chapter01 e7

8/8/2019 Chapter01 E7

1/23

CHAPTER 1

The Changing Role of Managerial Accounting ina Dynamic Business Environment

ANSWERS TO REVIEW QUESTIONS

1-1 The explosion in e-commerce will affect managerialaccounting in significant ways. One effect will be adrastic reduction in paper work. Millions of transactionsbetween businesses will be conducted electronically withno hard-copy documentation. Along with this method ofcommunicating for business transactions comes the very

significant issue of information security. Businesses needto find ways to protect confidential information in theirown computers, while at the same time sharing theinformation necessary to complete transactions. Anothereffect of e-commerce is the dramatically increased speedwith which business transactions can be conducted. Inaddition to these business-to-business transactionalissues, there will be dramatic changes in the waymanagerial accounting procedures are carried out, oneexample being e-budgeting, which is the enterprise-wide

and electronic completion of a companys budgetingprocess.

1.2 Plausible goals for the organizations listed are asfollows:

(a) Amazon.com: (1) To achieve and maintainprofitability, and (2) to grow on-line sales of books,music, and other goods.

(b) American Red Cross: (1) To raise funds from thegeneral public sufficient to have resources available tomeet any disaster that may occur, and (2) to provideassistance to people who are victims of a disasteranywhere in the country on short notice.

(c) General Motors: (1) To earn income sufficient toprovide a good return on the investment of the

McGraw-Hill/Irwin 2008 The McGraw-Hill Companies,Inc.

Managerial Accounting, 7/e 1-1

8/8/2019 Chapter01 E7

2/23

company's stockholders, and (2) to provide the highest-quality product possible.

(d) Wal-Mart: (1) To penetrate the retail market invirtually every location in the United States, and (2) to

grow over time in terms of number of retail locations,total assets, and earnings.

(e) City of Seattle: (1) To maintain an urban environmentas free of pollution as possible, and (2) to providepublic safety, police, and fire protection to the city'scitizens.

(f)Hertz: (1) To be a recognizable household nameassociated with rental car services, and (2) to providereliable and economical transportation services to thecompany's customers.

1-3 The four basic management activities are listed anddefined as follows:

(a) Decision making: Choosing among the availablealternatives.

(b) Planning: Developing a detailed financial andoperational description of anticipated operations.

(c) Directing operations: Running the organization on aday-to-day basis.

(d) Controlling: Ensuring that the organization operatesin the intended manner and achieves its goals.

1-4 Examples of the four primary management activities inthe context of a national fast-food chain are as follows:

(a) Decision making: Choosing among several possible

locations for a new fast-food outlet.

(b) Planning: Developing a cost budget for the food andpaper products to be used during the next quarter in aparticular fast-food restaurant.


1-2 Solutions Manual

8/8/2019 Chapter01 E7

3/23

(c) Directing operations: Developing detailed schedulesfor personnel for the next month to provide counterservice in a particular fast-food restaurant.

(d) Controlling: Comparing the actual cost of paper

products used during a particular month in a restaurantwith the anticipated cost of paper products for thatsame time period.

1-5 Examples of the objectives of managerial-accountingactivity in an airline company are described below:

(a) Providing information for decision making andplanning, and proactively participating as part of themanagement team in the decision making and planningprocesses: Managerial accountants provide estimatesof the cost of adding a flight on the route from New

York to Miami and actively participate in making thedecision about adding the flight.

(b) Assisting managers in directing and controllingoperations: Managerial accountants provideinformation about the actual costs of flying theroutes in the airline's northeastern geographicalsector during a particular month.

(c) Motivating managers and other employees towardthe organization's goals: A budget is provided for thecost of handling baggage at O'Hare Airport in Chicago.The budget is given to the airline's baggage handlingmanager, who is expected to strive to achieve thebudget.

(d) Measuring the performance of activities, subunits,managers, and other employees within theorganization: Quarterly income statements are

prepared for each of the airline's major geographicalsectors, and these income reports are used to evaluatethe earnings performance of each sector during therelevant time period.

(e) Assessing the organization's competitive positionand working with other managers to ensure theorganization's long-run competitiveness in its industry:



8/8/2019 Chapter01 E7

4/23

Information about industry-wide performancestandards is obtained and compared with the airline'sown performance. For example, how does the airlinestack up against its competitors in ticket prices, on-time departures, mishandled baggage, customer

complaints, and safety?

