About the Authors xii
Preface xiii
Part 1
Management accounting and cost management 1
Chapter 1
The role of accounting information in management decision making 2
1.1 Management decision making 3
Organisational vision 3
Organisational core competencies 3
Organisational strategies 3
Operating plans 4
Actual operations 4
Measuring, monitoring and motivating performance 4
1.2 Cost and management accounting for decision making 4
Key influences on management accounting system structure 6
Cost and management accounting, yesterday and tomorrow 6
Relevant information for decision making 9
1.3 Management accounting information and the quality of decision making 9
1.4 Value chain analysis: a framework for management accounting 10
Cost objects and cost drivers 13
The value chain and organisational structure 13
Summary 16
Key terms 18
Self-study problems 19
Questions 20
Exercises 20
Problems 21
Endnotes 26
Acknowledgements 26
Appendix 1A Excel primer b27
Chapter 2
Cost concepts, behaviour and estimation 85
2.1 Cost behaviour 86
2.2 Variable, fixed and mixed costs 86
Relevant range 87
Cost functions 88
2.3 Cost estimation techniques 89
Engineered estimate of cost 89
Analysis at the account level 90
Graphical technique â" scatter plots 90
Two-point method 91
High-low method 91
2.4 Estimating the cost function 91
2.5 Regression analysis 95
Simple regression analysis 95
Interpreting simple regression results 95
2.6 Uses and limitations of cost estimates 100
Information quality 101
Average costs 101
Quality of estimation techniques 101
Reliance on cost estimates 102
Data limitations 103
Appendix 2A Regression analysis â" additional topics 104
Summary 108
Key terms 109
Self-study problems 110
Questions 112
Exercises 112
Problems 114
Acknowledgement 121
Chapter 3
A costing framework and cost allocation 123
3.1 Cost objects â" need for cost information 124
3.2 Direct and indirect costs 125
Direct costs 125
Indirect costs 125
3.3 Process of indirect cost allocation 126
Cost drivers 126
Determining the allocation rate 127
3.4 A costing framework 128
3.5 Applying the costing framework in a service entity setting 128
3.6 Applying the costing framework in a support department setting 132
Allocation methods 132
Comparing the direct, step-down and reciprocal methods 140
3.7 Limitations of cost allocation data 140
Appendix 3A Single- versus dual-rate allocations 141
Appendix 3B Using Solver to calculate simultaneous equations for the reciprocal method 145
Summary 146
Key terms 148
Self-study problems 148
Questions 152
Exercises 152
Problems 157
Acknowledgements 164
Chapter 4
Costâ"volumeâ"profit (CVP) analysis 165
4.1 Costâ"volumeâ"profit (CVP) analysis 166
Profit equation and contribution margin 166
4.2 Breakeven point 166
4.3 CVP analysis for a single product 167
Calculating breakeven in units and total revenue 167
Achieving a targeted pre-tax profit 168
Looking at after-tax profit 168
Costâ"volumeâ"profit (CVP) graph 168
4.4 CVP analysis for multiple products 169
Discretionary expenditure decision 170
4.5 Assumptions and limitations of CVP analysis 171
4.6 Margin of safety and degree of operating leverage 171
Margin of safety 171
Degree of operating leverage 172
Appendix 4A Performing CVP analysis with the use of a spreadsheet 177
Summary 180
Key terms 182
Self-study problems 182
Questions 186
Exercises 186
Problems 193
Acknowledgements 199
Chapter 5
Planning â" budgeting and behaviour 201
5.1 The role of planning and budgeting for improved performance and value creation: testing alternative actions 202
5.2 Impact of likely actions on profit, assets and cash flow management 202
Sales/revenue estimation 202
Operating expenses 204
New investment 204
The operating cycle 204
5.3 Planning in cost centres 207
5.4 Contemporary approaches to budgeting 208
Program budgeting 208
Zero-based budgeting 208
Rolling budgeting 209
Activity-based budgeting 210
Kaizen budgeting 210
5.5 The behavioural implications of budgeting 210
5.6 Beyond Budgeting 212
Beyond Budgeting in practice: managing without budgets 213
Summary 215
Key terms 215
Self-study problems 216
Questions 216
Exercises 217
Problems 219
Endnotes 225
Acknowledgement 225
Chapter 6
Operational budgets 227
6.1 Budgeting â" a tool for short- and long-term planning 228
Budget cycle 228
6.2 The role of the master budget 229
Developing a master budget 230
Budgeting in non-manufacturing entities 234
6.3 Developing a cash budget 234
Operating cash receipts and disbursements 235
Other planned cash flows 235
Short-term borrowing or investing 235
6.4 Budgets as performance benchmarks 238
Budget variances and uncertainties 238
Static and flexible budgets 239
6.5 Budgets, incentives and rewards 241
Participative budgeting 241
Budget manipulation 241
Budget responsibility 242
Budget and variance adjustments to measure performance 242
Summary 244
Key terms 247
Self-study problems 247
Questions 252
Exercises 252
Problems 257
Endnotes 263
Acknowledgements 263
Chapter 7
Job costing systems 265
7.1 The flow of costs through the manufacturing process 266
7.2 Calculating the inventoriable product cost for customised products 267
Computerised and manual job costing systems 269
7.3 Allocating manufacturing overhead 269
1. Identify the relevant cost object 269
2. Identify one or more overhead cost pools and allocation bases 269
3. For each overhead cost pool, calculate an overhead allocation rate 270
4. For each overhead cost pool, allocate costs to the cost object 271
Overapplied and underapplied overhead 271
Recording transactions in the financial accounting system 273
7.4 Spoilage, rework and scrap in job costing 276
Normal and abnormal spoilage 276
Rework 277
Scrap 277
Spoilage opportunity costs 278
7.5 Uses and limitations of job cost information 278
Uncertainties in measuring job costs 278
Uncertainties in estimating future job costs 279
Summary 280
Key terms 281
Self-study problems 282
Questions 284
Exercises 285
Problems 288
Acknowledgement 291
Chapter 8
Process costing systems 293
8.1 Accounting for the cost of mass-produced goods 294
Assigning direct materials and conversion costs 294
8.2 Work in process and equivalent units 294
8.3 Process costing methods 296
Process cost reports without beginning or ending WIP â" first month (March) 297
Process cost reports with ending WIP â" second month (April) 299
Process cost reports with beginning and ending WIP â" third month (May) 300
Journal entries for process costing 302
8.4 Production costs and multiple production departments 303
Transferred-in costs and timing of direct materials 303
8.5 Accounting for spoilage in process costing 306
8.6 Uses and limitations of process costing information 308
Monitoring process quality and costs 309
Process costing information and decision making 309
Uncertainties and mismeasurement of cost flows 309
Work in process units at different stages of completion 309
Hybrid costing systems and operation costing 310
Appendix 8A Standard costing use in mass production 311
Summary 312
Key terms 313
Self-study problems 314
Questions 316
Exercises 317
Problems 318
Acknowledgement 324
Chapter 9
Absorption and variable costing 325
9.1 Different measures of cost for different purposes 326
Absorption costing 326
Variable costing 327
Absorption costing compared to variable costing 328
Reconciling absorption and variable costing incomes 330
Incentives to build up inventories 332
Disincentives to build up inventories 332
Uncertainties about desirable inventory levels 332
9.2 A closer look at absorption costing using normal costing 332
Motivation for normal costing 333
Allocation rate denominator considerations 333
Volume variance with normal costing 334
Evaluating denominator choices 334
9.3 Comparison of absorption and variable costing 335
Summary 339
Key terms 340
Self-study problems 340
Questions 344
Exercises 344
Problems 347
Acknowledgement 351
Chapter 10
Flexible budgets, standard costs and variance analysis 353
10.1 Flexible budgets 354
10.2 Standard costs 354
Developing standard costs 354
10.3 Variance analysis 355
Price variances 356
Efficiency variances 356
Deciding which variances to investigate 357
Analysing interactions between incentives and variances 357
10.4 Flexible budgeting in practice 358
Manager conclusions and actions 360
Summary 365
Key terms 366
Self-study problems 366
Questions 368
Exercises 368
Problems 370
Acknowledgement 373
Chapter 11
Variance analysis: revenue and cost 375
11.1 Identifying variances 376
11.2 Profit- and revenue-related variances 377
Profit variance 377
Revenue variance 377
Sales price and sales quantity variances 378
Sales volume and profit variance 378
11.3 Direct cost variances 382
Direct materials price variance 382
Direct materials efficiency variance 383
Summary of direct material variances 384
Direct labour price variance 384
Direct labour efficiency variance 384
Summary of direct labour variances 384
Journal entries for direct costs and variances 385
11.4 Analysing direct cost variance information 385
Identifying reasons for direct cost variances 385
11.5 Overhead variances 387
Variable overhead spending variance 388
Variable overhead efficiency variance 389
Fixed overhead spending variance 390
Production volume variance 390
Summary of overhead variances 391
Journal entries for overhead costs and variances 391
11.6 Using overhead variance information 391
Analysing overhead spending variances 391
Interpreting the variable overhead efficiency variance 391
Interpreting the production volume variance 392
11.7 Cost variance adjustments in the general ledger 393
Summary 399
Key terms 401
Self-study problems 402
Questions 405
Exercises 405
Problems 409
Acknowledgement 414
Chapter 12 Activity analysis: costing and management 415
12.1 Activity-based costing (ABC) and conventional costing 416
Conventional cost accounting systems 416
Activity-based costing systems 417
12.2 ABC cost hierarchy 418
