Z04_ATRI3622_06_SE_APP4.QXD 508 APPENDIX D 5/29/09 10:43 AM Page 508 SOLUTIONS TO SELECTED EXERCISES (c) The ground improvement option provides the higher NPV and is therefore the preferable option, based on the objective of shareholder wealth maximisation (d) A professional football club may not wish to pursue an objective of shareholder wealth enhancement It may prefer to invest in quality players in an attempt to enjoy future sporting success If this is the case, the NPV approach will be less appropriate because the club is not pursuing a strict wealth-related objective 8.7 Simtex Ltd (a) Net operating cash flows each year will be: £000 Sales revenue (160 × £6) Less Variable costs (160 × £4) Relevant fixed costs 640 170 £000 960 810 150 The estimated NPV of the new product can then be calculated: Annual cash flows (150 × 3.038*) Residual value of equipment (100 × 0.636) Less Initial outlay Net present value £000 456 64 520 480 40 * This is the sum of the 12 per cent discount factors over four years Where the cash flows are constant, it is a quicker procedure than working out the present value of cash flows for each year and then adding them together (b) (i) Assume the discount rate is 18% The net present value of the project would be: Annual cash flows (150 × 2.690) Residual value of equipment (100 × 0.516) Less Initial outlay NPV £000 404 52 456 480 (24) Thus an increase of 6%, from 12% to 18%, in the discount rate causes a fall from +40 to −24 in the NPV, a fall of 64 or 10.67 (that is, 64/6) for each 1% rise in the discount rate So a zero NPV will occur with a discount rate approximately equal to 12 + (40/11.67) = 15.4% (This is, of course, the IRR.) This higher discount rate represents an increase of about 28% on the existing cost of capital figure (ii) The initial outlay on equipment is already expressed in present-value terms and so, to make the project no longer viable, the outlay will have to increase by an amount equal to the NPV of the project (that is, £40,000) – an increase of 8.3% on the stated initial outlay (iii) The change necessary in the annual net cash flows to make the project no longer profitable can be calculated as follows: Let Y = change in the annual operating cash flows Then (Y × cumulative discount rates for a four-year period) − NPV = Z04_ATRI3622_06_SE_APP4.QXD 5/29/09 10:43 AM Page 509 SOLUTIONS TO SELECTED EXERCISES This can be rearranged as Y × cumulative discount factors for a four-year period = NPV Y × 3.038 = £40,000 Y = £40,000/3.038 Y = £13,167 In percentage terms, this is a decrease of 8.8% on the estimated cash flows (iv) The change in the residual value required to make the new product no longer profitable can be calculated as follows: Let V = change in the residual value: (V × discount factor at end of four years) − NPV of product = This can be rearranged as follows: V × discount factor at end of four years = NPV of product V × 0.636 = £40,000 V = £40,000/0.636 V = £62,893 This is a decrease of 63.9% in the residual value of the equipment (c) The NPV of the product is positive and so it will increase shareholder wealth Thus, it should be produced The sensitivity analysis suggests that the initial outlay and the annual cash flows are the most sensitive variables for managers to consider 8.8 Kernow Cleaning Services Ltd (a) The first step is to calculate the expected annual cash flows: Year £ 80,000 × 0.3 £160,000 × 0.5 £200,000 × 0.2 £ 24,000 80,000 40,000 144,000 Year £140,000 × 0.4 £220,000 × 0.4 £250,000 × 0.2 £ 56,000 88,000 50,000 194,000 Year £140,000 × 0.4 £200,000 × 0.3 £230,000 × 0.3 £ 56,000 60,000 69,000 185,000 Year £100,000 × 0.3 £170,000 × 0.6 £200,000 × 0.1 £ 30,000 102,000 20,000 152,000 509 Z04_ATRI3622_06_SE_APP4.QXD 510 APPENDIX D 5/29/09 10:43 AM Page 510 SOLUTIONS TO SELECTED EXERCISES The expected net present value (ENPV) can now be calculated as follows: Period Expected cash flow £ (540,000) 144,000 194,000 185,000 152,000 ENPV Discount rate 10% 1.000 0.909 0.826 0.751 0.683 Expected PV £ (540,000) 130,896 160,244 138,935 103,816 (6,109) (b) The worst possible outcome can be calculated by taking the lowest values of savings each year, as follows: Period Cash flow £ (540,000) 80,000 140,000 140,000 100,000 NPV Discount rate 10% 1.000 0.909 0.826 0.751 0.683 PV £ (540,000) 72,720 115,640 105,140 68,300 (178,200) The probability of occurrence can be obtained by multiplying together the probability of each of the worst outcomes above, that is 0.3 × 0.4 × 0.4 × 0.3 = 0.014 Thus, the probability of occurrence is 1.4%, which is very low Chapter 9.1 Aires plc (a) The SVA determination of shareholder value will be as follows: Year FCF £m 28.0* 28.0 28.0 28.0 Total business value Less Loan notes Shareholder value Discount rate 12% 0.893 0.797 0.712 0.636 Present value £m 25.0 22.3 19.9 17.8 85.0 24.0 61.0 * The free cash flows will be the operating profit after tax plus the lease depreciation charge (that is, £12.0m + £16m) (b) The EVA® determination of shareholder value will be as follows: Year Opening capital invested (C) £m 64.0 48.0 32.0 16.0 Capital charge (12% × C) £m 7.7 5.8 3.8 1.9 Operating profit after tax £m 12.0 12.0 12.0 12.0 Opening capital Less Loan notes Shareholder value EVA® £m 4.3 6.2 8.2 10.1 Discount rate 12% 0.893 0.797 0.712 0.636 PV of EVA® £m 3.8 4.9 5.8 6.4 20.9 64.0 84.9 24.0 60.9 Z04_ATRI3622_06_SE_APP4.QXD 5/29/09 10:43 AM Page 511 SOLUTIONS TO SELECTED EXERCISES 9.3 Sharma plc Analysis of trading with Lopez Ltd during last year Gross sales revenue Discount allowed Manufacturing cost Sales order handling Delivery costs Customer sales visits Credit costs Profit from the customer for the year 9.4 (40,000 × £20) (£800,000 × 5%) (40,000 × £12) (22 × £75) (22 × 120 × £1.50) (30 × £230) [(£800,000 − £40,000) × 2/12 × 2%] £ 800,000 (40,000) (480,000) (1,650) (3,960) (6,900) (2,533) (535,043) 264,957 Shareholder value and EVA® (a) It is difficult for these different approaches to co-exist in a highly competitive economy The pursuit of shareholder value may be necessary in order to secure funds and for managers to secure their jobs A stakeholder approach, which is committed to satisfying the needs of a broad group of constituents, may be difficult to sustain in such an environment It has been suggested that other stakeholders have been seriously adversely affected by the pursuit of shareholder value It is claimed that the application of various techniques to improve shareholder value such as hostile takeovers, cost cutting and large management incentive bonuses have badly damaged the interests of certain stakeholders such as employees and local communities However, a commitment to shareholder value must take account of the needs of other stakeholders if it is to deliver long-term benefits (b) If businesses are overcapitalised it is probably because insufficient attention is given to the amount of capital that is required Management incentive schemes that are geared towards generating a particular level of profits or achieving a particular market share without specifying the level of capital invested can help create such a problem EVA® can help by highlighting the cost of capital, through the capital charge 9.5 Virgo plc There is no single correct answer to this problem The suggestions set out below are based on experiences that some businesses have had in implementing a management bonus system based on EVA® performance In order to get the divisional managers to think and act like the owners of the business, it is recommended that divisional performance, as measured by EVA®, should form a significant part of their total rewards Thus, around 50 per cent of the total rewards paid to managers could be related to the EVA® that has been generated for a period (In the case of very senior managers it could be more, and for junior managers less.) The target for managers