Contents Preface to the eighth edition... Preface to the seventh edition... Foreword... Page v vii ix CHAPTER 1 The context of costing... 1 LEARNING OUTCOMES... 1 CHAPTER OUTLINE... 1 THE NEED FOR RELEVANT ACCOUNTING INFORMATION... 2 THE DIFFERENT FIELDS OF ACCOUNTING... 2 Financial accounting... 3 Management accounting... 3 THE PLACE AND FUNCTION OF COST ACCOUNTING... 5 THE FUNCTION OF MANAGEMENT ACCOUNTING... 5 Planning decisions... 5 Control decisions... 6 COST ACCOUNTING SYSTEMS... 6 Cost determination... 6 Cost recording... 7 Cost analysis... 7 Cost management... 7 Cost reporting... 7 ETHICAL CONDUCT... 7 THE CHARTERED INSTITUTE OF MANAGEMENT ACCOUNTANTS (CIMA)... 10 THE AIM OF THIS BOOK... 10 SUMMARY... 11 PERSPECTIVES ON COSTING... 11 KEY TERMS AND CONCEPTS... 12 EXERCISES... 12 CHAPTER 2 Cost classification and terminology... 13 LEARNING OUTCOMES... 13 CHAPTER OUTLINE... 13 xi
xii Fundamentals of Cost and Management Accounting THE CONCEPT OF COST... 14 COST OBJECTS... 15 ACCOUNTING FOR COST... 16 COST CLASSIFICATION... 17 Classification of costs by their nature... 17 Classifying costs by their timing... 18 Classifying costs by their function... 20 Classifying costs according to their behaviour... 24 Variable costs... 24 Fixed cost... 25 Step cost... 25 Mixed cost... 26 SUMMARY... 27 PERSPECTIVES ON COSTING... 27 KEY TERMS AND CONCEPTS... 28 REVIEW PROBLEMS... 28 EXERCISES... 32 CHAPTER 3 Elements of cost... 35 LEARNING OUTCOMES... 35 CHAPTER OUTLINE... 36 MATERIAL COST... 37 TERMINOLOGY... 37 INVENTORY PILING... 37 INVENTORY ACTIVITIES... 39 Acquisition... 39 Storage... 43 Distribution and consumption... 44 Inventory valuation... 45 JUST IN TIME INVENTORY-HOLDING (JIT)... 47 ACCOUNTING ENTRIES... 48 SUMMARY... 49 REVIEW PROBLEMS MATERIAL... 50 LABOUR... 52 EMPLOYEE AND EMPLOYER EXPECTATIONS... 52 Productivity... 54 Humanitarian factors that have an influence on labour productivity... 54 External factors that have an influence on productivity... 54 PERSONNEL ADMINISTRATION... 55 EMPLOYMENT RECORDS... 57 Personnel records... 57 Clock cards... 57 Job cards... 58 Production reports... 58 ASSIMILATION OF INFORMATION... 58
Contents xiii LABOUR REMUNERATION... 59 Methods of remuneration... 59 Important terminology... 60 Calculation of remuneration... 61 WAGE INCENTIVE SCHEMES... 63 Straight piecework... 63 Taylor s differential piecework system... 64 Halsey bonus scheme... 65 Emerson s efficiency scheme... 65 Bonus points... 65 Measured day work... 65 Group bonus systems, share incentive schemes and profit-sharing schemes.. 65 RECOVERY OF DIRECT LABOUR COSTS... 66 LEARNING CURVE... 67 The learning curve effect... 67 Learning curve formula... 68 Application value... 70 Challenges with the application of the learning curve... 70 SUMMARY... 70 REVIEW PROBLEMS LABOUR... 71 MANUFACTURING OVERHEADS... 74 COST PRICE CALCULATION AND MANUFACTURING OVERHEADS... 76 Problems associated with overheads... 76 Classification and analysis of overheads... 76 TOTAL MANUFACTURING OVERHEADS AND THE LINEAR FUNCTION... 80 TECHNIQUES FOR DIVIDING MANUFACTURING OVERHEADS... 80 Scatter diagram... 80 High-low method... 82 Simple regression... 83 Multiple regression... 85 SUMMARY... 86 REVIEW PROBLEM MANUFACTURING OVERHEADS... 86 MARKETING COSTS... 89 BASES FOR APPORTIONMENT... 89 PLANNING AND CONTROL... 90 Products... 91 Sales representatives... 92 Areas... 93 Size of orders... 95 SUMMARY... 97 REVIEW PROBLEM MARKETING... 98 PERSPECTIVES ON COSTING... 99 KEY TERMS AND CONCEPTS... 100 EXERCISES... 101
