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MANAGEMENT
ACCOUNTING
FOR DECISION MAKERS
F01 Management Accounting for Decision Makers 49459.indd 1 23/09/2020 17:05

At Pearson, we have a simple mission: to help people
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To learn more, please visit us at www.pearson.com/uk

TENTH EDITION
MANAGEMENT
ACCOUNTING
Peter Atrill and
Eddie McLaney FOR DECISION MAKERS
Harlow, England • London • New York • Boston • San Francisco • Toronto • Sydney
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First published 1995 by Prentice Hall Europe (print)

Second edition published 1999 by Prentice Hall Europe (print)
Third edition published 2002 by Pearson Education Limited (print)
Fourth edition published 2005 (print)
Fifth edition published 2007 (print)
Sixth edition published 2009 (print)
Seventh edition published 2012 (print and electronic)
Eighth edition published 2015 (print and electronic)
Ninth edition published 2018 (print and electronic)
Tenth edition published 2021 (print and electronic)
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ISBN: 978-1-292-34945-9 (print)

978-1-292-34946-6 (PDF)
978-1-292-34951-0 (ePub)
British Library Cataloguing-in-Publication Data
A catalogue record for the print edition is available from the British Library
Library of Congress Cataloging-in-Publication Data
Names: Atrill, Peter, author. | McLaney, E. J., author.
Title: Management accounting for decision makers / Peter Atrill and Edward
McLaney.
Description: Tenth edition. | Harlow, England ; New York : Pearson, 2021. |
Includes bibliographical references and index. | Summary: “In this
edition, we have taken the opportunity to improve the book. We have
expanded on the changing role of management accountants to enable them
to retain their place at the centre of the decision-making and planning
process. In Chapter 1, we have included the recently developed statement
of Global Management Accounting Principles. These principles have been
identified (by the leading management accounting professional bodies in
the UK and US) as those to be followed when determining the information
that managers need. In Chapter 7, we have brought in a discussion of
current thinking and practice in the area of management control.
Throughout this new edition, we have included additional, and more
up-to-date, examples of management accounting in practice. We have also
added more in-chapter questions and diagrams”-- Provided by publisher.
Identifiers: LCCN 2020032735 | ISBN 9781292349459 (hardback)
Subjects: LCSH: Managerial accounting. | Decision making.
Classification: LCC HF5657.4 .A873 2021 | DDC 658.15/11--dc23
LC record available at https://lccn.loc.gov/2020032735
10 9 8 7 6 5 4 3 2 1
25 24 23 22 21
Front cover image Singora/Shutterstock
Print edition typeset in 9.25/13 pt Helvetica Neue LT W1G by SPi Global
Printed in Slovakia by Neografia
NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION

Brief contents
Preface xvii
How to use this book xix
Acknowledgements xxi
1 Introduction to management accounting 1

2 Relevant costs and benefits for decision making 42
3 Cost–volume–profit analysis 66
4 Full costing 107
5 Costing and cost management in a competitive environment 154
6 Budgeting 197
7 Accounting for control 243
8 Making capital investment decisions 286
9 Managing risk 333
10 Strategic management accounting: performance
evaluation and pricing in a competitive environment 360
11 Measuring divisional performance 413
12 Managing working capital 459
Appendix A Glossary of key terms 513

Appendix B Solutions to self-assessment questions 522
Appendix C Solutions to critical review questions 534
Appendix D Solutions to selected exercises 544
Appendix E Present value table 584
Index 587
Credits 601
BRIEF CONTENTS v

Contents
Preface xvii
How to use this book xix
Acknowledgements xxi
1 Introduction to management accounting 1

Introduction 1
Learning outcomes 1
What is the purpose of a business? 2
How are businesses organised? 3
How are businesses managed? 6
Establish mission, vision and objectives 7
Undertake a position analysis 9
Identify and assess the strategic options 10
Select strategic options and formulate plans 10
Perform, review and control 10
The changing business landscape 11
What is the financial objective of a business? 12
Balancing risk and return 14
What is management accounting? 16
How useful is management accounting information? 18
Providing a service 18
Weighing up the costs and benefits 20
Management accounting as an information system 22
It’s just a phase 23
What information do managers need? 25
Reporting non-financial information 27
Influencing managers’ behaviour 28
Reaping the benefits of information technology 29
From bean counter to team member 30
Reasons to be ethical 32
Management accounting and financial accounting 34
Summary 36
Key terms 39
References 39
Further reading 39
Critical review questions 39
Exercises 40
CONTENTS vii

2 Relevant costs and benefits for decision making 42
Introduction 42
Learning outcomes 42
Cost–benefit analysis 43
What is meant by ‘cost’? 44
Relevant costs: opportunity and outlay costs 46
Irrelevant costs: sunk costs and committed costs 49
Sunk cost fallacy 50
Determining the relevant cost of labour and materials 51
Labour 51
Materials 54
Non-measurable costs and benefits 56
Summary 58
Key terms 59
Further reading 59
Exercises 60
3 Cost–volume–profit analysis 66
Introduction 66
Cost behaviour 67
Fixed cost 67
Variable cost 69
Semi-fixed (semi-variable) cost 70
Analysing semi-fixed (semi-variable) costs 70
Finding the break-even point 72
Contribution 78
Contribution margin ratio 79
Margin of safety 79
Achieving a target profit 81
Operating gearing and its effect on profit 82
Profit–volume charts 84
The economist’s view of the break-even chart 85
The problem of breaking even 87
Weaknesses of break-even analysis 87
Using contribution to make decisions: marginal analysis 90
Pricing/assessing opportunities to enter contracts 91
The most efficient use of scarce resources 93
Make-or-buy decisions 95
Closing or continuation decisions 97
Summary 100
Key terms 101
Further reading 101
Exercises 102
viii CONTENTS

4 Full costing 107
Introduction 107
What is full costing? 108
Why do managers want to know the full cost? 108
Single-product businesses 110
Process-costing problems 111
Multi-product businesses 113
Direct and indirect cost 114
Job costing 115
Full costing and cost behaviour 116
The problem of indirect cost 118
Overheads as service renderers 118
Job costing: a worked example 118
Selecting a basis for charging overheads 123
Segmenting the overheads 126
Dealing with overheads on a cost centre basis 127
Batch costing 137
Non-manufacturing overheads 139
Full (absorption) costing and estimation errors 140
Full (absorption) costing and relevant costs 141
Full (absorption) costing versus variable costing 142
Which method is better? 144
Summary 146
Key terms 148
Reference 148
Further reading 148
Exercises 149
5 Costing and cost management in a

competitive environment 154
Introduction 154
Cost determination in the changed business environment 155
Costing and pricing: the traditional way 155
Costing and pricing: the new environment 155
Cost management systems 157
The problem of overheads 157
Taking a closer look 157
Activity-based costing 158
Assigning overheads 159
ABC and the traditional approach compared 160
ABC and service industries 161
Benefits and costs of ABC 165
ABC in practice 167
CONTENTS ix

Managing costs over the product life cycle 169
Total life-cycle costing 170
Target costing 172
Kaizen costing 175
Other approaches to managing costs in the modern environment 178
Value chain analysis 178
Benchmarking 180
Total quality management 184
Managing quality costs 186
An alternative view 188
Summary 191
Key terms 192
Reference 192
Further reading 192
Exercises 193
6 Budgeting 197
Introduction 197
How budgets link with strategic plans and objectives 198
Exercising control 199
Time horizon of plans and budgets 201
Budgets and forecasts 202
Periodic and continual budgets 202
Limiting factors 203
How budgets link to one another 203
How budgets help managers 206
The budget-setting process 208
Step 1: Establish who will take responsibility 208
Step 2: Communicate budget guidelines to relevant managers 208
Step 3: Identify the key, or limiting, factor 208
Step 4: Prepare the budget for the area of the limiting factor 209
Step 5: Prepare draft budgets for all other areas 209
Step 6: Review and coordinate budgets 209
Step 7: Prepare the master budgets 210
Step 8: Communicate the budgets to all interested parties 210
Step 9: Monitor performance relative to the budget 210
Using budgets in practice 211
Incremental and zero-base budgeting 213
Preparing budgets 216
The cash budget 216
Preparing other budgets 220
Activity-based budgeting 222
Non-financial measures in budgeting 225
Budgets and management behaviour 225
Problems with budgets 226
Beyond conventional budgeting 228
The future of budgeting 230
x CONTENTS

Summary 233
Key terms 234
References 234
Further reading 234
Exercises 235
7 Accounting for control 243

Introduction 243
Budgeting for control 244
Types of control 245
Variances from budget 247
Flexing the budget 247
Sales volume variance 248
Sales price variance 251
Materials variances 252
Labour variances 253
Fixed overhead variance 254
Reconciling the budgeted profit with the actual profit 255
Reasons for adverse variances 259
Variance analysis in service industries 261
Non-operating-profit variances 261
Investigating variances 261
Variance analysis in practice 264
Compensating variances 264
Standard quantities and costs 265
Setting standards 266
Who sets the standards? 266
How is information gathered? 266
What kind of standards should be used? 267
The learning-curve effect 267
Other uses for standard costing 268
Some problems 269
The new business environment 271
Making budgetary control effective 272
Behavioural issues 273
Failing to meet the budget 274
Budgets and management autonomy 275
Types of management control 275
Direct control 275
Indirect control 276
Summary 278
Key terms 280
Reference 280
Further reading 280
Exercises 281
CONTENTS xi

8 Making capital investment decisions 286
Introduction 286
The nature of investment decisions 287
Investment appraisal methods 288
Accounting rate of return (ARR) 290
ARR and ROCE 291
Problems with ARR 292
Payback period (PP) 294
Problems with PP 296
Net present value (NPV) 298
Why does time matter? 299
Interest lost 299
Risk 299
Inflation 300
What should managers do? 300
Dealing with the time value of money 301
Calculating the net present value 303
Using present value tables 304
The discount rate and the cost of capital 305
Why NPV is better 306
NPV and economic value 306
Internal rate of return (IRR) 307
Problems with IRR 310
Some practical points 311
Investment appraisal in practice 314
Investment appraisal and strategic planning 317
Managing investment projects 318
Stage 1: Determine investment funds available 318
Stage 2: Identify profitable project opportunities 319
Stage 3: Evaluate the proposed project 319
Stage 4: Approve the project 319
Stage 5: Monitor and control the project 320
Summary 323
Key terms 324
References 325
Further reading 325
Exercises 326
9 Managing risk 333

Introduction 333
Dealing with risk 334
xii CONTENTS

Assessing the level of risk 334
Sensitivity analysis 334
Strengths and weaknesses of sensitivity analysis 341
Scenario analysis 343
Expected values 343
Reacting to the level of risk 351
Summary 352
Key terms 353
Further reading 354
Exercises 354
10 Strategic management accounting: performance

evaluation and pricing in a competitive environment 360
Introduction 360
What is strategic management accounting? 361
Facing outwards 362
Competitor analysis 362
Customer profitability analysis 366
Competitive advantage through cost leadership 370
Non-financial measures of performance 372
The balanced scorecard 373
Scorecard problems 380
Measuring shareholder value 380
The quest for shareholder value 381
How can shareholder value be created? 381
The need for new measures 382
Economic value added (EVA®) 383
Shareholder value-based management in practice 388
Just another fad? 389
Pricing 389
Economic theory 389
Some practical considerations 397
Full cost (cost-plus) pricing 398
Pricing on the basis of marginal cost 400
Target pricing 402
Pricing strategies 402
Summary 406
Key terms 407
References 407
Further reading 407
Exercises 408
CONTENTS xiii

11 Measuring divisional performance 413
Introduction 413
Divisionalisation 414
Why do businesses divisionalise? 414
Devolving decisions 414
Divisional structures 416
Is divisionalisation a good idea? 416
Measuring divisional profit 421
Contribution 421
Controllable profit 422
Divisional profit before common expenses 422
Divisional profit for the period 423
Divisional performance measures 424
Return on investment (ROI) 424
Residual income (RI) 428
Looking to the longer term 429
Comparing performance 431
EVA® revisited 432
Transfer pricing 433
The objectives of transfer pricing 434
Transfer pricing and tax mitigation 436
Transfer pricing policies 438
Market prices 438
Variable cost 439
Full cost 439
Negotiated prices 440
Divisions with mixed sales 441
Differential transfer prices 443
Transfer pricing and service industries 445
Non-financial measures of performance 445
What is measured? 446
Choosing non-financial measures 449
Who should report? 449
Summary 451
Key terms 453
Further reading 453
Exercises 454
12 Managing working capital 459

Introduction 459
What is working capital? 460
Managing working capital 461
The scale of working capital 461
xiv CONTENTS

Managing inventories 464
Budgeting future demand 466
Financial ratios 466
Recording and reordering systems 466
Levels of control 469
Inventories management models 471
XYZ inventories management 477
Managing trade receivables 478
Which customers should receive credit and how much should they be
offered? 479
Length of credit period 480
An alternative approach to evaluating the credit decision 483
Cash discounts 484
Debt factoring and invoice discounting 485
Credit insurance 485
Collection policies 485
Reducing the risk of non-payment 489
Managing cash 490
Why hold cash? 490
How much cash should be held? 490
Controlling the cash balance 491
Cash budgets and managing cash 492
Operating cash cycle 493
Cash transmission 497
Bank overdrafts 498
Managing trade payables 498
Taking advantage of cash discounts 499
Controlling trade payables 500
Managing working capital 500
Summary 503
Key terms 505
Further reading 506
Exercises 507
Appendix A Glossary of key terms 513

Appendix B Solutions to self-assessment questions 522
Appendix C Solutions to critical review questions 534
Appendix D Solutions to selected exercises 544
Appendix E Present value table 584
Index 587
Credits 601
Lecturer Resources ON THE

WEBSITE
For password-protected online resources tailored to
support the use of this textbook in teaching, please visit
go.pearson.com/uk/he/resources
CONTENTS xv

Preface
Welcome to the tenth edition of Management Accounting for Decision Makers. This book is
directed primarily at those following an introductory course in management accounting. Many
readers will be studying at a university or college, perhaps majoring in accounting or in another
area, such as business studies, IT, tourism or engineering. Other readers, however, may be
studying independently, perhaps with no qualification in mind.
The book is written in an ‘open learning’ style, which has been adopted because we believe
that readers will find it more ‘user-friendly’ than the traditional approach. Whether they are
using the book as part of a taught course, or for personal study, we feel that the open learning
approach makes it easier for readers to learn.
In writing this book, we have been mindful of the fact that most readers will not have studied
management accounting before. We have tried to make the topic accessible to readers in a
number of ways. This includes avoiding unnecessary jargon. Where technical terminology is
unavoidable, we have given clear explanations. At the end of the book (in Appendix A) there
is a glossary of technical terms, which readers can use to refresh their memory if they come
across a term whose meaning is in doubt. In the book, we also introduce topics gradually,
explaining everything as we go. We have included frequent questions and tasks of various
types to try to help readers to understand the subject fully, in much the same way as a good
lecturer would do in lectures and tutorials. These questions and tasks have been framed in a
way that is designed to encourage readers to help improve their critical thinking. Many of the
questions and tasks require readers to think beyond the material in the text and/or to link the
current topic with material covered earlier in the book. More detail on the nature and use of
these questions and tasks is given in the ‘How to use this book’ section immediately following
this preface.
A note to students from the authors

Management accounting is concerned with providing information to those who need to make
financial/economic decisions about their organisation. Such decisions could involve such
things as:
■ assessing how much inventories (stock) a retail outlet should hold for optimal profitability;
■ deciding whether to abandon a particular product by a manufacturing business on the basis
of its profitability:
■ appraising the economic desirability of investing in new equipment that would enable a
business to provide a new service to its customers; and
■ a government weighing the costs and benefits of building a high-speed rail link from London
to Birmingham and the North.
It should be clear that these types of decision have a real impact on businesses, those who
work for them and for their customers. Getting these decisions wrong could have profound
effects, perhaps leading to a business collapsing, throwing its employees out of work and
PREFACE xvii

depriving customers of a product or service that they wish to buy. In the case of the rail link,
the impact is felt by the taxpayer who will fund the project, people who live on or near the
proposed route and, eventually, those who will travel on the line.
To relate the subject matter of the book to real life, each chapter includes a number of
‘Real world’ examples. These are generally short case studies that examine how a particular
business has approached a particular management accounting issue. In some cases, they are
presentations of research evidence as how organisations, in general, deal with such issues.
Evidence from students who have used past editions indicates that these can help to bring
the subject to life.
When you have completed your studies and are working in an organisation, you will need
to have the ability to solve problems. It is also crucial for you to be able to communicate your
solutions to colleagues and to customers. To do this you will need to develop a capacity to
think critically. ‘Critical thinking’ can be defined as the analysis of facts to form a judgement.
In analysing the facts, it is important that factual evidence is used in a logical way. It is also
important that a sceptical and questioning approach to the evidence is applied. When recruit-
ing, organisations are increasingly looking for evidence that potential employees can think
critically when seeking to solve problems.
In writing this book, we have been aware of the need to encourage critical thinking. The
‘Activities’ (typically short questions) that are interspersed throughout the book are designed,
among other things, to try to develop the appropriate critical thinking skills. This is also true
of the ‘Critical review questions’ at the end of each chapter. Similarly with many of the end-
of-chapter ‘Exercises’.
We hope that students will find the book readable and helpful.
A note to lecturers and tutors from the authors

In this edition, we have taken the opportunity to improve the book. We have expanded on the
changing role of management accountants to enable them to retain their place at the centre
of the decision-making and planning process. In Chapter 1, we have included the recently
developed statement of Global Management Accounting Principles. These principles have
been identified (by the leading management accounting professional bodies in the UK and US)
as those to be followed when determining the information that managers need. In Chapter 7,
we have brought in a discussion of current thinking and practice in the area of management
control. Throughout this new edition, we have included additional, and more up-to-date, exam-
ples of management accounting in practice. We have also added more in-chapter questions
and diagrams.
This text is supported by its own MyLab Accounting which is an environment that gives
unlimited opportunities for practice using a range of questions, and which provides timely
feedback. Updates to MyLab Accounting for the 10th edition include the enhancement of
over 45 previously static questions so that these are now algorithmic, which means that each
student is able to work on a numerical problem that is individual to him or her. In addition to
the Case Studies, useful self-study suggestions in the Study Plan, and vast range of exercises
(over 940) to select from, better feedback has been incorporated in MyLab Accounting for
this edition, providing a greater quality of response to help students learn from their incorrect
answers and make progress in their learning.
For access to MyLab Accounting, students need both a course ID and an access card (see
the advert on the inside back cover of the book).
Peter Atrill
Eddie McLaney
xviii PREFACE

How to use this book
Whether you are using the book as part of a lecture/tutorial-based course or as the basis for a
more independent mode of study, the same approach should be broadly followed.
Order of dealing with the material

The contents of the book have been ordered in what is meant to be a logical sequence. For
this reason, it is suggested that you work through the book in the order in which it is presented.
Every effort has been made to ensure that earlier chapters do not refer to concepts or terms
which are not explained until a later chapter. If you work through the chapters in the ‘wrong’
order, you may encounter points that have been explained in an earlier chapter which you
have not read.
Working through the chapters

You are advised to work through the chapters from start to finish, but not necessarily in one
sitting. Activities are interspersed within the text. These are meant to be like the sort of ques-
tions which a good lecturer will throw at students during a lecture or tutorial. Activities seek
to serve two purposes:
■ To give you the opportunity to check that you understand what has been covered so far.
■ To try to encourage you to think beyond the topic that you have just covered, sometimes
so that you can see a link between that topic and others with which you are already familiar.
Sometimes, activities are used as a means of linking the topic just covered to the next one.
You are strongly advised to work through all the activities. Answers are provided immediately
after each activity. These answers should be covered up until you have arrived at a solution,
which should then be compared with the suggested answer provided.
Towards the end of Chapters 2–12, there is a ‘self-assessment question’. This is rather
more demanding and comprehensive than any of the activities. It is intended to give you an
opportunity to see whether you understand the main body of material covered in the chapter.
The solutions to the self-assessment questions are provided in Appendix B at the end of the
book. As with the activities, it is very important to make a thorough attempt at the question
before referring to the solution. If you have real difficulty with a self-assessment question you
should go over the chapter again, since it should be the case that careful study of the chapter
will enable completion of the self-assessment question.
End-of-chapter assessment material

At the end of each chapter there are four ‘critical review questions’. These are short ques-
tions that require you to analyse a topic dicussed in the chapter and to form a judgement. In
providing that answer you will need to apply some critical thinking skills (see ‘Note to students
HOW TO USE THIS BOOK xix

from the authors’ in the Preface). The questions attempt to raise many of the key issues in the
chapter concerned. Suggested answers to these questions are provided in Appendix C at the
end of the book. Again, a serious attempt should be made to answer these questions before
referring to the suggested answers.
At the end of each chapter, there are normally eight exercises. These are more demanding
and extensive questions, mostly computational, and should further reinforce your knowledge
and understanding. We have attempted to provide questions of varying complexity.
Answers to five out of the eight exercises in each chapter are provided in Appendix D at the
end of the book. These exercises are marked with a coloured number, but a thorough attempt
should be made to answer these questions before referring to the answers. Answers to the
three exercises that are not marked with a coloured number are given in a separate teacher’s
manual.
xx HOW TO USE THIS BOOK

Acknowledgements
The publisher thanks the following reviewers for their very valuable comments on the book:
Martyn Jones, University of Winchester

Ed Tew at the University of Reading
Christos Begkos, University of Manchester
Anis Zras, University of Southampton
Mohamed Fadzly, University of Birmingham
Jatin Pancholi, Middlesex University
ACKNOWLEDGEMENTS xxi

Chapter 1
INTRODUCTION TO
MANAGEMENT
ACCOUNTING
INTRODUCTION
Welcome to the world of management accounting! Management
accounting is concerned with collecting and analysing financial and other
information and then communicating this to managers. This information
is intended to help managers within businesses and other organisations
make better decisions. In this introductory chapter, we examine the role of
management accounting within a business. To understand the context for
management accounting, we begin by examining the nature and purpose
of a business. Thus, we first consider what businesses seek to achieve,
how they are organised and how they are managed. Having done this, we
go on to explore how management accounting information can be used
within a business to improve the quality of managers’ decisions. We also
identify the characteristics that management accounting information must
possess to fulfil its role. Management accounting has undergone significant
advances in response to changes in the business environment and to the
increasing size and complexity of business entities. In this chapter we shall
discuss some of the more important changes that have occurred.
Learning outcomes
When you have completed this chapter, you should be able to:
■ identify the purpose of a business and discuss the ways in which a
business may be organised and managed;
■ discuss the issues to be considered when setting the long-term direction
of a business;
■ explain the role of management accounting within a business and
describe the key principles upon which management accounting rests;
and
■ explain the changes that have occurred over time in both the role of
the management accountant and the kind of information provided by
management accounting systems.
M01 Management Accounting for Decision Makers 49459.indd 1 23/09/2020 16:31

WHAT IS THE PURPOSE OF A BUSINESS?
Peter Drucker, an eminent management thinker, has argued that ‘The purpose of business is
to create and keep a customer’ (see Reference 1 at the end of the chapter). Drucker defined
the purpose of a business in this way in 1967, at a time when most businesses did not adopt
this strong customer focus. His view therefore represented a radical challenge to the accepted
view of what businesses do. Now, more than 50 years later, his approach forms part of the
conventional wisdom. It is now widely accepted that, in order to succeed, businesses must
focus on satisfying the needs of the customer.
Although the customer has always provided the main source of revenue for a business, this
has often been taken for granted. In the past, too many businesses assumed that the customer
would readily accept whatever services or products were on offer. When competition was weak
and customers were passive, businesses could operate under this assumption and still make a
profit. However, the era of weak competition has passed. Today, customers have much greater
choice and are much more assertive concerning their needs. They now demand higher quality
services and goods at cheaper prices. They also require that services and goods be delivered
faster with an increasing emphasis on the product being tailored to their individual require-
ments. If a business cannot meet these criteria, a competitor often can. Thus, the business
mantra for the current era is ‘the customer is king’. Most businesses now recognise this fact
and organise themselves accordingly.
Real World 1.1 describes how the Internet and social media have given added weight to
this mantra. It points out that dissatisfied customers now have a powerful medium for broad-
casting their complaints.
Real World 1.1
The customer is king