Organisation-sustaining activities 419
Facility-sustaining activities 419
Customer-sustaining activities 419
Product-sustaining activities 419
Batch-level activities 419
Unit-level activities 419
12.3 Understanding and implementing an ABC model 420
12.4 Activity-based management (ABM) 423
Managing customer profitability 423
Managing product and process design 424
Managing environmental costs 424
Managing constrained resources 424
Managing resources supplied and consumed 424
12.5 Benefits, costs and issues related to ABC 425
Benefits of ABC 425
Costs of ABC 425
Issues related to ABC 426
Summary 435
Key terms 436
Self-study problems 436
Questions 438
Exercises 439
Problems 443
Endnotes 447
Acknowledgements 447
Chapter 13
Relevant costs for decision making 449
13.1 Non-routine operating decisions 450
13.2 Special orders 452
General rule for special order decisions 452
13.3 Product line and business segment (keep or drop) decisions 454
General rule for keep or drop decisions 454
13.4 Insource or outsource (make or buy) decisions 455
General rule for make or buy decisions 455
13.5 Constrained resources 457
General rule for choosing the product mix when resources are constrained 457
General rule for relaxing constraints for one or two products 458
13.6 Qualitative factors important to non-routine operating decisions 459
Quality of decision process 461
13.7 Joint products and costs 461
Allocating joint costs 462
Choosing an appropriate joint cost allocation method 465
Pros and cons of alternative allocation methods 465
Processing a joint product beyond the split-off point 467
Uncertainty and bias in incremental revenue and cost estimates 468
Joint products and by-products 468
Joint product costing with a sales mix 470
Uses and limitations of joint cost information 472
Summary 474
Key terms 477
Self-study problems 477
Questions 481
Exercises 482
Problems 489
Acknowledgement 497
Part 2
Management accounting, extending performance measurement and strategy 499
Chapter 14
Strategy and control 500
14.1 Management accounting and control in a dynamic world 501
14.2 Introduction to strategy and control 502
14.3 Frameworks for strategy and control 504
Ferreira and Otleyâs performance management systems framework 504
Simonsâ levers of control framework 506
Kaplan and Nortonâs strategy map framework 507
Ittner and Larckerâs value-based management framework 508
Flamholtzâs control system framework 509
14.4 Management responsibility and accountability practices 511
Strategy, control and remaining chapters 512
Summary 514
Key term 514
Self-study problem 514
Questions 515
Exercises 515
Problems 516
Endnotes 517
Acknowledgements 518
Chapter 15
Capital budgeting and strategic investment decisions 519
15.1 Capital investment decisions 520
Capital budgeting 520
Decision alternatives 520
15.2 Relevant cash flows 521
15.3 Net present value (NPV) method 522
Present value of a series of cash flows 522
Net present value of a project 523
Identifying a reasonable discount rate 524
15.4 Uncertainties and sensitivity analysis 524
Cash flow uncertainties 524
Project life and discount rate uncertainties 525
Estimation bias 525
Sensitivity analysis 525
15.5 Alternative methods used for capital investment decisions 527
Internal rate of return 527
Comparison of NPV and IRR methods 528
Payback method 528
Accrual accounting rate of return method 529
15.6 Strategic considerations for investment decisions 529
The type of information required in decision making 529
Moving baseline concept 530
Project champion 530
Cost of reversing the decision 530
Reputation, risks, environment, quality and community 530
Making and monitoring investment decisions 534
15.7 Income taxes and the net present value method 535
Calculating incremental tax cash flows 535
15.8 Inflation and the net present value method 536
Real and nominal methods for NPV analysis 536
Appendix 15A Present and future value tables 538
Summary 546
Key terms 547
Self-study problems 548
Questions 551
Exercises 552
Problems 556
Endnotes 561
Acknowledgements 562
Chapter 16
The strategic management of costs and revenues 563
16.1 Value chain activities for continuous cost improvement 564
Value chain and supply chain analysis 564
16.2 Customer profitability 568
16.3 Building desired profit into decisions 573
Target costing 574
16.4 Kaizen costing 578
Using target and kaizen costing over time 580
16.5 Life cycle costing 581
16.6 Price management: pricing methods 582
Cost-based pricing 582
Market-based pricing 583
Cost-based versus market-based pricing 586
Other influences on price 587
Pricing in not-for-profit entities 587
Government regulations, ethics and pricing 588
Summary 589
Key terms 591
Self-study problems 592
Questions 593
Exercises 594
Problems 598
Endnotes 603
Acknowledgements 604
Chapter 17
Strategic management control: a lean perspective 605
17.1 Lean thinking philosophy 606
17.2 Theory of constraints 609
Throughput costing 610
TOC performance measurement 612
