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DRURY
COLIN Management and
Cost Accounting
11
ELEVENTH
EDITION
Australia ● Brazil ● Canada ● Mexico ● Singapore ● United Kingdom ● United States
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Management and Cost Accounting, © 2021, Colin Drury
11th Edition WCN: 02-300
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A catalogue record for this book is available from the British Library.
978-1-4737-7361-5
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Print Number: 01 Print Year: 2020
BRIEF CONTENTS
PART ONE PART FOUR

Introduction to management and Information for planning, control and
cost accounting 2 performance measurement 380
1 Introduction to management accounting 4 15 The budgeting process 382
2 An introduction to cost terms and 16 Management control systems 419
concepts 26 17 Standard costing and variance
analysis 1 450
18 Standard costing and variance analysis 2:
PART TWO
further aspects 488
Cost accumulation for inventory 19 Divisional financial performance
valuation and profit measurement 48 measures 513
3 Cost assignment 50 20 Transfer pricing in divisionalized
4 Accounting entries for a job costing companies 545
system 88
5 Process costing 111 PART FIVE
6 Joint and by-product costing 138
Strategic performance and cost
7 Income effects of alternative cost
management, value creation and
accumulation systems 156
challenges for the future 580
21 Strategic performance management 582
PART THREE
22 Strategic cost management and value
Information for decision-making 176
creation 616
8 Cost–volume–profit analysis 178 23 Challenges for the future 658
9 Measuring relevant costs and revenues for
decision-making 204
PART SIX
10 Pricing decisions and profitability
analysis 238
Addendum: The application
11 Activity-based costing 265 of quantitative methods to
12 Decision-making under conditions of risk management accounting 686
and uncertainty 297 24 Cost estimation and cost behaviour 688
13 Capital investment decisions: appraisal 25 Quantitative models for the planning and
methods 320 control of inventories 712
14 Capital investment decisions: the impact 26 The application of linear programming to
of capital rationing, taxation, inflation and management accounting 733
risk 351
iii
CONTENTS
In Memoriam IX Incremental and marginal costs 38

Preface X The cost and management accounting
About the authors XVI information system 39
Acknowledgements XVII
PART TWO
PART ONE Cost accumulation for
Introduction to management inventory valuation and
and cost accounting 2 profit measurement 48
1 Introduction to management 3 Cost assignment 50
accounting 4 Assignment of direct and indirect costs 51
The users of accounting information 5 Different costs for different purposes 52
Differences between management accounting Cost–benefit issues and cost systems
and financial accounting 6 design 53
The decision-making, planning and control Assigning direct costs to cost objects 54
process 6 Plant-wide (blanket) overhead rates 54
The impact of the changing business The two-stage allocation process 55
environment on management accounting 10 An illustration of the two-stage process for a
Focus on customer satisfaction and new traditional costing system 57
management approaches 16 An illustration of the two-stage process for an
Functions of management accounting 18 abc system 62
Summary of the contents of this book 20 Extracting relevant costs for
Guidelines for using this book 20 decision-making 66
Budgeted overhead rates 67
Under- and over-recovery of overheads 68
2 An introduction to cost terms and Non-manufacturing overheads 69
concepts 26 Cost assignment in non-manufacturing
organizations 70
Cost objects 26
The indirect cost assignment process 72
Manufacturing, merchandising and service
Appendix 3.1: Inter-service department
organizations 27
reallocations 74
Direct and indirect costs 27
Period and product costs 30
4 Accounting entries for a job
Cost behaviour 32
Relevant and irrelevant costs and revenues 35
costing system 88
Avoidable and unavoidable costs 36 Materials recording procedure 89
Sunk costs 36 Pricing the issues of materials 90
Opportunity costs 37 Control accounts 91
iv
CONTENTS v
Recording the purchase of raw materials 92 PART THREE

Recording the issue of materials 94
Information for
Accounting procedure for labour costs 95
Accounting procedure for manufacturing decision-making 176
overheads 97
Non-manufacturing overheads 98 8 Cost–volume–profit analysis 178
Accounting procedures for jobs completed and Curvilinear cvp relationships 179
products sold 98 Linear CVP relationships 180
Costing profit and loss account 99 A numerical approach to CVP analysis 182
Job-order costing in service organizations 99 The contribution margin ratio 183
Interlocking accounting 99 Relevant range 184
Accounting entries for a just-in-time Margin of safety 186
manufacturing system 101 Constructing the break-even or cvp chart 186
Alternative presentation of CVP analysis 187
5 Process costing 111 Multi-product CVP analysis 189
Operating leverage 191
Flow of production and costs in a process CVP analysis assumptions and limitations 192
costing system 112 The impact of information technology 195
Process costing when all output is fully
complete 113
9 Measuring relevant costs and
Process costing with ending work in progress
revenues for decision-making 204
partially complete 118
Beginning and ending work in progress of Identifying relevant costs and revenues 205
uncompleted units 121 Importance of qualitative/non-financial
Partially completed output and losses in factors 205
process 126 Special pricing decisions 206
Process costing in service organizations 126 Product mix decisions when capacity
Batch/operating costing 126 constraints exist 210
Appendix 5.1: Losses in process and partially Replacement of equipment – the irrelevance of
completed units 128 past costs 213
Outsourcing and make-or-buy decisions 214
6 Joint and by-product costing 138 Discontinuation decisions 218
Determining the relevant costs of direct
Joint products and by-products 139
materials 220
Methods of allocating joint costs 139
Determining the relevant costs of direct
Irrelevance of joint cost allocations for
labour 220
decision-making 145
Appendix 9.1: The theory of constraints and
Accounting for by-products 146
throughput accounting 222
7 Income effects of alternative
cost accumulation systems 156 10 Pricing decisions and
profitability analysis 238
External and internal reporting 157
Variable costing 159 The role of cost information in pricing
Absorption costing 160 decisions 239
Variable costing and absorption costing: a A price-setting firm facing short-run pricing
comparison of their impact on profit 161 decisions 239
Some arguments in support of variable A price-setting firm facing long-run pricing
costing 162 decisions 240
Some arguments in support of absorption A price-taking firm facing short-run product mix
costing 164 decisions 244
Alternative denominator-level measures 165 A price-taking firm facing long-run product mix
Appendix 7.1: Derivation of the profit decisions 245
function for an absorption costing Surveys of practice relating to pricing
system 168 decisions 247
vi CONTENTS
Limitations of cost-plus pricing 247 Payback method 334

Reasons for using cost-plus pricing 248 Accounting rate of return 338
Pricing policies 248 The effect of performance measurement on
Customer profitability analysis 250 capital investment decisions 339
Appendix 10.1: Calculating optimal selling Qualitative factors 340
prices using differential calculus 255
14 Capital investment decisions:
11 Activity-based costing 265 the impact of capital rationing,
taxation, inflation and risk 351
The need for a cost accumulation system in
generating relevant cost information for Capital rationing 351
decision-making 266 Taxation and investment decisions 353
Types of cost system 267 The effect of inflation on capital
A comparison of traditional and abc investment appraisal 356
systems 267 Calculating risk-adjusted discount rates 358
The emergence of abc systems 269 Risk-adjusted discount rates and the weighted
Volume-based and non-volume-based cost average cost of capital 362
drivers 270 Sensitivity analysis 363
Designing abc systems 273 Initiation, authorization and review of projects 365
Activity hierarchies 275
ABC profitability analysis 277
Cost versus benefits considerations 279 PART FOUR
Time-driven abc 280 Information for planning,
Resource consumption models and unused
control and performance
capacity 283
Periodic review of an abc database 285 measurement 380
Abc cost management applications 285
15 The budgeting process 382
12 Decision-making under The strategic planning, budgeting and control
conditions of risk and process 383
uncertainty 297 The multiple functions of budgets 386
Conflicting roles of budgets 387
Risk and uncertainty 298
The budget period 387
Probability distributions and expected value 300
Administration of the budgeting process 388
Measuring the amount of risk 301
Stages in the budgeting process 389
Attitudes to risk by individuals 302
A detailed illustration 391
Decision tree analysis 304
Computerized budgeting 400
Buying perfect and imperfect information 306
Activity-based budgeting 401
Maximin, maximax and regret criteria 307
The budgeting process in non-profit-making
Risk reduction and diversification 308
organizations 403
13 Capital investment decisions: Zero-based budgeting 404
Criticisms of budgeting 406
appraisal methods 320
The opportunity cost of an investment 322
16 Management
Compounding and discounting 323
control systems 419
The concept of net present value 325
Calculating net present values 326 Control at different organizational levels 420
The internal rate of return 328 Different types of control mechanism 420
Relevant cash flows 331 Feedback and feed-forward controls 422
Timing of cash flows 331 Harmful side-effects of controls 423
Comparison of net present value and internal Management accounting control systems 424
rate of return 332 Responsibility centres 425
Techniques that ignore the time value of The nature of management accounting
money 334 control systems 427
CONTENTS vii
The controllability principle 428 Distinguishing between the managerial and

Setting performance targets and determining economic performance of the division 518
how challenging they should be 432 Alternative divisional profit measures 518
Determining how much influence managers Surveys of practice 519
should have in setting targets 433 Return on investment 520
Different approaches that managers use to Residual income 521
evaluate budgetees’ performance 434 Economic value added (EVA(TM)) 522
Contingency theory 435 An illustration of the calculation of EVA(TM) 523
Alternative uses of management accounting Determining which assets should be included
information 436 in the investment base 526
The impact of depreciation 527
The effect of performance measurement on
17 Standard costing and variance
capital investment decisions 528
analysis 1 450
Addressing the dysfunctional consequences
Operation of a standard costing system 451 of short-term financial performance
Establishing cost standards 453 measures 530
Purposes of standard costing 457
A summary of variance analysis for a variable 20 Transfer pricing in divisionalized
costing system 458 companies 545
Material variances 458
Purpose of transfer pricing 546
Labour variances 463
Alternative transfer pricing methods 547
Variable overhead variances 464
Market-based transfer prices 548
A generic routine approach to variance
Cost plus a mark-up transfer price 549
analysis for variable costs 465
Marginal/variable cost transfer prices 551
Fixed overhead expenditure or spending
Full cost transfer prices without a
variance 466
mark-up 552
Sales variances 466
Negotiated transfer prices 552
Reconciling budgeted profit and actual profit 469
Marginal/variable cost plus opportunity cost
Standard absorption costing 470
transfer prices 553
Reconciliation of budgeted and actual profit for
Comparison of cost-based transfer pricing
a standard absorption costing system 474
methods 554
Appendix 17.1: A generic routine approach to
Proposals for resolving transfer pricing
variance analysis 477
conflicts 555
Domestic transfer pricing
18 Standard costing and variance recommendations 558
analysis 2: further aspects 488 International transfer pricing 559
Appendix 20.1: Economic theory of transfer
Recording standard costs in the accounts 488
pricing 563
Direct materials mix and yield variances 493
Sales mix and sales quantity variances 497
Distinguishing between planning and operating Part Five
variances 498 Strategic performance and
The investigation of variances 500
The role of standard costing when ABC has
cost management, value
been implemented 501 creation and challenges for
the future 580
19 Divisional financial performance
measures 513 21 Strategic performance
management 582
Divisional organizational structures 514
Advantages and disadvantages of The performance management framework 583
divisionalization 515 Strategy and strategic positioning 583
Prerequisites for successful Performance measurement and performance
divisionalization 516 management systems 585
viii CONTENTS
Alternative performance management Relevant range and non-linear cost

frameworks 585 functions 697
The balanced scorecard 585 A summary of the steps involved in estimating
Linking performance evaluation with the cost functions 698
balanced scorecard 596 Cost estimation when the learning effect is
Benefits and limitations of the balanced present 699
scorecard approach 597 Estimating incremented hours and incremental
cost 702
22 Strategic cost management and Appendix 24.1: Multiple regression
value creation 616 analysis 704
Cost management and the value chain 617 25 Quantitative models for
Life cycle cost management 620
the planning and control of
Target costing 621
inventories 712
Kaizen costing 626
Activity-based management 627 Why do firms hold inventories? 713
Benchmarking 631 Relevant costs for quantitative models under
Business process reengineering 632 conditions of certainty 713
Just-in-time systems 632 Determining the economic order
Quality cost management 638 quantity 714
Assumptions of the eoq formula 716
23 Challenges for the future 658 Application of the eoq model in determining
the optimum batch size for a production
A brief historical review of run 717
management accounting 659 Quantity discounts 718
Globalization and management accounting Determining when to place the order 719
practices 660 Uncertainty and safety stocks 719
Environmental and sustainability issues 661 The use of probability theory for determining
Focus on ethical behaviour 666 safety stocks 720
Information technology and Control of inventory through
digitalization 668 classification 722
Intellectual capital and the knowledge-based Other factors influencing the choice of order
economy 673 quantity 723
Integrated reporting 675 Materials requirement planning 724
Implications for management accounting 676 Just-in-time (jit) purchasing arrangements 724
26 The application of linear

Part six programming to management
Addendum: The application accounting 733
of quantitative methods to Linear programming 734
management accounting 686 Graphical method 735
Simplex method 740
Uses of linear programming 743
24 Cost estimation
and cost behaviour 688
Bibliography 754
General principles applying to estimating cost Glossary 764
functions 689 Appendices 775
Cost estimation methods 690 Answers to review problems 777
Tests of reliability 696 Index 861
In Memoriam
Emeritus Professor Colin Drury (1944–2019)
S adly, Professor Colin Drury passed away in 2019 after a short illness. At the time of his passing, Colin
had already made plans for the content of the 11th edition of his bestselling textbook. Therefore,
in discussion with Colin’s family, Cengage brought on board a new and highly experienced contributing
author for the 11th edition, Professor Mike Tayles, to bring Colin’s initial plans and drafts to conclusion.
For several decades, Colin had been known for his textbooks, especially Management and Cost
Accounting, by almost anyone who wanted a thorough understanding of the subject. Colin was often
complimented on the comprehensive nature and clarity of his writing. This was probably attributable to
his previous practical experience, but also to the thorough and uncomplicated manner in which he tack-
led all his work. He managed to navigate successfully between the academic and practitioners’ study of
management accounting and as a result of his rigour and authority, his textbook became recommended
reading in management accounting by the professional accounting bodies as well as in many universi-
ties across the UK, Europe and beyond. From as early as the third edition it was regarded as ‘Europe’s
Bestselling Management Accounting Textbook’. The ACCA Students’ Newsletter noted: ‘Drury’s book
can be recommended, without reservation, to all accounting students.’
Colin also served on the Research Committee of CIMA and worked on the CIMA Official
Management Accounting Terminology. Colin was quick to include the most up-to-date research findings
into the latest editions of his textbooks and therefore helped turn research into practice. The areas of his
own research interests emphasized current practice, hence, he helped to bring management accounting
practice into research. Shortly after Colin’s retirement, to acknowledge his achievements, the British
Accounting and Finance Association bestowed upon him a Lifetime Achievement Award, which he
richly deserved.
Colin’s legacy will live on through this award and through his extensive contributions to books and
journals – Cengage thanks him for all his dedication over the past decades, and for his family’s support
in enabling the 11th edition to reach fruition.
All at Cengage
ix
PREFACE
F undamentally, this new 11th edition updates and builds upon the foundation in Management and
Cost Accounting which Colin so successfully established. Colin and I first started to teach together
40 years ago and commenced our research collaboration in 1990 with research into contemporary man-
agement accounting practices. I enjoyed collaborating with Colin, producing A Survey of Management
Accounting Practices in UK Manufacturing Companies (ACCA) and Cost System Design and Profitability
Analysis in UK Companies (CIMA) in addition to various journal articles. Colin was a pleasure to work
with, he had a clear passion for this work, but for someone so renowned in the academic accounting
community he was very modest about his achievements. There was always a humility in the way he
went about all of his academic endeavours. Although our careers ultimately followed different paths, we
maintained contact and so I am privileged to make a small contribution to this highly successful text-
book which for over three decades and ten editions, has been at the forefront of helping students learn
the key concepts and processes in management and cost accounting.
The aim of the 11th edition of this book is to explain the principles involved in designing and evalu-
ating management and cost accounting information systems. Management accounting systems accu-
mulate, classify, summarize and report information that will assist employees within an organization in
their decision-making, planning, control and performance measurement activities. A cost accounting
system is concerned with accumulating costs for inventory valuation to meet external financial account-
ing and internal monthly or quarterly profit measurement requirements. As the title suggests, this book
is concerned with both management and cost accounting, but with emphasis placed on the former.
A large number of cost and management accounting textbooks have been published. Many of these
books contain a detailed description of accounting techniques without any discussion of the principles
involved in evaluating management and cost accounting systems. Such books often lack a conceptual
framework and ignore the considerable amount of research conducted in management accounting in
the past three decades. At the other extreme, some books focus entirely on a conceptual framework of
management accounting with an emphasis on developing normative models of what ought to be. These
books pay little attention to accounting techniques. The objective has been to produce a book that falls
within these two extremes.
The target audience for this book is undergraduate students who are pursuing a one-year or two-year
management accounting course, and students who are preparing for the management and cost account-
ing examinations of professional accountancy bodies at an intermediate or advanced professional level.
It will also be of use to postgraduate and higher national diploma students who are studying manage-
ment and cost accounting for the first time. An introductory course in financial accounting is not a
prerequisite, although many students will have undertaken such a course.
PREFACE xi
STRUCTURE AND PLAN OF THE BOOK

