Solution manual managerial accounting concept and applications by cabrera chapter 01 answer

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 bene

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

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

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

3 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 7-point concept of modern controllership Cost accounting is intertwined with all seven duties to some extent, but its major focus is

on the first three

8 Bettina Company

Assistant Controller Assistant Treasurer

Special

Studies

Manager

Cost Accounting

Manager

Tax Manager Internal Audit

Manager

General Accounting Manager

System & EDP Manager

Cost

Systems

Analyst

Budget &

Standard

Cost Analyst

Performance Analyst

Cost

Clerk PayrollClerk ReceivableAccounts

Clerk

Accounts Payable Clerk

Billing Clerk GeneralLedger

Bookkeeper

9 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

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

Financial Accounting

Audience: External: shareholders, creditors, tax

authorities Purpose: Report on past performance to external

parties; basis of contracts with owners and lenders

Timeliness: Delayed; historical

Restrictions: Regulated; rules driven by generally

accepted accounting principles and government authorities

Type of Information: Financial measurements only

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

precise Scope: 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

Nature of Information: More subjective and judgmental; valid,

relevant, accurate Scope: Disaggregate; inform local decisions and

actions

16 The competitive environment has changed dramatically Companies encountered severe competition from overseas companies that offered high-quality 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 (1) Problem solving

b (3) Attention-directing

c (1) Problem solving

d (2) Scorekeeping

Exercise 2

a (4) Marketing

b (3) Production

c (6) Customer service

d (5) Distribution

Exercise 3

a (4) Marketing

b (3) Production

c (5) Distribution

d (4) Marketing

e (5) Distribution

f (3) Production

g (1) Research and development

h (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 Scorekeeping

2 Attention directing

3 Scorekeeping

4 Problem solving

5 Attention directing

6 Attention directing

7 Problem solving

8 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

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 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-of-year 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

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

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 Determine the Facts – What, Who, Where, How

2 Define the Ethical Issue

3 Identify Major Principles, Rule, Values

4 Specify the Alternatives

5 Compare Values and Alternatives, See if Clear Decision

6 Assess the Consequences

7 Make Your Decision