Management and Cost Accounting, 11th Edition PDF by Colin Drury


Management and Cost Accounting, 11th Edition

By Colin Drury

Management and Cost Accounting, 11th Edition


In Memoriam IX

Preface X

About the authors XVI

Acknowledgements XVII


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, planning and control process 6

The impact of the changing business environment on management accounting 10

Focus on customer satisfaction and new management approaches 16

Functions of management accounting 18

Summary of the contents of this book 20

Guidelines for using this book 20

2 An introduction to cost terms and concepts 26

Cost objects 26

Manufacturing, merchandising and service organizations 27

Direct and indirect costs 27

Period and product costs 30

Cost behaviour 32

Relevant and irrelevant costs and revenues 35

Avoidable and unavoidable costs 36

Sunk costs 36

Opportunity costs 37

Incremental and marginal costs 38

The cost and management accounting

information system 39


Cost accumulation for inventory valuation and profit measurement 48

3 Cost assignment 50

Assignment of direct and indirect costs 51

Different costs for different purposes 52

Cost–benefit issues and cost systems design 53

Assigning direct costs to cost objects 54

Plant-wide (blanket) overhead rates 54

The two-stage allocation process 55

An illustration of the two-stage process for a traditional costing system 57

An illustration of the two-stage process for an abc system 62

Extracting relevant costs for decision-making 66

Budgeted overhead rates 67

Under- and over-recovery of overheads 68

Non-manufacturing overheads 69

Cost assignment in non-manufacturing

organizations 70

The indirect cost assignment process 72

Appendix 3.1: Inter-service department

reallocations 74

4 Accounting entries for a job


system 88

Materials recording procedure 89

Pricing the issues of materials 90

Control accounts 91

Recording the purchase of raw materials 92

Recording the issue of materials 94

Accounting procedure for labour costs 95

Accounting procedure for manufacturing

overheads 97

Non-manufacturing overheads 98

Accounting procedures for jobs completed and

products sold 98

Costing profit and loss account 99

Job-order costing in service organizations 99

Interlocking accounting 99

Accounting entries for a just-in-time


system 101

5 Process costing 111

Flow of production and costs in a process

costing system 112

Process costing when all output is fully

complete 113

Process costing with ending work in progress

partially complete 118

Beginning and ending work in progress of

uncompleted units 121

Partially completed output and losses in

process 126

Process costing in service organizations 126

Batch/operating costing 126

Appendix 5.1: Losses in process and partially

completed units 128

6 Joint and by-product costing 138

Joint products and by-products 139

Methods of allocating joint costs 139

Irrelevance of joint cost allocations for

decision-making 145

Accounting for by-products 146

7 I ncome effects of alternative

cost accumulation

systems 156

External and internal reporting 157

Variable costing 159

Absorption costing 160

Variable costing and absorption costing: a

comparison of their impact on profit 161

Some arguments in support of variable

costing 162

Some arguments in support of absorption

costing 164

Alternative denominator-level measures 165

Appendix 7.1: Derivation of the profit

function for an absorption costing

system 168


Information for

decision-making 176

8 Cost–volume–profit analysis 178

Curvilinear cvp relationships 179

Linear CVP relationships 180

A numerical approach to CVP analysis 182

The contribution margin ratio 183

Relevant range 184

Margin of safety 186

Constructing the break-even or cvp chart 186

Alternative presentation of CVP analysis 187

Multi-product CVP analysis 189

Operating leverage 191

CVP analysis assumptions and limitations 192

The impact of information technology 195

9 Measuring relevant costs and

revenues for decision-making 204

Identifying relevant costs and revenues 205

Importance of qualitative/non-financial

factors 205

Special pricing decisions 206

Product mix decisions when capacity


exist 210

Replacement of equipment – the irrelevance of

past costs 213

Outsourcing and make-or-buy decisions 214

Discontinuation decisions 218

Determining the relevant costs of direct

materials 220

Determining the relevant costs of direct

labour 220

Appendix 9.1: The theory of constraints and


accounting 222

10 Pricing decisions and


analysis 238

The role of cost information in pricing

decisions 239

A price-setting firm facing short-run pricing

decisions 239

A price-setting firm facing long-run pricing

decisions 240

A price-taking firm facing short-run product mix

decisions 244

A price-taking firm facing long-run product mix

decisions 245

Surveys of practice relating to pricing

decisions 247

Limitations of cost-plus pricing 247

Reasons for using cost-plus pricing 248

Pricing policies 248

Customer profitability analysis 250

Appendix 10.1: Calculating optimal selling

prices using differential calculus 255

11 Activity-based costing 265

The need for a cost accumulation system in

generating relevant cost information for

decision-making 266

Types of cost system 267

A comparison of traditional and abc

systems 267

The emergence of abc systems 269

Volume-based and non-volume-based cost

drivers 270

Designing abc systems 273

Activity hierarchies 275

ABC profitability analysis 277

Cost versus benefits considerations 279

Time-driven abc 280

Resource consumption models and unused

capacity 283

Periodic review of an abc database 285

Abc cost management applications 285

12 Decision-making under


of risk and

uncertainty 297

Risk and uncertainty 298

Probability distributions and expected value 300

Measuring the amount of risk 301

Attitudes to risk by individuals 302

Decision tree analysis 304

Buying perfect and imperfect information 306

Maximin, maximax and regret criteria 307

Risk reduction and diversification 308

13 Capital investment decisions:

appraisal methods 320

The opportunity cost of an investment 322

Compounding and discounting 323

The concept of net present value 325

Calculating net present values 326

The internal rate of return 328

Relevant cash flows 331

Timing of cash flows 331

Comparison of net present value and internal

rate of return 332

Techniques that ignore the time value of

money 334

Payback method 334

Accounting rate of return 338

The effect of performance measurement on

capital investment decisions 339

Qualitative factors 340

14 Capital investment decisions:

the impact of capital rationing,

