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Find more at www.downloadslide.com Find more at www.downloadslide.com COLIN DRURY Management and Cost Accounting, eighth edition The eighth edition of Colin Drury’s Management and Cost Accounting text is accompanied by the following dedicated digital support resources: • Dedicated instructor resources only available to lecturers, who can register for access either at http://login.cengage.com or by speaking to their local Cengage Learning representative. • Replacing the former www.drury-online.com, which hosted the online student resources, Cengage Learning’s CourseMate brings course concepts to life with interactive learning, study and exam preparation tools which support the printed textbook. Students can access this using the unique personal access card included in the front of the book, and lecturers can access it by registering at http://login.cengage.com or by speaking to their local Cengage Learning representative. • Cengage Learning’s Aplia, an online homework solution dedicated to improving learning by increasing student effort and engagement. A demo is available at www.aplia.com. Instructors can find out more about accessing Aplia by speaking to their local Cengage Learning representative, and on the recommendation of their instructor, students can purchase access to Aplia at www.cengagebrain.com. Dedicated Instructor Resources This includes the following resources for lecturers: • • • • • Instructor’s Manual which includes answers to ‘IM Review Problems’ in the text ExamView Testbank provides over 1800 questions PowerPoint slides to use in your teaching Case Study Teaching Notes to accompany the Case Studies on CourseMate Downloadable figures and tables from the book to use in your teaching CourseMate CourseMate offers lecturers and students a range of interactive teaching and learning tools tailored to the eighth edition, including: • • • • • • Case Studies Quizzes Beat the Clock Q&A games PowerPoint slides Interactive ebook Learning Notes • Outline solutions to Real World View questions • • • • • Glossary Accounting and Finance definitions Crossword puzzles and flashcards Guide to Excel Useful weblinks The lecturer view on CourseMate also gives lecturers access to the integrated Engagement Tracker, a first-of-its-kind tool to assess their students’ preparation and engagement. Find more at www.downloadslide.com Find more at www.downloadslide.com Aplia Cengage Learning’s Aplia is a fully tailored online homework solution, dedicated to improving learning by increasing student effort and engagement. Aplia has been used by more than 1 million students at over 1,300 institutions worldwide, and offers automatically graded assignments and detailed explanations for every question, to help students stay focussed, alert and thinking critically. A demo is available at www.aplia.com Aplia accounting features include: • • • • Embedded eBook An easy-to-use course management system Personalized customer support Automatically graded chapter assignments with instant detailed feedback Find more at www.downloadslide.com COLIN DRURY MANAGEMENT AND COST ACCOUNTING EIGHTH EDITION Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States Find more at www.downloadslide.com Management and Cost Accounting Eighth Edition Colin Drury Publishing Director: Linden Harris Publisher: Brendan George Development Editor: Annabel Ainscow Editorial Assistant: Lauren Darby Production Editor: Lucy Arthy Production Controller: Eyvett Davis Marketing Manager: Amanda Cheung Typesetter: Integra, India Cover design: Design Deluxe Text design: Design Deluxe ª , Colin Drury ALL RIGHTS RESERVED. No part of this work covered by the copyright herein may be reproduced, transmitted, stored or used in any form or by any means graphic, electronic, or mechanical, including but not limited to photocopying, recording, scanning, digitizing, taping, Web distribution, information networks, or information storage and retrieval systems, except as permitted or of the United States Copyright Act, or under Section applicable copyright law of another jurisdiction, without the prior written permission of the publisher. While the publisher has taken all reasonable care in the preparation of this book, the publisher makes no representation, express or implied, with regard to the accuracy of the information contained in this book and cannot accept any legal responsibility or liability for any errors or omissions from the book or the consequences thereof. Products and services that are referred to in this book may be either trademarks and/or registered trademarks of their respective owners. The publishers and author/s make no claim to these trademarks. The publisher does not endorse, and accepts no responsibility or liability for, incorrect or defamatory content contained in hyperlinked material. For product information and technology assistance, contact emea.info@cengage.com. For permission to use material from this text or product, and for permission queries, email emea.permissions@cengage.com. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN: -- - - Cengage Learning EMEA Cheriton House, North Way, Andover, Hampshire, SP BE, United Kingdom Cengage Learning products are represented in Canada by Nelson Education Ltd. For your lifelong learning solutions, visit www.cengage.co.uk Purchase your next print book, e-book or e-chapter at www.cengagebrain.com Printed in China by RR Donnelley 1 2 3 4 5 6 7 8 9 10 – 14 13 12 Find more at www.downloadslide.com BRIEF CONTENTS PART ONE Introduction to management and cost accounting 2 1 2 Introduction to management accounting 4 An introduction to cost terms and concepts 23 PART TWO Cost accumulation for inventory valuation and profit measurement 3 4 5 6 7 Cost assignment 44 Accounting entries for a job costing system 80 Process costing 102 Joint and by-product costing 129 Income effects of alternative cost accumulation systems 146 PART THREE Information for decision-making 8 9 10 11 12 13 14 42 166 Cost–volume–profit analysis 168 Measuring relevant costs and revenues for decision-making 194 Pricing decisions and profitability analysis 227 Activity-based costing 251 Decision-making under conditions of risk and uncertainty 278 Capital investment decisions: appraisal methods 300 Capital investment decisions: the impact of capital rationing, taxation, inflation and risk 329 PART FOUR Information for planning, control and performance measurement 356 The budgeting process 358 Management control systems 393 Standard costing and variance analysis 1 423 Standard costing and variance analysis 2: further aspects 458 19 Divisional financial performance measures 484 20 Transfer pricing in divisionalized companies 509 15 16 17 18 PART FIVE Strategic cost management and strategic management accounting 540 21 Strategic cost management 542 22 Strategic management accounting 578 PART SIX The application of quantitative methods to management accounting 606 23 Cost estimation and cost behaviour 608 24 Quantitative models for the planning and control of inventories 632 25 The application of linear programming to management accounting 655 v Find more at www.downloadslide.com CONTENTS Preface xiii About the author xix Acknowledgements xx Walk through tour xxiv PART ONE Introduction to management and cost accounting 2 1 Introduction to management accounting 4 The users of accounting information 5 Differences between management accounting and financial accounting 6 The decision-making process 7 The impact of the changing business environment on management accounting 9 Focus on customer satisfaction and new management approaches 13 Management accounting and ethical behaviour 14 International convergence of management accounting practices 15 Functions of management accounting 16 A brief historical review of management accounting 17 Summary of the contents of this book 18 Guidelines for using this book 19 Summary 19 Key terms and concepts 20 Key examination points 21 Assessment material 21 Review questions 22 2 An introduction to cost terms and concepts 23 Cost objects 23 Manufacturing, merchandising and service organizations 24 vi Direct and indirect costs 24 Period and product costs 27 Cost behaviour 29 Relevant and irrelevant costs and revenues 32 Avoidable and unavoidable costs 32 Sunk costs 33 Opportunity costs 33 Incremental and marginal costs 35 The cost and management accounting information system 36 Summary 36 Key terms and concepts 37 Recommended reading 38 Key examination points 38 Assessment material 38 Review questions 39 Review problems 39 PART TWO Cost accumulation for inventory valuation and profit measurement 42 3 Cost assignment 44 Assignment of direct and indirect costs 45 Different costs for different purposes 46 Cost-benefit issues and cost systems design 47 Assigning direct costs to cost objects 48 Plant-wide (blanket) overhead rates 49 The two-stage allocation process 50 An illustration of the two-stage process for a traditional costing system 52 An illustration of the two-stage process for an ABC system 57 Extracting relevant costs for decision-making 60 Budgeted overhead rates 60 Under- and over-recovery of overheads 62 Non-manufacturing overheads 63 Find more at www.downloadslide.com CONTENTS Cost assignment in non-manufacturing organizations 63 The indirect cost assignment process 65 Summary 65 Appendix 3.1: Inter-service department reallocations 67 Key terms and concepts 71 Recommended readings 72 Key examination points 72 Assessment material 73 Review questions 73 Review problems 73 4 Accounting entries for a job costing system 80 Materials recording procedure 81 Pricing the issues of materials 82 Control accounts 83 Recording the purchase of raw materials 84 Recording the issue of materials 87 Accounting procedure for labour costs 87 Accounting procedure for manufacturing overheads 89 Non-manufacturing overheads 90 Accounting procedures for jobs completed and products sold 91 Costing profit