CHAPTER 1
MANAGEMENT ACCOUNTING: AN OVERVIEW
I.
Questions
1.
Use of the word “need” in the quoted passage is pejorative. It implies an
unlimited level of demand for information. However, rational managers
apply a cost-benefit criterion to information and will only want accounting
information if its benefits exceed its costs. Accounting information
provides benefits by improving decision making and controlling behavior in
organizations. In most organizations, accounting information is very
prevalent which implies that its benefits exceed its costs. Hence, successful
managers will find it in their self-interest to learn how to use accounting
information in these organizations.
Clearly, this statement is incurred in those firms where accounting
information has very limited usefulness (e.g., if the accounting
information is often wrong or is not produced in a timely fashion). In these
organizations, managers do not find the accounting information to have
benefits in excess of its costs, will not use it, do not need to know how to
use it, and definitely do not need it.
2.
a. Historical costs are of limited use in making planning decisions in a
rapidly changing environment. With changing products, processes and
prices, the historical costs are inadequate approximations of the
opportunity costs of using resources.
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Management Accounting: An Overview Chapter 1
Historical costs may, however, be useful for control purposes, as they
provide information about the activities of managers and can be used
as performance measures to evaluate managers.
3.
b. The purpose of accounting systems is to provide information for
planning purposes and control. Although historical costs are not
generally appropriate for planning purposes, additional measures are
costly to make. An accounting system should include additional
measures if the benefits of improved decision making are greater than
the costs of the additional information.
Finance and economics textbooks traditionally state that the goal of a profit
organization is to maximize shareholder wealth. Managers are frequently
presumed to act in the best interest of the shareholder, although recent
finance literature recognizes that appropriate incentives are necessary to
align manager interests with shareholder interests. The goal, however, are
not very clear as to how this is achieved. Most finance textbooks focus on
financing decisions and not on the use of assets and dealing with customers.
Marketing’s goal of satisfying customers recognizes that customers are the
source of revenues for the organization, and therefore the means through
which shareholder value is increased. However, customer satisfaction is
only valuable insofar as it creates shareholder wealth. The further goal of
marketing is to ensure that customer satisfaction is maximized without
compromising the organization’s profitability.
4.
Yes. Planning is really much more vital than control; that is, superior
control is fruitless if faulty plans are being implemented. However,
planning and control are so intertwined that it seems artificial to draw rigid
lines of separation between them.
5.
Yes. The controller has line authority over the personnel in his own
department but is a staff executive with respect to the other departments.
6.
Line authority is exerted downward over subordinates. Staff authority is
the authority to advise but not command others; it is exercised laterally or
upward. Functional authority is the right to command action laterally and
downward with regard to a specific function or specialty.
7.
Cost accounting is the controller’s primary means of implementing the 7point concept of modern controllership. Cost accounting is intertwined with
all seven duties to some extent, but its major focus is on the first three.
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Chapter 1 Management Accounting: An Overview
8.
Bettina Company
President
VP, Production
VP, Finance
Controller
Treasurer
Assistant
Controller
Assistant
Treasurer
Special
Studies
Manager
Cost
Accounting
Manager
Tax
Manager
Cost
Systems
Analyst
Budget &
Standard
Cost Analyst
Performance
Analyst
Cost Clerk
Payroll
Clerk
9.
VP, Sales
Internal
Audit
Manager
Accounts
Receivable
Clerk
Accounts
Payable
Clerk
General
Accounting
Manager
Billing
Clerk
System &
EDP
Manager
General
Ledger
Bookkeeper
Management accountants contribute to strategic decisions by providing
information about the sources of competitive advantage and by helping
managers identify and build a company’s resources and capabilities.
10. In most organizations, management accountants perform multiple roles:
problem solving (comparative analyses for decision making), scorekeeping
(accumulating data and reporting reliable results), and attention directing
(helping managers properly focus their attention).
11. Three guidelines that help management accountants increase their value to
managers are (a) employ a cost-benefit approach, (b) recognize behavioral
as well as technical considerations, and (c) identify different costs for
different purposes.
12. Management accounting is an integral part of the controller’s function in
an organization. In most organizations, the controller reports to the chief
financial officer, who is a key member of the top management team.
