M1
Management Accounting:
Its Environment and Future
Discussion Questions
NOTE TO INSTRUCTOR: The purpose of Discussion
Questions 1-1 through 1-4 is to encourage your students to
consider what is presented in Exhibit 1-1 as more than just a
"laundry list." Specific examples of the decision makers and the
types of decisions they make are not as important as the thought
process your students go through to answer the questions.
1-1. Your students’ answers to this question will likely include:
Stockholders (present and potential):
 Whether to purchase the company's stock.
 Whether to sell some or all of the stock owned in the
company.
Bankers and other lending institutions:
 Whether to lend money to the company.
 What interest rate to charge the company.
Bondholders (present and potential):
 Whether to buy the company's bonds.
 Whether to sell some or all of the company's bonds
already purchased.
Suppliers:
 Whether to sell products or services to the company.
 What credit terms should be extended to the company.
Customers:
 Whether to buy products or services from the company.
 Whether to accept the credit terms offered by the
company.
Chapter M1 – Management Accounting: Its Environment and Future
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Competitors:
 Whether to enter markets served by the company.
 Whether we need to reduce our administrative cost to
remain competitive with the company.
1-2. Three additional external parties and examples of decisions
they might make are:
Governmental bodies: Whether the company is in
compliance with applicable laws.
Labor Unions: Whether to negotiate wage increases with
the company.
Prospective employees: Whether to accept a position with
the company.
1-3. Your students’ answers to this question might include:
Marketing managers:
 Whether to hire a particular prospective sales
representative.
 What commission structure to adopt in paying sales
representatives.
Salespersons:
 Which customers to call on during a particular day.
 Which products to emphasize in a presentation to a
potential customer.
Production managers:
 Scheduling production runs on particular products.
 Whether and how to reward subordinates.
Production supervisors:
 Which job functions to assign individual subordinates.
 Whether to schedule overtime to complete a particular
production run.
Strategic planners:
 What products and markets the company should focus on.
 Whether to build a new production facility.
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Chapter M1 – Management Accounting: Its Environment and Future
Company president:
 Whether to revise the organizational structure of the
company.
 Whether to approve a recommendation from a
subordinate manager.
Engineers:
 Whether to continue working on a partially developed
product.
 Whether to refine the design of existing products.
1-4. Additional internal parties and examples of decisions they
might make are:
 Maintenance supervisor: Whether to contract with
outside vendors to perform grounds maintenance.
 Computer specialist: Whether to purchase a particular
software package.
 Credit manager: Whether to extend credit to a customer.
1-5. This will likely be a difficult question for your students to
answer because they probably think they would have to
know more about a sales manager's responsibilities before
they could respond. Actually, much of the information
needed is very intuitive. Encourage them to approach the
question logically. Once again, the actual answers to the
question are not as important as the process your students
go through to arrive at those answers. Some possible
responses are:
 The production cost of manufacturing the computers This will help in establishing selling prices and profit
margins.
 Inventory levels - This will help determine whether there
is too much or not enough product to support projected
sales.
 Other costs necessary that relate to the production
function - This may include maintenance and overhead
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such as electricity to help determine the overhead cost
associated with the products.
 Profits of the company’s individual divisions - This is
important if the company is diversified, such as Time
Warner, and operates various segments to know which
are profitable and which are not.
 Profits of individual products or product lines - This
may help managers determine if a product should be
discontinued.
There are various other responses your students might bring
out.
1-6. Given that the reports prepared for external parties are so
different from the reports prepared for internal parties, the
information is not able to meet the needs of both parties at
the same time. Financial reporting for external parties does
not provide the degree of detail which management needs to
make its decisions. In addition, management needs more
timely information in order to make projections and correct
excessive expenses or underpricing that may occur. Reports
generated for management generally break revenue into
costs by product, product line, division, or other segment of
the entity. If the same reports used for management
purposes were provided to external users, a number of
problems may result. The primary issue would be cost and
profit information that should not be provided to external
users, such as individual product costs and the profit on
individual products. Another problem is the lack of
understanding that external users may need to comprehend
many internal reports. Internal reports might include budget
information, which is a future focus, as opposed to the
information provided in external reports that focus on the
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Chapter M1 – Management Accounting: Its Environment and Future
past. Should external users get their hands on budget and
projected sales information, they may rely on it as if it were a
guarantee or the actual historical information of the
company.
