Management and cosst accounting 4th bhimani horngren foster

Concepts in Action and Surveys of Company Practice boxes allow students to appreciate how accounting techniques are put into practice by managers in the business environment... 18 Contro

Alnoor Bhimani Charles T Horngren Srikant M Datar

George Foster

ManageMent and Cost aCCounting

Fourth Edition

Bhimani Horngren Datar Foster

The fourth edition of Management and Cost Accounting continues to offer a wide-ranging suite of

resources to serve the needs of students, instructors and professionals

With a strong international focus, this text provides definitive coverage of established and contemporary issues within management and cost accounting Drawing on the latest research and surveys, the authors bring technical and theoretical concepts to life through extensive use

of real-world examples and case studies

the authors Alnoor Bhimani is Professor in Accounting and Finance at London School of Economics and

George Foster is Professor of Management at Stanford University.

Features

Extensive new material on corporate strategy, performance evaluation, corporate governance and the network economy

Many new unique examples of management accounting in real-world action

Revamped references at the end of each chapter to reflect new literature and the latest thinking

Richly illustrated with a striking full colour text design and photographs to further engage the reader, reinforcing the practical relevance of the issues discussed

In-depth unique European and Harvard Business School case studies A mix of new and classic real-world cases that pull together themes and offer a broader perspective of how management accounting can be applied in a range of different contexts

Extensive assessment material, including questions taken from past professional papers, allows students to consolidate learning and practise their exam technique

Questions are available for every chapter and are classified according to level of difficulty

Concepts in Action and Surveys of Company Practice boxes allow students to appreciate how accounting techniques are put into practice by managers in the business environment

MANAGEMENT and COST ACCOUNTING

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A mix of multiple choice, fill-in-the-blank and true/false questions to help test your learning

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An online glossary to explain key terms

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Copyright © 1999 by Prentice-Hall, Inc.

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First edition published in Great Britain under the Prentice Hall Europe imprint in 1999 Second edition published in 2002

Third edition published 2005

Fourth edition published in 2008

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The rights of Alnoor Bhimani, Charles T Horngren, Srikant M Datar and George Foster

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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.

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ISBN 978-0-273-71149-0

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library

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A catalog record for this book is available from the Library of Congress

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Typeset in 9.5/12pt Stone Serif by 30.

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To Our Families

AB: Mum and Dad

CH: Joan, Scott, Mary, Susie and Cathy

SD: Swati, Radhika, Gayatri and Sidharth

GF: The Foster Family

Contents vii

7 Income effects of alternative stock-costing methods 198

12 Pricing, target costing and customer profitability analysis 376

14 Motivation, budgets and responsibility accounting 466

Brief contents

18 Control systems and transfer pricing 614

20 Quality and throughput concerns in managing costs 700

22 Strategic management accounting and emerging issues 770

Appendix A: Solutions to selected exercises 847

Appendix B: Notes on compound interest and interest tables 915

Supporting resourcesVisit www.pearsoned.co.uk/bhimani to find valuable online resources

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Guided tour xiv

Accounting systems and management

Themes in the design of management

Two types of cost behaviour pattern:

The building block concept of costing systems 65

Job costing in service organisations using

An illustration of a job-costing system in

Case 1: Process costing with no opening or

Case 2: Process costing with no opening

Case 3: Process costing with both some

opening and some closing

Comparison of weighted-average and FIFO

Standard-costing method of process costing 112

Cost–benefit issues and other contextual

Allocating costs from one department

Support department cost-allocation methods 148

Irrelevance of joint costs for decision making 182

Comparison of variable costing and

PART TWO: Denominator-level concepts

Appendix: Breakeven points in variable

PART I Case study problems 229

structures to manage the risk–return

General issues in estimating cost functions 271

The cause-and-effect criterion in choosing

Learning curves and non-linear

An illustration of relevance: choosing

Opportunity costs, outsourcing and capacity

Irrelevance of past costs and

Cost–volume–profit relationships 240 CHAPTER 10

Relevant information for decision

Using ABC systems for cost and profit

Achieving the target cost per unit for

using activity-based management at

Customer-profitability analysis attracts increasing

Relevant cash flows in discounted cash-flow

Choosing between the net present-value and the internal rate-of-return decision

Pricing, target costing and

customer profitability analysis 376

CHAPTER 13

Capital investment decisions 416

Computer-based financial planning models 483

Flexible-budget variances and

Price variances and efficiency variances

Integrated analysis of overhead cost

Different purposes of manufacturing

Journal entries for overhead costs and

standard costing: Helping Sandoz manage

Activity-based costing and variance analysis 562

Organisational structure and decentralisation 616

A general guideline for transfer-pricing

Service, Japanese National Tax Agency and

Choosing targeted levels of performance

Distinction between managers and

Performance measures at the individual

403 Procurement at Betapharm (A, B and C) 686

Theory of constraints and throughput

securing the benefits of supply-chain

Enterprise resource planning (ERP) systems 734

Managing goods for sale in retail

Challenges in estimating stock-related

What is strategic management accounting? 774

The strategic management accounting

Appendix A: Solutions to selected exercises 847Appendix B: Notes on compound interest

Strategic management accounting

H ow much does it cost PricewaterhouseCoopers to audit sliced, cracker-sized cheese? How much does it cost Peugeot to does it cost Nokìa to incorporate a game console in its N-Gage including formulating overall strategies, determining product and external reporting obligations This chapter presents concepts and will refine some ideas presented here.

Costing systems aim to report cost numbers that indicate the manner in which particular cost objects – such as products, services explore the details of costing systems, three points are worth noting:

of relevance in designing and choosing costing systems The costs and other personnel, can be quite high Managers may choose to will outweigh its costs In practice, experienced managers tend to sis Behavioural, political and institutional factors generally influence accounting information systems choice and design.

2 Systems tend to be tailored to the underlying operations and not

vice versa Any significant change in underlying operations is costing systems Systems fail when operating managers per- management style.

3 Costing systems are only one source of information for managers.

Generally, managers combine cost information with non-financial metrics and qualitative information when making decisions.

LEARNING OBJECTIVES

After studying this chapter, you

should be able to:

● Describe the building block

concept of costing systems

● Distinguish between job costing

and process costing

● Outline a six-step approach to job

costing

● Distinguish actual costing from

normal costing

● Understand job costing in service

and manufacturing contexts

● Describe key source documents

used in job-costing systems

● Understand how the steps in the

production process are tracked in

a job-costing system

● Describe alternative methods of

dealing with period-end

under-or overallocated indirect costs

C H A P T E R 3 Job-costing systems

61

Parts – the book is split into five parts, each with a part opener describing the main

themes and links between chapters within that part

Learning objectives – introduce topics

covered and summarise what you should

have learnt by the end of the chapter

Exhibits, figures and diagrams – feature

throughout the text

to illustrate keypoints and clarifytopics discussed

Surveys of company

practice – summarise

and discuss the survey

results of companies

from various countries

to evidence and contrast

the practical use of

accounting concepts and

techniques in business

Concepts in action – highlight the practical application of

accounting concepts and techniques by real companies.They are taken from a range of commercial sectors andcountries from around the globe

Let us briefly review some terms introduced in Chapter 2 that we will use in discussing costing systems:

●Cost object – anything for which a separate measurement of costs is desired.

●Direct costs of a cost object – costs that are related to the particular cost object and

can be traced to it in an economically feasible (cost-effective) way.

●Indirect costs of a cost object – costs that are related to the particular cost object but

are allocated to the cost object using a cost-allocation method.

The relationship among these three concepts is shown in Exhibit 3.1.

Two concepts not previously defined are also important when discussing costing systems:

broad (such as a company-wide total-cost pool for telephones and fax machines) to

linking an indirect cost or group of indirect costs to a cost object A cost-allocation number of car kilometres travelled) Companies often seek to use the cost driver of travelled may be used as the base for allocating motor vehicle operating costs among different sales districts.

These five terms constitute the building blocks that are considered relevant in the design of costing systems.

Companies frequently adopt one of two basic types of costing system to assign costs to products or services:

of a product or service A job is a task for which resources are expended in bringing

62

The building block concept of costing systems

Job-costing and process-costing systems

Chapter 3 Job-costing systems

Exhibit 3.1Relationship between a cost object and direct and indirect costs

Cost assignment objectCost

Direct costs

Indirect costs Cost tracing

Cost allocation

Chapter 11 Activity-based costing

Activity-based costing has been implemented by a large number of companies around ABC (Bjørnenak, 1997) Another study of 88 Belgian companies (manufacturing and 1996) These companies were concerned with understanding cost behaviour, improv- ing cost accuracy and achieving cost reductions.

In France (see Lebas, 1996), a survey of 70 manufacturing and service companies revealed usage of ABC by one-third of these companies For most ABC users in France, the goal was better process design and attaining lower costs.

A UK survey (adapted from Innes and Mitchell, 1995) found that just under 20% of

251 respondents had adopted ABC with another 27% of firms actively considering reported a 17% adoption rate with another 20% actively considering ABC The appli- pricing and cost modelling.

A study (adapted from Clarke, 1995) of Irish companies that had implemented ABC reported the following actual benefits: more accurate cost information for prod- into cost causation; better performance measures; and more accurate customer prof- itability analysis.

One study (adapted from APQC/CAM-I, 1995) of 162 US-based companies using ABC (including 29 service-sector organisations) reported the primary applications as

141 US manufacturers reported that 27% of respondents to the study had mented ABC, 37% planned to do so and 36% did not (Shim and Stagliano, 1997)

imple-The Irish survey reported that the most common implementation problems were difficulties in defining activities and in selecting cost drivers as well as inadequate

‘lack of top management support’, ‘lack of time’, ‘lack of perceived benefits’ and ‘lack tion is the necessary change of culture and mindset.

An international survey of 321 organisations revealed the following usage of ABC across some or a majority of business units (Bhimani and Gosselin, 2004):

Country %

Canada 61 France 86 Germany 69 Italy 47

UK 81 USA 74 Source: Bhimani and Gosselin (2004).

S U R V E Y S O F C O M P A N Y P R A C T I C E

Growing interest in activity-based costing

Relevant costs and benefits of quality improvement Next consider external failure costs Braganza currently repairs 3000 copiers at cus- tomer sites If incoming frames are inspected more carefully, Braganza estimates that tional copiers If the frame is redesigned, Braganza estimates that 700 fewer copiers will require warranty repair and that it will be able to sell 300 additional copiers Variable and fixed costs per copier repaired of individual external failure COQ items described in Exhibit 20.2 (Panel A, column 4) are as follows:

Variable costs Fixed costs Total costs

Customer-support costs €80 €120 €200 Transportation costs 180 60 240 Warranty repair costs 1800 2600 4400

As Braganza eliminates repair work on copiers, it expects to save only the variable costs of customer support, transportation and warranty repair.

C O N C E P T SI N A C T I O N

Mercedes buyers in the UK have increasingly voiced their concerns over quality electronics, airbags that fail to inflate in accidents and malfunctioning navigation sys- his C-class car, parked it in front of his dealership with a sign that read: ‘Mercedes is the USA in 26th place Ten years earlier, Mercedes had been in first place Websites customers complaining about Mercedes quality.

prob-Such quality problems translate into the inability to maintain historic price ums For Mercedes, this is worrying in that it is the profit engine that is driving the

premi-parent Daimler Chrysler – to the tune of 75% in 2003 The customers to consider alternatives Gareth Rhys, director of

of Cardiff Business School, notes that: ‘The market is less and itself out They’re going to buy a BMW or Lexus.’ In 2001, car-buyer intentions reported that the number of car shoppers fast as those who would like to buy a Mercedes Fixing quality pushed dealers to invest almost $500 million in expanded cians Other quality-focused programmes are afoot The message is clear: once immense cost to the company.

Source: Adapted from A Taylor, Mercedes hits a pothole, Fortune, 27 October 2003, pp 44–9.

Does Mercedes stand for quality?

The following points are linked to the chapter’s learning objectives.

1 Cost accounting measures and reports financial and other information related to an

organisation’s acquisition or consumption of resources It is an important nent of both management accounting and financial accounting.

compo-2 Cost management and strategy are increasingly relevant aspects of management

accounting processes.

3 Accounting systems are intended to provide information for five broad purposes: (a)

formulating overall strategies and long-range plans, (b) resource allocation decisions formance measurement, and (e) meeting external regulatory and legal reporting obligations.

4 Accounting influences planning, control and decision making through budgets and

other financial benchmarks, its systematic recording of actual results and its role in performance evaluation.

5 In most organisations, management accountants perform scorekeeping,

attention-directing and problem-solving functions The first function emphasises the helper role of the accountant.

6 Economic benefits and costs in the design, implementation and use of accounting

systems need to be assessed in the light of organisational context and process issues.

of management accounting in enterprises.

7 Important management themes are shaping the design and uses of management

accounting systems.

8 A variety of global forces are affecting management accounting thinking and

prac-tices, including organisational structure changes, digitisation, the need to assess intellectual capital and recognise the significance of knowledge management.

Ethical guidelines

Professional accounting organisations representing management accountants exist in bership in the institute Membership signals that the holder has passed the admission CIMA to become a chartered management accountant.

To become a CIMA member, completion of three levels (Foundation, Intermediate and Final) spanning fifteen examinations is required (see www.cimaglobal.com for more information).

Management accounting topics are also covered by several other professional bodies The syllabus for the examinations of the Association of Chartered Certified

Summary

Professional ethics

Professional ethics

A P P E N D I X

Summaries – pull together the key points

addressed in the chapter to provide a useful

reminder of topics covered The summary

directly connects with the learning outcomes

of the chapter

Case studies – a set of problem-based illustrative case studies

with questions are provided at the end of each part These allowyou to apply your understanding of accounting concepts, issuesand techniques within a broader organisational context

22.1 Define strategy.

22.2 Describe two generic strategies.

22.3 What are the four key perspectives in the balanced scorecard?

22.4 What is reengineering?

22.5 Describe three features of a good balanced scorecard.

22.6 What are three important pitfalls to avoid when implementing a balanced scorecard?

22.7 How does an engineered cost differ from a discretionary cost? Are these strategic costs?

22.8 Define SMA.

22.9 Why is SMA practice organisation-specific?

22.10 What affects SMA’s potential?

BASIC LEVEL

*22.11 Balanced scorecard (20 minutes)

La Quinta Ltd manufactures corrugated cardboard boxes It competes and plans to grow by manner There are many other manufacturers who produce similar boxes La Quinta employees are critical to implementing its strategy in 2005.

Required

1 Is La Quinta’s 2005 strategy one of product differentiation or cost leadership? Explain

briefly.

2 Indicate two measures you would expect to see under each perspective in La Quinta’s

balanced scorecard for 2005 Explain your answer briefly.

Chapter 22 Assessment material

Review questions

Exercises

Adapted with the kind permission of the Institute of Management Accountants (Volume 16 of the Cases from

Management Accounting Practice.)

This case demonstrates the importance of strategy and cost allocation in the IT manufacturing ness together with the construction of an appropriate ABC model.

Background

High-Tech (H-T) is a computer manufacturer founded in Yorkshire, England, in 1901 and time recording conglomerate The company began with 1300 employees and with diversified products in numerous locations H-T undertook several strategies to over- incentives, grooming its salesmen in dark suits, promoting company pride and loyalty ulating machines, and expanded sales to the USA, Asia, Australia and South America These strategies helped H-T overcome its sinking operations While other compa- nies were folding during the Great Depression, H-T continued to grow and began inventory control would not have been useful to H-T during the Depression Because tracts during the 1930s H-T had become so large in the computer industry that it was

II, H-T continued to grow through government contracts H-T used some of its profits

Case study problems

short questions which

encourage you to review

and/or critically discuss

your understanding of

the main topics and

issues covered in each

Journal of Management Accounting Research

http://accounting.rutgers.edu/raw/aaa/aaamas/JMAR/JMAR.html

The objective of this website is to contribute to improving the theory and practice of

man-a number of man-articles man-and links on cost man-allocman-ation man-and the problems man-associman-ated

Ingenta

http://www.ingenta.com/journals/browse/ap/mg

This is a new website that contains 27 000 articles that can be accessed on a pay-per-view visitors to access and review publications that are available to view online There are a number of articles on cost allocation and joint costing.

184

joint cost (166) split-off point (166) separable costs (166) product (166) joint products (166) main product (166) by-product (166)

scrap (166) sales value at split-off method (169) physical measure method (170) estimated net realisable value (NRV) method (172) constant gross-margin percentage NRV method (174)

Key terms

Weblinks

Further reading

Chapter 6 Cost allocation: joint-cost situations

Key terms – each chapter

concludes with a list of themain concepts defined,explained, and illustrated

in the chapter

Further reading – offers

sources of additional information for those whowish to explore a topic further

Weblinks – provide an

annotated guide to usefulwebsites relevant to eachchapter

Multiple choice questions

A set of interactive questions,

including multiple choice,

fill-in-the-blank and true/false question sets are

included for every chapter toallow students to test andconsolidate their

understanding

Fill-in-the-blank questions

Guided tour (continued)

An online glossary is available

with concise definitions of all the key concepts and techniques discussed in

A set of annotated weblinks

provide guidance and ideasabout where to find usefulfurther online resources andinformation

Annotated weblinks

Glossary

Legal and ethical issues involved

in software piracy.

The ethical dilemma at Northlake:

How far does the notion of 'different costs for different purposes extend'?

Electronic Boards plc: Design of

costing systems for a firm operating

in a high tech environment.

Simplistic vs complex costing.

PART 2 Permaclean Products plc: Analysis

of costs and price-demand information using past sales data to make decisions on product pricing.

Morgan Components:

Highlights aspects of decision analysis, cost issues and strategy.

Tankmaster Manufacturing Company: ABC in an altered

Colombo Frozen Yoghurt: explores

adapting to competitive markets and development of strategies according to market.

PART 3 Zeros plc: Use of ROI to measure

divisional performance Use of costing systems to produce meaningful profit statements.

Fiddler Ltd: Compares

cost-volume-profit based calculations to absorption based costing profit figures.

Hereford Steak Houses: Use of

variance analysis in the restaurant industry Variance calulations using

Guide to the case studies

where divisional interests are pitted against total corporate profitability.

Cresta Plating Company Ltd:

Considers issues of decentralisation and responsibility within accounting issues.

Procurement at Betapharm:

Discusses centralisation, sourcng and strategy issues.

PART 5 High-Tech Ltd: Importance of

strategy and cost allocation within the IT manufacturing industry.

Considers JIT inventory systems

Dogfight over Europe Ryanair (A,

B and C): Cost–benefit analyses

with an assessment of competitor pricing and market-based strategies to stage a comeback from a near-bankruptcy situation.

Osram: Analysis of potential

savings made by newer, more efficient consumables as opposed

to traditionally used ones.

Coors: Demonstrates importance

of supply chain management and compares strategies through the use of EVA.