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Management Accounting: An Overview Chapter 1
13. Management accountants have ethical responsibilities that are related to
competence, confidentiality, integrity, and objectivity.
14. By reporting and interpreting relevant data, the controller exerts a force or
influence that impels management toward making better-informed
decisions.
The controller of one company described the job as “a business advisor
to…help the team develop strategy and focus the team all the way through
recommendations and implementation.”
15. 15.
Audience:
Purpose:
Timeliness:
Restrictions:
Type of Information:
Nature of Information:
Scope:
Financial Accounting
External:
shareholders, creditors, tax
authorities
Report on past performance to external parties;
basis of contracts with owners and lenders
Delayed; historical
Regulated; rules driven by generally accepted
accounting principles and government
authorities
Financial measurements only
Objective, auditable, reliable, consistent,
precise
Highly aggregate; report on entire organization
Managerial Accounting
Audience:
Internal: Workers, managers, executives
Purpose:
Inform internal decisions made by employees
and managers; feedback and control on
operating performance
Timeliness:
Current, future oriented
Restrictions:
No regulations; systems and information
determined by management to meet strategic
and operational needs
Type of Information: Financial, plus operational and physical
measurements on processes, technologies,
suppliers customers, and competitors
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Chapter 1 Management Accounting: An Overview
Nature of Information:
Scope:
More subjective and judgmental; valid,
relevant, accurate
Disaggregate; inform local decisions and
actions
16. The competitive environment has changed dramatically. Companies
encountered severe competition from overseas companies that offered highquality products at low prices. Activity-based costing systems are
introduced in many manufacturing and service organizations to overcome
the inability of traditional cost systems to accurately assign overhead costs.
Activity-based management is a viable approach for managers to make
decisions based on ABC information. There has been improvement of
operational control systems such that information is more current and
provided more frequently. The nature of work has changed from controlling
to informing. Firms are concerned about continuous improvement,
employee empowerment and total quality. Nonfinancial information has
become a critical feedback measure. Finally, the focus of many firms is on
measuring and managing activities.
17. As measurements are made on operations and, especially, on individuals
and groups, the behavior of the individuals and groups are affected. People
will react to the measurements being made by focusing on the variables or
behavior being measured. In addition, if managers attempt to introduce or
redesign cost and performance measurement systems, people familiar with
the previous system will resist. Management accountants must understand
and anticipate the reactions of individuals to information and
measurements. The design and introduction of new measurements and
systems must be accompanied with an analysis of the likely reactions to
the innovations.
II. Exercises
Exercise 1
a.
b.
c.
d.
(1) Problem solving
(3) Attention-directing
(1) Problem solving
(2) Scorekeeping
Exercise 2
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Management Accounting: An Overview Chapter 1
a.
b.
c.
d.
(4) Marketing
(3) Production
(6) Customer service
(5) Distribution
Exercise 3
a.
b.
c.
d.
e.
f.
g.
h.
(4) Marketing
(3) Production
(5) Distribution
(4) Marketing
(5) Distribution
(3) Production
(1) Research and development
(2) Design
III. Problems
Problem 1 (Problem Solving, Scorekeeping, and Attention Directing)
Because the accountant’s duties are often not sharply defined, some of these
answers might be challenged:
1.
2.
3.
4.
5.
6.
7.
8.
Scorekeeping
Attention directing
Scorekeeping
Problem solving
Attention directing
Attention directing
Problem solving
Scorekeeping (depending on the extent of the report) or attention
getting
9. This question is intentionally vague. The give-and-take of the
budgetary process usually encompasses all three functions, but it
emphasizes scorekeeping the least. The main function is attention
directing, but problem solving is also involved.
10. Problem solving
Problem 2 (Management Accounting Information System)
1. Inputs: b, g, i, m
2. Processes: a, d, f, j
3. Outputs: e, k, n
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Chapter 1 Management Accounting: An Overview
4. System objectives: c, h, l
Problem 3 (Role of Management Accountants)
Planning. The management accountant gains an understanding of the impact
on the organization of planned transactions (i.e., analyzing strengths and
weaknesses) and economic events, both strategic and tactical, and sets
obtainable goals for the organization. The development of budgets is an
example of planning.
