chapter 01 - answer

Download Chapter 01 - Answer

Post on 05-Apr-2018




2 download

Embed Size (px)


  • 7/31/2019 Chapter 01 - Answer


    MANAGEMENT ACCOUNTING - Solutions Manual



    I. Questions

    1. Use of the word need in the quoted passage is pejorative. It implies anunlimited level of demand for information. However, rational managersapply a cost-benefit criterion to information and will only wantaccounting information if its benefits exceed its costs. Accountinginformation provides benefits by improving decision making and

    controlling behavior in organizations. In most organizations, accountinginformation is very prevalent which implies that its benefits exceed itscosts. Hence, successful managers will find it in their self-interest tolearn how to use accounting information in these organizations.

    Clearly, this statement is incurred in those firms where accountinginformation has very limited usefulness (e.g., if the accountinginformation is often wrong or is not produced in a timely fashion). Inthese organizations, managers do not find the accounting information tohave benefits in excess of its costs, will not use it, do not need to knowhow 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, processesand prices, the historical costs are inadequate approximations of theopportunity costs of using resources.

    Historical costs may, however, be useful for control purposes, as theyprovide information about the activities of managers and can be usedas performance measures to evaluate managers.

    b. The purpose of accounting systems is to provide information forplanning purposes and control. Although historical costs are notgenerally appropriate for planning purposes, additional measures arecostly to make. An accounting system should include additionalmeasures if the benefits of improved decision making are greater

    than the costs of the additional information.3. Finance and economics textbooks traditionally state that the goal of a

    profit organization is to maximize shareholder wealth. Managers arefrequently presumed to act in the best interest of the shareholder,


  • 7/31/2019 Chapter 01 - Answer


    Chapter 1 Management Accounting: An Overview

    although recent finance literature recognizes that appropriate incentives

    are necessary to align manager interests with shareholder interests. Thegoal, however, are not very clear as to how this is achieved. Most financetextbooks focus on financing decisions and not on the use of assets anddealing with customers.

    Marketings goal of satisfying customers recognizes that customers arethe source of revenues for the organization, and therefore the meansthrough which shareholder value is increased. However, customersatisfaction is only valuable insofar as it creates shareholder wealth. Thefurther goal of marketing is to ensure that customer satisfaction ismaximized without compromising the organizations 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 drawrigid lines of separation between them.

    5. Yes. The controller has line authority over the personnel in his owndepartment but is a staff executive with respect to the other departments.

    6. Line authority is exerted downward over subordinates. Staff authority isthe authority to advise but not command others; it is exercised laterally orupward. Functional authority is the right to command action laterallyand downward with regard to a specific function or specialty.

    7. Cost accounting is the controllers primary means of implementing the 7-point concept of modern controllership. Cost accounting is intertwinedwith all seven duties to some extent, but its major focus is on the firstthree.

    8. Bettina Company



  • 7/31/2019 Chapter 01 - Answer


    Management Accounting: An Overview Chapter 1

    VP, Production VP, Finance VP, Sales

    Controller Treasurer










    System &EDP




    Budget &Standard

    Cost Analyst


    Cost Clerk PayrollClerk







    9. Management accountants contribute to strategic decisions by providinginformation about the sources of competitive advantage and by helpingmanagers identify and build a companys 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), andattention directing (helping managers properly focus their attention).

    11. Three guidelines that help management accountants increase their valueto managers are (a) employ a cost-benefit approach, (b) recognizebehavioral as well as technical considerations, and (c) identify differentcosts for different purposes.

    12. Management accounting is an integral part of the controllers function inan organization. In most organizations, the controller reports to the chieffinancial officer, who is a key member of the top management team.

    13. Management accountants have ethical responsibilities that are related to

    competence, confidentiality, integrity, and objectivity.


  • 7/31/2019 Chapter 01 - Answer


    Chapter 1 Management Accounting: An Overview

    14. By reporting and interpreting relevant data, the controller exerts a force

    or influence that impels management toward making better-informeddecisions.

    The controller of one company described the job as a business advisortohelp the team develop strategy and focus the team all the waythrough recommendations and implementation.

    15.Financial Accounting

    Audience: External: shareholders, creditors, taxauthorities

    Purpose: Report on past performance to external

    parties; basis of contracts with owners andlenders

    Timeliness: Delayed; historical

    Restrictions: Regulated; rules driven by generally acceptedaccounting principles and governmentauthorities

    Type of Information: Financial measurements only

    Nature of Information: Objective, auditable, reliable, consistent,precise

    Scope: Highly aggregate; report on entireorganization

    Managerial Accounting

    Audience: Internal: Workers, managers, executives

    Purpose: Inform internal decisions made by employeesand managers; feedback and control onoperating performance

    Timeliness: Current, future oriented

    Restrictions: No regulations; systems and informationdetermined by management to meet strategicand operational needs

    Type of Information: Financial, plus operational and physicalmeasurements on processes, technologies,suppliers customers, and competitors

    Nature of Information: More subjective and judgmental; valid,relevant, accurate


  • 7/31/2019 Chapter 01 - Answer


    Management Accounting: An Overview Chapter 1

    Scope: Disaggregate; inform local decisions and


    16. The competitive environment has changed dramatically. Companiesencountered severe competition from overseas companies that offeredhigh-quality products at low prices. Activity-based costing systems areintroduced in many manufacturing and service organizations to overcomethe inability of traditional cost systems to accurately assign overheadcosts. Activity-based management is a viable approach for managers tomake decisions based on ABC information. There has been improvementof operational control systems such that information is more current andprovided more frequently. The nature of work has changed fromcontrolling to informing. Firms are concerned about continuous

    improvement, employee empowerment and total quality. Nonfinancialinformation has become a critical feedback measure. Finally, the focusof many firms is on measuring and managing activities.

    17. As measurements are made on operations and, especially, on individualsand groups, the behavior of the individuals and groups are affected.People will react to the measurements being made by focusing on thevariables or behavior being measured. In addition, if managers attemptto introduce or redesign cost and performance measurement systems,people familiar with the previous system will resist. Managementaccountants must understand and anticipate the reactions of individualsto information and measurements. The design and introduction of newmeasurements and systems must be accompanied with an analysis of the

    likely reactions to the innovations.

    II. Exercises

    Exercise 1

    a. (1) Problem solvingb. (3) Attention-directingc. (1) Problem solvingd. (2) Scorekeeping

    Exercise 2

    a. (4) Marketing


  • 7/31/2019 Chapter 01 - Answer


    Chapter 1 Management Accounting: An Overview

    b. (3) Production

    c. (6) Customer serviced. (5) Distribution

    Exercise 3

    a. (4) Marketingb. (3) Productionc. (5) Distributiond. (4) Marketinge. (5) Distributionf. (3) Productiong. (1) Research and developmenth. (2) Design

    III. Problems

    Problem 1 (Problem Solving, Scorekeeping, and Attention Directing)

    Because the accountants duties are often not sharply defined, some of theseanswers might be challenged: