Accounting for Managers

Dr Paul M. Collier was Professor of Accounting at Monash University in Melbourne, Australia. He was previously at Aston Business School in Birmingham, UK.  Paul is currently a consultant and investor in a hospitality business but retains an ongoing association in various academic projects with Monash University. Before becoming an academic, Paul was chief financial officer of a listed company and has worked in senior financial and general management positions in the UK and Australia. He has also conducted numerous executive education courses. Paul has been a board member of a large UK Housing Association and an Australian health service. This book is a result of his practical experience as a producer and user of accounting information as well as his teaching and training experience in the UK and Australia.  A comprehensive package of supplementary material is available on the book companion website at www.wileyeurope.com/college/collier, including PowerPoint slides, multiple choice questions for each chapter, and additional questions and solutions.

Preface to the Fifth Edition xiii

About the Author xvii

Acknowledgements xix

Part I Context of Accounting 1

1 Introduction to Accounting 3

Accounting, accountability, and the account 3

A short history of accounting 5

Introducing the functions of accounting 7

The role of financial accounting 7

The role of management accounting 8

Recent developments in accounting 10

The relationship between financial accounting and management accounting 12

A critical perspective 14

Conclusion 16

References 16

Questions 17

2 Accounting and its Relationship to Shareholder Value and Corporate Governance 19

Capital and product markets 19

Shareholder value‐based management 21

Shareholder value, strategy, and accounting 23

Company regulation and corporate governance 25

Risk management, internal control, and accounting 28

A critical perspective 29

Conclusion 30

References 30

Questions 31

3 Recording Financial Transactions and the Principles of Accounting 33

Business events, transactions, and the accounting system 33

The double entry: recording transactions 35

Extracting financial information from the accounting system 38

Basic principles of accounting 42

Cost terms and concepts: the limitations of financial accounting 45

Conclusion 47

References 47

Questions 47

4 Management Control, Accounting, and its Rational‐Economic Assumptions 51

Management control systems 51

Planning and control in organizations 54

Non‐financial performance measurement 58

A theoretical framework for accounting 64

Conclusion 65

References 65

Websites 67

Questions 67

5 Interpretive and Critical Perspectives on Accounting and Decision Making 69

Research and theory in management control and accounting 70

Alternative paradigms 73

The interpretive paradigm and the social construction perspective 75

Culture, control, and accounting 77

The radical paradigm and critical accounting 78

Power and accounting 80

Creative accounting, ethics, and accounting 84

Conclusion 90

References 91

Questions 93

Part II The Use of Financial Statements for Decision Making 95

6 Constructing Financial Statements: IFRS and the Framework of Accounting 97

International Financial Reporting Standards (IFRS) 98

Framework for the Preparation and Presentation of Financial Statements 100

True and fair view 103

Reporting profitability: the Income Statement and Statement of Comprehensive Income 104

Reporting financial position: the Balance Sheet or Statement of Financial Position 107

The matching principle and accruals accounting 109

Depreciation 111

Specific IFRS accounting treatments 112

Reporting cash flow: the Statement of Cash Flows 116

Differences between the financial statements 118

A theoretical perspective on financial statements 120

A critical perspective on financial statements and accounting standards 121

Conclusion 122

Reference 122

Websites 122

Appendix to Chapter 6: List of IFRS and FRS 123

Questions 125

7 Interpreting Financial Statements 129

Annual Reports 129

The context of financial statements 131

Ratio analysis 132

Profitability 133

Liquidity 135

Gearing 135

Activity/efficiency 136

Working capital 137

Managing receivables 138

Managing inventory 138

Managing payables 139

Managing working capital 139

Shareholder return 140

The relationship between financial ratios 141

Interpreting financial statements using ratios 143

Using the Statement of Cash Flows 145

Limitations of ratio analysis 152

A wider view on corporate reporting 156

Intellectual capital 157

Institutional theory 158

Corporate social and environmental responsibility 158

Applying different perspectives to financial statements 161

Conclusion 162

References 163

Questions 163

8 Accounting for Inventory 171

Introduction to inventory 171

Methods of costing inventory in manufacturing 175

Management accounting statements 180

Conclusion 181

Questions 182

Part III Using Accounting Information for Decision Making, Planning, and Control 185

9 Accounting and Information Systems 187

Introduction to accounting and information systems 187

Methods of data collection 188

Big data 190

Types of information system 190

Business processes 192

Information systems design and controls 194

Conclusion 196

References 196

Questions 196

10 Marketing Decisions 197

Marketing strategy 197

Cost behaviour 199

Cost–volume–profit analysis 201

Alternative approaches to pricing 208

Segmental profitability 212

Customer profitability analysis 216

Conclusion 219

References 219

Questions 220

11 Operating Decisions 223

The operations function 223

Managing operations – manufacturing 225

Managing operations – services 227

Accounting for the cost of spare capacity 228

Capacity utilization and product mix 229

Theory of Constraints 231

Operating decisions: relevant costs 232

Supply chain management, total cost of ownership, and supplier cost analysis 237

The cost of quality 239

Environmental cost management 241

Conclusion 246

References 247

Questions 247

12 Human Resource Decisions 251

Human resources and accounting 251

The cost of labour 252

Relevant cost of labour 255

Conclusion 261

References 262

Questions 262

13 Overhead Allocation Decisions 267

Cost classification 267

The overhead allocation problem 271

Shifts in management accounting thinking 272

Alternative methods of overhead allocation 273

Differences between absorption and activity‐based costing 282

Contingency theory 285

International comparisons 286

Behavioural implications of management accounting 287

Conclusion 290

References 291

Questions 292

14 Strategic Investment Decisions 297

Strategy 297

Capital expenditure evaluation 298

Accounting rate of return 301

Payback 304

Discounted cash flow 304

Comparison of techniques 307

Conclusion 311

References 311

Appendix to Chapter 14: Present value factors 311

Questions 313

15 Performance Evaluation of Business Units 317

Structure of business organizations 317

The decentralized organization and divisional performance measurement 320

Controllability 323

Comparison of methods 326

Transfer pricing 327

Transaction cost economics 329

Conclusion: a critical perspective 330

References 331

Questions 332

16 Budgeting 335

What is budgeting? 335

The budgeting process 336

The profit budget 339

Cash forecasting 345

A behavioural perspective on budgeting 349

A critical perspective: beyond budgeting? 350

Conclusion 354

References 354

Questions 354

17 Budgetary Control 359

What is budgetary control? 359

Variance analysis 361

Flexible budgets and sales variances 362

Flexible budgets and cost variances 363

Interpreting variances 365

Criticism of variance analysis 366

Applying different perspectives to management accounting 368

Conclusion 368

References 369

Questions 369

18 Strategic Management Accounting 371

Trends in management accounting 371

Strategic management accounting 372

Accounting techniques to support strategic management accounting 374

Lean production, lean accounting, and backflush costing 381

Conclusion 384

References 384

Further reading 385

Questions 386

Part IV Supporting Information 387

Readings 389

Reading 1 Cooper and Kaplan (1988). How cost accounting distorts product costs 390

Reading 2 Dent (1991). Accounting and organizational cultures: a field study of the emergence of a new organizational reality 403

Glossary of Accounting Terms 435

Solutions to Questions 449

Index 509