A major theme of this book continues to be different financial information for different management
purposes and how to explain this to students. The framework used in this book highlights that there are
three ways of constructing management accounting information:
1. The first is cost accounting with its emphasis on producing product (or service) costs for allo-
cating costs between cost of goods sold and inventories to meet external and internal financial
accounting inventory valuation and profit measurement requirements.
2. The second is the notion of decision-relevant costs with the emphasis on providing relevant
information to help managers to make good decisions.
3. The third is responsibility accounting and performance measurement that focuses on both
financial and non-financial information; in particular, the assignment of costs and revenues to
responsibility centres.
These are captured in Figure 0.1 and throughout the book we remind the reader of this distinction and
point out where different examples of management and cost accounting information are – or are not –
suited to particular circumstances.
FIGURE 0.1
The management
accounting system
structure of this Introduction to management and cost
book accounting – Part 1
Cost accumulation
for inventory
valuation and profit
measurement –
Part 2
Information for
planning, control Information for
and performance decision-making –
measurement – Part 3
Part 4
The application of quantitative Strategic performance

methods to management and cost management,
accounting – Part 6 value creation and
challenges for the future –
Part 5
The book is divided into six parts. Part One consists of two chapters and provides an introduction to
management and cost accounting, its terminology and a framework for studying the remaining chap-
ters. The following three parts reflect the three different ways of constructing accounting information.
Part Two comprises five chapters and is entitled ‘Cost accumulation for inventory valuation and profit
measurement’. This part focuses on assigning costs to products, to separate the costs incurred during a
period between costs of goods sold and the closing inventory valuation for internal and external profit
xii PREFACE
measurement. The extent to which product costs accumulated for inventory valuation and profit mea-
surement should be adjusted for meeting decision-making, cost control and performance measurement
requirements is also briefly considered. Part Three consists of seven chapters and is entitled ‘Informa-
tion for decision-making’. Here the focus is on measuring and identifying those costs that are relevant
for different types of decision. The title of Part Four is ‘Information for planning, control and perfor-
mance measurement’. It consists of six chapters and concentrates on the process of translating goals and
objectives into specific activities and the resources that are required, via the short-term (budgeting) and
long-term planning processes. In addition, the management control systems that organizations use are
described and the role that management accounting control systems play within the overall control pro-
cess is examined. The emphasis here is on the accounting process as a means of providing information
to help managers control the activities for which they are responsible. Performance measurement and
evaluation within different segments of the organization is also examined. Part Five consists of three
chapters and is entitled ‘Strategic performance and cost management, value creation and challenges for
the future’. The first chapter focuses on strategic performance management, the second on strategic cost
management and value creation. The third chapter concentrates on the emerging issues that are likely to
have an impact on management accounting and considers some potential future developments in man-
agement accounting. Part Six consists of three chapters and is entitled ‘ADDENDUM: The application
of quantitative methods to management accounting’. This part can be incorporated flexibly depending
on the wishes of the instructor.
In devising a framework around the three methods of constructing financial information, there is
a risk that the student will not appreciate that the three categories use many common elements, that
they overlap (see Figure 0.1) and that they constitute a single overall management accounting system,
rather than three independent systems. Steps have been taken to minimize this risk in each part by
emphasizing why financial information for one purpose should or should not be adjusted for another
purpose. In short, each part of the book is not presented in isolation and an integrative approach has
been taken.
A frequent consideration in a book of this type is how much the application of quantitative tech-
niques should be integrated with the appropriate topics or if it should be considered separately. Quan-
titative techniques have been integrated whenever they are an essential part of a chapter, but otherwise
they are presented separately in Part Six. This approach allows for maximum flexibility. Instructors
wishing to integrate ‘quantitative techniques’ with particular earlier chapters may do so by assigning
readings from Part Six, while those who wish to concentrate on more ‘discursive’ material will not be
distracted by having to exclude the relevant quantitative portions of chapters.
CHANGES IN THE CONTENT OF THE 11TH EDITION

Feedback in relation to structure and content of the previous editions has been extremely favourable
and therefore no major changes have been made to the structure. The major objective in preparing the
11th edition has been to continue to produce an accessible text and to incorporate appropriate recent
developments in the management accounting literature. The content and expression was thoroughly
reviewed as well as the opportunity to rewrite or improve the presentation and explanation of the mate-
rial. Greater attention has been given to emerging issues such as environmental and sustainability issues,
ethical considerations, the knowledge-based economy, IT and digitalization.
We have also included a new ‘employability skills’ section at the end of each chapter, given the
increasing emphasis on teaching employability skills. Comprehensive solutions to all these questions
can be downloaded from the companion website to this title.
In addition, substantial updates have been made to the end-of-chapter assessment material that con-
tains the solutions in a separate section at the end of the book. Finally, most of the ‘Real World Views’
that provide examples of the practical application of management accounting have been updated or
replaced by more recent examples that provide better illustrations of the practical applications. Sug-
gested outline solutions to the answers to the questions accompanying the ‘Real World Views’ have been
added to the Instructor’s Manual accompanying this book.
PREFACE xiii
LEARNING NOTES
The scale and scope of management accounting is always expanding. It is inevitable that not all
instructors will use all chapters of this book in their teaching programmes. In order to meet the differ-
ent requirements of lecturers, different course curricula and to retain the book at a manageable size,
various topics have been included as learning notes that can be accessed by students and lecturers in
the digital support resources accompanying this book. The learning notes tend to include the more
complex issues that often do not feature as part of the content of other management accounting text-
books, but which, over the years, have remained topics of relevance and interest. All learning notes are
appropriately referenced within the text. For example, at appropriate points within specific chapters
the reader’s attention is drawn to the fact that, for a particular topic, more complex issues exist and that
a discussion of these issues can be found by referring to a specific learning note in the digital resources
accompanying this book.
CASE STUDIES
Over 30 case studies are available in the digital support resources for this book. Both lecturers and stu-
dents can download these case studies from the book’s companion website. Teaching notes for the case
studies are only available for instructors to download. The cases generally cover the content of several
chapters and contain questions to which there is no ideal answer. They are intended to encourage inde-
pendent thought and initiative and to apply the content of this book in particular contexts. Case studies
are also intended to develop critical thinking and analytical skills.
HIGHLIGHTING OF ADVANCED READING SECTIONS

One of the major advantages of this book, highlighted in feedback, has been the comprehensive treat-
ment of management accounting. Throughout the book there are sections that have been identified
as advanced reading. Instructors and students can decide whether or not some of the more advanced
material is essential for their course. These advanced reading sections have been highlighted using a
vertical coloured line. They should be read in detail only when the remaining parts of the chapter have
been fully understood.
INTERNATIONAL FOCUS
The book is an established text in many different countries throughout the world. As a result, a more
international focus has been adopted. A major feature is the presentation of boxed exhibits of surveys
and practical applications of management accounting in companies in many different countries, par-
ticularly on the European mainland. Most of the assessment material includes questions set by the UK
professional accountancy bodies. These questions are appropriate for worldwide use, and users who
are not familiar with the requirements of the UK professional accountancy bodies should note that
many of the advanced-level questions also contain the beneficial features described above for case study
assignments.
RECOMMENDED READING
A separate section at the end of most chapters provides advice on key articles or books which you
are recommended to read if you wish to pursue topics and issues in more depth. Many of the refer-
ences are the original work of writers who have played a major role in the development of management
xiv PREFACE
accounting. The contribution of such writers is often reflected in this book but there is frequently no
substitute for reading the original work of the authors. The detailed references are presented in the bib-
liography towards the end of the book.
ASSESSMENT MATERIAL
Throughout the text, illustrations have been kept relatively simple. You can check understanding of
each chapter by answering the review questions. Each question is followed by page numbers within
parentheses that indicate where in the text the answers to specific questions can be found. In addition,
more complex review problems are set at the end of each chapter to enable students to pursue certain
topics in more depth. Each question is graded according to the level of difficulty. Questions graded
‘Basic’ are appropriate for a first-year course and normally take less than 20 minutes to complete. Ques-
tions graded ‘Intermediate’ are also appropriate for a first-year course but take about 30–45 minutes
to complete, whereas questions graded ‘Advanced’ are normally appropriate for a second-year course
or the final stages of the professional accountancy examinations. Fully worked solutions to the review
problems not prefixed by the term ‘IM’ (Instructor’s Manual) are provided in a separate section at the
end of the book.
This book is part of an integrated educational package. A Student Manual offers additional review
problems with fully worked solutions. Students are strongly recommended to purchase the Student
Manual, which complements this book. In addition, the Instructor’s Manual provides suggested solu-
tions to the questions at the end of each chapter that are prefixed by the term ‘IM’. The solutions to these
questions are not available to students. The Instructor’s Manual can be downloaded free by lecturers.
Also available to lecturers is a Cognero test bank offering 1,800+ questions and answers tailored to the
content of the book, for use in classroom assessment.
The form of assessment in both academic and professional accounting is evolving, which is reflected
in the use of objective test (OT), multiple-choice or drag-and-drop-based short problems. Periodically,
use is made of larger questions or case studies (sometimes pre-distributed) which are cross-functional
containing contextual material.
Candidates are advised that the graded questions in this book are still an ideal way to prepare for
both these styles of assessment. The reasons are:
●● OT questions: candidates need to understand the whole process of any calculation, decision or
action in order to understand the particular part being examined in any shorter OT question.
●● Case studies: candidates may be faced with a case study (at any level), which contains the detail
or results of a comprehensive calculation. They may be required to understand, adapt, perhaps
critique, such a calculation and use it to make judgements and recommendations.
Candidates can only make a correct judgement in response to either situation if they understand the
overall problem and how any one part fits with the whole process. This will be guided by making attempts
at a combination of basic, intermediate and advanced questions which appear at the end of each chapter.
I hear and I forget, I see and I remember, I do and I understand.
Chinese proverb
ALTERNATIVE COURSE SEQUENCES

Although conceived and developed as a unified whole, the book can be tailored to the individual
requirements of a course and to the preferences of the individual reader. For a discussion of the alterna-
tive sequencing of the chapters see ‘Guidelines for using this book’ in Chapter 1.
PREFACE xv
SUPPLEMENTARY MATERIAL
The 11th edition of the print Student Manual helps you work through the text and is available from all
good bookshops (ISBN 978-1-4737-7362-2).
The 11th edition of Colin Drury’s Management and Cost Accounting text is accompanied by the fol-
lowing dedicated digital support resources:
●● Dedicated instructor resources only available to instructors, who can register for access either at
login.cengage.com or by speaking to their local Cengage learning consultant.
●● Cengage MindTap, an online learning solution that allows lecturers to easily customize and
combine learning tools such as readings, interactive content and assessment activities to create
a personalized learning path for students, including Aplia. Lecturers can add or remove existing
content within the learning path or add their own content in order to deliver a seamless student
experience that aligns exactly with the way they teach their course.
DEDICATED INSTRUCTOR RESOURCES

This includes the following resources for lecturers:
●● Instructor’s Manual which includes answers to ‘IM Review problems’ in the text
●● Online test bank which provides over 1,800 questions and answers
●● PowerPoint slides to use in your teaching
●● Teaching notes to accompany the case studies
●● Downloadable figures and tables from the book to use in your teaching.
Mike Tayles, Emeritus Professor Accounting and Finance, University of Hull
ABOUT THE AUTHORS
Colin Drury
Colin Drury was at Huddersfield University from 1970 until his retirement in 2004, when he was
awarded the title of Emeritus Professor. For the last 35 years, Colin had been at the forefront of helping
students learn the key concepts and processes in management and cost accounting through his bestsell-
ing textbooks, which have been widely recommended by the main professional accounting bodies for
their examinations. He was an active researcher throughout his career and his research had been pub-
lished in around 100 professional and academic journals.
In recognition for his contribution to accounting education and research, Drury was given a Lifetime
Achievement Award by the British Accounting Association in 2009.
Colin’s flagship title Management and Cost Accounting was first published over 35 years ago and is
now in its 11th edition. It established itself as one of the leading management accounting textbooks in
EMEA. It is known, not just for its rigour and authority, but particularly for Colin’s down-to-earth style
that reflected his background as a practising accountant before his involvement in academia.
Mike Tayles
Mike Tayles holds the Emeritus Chair in Accounting and Finance at The University of Hull. During his
career, he has been the Head of Management Accounting and Programme Director of various Degree Pro-
grammes as well as a Visiting Professor at various universities internationally. He has been an Examiner/
Lead Marker for both the ACCA and CIMA.
Mike is a chartered management accountant with a first degree in mathematics and economics and a
doctorate in contemporary management accounting practices. He has worked in various manufactur-
ing industries, holding such positions as group management accountant and financial controller.
Mike’s research interests include management accounting practices, cost system design, activity-
based cost management and developments in strategic management accounting, including quality and
intellectual capital. He has presented papers at national and international conferences, and published
articles in professional and international academic journals and research reports. He has consulting
and research experience in both manufacturing and service businesses.
xvi
ACKNOWLEDGEMENTS
T he authors are indebted to many individuals for their ideas and assistance in preparing this and
previous editions of the book. In particular, we would like to thank the following who have provided
material for inclusion in the text and the dedicated digital support resources or who have commented
on this and earlier editions of the book:
Alicia Gazely, Nottingham Trent University, UK
Anh Nguyen, ICHEC, Belgium
Annie van der Merwe, University of Johannesburg, South Africa
Anthony Atkinson, University of Waterloo, Canada
Antony Head, Sheffield Hallam University, UK
Ben Ukaegbu, London Metropolitan University, UK
Bjarni Frimann Karlsson, University of Iceland, Iceland
Carsten Rohde, Copenhagen Business School, Denmark
Cathy Knowles, Oxford Brookes University, UK
Charlotte Wilson, University of Hull, UK
Christopher Coles, Glasgow University, UK
Clare Guthrie, Manchester Metropolitan University, UK
Corinna Schwarze, University of Stellenbosch, South Africa
Dan Otzen, Copenhagen Business School, Denmark
David MacKerrell, Bromley College, UK
David Russell, De Montfort University, UK
Dermot O’Leary, Athlone Institute of Technology, Ireland
Deryl Northcott, Auckland University of Technology, New Zealand
Dinah-Ann Rogers, Manchester Metropolitan University, UK
F.J.C. Benade, UNISA, South Africa
Falconer Mitchell, University of Edinburgh, UK
Fanus Nortje, UNISA, South Africa
Finland Joset Jordaan-Marais, University of Johannesburg, South Africa
Francois Steyn, University of Stellenbosch, South Africa
Gary Owen, University of Greenwich, UK
Gordian Bowa, Polytechnic of Namibia, Africa
Graham Parker, Kingston University, UK
xvii
xviii ACKNOWLEDGEMENTS
Hadiza Said, University of Hull, UK

Hugh McBride, GMIT, Ireland
Ian G. Fisher, John Moores University, UK
Ian Herbert, Loughborough University, UK
Igbekele Sunday Osinubi, University of East London, UK
James S. Reece, University of Michigan, USA
Jayne Ducker, Sheffield Hallam University, UK
Jim Stockton, University of Chester, UK
Joanne Monkman, CIMA, UK
Jodie Moll, University of Manchester, UK
John Currie, National University of Ireland, Galway, Ireland
John Fletcher, Middlesex University, UK
John Innes, University of Dundee, UK
John Joyce, Sheffield Hallam University, UK
John Perrin, University of Exeter, UK
John Shank, The Amos Tuck School of Business, Dartmouth College, UK
Jonathan Rooks, London South Bank University, UK
Jose Manuel de Matos Carvalho, ISCA de Coimbra, Portugal
Jukka Pellinen, University of Jyväskylä, Finland
Julia Smith, University of Wales Cardiff, UK
Katlijn Haesebrouck, Maastricht University, NL
Keith Best, University of Huddersfield, UK
Khaled Hussainey, Stirling University, UK
Kirsten Kininmonth, University of Glasgow, UK
Lewis Gordon, University of Liverpool, UK
Lin Fitzgerald, Loughborough University, UK
Louise McAlinden, ACCA, UK
Martin Quinn, Queen’s University Belfast, Ireland
Melissa McGill, University of Johannesburg, South Africa
Michael Tapiwa Mubaiwa, Manchester Metropolitan University, UK
Michel Lebas, HEC Paris, France
Mike Johnson, University of Dundee, UK
Mubina Musa, Manchester Metropolitan University, UK
Nick Best, Astranti Financial Training, UK
Obert Matarirano, University of Forth Hare, South Africa
Paul Collier, University of Exeter, UK
Peter Clarke, University College Dublin, Ireland
Peter Cleary, University College Cork, Ireland
Peter Nordgaard, Copenhagen Business School, Denmark
Richard Andrews, University of Hull, UK
Richard Grey, University of Strathclyde, UK
Richard M.S. Wilson, Loughborough University Business School, UK
Robin Roslender, Heriot-Watt University, UK
ACKNOWLEDGEMENTS xix
Rona O’Brien, Sheffield Hallam University, UK

Ronnie Patton, University of Ulster, Ireland
Ruth O’Leary, National College of Ireland, Ireland
Sophie Hoozee, IESEG School of Management, Lille Catholic University, France
Stan Brignall, Aston Business School, UK
Steve Dungworth, De Montford University, Leicester, UK
Tony Rayman, University of Bradford, UK
Wayne Fiddler, University of Huddersfield, UK
Yousif Abdalla, University of Sharjah, United Arab Emirates
We are also indebted to Martin Quinn (Queen’s University Belfast, Ireland) and Peter Cleary (University
College Cork, Ireland) for providing the new Real World Views and outline solutions that have been
added to the 11th edition, Mubina Musa and Michael Tapiwa Mubaiwa (Manchester Metropolitan
University) for the highly engaging employability skills questions in the assessment section of each
chapter, Matthew Pinnock (Isthmus Consulting) for his work on review problems as well as Birgit
Gruber, Marie Lebreton, Annabel Ainscow and Phillipa Davidson-Blake at Cengage for their valuable
publishing advice, support and assistance. Our appreciation goes also to the Chartered Institute of
Management Accountants, the Association of Chartered Certified Accountants and the Association
of Accounting Technicians for permission to reproduce past examination questions. Questions from
the Chartered Institute of Management Accountants’ examinations are designated CIMA; questions
from the Association of Chartered Certified Accountants are designated ACCA; and questions from
the Association of Accounting Technicians are designated AAT. On the digital support resources, we
acknowledge and thank: Alicia Gazely of Nottingham Trent University, Steve Rickaby and Wayne Fiddler
of York St John University. The answers in the text and accompanying Student and Instructor’s Manuals
to this book are our own and are in no way the approved solutions of the above professional bodies.
Thanks are also given to the many contributors who have provided case studies for the online support
resource, as well as those who have contributed to the MindTap resources:
Adriana van Cruysen, Zuyd Hogeschool, NL

Alastair Marais, University of KwaZulu-Natal, South Africa
Alexander Himme, Kühne Logistics University, Germany
Carla Serfontein, University of the Free State, South Africa
Chris Kelsall, University of Central Lancashire, UK
Denny Emslie, University of Fort Hare, South Africa
Ed Tew, University of Winchester, UK
Henry Ababio, National University of Lesotho, Lesotho
Karen Boyd, Fellow of ACCA, UK
Liz Crookes, University of Derby, UK
Lorenzo Neri, University of Greenwich, UK
Manjit Biant, University of Wales Trinity Saint David, UK
Maria Gee, Royal Holloway, University of London, UK
Mohamed Saeudy, University of Bedfordshire, UK
Rosemarie Kelly, Waterford Institute of Technology, Ireland
Tessa de Jongh, North-West University, South Africa
Yolande Reyneke, UNISA, South Africa
Zani-Andrea Labuschagne, University of Pretoria, South Africa
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PART ONE INTRODUCTION
TO MANAGEMENT
AND COST
ACCOUNTING
1 Introduction to management accounting
2 An introduction to cost terms and concepts
T he objective of this part is to provide an introduction to management and cost accounting. In Chapter 1,
we define accounting and distinguish between financial, management and cost a ccounting. This is
followed by an examination of the role of management accounting in providing information to managers
for decision-making, planning, control and performance measurement. We also consider the important
changes that are taking place in the business environment. As you progress through the book you will learn
how these changes are influencing management accounting systems. In Chapter 2, the basic cost terms and
concepts that are used in the cost and management accounting literature are described.
1
INTRODUCTION
TO MANAGEMENT
ACCOUNTING
LEARNING OBJECTIVES After studying this chapter, you should be able to:
●● distinguish between management accounting and financial accounting;
●● identify and describe the elements involved in the decision-making, planning and control
process;
●● justify the view that a major objective of commercial organizations is to broadly seek to
maximize future profits;
●● explain the important changes that have taken place in the business environment that have
influenced management accounting practice;
●● outline and describe the key success factors that directly affect customer satisfaction;
●● identify and describe the functions of a cost and management accounting system.
T here are many definitions of accounting, but the one that captures the theme of this book is the
definition formulated by the American Accounting Association. It describes accounting as:
the process of identifying, measuring and communicating economic information to permit
informed judgements and decisions by users of the information.
In other words, accounting is concerned with providing both financial and non-financial information
that will help decision-makers to make good decisions. In order to understand accounting, you need
to know something about the decision-making process, and also to be aware of the various users of
accounting information.
During the past two decades many organizations in both the manufacturing and service sectors have
faced dramatic changes in their business environment. Deregulation and extensive competition from
international companies in domestic markets have resulted in a situation in which most companies now
operate in a highly competitive global market. At the same time there has been a significant reduction
in product life cycles arising from technological innovations and the need to meet increasingly discrimi-
nating customer demands. To succeed in today’s highly competitive environment, companies have made
customer satisfaction an overriding priority. They have also adopted new management approaches and
manufacturing companies have changed their manufacturing systems and invested in new technologies.
These changes have had a significant influence on management accounting systems.
THE USERS OF ACCOUNTING INFORMATION 5
The aim of this first chapter is to give you the background knowledge that will enable you to achieve
a more meaningful insight into the role, benefits, issues and problems of cost and management account-
ing that are discussed in the book. We begin by looking at the users of accounting information and
identifying their requirements. This is followed by a description of the decision-making, planning and
control process and the changing business environment. Finally, the different functions of management
accounting are described.
THE USERS OF ACCOUNTING INFORMATION

Accounting is a language that communicates economic information to various parties (known as
stakeholders) who have an interest in the organization. Stakeholders fall into several groups (e.g.
managers, shareholders and potential investors, employees, suppliers and customers, creditors and the
government) and each of these groups has its own requirements for information:
●● Managers require information that will assist them in their decision-making and control activities;
for example, information is needed on the estimated selling prices, costs, demand, competitive
position and profitability of various products/services that are provided by the organization.
●● Shareholders require information on the value of their investment and the income that is derived
from their shareholding. Likewise, potential investors are interested in their potential returns.
●● Employees require information on the ability of the firm to meet wage demands and avoid
redundancies, their potential for continued employment.
●● Creditors and the providers of loan capital require information on a firm’s ability to meet its
financial obligations.
●● Government agencies such as the Central Statistical Office collect accounting information and
require such information as the details of sales activity, profits, investments, stocks (i.e. inventories),
dividends paid, the proportion of profits absorbed by taxation and so on. In addition, government
taxation authorities require information on the amount of profits that are subject to taxation. All
this information is important for determining policies to manage the economy.
The need to provide accounting information is not confined to business organizations. Non-profit-
making organizations such as churches, charitable organizations, clubs and government units such
as local authorities, also require accounting information for decision-making and for reporting the
results of their activities. For example, a tennis club will require information on the cost of undertak-
ing its various activities so that a decision can be made as to the amount of the annual subscription
that it will charge to its members. Similarly, municipal authorities, such as local government and public
sector organizations, need information on the costs of undertaking specific activities so that deci-
sions can be made as to which activities will be undertaken and the resources that must be raised to
finance them.
As you can see, there are many different users of accounting information who require information
for decision-making. The objective of accounting is to provide sufficient information to meet the needs
of the various users at the lowest possible cost. Obviously, the benefit derived from using an information
system for decision-making must be greater than the cost of operating the system.
The users of accounting information can be divided into two categories:
1 internal users within the organization, such as managers and other employees who need this
information to operate their part of the business to best effect;
2 external users such as shareholders, creditors and regulatory agencies outside the organization.
From the above, it is possible to distinguish between two branches of accounting, which reflect the inter-
nal and external users of accounting information. Management accounting is concerned with the pro-
vision of information to people within the organization to help them make better decisions and improve
the efficiency and effectiveness of existing operations, whereas financial accounting is concerned with
6 CHAPTER 1 INTRODUCTION TO MANAGEMENT ACCOUNTING
the provision of information to external parties outside the organization, including the general public.
Thus, management accounting could be called internal reporting and financial accounting could be
called external reporting. This book concentrates on management accounting.
DIFFERENCES BETWEEN MANAGEMENT ACCOUNTING

AND FINANCIAL ACCOUNTING
The major differences between these two branches of accounting are:
●● Legal requirements. There is a statutory requirement for public limited companies to produce annual
financial accounts, regardless of whether or not management regards this information as useful.
Management accounting, by contrast, is entirely optional and information should be produced only
if it is considered that the benefits it offers management exceed the cost of collecting it.
●● Focus on individual parts or segments of the business. Financial accounting reports describe the
whole of the business, whereas management accounting focuses on parts of the organization; for
example, the cost and profitability of products, services, departments, customers and activities.
●● Generally accepted accounting principles. Financial accounting statements must be prepared to
conform with the legal requirements and the generally accepted accounting principles established
by the regulatory bodies such as the Financial Accounting Standards Board (FASB) in the USA,
the Financial Reporting Council (FRC) in the UK and the International Accounting Standards
Board (the Board). These requirements are essential to ensure uniformity and consistency, which
make intercompany and historical comparisons possible. Financial accounting data should be
verifiable and objective. In contrast, management accountants are not required to adhere to
generally accepted accounting principles when providing managerial information for internal
purposes. Instead, the focus is on serving the management’s needs and providing information
that is useful to managers when they are carrying out their decision-making, planning and
control functions. Indeed, it could be said that the best management accounting is that which
is most useful to the manager, and this varies with the business size, sector, technology and the
circumstances of the question or problem.
●● Time dimension. Financial accounting reports what has happened in the past in an organization, i.e. it
is historical; management accounting is concerned with future information as well as past information.
Decisions are concerned with future events and management, therefore, requires details of expected
future costs and revenues, which by definition are predictions and not known with certainty.
●● Report frequency and less emphasis on precision. A detailed set of financial accounts is published
annually and less detailed accounts are published semi-annually. Management usually requires
information more quickly than this if it is to act on it. Managers are often more concerned with
timeliness rather than precision. They prefer a good estimate now rather than a precise answer
much later. Consequently, management accounting reports on various activities may be ad hoc
investigations or be prepared at daily, weekly or monthly intervals.
THE DECISION-MAKING, PLANNING

AND CONTROL PROCESS
Information produced by management accountants must be judged in the light of its ultimate effect on
the outcome of decisions. It is therefore important to have an understanding of the decision-making,
planning and control process. Figure 1.1 presents a diagram of the decision-making, planning and con-
trol process. The first four stages represent the decision-making or planning process. The final two
stages represent the control process, which is the process of measuring and correcting actual perfor-
mance to ensure the alternatives that are chosen and the plans for implementing them are carried out.
We will now examine the stages in more detail.
THE DECISION-MAKING, PLANNING AND CONTROL PROCESS 7
FIGURE 1.1
1. Identify objectives
The decision-making,
planning and control
process 2. Search for alternative courses of action
Planning
process
3. Select appropriate courses of action
4. Implement the decisions
5. Compare actual and planned outcomes

Control
process
6. Respond to divergencies from plan
REAL WORLD just in finance. In addition to strong accounting