to achieve could be a particular level of improvement in EVA® for their division over a year A target bonus can then be set for achievement of the target level of improvement If this target level of improvement is achieved, 100 per cent of the bonus should be paid If the target is not achieved, an agreed percentage (below 100 per cent) could be paid according to the amount of shortfall If, on the other hand, the target is exceeded, an agreed percentage (with no upper limits) may be paid The timing of the payment of management bonuses is important In the question it was mentioned that Virgo plc wishes to encourage a longer-term view among its managers One approach is to use a ‘bonus bank’ system whereby the bonus for a period is placed in a ‘bank’ and a certain proportion (usually one-third) can be drawn in the period in which it is earned If the target for the following period is not met, there can be a charge against the 511 Z04_ATRI3622_06_SE_APP4.QXD 512 APPENDIX D 5/29/09 10:43 AM Page 512 SOLUTIONS TO SELECTED EXERCISES bonus bank so that the total amount available for withdrawal is reduced This will ensure that the managers try to maintain improvements in EVA® consistently over the years In some cases, the amount of bonus is determined by three factors: the performance of the business as a whole (as measured by EVA®), the performance of the division (as measured by EVA®) and the performance of the particular manager (using agreed indicators of performance) The performance for the business as a whole is often given the most weighting, and individual performance the least weighting Thus, 50 per cent of the bonus may be for corporate performance, 30 per cent for divisional performance and 20 per cent for individual performance 9.6 Leo plc Free cash flows Sales revenue Operating profit (20%) Less Cash tax (25%) Operating profit less cash tax Less ANCAI (15%) AWCI (10%) Free cash flows 12% discount factor Present value Year £m 30.0 6.0 Year £m 36.0 7.2 Year £m 40.0 8.0 Year £m 48.0 9.6 Year £m 60.0 12.0 After Year £m 60.0 12.0 1.5 4.5 1.8 5.4 2.0 6.0 2.4 7.2 3.0 9.0 3.0 9.0 (0.9) (0.6) 3.9 0.797 3.1 (0.6) (0.4) 5.0 0.712 3.6 (1.2) (0.8) 5.2 0.636 3.3 (1.8) (1.2) 6.0 0.567 3.4 (4.5)* (3.0)* (3.0) 0.893 (2.7) 53.2 – – 9.0 0.567 42.5† * In the first year, the additional sales revenue will be £30m and so the calculations for non-current (fixed) assets and working capital must be based on this figure † The terminal value is (9.0/0.12 × 0.567) = 42.5 Total business value will increase by £53.2m As there has been no change to the level of borrowing, shareholder value should increase by this amount Chapter 10 10.1 Divisionalised organisations (a) A divisionalised organisation is one that divides itself into operating units in order to deliver its range of products or services Divisionalisation is, in essence, an attempt to deal with the problems of size and complexity Autonomy of action relates to the amount of discretion the managers of divisions have been given by central management over the operations of the division Two popular forms of autonomy are profit centres and investment centres Though divisionalisation usually leads to decentralisation of decision making, this need not necessarily be the case (b) The benefits of allowing divisional managers autonomy include: l l l l l l Better use of market information Increase in management motivation Providing opportunities for management development Making full use of specialist knowledge Giving central managers time to focus on strategic issues Permitting a more rapid response to changes in market conditions Z04_ATRI3622_06_SE_APP4.QXD 5/29/09 10:43 AM Page 513 SOLUTIONS TO SELECTED EXERCISES (c) There are certain problems with this approach which include: l l l l Goal conflict between divisions or between divisions and central management Risk avoidance on the part of divisional managers The growth of management ‘perks’ Increasing costs due to inability to benefit from economies of scale Transfers between divisions can create problems for a business Managers of the selling division may wish to obtain a high price for the transfers in an attempt to achieve certain profit objectives However, the managers of the purchasing division may wish to buy as cheaply as possible in order to achieve their own profit objectives This can create conflict, and central managers may find that they are spending time arbitrating disputes It may be necessary for central managers to impose a solution on the divisions where agreement cannot be reached, which will, of course, undermine the divisions’ autonomy 10.2 Financial performance measures (a) Contribution represents the difference between the total sales revenue of the division and the variable expenses incurred This is a useful measure for understanding the relationship between costs, output and profit However, it ignores any fixed expenses incurred and so not all aspects of operating performance are considered The controllable profit deducts all expenses (variable and fixed) within the control of the divisional manager when arriving at a measure of performance This is viewed by many as the best measure of performance for divisional managers as they will be in a position to determine the level of expenses incurred However, in practice, it may be difficult to categorise expenses as being either controllable or non-controllable This measure also ignores the investment made in assets For example, a manager may decide to hold very high levels of inventories, which may be an inefficient use of resources Return on investment (ROI) is a widely used method of evaluating the profitability of divisions The ratio is calculated in the following way: ROI = Division profit Divisional investment (assets employed) × 100% The ratio is seen as capturing many of the dimensions of running a division When defining divisional profit for this ratio, the purpose for which the ratio is to be used must be considered When evaluating the performance of a divisional manager, the controllable contribution is likely to be the most appropriate, whereas for evaluating the performance of a division, the divisional contribution is likely to be more appropriate Different definitions can be employed for divisional investment The net assets or total assets figure may be used In addition, assets may be shown at original cost or some other basis such as current replacement cost (b) There are several non-financial measures available to evaluate a division’s performance Examples of these measures have been cited in the chapter Further examples include: l l l l Plant capacity utilised Percentage of rejects in production runs Ratio of customer visits to customer orders Number of customers visited If a broad range of financial and non-financial measures covering different time horizons are used, there is a better chance that all of the major dimensions of management and divisional performance will be properly assessed Focusing on a few short-term financial objectives incurs the danger that managers will strive to achieve these at the expense of the longer-term objectives Clearly, ROI can be increased in the short term 513 Z04_ATRI3622_06_SE_APP4.QXD 514 APPENDIX D 5/29/09 10:43 AM Page 514 SOLUTIONS TO SELECTED EXERCISES by cutting back on discretionary expenditure such as staff training and research and development and by not replacing heavily depreciated assets 10.4 ABC Corporation (a) (1) Residual income calculation – original plan: Sales revenue Variable costs Contribution Fixed costs Divisional profit Capital charge (£500,000 × 20%) Residual income £000 1,200 (800) 400 (250) 150 (100) 50 (2) Residual income calculation – original plan and Option X: Sales revenue [(100,000 × £12) + (20,000 × £11)] Variable costs (120,000 × £8) Contribution Fixed costs [250,000 + (80,000/4)] Divisional profit Capital charge (£580,000 × 20%) Residual income £000 1,420 ( 960) 460 ( 270) 190 (116) 74 (3) Residual income calculation – original plan and Option Y: Sales revenue [(80,000 × £12) (20,000 × £10)] Variable costs Contribution Fixed costs Divisional profit Capital charge (£500,000 × 20%) Residual income £000 1,160 (800) 360 (250) 110 (100) 10 We can see that the highest residual income for Division A arises when only Option X is added to the original plan and that the lowest residual income arises when only Option Y is added to the original plan (b) Division A is unlikely to find the price reduction for Division B attractive Division B, on the other hand, will benefit by £40,000 (20,000 × £2) from the price reduction However, overall, the total profits of the business will be unaffected as the increase in Division B’s profits will be cancelled out by the decrease in Division A’s profit If an outside supplier is used, the profits of the business overall will fall by the amount of the lost contribution (20,000 × (£10 − £8) = £40,000) Another option would be to allow the outsiders to supply Division B and to use the released production capacity to sell outside customers 20,000 units at £11 per unit In this way, additional equipment costs would be avoided 10.5 Telling Company (a) (1) ROI = = Divisional profit Divisional investment (assets employed) 25,000 150,000 = 16.7% × 100% × 100% Z04_ATRI3622_06_SE_APP4.QXD 5/29/09 10:43 AM Page 515 SOLUTIONS TO SELECTED EXERCISES (2) £ 25,000 (30,000) (5,000) Divisional profit Required return (20% × £150,000) Residual income (loss) (3) The results show that the ROI is less than the required return of 20 per cent and the residual income is negative The results must therefore be considered unsatisfactory (b) Increase Increase Increase Increase Increase Increase Increase in in in in in in in £ 75,000 (60,000) 15,000 (5,000) 10,000 (4,000) 6,000 sales revenue (£7.50 × 10,000) variable costs (£6 × 10,000) contribution fixed costs divisional profit cost of capital (20% × £20,000) RI (c) (1) Though the divisional profits of Goodman and Sharp will each be affected by a change in the transfer price, the total profits of Telling Co will be unaffected The increase in profit occurring in one division will be cancelled out by the decrease in profit in the other division and so the overall effect will be nil (2) If the work goes outside, Goodman would lose £20,000 in contribution (that is, 10,000 × £2) and Sharp would gain £8,000 by the reduction in the buying-in price (that is, 10,000 × (£8 − £7.20)) The net effect on the business as a whole will therefore be a loss of £12,000 (that is, £20,000 − £8,000) 10.6 Glasnost plc (a) West £000 Residual income: 300 − (2,500 × 10%) 100 − (500 × 10%) Return on investment (ROI): Based on net profit (250/2,500) × 100% (80/500) × 100% Based on divisional profit (300/2,500) × 100% (100/500) × 100% Expenses to sales revenue ratio: Direct manufacturing Indirect manufacturing Selling and distribution Central overhead East £000 50 50 10% 16% 12% 20% 30% 22% 18% 5% 53% 12% 10% 5% (b) The ROI ratios indicate that East is the better performing division However, we are told in the question that East has older plant than West, which has recently modernised its production lines This difference in the age of the plant is likely to mean that the ROI of East is higher due, at least in part, to the fact that the plant has been substantially written down Some common base is required for comparison purposes (for example, unadjusted historical cost) 515 Z04_ATRI3622_06_SE_APP4.QXD 516 APPENDIX D 5/29/09 10:43 AM Page 516 SOLUTIONS TO SELECTED EXERCISES We are told that ROI is used as the basis for evaluating performance We can see that, whichever measure of ROI is used, the two divisions meet the minimum returns required If ROI is being used to assess managerial performance then the divisional profit rather than net profit figure should be used in the calculation This is because the net profit figure is calculated after non-controllable central overheads have been deducted The business should consider the use of RI as another measure of divisional performance This measure reveals the same level of performance for the current year from each division The expenses to sales revenue ratios are revealing West has a lower direct manufacturing cost to sales revenue ratio but a higher indirect manufacturing cost to sales revenue ratio than East This is consistent with the introduction of modern laboursaving plant West has a higher selling expenses to sales revenue ratio than East This is probably due to the fact that inter-business transfers are minimal whereas for East they represent 50 per cent of total sales revenue Chapter 11 11.1 Hercules Wholesalers Ltd (a) The business is probably concerned about its liquidity position because: l it has a substantial overdraft, which together with its non-current borrowings means that it has borrowed an amount roughly equal to its equity (according to values in the statement of financial position); l it has increased its investment in inventories during the past year (as shown by the income statement); and l it has a low current ratio (ratio of current assets to current liabilities) (b) The operating cash cycle can be calculated as follows: Number of days Average inventories holding period: [(Opening inventories + Closing inventories)/2] × 360 Cost of inventories = [(125 + 143/2)] × 360 323 = 149 Add Average settlement period for receivables: Trade receivables × 360 Credit sales revenue 163 = 452 × 360 = 130 279 Less Average settlement period for payables: Trade payables × 360 Credit purchases Operating cash cycle = 145 341 × 360 = 153 126 (c) The business can reduce the operating cash cycle in a number of ways The average inventories holding period seems quite long At present, average inventories held represent almost five months’ sales Reducing the level of inventories held can reduce this period Similarly, the average settlement period for receivables seems long at more than four months’ sales revenue Imposing tighter credit control, offering discounts, charging interest on overdue accounts, and so on, may reduce this However, any policy Z04_ATRI3622_06_SE_APP4.QXD 5/29/09 10:43 AM Page 517 SOLUTIONS TO SELECTED EXERCISES decisions concerning inventories and receivables must take account of current trading conditions Extending the period of credit taken to pay suppliers would also reduce the operating cash cycle However, for the reasons mentioned in the chapter, this option must be considered carefully 11.5 Mayo Computers Ltd New proposals from credit control department £000 Current level of investment in receivables (£20m × (60/365)) Proposed level of investment in receivables ((£20m × 60%) × (30/365)) (986) ((£20m × 40%) × (50/365)) (1,096) Reduction in level of investment £000 3,288 (2,082) 1,206 The reduction in overdraft interest as a result of the reduction in the level of investment will be £1,206,000 × 14% = £169,000 £000 Cost of cash discounts offered (£20m × 60% × 2.5%) Additional cost of credit administration Bad debt savings Interest charge savings (see above) Net cost of policy each year (100) (169) £000 300 20 320 (269) 51 These calculations show that the business would incur additional annual costs if it implemented this proposal It would therefore be cheaper to stay with the existing credit policy 11.6 Boswell Enterprises Ltd (a) (i) Current policy £000 Receivables [(£3m × 1/12 × 30%) + (£3m × 2/12 × 70%)] [(£3.15m × 1/12 × 60%) + (£3.15m × 2/12 × 40%)] Inventories {[£3m − (£3m × 20%)] × 3/12} {[£3.15m − (£3.15m × 20%)] × 3/12} Cash (fixed) Payables {[£3m − (£3m × 20%)] × 2/12} {[£3.15m − (£3.15m × 20%)] × 2/12} Accrued variable expenses [£3m × 1/12 × 10%] [£3.15m × 1/12 × 10%] Accrued fixed expenses Investment in working capital £000 (ii) New policy £000 £000 425.0 367.5 600.0 630.0 140.0 1,137.5 140.0 1,165.0 (400.0) (420.0) (25.0) (15.0) (440.0) 725.0 (26.3) (15.0) (461.3) 676.2 517 Z05_ATRI3622_06_SE_APP5.QXD 522 APPENDIX E 5/29/09 10:44 AM Page 522 PRESENT VALUE TABLE Discount rates (r) Periods (n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 25% 30% 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.800 0.769 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 0.640 0.592 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 0.512 0.455 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 0.410 0.350 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 0.328 0.269 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 0.262 0.207 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 0.210 0.159 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 0.168 0.123 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 0.134 0.094 10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 0.107 0.073 10 11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 0.086 0.056 11 12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 0.069 0.043 12 13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 0.055 0.033 13 14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 0.044 0.025 14 15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065 0.035 0.020 15 Z06_ATRI3622_06_SE_IDX.QXD 5/29/09 10:44 AM Page 523 Index Note: page references in bold refer to terms defined in the Glossary ABB (activity-based budgeting) 201–2, 452 ABC see activity-based costing ABC system of inventories control 418–19, 452 absenteeism 399 absorption costing 98, 452 see also full (absorption) costing accounting ‘creative’ 342–3 information, users 15, 16–17 periods 122 policies 342 profits 342, 350 role 15 see also management accounting; strategic management accounting accounting rate of return (ARR) 261–5, 452 advantages 263 limitations 263–5 in practice 286, 287, 288 ROCE compared with 262–3 activity volumes costs and 56, 57, 58–9, 60 relevant range 74 activity-based budgeting (ABB) 201–2, 452 activity-based costing (ABC) 136–48 as alternative approach to full costing 137–8 benefits 139 cost drivers 138, 140, 141, 454 cost pools 138–9, 140, 141, 454 criticisms 144–5 meaning of term 138, 452 service industries 140–4 traditional approach compared with 140, 141 use in budgeting 201 use in practice 146 adverse variances 223, 233–4, 235, 452 after-sales support 323 ageing schedules of receivables 429–30, 452 Ahold (retailer) 331 Airbus 282 allocation of costs 112, 453 allocation of resources 23, 24 transfer pricing and 387 annual reports, competitors’ 321 apportionment of costs 112, 454 appraisal costs 152 ARR see accounting rate of return asset-based finance 429 assets current 410 intangible 342, 351 near-liquid 432 non-current 345, 346, 349 assumptions, competitors’ 320, 321 Atradius Group 431 audit, post-completion 306, 458 automated manufacturing 11 average inventories turnover periods 416, 437 average settlement periods for payables 435, 437, 441, 452 for receivables 429, 435, 437, 452 BA (British Airways plc) 63–4, 69, 231, 412, 413 BAA (British Airports Authority) 207 Babcock International Group plc 190 bad debt provisions 351, 353 balance sheets (financial position statements) 181, 182, 194 UK businesses 412–13 balanced scorecard 205, 334–9, 400, 452 problems 339 banks cash in 410 cash-transmission systems 438 cheque clearance 438 cost structures 137 overdrafts 410, 439 references 425 batch costing 119, 452 BBC (British Broadcasting Corporation) 207 BE analysis see break-even analysis Z06_ATRI3622_06_SE_IDX.QXD 524 5/29/09 10:44 AM Page 524 INDEX behavioural aspects of budgetary control 239–43, 452 benchmarking 153–4, 332, 383, 452 benefits and costs see cost–benefit issues; costs BEP see break-even points best-fit lines 60 Better Budgeting Forum 207 ‘beyond conventional budgeting’ model 205–7 boards of directors meetings 6–7 bonuses 357–8 Boots Company plc 423 borrowing 433 bottom-up approach to budget-setting 187–8 break-even analysis 60–6, 159, 453 multi-product businesses 75 weaknesses 74–7 break-even charts 61, 62, 68, 453 economists’ views 72–4 break-even points (BEP) 61–5, 159, 453 failure to reach 74 break-even prices, full (absorption) cost as 120 bribery 28 British Airports Authority (BAA) 207 British Airways plc (BA) 63–4, 69, 231, 412, 413 British Broadcasting Corporation (BBC) 207 Brittany Ferries 258 budget committees 186, 188, 453 budget-constrained management style 241 budget holders 192, 453 budget officers 186, 453 budgetary control 93, 121, 218–19, 239, 453 behavioural aspects 239–43, 452 budgeted income statements 181, 182, 191, 192, 194, 195, 196 comparison with actual income 221, 230 budgeting 175–216 activity-based 452 ‘beyond conventional budgeting’ model 205–7 criticisms against conventional budgets 204, 208 incremental 192, 456 non-financial measures in 203 zero-base 193–4, 460 budget(s) accuracy 191 actual performance see budget(s): variances as basis for control system 184 benefits 184, 204 bottom-up approach 187–8 capital expenditure budgets 181 cash budgets 181, 191, 192, 194–7, 434 communication to managers 186, 188 conflict between uses 183 continual (or rolling) budgets 180, 453, 459 control and 93, 121, 218–19, 239, 453 co-ordination of 188 direct labour budgets 181 discretionary budgets 192–3, 454 draft budgets 187–8 failure to meet 242 flexible budgets 222, 232–3, 455 flexing 221–2, 230, 232–3, 455 forecasts and 179–80 interrelationships 180–3, 199 inventories budgets 181, 198–9, 416 limiting factors 179, 181, 182, 186–7 links between 180–3, 199 management behaviour and 203–4 master budgets 181, 188, 457 materials budgets 181 meaning of term 176, 453 monitoring of performance 188–9 need for 207 objectives and 176–7 overheads budgets 181, 191, 192 periodic budgets 180, 458 as plans 179, 207 in practice 190–2 relationships 180–3, 199 responsibility for 185–6 reviews 188, 189 rolling budgets 180, 453, 459 sales budgets 181, 182, 183, 186–7, 191, 192 setting 185–9 small and medium-sized enterprises 191–2 strategic plans and 176–7 time horizons 178–9 top-down approach 187–8, 204 trade payables budgets 181, 198, 199 trade receivables budgets 181, 198, 199 unconventional budgets 205–7 uses 183–5 conflict between 183 variances 220–33 adverse 223, 233–4, 235, 452 analysis of 229–31 compensating 238, 453 favourable 223, 235, 455 fixed overheads 228, 234 flexing budgets and 221–2, 232–3 insignificant 236 investigating 235–8 labour 227–8, 234 materials 225–6, 233 meaning of term 223, 460 non-operating profits 234–5, 457 sales prices 225, 233 sales volumes 222–5, 233 in service industries 234 Z06_ATRI3622_06_SE_IDX.QXD 5/29/09 10:44 AM Page 525 INDEX buffer inventories 417 business value, shareholder value and 346–8 businesses changing landscapes 11–15 co-ordination, budgets in 183 management of 3, 6–11 objectives 7–8, 178, 278 organisation 2–6 purposes Cadbury Schweppes plc 29 capacity in credit decisions 424 capacity utilisation 399 capital costs 277, 342 in credit decisions 424 rationing 304 understated 351 see also working capital capital expenditure budgets 181 capital-intensive production 135 capital investments appraisal methods 259–83 practical points 283–4 in practice 286–90 strategic planning and 290–1 approval of project 305 decision making 258–9 evaluation of project 305 funds availability 304 monitoring and control of project 305–6 payback period 265–9 profitable opportunities 304–5 project management 303–8 rate of return see accounting rate of return; internal rate of return risk 270–2, 273, 291–303 assessing levels of risk 292–302 reacting to levels of risk 302–3 see also return on investment Carphone Warehouse 414 cash amounts held 432–3 as current assets 410 management of 431–9 operating cash cycles (OCC) 434–8, 457 reasons for holding 431–2 transmission