Mangement Accounting for Decision Makers

Cover......Page 1
Contents......Page 8
Preface......Page 18
How to use this book......Page 20
Acknowledgments......Page 22
 Learning outcomes......Page 26
 WHAT IS THE PURPOSE OF A BUSINESS?......Page 27
 HOW ARE BUSINESSES ORGANISED?......Page 28
 HOW ARE BUSINESSES MANAGED?......Page 31
  1 Establish mission, vision and objectives......Page 32
  2 Undertake a position analysis......Page 34
  4 Select strategic options and formulate plans......Page 35
 THE CHANGING BUSINESS LANDSCAPE......Page 36
 WHAT IS THE FINANCIAL OBJECTIVE OF A BUSINESS?......Page 37
 BALANCING RISK AND RETURN......Page 39
 WHAT IS MANAGEMENT ACCOUNTING?......Page 41
 PROVIDING A SERVICE......Page 43
  Further qualities......Page 44
 WEIGHING UP THE COSTS AND BENEFITS......Page 45
 MANAGEMENT ACCOUNTING AS AN INFORMATION SYSTEM......Page 48
 IT’S JUST A PHASE......Page 49
 WHAT INFORMATION DO MANAGERS NEED?......Page 51
 REPORTING NON-FINANCIAL INFORMATION......Page 52
 INFLUENCING MANAGERS’ BEHAVIOUR......Page 53
 REAPING THE BENEFITS OF INFORMATION TECHNOLOGY......Page 54
 REASONS TO BE ETHICAL......Page 55
 MANAGEMENT ACCOUNTING AND FINANCIAL ACCOUNTING......Page 57
 NOT-FOR-PROFIT ORGANISATIONS......Page 59
 SUMMARY......Page 61
 FURTHER READING......Page 63
 EXERCISES......Page 64
 Learning outcomes......Page 66
 COST–BENEFIT ANALYSIS......Page 67
 WHAT IS MEANT BY ‘COST’?......Page 68
 RELEVANT COSTS: OPPORTUNITY AND OUTLAY COSTS......Page 70
 SUNK COSTS AND COMMITTED COSTS......Page 75
 NON-MEASURABLE COSTS AND BENEFITS......Page 76
 Self-assessment question 2.1......Page 77
 FURTHER READING......Page 78
 EXERCISES......Page 79
 Learning outcomes......Page 85
 FIXED COST......Page 86
 VARIABLE COST......Page 88
  Analysing semi-fixed (semi-variable) costs......Page 89
 FINDING THE BREAK-EVEN POINT......Page 91
 CONTRIBUTION......Page 96
 MARGIN OF SAFETY......Page 97
 ACHIEVING A TARGET PROFIT......Page 99
 OPERATING GEARING AND ITS EFFECT ON PROFIT......Page 100
 PROFIT–VOLUME CHARTS......Page 102
 THE ECONOMIST’S VIEW OF THE BREAK-EVEN CHART......Page 103
 FAILING TO BREAK EVEN......Page 104
 WEAKNESSES OF BREAK-EVEN ANALYSIS......Page 105
 USING CONTRIBUTION TO MAKE DECISIONS: MARGINAL ANALYSIS......Page 108
  Pricing/assessing opportunities to enter contracts......Page 109
  The most efficient use of scarce resources......Page 110
  Make-or-buy decisions......Page 112
  Closing or continuation decisions......Page 115
 Self-assessment question 3.1......Page 116
 SUMMARY......Page 117
 FURTHER READING......Page 118
 EXERCISES......Page 119
 Learning outcomes......Page 124
 WHY DO MANAGERS WANT TO KNOW THE FULL COST?......Page 125
 SINGLE-PRODUCT BUSINESSES......Page 127
  Process-costing problems......Page 128
  Direct and indirect cost......Page 130
  Job costing......Page 132
  Full (absorption) costing and the behaviour of cost......Page 133
 OVERHEADS AS SERVICE RENDERERS......Page 134
  Job costing: a worked example......Page 135
  Selecting a basis for charging overheads......Page 139
  Segmenting the overheads......Page 141
  Dealing with overheads on a cost centre basis......Page 142
  Batch costing......Page 151
  Full (absorption) costing and estimation errors......Page 153
 FULL (ABSORPTION) COSTING VERSUS VARIABLE COSTING......Page 155
  Which method is better?......Page 158
 Self-assessment question 4.1......Page 159
 SUMMARY......Page 160
 REVIEW QUESTIONS......Page 162
 EXERCISES......Page 163
 Learning outcomes......Page 168
  Costing and pricing: the new environment......Page 169
