Solution manual cost accounting 14e by carter ch01

Early results and the early findings of control activity can then be used in finalizing later parts of the same plan.. The most elegant example of the inseparability of planning and cont

CHAPTER 1

DISCUSSION QUESTIONS

1-1

Q1-1 Planning is the development of a consistent

set of actions, resources, and measurements

by which the achievement of objectives can

be assessed Planning takes into account the

interactions between the organization and its

environment in whatever is to be done.

Control is the process by which managers

assure that resources are obtained and used

in an efficient and effective manner to carry

out the plan and accomplish the

organiza-tion’s objectives Control implies that

perform-ance measurements are reviewed to

determine if corrective action is required.

Planning and control are interrelated.

Control is carried out within the established

planning framework and serves to evaluate

conformance to the plan so that

organiza-tional objectives are achieved.

Q1-2 Short-range plans usually deal with a period

of a quarter or a year, while long-range plans

usually cover three to five years Short-range

plans are detailed enough to permit

prepara-tion of a complete set of financial statements

as of a future date, while long-range plans

culminate in a very summarized set of

expected results or a few quantified

objec-tives, such as financial ratios.

Q1-3 Long-range plans contain quantitative results,

while strategic plans are the least quantifiable

of all plans Long-range plans usually extend

three to five years into the future, while

strate-gic plans may contemplate shorter or much

longer periods Long-range plans covering a

three-to-five-year period would be prepared

every three to five years, or might be

system-atically updated each year to maintain a

com-plete plan, while strategic plans are

formulated at irregular intervals by an

essen-tially unsystematic process.

Q1-4 Accountability is identical with responsibility

accounting Accountability deals with the

dis-charge of an individual’s responsibility to

achieve assigned objectives within the costs

and expenses allowed for the performance

and agreed to by the individual.

Q1-5 The controller does not control, but aids the control task of the managerial levels by issu-ing reports pointissu-ing out deviations from the predetermined course of action.

Q1-6 The cost department keeps detailed records

of materials, labor, factory overhead, and marketing and administrative expenses; ana-lyzes these costs; issues control reports; pre-pares cost studies for planning and decision making; and coordinates cost and budget data with other departments.

Q1-7 For product research and design, the manu-facturing departments need estimates of materials, labor, and machine process costs; for measuring and efficiency of scheduling, producing, and inspecting products, the departments need to know the costs incurred The personnel department supplies employ-ees’ wage rates The treasury department needs accounting, budgeting, and related reports in scheduling cash requirements The marketing department needs cost information

in setting prices The public relations depart-ment needs information on prices, wages, profits, and dividends in order to inform the public The legal department needs cost infor-mation for keeping many affairs of the com-pany in conformity with the law.

Q1-8 Modern techniques in communications give the controller and staff the means to transmit information in the form of results, analyses, and forecasts in a way never before possible Profit opportunities or control actions have been delayed or missed entirely because timely information that might have improved the cost and profit position of the company was poorly communicated.

Q1-9 The budget is an essential cost planning tool because it (a) supplies information and serves

as a standard of performance for cost control

by the supervisors responsible for cost; (b) pro-vides an easy method for anticipating profits at

an anticipated sales level; (c) helps in forecast-ing sales, costs, expenses, and profits for a period of one year or more in advance.

Q1-10 These standards will not necessarily be able

to prevent management fraud, but they do

give internal accountants some guidance on

how to proceed if they encounter a

question-able practice.

Q1-11 CASB standards: (a) enunciate a principle or

principles to be followed; (b) establish

prac-tices to be applied; (c) specify criteria to be employed in selecting from alternative princi-ples and practices in estimating, accumulat-ing, and reporting contract costs The standards are backed by the full force and effect of the law.

EXERCISES E1-1 The exercise requires two examples of the inseparability of planning and control.

Three are listed here, and the third one gives two illustrations:

The most obvious example of the inseparability of planning and control is found in the definition of control: management’s systematic effort to achieve objectives by comparing performance to plans and taking appropriate action to correct important differences The definition shows that the specific results of planning are an essential input to the control phenomenon; there cannot be any such thing as a control effort without reference to some set of plans.

A second example of the inseparability of planning and control results from the fact that they are simultaneous In practice, the implementation of the first steps of a plan, and any control action needed in those steps, are begun before all parts of planning are complete Early results and the early findings of control activity can then be used in finalizing later parts of the same plan An example

is that a single annual budget is usually not completely finalized before cus-tomer orders begin to be received for that year, and consideration of the number

of these actual customer orders may point to trends that need to be considered

in finalizing the budget Even actual financial results of the early weeks and months of the year can provide a basis for better establishing the budget for the later portion of the year.