Accounting shapes our lives It changes organisations and alters our social, economicand physical environment Whether or not we engage in producing and/or readingaccounting information, it influences what we can and cannot do Corporate deci-sions regarding new product developments, pricing strategy, staff recruitment andsalary levels are generally influenced by accounting information The way in which amanager acts is often associated with how he or she reacts to accounting data Attimes, accounting motivates certain types of behaviour and discourages others Inmost organisations, decisions, actions and human behaviour find direct links with thenature, use and focus of accounting information This text is about understanding thepreparation and use of management and cost accounting information in this light.Whereas management accounting is concerned with the measurement and report-ing of financial and other types of information to managers in their pursuit oforganisational and other goals, cost accounting is more concerned with information

on the acquisition and consumption of resources Cost accounting tends to provide auseful input into management accounting Our concern is to encompass both man-agement and cost accounting, stressing particularly the design, use and role ofaccounting information in the management of organisational activities The intent is

to balance technical detail and organisational insight so as to encompass issues of mary interest to the discharge of management activities The focus is on basicconcepts, analyses and practice vis-à-vis management decision making

pri-Management and cost accounting is a dynamic discipline which interacts withmany facets of the organisational environment in which it exists across nations,industrial settings and management functions It entails the application both of long-established techniques as well as newly emerging concepts Consequently, the book covers conventional topic areas such as job costing and process costing, cost–volume–profit relationships, capital investment decisions and budgetary controlsystems in the light of changes in modern-day operational circumstances In addition,

we have addressed innovative approaches in management accounting which relate to,for example, quality concerns, throughput concepts, non-financial performance issuesand strategic analysis Throughout the book’s chapters we point to emerging themeswithin the field of management accounting which are regarded as important fororganisations seeking to evolve their management accounting systems Additionally,

we discuss the possible implications for management accounting practices of ment and organisational concerns which are recent but fast evolving We point,therefore, to the relevance of many issues, including knowledge management andintellectual capital, enterprise governance, environmental management accounting,which hold significance for potential management accounting practice changes

manage-We have also explicitly incorporated discussions of the management accountingimplications of the use of flexible organisational technologies in the production anddelivery of physical goods and services Further, some of the potential influences of e-business innovations, the ‘digitisation’ of the economy and Internet technologies onmanagement accounting practices are considered The dotcom boom of the late 1990sand its meltdown at the turn of the millennium present important lessons of interest

to management accountants The convergence of telecommunications and digitaltechnologies embedded within the Internet has given rise to the restructuring of busi-ness activities while also bringing to the fore questions concerning the continued

Preface

relevance of established management accounting principles within highly enabled enterprises We are now in a more mature and perhaps secondary phase of thegrowing impact of the Internet on society and the economy We highlight aspects ofWeb 2.0 issues Although no established body of research exists in this domain, ourintent is to highlight some of the management accounting implications broughtabout by the Internet

web-Throughout the text an emphasis is placed on developing a context-based standing of management and cost accounting practices By this, we mean that,although generalisations need to be made to introduce topics and issues, it is essential

under-to recognise that these practices are highly dependent upon the situational and isational factors within which such application takes place We therefore discussglobal themes and concepts in management and cost accounting while stressing theneed to understand the context in which it is practised This focus extends to address-ing issues of social and ethical concern Enterprise governance as an issue of increasingcorporate concern is discussed at some length Rather than accord a separate chapter

organ-to consider organisational and social aspects of management accounting, we integratethis perspective throughout the text to lend it a greater degree of realism

This text pays particular attention to concerns and issues within the European ting Our endeavour to cover fundamental concepts and techniques of managementand cost accounting, while also highlighting the diversity of approaches and practiceswhich management and cost accounting are viewed to encompass in differentEuropean countries, has made the writing of this text a unique and interesting chal-lenge We draw comfort from the realisation that other management accounting textshave begun to attempt to present a similar mix of practical examples, case studies andcoverage of research findings while also sharing our preference for the format andstructure adopted here In this edition we provide new illustrative examples, surveyfindings and case studies relating to many European companies, and have drawn on awide range of European business writings This is regarded as an important feature ofthis book, especially with the growing number of countries joining the EU communityproper Although the European perspective is an important emphasis, the text alsoincludes significant discussion and illustrative examples of practice and issues relating

set-to countries and regions outside of Europe

Deciding on the sequence of chapters in a management and cost accounting book which spans introductory through to relatively detailed analysis of material is achallenge Every lecturer has a favourite way of organising his or her course The fivepart structure of this text and the sequencing of chapters has been designed to facili-tate fexibility and diversity in the teaching of different topic areas and the use of thetext for a range of courses and levels An outline of the coverage and component chap-ters of each part is given in each of the part openers

text-This book includes a high quantity and broad range of assessment material to furtherfacilitate the use of the text on a diverse range of courses:

 Review questions These short questions encourage students to review and/or

criti-cally discuss their understanding of the main topics and issues covered in each

Assessment material

several professional accountancy bodies There is an average of fourteen exercisesper chapter Fully worked solutions to a selection of exercises in each chapter (iden-tified by an asterisk) are provided in Appendix A

 Professional questions Additional assessment material is provided in the

profes-sional questions booklet accompanying this text and on the website supporting this

book at www.pearsoned.co.uk/horngren.

At the end of each of the five parts are problem-based illustrative cases Each is moresubstantive and typically more demanding than the end-of-chapter exercises, integrat-ing topics from several chapters in each of the core parts of the text, allowing you toapply your understanding of accounting concepts, issues and techniques within abroader organisational context, and to develop your critical thinking and analyticalskills The questions which follow the case material include some aspects suitable forgroup discussion/assignment

Additional assessment material is provided on the CD-ROM included with theLecturer’s Resource Pack and on the companion website supporting this book (seebelow)

To familiarise yourself with the main features of this text, and how they will benefityour study, an illustrated Guided tour of the book and web resources is given on pagesxiv–xxi

Students will need to use these tables in studying Chapter 13 of the text and ing the end-of-chapter exercises For ease of reference, we recommend students make aphotocopy of these pages

undertak-Many of the chapters include a list of selected readings of relevance for those seeking

to further their knowledge base in the specific chapter areas There is a comprehensivebibliography at the end of the book which will also be of assistance to students wish-ing to follow up topics and issues in more detail

This comprises an alphabetical listing of all the key terms, including a concise tion, so allowing revision of all the key concepts and techniques in the text

defini-Case study problems

Appendix B: Compound and interest rate tables

Bibliography

Glossary

Lecturers who adopt this text are provided with a range of additional materials toassist in the preparation and delivery of courses These include:

end-of-chapter exercises not given in the text;

allowing you to provide a lecture or seminar presentation (and/or to print outs) These incorporate colourful graphics, outlines of chapter material, textexhibits, additional examples and graphical explanations of difficult topics;

Grade Tracker is an exclusive new resource for instructors and students, giving youaccess to the best online teaching and learning tools 24 hours a day, 7 days a week.Please see the Guided Tour beginning on page xiv for more details of the Grade Tracker

resources available with Management and Cost Accounting, Fourth Edition.