xiv Fundamentals of Cost and Management Accounting CHAPTER 4 Cost-volume profit analysis... 107 LEARNING OUTCOMES... 107 CHAPTER OUTLINE... 107 INTRODUCTION... 108 MARGINAL COST ACCOUNTING APPROACH... 109 CVP ANALYSIS USING THE MARGINAL INCOME APPROACH... 110 CONTRIBUTION... 110 BREAK-EVEN USING THE MARGINAL INCOME APPROACH... 111 BREAK-EVEN USING THE MARGINAL INCOME RATIO APPROACH... 112 APPLICATIONS OF CVP... 113 Expected profit... 114 Calculating the margin of safety... 114 Evaluating the impact on profit of changes in cost and/or quantity... 115 Change in selling price... 116 Change in variable costs... 116 Change in fixed costs... 117 Product mix... 118 CHANGE-OVER POINT... 120 BREAK-EVEN ANALYSIS USING A GRAPHICAL APPROACH... 121 Break-even graphs... 121 CVP ANALYSIS USING AN ALGEBRAIC AND EQUATION APPROACH... 125 Algebraic method... 125 Equation method... 127 CVP ANALYSIS IN SERVICE INDUSTRIES... 127 COST STRUCTURE AND THE OPERATING LEVERAGE FACTOR... 129 EVALUATING CVP ANALYSIS... 131 SUMMARY... 132 PERSPECTIVES ON COSTING... 133 KEY TERMS AND CONCEPTS... 133 REVIEW PROBLEMS... 133 EXERCISES... 138 CHAPTER 5 Relevant information for short-term decision making... 143 LEARNING OUTCOMES... 143 CHAPTER OUTLINE... 143 INTRODUCTION... 144 COST CONCEPTS FOR DECISION-MAKING... 144 Differential costs... 144 Opportunity costs... 145 Relevant costs... 145 Imputed costs... 146 Sunk costs... 146
Contents xv TYPES OF SHORT-TERM DECISIONS... 146 Price determination... 146 Acceptance of a special order... 147 Elimination of non-profitable products... 148 Purchasing or manufacturing of a product/part... 149 Joint products... 150 Closing down a factory or continuing with production... 152 Capital investment decisions... 153 THE INFLUENCE OF LIMITING FACTORS... 154 LINEAR PROGRAMMING (LP)... 155 UNCERTAINTY IN DECISION-MAKING... 163 PROBABILITY IN DECISION-MAKING... 164 PAYOFF TABLES AND DECISION TREES... 166 Payoff tables... 166 Decision trees... 168 SUMMARY... 169 PERSPECTIVES ON COSTING... 169 KEY TERMS AND CONCEPTS... 171 REVIEW PROBLEMS... 171 EXERCISES... 176 CHAPTER 6 The flow of cost information... 183 LEARNING OUTCOMES... 183 CHAPTER OUTLINE... 183 INTRODUCTION... 184 PLANNING... 184 Establishment... 184 Factory layout... 185 The production line... 185 Labour... 186 Material (Raw material)... 187 THE MANUFACTURING PROCESS... 187 CONTROL... 187 THE FLOW OF COSTS... 188 ACCOUNTING FOR A MANUFACTURING ENTERPRISE... 188 COST FLOWS... 189 INVENTORY ACCOUNTS IN A MANUFACTURING ENTERPRISE... 190 THE STATEMENT OF PROFIT AND LOSS OF A MANUFACTURING ENTERPRISE193 COLUMNAR FORM OF COST AND STATEMENT OF PROFIT AND LOSS... 194 SUMMARY... 196 PERSPECTIVES ON COSTING... 196 KEY TERMS AND CONCEPTS... 197 REVIEW PROBLEMS... 197 EXERCISES... 199
xvi Fundamentals of Cost and Management Accounting CHAPTER 7 Manufacturing overhead calculation and allocation: A traditional approach... 201 LEARNING OUTCOMES... 201 CHAPTER OUTLINE... 201 INTRODUCTION... 202 BUDGETED MANUFACTURING OVERHEADS... 202 APPLIED MANUFACTURING OVERHEADS... 203 ACTUAL MANUFACTURING OVERHEADS... 206 OVER OR UNDERAPPLIED MANUFACTURING OVERHEADS... 208 DEPARTMENTALISATION OF MANUFACTURING OVERHEADS... 210 PRIMARY ALLOCATION OF MANUFACTURING OVERHEADS... 211 SECONDARY ALLOCATION OF MANUFACTURING OVERHEADS... 212 APPLICATION TO THE PRODUCTS AND/OR JOBS... 213 REPEATED ALLOCATION METHOD... 216 ACTIVITY-BASED COSTING (ABC)... 218 SUMMARY... 219 PERSPECTIVES ON COSTING... 219 KEY TERMS AND CONCEPTS... 220 REVIEW PROBLEMS... 220 EXERCISES... 222 CHAPTER 8 Variable and absorption costing... 225 LEARNING OUTCOMES... 225 CHAPTER OUTLINE... 225 INTRODUCTION... 226 THE APPLICATION OF DIRECT AND ABSORPTION COSTING... 226 Inventory valuation... 227 Statement of Profit or Loss: Comparing absorption costing to variable costing. 228 Revenue, production and income relationships... 230 Impact of revenue fluctuations... 234 Reconciliation of the variable costing profit with the absorption costing profit... 234 PERSPECTIVES ON COSTING... 235 SUMMARY... 235 KEY TERMS AND CONCEPTS... 236 REVIEW PROBLEMS... 236 EXERCISES... 240 CHAPTER 9 Activity-based costing (ABC)... 243 LEARNING OUTCOMES... 243 CHAPTER OUTLINE... 243 INTRODUCTION... 244 ABC system design... 244
Contents xvii Step 1: Identify activities... 247 Step 2: Identify cost drivers for each activity... 248 Step 3: Cost pool creation... 248 Step 4: Trace activity costs to cost objectives... 249 AN ILLUSTRATIVE EXAMPLE OF ABC... 251 Criteria for use of an ABC system... 252 PERSPECTIVES ON COSTING... 253 SUMMARY... 253 KEY TERMS AND CONCEPTS... 253 REVIEW PROBLEMS... 253 EXERCISES... 257 CHAPTER 10 Job costing systems... 261 LEARNING OUTCOMES... 261 CHAPTER OUTLINE... 261 INTRODUCTION... 262 THE JOB DESCRIPTION... 263 COST DETERMINATION OF A JOB... 263 INVENTORY LEDGERS... 264 COMPREHENSIVE EXAMPLE OF A JOB COSTING SYSTEM... 266 The recording of material costs... 266 The recording of labour costs... 269 The recording of manufacturing overheads... 272 The recording of completed/finished goods... 275 SPOILT UNITS... 279 Spoilt products... 279 Wastage... 279 Shrinkage and evaporation... 279 Normal wastage... 279 Abnormal wastage... 280 Scrap... 280 ACCOUNTING FOR SPOILT WORK IN JOB COSTING SYSTEMS... 280 As a general manufacturing cost... 280 Job-related normal wastage... 281 Re-processing costs... 283 CONTRACT COSTING... 283 SUMMARY... 287 PERSPECTIVES ON COSTING... 287 KEY TERMS AND CONCEPTS... 288 REVIEW PROBLEMS... 288 EXERCISES... 291 CHAPTER 11 Process costing... 295 LEARNING OUTCOMES... 295 CHAPTER OUTLINE... 296
xviii Fundamentals of Cost and Management Accounting INTRODUCTION... 296 DEPARTMENTALISATION AND UNIT COSTS... 297 PRODUCT AND COST FLOWS... 297 PROCESS COST REPORTS... 300 SINGLE PRODUCT: SINGLE PROCESS (NO OPENING OR CLOSING INVENTORY)... 301 SINGLE PRODUCT: MULTIPLE PROCESSES... 303 THE CALCULATION OF INCOMPLETE UNITS IN THE CLOSING INVENTORY OF A PROCESS... 306 EQUIVALENT COMPLETE UNITS... 307 WAYS OF USING MANUFACTURING RESOURCES... 308 INCOMPLETE UNITS IN CLOSING INVENTORY... 309 INCOMPLETE UNITS IN OPENING INVENTORY... 