The most elegant example of the inseparability of planning and control results from the fact that both planning and control are complex human activi-ties, and almost all complex human activities are planned activities and also controlled activities In other words, planning can be so complex that the plan-ning effort is itself controlled (and planned), and control can be so complex that control activities are themselves planned (and controlled) Two illustrations of this are provided as follows:

(1) A case in which planning is itself planned and controlled is when a compli-cated budget (plan) is to be prepared To facilitate the creation of the budget,

a detailed weekly schedule (another plan) is first agreed upon, showing which steps in the preparation of the budget are to be carried out during each week Because it is desired that the creation of the budget not be allowed to fall far behind schedule, the responsible manager will exercise control by making comparisons between (a) the actual progress made on the budget each week and (b) the schedule The manager will also take some corrective action if the difference between the schedule and the actual progress is considered important.

(2) A case in which control is itself planned is when a manager decides what kinds of control reports will be used to compare actual results with plans in each future period of business operations That decision, any efforts made

to acquire a supply of preprinted report forms to be filled in each period, and any changes in the design of the cost accounting system to capture and compile the needed information about actual results represent evidence that the future control activity is being planned.

(6) B—although the time frame involved in this kind of plan may be extremely long,

there is nothing strategic about this kind of plan or decision In fact, the plan and obligation to pay off the bonds when they come due is so routine that manage-ment would not consciously approach it as a decision.

E1-3

(1) Paragraph (b) comes closest to describing the kind of control used in managing

a business, although it is described in a nonbusiness setting There is a plan for-mulated in advance, there is a measure of actual results, there is a decision maker who compares actual results with plans, there is a selection of a correc-tive action to bring results closer in line with the plan, and there is a foreshad-owing of repeated periodic control activities (the remaining quizzes).

The fact that the measures of planning and actual performance are nonfinan-cial measures is not the governing consideration Much planned and actual information used in controlling a business is non-financial, including some cost accounting information such as the number of units produced, the percentage of units that were defective, and the percentage of available machine time that was utilized.

(2) Paragraph (a) is a perfect example of an engineering control, rather than the kind

of control managers use in business The simple device described, which is found in any home bathroom, is the kind of control device designed to monitor

a physical condition, and so it is analogous to a thermostat or any of a variety of devices called “industrial controls.” Of course, devices of this kind are used in manufacturing and other businesses, but they do not possess the essential attributes of control in the sense used in business and in cost accounting The device achieves a continuous monitoring of the results, rather than a periodic comparison of results with plans There is no human decision maker who selects

a corrective action to be taken A human decision maker is probably the salient attribute of control in managing a business that is missing in paragraph (a).

E1-3 (Concluded)

Paragraph (c) could be interpreted as an example of planning, but it lacks some essential ingredients of control (even though the word “control” is used in its last sentence) There is no periodic comparison of actual results with plans and no provision for modifying the treatment based on periodic results For example, the contract requires five treatments each year, even if no weeds are visible The actions taken are entirely preemptive.

Paragraph (d) refers to the concept of control that applies to police work and military science It consists of being able to physically determine each event that occurs in some location and being able to prevent certain events from occurring The potential use of coercive force, which is very clear in paragraph (d), is always present in achieving this kind of control In paragraph (d), there is no indi-cation that results were periodically compared with plans A rule that says

“Obtain the objective at any cost” is sometimes associated with these activities.

C1-1

(1) Yes, Williams has an ethical responsibility to take action.

The IMA’s Standards of Ethical Conduct states that management accountants

“shall not commit acts contrary to these standards nor shall they condone the commission of such acts by others within their organizations.”

(2) (The requirement does not ask which standards have been violated, but, rather,

which ones apply to Williams’ situation.)

Management accountants have a responsibility to:

Competence: Perform their professional duties in accordance with relevant laws, regulations, and technical standards (Dumping toxic wastes in a residen-tial landfill is generally a violation of law.)

Confidentiality: Refrain from disclosing confidential information acquired in the course of their work except when authorized, unless legally obligated to do

so (Williams may be legally obligated to take action and make certain disclo-sures.)

Integrity: Refrain from either actively or passively subverting the attainment

of the organization’s legitimate and ethical objectives (Williams’ avoidance of the issue would passively subvert attainment of ethical objectives.)

Communicate unfavorable as well as favorable information and professional judgments or opinions (Williams is obligated to report his unfavorable findings

to appropriate persons.)

