Management Accounting-Performance Evaluation

594 Pages·2007·2.21 MB·English

by  Robert Scarlett

CIMA’s Official
Study System
Managerial Level
Management
Accounting –
Performance
Evaluation
Bob Scarlett
AMSTERDAM BOSTON HEIDELBERG LONDON NEW YORK OXFORD
PARIS SAN DIEGO SAN FRANCISCO SINGAPORE SYDNEY TOKYO
CIMA Publishing
An imprint of Elsevier
Linacre House,Jordan Hill,Oxford OX2 8DP
30 Corporate Drive,Burlington,MA 01803
First published 2005
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A catalogue record for this book is available from the British Library
ISBN 0 7506 67117
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Important Note
A new edition of the CIMA Official Terminology is due to be published in
September 2005. As this is past the publication date of this Study System the
page reference numbers for ‘Management Accounting Official Terminology’
contained in this Study System are for the 2000 edition.You should ensure that
you are familiar with the 2005 CIMAOfficial Terminology (ISBN 0 7506 6827 X)
once published,available from www.cimapublishing.com
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Contents
The CIMA Study System xiii
Acknowledgements xiii
How to use your CIMA Study System xiii
Study technique xv
The Performance Evaluation syllabus xvi
Transitional arrangements xxi
1 Cost Accounting Systems 1
Learning Outcomes 1
1.1 Introduction 1
1.2 The difference between marginal costing
and absorption costing 1
1.3 Preparing profit statements using each method 2
1.3.1 Profit statements using marginal costing 3
1.3.2 Profit statements using absorption costing 3
1.4 Reconciling the profit figures 4
1.4.1 Reconciling the profits given by the different methods 4
1.4.2 Reconciling the profits for different periods 5
1.4.3 Profit differences in the long term 5
1.5 Marginal costing or absorption costing? 6
1.6 Specific order costing 6
1.7 Job costing 7
1.7.1 Job cost cards and databases 7
1.7.2 Collecting the direct costs of each job 7
1.7.3 Attributing overhead costs to jobs 8
1.7.4 A worked example 8
1.7.5 Other applications for job costing 10
1.8 Batch costing 10
1.9 Process costing 10
1.9.1 Previous process costs 12
1.9.2 Opening work in progress 12
1.9.3 Solution to Example 1 using the FIFO method 14
1.9.4 Discussion of Example 1 15
1.9.5 Choice of methods and standard costing 16
1.9.6 Process costing with opening work in progress 17
1.9.7 Solution to Example 2 using the FIFO method 18
1.9.8 Process losses 20
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S 1.10 Joint products and by-products 21
T
N
1.10.1 Joint product costing 22
E
T
N 1.10.2 Apportioning common costs to joint products 22
O
C 1.10.3 Using notional or proxy sales values for common
cost apportionment 23
1.10.4 The final sales value method of
common cost apportionment 24
1.10.5 Using joint product costs for decision-making 25
1.10.6 Joint products and the further processing decision: an example 25
1.10.7 Costing by-products 26
1.10.8 Joint and by-products: an example 27
1.11 Summary 28
Reading 29
Revision Questions 31
Solutions to Revision Questions 37
2 The Theory and Practice of Standard Costing 43
Learning Outcomes 43
2.1 Introduction 43
2.2 The theory and practice of standard costing 43
2.3 What is a standard cost? 44
2.4 Performance levels 45
2.4.1 A standard 45
2.4.2 Ideal standard 45
2.4.3 Attainable standard 45
2.4.4 Basic standard 45
2.5 Setting standard costs 46
2.5.1 Standard material price 46
2.5.2 Standard material usage 46
2.5.3 Standard labour rate 46
2.5.4 Standard labour times 46
2.5.5 Production overhead costs 46
2.6 Updating standards 47
2.7 Standard costing in the modern industrial environment 47
2.8 What is variance analysis? 47
2.9 Variable cost variances 48
2.9.1 Direct material cost variances 48
2.9.2 The direct material price variance and
stock valuation 49
2.9.3 Direct labour cost variances 50
2.9.4 Variable overhead cost variances 51
2.10 Fixed production overhead variances 52
2.10.1 The reasons for under- or over-absorption of overhead 52
2.10.2 The fixed production overhead total variance 53
2.10.3 The fixed production overhead expenditure variance 53
2.10.4 The fixed production overhead volume variance 53
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MANAGEMENT ACCOUNTING – PERFORMANCE EVALUATION P1 v