1-7. If a company hires permanent employees instead of
temporary employees, a number of problems may arise.
Management will spend more time on training if employee
turnover is more frequent. There may be periods of inability
to attract temporary employees if the job market is very
good, since many may have accepted permanent positions.
Permanent employees are more likely to show loyalty to the
company, which is important because of the image the
company expects to project to its customers. Temporary
employees tend to work when they want to work, while
permanent workers are scheduled and generally show up to
work on a regular basis. Management also has more control
over the production process with permanent workers
because the workers are under the direct control of the
company and must respond to company managers and
supervisors. Temporary workers might not feel as obligated
to do exactly as management says or complete the work on
the schedule that managers want since they believe they
“work for themselves.”
1-8. The purpose of this question is to get your students to think
about the controls that employers have over their employees
today. Permanent employees are no longer independent
with respect to a company for which they work. They have
more rigid work schedules than temporary employees, and
generally cannot choose the time and place to work.
Permanent employees may not have the same liberty in
choosing vacation periods or job preferences.
1-9. The emergence of the factory makes it more difficult to
determine the cost of manufactured products because labor
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costs associated with some employees impact more than
one product. Often the labor cost for one employee is
partially administrative and partially production. Prior to the
concept of ‘factory,’ the amount paid to a subcontractor for
manufacturing of products included the entire cost—labor,
materials, and overhead. The company did not have to be
concerned with costs that needed to be allocated. Rather
than determine product cost based on a lump sum or per
piece cost paid to a subcontractor, the emergence of the
‘factory’ concept forced the need for cost accounting in order
to determine which portion of materials, labor, and various
overhead costs might be included as part of product costs.
1-10. Square feet of wood required for each tabletop
4
Cost per square foot
$ 2.00
Total material cost for each tabletop
$ 8.00
Time in hours required to complete one tabletop 3/4
Labor cost per hour
$10.00
Total labor cost for each tabletop
$ 7.50
Total cost for each table
$15.50
The product cost includes only the material and labor since
no information is provided for overhead. Overhead costs are
a crucial part of the cost of products that should also be
included, but your students will not necessarily realize this
until they cover this topic in the text. The point is to get your
students to think of a ‘cost per unit’ concept.
1-11. Other costs that should be considered in the calculation fall
into the category of manufacturing overhead. These costs
may include such items as: electricity and other utilities,
factory supplies, insurance, taxes, supervisors’ salaries,
factory maintenance expenses, factory workers’ benefits,
depreciation of factory equipment, and janitorial supplies and
workers. Your students may list various other costs that may
be associated with the cost of producing the table. The point
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Chapter M1 – Management Accounting: Its Environment and Future
of this question is to get your students to think about the
many additional costs of production.
1-12. The point of this question is to get your students to focus on
why so many companies exist today in diversified form.
Some of the reasons companies began to diversify in the
early years of the twentieth century resulted from the inability
to acquire raw materials from suppliers, an unreasonable
delay in acquiring them, or lack of control over the quality of
the materials needed for the manufacturing process.
Companies found that owning the source of raw materials
would make it much easier to acquire them and would let
them control the quality of the products.
1-13. The point of this question is to get your students to focus on
the real need for two sets of accounting information. A
company that has a single accounting system must convert
the information to a different format for the second party.
Accounting information designed to provide information to
external users relies primarily on GAAP. The level of detail in
GAAP reports is not adequate for management purposes.
The company must convert the information to a form that is
useful in making such management decisions as pricing,
cost reduction, or other product control issues.
Review the Facts
A.
Management accounting is the branch of accounting
designed to provide information to the firm’s internal
economic decision makers, or managers. Managerial
accounting is another term for management accounting
while cost accounting is a narrow application of management
accounting dealing specifically with procedures designed to
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determine how much a particular item usually one that is
manufactured costs the company.
B.
The purpose of management accounting is to provide
information to internal decision makers that will help
management to plan, evaluate, and control the organization.
C.
The primary difference between financial accounting and
management accounting is the user. Financial accounting
information is used by external decision makers and
management accounting information is used by internal
decision makers. Financial information must be prepared
according to GAAP guidelines and there is no similar
requirement for management accounting information.
Financial accounting deals with the company as a whole,
reports quarterly and annually, and is oriented to the past.