 COST MANAGEMENT SYSTEMS......Page 170
  Taking a closer look......Page 171
 ACTIVITY-BASED COSTING......Page 172
  Attributing overheads......Page 173
  ABC versus the traditional approach......Page 174
  ABC and service industries......Page 176
  ABC in practice......Page 179
  Total life-cycle costing......Page 181
  Target costing......Page 184
  Kaizen costing......Page 187
  Value chain analysis......Page 189
  Benchmarking......Page 191
  Total quality management......Page 195
  Managing quality costs......Page 197
  An alternative view......Page 198
 Self-assessment question 5.1......Page 200
 SUMMARY......Page 201
 FURTHER READING......Page 203
 EXERCISES......Page 204
 Learning outcomes......Page 208
 HOW BUDGETS LINK WITH STRATEGIC PLANS AND OBJECTIVES......Page 209
  Exercising control......Page 210
 TIME HORIZON OF PLANS AND BUDGETS......Page 212
 PERIODIC AND CONTINUAL BUDGETS......Page 213
 HOW BUDGETS LINK TO ONE ANOTHER......Page 214
 HOW BUDGETS HELP MANAGERS......Page 216
  Step 1: Establish who will take responsibility......Page 218
  Step 5: Prepare draft budgets for all other areas......Page 219
  Step 7: Prepare the master budgets......Page 220
  Step 9: Monitor performance relative to the budget......Page 221
 USING BUDGETS IN PRACTICE......Page 222
 INCREMENTAL AND ZERO-BASE BUDGETING......Page 224
  The cash budget......Page 226
  Preparing other budgets......Page 229
 ACTIVITY-BASED BUDGETING......Page 232
 WHO NEEDS BUDGETS?......Page 234
 BEYOND CONVENTIONAL BUDGETING......Page 236
 LONG LIVE BUDGETS!......Page 238
 Self-assessment question 6.1......Page 241
 SUMMARY......Page 242
 REVIEW QUESTIONS......Page 243
 EXERCISES......Page 244
 Learning outcomes......Page 251
 BUDGETING FOR CONTROL......Page 252
 TYPES OF CONTROL......Page 253
  Flexing the budget......Page 255
  Sales volume variance......Page 256
  Sales price variance......Page 259
  Materials variances......Page 260
  Labour variances......Page 261
 RECONCILING THE BUDGETED PROFIT WITH THE ACTUAL PROFIT......Page 263
 REASONS FOR ADVERSE VARIANCES......Page 267
 INVESTIGATING VARIANCES......Page 269
 COMPENSATING VARIANCES......Page 272
 MAKING BUDGETARY CONTROL EFFECTIVE......Page 273
 BEHAVIOURAL ISSUES......Page 274
  The impact of management style......Page 275
  Failing to meet the budget......Page 276
  Budgets and innovation......Page 277
 STANDARD QUANTITIES AND COSTS......Page 278
  How is information gathered?......Page 279
 THE LEARNING-CURVE EFFECT......Page 280
 OTHER USES FOR STANDARD COSTING......Page 281
 SOME PROBLEMS . . .......Page 282
 THE NEW BUSINESS ENVIRONMENT......Page 283
 Self-assessment question 7.1......Page 285
 SUMMARY......Page 286
 FURTHER READING......Page 287
 EXERCISES......Page 288
 Learning outcomes......Page 292
 THE NATURE OF INVESTMENT DECISIONS......Page 293
 INVESTMENT APPRAISAL METHODS......Page 294
 ACCOUNTING RATE OF RETURN (ARR)......Page 296
  ARR and ROCE......Page 297
  Problems with ARR......Page 298
 PAYBACK PERIOD (PP)......Page 300
  Problems with PP......Page 302
 NET PRESENT VALUE (NPV)......Page 304
  Risk......Page 305
  What will logical investors do?......Page 306
  Using present value tables......Page 309
  The discount rate and the cost of capital......Page 311
 INTERNAL RATE OF RETURN (IRR)......Page 312
  Problems with IRR......Page 317
 SOME PRACTICAL POINTS......Page 318
 INVESTMENT APPRAISAL IN PRACTICE......Page 321
 INVESTMENT APPRAISAL AND STRATEGIC PLANNING......Page 324
  Assessing the level of risk......Page 325
