Management accounting for decision makers

529 Pages·2007·4.83 MB·English

by  Peter Atrill

Management Accounting
Fifth Edition
for Decision Makers
M
Peter Atrill Eddie McLaney a
n Fifth Edition
Fifth Edition
a
g
Management Accounting
e
‘...friendly, accessible and engaging.
m
It is easy to read and draws the reader in.’
e for Decision Makers
Ellis Jenkins, University of Glamorgan
n
t

A
c
c
Designed to help you study, Management Accounting for Decision Makers is praised for its clear, accessible and o Peter Atrill
uncluttered style. It provides a comprehensive introduction to the main principles of management accounting, with a u
strong practical emphasis avoiding excessive technical detail. It has a clear and unequivocal focus on how accounting n Eddie McLaney
information can be used to improve the quality of decision making by managers, providing the perfect grounding for t
the decision makers of the future. i
n
g

f
Audience Features o
r
Suitable for those studying an introductory course in l Numerous activities and exercises enable you D
management accounting, who are seeking an under- to constantly test your understanding and
standing of basic principles and underlying concepts reinforce learning. e
without detailed technical knowledge. c
l Lively and relevant examples from the real i
world demonstrate the practical application s
Authors
and value of concepts and techniques learnt. i
o
Peter Atrill is a freelance academic and author
l Interactive ‘open-learning’ style is ideal n
working with leading institutions in the UK, Europe
for self study.
and SE Asia. He was previously Head of Business M
and Management at the University of Plymouth l Decision-making focus on the use of
Business School. accounting information rather than the a
preparation is highly appropriate for k
Eddie McLaney is Visiting Fellow in Accounting and
business managers. e
Finance at the University of Plymouth.
r
l Full range of topical examples from the service s
sector, public sector and manufacturing
Visit the companion website at industry.
E P
www.pearsoned.co.uk/atrillmclaney l Key terms, glossary and bulleted summaries d e
d t
are excellent revision aids. i e
e r

M A
c t
L ri
a ll
n
e
y
ISBN 0-273-71044-3
9 780273 710448
www.pearson-books.com
an imprint of
0273710443_05_COVER.indd 1 19/9/06 09:21:18
MANA_A01.qxd 11/9/07 1:34 PM Page i
Management Accounting
for Decision Makers
Visit the Management Accounting for Decision Makers,
fifth edition Companion Website with Grade Tracker at
www.pearsoned.co.uk/atrillmclaney to find valuable student
learning material including:
n Self assessment questions with Grade Tracker function to
test your learning and monitor your progress
n A study guide to aid self-learning
n Revision questions and exercises to help you check your
understanding
n Extensive links to valuable resources on the web
n Comments on case studies to aid interpretative and
analytical skills
MANA_A01.qxd 11/9/07 1:34 PM Page ii
We work with leading authors to develop the
strongest educational materials in accounting,
bringing cutting-edge thinking and best
learning practice to a global market.
Under a range of well-known imprints, including
Financial Times Prentice Hall, we craft high-quality print and
electronic publications which help readers to understand
and apply their content, whether studying or at work.
To find out more about the complete range of our
publishing, please visit us on the World Wide Web at:
www.pearsoned.co.uk
MANA_A01.qxd 11/9/07 1:34 PM Page iii
5th
Edition
Management Accounting
for Decision Makers
Peter Atrill
and
Eddie McLaney
MANA_A01.qxd 11/9/07 1:34 PM Page iv
Pearson Education Limited
Edinburgh Gate
Harlow
Essex CM20 2JE
England
and Associated Companies throughout the world
Visit us on the World Wide Web at:
www.pearsoned.co.uk
First published 1995 by Prentice Hall Europe
Second edition published 1999 by Prentice Hall Europe
Third edition published 2002 by Pearson Education Limited
Fourth edition published 2005
Fifth edition published 2007
© Prentice Hall Europe 1995, 1999
© Pearson Education Limited 2002, 2007
The rights of Peter Atrill and Edward John McLaney to be identified as authors of this work have
been asserted by them in accordance with the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, without either the prior written permission of the
publisher or a licence permitting restricted copying in the United Kingdom issued by the
Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS.
All trademarks used herein are the property of their respective owners. The use of any
trademark in this text does not vest in the author or publisher any trademark ownership rights
in such trademarks, nor does the use of such trademarks imply any affiliation with or
endorsement of this book by such owners.
ISBN: 978-0-273-71044-8
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Da ta
A catalog record for this book is available from the Library of Congress
10 9 8 7 6 5 4 3 2
10 09 08 07
Typeset in 9.5/12.5pt Stone Serif by 35
Printed and bound by Mateu Cromo Artes Graficas, Madrid, Spain
The publisher’s policy is to use paper manufactured from sustainable forests.
MANA_A01.qxd 11/9/07 1:34 PM Page v
Contents
Guided tour of the book xiv
Guided tour of the Companion Website xvi
Preface xviii
How to use this book xx
Acknowledgements xxii
1 Introduction to management accounting 1
Introduction 1
Learning outcomes 1
What is the purpose of a business? 2
How are businesses organised? 2
How are businesses managed? 5
1 Establish mission and objectives 6
2 Undertake a position analysis 7
3 Identify and assess the strategic options 8
4 Select strategic options and formulate plans 8
5 Perform, review and control 9
The changing business landscape 10
Setting financial ai ms and objectives 11
Enhancing the owners’ wealth 11
Balancing risk and return 12
What is management accounting? 13
How useful is management accounting information? 14
Providing a service 15
But...is it material? 16
Weighing up the costs and benefits 16
Management accounting as an information system 18
It’s just a phase... 19
What information do managers need? 20
Reporting non-financial information 22
Influencing managers’ behaviour 23
Reaping the benefits of IT 24
From bean counter to team member 24
Reasons to be ethical 25
Management and financial accounting 26
Not-for-profit organisations 28
MANA_A01.qxd 11/9/07 1:34 PM Page vi
vi CONTENTS
Summary 29
Key terms 31
Further reading 31
References 31
Review questions 32
Exercises 32
2 Relevant costs for decision making 34
Introduction 34
Learning outcomes 34
What is meant by ‘cost’? 35
A definition of cost 36
Relevant costs: opportunity and outlay costs 36
Sunk costs and committed costs 40
Qualitative factors of decisions 41
Self-assessment question 2.1 42
Summary 44
Key terms 44
Further reading 45
Review questions 46
Exercises 46
3 Cost–volume–profit analysis 52
Introduction 52
Learning outcomes 52
The behaviour of costs 53
Fixed costs 53
Variable costs 55
Semi-fixed (semi-variable) costs 56

