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Cost Accounting A Managerial Emphasis 2nd Edition by Horngren, Datar, Rajan, Wynder, Maguire, Tan | eBook [PDF]

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Cost Accounting A Managerial Emphasis 2nd Edition by Horngren, Datar, Rajan, Wynder, Maguire, Tan | eBook [PDF] BRIEF CONTENTS About the Australian authors ix About the US authors xii Preface xiv Acknowledgements xx Photo credits 1 1 Management accounting in context 2 2 An introduction to costs terms and inventory costing 28 3 Determining how costs behave 76 4 Cost–volume–profit analysis 126 5 Product and service costing 166 6 Activity-based costing and activity-based management 208 7 Cost management, capacity costing and capacity management 262 8 Decision making and relevant information 298 9 Pricing decisions and customer-profitability analysis 342 10 Master budget and responsibility accounting 372 11 Flexible budgets, direct cost variances and management control 418 12 Flexible budgets, overhead cost variances and management control 466 13 Allocation of support-department costs, common costs and revenues 506 14 Measuring and reporting sustainability 540 15 Strategy, balanced scorecard and strategic profitability analysis 580 16 Balanced scorecard: quality, time and the theory of constraints 620 17 Inventory management, just-in-time and simplified costing methods 656 18 Capital budgeting and cost analysis 690 19 Management control systems, transfer pricing and multinational considerations 726 20 Performance measurement, compensation and multinational considerations 758 Appendix: Notes on compound interest and interest tables 792 Glossary 799 Index 809 ΌϕϖϟϘϏύώϚЫΙϋχϘϙϕϔΊϛϙϚϘχϒϏχ͸χϊϏϜϏϙϏϕϔϕόΙϋχϘϙϕϔΊϛϙϚϘχϒϏχΐϘϕϛϖΙϚϟΕϚϊ͹лйкн΁трскннлопммрр΁ΑϕϘϔύϘϋϔͿΌϕϙϚΊωωϕϛϔϚϏϔύͧΊΖχϔχύϋϘϏχϒΊϔχϒϟϙϏϙлϋAbout the Australian authors xi About the US authors xii Preface xiv Acknowledgements xx Photo credits 1 1 Management accounting in context 2 Management accounting, financial accounting and cost accounting 4 Sustainability 6 Strategic decisions and the management accountant 7 CONCEPTS IN ACTION: Management accounting beyond the numbers 8 Value chain and supply chain analysis 8 Decision making, planning and control: the five-step decision-making process 11 Key management accounting guidelines 14 Management accountants in organisations 15 Professional ethics 16 Problem for self-study 19 Decision points 20 Terms to learn 21 Assignment material 22 2 An introduction to costs terms and inventory costing 28 Costs and cost terminology 30 Direct costs and indirect costs 31 Cost behaviour patterns: variable costs and fixed costs 32 CONCEPTS IN ACTION: Changing cost structures using software as a service (SaaS) vendors or application service providers (ASPs) 34 SUSTAINABILITY IN ACTION: How car sharing is helping reduce business transportation costs 36 Total costs and unit costs 37 Business sectors, types of inventory, inventoriable costs and period costs 39 Illustrating the flow of inventoriable costs and period costs 41 Variable costing and absorption costing 46 Absorption costing and performance measures 52 A comparison of alternative inventory costing methods 54 Contribution margin versus gross margin 55 Measuring costs requires judgement 55 A framework for cost accounting and cost management 58 Problem for self-study 60 Decision points 62 Terms to learn 63 Assignment material 64 3 Determining how costs behave 76 Basic assumptions and examples of cost functions 78 SUSTAINABILITY IN ACTION: Cost savings from going green 80 Identifying cost drivers 81 The cause-and-effect criterion in choosing cost drivers 81 Cost drivers and the decision-making process 82 Cost estimation methods 83 Steps in estimating a cost function using quantitative analysis 85 Evaluating cost drivers of the estimated cost function 89 CONCEPTS IN ACTION: Activity-based costing: identifying cost and revenue drivers 92 Cost drivers and activity-based costing 92 Non-linear cost functions 93 Learning curves 94 Data collection and adjustment issues 98 Problem for self-study 100 Decision points 102 Terms to learn 103 APPENDIX 3-1: Regression analysis 104 Assignment material 112 4 Cost–volume–profit analysis 126 Essentials of CVP analysis 128 SUSTAINABILITY IN ACTION: Cleaner production and eco-efficiency—turning waste into profit 132 Cost–volume–profit assumptions 132 Break-even point and target profit 133 CONCEPTS IN ACTION: The break-even point in the battle of the skies 135 vi Chapter 27: The framework of accounting CONTENTS ΌϕϖϟϘϏύώϚЫΙϋχϘϙϕϔΊϛϙϚϘχϒϏχ͸χϊϏϜϏϙϏϕϔϕόΙϋχϘϙϕϔΊϛϙϚϘχϒϏχΐϘϕϛϖΙϚϟΕϚϊ͹лйкн΁трскннлопммрр΁ΑϕϘϔύϘϋϔͿΌϕϙϚΊωωϕϛϔϚϏϔύͧΊΖχϔχύϋϘϏχϒΊϔχϒϟϙϏϙлϋUsing CVP analysis for decision making 137 Sensitivity analysis and margin of safety 139 Cost planning and CVP 140 Effects of sales mix on income 143 Multiple cost drivers 144 CVP analysis in service and not-for-profit organisations 145 Problem for self-study 146 Decision points 147 Terms to learn 147 APPENDIX 4-1: Break-even points in variable costing and absorption costing 148 APPENDIX 4-2: Decision models and uncertainty 149 Assignment material 153 5 Product and service costing 166 Job-costing and process-costing systems 168 Job costing: an example 169 Time period used to