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1 COLIN DRURY COST AND MANAGEMENT ACCOUNTING AN INTRODUCTION EIGHTH EDITION visit the Website at drury-online.com CENGAGE Learning" Australia Grazil«Japan Korea Mexico Singapore» Spain United Kingdom «United States

2 CONTENTS Preface and acknowledgements xv Walk through tour xxii About the Website xxv PART 1 INTRODUCTION TO MANAGEMENT AND COST ACCOUNTING 3 1 INTRODUCTION TO MANAGEMENT ACCOUNTING 5 The users of accounting Information 6 Differences between management accounting and financial accounting 7 The decision-making process 8 The impact of the changing business environment on management accounting 11 Focus on customer satisfaction and new management approaches 14 Management accounting and ethical behaviour 17 International convergence of management accounting practices 17 Functions of management accounting 18 Summary of the Contents of this book 19 Summary 20 Key terms and concepts 21 Key examination points 22 Review questions 23 2 AN INTRODUCTION TO COST TERMS AND CONCEPTS 25 Cost objects 26 Manufacturing, merchandising and Service organizations 26 Direct and indirect costs 27 Period and product costs 29 Cost behaviour 33 Relevant and irrelevant costs and revenues 35 Avoidable and unavoidable costs 36 Sunk costs 37 Opportunity costs 38 Incremental and marginal costs 38 The cost and management accounting Information system 39 Summary 40

3 > viii CONTENTS Key terms and concepts 41 Key examination points 42 Review questions 43 Review problems 44 PART 2 COST ACCUMULATION FOR INVENTORY VALUATION AND PROFIT MEASUREMENT 51 3 ACCOUNTING FOR DIRECT COSTS 53 Accounting treatment of various labour cost items 54 Materials recording procedure 55 Pricing the issues of materials 58 Issues relating to accounting for materials 62 Quantitative models for the planning and control of inventories 64 Relevant costs for quantitative models under conditions of certainty 64 Determining the economic Order quantity 65 Assumptions of the EOQ formula 68 Determining when to place the order 69 Control of inventories through Classification 69 Just-in-time systems 71 Materials requirement planning 72 Summary 73 Key terms and concepts 74 Key examination points 75 Review questions 76 Review problems 76 4 COST ASSIGNMENT FOR IN DIRECT COSTS 85 Assignment of direct and indirect costs 86 Different costs for different purposes 87 Cost-benefit issues and cost systems design 88 Plant-wide (blanket) overhead rates 90 The two-stage allocation process 91 An Illustration of the two-stage process for a traditional costing system 92 Extracting relevant costs for decision-making 100 Budgeted overhead rates 101 Under- and over-recovery of overheads 102 Non-manufacturing overheads 103 Cost assignment in non-manufacturing organizations 104 The indirect cost assignment process 105 Summary 106 Appendix 4.1: Inter-service department reallocation 108 Key terms and concepts 112 Key examination points 113

4 CONTENTS ix Review questions 114 Review problems ACCOUNTING ENTRIES FOR A JOB-ORDER COSTING SYSTEM 123 Control accounts 124 Recording the purchase of raw materials 124 Recording the issue of materials 125 Accounting procedure for labour costs 128 Accounting procedure for manufacturing overheads 130 Non-manufacturing overheads 131 Accounting procedures for jobs completed and producta sold 131 Costing profit and loss account 132 Job-order costing in Service organizations 132 Interlocking accounting 132 Contract costing 134 Work in progress valuation and amounts recoverable on contracts 139 Summary 139 Key terms and concepts 141 Key examination points 141 Review questions 142 Review problems PROCESS COSTING 151 Flow of production and costs in a process costing system 152 Process costing when all Output is fully complete 152 Process costing with ending work in progress partially complete 160 Beginning and ending work in progress of uncompleted units 163 Partially completed Output and losses in process 167 Process costing in service organizations 168 Batch/operating costing 168 Summary 169 Appendix 6.1: Losses in process and partially completed units 170 Key terms and concepts 173 Key examination points 174 Review questions 175 Review problems JOINT AND BY-PRODUCT COSTING 185 Joint products and by-products 186 Methods of allocating joint costs 186 Irrelevance of joint cost allocations for decision-making 193 Accounting for by-products 194 Summary 196 Key terms and concepts 197

5 x CONTENTS Key examination points 197 Review questions 198 Review problems INCOME EFFECTS OF ALTERNATIVE COST ACCUMULATION SYSTEMS 205 Externa! and internal reporting 207 Variable costing 208 Absorption costing 209 Variable costing and absorption costing: a comparison of their impact on profit 210 Some arguments in support of variable costing 212 Sonne arguments in support of absorption costing 214 Summary 215 Appendix 8.1: Derivation of the profit function for an absorption costing system 216 Key terms and concepts 218 Key examination points 218 Review questions 219 Review problems 219 PART 3 INFORMATION FOR DECISION-MAKING C0ST-V0LUME-PR0FIT ANALYSIS 227 Curvilinear CVF relationships 228 Linear CVP relationships 229 A numerical approach to cost-volume-profit analysis 231 The profit-volume ratio 234 Relevant ränge 234 Margin of safety 234 Constructing the break-even chart 235 Alternative presentation of cost-volume-profit analysis 237 Multi-product cost-volume-profit analysis 238 Cost-volume-profit analysis assumptions 241 The impact of Information technology 242 Summary 243 Key terms and concepts 244 Key examination points 244 Review questions 245 Review problems COST ESTIMATI0N AND COST BEHAVI0UR 255 General principles applying to estimating cost functions 256 Cost estimation methods 257

6 CONTENTS xi Tests of reliability 264 A summary of the steps involved in estimating cost functions 266 Summary 267 Key terms and concepts 269 Key examination points 269 Review questions 270 Review problems MEASURING RELEVANT COSTS AND REVENUES FOR DECISION-MAKING 275 Identifying relevant costs and revenues 276 Importance of qualitative/non-financial factors 277 Special pricing decisions 277 Product mix decisions when capacity constraints exist 282 Replacement of equipment - the irrelevance of past costs 284 Outsourcing and make or buy decisions 286 Discontinuation decisions 289 Determining the relevant costs of direct materials 292 Determining the relevant costs of direct labour 292 Incorporating uncertainty into the decision-making process 293 Summary 293 Appendix 11.1: Calculating Optimum selling prices using differential calculus 295 Key terms and concepts 296 Key examination points 296 Review questions 298 Review problems ACTIVITY-BASED COSTING 309 The need for a cost accumulation system in generating relevant cost Information for decision-making 310 A comparison of traditional and ABC systems 311 Volume-based and non-volume-based cost drivers 312 An Illustration of the two-stage process for an ABC system 316 Designing ABC systems 323 Activity hierarchies 325 Cost versus benefits considerations 326 ABC in Service organizations 327 ABC cost management applications 329 Summary 330 Key terms and concepts 331 Key examination points 332 Review questions 333 Review problems 334

7 xii CONTENTS PART 4 INFORMATION FOR PLANNING, CONTROL AND PERFORMANCE MEASUREMENT THE BUDGETING PROCESS 343 The Strategie planning, budgeting and control process 344 The multiple functions of budgets 346 Conflicting roles of budgets 348 The budget period 349 Administration of the budgeting process 349 Stages in the budgeting process 350 A detailed Illustration 354 Sales budget 356 Production budget and budgeted inventory levels 359 Direct materials usage budget 359 Direct materials purchase budget 359 Direct labour budget 360 Factory overhead budget 360 Selling and administration budget 361 Departmental budgets 362 Master budget 363 Cash budgets 364 Final review 365 Computerized budgeting 365 Criticisms of budgeting 366 Summary 368 Key terms and concepts 369 Key examination points 369 Review questions 370 Review problems MANAGEMENT CONTROL SYSTEMS 379 Different types of controls 380 Feedback and feed-forward controls 383 Management accounting control systems 383 Responsibility centres 384 The nature of management accounting control systems 386 The controllability principle 388 Setting financial Performance targets and determining how challenging the targets should be 391 Participation in the budgeting and target-setting process 393 Non-financial Performance measures 393 Activity-based cost management 394 Summary 395 Key terms and concepts 397 I

8 Key examination points 398 Review questions 399 Review problems STANDARD COSTING AND VARIANCE ANALYSIS 405 Operation of a Standard costing system 406 Establishing cost Standards 408 Purposes of Standard costing 412 Variance analysis 414 Material variances 416 Material price variances 417 Material usage variances 419 Total material variances 420 Wage rate variances 420 Labour efficiency variance 421 Total labour variance 422 Variable overhead variances 422 The generic routine approach to variance analysis 424 Fixed overhead expenditure or spending variance 424 Sales variances 425 Reconciling budgeted profit and actual profit 429 Standard absorption costing 429 Volume variance 430 Volume efficiency variance 431 Volume capacity variance 431 Reconci Nation of budgeted and actual profit for a Standard absorption costing system 433 Recording Standard costs in the accounts 433 Summary 439 Key terms and concepts 442 Key examination points 443 Review questions 444 Review problems 445 Case studies available from the Website 455 Bibliography 459 Answers to review problems 463 Index 507