Alnoor Bhimani Charles Horngren Srikant Datar George Foster

We are indebted to many individuals for their ideas and assistance Our primarythanks go to the many academics and practitioners who have advanced our knowl-edge of management and cost accounting Aside from the many individuals in NorthAmerica who have contributed in one way or another, we would like to thank the fol-lowing who have provided material for inclusion in the text, or who havepainstakingly commented on chapters in draft form, or have otherwise helped thereview process:

David Adnum, Wrexham Business SchoolThomas Ahrens, Warwick UniversityJasim Al-Ali, Manchester Metropolitan UniversityMohammed Al-Omiri, Umm Al-Qurag UniversityMichael Anderson, Copenhagen Business SchoolDenise Ashworth, Manchester Metropolitan UniversityRichard Barker, Judge Institute, University of CambridgeRonnie Barnes, London Business School

Ken Bates, Warwick Business SchoolJoachim Behrendt, Luneburg University, GermanyNiels Boberg Bøgh, Syddansk Universitet

Jane Broadbent, Royal Holloway, University of LondonMick Broadbent, Manchester Metropolitan UniversityMichael Bromwich, London School of EconomicsWerner Brugemann, University of Ghent

Christopher Chapman, Oxford UniversityPeter Clarke, University College DublinCiaran Connolly, Ulster UniversityJohn Currie, University College GalwayJay Dahya, Cardiff University

Claire Dambrin (HEC)Shanta Davie, University of Newcastle Upon TyneJeremy Dent, London School of EconomicsRobert Dixon, University of DurhamJohn Duran, Cork University

Pam Edwards, Manchester School of ManagementRoy Edwards, University of Southampton

Ian Fisher, Liverpool John Moores UniversityVictor Franco, ISCTE (Portugal)

Miles Gietzmann, City UniversityPauline Gleadle, Open UniversityBetty Goens, Limburgs Centrum Universitat, BelgiumRobert Greenhalgh, Nottingham University

Tom Groot, Free University of AmsterdamFrank Hartmann, University of NijmegenBijan Hasri, University of WestminsterMostafa Hassan, University of Hertfordshire

Acknowledgements

Jos Hexspoor, Tilburg University, NetherlandsAnthony Hopwood, Oxford UniversityJohn Innes, Dundee University

Evelyn Kapteyn, Haagse HogeschoolClaes-Goran Larsson, Umea UniversitetMichel Lebas, Hautes Etudes CommercialesKari Lukka, Turku School of EconomicsMaria Major, ISCTE (Portugal)

Carolyn Malinowski, University of East LondonTeemu Malmi, Helsinki School of EconomicsAlyson McLintock, University of NottinghamPeter Miller, London School of EconomicsTony Miller, University of NewcastleFalconer Mitchell, Edinburgh UniversityJan Mouritsen, Copenhagen Business SchoolBill Neale, Bradford University

Bill Nixon, University of DundeeDeryl Northcott, University of ManchesterVincent O’Connell, University College, CorkHiroshi Okano, Osaka City UniversityDavid Otley, Lancaster UniversityMike Partridge, Brighton UniversityMark Pilkington, University of WestminsterMike Pogue, Queens University BelfastIver Poulsen, Syddansk UniversitetDavid Preen, University of BrightonPaolo Quattrone, Oxford UniversityFlemming Rasmussen, Copenhagen Business SchoolHanno Roberts, Norwegian School of ManagementKeith Robson, Cardiff University

Carsten Rohde, Copenhagen Business SchoolRobin Roslender, Stirling University

Ken Shackleton, Glasgow UniversityPeter Smidt, Vrije University, NetherlandsHeather Stewart, Southampton Institute of Higher EducationRennie Tjerkstra, University of Kent

Mathew Tsamenyi, Sheffield Hallam UniversityChin Bun Tse, University of Leicester

Juhani Vaivio Helsinki School of EconomicsHerman van der Meulen, Nijenrode University, NetherlandsGerrit Vjige, Twente University, Netherlands

Fred Vlotman,Tilburg University, NetherlandsLuca Zan, Università degli Studi di Bologna, Italy

We would like to thank the following for their research and administrative assistance:Narisa Dai, London School of Economics

Mahvish Shami, London School of Economics

The Chartered Institute of Management AccountantsThe Institute of Chartered Accountants in Ireland

We are grateful to the following for permission to reproduce copyright material:

Illustrations and tables

Exhibit 1.3: Bhimani, A (2005) Strategic Finance and Cost Management London:

Management Press Reproduced with permission from Management Press; Chapter 1,unnumbered table, p 20: Bescos, P and Mendoza, C (2000) ‘Management accountingand decision-making: why managers need information’, paper presented to the 23rdAnnual Congress of the European Accounting Association, Munich, 29–31 March.Reproduced with permission from Prof Pierre-Laurent Bescos and Dr Carla Mendoza;

Exhibit 1.7: Chartered Institute of Management Accountants (CIMA) (2006) CIMA Code

of Ethics for Professional Accountants, London: CIMA Reproduced with permission;

Exhibit 14.2: Hopwood, A (1974) Accounting and Human Behaviour London:

Haymarket Reproduced with permission from Haymarket Business Publications Ltd.;Exhibit 22.5: Soonawalla, K (2006) ‘Environmental management accounting’, in A

Bhimani (ed) Contemporary Issues in Management Accounting Oxford: Oxford University

Press, pp 381–406 Reproduced with permission of Oxford University Press(www.oup.co.uk); Exhibit 22.6: Adapted from Roberts, H (2006) ‘Making management

accounting intelligble’, in A Bhimani (ed) Contemporary Issues in Management

Accounting Oxford: Oxford University Press, pp 381–406 Reproduced with permission

of Oxford University Press (www.oup.co.uk)

Photos

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Text

Case 101: ‘The European Savings Bank’ adapted from Christiansen, A and Eining,

M.M (1994) ‘Software piracy – who does it impact?’, Issues in Accounting Education,

Vol 9, No 1, Spring 1996 Reproduced with permission from the AmericanAccounting Association; Case 102: Grant, R (1993) ‘The ethical dilemma at

Northlake’, CMA Magazine, March 1993 Reproduced with permission from the Centre

for Accounting Ethics; Case 103: Innes, J and Mitchell, F (1988) ‘Electronic Boards

plc’, in D Otley, D Brown and C Wilkinson (eds) Case Studies in Management

Accounting, Hemel Hempstead, UK: Philip Allan Publishers Reproduced with

permis-Publisher’s acknowledgements

Publisher’s acknowledgements

with permission from Pearson Education Ltd and Falconer Mitchell; Chapter 12,

Concepts in Action, p 403: Kay, A (2004) ‘The visionary elite’, Business 2.0, 9 January

2004 Reproduced with permission from Time-Warner, Inc.; Case 201: Otley, D (1988)

‘Permaclean Products plc’, in D Otley, D Brown and C Wilkinson (eds) Case Studies in

