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managerial cost accounting and control

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MANAGERIAL COST ACCOUNTING AND CONTROL
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ii
MANAGERIAL COST
ACCOUNTING AND
CONTROL

Clement C. M. Ajekwe
and
Adzor Ibiamke

ABOKI PUBLISHERS
Makurdi-Ibadan-Abuja

iii
 MANAGERIAL COST ACCOUNTING AND CONTROL

First Published in 2017 by

ABOKI PUBLISHERS
(A Division of Aboki Associates)
Plot 6875 David Mark By-Pass
PO.Box 161, High Level Makurdi,
Benue State, Nigeria.
Email: abokiassociates@yahoo.com
Website: www.abokipublishers.com
Tel.: 08038708155, 08087073738

ISBN: 978-978-8512-60-8

© Clement C. M. Ajekwe, Adzor Ibiamke, 2017

ALL RIGHTS RESERVED.

No part of this publication should be reproduced or transmitted

in any form or by any means, electronic or mechanical, including
photocopy, recording, or any information storage or retrieval sys-
tem, without permission in writing from the publisher.

iv
DEDICATION

To
Almighty God

v
 PREFACE
This book is directed primarily at those following an introductory and
subsequent course in managerial cost accounting (a term used to refer
to cost management, cost and management accounting).
Many readers will be studying at a university or college, perhaps
majoring in accounting or in another area such as management,
business education, information technology or engineering. Other
readers may be studying independently, perhaps for professional
qualifications like ICAN, ANAN, AIB etc., or they will be studying
with no formal qualifications in mind.
The authors are mindful of the fact that most readers will not have
studied managerial cost accounting before. Therefore the book is
written in an accessible style in order to avoid technical jargons in
management cost accounting and control. Where technical jargon is
unavoidable, attempts have been made to introduce them gradually
and explain them clearly. The book comprises fifteen chapters,
organised in four parts; and covers all the areas required to gain a firm
foundation in the subject.
Part 1 (Managerial Cost Accounting Fundamentals) acquaints
readers with the fundamentals of managerial cost accounting. It
comprises a broad introduction to the nature and purpose of managerial
cost accounting as an integral part of the strategic management team
(Chapter 1). Managerial cost accounting is undergoing a revolution in
thought and practice. Much of this change is due to recent changes in
the contemporary business environment. These issues are covered in
chapter 2. Cost driver concepts; how costs behave and how they can
be modelled for short- and medium-term decisions are covered in
Chapters 3, 4, and 5.
Part 2 (Product Costing Systems) discusses the different types of
product costing systems available: cost accumulation and measurement
methods; job or process costing (chapters 6 and 7)), overhead
assignment methods; traditional volume- or activity-based costing
(chapter 8), and treatment of fixed manufacturing overhead costs;
absorption or variable costing (chapter 9).
Part 3 (Planning, Control & Performance Evaluation) discusses
management accounting control systems such as Budgeting (chapter

vi
10), Standard Costing (chapter 11), Flexible Budgeting (chapter 12)
and Control Systems in Organisations (chapter 13).
Part 4 (Information for Decision Making) discusses relevant costs in
making decisions (chapter 14) and illustrates this point with pricing
decisions (chapter 15) which is one of the most important decisions
managers make.

vii
 TABLE OF CONTENTS

Dedication v
Preface vi
Table of Contents viii
PART ONE
MANAGERIAL COST ACCOUNTING
FUNDAMENTALS 1

1. Introduction to Managerial Cost Accounting 3

Role of Management Accounting in Organisations 3
The Planning and Control Cycle 4
Branch of Accounting 4
The Role of Cost Accounting 5
Differences between Management Accounting and
Financial Accounting 6
Cost Management 9
Strategic Decisions and Management Accounting 10
Management Accountants’ Role in Implementing Strategy 12
Problem Solving, Score Keeping and Attention Directing 14
Enhancing the Value of Management Accounting Systems 15
Business Functions in an Organisation’s Value Chain 17
Key Management Accounting Guidelines 18
Organisation Structure and the Management Accountant 20
Professional Ethics 21
Summary of the Chapter’s Learning Objectives 22
Review Questions 24

2. The Contemporary Business Environment 25

Evolution and Adaptation of Cost and Management Acounting 26
Contemporary Management Techniques 31
Strategic Management Accounting 31
Total Quality Management 32
Kaizen Costing in Continuous Improvement 33
Activity-Based Costing and Management 34
Business Process-Re-engineering 35
viii
Just-in-Time (JIT) 36
Simplified Accounting and Back Flush Costing in the JIT
Environment 39
Back Flush Costing 39
Mass Customisation 46
Target Costing 47
Life-Cycle Costing 48
Balanced Scorecard 48
Theory of Contrainsts 49
Throughout Accounting 49
TOC and Continuous Improvement 51
Summary of the Chapter’s Learning Objectives 51
Review Questions 55

