Management Accounting: Principles and Applications


Hugh Coombs, David Hobbs & Ellis Jenkins

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  • Chapters
  • Front Matter
  • Back Matter
  • Subject Index
  • Copyright

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    List of Illustrations

    • 2.1 Total cost of sales analysis, manufacturing industry 24
    • 2.2 Cost behaviour against output change 29
    • 3.1 Absorption costing and ABC compared 62
    • 3.2 Break-even chart 70
    • 3.3 Contribution chart 71
    • 4.1 The strategy and planning process 90
    • 4.2 Buddy Ltd's budgeting process 95
    • 5.1 Graph of maintenance costs against direct machine hours 128
    • 5.2 Balanced scorecard (University of California – Business and Administrative Services) 135
    • 6.1 Feedback control loop 149
    • 6.2 The information summarising process 150
    • 7.1 Possible avenues for exploring variances in more depth 189
    • 7.2 The multidimensional aspects of (materials) variance analysis 191
    • 7.3 Variance investigation tree 198
    • 7.4 Probability tree for Exhibit 7.2 data 200
    • 7.5 Investigation of latest direct unit variance in Exhibit 7.3 202
    • 8.1 The break-even chart 226
    • 8.2 The contribution graph 226
    • 8.3 The profit-volume graph 227
    • 8.4 Graphical solution to contribution maximisation problem 233
    • 8.5 Graphical solution to cost minimisation problem 237
    • 9.1 The impact of changes in discount rate on NPV 267
    • 1.1 Some areas of activity considered to be part of ‘management accounting’ 7
    • 2.1 Example of a unit cost statement: comparative food costs for four schools providing school meals, March-December 2004 31
    • 2.2 Workload analysis of meals per worker 32
    • 2.3 Illustration of cost classification 38
    • 2.4 Incremental analysis of proposed expansion 41
    • 3.1 Examples of production and other overheads 53
    • 3.2 Examples of overhead bases 54
    • 3.3 Apportionment data 55
    • 3.4 Budgeted overhead analysis for 2005 56
    • 3.5 Budgeted annual activity 56
    • 3.6 Overhead absorption rates 57
    • 3.7 Direct costs and production times 57
    • 3.8 The full cost of products A and B 57
    • 3.9 Overhead absorption in January 58
    • 3.10 Cost pools and cost drivers 63
    • 3.11 Annual production overhead for Eiger ice axes 63
    • 3.12 Cost driver breakdown 64
    • 3.13 Activity-based cost per ice axe 65
    • 3.14 Product costs 66
    • 4.1 Some dictionary definitions of common business term 85
    • 4.2 Some attempts at defining some common terms used in management accounting 88
    • 4.3 Uses of budgets 91
    • 4.4 Some questions to be asked when preparing a manufacturing firm's annual budget 92
    • 4.5 Some possible complicating factors in real-life budgeting 106
    • 5.1 Total maintenance costs and direct machine hours for the past 10 accounting periods 128
    • 5.2 Regression analysis calculations 129
    • 6.1 Expenditure control statement for a university department 148
    • 6.2 Comparison with a fixed budget 153
    • 6.3 Comparison with a flexible budget 153
    • 6.4 Flexible budgets at different levels of output (£) 155
    • 6.5 Calculating flexed budget variances 155
    • 6.6 Standard cost statement for one wheel build 156
    • 6.7 Standard times of output 159
    • 6.8 Standard times of activities 159
    • 6.9 Standard costs per unit and annual budget 160
    • 6.10 Actual output and costs for October 160
    • 6.11 Variances for October (£) 161
    • 6.12 Subvariances 162
    • 6.13 Reconciliation of standard and actual costs of production 165
    • 8.1 Budgeted cost for shrub growing 222
    • 8.2 Contribution per acre 223
    • 8.3 Maximum contribution and profit available 223
    • 8.4 Analysis of past performance 228
    • 8.5 Shadow prices – resources table 235
    • 8.6 Country Limited absorption budget statement 239
    • 8.7 Country Limited restated contribution budget statement 239
    • 8.8 Avoidable costs 241
    • 8.9 A conventional approach to identifying revenues and costs 242
    • 8.10 Relevant costs and revenues 242
    • 8.11 Relevant cost of material, and explanations 244
    • 8.12 Calculation for Exhibit 8.8 245
    • 8.13 Desiderata table for make or buy appraisal 246
    • 9.1 Data for projects A, B and C 262
    • 9.2 Present value calculations for a discount rate of 10% 264
    • 9.3 Discount factors for one to five periods and discount rates up to 10% 264
    • 9.4 Project net present values 265
    • 9.5 Present value of annuity 266
    • 9.6 Cumulative NCFs for projects A, B and C (from Table 9.1) 269
    • 9.7 Discounted payback 270
    • 9.8 Sensitivity analysis 275
    • 9.9 Two-way analysis of net present value (£ millions) 276
    • 9.10 The pivot approach 277
    • 9A.1 Present value of future cash flows 293
    • 9A.2 Present value of annuities 294
    • 10.1 Issues to consider in performance measurement 296
    • 10.2 Some contingent factors for consideration 297
    • 10.3 Issues that may arise as an organisation becomes increasingly decentralised 300
    • 10.4 Some possible transfer pricing bases and some advantages/disadvantages 301
    • 10.5 Some of the parties interested in performance information 307
    • 2.1 Cost classification 37
    • 2.2 Fixed and variable costs 38
    • 2.3 Incremental costs and revenue 40
    • 4.1 Illustration of budgeting within a small manufacturing firm 93
    • 7.1 Illustration of a more comprehensive analysis of materials variance 190
    • 7.2 Application of statistical techniques to the variance investigation/correction decision 199
    • 7.3 The use of normal distribution theory in variance investigations 201
    • 8.1 Contribution statement compared with a functional financial reporting type approach 221
    • 8.2 The Hardy Out Door Company 224
    • 8.3 Break-even and related formulas 231
    • 8.4 Maximise contribution 231
    • 8.5 Cost minimisation 236
    • 8.6 Ceasing production 238
    • 8.7 Avoidable and unavoidable costs 240
    • 8.8 Reviewing a project 245
    • 10.1 Transfer pricing example 303
    • 10.2 Illustration of the use of financial performance measures 308