Benefits and limitations of the theory of constraints and throughput costing 613
17.3 Just-in-time (JIT) production 616
17.4 Total quality management (TQM): managing quality 619
Value chain approach to quality management 620
Summary 623
Key terms 624
Self-study problems 624
Questions 625
Exercises 626
Problems 631
Endnotes 632
Acknowledgements 633
Chapter 18
Responsibility accounting, performance evaluation and transfer pricing 635
18.1 Decision-making authority and responsibility 636
Centralised and decentralised entities 636
General versus specific knowledge 637
Technology and globalisation 638
18.2 Responsibility accounting 639
Cost centres 640
Revenue centres 640
Profit centres 641
Investment centres 641
Responsibility centres and suboptimal decision making 641
18.3 Income-based performance evaluation 641
Return on investment 642
Advantages and disadvantages of ROI 644
Residual income 645
Advantages and disadvantages of residual income 645
Economic value added 646
Advantages and disadvantages of EVA 647
Income-based performance evaluation in the public sector 648
18.4 Transfer pricing 648
Transfer prices and conflicts among managers 649
Setting an appropriate transfer price 651
18.5 Additional transfer price considerations 654
International income taxes 654
Transfer prices for support services 655
Setting transfer prices for internal services 655
Transfer of corporate overhead costs 655
Summary 656
Key terms 657
Self-study problems 658
Questions 659
Exercises 660
Problems 663
Endnotes 667
Acknowledgements 667
Chapter 19
The balanced scorecard and strategy maps 669
19.1 Measuring organisational performance 670
Financial and non-financial measures 670
19.2 Strategy maps 674
19.3 The balanced scorecard 675
Financial perspective and related measures 677
Customer perspective and related measures 677
Internal business process perspective and related measures 678
Learning and growth perspective and related measures 679
Role of social media performance measures 683
Using the balanced scorecard diagnostically or interactively (levers of control) 684
Belief systems, boundary systems and the balanced scorecard 684
19.4 Steps in implementing a balanced scorecard 684
Clarify vision, core competencies and strategies 684
Analyse perspectives to develop performance objectives and measures 685
Construct a strategy map to reinforce links between measures 686
Communicate, link throughout the organisation and refine 686
Establish performance targets and action plans 686
Collect and analyse scorecard data to monitor performance 686
Investigate variances and reward employees 687
Provide feedback and refine the balanced scorecard 687
19.5 Strengths and weaknesses of the balanced scorecard 691
Strengths 691
Weaknesses 691
How valuable is the balanced scorecard? 693
Summary 694
Key terms 696
Self-study problems 696
Questions 699
Exercises 699
Problems 703
Endnotes 708
Acknowledgements 709
Chapter 20
Rewards, incentives and risk management 711
20.1 Agency theory and rewards 712
Agency costs 712
Rewards 713
20.2 The structure of reward systems 713
20.3 Forms of incentives 714
Types of equity incentives 715
20.4 Structuring reward systems containing incentives 715
20.5 Emerging themes in reward systems 719
Relative performance evaluation 719
Pay-for-performance issues 719
Regulation and government intervention 720
Connecting the incentive to performance metrics 721
20.6 Risk management 721
Risk management and compliance 721
The integrated approach to risk management 722
Risk management principles â" summary 723
Incentives, rewards and risk management 723
Effective risk management architecture 725
Summary 726
Key terms 727
Self-study problem 727
Questions 729
Exercises 730
Problems 732
Endnotes 739
Acknowledgements 740
Chapter 21
Sustainability management accounting 741
21.1 Sustainability and management accounting 742
Sustainability 742
United Nations Sustainable Development Goals 743
Mandatory and voluntary sustainability initiatives 743
Implications for management accounting 745
Sustainability management 748
Greenhouse gas (or carbon) accounting and monitoring 749
Carbon footprint 752
Sustainability management accounting 754
21.2 Sustainability, ethics and integrated thinking 756
21.3 Scope and benefits of sustainability management accounting 759
Sustainability scope considerations 759
Management decisions benefiting from sustainability management accounting 761
21.4 Sustainability management accounting tools 762
Sustainability value chain analysis 762
Sustainability cost allocation and full cost accounting 763
Sustainability life cycle costing 765
Internal carbon prices 766
Sustainability and capital budgeting 766
Sustainability balanced scorecard 768
21.5 Sustainability management accounting â" issues relating to successful integration 770
Summary 773
Key terms 775
Self-study problems 776
Questions 777
Exercises 777
Problems 778
Endnotes 786
Acknowledgements 789
Index 791