VIEWS 1.1 and analytical fundamentals, CIMA teaches their
members strategic business and management
skills in areas such as the following:
Chartered Institute of Management
●● Analysis – analyse information and use it to
Accountants (CIMA)/Chartered Global
make business decisions.
Management Accountants (CGMA)
●● Strategy – formulate business strategy to
Activities and skills of management accounting create wealth and shareholder value.
Management accounting combines accounting, ●● Risk – identify and manage risk.
finance and management with the leading-edge ●● Planning – apply accounting techniques to plan
techniques needed to drive successful busi- and budget.
nesses. According to CIMA, the primary activities
performed by management accountants occur
●● Communication – determine what information
within the areas of strategy, management and management needs and explain the numbers
operations. Examples within each area include: to non-financial managers.
●● advising on mergers, acquisitions and

divestments;
Question
●● formulating and evaluating financial strategy; 1 Provide three examples of a business
decision that a management accountant could
●● designing and managing budgeting systems;
potentially support within an organization.
●● evaluating organizational performance;
●● forecasting and budgeting for organization
activities; References
What is management accounting? Available at www.cgma.
●● managing short-term finance. org/aboutcgma/whatiscgma.htm (accessed 28 April
2020).
Management accounting skill-set Management accounting in your business. Available at
Companies globally require the knowledge and www.cimaglobal.com/Employers/CGMA-The-new-
services offered by management accountants in a global-standard/Management-accounting-in-your-
multitude of areas across their organizations, not business/ (accessed 28 April 2020).
Identifying objectives
Before good decisions can be made there must be some guiding aim or direction that will enable the
decision-makers to assess the desirability of choosing one course of action over another. Hence, the
first stage in the decision-making process should be to specify the company’s goals or organizational
objectives, that is, what they are in business to achieve.
This is an area in which there is considerable controversy. Economic theory traditionally assumes
that firms seek to maximize profits for the owners of the firm or, more precisely, the maximization
of shareholders’ wealth, which, we as shall see in Chapter 13, is equivalent to the maximization of the
present value of future cash flows. Various arguments have been used to support the profit maximiza-
tion objective. There is the legal argument that the ordinary shareholders are the owners of the firm,
which therefore should be run for their benefit by trustee managers. Another argument supporting
the profit objective is that profit maximization leads to the maximization of overall economic welfare.
That is, by doing the best for yourself, you are unconsciously doing the best for society. These are typical
capitalist arguments for the profit maximizing objective. However, it seems a reasonable belief that the
interests of firms (and managers and employees) will be better served by a larger profit than by a smaller
profit, so that maximization is at least a useful approximation. Some writers (e.g. Simon, 1959) have
argued that many managers are content to find a plan that provides satisfactory profits rather than to
maximize profits.
In contrast, organizational and behavioural scientists, such as Cyert and March (1969), have argued
that the firm is a coalition of various different groups – shareholders, employees, customers, suppliers
and the government – each of whom must be ‘paid’ a minimum to participate in the coalition. Any
excess benefits after meeting these minimum constraints are seen as being the object of bargaining
between the various groups. In addition, a firm is subject to constraints of a societal nature. Maintaining
a clean environment, employing disabled workers and providing social and recreation facilities are all
examples of social goals that a firm may pursue. We are seeing increasing interest in the responsibility
of firms to a wider society at the present time. This is demonstrated by calls for firms to publish a Triple
Bottom Line of performance in terms of social and environmental responsibility in addition to the eco-
nomic performance of profitability. It is only by addressing these three requirements that firms can be
said to be ‘sustainable’ (see Figure 1.2). We shall discuss the implications for management accounting of
these developments in Chapter 23.
FIGURE 1.2
The interconnection of the elements of the
Triple Bottom Line concept PEOPLE
Social variables dealing with
community, education, equity, social
resources, health, well-being and quality
of life
BEARABLE EQUITABLE
SUSTAINABLE
PLANET
Environmental PROFIT
variables relating Economic variables
to natural resources, dealing with the
water and air quality, bottom line and
VIABLE cash flow
energy conservation
and land use
Clearly it is too simplistic to say that the only objective of a business firm is to maximize profits. Some
managers seek to establish a power base and build an empire. Another common goal is security, and
the removal of uncertainty regarding the future may override the pure profit motive. Organizations
may also pursue more specific objectives, such as producing high-quality products or being the market
THE DECISION-MAKING, PLANNING AND CONTROL PROCESS 9
leader within a particular market segment. Nevertheless, the view adopted in this book is that, broadly,
firms seek to maximize future profits. There are three reasons for us to concentrate on this objective:
1 It is unlikely that any other objective is as widely applicable in measuring the ability of the
organization to survive in the future.
2 It is unlikely that maximizing future profits can be realized in practice, but by establishing the
principles necessary to achieve this objective you will learn how to increase profits.
3 It enables shareholders as a group in the ‘bargaining coalition’ to know how much the pursuit of
other goals is costing them by indicating the amount of cash distributed among the members of
the coalition.
The search for alternative courses of action

The second stage in the decision-making model is a search for a range of possible courses of action (or
strategies) that might enable the objectives to be achieved. If the management of a company concen-
trates entirely on its present product range and markets, and market shares and profits are allowed to
decline, there is a danger that the company will be unable to survive in the future. If the business is to
survive, management must identify potential opportunities and threats in the current environment and
take specific steps now so that the organization will not be taken by surprise by future developments.
In particular, the company should consider one or more of the following courses of action:
1 developing new products for sale in existing markets (product development);
2 developing new markets for existing products (market development);
3 developing new products for new markets (diversification).
The search for alternative courses of action involves the acquisition of information concerning future
opportunities and environments; it is the most difficult and important stage of the decision-making
process. We shall examine this search process in more detail in Chapter 15. Note that while the manage-
ment accountant might provide information to support this judgement, it involves executives from all
functions including marketing, manufacturing and service operations, R&D, IT, etc.
Select appropriate alternative courses of action

In order for managers to make an informed choice of action, data about the different alternatives must
be gathered. For example, managers might ask to see projected figures on:
●● the potential growth rates of the alternatives under consideration;
●● the market share the company is likely to achieve;
●● projected profits for each alternative.
The alternatives should be evaluated to identify which course of action best satisfies the objectives
of an organization. The selection of the most advantageous alternative is central to the whole deci-
sion-making process and the provision of information that facilitates this choice is one of the major func-
tions of management accounting. These aspects of management accounting are examined in Chapters 8
to 14 and the extent to which they involve mathematical and quantitative techniques in Chapters 24 to 26.
Implementation of the decisions

Once the course of action has been selected, it should be implemented as part of the budgeting and
long-term planning process. The budget is a financial plan for implementing the decisions that man-
agement has made. The budgets for all of the various decisions a company takes are expressed in
terms of cash inflows and outflows, and sales revenues and expenses. These budgets are initially
prepared at the departmental/responsibility centre level (i.e. a unit or department within an orga-
nization where a manager is held responsible for performance) and merged together into a single
unifying statement for the organization as a whole that specifies the organization’s expectations for
future periods. This statement is known as a master budget and consists of budgeted profit and cash
flow statements. The budgeting process communicates to everyone in the organization the part that
they are expected to play in implementing management’s decisions. We shall examine the budgeting
process in Chapter 15.
Comparing actual and planned outcomes

and responding to divergencies from plan
The final stages in the process outlined in Figure 1.1 involve comparing actual and planned outcomes
and responding to divergencies from plan. The managerial function of control consists of the mea-
surement, reporting and subsequent correction of performance in an attempt to ensure that the firm’s
objectives and plans are achieved.
To monitor performance, the accountant produces performance reports and presents them to the
managers who are responsible for implementing the various decisions. These reports compare actual
outcomes (actual costs and revenues) with planned outcomes (budgeted costs and revenues) and should
be issued at regular intervals. Performance reports provide feedback information and should highlight
those activities that do not conform to plans, so that managers can devote their limited time to focus-
ing mainly on these items. This process represents the application of management by exception,
which involves a focus on the ‘vital few’ not the ‘trivial many’ events that take place in the organization.
Effective control requires that corrective action be taken so that actual outcomes conform to planned
outcomes. Alternatively, the plans may require modification if the comparisons indicate that the plans
are no longer attainable. Note that these performance reports will contain both financial and non-
financial information. We shall develop this notion throughout the book and particularly focus on it in
Chapter 21.
The process of taking corrective action or modifying the plans if the comparisons indicate that actual
outcomes do not conform to planned outcomes, is indicated by the arrowed lines in Figure 1.1 linking
stages 6 and 4 and 6 and 2. These arrowed lines represent ‘feedback loops’. They signify that the process
is dynamic and stress the interdependencies between the various stages in the process. The feedback
loop between stages 6 and 2 indicates that the plans should be regularly reviewed, and if they are no
longer attainable then alternative courses of action must be considered for achieving the organization’s
objectives. The second loop stresses the corrective action taken so that actual outcomes conform to
planned outcomes. Chapters 15 to 18 focus on the planning and control process.
THE IMPACT OF THE CHANGING BUSINESS ENVIRONMENT

ON MANAGEMENT ACCOUNTING
During the last few decades, global competition, deregulation, declines in product life cycles, advances
in manufacturing and information technologies, environmental issues and a competitive environment
requiring companies to become more customer driven, have changed the nature of the business envi-
ronment, which has become more digitized. These changes have significantly altered the ways in which
firms operate, which in turn have resulted in changes in management accounting practices. We shall
discuss these briefly below and their implications will also emerge in the chapters which follow.
THE IMPACT OF THE CHANGING BUSINESS ENVIRONMENT ON MANAGEMENT ACCOUNTING 11
Global competition
Throughout the last few decades reductions in tariffs and duties on imports and exports, and dramatic
improvements in transportation and communication systems, have resulted in many firms operating
in a global market. Prior to this, many organizations operated in a protected competitive environment.
Barriers of communication and geographical distance, and sometimes protected markets, limited the
ability of overseas companies to compete in domestic markets. There was little incentive for firms to
maximize efficiency and improve management practices, or to minimize costs, as cost increases could
often be passed on to customers. During the 1990s, however, organizations began to encounter severe
competition from international competitors who offered high-quality products at low prices. Manufac-
turing companies can now establish global networks for acquiring raw materials and components, and
distributing goods overseas through the development of sophisticated supply chains. Service organiza-
tions can communicate with customers and overseas offices instantaneously using internet and digital
technologies. These changes have enabled competitors to gain access to domestic markets throughout
the world. Nowadays, organizations have to compete against the best companies in the world. This new
competitive environment has increased the demand for information relating to quality and customer
satisfaction, and cost information relating to cost management, ways to add value and profitability anal-
ysis by product/service lines and geographical locations.
REAL WORLD healthcare costs while broadening access

VIEWS 1.2 to more patients. This will come from the
adoption of telemedicine, telesurgery and
expanded home healthcare.
The Internet of Things – new products and
services Question
The Internet of Things (IoT) refers to physical objects
which are connected to the internet. This includes 1 Can you
household devices and many business and indus- think of any
© svetabelaya/
barriers to
Shutterstock
trial applications. Together with 5G networking tech-
nologies, the IoT has given way to a vast array of new entry for a
products and services. For example, fill-level sen- business
sors developed by smartbinTM. This product can be entering
placed inside industrial bins and send data on the the market
fill level and location back to the waste collection for IoT sensors or similar?
firm. The sensors also allow the waste collection
firm to optimize the waste collection routes. Another References
example is telemedicine. Cisco, for example, notes: www.smartbin.com/solutions/iot-level-sensors/
(accessed 28 April 2020).
The new 5G wireless standard, in tandem www.cisco.com/c/en/us/solutions/enterprise-
with advances in artificial intelligence (AI) and networks/5g-network-infrastructure-telehealth.html
edge computing architectures, can reduce (accessed 28 April 2020).
Changing product life cycles

A product’s life cycle is the period of time from initial expenditure on research and development to
the time at which support to customers is withdrawn. Intensive global competition and technologi-
cal innovation, combined with increasingly discriminating and sophisticated customer demands, have
resulted in a dramatic decline in product life cycles. To be successful companies must now speed up the
rate at which they introduce new products to the market and constantly develop new products and ser-
vices. Being later to the market than the competitors can have a dramatic effect on product profitability,
market share and hence overall profitability of a product or service.
In many industries a large fraction of a product’s life cycle costs are determined by decisions made
early in its life cycle. This has created a need for management accounting to place greater emphasis on
providing information at the design stage because many of the costs are committed or locked in at this
time. Therefore, to compete successfully, companies must be able to manage their costs effectively at
the design stage, have the capability to adapt to new, different and changing customer requirements and
reduce the time to market of new and modified products. This is an important point; costs are not
‘managed’ when they are reported in an accounting statement, they are managed when decisions are
made by management related to place and method of manufacture, type and source of material. These
costs will show in the accounting statements when they are incurred, but by that time they cannot be
changed or managed. See Figure 1.3.
FIGURE 1.3 100% Costs committed

Percentage of costs committed
A comparison of costs
committed and costs 80%
incurred over a life cycle
or incurred
60% Manufacturing
and operations
phase
40% Design
phase End of
20% life phase
Costs incurred
0
Product life cycle phase
Advances in manufacturing technologies

Excellence in manufacturing and the provision of services can become a competitive weapon to com-
pete in sophisticated worldwide markets. In order to compete effectively, companies must be capable
of providing innovative products or services of high quality at a low cost, and also provide a first-class
customer service. At the same time, they must have the flexibility to cope with short product life cycles,
demands for greater product variety from more discriminating customers and increasing international
competition. World-class manufacturing companies have responded to these competitive demands by
replacing traditional production systems with lean manufacturing systems that seek to reduce waste
by implementing just-in-time (JIT) production systems, focusing on quality, simplifying processes and
investing in advanced manufacturing technologies (AMTs). The major features of these new systems
and their implications for management accounting will be described throughout this book.
The impact of information technology and digitalization

During the past two decades the use of information technology (IT) to support business activities
has increased dramatically and the development of electronic business communication technologies
known as e-business, e-commerce or internet commerce have had a major impact. For example,
consumers are more discerning in their purchases because they can access the internet to compare
the relative merits of different products and services. Internet trading also allows buyers and sellers
to undertake transactions from diverse locations in different parts of the world. E-commerce (such
as bar coding) has allowed considerable cost savings to be made by streamlining business processes
and has generated extra revenues from the adept use of online sales facilities (such as ticketless airline
bookings and internet banking). The proficient use of e-commerce has given many companies a
competitive advantage.
The developments in IT have had a significant impact on the work of management accountants.
They have substantially reduced information gathering and the processing of information, especially
for recording and reporting cost and revenue transactions. Instead of managers asking management
accountants for information, they can access the system on their personal computers to derive the infor-
mation they require directly and do their own analyses. Once they understand the origins of the data
they become their own management accountants, being able to drill down for the information they
need, using the systems installed for them by the management accounting function. This has freed
accountants to adopt the role of advisers and internal consultants to the business. Management accoun-
tants have now become more involved in interpreting the information generated from the accounting
system and providing business support for managers.
Digitalization and the generation of big data are a trend with enormous potential. Big data is
a term that describes the large volume of raw data that previously was not available to companies
but is made possible by artificial intelligence and the Internet of Things. Artificial intelligence (AI)
such as machine-based learning is a simulation of human intelligence. The Internet of Things (IoT)
involves the interconnection via the internet of computing devices embedded in everyday objects,
like smartphones, enabling them to send and receive data.
Often unstructured, big data involves detail from email messages, social media postings, phone calls,
online purchase transactions, website traffic and video streams. It has the potential to influence and enhance
management accounting information by revealing patterns and trends that are often related to human
behaviour detected by the technology. These insights, when available to company management, have the scope
to change the way companies do business, improve value added and in some cases change their business model.
REAL WORLD intelligence called machine learning, meaning their