The mantra that the ‘customer is king’ has gained even greater significance among busi-
nesses in recent years because of the rise of the Internet and social media. In the past, a
dissatisfied customer might tell only a few friends about a bad buying experience. As a result,
the damage to the reputation of the business concerned would normally be fairly limited.
However, nowadays, through the magic of the Internet, several hundred people, or more,
can be very speedily informed of the poor service.
Businesses are understandably concerned about the potential of the Internet to damage
reputations, but are their concerns justified? Do customer complaints, which wing their way
through cyberspace, have any real effect on the businesses concerned? A Harris Poll survey
of 2,000 adults in the UK and US suggests they do and so businesses should be concerned.
It seems that social media can exert a big influence on customer buying decisions.
The Harris Poll survey, which was conducted online, found that around 20 per cent of
those surveyed use social media when making buying decisions. For those in the 18 to 34
age range, the figure rises to almost 40 per cent. Furthermore, 60 per cent of those surveyed
indicated that they would avoid buying from a business that receives poor customer reviews
for its products or services.
The moral of this tale appears to be that, in this Internet age, businesses must work even
harder to keep their customers happy if they are to survive and prosper.
Source: Based on information in Miesbach, A. (2015) Yes, the Customer Is Still King, 30 October, www.icmi.com
2 CHAPTER 1 INTRODUCTION TO MANAGEMENT ACCOUNTING

HOW ARE BUSINESSES ORGANISED?
Nearly all businesses that involve more than a few owners and/or employees are set up as
limited companies. Finance will come from the owners (shareholders) both in the form of a
direct cash investment to buy shares (in the ownership of the business) and through the share-
holders allowing past profits, which belong to them, to be reinvested in the business. Finance
will also come from lenders (banks, for example) as well as through suppliers providing goods
and services on credit.
In larger limited companies, the owners (shareholders) tend not to be involved in the daily
running of the business; instead they appoint a board of directors to manage the business on
their behalf. The board is charged with three major tasks:
■ setting the overall direction for the business;

■ monitoring and controlling the activities of the business; and
■ communicating with shareholders and others connected with the business.
Each board has a chairman who is elected by the directors. The chairman is responsible
for the smooth running of the board. In addition, each board has a chief executive officer
(CEO) who leads the team that is responsible for running the business on a day-to-day
basis. Occasionally, the roles of chairman and CEO are combined, although it is usually
considered to be good practice to separate them. It prevents a single individual having
excessive power.
The board of directors represents the most senior level of management. Below this level,
managers are employed, with each manager being given responsibility for a particular part of
the business’s operations.
Activity 1.1
Why doesn’t just one manager manage larger businesses as a single unit? Try to think of
at least one reason.
Three common reasons are:
■ The sheer volume of activity or number of employees makes it impossible for one person
to manage them.
■ Certain business operations may require specialised knowledge or expertise.
■ Geographical remoteness of part of the business operations may make it more practical
to manage each location as a separate part, or set of separate parts.
The operations of a business may be divided for management purposes in different ways.
For smaller businesses offering a single product or service, separate departments are often
created. Tasks are grouped according to functions (such as marketing, human resources and
finance) with each department responsible for a particular function. The managers of each
department will then be accountable to the board of directors. In some cases, a departmental
manager may also be a board member. A typical departmental structure, organised along
functional lines, is shown in Figure 1.1.
HOW ARE BUSINESSES ORGANISED? 3

Board of directors
Human
Finance Marketing Operations
resources
This is a typical departmental structure organised according to business functions.
Figure 1.1 A departmental structure organised according to business functions
Departments based around functions permit greater specialisation, which, in turn, can pro-
mote greater efficiency. The departmental structure, however, can become too rigid. This can
lead to poor communication between departments and, perhaps, a lack of responsiveness to
changing market conditions.
The structure set out in Figure 1.1 may be adapted according to the particular needs of
the business. Where, for example, a business has few employees, the human resources func-
tion may not form a separate department but rather form part of another department. Where
business operations are specialised, separate departments may be created to deal with each
specialist area. Example 1.1 illustrates how Figure 1.1 may be modified to meet the needs of
a particular business.
Example 1.1
Supercoach Ltd owns a small fleet of coaches that it hires out with drivers for private group
travel. The business employs about 60 people. It could be departmentalised as follows:
■ Marketing department, dealing with advertising, answering enquiries from potential

customers, maintaining good relationships with existing customers and entering into
contracts with customers.
■ Routing and human resources department, responsible for the coach drivers’ routes,
schedules, staff duties and rotas as well as problems that arise during a particular job
or contract.
■ Coach maintenance department, looking after repair and maintenance of the coaches,
buying spares, and giving advice on the need to replace old or inefficient coaches.
■ Finance department, responsible for managing cash flows, costing business activities,
pricing new proposals, measuring financial performance, preparing budgets, borrowing,
paying wages and salaries, billing and collecting amounts due from customers, and
processing and paying invoices from suppliers.
For large businesses with a diverse geographical spread and/or a wide product range, the
simple departmental structure set out in Figure 1.1 will usually have to be adapted. Separate
divisions are often created for each geographical area and/or major product group. Each
division will be managed separately and will usually enjoy a degree of autonomy. This can
produce more agile responses to changing market conditions. Within each division, however,

departments are often created and organised along functional lines. Those functions that
provide support across the various divisions, such as human resources, may be carried out
at head office to avoid duplication. The managers of each division will be accountable to the
board of directors. In some cases, individual board members may also be divisional managers.
A typical divisional organisational structure is set out in Figure 1.2. Here the main basis of
the structure is geographical. Thus, North Division deals with production and sales in the north
and so on.
Board of directors
North South East West

Division Division Division Division
Finance Finance Finance Finance
Operations Operations Operations Operations
Marketing Marketing Marketing Marketing
Other Other Other Other
This is a typical organisational structure for a business that has been divided into separate
operating divisions.
Figure 1.2 A divisional organisational structure
Once a particular divisional structure has been established, it need not be permanent.
Successful businesses constantly strive to improve their operational efficiency. This could well
result in revising their divisional structure. Real World 1.2 includes an extract from a press
release that describes how one well-known business restructured in order to simplify opera-
tions and to reduce costs.
Real World 1.2
Engineering change
Rolls-Royce plc, the engineering business, announced in 2018 that it would simplify its busi-
ness operations. This involved consolidating its five operating divisions into three core units
based around Civil Aerospace, Defence and Power Systems.
Chief Executive Warren East justified the restructuring of the business as follows:
Building on our actions over the past two years, this further simplification of our business means
Rolls-Royce will be tightly focused into three operating businesses, enabling us to act with much
➔
HOW ARE BUSINESSES ORGANISED? 5

greater pace in meeting the vital power needs of our customers. It will create a Defence operation
with greater scale in the market, enabling us to offer our customers a more integrated range of
products and services. It will also strengthen our ability to innovate in core technologies and ena-
ble us to take advantage of future opportunities in areas such as electrification and digitalisation.
The business made the restructuring announcement not long after reporting a massive
pre-tax loss of £4.6 billion. It is expected that the move towards a simpler structure will
generate significant cost savings.
Source: Extract from Roll-Royce (2018) Rolls-Royce announces further simplification of business, strategic review of
Commercial Marine operation and plans to restructure support and management functions, Rolls-Royce.com Press
Release, 17 January.
While both divisional and departmental structures are very popular in practice, it should be
noted that other organisational structures will be found.
HOW ARE BUSINESSES MANAGED?
Over the past three decades, the environment in which businesses operate has become
increasingly turbulent and competitive. Various reasons have been identified to explain these
changes, including:
■ the increasing sophistication of customers (as we have seen);

■ the development of a global economy where national frontiers have become less important;
■ rapid changes in technology;
■ the deregulation of domestic markets (for example, electricity, water and gas);
■ increasing pressure from owners (shareholders) for competitive economic returns; and
■ the increasing volatility of financial markets.
The effect of these environmental changes has been to make the role of managers more
complex and demanding. This, along with the increasing size of many businesses, has led
managers to search for new ways to manage their businesses. One important tool that has
been developed in response to managers’ needs is strategic management. This is concerned
with establishing the long-term direction for the business. It involves setting long-term goals
and then ensuring that they are implemented effectively. To help the business develop a
competitive edge, strategic management focuses on doing things differently rather than simply
doing things better.
Strategic management provides a business with a clear sense of purpose along with a
series of steps to achieve that purpose. The steps taken should link the internal resources
of the business to the external environment of competitors, suppliers, customers and so
on. This should be done in such a way that any business strengths, such as having a skilled
workforce, are exploited and any weaknesses, such as being short of investment finance,
are not exposed. To achieve this requires the development of strategies and plans that take
account of the business’s strengths and weaknesses, as well as the opportunities offered
and threats posed by the external environment. Access to a new, expanding market is an
example of an opportunity; the decision of a major competitor to reduce prices is an example
of a threat.
Real World 1.3 provides an indication of the extent to which strategic planning is carried
out in practice.

Real World 1.3
Strategic planning high on the list

A recent survey investigated the use of various management tools throughout the world. It
found that strategic planning is used by 48 per cent of those businesses that took part in the
survey. This made it the most popular management tool. The survey, which is conducted
annually, has ranked strategic planning highly, in terms of both usage and satisfaction,
over many years. Figure 1.3 reveals the level of usage and satisfaction concerning this
technique.
Percentage 5 = highest
of respondents satisfaction
100% 5
80 4
60 3
40 2
20 1
0 0
1996 2017
Total usage Overall satisfaction
The results were based on a survey of 1,268 senior executives throughout the world.
Source: Rigby, D. and Bilodeau, B. (2018) Management Tools and Trends 2018, Bain and Company.
Figure 1.3 The level of satisfaction with, and usage of, strategic planning
We can see that the level of satisfaction with this technique has remained remarkably stable
over time. However, there has been a decline in usage in recent years.
The strategic management process may be approached in different ways. One popular
approach, involving five steps, is described below.
1 Establish mission, vision and objectives

The first step is to establish the mission of a business, which may be set out in the form of a
mission statement. This is a concise declaration of the overriding purpose of the business. It
addresses the question ‘What business are we in?’ To answer this question, managers should
focus on those customer needs that the business seeks to satisfy rather than on the products
currently produced. Thus, a publisher of novels might, for example, conclude that it is really in
the entertainment business. The vision statement is closely connected to the mission state-
ment and declares the business’s aspirations. It addresses the question ‘What do we want
to achieve?’ Once again, it should be in as concise a form as possible. By answering both
questions, managers are provided with a clear focus for decision making. Unless managers
are clear as to what is the overall aim of the business, they have no basis for setting out plans
and making decisions.
HOW ARE BUSINESSES MANAGED? 7

Activity 1.2
Can you think why mission statements and vision statements should be concise?
Having to produce concise statements will force managers to think very carefully about the
essential nature of their business and the aspirations that they have for it. In practice, this
can prove more difficult than it may sound. Concise statements have the added advantages
that they are easier to remember and to communicate to employees, owners and others.
The mission and vision of a business will often adorn its website. Real World 1.4 provides
an example of these strategic statements for one large business.
Real World 1.4
On a mission
Spire Healthcare plc is a leading independent hospital group operating in the UK. Its mission is:
To bring together the best people who are dedicated to developing excellent clinical environments
and delivering the highest quality patient care.
Its stated vision is:
To be recognised as a world class healthcare business.
Source: Spire Healthcare plc, https://investors.spirehealthcare.com/about/, accessed 10 November 2019.
Having established the purpose and aspirations of the business, objectives must be devel-
oped in order to translate these into specific commitments. Objectives help to bring real dis-
cipline into the strategy process. They should provide clear targets, or outcomes, which are
both challenging and achievable. They should also provide the basis for assessing actual
performance. Although quantifiable objectives provide the clearest targets, some areas of
performance, such as employee satisfaction, may be capable of only partial quantification.
Other areas, such as business ethics, may be impossible to quantify.
In practice, the objectives set by a business are likely to range across all key areas and
might include a commitment to achieve:
■ a specified percentage share of the market in which the business competes;

■ a high level of customer satisfaction;
■ a high degree of employee involvement;
■ a specified percentage of sales revenue being generated from newly developed products;
■ high standards of ethical behaviour in business dealings;
■ a specified percentage operating profit margin (operating profit as a percentage of sales
revenue); and
■ a specified percentage return on capital employed.
Businesses do not normally make their statement of objectives public.
Activity 1.3
Can you think why they may not wish to do so?
It is often because they do not wish to make their intentions clear to their competitors.

