CHAPTER 1
The Changing Role of Managerial Accounting in
a Global Business Environment
ANSWERS TO REVIEW QUESTIONS
1-1 The explosion in e-commerce will affect managerial
accounting in significant ways. One effect will be a
drastic reduction in paper work. Millions of transactions
between businesses will be conducted electronically with
no hard-copy documentation. Along with this method of
communicating for business transactions comes the very
significant issue of information security. Businesses need
to find ways to protect confidential information in their
own computers, while at the same time sharing the
information necessary to complete transactions. Another
effect of e-commerce is the dramatically increased speed
with which business transactions can be conducted. In
addition to these business-to-business transactional
issues, there will be dramatic changes in the way
managerial accounting procedures are carried out, one
example being e-budgeting, which is the enterprise-wide
and electronic completion of a company’s budgeting
process.
1.2 Plausible goals for the organizations listed are as follows:
(a) Amazon.com: (1) To achieve and maintain
profitability, and (2) to grow on-line sales of books,
music, and other goods.
(b) American Red Cross: (1) To raise funds from the
general public su.cient to have resources available to
meet any disaster that may occur, and (2) to provide
assistance to people who are victims of a disaster
anywhere in the country on short notice.
(c) General Motors: (1) To earn income su.cient to
provide a good return on the investment of the
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company’s stockholders, and (2) to provide the highest-
quality product possible.
(d) Wal-Mart: (1) To penetrate the retail market in
virtually 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 environment
as free of pollution as possible, and (2) to provide
public safety, police, and fire protection to the city’s
citizens.
(f)Hertz: (1) To be a recognizable household name
associated with rental car services, and (2) to provide
reliable and economical transportation services to the
company’s customers.
1-3 The four basic management activities are listed and
defined as follows:
(a) Decision making: Choosing among the available
alternatives.
(b) Planning: Developing a detailed financial and
operational description of anticipated operations.
(c) Directing operations: Running the organization on a
day-to-day basis.
(d) Controlling: Ensuring that the organization operates
in the intended manner and achieves its goals.
1-4 Examples of the four primary management activities in
the 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 and
paper products to be used during the next quarter in a
particular fast-food restaurant.
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(c) Directing operations: Developing detailed schedules
for personnel for the next month to provide counter
service in a particular fast-food restaurant.
(d) Controlling: Comparing the actual cost of paper
products used during a particular month in a restaurant
with the anticipated cost of paper products for that
same time period.
1-5 Examples of the objectives of managerial-accounting
activity in an airline company are described below:
(a) Providing information for decision making and
planning, and proactively participating as part of the
management team in the decision making and planning
processes: Managerial accountants provide estimates
of the cost of adding a <ight on the route from New
York to Miami and actively participate in making the
decision about adding the <ight.
(b) Assisting managers in directing and controlling
operations: Managerial accountants provide
information about the actual costs of <ying the routes
in the airline’s northeastern geographical sector during
a particular month.
(c) Motivating managers and other employees toward
the organization’s goals: A budget is provided for the
cost of handling baggage at O’Hare Airport in Chicago.
The budget is given to the airline’s baggage handling
manager, who is expected to strive to achieve the
budget.
(d) Measuring the performance of activities, subunits,
managers, and other employees within the
organization: Quarterly income statements are
prepared for each of the airline’s major geographical
sectors, and these income reports are used to evaluate
the earnings performance of each sector during the
relevant time period.
(e) Assessing the organization’s competitive position
and working with other managers to ensure the
organization’s long-run competitiveness in its industry:
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Information about industry-wide performance
standards is obtained and compared with the airline’s
own performance. For example, how does the airline
stack up against its competitors in ticket prices, on-
time departures, mishandled baggage, customer
complaints, and safety?
1-6 Four important differences between managerial
accounting and financial accounting are listed below:
(a) Managerial-accounting information is provided to
managers within the organization, whereas financial-
accounting information is provided to interested
parties outside the organization.
(b) Managerial-accounting reports are not required and
are unregulated, whereas financial-accounting reports
are required and must conform to generally accepted
accounting principles.
