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Instructor’s ManualManagement and Cost
Accounting
Fifth edition
Alnoor Bhimani
Charles T. Horngren
Srikant M. Datar
Madhav V. Rajan
Farah Ahamed
For further instructor material
please visit:
www.pearsoned.co.uk/bhimani
ISBN: 978-0-273-75986-7
Pearson Education Limited 2012
Lecturers adopting the main text are permitted to download and photocopy the manual as required.
,Pearson Education Limited
Edinburgh Gate
Harlow
Essex CM20 2JE
England
and Associated Companies around the world
Visit us on the World Wide Web at:
www.pearson.com/uk
This edition published 2012
© Pearson Education Limited 2012
The rights of Alnoor Bhimani, Charles T. Horngren, Srikant M. Datar, Madhav V. Rajan, Farah
Ahamed to be identified as the authors of this Work have been asserted by them in accordance
with the Copyright, Designs and Patents Act 1988.
Pearson Education is not responsible for the content of third-party internet sites.
ISBN: 978-0-273-75986-7
All rights reserved. Permission is hereby given for the material in this publication to be
reproduced for OHP transparencies and student handouts, without express permission of the
Publishers, for educational purposes only. In all other cases, no part of this publication may be
reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise without either the prior written permission of
the Publishers or a licence permitting restricted copying in the United Kingdom issued by the
Copyright Licensing Agency Ltd. Saffron House, 6-10 Kirby Street, London EC1N 8TS. This
book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of
binding or cover other than that in which it is published, without the prior consent of the
Publishers.
, Contents
Chapters Pages
Part I – Management and cost accounting fundamentals
1. The accountant’s role in the organisation 6
2. An introduction to cost terms and purposes 15
3. Job-costing systems 28
4. Process-costing systems 42
5. Cost allocation 66
6. Cost allocation: joint-cost situations 81
7. Income effects of alternative stock-costing methods 98
Part II – Accounting Information for decision making
8. Cost–volume–profit relationships 114
9. Determining how costs behave 131
10. Relevant information for decision making 144
11. Activity-based costing 155
12. Pricing, target costing and customer profitability analysis 166
13. Capital investment decisions 179
Part III – Planning and budgetary control systems
14. Motivation, budgets and responsibility accounting 200
15. Flexible budgets, variances and management control: I 213
16. Flexible budgets, variances and management control: II 230
17. Measuring yield, mix and quantity effects 248
Part IV – Management control systems and performance issues
18. Control systems and transfer pricing 268
19. Control systems and performance measurement 281
Part V – Quality, time and the strategic management of costs
20. Quality and throughput concerns in managing costs 298
21. Accounting for just-in-time systems 309
22. Strategic management accounting and emerging issues 326
Guide to case study solutions 334
3
© Pearson Education Limited 2012
, Preface
This manual is intended to assist lecturers’ discussion of assignments and lecture topics. ‘Points
to stress and teaching tips’ are provided for each chapter to give broad guidance on relevant
issues or potential areas of difficulty to students. Solutions are offered for end-of-chapter
‘assessment material’ in the text. Case notes prepared (in most cases) by the case writer to all
cases included in the text are also provided. The assistance of Pauline Gleadle, Laurence Habib,
Imran Malik, Rishi Zaveri and Marvish Shami with reviewing and checking many of the
problems and their solutions is gratefully acknowledged.
A. Bhimani
C. Horngren
S. Datar
M. Rajan
F. Ahamed
4
© Pearson Education Limited 2012
, PART I
MANAGEMENT AND COST
ACCOUNTING FUNDAMENTALS
5
© Pearson Education Limited 2012
, CHAPTER 1
The accountant’s role in the organisation
Teaching tips and points to stress
Modern management accounting
While the accounting system provides information (e.g. product costs, downtime) for
management decisions, cost management refers to active use of this information to plan and
control costs. Cost management requires managers to actively seek ways to reduce costs. Much
cost management occurs well before the accounting system recognises costs. (The product
design stage often offers more cost management opportunities than controlling manufacturing
operations.) Cost management is integrated throughout the text.
To reinforce the value-chain concept, ask a student to illustrate activities/costs in each function
in the context of his/her work experience.
Students are often confused about the difference between R&D and Design. The distinctions are
not always clear-cut, but R&D is basic research and idea generation, whereas design turns those
ideas into reality. Design encompasses development of prototype products and the
manufacturing process by which the products are produced.
Elements of management control
Planning and control are distinct activities, but they go hand in hand. To maximise the benefits
from planning (e.g. budgeting), the manager should use that plan as a benchmark for controlling
(i.e. assessing the effectiveness and efficiency of implementation). Conversely, it is difficult to
control activities without a plan or budget.
To help students understand how accounting numbers can affect employees’ behaviour and
hence firm’s performance, ask questions, such as if a materials procurement officer’s annual
bonus depends on the difference between budgeted price and actual price paid, how will the
officer behave? The officer may be tempted to purchase cheap, perhaps low-quality materials
that may not be delivered on a reliable, timely basis; he or she may refuse to order materials for
rush orders if there will be an extra delivery charge, etc.
Although it is difficult to quantify the costs and benefits of accounting systems, a decision about
the system will be made. The question is whether costs and benefits are considered implicitly
(as part of a ‘gut feeling’) or explicitly, where effects of different estimates can be examined.
Product cost information permeates all three functions. In the scorekeeping function, accountants
accumulate product cost information for both external and internal reportings. Product cost
information can help identify cost management opportunities (i.e. attention directing) and it is
used in make-or-buy decisions, where managers compare the cost of making the product or
component with the cost of buying it from an external supplier (i.e. problem solving).