and loss account 91 Job-order costing in service organizations 91 Interlocking accounting 92 Accounting entries for a jit manufacturing system 93 Summary 95 Key terms and concepts 96 Recommended reading 97 Key examination points 97 Assessment material 97 Review questions 97 Review problems 98 5 Process costing 102 Flow of production and costs in a process costing system 102 Process costing when all output is fully complete 104 Process costing with ending work in progress partially complete 109 Beginning and ending work in progress of uncompleted units 112 Partially completed output and losses in process 117 Process costing in service organizations 117 Batch/operating costing 118 Summary 118 Appendix 5.1: Losses in process and partially completed units 119 Key terms and concepts 123 Key examination points 123 Assessment material 123 Review questions 123 Review problems 124 6 Joint and by-product costing 129 Joint products and by-products 129 Methods of allocating joint costs 131 Irrelevance of joint cost allocations for decision-making 136 Accounting for by-products 137 Summary 139 Key terms and concepts 140 Recommended reading 140 Key examination points 140 Assessment material 140 Review questions 141 Review problems 141 7 Income effects of alternative cost accumulation systems 146 External and internal reporting 147 Variable costing 148 Absorption costing 150 Variable costing and absorption costing: a comparison of their impact on profit 151 Some arguments in support of variable costing 152 Some arguments in support of absorption costing 154 Alternative denominator level measures 155 Summary 157 Appendix 7.1: Derivation of the profit function for an absorption costing system 158 Key terms and concepts 160 Key examination points 160 Assessment material 160 Review questions 160 Review problems 161 PART THREE Information for decision-making 166 8 Cost–volume–profit analysis Curvilinear cvp relationships 169 Linear cvp relationships 170 168 vii Find more at www.downloadslide.com viii CONTENTS A numerical approach to cost–volume–profit analysis 172 The profit–volume ratio 173 Relevant range 174 Margin of safety 174 Constructing the break-even chart 174 Alternative presentation of cost–volume–profit analysis 176 Multi-product cost–volume–profit analysis 178 Operating leverage 180 Cost–volume–profit analysis assumptions 183 The impact of information technology 184 Separation of semi-variable costs 184 Summary 185 Key terms and concepts 186 Key examination points 186 Assessment material 187 Review questions 187 Review problems 187 9 Measuring relevant costs and revenues for decision-making 194 Identifying relevant costs and revenues 195 Importance of qualitative/non-financial factors 195 Special pricing decisions 196 Product mix decisions when capacity constraints exist 200 Replacement of equipment – the irrelevance of past costs 203 Outsourcing and make or buy decisions 204 Discontinuation decisions 207 Determining the relevant costs of direct materials 209 Determining the relevant costs of direct labour 210 Summary 211 Appendix 9.1: The theory of constraints and throughput accounting 212 Key terms and concepts 216 Recommended reading 216 Key examination points 217 Assessment material 217 Review questions 217 Review problems 218 10 Pricing decisions and profitability analysis 227 The role of cost information in pricing decisions 228 A price-setting firm facing short-run pricing decisions 228 A price-setting firm facing long-run pricing decisions 229 A price-taking firm facing short-run product mix decisions 233 A price-taking firm facing long-run product mix decisions 234 Surveys of practice relating to pricing decisions 236 Establishing target mark-up percentages 236 Limitations of cost-plus pricing 237 Reasons for using cost-plus pricing 237 Pricing policies 238 Customer profitability analysis 239 Summary 241 Appendix 10.1: Calculating optimal selling prices using differential calculus 242 Key terms and concepts 244 Recommended reading 244 Key examination points 244 Assessment material 244 Review questions 245 Review problems 245 11 Activity-based costing 251 The need for a cost accumulation system in generating relevant cost information for decision-making 252 Types of cost systems 252 A comparison of traditional and ABC systems 253 The emergence of ABC systems 254 Volume-based and non-volume-based cost drivers 255 Designing ABC systems 257 Activity hierarchies 259 Activity-based costing profitability analysis 260 Resource consumption models 262 Cost versus benefits considerations 265 Periodic review of an ABC database 265 ABC in service organizations 265 ABC cost management applications 267 Summary 268 Key terms and concepts 270 Recommended reading 270 Key examination points 270 Assessment material 271 Review questions 271 Review problems 271 12 Decision-making under conditions of risk and uncertainty 278 Risk and uncertainty 279 Probability distributions and expected value 281 Measuring the amount of uncertainty 282