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www.downloadslide.com The second edition provides: • Comprehensive coverage of management accounting topics. • Provides a number of unique case studies complete with innovative ideas for interactive teaching sessions, as well as engaging real-life commentaries. • Excellent business focus shows students how management accounting techniques can be applied in real business situations. • Relevant research is outlined to link teaching to current developments. • Extensive coverage of service and not for profit sectors as well as manufacturing. • Practical and imaginative pedagogy includes group discussions and activities, a management accounting consultant which helps bring topics alive, as well as a wealth of examples, questions and problems throughout. • Innovative full colour design brings key issues and essential topics to life. • Fully reflects CIMA terminology. • Additional questions based on CIMA examination questions, with worked solutions and commentary. • Up-to-date real world cases to relate topics to the financial world. Fully supported by a comprehensive suite of student and lecturer resources, including cases with teaching notes, questions and multiple choice questions, PowerPoint slides, lecture notes, graded questions, and solutions to questions in the book. To utilise this excellent online resource visit: www.pearsoned.co.uk\weetman. Pauline Weetman BA, BSc (Econ), PhD, CA, FRSE, is Professor of Accounting at the University of Edinburgh, and has extensive experience of teaching at undergraduate and postgraduate level, with previous chairs held at Stirling, Heriot-Watt, Strathclyde and Glasgow Universities. She received the Distinguished Academic Award of the British Accounting Association in 2005. She has convened the examining board of the Institute of Chartered Accountants of Scotland and was formerly Director of Research at ICAS. Front cover image: © Getty Images CVR_WEET8451_02_SE_CVR.indd 1 Management Accounting Pauline Weetman second edition Weetman Management Accounting provides continuity of study over the introductory stages in specialist accounting programmes while preserving the generality of coverage that is suitable for business studies degrees. The text is also suitable for professional courses where management accounting is introduced for the first time. second edition Management Accounting Pauline Weetman’s innovative text expertly guides students through the fundamentals of management accounting and provides a solid foundation across the introductory stages and a strong basis for further specialist study. The text is clear, well structured and brings an imaginative approach to student learning with its emphasis on allowing students to practice the application of theory. www.pearson-books.com 12/5/10 13:57:48 www.downloadslide.com Management Accounting Visit the Management Accounting Companion Website at www.pearsoned.co.uk/weetman to find valuable student learning material including: l l l Multiple choice questions to help test your learning Extensive links to valuable resources on the web An online glossary to explain key terms www.downloadslide.com 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 www.downloadslide.com Management Accounting SECOND EDITION PAULINE WEETMAN Professor of Accounting, University of Edinburgh www.downloadslide.com To my parents, Harry and Freda Weetman 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 2006 Second edition published 2010 © Pearson Education Limited 2006, 2010 The right of Pauline Weetman to be identified as author of this work has been asserted by her 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: 978-0-273-71845-1 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Weetman, Pauline. Management accounting / Pauline Weetman. – 2nd ed. p. cm. ISBN 978-0-273-71845-1 (pbk.) 1. Managerial accounting. I. Title. HF5657.4.W415 2010 658.15′11—dc22 2010000671 10 9 8 7 6 5 4 3 2 1 14 13 12 11 10 Typeset in 9.5/12pt Palatino by 35 Printed and bound by Rotolito Lombarda, Italy The publisher’s policy is to use paper manufactured from sustainable forests. www.downloadslide.com Contents Guided tour Preface Publisher’s acknowledgements Part 1 Chapter 1 DEFINING, REPORTING AND MANAGING COSTS What is management accounting? 2 Real world case 1.1 Learning outcomes 2 3 1.1 1.2 1.3 1.4 1.5 Chapter 2 xiv xvi xvii Introduction Meeting the needs of internal users Management functions Role of management accounting Judgements and decisions: case study illustrations 4 6 7 14 17 Real world case 1.2 Real world case 1.3 18 23 1.6 1.7 1.8 23 24 25 The language of management accounting What the researchers have found Summary References and further reading Questions Case studies Notes 26 26 30 30 Classification of costs 31 Real world case 2.1 Learning outcomes 31 32 2.1 2.2 2.3 2.4 33 33 33 34 Definition of a cost The need for cost classification The meaning of ‘activity’ and ‘output’ Variable costs and fixed costs Real world case 2.2 39 2.5 2.6 2.7 39 41 43 Direct costs and indirect costs Product costs and period costs Cost classification for planning, decision making and control Real world case 2.3 46 www.downloadslide.com