of 438 cash balances, control of 433–4 cash budgets 181, 191, 192, 194–7, 434 cash discounts 428, 440–1, 453 cash flows discounted 270, 277, 279, 284, 343 free cash flows 344–6, 347–8, 455 future cash flows 343 investment decisions and 264, 266, 267–8, 275, 276, 278, 284 in NPV 269, 273, 275, 276 statements 181 CEO (chief executive officers) 2, CFO Europe, working capital survey 413, 437–8 chairmen (of companies) channel stuffing 343 Channel Tunnel 307–8 character in credit decisions 424 Chelsea Football Club 39 cheque clearance 438 chief executive officers (CEO) 2, Citigroup Inc 5, 10 City Link (parcel delivery business) 76 closing decisions 83–5 collateral in credit decisions 424 committed costs 453 common costs 96, 283, 374–6, 453 see also overheads communication about cost management 332 communities 12 accounting information for 16 companies 2–3 comparability of management accounting information 18, 453 compensating variances 453 competition 2, 12, 340 between divisions 371 competitive advantage cost leadership 319, 327–33 value chain analysis 330–1 competitive international market 136 competitors accounting information for 16 analysis 319–22, 453 conditions in credit decisions 424 continual (or rolling) budgets 180, 453, 459 continuation decisions 83–5 contracts, special 78–9 contribution 66–7 decision making using 77–84 divisional 373 contribution margin ratio 67, 453 contribution per unit 66, 453 of scarce factor 79 control budgetary 93, 121, 218–19, 453 cash balances 433–4 inventories 414–19 meaning of term 177, 453 of performance 10, 14, 23, 176, 184 standard quantities and costs 244–50 trade payables 441–2 525 Z06_ATRI3622_06_SE_IDX.QXD 526 5/29/09 10:44 AM Page 526 INDEX control (continued) trade receivables 429–31 types 219–20 variances from budget 220–33 controllable costs 374, 453 controllable profits, divisional 374 co-operative working 249 cost–benefit issues, management accounting information 18–21 cost centres 110–19, 454 cost drivers (in activity-based costing ) 138, 140, 141, 454 cost leadership, competitive advantage through 319, 327–33 cost-plus pricing 121, 163–6, 455 cost pools (in activity-based costing ) 138–9, 140, 141, 454 cost–volume–profit analysis 55–91 costing batch costing 119, 452 in changed business environments 135–6 full costing 94–5, 455 job costing 98–9, 101–5, 456 kaizen costing 153, 329, 456 marginal costing see variable costing process costing 96, 458 quality control 152 target costing 151–2, 329, 460 total life-cycle costing 148–51, 306, 328, 329, 460 see also activity-based costing; full (absorption) costing; variable costing cost(s) activity volumes and 56, 57, 58–9, 60 allocation of 112, 453 apportionment of 112, 454 appraisal costs 152 behaviour 56, 99–100, 454 benefits and determining 23, 24 of management accounting information 18–21 of borrowing 433 capital costs 277, 342, 454 committed costs 44, 453 common costs 96, 283, 374–6, 453 controllable costs 374, 453 customer costs 323–6 delivery costs 323 direct costs 96–7, 454 external failure costs 152 failure costs 152 fixed costs 56–8, 455 full costs 94, 391, 455 future costs 40–4, 45, 283 handling costs 323 historic costs 38, 456 increasing, divisions and 371, 372 indirect see overheads internal failure costs 152 inventory-holding costs 323, 414–16, 420, 421 irrelevant costs 39, 45, 456 labour costs 57, 163 management systems 136–53 manufacturing costs 162 marginal costs 78, 457 marketing costs 351, 353 meaning of term 38, 39, 453 non-controllable costs 374, 457 outlay costs 40–1, 45, 457 past costs 40, 44, 45, 283, 458 in post-production phases 148, 149, 151 in pre-production phases 148, 149, 152 prevention costs 152 in production phases 148, 149, 151 quality costs 152, 458 relevant costs 39, 40, 45, 283, 458 research and development (R&D) costs 351, 397 restructuring costs 351, 353 semi-fixed (semi-variable) costs 59–60, 459 standard costs 244–6, 247, 459 limitations 247–9 stepped fixed costs 58, 75, 459 sunk costs 44, 459 total costs 61, 62, 100, 460 units 95, 454 variable costs 56, 390, 460 see also full costs; opportunity costs; overheads County Court judgements 425 CPA (customer profitability analysis) 454 ‘creative accounting’ 342–3 credit cash discounts 428, 440–1 collection policies 429–31 five Cs of 424, 455 offering 323, 424–5 periods 425–6 terms 429 trade payables 439–40 trade receivables 424–8 credit agencies 425 credit decisions, factors involved 424 credit references 425 creditors see trade payables current assets 410 current liabilities 410 customer(s) 2, 12 accounting information for 16 complaints 399 Z06_ATRI3622_06_SE_IDX.QXD 5/29/09 10:44 AM Page 527 INDEX costs 323–6 loyalty 334 profitability analysis (CPA) 323–7, 454 relationships 429, 430 reputation in credit management 424, 425 satisfaction 335, 397 targets in balanced scorecard 335, 336, 337 debit cards 438 debt factoring 429 debtors see trade receivables debts, outstanding 429 decision making accounting information and 15, 23–4 capital investments 258–9 closing or continuation decisions 83–5 credit 424– factors affecting 13–14, 45–6, 93 marginal analysis 77–85 pricing 93, 121 timely, divisions and 369 defects, product 399 delivery costs 323 on-time measure 399 demand 162 elasticity of 155–7, 455 future demand 416 departments 3–4, 108–19 depreciation 261, 262 divisions and 374 shareholder value and 342, 345, 347 detail of accounting information 30 development of plans and budgets 23, 24 differential transfer prices 394 direct costs 96–7, 454 relationship with indirect costs 98, 135 direct debits 438 direct labour 96 as basis for charging overheads 101–2, 105, 106, 107, 108, 115 budgets 181 efficiency variance 227, 228, 234, 454 rate variance 227, 228, 234, 454 direct materials 97, 109, 110, 115 price variance 226, 233, 454 usage variance 225, 233, 454 directors discount factors 276, 454 discount rates in NPV 274, 277 discount tables 275–7, 521–2 discounted cash flows 270, 277, 279, 284, 343 discounts, cash 428, 440–1 discretionary budgets 192–3, 454 diseconomies of scale 74 divisions 367–72 advantages and disadvantages 369–72 independence 387 meaning of term 367, 454 mixed sales 392–4 net profits 374–5 other-businesses comparison 383 performance measurements assessment 387 budgeted/target performance 383 contribution 373 economic value added 383–5 inter-divisional comparisons 383 long-term performance 381–2 non-financial measures 396–401 NPV 381–2 previous performance 383 profits 374 residual income 379–80, 381–2, 384, 385 return on investment 376–9, 381–2, 384, 385 profits 372–6 reasons for 367 structures 4–5, 367–8 transfer pricing 386–96 types 367 downside risk in ENPV decisions 298–9 draft budgets 187–8 Drucker, Peter drug prices 168 e-commerce 11 EADS (German industrial group) 76 easyJet plc 7, 63–4, 291 Ecofin 282 economic conditions cash holding and 433 credit decisions and 424 economic order quantity (EOQ) model 419–22, 454 economic theory of pricing 155–62 economic value added (EVAR) 350–5, 455 adjustments 351 advantages 355 for divisions 383–5 limitations 355 in practice 354, 355 residual income and 380, 384 shareholder value analysis and 355–7 economic values 278 economies of scale 73, 455 economists’ views of break-even charts 72–4 elasticity of demand 155–7, 455 electronic point-of-sale (EPOS) systems 418 Elsevier Science Publishers 164 527 Z06_ATRI3622_06_SE_IDX.QXD 528 5/29/09 10:44 AM Page 528 INDEX employee(s) 12 accounting information for 16 attitudes 399 lateness 399 satisfaction 334 see also staff energyTEAM 269 ENPV (expected net present value) 296–302, 455 Enron 343 Enterprise (car rental business) 370, 397 environmental issues 328, 398 EOQ (economic order quantity) model 419–22, 454 EPOS (electronic point-of-sale) systems 418 ethics 28–9 Eureka Mining plc 295–6 European business operating cash cycles 437–8 working capital survey 413 