    Management accounting may be seen as a practical tool aimed at solving the day-to-day financial management problems facing decision makers in the private and public sectors. We feel, however, that this is too narrow a view of the potential of the subject. Accordingly, we have gone beyond this view. In this book, while we have looked at the practical techniques that can help managers and students solve management accounting problems, we have tried to approach the subject in a way which ensures coverage of technical financial topics in an accessible style while making appropriate reference to research. In addition, the book goes beyond techniques to recognise qualitative issues by attempting to identify analytical and critical issues of relevance to decision makers at all levels in a variety of organisations in both the private and public sectors.

    While chapters contain exhibits and examples, we have introduced case studies from the end of Chapter 2. These can be approached on many levels such that students from a wide range of backgrounds and experience can benefit from working through them either in whole or in part. The case studies are intended to be underpinned by reference to the research literature to gain maximum benefit. We introduce some of this research literature in the practical context of each chapter in order to encourage further reading. Readers can thus contextualise the issues which they are studying within the wider environment of the research literature and through the case studies before continuing their studies in more depth. Indeed, the case studies are based on our own consultancy and research areas, although the names have been changed to protect the ‘guilty’.

    The case studies in this book represent the development of teaching approaches at the University of Glamorgan and are one of a number of innovative approaches used in the delivery of accounting modules in the Business School at the University. They contributed to the HEFCW/QAA ‘excellent’ rating received by the accounting teaching team. The cases have been well received by students and managers both locally and internationally (see Coombs et al., 2000) and are aimed at developing the ‘graduateness’ skills of critical and analytical appraisal in decision-making situations. We are grateful to the University of Glamorgan and colleagues for the encouragement we have received to develop and expand this approach.

    In today's competitive world, managers from whatever background need an understanding of the tools of management accounting when making financial decisions, yet they must also be aware of the qualitative issues affecting such decisions. Furthermore, they need to be aware of what is happening through research into their competitors. In this context we believe managers and students will find this book of value.

    March 2005


    We would wish to thank Shane Johnson for his advice on aspects of this book and the Teaching and Learning Office at the University of Glamorgan for their support of innovative teaching methods.

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