311 ALTERNATIVE LAYOUT FOR THE COMBINED PRODUCTION COST REPORT 319 INCREASE IN UNITS AS A RESULT OF THE ADDITION OF MATERIAL... 319 ACCOUNTING FOR SPOILT UNITS... 325 ACCOUNTING FOR WASTAGE WHERE THE WEIGHTED AVERAGE METHOD IS APPLIED... 326 ACCOUNTING FOR WASTAGE WHERE THE FIFO METHOD IS APPLIED... 335 SUMMARY... 341 PERSPECTIVES ON COSTING... 342 KEY TERMS AND CONCEPTS... 343 REVIEW PROBLEMS... 343 EXERCISES... 350 CHAPTER 12 Joint and by-products... 355 LEARNING OUTCOMES... 355 CHAPTER OUTLINE... 355 INTRODUCTION... 356 CLASSIFICATION INTO JOINT AND BY-PRODUCTS... 356 Common costs... 357 Additional processing costs... 357 Costing methods for joint products... 358 COSTING METHODS FOR BY-PRODUCTS... 363 BY-PRODUCTS AND WASTE MATERIAL... 365 SUMMARY... 366 PERSPECTIVES ON COSTING... 366 KEY TERMS AND CONCEPTS... 366 REVIEW PROBLEMS... 366 EXERCISES... 369
Contents xix CHAPTER 13 Budgets... 371 LEARNING OUTCOMES... 371 CHAPTER OUTLINE... 371 INTRODUCTION... 372 THE CONCEPTS BUDGET AND BUDGET CONTROL... 372 Budgets... 372 Budget control... 373 THE FUNCTIONS OF BUDGETS AND BUDGET CONTROL... 373 Planning... 373 Co-ordination... 374 Control... 374 AIMS OF BUDGET CONTROL... 374 ADVANTAGES OF BUDGETS AND BUDGETS CONTROL... 375 DISADVANTAGES OF BUDGETS... 375 IMPORTANT ASPECTS FOR THE PREPARATION OF BUDGETS... 375 The human factor... 375 Budget period... 375 Budget personnel... 376 Budget factor... 376 TYPES OF BUDGETS OF A MANUFACTURING ENTERPRISE... 376 Sales budget... 379 Production budget... 381 Plant utilisation budget... 382 Trading purchases budget... 383 Direct material or raw material budget... 384 Labour budget... 385 Manufacturing overheads budget... 386 Production cost budget... 387 Ending finished goods inventory budget... 387 Marketing cost budget... 388 Administrative budget... 388 Research and development budget... 389 Capital budget... 389 Cash budget... 390 Budgeted Statement of Profit and Loss... 392 Budgeted Statement of Financial Position... 393 Master budget... 393 ZERO-BASED BUDGETING (ZBB)... 394 RESPONSIBILITY ACCOUNTING AND COST CONTROL... 394 Responsibility centres... 394 Responsibility budgets... 395 Controllable and uncontrollable costs... 395 Reporting... 396 FLEXIBLE BUDGETING... 397 ACTIVITY-BASED BUDGETING (ABB)... 398 NON-FINANCIAL PERFORMANCE INDICATORS... 399 SUMMARY... 403
xx Fundamentals of Cost and Management Accounting PERSPECTIVES ON COSTING... 404 KEY TERMS AND CONCEPTS... 404 REVIEW PROBLEMS... 405 EXERCISES... 408 CHAPTER 14 Standard costing... 421 LEARNING OUTCOMES... 421 CHAPTER OUTLINE... 422 INTRODUCTION... 422 AIMS... 423 CHARACTERISTICS OF STANDARD COSTING... 424 THE USES OF STANDARDS AND STANDARD COSTS... 424 THE CLASSIFICATION OF STANDARDS... 424 ADVANTAGES OF STANDARD COSTING... 425 THE IMPLEMENTATION OF A STANDARD COSTING SYSTEM... 426 MATERIAL STANDARDS AND VARIANCES... 427 MATERIAL PRICE VARIANCE... 428 Purchase price variance... 428 Issue price variance... 429 MATERIAL QUANTITY VARIANCE... 429 MATERIAL SUB-VARIANCES... 431 RECORDING OF MATERIAL COSTS... 435 LABOUR STANDARDS AND VARIANCES... 437 LABOUR RATE VARIANCE... 438 LABOUR EFFICIENCY VARIANCE... 438 SUB-VARIANCES... 440 RECORDING OF LABOUR COSTS... 443 MANUFACTURING OVERHEADS STANDARDS AND VARIANCE... 