1-6 Four important differences between managerialaccounting and financial accounting are listed below:

(a) Managerial-accounting information is provided tomanagers within the organization, whereas financial-accounting information is provided to interestedparties outside the organization.

(b) Managerial-accounting reports are not required andare unregulated, whereas financial-accounting reportsare required and must conform to generally acceptedaccounting principles.

(c) The primary source of data for managerial-accounting information is the organization's basicaccounting system, plus various other sources. Thesesources include such data as rates of defectiveproducts manufactured, physical quantities of materialand labor used in production, occupancy rates in hotels

and hospitals, and average takeoff delays in airlines.The primary source of data for financial-accountinginformation is almost exclusively the organization'sbasic accounting system, which accumulates financialinformation.

(d) Managerial-accounting reports often focus onsubunits within the organization, such as departments,divisions, geographical regions, or product lines. Thesereports are based on a combination of historical data,

estimates, and projections of future events. Financial-accounting reports focus on the enterprise in itsentirety. These reports are based almost exclusively onhistorical transaction data.

1-7 The cost-accounting system is one part of anorganization's overall accounting system, the purpose ofwhich is to accumulate cost information. Cost information



8/8/2019 Chapter01 E7

5/23

accumulated by the cost-accounting system is used forboth managerial-accounting and financial-accountingpurposes. Managerial accounting is the broad task ofpreparing information for making decisions aboutplanning, directing, and controlling an organization's

operations.

1-8 Managers in line positions are directly involved in theprovision of services or the production of goods in anorganization. Managers in staff positions support theorganization's overall objectives, but they are indirectlyinvolved in operations. Examples of line positions in auniversity are the president, who is the university's chiefexecutive officer, and the provost, who is the university'schief academic officer. Examples of staff positions in a

university are the university counsel, who is theuniversity's chief lawyer, and the director of maintenance,who is charged with maintaining the university's facilities.

1-9 An organization's controller (or comptroller) is the chiefmanagerial and financial accountant. The controllerusually is responsible for supervising the personnel in theaccounting department and for preparing the informationand reports used in both managerial and financialaccounting. The treasurer typically is responsible for

raising capital and safeguarding the organization'sassets. Among the treasurer's responsibilities is themanagement of an organization's investments, creditpolicy, and insurance coverage.

1.10 A college or university could use the balancedscorecard as a management tool just like any otherbusiness. There is one important difference, however,between a profit-seeking enterprise and a nonprofitorganization like a university. A profit-seekingenterprise generally has long-term profitability as its

foremost goal, and the other points on the balancedscorecard are oriented toward helping the enterpriseachieve that goal of profitability. Universities, on theother hand, usually have multiple goals, which aresometimes in competition with each other. Forexample, a land-grant university may have teaching,research and public service as its three primary goals.



8/8/2019 Chapter01 E7

6/23

Nevertheless, it is possible for a college or university todevelop performance measures for each of the areas inthe balanced scorecard. Some examples follow:

Financial: Amount of the unrestricted endowment

supporting the universitys activities, and theextent to which the university operates with abalanced budget.

Internal operations: Tenure rates for faculty, andthe extent to which the universitys facilities areup to date and well maintained.

Customer: Class evaluations by students, and jobplacement rates for students.

Innovation and learning: Dollars of researchgrants obtained, and publication of journal articlesand books by faculty.

1-11 This quote from a managerial accountant at Caterpillarsuggests that managerial accountants are physicallylocatedthroughout an organization where the day-to-daywork is being done, rather than being sequestered off bythemselves as was the tendency some years ago.Managerial accountants are increasingly deployedas keymembers of management teams.

1-12 Managerial-accounting information often brings to theattention of managers important issues that need theirmanagerial experience and skills. In many cases,managerial-accounting information will not answer thequestion or solve the problem, but rather makemanagement aware that the issue or problem exists. Inthis sense, managerial accounting sometimes is said toserve an attention-directing role.

1-13 Both manufacturing and service industry firms areengaged in production. The primary difference betweenthese types of companies is that manufacturing firmsproduce inventoriable goods, whereas the servicesproduced by service industry firms are not inventoriable.



8/8/2019 Chapter01 E7

7/23

Services, such as air transportation or hotel service, areconsumed as they are produced.