2.10.5 Analysing the fixed production overhead volume variance 54 C
O
2.10.6 Fixed production overhead capacity variance 54 N
T
2.10.7 Fixed production overhead efficiency variance 54 E
N
2.11 Sales variances 55 TS
2.11.1 The selling price variance 55
2.11.2 The sales volume variance 56
2.11.3 The sales volume profit variance 56
2.12 Reconciling the actual and budget profit 56
2.13 Standard marginal costing 59
2.13.1 The fixed overhead volume variance 59
2.13.2 The fixed overhead expenditure variance 59
2.13.3 The sales volume contribution variance 59
2.13.4 Reconciling the actual and budget profit 60
2.14 Idle time variances 61
2.14.1 Expected idle time 62
2.15 Calculating actual data from standard cost details and variances 63
2.16 Example: Preparing a reconciliation statement 64
2.16.1 Reconciliation of budgeted and actual profit 66
2.16.2 Calculation of cost variances shown in reconciliation above 67
2.17 Some miscellaneous ideas 68
2.18 Summary 69
Readings 71
Revision Questions 89
Solutions to Revision Questions 97
3 Standard Costing and Performance Evaluation 107
Learning Outcomes 107
3.1 Introduction 107
3.2 Material mix and yield variances 107
3.3 Labour mix and yield variances 110
3.4 Sales variances 112
3.5 Planning and operational variances 114
3.6 Capacity ratios 118
3.6.1 Standard hour 118
3.6.2 Calculating the capacity ratios 119
3.7 Investigation and interpretation of variances 120
3.7.1 Percentage variance charts 121
3.7.2 The reasons for variances 122
3.7.3 Investigation models 123
3.7.4 Interrelationship of variances 124
3.8 Behavioural considerations 126
3.8.1 Organisational goals 126
3.8.2 Target levels for standards and budgets 126
3.8.3 Performance measures and evaluation 127
3.8.4 Participation in setting standards and budgets 128
3.8.5 Budget bias 128
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vi MANAGEMENT ACCOUNTING – PERFORMANCE EVALUATION P1
S 3.9 Standard costing in the modern business environment 129
T
N
3.9.1 Criticisms of standard costing 129
E
T
N 3.9.2 Addressing the criticisms 129
O
C 3.9.3 Standards and variances: a cautionary note 130
3.10 Benchmarking 130
3.11 Developments and current thinking in the application
of standard costing 131
3.11.1 McDonaldization – Another angle on things 131
3.11.2 Diagnostic reference groups 131
3.12 Summary 132
Readings 133
Revision Questions 139
Solutions to Revision Questions 145
4 Basic Aspects of Management Accounting 153
Learning Outcomes 153
4.1 Introduction 153
4.2 Cost behaviour 153
4.2.1 Fixed cost 154
4.2.2 Variable cost 155
4.2.3 Semi-variable cost 157
4.2.4 Analysing semi-variable costs 158
4.2.5 Using historical data 160
4.3 Costs and activity based techniques (ABTs) 160
4.4 Breakeven or cost–volume–profit analysis 161
4.4.1 Calculating the breakeven point 161
4.5 The margin of safety 161
4.6 The contribution to sales (C/S) ratio 162
4.7 Drawing a basic breakeven chart 163
4.8 The contribution breakeven chart 165
4.9 The PV chart 165
4.9.1 The advantage of the PV chart 166
4.10 The limitations of breakeven (or CVP) analysis 167
4.11 The economist’s breakeven chart 168
4.12 Using costs for decision-making 168
4.12.1 Short-term decision-making 169
4.13 Evaluating proposals 169
4.14 Relevant costs 171
4.14.1 Non-relevant costs 171
4.15 Opportunity costs 173
4.15.1 Examples of opportunity costs 173
4.15.2 Notional costs and opportunity costs 173
4.16 Avoidable, differential and incremental costs 174
4.16.1 Avoidable costs 174
4.16.2 Differential/incremental costs 174
4.16.3 Using incremental costs 174
4.16.4 Incremental revenues 174
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MANAGEMENT ACCOUNTING – PERFORMANCE EVALUATION P1 vii
4.17 Limiting factor decision-making 175 C
O
4.17.1 Decisions involving a single limiting factor 176 N
T
4.18 Summary 178 E
N
T
Readings 179 S
Revision Questions 183
Solutions to Revision Questions 189
5 The Theory and Practice of Budgeting 195
Learning Outcomes 195
5.1 Introduction 195
5.2 The purposes of budgeting 195
5.2.1 Budgetary planning and control 196
5.2.2 What is a budget? 196
5.2.3 The budget period 197
5.2.4 Strategic planning, budgetary planning and
operational planning 197
5.3 The preparation of budgets 198
5.3.1 Co-ordination: the budget committee 198
