## Management Accounting For Decision Makers, Tenth Edition

By Peter Atrill and Eddie McLaney

**Contents:**

Preface xvii

How to use this book xix

Acknowledgements xxi

1 Introduction to management accounting 1

Introduction 1

Learning outcomes 1

What is the purpose of a business? 2

How are businesses organised? 3

How are businesses managed? 6

Establish mission, vision and objectives 7

Undertake a position analysis 9

Identify and assess the strategic options 10

Select strategic options and formulate plans 10

Perform, review and control 10

The changing business landscape 11

What is the financial objective of a business? 12

Balancing risk and return 14

What is management accounting? 16

How useful is management accounting information? 18

Providing a service 18

Weighing up the costs and benefits 20

Management accounting as an information system 22

It’s just a phase 23

What information do managers need? 25

Reporting non-financial information 27

Influencing managers’ behaviour 28

Reaping the benefits of information technology 29

From bean counter to team member 30

Reasons to be ethical 32

Management accounting and financial accounting 34

Summary 36

Key terms 39

References 39

Further reading 39

Critical review questions 39

Exercises 40

2 Relevant costs and benefits for decision making 42

Introduction 42

Learning outcomes 42

Cost–benefit analysis 43

What is meant by ‘cost’? 44

Relevant costs: opportunity and outlay costs 46

Irrelevant costs: sunk costs and committed costs 49

Sunk cost fallacy 50

Determining the relevant cost of labour and materials 51

Labour 51

Materials 54

Non-measurable costs and benefits 56

Summary 58

Key terms 59

Further reading 59

Critical review questions 59

Exercises 60

3 Cost–volume–profit analysis 66

Introduction 66

Learning outcomes 66

Cost behaviour 67

Fixed cost 67

Variable cost 69

Semi-fixed (semi-variable) cost 70

Analysing semi-fixed (semi-variable) costs 70

Finding the break-even point 72

Contribution 78

Contribution margin ratio 79

Margin of safety 79

Achieving a target profit 81

Operating gearing and its effect on profit 82

Profit–volume charts 84

The economist’s view of the break-even chart 85

The problem of breaking even 87

Weaknesses of break-even analysis 87

Using contribution to make decisions: marginal analysis 90

Pricing/assessing opportunities to enter contracts 91

The most efficient use of scarce resources 93

Make-or-buy decisions 95

Closing or continuation decisions 97

Summary 100

Key terms 101

Further reading 101

Critical review questions 101

Exercises 102

4 Full costing 107

Introduction 107

Learning outcomes 107

What is full costing? 108

Why do managers want to know the full cost? 108

Single-product businesses 110

Process-costing problems 111

Multi-product businesses 113

Direct and indirect cost 114

Job costing 115

Full costing and cost behaviour 116

The problem of indirect cost 118

Overheads as service renderers 118

Job costing: a worked example 118

Selecting a basis for charging overheads 123

Segmenting the overheads 126

Dealing with overheads on a cost centre basis 127

Batch costing 137

Non-manufacturing overheads 139

Full (absorption) costing and estimation errors 140

Full (absorption) costing and relevant costs 141

Full (absorption) costing versus variable costing 142

Which method is better? 144

Summary 146

Key terms 148

Reference 148

Further reading 148

Critical review questions 148

Exercises 149

5 Costing and cost management in a

competitive environment 154

Introduction 154

Learning outcomes 154

Cost determination in the changed business environment 155

Costing and pricing: the traditional way 155

Costing and pricing: the new environment 155

Cost management systems 157

The problem of overheads 157

Taking a closer look 157

Activity-based costing 158

Assigning overheads 159

ABC and the traditional approach compared 160

ABC and service industries 161

Benefits and costs of ABC 165

ABC in practice 167

Managing costs over the product life cycle 169

Total life-cycle costing 170

Target costing 172

Kaizen costing 175

Other approaches to managing costs in the modern environment 178

Value chain analysis 178

Benchmarking 180

Total quality management 184

Managing quality costs 186

An alternative view 188

Summary 191

Key terms 192

Reference 192

Further reading 192

Critical review questions 193

Exercises 193

6 Budgeting 197

Introduction 197

Learning outcomes 197

How budgets link with strategic plans and objectives 198

Exercising control 199

Time horizon of plans and budgets 201

Budgets and forecasts 202

Periodic and continual budgets 202

Limiting factors 203

How budgets link to one another 203

How budgets help managers 206

The budget-setting process 208

Step 1: Establish who will take responsibility 208

Step 2: Communicate budget guidelines to relevant managers 208

Step 3: Identify the key, or limiting, factor 208

Step 4: Prepare the budget for the area of the limiting factor 209

Step 5: Prepare draft budgets for all other areas 209

Step 6: Review and coordinate budgets 209

Step 7: Prepare the master budgets 210

Step 8: Communicate the budgets to all interested parties 210

Step 9: Monitor performance relative to the budget 210

Using budgets in practice 211

Incremental and zero-base budgeting 213

Preparing budgets 216

The cash budget 216

Preparing other budgets 220

Activity-based budgeting 222

Non-financial measures in budgeting 225

Budgets and management behaviour 225

Problems with budgets 226

Beyond conventional budgeting 228

The future of budgeting 230

Summary 233

Key terms 234

References 234

Further reading 234

Critical review questions 235

Exercises 235

7 Accounting for control 243

Introduction 243

Learning outcomes 243

Budgeting for control 244

Types of control 245

Variances from budget 247

Flexing the budget 247

Sales volume variance 248

Sales price variance 251