Management Accounting, Hemel Hempstead, UK: Philip Allan Publishers Reproduced

with permission from Pearson Education Ltd and David Otley; Case 202: Palencia, L

and Fernández, A (2004) ‘Morgan Components’, IESE Business School Cases Copyright

© 2004 IESE Reproduced with permission from IESE Publishing; Case 204: Neale, B

(1988) ‘Torquemada plc’, in D Otley, D Brown and C Wilkinson (eds) Case Studies in

Management Accounting, Hemel Hempstead, UK: Philip Allan Publishers Reproduced

with permission from Pearson Education Ltd and Bill Neale; Case 301: Mitchell, F

(1988) ‘Zeros plc’, in D Otley, D Brown and C Wilkinson (eds) Case Studies in

Management Accounting, Hemel Hempstead, UK: Philip Allan Publishers Reproduced

with permission from Pearson Education Ltd and Falconer Mitchell; Case 302:

‘Instrumental Ltd’ adapted from a case written by Govindarajan, V and Shank, J

(1989) ‘Profit variance analysis: a strategic focus’, Issues in Accounting Education, Fall,

pp 396–410 Reproduced with permission from the American Accounting Association;Case 401: Emmanuel, C.R (1988) ‘BBR plc’, in D Otley, D Brown and C Wilkinson

(eds) Case Studies in Management Accounting, Hemel Hempstead, UK: Philip Allan

Publishers Reproduced with permission from Pearson Education Ltd and Clive R.Emmanuel; Case study 403: Kulp, S.L and Randall, T (2005) ‘Procurement at

Betapharm Corp (A), (B) and (C)’, Harvard Business School Cases Copyright © 2005 by

the President and Fellows of Harvard College Reproduced with permission; Chapter

20, Concepts in Action, page 709: From Taylor, A (2003) ‘Mercedes hits a pothole’,

Fortune, 27 October 2003, pp 44–9 Copyright © Time Inc 2003 Reproduced with

per-mission from Time-Warner, Inc.; Chapter 22, Concepts in Action, pages 788–9:Tomlinson, R (2004) ‘The cat that came back’ and Guyon, J (2004) ‘Nokia tries to re-

invent itself – again’, Fortune, 22 March 2004, pp 60–6 Copyright © Time Inc 2004.

Reproduced with permission from Time-Warner, Inc.; Case 502: Rivkin, J.W (2000)

‘Dogfight Over Europe: Ryanair (A), (B) and (C)’, Harvard Business School Cases.

Copyright © 2000 by the President and Fellows of Harvard College Reproduced withpermission

Questions in the end-of-chapter assessment material have been questions adaptedfrom the following sources: Association of Chartered Certified Accountants (ACCA)(2004) Financial Information for Management: Part 1, 11 June 2004 Reproduced withpermission from ACCA

In some instances we have been unable to trace the owners of copyright material, and

we would appreciate any information that would enable us to do so

MANAGEMENT AND COST ACCOUNTING FUNDAMENTALS

P a r t I

This part is intended to provide an introduction to fundamental concepts and ideas in management and cost accounting Chapter 1 considers the role of accounting and accountants in organisations Chapters 2–7 discuss relevant technical and broader organisational issues in the design and functioning of cost-systems Specifically, Chapter 2 provides an introduction to costing terminology and its aims Chapters 3 and 4 discuss what might be considered ends of a continuum in costing systems: job order costing and process costing Chapter 5 addresses fundamental cost allocation issues while Chapter 6 deals with joint-costing situations The final chapter in this part discusses

absorption costing and variable costing as two distinct approaches to stock costing.

Former accountants are currently at the head of many large panies across the world, including Coca-Cola, P&O, Bass, RoyalBank of Scotland, ASDA and Nike Historically, accountancy traininghas been regarded as excellent preparation for senior managementroles For instance, George Jamieson, a Scottish accountant,restored the fortunes of the Arizona Copper Company in the 1880s,making it the most profitable British mining investment in NorthAmerica Webster Jenkinson, an accountant, headed Vickers, theindustrial engineering giant in the 1920s, and another accountant,D’Arcy Cooper, took over the running of Lever Brothers in the 1920sand later created Unilever Lucas and Rowntree were also to beheaded by accountants who joined the firms during the 1920s Themanaging director of British Petroleum during the 1960s and 1970swas also an accountant (Sir Alistair Down) Large British concernsheaded by accountants during the 1990s include GrandMetropolitan, GEC and GlaxoSmithKline In the Top 100 UK compa-nies, almost a quarter of chief executive officers possess anaccountancy qualification In many organisations, the accountant’sduties are intertwined with management planning, control anddecision making Accounting in such organisations is considered toprovide a very good training field for senior management positions.The study of management and cost accounting yields insightsinto the changing roles and relationships between managerialactivities and accounting intelligence What types of decisions domanagers make? How can accounting help managers make thesedecisions? Are managerial needs proactively being met by manage-ment and cost accounting solutions? This book addresses thesequestions In this chapter we look at some dimensions of the role ofmanagement accounting in modern enterprises, why managementaccounting is subject to continual change and where the accountantfits into the organisation A consideration of these issues will give

com-us a framework for studying the succeeding chapters

LEARNING OBJECTIVES

After studying this chapter, you

should be able to:

accounting from financial

accounting and cost management

strategy in management

accounting processes

accounting systems

influence planning, control and

and costs are to be considered

alongside contextual and

organisational process issues in

the design, implementation and

use of accounting systems

are shaping management

accounting systems

management accounting,

including enterprise structure,

digitisation, intellectual capital

and knowledge management

C H A P T E R 1

The accountant’s role in the organisation

Management accounting, financial accounting and cost accounting

A distinction is often made in practice between management accounting and financial

well as other types of information that are intended primarily to assist managers infulfilling the goals of the organisation Additionally, a management accountingsystem is an important facet of overall organisational control, as is discussed later inthis book The Chartered Institute of Management Accountants (CIMA) – the largestassociation of management accountants in the UK – considers management account-ing to be an integral part of management It considers management accounting torequire the identification, generation, presentation, interpretation and use of informa-tion relevant to:

guidelines Organisations are required to follow these guidelines in their financial

non-financial information related to the organisation’s acquisition or consumption

of resources It provides information for both management accounting and cial accounting

finan-Financial accounting is guided by prescribed accounting principles These principlesdefine the set of revenue and cost measurement rules and the types of item that areclassified as assets, liabilities or owners’ equity in balance sheets Sources of authorityfor accounting regulation differ across countries In Spain, for instance, the Instituto

de Contabilidad y Auditoria de Cuentas (ICAC) has been appointed by the ment for this purpose In the UK, the Accounting Standards Board (ASB), aprivate-sector body, plays this role The ASB is an operating body of the FinancialReporting Council (FRC), which is the UK’s independent regulator for corporatereporting and governance The FRC’s regulator philosophy is underpinned by its beliefthat promoting confidence in corporate reporting and governance can make the cre-ation of wealth more likely (FRC, 2004, p 30) In France, the Conseil National de laComptabilité (CNC), a public body, oversees accounting legislation, whereas inDenmark, the Føreningen af Statsautoriserede Revisører (FSR), a professional account-ing body, publishes national accounting standards with which members voluntarilycomply Other bodies in Europe which are concerned with accounting standardsinclude Sweden’s Föreningen för god sed på vardepappersm värdepappersmarknaden,

govern-Accounting, costing and strategy

Accounting, costing and strategy

Chapter 1 The accountant’s role in the organisation

accordance with the legal framework within which externally oriented financialreports can be prepared in Sweden

In some European countries, close links exist between accounting information duced internally for managers and that intended for the compilation of externalfinancial accounts For instance, the French Plan Comptable Général (PCG) provides amodel for integrating the needs of corporate management with the requirements ofstatute and fiscal authorities In Portuguese enterprises, the Chart of Accounts is usedboth as a detailed coding matrix and as a management tool and a way of involving

pro-personnel in the operations of their individual organisations (see Alexander et al.,

2005; Cairns, 2008)

While the work of management accountants and financial accountants tends to beorganisation-specific, some broad differences generally exist They may be categorised

as follows:

and no external regulations govern their preparation Conversely, financialaccounting reports are generally required to be prepared according to accountingregulations and guidelines imposed by law and the accounting profession

financial, non-financial and qualitative information which may be very detailed orhighly aggregated Financial accounting is usually broad based, lacking detail andintended to provide an overview of the position and performance of an organisa-tion over a time period It tends to focus on financial information

an hourly, daily or weekly basis, possibly to span several years The interval covered

by management accounting information will be dictated by the decision-makingand control needs of the information users Conversely, financial accountingreports are produced annually Some large companies also produce semi-annual andquarterly reports

information but also often provide information on expected future performanceand activities Financial accounting reports provide information on the perform-ance and position of an organisation for the past period They tend to bebackward-looking

Cost management and accounting systems

the actions managers undertake in the short-run and long-run planning and control

of costs that increase value for customers and lower the costs of products and services

An important component of cost management is the recognition that prior agement decisions often commit the organisation to the subsequent incurrence ofcosts Consider the costs of handling materials in a production plant Decisions aboutplant layout and the extent of physical movement of materials required for produc-tion are usually made before production begins These decisions greatly influence thelevel of day-to-day materials handling costs once production begins For this reason,cost management has a broad focus It typically includes the continuous reduction ofcosts and encompasses the whole life cycle of the product from product conception todeletion Cost management is often carried out as a key part of general managementstrategies and their implementation Examples include enhanced customer satisfac-tion programmes, quality initiatives and more efficient supplier relationshipsmanagement via the Internet

man-Managers around the globe are becoming increasingly aware of the importance of

Accounting, costing and strategy

turn, accountants are becoming increasingly sensitive to the quality and timeliness ofaccounting information required by managers For example, a management account-ing group at Johnson & Johnson (a manufacturer of many consumer products) has avision statement that includes the phrases ‘delight our customers’ and ‘be the best’.The success of management accounting depends on whether managers perceive theirdecisions as being improved by the accounting information provided to them Thisdoes not necessarily imply that management accountants should shed past techniquesand practices, but that they will undergo change in line with how they and othermanagers believe they can be most effective There is evidence that, in many organisa-tions, accountants are regarded as ‘hybrid accountants’ who combine the skills ofbusiness managers with those of accountants Scapens notes that:

The accountants’ analytical skills, supplemented by extensive knowledge of the business, can put the management accountant in a position to recognise the more strategic impacts and value creation potential of decisions taken in the individual areas of the business Such

a role for the management accountant is crucial for the organisation as it helps to integrate the various activities and functions of the business (2006, p 339).

Thus, the management accountant must be seen to make use of a sound body ofknowledge as well as to abide by ethical guidelines (discussed in the appendix of thischapter) Of particular relevance is the growing contribution which managementaccountants make to strategic financial management information production andanalysis and to strategic management action itself

Strategic decisions and management accounting

Many organisations seek to be more expansionist, entrepreneurial, risk taking andinnovative as a conscious move away from inwardly focused management techniques.Entirely new markets are emerging for products and services and avant-garde innova-tive firms are reaping significant benefits Consider, for instance, the world’s biggestonline virtual community Second Life The community has in excess of 5 millionusers who download software to create their ‘avatar’, personalised according to regis-trants’ preferences for facial characteristics, gender and clothes Companies such asToyota, Adidas and Dell have a presence within Second Life Dell’s store within thecommunity allows consumers to build their own virtual PC Once configured, Dellwill provide a price for the real equivalent which users can then order from withinSecond Life Also, Adidas sells virtual versions of their real training shoes which userscan buy for their avatars Fashion-conscious Second Life users spend large amounts ofLinden Dollars (tradable for real money) on designer goods for their 3D figures At one

point, one of Adidas’ virtual shoes was outselling its real equivalent (Crow, D The

Business, 31 March 2007, p 38) Such forays into new markets have many financial

implications which management accounting tools can help assess

Studies reveal that companies that emphasise creating long-term value for holders are likely to outperform those that focus on preserving shareholder value inthe short term Companies whose primary focus is on internal control and valuepreservation do not increase their stock market valuations as effectively as those thatlook outside for opportunities to create value Outperformers in business are thosewith the strategic and external awareness to evolve and change when need arises.Studies have also revealed that performance-based pay focusing on highly tangible

share-Chapter 1 The accountant’s role in the organisation

Consider the professional management accounting body CMA Canada whose sion is to optimise the performance of enterprises by driving the continual development

mis-of management accounting and shaping the strategic leadership competences mis-of fied management accountants According to Amanda Whitewood, the 2007 Chair ofCMA Canada’s National Board of Directors: ‘The value of being a CMA is in our diverseapproach, and in our ability to add value for our customers CMAs are always planning for

certi-the future, focused on managing growth’ (Strategic Direction, Winter 2007, p 11) CMA

