MANAGERIAL ACCOUNTING DECISION MAKING AND PERFORMANCE MANAGEMENT Fourth Edition Ray Proctor With contributions from Nigel Burton, Adrian Pierce and Gary Burmiston V PEARSON Hartow, England London " New York Boston San Francisco Toronto Sydney Auckland Singapore Hong Kong Tokyo Seoul Taipei New Delhi Cape Town Sao Paulo Mexico City Madrid Amsterdam Munich Paris Milan
Contents Introduction to the book for students Introduction to the book for lecturers About the authors Acknowledgements Publisher's acknowledgements Parti FOUNDATIONS xv xx xxiv xxvi xxvii 1 Cost behaviour 3 Introduction 3 Learning objectives 4 Types of business 4 Product and period costs 5 Variable and fixed costs 6 Analysis of semi-variable costs into their fixed and variable elements 8 Absorption costs: direct and indirect 11 Comparison of alternative cost analyses 12 Cost analysis by activity 12 Relevant and irrelevant costs 12 13 13 14 15 2 The difference between profit and cash 16 Introduction 16 Learning objectives 18 Example 2.1: The Pizza Wagon 18 The lifetime view 20 22 24 24 Answer to self-assessment question 25 25 Part 2 FINANCIAL MANAGEMENT 27! 3 Ratio analysis and financial management 29 Introduction 30 Learning objectives 30 Financial statements and ratio analysis 30 Performance ratios: profitability 31 Return on capital employed 35 Profit margin 35 Asset utilization 36 Cross margin and cost control 38 Performance ratios: working capital 39 Stock turnover ratio 39 Debtor collection period 40 Creditor payment period 41 The cash cycle 42 Position ratios: liquidity 43 Position ratios: gearing/capital structure 44 Limitations of ratio analysis 47 48 51 of ratio formulae 51 52 52 Case study: jrp Ltd 56 58 63 4 Working capital management 64 Introduction 64 Learning objectives 65 Definition of working capital 66 Objectives of working capital management 67 Effect of working capital financing policies on profitability 68 Stock 70
X CONTENTS Debtors Cash Creditors Cycles and ratios Case study: Kindorm Ltd 75 79 82 83 85 86 89 90 92 94 100 Part 3 1 DECISION MAKING IOI ; 5 Variable costing and breakeven analysis Introduction Learning objectives Cost behaviour Contribution Breakeven point Margin of safety Operational gearing Activity levels for target profits Profit-volume relationships Effect of alternative sales mixes Limitations of variable costing Case study 7: the Hutton Vinification Company Case study 2: the Muesli Company 6 Short-term decisions using variable costing Introduction Learning objectives Cessation of activities Scarce resources One-off contracts Make or buy 103 103 104 104 105 106 109 109 111 112 113 115 116 117 118 118 122 125 128 133 134 134 135 135 138 140 142 Limitations of short-term decision making using variable costing Case study: Sara Wray Enterprises 144 145 146 147 147 150 153 157 7 Short-term decisions usine relevant costing 158 Introduction 158 Learning objectives 159 Definition of relevant cost/revenue 159 Types of relevant cost 159 Types of irrelevant cost 160 Example 7.1: relevant costing 161 Opportunity benefits 162 Relevant cost of materials 162 Example 7.2: relevant cost of materials 163 Qualitative factors 165 Limitations of decision making using relevant costing 165.166 168 168 169 Case study: Roverco 170 172 1 78 8 Capital investment appraisal for long-term decisions 179 Introduction 180 Learning objectives 181 Method 1: accounting rate of return (ARR) 181 Converting profits to cash flows 183 Method 2: payback period (PBP) 184 Discounting cash flows 185 Method 3: net present value (NPV) 187 Example 8.1: Eastshore Airport, NPV calculation 189 Method 4: internal rate of return (IRR) 190 Comparing NPV with IRR 192 Capital rationing and the profitability index 192 Discounted PBP? 194 Choice of method 195
CONTENTS xi Sensitivity analysis 195 Example 8.2: sensitivity analysis 195 The financing decision 198 Qualitative factors 199 Limitations of capital investment appraisal techniques 199 200 202 202 203 Case study 1: Nufone 207 Case study 2: The Private Healthcare Croup 209 212 218 Present value factor table 219 Cumulative present value factor table (annuities) 220 Part 4 PRODUCT COSTING AND PRICING i 221 j 9 Product costs using absorption costing 223 Introduction 223 Learning objectives 224 Direct and indirect costs 224 The absorption cost of products 225 Attaching overheads to products / 226 Single- and multi-product companies 228 Example 9.1: overhead attachment 229 Limitations of absorption costing 232 232 235 235 235 Case study: Travelsound 237 240 244 10 Product costs using activitybased costing 245 Introduction 245 Learning objectives 247 A new philosophy 248 The ABC process 249 Example 10.1: Storrit Ltd 249 Example 10.1 (continued): Storrit Ltd 251 Cross-subsidization of costs 253 ABC in service businesses 254 Activity-based management 256 Limitations of ABC 257 257 260 261 262 Case study: Danbake 264 266 273 11 Comparison of profits under absorption and variable costing 274 Introduction 274 Learning objectives 275 Treatment of fixed production overheads 275 Predetermination of overhead absorption rates 275 Under- and overabsorption of overheads. 277 Example 11.1: the Jinasy Umbrella Company 278 Limitations 281 281 283 285 Answer to self-assessment question 285 Case study: Canco Foods 287 289 293 12 Pricing your products 294 Introduction 294 Learning objectives 295 The economist's view 295 The accountant's view 298 The marketer's view 301 Target pricing and costing: an integrated ^ strategy 302 Limitations of pricing theory 303 303 306 306 307 Case study: the Hydrogen Car Project 308 310 312
CONTENTS XIII Moving future sales to the present 417 Moving present sales to the future 418 The utility of budgetary control systems 419 The 'Beyond Budgeting' philosophy 419 Devolved leadership: structure and principles 422 Adaptive (or flexible) processes 423 Example 16.1: Svenska Handelsbanken 426 Example 16.2: the Toyota production system 430 Membership of the BBRT 432 Limitations 433 The counter point of view 434 Better Budgeting 436 437 440 440 Case study 1: Medibed 442 Case study 2: Freeshire Hospital Trust 449 452 17 Balanced scorecards 453 Introduction ' 454 Learning objectives 455 Structure and internal relationships 456 Practical application r 459 Flexibility 461 Cascading and employee involvement 462 Strategy maps 464 Example 17.1: a multinational pharmaceutical company 465 Example 17.2: 'Tesco's steering wheel',. 467 Successful implementation of a balanced scorecard 467 Strategy formulation 468 Multiple benefits 469 Financial incentives 470 A note of caution 470 Limitations The way forward Case study 7: Chumpy Lighting Ltd Case study 2: Parnham Clarke (UK) pic 471 473 475 475 476 478 484 491 18 Performance improvement techniques 492 Introduction 493 Learning objectives 494 Life cycle costing 494 Business process re-engineering (BPR) 496 Theory of constraints 498 Kaisen costing 500 Just in time 501 Total quality management 504 Activity-based management 508 Benchmarking 514 Economic Value Added 516 Value analysis and engineering 519 Six sigma 521 Lean production and lean accounting 524 Performance dashboards 528 Strategic management accounting 533 Environmental accounting 536 Overview of performance improvement techniques 541 543 546 Glossary 547 Answers to end-of-chapter questions 554 Index 606