COLIN DRURY Management and Cost Accounting, eighth edition The eighth edition of Colin Drury’s Management and Cost Accounting text is accompanied by the following dedicated digital support resources: • Dedicated instructor resources only available to lecturers, who can register for access either at http://login.com or by speaking to their local Cengage Learning representative. • Replacing the former www.com, which hosted the online student resources, Cengage Learning’s CourseMate brings course concepts to life with interactive learning, study and exam preparation tools which support the printed textbook. Students can access this using the unique personal access card included in the front of the book, and lecturers can access it by registering at http://login.com or by speaking to their local Cengage Learning representative. • Cengage Learning’s Aplia, an online homework solution dedicated to improving learning by increasing student effort and engagement.
A demo is available at www. Instructors can find out more about accessing Aplia by speaking to their local Cengage Learning representative, and on the recommendation of their instructor, students can purchase access to Aplia at www. Dedicated Instructor Resources This includes the following resources for lecturers: • Instructor’s Manual which includes answers to ‘IM Review Problems’ in the text • ExamView Testbank provides over 1800 questions • PowerPoint slides to use in your teaching • Case Study Teaching Notes to accompany the Case Studies on CourseMate • Downloadable figures and tables from the book to use in your teaching CourseMate CourseMate offers lecturers and students a range of interactive teaching and learning tools tailored to the eighth edition, including: • Case Studies • Outline solutions to Real World View questions • Quizzes • Beat the Clock Q&A games • Glossary • PowerPoint slides • Accounting and Finance definitions • Interactive ebook • Crossword puzzles and flashcards • Learning Notes • Guide to Excel • Useful weblinks The lecturer view on CourseMate also gives lecturers access to the integrated Engagement Tracker, a first-of-its-kind tool to assess their students’ preparation and engagement. Aplia Cengage Learning’s Aplia is a fully tailored online homework solution, dedicated to improving learning by increasing student effort and engagement.
Aplia has been used by more than 1 million students at over 1,300 institutions worldwide, and offers automatically graded assign- ments and detailed explanations for every question, to help students stay focussed, alert and thinking critically. A demo is available at www.com Aplia accounting features include: • Embedded eBook • An easy-to-use course management system • Personalized customer support • Automatically graded chapter assignments with instant detailed feedback COLIN DRURY MANAGEMENT AND COST ACCOUNTING EIGHTH EDITION Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States Management and Cost Accounting ª , Colin Drury Eighth Edition ALL RIGHTS RESERVED. No part of this work covered by the copyright herein Colin Drury may be reproduced, transmitted, stored or used in any form or by any means Publishing Director: Linden Harris graphic, electronic, or mechanical, including but not limited to photocopying, recording, scanning, digitizing, taping, Web distribution, information Publisher: Brendan George networks, or information storage and retrieval systems, except as permitted Development Editor: Annabel Ainscow under Section or of the United States Copyright Act, or Editorial Assistant: Lauren Darby applicable copyright law of another jurisdiction, without the prior written permission of the publisher. Production Editor: Lucy Arthy Production Controller: Eyvett Davis While the publisher has taken all reasonable care in the preparation of this book, the publisher makes no representation, express or implied, with regard Marketing Manager: Amanda Cheung to the accuracy of the information contained in this book and cannot accept Typesetter: Integra, India any legal responsibility or liability for any errors or omissions from the book Cover design: Design Deluxe or the consequences thereof.
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For your lifelong learning solutions, visit www.uk Purchase your next print book, e-book or e-chapter at www.com Printed in China by RR Donnelley 1 2 3 4 5 6 7 8 9 10 – 14 13 12 BRIEF CONTENTS PART ONE PART FOUR Introduction to management and cost Information for planning, control and accounting 2 performance measurement 356 1 Introduction to management accounting 4 15 The budgeting process 358 2 An introduction to cost terms and concepts 23 16 Management control systems 393 17 Standard costing and variance analysis 1 423 18 Standard costing and variance analysis 2: PART TWO further aspects 458 Cost accumulation for inventory 19 Divisional financial performance measures 484 valuation and profit measurement 42 20 Transfer pricing in divisionalized companies 509 3 Cost assignment 44 4 Accounting entries for a job costing system 80 PART FIVE 5 Process costing 102 Strategic cost management and 6 Joint and by-product costing 129 strategic management accounting 540 7 Income effects of alternative cost accumulation systems 146 21 Strategic cost management 542 22 Strategic management accounting 578 PART THREE Information for decision-making 166 PART SIX The application of quantitative methods 8 Cost–volume–profit analysis 168 9 Measuring relevant costs and revenues for to management accounting 606 decision-making 194 23 Cost estimation and cost behaviour 608 10 Pricing decisions and profitability analysis 227 24 Quantitative models for the planning and control 11 Activity-based costing 251 of inventories 632 12 Decision-making under conditions