vi Contents Chapter 3 Chapter 4 Chapter 5 2.8 Cost coding 2.9 Cost selection and reporting 2.10 Summary 47 48 49 References and further reading Questions Case studies 49 50 53 Materials and labour costs 54 Real world case 3.1 Learning outcomes 54 55 3.1 3.2 3.3 3.4 56 57 60 63 Introduction Accounting for materials costs Costs when input prices are changing Accounting for labour costs Real world case 3.2 Real world case 3.3 64 66 3.5 3.6 66 67 What the researchers have found Summary References and further reading Questions Case studies Note 67 67 69 69 Overhead costs 70 Real world case 4.1 Learning outcomes 70 71 4.1 72 Introduction Real world case 4.2 73 4.2 4.3 4.4 74 85 94 Production overheads: traditional approach Activity-based costing (ABC) for production overheads Comparing traditional approach and ABC Real world case 4.3 95 4.5 4.6 96 97 What the researchers have found Summary References and further reading Questions Case studies Notes 98 98 103 104 Absorption costing and marginal costing 105 Real world case 5.1 Learning outcomes 105 106 5.1 5.2 107 107 Introduction A note on terminology: marginal or variable? www.downloadslide.com Contents 5.3 5.4 5.5 5.6 Chapter 6 Chapter 7 Illustration of absorption and marginal costing Over- and under-absorbed fixed overheads Case study Why is it necessary to understand the difference? 107 110 113 116 Real world case 5.2 117 5.7 5.8 5.9 117 119 119 Absorption costing in financial accounting Arguments in favour of absorption costing Arguments in favour of marginal costing Real world case 5.3 120 5.10 What the researchers have found 5.11 Summary 121 121 References and further reading Questions Case studies Note 122 122 126 126 Job costing 127 Real world case 6.1 Learning outcomes 127 128 6.1 6.2 129 130 Introduction Job cost records: an illustration Real world case 6.2 134 6.3 6.4 135 140 Job costing: applying the accounting equation to transactions Moving forward Real world case 6.3 141 6.5 6.6 141 142 What the researchers have found Summary References and further reading Questions Case studies 142 143 146 Recording transactions in a job-costing system 147 Real world case 7.1 Learning outcomes 147 149 7.1 7.2 7.3 7.4 149 150 150 152 Introduction Types and titles of cost ledger accounts The flow of entries in a job-costing system Recording transactions for a job-costing system Real world case 7.2 157 7.5 7.6 7.7 7.8 157 165 168 174 The use of control accounts and integration with the financial accounts Contract accounts Illustration of contract accounting What the researchers have found Real world case 7.3 175 7.9 175 Summary vii www.downloadslide.com viii Contents Chapter 8 Reference and further reading Questions Case studies 175 176 180 Process costing 181 Real world case 8.1 Learning outcomes 181 182 8.1 8.2 183 184 Introduction Allocation of costs to products in a process industry Real world case 8.2 191 8.3 192 Joint product costs and by-products Real world case 8.3 196 8.4 8.5 8.6 196 197 198 Decisions on joint products: sell or process further What the researchers have found Summary References and further reading Questions Case studies Part 2 Chapter 9 Chapter 10 199 199 203 DECISION MAKING Short-term decision making 206 Real world case 9.1 Learning outcomes 206 207 9.1 9.2 9.3 9.4 9.5 9.6 208 208 213 216 219 220 Introduction Cost behaviour: fixed and variable costs Break-even analysis Using break-even analysis Limitations of break-even analysis Applications of cost–volume–profit analysis Real world case 9.2 221 9.7 222 Cases in short-term decision making Real world case 9.3 226 9.8 Estimating fixed and variable costs 9.9 What the researchers have found 9.10 Summary 227 228 229 References and further reading Questions Case studies 230 230 236 Relevant costs, pricing and decisions under uncertainty 237 Real world case 10.1 Learning outcomes 237 238 www.downloadslide.com Contents Chapter 11 Chapter 12 10.1 Introduction 10.2 Relevant costs and revenues 239 239 Real world case 10.2 242 10.3 Pricing decisions 243 Real world case 10.3 246 10.4 Decision making under risk and uncertainty 10.5 What the researchers have found 10.6 Summary 247 254 255 References and further reading Questions Case studies 256 256 261 Capital investment appraisal 263 Real world case 11.1 Learning outcomes 263 264 11.1 Capital project planning and decisions 11.2 Payback method 11.3 Accounting rate of return 265 267 269 Real world case 11.2 271 11.4 Net present value method 11.5 Internal rate of return 271 277 Real world case 11.3 280 11.6 Which methods are used in practice? 11.7 What the researchers have found 11.8 Summary 280 281 282 References and further reading Questions Case studies Appendix: table of discount factors 283 283 286 287 Capital budgeting applications 289 Real world case 12.1 Learning outcomes 289 290 12.1 Introduction 12.2 Capital rationing 12.3 Cash flows for discounting calculations 291 291 295 Real world case 12.2 299 12.4 Control of investment projects: authorisation and review 12.5 Advanced manufacturing technologies 300 301 Real world case 12.3 303 12.6 What the researchers have found 12.7 Summary 304 305 References and further reading Questions Case studies 305 306 311 ix