Refrain from engaging in or supporting any activity that would discredit the profession (Williams’ silence would provide support to the dumping activity and, thus, could discredit the profession.)

Objectivity: Disclose fully all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, com-ments, and recommendations presented (Williams should disclose his findings

to the appropriate persons.)

(3) Alternative (a), to seek the advice of his immediate superior, is appropriate This

is the first step he is required to take, unless the superior is involved.

Alternative (b), communication of confidential information to persons outside the company, such as the local newspaper, is inappropriate unless there is a legal obligation to do so If required by law, Williams should contact the proper authorities.

Alternative (c), contacting a member of the board of directors, would be inap-propriate at this time Williams should report the problem to successively higher levels within the company and turn to the board of directors only if the problem

is not resolved at lower levels.

C1-1 (Concluded)

(4) Williams should follow the company’s established policies for resolving such

issues, if such policies exist If the issue is not resolved through existing poli-cies, he should report the problem to successively higher levels within the com-pany until it is resolved (Williams is not required to report this action to his superior if his superior appears to be involved in the conflict He is not to dis-close the matter to persons outside the organization, unless required by law.) During these steps, Williams may clarify relevant concepts by confidential dis-cussion with an objective advisor to obtain an understanding of possible courses of action If the conflict is not resolved after exhausting all these courses of action, Williams may have no other recourse than to resign and sub-mit an informative memorandum to an appropriate representative of the organi-zation Consultation with one’s personal attorney is also appropriate.

C1-2

(1) (The requirement does not ask which standards have been violated, but, rather,

which ones apply to the CFO’s behavior.)

Management accountants have a responsibility to:

Competence: Perform their professional duties in accordance with relevant laws, regulations, and technical standards (The CFO has asked Deerling to account for information in a way that is not in accordance with generally accepted accounting principles.)

Prepare complete and clear reports and recommendations after appropriate analyses of relevant and reliable information (The CFO’s restrictions on disclo-sure will result in incomplete reports.)

Confidentiality: Refrain from using or appearing to use confidential informa-tion acquired in the course of their work for unethical or illegal advantage, either personally or through third parties (The CFO is attempting to use confidential information to protect the job security and bonuses of top management.)

Integrity: Avoid actual or apparent conflicts of interest and advise all appro-priate parties of any potential conflict (The CFO has failed to avoid a conflict of interest and has not informed the stockholders of the conflict.)

Refuse any gift, favor, or hospitality that would influence or would appear to influence their actions (The CFO’s bonus appears to be an influence on his actions.)

Refrain from either actively or passively subverting the attainment of the organization’s legitimate and ethical objectives (The CFO has subverted the attainment of the organization’s legitimate objective, profit for stockholders, by pursuing, instead, the job security and bonuses of top management.)

Communicate unfavorable as well as favorable information and professional judgments or opinions (The CFO is attempting to restrict disclosure of informa-tion about the acquisiinforma-tion.)

C1-2 (Continued)

Refrain from engaging in or supporting any activity that would discredit the profession (The CFO’s actions could discredit the profession.)

Objectivity: Communicate information fairly and objectively (The CFO is attempting to unfairly control the information reported, resulting in a report that is not objective.)

Disclose fully all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, comments, and rec-ommendations presented (The CFO is attempting to restrict disclosure of rele-vant information.)

(2) (The requirement does not ask which standards have been violated, but, rather,

which ones apply to Deerling’s situation.)

Management accountants have a responsibility to:

Competence: Perform their professional duties in accordance with relevant laws, regulations, and technical standards (Deerling is being asked to violate generally accepted accounting principles.)

Prepare complete and clear reports and recommendations after appropriate analyses of relevant and reliable information (Deerling is being asked to prepare

an incomplete report.)

Confidentiality: Refrain from using or appearing to use confidential informa-tion acquired in the course of their work for unethical or illegal advantage either personally or through third parties (Deerling must not use the confidential infor-mation about the possible takeover to his own advantage or to that of the per-son(s) mounting the takeover attempt.)

Integrity: Refuse any gift, favor, or hospitality that would influence or would appear to influence their actions (The last sentence of the case suggests that Deerling is considered a member of the top management group, so he may be eligible for a bonus.)

Refrain from either actively or passively subverting the attainment of the organization’s legitimate and ethical objectives (Deerling is being asked to sub-vert the attainment of the organization’s legitimate objective, profit for stock-holders, by pursuing instead the job security and bonuses of top management.) Communicate unfavorable as well as favorable information and professional judgments or opinions (Deerling is being asked to restrict disclosure of infor-mation about the acquisition.)