Eurotunnel plc 307–8 EVAR see economic value added expected net present value (ENPV) 296–302, 455 external failure costs 152 external measures, in balanced scorecard 337 factoring, debt 429 failure costs 152 favourable variances 223, 235, 455 feedback control 219, 220, 455 feedforward control 219–20, 455 finance asset-based 429 financial accounting 455 management accounting compared with 29–31 financial measures, non-financial measures and 334 financial objectives 12–15, 337 financial plans, budgets as 179 financial position statements (balance sheets) 181, 182, 194 UK businesses 412–13 financial ratios, in inventories management 416 financial statements credit decisions and 424, 425 manipulation of 28 financial targets in balanced scorecard 335, 336, 337 finished goods 410 finished inventories budgets 199 Finnish hospitals 333 five Cs of credit 424, 455 fixed costs 56–8, 455 relationship with variable costs and total costs 99 fixed overhead spending variances 228, 455 fixed overhead variances 228, 234 flexible budgets 222, 232–3, 455 flexing the budget 221–2, 230, 232–3, 455 Ford Motors 154, 207 forecasts 179, 455 Forth Ports plc 282 forward thinking, budgets and 183 free cash flows 344–6, 347–8, 455 full (absorption) costing 92–133 alternative approaches 123–6, 137–8 behaviour of costs 99–100 criticisms 123 forward-looking nature 120 information, using 93–4, 121–3 managers’ needs to know full costs 93–4 meaning of term 94–5, 455 multi-product businesses 96–120 batch costing 119 behaviour of costs 99–100 break-even prices 120 direct costs 96–7 indirect costs 96–7 information, using 121–3 job costing 98–9, 101–5 overheads 105–19 single-product businesses 95–6 variable costing compared with 123–6 full cost (cost-plus) pricing 121, 163–6, 455 full costing 94–5, 455 see also activity-based costing; full (absorption) costing full costs 94, 455 managers’ needs to know 93–4 in transfer pricing 391 future cash flows 343 future costs 40–4, 45, 283 future demand 416 future performance 338 Gap 13 GB Airways Ltd 291 gearing, operating (operational) 70–1, 457 goals, conflict between divisions 370–1, 371–2 government accounting information for 16 budgets 193 Greggs plc 368 handling costs 323 Hanson plc 358 High Speed railway line 81 historic costs 38, 456 hollow swaps 343 Hopwood, A.G 241, 332, 333 House of Hardy 320 hurdle rate (in investment decisions) 282 Hutchison Whampoa 282 Z06_ATRI3622_06_SE_IDX.QXD 5/29/09 10:44 AM Page 529 INDEX ideal standards 245, 456 ‘in-and-out trading’ 343 income measurement of 93, 122 residual 379–80, 384, 385, 459 incremental budgeting 192, 456 Indesit 439 indirect costs meaning of term 96, 456, 458 problems 100 relationship with direct costs 98, 135 see also overheads Industrial Revolution 135 industries, emergence of new 11 inflation 272, 456 cash holding and 432 in NPV calculations 272, 273 information for budgets 177–8 competitors’ businesses 321–2 cost-plus information, used by price takers 164–5 on creditworthiness 425 full (absorption) cost information, using 121–3 market information 369 non-financial information 24–5 quality 30 range 30 standards setting 245 see also management accounting: information information systems 21 information technology(IT) 26–7 innovation, product 11, 334 insignificant variances 236 intangible assets 342, 351 interest investment decisions 284 lost interest 270, 273 internal business process targets, in balanced scorecard 335, 336, 337 internal failure costs 152 internal measures, in balanced scorecard 337 internal rate of return (IRR) 279–83 disadvantages 283 meaning of term 279, 456 in practice 282, 286, 287, 288 relationship with NPV 280–2 inventories average turnover periods 416, 437 budgets 181, 198–9, 416 buffer inventories 417 as current assets 410 financing costs 414–15 holding costs 323, 414–16, 420, 421 management of 414–23 ABC system 418–19, 452 budgets of future demand 416 economic order quantity model 419–22, 454 financial ratios used 416 just-in-time (JIT) approach 422–3, 456 levels of control 418 materials requirement planning (MRP) systems 422 models 419–23 recording and reordering systems 416–18 valuation of 123 investigating variances 229–31 investment projects see capital investments return on 376–9, 381–2, 384, 385, 459 scale of 283 investment analysts, accounting information for 16 investment centres 367, 456 invoice discounting 429 invoicing 429 IRR see internal rate of return irrelevant costs 39, 45, 456 IT (information technology) 26–7 Jaguar Cars plc 154 JIT (just-in-time) inventories management 422–3, 456 job costing 98–9, 456 worked example 101–5 just-in-time (JIT) inventories management 422–3, 456 kaizen costing 153, 329, 456 Kaplan, R 334, 337, 338, 339 Kappa Packaging 153 key (limiting) factors 79, 186 see also limiting factors key performance indicators (KPIs) 24, 456 Kingfisher plc 307, 414 knowledge, specialist 369 KPIs (key performance indicators) 24, 456 labour costs 57, 163 standard quantities and costs 244, 248–9, 250 variances 227–8, 234 see also direct labour labour-intensive production 135 ‘lag’ indicators 334, 335, 337, 397 Land Rover 154 ‘lead’ indicators 334, 335, 338, 397 lead time 417, 456 lean manufacturing 11, 329, 456 learning curves 246–7, 456 learning targets, in balanced scorecard 335, 336, 337 529 Z06_ATRI3622_06_SE_IDX.QXD 530 5/29/09 10:44 AM Page 530 INDEX leasing 343 least squares regression 60 lenders, accounting information for 16 Lesotho Diamond Corporation 278–9 liabilities, current 410 life-cycle approach 328 see also total life-cycle costing limited companies 2–3 limiting (scarce) factors 79, 179, 181, 182, 456 lines of best fit 60 liquidity, investment decisions and 288 load factors (airlines) 63–4 local cost management 332, 333 local government budgets 193 local managers 332, 333 logical investors, actions 272–5 London Olympic Games (2012) 219 long-term business stability 13 long-term performance, divisional 381–2 long-term planning 13 long-term returns 269, 342 loss leaders 168–9 lost interest (in investment decisions) 270, 273 loyalty of customers 334 machine hours, as basis for charging overheads 105, 106, 108, 115 McKinsey & Co (management consultants) on board meetings 6–7 on competitor analysis 322 on investment decisions 306 make-or-buy decisions 81–3 management behaviour, budgets and 203–4 businesses/companies 3, 6–11 capital investment projects 303–8 of cash 431–9 development of, divisions and 369 divisions and 369, 371 information needs 23–4, 93–4 of inventories 414–23 strategic 6–11, 459 styles 241 of working capital 411 see also managers management accounting changes in 27–8 decision making and 15, 23–4 ethics and 28–9 financial accounting compared with 29–31 human behaviour and 25–6 influence on managers’ behaviour 25–6 information cost–benefit issues 18–21 key characteristics 17–18 managers’ requirements 23–4 materiality 18 systems 21, 456 usefulness 16–17, 20 information technology and 26–7 meaning of term 15–16, 456 non-financial information, reporting 24–5 for non-governmental organisations 32 for not-for-profit organisations 31–2 phases 22–3 role changes 27–8 as service provision 17–18 see also strategic management accounting management by exception 184, 219, 456 managers accounting information for 16, 23–4 authorisation system for 184 behaviour, influencing 25–6 bonuses 357–8 budgetary control and 239–40, 242–3 communication of budgets 186, 188 divisions and 369, 371 information requirements 23–4, 93–4 local managers 332, 333 motivation of budgets and 183 divisions and 369, 387 need to know full costs 93–4 perks 371, 372 rewards 357–8 strategic role, divisions and 369 see also management managing directors Manchester City Football Club 39 Mango (Management Accounting for NGOs) 32 manipulation (of measures/financial statements) 26, 28, 342–3 manufacturing automated manufacturing 11 costs 162 efficiency 399 