(c) The primary source of data for managerial-
accounting information is the organization’s basic
accounting system, plus various other sources. These
sources include such data as rates of defective
products manufactured, physical quantities of material
and labor used in production, occupancy rates in hotels
and hospitals, and average takeoff delays in airlines.
The primary source of data for financial-accounting
information is almost exclusively the organization’s
basic accounting system, which accumulates financial
information.
(d) Managerial-accounting reports often focus on
subunits within the organization, such as departments,
divisions, geographical regions, or product lines. These
reports are based on a combination of historical data,
estimates, and projections of future events. Financial-
accounting reports focus on the enterprise in its
entirety. These reports are based almost exclusively on
historical transaction data.
1-7 The cost-accounting system is one part of an
organization’s overall accounting system, the purpose of
which is to accumulate cost information. Cost information
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accumulated by the cost-accounting system is used for
both managerial-accounting and financial-accounting
purposes. Managerial accounting is the broad task of
preparing information for making decisions about
planning, directing, and controlling an organization’s
operations.
1-8 Managers in line positions are directly involved in the
provision of services or the production of goods in an
organization. Managers in staff positions support the
organization’s overall objectives, but they are indirectly
involved in operations. Examples of line positions in a
university are the president, who is the university’s chief
executive o.cer, and the provost, who is the university’s
chief academic o.cer. Examples of staff positions in a
university are the university counsel, who is the
university’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 chief
managerial and financial accountant. The controller
usually is responsible for supervising the personnel in the
accounting department and for preparing the information
and reports used in both managerial and financial
accounting. The treasurer typically is responsible for
raising capital and safeguarding the organization’s
assets. Among the treasurer’s responsibilities is the
management of an organization’s investments, credit
policy, and insurance coverage.
1.10 A college or university could use the balanced scorecard
as a management tool just like any other business. There
is one important difference, however, between a profit-
seeking enterprise and a nonprofit organization like a
university. A profit-seeking enterprise generally has long-
term profitability as its foremost goal, and the other
points on the balanced scorecard are oriented toward
helping the enterprise achieve that goal of profitability.
Universities, on the other hand, usually have multiple
goals, which are sometimes in competition with each
other. For example, a land-grant university may have
teaching, research and public service as its three primary
goals. Nevertheless, it is possible for a college or
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university to develop performance measures for each of
the areas in the balanced scorecard. Some examples
follow:
Financial: Amount of the unrestricted endowment
supporting the university’s activities, and the extent to
which the university operates with a balanced budget.
Internal operations: Tenure rates for faculty, and the
extent to which the university’s facilities are up to date
and well maintained.
Customer: Class evaluations by students, and job
placement rates for students.
Innovation and learning: Dollars of research grants
obtained, and publication of journal articles and books
by faculty.
1-11 This quote from a managerial accountant at Caterpillar
suggests that managerial accountants are physically
located throughout an organization where the day-to-day
work is being done, rather than being sequestered off by
themselves as was the tendency some years ago.
Managerial accountants are increasingly deployed as key
members of management teams.
1-12 Managerial-accounting information often brings to the
attention of managers important issues that need their
managerial experience and skills. In many cases,
managerial-accounting information will not answer the
question or solve the problem, but rather make
management aware that the issue or problem exists. In
this sense, managerial accounting sometimes is said to
serve an attention-directing role.
1-13 Both manufacturing and service industry firms are
engaged in production. The primary difference between
these types of companies is that manufacturing firms
produce inventoriable goods, whereas the services
produced by service industry firms are not inventoriable.
Services, such as air transportation or hotel service, are
consumed as they are produced.
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1-14 (a) Practical capacity is the upper limit on goods or
services that an organization can produce in a specified
period of time, allowing for normal occurrences such as
machine downtime and employee fatigue or illness.
(b) The cost of resources supplied includes all costs of
providing for the practical capacity within which an
organization may produce goods or services.
(c) The cost of resources used includes the costs of
providing the resources for that portion of an
organization’s practical capacity that was actually
consumed in production of goods or services during a
specified period of time.
(d) The cost of resources unused includes the costs of
providing the resources for that portion of an
organization’s practical capacity that was not
consumed in production of goods or services during a
specified period of time.
1-15 E-commerce is defined as buying and selling over digital
media. E-business is a broader concept, which not only