3. Cost Terms, Concepts and Purposes 56

Costs and Cost Terminology
56
Direct Costs and Indirect Costs 57
Cost Behaviour Patterns: Variable and Fixed Costs 57
Cost Drivers 58
Relationships of Types of Costs 58
Unit Cost, Average Cost and Total Cost 58
Company Types 59
Types of Inventory 59
Common Elements of Costs 60
Product and Period Costs 60
Cost Flows in a Manufacturing Company 63
Prime Costs and Conversion Costs 64
Judgement in Cost Measurements 65
Overtime Premium and Idle Time 65
Economic Characteristics of Costs 66
Differential Cost and Revenue 66
Opportunity Costs 66
The Many Meanings of Product Costs 67
A Framework for Cost Management 68
Information for Planning and Control and Performance

ix
Evaluation 68
Summary of the Chapter’s Learning Objectives 69
Review Questions 71

4. Cost Behaviour and Analysis 72

Types of Cost Behaviour 72
True Variable and Step-Variable Costs 74
Linearity Assumption and the Relevant Range 74
Fixed Costs 75
Committed and Discretionary Fixed Costs
76
The Trend toward Fixed Costs 76
Fixed Costs and the Relevant Range 77
Mixed Costs 78
The Scatter-Graph Method 80
Use of Judgement in Cost Analysis 81
Multiple Regression Analysis 82
Why a New Income Statement Format 83
Review Questions 85

5. Cost Volume-Profit (CVP) Analysis 94

CVP Basics 95
CVP Model 96
Contribution Margin 97
Contribution Margin Ratio 97
Some Applications of CVP Concepts 98
Importance of Contribution Margin 101
Break-even Computations 102
CVP Relationship in Graphic Form 104
Target Net Profit Analysis 106
The Margin of Safety 107
The Concept of Sales Mix 112
Assumptions of CVP Analysis 114
Review Questions 115

x
 PART TWO
PRODUCT COSTING SYSTEMS 120

6. Job-Order Costing 124

Building Block Concepts of Costing Systems 124
Two Major Cost Objects: Products and Departments 125
Job-Costing and Process Costing Systems 126
Cost Measurement Methods 127
General Approach to Job Costing 128
The Role of Technology 129
Manufacturing Overhead Costs 130
Normal Costing 131
General Ledger and Subsidiary Ledgers 133
Budgeted Indirect Costs and End-of-Period Adjustments 138
Dispositions of Under-or Over Applied Balances 139
Multiple Overhead Rates 140
Variation from Normal Costing: A Service Sector Example 140
Summary of the Chapter’s Learning Objectives 141
Review Questions 143

7. Process Costing 146

Situations Appropriate for Job and Process Costing 146
Process Cost Flows 148
Flow of Material, Labour and Overhead Costs 149
Completing the Cost Flows 152
A Comparison of Weighted Average and FIFO Methods 159
Hybrid Costing Systems 160
Review Questions 163

8. Activity Based Costing and Activity Based Management 167

The Causes of Product Cost Distortions 168
The Concept of Activity Based Costing 169
Changing Manufacturing Environment 170
Activity Based Costing 172
The Logic of ABC 173
Activity Based Costing Model 175
Design of an Activity –Based Costing System 176
xi
Process Value Analysis (PVA) 177
Assigning Costs to Activity Centres 180
Benefits of Activity-Based Costing 183
Cost Management Systems 185
Non-Value-Added Costs 186
Activity-Based Management 187
Numerical Illustration of Activity-Based Costing 193
Review Questions 196

9. Variable Costing 200

Absorption Costing 201
Variable Costing 201
Alternative Denominator Level Measures 203
Income Comparison of Absorption and Variable Costing 205
Effect of Changes in Production on Net Income 211
Performance Measures and Absorption Costing 213
Advantages of the Contribution Approach 214
Impact of JIT Inventory Methods 215
Summary of the Chapter’s Learning Objectives 218
Review Questions 221

PART THREE
INFORMATION FOR PLANNING, CONTROL AND
PERFORMANCE EVALUATION 230

10. Profit Planning 233

Definition of Budgeting 233
Personal Budgets 234
Difference between Planning and Control 234
Responsibility Accounting 235
Types of Budgets 236
The Budgeting Process 237
The Sales Budget 240
Direct Materials Budget 242
Direct Labour Budget 243
The Manufacturing Overhead Budgeted 243
The Selling and General Administrative Expenses Budgets 244
xii
The Cash Budgets 245
The Budgeted Income Statement 247
Budgeting in Not-for-Profit Organisations 248
Zero-Base Budgeting 249
Review Questions 250