1-14 (a) In a just-in-time (or JIT) production environment, rawmaterials and components are purchased or produced

just in time to be used at each stage in the productionprocess.

(b) A computer-integrated manufacturing (CIM) systemis the most advanced form of automated manufacturingsystem, with computers controlling the entireproduction process.

(c) A cost management system is a managementplanning and control system with the followingobjectives: to measure the cost of the resourcesconsumed in performing the organization's significantactivities; to identify and eliminate non-value-addedcosts; to determine the efficiency and effectiveness ofall major activities; and to identify and evaluate newactivities that can improve the future performance ofthe organization.

(d) Empowerment is the concept of encouraging andauthorizing workers to take their own initiative toimprove operations, reduce costs, and improve product

quality and customer service.

(e) Total quality management (or TQM) is the broad setof management and control processes designed tofocus the entire organization and all of its employeeson providing products or services that do the bestpossible job of satisfying the customer.

1-15 E-commerce is defined as buying and selling over digitalmedia. E-business is a broader concept, which not only

encompasses e-commerce, but also includes theelectronic business processes that form the engine ofmodern business.

1-16 CMA stands for Certified Management Accountant. Thistitle is the professional certification for managerialaccountants administered by the Institute of ManagementAccountants. The requirements for becoming a CMA



8/8/2019 Chapter01 E7

8/23

include fulfilling specified educational requirements andsuccessfully passing the CMA examination.

1-17 (a) Competence: Ongoing development of knowledgeand skills, performance of duties in accordance with

relevant laws, adherence to regulations and technicalstandards, and preparation of complete and clearreports for management.

(b) Confidentiality: Refraining from disclosing, using, orappearing to use confidential information acquired inthe course of the managerial accountant's work.

(c) Integrity: Avoiding conflicts of interest in activitiesthat would prejudice the managerial accountant'sability to carry out his or her duties ethically, andrefraining from other activities that would discredit theprofession.

(d) Credibility: Communication of information fairly,objectively, and fully.

1-18 Non-value-added costs are the costs of activities that canbe eliminated with no deterioration of product quality,performance, or perceived value.

1-19 Managers rely on many information systems in addition tomanagerial-accounting information. Examples of otherinformation systems include economic analysis andforecasting, marketing research, legal research andanalysis, and technical information provided by engineersand production specialists.

1-20 Managerial accounting is just as important in nonprofitorganizations as it is in profit-seeking enterprises.Managers in nonprofit organizations also needmanagerial-accounting information for decision making,planning, directing, and controlling operations.

1-21 Becoming the low-cost producer in an industry requires aclear understanding by management of the costs incurredin its production process. Reports and analysis of thesecosts are a primary function of managerial accounting.



8/8/2019 Chapter01 E7

9/23

1-22 A professional is a person engaged in a specifiedoccupation that requires advanced training, skill, and awell-defined body of knowledge. According to thisdefinition from Webster, a managerial accountant is aprofessional.

1-23 Some activities in the value chain of a manufacturer ofcotton shirts are as follows:

(a) Growing and harvesting cotton

(b) Transporting raw materials

(c) Designing shirts

(d) Weaving cotton material

(e) Manufacturing shirts

(f ) Transporting shirts to retailers

(g) Advertising cotton shirts

Some activities in the value chain of an airline are asfollows:

(a) Making reservations and ticketing

(b) Designing the route network

(c) Scheduling

(d) Purchasing aircraft

(e) Maintaining aircraft

(f)Running airport operations, including handling baggage(g) Serving food and beverages in flight

(h) Flying passengers and cargo

1-24 Strategic cost management is the process ofunderstanding and managing, to the organization's



8/8/2019 Chapter01 E7

10/23

advantage, the cost relationships among the activities inan organization's value chain.



8/8/2019 Chapter01 E7

11/23

SOLUTIONS TO EXERCISES

EXERCISE 1-25 (20 MINUTES)

1. Estimates of any operating costs associated with the

proposed luxury cars would be relevant. For example,estimates of the cost of gasoline, routine maintenance,and insurance on the new vehicles would be useful.

2. Data about the cost of maintaining the machine weekly orbiweekly would be relevant. In addition, theproduction manager should consider information aboutthe likely rates of defective products under eachmaintenance alternative.