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© Pearson Education Limited 2012
, Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, Instructor’s Manual
Costs, benefits and context
The ‘best’ information system depends on both technical and human aspects of the specific
situation. This is a major difference between financial accounting, where firms generally need to
comply with external reporting requirements where they exist, and management accounting,
where choices are based on an explicit or implicit cost–benefit analysis. Management
accounting students must do more than memorising rules. They must evaluate the situation and
context, decide which technique or information system is most appropriate and implement it.
Themes in the design of management accounting systems
Customer satisfaction is the dominant theme. All other themes are directed toward attracting and
retaining profitable customers who remain satisfied.
These themes can also be applied to functions within a business. For example, management
accountants (MAs) must satisfy their customers (managers) by satisfying key success factors.
MAs must provide high-quality information on a timely basis for a reasonable cost. MAs can
develop innovative formats and analyses to facilitate management decisions. They should
provide information regarding all elements of the value chain and must prepare information for
internal decisions as well as external financial reporting. MAs should continually strive to
provide better quality information, faster, at a lower cost.
Solutions to review questions
1.1 The five broad purposes are:
Purpose 1: Formulating overall strategies and long-range plans.
Purpose 2: Resource allocation decisions such as product and customer emphasis and
pricing.
Purpose 3: Cost planning and cost control of operations and activities.
Purpose 4: Performance measurement and evaluation of people.
Purpose 5: Meeting external regulatory and legal reporting requirements where they
exist.
1.2 Management accounting measures and reports financial as well as other types of
information that may be useful to managers in fulfilling the goals of the organisation.
Financial accounting focuses on external reporting that is guided by generally
accepted accounting principles.
1.3 The business functions in the value chain are:
• Research and development – the generation of, and experimentation with, ideas
related to new products, services or processes.
• Design of products, services and processes – the detailed planning and engineering
of products, services or processes.
• Production – the coordination and assembly of resources to produce a product or
deliver a service.
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© Pearson Education Limited 2012
, Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, Instructor’s Manual
• Marketing – the process by which individuals or groups (a) learn about and value
the attributes of products or services and (b) purchase those products or services.
• Distribution – the mechanism by which products or services are delivered to a
customer.
• Customer service – the support activities provided to the customers.
1.4 Cost management refers to actions that managers undertake to satisfy customers while
continuously reducing and controlling costs.
1.5 A successful accountant requires general business skills (such as understanding the
strategy of an organisation) and people skills (such as motivating other team members)
as well as technical skills (such as computer knowledge).
1.6 Yes. Drucker is advocating that accountants do more than scorekeeping, which is often
interpreted as being a ‘bobby on the beat’ or a watchdog. It is also essential that
accountants emphasise their attention-directing and problem-solving functions.
1.7 The new accountant could reply in one or more of several ways:
a Demonstrate to the plant manager how he or she could make better decisions, if the
plant accountant was viewed as a resource rather than a dead weight.
In a related way, the plant accountant could show how the plant manager’s time and
resources could be saved by viewing the new plant accountant as a team member.
b Demonstrate to the plant manager a good knowledge of technical aspects at the
plant. This approach may involve doing background reading. It certainly will
involve spending much time on the plant floor speaking to plant personnel.
c Show the plant manager’s examples of the new plant accountant’s past successes in
working with line managers in other plants. Examples could include
• assistance in preparing the budget,
• assistance in analysing problem situations and
• assistance in submitting capital budget requests.
d Seek assistance from the corporate accountant to highlight to the plant manager the
importance of many tasks undertaken by the new plant accountant. This approach is
a last resort but may be necessary in some cases.
1.8 A customer-driven management accountant function would
a approach its customers (such as managers in different parts of the value chain) to
determine how it can facilitate those managers making better decisions, and
b solicit regular and systematic feedback from those customers about its performance.
1.9 Yes, management accountants have customers just as companies have customers who
purchase their products or services. Management accountants provide information and
advice to many line and staff people in the organisation and to various external parties.
It is essential that they provide information and advice that line and staff customers and
external parties view as timely and relevant.
8
© Pearson Education Limited 2012
, Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, Instructor’s Manual
1.10 Five themes that affect the way managers operate and have prompted developments in
management accounting are the following:
• Customer satisfaction is priority one
• Key success factors (cost, quality, time, and innovative products and services)
• Total value-chain analysis
• Continuous improvement
• Dual external/internal focus.
Solutions to exercises
1.13 Value chain and classification of costs, computer company. (15 min)
Cost item Value-chain business function
a Production
b Distribution
c Design
d Research and development
E Customer service
F Design (or research and development)
G Marketing
H Production
1.14 Value chain and classification of costs, pharmaceutical company. (15 min)
Cost item Value-chain business function
a Design
b Marketing
c Customer service
d Research and development
e Marketing
f Production
g Marketing
h Distribution
9
© Pearson Education Limited 2012
, Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5th Edition, Instructor’s Manual
1.15 Uses of feedback. (10 min)
Item Use of feedback
a 2
b 6
c 4
d 3
e 5
f 1
1.16 Scorekeeping, attention directing and problem solving. (15 min)
Because the accountant's duties are often not sharply defined, some of these answers
might be challenged.
Activity Function
a Scorekeeping
b Attention directing
c Scorekeeping
d Problem solving
e Attention directing
f Attention directing
g Problem solving
h Scorekeeping, depending on the extent of the report
i This question is intentionally vague. The give-and-take of the budgetary
process usually encompasses all three functions, but it emphasises
scorekeeping the least. The main function is attention directing, but
problem solving is also involved.
j Problem solving
1.17 Scorekeeping, attention directing and problem solving. (15 min)
The accountant’s duties are often not sharply defined, so some of these answers might
be challenged.
Activity Function
a Attention directing
b Problem solving
c Scorekeeping
10
© Pearson Education Limited 2012
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