VIEWS 1.3 software can learn where key data may be found
on invoices, for example. The more invoices and
receipts processed, the better the learning and the
More time and better information by auto- more accurate the output – they presently process
mating the mundane about 2 million documents per week. Other similar
As technology has developed in recent decades, apps include shoeboxed.com or autoentry.com.
more time has been freed up for management With such data extraction automated, accoun-
accountants as they have less of the mundane tants and bookkeepers spend less time on this
transaction processing work to do. Technology has more mundane work. Small business owners too
also enabled even the smallest businesses to take can get information on costs as they scan receipts
advantage of management accounting information into their accounting system, which in turn may be
as the processing of cost/expense transactions useful for decision-making.
can be automated.
Take receipt-bank.com for example. The com- Question
pany offers services to accountants, bookkeepers
and businesses which scan receipts and invoices 1 How do you think scanned expense documents
for key data, and then process the data into accoun would be categorized by products like
ting systems. ReceiptBank, according to their ReceiptBank?
website, uses ‘OCR and templating technology to
extract written information (on receipts, invoices
References
or other financial documents), and present the Available at www.receipt-bank.com/uk/about-
visible data in an electronic, easy-to-manage for- us/ and help.receipt-bank.com/hc/en-us/
mat; perfect for publishing on to other accounting articles/200826581-What-technology-does-Receipt-
software’. They are in fact using a form of artificial Bank-use (accessed 28 April 2020).
It is able to provide more information, often strategic information which enables management to make
better decisions because they have greater insight. This can be seen in improved cost management
through technology and enhancing revenue through interaction with customers, improving satisfaction,
informing of promotions, etc.
One outstanding example of this technology is the ‘Uber’ or ‘Grab’ taxi service (different names
are used in different parts of the world). Companies providing taxi services, such as Uber or Grab,
enable customers to book a taxi, know the identity of the driver, the expected arrival time including
updates en route and the fare, and they pay for this electronically from their bank account all in one
interaction from a mobile phone. There are wider benefits also, as the taxi which is routed is the near-
est available, saving time and reducing environmental costs of taxi drivers wandering around looking
for business.
This is not information which is exclusive to the accountant, however. Other functional specialists
from IT and marketing, for example, are also involved and interested in this.
The overall volume of information that is potentially available has exploded in recent years, but it is
not the volume of information that matters but what is done with the available information and its use-
fulness. An important role of management accounting is to ensure that the information is value adding
(financially useful) and that users are not faced with too much information. Additionally, while big data
may provide considerable competitive advantage for some businesses, there is also public concern about
its intrusion into everyday life and the erosion of privacy, so its impact and acceptance are still evolving.
The collection of big data still needs appropriate governance. We shall say more about the future poten-
tial of big data in Chapter 23.
Environmental and sustainability issues

Increasing attention is now being given to making companies accountable for ethical, social and envi-
ronmental issues and the need for organizations to be managed in a sustainable way. There is now
a general recognition that environmental resources are limited and should be preserved for future
generations.
Customers are no longer satisfied if companies simply comply with the legal requirements of
undertaking their activities. They expect company managers to be more proactive in terms of their
social responsibility, safety and environmental issues. Environmental management accounting is
becoming increasingly important in many organizations. There are several reasons for this. First,
environmental costs can be large for some industrial sectors. Second, regulatory requirements
involving huge fines for non-compliance have increased significantly over the past decade. There-
fore, selecting the least costly method of compliance has become a major objective. Third, society is
demanding that companies focus on being more environmentally friendly. Companies are finding
that becoming a good social citizen and being environmentally responsible improves their image
and enhances their ability to sell their products and services, thus improving their profitability, share
price and hence company value.
These developments have created the need for companies to develop systems of measuring and
reporting environmental costs, the consumption of scarce environmental resources and details of haz-
ardous materials used or pollutants emitted to the environment. Knowledge of environmental costs
and their causes provides the information that managers need to redesign processes to minimize the
usage of scarce environmental resources and the emission pollutants and to also make more sensitive
environmental decisions.
Pressures to adopt higher standards of ethical behaviour

Earlier in this chapter it was suggested that management accounting practices were developed to
provide information that assist managers to maximize future profits. It was, however, pointed out
that it is too simplistic to assume that the only objective of a business firm is to maximize profits.
REAL WORLD less regulation and lower labour and factory costs.
VIEWS 1.4 Everyday high-street names such as Zara, H&M,
Primark and New Look all compete for market
share by introducing more fashion at lower costs,
Changing product life cycles – fast fashion culminating in a situation where such retailers can
Fast fashion refers to clothes that are designed now launch tens of new collections per year. Also,
and manufactured quickly and sold to consumers the retailers monitor demand for fast-selling prod-
at extremely low prices. New garments arrive in ucts’ point-of-sale data, and place orders for more
stores weekly, or even more frequently, and cost with manufacturers, expecting them to make and
so little that consumers can fill their wardrobes deliver in a short lead-time.
with new outfits regularly and throw out older gar-
ments. The rapid pace of globalization since the
Questions
1980s has seen a shift in garment production to
the developing world. Many fashion companies 1 Are there any hidden costs of fast fashion?
no longer use in-house production and have sup- 2 Does the decreasing product life cycle captured
pliers in developing countries manufacture for in the notion of fast fashion pose any risks for
them instead. There, they can take advantage of manufacturers?
The profit maximization objective should be constrained by the need for firms to also give high priority
to their social responsibilities and ensure that their employees adopt high standards of ethical behaviour.
A code of ethics has now become an essential part of corporate culture.
Identification of what is acceptable ethical behaviour has attracted much attention in recent years
with numerous examples of companies attracting negative coverage for ethical failings and their impact
on reported profits. For example, Volkswagen (VW), Europe’s biggest car maker, has suffered a dramatic
decline in its reputation after the revelation that it fitted software designed to cheat emission tests to
11 million cars worldwide. Volkswagen has set aside €18.4 billion to cover the costs of legal action, com-
pensation and refits. Public distrust and protests against corporate misdemeanours have resulted in calls
for increased regulation and the need to focus on improving ethical behaviour.
Management accountants have a critical part to play in the management of ethical performance and
an obligation to uphold ethical standards. Professional accounting organizations play an important role
in promoting a high standard of ethical behaviour by their members. Both of the professional bodies
representing management accountants, in the UK (Chartered Institute of Management Accountants)
and in the USA (The American Institute of Certified Public Accountants), have issued codes of ethical
guidelines for their members and established mechanisms for monitoring and enforcing profes-
sional ethics. You can view each organization’s ethical standards at www.cimaglobal.com/ethics and
www.aicpa.org/research/standards/codeofconduct.html. Ethical training is now incorporated into
accounting training and assessment and is receiving a high profile in all management development.
On the one hand, regulation is being used to encourage ethical behaviour, but on the other, ethics are
influenced by the morals of the individuals concerned; they come from within. Ethics also influence the
information provided by the management accountant and the reactions of managers to it.
Deregulation and privatization

Before the 1990s many organizations, such as those operating in the airline, utility and financial service
industries, were either government-owned monopolies or operated in a highly regulated, protected and
non-competitive environment. These organizations were not subject to any great pressure to improve
the quality and efficiency of their operations or to improve profitability by eliminating services or prod-
ucts that were making losses. Prices were set to cover operating costs and provide a predetermined
return on capital. Hence, cost increases could often be absorbed by increasing the prices of the products
or services. Little attention was therefore given to developing management accounting systems that
accurately measured the costs and profitability of individual products or services.
Privatization of government-controlled companies and deregulation has resulted in the elimination
of pricing and competitive restrictions. Deregulation, intensive competition and an expanding prod-
uct range create the need for these organizations to focus on cost management and develop manage-
ment accounting information systems that enable them to understand their cost base and determine
the sources of profitability for their products, customers and markets. Much of this development has
taken place within the service sector where the ‘product’ is intangible, which adds to the challenge and
complexity of measuring profitability and performance.
Focus on value creation

There is now an increasing recognition that management accounting needs to place greater emphasis
on creating value rather than an overemphasis on managing and recording costs. Reducing cost is still
important because it enables a company to remain competitive by reducing or maintaining selling prices
and thus increasing customer value. You will see in Chapter 22 that recent developments have resulted
in management accounting distinguishing between value-added and non-value-added activities, with
the former representing those activities that the customers perceive as adding value to the product or
service and the latter adding costs but no value. That is, the customer does not perceive any benefit in
non-value-adding activities and hence is not paying for them. Cost management seeks to eliminate or
reduce non-value-added activities and to identify ways of performing the value-added activities in such
a way that they enhance the value to the product or service.
Recently, increasing attention has been given to the importance of intellectual capital (also known
as intangible assets) arising from the observed dramatic differences between the book and market val-
ues of many companies, particularly technology companies and some service businesses. This reflects
the move for some companies from the industrial age to the information age. Examples of items that
represent intellectual capital include resources such as the organization’s reputation, the morale of its
staff, customer satisfaction, knowledge and skills of employees, established relationships with suppliers,
etc. It is important that intangible assets be taken into account in order to assess the value of future busi-
ness opportunities. This presents a challenge to management accountants as to how to identify, measure
and report on the value of intellectual capital, given that it can fluctuate up and down and is not tangible
and not capable of objective measurement.
Customer orientation
In order to survive in today’s competitive environment, companies have had to become more customer
driven and to recognize that customers are crucial to their future success. They are being encouraged to
look outward at customer requirements and reflect that internally, rather than only inward at their own
operations. This has resulted in companies making customer satisfaction an overriding priority and to
focus on identifying and achieving the key success factors that are necessary to be successful in today’s
competitive environment. These key success factors are discussed in the next section.
FOCUS ON CUSTOMER SATISFACTION

AND NEW MANAGEMENT APPROACHES
The key success factors that organizations must concentrate on to provide customer satisfaction are cost,
quality, reliability, delivery and the choice of innovative new products. In addition, firms are attempting
to increase customer satisfaction by adopting a philosophy of continuous improvement to reduce costs
and improve quality, reliability and delivery.
FOCUS ON CUSTOMER SATISFACTION AND NEW MANAGEMENT APPROACHES 17
Cost efficiency
Keeping costs low and being cost efficient provides an organization with a strong competitive advan-
tage. Increased competition has also made decision errors potentially more hazardous to an organiza-
tion, due to poor cost information. Many companies have become aware of the need to improve their
cost systems so that they can produce more accurate cost information to determine the cost of their
products and services, monitor trends in costs over time, pinpoint loss-making activities and analyse
profits by products, sales outlets, customers and markets.
Quality
In addition to demanding low costs, customers are demanding high-quality products and services.
Most companies are responding to this by focusing on total quality management (TQM). TQM is a
term used to describe a situation and culture in which all business functions are involved in a process
of continuous quality improvement that focuses on delivering products or services of consistently
high quality in a timely fashion. The emphasis on TQM has created fresh demands on the manage-
ment accounting function to measure and evaluate the quality of products and services and the activ-
ities that produce them. In a related move they are demonstrating their commitment to measuring
quality issues and their ability to respond to them by adopting the International Organization for
Standardization’s quality certificate (ISO 9000). Some customers will only do business with suppliers
who have this quality certification.
Time as a competitive weapon

Organizations are also seeking to increase customer satisfaction by providing a speedier response to
customer requests, ensuring 100 per cent on-time delivery and reducing the time taken to develop and
bring new products to market. For these reasons management accounting systems now place more
emphasis on time-based measures, such as cycle time. This is the length of time from start to com-
pletion of a product or service. It consists of the sum of processing time, move time, wait time and
inspection time. Only processing time adds value to the product, and the remaining activities are
non-value-added activities in the sense that they can be reduced or eliminated without altering the
product’s service potential to the customer. Organizations are therefore focusing on minimizing cycle
time by reducing the time spent on such activities. The management accounting system has an import-
ant role to play in this process by identifying and reporting on the time and cost devoted to value-added
and non-value-added activities. Cycle time measures have also become important for service organi-
zations. For example, the time taken to process mortgage loan applications by financial organizations
can be considerable, involving substantial non-value-added waiting time. Reducing the time to pro-
cess applications enhances customer satisfaction and creates the potential for increasing sales revenue
through improved reputation and repeat business. This also illustrates the importance of the manage-
ment accountant evaluating and reporting non-financial information alongside financial information.
Innovation and continuous improvement

To be successful, companies must develop a steady stream of innovative new products and services
and have the capability to adapt to changing customer requirements. Management accounting infor-
mation systems have begun to report performance measures relating to innovation. Examples include:
●● the total launch time for new products/services;
●● an assessment of the key characteristics of new products relative to those of competitors;
●● feedback on customer satisfaction with the new features and characteristics of newly introduced
products and the number of new products launched.
Organizations are also attempting to enhance customer satisfaction by adopting a philosophy of

continuous improvement. Traditionally, organizations have sought to study activities and establish
standard operating procedures. Management accountants developed systems and measurements that
compared actual results with predetermined standards. This process created a climate in which the
predetermined standards represented a target to be achieved and maintained. If a company stands still
now, it will be overtaken. In today’s competitive environment, companies must adopt a philosophy
of continuous improvement, an ongoing process that involves a continuous search to reduce costs,
eliminate waste and improve the quality and performance of activities that increase customer value or
satisfaction. Management accounting supports continuous improvement by identifying opportunities
for change and then reporting on the progress of the methods and projects, involving both financial and
non-financial aspects, that have been implemented.
Benchmarking is a technique that is increasingly being adopted as a mechanism for achieving con-
tinuous improvement. It is a continuous process of measuring a firm’s products, services or activities
against the other best performing organizations, either internal or external to the firm. The objective is
to ascertain how the processes and activities can be improved. Ideally, benchmarking should involve an
external focus on the latest developments, best practice and model examples that can be incorporated
within various operations of business organizations. It therefore represents the ideal way of moving
forward and achieving high competitive standards.
In their quest for the continuous improvement of organizational activities, managers have found
that they need to rely more on the people closest to the operating processes and customers to
develop new approaches to performing activities. This has led to employees being provided with
relevant information to enable them to make continuous improvements to the output of processes.
Allowing employees to take such actions without the authorization by superiors has come to be
known as employee empowerment. It is argued that by empowering employees and giving them
relevant information they will be able to come forward with improvement suggestions, respond
faster to customers, increase process flexibility, reduce cycle time and improve morale. Management
accounting is therefore moving from its traditional emphasis on providing information to managers
to monitor the activities of employees, to providing information to employees to empower them to
focus on the continuous improvement of activities.
FUNCTIONS OF MANAGEMENT ACCOUNTING