3. Estimates of the cost of lost merchandise due toshoplifting and the cost of employing securitypersonnel would be relevant to this decision.

4. Estimates of building costs for the library addition as wellas estimates of benefits to the population from havingthe addition would be useful. Estimating the benefitsmay require value judgments about the benefits to thepublic from having additional library space and morebooks.


1. Developing a bonus reward system for managerialpersonnel is an example of motivating managers andother employees toward the organization's goals. To beeffective, the bonus system must provide incentivesfor managers to work toward achieving those goals.

2. Comparing actual and planned costs is consistent with

two objectives of managerial accounting activity: (1)assisting managers in controlling operations, and (2)measuring the performance of activities, subunits,managers, and other employees within theorganization.

3. Determining manufacturing costs is related to all of theobjectives of managerial accounting. It is especially



8/8/2019 Chapter01 E7

12/23

closely related to the objective of providinginformation for decision making and planning.

4. Measuring inventory costs is most closely associated withthe first two objectives of managerial accounting

activity: (1) providing information for decision makingand planning, and (2) assisting managers in directingand controlling operational activities. Since inventorycosts are used in external financial reports, they arealso relevant to measuring the performance ofmanagers and subunits within the organization.

EXERCISE 1-26 (CONTINUED)

5. Estimating costs is particularly relevant to the objectiveof providing information for decision making and

planning.

6. Measuring operating costs is relevant to all of theobjectives of managerial accounting activity.

7. Comparing operating statistics such as those mentionedfor a hotel is particularly relevant to the followingobjective of managerial accounting: Assessing theorganization's competitive position and working withother managers to ensure the organization's long-runcompetitiveness in its industry.


Answers will vary widely for this exercise, depending onthe company chosen by each student. Companiesfinancial goals often include profitability, earnings pershare, growth in the stock price, sales growth, and soforth. Managerial accounting can make an importantcontribution to all of these goals.


Answers will vary widely for this exercise, depending onthe company chosen by each student (or group ofstudents).



8/8/2019 Chapter01 E7

13/23



8/8/2019 Chapter01 E7

14/23

SOLUTIONS TO PROBLEMS

PROBLEM 1-29 (25 MINUTES)

1. Managerial accounting can be of significant benefit when

it comes to solving the companys problems. Managerialaccounting is defined as the process of identifying,measuring, analyzing, interpreting, and communicatinginformation in pursuit of an organizations goals. Severalof the problems lie in this area and may be attributed to alack of formal planning, controlling, directing, anddecision-making expertise.

For example, bulging inventories and the fact thatgrowth has occurred in spite of what weve done mayindicate the absence of a formal planning systemonethat involves developing a detailed financial andoperational description of anticipated activities.Dangerously low cash balances and the need for short-term loans may be eliminated by the use of a cashbudget, which depicts cash inflows and outflows over aperiod of time. The addition of ski equipment may or maynot have been the proper decision. Did Nelson correctlyidentify all possible alternatives and then make theproper selection?

The canoe-building activities and white-water raftingtrips may be losing money. Are costs skyrocketinghopelessly out of control? It is difficult to tell because theincome statement does not provide adequate informationit is a summary of past transactions for the entirebusiness. A performance report that identifies thecompanys major areas of activity would be of assistance,especially if the report measured budgeted vs. actualcosts and highlighted (directed attention toward)significant deviations for management attention. If such

a report were prepared, managers could better directoperational activities and ensure that the companyachieves its goals (i.e., the control function).

2. Yes, a cross-functional team would be useful in thissituation. Several of the companys problems affectmultiple functional areas within the firm. For example,



8/8/2019 Chapter01 E7

15/23

bulging inventories, which impact profitability and cashbalances, may be the result of poor ordering practicesand/or ineffective marketing programs. Issues related tothe operation of a seasonal business may be overcomewith the selection of different off-season product lines

and aggressive marketing campaigns. These problems,coupled with the fact that a number of the key executivesmanage in silos and lack the big-picture outlook forthe firm, seem to indicate the desirability of teams thathave different employee backgrounds and interests (suchas marketing, operations, and finance) represented.

