M ‘…friendly, accessible and engaging. It is easy to read and draws the reader in.’ a Ellis Jenkins, University of Glamorgan n Sixth Edition a g Designed to help you study, Management Accounting for Decision Makers is praised for its clear, e Management Accounting accessible and uncluttered style. It provides a comprehensive introduction to the main principles m of management accounting, with a strong practical emphasis and avoids excessive technical e detail. It has a clear and unequivocal focus on how accounting information can be used to improve n for Decision Makers the quality of decision making by managers, providing the perfect grounding for the decision t makers of the future. A c Features c • Numerous activities and exercises that o enable you to constantly test your u Peter Atrill understanding and reinforce learning. n • Lively and relevant examples from the t Eddie McLaney The text is supported by MyAccountingLab, i real world demonstrating the practical n a completely new type of educational application and value of concepts and g resource. MyAccountingLab complements techniques learnt. f student learning by presenting the • Interactive ‘open-learning’ style that is o user with a study plan that adapts and ideal for self-study. r customises to the student’s individual D • Decision-making focus on the use of requirements as they progress through accounting information rather than the e online tests. Students can also practise preparation, which is highly appropriate c problems before taking tests, and because i for business managers. s most of these are algorithmically driven, i • Full range of topical examples from they can practise over and over again o the service sector, public sector and without repetition. Additionally, students n manufacturing industry. have access to an eBook, animated guides M • Key terms, glossary and bulleted to various key topics, and guided solutions, a summaries are excellent revision aids. all of which are designed to help them k overcome the most difficult concepts. e Both students and lecturers have access Audience r to gradebooks that allow them to track s Suitable for those studying an introductory progress, and lecturers will have the ability course in management accounting, who are Sixth to create new tests and activities using the seeking an understanding of basic principles large number of problems available in the Edition and underlying concepts without too much question database. detailed technical knowledge. MA Author ct r L Peter Atrill is a freelance academic and author working with leading i al l institutions in the UK, Europe and SE Asia. He was previously Head n of Business and Management and Head of Accounting and Law at the e University of Plymouth Business School. y Eddie McLaney is Visiting Fellow in Accounting and Finance at the University of Plymouth. www.pearson-books.com an imprint of Front cover image: © Getty Images CVR_ATRI3622_06_SE_CVR.indd 1 2/6/09 09:46:05 A01_ATRI3622_06_SE_A01.QXD 5/29/09 10:33 AM Page i Management Accounting for Decision Makers A01_ATRI3622_06_SE_A01.QXD 5/29/09 10:33 AM Page ii We work with leading authors to develop the strongest educational materials in accounting, bringing cutting-edge thinking and best learning practice to a global market. Under a range of well-known imprints, including Financial Times Prentice Hall, we craft high quality print and electronic publications which help readers to understand and apply their content, whether studying or at work. To find out more about the complete range of our publishing, please visit us on the World Wide Web at: www.pearsoned.co.uk A01_ATRI3622_06_SE_A01.QXD 5/29/09 10:33 AM Page iii 6th Edition Management Accounting for Decision Makers Peter Atrill and Eddie McLaney A01_ATRI3622_06_SE_A01.QXD 5/29/09 10:33 AM Page iv Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk First published 1995 by Prentice Hall Europe Second edition published 1999 by Prentice Hall Europe Third edition published 2002 by Pearson Education Limited Fourth edition published 2005 Fifth edition published 2007 Sixth edition published 2009 © Prentice Hall Europe 1995, 1999 © Pearson Education 2002, 2005, 2007, 2009 The rights of Peter Atrill and Edward John McLaney to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS. All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners. ISBN: 978-0-273-72362-2 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Atrill, Peter. Management accounting for decision makers / Peter Atrill and Eddie McLaney. — 6th ed. p. cm. Includes bibliographical references and index. ISBN 978-0-273-72362-2 (pbk. : alk. paper) 1. Managerial accounting. 2. Decision making. I. McLaney, Eddie. II. Title. HF5657.4.A873 2009 658.15′11—dc22 2009014455 10 9 8 7 6 5 4 3 2 1 11 10 09 08 07 Typeset in 9.5/12.5pt Stone Serif by 35 Printed and bound by Rotolito Lombarda, Italy Thepublisher’s policy is to use paper manufactured from sustainable forests. A01_ATRI3622_06_SE_A01.QXD 5/29/09 10:33 AM Page v Contents Guided tour of the book xiv Guided tour of MyAccountingLab xvi Preface xviii How to use this book xx Acknowledgements xxii 1 Introduction to management accounting 1 Introduction 1 Learning outcomes 1 What is the purpose of a business? 2 How are businesses organised? 2 How are businesses managed? 6 1 Establish mission and objectives 7 2 Undertake a position analysis 8 3 Identify and assess the strategic options 9 4 Select strategic options and formulate plans 9 5 Perform, review and control 10 The changing business landscape 11 Setting financial aims and objectives 12 Enhancing the owners’ wealth 12 Balancing risk and return 14 What is management accounting? 15 How useful is management accounting information? 16 Providing a service 17 But...is it material? 