Estimating semi-fixed (semi-variable) costs 57
Finding the break-even point 58
Contribution 62
Margin of safety 63
Operating gearing 66
Operating gearing and its effect on profit 66
Profit–volume charts 68
The economist’s view of the break-even chart 68
Failing to break even 70
Weaknesses of break-even analysis 70
Using contribution to make decisions – marginal analysis 72
Accepting/rejecting special contracts 73
The most efficient use of scarce resources 74
Make-or-buy decisions 76
Closing or continuation decisions 78
Self-assessment question 3.1 79
Summary 80
Key terms 81
MANA_A01.qxd 11/9/07 1:34 PM Page vii
CONTENTS vii
Further reading 81
Review questions 82
Exercises 82
4 Full costing 87
Introduction 87
Learning outcomes 87
Why do managers need to know the full cost? 88
What is full costing? 89
Single-product businesses 89
Multi-product businesses 90
Direct and indirect costs 90
Job costing 92
Full (absorption) costing and the behaviour of costs 93
The problem of indirect costs 94
Job costing: a worked example 95
Selecting a basis for charging overheads 98
Segmenting the overheads 101
Dealing with overheads on a departmental basis 102
Batch costing 112
Full (absorption) cost as the break-even price 113
The forward-looking nature of full (absorption) costing 113
Self-assessment question 4.1 113
Using full (absorption)-cost information 114
Criticisms of full (absorption) costing 116
Full (absorption) costing versus variable costing 116
Which method is better? 117
Summary 118
Key terms 119
Further reading 120

References 120
Review questions 121
Exercises 121
5 Costing and pricing in a competitive
environment
126
Introduction 126
Learning outcomes 126
Cost determination in the changed business environment 127
Costing and pricing products in the traditional way 127
Costing and pricing products in the new environment 127
Cost management systems 128
Activity-based costing 128
An alternative approach to full costing 129
What drives the costs? 129
Cost pools 130
ABC and service industries 131
Criticisms of ABC 135
MANA_A01.qxd 11/9/07 1:34 PM Page viii
viii CONTENTS
Self-assessment question 5.1 138
Other approaches to cost management in the modern environment 139
Total (or whole) life-cycle costing 139
Target costing 142
Costing quality control 143
Kaizen costing 144
Benchmarking 144
Pricing 146
Economic theory 146
Some practical considerations 154
Full cost (cost-plus) pricing 155
Pricing on the basis of relevant/marginal cost 158
Target pricing 160
Pricing strategies 160
Summary 161
Key terms 162
Further reading 162
References 163
Review questions 164
Exercises 164
6 Budgeting 168
Introduction 168
Learning outcomes 168
How budgets link with strategic plans and objectives 169
Collecting information on performance and exercising control 170
Time horizons of plans and budgets 170
Limiting factors 172
Budgets and forecasts 172
Periodic and continu al budgets 172
How budgets link to one another 173
How budgets help managers 175
The budget-setting process 178
Step 1: Establish who will take responsibility 178
Step 2: Communicate budget guidelines to relevant managers 179
Step 3: Identify the key, or limiting, factor 179
Step 4: Prepare the budget for the area of the limiting factor 179
Step 5: Prepare draft budgets for all other areas 180
Step 6: Review and co-ordinate budgets 181
Step 7: Prepare the master budgets 181
Step 8: Communicate the budgets to all interested parties 181
Step 9: Monitor performance relative to the budget 181
Using budgets in practice 183
Incremental and zero-base budgeting 184
Preparing the cash budget 186
Preparing other budgets 189
Activity-based budgeting 193
Non-financial measures in budgeting 193
MANA_A01.qxd 11/9/07 1:34 PM Page ix
CONTENTS ix
Budgets and management behaviour 194
Self-assessment question 6.1 194
Who needs budgets? 195
Beyond conventional budgeting 196
Long live budgets! 199
Summary 200
Key terms 201
Further reading 201
References 201
Review questions 202
Exercises 202
7 Accounting for control 209
Introduction 209
Learning outcomes 209
Budgeting for control 210
Types of control 211
Variances from budget 212
Flexing the budget 213
Sales volume variance 213
Sales price variance 216
Materials variances 216
Labour variances 218
Fixed overhead variance 219
Reasons for adverse variances 222
Non-operating profit variances 224
Investigating variances 224
Compensating variances 227
Making budgetary control effective 228
Behavioural issues 228

The impact of management style 229
Reservations about the Hopwood study 230
Failing to meet the budget 230
Self-assessment question 7.1 231
Standard quantities and costs 232
Setting standards 232
What kind of standards should be used? 232
Information gathering 233
The learning-curve effect 234
Other uses for standard costing 235
Some problems... 235
...and some more problems 236
Summary 237
Key terms 238
Further reading 239
References 239
Review questions 240
Exercises 240