3. Nelsons business is operating in a sparsely populatedstate and suffers from the ability to draw from moreheavily populated areas such as those in Florida,

California, Texas, and New York. In addition, the firm isgetting hammered by mail-

PROBLEM 1-29 (CONTINUED)

order businesses and businesses that operate via toll-freetelephone numbers. These issues, combined withNelsons Internet background, seem to make his firm alikely candidate for e-commerce.

Consumer-to-business channels (sometimes called c-

to-b) allow consumers to order goods on line frombusinesses. In contrast, businesses order goods fromother firms via business-to-business (b-to-b) channels.Consumer-to-business channels would be a natural indealing with the firms population and competitiveproblems. However, keeping in mind that there are somedifficulties related to suppliers (e.g., quality, reliability,and prices), b-to-b channels may be of assistance as well.


1. The balanced scorecard is a business model that helps toassess a firms competitive position and ensures that thefirm is progressing toward long-term survival. Althoughbalanced scorecards differ from one firm to the next,most have a combination of financial measures, customer-satisfaction measures, internal operating measures, andmeasures of innovation and learning.



8/8/2019 Chapter01 E7

16/23

2. Functional areas for the airline include marketing,finance, operations (e.g., maintenance, reservations,customer service, and scheduling), human resources,purchasing, accounting, planning, and informationsystems/technology.

3. Financial measures:Net income Operatingexpenses per seat mileEarnings per share Cost per mealservedPassenger revenue per seat mile Revenuegrowth

Customer-satisfaction measures:

Load factors Number of bagslost

Number of passenger complaints Market shareAverage wait time when calling Response

time for resolvingreservations center customer

problems

Internal operating measures:Percentage of on-time arrivals Number of

cities/new cities servedPercentage of on-time departures Number of

aircraft in fleet Average trip length (inmiles) Average age of aircraft in fleet

Percentage of tickets sold through Aircraftturnaround time between travel agents,reservation flights

agents, and the InternetPROBLEM 1-30 (CONTINUED)

Innovation/learning measures:Enhancements to product line Employee

turnover(new class of service) Employee

satisfaction scoresNew unique features of frequent-flier Employee

training programsclub



8/8/2019 Chapter01 E7

17/23

4. Yes. By focusing on only one factor, other importantfacets of the business are ignored, which could lead tolong-run problems. For example, paying too muchattention to load factors may result in a decrease in

profitability (e.g., the sale of too many inexpensiveseats). A significant focus on profitability could result inthe airline providing marginal service to its customers(poor meals; long wait times when calling reservationscenters; a large number of lost bags by a small, poorly-trained crew, and so forth).


1. Allen's considerations are determined largely by her

position as an accountant, with responsibilities toAccuSound Corporation, others in the company, andherself. Allen's job involves collecting, analyzing, andreporting operating information. Although not responsiblefor product quality, Allen should exercise initiative andgood judgment in providing management with informationhaving potentially adverse economic impact.

Allen should determine whether the controller'srequest violates her professional or personal standards or

the company's code of ethics, should the company havesuch a code. As Allen decides how to proceed, she shouldprotect proprietary information and should not violate thechain of command by discussing this matter with thecontroller's superiors.

2. a. The controller has reporting responsibilities and shouldprotect the overall company interests by encouragingfurther study of the problem by those in his or herdepartment, by informing superiors in this matter, and

by working with others in the company to findsolutions.

b. The quality control engineer has responsibilities forproduct quality and should protect overall companyinterests by continuing to study the quality of reworkedrejects, by informing the plant manager and his staff in



8/8/2019 Chapter01 E7

18/23

this matter, and by working with others in the companyto find solutions.



8/8/2019 Chapter01 E7

19/23


c. The plant manager and his or her staff haveresponsibilities for product quality and cost and shouldprotect overall company interests by exercising thestewardship expected of them. Plant managementshould be sure that products meet quality standards.Absentee owners need information from management,and the plant management staff have a responsibilityto inform the board of directors elected by the ownersof any problems that could affect the well-being of thefirm.

3. Allen needs to protect the interests of the company,others in the company, and herself. Allen is vulnerable if

she conceals the problem and it eventually surfaces. Allenmust take some action to reduce her vulnerability. Onepossible action would be to obey the controller andprepare the advance material for the board withoutmentioning or highlighting the probable failure ofreworks. Because this approach differs from the long-standing practice of highlighting information withpotentially adverse economic impact, Allen should write areport to the controller detailing the probable failure ofreworks, the analysis made by her and the quality control

engineer, and the controller's instructions in this matter.