444 SEPARATE VARIABLE AND FIXED MANUFACTURING OVERHEADS VARIANCES... 445 Variable manufacturing overheads variances... 445 Fixed manufacturing overheads variances... 447 Causes of manufacturing overheads variances... 451 COMBINED VARIABLE AND FIXED MANUFACTURING OVERHEADS VARIANCES... 451 Two-variance analysis method... 451 Three-variance analysis method... 452 RECORDING OF MANUFACTURING OVERHEADS... 454 STANDARD COSTING RATIOS... 456 SALES VARIANCES... 457 Analysis of variances... 460 PROBLEMS IN APPLICATION... 461
Contents xxi RECONCILIATION OF ACTUAL COSTS WITH STANDARD COSTS... 463 SUMMARY... 466 PERSPECTIVES ON COSTING... 467 KEY TERMS AND CONCEPTS... 468 REVIEW PROBLEMS... 469 EXERCISES... 476 CHAPTER 15 Performance evaluation... 481 LEARNING OUTCOMES... 481 CHAPTER OUTLINE... 481 INTRODUCTION... 481 CHOICE OF ORGANISATIONAL STRUCTURE... 482 RESPONSIBILITY CENTRES... 482 ADVANTAGES OF DECENTRALISATION... 483 DISADVANTAGES OF DECENTRALISATION... 483 DIVISIONAL PERFORMANCE MEASUREMENT... 483 Profit... 484 Rate of return (ROI)... 485 Advantages and disadvantages of return on investment... 487 Residual income... 487 Advantages and disadvantages of residual income... 489 NON-FINANCIAL PERFORMANCE MEASUREMENT... 491 THE BALANCED SCORECARD... 491 Customer perspective: How do customers see us?... 491 Internal business perspective: What must we excel at?... 491 Innovation and learning perspective: Can we continue to improve and create value?... 491 Financial perspective: How do we look to shareholders?... 492 USING THE BALANCED SCORECARD... 492 SUMMARY... 494 PERSPECTIVES ON COSTING... 494 KEY TERMS AND CONCEPTS... 495 REVIEW PROBLEMS... 495 EXERCISES... 499 CHAPTER 16 Transfer pricing in decentralised enterprises... 503 LEARNING OUTCOMES... 503 CHAPTER OUTLINE... 503 INTRODUCTION... 504 CRITERIA FOR THE DEVELOPMENT OF TRANSFER PRICES... 504 Goal congruence... 504 Performance evaluation... 505 Autonomy... 505 Administrative cost... 505
xxii Fundamentals of Cost and Management Accounting COMPANY POLICIES GOVERNING INTER-UNIT TRANSFERS... 505 TRANSFER PRICING... 505 Market-based transfer prices... 505 Cost based transfer prices... 507 Negotiated price... 507 Dual transfer prices... 507 AN ILLUSTRATIVE EXAMPLE OF TRANSFER PRICING... 508 INTERNATIONAL TRANSFERS... 509 SUMMARY... 511 PERSPECTIVES ON COSTING... 511 KEY TERMS AND CONCEPTS... 512 REVIEW PROBLEMS... 512 EXERCISES... 517 CHAPTER 17 An introduction to costing in the modern business environment... 521 LEARNING OUTCOMES... 521 CHAPTER OUTLINE... 521 INTRODUCTION... 522 MATERIAL REQUIREMENTS PLANNING... 522 MANUFACTURING RESOURCE PLANNING... 522 ENTERPRISE RESOURCE PLANNING... 523 TOTAL QUALITY MANAGEMENT... 523 Just in time... 523 Lean management... 524 Kaizen... 524 SIX SIGMA... 525 Key principles of Six Sigma include:... 525 Advantages of Six Sigma include:... 525 Disadvantages of Six Sigma include:... 526 BUSINESS PROCESS RE-ENGINEERING... 526 Where to apply BPR?... 526 How to implement Business Process Re-engineering... 526 Practical application limitations... 527 THE FOURTH INDUSTRIAL REVOLUTION... 527 Robotic Process Automation (RPA)... 528 Blockchain Technology... 529 PERSPECTIVES ON COSTING... 529 SUMMARY... 530 KEY TERMS AND CONCEPTS... 530