Table Of ContentCOSTING
AN INTRODUCTION
C O S TING
AN INTRODUCTION
COLIN DRURY
SPRINGER-SCIENCE+BUSINESS MEDIA, B.V.
First edition 1987
Reprinted 1988, 1989
Second edition 1990
Reprinted 1991 (twice), 1992, 1993
© 1987, 1990, 1994 Colin Drury
Originally published by Chapman & Hall in 1994
Typeset in 10/12 pt Palatino by Best-set Typesetter Ltd., Hong Kong
Printed and bound in Hong Kong
ISBN 978-0-412-58780-1 ISBN 978-1-4899-6880-7 (eBook)
DOI 10.1007/978-1-4899-6880-7
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A catalogue record for this book is available from the British Library
Library of Congress Catalog Card Number: 93-074895
Contents
Preface xi
Part One: Introduction to Management and Cost Accounting
1 The scope of management accounting 3
The users of accounting information 3
Comparison between management accounting and financial
accounting 5
The decision-making process 5
The management process 10
The role of the management accountant in the management process 12
Cost accounting and management accounting 14
Summary of the contents of this book 15
2 Cost and revenue classification 18
Cost objectives 18
Classification of costs 19
Cost accounting: classification of costs for stock valuation and
profit measurement 20
Classification for decision-making and planning 24
Classification for control 32
Part Two: Cost Accumulation for Stock Valuation and
Profit Measurement
3 Accounting for materials and labour 43
Materials control procedure 44
Pricing the issues of raw materials 48
Treatment of stores losses 53
Treatment of transportation costs 53
Treatment of material handling costs 54
Just-in-time purchasing 54
Accounting for labour 55
Labour cost accounting 55
Payroll accounting 56
Incentive schemes 57
Accounting treatment of various labour cost items 58
Decision-making and cost control 60
Appendix 3.1 Stores pricing methods 63
4 Accounting for overhead expenditure 73
An overview of the procedure for allocating overheads to products 75
Blanket overhead rates 76
Procedure for calculating cost centre overhead rates 77
An illustration of the overhead allocation procedure 80
Predetermined overhead rates 84
CONTENTS v
Under- and over-recovery of overheads 85
Overhead absorption rates and new manufacturing technology 86
Non-manufacturing overheads 86
Overheads for decision-making 87
Overheads for control 88
Appendix 4.1 Inter-service department transfers 92
Appendix 4.2 Overhead absorption rates 95
5 Accounting entries for a job costing system 109
Control accounts 109
Recording the purchase of raw materials 110
Recording the issue of materials 111
Accounting procedure for labour costs 114
Accounting procedure for manufacturing overheads 116
Non-manufacturing overheads 117
Accounting procedures for jobs completed and products sold 118
Costing profit and loss account 118
Interlocking accounting 119
Contract costing 120
Work in progress valuation and amounts recoverable on contracts 124
6 Process costing 138
Flow of costs in a process costing system 139
Normal and abnormal losses 140
Accounting for the sale of scrap 142
Abnormal gains 144
Opening and closing work in progress 146
Previous process cost 148
Opening work in progress 150
Weighted average method 151
First-in, first-out (FIFO) method 153
Equivalent production and normal losses 155
Equivalent production and abnormal losses 158
Process costing for decision-making and cost control 159
Batch costing 161
7 Joint product and by-product costing 174
Methods of apportioning joint costs to joint products 175
Limitations of joint cost allocations for decision-making 180
Accounting for by-products 181
By-products, scrap and waste 184
Defective units 185
8 Absorption costing and variable costing 195
External and internal reporting 196
Variable costing and absorption costing: a comparison of their
impact on profit 199
Some arguments in support of variable costing 201
Some arguments in support of absorption costing 203
Current cost accounting 204
vi CONTENTS
Part Three: Information for Decision-making
9 Cost-volume-profit analysis 215
The economist's model 216
The accountant's cost-volume-profit model 218
A mathematical approach to cost-volume-profit analysis 220
Margin of safety 223
Constructing the break-even chart 224
Alternative presentation of cost-volume-profit analysis 224
Cost-volume-profit analysis assumptions 225
Cost-volume-profit analysis and computer applications 228
10 Special studies: measuring relevant costs for decision-making 245
Measuring relevant costs and benefits 246
Quantitative and qualitative factors 249
Deleting a segment 250
Special selling-price decisions 252
Decision-making and the influence of limiting factors 254
Make or buy decisions 256
11 Activity-based costing 273
The emergence of activity-based costing systems 274
A comparison of ABC and traditional product costs 274
Activity-based cost systems 275
An illustration of ABC and traditional product costing systems 277
Impact of volume diversity 279
Resource consumption models 281
A comparison of activity-based systems with decision-relevant costs 281
Activity-based cost management 282
12 Capital investment decisions 289
The opportunity cost of an investment 290
Compounding and discounting 291
The concept of net present value 293
Calculating net present values 294
Constant annual cash inflows 296
The internal rate of return 296
Relevant cash flows 300
Timing of cash flows 300
Payback method 300
Accounting rate of return 302
Surveys of practice 303
Qualitative factors 304