of risk and 25 The application of linear programming to uncertainty 278 management accounting 655 13 Capital investment decisions: appraisal methods 300 14 Capital investment decisions: the impact of capital rationing, taxation, inflation and risk 329 v CONTENTS Preface xiii Direct and indirect costs 24 About the author xix Period and product costs 27 Acknowledgements xx Cost behaviour 29 Walk through tour xxiv Relevant and irrelevant costs and revenues 32 Avoidable and unavoidable costs 32 Sunk costs 33 PART ONE Opportunity costs 33 Introduction to management and Incremental and marginal costs 35 The cost and management accounting information cost accounting 2 system 36 Summary 36 1 Introduction to management Key terms and concepts 37 accounting 4 Recommended reading 38 The users of accounting information 5 Key examination points 38 Differences between management accounting and Assessment material 38 financial accounting 6 Review questions 39 The decision-making process 7 Review problems 39 The impact of the changing business environment on management accounting 9 Focus on customer satisfaction and new PART TWO management approaches 13 Cost accumulation for inventory Management accounting and ethical behaviour 14 International convergence of management valuation and profit accounting practices 15 measurement 42 Functions of management accounting 16 A brief historical review of management 3 Cost assignment 44 accounting 17 Summary of the contents of this book 18 Assignment of direct and indirect costs 45 Guidelines for using this book 19 Different costs for different purposes 46 Summary 19 Cost-benefit issues and cost systems design 47 Key terms and concepts 20 Assigning direct costs to cost objects 48 Key examination points 21 Plant-wide (blanket) overhead rates 49 Assessment material 21 The two-stage allocation process 50 Review questions 22 An illustration of the two-stage process for a traditional costing system 52 An illustration of the two-stage process for an ABC 2 An introduction to cost terms and system 57 concepts 23 Extracting relevant costs for decision-making 60 Cost objects 23 Budgeted overhead rates 60 Manufacturing, merchandising and service Under- and over-recovery of overheads 62 organizations 24 Non-manufacturing overheads 63 vi CONTENTS vii Cost assignment in non-manufacturing Summary 118 organizations 63 Appendix 5.1: Losses in process and partially The indirect cost assignment process 65 completed units 119 Summary 65 Key terms and concepts 123 Appendix 3.1: Inter-service department Key examination points 123 reallocations 67 Assessment material 123 Key terms and concepts 71 Review questions 123 Recommended readings 72 Review problems 124 Key examination points 72 Assessment material 73 Review questions 73 6 Joint and by-product costing 129 Review problems 73 Joint products and by-products 129 Methods of allocating joint costs 131 Irrelevance of joint cost allocations for 4 Accounting entries for a job costing decision-making 136 system 80 Accounting for by-products 137 Summary 139 Materials recording procedure 81 Key terms and concepts 140 Pricing the issues of materials 82 Recommended reading 140 Control accounts 83 Key examination points 140 Recording the purchase of raw materials 84 Assessment material 140 Recording the issue of materials 87 Review questions 141 Accounting procedure for labour costs 87 Review problems 141 Accounting procedure for manufacturing overheads 89 Non-manufacturing overheads 90 7 Income effects of alternative cost Accounting procedures for jobs completed and accumulation systems 146 products sold 91 Costing profit and loss account 91 External and internal reporting 147 Job-order costing in service organizations 91 Variable costing 148 Interlocking accounting 92 Absorption costing 150 Accounting entries for a jit manufacturing system 93 Variable costing and absorption costing: a Summary 95 comparison of their impact on profit 151 Key terms and concepts 96 Some arguments in support of variable costing 152 Recommended reading 97 Some arguments in support of absorption costing 154 Key examination points 97 Alternative denominator level measures 155 Assessment material 97 Summary 157 Review questions 97 Appendix 7.1: Derivation of the profit function for an Review problems 98 absorption costing system 158 Key terms and concepts 160 Key examination points 160 5 Process costing 102 Assessment material 160 Review questions 160 Flow of production and costs in a process costing Review problems 161 system 102 Process costing when all output is fully complete 104 Process costing with ending work in progress PART THREE partially complete 109 Information for Beginning and ending work in progress of decision-making 166 uncompleted units 112 Partially completed output and losses in 8 Cost–volume–profit analysis 168 process 117 Process costing in service organizations 117 Curvilinear cvp relationships 169 Batch/operating costing 118 Linear cvp relationships 170 viii CONTENTS A numerical approach to cost–volume–profit A price-taking firm facing short-run product mix analysis 172 decisions 233 The profit–volume ratio 173 A price-taking firm facing long-run product mix Relevant range 174 decisions 234 Margin of safety 174 Surveys of practice relating to pricing Constructing the break-even chart 174 decisions 236 Alternative presentation of cost–volume–profit Establishing target mark-up percentages 236 analysis 176 Limitations of cost-plus pricing 237 Multi-product cost–volume–profit analysis 178 Reasons for using cost-plus pricing 237 Operating leverage 180 Pricing policies 238 Cost–volume–profit analysis assumptions 183 Customer profitability analysis 239 The impact of information technology 184 Summary 241 Separation of semi-variable costs 184 Appendix 10.