Controlling. The management accountant ensures the integrity of financial
information, monitors performance against budgets and goals, and provides
information internally for decision making. Comparing actual performance
against budgeted performance and taking corrective action where necessary is
an example of controlling. Internal auditing is another example.
Evaluating Performance. The management accountant judges and analyzes the
implication of various past and expected events, and then chooses the optimum
course of action. The management accountant also translates data and
communicates the conclusions. Graphical analysis (such as trend, bar charts,
or regression) and reports comparing actual costs with budgeted costs are
examples of evaluating performance.
Ensuring Accountability of Resources. The management accountant
implements a reporting system closely aligned to organizational goals that
contribute to the measurement of the effective use of resources and
safeguarding of assets. Internal reporting such as comparison of actual to
budget is an example of accountability.
External Reporting. The management accountant prepares reports in
accordance with generally accepted accounting principles and then
disseminates this information to shareholders, creditors, and regulatory tax
agencies. An annual report or a credit application are examples of external
reporting.
Problem 4 (Line Versus Staff)
Jamie Reyes is staff. She is in a support role – she prepares reports and helps
explain and interpret them. Her role is to help the line managers more
effectively carry out their responsibilities.
Stephen Santos is a line manager. He has direct responsibility for producing a
garden hose. Clearly, one of the basic objectives for the existence of a
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Management Accounting: An Overview Chapter 1
manufacturing firm is to make a product. Thus, Stephen has direct
responsibility for a basic objective and therefore holds a line position.
Problem 5 (Professional Ethics and End-of-Year Games)
Requirement 1
The possible motivations for the snack foods division wanting to play end-ofyear games include:
(a) Management incentives. Yummy Foods may have a division bonus scheme
based on one-year reported division earnings. Efforts to front-end revenue
into the current year or transfer costs into the next year can increase this
bonus.
(b) Promotion opportunities and job security. Top management of Yummy
Foods likely will view those division managers that deliver high reported
earnings growth rates as being the best prospects for promotion. Division
managers who deliver “unwelcome surprises” may be viewed as less
capable.
(c) Retain division autonomy. If top management of Yummy Foods adopts a
“management by exception” approach, divisions that report sharp
reductions in their earnings growth rates may attract a sizable increase in
top management supervision.
Requirement 2
The “Standards of Ethical Conduct…” require management accountants to:


Refrain from either actively or passively subverting the attainment of
the organization’s legitimate and ethical objectives, and
Communicate unfavorable as well as favorable information and
professional judgment or opinions.
Several of the “end-of-year games” clearly are in conflict with these
requirements and should be viewed as unacceptable by Tan:
(a) The fiscal year-end should be closed on midnight of December 31.
“Extending” the close falsely reports next year’s sales as this year’s sales.
(b) Altering shipping dates is falsification of the accounting reports.
(c) Advertisements run in December should be charged to the current year. The
advertising agency is facilitating falsification of the accounting records.
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Chapter 1 Management Accounting: An Overview
The other “end-of-year games” occur in many organizations and may fall into
the “gray” to “acceptable” area. However, much depends on the circumstances
surrounding each one:
(a) If the independent contractor does not do maintenance work in December,
there is no transaction regarding maintenance to record. The responsibility
for ensuring that packaging equipment is well maintained is that of the plant
manager. The division controller probably can do little more than observe
the absence of a December maintenance charge.
(d) In many organizations, sales are heavily concentrated in the final weeks of
the fiscal year-end. If the double bonus is approved by the division
marketing manager, the division controller can do little more than observe
the extra bonus paid in December.
(e) If TV spots are reduced in December, the advertising cost in December will
be reduced. There is no record falsification here.
(g) Much depends on the means of “persuading” carriers to accept the
merchandise. For example, if an under-the-table payment is involved, it is
clearly unethical. If, however, the carrier receives no extra consideration
and willingly agrees to accept the assignment, the transaction appears
ethical.
Each of the (a), (d), (e) and (g) “end-of-year games” may well disadvantage
Yummy Foods in the long run. For example, lack of routine maintenance may
lead to subsequent equipment failure. The divisional controller is well advised
to raise such issues in meetings with the division president. However, if Yummy
Foods has a rigid set of line/staff distinctions, the division president is the one
who bears primary responsibility for justifying division actions to senior
corporate officers.