Management accounting deals with various parts of the
company, prepares information as needed, and is oriented to
the future.
D.
Management accounting information is prepared for use by
those working within the company, its users can question the
content, meaning, level of detail, and the validity of the
accounting information. Users can determine the format of
the information.
E.
The emergence of permanent employees, the Industrial
Revolution, the rise of scientific management, and
diversification are the four significant changes that occurred
between 1825 and 1925 that altered the nature of
management accounting.
F.
The IMA is the Institute of Management Accountants which
is a professional association of management accountants.
The IMA provides professional status to management
accountants.
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Chapter M1 – Management Accounting: Its Environment and Future
G.
A good decision is the proper decision made based on the
information available at the time. It is possible that because
of incomplete information a bad outcome may arise. A good
outcome is a positive result that arises from a good decision.
H.
An understanding of management accounting helps us to
become good consumers of accounting information.
Apply What You Have Learned
1-14.
1.
2.
3.
4.
a
b
a
b
5.
6.
7.
8.
a
a
a
b
9.
10.
b
a
Must conform to GAAP.
Tends to be quite detailed.
Generally limited to presenting historical information.
Need not conform to a formal set of rules and
standards.
Information prepared primarily for external users.
Tends to include only a limited amount of detail.
Information prepared on a quarterly or yearly basis.
Information prepared on a monthly, weekly, or daily
basis.
Information often includes future projections.
Information prepared for use by internal parties.
1-15.
Management accounting is just as important for not-for-profit
organizations as it is for profit oriented organizations. Aside from
the profit motivation, many aspects of for-profit and not-for-profit
firms are similar. For example, the operation of a hospital is
effected little by whether it is a for-profit or a not-for-profit
institution. Both for-profit and not-for-profit hospitals set goals to
provide high quality health care at a reasonable cost. Managers
must make sound, well informed decisions to achieve this goal
regardless of whether a profit motivation exists.
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1-15. (Continued)
Even though managers of not-for-profit firms are not striving
to increase income, they still make an array of important decisions
that are much the same as the decisions made by their for-profit
counterparts. Managers of not-for-profit firms need good
accounting information to help make these decisions.
Although profit is not the sole motive for a not-for-profit
organization, unless the firm breaks even each year, it will not
continue to exist. Therefore, the need to carefully manage income
and costs is as critical as it is for a for-profit firm. Not-for-profit
firms use “profits” each year to improve the organization or save
money for future investments or “rainy days.”
1-16.
Students are encouraged to think of information they would
want to help make decisions to enhance their store. Perhaps
these decisions would relate to allocating adequate store space to
the most popular movies, to determining the staff required to
support sales, or to determining by movie title whether the store
has too few or too many tapes on hand relative to rental demand.
Student answers will vary, but the following list provides
examples of desired information includes:
a. Actual monthly, weekly, and daily revenue and
expenses
b. Anticipated monthly, weekly, and daily revenue and
expenses.
c. A comparison of actual versus budgeted revenues and
expenses.
d. Frequency of rentals by title and movie classification.
e. Rental volume by day of week and time of day.
f.
Hours worked and wages paid by day of week and time
of day
g. Information about the costs of employee benefits,
training, and payroll taxes.
h. Inventory information about tapes that are for rent and
tapes and other products that are for sale.
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Future
Chapter M1 – Management Accounting: Its Environment and
1-17.
The renewed emphasis on developing management
accounting is due to the need for better accounting information
because of the tremendous increase in competition and major
changes in the way goods and services are produced and
distributed.
In the face of fierce global competition, managers must
make sound decisions for businesses to prosper and succeed.
Dated management accounting techniques fail to provide the level
of detail and accuracy needed to make appropriate decisions
required to survive in today's highly competitive business
environment.
Business and manufacturing environments have changed
dramatically over the past century. Management accounting
techniques must be updated and new ones developed to keep up
with the need for information that accurately depicts the reality of
these new environments.
1-18.
1. b
2. b
3. a
4. a
5. a
6. a
7. b
8. b
9. b
10. a
Sales supervisor
Salespersons
Wall Street analyst
Suppliers
Current shareholders
Potential shareholders
Personnel manager
Maintenance supervisor
Maintenance worker
Loan officer at a company's bank
Chapter M1 – Management Accounting: Its Environment and Future
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