lean manufacturing 11, 329, 456 margin of safety in break-even analysis 67–9, 457 in sensitivity analysis 292, 294 marginal analysis 77–85, 457 marginal cost pricing 166–8, 457 marginal costing see variable costing marginal costs 78, 160, 162, 457 marginal sales revenue 160, 162 market demand 162 market information, divisions and 369 market prices 457 transfer pricing and 389–90 market share 397 Z06_ATRI3622_06_SE_IDX.QXD 5/29/09 10:44 AM Page 531 INDEX marketable investments, shareholder value and 351, 353 marketing costs 351 Marks & Spencer 13 master budgets 181, 188, 194, 457 see also balance sheet (financial position statement); budgeted income statement; cash budgets Master of Business Administration (MBA) courses 44 materiality, management accounting information 18, 457 materials budgets 181 requirement planning (MRP) systems 422, 457 standard quantities and costs 244, 248, 250 variances 225–6 see also direct materials maximisation of profits 159, 160, 162, 163 MBA (Master of Business Administration) courses 44 medium-sized enterprises see small and mediumsized enterprises Mexican roads 265 MFI furniture retail chain 47 mission statements 7, 176, 177, 457 morale, staff 397 motivation of managers budgets and 183 divisions and 369 MRP (materials requirement planning) systems 422, 457 multi-product businesses break-even analysis 75 full costing see full (absorption) costing National Audit Office (NAO) 219 National Health Service (NHS) 27–8, 94, 103, 440 near-liquid assets 432 negotiated prices 391–2, 457 net operating profit after tax (NOPAT) 350, 353, 354 net present value (NPV) 260, 269–79 advantages 278 cash flows and 275, 276, 278 comparison with other investment appraisal methods 278, 283 credit decisions 428 discount rates 274, 277, 521–2 divisional performance 381–2 expected (ENPV) 296–302, 455 factors affecting sensitivity of NPV calculations 292 –4 inflation and 272 interest lost 270, 273 logical investors, actions 272–5 meaning of term 457 in practice 286, 287, 288, 289–90 present value table 521–2 relationship with IRR 280–2 risk and 270–2 shareholder value and 343–4 superiority 278 UK businesses 287, 289 US businesses 288 new industries, emergence of 11 Next plc 231, 412 NGOs (non-governmental organisations), management accounting for 32 NHS (National Health Service) 27–8, 94, 103, 440 Nike 13 Nissan Motors UK Ltd 423 non-accounting management style 241 non-controllable costs 374, 457 non-current assets 345, 346, 349 non-financial information, reporting 24–5 non-financial measures 334 in balanced scorecard 334–9 in budgeting 203 in divisional performance 396–401 reporting 400–1 non-governmental organisations (NGOs), management accounting for 32 non-linear relationships 74–5 non-operating profit variances 234–5, 457 NOPAT (non-operating profit after tax) 350, 353, 354 Norton, D 334, 337, 338, 339 not-for-profit organisations, management accounting information for 31–2 NPV see net present value objective probabilities 299, 457 objectives budgets and 176–7 business 7–8, 178, 278 competitors’ 320, 321 development of 23, 24 financial 12–15, 337 strategic 176, 177 OCC (operating cash cycles) 434–8, 457 off-balance-sheet activities 343 off-peak travel pricing 167 Ofwat 395 Olympic Games (2012) 219 on-time delivery 399 operating cash cycles (OCC) 434–8, 457 operating (operational) gearing 70–1, 457 operating profit margins, in shareholder value analysis 345, 346, 347, 349 531 Z06_ATRI3622_06_SE_IDX.QXD 532 5/29/09 10:44 AM Page 532 INDEX opportunity costs 38, 39, 40–4, 45, 163, 457 cash holdings 432 cheque clearance 438 of finance 277 investment decisions and 270, 283–4 transfer pricing and 389 options, strategic 9, 176 order-handling costs 323 ordering costs (in EOQ model) 420, 421 organisation charts 4, outcomes 8, 334, 337 outlay costs 40–1, 45, 457 output decisions 93, 121 outsourcing 82, 457 outstanding debts, monitoring 429 overdrafts 410, 439 overhead recovery rates 101, 115, 118, 136–7, 457 overheads activity-based costing 138–9 basis for charging 105–7 budgets 181 departmental basis 108–19 direct costs and 98, 135 in job costing 98–9, 101–5 meaning of term 456, 458 multi-product businesses 105–19 problems 100 recovery rates 101, 115, 118, 136–7, 457 segmenting 107–8 as service renderers 100–1 standard quantities and costs 250 in UK and USA 97 variances 228, 234 overtime 399 past costs 40, 44, 45, 283, 458 payback period (PP) 265–9, 458 advantages 267, 288 limitations 267–9 in practice 287, 288 penetration pricing 168–9, 458 percentage measures 263, 265, 283 performance budgets and 176, 188–9 comparisons with see budgets: variances control of 10, 23, 24, 176 divisional 372–85 evaluation of 23, 24, 122 future performance 338 reviews 10, 176 periodic budgets 180, 458 planning and control process 177, 178 long-term 13 strategic 10, 176–7 plans budgets as 179, 207 developing 23, 24 time horizons 178–9 Plymouth Argyle Football Club 75–6 position analysis 8–9, 176, 458 post-completion audit 306, 458 post-production phases, costs in 148, 149, 151 PP see payback period practical standards 245, 458 pre-despatching 343 pre-production phase, costs in 148, 149, 152 present value table 521–2 prevention costs 152 price makers 121, 164 price skimming 169, 458 price takers 121, 164 cost-plus information used by 164–5 prices market prices 389–90, 457 negotiated prices 391–2, 457 pricing 154–69 cost-plus pricing 121, 163–6, 454 decision making 93, 121 economic theory of 155–62 marginal cost pricing 166–8, 457 penetration pricing 168–9, 458 strategies 168–9 target pricing 168 see also transfer pricing probabilities, in ENPV calculations 299–300 process costing 96, 458 product cost centres 111, 113, 114, 458 production capital-intensive 135 direct-labour-intensive and direct-labour paced 135 efficiency 399 machine-paced 135 phases, costs in 148, 149, 151 products innovation 11, 334 quality, divisional performance and 397 profit centres 367, 368, 458 profit-conscious management style 241 profit–volume (PV) charts 72, 458 profitability measure 377 profits accounting of 342 actual vs budgeted 223 divisional 372–4 effect of gearing 70–1 investment decisions and 264, 284 maximisation of 159, 160, 162, 163 measurement of 93 Z06_ATRI3622_06_SE_IDX.QXD 5/29/09 10:44 AM Page 533 INDEX short-period measurement 342 targets 65–6, 220 transfer pricing and 387 understated 351 see also operating profit margins project management 303–8 prompt payment, discount for 428 provisions (in accounts) 351, 353 public utilities 165 published accounts, in credit management 425 purchases budgets 181 PV (profit–volume) charts 72, 458 qualitative factors of decisions 45–7 quality control, costing 152 costs 152, 458 of products and services 397 R&D see research and development raw materials budgets 181, 199 receivables see trade receivables Reckitt Benckiser Group plc 12 recording systems for inventories management 416–17 recovery rates see overhead absorption (recovery) rates references, credit 425 regulations, accounting 30 REL Consulting Group on extended credit terms 441 working capital survey 413, 437–8 relationships with customers 429, 430 with suppliers 433 relative efficiency, assessing 94, 121 relevance of management accounting information 17, 458 relevant costs 39, 40, 45, 458 relevant/marginal cost pricing 166–8 relevant range of activity volume 74, 458 reliability of management accounting information 17, 458 Renault 150–1 rent costs 58, 95 reordering systems for inventories management 417–18 reporting financial and non-financial measures 400–1 frequency 30 nature of reports 30 reputation of customers (in credit management) 424 research and development (R&D) expenditure divisional performance and 397 shareholder value and 351 residual income (RI) 379–80, 384, 385, 459 EVAR and 380, 384 resources allocation of 23, 24 transfer pricing and 387 competitors’ 320, 