Management Accounting

Second edition. Integrating basic concepts and meaning.

The business and societal environment has dramatically changed over the past two decades. The accountant is not more a bookkeeper but a business partner in creating both economic and societal value. Being grounded in operational reality and employing leading edge methods needed for the organizational success, management accounting is at the heart of accounting profession today. This book is your guide through the challenges in understanding this fascinating field of accounting and this profession.

Management Accounting: Integrating Basic Concepts and Meaning is intended primarily for the undergraduate - BSc core course in management accounting. It could be used in MSc programs, for students whose undergraduate work did not include a management accounting course. It also could be used by students who are preparing for the management accounting examinations of the professional accountancy bodies at the foundation professional level. A course in financial accounting is a desirable but not obligatory preparation. The aim of the second edition of this book is to provide an understanding of the basic concepts of management accounting in a clear, understandable, and integrative fashion.

A balance of readability and factual soundness is pursued following Einstein's make it as simple as possible, but not simpler. Since these concepts are inseparably interrelated as well as related to other areas of accounting and finance, I emphasize such interrelationships throughout. Great care is exercised to spell out the logic of each model or method and walk the student through realistic illustrative examples emphasizing the practical relevance of theory to management accounting practice.

УНСС
София 1700
жк Студентски град Христо Ботев, ул. 8-ми декември 19
v.mitev@unwe.bg

Preface
Acknowledgements
Foundations of Management Accounting

• Why management Accounting Matters?
• What is Management Accounting?
• Defining Management Accounting
• Comparing Management Accounting and Financial Accounting
• Why Study Management Accounting?
• Management Accounting Practice Today
• The Business and Societal Context of Management Accounting
• The Principles of Management Accounting
• Summary
• Brief History of Management Accounting
• Management Accounting and the Professional Qualifications
• Management Accounting in Today's Organizations
• Institute of Management Accountants (IMA) Statement of Ethical Professional Practice
• Cost Concepts and Classifications
• Costs versus Expenses
• Cost Concepts
• Cost Pool and Cost Object
• Cost Accumulation and Cost Assignment
• Cost Classification for Cost Assignment
• Direct Costs and Indirect Costs
• Relativity of Direct/Indirect Cost Classifications
• Cost Classifications by Business Functions
• Manufacturing Costs and Nonmanufacturing Costs
• Prime Costs and Conversion Costs
• Cost Classification for Inventory Valuation and Profit Measurement
• Product Costs and Period Costs
• Product Cost Flows and Period Cost Flows in Manufacturing Settings
• Product Cost Flows and Period Cost Flows in Nonmanufacturing Settings
• Integrated Summary of Product Costs and Period Costs
• Cost Classification for Planning
• Variable Costs
• Fixed Costs
• Mixed Costs
• The Problem with Unit Costs
• Relationships Between Cost Classifications
• Cost Classification for Decision Making
• Relevant Costs
• Sunk Costs
• Opportunity Costs
• Cost Classification for Management Control
• Controllable Costs
• Non controllable Costs
• Accounting for Costs: Three Key Purposes
• Ethical Issues in Cost Classification
• Summary
• Variable Costs and Fixed Costs in Practice
• Cost Estimation and Regression Analysis
• Cost Behaviour Patterns and Cost Estimation
• The Cost Driver Concept
• General Assumptions in Cost Estimation
• Non-Statistical Cost Estimation Methods
• Engineering Method
• Account Analysis Method
• Scattergraph Method
• High-Low Method
• Statistical Regression Analysis in Cost Estimation
• Simple Linear Regression (Least-Squares Technique)
• Coefficient of Determination and Coefficient of Correlation
• Standard Error of the Estimate and Confidence Intervals
• Multiple Regression
• Practical Issues in Performing Regression Analyses
• Integrated Summary of Cost Estimation Methods
• Ethical Issues in Cost Estimation
• Summary
• Regressions Analysis Using Microsoft Excel
• Big Data Analytics