2 Undertake a position analysis
The position analysis seeks to discover how, given its attributes, the business is placed
in relation to its environment (customers, competitors, suppliers, technology, the economy,
political climate and so on). This will be carried out in the context of its mission, vision and
objectives. The position analysis is often approached within the framework of the business’s
strengths, weaknesses, opportunities and threats (a SWOT analysis). It involves identifying
the business’s strengths and weaknesses as well as the opportunities provided and threats
posed by the external environment. Strengths and weaknesses are internal attributes of the
business, whereas opportunities and threats are present in the environment within which the
business operates.
Activity 1.4
Ryanair Holdings plc is a highly successful ‘no-frills’ airline. Can you suggest some factors
that could be strengths, weaknesses, opportunities and threats for this business? Try to
think of two for each of these (eight in all).
Strengths could include such things as:
■ a strong, well-recognised brand name;

■ a modern fleet of aircraft requiring less maintenance;
■ reliable customer service concerning punctuality and baggage loss; and
■ an Internet booking facility used by virtually all passengers, which reduces administration
costs.
Weaknesses might include:
■ limited range of destinations;

■ use of secondary airports situated some distance from city centres;
■ poor facilities at secondary airports; and
■ poor customer service concerning complaints.
Opportunities might include:
■ new destinations becoming available, particularly in eastern Europe;

■ increasing acceptance of ‘no-frills’ air travel among business travellers; and
■ the development of new fuel-efficient aircraft.
Threats to the business might come from:

■ increased competition – either new low-fare competitors entering the market or traditional
airlines reducing fares to compete;
■ increases in fuel prices and airport charges;
■ increasing congestion at airports, making it more difficult to turn aircraft around quickly;
■ changes in the regulatory environment (for example, changes in regulations concerning
the maximum monthly flying hours for a pilot) making it harder to operate; and
■ vulnerability to a downturn in economic conditions and foreign currency movements.
You may have thought of others.
The SWOT framework is not the only way to carry out a position analysis; nevertheless, it
seems to be very popular. A 2009 survey of businesses covering different industry sectors,
geographical locations and size found that about 65 per cent of the total used SWOT analysis
(see Reference 2 at the end of the chapter).
HOW ARE BUSINESSES MANAGED? 9

3 Identify and assess the strategic options
This involves trying to identify possible courses of action. Each of the options identified should
assist the business in reaching its objectives by using its strengths to exploit opportunities
while not exposing its weaknesses to threats. The strengths, weaknesses, opportunities and
threats are, of course, those identified using SWOT analysis. Having identified the available
strategic options, each will then be assessed according to agreed criteria.
4 Select strategic options and formulate plans

The business will select what appears to be the best of the courses of action or strategies
(identified in Step 3) available. When doing this, the potential for the selected strategies to
achieve the mission, vision and objectives must be the key criterion. While the strategies
selected provide the broad outline, a more detailed plan is required to specify the particular
actions to be taken. This overall plan will normally be broken down into a series of plans, one
for each aspect of the business.
In an effort to match the chosen strategies with the opportunities available, a business may
decide to acquire other businesses. Real World 1.5 is an extract from an article that discusses
how an acquisition was undertaken because of its ‘strategic fit’.
Real World 1.5
A good fit
Anglo-Dutch conglomerate Unilever has acquired British healthy snacking brand Graze
from Washington-based buyout group Carlyle, the companies said in a statement on
Tuesday.
The consumer goods giant beat bids from rivals including Kellogg’s and PepsiCo, which
had expressed interest in the business. Nitin Paranjpe, president of Unilever’s food and
refreshment business said the acquisition of Graze fits the group’s strategy: “Accelerat-
ing our presence in healthy foods and out of home this is an excellent strategic fit for the
Unilever food and refreshment business, and a wonderful addition to our stable of purpose
driven brands.”
Graze, founded in 2008, sells snacking nuts, seeds, trail mixes and snack bars with no arti-
ficial ingredients.
Source: Extracts from Espinoza, J. (2019) Unilever snaps up healthy snack brand Graze, ft.com, 5 February.
© The Financial Times Limited 2019. All Rights Reserved.
The acquisition mentioned above was described by Unilever as an ‘excellent strategic fit’.
A different acquirer, paying the same price, would not benefit as much if the strategic fit was
not as good.
5 Perform, review and control

Finally, the business must implement the plans derived in Step 4. The actual outcome will be
monitored and compared with the plans to see whether things are progressing satisfacto-
rily. Steps must be taken to exercise control where actual performance fails to match earlier
planned performance.

Figure 1.4 shows the strategic management framework in diagrammatic form. This framework
will be considered further in later chapters. We shall see, for example, how the business’s mission
and vision links, through objectives and long-term plans, to detailed budgets in Chapters 6 and 7.
Establish mission, vision and objectives
Undertake a position analysis
Identify and assess the strategic options
Select strategic options and formulate plans
Perform, review and control
The business should set out its mission, vision and objectives and then develop plans in a
systematic manner to achieve them.
Figure 1.4 The strategic management framework
THE CHANGING BUSINESS LANDSCAPE
Factors such as increased global competition and advances in technology, mentioned

earlier, have had a tremendous impact on the kind of businesses that survive and prosper.
They have also had an impact on the kind of business structures and processes adopted.
Examples of the changes that have occurred in many countries in recent years, including
the UK, are:
■ The growth of the service sector. This includes businesses such as financial services, com-
munications, tourism, transportation, consultancy, leisure and so on. This growth of the
service sector has been matched by the decline of the manufacturing and extractive (for
example, coal mining) sectors.
■ The emergence of new industries. This includes science-based industries such as genetic
engineering and biotechnology.
■ The growth of e-commerce. Consumers are increasingly drawn to buying a wide range
of goods including groceries, books, music and computers online. Businesses also use
e-commerce to order supplies, monitor deliveries and distribute products.
■ Automated manufacturing. Many manufacturing processes are now fully automated and
computers are used to control the production process.
THE CHANGING BUSINESS LANDSCAPE 11

■ Lean manufacturing. This involves a systematic attempt to identify and eliminate waste,
surplus production, delays, defects and so on in the production process.
■ Greater product innovation. There is much greater pressure to produce new, innovative
products. The effect has been to increase the range of products available and to shorten
the life cycles of many products.
■ The growth of outsourcing Activities and processes required by a business, but which a
subcontractor can do better, are increasingly outsourced.
■ Faster response times. There is increasing pressure on businesses to develop products
more quickly, to produce products more quickly and to deliver products more quickly.
These changes have presented huge challenges for the management accountant. New tech-
niques have been developed and existing techniques adapted to try to ensure that manage-
ment accounting retains its relevance. These issues will be considered in more detail as we
progress through the book.
WHAT IS THE FINANCIAL OBJECTIVE OF A BUSINESS?
A business is normally created to enhance the wealth of its owners. Throughout this book
we shall assume that this is its main objective. This may come as a surprise, as there are
other objectives that may be pursued that relate to the needs of others associated with the
business.
Activity 1.5
Can you think of two examples of what these other objectives may be?
A business may seek to:
■ provide good working conditions for its employees;

■ conserve the environment for the local community;
■ develop safer products for its customers; and
■ offer fair trading terms to suppliers in underdeveloped countries.
You may have thought of others.
While a business may pursue these objectives, it is normally set up primarily with a view to
increasing the wealth of its owners. In practice, the behaviour of businesses over time appears
to be consistent with this objective.
Within a market economy there are strong competitive forces at work that ensure that failure
to enhance owners’ wealth will not be tolerated for long. Competition for the funds provided
by the owners and competition for managers’ jobs will normally mean that the owners’ inter-
ests will prevail. If the managers do not provide the expected increase in ownership wealth,
the owners have the power to replace the existing management team with a new team that is
more responsive to owners’ needs. Does this mean that the needs of other groups associated
with the business (employees, customers, suppliers, the community and so on) are not really
important? The answer to this question is almost certainly no, if the business wishes to survive
and prosper over the longer term.

Satisfying the needs of other groups is usually consistent with increasing the wealth of the
owners over the longer term. Disaffected customers, for example, may turn to another supplier,
resulting in a loss of shareholder wealth for the original supplier. A dissatisfied workforce may
result in low productivity, strikes, high labour turnover rates and so forth, which will in turn have
an adverse effect on owners’ wealth. Similarly, a business that upsets the local community by
unacceptable behaviour, such as polluting the environment, may attract bad publicity, resulting
in a loss of customers and heavy fines.
Real World 1.6 describes how one well-known business came to recognise that future
success depended on the continuing support of one important stakeholder group – its
customers.
Real World 1.6
The price of clothes

Nike is a highly successful business with a globally recognised brand. However, it was not
so long ago that the business was mired in controversy. It had become a focal point for
protesters who regarded the business as a byword for ‘sweatshop’ labour practices. In
1992, an article was published that exposed the low wages and poor working conditions
of those producing Nike products in Indonesia. Subsequent protests and further revela-
tions resulted in unwanted media attention to which the business was, at first, slow to
properly respond. However, by 1998, weakening demand for its products meant that the
issue could no longer be lightly dismissed. Nike publicly acknowledged the reputation it
had gained for ‘sweatshop’ labour practices and the adverse effect this was having on
customer attitudes.
Its management realised that, if nothing else, it was good business to improve the working
lives of those producing Nike products in third world countries. This resulted in a commit-
ment to better working conditions, higher wages and a minimum working age. A code of
conduct for Nike suppliers concerning the treatment of their workforce was established and
independent audits were implemented to monitor adherence to the code. The business also
committed to greater transparency: it now publishes reports on its responsibilities and the
ways in which these have been fulfilled.
Although Nike was not the only large business engaged in sweatshop practices, it took a
lead in trying to eradicate them and, by doing so, removed the stain from its reputation. This
has been rewarded by a continuing demand for its products.
Source: Based on information in Nisen, M. (2013) How Nike solved its sweatshop problem, Business Insider, 9 May,
and Allarey, R. (2015) This is how Nike managed to clean up its sweatshop reputation, www.complex.com, 8 June.
Increasing the wealth of the owners may not be the perfect definition of what businesses
are seeking to achieve, but it is clear that a business cannot consistently take decisions that
reduce the wealth of the owners. If it does this, it will quickly collapse as a result of having
insufficient funds to carry on trading.
Generating wealth for the owners is not the same as seeking to maximise the current
year’s profit. Wealth creation is concerned with the longer term and so it relates not only to
this year’s profit but to that of future years as well. In the short term, corners can be cut and
risks taken that improve current profit at the expense of future profit. Real World 1.7 is a
Financial Times article that provides some examples of how emphasis on short-term profit
can be damaging.
WHAT IS THE FINANCIAL OBJECTIVE OF A BUSINESS? 13