321 efficient use of 79–81 investment decisions 258 response times 12 responsibilities for cost management 332 restructuring costs, shareholder value and 351, 353 return on capital employed (ROCE), ARR compared with 262–3 return on investment (ROI) 376–9, 381–2, 384, 385, 459 returns, risks and 14–15 reviews, budgets 188, 189 rework 399 Rexam 414 RI (residual income) 379–80, 384–5, 459 risk avoidance of, in divisions 371, 372 ignoring 342 investment decisions 270–2, 273, 291–303 assessing levels of risk 292–302 reacting to levels of risk 302–3 meaning of term 459 returns and 14–15 risk-adjusted discount rates 302, 459 risk-free rate of return 302, 303 risk premiums 272, 273, 302, 303, 459 ROCE see return on capital employed ROI (return on investment) 376–9, 381–2, 384, 385, 459 Rok plc 282 rolling (or continual) budgets 180, 453, 459 Rolls-Royce plc 289, 306, 328, 412, 414 round tripping 343 Royal Dutch Shell 29 Royal Mail 145 Ryanair plc 8–9, 63–4 safety margin, see also margin of safety Sainsbury plc 71, 207 sales budgets 181, 182, 183 optimum level 159 price variances 225, 233, 459 revenues 62, 65, 158, 159 in shareholder value analysis 345, 346, 347, 349 volume variances 222–5, 233, 459 scale diseconomies of scale 74 economies of 73, 455 scale of investment 283 533 Z06_ATRI3622_06_SE_IDX.QXD 534 5/29/09 10:44 AM Page 534 INDEX scarce factor, contribution per unit 79 scarce resources, use of 79–81 scenario building 295, 459 scrap levels 399 segmenting overheads 107–8 semi-fixed (semi-variable) costs 59–60, 459 sensitivity analysis 292–6, 459 service management accounting as 17–18 quality 397 service cost centres 111, 112, 113, 114, 459 service industries activity-based costing 141–4 budgets 181–2 transfer pricing in 396 variance analysis 234 service renderers, overheads as 100–1, 141 service sector, growth 11 SES Global 289 Setanta Sports Holdings Ltd 76 Severn Trent plc 412, 413 shareholder value analysis (SVA) 344, 459 economic value analysis and 355–7 free cash flows in 344–6, 347–8 implications 350 managing with 348–9 business value and 346–8 creating 340–1 deriving 348–9 meaning of term 340 measuring 340–58 NPV analysis 343–4 quest for 340 shareholders 2–3 accounting information for 16 rate of return 343, 344 wealth, factors affecting 12–14 shares Shell plc 29 short-term profits 342 Siemens 355 Signet Group plc 282 single-product businesses 95–6 slow payers 430–1 small and medium-sized enterprises (SMEs) budgets 191–2 investment decisions 269, 271 social concerns 398 special contracts 78–9 special-purpose entities 343 specialist knowledge, divisionalisation and 369 Spice plc 165 staff absenteeism 399 salaries and wages 57 training and morale 397 turnover 399 see also employee(s) stakeholders 340 standard quantities and costs 244–6, 247, 459 limitations 247–9 in new business environment 249–50 standards ideal standards 245, 456 practical standards 245, 458 responsibility for setting 244 setting 244–6 types 245 standing orders (bank accounts) 438 Starbucks stepped fixed costs 58, 75, 459 Stern Stewart (management consultants) 350, 351, 358 stock see inventories ‘strategic fit’ 9, 291 strategic management 6–11, 459 strategic management accounting 318–19 competitive advantage through cost leadership 319, 327–33 competitor analysis 319–22 customer profitability analysis 323–7 failure rates for techniques 359 translating strategy into action 333–9 see also shareholder value strategic objectives 176, 177 strategic options 9, 176 strategic planning 10, 176–7 investment appraisal and 290–1 strategies, competitors’ 320, 321 strengths, weaknesses, opportunities and threats (SWOT) analysis 8–9, 460 subcontracting 81–2, 179 subjective probabilities 300, 459 sunk costs 44, 459 suppliers 3, 12 accounting information for 16 credit references 425 oppressive treatment of 28 relationships 433 SVA (shareholder value analysis) 459 SWOT (strengths, weaknesses, opportunities and threats) analysis 8–9, 460 target costing 151–2, 329, 460 target pricing 168 target profits 65–6, 384, 385 targets 7, 26, 176, 177, 179 taxation investment decisions and 284 Z06_ATRI3622_06_SE_IDX.QXD 5/29/09 10:44 AM Page 535 INDEX minimisation of 387, 388–9 rates, in shareholder value analysis 345, 346, 347, 349 technological change, effects 22–3, 26–7 Tesco plc 2, 307, 338, 412, 413 time decisions, divisions and 369 fixed costs based on 57 horizons 30 of budgets 178–9 in investment decisions 258 ARR 263–4 NPV 270, 278 PP 266, 269 lead time (in inventories management) 417, 456 top-down approach to budget-setting 187–8 total costs 61, 62, 100, 157, 159, 160, 460 relationship with fixed costs and variable costs 99 total direct labour variances 227, 228, 460 total direct materials variances 225, 226, 460 total life-cycle costing 148–51, 306, 328, 460 in practice 150, 328 total sales revenue 62, 65, 158, 159, 160 Toyota Motors 205–6 trade creditors see trade payables trade debtors see trade receivables trade loading 343 trade payables average settlement period for 435, 437, 441, 452 budgets 181, 198, 199 cash discounts 440–1 controlling 441–2 as current liabilities 410 managing 439–42 trade receivables ageing schedule for 429–30, 452 average settlement period for 429, 435, 437, 452 budgets 181, 198, 199 cash discounts 428 collection policies 429–31 credit periods 426–7 as current assets 410 customers to receive credit 424–5 managing 424–31 provision for 351, 353 trade references in credit management 425 training, staff 397 transfer pricing 386–96 differential 394 full costs 391 market prices and 389–90 meaning of term 386, 460 negotiated prices 391–2, 457 objectives 386–7 policies 389 in practice 395–6 in service industries 396 tax mitigation and 387, 388–9 in UK 395–6 variable costs 390 transmission of cash 438 UK hospitals 333 investment appraisal methods 287, 289 National Health Service 27–8, 94, 103, 440 overheads 97 transfer pricing 395–6 uncertainty, budget targets 242 uncompetitive markets 135 unconventional budgets 205–7 understandability of management accounting information 18, 460 Unilever 207 United Business Media 414 units, cost 95, 454 US businesses investment appraisal methods 287–8 overheads 97 value chain analysis 330–1, 460 value drivers 334, 460 in shareholder value analysis 345, 346, 347, 349 variable costing 123, 460 full (absorption) costing compared with 123–6 variable costs 56, 460 relationship with fixed costs and total costs 99 variances adverse 223, 233–4, 452 analysis of 229–31, 234 compensating 453 favourable 223, 455 insignificant 236 meaning of term 223, 460 non-operating profit 457 sales price 459 see also budget(s): variances Vodafone Group plc 82 volumes of activity, costs and 56, 57, 58–9, 60 Volvo Cars 74 Wal-Mart 415–16 warranty claims 399 water industry, transfer pricing in 395 wealth enhancement 12–14, 163, 220 535 Z06_ATRI3622_06_SE_IDX.QXD 536 5/29/09 10:44 AM Page 536 INDEX Whole Foods Market 354 whole life-cycle costing see total life-cycle costing work in progress 410 working capital cycle 410 management of 411 meaning of term 410–11, 460 scale of 411–13 in shareholder value analysis 345, 346, 347, 349 see also inventories write-offs 342, 351 year-end assumptions, in investment appraisal 284 zero-base budgeting (ZBB) 193–4, 460 ... (absorption) costing accounting ‘creative’ 342–3 information, users 15, 16–17 periods 122 policies 342 profits 342, 350 role 15 see also management accounting; strategic management accounting accounting... provision 17–18 see also strategic management accounting management by exception 184, 219, 456 managers accounting information for 16, 23–4 authorisation system for 184 behaviour, influencing 25–6... market information 369 non-financial information 24–5 quality 30 range 30 standards setting 245 see also management accounting: information information systems 21 information technology(IT) 26–7 innovation,