A cost and management accounting system should generate information to meet the following require-
ments. It should:
1 allocate costs between cost of goods sold and inventories for internal and external profit
reporting;
2 provide relevant information to help managers make better decisions;
3 provide information for planning, control, performance measurement and continuous
improvement.
These have been likened to, respectively, score-keeping, problem-solving and attention directing. That
is answering questions posed by managers to the management accountant:
1 How well am I doing?
2 Of the various ways I can make improvements, which is the best?
3 Of all the activities taking place, which ones need my attention the most?
The management accounting system needs to be analysed in different ways in order to provide infor-
mation to deal with these questions, that is different data need to be extracted for different pur-
poses. This is explained in a little more detail below and it guides the content of the remaining parts
of the book.
FUNCTIONS OF MANAGEMENT ACCOUNTING 19
Financial accounting rules require that we match costs with revenues to calculate profit. Conse-
quently, any unsold finished goods inventories (or partly completed work in progress) will not be
included in the cost of goods sold, which is matched against sales revenue during a given period.
In an organization that produces a wide range of different products it will be necessary, for inventory
valuation purposes, to trace the costs to each individual product. The total value of the inventories of
completed products and work in progress, plus any unused raw materials, forms the basis for determin-
ing the inventory valuation to be deducted from the current period’s costs when calculating profit. This
total is also the basis for determining the inventory valuation for inclusion in the balance sheet. Costs
are therefore traced to each individual job or product for financial accounting requirements, in order
to allocate the costs incurred during a period between cost of goods sold and inventories. (Note that
the terms ‘stocks’ and ‘inventories’ are used synonymously throughout this book.) This information is
required for meeting external financial accounting requirements, but most organizations also produce
internal profit reports at monthly intervals. Thus, product costs are also required for periodic internal
profit reporting. Many service organizations, however, do not carry any inventories and product costs
are therefore not required by these organizations for valuing inventories.
The second requirement of a cost and management accounting system is to provide relevant
financial information to managers to help them make better decisions. Information is required relat-
ing to the profitability of various segments of the business, such as products, services, customers and
distribution channels, in order to ensure that only profitable activities are undertaken. Information is
also required for making resource allocation and product/service mix and discontinuation decisions.
In some situations, information extracted from the costing system also plays a crucial role in deter-
mining selling prices, particularly in markets in which customized products and services that do not
have readily available market prices are provided.
REAL WORLD ●● Pioneering – We challenge to find new ways to

VIEWS 1.5 make travel easy and affordable.
A look at a key feature of easyJet’s business Question

As one of the pioneers in the low-cost airline indus- 1 How can the
© Paul Hanley/
try, easyJet’s business model has some core values:
Shutterstock
management
●● Safety – We never compromise on safety. accounting function
provide information
●● Simplicity – We cut out the things that don’t
to support a low-cost
matter to keep us lean and make it easy.
strategy?
●● One team – Together we’ll always find a way.
●● Integrity – We stand by our word and do what
Reference
we say. easyJet plc Our values. Available at corporate.easyjet.
●● Passion – We have a passion for our com/about/our-values (accessed 28 April 2020).
customers, our people and the work we do.
Management accounting systems should also provide information for planning, control, performance
measurement and continuous improvement. Planning involves translating goals and objectives into
the specific activities and resources that are required to achieve them. Companies develop both
long-term and short-term plans and the management accounting function plays a critical role in
this process. Short-term plans, in the form of the budgeting process, are prepared in more detail
than the longer-term plans and are one of the mechanisms used by managers as a basis for control
and performance evaluation. The control process involves the setting of targets or standards (often
derived from the budgeting process) against which actual results are measured. The management
accountant’s role is to provide managers with feedback information in the form of periodic reports,
suitably analysed, to enable them to determine if operations for which they are responsible are
proceeding according to plan, and to identify those activities where corrective action is necessary. In
particular, the management accounting function should provide economic feedback to managers to
assist them in controlling costs and improving the efficiency and effectiveness of operations.
It is appropriate at this point to distinguish between cost accounting and management accounting.
Cost accounting is concerned with cost accumulation for inventory valuation to meet the require-
ments of external reporting and internal profit measurement, whereas management accounting relates
to the provision of appropriate information for decision-making, planning, control and performance
evaluation. However, a study of the literature reveals that the distinction between cost accounting and
management accounting is not clear cut and the two terms are often used synonymously. In this book,
no further attempt will be made to distinguish between them.
You should now be aware that a management accounting system serves multiple purposes. The
emphasis throughout this book is that costs must be assembled in different ways for different purposes.
Most organizations record cost information in a single database, with costs appropriately coded and
classified, so that relevant information can be extracted to meet the requirements of different users.
We shall examine this topic in the next chapter.
SUMMARY OF THE CONTENTS OF THIS BOOK

This book is divided into six parts. Part One contains two chapters and provides an introduction
to management and cost accounting and a framework for studying the remaining chapters. Part
Two consists of five chapters and is entitled ‘Cost accumulation for inventory valuation and profit
measurement’. This part focuses mainly on cost accounting. It is concerned with assigning costs to
products to separate costs incurred during a period between costs of goods sold and the closing
inventory valuation. The extent to which product costs accumulated for inventory valuation and
profit measurement should be adjusted for meeting decision-making, cost control and performance
measurement requirements, is also briefly considered. Part Three is made up of seven chapters and is
entitled ‘Information for decision-making’. Here the focus is on measuring and identifying those costs
that are relevant for different types of decision.
The title of Part Four is ‘Information for planning, control and performance measurement’. It consists
of six chapters and concentrates on the process of translating goals and objectives into specific activities
and the resources that are required, via the short-term (budgeting) and long-term planning processes,
to achieve the goals and objectives. In addition, the management control systems that organizations use
are described and the role that management accounting control systems play within the overall control
process is examined. The emphasis here is on the accounting process as a means of providing informa-
tion to help managers control the activities for which they are responsible. Performance measurement
and evaluation within different segments of the organization is also examined.
Part Five contains three chapters and is entitled ‘Strategic performance and cost management, value
creation and challenges for the future.’ The first chapter focuses on strategic performance management,
the second on strategic cost management and the third chapter discusses the challenges for the future
facing management accounting. Part Six consists of three chapters and is entitled ‘The application of
quantitative methods to management accounting’.
GUIDELINES FOR USING THIS BOOK

This is a large and comprehensive textbook with considerable detail supporting it. It is important that
you consider your requirements and the syllabus of your course to guide your use of the parts and
chapters. As indicated above, Part Two deals with cost accounting and includes some technical aspects
of recording and assigning costs. Part Three deals with extracting information from the management
accounting system to inform various decisions faced by managers, and Part Four covers the processes of
SUMMARY 21
planning, control and performance measurement. As the Venn diagram (Preface Figure 0.1) indicated,
this content overlaps, but the parts can be studied separately, but you should read Chapter 3 on cost
assignment prior to reading Chapter 11 on activity-based costing.
Part Five places a contemporary and strategic perspective on management and cost accounting and
the parts of the book which preceded it and speculates on the future of management accounting.
Accounting is a numerical and quantitative subject and various mathematical techniques can be
applied to it. These have been separately gathered into Part Six at the end of the book. To study this part
you should note that Chapter 24 builds on and complements Chapter 8 on cost–volume–profit analysis
and so they could be studied together. Chapter 26 dealing with linear programming should be studied
only after Chapter 9 on relevant costs for decisions. Chapter 25 on inventory control models can be
studied at any stage.
Finally, throughout the book there are sections which are indicated as advanced reading and may
not be required for an introductory programme. You are occasionally referred to material which is con-
tained within the digital support which accompanies the book, if you need to consult it.
SUMMARY
The following items relate to the learning objectives listed at the beginning of the chapter.
●● Distinguish between management accounting and financial accounting.

Management accounting differs from financial accounting in several ways. Management account-
ing is concerned with the provision of information to internal users to help them make better
decisions and improve the efficiency and effectiveness of operations. Financial accounting is
concerned with the provision of information to external parties outside the organization. Unlike
financial accounting there is no statutory requirement for management accounting to produce
financial statements or to follow externally imposed rules. Furthermore, management account-
ing provides information relating to different parts of the business whereas financial accounting
reports focus on the whole business. Management accounting also tends to be more future ori-
ented and reports are often published on a daily basis whereas financial accounting reports are
published semi-annually.
●● Identify and describe the elements involved in the decision-making, planning

and control process.
The following elements are involved in the decision-making, planning and control process:
(a) identify the objectives that will guide the business; (b) search for a range of possible courses of
action that might enable the objectives to be achieved; (c) select appropriate alternative courses
of action that will enable the objectives to be achieved; (d) implement the decisions as part of
the planning and budgeting process; (e) compare actual and planned outcomes; and (f) respond
to divergencies from plan by taking corrective action so that actual outcomes conform to planned
outcomes, or modify the plans if the comparisons indicate that the plans are no longer attainable.
●● Justify the view that a major objective of commercial organizations is to broadly

seek to maximize future profits.
The reasons for identifying maximizing future profits as a major objective are: (a) it is unlikely
that any other objective is as widely applicable in measuring the ability of the organization to
survive in the future; (b) although it is unlikely that maximizing future profits can be realized in
practice, it is still important to establish the principles necessary to achieve this objective; and
(c) it enables shareholders as a group in the bargaining coalition to know how much the pursuit
of other goals is costing them by indicating the amount of cash distributed among the members
of the coalition.
●● Explain the important changes that have taken place in the business environment
that have influenced management accounting practice.
The important changes are: (a) globalization of world trade; (b) deregulation in various industries;
(c) changing product life cycles; (d) advances in manufacturing and information technologies;
(e) focus on environmental and ethical issues; (f) a greater emphasis on value creation; and
(g) the need to become more customer driven.
●● Outline and describe the key success factors that directly affect customer satisfaction.
The key success factors are: cost efficiency, quality, time, and innovation and continuous improve-
ment. Keeping costs low and being cost efficient provides an organization with a strong competi-
tive advantage. Customers also demand high-quality products and services and this has resulted
in companies making quality a key competitive variable. Organizations are also seeking to
increase customer satisfaction by providing a speedier response to customer requests, ensuring
100 per cent on-time delivery and reducing the time taken to bring new products to the market.
To be successful, companies must be innovative and develop a steady stream of new products
and services and have the capability to rapidly adapt to changing customer requirements.
●● Identify and describe the functions of a cost and management accounting system.
A cost and management accounting system should generate information to meet the following
requirements: (a) allocate costs between cost of goods sold and inventories for internal and
external profit reporting and inventory valuation; (b) provide relevant information to help man-
agers make better decisions; and (c) provide information for planning, control and performance
measurement.
KEY TERMS AND CONCEPTS

Each chapter includes a section like this. You should correction of performance in order to achieve the
make sure that you understand each of the terms organization’s objectives.
listed below before you proceed to the next chapter. Control process The process of setting targets or
Artificial intelligence (AI) such as machine-based standards against which actual results are measured.
learning is a simulation of a limited range of Cost accounting Accounting concerned with cost
human intelligence. accumulation for inventory valuation to meet the
Benchmarking A mechanism for achieving requirements of external reporting and internal
continuous improvement by measuring products, profit measurement.
services or activities against those of other best Cycle time The length of time from start to completion
performing organizations. of a product or service and is the sum of processing
Big data A term that describes the large volume of time, move time, wait time and inspection time.
raw data, both structured and unstructured, that Digitalization The use of digital technologies to
inundates a business on a daily basis. It includes change the business model by creating new ways
information such as email messages, social media to add value. In management accounting it involves
postings, phone calls, purchase transactions, artificial intelligence, the Internet of Things and big
website traffic and video streams. data.
Budget A financial plan for implementing E-business The use of information and
management decisions. communication technologies to support any
Continuous improvement An ongoing search to business activities, including buying and selling.
reduce costs, eliminate waste and improve the E-commerce The use of information and
quality and performance of activities that increase communication technologies to support the
customer value or satisfaction. purchase, sale and exchange of goods.
Control A managerial function that consists of Employee empowerment Providing employees
the measurement, reporting and subsequent with relevant information to allow them to
ASSESSMENT MATERIAL 23
make continuous improvements to the output the organization to aid decision-making and
of processes without the authorization of superiors. improve the efficiency and effectiveness of existing
Ethical behaviour Behaviour that is consistent with operations.
the standards of honesty, fairness and social Management by exception A situation in which
responsibility that have been adopted by the management attention is focused on areas where
organization. outcomes do not meet targets.
Financial accounting Accounting concerned with the Master budget A single unifying statement of an
provision of information to parties that are external organization’s expectations for future periods
to the organization. comprising budgeted profit and cash flow
Intellectual capital The intangible benefits statements.
accessible by a firm from its workforce and, Non-value-added activities Activities that can be
more broadly, from its established relationships reduced or eliminated without altering the product’s
with groups such as customers, suppliers and service potential to the customer.
competitors. It is often used interchangeably Performance reports Regular reports to management
with other terms such as ‘knowledge capital’, that compare actual outcomes with planned
‘knowledge economy’ and ‘intangible assets’. outcomes.
Internet commerce The buying and selling of goods Product’s life cycle The period of time from initial
and services over the internet. expenditure on research and development to the
Internet of Things (IoT) The interconnection via withdrawal of support to customers.
the internet of computing devices embedded Stakeholders Various parties that have an interest
in everyday objects enabling them to send and in an organization. Examples include managers,
receive data. shareholders and potential investors, employees,
Lean manufacturing systems Systems that seek to creditors and the government.
reduce waste in manufacturing by implementing Strategies Courses of action designed to ensure that
just-in-time production systems, focusing on quality, objectives are achieved.
simplifying processes and investing in advanced Total quality management (TQM) A customer-
technologies. oriented process of continuous improvement that
Management accounting Accounting concerned focuses on delivering products or services of
with the provision of information to people within consistent high quality in a timely fashion.
KEY EXAMINATION POINTS

Chapter 1 has provided an introduction to the scope accounting. Cost accounting is often used to also
of management accounting. It is unlikely that exam- embrace management accounting. Your discussion of
ination questions will be set that refer to the con- a cost accounting system should therefore include a
tent of an introductory chapter. However, questions description (with illustrations) of how the system pro-
are sometimes set requiring you to outline how a vides information for decision-making, planning and
costing system can assist the management of an control. Make sure that you draw off your experience
organization. Note that the examiner may not dis- from the whole of a first-year course and not just this
tinguish between cost accounting and management introductory chapter.
ASSESSMENT MATERIAL
T he review questions are short questions that enable you to assess your understanding of the main topics
included in the chapter. The numbers in parentheses provide you with the page numbers to refer to if you
cannot answer a specific question. Starting in Chapter 2, employability skills questions ask you to apply what
you have just learned in a realistic scenario, encouraging you to hone your spreadsheet, word processing and
presentation skills.
The remaining chapters also contain review problems. These are more complex and require you to relate and
apply the chapter content to various business problems. Fully worked solutions to the review problems are pro-
vided in a separate section at the end of the book.
Another random document with
no related content on Scribd:
post-office orders to put with them in the morning. But let us see if
the advertisement wants any improving. Read it again.”
The maid did so. As she concluded, and before she could speak, the
advertisement was answered, for a low knock was heard at the door,
and the young governess, in her black dress and with her young face
pitiful in its sadness, entered the room, and said shyly and with a low
courtesy:
“If you please, ma’am, I’m the governess, and Mrs. Blight sent me in
to play to you. My name is Miss Bird.”
CHAPTER IV.
LALLY AND MRS. WROAT.
The simple and business-like announcement of her name by Mrs.

