The aim of the tenth edition of this book is to explain the principles involved in designing and evaluating management and cost accounting information systems. Management accounting systems accumulate, classify, summarize and report information that will assist employees within an organization in their decision-making, planning, control and performance measurement activities. A cost accounting system is concerned with accumulating costs for inventory valuation to meet external financial accounting and internal monthly or quarterly profit measurement requirements. As the title suggests, this book is concerned with both management and cost accounting, but with emphasis placed on the former.
A large number of cost and management accounting textbooks have been published. Many of these books contain a detailed description of accounting techniques without any discussion of the principles involved in evaluating management and cost accounting systems. Such books often lack a conceptual framework and ignore the considerable amount of research conducted in management accounting in the past three decades. At the other extreme, some books focus entirely on a conceptual framework of management accounting with an emphasis on developing normative models of what ought to be. These books pay little attention to accounting techniques. My objective has been to produce a book that falls within these two extremes.
This book is intended primarily for undergraduate students who are pursuing a one-year or two-year management accounting course, and for students who are preparing for the cost and management accounting examinations of the professional accountancy bodies at an intermediate or advanced professional level. It should also be of use to postgraduate and higher national diploma students who are studying cost and management accounting for the first time. An introductory course in financial accounting is not a pre-requisite, although many students will have undertaken such a course.
A major theme of this book is that different financial information is required for different purposes, but my experience indicates that this approach can confuse students. In one chapter of a typical book, students are told that costs should be allocated to products including a fair share of overhead costs; in another chapter, they are told that some of the allocated costs are irrelevant and should be disregarded. In yet another chapter, they are told that costs should be related to people (responsibility centres) and not products, whereas elsewhere no mention is made of responsibility centres.
In writing this book, I have devised a framework that is intended to overcome these difficulties. The framework is based on the principle that there are three ways of constructing accounting information. The first is cost accounting with its emphasis on producing product (or service) costs for allocating costs between cost of goods sold and inventories to meet external and internal financial accounting inventory valuation and profit measurement requirements. The second is the notion of decision-relevant costs with the emphasis on providing information to help managers to make good decisions. The third is responsibility accounting and performance measurement that focuses on both financial and non-financial information; in particular, the assignment of costs and revenues to responsibility centres.
This book is divided into six parts. Part One consists of two chapters and provides an introduction to management and cost accounting and a framework for studying the remaining chapters. The following three parts reflect the three different ways of constructing accounting information. Part Two consists of five chapters and is entitled ‘Cost Accumulation for Inventory Valuation and Profit Measurement’. This section focuses mainly on assigning costs to products to separate the costs incurred during a period between costs of goods sold and the closing inventory valuation for internal and external profit measurement. The extent to which product costs accumulated for inventory valuation and profit measurement should be adjusted for meeting decision-making, cost control and performance measurement requirements is also briefly considered. Part Three consists of seven chapters and is entitled ‘Information for Decision-Making’. Here the focus is on measuring and identifying those costs that are relevant for different types of decision.
The title of Part Four is ‘Information for Planning, Control and Performance Measurement’. It consists of six chapters and concentrates on the process of translating goals and objectives into specific activities and the resources that are required, via the short-term (budgeting) and long-term planning processes, to achieve the goals and objectives. In addition, the management control systems that organizations use are described and the role that management accounting control systems play within the overall control process is examined. The emphasis here is on the accounting process as a means of providing information to help managers control the activities for which they are responsible. Performance measurement and evaluation within different segments of the organization is also examined.
Part Five consists of three chapters and is entitled ‘Strategic Performance and Cost Management and Challenges for the Future’. The first chapter focuses on strategic performance management, the second on strategic cost management and value creation. The third chapter concentrates on the emerging issues that are likely to have an impact on management accounting and considers some potential future developments in management accounting. Part Six consists of three chapters and is entitled ‘The Application of Quantitative Methods to Management Accounting’.
In devising a framework around the three methods of constructing financial information, there is a risk that the student will not appreciate that the three categories use many common elements, that they overlap, and that they constitute a single overall management accounting system, rather than three independent systems. I have taken steps to minimize this risk in each section by emphasizing why financial information for one purpose should or should not be adjusted for another purpose. In short, each section of the book is not presented in isolation and an integrative approach has been taken.
When I wrote this book, one important consideration was the extent to which the application of quantitative techniques should be integrated with the appropriate topics or considered separately. I have chosen to integrate quantitative techniques whenever they are an essential part of a chapter. For example, the use of probability statistics are essential to Chapter 12 (Decision-making under conditions of risk and uncertainty) but my objective has been to confine them, where possible, to Part Six.
This approach allows for maximum flexibility. Lecturers wishing to integrate quantitative techniques with earlier chapters may do so but those who wish to concentrate on other matters will not be hampered by having to exclude the relevant quantitative portions of chapters.
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