Requirement 3
If Tan believes that Ryan wants her to engage in unethical behavior, she should
first directly raise her concerns with Ryan. If Ryan is unwilling to change his
request, Tan should discuss her concerns with the Corporate Controller of
Yummy Foods. Tan also may well ask for a transfer from the snack foods
division if she perceives Ryan is unwilling to listen to pressure brought by the
Corporate Controller, CFO, or even President of Yummy Foods. In the extreme,
she may want to resign if the corporate culture of Yummy Foods is to reward
division managers who play “end-of-year games” that Tan views as unethical
and possibly illegal.
Problem 6
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Management Accounting: An Overview Chapter 1
James Torres has come up with a scheme that involves a combination of data
falsification and smoothing! Not only has he made up the revenue numbers,
but also he has had the gall to defer some of them to the next period. Making
up such numbers is clearly illegal. Smoothing, in this example is also illegal
because the numbers are fictitious.
Problem 7
Clearly the vice-president will lose his or her job if you turn him or her in. Given
that this is a major violation of the code of ethics and a violation patent law, the
vice-president could go to jail. Your best course of action is to check your
information and if the vice-president is definitely involved, go immediately to
the VP’s superior (who is probably a senior VP or the company president). The
organization’s attorneys will take over from there.
Problem 8
One option is to do nothing and ignore what you saw, however, this may
violate your own code of ethics and your ethical responsibilities under the
organization’s code of ethics. Given that you want to do something, it is
probably best to start by talking to employees in your organization whose job
it is to deal with ethical issues. If no such employees exist or are available, you
might start by using a decision model. This model incorporated the following
steps:
1.
2.
3.
4.
5.
6.
7.
Determine the Facts – What, Who, Where, How
Define the Ethical Issue
Identify Major Principles, Rule, Values
Specify the Alternatives.
Compare Values and Alternatives, See if Clear Decision
Assess the Consequences.
Make Your Decision.
IV. Cases
Case 1 (Financial vs. Managerial Accounting)
Requirement (a)
Other forward looking information desired in addition to the income statement
information are
1.
Disclosure of the components of financial performance, i.e., nature and
source of revenues, various activities, transactions, and other relevant
events affecting the company.
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Chapter 1 Management Accounting: An Overview
2.
Nature and function of the components of income and expenses
Requirement (b)
No. GAAP does not allow capitalization of employee training and advertising
costs even if management feels that they increase the value of the company’s
brand name. The reasons are uncertainty of the future benefits that may be
derived therefrom and difficulty and reliability of their measurement.
Requirement (c)
Detailed information that managers would likely request are analysis of the
significant increases in
1.
2.
3.
4.
5.
Sales
Cost of sales
Payroll
Stock and option based compensation
Advertising and promotion.
Requirement (d)
Nonmonetary measures:
1.
2.
3.
4.
5.
Change in number and profile of customers
Share in the market
Who, what and how many are the competitors
Product lines offered by the entity vs. Product lines of competitors
Sales promotion and advertising activities
Requirement (e)
1. Competitors
2. Employees
3. Prospective creditors
Case 2 (You get what you measure!)
Requirement (a)
Increase in sales to new customers to sales
Too much emphasis on this ratio may lead the sales manager to spend more
time developing business with new customers and disregard the needs of
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Management Accounting: An Overview Chapter 1
existing customers. It is therefore possible to lose the business of several key
accounts.
Requirement (b)
Decrease in cost of goods sold to sales
This performance measure could create the following problems:
1. Purchasing goods with poor quality at lower cost and selling them for
the same price.
2. Indiscriminately increasing selling price to widen the profit margin
without regard to competitor’s current prices.
3. If the entity is manufacturing its own goods, managers could try to
economize on costs, i.e., buying poorer quality of materials, employing
unskilled workers, etc. thereby causing deterioration of the quality of
the finished products.
In all of the above situations, customer patronage could eventually be
adversely affected.
Requirement (c)
Decrease in selling and administrative expense to sales
Cost-cutting is generally advisable for as long as the quality of goods and
services are not compromised. Likewise, certain cost-saving measures could
demotivate sales people and other employees and could lead to counterproductive activities.