Costing

• Traditional Product-Costing Methods: Job-Order Costing
• Introduction to Product Costing: Three Key Questions
• Fundamentals of Job Order Costing
• The Overhead Rate Concept
• General Approach to Job-Order Costing Using Predetermined Costs
• Job-Order Costing Illustrated
• Overapplied and Underapplied Overhead
• Methods of Disposing Overapplied or Underapplied Overhead
• Job-Order Costing in Multiple Departments
• Job-Order Costing in Nonmanufacturing Settings
• Spoilage and Rework in Job-Order Costing
• Ethical Issues in Job-Order Costing
• Summary
• Journal Entries in Job-Order Costing
• Job-Order Costing Using Actual Costs
• Traditional Product-Costing Methods: Process Costing
• Fundamentals of Process Costing
• The Equivalent Unit Concept
• General Approach to Process Costing using Actual Costs
• Process Costing in the Initial Department
• Weighted-Average Method
• First-In, First-Out (FIFO) Method
• Comparing the Weighted-Average and FIFO Methods
• Process Costing in Subsequent Departments
• Weighted-Average Method and Transferred-In Costs
• FIFO Method and Transferred-In Costs
• Spoilage in Process Costing
• Weighted-Average Method and Spoilage
• FIFO Method and Spoilage
• Hybrid-Costing Systems
• Ethical Issues in Process Costing
• Summary
• Journal Entries in Process Costing
• Process Costing Using Predetermined Costs
• Operation Costing
• Activity-Based Costing
• Problems With the Traditional Costing Methods
• Fundamentals of Activity-Base Costing (ABC)
• ABC-Related Concepts
• Activity
• Activity Cost Pool
• Activity Cost Driver (or Cost-Allocation Base)
• Cost Hierarchy
• General Approach to Activity-Based Costing
• Comparison of Traditional and Activity-Based Costing Systems
• Advantages and Disadvantages of ABC Systems
• Application of ABC systems
• Ethical Issues in Activity-Based Costing
• Summary
• Journal Entries in Activity-Based Costing
• Time-Driven Activity-Based Costing
• Activity-Based Management
• Inventory-Valuation Approaches: Absorption Costing and Variable Costing
• Introduction to Absorption and Variable Costing
• Two Conceptual Formats of Income Statement
• The Function-Of-Expense Format Income Statement (Absorption Costing Presentation)
• The Contribution-Mrgin Format income Statement (Variable Costing Presentation)
• General Approach to Absorption and Variable Costing Using Actual Costs
• Absorption Costing
• Variable Costing
• Comparing Absorption and Variable Costing
• General Approach to Absorption and Variable Costing Using Predetermined Costs
• Absorption Costing and Production-Volume Variance
• Variable Costing
• Comparing Absorption and Variable Costing
• Advantages and Disadvantaged of Absorption and Variable Costing
• Application of Absorption and Variable Costing
• Ethical Issues in Absorption and Variable Costing
• Summary
• Throughput Costing
• Allocation Actual Fixed Manufacturing Overheads for External-Reporting Purposes: The Requirements of IAS 2 Inventories
• Allocating Budgeted Fixed Manufacturing Overheads for Internal-Reporting Purposes: Predetermined Rates and Capacity Concepts