11. Standard Costing 262

Standard Costs 263
Setting Standards 264
Ideal versus Practical Standards: A Behavioural Issue 265
Setting Direct Materials Standards 266
Setting Direct Labour Standards 266
Standards and Budgets 267
Traditional Advantages of Standard Costing 267
Potential problems with th use of Standard Costs 268
Standard Costs in the New Manufacturing Environment 269
Criticisms of Standard Costing in Today’s Manufacturing
environment 269
Adaptation of Standard Costing Systems 271
A General Model for Variance Analysis 272
Investigation of Variances 277
Standard Costs and the New Competitive Environment 278
New Performance Measures 279
Standard Costs and Operating Performance Measures 282
Review Questions 286

12. Flexible Budgets and Overhead Analysis 291

Effectiveness and Efficiency 293
The Problem of Budget Allowance 295
Spending Variance 296
Usefulness of the Spending Variance 297
Flexible Budgets and Overhead Rates 303
Computing Overhead Rates 304
Overhead Variance-Summary 308
Review Questions 309

xiii
13. Control in Organisations 316
Different Types of Control 317
Advantages and Disadvantages of the Different Control Types 319
Harmful Side-effects of Control 321
Management Accounting Control Systems (MACS) 322
Evaluating Responsibility Centre Performance 326
Dysfunctional Consequences of Short-term Financial
Performance Measures 329
Budget Targets and Performance Evaluation 334
Review Questions 336
PART FOUR
INFORMATION FOR DECISION-MAKING 337

14. Information for Decision-Making 339

The Five-Step Decision-Making Process 340
The Concept of Relevance 341
Decision-Making Situations 342
Quantitative and Qualitative Factors Relevant in Decision Making 345
Behavioural Issues of Relevant Cost Analysis 346
Activity-Based Costing and the New Manufacturing
Environment 348
Uncertainty 350
Summary of the Chapter’s Learning Objective 351
Review Questions 352

15. Pricing Decisions 358

Major Influences on Pricing Decisions 358
Pricing in the Short-Run 360
Pricing in the Long-Run 361
Reasons for Using Target Costing 362
Competitive Bidding 365
Strategic Pricing of New Products 366
Product-Cost Distortion and Pricing: The Role of ABC 367
Review Questions 369

References 371
Index 373
xiv
 Managerial Cost Accounting and Control is a book directed primarily at those
following an introductory and subsequent course in managerial cost accounting
(a term used to refer to cost management, cost and management accounting). It is
written in an accessible style in order to avoid technical jargons in management
cost accounting and control. The book therefore comprises fifteen chapters,
organised in four parts; and covers all the areas required to gain a firm foundation
in the subject. Part 1 (Managerial Cost Accounting Fundamentals); Part 2 (Product
Costing Systems); Part 3 (Planning, Control and Performance Evaluation) and
Part 4 (Information for Decision Making).

CLEMENT C. M. AJEKWE is a Senior Lecturer in the department

of Accounting, Benue State University, Makurdi. He received
his BSc. degree from the Ahmadu Bello University, M Sc de-
gree from the University of London (London School of Eco-
nomics & Political Science) and PhD degree from the Benue
State University. He is also a member of the Chartered Insti-
tute of Management Accountants of the United Kingdom and
the Institute of Chartered Accountants of Nigeria. Dr Ajekwe
has more than twenty seven years of academic experience;
he has taught and researched at the University of Maiduguri,
University of Agriculture, Makurdi, Cross River University
of Technology, University of Mkar and the Benue State University. He has twelve
years of professional experience; he held several management positions in corporate
Nigeria, including appointments as Financial Controller and Managing Director.Dr
Ajekwe has published several articles in peer-reviewed Journals, chapters in books
and has made several workshop presentations. He has been teaching Cost and Man-
agement Accounting at the undergraduate and masters levels.

ADZOR IBIAMKE is a Doctorate degree candidate at the Bayero

University Kano. He holds a Master of Science (M Sc) Degree
in Accounting and Finance and Bachelor of Science (B Sc)
Degree with second class upper division from the Benue State
University Makurdi.For several years, Ibiamke has been
teaching Cost and Management Accounting to undergradu-
ate students. Ibiamke has published over fifteen articles in
peer-reviewed journal including contribution of chapters in
books. Ibiamke is happily married with a son.

ISBN: 978-978-8512-60-8
ABOKI PUBLISHERS
www.abokipublishers.com xv

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