5.3.2 Participative budgeting 198
5.3.3 Information: the budget manual 198
5.3.4 Early identification of the principal
budget factor 199
5.3.5 The interrelationship of budgets 199
5.3.6 Using spreadsheets in budget preparation 200
5.3.7 The master budget 200
5.4 Preparation of operational budgets 200
5.4.1 Using stock control formulae in budget preparation 201
5.4.2 Budget interrelationships 202
5.5 The cash budget 202
5.5.1 Preparing cash budgets 202
5.5.2 Interpretation of the cash budget 204
5.5.3 Cash budget: second example 204
5.6 Rolling budgets 207
5.7 Forecasting and planning 208
5.8 Time series 210
5.8.1 The concept 210
5.8.2 Factors that cause variations 211
5.8.3 Time series modelling 211
5.9 Sensitivity analysis 214
5.10 Zero-based budgeting 215
5.10.1 Advantages of ZBB 217
5.10.2 Disadvantages of ZBB 217
5.10.3 ZBB in practice 218
5.11 Programme-planning budgeting systems 218
5.12 Activity-based budgeting 221
5.13 Summary 222
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viii MANAGEMENT ACCOUNTING – PERFORMANCE EVALUATION P1
S Readings 223
T
N
TE Revision Questions 235
N
O
Solutions to Revision Questions 245
C
6 Budgetary Control 255
Learning Outcomes 255
6.1 Introduction 255
6.2 The Theory of Systems 256
6.3 System design 256
6.3.1 The characteristics and components of a system 256
6.3.2 Control systems 256
6.4 Feedback control loops and system operation 257
6.5 Budgetary control information 258
6.5.1 Budget centres 258
6.5.2 Budgetary control reports 259
6.6 Fixed and flexible budgets 261
6.6.1 Preparing a flexible budget 261
6.6.2 Using flexible budgets for planning 263
6.6.3 Flexible budgets 263
6.6.4 Extrapolating outside the relevant range 265
6.7 Behavioural aspects of budgetary control 265
6.7.1 Motivation and co-operation 266
6.7.2 Failure of goal congruence 266
6.7.3 The budget as a pot of cash 267
6.7.4 Budget negotiation 267
6.7.5 Influence on accounting policies 268
6.7.6 Budget constrained management styles 268
6.7.7 Budgets and motivation 268
6.8 Modern developments in control systems 269
6.8.1 The problem of discretionary costs 269
6.8.2 Developments from financial modelling and
budgeting packages 270
6.8.3 Rethinking the purpose of the monthly report and
decision support systems 270
6.8.4 Beyond budgeting 271
Readings 273
Revision Questions 283
Solutions to Revision Questions 289
7 Budgeting and Performance Evaluation 301
Learning Outcomes 301
7.1 Introduction 301
7.2 Performance evaluation 302
7.2.1 The profit and loss account 302
7.2.2 Return on capital employed 303
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MANAGEMENT ACCOUNTING – PERFORMANCE EVALUATION P1 ix
7.2.3 Asset turnover 303 C
O
7.2.4 Liquidity 304 N
T
7.3 Exercise 304 E
N
7.4 Understanding the business 306 TS
7.5 Reporting a performance evaluation 306
7.6 Non-financial performance indicators 307
7.7 Benchmarking 310
7.8 The balanced scorecard 312
7.9 Performance evaluation in
the not-for-profit sector 313
7.10 Summary 315
Reading 317
Revision Questions 323
Solutions to Revision Questions 325
8 Developments in Management Accounting 331
Learning Outcomes 331
8.1 Introduction 331
8.2 The modern economic environment 331
8.2.1 Traditional production processes 331
8.2.2 The background to change 332
8.3 The new manufacturing 333
8.3.1 Computer-aided design 333
8.3.2 Computer-aided manufacturing 333
8.3.3 Computer-integrated manufacturing 334
8.3.4 Flexible manufacturing systems 334
8.4 The value chain 335
8.5 Production operations systems and management strategies 335
8.5.1 Material requirements planning 335
8.5.2 Manufacturing resources planning 336
8.5.3 Optimised production technology (OPT) 337
8.5.4 ERP, CRM and SCM 338
8.5.5 Just-in-time concept 339
8.6 Total quality management (TQM) 341
8.7 Synchronous manufacturing 343
8.8 The emphasis on continuous improvement 344
8.9 Activity-based costing 344
8.9.1 Traditional versus activity-based cost 344
8.10 Transaction analysis and cost drivers 346
8.11 Favourable conditions for ABC 348
8.12 Establishing an activity-based product cost 348
8.12.1 Comparison with traditional costing 348
8.12.2 Analysis of activities 349
8.12.3 Cost management and ABC 352
8.12.4 A comprehensive example of ABC 353
8.12.5 Variance analysis and ABC 362
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