Part Four: Information for Planning and Control
13 The budgeting proces 319
Why do we produce budgets? 320
Conflicting roles of budgets 322
The budget period 322
Administration of the annual budget 323
Stages in the budgeting process 324
A detailed illustration 327
CONTENTS vii
Sales budget 330
Production budget and budgeted stock levels 331
Direct materials usage budget 331
Direct materials purchase budget 332
Direct labour budget 332
Factory overhead budget 333
Selling and administration budget 333
Departmental budgets 334
Master budget 335
Cash budgets 336
Final review 337
Computerized budgeting 337
14 Operational control and performance measurement 354
Control systems 355
Feedback and feed-forward controls 356
Responsibility accounting and cost control 357
Flexible budgeting 360
Activity-based cost management 361
Non-financial performance measures 364
15 Standard costing and variance analyse 375
Operation of a standard costing system 376
Establishing cost standards 378
Types of cost standards 381
Purposes of standard costing 382
Variance analysis 383
Material variances 385
Material price variances 385
Material usage variance 386
Total material variance 387
Labour variances 388
Wage rate variance 388
Labour efficiency variance 389
Total labour variance 389
Variable overhead variances 390
Variable overhead expenditure variance 390
Variable overhead efficiency variance 391
Similarities between materials, labour and overhead variances 391
Fixed overhead expenditure or spending variance 392
Sales variances 393
Total sales margin variance 393
Sales margin price variance 394
Sales margin volume variance 394
Reconciling budgeted profit and actual profit 394
Standard absorption costing 395
Volume variance 397
Volume efficiency variance 398
Volume capacity variance 398
Summary of fixed overhead variances 399
Reconciliation of budgeted and actual profit for a standard absorption
costing system 400
viii CONTENTS
Performance reports 401
Appendix 15.1 Accounting entries for a standard costing system 406
16 Planning and control of stock levels 426
Relevant costs for quantitative models under conditions of certainty 426
Determining the economic order quantity 427
Assumptions of the EOQ formula 430
Application of the EOQ model in determining the length of a
production run 431
Determining when to place the order 431
Control of stocks through classification 432
Other considerations 434
Materials requirements planning 434
The just-in-time approach 437
Part Five: Current Developments in Management Accounting
17 Current developments in management accounting 447
Criticisms of management accounting practice 447
The future of management accounting 452
Appendices 457
Appendix A - Present value of £1 459
Appendix B - Present value of £1 received annually for N years 460
Answers to self-assessment questions 461
Index 487
CONTENTS ________________________________ ix
Preface
The aim of the third edition of this book is to provide an introduction to
the theory and practice of cost and management accounting. A cost
accounting system accumulates financial information for stock valuation
and profit measurement, whereas a management accounting system
accumulates, classifies and reports information that will assist managers
in their decision-making, planning and control activities. This book is
concerned with both cost and management accounting, with equal em
phasis being placed on both systems.
Intended primarily for students who are pursuing a one year cost and
management accounting course, the book is ideal for those approaching
this subject for the first time. The more advanced topics contained in the
final stages of the cost and management accounting syllabuses of the
professional accountancy bodies and final year of degree courses are not
included. These topics are covered in the author's successful Management
and Cost Accounting, the third edition of which is also published by
Chapman and Hall.
Feedback from teachers in a large number of colleges and universities
indicates that they have found the structure and presentation of Manage
ment and Cost Accounting extremely satisfactory and most appropriate for
students pursuing a two year management accounting course at an ad
vanced professional or degree level. It was also indicated that there was a
need for a book (based on Management and Cost Accounting) tailored to
meet the specific needs of a one year introductory course in cost and
management accounting. Many lecturers, in particular those running
introductory accounting courses, felt there was a need for an introductory
text which covered the required ground in an academically sound manner
and which was also appropriate for students on non-advanced courses.
This book is aimed specifically at students who are pursuing a one
year non-advanced course and is particularly suitable for the following
courses:
Foundation preliminary professional (ACCA, CIMA and one year
college foundation courses)
Association of Accounting Technicians
BTEC higher and national diploma
A first level costing course for undergraduate degree students
An introductory course in financial accounting is not a prerequisite,
although many students will have undertaken such a course.
Major changes in the content
Feedback from teachers in many colleges and universities has indicated
that the structure of the first two editions was most satisfactory. The
organizational structure of the book has therefore remained unchanged.
The notable alterations are:
PREFACE __________________________________ xi
