CHAPTER 1
The Changing Role of Managerial Accounting in a Dynamic 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 companys 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 sufficient 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 sufficient to provide a good return on the
investment of the companys 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 citys 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 companys 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.
(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 flight on the route from
New York to Miami and actively participate in making the decision about adding the flight.
(b) Assisting managers in directing and controlling operations: Managerial accountants
provide information about the actual costs of flying the routes in the airlines northeastern
geographical sector during a particular month.
(c) Motivating managers and other employees toward the organizations goals: A budget is
provided for the cost of handling baggage at OHare Airport in Chicago. The budget is
given to the airlines 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 airlines
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 organizations competitive position and working with other managers to
ensure the organizations long-run competitiveness in its industry: Information about
industry-wide performance standards is obtained and compared with the airlines 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 organizations
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
organizations 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 organizations overall accounting system,