Case 3 (The Roles of Managers and Management Accountants)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Managerial accounting, Financial accounting
Planning
Directing and motivating
Feedback
Decentralization
Line
Staff
Controller
Budgets
Performance report
Chief Financial Officer
Precision; Nonmonetary data
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Chapter 1 Management Accounting: An Overview
Case 4 (Ethics in Business)
If cashiers routinely short-changed customers whenever the opportunity
presented itself, most of us would be careful to count our change before leaving
the counter. Imagine what effect this would have on the line at your favorite
fast-food restaurant. How would you like to wait in line while each and every
customer laboriously counts out his or her change? Additionally, if you can’t
trust the cashiers to give honest change, can you trust the cooks to take the time
to follow health precautions such as washing their hands? If you can’t trust
anyone at the restaurant would you even want to eat out?
Generally, when we buy goods and services in the free market, we assume we
are buying from people who have a certain level of ethical standards. If we
could not trust people to maintain those standards, we would be reluctant to
buy. The net result of widespread dishonesty would be a shrunken economy
with a lower growth rate and fewer goods and services for sale at a lower overall
level of quality.
Case 5 (Ethics and the Manager)
Requirement 1
Failure to report the obsolete nature of the inventory would violate the
Standards of Ethical Conduct as follows:
Competence


Perform duties in accordance with relevant technical standards.
Prepare complete reports using reliable information.
By failing to write down the value of the obsolete inventory, Perez would not
be preparing a complete report using reliable information. In addition,
generally accepted accounting principles (GAAP) require the write-down of
obsolete inventory.
Integrity




Avoid conflicts of interest.
Refrain from activities that prejudice the ability to perform duties
ethically.
Refrain from subverting the legitimate goals of the organization.
Refrain from discrediting the profession.
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Management Accounting: An Overview Chapter 1
Members of the management team, of which Perez is a part, are responsible for
both operations and recording the results of operations. Since the team will
benefit from a bonus, increasing earnings by ignoring the obsolete inventory is
clearly a conflict of interest. Perez would also be concealing unfavorable
information and subverting the goals of the organization. Furthermore, such
behavior is a discredit to the profession.
Objectivity


Communicate information fairly and objectively.
Disclose all relevant information.
Hiding the obsolete inventory impairs the objectivity and relevance of financial
statements.
Requirement 2
As discussed above, the ethical course of action would be for Perez to insist on
writing down the obsolete inventory. This would not, however, be an easy thing
to do. Apart from adversely affecting her own compensation, the ethical action
may anger her colleagues and make her very unpopular. Taking the ethical
action would require considerable courage and self-assurance.
Case 6 (Preparing an Organization Chart)
Requirement 1
See the organization chart on page 17.
Requirement 2
Line positions would include the university president, academic vice-president,
the deans of the four colleges, and the dean of the law school. In addition, the
department heads (as well as the faculty) would be in line positions. The reason
is that their positions are directly related to the basic purpose of the university,
which is education. (Line positions are shaded on the organization chart.)
All other positions on the organization chart are staff positions. The reason is
that these positions are indirectly related to the educational process, and exist
only to provide service or support to the line positions.
Requirement 3
All positions would have need for accounting information of some type. For
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Chapter 1 Management Accounting: An Overview
example, the manager of central purchasing would need to know the level of
current inventories and budgeted allowances in various areas before doing any
purchasing; the vice president for admissions and records would need to know
the status of scholarship funds as students are admitted to the university; the
dean of the business college would need to know his/her budget allowances in
various areas, as well as information on cost per student credit hour; and so
forth.
Case 7 (Ethics in Business)
Requirement 1
No, Santos did not act in an ethical manner. In complying with the president’s
instructions to omit liabilities from the company’s financial statements he was
in direct violation of the IMA’s Standards of Ethical Conduct for Management
Accountants. He violated both the “Integrity” and “Objectivity” guidelines on
this code of ethical conduct. The fact that the president ordered the omission
of the liabilities is immaterial.