Real World 1.7
Short-term gains, long-term problems

For many years, under the guise of defending capitalism, we have been allowing ourselves to
degrade it. We have been poisoning the well from which we have drawn wealth. We have misun-
derstood the importance of values to capitalism. We have surrendered to the idea that success
is pursued by making as much money as the law allowed without regard to how it was made.
Thirty years ago, retailers would be quite content to source the shoes they wanted to sell
as cheaply as possible. The working conditions of those who produced them was not their
concern. Then headlines and protests developed. Society started to hold them responsible for
previously invisible working conditions. Companies like Nike went through a transformation.
They realised they were polluting their brand. Global sourcing became visible. It was no longer
viable to define success simply in terms of buying at the lowest price and selling at the highest.
Financial services and investment are today where footwear was thirty years ago. Public
anger at the crisis will make visible what was previously hidden. Take the building up of
huge portfolios of loans to poor people on US trailer parks. These loans were authorised
without proper scrutiny of the circumstances of the borrowers. Somebody else then deemed
them fit to be securitised and so on through credit default swaps and the rest without any-
one seeing the transaction in terms of its ultimate human origin.
Each of the decision makers thought it okay to act like the thoughtless footwear buyer of
the 1970s. The price was attractive. There was money to make on the deal. Was it respon-
sible? Irrelevant. It was legal, and others were making money that way. And the conse-
quences for the banking system if everybody did it? Not our problem.
The consumer has had a profound shock. Surely, we could have expected the clever and wise
people who invested our money to be better at risk management than they have shown them-
selves to be in the present crisis? How could they have been so gullible in not challenging
the bankers whose lending proved so flaky? How could they have believed that the levels of
bonuses that were, at least in part, coming out of their savings could have been justified in
‘incentivising’ a better performance? How could they have believed that a ‘better’ performance
would be one that is achieved for one bank without regard to its effect on the whole banking
system? Where was the stewardship from those exercising investment on their behalf?
The answer has been that very few of them do exercise that stewardship. Most have stood
back and said it doesn’t really pay them to do so. The failure of stewardship comes from
the same mindset that created the irresponsible lending in the first place. We are back to
the mindset that has allowed us to poison the well: never mind the health of the system as
a whole, I’m making money out of it at the moment. Responsibility means awareness for
the system consequences of our actions. It is not a luxury. It is the cornerstone of prudence.
Source: Adapted from Goyder, M. (2009) How we’ve poisoned the well of wealth, Financial Times,
15 February.
© The Financial Times Limited 2009. All Rights Reserved. We would like to thank Mark Goyder,
Founder Director of Tomorrow’s Company for permission to quote his article ‘How we’ve poisoned
the well of wealth’ as published in the Financial Times.
BALANCING RISK AND RETURN
All decisions attempt to influence future outcomes, and financial decisions are no exception.
The only thing certain about the future, however, is that we cannot be sure what will happen.
There is a risk that things may not turn out as planned and this should be taken into account
when making financial decisions.

As in other aspects of life, risk and return tend to be related. Evidence shows that returns
relate to risk in something like the way shown in Figure 1.5.
Return
Risk
Even at zero risk a certain level of return will be required. This will increase as the level of risk
increases.
Figure 1.5 Relationship between risk and return
Activity 1.6
Look at Figure 1.5 and state, in broad terms, where an investment in:
(a) a government savings account, and

(b) shares in an oil-exploration business
should be placed on the risk–return line.
A government savings account is normally a very safe investment. Even if the government is
in financial difficulties, it can always print more money to repay investors. Returns from this
form of investment, however, are normally very low.
Investing in shares in a commercial business runs a risk of losing part or, possibly, the
entire amount invested. Moreover, oil exploration carries more risk than many types of
business activity. It can, however, produce very high returns.
Thus, the government savings account should be placed towards the far left of the
risk–return line and the oil-exploration business towards the far right.
This relationship between risk and return has important implications for setting financial
objectives for a business. The owners will require a minimum return to induce them to
invest at all, but will require an additional return to compensate for taking risks; the higher
the risk, the higher the required return. Managers must be aware of this and must strike the
appropriate balance between risk and return when setting objectives and pursuing particular
courses of action.
In practice, the right balance is not always struck. Real World 1.8 discusses how one large
business is trying to learn from past mistakes.
BALANCING RISK AND RETURN 15

Real World 1.8
Risky returns
BHP Group, the world’s biggest miner, is seeking a mandate to grow, telling investors
that it has learnt the lessons of past mistakes and has the rules in place to make sure
it invests wisely in future. The mining industry has been slammed by shareholders for
ploughing billions of dollars into big ticket deals and new projects that failed to deliver
adequate returns during the commodities boom. BHP, for example, spent more than
$40 billion trying to break into the onshore US oil industry before admitting defeat and
selling its shale assets to BP Group for around $11 billion earlier this year.
But the fact remains that miners have to replace the raw materials they are extract-
ing from the ground otherwise they will go out of business. Getting the balance right
between investment and shareholders returns is something the industry has found dif-
ficult to do.
In a briefing on Wednesday, BHP’s finance chief Peter Beaven said the Anglo-Australian
group, which has been criticised by Elliott Advisors, the activist investor, for being a poor
steward of capital, had been making better investment decisions since the introduction of
new spending rules.
In the future, he said BHP was more likely to make small acquisitions in early stage
assets than ‘big ticket’ purchases, citing the company’s recent investment in SolGold,
a junior exploration company looking to develop a highly prospective copper deposit in
Ecuador.
He said BHP would also invest in high risk, high return projects like Trion, an oil joint
venture with Pemex, Mexico’s state oil company. “We could lose all our investment on
these, if, for instance, exploration fails. But we could create the tier one assets of the
future,” he said.
Source: Extracts from Hume, N. (2018) Anglo-Australian miner BHP seeks mandate to grow, ft.com,
21 November.
© The Financial Times Limited 2018. All Rights Reserved.
WHAT IS MANAGEMENT ACCOUNTING?
Having considered what businesses are and how they are organised and managed, we can now
turn our attention to the role of management accounting. A useful starting point for our dis-
cussion is to understand the general role of accounting, which is to help people make informed
business decisions. All forms of accounting, including management accounting, are concerned
with collecting and analysing financial, and other, information and then communicating this to
those making decisions. This decision-making perspective of accounting provides the theme
for the book and shapes the way that we deal with each topic.
For accounting information to be useful for decision making, the accountant must be clear
about for whom the information is being prepared and for what purpose it will be used. In
practice there are various groups of people (known as ‘user groups’) with an interest in a
particular organisation, in the sense of needing to make decisions about that organisation. For
the typical private-sector business, the most important of these groups of users of accounting
information are shown in Figure 1.6. Each of these groups will have different needs.

Owners Customers Competitors
Employees
Managers and their
representatives
Business
Lenders Government
Investment Community
Suppliers
analysts representatives
Several user groups have an interest in accounting information relating to a business.

The majority of these are outside the business but, nevertheless, have a stake in it. This is not
meant to be an exhaustive list of potential users; however, the groups identified are normally
the most important.
Figure 1.6 Main users of accounting information relating to a business
This book is concerned with providing accounting information for only one of the groups
identified – the managers. It is, however, a particularly important user group. Managers are
responsible for running the business, and their decisions and actions play a vital role in deter-
mining its success. Planning for the future and exercising day-to-day control over a business
involves a wide range of decisions being made. For example, managers may need to decide
whether to:
■ develop new products or services (as with a computer manufacturer developing a new range
of computers);
■ increase or decrease the price or quantity of existing products or services (as with a
telecommunications business changing its mobile phone call and text charges);
■ outsource activities carried out by the business to outside contractors (as with an airline
outsourcing its ticketing operations)
■ increase or decrease the operating capacity of the business (as with a beef farming business
reviewing the size of its herd); and/or
■ change the methods of purchasing, production or distribution (as with a clothes retailer
switching from local to overseas suppliers).
The accounting information provided should help in identifying and assessing the financial
consequences of the kind of decisions listed above. In later chapters, we shall consider
each of the types of decisions in the list and see how their financial consequences can be
assessed.
WHAT IS MANAGEMENT ACCOUNTING? 17

HOW USEFUL IS MANAGEMENT ACCOUNTING
INFORMATION?
There are arguments and convincing evidence that managers regard management accounting
information as useful. There have been numerous research surveys that have asked managers
to rank the importance of management accounting information, in relation to other sources of
information, for decision-making purposes. These studies have almost invariably found that
managers rank accounting information very highly. It is also worth noting that businesses of
any size will normally produce management accounting information even though there is no
legal compulsion for businesses to do so. Presumably, the cost of producing this information
is justified on the grounds that managers believe it is useful. Such arguments and evidence,
however, leave unanswered the question as to whether the information is actually useful for
decision-making purposes: that is, does it really affect managers’ behaviour?
It is impossible to measure just how useful management accounting information is to managers.
We should remember that this information usually represents only one input to a particular deci-
sion. The precise weight attached to it by managers, and the benefits that flow as a result, cannot
be accurately assessed. We shall shortly see, however, that it is at least possible to identify the
kinds of principles that accounting information should be followed in order to be useful. Where
these principles have not been followed, the usefulness of the information will be impaired.
PROVIDING A SERVICE
One way of viewing management accounting is as a form of service. Management accountants

provide a service by reporting information to their ‘clients’ – the managers. The quality of this
service provided will be determined by the extent to which managers’ information needs have
been met. In practice, this can be very difficult to assess. By adhering to certain principles,
however, management accounting information is more likely to meet these needs and so
improve the quality of management decisions.
Two leading professional bodies – the American Institute of Certified Public Accountants
and the UK-based Chartered Institute of Management Accountants – have developed the
Global Management Accounting Principles. These consist of four principles to be followed
when determining the information that managers need. (See Reference 3 at the end of the
chapter.) The four principles, which focus on four outcomes, are set out in Figure 1.7.
We shall now consider each of these principles.
■ Influence. This principle asserts that communication provides insights, which can, in turn,
influence management decisions. Communication is particularly important when developing
and implementing business strategies and plans. To be effective, strategic planning relies on
conversations occurring between those involved in the process. Through such conversations,
a better understanding can be achieved of the likely impact of key decisions and of where
improvements may be needed. By feeding information into these conversations, management
accounting can exert a powerful influence over the decisions made and the ultimate outcomes.
Conversations between the management accountant and those involved in the strategic plan-
ning process are also important in identifying the kind of information needed.
To exert maximum influence, managers should receive information that is customised to
their needs. This means that it should be in a form suitable to their level of financial under-
standing. It also means that it should avoid dense, jargon-ridden prose and should exclude
information that is of no great significance to the managers concerned.

Influence
Principles
focused
Trust Relevance
on four
outcomes
Analysis
Figure 1.7 Four principles focused on four outcomes
Activity 1.7
What problems may arise with providing information to managers that has no great
significance for them?
It will clutter up the management accounting reports, making them more difficult to
understand. It may also draw the managers’ attention away from the more significant
information contained in the reports.
■ Relevance. Managers rely on information for planning and control purposes. The nature of
the information provided will depend on the nature of the decisions and the needs of manag-
ers. These must be identified so that the sources of information available can be examined
and, from these, relevant information extracted. This information can take various forms. It
can be financial or non-financial, future oriented or past oriented, drawn from inside or from
outside the business. Whichever form it takes, however, the information should be reliable
and should represent the best that is available.
Activity 1.8
Do you think that incomplete information, or unverified information, should be presented
to managers?
Sometimes, it may be the only information available and so the management accountant may
consider it to be better than nothing. However, managers must be made aware of the deficiencies
of the information provided so they can decide on the level of confidence to be placed on it.
Relevant information will cover issues that have a significant effect on outcomes. It is
important, however, that the information is communicated in a timely manner. Unless it
reaches managers before a decision has to be made, it loses its relevance.
PROVIDING A SERVICE 19

■ Analysis. Management accounting information can help to identify the various options available
to a business and the risks involved. It can then model the potential impact of each on the
performance and wealth of the business. This should help managers to understand cause-
and-effect relationships and to decide between competing options. To undertake impact
analysis of this nature, the management accountant needs a thorough grasp of the business’s
strategy as well as a clear understanding of the environment within which it operates.
■ Trust. This final principle is concerned with maintaining the reputation and wealth of the business.
It relates more to the behaviour of management accountants than to the nature of the information
they provide. Management accountants should adhere to high ethical standards. This means
they should act with integrity and should avoid conflicts of interest. They should also be prepared
to confront anything that runs counter to the stated values of the business. By acting in this way,
they can gain the trust of managers, as well as others associated with the business.
High standards of reporting are essential in gaining trust. Management accountants
should, therefore, adhere to best practice. They should avoid providing any information that
may be misleading and should comply with the spirit, as well as the letter, of the relevant
rules and regulations.
Management accountants are accountable to their ‘clients’ – the managers – and should
be responsive to issues raised regarding their performance. By adopting a positive attitude
towards accountability, they can cement their reputation for being reliable and trustworthy.
WEIGHING UP THE COSTS AND BENEFITS
In theory, a particular item of management accounting information should only be produced

if the costs of providing it are less than the benefits, or value, to be derived from its use. This
cost–benefit issue will limit the amount of management accounting information provided.
Figure 1.8 shows the relationship between the costs and value of providing additional
management accounting information.
Total value
or cost Cost
(£)
Value
Optimal
quantity
Total quantity of information
The benefits of management accounting information eventually decline. The cost of providing the
information, however, will rise with each additional piece of information. The optimal level of information
provision is where the gap between the value of the information and the cost of providing it is at its greatest.
Figure 1.8 Relationship between the cost and value of providing additional management
accounting information

Figure 1.8 shows how the total value of information received by the manager eventually
begins to decline. This is, perhaps, because additional information becomes less relevant, or
because of the problems that a manager may have in processing the sheer quantity of infor-
mation provided. The total cost of providing the information, however, will increase with each
additional piece of information. The broken line indicates the point at which the gap between
the value of information and the cost of providing that information is at its greatest. This rep-
resents the optimal amount of information that should be provided. Beyond this optimal level,
each additional piece of information will cost more than the value of having it. This theoretical
model, however, poses a number of problems in practice, which we shall now discuss.
To illustrate the practical problems of establishing the value of information, let us assume
that when parking our car, we accidentally reversed into a wall in a car park. This resulted in
a dented boot and scraped paintwork. We want to have the dent taken out and the paintwork
resprayed at a local garage. We have discovered that the nearest garage would charge £400,
but we believe that other local garages may offer to do the job for a lower price. The only way
of finding out the prices at other garages is to visit them, so that they can see the extent of the
damage. Visiting the garages will involve using some fuel and will take up some of our time. Is
it worth the cost of finding out the price for the job at the various local garages? The answer,
as we have seen, is that if the cost of discovering the price is less than the potential benefit, it
is worth having that information.
To identify the various prices for the job, there are several points to be considered, including:
■ How many garages shall we visit?

