Management Accounting : Principles and Applications

1 Management AccountingCoombs 3/18/2005 1:07 PM Page iCoombs 3/18/2005 1:07 PM Page iiManagement AccountingPrinciples and ApplicationsHugh CoombsDavid HobbsEllis Jenkins SAGEP ublicationsLondon Thousand Oaks New DelhiCoombs 3/18/2005 1:07 PM Page iii Hugh Coombs, David Hobbs, Ellis Jenkins, 2005 First published 2005 Apart from any fair dealing for the purposes of research or privatestudy, or criticism or review, as permitted under the Copyright,Designs and Patents Act, 1988, this publication may bereproduced, stored or transmitted in any form, or by any means,only with the prior permission in writing of the publishers, or inthe case of reprographic reproduction, in accordance with theterms of licences issued by the Copyright Licensing concerning reproduction outside those terms should besent to the Publications Ltd1 Oliver s Yard55 City RoadLondon EC1Y 1 SPSAGE Publications Teller RoadThousand Oaks.

2 california 91320 SAGE Publications India Pvt LtdB-42, Panchsheel EnclavePost Box 4109 New Delhi 110 017 Library of Congress Control Number: 2005901200A catalogue record for this book is available from the British LibraryISBN 1-4129-0843-4 ISBN 1-85396-383-6 (pbk)Typeset by C&M Digitals (P) Ltd., Chennai, IndiaPrinted on paper from sustainable resourcesPrinted in Great Britain by Alden Press, OxfordCoombs 3/18/2005 1:07 PM Page ivCONTENTSList of IllustrationsviPrefacexAcknowledgementsx ii1An Introduction to Management Accounting12 Cost Analysis and Decision Making213 Costing Products and Services524 Management Accounting and the Planning Process 1845 Management Accounting and the Planning Process 21256 Management Accounting and the Control Process 11477 Management Accounting and the Control Process 21868 Operational Decision Making2199 Strategic Decision Making26010 Management Accountancy and Performance Management Systems295 Bibliography and Recommended Further Reading339 Index343 Coombs 3/18/2005 1.

3 07 PM Page vLIST OF cost of sales analysis, manufacturing behaviour against output costing and ABC strategy and planning Ltd s budgeting of maintenance costs against direct machine scorecard (University of california Businessand Administrative Services) control information summarising avenues for exploring variances in more multidimensional aspects of (materials)variance investigation tree for Exhibit of latest direct unit variance in Exhibit break-even contribution profit-volume solution to contribution maximisation solution to cost minimisation impact of changes in discount rate on NPV267 Tables Some areas of activity considered to be part of Management Accounting of a unit cost statement: comparative food costs for fourschools providing school meals, March December 200431 Coombs 3/18/2005 1.

4 07 PM Page analysis of meals per of cost analysis of proposed of production and other of overhead overhead analysis for 2005 annual absorption costs and production full cost of products A and absorption in Cost pools and cost Annual production overhead for Eiger ice Cost driver Activity-based cost per ice Product dictionary definitions of common business attempts at defining some common terms used inmanagement of questions to be asked when preparing a manufacturing firm sannual possible complicating factors in real-life maintenance costs and direct machine hours forthe past 10 Accounting analysis control statement for a university with a fixed with a flexible budgets at different levels of output ( ) flexed budget cost statement for one wheel times of times of costs per unit and annual Actual output and costs for Variances for October ( ) Reconciliation of standard and actualcosts of production165 LIST OF ILLUSTRATIONSviiCoombs 3/18/2005 1.

5 07 PM Page cost for shrub per contribution and profit of past prices resources Limited absorption budget Limited restated contribution budget conventional approach to identifyingrevenues and costs and cost of material, and for Exhibit table for make or buy for projects A, B and value calculations for a discount rate of 10% factors for one to five periods and discount rates up to 10% net present value of NCFs for projects A, B and C (from Table ) analysis analysis of net present value ( millions) pivot Present value of future cash Present value of to consider in performance contingent factors for that may arise as an organisation becomesincreasingly possible transfer pricing bases and of the parties interested in performance information307 Case StudiesSHB44 Billy Griffiths75 Jim Davies76viiiLIST OF ILLUSTRATIONSC oombs 3/18/2005 1.

6 07 PM Page viiiBudget preparation114 Tuba Accessories142 Budget preparation and variance analysis172 Dayview Ltd211 The Odd-Job Manufacturing Company252 Branchester United282 Social Services Agency289 Callas plc324 Fantasy Planet University329 Sioca and variable costs and of budgeting within a small manufacturing of a more comprehensive analysis of materials of statistical techniques to the varianceinvestigation/correction use of normal distribution theory invariance statement compared with a functional financialreporting type Hardy Out Door and related and unavoidable a pricing of the use of financial performance measures308 LIST OF ILLUSTRATIONSixCoombs 3/18/2005 1:07 PM Page ixPREFACE Management Accounting may be seen as a practical tool aimed at solving the day-to-dayfinancial Management problems facing decision makers in the private and publicsectors.

7 We feel, however, that this is too narrow a view of the potential of the , we have gone beyond this view. In this book, while we have looked at thepractical techniques that can help managers and students solve Management accountingproblems, we have tried to approach the subject in a way which ensures coverage of tech-nical financial topics in an accessible style while making appropriate reference toresearch. In addition, the book goes beyond techniques to recognise qualitative issues byattempting to identify analytical and critical issues of relevance to decision makers at alllevels in a variety of organisations in both the private and public chapters contain exhibits and examples, we have introduced case studies fromthe end of Chapter 2.

8 These can be approached on many levels such that students from awide range of backgrounds and experience can benefit from working through them eitherin whole or in part. The case studies are intended to be underpinned by reference to theresearch literature to gain maximum benefit. We introduce some of this research literaturein the practical context of each chapter in order to encourage further reading. Readers canthus contextualise the issues which they are studying within the wider environment of theresearch literature and through the case studies before continuing their studies in moredepth. Indeed, the case studies are based on our own consultancy and research areas,although the names have been changed to protect the guilty.

9 The case studies in this book represent the development of teaching approaches at theUniversity of Glamorgan and are one of a number of innovative approaches used in thedelivery of Accounting modules in the Business School at the University. They contributedto the HEFCW/QAA excellent rating received by the Accounting teaching team. Thecases have been well received by students and managers both locally and internationally(see Coombs et al., 2000) and are aimed at developing the graduateness skills of criticaland analytical appraisal in decision-making situations. We are grateful to the Universityof Glamorgan and colleagues for the encouragement we have received to develop andexpand this today s competitive world, managers from whatever background need an under-standing of the tools of Management Accounting when making financial decisions, yetCoombs 3/18/2005 1:07 PM Page xthey must also be aware of the qualitative issues affecting such decisions.

10 Furthermore,they need to be aware of what is happening through research into their competitors. In thiscontext we believe managers and students will find this book of CoombsDave HobbsEllis JenkinsMarch 2005 PREFACExiCoombs 3/18/2005 1:07 PM Page xiACKNOWLEDGEMENTSWe would wish to thank Shane Johnson for his advice on aspects of this book and theTeaching and Learning Office at the University of Glamorgan for their support of innov-ative teaching 3/18/2005 1:07 PM Page xiiChapter 1AN INTRODUCTIONTO Management ACCOUNTINGBy the time you have finished studying this chapter, you should be able to: explain the meaning and nature of Management Accounting ; describe the scope and content of Management Accounting .