	Critical review questions
	Exercises
10 Strategic management accounting: performance evaluation and pricing in a competitive environment
	Introduction
	Learning outcomes
	What is strategic management accounting?
	Facing outwards
		Competitor analysis
		Customer profitability analysis
	Competitive advantage through cost leadership
	Non-financial measures of performance
		The balanced scorecard
		Scorecard problems
	Measuring shareholder value
		The quest for shareholder value
		How can shareholder value be created?
		The need for new measures
		Economic value added (EVA® )
		Shareholder value-based management in practice
	Just another fad?
	Pricing
		Economic theory
		Some practical considerations
		Full cost (cost-plus) pricing
		Pricing on the basis of marginal cost
		Target pricing
		Pricing strategies
	Summary
	Key terms
	References
	Further reading
	Critical review questions
	Exercises
11 Measuring divisional performance
	Introduction
	Learning outcomes
	Divisionalisation
		Why do businesses divisionalise?
		Devolving decisions
		Divisional structures
		Is divisionalisation a good idea?
	Measuring divisional profit
		Contribution
		Controllable profit
		Divisional profit before common expenses
		Divisional profit for the period
	Divisional performance measures
		Return on investment (ROI)
		Residual income (RI)
		Looking to the longer term
		Comparing performance
	EVA® revisited
	Transfer pricing
		The objectives of transfer pricing
		Transfer pricing and tax mitigation
		Transfer pricing policies
		Market prices
		Variable cost
		Full cost
		Negotiated prices
		Divisions with mixed sales
		Differential transfer prices
		Transfer pricing and service industries
	Non-financial measures of performance
		What is measured?
		Choosing non-financial measures
		Who should report?
	Summary
	Key terms
	Further reading
	Critical review questions
	Exercises
12 Managing working capital
	Introduction
	Learning outcomes
	What is working capital?
	Managing working capital
	The scale of working capital
	Managing inventories
		Budgeting future demand
		Financial ratios
		Recording and reordering systems
		Levels of control
		Inventories management models
		XYZ inventories management
	Managing trade receivables
		Which customers should receive credit and how much should they be offered?
		Length of credit period
		An alternative approach to evaluating the credit decision
		Cash discounts
		Debt factoring and invoice discounting
		Credit insurance
		Collection policies
		Reducing the risk of non-payment
	Managing cash
		Why hold cash?
		How much cash should be held?
		Controlling the cash balance
		Cash budgets and managing cash
		Operating cash cycle
		Cash transmission
		Bank overdrafts
	Managing trade payables
		Taking advantage of cash discounts
		Controlling trade payables
		Managing working capital
	Summary
	Key terms
	Further reading
	Critical review questions
	Exercises
Appendix A Glossary of key terms
Appendix B Solutions to self-assessment questions
Appendix C Solutions to critical review questions
Appendix D Solutions to selected exercises
Appendix E Present value table
Index
Credits
Back Cover