Blight’s young governess to Mrs. Blight’s eccentric guest, produced a
sensation as startling as unexpected to Lally. Mrs. Wroat uttered a
strange exclamation, and leaned forward on her staff, her black eyes
staring at the young girl in a piercing gaze, her hooked nose and her
chin almost meeting, and her shrivelled lips mumbling excitedly an
inaudible whisper. The old lady’s eagerness and agitation was
shared by her maid, who stared at Lally with a wondering and
incredulous gaze.
“Who—who did you say you were?” demanded Mrs. Wroat, as soon
as she could speak, in cracked, hoarse tones—“Who?”
“I am Mrs. Blight’s governess, ma’am,” replied Lally wonderingly, and
concluding that Mrs. Wroat’s eccentricities verged upon madness.
“Yes, yes, I know,” cried the old lady impatiently, “but who are you?”
“Nobody, ma’am—only Lally Bird, the governess.”
“Ah-h!” said the old lady, in an odd, choked voice. “Lal-Lally Bird!
Lord bless my soul, Peters!”
Mrs. Wroat looked at the young governess with such a queer snap in
her eyes, and such a glow on her sallow, withered face, that Lally
involuntarily retreated a step toward the door.
“It’s the young lady, ma’am,” whispered Peters, full of amazement.
“Whatever does it mean? It’s like magic or sorcery.”
“It means that our advertisement is already answered,” returned Mrs.
Wroat grimly. “Saved the post-office orders, Peters. I believe in
advertising, Peters. We’ve just seen the benefit of it.”
Lally retreated another step toward the door.
“If you please, ma’am,” she said, in a little fluttering voice, “I will
come and play for you later—”
“No you won’t!” interrupted Mrs. Wroat. “Now you are here, you’ll
stay here till I am through with you. Do you know who I am?”
Lally brought to her support a pretty, girlish dignity which sat well
upon her round gipsy face.
“Yes, madam,” she answered; “you are Mrs. Wroat, the aunt of Mr.
Blight.”
“Wrong. I am only his uncle’s widow. Come under the chandelier.”
Lally came forward hesitatingly, and stood under the great chandelier
where a dozen wax candles burned mellowly from a forest of tall
unlighted ones. The soft glow fell upon Lally’s face and figure. She
was thin, and there was a tremulous anxiety on her features; but in
her mourning dress, with a red flush on her dark cheeks, and a bright
light in her velvety black eyes, she was very pretty, with a dark gipsy
beauty that seemed to startle Mrs. Wroat.
“The very image of poor Clara,” muttered the old lady, “and the very
image of what I was at her age. There, Peters, if you want to see
how I looked in my youth, look at that girl.”
However Mrs. Wroat might have looked in her far-past youth, she
looked now like a malignant old fairy in her gown of black velvet, and
with her cloak of scarlet velvet drawn around her shoulders. Her
diamonds were not brighter than her eyes, whose keen and piercing
glances tried to read Lally’s soul.
“Peters,” said the old lady, abruptly, “give the girl that copy of the
advertisement.”
The maid silently handed the slip of paper to Lally, who read it in
deepening amazement.
“Is this an advertisement for me, madam?” she demanded. “I am
Lally Bird. Are—are you ‘M. W.?’”
“Of ‘Mount street, London?’” finished the old lady. “Yes, I am ‘M.
W.’—Maria Wroat.”
“And you were about to advertise for me, madam? I—I don’t
understand. Or, is there some other Lally Bird?”
“No danger of that,” said Mrs. Wroat. “There were never two women
in this world so silly and moonstruck as your mother—never two
women who named their girls Lalla Rookh. Pah! What a name! But
for fear your mother was not the only goose in the world who married
a Bird, just answer me a few questions. What was your father’s
name, and what was his business?”
“He was a corn-chandler in the city, and his name was John Bird,”
answered Lally, quite bewildered.
“And what was your mother’s name before her marriage?”
“Clara Mulford Percy—”
Mrs. Wroat gave a queer little gasp, and her hands trembled, and
she looked at her faithful attendant in a sort of triumph.
“Do you hear that, Peters?” she whispered. “Do you hear it, I say?”
Then she added aloud, “Go on, girl. Who was your mother?”
“She was the daughter of a country gentleman who owned an estate
in Hampshire. There were several children besides my mother, but
they all died young and unmarried. The estate was entailed, and
went to a distant relative. My mother married my father against the
wishes of her friends, and was disowned by them for her
misalliance.”
“And very properly too, I should say. If a girl chooses to descend
from her proper rank in society as a gentleman’s petted daughter,
and take to living in a back room behind a corn-chandler’s shop, she
can’t expect her friends to follow her,” said Mrs. Wroat, with some
energy. “And you were her only child?”
“Yes madam.”
“Any relatives living?”
“No, madam. My mother died young. My father lived to give me a
good education, and then died insolvent, leaving me dependent
upon my own exertions when I was less than sixteen years old. My
father was a tradesman, humbly born, madam, but he was a
gentleman at heart—”
“So poor Clara said. Humph! So you’ve no relatives living, eh?”
“None whom I know, madam. The present holder of my grandfather’s
estate in Hampshire is my distant relative, but he knows as little of
me as I know of him. And—and,” added Lally, suddenly trembling, as
if a suspicion of the truth were dawning upon her soul, “I have a
great-aunt living in London—she was my mother’s aunt—who
married a banker, and is now a widow, if she still lives. She must be
very old.”
“About my age!” said Mrs. Wroat, her eyes snapping. “Just about my
age. What was her name?”
“Her name was Maria Percy, when a girl. She was married many
years before my mother was born, and she was my mother’s god-
mother. I don’t know her married name. If I ever heard it, I have
forgotten it.”
“Then I’ll tell it to you,” said the old lady. “Her present name is Maria
Wroat. Her home is in Mount street, London. And at this moment she
sits before you, taking stock of you.”
Lally grew pale, and her black eyes opened to their widest extent.
“You—you my aunt?” she ejaculated.
“So it seems, my dear. I’ve been searching for you for some time.
And so you are Clara’s child? You may kiss me if you want to, my
dear.”
Lally approached the old lady with some hesitation, and bestowed a
kiss upon the proffered wrinkled cheek. Then she shrank back in a
sort of affright, wondering at her own temerity.
“Sit down,” said the old lady kindly. “I have a few questions to ask
you, and on your answers depend more than you know of. Peters,
don’t stare the poor child out of countenance. Girl, how old are you?”
“Seventeen years, ma’am.”
“And I’m eighty—one of us at the beginning, the other at the end of
life! Heigh-ho! And so you’re governess here?”
Lally replied in the affirmative.
“No wonder you look sorrowful and pale and woe-begone!” muttered
Mrs. Wroat. “To be governess of the young Blights is a horrible
martyrdom. Don’t you think so? And isn’t it martyrdom to be under
the orders of that odious, vulgar, garrulous Mrs. Blight? Hey?”
“When I came here,” said Lally agitatedly, “I had no home on earth. I
was out of money, out of clothes, and utterly friendless. And so,
madam, I am very grateful to Mrs. Blight for shelter and a home, and
I cannot consider any service that gives me these a martyrdom.”
“Grateful, eh? What have you to be grateful for?” asked the old lady
cynically. “You have shelter and food, but you earn them, I’ll be
bound. You work early and late for the pitiful sum of forty pounds a
year. That is what you get, is it not?”
“No, ma’am. I am young and inexperienced, and I needed the place
so much, so I get but twenty pounds a year.”
“Bless my soul!” cried the old lady. “Because you needed the place
so much, you get only half price! That is just like Laura Blight. How
came you to be so friendless?”
“After my father’s death,” said Lally, “I taught music in the school in
which I had been educated. The school broke up, the proprietors
being advanced in life and being able to retire from labor, and I was
thrown adrift. I was obliged to do anything I could get to do. I lived for
some weeks or months with an old woman who was seamstress to a
boys’ school, and when she died I was out of work again, and came
down into Kent and worked in the hop-fields. I was so hungry—”
“Do you hear that, Peters?” interrupted the old lady, turning savagely
upon her attendant, her bright black eyes beaded with tears. “Do you
hear it, and sit there unmoved? She was hungry, while my servants
flung away the dainties from my table, and I grumbled because they
could not contrive newer delicacies to tempt my appetite. Hungry?
Homeless? Friendless? Heaven be merciful to me! Hungry! Ah-h!”
“That is all past now, madam,” said Lally softly.
“To begin again when Laura Blight chooses to send you packing!
She’s full of caprices, is Laura. You’re not sure of a place here over
night, unless her interest bids her keep you. How much money have
you laid up?”
“Mrs. Blight advanced me five pounds, my first quarter’s salary, and I
have eighteen shillings remaining,” answered Lally.
“Humph. Eighteen shillings between you and the union. Look me in
the eye, Lally.”
The young girl obeyed, looking into Mrs. Wroat’s piercing eyes with a
steady, honest, unflinching gaze, although the color fluttered in and
out of her cheeks, as a bird flutters in and out of its cage.
“Have you ever done anything in your life of which you are
ashamed?” asked the old lady, in a low, sternly anxious voice.
“No, ma’am,” answered the girl truthfully, “I never have.”
“What do you think of her, Peters?” demanded Mrs. Wroat, turning to
her maid and confidant.
The woman was crying behind her handkerchief. She had hard
features, but her heart was warm and soft. She answered sobbingly:
“I think, ma’am, as you’d ought to take her and adopt her, and make
her your heiress—that’s what I think, poor, pretty dear!”
“Shows your sense, Peters,” said Mrs. Wroat. “You’re a woman of a
thousand, Peters, and I’ll double the annuity I’m going to give you.
Girl, come and sit here on the stool at my feet.”
Lally came forward and sat down as directed.
“I am alone in the world, except for my good old Peters,” said Mrs.
Wroat, with a quiver of her pointed, up-turned chin. “These people
here think only of what they can make out of me—of the fortune they
hope to inherit at my death. I am old, and very near my end. I should
like to leave my money to one of my own kindred, and to one who
would really mourn a little for me when I am gone. I’m a queer old
woman, Lally, full of notions, and so cross that any one but Peters
would have given me up long ago; but, strange as it may seem, the
good soul actually loves me. She’s been in my service five and thirty
years, and she’s more a friend to me than a servant. Now, Lally, do
you think you could ever love me? It’s odd, I own, but even a dried-
up old woman like me sometimes yearns to be loved.”
Her voice trembled, and tears brimmed over the bright black eyes,
and her sharp features were convulsed in sudden emotion. She
looked at Lally with a strange wistfulness and yearning, and Lally’s
desolate, frozen soul thawed within her, and with a great sob she
sprang up and threw her arms around her aged kinswoman, and
kissed her fervently and tenderly.
“I have no one to love,” whispered the girl, sobbing. “I would love you
if you would let me.”
A paroxysm of coughing seized upon the old lady, and Lally shrank
back affrighted into her seat. Peters patted her mistress gently on
her back and gave her water to drink, and she soon recovered,
sinking back upon her cushions, tired and panting.
“I am near the end, my dear,” she said, when she could command
her voice. “I may live weeks, or it may be months; but the time is
short. I like you, Lally, and I am going to adopt you and make you my
heiress. You shall change your name to mine, and be known as Lally
Wroat, and at my death you shall inherit my fifty thousand pounds.
And all I ask of you, Lally, is to love me a little, and try to be a
daughter to me. I never had a daughter of my own.”
Lally raised the old lady’s hand reverently to her lips.
“I am afraid all this happiness is not for me, madam,” she said
bravely. “I am not what you think me, and you may not deem me fit
to inherit your wealth. I—I have been married!”
“Peters, the girl’s head is turned.”
“No, madam, I speak the truth. I am pure in the sight of God, but I
am a disowned wife.”
“A wife—at seventeen?”
“Yes, madam. After I lost my situation as music teacher I was
married to a young gentleman, just from Oxford, where he had been
educated. He was only twenty years old, and we were married by
license. He worked to support us, having talent as an artist, and we
struggled along together until his father discovered our marriage and
separated us, declaring the marriage null and void, his son being
under twenty-one years of age. We were married in good faith; we
loved each other; and Rufus was good, although he made oath that
he was of age in order to secure the marriage license. His father
threatened to prosecute him for perjury if he did not give me up; and
he gave me up.”
“And who is this precious youth?” asked Mrs. Wroat.
Lally replied by telling her story precisely as it had occurred,
excusing the conduct of her young husband as well as she could,
and displaying in every look and word how passionately she still
loved him.
“So the young man is poor, but of good birth and connections, and
university bred?” commented Mrs. Wroat. “Well, Lally, my opinion is
that your husband is not free from you, but that he will have to have
recourse to law to secure his freedom. We’ll consult my London
lawyer when we get up to town, and we’ll see about the young man.
I’m afraid he’s a poor stick; but we’ll see—we’ll see. I haven’t
changed my mind about adopting you, and I shall immediately
assume a guardianship over you. You will quit Mrs. Blight’s service
to-morrow. Peters, how soon can we go back to town?”
“At the end of the week, ma’am, if you like,” responded Peters,
brightening.
“So be it then. Pack your trunk, Lally. You will finish your stay in this
house as my adopted daughter and future heiress, and to-morrow
you and Peters shall go out shopping—”
Mrs. Wroat paused, as a knock was heard at the door.
“Open the door, Peters,” commanded the old lady. “It’s Laura Blight.”
Before Peters could obey, the door opened from without, and Mrs.
Blight, her chains tinkling and her red silk gown rustling, came into
the room as airily as the rotund proportions of her figure would
permit.
Her glances fell upon Lally, who was still sitting at the feet of her
great-aunt, and Mrs. Blight’s face showed her surprise and
displeasure.
“I didn’t hear the piano, dear Aunt Wroat,” she exclaimed, “and I
feared my governess might not have obeyed my order and come in
to you. Miss Bird, I fear you forget your place. You are not a guest in
this house—you are merely a hired servant. If you try, like a
treacherous viper, to creep into the good graces of my poor
unsuspecting relative, I shall dismiss you in the morning. You are to
play upon the piano, and then go to your room.”
The old lady’s yellow and bony hand was stretched out and laid
caressingly on Lally’s black hair.
“I was talking to the child, Laura,” she said. “I have been hearing her
history. Don’t you remember that I’ve been trying for years to find my
niece, Clara Bird, or her children? Well, this girl is Clara’s child—”
A look of fear and anger disfigured Mrs. Blight’s face. The girl
became, upon the instant, a terror to her.
“Aunt Wroat,” said the lawyer’s wife hastily, “this girl is a mere
imposter that I took in out of charity. She has deceived you. Miss
Bird, go to your room at once. To-morrow morning you leave my
house.”
“Peters,” said Mrs. Wroat quietly, “give me my purse.”
Peters brought a plethoric pocket-book from her mistress’ traveling-
bag, and the old lady took out a five-pound Bank of England note.
“Give that to Mrs. Blight, Peters,” continued the old lady calmly. “Mrs.
Blight, that is the amount you advanced to my great-niece when she
entered your service. I do not wish her to be indebted to you. And
here are twenty pounds to reimburse you for any expense I may
have put you to. I am sorry, Laura, to disappoint you,” added Mrs.
Wroat, putting her wallet in her pocket, “but you and your husband
need the lesson. I am not so deaf but that I heard every whisper you
and your husband exchanged in the drawing-room to-night. I am
aware that you consider me ‘an old cat,’ and ‘an old nuisance,’ and
that you ‘would send me to an alms-house, if it were not for my
money.’ I have now only to say to you that your heartlessness has
met with its appropriate reward. This young lady is my adopted
daughter and future heiress, and when you order a cab for her in the
morning, you may let the boy come up for my luggage also. I shall go
with my adopted daughter.”
CHAPTER V.
NEVA AND HER ENEMIES.
Neva Wynde had arrived in London, by the morning express train