calculate indirect cost rates 173 SUSTAINABILITY IN ACTION: It’s back to the future for the aviation industry 173 Normal costing 175 Variations from normal costing: a service sector example 177 Budgeted indirect costs and end-of-accountingyear adjustments 178 Process costing 181 Weighted-average method 186 Transferred-in costs in process costing 188 CONCEPTS IN ACTION: Wicked Wolf and Buderim Ginger 189 Hybrid costing systems 190 Problem for self-study 190 Decision points 192 Terms to learn 193 APPENDIX 5-1: First-in, first-out method 194 Assignment material 197 6 Activity-based costing and activity-based management 208 Purposes of cost allocation 210 Criteria to guide cost-allocation decisions 211 Broad averaging and its consequences 212 Simple costing system at Realenz Ltd 213 Refining a costing system 217 Activity-based costing systems 218 Implementing activity-based costing at Realenz Ltd 222 Comparing costing systems 226 Implementing ABC systems 227 CONCEPTS IN ACTION: Successfully championing ABC 228 Using ABC systems for improving cost management and profitability 229 SUSTAINABILITY IN ACTION: Managing environmental costs 229 Activity-based costing and department costing systems 231 Cost allocation and costing systems 232 Problem for self-study 237 Decision points 239 Terms to learn 240 Assignment material 241 7 Cost management, capacity costing and capacity management 262 Cost management and pricing 264 Target costing for target pricing 265 CONCEPTS IN ACTION: Extreme target pricing and cost management at IKEA 269 Life-cycle product budgeting and costing 273 SUSTAINABILITY IN ACTION: Qantas’s environmental improvement strategy: the role of continuous improvement and innovation 275 Capacity costing and capacity management 276 Choosing a capacity concept for capacity management 278 More issues regarding capacity costs and capacity concepts 283 Problem for self-study 284 Decision points 285 Terms to learn 286 Assignment material 287 8 Decision making and relevant information 298 Information and the decision process 300 The concept of relevance 300 An illustration of relevance: choosing output levels 302 Insourcing-versus-outsourcing and make-versus-buy decisions 305 SUSTAINABILITY IN ACTION: The challenge— integrating sustainability considerations in decision making 308 CONCEPTS IN ACTION: The changing benefits and costs of ‘offshoring’ 309 Opportunity costs and outsourcing 309 Product mix decisions with capacity constraints 313 Customer profitability, activity-based costing and relevant costs 314 Contents vii ΌϕϖϟϘϏύώϚЫΙϋχϘϙϕϔΊϛϙϚϘχϒϏχ͸χϊϏϜϏϙϏϕϔϕόΙϋχϘϙϕϔΊϛϙϚϘχϒϏχΐϘϕϛϖΙϚϟΕϚϊ͹лйкн΁трскннлопммрр΁ΑϕϘϔύϘϋϔͿΌϕϙϚΊωωϕϛϔϚϏϔύͧΊΖχϔχύϋϘϏχϒΊϔχϒϟϙϏϙлϋIrrelevance of past costs and equipmentreplacement decisions 318 Decisions and performance evaluation 320 Problem for self-study 321 Decision points 322 Terms to learn 323 APPENDIX 8-1: Linear programming 324 Assignment material 328 9 Pricing decisions and customer-profitability analysis 342 Pricing decisions 344 Market-based pricing 346 SUSTAINABILITY IN ACTION: Carbon tax and pricing policy 347 Cost-based (cost-plus) pricing 348 Costing and pricing for the long run 351 Costing and pricing for the short run 351 The impact of Australian law on pricing 352 CONCEPTS IN ACTION: Best Buy decides that not all customers are welcome 353 Customer-profitability analysis 352 Using the five-step decision-making process to manage customer profitability 359 Problem for self-study 360 Decision points 362 Terms to learn 363 Assignment material 363 10 Master budget and responsibility accounting 372 Budgets and the budgeting cycle 374 SUSTAINABILITY IN ACTION: Budgeting for the environment 375 Advantages of budgets 376 Developing an operating budget 378 Steps in developing an operating budget 378 Financial planning models and sensitivity analysis 387 Budgeting and responsibility accounting 388 CONCEPTS IN ACTION: Budgeting with ERPs 389 Human aspects of budgeting 391 Kaizen budgeting 393 Budgeting in multinational companies 393 Problem for self-study 394 Decision points 395 Terms to learn 396 APPENDIX 10-1: The cash budget 397 Assignment material 402 11 Flexible budgets, direct cost variances and management control 418 The use of variances 420 SUSTAINABILITY IN ACTION: Small changes equal big savings for the environment 421 Standard costs 422 Static budgets and static-budget variances 424 Flexible budgets 425 Flexible-budget variances and sales-volume variances 426 Price variances and efficiency variances for direct cost inputs 428 Implementing standard costing 435 Management uses of variances 435 CONCEPTS IN ACTION: Hospitals use variance analysis to provide more efficient, quality healthcare 437 Variance analysis and activity-based costing 438 Benchmarking and variance analysis 440 Problem for self-study 442 Decision points 443 Terms to learn 444 APPENDIX 11-1: Further variances: sales and substitutable inputs 444 Assignment material 452 12 Flexible budgets, overhead cost variances and management control 466 Planning of variable and fixed overhead costs 468 Standard costing at Webb Ltd 469 Developing budgeted variable overhead cost rates 469 Developing budgeted fixed overhead rates 470 Variable overhead cost variances 471 SUSTAINABILITY IN ACTION: Cleaner production = overhead savings 474 Fixed overhead cost variances 476 Production-volume variance 477 CONCEPTS IN ACTION: Variance analysis and standard costing help Sandoz manage its overhead costs 479 Journal entries for fixed overhead costs and variances 479 Integrated analysis of overhead cost variances 481 Production-volume variance and sales-volume variance 484 Variance analysis and activity-based costing 485 Overhead variances in non-manufacturing and service settings 489 viii Contents ΌϕϖϟϘϏύώϚЫΙϋχϘϙϕϔΊϛϙϚϘχϒϏχ͸χϊϏϜϏϙϏϕϔϕόΙϋχϘϙϕϔΊϛϙϚϘχϒϏχΐϘϕϛϖΙϚϟΕϚϊ͹лйкн΁трскннлопммрр΁ΑϕϘϔύϘϋϔͿΌϕϙϚΊωωϕϛϔϚϏϔύͧΊΖχϔχύϋϘϏχϒΊϔχϒϟϙϏϙлϋFinancial and non-financial performance measures 489 Problem for self-study 490 Decision points 492 Terms to learn 493 Assignment material 494 13 Allocation of support- department costs, common costs and revenues 506 Allocating costs of a support department to operating departments 508 SUSTAINABILITY IN ACTION: The Qantas Group and resource consumption (water, electricity and waste diverted directly to landfill) 513 Allocating costs of multiple support departments 513 Allocating common costs 520 Cost allocations and contracts 522 CONCEPTS IN ACTION: Cost allocations at Australia Post 522 Revenue allocation and bundled products 523 Revenue-allocation methods 523 Problem for self-study 526 Decision points 528 Terms to learn 529 Assignment material 529 14 Measuring and reporting sustainability 540 The sustainability shift 542 Definition of sustainability 542 SUSTAINABILITY IN ACTION: What sustainability means for Qantas 543 Sustainability and maximising the social good 545 An organisation’s impact—externalities 546 Internalising externalities: the emissions trading scheme (ETS) 548 External reporting 549 Environmental management systems 553 The business case for sustainability 557 CONCEPTS IN ACTION: Environmental innovation at Mercedes Benz 557 A strategy for sustainability 558 Life-cycle analysis 561 Sustainability management accounting tools 564 Problems for self-study 565 Decision points 572 Terms to learn 573 Assignment material 574 15 Strategy, balanced scorecard and strategic profitability analysis 580 What is strategy? 582 Building internal capabilities: quality improvement and re-engineering at Chipset 584 Strategy implementation and the balanced scorecard 585 SUSTAINABILITY IN ACTION: Strategy for sustainability at Qantas 592 Evaluating the success of strategy and implementation 593 Strategic analysis of operating profit 594 CONCEPTS IN ACTION: Growth may finally be paying off for YouTube 600 Applying the five-step decision-making framework to strategy 601 Downsizing and the management of capacity 601 Problem for self-study 604 Decision points 608 Terms to learn 608 APPENDIX 15-1: Productivity measurement 609 Assignment material 611 16 Balanced scorecard: quality, time and the theory of constraints 620 Part one: Quality as a competitive tool 622 SUSTAINABILITY IN ACTION: Environmental, social and economic costs 623 The financial perspective: costs of quality 623 The customer perspective: non-financial measures of customer satisfaction 626 The internal-business-process perspective: analysing quality problems and improving quality 626 The learning-and-growth perspective for quality improvements 630 Making decisions and evaluating quality performance 630 CONCEPTS IN ACTION: Customer service at Telstra: diagnosis and remedy 631 Part two: Time as a competitive tool 633 Customer response time and on-time performance 633 Time drivers and costs of time 634 CONCEPTS IN ACTION: Overcoming wireless data bottlenecks 635 Part three: Theory of constraints 638 Managing bottlenecks 638 Balanced scorecard and time-related measures 640 Problem for self-study 641 Decision points 642 Terms to learn 643 Assignment material 643 Contents ix ΌϕϖϟϘϏύώϚЫΙϋχϘϙϕϔΊϛϙϚϘχϒϏχ͸χϊϏϜϏϙϏϕϔϕόΙϋχϘϙϕϔΊϛϙϚϘχϒϏχΐϘϕϛϖΙϚϟΕϚϊ͹лйкн΁трскннлопммрр΁ΑϕϘϔύϘϋϔͿΌϕϙϚΊωωϕϛϔϚϏϔύͧΊΖχϔχύϋϘϏχϒΊϔχϒϟϙϏϙлϋ17 Inventory management, just-in-time and simplified costing methods 656 Inventory management in retail organisations 658 CONCEPTS IN ACTION: Inventory management— at the heart of Woolworths’ strategy 662 Estimating inventory-related relevant costs and their effects 663 Just-in-time purchasing 665 SUSTAINABILITY IN ACTION: Sustainable supply chain management 669 Inventory management and MRP 670 Inventory management and JIT production 671 Backflush costing 674 Problems for self-study 679 Decision points 681 Terms to learn 682 Assignment material 683 18 Capital budgeting and cost analysis 690 Two dimensions of cost analysis 692 Stages of capital budgeting 693 Discounted cash flow 694 Sensitivity analysis 698 Payback method 699 SUSTAINABILITY IN ACTION: Qantas passengers are investing in sustainability projects worldwide 700 Accrual accounting rate-of-return method 702 Evaluating managers and goal-congruence issues 703 Relevant cash flows in discounted cash flow analysis 703 Managing the project 709 Strategic considerations in capital budgeting 709 CONCEPTS IN ACTION: International capital budgeting at Disney 710 Problems for self-study 712 Decision points 714 Terms to learn 715 Assignment material 716 19 Management control systems, transfer pricing and multinational considerations 726 Management control