Decision Making

• Cost-Volume-Profit Analysis
• Fundamentals of Cost-Volume-Profit Analysis
• The Contribution Margin Concept
• CVP Analysis and Break-Even Point
• Analytical Method
• Graph Method
• CVP Analysis and Target Operating Income
• CVP Analysis and Operating Risk
• Margin of Safety
• Operating Leverage
• Sensitivity Analysis
• Scenario Analysis
• Multi-Product CVP Analysis
• Analytical Method
• Graph Method
• Target Operating Income for Multiple Products
• Margin of Safety for Multiple Products
• Assumptions in CVP Analysis
• Ethical Issues in CVP Analysis
• Summary
• Operating Leverage, Financial Leverage, and Total Leverage
• Relevant Costs and Revenues for Short-Term Decision Making
• Fundamentals of Short-Term Decision Making
• Two Conceptual Approaches in Short-Term Decision Making
• The Relevant-Information Approach
• The Contribution-Margin Approach
• General Model of Short-Term Decision Making
• Adding/Dropping Operating Segments
• Essence and Application
• Relevant Costs and Revenues. Capacity Considerations
• Further Considerations
• Make-or-Buy Decisions
• Essence and Application
• Relevant Costs and Capacity Considerations
• Further Considerations
• Pricing One-Time-Only Special Orders
• Essence and Application
• Relevant Costs and Revenues. Capacity Considerations
• Further Considerations
• Ethical Issues in Short-Term Decision Making
• Summary
• The Relevant Costs of Direct Materials and Direct Labor
• Pricing Decisions in the Long Run

Performance Management

• Performance Management: A Theoretical Framework
• Fundamentals of Performance Management
• Performance Management Hierarchy
• Feedback and Feed-Forward Controls
• Elements of Performance Management Systems
• Formal Planning Process
• Strategic Planning and Budgeting within the Performance Management Cycle
• Functions of Budgeting. Advantages and Disadvantages
• Administration of Budgeting
• Approaches to Budgeting
• Decentralization and Responsibility Accounting
• Decentralization - Advantages and Disadvantages
• Responsibility Centers
• Responsibility Accounting
• Performance Measurement and Performance Evaluation
• Performance Measurement
• Performance Evaluation
• Reward Program
• Informal Control Process
• Balancing the Elements: The Contingency Theory Approach
• Human Challenges and Ethical Issues in Performance Management
• Summary
• Accounting Information and Performance Management
• Contemporary Approaches of Budgeting
• Mater Budgeting: Basic Quantitative Issues
• The Master Budget Concept
• Two Bases of Accounting in Developing the Master Budget
• Accrual Accounting
• Cash-Basis Accounting
• Developing the Master Budget
• The Sales Budget
• The Production Budget
• The Direct Materials Purchases Budget and Direct Materials Usage Budget
• The Direct Labor Budget
• The Manufacturing Overhead Budget
• The Cost of Goods Manufactured and Sold Budget
• The Selling and Administrative Expenses Budget
• The Budgeted Income Statement
• The Cash Budget
• The Budgeted Balance Sheet
• Alternative Structures of the Master Budget
• Budgeting in Nonmanufacturing Settings
• Budgeting under Uncertainty
• Rolling Budgets
• Sensitivity Analysis
• Scenario Analysis
• Ethical Issues in Master Budgeting
• Summary
• Budgeting Using Microsoft Excel
• Methods of Sales Forecasting
• Learning Curves
• Performance Measurement and Budget Variances
• Introduction to Variance Analysis
• The Flexible Budget Concept
• The Standard Costs Concept
• General Approach to Cost Variance Analysis
• Direct Materials Variances
• Materials Usage Variance
• Materials Price Variance
• Direct Labor Variances
• Labor Efficiency Variance
• Labor Rate Variance
• Variable Manufacturing Overhead Variances
• Variable Overhead Efficiency Variance
• Variable Overhead Rate Variance
• Fixed Manufacturing Overhead Variances
• Fixed Overhead Spending Variance
• Production-Volume Variance
• Integrated Analysis of Cost Variances
• Summary of Cost Variance Analysis
• Interdependencies Between Variances
• Completing the Variance Analysis Cycle
• Reporting Variances
• Investigating Variances
• Taking Corrective Actions or Revising the Plans
• Insufficiency of Variance Analysis
• Ethical Issues in Variance Analysis
• Summary
• Types of Standards
• Direct Materials Variances: Further Aspects
• Direct Labor Variances: Further Aspects
• Production-Volume Variance: Further Aspects
Partial Table of the Distribution
References and Further Reading
Frequently Used Symbols