from Canterbury, in the care of Mr. and Mrs. Craven Black, and from
the moment in which she had emerged with them from the railway
station, all clue to her movements was suddenly and mysteriously
lost.
What had become of her? How had she so singularly disappeared?
These questions, which filled the souls of Neva’s lover and
guardians with such unspeakable terror and anxiety and which they
so signally failed in their efforts to solve, we now purpose answering
for the benefit of the reader.
On alighting from the crowded morning train, Craven Black hurried
his bride, her maid and Neva into a waiting cab, superintended the
mounting of the luggage to the stout cab roof, and gave the order to
be driven to Gravesend, adding more explicit directions in an
undertone. He then entered the vehicle, and the vehicle rolled from
the station.
“Where are we going, Mrs. Black?” asked Neva, looking from the cab
windows. “I fancied Mr. Black said Gravesend.”
“So he did, my dear,” said Mrs. Craven Black placidly. “Didn’t I tell
you that we are going to Yorkshire by water? September is such a
lovely month, and this is such lovely weather, and it’s quite the thing
to take a sea trip for a bridal tour, and I prevailed upon Craven to
charter—is not that the word—a beautiful little yacht, which we are to
have three months if we want it. We shall have a glorious voyage
down the Thames and up the Channel, and through the great
German ocean. The very idea stirs all my love of romance. Doesn’t it
affect you in the same manner!”
“But Wynde Heights is not near the sea,” objected Neva, in surprise.
“It’s not two hours distant by rail, and it will be delightful to get up
yachting parties by ourselves, and go off for a two-days’ excursion;
don’t you think so? Don’t throw cold water upon my little plans for
happiness, I beg of you, my dear Neva,” cried Mrs. Craven Black
imploringly. “There is no reason why we shouldn’t be perfectly happy,
if you won’t interpose objections, Neva.”
Thus adjured, Neva took care to “interpose” no more objections. She
had no liking for nor trust in Craven Black, but Mrs. Craven Black
had been her father’s beloved and honored wife, and Neva still
believed in her. That the pair could mean her harm never once
occurred to her. Neither did she realize how completely she was in
their power. She had left her maid at home, at Mrs. Black’s
solicitation, the latter declaring that one maid would suffice for both,
and that she especially disliked Meggy West, the girl who attended
upon Neva. Thus the young heiress of Hawkhurst was absolutely
friendless and helpless, in the hands of her enemies.
They had a long drive to Gravesend. On arriving at their destination,
they alighted at a pier at which a small boat with two oarsmen was
lying. These men were dressed in blue sailor custom, each having
an arrow embroidered on the breast of his jacket. Mr. Black went up
to them, accosting them familiarly.
“What boat do you belong to?” he demanded.
“To the Arrow, sir, lying out yonder,” said one of the men, pointing to
a graceful yacht lying in the stream, her sails unfurled, and looking
ready for flight. “We are waiting for Mr. Craven Black.”
“I am he. It’s all right, my men. Octavia, my love, let me assist you
into the boat. Miss Wynde, this way.”
The maid was left to scramble in by herself. The luggage was
deposited in the boat; Mr. Black took his seat, and the rowers pulled
off for the yacht.
The process of transferring passengers and luggage to the deck of
the Arrow was speedily and safely accomplished. Mrs. Black was
ecstatic in her commendations of the arrangements of the little
vessel, and occupied the attention of Neva while Mr. Black
conversed with the sailors and their captain, and the vessel was
gotten under way.
The Arrow was no means a new vessel but she had been recently
painted and fitted with new sails, and presented a very trim
appearance. She was of about twenty tons burden. She had
belonged to a member of the Royal Yacht Club, but had been
advertised to be sold for a comparatively small sum, her owner
having had built for him a vessel of greater size and speed. Craven
Black had seen, a week before, the advertisment offering the Arrow
for sale, and warranting her ready to put to sea at an hour’s notice;
and a part of the business of Mrs. Artress in town had been to
purchase the vessel.
Among his friends of high and low degree, Craven Black possessed
one who was thoroughly disreputable, but who had proved useful to
him at too many periods of his life to be thrown aside. This person
had formerly been a lawyer, but had been stricken from the rolls for
illegal or dishonorable practice, and was a needy hanger-on and
parasite of Craven Black. This person had been called upon to assist
Mrs. Artress in the examination of the yacht, and had purchased the
boat in his own name, paying therefor a sum of money provided by
Mrs. Craven Black out of the jointure acquired by her marriage with
Sir Harold Wynde. This ex-lawyer had also engaged three
experienced sailors, one of whom had been a mate on an India
vessel, and whom he hired as captain of the Arrow, and these three
men were now in charge of the little yacht.
These sailors, we may as well mention here, had been chosen for
other qualifications than good seamanship. The ex-lawyer, in the
days when he had been qualified to practice his profession, had
been called upon to defend the three against a charge of mutiny,
preferred against them by their captain. The charge had been
proved, they had been convicted, and were now fresh from two
years’ imprisonment. The ex-lawyer had come upon them at a
drinking shop, after their release, and only a few days before, and
knowing their reckless character, had engaged them for a cruise of
the Arrow.
Such was the character of the seamen in charge of the yacht; and in
such manner had the yacht itself been acquired by Craven Black.
As the vessel moved forward down the stream, the sails filling, Mrs.
Black said to her young charge:
“Let us go below, Neva, and take a look at our quarters. The luggage
and my maid have gone down.”
Neva assented, and the two went into the cabin, which was found to
be newly fitted up, and smelling unpleasantly of fresh paint. The
cabin was small, affording room only for the table and divans around
it, but there were three neat little state-rooms, newly carpeted and
newly furnished with mattresses, blankets, bed-linen, towels, camp
chairs, and all toilet appurtenances. One of these state-rooms was
appropriated by Mr. and Mrs. Black, the second by Neva, and the
third was assigned to the maid, a French woman completely won to
the interests of her mistress.
“We shall be very comfortable here, Neva,” said Mrs. Black, with
gayety. “The sea air will bring the roses to your cheeks. I think you’ve
not been looking well lately.”
“I wish you had told me that we were to go to Yorkshire by sea,” said
Neva gravely.
“How could I suppose, my dear child, that you cared whether you
went by train or by boat?” demanded Mrs. Black, in seeming
surprise. “Your dear papa told me once that you were a fine sailor,
and I planned this voyage as a little surprise to you—that’s the truth,
Neva.”
“You are very kind,” said the young girl, “but I would have preferred
to know it beforehand. My friends will be anxious about me if I do not
write as soon as I promised.”
“Your friends?” and Mrs. Black arched her brows. “Are we not your
friends?”
“You are, madam, I trust, but you are not my only friend. I leave
those behind me who are dear to me, and who have a right to know
my movements.”
Mrs. Black looked significantly down upon the great diamond that
sparkled in limpid splendor upon Neva’s finger. She had noticed the
jewel before, but had refrained from alluding to it.
“Is that ring the gift of one who has a right to know your
movements?” she asked, smiling.
Neva blushed, but gravely assented.
“It is from Rufus Black?” asked the elder lady, well knowing to the
contrary.
“No, madam,” said Neva bravely, “it is the gift of Lord Towyn, and is
the emblem of our betrothal.”
Mrs. Black bit her lips fiercely, but made no response. There was a
hardness in her glittering eyes, and a cruel compression of her lips,
that boded ill for the engagement thus proclaimed to her.
One of the seamen was an excellent cook and steward, and
presently a luncheon was spread in the cabin which proved very
tempting to appetites sharpened by sea air. Mrs. Artress had
provided such an abundance of delicate stores that a cook was
scarcely required. There were tin boxes of assorted biscuits, jars of
pickles, boxes of fruits of every kind attainable in Covent Garden
market, dried and crystalized fruits, smoked salmon, jerked beef and
venison, pickled reindeers’ tongues, and cheeses, cakes and fancy
breads in every variety.
After the luncheon, the ladies went on deck, Mr. and Mrs. Craven
Black paced to and fro, arm in arm, and Neva leaned idly upon the
rail, watching the fleeting shores and the frequent sails and
steamers, and tried to shake off the shadow of distrust and gloom
that would creep over her soul.
At six o’clock, dinner was served in the cabin. This second meal
resembled the one that had preceded, but there were also roast
beef, roast fowls, and vegetables, and wines. The swinging lamp
was lighted in the cabin, which looked as comfortable as a yacht
cabin can be made to look. There is, at best, a dreariness about a
ship’s cabin or state-room which no art can conquer. And this cabin
was no exception to the rule. Neva was glad to throw a shawl around
her and go out again upon the deck.
The moon was shining when she sat down at one side of the boat in
her folding deck chair, and the pale flood of silvery light illumined the
white-capped waves, and the dark abysses of the waters, the sails of
vessels making into port, and the dusky little steamers, making the
whole scene a picture full of glorious lights and shadows, but a
scene that seemed a picture rather than a reality.
The yacht was out in the North Sea now, battling with the short,
chopping waves, but impelled onward by a fine breeze. She was well
ballasted, seaworthy, and a swift sailer. What more could be desired
by the guilty pair whose hearts beat exultantly at their evil success,
as they regarded the unconscious victim of their machinations.
“She has no suspicion,” murmured Craven Black, as he promenaded
the deck, his wife leaning on his arm.
“None whatever. She is too guileless herself to suspect guile in
others. And she trusts me implicitly,” laughed Octavia Black softly.
“That old dotard, her father, did you and me a good turn when he so
frequently urged his daughter to obey me and love me, and try to win
my love. I declare, Craven, it’s enough to make the old fellow come
out of his grave, to confront us; isn’t it now?”
“If I were superstitions, I might think so,” said Black.
“If he did come out of his grave, he’d be slightly astonished at finding
how I had cajoled and hoodwinked him, eh, Craven?” said the
woman mockingly. “I’d like him to find out the truth where he is; I
would, indeed. I hated the man; and to think you were jealous of him
even when you urged me to marry him! Oh, Craven? Do you know,
dear, speaking of jealousy, I was once jealous of Neva Wynde?”
“I did not know it.”
“No? Well, I was. It was absurd, of course. I fancied you fell in love
with her the first time you saw her.”
Craven Black’s heart stirred guiltily, and his fair cheek flushed. His
love for Neva Wynde was not altogether dead yet. It smouldered in
his breast, and although at times he believed that he felt an absolute
hatred for her, yet all the while a spark of the old passion remained
that circumstances might again fan into a flame.
“We’re likely to have more trouble than we looked for,” said Mrs.
Black, changing the subject, without awaiting a reply to her previous
remark. “Neva owned to me since we came on board that she is
engaged to Lord Towyn.”
“I suspected it when I saw that new ring she wears. But go to her
now, Octavia. She will suspect us of plotting against her if we
whisper together longer.”
Mrs. Black relinquished her husband’s arm, and went to Neva’s side,
drawing a deck chair beside her.
“Enjoying the moonlight, Neva?” she asked. “And thinking of the earl,
of course? I have not yet wished you joy of your future husband, and
I suppose I ought to do so now. But first I would like to ask you if you
have irrevocably chosen to obey your own wishes in regard to your
marriage, rather than to regard the last wishes of your father?”
“I am not certain what were my father’s wishes,” said Neva, with a
strange gravity, looking afar over the waters with her eyes of red
gloom.
“Not certain? My dear child, you puzzle me. Did I not give into your
own hands your father’s last letter to you, received by me from India
in the same mail that brought me the awful news of his death?”
“You gave me a letter purporting to be from my father, Mrs. Black,”
said the young girl, looking now at her companion, “but are you sure
that it was not changed by any one while in your possession? Do not
think I would hint one word against your watchful care of it, or—or—
your good faith with me; but I am not altogether convinced that papa
wrote that letter. Lord Towyn, on reading it, immediately declared it a
forgery.”
Mrs. Black started.
“Did you show it to Lord Towyn?” she demanded.
“Yes, and he has it now in his possession, and will submit it to Sir
John Freise and Mr. Atkins for their inspection and opinion,”
answered Neva.
Octavia Black’s dark cheeks paled in the moonlight, and a sudden
terror gathered in her hard black eyes.
“Neva,” she exclaimed harshly, “I am astonished at the singular want
of delicacy that prompted your display of your father’s last letter to
Lord Towyn. Of course the earl believes the letter a forgery, since he
purposes marrying you himself. He believes whatever it is to his
interest to believe.”
“Lord Towyn is the soul of honor,” asserted Neva, her cheeks
flushing hotly. “He would tell the truth, whether it might be for or
against his interests.”
“What simple, childlike faith!” murmured Octavia Black, in affected
admiration. “But, my dear child, Lord Towyn is no better than other
men. Did—did he think that I forged Sir Harold’s letter?”
“No, he has too high an opinion of the lady who has been my father’s
wife,” returned Neva proudly, “to think such evil of her. But he fancied
the true letter might have been replaced with a forged one. Mrs.
Artress—Mr. Black—”
She paused abruptly, having been urged into saying more than she
had intended.
“Ah, Lord Towyn thinks them capable of the forgery. Let me tell you,
Neva Wynde, that your father told me with his own lips that he had
once hoped for your marriage with Lord Towyn, but that he desired in
his later days with all his mind and heart that you should marry Rufus
Black.”
“Papa said that—to you?”
“He did. I swear it,” cried the woman, perjuring herself, in her
eagerness to produce the desired impression upon Neva’s mind.
“But Rufus said he did not know papa?”
“That does not affect the fact that Sir Harold knew him,” said Octavia
Black firmly. “Rufus did some brave deed at Oxford—saved a
comrade’s life, or some such thing—and that first fixed Sir Harold’s
eyes upon him. From that moment Sir Harold watched the young
fellow’s progress. He saw him frequently, himself unseen. He studied
his character, and he became resolved upon your marriage to
Rufus.”
“But, Mrs. Black, this is incredible!” exclaimed Neva, utterly refusing
to believe the preposterous story, although until this moment her
faith in her companion had remained unshaken. “Papa could not
have wished me to marry a man he did not know personally. He
would not have laid upon me the burden of a command—for that
solemnly expressed desire was little less than a command—to marry
a man whom he admired for a single act of personal courage, but of
whose character he was ignorant. I know papa too well to believe
anything like this, Mrs. Black.”
“You accuse me of falsehood then. I say such was his wish!”
declared Octavia, doggedly and sullenly.
Neva looked pained, perplexed, and deeply troubled.
“If this indeed be so,” she murmured, “then he could not have been
in his right mind, terrible as it seems to utter the words. For there
never was a truer, kinder father, or a more noble man, than papa. He
thought my happiness of so much moment that he never would have
dictated my course in such a vital matter as the acceptance or
rejection of a lover, so long as the lover was worthy. I am sorry you
have told me this, Mrs. Black. I am compelled to doubt papa’s
complete sanity, or—or—”
“Or me?” said the handsome Octavia, with an ugly frown. “You ought
to know me too well by this time to doubt me. Old gentlemen
frequently get odd ideas, which seem at variance with their usual
character, but the having them does not prove them insane, only
crotchety. As for me, knowing Sir Harold’s wishes, I did not doubt
that you would act upon them as upon his actual command. Your
father told you to obey me in all things. Is that command to be as
lightly set aside?”

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