systems 728 Organisation structure and decentralisation 729 SUSTAINABILITY IN ACTION: Qantas: an integrated approach to sustainability 732 Transfer pricing 732 An illustration of transfer pricing 734 Market-based transfer prices 736 Cost-based transfer prices 738 Hybrid transfer prices 740 A general guideline for transfer pricing 741 Multinational transfer pricing and tax implications 743 CONCEPTS IN ACTION: Using transfer pricing to minimise tax 744 Problem for self-study 745 Decision points 747 Terms to learn 748 Assignment material 749 20Performance measurement, compensation and multinational considerations 758 Financial and non-financial performance measures 760 Choosing between different performance measures: step 1 761 Choosing the time period of the performance measures: step 2 766 Choosing alternative definitions for performance measures: step 3 767 Choosing measurement alternatives for performance measures: step 4 767 Choosing target levels of performance: step 5 770 Choosing the timing of feedback: step 6 771 Performance measurement in multinational companies 771 CONCEPTS IN ACTION: Australian exporting companies hit hard by rising dollar 772 Distinction between managers and organisation units 774 Performance measures at the individual activity level 776 Executive performance measures and compensation 776 SUSTAINABILITY IN ACTION: Is it really fair? 777 Strategy and levers of control 778 Problem for self-study 779 Decision points 781 Terms to learn 782 Assignment material 783 Appendix: Notes on compound interest and interest tables 792 Glossary 799 Index 809 x Contents ΌϕϖϟϘϏύώϚЫΙϋχϘϙϕϔΊϛϙϚϘχϒϏχ͸χϊϏϜϏϙϏϕϔϕόΙϋχϘϙϕϔΊϛϙϚϘχϒϏχΐϘϕϛϖΙϚϟΕϚϊ͹лйкн΁трскннлопммрр΁ΑϕϘϔύϘϋϔͿΌϕϙϚΊωωϕϛϔϚϏϔύͧΊΖχϔχύϋϘϏχϒΊϔχϒϟϙϏϙлϋKey features of the Australian edition LEARNING OBJECTIVES 1 Explain the way in which cost accounting supports management accounting and financial accounting 2 Explain the role of management accounting in sustainability decisions 3 Explain the way in which management accountants influence strategic decisions 4 Describe the set of business functions in the value chain 5 Identify the key success factors that customers expect companies to meet 6 Explain the five-step decision-making process and its role in management accounting 7 Describe three guidelines management accountants follow to support managers 8 Describe how management accounting fits into an organisation’s structure 9 Explain how professional ethics impacts on management accountants’ decisions Learning objectives open each chapter and outline the key concepts to be covered. They are then signposted in the margins to indicate where a particular objective is covered. Among the many issues dealt with in this book, we place sustainability on centre stage. Chapter 14 deals extensively with this topic and its interface with management accounting, outlining how sustainability is reported and measured. Sustainability in action boxes also appear in most chapters, showing how management accounting connects with sustainability. DECISION POINT 2: How does management accounting assist in sustainability decisions? Strategic decisions and the management accountant Strategy relates to how an organisation matches its capabilities with the opportunities in the marketplace to accomplish its objectives. In other words, strategy describes how an organisation chooses to compete and the opportunities its managers should seek and pursue. Many businesses follow one of two broad strategies. Some companies, such as Virgin Blue, JB Hi-Fi and The Warehouse (New Zealand), have been profitable and have grown over the years by providing quality products or services at low prices. In contrast, as shown in the opening vignette, Australian Weaving Mills carefully decided not to compete on low price but to differentiate its product in a number of ways. Parker Hannifin (Australia) and David Jones are other companies that choose to generate their profits and growth based on their ability to offer differentiated or unique products or services, often at higher prices than those of their competitors. Deciding between these strategies is a critical part of what managers do. Management accountants work closely with managers in formulating strategy by providing information about the sources of competitive advantage; for example, the cost, productivity or efficiency advantage of their company relative to that of competitors or the premium prices a company can charge relative to the costs of adding features that make its products or services distinctive. Strategic cost management describes cost management that specifically focuses on strategic issues. Management accountants help to formulate strategy by helping managers to answer questions such as: ◗ Who are our most important customers, and how do we deliver value to them? For example, success in selling online has encouraged many businesses to develop the capability to sell online by building the necessary information and technology infrastructure. Toyota has built flexible computer-integrated manufacturing (CIM) plants that enable it to use the same equipment to produce a variety of cars in response to changing customer tastes. As reported in the opening vignette, Australian Weaving Mills has developed