18 Weighing up the costs and benefits 18 Management accounting as an information system 21 It’s just a phase... 22 What information do managers need? 23 Reporting non-financial information 24 Influencing managers’ behaviour 25 Reaping the benefits of IT 26 From bean counter to team member 27 Reasons to be ethical 28 Management accounting and financial accounting 29 Not-for-profit organisations 31 A01_ATRI3622_06_SE_A01.QXD 5/29/09 10:33 AM Page vi vi CONTENTS Summary 32 Key terms 34 References 34 Further reading 34 Review questions 35 Exercises 35 2 Relevant costs for decision making 37 Introduction 37 Learning outcomes 37 What is meant by ‘cost’? 38 A definition of cost 39 Relevant costs: opportunity and outlay costs 40 Sunk costs and committed costs 44 Qualitative factors of decisions 45 Self-assessment question 2.1 46 Summary 47 Key terms 48 Further reading 48 Review questions 49 Exercises 49 3 Cost–volume–profit analysis 55 Introduction 55 Learning outcomes 55 Cost behaviour 56 Fixed cost 56 Variable cost 58 Semi-fixed (semi-variable) cost 59 Estimating semi-fixed (semi-variable) cost 60 Finding the break -even point 61 Achieving a target profit 65 Contribution 66 Contribution margin ratio 67 Margin of safety 67 Operating gearing 70 The effect of gearing on profit 70 Profit–volume charts 72 The economist’s view of the break-even chart 72 Failing to break even 74 Weaknesses of break-even analysis 74 Using contribution to make decisions – marginal analysis 77 Accepting/rejecting special contracts 78 The most efficient use of scarce resources 79 Make-or-buy decisions 81 Closing or continuation decisions 83 A01_ATRI3622_06_SE_A01.QXD 5/29/09 10:33 AM Page vii CONTENTS vii Self-assessment question 3.1 85 Summary 85 Key terms 86 Further reading 86 Review questions 87 Exercises 87 4 Full costing 92 Introduction 92 Learning outcomes 92 Why do managers want to know the full cost? 93 What is full costing? 94 Single-product businesses 95 Multi-product businesses 96 Direct and indirect cost 96 Job costing 98 Full (absorption) costing and the behaviour of cost 99 The problem of indirect cost 100 Overheads as service renderers 100 Job costing: a worked example 101 Selecting a basis for charging overheads 105 Segmenting the overheads 107 Dealing with overheads on a cost centre basis 108 Batch costing 119 Full (absorption) cost as the break-even price 120 The forward-looking nature of full (absorption) costing 120 Self-assessment question 4.1 120 Using full (absorption) cost information 121 Criticisms of full (absorption) costing 123 Full (absorption) costing versus variable costing 123 Which method is better? 125 Summary 126 Key terms 128 Further reading 128 Review questions 129 Exercises 129 5 Costing and pricing in a competitive environment 134 Introduction 134 Learning outcomes 134 Cost determination in the changed business environment 135 Costing and pricing products in the traditional way 135 Costing and pricing products in the new environment 135 Cost management systems 136 A01_ATRI3622_06_SE_A01.QXD 5/29/09 10:33 AM Page viii viii CONTENTS Activity-based costing 136 An alternative approach to full costing 137 What drives the costs? 138 Attributing overheads 138 Benefits of ABC 139 ABC versus the traditional approach 140 ABC and service industries 140 Criticisms of ABC 144 Self-assessment question 5.1 147 Other approaches to cost management in the modern environment 148 Total (or whole) life-cycle costing 148 Target costing 151 Costing quality control 152 Kaizen costing 153 Benchmarking 153 Pricing 154 Economic theory 155 Some practical considerations 162 Full cost (cost-plus) pricing 163 Pricing on the basis of relevant/marginal cost 166 Target pricing 168 Pricing strategies 168 Summary 169 Key terms 170 Further reading 170 Review questions 171 Exercises 171 6 Budgeting 175 Introduction 175 Learning outcomes 175 How budgets link with strategic plans and objectives 176 Collecting information on performance and exercising control 177 Time horizon of plans and budgets 178 Limiting factors 179 Budgets and forecasts 179 Periodic and continual budgets 180 How budgets link to one another 180 How budgets help managers 183 The budget-setting process 185 Step 1: Establish who will take responsibility 185 Step 2: Communicate budget guidelines to relevant managers 186 Step 3: Indentify the key, or limiting, factor 186 Step 4: Prepare the budget for the area of the limiting factor 186 Step 5: Prepare draft budgets for all other areas 187 Step 6: Review and co-ordinate budgets 188 A01_ATRI3622_06_SE_A01.QXD 5/29/09 10:33 AM Page ix CONTENTS ix Step 7: Prepare the master budgets 188 Step 8: Communicate the budgets to all interested parties 188 Step 9: Monitor performance relative to the budget 188 Using budgets in practice 190 Incremental and zero-base budgeting 192 Preparing the cash budget 194 Preparing other budgets 197 Activity-based budgeting 201 Self-assessment question 6.1 202 Non-financial measures in budgeting 203 Budgets and management behaviour 203 Who needs budgets? 204 Beyond conventional budgeting 205 Long live budgets! 207 Summary 208 Key terms 209 References 209 Further reading 209 Review questions 210 Exercises 210 7 Accounting for control 217 Introduction 217 Learning outcomes 217 Budgeting for control 218 Types of control 219 Variances from budget 220 Flexing the budget 221 Sales volume variance 222 Sales price variance 225 Materials variances 225 Labour variances 227 Fixed overhead variance 228 Reasons for adverse variances 233 Variance analysis in service industries 234 Non-operating profit variances 234 Investigating variances 235 Compensating variances 238 Making budgetary control effective 239 Behavioural issues 239 The impact of management style 241 Failing to meet the budget 242 Self-assessment question 7.1 243 Standard quantities and costs 244 Setting standards 244 Who sets the standards? 244