  Reacting to the level of risk......Page 335
 MANAGING INVESTMENT PROJECTS......Page 336
  Stage 2: Identify profitable project opportunities......Page 337
  Stage 5: Monitor and control the project......Page 338
 Self-assessment question 8.1......Page 341
 SUMMARY......Page 342
 FURTHER READING......Page 344
 EXERCISES......Page 345
 Learning outcomes......Page 352
 WHAT IS STRATEGIC MANAGEMENT ACCOUNTING?......Page 353
  Competitor analysis......Page 354
  Customer profitability analysis......Page 358
 COMPETITIVE ADVANTAGE THROUGH COST LEADERSHIP......Page 362
 NON-FINANCIAL MEASURES OF PERFORMANCE......Page 363
  The balanced scorecard......Page 364
  Scorecard problems......Page 369
  The quest for shareholder value......Page 370
  The need for new measures......Page 371
  Economic value added (EVA ® )......Page 373
 JUST ANOTHER FAD?......Page 377
  Economic theory......Page 378
  Some practical considerations......Page 386
  Full-cost (cost-plus) pricing......Page 387
  Pricing on the basis of marginal cost......Page 389
  Pricing strategies......Page 391
 Self-assessment question 9.1......Page 394
 SUMMARY......Page 395
 FURTHER READING......Page 396
 EXERCISES......Page 397
 Learning outcomes......Page 402
  Types of responsibility centres......Page 403
  Divisional structures......Page 404
  Is divisionalisation a good idea?......Page 405
 MEASURING DIVISIONAL PROFIT......Page 409
  Controllable profit......Page 410
  Divisional profit for the period......Page 411
  Return on investment (ROI)......Page 413
  Residual income (RI)......Page 416
  Looking to the longer term......Page 417
  Comparing performance......Page 419
 EVA ® REVISITED......Page 420
 TRANSFER PRICING......Page 421
  The objectives of transfer pricing......Page 422
  Transfer pricing and tax mitigation......Page 424
  Market prices......Page 426
  Full cost......Page 427
  Negotiated prices......Page 428
  Divisions with mixed sales......Page 429
  Differential transfer prices......Page 431
 NON-FINANCIAL MEASURES OF PERFORMANCE......Page 433
  What is measured?......Page 434
  Who should report?......Page 437
 Self-assessment question 10.1......Page 438
 SUMMARY......Page 439
 FURTHER READING......Page 441
 EXERCISES......Page 442
 Learning outcomes......Page 447
 WHAT IS WORKING CAPITAL?......Page 448
 THE SCALE OF WORKING CAPITAL......Page 449
 MANAGING INVENTORIES......Page 452
  Recording and reordering systems......Page 455
  Levels of control......Page 457
  Economic order quantity......Page 459
  Just-in-time inventories management......Page 462
  Which customers should receive credit and how much should they be offered?......Page 464
  Length of credit period......Page 466
  Cash discounts......Page 468
  Collection policies......Page 470
  Reducing the risk of non-payment......Page 473
  How much cash should be held?......Page 474
  Controlling the cash balance......Page 475
  Cash budgets and managing cash......Page 476
  Operating cash cycle......Page 477
  Cash transmission......Page 481
  Bank overdrafts......Page 482
 MANAGING TRADE PAYABLES......Page 483
  Controlling trade payables......Page 485
 Self-assessment question 11.1......Page 487
 SUMMARY......Page 488
 FURTHER READING......Page 490
 EXERCISES......Page 491
Appendix A GLOSSARY OF KEY TERMS......Page 498
Appendix B SOLUTIONS TO SELF-ASSESSMENT QUESTIONS......Page 506
Appendix C SOLUTIONS TO REVIEW QUESTIONS......Page 517
Appendix D SOLUTIONS TO SELECTED EXERCISES......Page 526
Appendix E PRESENT VALUE TABLE......Page 564
INDEX......Page 566