taxation, inflation and risk 351

Capital rationing 351

Taxation and investment decisions 353

The effect of inflation on capital

investment appraisal 356

Calculating risk-adjusted discount rates 358

Risk-adjusted discount rates and the weighted

average cost of capital 362

Sensitivity analysis 363

Initiation, authorization and review of projects 365


Information for planning,

control and performance

measurement 380

15 The budgeting process 382

The strategic planning, budgeting and control

process 383

The multiple functions of budgets 386

Conflicting roles of budgets 387

The budget period 387

Administration of the budgeting process 388

Stages in the budgeting process 389

A detailed illustration 391

Computerized budgeting 400

Activity-based budgeting 401

The budgeting process in non-profit-making organizations 403

Zero-based budgeting 404

Criticisms of budgeting 406

16 Management

control systems 419

Control at different organizational levels 420

Different types of control mechanism 420

Feedback and feed-forward controls 422

Harmful side-effects of controls 423

Management accounting control systems 424

Responsibility centres 425

The nature of management accounting

control systems 427

The controllability principle 428

Setting performance targets and determining

how challenging they should be 432

Determining how much influence managers

should have in setting targets 433

Different approaches that managers use to

evaluate budgetees’ performance 434

Contingency theory 435

Alternative uses of management accounting

information 436

17 Standard costing and variance

analysis 1 450

Operation of a standard costing system 451

Establishing cost standards 453

Purposes of standard costing 457

A summary of variance analysis for a variable

costing system 458

Material variances 458

Labour variances 463

Variable overhead variances 464

A generic routine approach to variance


for variable costs 465

Fixed overhead expenditure or spending

variance 466

Sales variances 466

Reconciling budgeted profit and actual profit 469

Standard absorption costing 470

Reconciliation of budgeted and actual profit for

a standard absorption costing system 474

Appendix 17.1: A generic routine approach to

variance analysis 477

18 Standard costing and variance

analysis 2: further

aspects 488

Recording standard costs in the accounts 488

Direct materials mix and yield variances 493

Sales mix and sales quantity variances 497

Distinguishing between planning and operating

variances 498

The investigation of variances 500

The role of standard costing when ABC has

been implemented 501

19 Divisional financial performance

measures 513

Divisional organizational structures 514

Advantages and disadvantages of

divisionalization 515

Prerequisites for successful

divisionalization 516

Distinguishing between the managerial and

economic performance of the division 518

Alternative divisional profit measures 518

Surveys of practice 519

Return on investment 520

Residual income 521

Economic value added (EVA(TM)) 522

An illustration of the calculation of EVA(TM) 523

Determining which assets should be included

in the investment base 526

The impact of depreciation 527

The effect of performance measurement on

capital investment decisions 528

Addressing the dysfunctional consequences

of short-term financial performance

measures 530

20 Transfer pricing in divisionalized

companies 545

Purpose of transfer pricing 546

Alternative transfer pricing methods 547

Market-based transfer prices 548

Cost plus a mark-up transfer price 549

Marginal/variable cost transfer prices 551

Full cost transfer prices without a

mark-up 552

Negotiated transfer prices 552

Marginal/variable cost plus opportunity cost

transfer prices 553

Comparison of cost-based transfer pricing

methods 554

Proposals for resolving transfer pricing

conflicts 555

Domestic transfer pricing

recommendations 558

International transfer pricing 559

Appendix 20.1: Economic theory of transfer

pricing 563

Part Five

Strategic performance and




and challenges


the future 580

21 Strategic performance

management 582

The performance management framework 583

Strategy and strategic positioning 583

Performance measurement and performance

management systems 585

Alternative performance management

frameworks 585

The balanced scorecard 585

Linking performance evaluation with the


scorecard 596

Benefits and limitations of the balanced


approach 597

22 Strategic cost management and

value creation 616

Cost management and the value chain 617

Life cycle cost management 620

Target costing 621

Kaizen costing 626

Activity-based management 627

Benchmarking 631

Business process reengineering 632

Just-in-time systems 632

Quality cost management 638

23 Challenges for the future 658

A brief historical review of

management accounting 659

Globalization and management accounting

practices 660

Environmental and sustainability issues 661

Focus on ethical behaviour 666

Information technology and

digitalization 668

Intellectual capital and the knowledge-based

economy 673

Integrated reporting 675

Implications for management accounting 676

Part six

Addendum: The application

of quantitative methods to


accounting 686

24 Cost estimation and cost behaviour 688

General principles applying to estimating cost functions 689

Cost estimation methods 690

Tests of reliability 696

Relevant range and non-linear cost

functions 697

A summary of the steps involved in estimating cost functions 698

Cost estimation when the learning effect is present 699

Estimating incremented hours and incremental cost 702

Appendix 24.1: Multiple regression analysis 704

25 Quantitative models for the planning and control of inventories 712

Why do firms hold inventories? 713

Relevant costs for quantitative models under conditions of certainty 713

Determining the economic order quantity 714

Assumptions of the eoq formula 716

Application of the eoq model in determining the optimum batch size for a production run 717

Quantity discounts 718

Determining when to place the order 719

Uncertainty and safety stocks 719

The use of probability theory for determining safety stocks 720

Control of inventory through classification 722

Other factors influencing the choice of order quantity 723

Materials requirement planning 724

Just-in-time (jit) purchasing arrangements 724

26 The application of linear programming to management accounting 733

Linear programming 734

Graphical method 735

Simplex method 740

Uses of linear programming 743

Bibliography 754

Glossary 764

Appendices 775

Answers to review problems 777

Index 861

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