manufacturing and information technology for superior customer service. ◗ What substitute products exist in the marketplace, and how do they differ from our product in terms of price and quality? For example, Hewlett-Packard designs new printers after comparing the functionality, quality and price of its printers with other printers available in the marketplace. ◗ What is our most critical capability? Is it technology, production or marketing? How can we leverage it for new strategic initiatives? Kellogg Company, for example, uses the reputation of its brand to introduce new types of cereal. ◗ Will adequate cash be available to fund the strategy, or will additional funds need to be raised? These questions are pertinent to Amcor Ltd’s proposed purchase of key divisions of Alcan’s packaging business from Rio Tinto Ltd for a consideration of $2.8 billion to be funded by debt and equity. The best-designed strategies and the best-developed capabilities are useless unless they are executed effectively. In the next section, we describe how management accountants help managers to take actions that create value for their customers. DECISION POINT 3: How do management accountants support strategic decisions? OBJECTIVE 3 Explain the way in which management accountants influence strategic decisions Chapter 1: Management accounting in context 7 Decision points are included throughout the chapters so that students can check their progress towards achieving the learning objectives. ◗ Quality—customers expect high levels of quality. Total quality management (TQM) is a philosophy in which management improves operations throughout the value chain to deliver products and services that exceed customer expectations. TQM encompasses designing the product or service to meet the needs and wants of customers, as well as making products with zero or minimal defects and waste and with low inventories. Management accountants evaluate the costs and revenue benefits of TQM initiatives. ◗ Time—time has many components. New product development time is the time it takes for new products to be created and brought to market. The increasing pace of technological innovation has led to shorter product life cycles and the need for companies to bring new products to market more rapidly. The management accountant measures the costs and benefits of a product over its life cycle. Customer response time describes the speed at which an organisation responds to customer requests. To increase customer satisfaction, organisations must complete activities faster and meet promised delivery dates reliably. Delays or bottlenecks occur when the work to be performed exceeds the available capacity. To increase output in these situations, managers need to increase the capacity of the bottleneck operation. The management accountant’s role is to quantify the costs and benefits of relieving the bottleneck constraints. ◗ Innovation—a constant flow of innovative products or services is the basis for ongoing company success. The management accountant helps managers evaluate investment and R&D decisions. Management accountants help managers track performance on the chosen key success factors relative to the performance of competitors on the same factors. Tracking what is happening in other companies serves as a benchmark and alerts managers to the changes their own customers are observing and evaluating. The goal is for a company to continuously improve its critical operations, for example on-time arrival for Virgin Blue, customer access for online auctions at eBay and cost reduction at Sumitomo Electric. Sometimes, more fundamental changes in operations—such as redesigning a manufacturing process to reduce costs—may be necessary. However, successful strategy implementation requires more than value chain and supply chain analysis and execution of key success factors. It is the decisions that managers make that move them and their teams to develop, integrate and implement their strategies. DECISION POINT 5: How do companies add value, and what are the dimensions of performance that customers expect of companies? Decision making, planning and control: the five-step decision-making process The five-step decision-making process provides a framework that may be used in a number of situations to make a variety of decisions. In subsequent chapters of this book, we describe how managers use this five-step decision-making process. We illustrate the five-step decision-making process using the example of the Daily News, a city newspaper. The Daily News has a strategy to differentiate itself from its competitors by focusing on in-depth analyses of news by its highly rated journalists, using colour to enhance attractiveness to readers and advertisers, and developing its website to deliver up-tothe-minute news, interviews and analyses. It has the capability to deliver on this strategy. It owns an automated, computer-integrated, state-of-the-art printing facility and has developed a web-based information technology infrastructure. Its distribution network is one of the best in the newspaper industry. A key challenge for Nancy Wong, manager of the Daily News, is to increase revenues. To decide what she should do, Nancy works through the five-step decision-making process. 