■ What is the cost of fuel to visit each garage?
■ How long will it take to make all the garage visits?
■ At what price do we value our time?
The economic benefit of having the information on the price of the job is probably even
harder to assess, in advance. The following points need to be considered:
■ What is the cheapest price that we might be quoted for the job?
■ How likely is it that we shall be quoted a price cheaper than £400?
As we can imagine, the answers to these questions may be far from clear – remember
that we have only contacted the local garage so far. When assessing the value of accounting
information, we are confronted with similar problems.
Producing management accounting information can be very costly. The costs, however, are
often difficult to quantify. Direct, out-of-pocket costs, such as salaries of accounting staff, are not
usually a problem, but these represent only part of the total costs involved. There are other costs,
such as the cost of users’ time spent on analysing and interpreting the information provided.
Activity 1.9
What about the economic benefits of producing management accounting information? Do
you think it is easier, or harder, to assess the economic benefits of management account-
ing information than to assess the costs of producing it?
It is normally much harder to assess the benefits. We saw earlier that, even if we could accu-
rately measure the economic benefits arising from a particular decision, we must bear in mind
that management accounting information will be only one factor influencing that decision.
Other factors will also be taken into account. Furthermore, the precise weight attached to the
management accounting information by the decision maker cannot normally be established.
WEIGHING UP THE COSTS AND BENEFITS 21

Costs and benefits cannot be assessed in advance of the management accounting system
becoming operational. Until the system is up and running, it is not really possible to estimate
the time that managers will spend reading the reports or the extent to which these reports will
be relied upon for decision-making purposes.
There are no easy answers to the problem of weighing costs and benefits. Although it is pos-
sible to apply some ‘science’ to the problem, a lot of subjective judgement is normally involved.
MANAGEMENT ACCOUNTING AS AN INFORMATION

SYSTEM
We have already seen that management accounting can be seen as the provision of a service
to its ‘clients’, the managers. Another way of viewing management accounting is as a part of
the business’s total information system. Managers have to make decisions concerning the allo-
cation of scarce economic resources. To ensure that these resources are efficiently allocated,
managers often require economic information on which to base their decisions. It is the role
of the management accounting system to provide that information.
The management accounting information system has certain features that are common
to all information systems within a business. These are:
■ identifying and capturing relevant information (in this case, economic information);
■ recording the information collected in a systematic manner;
■ analysing and interpreting the information collected; and
■ reporting the information in a manner that suits the needs of individual managers.
The relationship between these features is set out in Figure 1.9.

Given the decision-making emphasis of this book, we shall be concerned primarily with the
last two elements of the process – the analysis and reporting of management accounting infor-
mation. We shall consider the way in which information is used by, and is useful to, managers
rather than the way in which it is identified and recorded.
Information Information Information Information

identification recording analysis reporting
There are four sequential stages of a management accounting information system. The first two
stages are concerned with preparation, whereas the last two stages are concerned with using the
information collected.
Figure 1.9 The management accounting information system
The design of a management accounting system should reflect the particular features of the
business. This means that no two management accounting systems will be the same. Never-
theless, all management accounting systems should be designed with the principles discussed
above (influence, relevance, analysis and trust) firmly in mind. In particular, managers need
to have trust in the integrity of the information generated and the reports provided should be
tailored to their individual needs.

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but very dull, whom they occasionally pitied for being shut up with
“that disagreeable Mrs. Burbage.”
Anne found the bedroom she had loved as a child, now her own,
almost unchanged. The rosebuds on the wall were faded certainly,
but the dimity valance at the window, the white curtains to the bed
were fresh and spotless, and the “spindly” furniture remained. The
white roses had grown much taller. They clambered round the
window now, and far above her head, looked down at her as she
opened it in the morning.
The library was also unaltered, and in this room, and in the
garden, Anne found all the joy of her life.
She was permitted to do what she liked with the garden, and,
under the direction of the old gardener, who rejoiced to find some
one who loved the work, and, delighted in its results, Anne planned
and planted and laid the foundation for the beauty that now
surrounded her. The hours in the open air restored her health.
Insensibly, she grew strong and straight. Her always graceful figure
developed, and though it was marred by the ill-cut gowns of the
village dressmaker, she carried it superbly.
Through the long winter days, the library was her solace and
delight. At first, imperfectly educated as she was, unused to reading,
owing to lack of time and lack of opportunity, she was bewildered by
the numberless books through which she was free to range.
But gradually she found her way; made a path for herself, and
followed it to find it leading her to distant prospects. Mr. Burbage, a
gentle and scholarly recluse with a catholic taste in literature, had left
a fine and widely representative library behind him, containing not
only the masterpieces of French as well as English prose and poetry,
but many curious and rare volumes dealing with the less frequented
roads of mental travel.
Anne found history, biography, philosophy, in sufficient quantities
to last her for a lifetime.
She found curious memoirs of the seventeenth and eighteenth
centuries, as well as books on magic, on alchemy, on all the strange
and recondite studies which at various periods have exercised
human thought. French literature was well represented, and impelled
by interest and curiosity, Anne began to recall the little of the
language she had learnt with her governess as a child. In this
endeavour she unexpectedly found a ready teacher in Mrs. Burbage,
who, educated in a French convent up to the time of her marriage,
spoke the language fluently, and liked to speak it. Naturally gifted as
a linguist, Anne learnt quickly, and often from choice, as time went
on, the two women spoke French together, rather than English.
But it was to the English poets that Anne most often returned.
Poetry suited her nature. It was the form of art which to her, most
fully expressed the heights and depths, the beauty and the terror, the
haunting melancholy, the fear, the inexpressible longings, the
regrets, the sadness, the innocent delights of life, which, in all its
complexity, she had begun to recognize through the world of books.
In life, men went down to the sea in ships, and did business in
great waters. In life, there had been beautiful cities, in which a many-
coloured crowd of citizens and soldiers, of artists and thinkers, had
jostled and fought, and painted their thoughts in churches, and on
palace walls; built them into soaring towers, and mighty cathedrals;
woven them into immortal books, and lived them in schemes for the
regeneration of the world. In life, as Anne had come to know it
through her reading, there had been, and still were, fierce passions
of love and hate, swaying men and women as the trees of a forest
are swayed by a rushing wind. Passions which had given birth to the
great stories of the world—the stories of Helen of Troy, of Abelard
and Heloise, of Launcelot and Guinevere, of Romeo and Juliet. In
life, running like a dark mysterious stream, among the simpler
sensations, the more elemental passions of humanity, there had
been strange terrors, haunting curiosities, insatiable longings for the
unattainable, the unknowable, the unrealized—the desire of the moth
for the star.
In life too, there had always existed the fresh unspoiled delight in
Nature’s loveliness; in the charming natural embroidery of earth’s
garment. Delight in the simple things out of which, as her favourite
Herrick told her, he rejoiced to make his songs.
“I sing of Books, of Blossoms, Birds, and Bowers;

Of April, May, of June, and July flowers——”
In poetry, as in a mirror, Anne found the result of all her reading
reflected and transfigured.
It summed up for her all that she had learnt from other books, of
love and life, and hope of immortality.
She began with Chaucer, and found him sweet and fresh and
hardy as the hawthorn blossom with which he powders his English
meadows. She found in him all the simple and tender emotions
which have existed in the heart of man since he became human. The
love of Custance for her child delighted her.
“Pees litel sone, I wol do thee no harm:

With that hire couverchief of hire hed she braid,
And over his litel eyen she it laid.
O litel child, alas! what is thy gilt

That never wroughtest sinne as yet parde?”
The gentle, natural words, written five hundred years ago, went to
her heart. She loved the gaiety, the bustle, the gossip, the sense of
colour and vitality in that long procession which wound from the
Tabard Inn, along the white roads full of sunshine, which led to
Canterbury.
She read the ballads which like vivid lightning flashes illumine the
darkness of the Middle Ages, and show the mainsprings of human
action to be ever the old mainsprings of love and hate.
She came to the Elizabethan poets—to the period when England
had become “a nest of singing birds.” She found Spenser’s glorious
love-song, and the wonderful cry in which Marlowe’s Faust links one
great love-story to another.
“Was this the face that launched a thousand ships