Requirement 2
No, Santos’ actions can’t be justified. In dealing with similar situations, the
Securities and Exchange Commission (SEC) has consistently ruled that “…
corporate officers…cannot escape culpability by asserting that they acted as
‘good soldiers’ and cannot rely upon the fact that the violative conduct may
have been condoned or ordered by their corporate superiors.” (Quoted from:
Gerald H. Lander, Michael T. Cronin, and Alan Reinstein, “In Defense of the
Management Accountant,” Management Accounting, May, 1990, p. 55) Thus,
Santos not only acted unethically, but he could be held legally liable if
insolvency occurs and litigation is brought against the company by creditors or
others. It is important that students understand this point early in the course,
since it is widely assumed that “good soldiers” are justified by the fact that they
are just following orders. In the case at hand, Santos should have resigned
rather than become a party to the fraudulent misrepresentation of the
company’s financial statements.
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Case 6
Requirement 1
President
Vice
President,
Auxiliary
Services
Manager,
Central
Purchasing
Vice
Vice
President,
Admissions &
Records
Manager,
University
Press
Dean, Business
(Departments)
Academic Vice
President
Manager,
University
Bookstore
Dean,
Humanities
(Departments)
President,
Financial
Services
(Controller)
Manager,
Computer
Services
Dean,
Engineering &
Quantitative
Dean,
Fine Arts
(Departments)
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Vice
President,
Physical
Plant
(Departments)
Manager,
Accounting
& Finance
Manager,
Grounds &
Custodial
Services
Dean,
Law School
Manager, Plant
&
Maintenance
MANAGEMENT ACCOUNTING - Solutions Manual
Case 8 (Ethics in Business)
Requirement 1
Andres Romero has an ethical responsibility to take some action in the matter
of PhilChem, Inc. and the dumping of toxic wastes. The Standards of Ethical
Conduct for Management Accountants specifies that management accountants
should not condone the commission of acts by their organization that violate
the standards of ethical conduct. The specific standards that apply are as
follows.
•
•
•
•
Competence. Management accountants have a responsibility to
perform their professional duties in accordance with relevant laws and
regulations.
Confidentiality. Management accountants must refrain from disclosing
confidential information unless legally obligated to do so. However,
Andres Romero may have a legal responsibility to take some action.
Integrity. Management accountants have a responsibility to:
- refrain from either actively or passively subverting the attainment
of the organization’s legitimate and ethical objectives.
- communicate favorable as well as unfavorable information and
professional judgments or opinions.
Objectivity. Management accountants must fully disclose all relevant
information that could reasonably be expected to influence an intended
user’s understanding of the reports, comments, and recommendations.
Requirement 2
The Standards of Ethical Conduct for Management Accountants indicates that
the first alternative being considered by Andres Romero, seeking the advice of
his boss, is appropriate. To resolve an ethical conflict, the first step is to discuss
the problem with the immediate superior, unless it appears that this individual
is involved in the conflict. In this case, it does not appear that Romero’s boss is
involved.
Communication of confidential information to anyone outside the company is
inappropriate unless there is a legal obligation to do so, in which case Romero
should contact the proper authorities.
Contacting a member of the Board of Directors would be an inappropriate
action at this time. Romero should report the conflict to successively higher
levels within the organization and turn only to the Board of Directors if the
problem is not resolved at lower levels.
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Cost Concepts and Classifications Chapter 8
Requirement 3
Andres Romero should follow the established policies of the
organization bearing on the resolution of such conflict. If these
policies do not resolve the ethical conflict, Romero should report
the problem to successively higher levels of management up to the
Board of Directors until it is satisfactorily resolved. There is no
requirement for Romero to inform his immediate superior of this
action because the superior is involved in the conflict. If the
conflict is not resolved after exhausting all courses of internal
review, Romero may have no other recourse than to resign from
the organization and submit an informative memorandum to an
appropriate member of the organization.
(CMA Unofficial Solution, adapted)
V. Multiple Choice Questions
1. D
2. D
3. D
4. B
5. D
6. A
7. B
8. D
9. D
10. A
11. D
12. D
13. D
14. A
15. A
16. A
17. D
18. A
19. D
20. D
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
B
B
A
A
B
C
B
D
B
C
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
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D
C
D
B
D
B
C
B
A
A
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
A
C
D
B
C
B
A
B
C
D
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
B
B
A
C
D
C
C
C
A
B