1. Line activities are primary to the purpose of theorganization. They are the activities that create anddistribute the goods and services of the organization. Linereporting refers to the reporting relationship betweendifferent hierarchical management levels in line activities(e.g., the reporting relationship between the generalsupervisor and the plant manager).

Staff activities are services provided by departmentsin the organization in support of its line activities. Therole of the division controller in the division is an exampleof a staff activity. The reporting relationship between the



8/8/2019 Chapter01 E7

20/23

division controller and the division manager is an exampleof a staff reporting relationship.

2. a. The division controller is responsible to both thecorporate controller and the division manager. The

corporate controller assigns the division controller tothe division and has final responsibility for promotionand salary. Thus, the division controller is an employeeof the controller's department and reports to thecorporate controller. At the same time, the divisioncontroller serves as a staff resource to the divisionmanager. The division controller is required to file anindependent commentary on the division's financialresults, which could well differ from the divisionmanager's commentary.


The division manager evaluates the divisioncontroller's performance and makes salary andpromotion recommendations to the corporatecontroller.

b. The motivation of the division controller would beaffected by this dual reporting relationship. Thedivision controller is being evaluated by two peoplewhose responsibilities are not always congruent.What may be considered good performance by oneperson may be considered unsatisfactory by theother. Thus, the division controller will have difficultyknowing what factors influence his or her progress inthe company. The circumstances described in theproblem do not provide positive motivation for thedivision controller.



8/8/2019 Chapter01 E7

21/23

SOLUTION TO CASE

CASE 1-33 (40 minutes)

1. Andrea Nolans ethical responsibilities require that she

not tell her friend, Rob Borman, about Progressives cashflow problems. Nolan, as a management accountant,must comply with the following standards for ethicalconduct:

Confidentiality:

Keep information confidential except when disclosure isauthorized or legally required.

Inform all relevant parties regarding appropriate use ofconfidential information. Monitor subordinatesactivities to ensure compliance.

Refrain from using confidential information forunethical or illegal advantage.

Integrity:

Mitigate actual conflicts of interest. Regularlycommunicate with business associates to avoid

apparent conflicts of interest. Advise all parties of anypotential conflicts.

Refrain from engaging in any conduct that wouldprejudice carrying out duties ethically.

Abstain from engaging in or supporting any activitythat might discredit the profession.

2. Nolan has an ethical responsibility to inform Progressivethat Borman has decided to postpone the paper order. As

a management accountant, Nolan must comply with thefollowing standards of ethical conduct:

Confidentiality:

Keep information confidential except when disclosure isauthorized or legally required.



8/8/2019 Chapter01 E7

22/23

Inform all relevant parties regarding appropriate use ofconfidential information. Monitor subordinatesactivities to ensure compliance.

Refrain from using confidential information for

unethical or illegal advantage.



8/8/2019 Chapter01 E7

23/23

CASE 1-33 (CONTINUED)

Integrity:

Mitigate actual conflicts of interest. Regularly

communicate with business associates to avoidapparent conflicts of interest. Advise all parties of anypotential conflicts.

Refrain from engaging in any conduct that wouldprejudice carrying out duties ethically.

Abstain from engaging in or supporting any activitythat might discredit the profession.

3. Nolan should resolve this matter by discussing the

situation with her immediate superior. Nolan should tellher superior of her long-time friendship with Borman.However, she should make it clear that she has not andwill not disclose confidential company information toBorman or any other outside party except whenauthorized or legally obligated to do so. If a satisfactoryresolution to the problem is not achieved, Nolan shouldsubmit the matter to the next-higher managerial level.However, she should inform her immediate superior thatshe is going to take this step.

FOCUS ON ETHICS (See page 28 in the text.)

The focus-on-ethics inset for Chapter 1 is the IMA Statement ofEthical Professional Practice. Instructors can use this list ofethical standards to lead a class discussion. The discussioncan also range to consideration of how these standards wereviolated by managerial accountants involved in the various

accounting scandals uncovered over the past several years. Itis also useful to discuss the procedures that managerialaccountants can follow when they believe they know aboutethical lapses in their organization.

McGraw-Hill/Irwin 2008 The McGraw-Hill Companies,Inc

chapter01 e7

Documents