And burnt the topless towers of Ilium?
Sweet Helen, make me immortal with a kiss——”
She learnt to know so well that they haunted her thoughts like
music, the sonnets of Shakespeare, and the lyrics of all the “singing
birds,” Lodge and Peele and Nash, Ben Jonson and Campion, who,
a musician in every sense of the word, framed his “Ayres for one
voyce with the Lute or Violl,” so as “to couple words and notes
lovingly together.” She came to Milton, and the lighter poets of the
Restoration, of whom her love was given chiefly to Herrick. The
poets of comparatively modern times followed, and led her in due
time to Keats and Shelley, who revealed to her the modern note of
unrest, and the troubling effect on the human spirit, of beauty,
whether revealed as to Keats in the material world, or as to Shelley
in the intangible world of ideas. With these two poets, the library,
formed in her old friend’s youth, paused abruptly in its
representations of English poetry.
Anne found no volume of Browning, nor of Tennyson, on the
shelves.
In her friend’s day they were young, untried men, as in a still
greater degree, were Swinburne, Morris, and Meredith.
But without them, Anne, like Keats, had travelled in the realms of
gold, and the new planet that swam into her ken was the very world
in which for thirty years she had lived blind and a prisoner, ignorant
of its beauty, deaf to its calling voices.
It was of her five years of solitary reading that Anne was thinking
as she sat in the September sunshine with François’s letter open on
her lap.
She had read, she had thought. Imaginatively, she had entered
into the life of the great world outside her country home.
But of actual individual experience of one personal heart-beat,
known to thousands of men and women past and present, she was
as ignorant at thirty-five as she had been all through her quiet
existence.
Like the Lady of Shalott, she sat weaving her tapestry of dreams
before a magic mirror in which the pageant of the world was nothing
but a reflection; a shadow-dance of figures, loving, hating, struggling;
pursuing brave adventures, triumphing or defeated, hopeful or
despairing.
Miss Page folded her letter, and replaced it slowly in its envelope.
It was the day for her class of village children, whom she taught
to sew, and to whom, while they wrestled with long seams, she read
fairy tales.
There was tea in the garden afterwards, and she had forgotten to
tell Burks to put out the strawberry jam.
She rose, and went into the house to repair the omission.
VII
“We shall have a very dull winter,” complained Mrs. Carfax, “with
so many of you away. Sylvia and Mrs. Dakin have gone already, and
now you are going to desert us. We shall feel quite lost.”
It was a damp afternoon in mid-October, and the wood-fire in
Miss Page’s drawing-room glowed cheerfully.
The tea-table was drawn up near its blaze, and Mrs. Carfax leant
back comfortably in the corner of the sofa, sipping her tea and eating
hot cakes appreciatively.
“So you’re going to Rome?” she continued. “We hoped as you
didn’t go away last year you had become reconciled to an English
winter.”
“I didn’t mean to go,” confessed Anne. “I was very happy here
last year. But somehow this autumn I have begun to long for more
sunshine. I know we’ve had a lovely summer, and I ought to be
content, but the rain of the last fortnight has decided me.”
She glanced with a little shiver towards the drenched garden. The
rain had been too persistent to make much sweeping of leaves
practicable, and the grass was strewn with them, yellow, battered
and rotting.
“Tell me about Sylvia!” she inquired. “I heard from her the other
day, but I dare say you have later news. She seems very happy.”
“Oh, she writes in excellent spirits, as of course she would, now
she’s got her own way.”
Mrs. Carfax’s expression was one of rather irritable displeasure,
and Anne’s inward reflections turned on that deplorable yet possibly
comprehensible antagonism which so frequently exists between
children and parents; the tie of blood so binding, yet so provocative
of mutual adverse criticism, involuntary irritation and impatience.
“Do you like the boarding-house?” she asked.
“Oh yes. Very nice. Her father and I took her there last week, you
know. I couldn’t be easy till I’d seen what sort of place she was in.
And men are no good at that sort of thing.” She helped herself to
another tea-cake.
“Oh yes,” she repeated, “it’s a very comfortable house; on the
Embankment, I think you call it. At any rate, it’s quite close to the
school where she takes her lessons. Sylvia shares a sitting-room
with Susie Villiers, one of her school-fellows who is studying at the
Slade, is it? I always forget the names of these places. It’s a house
built on purpose for students, I understand. Most comfortable. Hot
and cold water on every floor, and bathrooms, and a beautiful dining-
room. To my mind it’s all too luxurious. Everything is done nowadays,
it seems to me, to tempt young people from their homes.”
Mrs. Carfax gave an exasperated sigh.
“But Sylvia has a great gift, dear Mrs. Carfax,” pleaded Anne. “It
isn’t as though she leaves home to do nothing.”
“That’s what her father says now. He never used to. He always
upheld me in maintaining that the place of the eldest daughter is at
home. I don’t know what you could have said to change him so, Miss
Page, but ever since he talked to you about Sylvia, his cry is that it’s
sinful not to use the gifts with which God has endowed us. Men are
so inconsistent; and if they’re clergymen they always seem able to
quote some text to annoy you. I don’t mean to be profane, but
sometimes I have found the Bible most trying.”
Mrs. Carfax sighed again.
“She has a lovely voice. You will be proud of her one day,”
declared Miss Page, with her disarming smile.
“But what is she going to do with it? I would never consent to a
child of mine singing in public, with her name in newspapers, and on
placards and all that! It would break my heart.”
“Still you needn’t think of the future yet, need you? She has years
of training before her.”
“But if she’s not going to do anything with it, what a waste of
money!” exclaimed Mrs. Carfax, tragically. “I think it’s much better for
girls not to have gifts,” she added.
Miss Page was rather disposed to consider that her guest had
uttered a great truth.
Her reply however, was non-committal.
“Perhaps,” she said. “But if they do possess them don’t you agree
with Mr. Carfax that it’s right to cultivate them? A gift of any sort is
such a worrying thing,” she added persuasively. “And if it’s allowed to
rust, it chiefly worries its possessor. Now that she’s doing what she
was born to do, Sylvia will be contented. I don’t think it’s just
because she’s getting her own way that she’s happy. It’s deeper than
that. She’s satisfied because she’s fulfilling a need of her nature for
which she’s no more responsible than she is for the colour of her
very pretty eyes.”
Anne’s voice was so gentle, her smile so irresistible, that Mrs.
Carfax was visibly softened.
“At any rate I’m glad it’s not art she’s got a taste for,” she
conceded.
To Mrs. Carfax, painting, to the exclusion of all the other activities
of the Muses, was art, as Miss Page understood.
“You wouldn’t like her to paint?”
“Oh landscapes and flowers, and that sort of thing is all right. A
very nice amusement. I’ve got lots of water-colour sketches I did as
a girl, and hand-painted screens, and sofa cushions too. But
nowadays art is such a shocking thing, isn’t it? I hear that Susie
Villiers draws from the nude, as they call it. To me, it’s a perfectly
disgusting idea. And they draw men, as well as women. Imagine a
young girl having the boldness to draw a man without his clothes!”
“Do have some of this toast before it gets cold,” urged Anne. “Oh!
while I think of it I wish you would tell me how to make that delicious
shortbread I tasted the last time I came to you.”
Mrs. Carfax, adroitly switched off the topic of art as she
understood it, was on firm ground now that culinary operations held
the conversational field.
She gave minute directions to which her friend listened with
flattering attention.
“I must write that down before I forget it,” said Anne, opening a
bureau to take from it her book of recipes.
“How beautifully orderly you are!” exclaimed her guest, glancing
with admiration at the packets of papers tied with ribbon, the piles of
little books which filled the pigeonholes. “What a pity you never
married. You would have made such a good wife. The wives of to-
day are shocking housekeepers. Look at that flighty little Mrs. Dakin!
The doctor, poor man, must suffer a good deal. I doubt whether he
ever gets a decent meal. Don’t you think it’s very extraordinary of
him to let her go away for such a long visit as she proposes to
make? I think that kind of thing is a mistake, you know.”
Launched upon the stream of gossip for which she possessed a
considerable weakness, Mrs. Carfax shook her head portentously.
“He thinks it will be good for her health. She’s not very strong, is
she? And this place doesn’t suit her in the winter.”
“Oh! I don’t think there’s much the matter with her health,”
answered Mrs. Carfax with a touch of scorn. “She hasn’t anything
else to think of. She hasn’t enough to do, that’s what’s the matter
with her. One or two children would soon make her forget her
ailments. Poor Dr. Dakin! I don’t think she’s very nice to him, do you?
I often pity him.”
“But I’m quite sure they’re devoted to one another,” began Miss
Page, hailing with relief the entrance of the Vicar, who had called to
fetch his wife, and to bid their hostess farewell.
“Well, dear lady!” he exclaimed in his hearty voice. “So you’re off
to the land of perpetual sunshine to-morrow. Lucky woman! And
Rome too, a city which I have always had a great desire to visit.
Most interesting. Most interesting. But you leave us desolate.”
“How kind of you to come and say good-bye! My farewells this
week have made me quite sad,” declared Anne. “I hate last days.”
“We shall all miss you terribly. You leave a heart-broken
community behind you,” said the Vicar. “Poor Dakin is already
bemoaning his fate, bereft of his wife and of you. It’s a good thing
Sylvia isn’t here, or we should have had nothing but lamentations till
the spring.”
“You all spoil me,” Anne said in a moved voice. “We have been
talking about Sylvia,” she went on rather hurriedly. “I’m so glad she’s
happy.”
“Best thing for her. Quite the right thing!” declared the Vicar
emphatically. “I’m always telling my wife that gifts are ours as a
sacred trust. Moreover, when the girl comes back for the holidays
and so on, she will appreciate her home, and we shall all get on
much better in consequence. Girls as well as boys must find their
own paths, and make their own lives. To thwart them only leads to
unnecessary friction, and is after all unjust. Every girl should have
her chance.”
If Miss Page smiled in secret to find the ideas she had implanted
in the Vicar’s mind so well assimilated that they re-appeared in the
form of original conviction, no trace of her amusement was visible.
“I’m sure Mrs. Carfax will find that you’re right,” was her remark,
as she smiled at the lady in question.
Mrs. Carfax kissed her affectionately. “Good-bye. I’m sure we’re
preventing you from looking after your packing,” she said.
“Good-bye,” echoed her husband, enclosing Anne’s frail hand in
his vigorous clasp. “Don’t let Sylvia bother you with too many letters.
I am convinced that I’ve done the right thing by the child in sticking to
my own ideas.”
He smiled the manly smile of self-confidence and wisdom denied
to women, and Miss Page, following her visitors to the hall-door,
waved to them as they went down the drive together.
The amusement that she need no longer repress, was in her

eyes, as she went upstairs to her room; the gentle tolerant
amusement of a woman old enough to look at life with kindly
sympathy for its absurdities, and that charity without which the
spectacle has a tendency to move to a mirth as bitter and more cruel
than anger.
She found Burks on her knees before a trunk, still engaged in
packing.
“That will do, Burks. I’ll finish it myself,” she said. “You go down
and get your tea.”
After the maid had left, Anne opened the door which led from her
bedroom into her sitting-room, and examined the shelves with the
idea of choosing one or two favourite books to take with her on her
journey.
The books in this room were chiefly modern, supplementing the
library downstairs.
She chose one or two French novels, and a little volume of
Herrick, which had found its way to the shelves mostly devoted to
French literature. Then she returned to the bedroom, which was
already bright with lamp and firelight.
She hesitated a moment, then went to the bureau, from which
several months before she had taken her old journal.
This time she sought for, and found another book. After adjusting
the spring, and locking the writing part of the piece of furniture, she
thrust this volume, without looking at it, deep into her nearly filled
trunk.
VIII
Anne always returned with pleasure to Rome, a city which she
knew well, and to which she was bound by many memories. She
settled down happily with her maid in the little hotel in the heart of
the city, at which she frequently stayed.
It had been chosen chiefly on account of the garden which her
rooms overlooked—one of those charming Roman gardens, full of
orange-trees in tubs, of oleanders, and of clambering vines.
A fountain splashed in the midst, and the sound of its falling
water was music in her ears.
The deep blue sky, the dazzling sunshine never ceased to fill her
with a sense of buoyancy and youth, and all her wanderings to
distant churches, to ruined temples; amongst pictures, and statues,
were a delight.
One morning, when she had tired herself by a long ramble
through the halls and corridors of the Vatican, she returned with the
determination to do nothing for the rest of the day, but read and be
lazy.
She went to her room after lunch, her mind filled with the beauty
of the Borgia rooms in which she had just lingered.
The ribbed ceilings, rich with the gorgeous colour of the emblems
and coats-of-arms of the princely house, the marble pavements, the
lofty windows, formed the empty frame into which her fancy painted
pictures of the scenes those rooms had beheld. She heard the rustle
of dresses stiff with gold and gems; she caught the backward glance
of many a face; the face of Isabella d’Este, of Beatrice, of Lucrezia,
framed in the golden hair she washed so frequently, and tended with
such care.
“What’s become of all the gold

Used to hang and brush their bosoms?”
Browning’s words had come to Anne’s mind as she stood for a

moment alone in one of the ante-chambers, and glanced about her
as though expecting it to be full of ghosts.
She wondered how many of these golden-haired women had
loved the painted walls upon which her eyes now rested. Those
wonderful frescoes of Pinturicchio with their background of valley
and mountain, and their flower-starred meadows; their animals and
birds, their fantastic towers, their dainty figures, fanciful and
charming as a fairy tale.
She hoped they had loved them, and praised the painter with
their sweetest smiles.
Outside in the garden, the fountain splashed in the sunshine, and
suddenly its melody was the melody of her own fountain in her own
English garden at home.
She thought of it lovingly, and planned a new hedge of briar-
roses in the sunny corner where the dovecote stood.
Gradually the memory of the garden filled her mind, and blotted
out the stately visions of palaces and princes.
It grew peopled with well-known figures, with men who twenty
years ago had walked with her across its green lawn, had sat with
her under its trees, laughing, talking, reading, sometimes, but rarely
silent.
Presently she rose, and took from a locked drawer the book she
had brought from home, and till this moment, forgotten.
Sitting in the sunshine, with the splash of the fountain sounding in
her ears, Anne opened it.
“March 3. Hugh came home last November to marry
Alice,” were the first words that met her eyes.
“They have taken a little furnished cottage by the sea, at
St. Margaret’s Bay near Dover, and they want me to stay with
them before they sail for New Zealand. Mrs. Burbage says of
course I must go, and I start to-morrow to be with them for a
fortnight. I long to see Hugh again, but I’m shy at the thought
of meeting his wife. I have never seen her.”
Except for the mention of her return to Fairholme Court, there
was nothing written in the book from that date, till May of the same
year, and the painful colour crept into Anne’s face as she noticed
this.
There was no need for written record. Clearly, as though she had
recently lived through the experience, she remembered that
fortnight’s visit.
She remembered getting out of the train at the wayside station,
the nearest station touched by the railroad, for St. Margaret’s Bay.
Her heart was beating rather fast. It was eighteen years since she
had seen Hugh. Should she recognize him? He would not know her.
When he last came home she was a girl of seventeen. The thought
of her present age struck her with a shock of dismay.
There were only two people on the platform. A big burly man, tall
and bearded, and beside him a girl in a white serge dress.
Hugh and his wife!
“I am Anne,” she stammered, going up to them.
Hugh put his arms round her with his old impulsive roughness,
and then held her away from him.
“Why, you’ve grown, Anne!” he cried gaily. “You were such a little
thing! So slight, I mean. Darling, this is Anne. Isn’t she a damned fine
woman?”
His old laugh rang out boyishly, as Anne turned shyly to his wife.
She was very small, very daintily made, very prettily dressed. Her
face, despite her twenty-five years, was still babyish with its large
blue eyes and rings of soft hair round a childish forehead. She took
her sister-in-law’s hand and smiled, but even then, Anne did not miss
the quick glance that scrutinized her quizzically from head to foot.
From that moment, she knew that for Alice she was merely a
dowdily dressed woman; an old maid, some one to be treated with
patronizing kindliness.
They drove from the station to the cottage, which was almost
upon the seashore.
“Hugh loves the sea. He can’t be happy away from it, can you,
darling?” Alice asked, slipping her hand into his, as they entered the
little parlour where tea was spread.
“Now Anne, tell us all about it!” exclaimed Hugh as they sat
down. “Bless my soul, it’s seventeen or eighteen years since I saw
you. What have you been doing all this time?”
A sudden paralyzing blankness fell upon Anne’s mind.
What had she been doing? For thirteen years after her brother’s
last departure, she had lived in the little house in Tufton Street,
managing the house work, anxiously counting her weekly allowance
for fear that with all her pains, both ends could not be made to meet.
She had nursed a hopeless invalid, and tried to bear his exacting
temper with patience. For the last five of the eighteen years she had
read books, and worked in the garden. There was nothing to tell
them.
Instinctively she felt that to these people who belonged to
practical life, who lived and loved, who were in the mainstream of
human activity, her world of books meant nothing.
The colour rushed to her cheeks, and left them white.
“I—I have done nothing at all,” she stammered. “You know I have
been living with Mrs. Burbage for five years? She’s very kind. But
she’s almost an invalid, so we’re—we’re very quiet. Tell me about
yourself, Hugh. Things are always happening to you.”
“Well, this has happened to me,” he returned with a laugh,
slipping his arm round his wife’s shoulder. “The best thing that ever
happened in my life.”
Alice drew close to him with a little nestling movement, and Anne
suddenly felt a sickening pain at her heart.
“Don’t be so silly, Hugh! Any one would think we were lovers,”
she declared, turning to her sister-in-law. “And we’ve been married
ages. Nearly four months.”
“Well, aren’t we lovers?” demanded Hugh, shaking her. “Answer
me at once. Aren’t we?”
She got up laughing, and kissed the top of his head.
“Of course we are. But don’t be silly!” she commanded. She
blushed, but her eyes were bright with happiness.
“Oh never mind Anne!” said Hugh. “She’s one of the family. She
doesn’t count.”
The light, kindly meant words caused Anne another strange
pang. She didn’t count. Of course she didn’t count. Why should she?
“How lovely the sea is!” she exclaimed hastily. “I can’t look at it
enough. You know I’ve only seen it once before.”
“Nonsense! How’s that?” asked Hugh, with the easy forgetfulness
of a man who does not realize the straitened life in which he never
had a part.
“I never went away,” said Anne, simply. “There was no money.
Once when I was a child, Miss Atkins took me for a day to
Broadstairs. You remember Miss Atkins?”
“Old Thomas? She was Anne’s governess, and exactly like a
tortoise-shell cat,” he explained turning to his wife. “Yes, what’s
become of her?”
“Dead,” said Anne. “She died ten years ago.”
“Poor old thing!” returned Hugh perfunctorily. “Darling, won’t you
show Anne her room, and then we can go for a walk before supper.
Isn’t it warm here!” he exclaimed, leaning from the open window. “It’s
so sheltered you see with the cliffs at the back. Make haste, Anne.
We’ll take you on to the downs, and show you the sea to your heart’s
content.”
At supper the talk was all about Hugh. His past adventures, his
future prospects. He had worked hard, and was now partner of the
promising sheep farm in New Zealand, to which next month he
proposed to return with his wife.
“I tell Alice it won’t be a very gay existence for her. She doesn’t
look much like a farmers wife, does she?” He threw her an admiring
glance. “But she declares she won’t mind.”
“You’ll be there,” was Alice’s only comment.
“Oh yes! And there are neighbours too. Very jolly people. And
Bob Holmes, that’s my partner, you know, Anne, is an awfully decent
fellow. You’ll like his wife, Alice. She’s such a cheery little woman.
Oh! it’s not so bad. And the climate’s splendid. Lord! how one misses
the sun in this damp misty old country!”
“It will be lovely. I’m longing to go,” Alice exclaimed.
“You see she’s only got an uncle and aunt to leave,” explained
Hugh, turning to his sister. “She’s a very lonely little person.”
“Not now,” said Alice, her voice full of content.
Before she had been with them two days, Anne had found herself
filled with a passionate longing to return to her quiet home. To get
back to the shelter in which she was not reminded twenty times an
hour that she “didn’t count.”
She was amazed at the violence of her own emotions.
Every glance exchanged by the married lovers, every word of
love, every caress, stabbed her afresh.
She had never before known what it was to feel acutely, and the
suffering bewildered her. She was afraid of it. She wanted
desperately to escape from herself, this new self which seemed all
torn and bleeding.
There was a hunted look in her eyes like that of a starving and
desperate animal. She shuddered at them sometimes when they met
her suddenly in the glass. One evening, unable to bear the sight of
their endearments, she had gone early to her room, pleading a
headache. She groped her way to the window, in the dark, and
kneeling down beside it, looked out upon the sea.
Every few minutes, a flash from the lighthouse on the cliffs
momentarily illumined the still water. Far out, lights moved on the
prow of passing ships. She could hear the wash and murmur of the
waves, as they broke lazily on the pebbly shore.
For a long time she knelt there immovable, the sound of the sea
lulling her into a sort of painless trance, till the hum of voices below
gradually filtered to her senses. The evening was so warm that Hugh
and his wife were sitting in the garden. At first, numbed and half
conscious in mind, she scarcely heeded the murmur of talk, but
finally a sentence in a man’s voice reached her consciousness.
“Nonsense, darling! She’s not at all bad looking. Well dressed,
she’d be a fine figure of a woman.”
“Why is she so dowdy then?”
“She lives in the country, you see. I suppose there’s no one to
dress for. And after all what does it matter?”
There was a little laugh. “No. She’s too old now. She’ll never
marry.”
Again there was an incoherent murmur. “Yes I know, darling, it’s
boring for you. But she’s had a dreary life, poor girl. I want you to be
nice to her.”
“I am nice,” the answer came in a hurt voice, and was followed
immediately by a rustle.
“I know you are. You’re a darling. You’re the sweetest thing on
this earth!”
There was a sound of a kiss, and Anne drew back from the
window with a quick movement.
“Hush!” The exclamation came swiftly from Hugh.
“Oh! it’s all right. Her light’s out. She’s asleep.”
Anne closed the window noiselessly to shut out the voices to
which she had listened without her will, scarcely conscious of how
they had reached her. She threw herself on her bed in the dark. After
all, as Hugh said, it didn’t matter. But she cried all night as though it
did.
In the journal which Miss Page held open on her knee, she saw
the date of her return recorded.
“Came back to Fairholme Court, March 17th.”
She remembered her old friend’s greeting, as she went to find
her in the morning-room, where she was lying on the sofa.
“Why, Anne! Sea air doesn’t suit you. You’ve got thin, my dear.
You look quite ill. You mustn’t go away again.”
“No,” she said quietly. “I will never go away again.”
She remembered going into the library before she took off her
walking things, looking round at the walls lined with books, and
wondering why they had ever meant anything to her at all.
“Books are no good,” she said to herself, as she went upstairs.
“This also is vanity,” was what the words implied.
Miss Page looked out with a sort of surprise upon the garden
steeped in sunshine. The fountain was still splashing gaily into its
marble basin. In the blue overhead, two pigeons flashed and
wheeled. She had been living over again the life of many years ago,
with such intensity of vision and of feeling, that her present
surroundings had the unreality of a dream.
After a few moments, she turned the next page, knowing well
what she should find, yet curious to see the words in her own
handwriting of twenty years ago.
“May 15th.—We have had visitors to-day for the first time
almost, since I have lived here. They were all men, too, and
Frenchmen. The parents of one of them, Monsieur René
Dampierre, knew Mrs. Burbage long ago, and he called and
brought three friends with him.”
As Anne slowly turned the pages, isolated paragraphs met her
eye.
“I felt horribly shy at first, but only for a little while. They
were all so nice. I suppose Frenchmen have easier manners
than Englishmen, though I have had no experience of either.”
“Monsieur Fontenelle is very amusing and clever. I like his
face, though he looks sarcastic, and I’m sure he can say bitter
things. But he never says them to me.”
“Mrs. Burbage wanted me to describe Monsieur Dampierre
in whom she is chiefly interested, because she knew him
when he was a child. I found it very difficult. When I had said
that he was tall, and broad-shouldered, and very fair and
handsome, it seemed as though I had said nothing. It’s his
smile and his changing face which make up his personality—a
very charming one.”
All through that summer there were short entries concerning the
little colony of Frenchmen that had settled in the village.
Anne glanced at them with a smile. It was a very sweet smile,
scarcely sad, scarcely regretful. It was the smile of content with
which a woman bends over a bowl of dried rose-leaves, and feels
again the warmth of the sun, and sees the glitter and the blueness of
the day when the leaves were red.
IX
It was grey and cheerless in Paris, while Anne sat in the
sunshine of Rome.
Winter had set in early, and in François’s studio the stove piled
with fuel was almost insufficient to warm the great room.
It was as he had suggested, the typical luxurious studio of a rich
man.
A broad divan under the window, was piled with cushions, and
supported by them in an attitude suggestive of extreme comfort,
François sat and smoked while he talked to an old friend.
The Vicomte de Montmédy, rich now, through his marriage with
an American heiress, was a lover of the arts, a connoisseur and a
buyer of pictures.
Fontenelle had known him in the days when he was only a
struggling and unsuccessful painter.
His title and his noble birth, had stood him in better stead than his
talent. That this was of an inferior quality to his fine taste in art,
François had early recognized, and his felicitations on the subject of
his prudent marriage had therefore gained an added warmth and
fervour of approval.
The two men had been talking while the daylight waned, and
when François, finding his match-box empty, rose to refill it from a jar
on a side table, he paused to glance with a shiver upon the prospect
outside the window.
The studio looked upon the Luxembourg Gardens. The trees
were bare now, and their branches showed black and stiff against a
wintry sky.

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First published 1995 by Prentice Hall Europe (print)

ISBN: 978-1-292-34945-9 (print)

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1 Introduction to management accounting 1

Appendix A Glossary of key terms 513

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1 Introduction to management accounting 1

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5 Costing and cost management in a

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7 Accounting for control 243

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9 Managing risk 333

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10 Strategic management accounting: performance

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12 Managing working capital 459

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Appendix A Glossary of key terms 513

Lecturer Resources ON THE

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A note to students from the authors

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A note to lecturers and tutors from the authors

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Order of dealing with the material

Working through the chapters

End-of-chapter assessment material

HOW TO USE THIS BOOK xix

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xx HOW TO USE THIS BOOK

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Martyn Jones, University of Winchester

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Real World 1.1

The customer is king

2 CHAPTER 1 INTRODUCTION TO MANAGEMENT ACCOUNTING

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■ setting the overall direction for the business;