Materials variances 252

Labour variances 253

Fixed overhead variance 254

Reconciling the budgeted profit with the actual profit 255

Reasons for adverse variances 259

Variance analysis in service industries 261

Non-operating-profit variances 261

Investigating variances 261

Variance analysis in practice 264

Compensating variances 264

Standard quantities and costs 265

Setting standards 266

Who sets the standards? 266

How is information gathered? 266

What kind of standards should be used? 267

The learning-curve effect 267

Other uses for standard costing 268

Some problems 269

The new business environment 271

Making budgetary control effective 272

Behavioural issues 273

Failing to meet the budget 274

Budgets and management autonomy 275

Types of management control 275

Direct control 275

Indirect control 276

Summary 278

Key terms 280

Reference 280

Further reading 280

Critical review questions 281

Exercises 281

8 Making capital investment decisions 286

Introduction 286

Learning outcomes 286

The nature of investment decisions 287

Investment appraisal methods 288

Accounting rate of return (ARR) 290

ARR and ROCE 291

Problems with ARR 292

Payback period (PP) 294

Problems with PP 296

Net present value (NPV) 298

Why does time matter? 299

Interest lost 299

Risk 299

Inflation 300

What should managers do? 300

Dealing with the time value of money 301

Calculating the net present value 303

Using present value tables 304

The discount rate and the cost of capital 305

Why NPV is better 306

NPV and economic value 306

Internal rate of return (IRR) 307

Problems with IRR 310

Some practical points 311

Investment appraisal in practice 314

Investment appraisal and strategic planning 317

Managing investment projects 318

Stage 1: Determine investment funds available 318

Stage 2: Identify profitable project opportunities 319

Stage 3: Evaluate the proposed project 319

Stage 4: Approve the project 319

Stage 5: Monitor and control the project 320

Summary 323

Key terms 324

References 325

Further reading 325

Critical review questions 325

Exercises 326

9 Managing risk 333

Introduction 333

Learning outcomes 333

Dealing with risk 334

Assessing the level of risk 334

Sensitivity analysis 334

Strengths and weaknesses of sensitivity analysis 341

Scenario analysis 343

Expected values 343

Reacting to the level of risk 351

Summary 352

Key terms 353

Further reading 354

Critical review questions 354

Exercises 354

10 Strategic management accounting: performance

evaluation and pricing in a competitive environment 360

Introduction 360

Learning outcomes 360

What is strategic management accounting? 361

Facing outwards 362

Competitor analysis 362

Customer profitability analysis 366

Competitive advantage through cost leadership 370

Non-financial measures of performance 372

The balanced scorecard 373

Scorecard problems 380

Measuring shareholder value 380

The quest for shareholder value 381

How can shareholder value be created? 381

The need for new measures 382

Economic value added (EVA®) 383

Shareholder value-based management in practice 388

Just another fad? 389

Pricing 389

Economic theory 389

Some practical considerations 397

Full cost (cost-plus) pricing 398

Pricing on the basis of marginal cost 400

**Target pricing** 402

Pricing strategies 402

Summary 406

Key terms 407

References 407

Further reading 407

Critical review questions 408

Exercises 408

11 Measuring divisional performance 413

Introduction 413

Learning outcomes 413

Divisionalisation 414

Why do businesses divisionalise? 414

Devolving decisions 414

Divisional structures 416

Is divisionalisation a good idea? 416

Measuring divisional profit 421

Contribution 421

Controllable profit 422

Divisional profit before common expenses 422

Divisional profit for the period 423

Divisional performance measures 424

Return on investment (ROI) 424

Residual income (RI) 428

Looking to the longer term 429

Comparing performance 431

EVA® revisited 432

Transfer pricing 433

The objectives of transfer pricing 434

Transfer pricing and tax mitigation 436

Transfer pricing policies 438

Market prices 438

Variable cost 439

Full cost 439

Negotiated prices 440

Divisions with mixed sales 441

Differential transfer prices 443

Transfer pricing and service industries 445

Non-financial measures of performance 445

What is measured? 446

Choosing non-financial measures 449

Who should report? 449

Summary 451

Key terms 453

Further reading 453

Critical review questions 454

Exercises 454

12 Managing working capital 459

Introduction 459

Learning outcomes 459

What is working capital? 460

Managing working capital 461

The scale of working capital 461

Managing inventories 464

Budgeting future demand 466

Financial ratios 466

Recording and reordering systems 466

Levels of control 469

Inventories management models 471

XYZ inventories management 477

Managing trade receivables 478

Which customers should receive credit and how much should they be

offered? 479

Length of credit period 480

An alternative approach to evaluating the **credit decision** 483

Cash discounts 484

Debt factoring and invoice discounting 485

Credit insurance 485

Collection policies 485

Reducing the risk of non-payment 489

Managing cash 490

Why hold cash? 490

How much cash should be held? 490

Controlling the cash balance 491

Cash budgets and managing cash 492

Operating cash cycle 493

Cash transmission 497

Bank overdrafts 498

Managing trade payables 498

Taking advantage of cash discounts 499

Controlling trade payables 500

Managing working capital 500

Summary 503

Key terms 505

Further reading 506

Critical review questions 506

Exercises 507

Appendix A Glossary of key terms 513

Appendix B Solutions to self-assessment questions 522

Appendix C Solutions to critical review questions 534

Appendix D Solutions to selected exercises 544

Appendix E Present value table 584

Index 587

Credits 601