Refrain from engaging in or supporting any activity that would discredit the profession (Deerling is being asked to take actions that could discredit the pro-fession.)

Objectivity: Communicate information fairly and objectively (Deerling is being asked to prepare a report that is not objective.)

Disclose fully all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, comments, and rec-ommendations presented (Deerling is being asked to restrict disclosure of rele-vant information.)

C1-2 (Concluded)

(3) If the company has established policies for dealing with such issues, Deerling

should first follow these policies If such policies do not exist, or if they are unsuccessful in resolving the problem, Deerling should present the problem to the chairman of the board Deerling’s immediate superior is involved, so he need not be informed of this action If the matter remains unresolved, Deerling should report to the audit committee, the board of directors, and finally the majority owners During these steps, Deerling may clarify relevant concepts by confiden-tial discussion with an objective advisor to obtain an understanding of possible courses of action If the conflict is not resolved after exhausting all these courses of action, Deerling may have no other recourse than to resign and sub-mit an informative memorandum to an appropriate representative of the organi-zation Consultation with one’s personal attorney is also appropriate.

(4) The primary responsibility the company must fulfill before taking defensive

actions is its fiduciary responsibility to stockholders Other responsibilities include the effects that the takeover and defensive actions would have on cred-itors, bondholders, employees, customers, and the community The company also has a responsibility to inform its external auditors and legal counsel to avoid putting them in a compromising position.

C1-3

(1) (The requirement does not ask which standards have been violated, but, rather,

which ones apply to Dixon’s behavior.)

Management accountants have a responsibility to:

Competence: Maintain an appropriate level of professional competence by ongoing development of their knowledge and skills (By systematically rejecting all minority applicants, Dixon is jeopardizing the level of competence among the staff.)

Perform their professional duties in accordance with relevant laws, regulations, and technical standards (Equal opportunity in employment is required by law.) Integrity: Avoid actual or apparent conflicts of interest and advise all appro-priate parties of any potential conflict (Dixon’s prejudice is in conflict with the company’s legal obligation to provide equal opportunity employment, and with the company’s need for the most competent staff regardless of race.)

Refrain from either actively or passively subverting the attainment of the organization’s legitimate and ethical objectives (The company’s objective of equal opportunity employment is being subverted by Dixon’s prejudice.)

C1-3 (Concluded)

Refrain from engaging in or supporting any activity that would discredit the profession (Such persistent, systematic discrimination in hiring could discredit the profession.)

(2) (The requirement does not ask which standards have been violated, but rather,

which ones apply to Foxworth’s situation.) Because management accountants may not condone the commission of unethical acts by others within their organ-izations, all of the responsibilities listed in the solution to requirement (1) also apply to Foxworth’s situation.

In addition, the following apply:

Management accountants have a responsibility to:

Confidentiality: Refrain from disclosing confidential information acquired in the course of their work except when authorized, unless legally obligated to do

so (Foxworth’s suspicions about Dixon’s behavior should not be disclosed inap-propriately See requirement (3)).

Objectivity: Communicate information fairly and objectively (Foxworth is obligated to make objective hiring recommendations to Dixon, in spite of his belief that Dixon will be prejudiced in acting on them.)

(3) Alternative (a), discussion with the director of personnel, who is one of Dixon’s

peers, is inappropriate at this time If, however, Foxworth believes the director of personnel is an objective party, Foxworth may discuss the matter with the direc-tor, confidentially, to clarify the relevant concepts and to obtain an understand-ing of possible courses of action.

Alternative (b), informal discussion with a group of MAD senior management accountants, is inappropriate.

Alternative (c), private discussion with the CFO, Dixon’s superior, is appropri-ate Because Foxworth has already approached his immediate superior, Dixon, who is involved in the conflict, it is not necessary for Foxworth to inform him of this action.

(4) Foxworth should follow the company’s established policies for dealing with this

type of conflict, if such policies exist If policies do not exist, or if they are unsuc-cessful in resolving the conflict, Foxworth should discuss the issue with the CFO If the matter remains unresolved, discussions with successively higher lev-els of management, including the audit committee and the board of directors, should follow During these steps, Foxworth may discuss the matter confiden-tially with an objective advisor to clarify the relevant concepts and to obtain an understanding of possible courses of action If the matter remains unresolved after exhausting all of these steps, Foxworth may have no recourse other than to resign and submit an informative memorandum to an appropriate representative

of the company Consultation with one’s personal attorney is also appropriate.