1 Identify the problem. The problem is how to increase revenue. Two possible ways are: (1) to increase the selling price per newspaper; or (2) to increase the rate per page charged to advertisers. Part of the problem is that Nancy does not know the potential effect on demand of any increase in price or rates. Any increase in price or rates may lead to a decrease in demand, which could offset the higher price or rate and lead to lower overall revenues. OBJECTIVE 6 Explain the five-step decision-making process and its role in management accounting Chapter 1: Management accounting in context 11 A framework for decision making is introduced in Chapter 1 for managers to utilise when making decisions. The framework introduced in the US text has been revised in line with reviewer suggestions and is interwoven throughout every chapter. It helps students see how the demand for various types of management accounting information is a response to the decision-making needs of managers. 2 Collect relevant information. Gathering information before making a decision helps managers get a better understanding of the uncertainties. Nancy asks her marketing manager to talk to some representative readers to gauge how they might react to an increase in the newspaper’s selling price. She asks her advertising sales manager to talk to current and potential advertisers to get a better understanding of the advertising market. She also reviews the effect that past price increases had on readership. Tony Cantelli, the management accountant at the Daily News, provides information about past increases or decreases in advertising rates and the subsequent changes in advertising revenues. He also collects and analyses information on advertising rates charged by competing media outlets, including other newspapers. 3 Determine possible courses of action and consider the consequences of each. On the basis of information she has obtained, Nancy considers the potential consequences of the possible courses of action, namely to increase the price or rates. She concludes that readers would be quite upset if she increased prices and is fairly certain that it would lead to a decrease in readership. She has a different view when it comes to advertising rates. She anticipates a market-wide increase in advertising rates and therefore believes that increasing these rates will have little effect on the number of pages of advertising sold. Nancy recognises that considering the consequences of contemplated actions requires considerable judgement. She carefully evaluates any biases that she might have. Has she correctly judged readers’ sentiments or has her thinking been overly influenced by anticipation of all the negative publicity she would get rather than an actual decline in readership? How sure is she that her competitors will increase advertising rates? Is her thinking in this regard biased by their past actions? Have circumstances changed? How confident is she that her sales representatives can convince advertisers to pay higher rates? Nancy retests her assumptions and reviews her thinking. She feels confident about the judgements she has made. 4 Evaluate each possible course of action and select the best one. Nancy decides to increase advertising rates by 4% to $5200 per page in March 2014. She communicates the new advertising rate schedule to the Sales Department. Tony Cantelli estimates advertising revenues to be $4 160 000 ($5200 per page × 800 pages predicted to be sold in March 2014). Steps 1 to 4 are collectively referred to as planning. Planning comprises selecting organisation goals, predicting results under various alternative ways of achieving those goals, deciding how to attain the desired goals, and communicating the goals and how to attain them to the entire 12 Chapter 1: Management accounting in context xvi Preface ΌϕϖϟϘϏύώϚЫΙϋχϘϙϕϔΊϛϙϚϘχϒϏχ͸χϊϏϜϏϙϏϕϔϕόΙϋχϘϙϕϔΊϛϙϚϘχϒϏχΐϘϕϛϖΙϚϟΕϚϊ͹лйкн΁трскннлопммрр΁ΑϕϘϔύϘϋϔͿΌϕϙϚΊωωϕϛϔϚϏϔύͧΊΖχϔχύϋϘϏχϒΊϔχϒϟϙϏϙлϋAustralian Weaving Mills’ strategic choices ensure survival and success Geoff Parker is the chief executive of Australian Weaving Mills in Devonport, Tasmania, the last of the towel manufacturers in Australia. The company was one of nine in 1985—the other eight closed down or moved offshore to countries like China following the reduction of tariff protection and quotas. He was quoted in the Sunday Tasmanian: ‘We knew we would have to compete in a different way to survive … If you compete on price, especially in the towel market, you are dead in the water.’ Of the Australian market of 180 tonnes a week, Australian Weaving Mills is now supplying 50 tonnes of towels weekly. Among its clients are major Australian retailers Myer, David Jones, Big W, Target and Spotlight. Their towels are marketed under a number of brands including Dri Glo, Esprit and Dickies. Knowing that Australian Weaving Mills could not use price as a factor to compete in this market, Parker developed a number of strategies. Ultra-short lead times Customers usually buy towels, bath mats, face clothes and hand towels as sets. If one item is out of stock in a particular colour, the other items of the same colour do not sell. Australian Weaving Mill has installed state-of-theart machinery allowing cutting, stitching and dyeing to be performed robotically. This dramatically reduces the time required to manufacture the towels. Overseas manufacturers can take months to refill orders, whereas Australian Weaving Mills takes only days. Although retailers do not give the mill much warning of upcoming sales—they don’t want their competitors to find out—the ultra-short lead times nevertheless allow Australian Weaving Mills to maintain ‘the wall of colour’, as Parker puts it. High-level customer service Although retailers do not make as much per unit of stock from Australian Weaving Mills, their profits increase because they sell more stock overall owing to the short lead times. Australian Weaving Mills has also installed special software that is able to read tills in 260 stores in Australia. Says Parker: ‘We read them each night, find out what the store sold and restock them within 72 hours.’ This means that stores do not have to hold stock or reorder it—Australian Weaving Mills take care of it. Importers are not able to match this level of service. Quality towels As well as the domestic market, about 15% of stock is exported to the Middle East and Asia, primarily to hotel chains such as Marriott, Hilton and Intercontinental. Mr Parker says: ‘Again, we can’t compete on price—only on service All businesses are concerned about revenues and costs. Whether their products are motor vehicles, fast food or the latest designer fashions, managers must understand the influence of revenues and costs on their operations or risk losing control. Managers use management accounting information to make decisions; decisions related to strategy, research and development, budgeting, production planning and pricing, among others. Sometimes these decisions involve trade-offs. While reading the vignette below, think about the strategic choices that Australian Weaving Mills has made for survival and success. Value chain and supply chain analysis Customers demand much more than a fair price from companies. For example, they also expect a quality product or service delivered in a timely way. These multiple factors drive how a customer experiences a product or service and the value or usefulness a customer derives from that product or service (see opening vignette on Australian Weaving Mills). How, then, does a company go about creating this value? Value chain analysis The value chain is the sequence of business functions in which customer usefulness is added to products or services. Figure 1-1 shows six business functions: R&D, design, production, marketing, distribution and customer service. We illustrate these business functions using Sony’s television division. OBJECTIVE 4 Describe the set of business functions in the value chain Management accounting beyond the numbers When you hear the job title ‘accountant’, what comes to mind? The person who does your tax return each year? Individuals who prepare budgets at Dell or Sony? To people outside the profession, it may seem like accountants are just ‘numbers people’. It is true that most accountants are adept financial managers, yet their skills do not stop there. To be successful, management accountants must possess certain values and behaviours that reach well beyond basic analytical abilities. Working in cross-functional teams and as a business partner of managers. It is not enough that management accountants simply be technically competent in their area of study. They also need to be able to work in teams, to learn about business issues, to understand the motivations of different individuals, to respect the views of their colleagues and to show empathy and trust. Promoting fact-based analysis and making tough-minded, critical judgements without being adversarial. Management accountants must raise tough questions for managers to consider, especially when preparing budgets. They must do so thoughtfully and with the intent of improving plans and decisions. One would expect management accountants to have raised questions about the operating and/or financing strategies and tactics of Chickenfeed and Gunns before these companies’ difficulties reached the news. Leading and motivating people to change and be innovative. Implementing new ideas, however good they may be, is seldom easy. When the United States Department of Defense sought to consolidate more than 320 finance and accounting systems into a centralised platform, the accounting services director and his team of management accountants made sure that the vision for change was well understood throughout the agency. Ultimately, each individual’s performance was aligned with the transformative change and incentive pay was introduced to promote adoption and drive innovation within this new framework. Communicating clearly, openly and candidly. Communicating information is a large part of a management accountant’s job. A few years ago, Pitney Bowes Inc. (PBI), a $4 billion global provider of integrated mail and document management solutions, implemented a reporting initiative to give managers feedback in key areas. The initiative succeeded because it was clearly designed and openly communicated by PBI’s team of management accountants. Having a strong sense of integrity. Management