Canada is expanding vast resources to brand itself as ‘the uncontested leaders in strategicmanagement accounting’ (ibid.) Its branding dedicated website, www.whataccounting-shouldbe.ca, illustrates ways in which this professional organisation is attempting tobecome a leading global resource for new and emerging practices in strategic managementaccounting and to ‘position CMAs as the leader in strategic management accounting inthe global marketplace’ (ibid.) In this light, CMA Canada is making continuous changes

to its course contents and indeed altering its accreditation process with renewed CMAEntrance Examination and a renewed Strategic Leadership programme which are elements

of the professional association’s accreditation requirements Likewise, UK-based CIMA hasalso been making changes to its qualification to give it a total business focus CIMA nowdelivers ‘a new professional qualification with double the focus of any competitor onbusiness management and strategic management accounting’ (www.cimaglobal.com).The US-based Institute of Management Accountants (IMA) considers a principal benefit

of the Certified Management Accounting designation to be able to offer the ability to act

as a ‘strategic business partner’ who has ‘significant competitive advantage whiledemonstrating accounting, finance, information management and strategic planning

skills’ (www.imanet.org) IMA’s flagship publication is called Strategic Finance The trend

in management accounting is to reorient the field towards strategic management mation preparation and analysis and the actual participation of managementaccountants in such activities Operational accounting techniques and issues continue

infor-to be relevant but their roles are being recasted in the context of their contributions andrelationships with organisation-wide financial management and strategic concerns

What are the objectives of accounting systems? Is Fiat’s management control systemmore effective than Audi’s? Is Nestlé’s more effective at planning than Cadbury’s? Thissection provides an overview of the broad purposes of accounting and managementcontrol systems, illustrating the role of accounting information

The major purposes of accounting systems

The accounting system is among the most significant quantitative information tems in almost every organisation This system aims to provide information for fivebroad purposes:

prod-uct development and investment in both tangible (equipment) and intangible(brands, patents or people) assets, and frequently involves special-purpose reports.Increasingly, many organisations seek market-, supplier- and customer-based infor-mation for determining longer-term strategic action

pric-ing This frequently involves reports on the profitability of products or services,

brand categories, customers, distribution channels, and so on

Accounting systems and management controls

Accounting systems and management controls

reports on revenues, costs, assets, and the liabilities of divisions, plants and otherareas of responsibility

compar-isons of actual results with planned results It can be based on financial ornon-financial measures

Regulations and statutes often prescribe the accounting methods to be followed.Financial reports are provided by some organisations to shareholders who aremaking decisions to buy, hold or sell company shares These reports ordinarilyattempt to adhere to authoritatively determined guidelines and procedures whichexist in many European countries

Each of the purposes stated here may require a different presentation or reportingmethod Accountants combine or adjust the method and data to answer the questionsfrom particular internal or external users

The nature of management-oriented accounting information alters in line with

changes in the business environment According to a major study by Scapens et al.

(2003), there are important ongoing changes in the way in which managementaccounting is used within organisations The shift is from a traditional monitoringand control perspective to a more business- and support-oriented focus A key role,according to the study, is for the management accountant to link financial considera-tions with both operating concerns and the strategic priorities of the enterprise Thisrequires a broad-based understanding of the business, with management accountantsworking alongside managers in cross-functional teams rather than in a separateaccounting function Some of the developments which are key influences on changes

in accounting information include:

In this book we consider the accounting information implications of many of thesedevelopments

Planning and control

Chapter 1 The accountant’s role in the organisation

1 Change the price per newspaper.

2 Change the rate per page charged to advertisers.

3 Reduce labour costs by having fewer workers at ESN’s printing facility.

expression of a plan of action and an aid to the coordination and implementation ofthe plan

planning decision and deciding on performance evaluation and the related feedbackthat will help future decision making With our ESN example, the action wouldinclude communicating the new advertising-rate schedule to ESN’s marketing salesrepresentatives and advertisers The performance evaluation provides feedback on theactual results

During March 2008, ESN sells advertising, sends out invoices and receives ments These invoices and receipts are recorded in the accounting system Exhibit 1.2shows the March 2008 advertising revenue performance report for ESN This reportindicates that 760 pages of advertising (40 pages less than the budgeted 800 pages)

€3 860 800 The actual advertising revenue in March 2008 is €299 200 less than the

is the practice of concentrating on areas not operating as expected (such as a cost

Management decisions

at

The European Sporting News

Management accounting system Budgets Planning

Control Accounting system

Financial representation

of plans

Recording transactions and classifying them in accounting records

Performance reports Reports of

actions comparing budgets with actual results

• Expected advertising pages sold, rates per page, and revenue

• Source documents (invoices to advertisers and payments received)

• Recording in general and subsidiary ledgers

• Actual advertising pages sold, average rate per page, and revenue

Action

Performance evaluation

• Increase advertising rates by 4%

• Implement a 4%

increase in advertising rates

• Advertising revenues 5.4% lower than budgeted

Exhibit 1.1 How accounting facilitates planning and control

Accounting systems and management controls

overrun on a project) and placing less attention on areas operating as expected The

budgeted amounts

The performance report in Exhibit 1.2 could spur investigation For example, didother newspapers experience a comparable decline in advertising revenue? Did themarketing department make sufficient efforts to convince advertisers that, even with

sales representatives offer discounted rates? Did a major advertiser threaten to transferits advertising to another newspaper unless it was given a large rate-per-page reduc-tion? Answers to these questions could prompt Saunier to take subsequent actions,including, for example, pushing marketing personnel to renew efforts to promoteadvertising by existing and potential advertisers

A well-conceived plan includes enough flexibility so that managers can seize tunities unforeseen at the time the plan is formulated In no case should control meanthat managers cling to a pre-existing plan when unfolding events indicate that actionsnot encompassed by the original plan would offer the best results to the company.Planning and control are so strongly intertwined that managers do not spend timedrawing artificially rigid distinctions between them Unless otherwise stated, we usecontrol in its broadest sense to denote the entire management process of both plan-ning and control For example, instead of referring to a management planning andcontrol system, we will refer to a management control system Similarly, we will oftenrefer to the control purpose of accounting instead of the awkward planning and con-trol purpose of accounting

oppor-Do not underestimate the role of individuals and groups in management controlsystems Both accountants and managers should always remember that managementcontrol systems are not confined to technical matters such as the type of computersystem used and the frequency with which reports are prepared Management control

is primarily a human activity that tends to focus on how to help individuals do theirjobs better For example, it is often better for managers to discuss personally withunderperforming workers how to improve performance rather than just sending thoseworkers a report highlighting their underperformance

Moreover, do not view accounting’s intended roles as being shared by all tions Accounting practice tends to be informed by technical considerations but isalways indicative of many organisational, social and political processes which are spe-

organisa-Actual Budgeted results amounts Variance

Exhibit 1.2 Advertising revenue performance report at The European

Sporting News for March 2008