accountants must never succumb to pressure from managers to manipulate financial information. They must always remember that their primary commitment is to the organisation and its shareholders. At WorldCom, under pressure from senior managers, members of the accounting staff concealed billions of dollars in expenses. Because the accounting staff lacked the integrity and courage to stand up to and report corrupt senior managers, WorldCom landed in bankruptcy. Some members of the accounting staff and the senior executive team served prison terms for their actions. Sources Garling, W. 2007, ‘Winning the Transformation Battle at the Defense Finance and Accounting Service’, Balanced Scorecard Report, May–June, . Gollakota, K. & Vipin, G. 2009, WorldCom Inc.: What Went Wrong, Richard Ivey School of Business Case No. 905M43, The University of Western Ontario, London, ON, . Green, M., Garrity, J., Gumbus, A. & Lyons, B. 2002, ‘Pitney Bowes Calls for New Metrics’, Strategic Finance, May, , accessed 10 February 2013. CONCEPTS IN ACTION 8 Chapter 1: Management accounting in context 120 000 kilometres. In the current year (2014), the predicted combined total hauling of the two trucks is 170 000 kilometres. Figure 2-3 shows how annual fixed costs behave at different levels of kilometres of hauling. Up to 120 000 kilometres, LL can operate with one truck; from 120 001–240 000 kilometres, it operates with two trucks; from 240 001–360 000 kilometres, it operates with three trucks. This pattern will continue as LL adds trucks to its fleet to provide more kilometres of hauling. Given the predicted 170 000 kilometre usage for 2014, the range from 120 001–240 000 kilometres hauled is the range in How car sharing is helping reduce business transportation costs Rising petrol prices, high insurance costs and hefty parking fees have forced many businesses to reconsider the ownership of company or fleet cars. In Sydney and Melbourne, car-sharing businesses, such as Flexicar, GoGet CarShare and Charter Drive, have emerged as an attractive alternative. These businesses provide an on-demand option for city businesses and individuals to rent a car by the day or even the hour. Basically, members make a reservation by telephone or internet, go to where the car is located (usually by walking or public transportation), swipe an electronic card over a sensor that unlocks the door, and then just climb in and drive away. Rental fees usually include fuel, insurance, maintenance and cleaning. Car sharing offers an environmentally friendly, low-cost and no hassle alternative for companies. Many small businesses own a company car or two for getting to meetings, making deliveries and other errands. Similarly, large companies may own a fleet of cars to shuttle visiting executives and clients back and forth from appointments, business lunches and the airport. Traditionally, companies had no other option but to own these cars, which involves very high fixed costs, including buying the asset (car) and costs of maintenance and insurance for multiple drivers. Now, companies can use car-sharing businesses for on-demand transportation while reducing their transportation, overhead and fringe benefits costs. This has resulted in lower or no fleet expenses for private companies using car-sharing services. In the United States, Twitter managers use Zipcar’s fleet of Mini Coopers and Toyota Priuses to meet venture capitalists and partners in Silicon Valley or when travelling far away from its headquarters. From a business perspective, car sharing allows companies to convert the fixed costs of owning a company car to variable costs. If business slows, or a car isn’t required to visit a client, car-share customers are not burdened with the fixed costs of car ownership. Of course, if companies use car-sharing services frequently, they can end up paying more overall than they would have paid if they had purchased and maintained the car themselves. Such an arrangement is also attractive to those keen on reducing carbon emissions or companies with core values of employing sustainable practices, as research has shown that one car-sharing vehicle can replace up to 10 privately owned cars on the road. Several councils are putting their support behind car sharing by providing dedicated parking spaces. Car sharing is a practical and creative concept that helps solve the problem of congestion on major city roads. In addition, car-sharing businesses that are conscious about the environment can choose to operate hybrid or small fuel-economical cars in their fleet. Sources Anon. 2008, ‘Share a Car and Fight Congestion’, Sydney Morning Herald, 28 May. Hutton, J. 2008, ‘Share Exchange—Covering Corporate Car Share and Outsourced Fleet Service’, Business Review Weekly, 5 June. Keegan, P. 2009, ‘Zipcar—The Best New Idea in Business.’ Fortune, 27 August, , accessed 3 December 2012. Olsen, E. 2009, ‘Car Sharing Reinvents the Company Wheels’, New York Times, 7 May, , accessed 3 December 2012. Zipcar, Inc. 2012, ‘Zipcar for Business Case Studies’, , accessed 3 December 2012. SUSTAINABILITY IN ACTION 36 Chapter 2: An introduction to costs terms and inventory costing Real company vignettes open each

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