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CHAPTER 1
THE MANAGER AND MANAGEMENT ACCOUNTING
See the front matter of this Solutions Manual for suggestions regarding your choices of assignment
material for each chapter.
1-1 Management accounting measures, analyzes, and reports financial and nonfinancial
information that helps managers make decisions to fulfill the goals of an organization. It focuses
on internal reporting and is not restricted by generally accepted accounting principles (GAAP).
Financial accounting focuses on reporting to external parties such as investors,
government agencies, and banks. It measures and records business transactions and provides
financial statements that are based on generally accepted accounting principles (GAAP).
Other differences include (1) management accounting emphasizes the future (not the past),
and (2) management accounting influences the behavior of managers and other employees (rather
than primarily reporting economic events).
1-2 Financial accounting is constrained by generally accepted accounting principles.
Management accounting is not restricted to these principles. The result is that
• management accounting allows managers to charge interest on owners’ capital to help
judge a division’s performance, even though such a charge is not allowed under GAAP,
• management accounting can include assets or liabilities (such as “brand names”
developed internally) not recognized under GAAP, and
• management accounting can use asset or liability measurement rules (such as present
values or resale prices) not permitted under GAAP.
1-3 Management accountants can help to formulate strategy by providing information about
the sources of competitive advantage—for example, the cost, productivity, or efficiency advantage
of their company relative to competitors or the premium prices a company can charge relative to
the costs of adding features that make its products or services distinctive.
1-4 The business functions in the value chain are
• Research and development—generating and experimenting with ideas related to new
products, services, or processes.
• Design of products and processes—the detailed planning, engineering, and testing of
products and processes.
• Production—procuring, transporting, storing, and assembling resources to produce a
product or deliver a service.
• Marketing—promoting and selling products or services to customers or prospective
customers.
• Distribution—processing orders and shipping products or services to customers.
• Customer service—providing after-sales service to customers.
1-5 Supply chain describes the flow of goods, services, and information from the initial
sources of materials and services to the delivery of products to consumers, regardless of whether
those activities occur in the same organization or in other organizations.
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Cost management is most effective when it integrates and coordinates activities across all
companies in the supply chain as well as across each business function in an individual company’s
value chain. Attempts are made to restructure all cost areas to be more cost-effective.
1-6 “Management accounting deals only with costs.” This statement is misleading at best, and
wrong at worst. Management accounting measures, analyzes, and reports financial and
nonfinancial information that helps managers define the organization’s goals and make decisions
to fulfill those goals. Management accounting also analyzes revenues from products and customers
in order to assess product and customer profitability. Therefore, while management accounting
does use cost information, it is only a part of the organization’s information recorded and analyzed
by management accountants.
1-7 Management accountants can help improve quality and achieve timely product deliveries
by recording and reporting an organization’s current quality and timeliness levels and by analyzing
and evaluating the costs and benefits—both financial and nonfinancial—of new quality initiatives,
such as TQM, relieving bottleneck constraints, or providing faster customer service.
1-8 The five-step decision-making process is (1) identify the problem and uncertainties;
(2) obtain information; (3) make predictions about the future; (4) make decisions by choosing
among alternatives; and (5) implement the decision, evaluate performance, and learn.
strategies, predicting results under various alternative ways of achieving those goals, deciding how
to attain the desired goals, and communicating the goals and how to attain them to the entire
organization.
Control decisions focus on taking actions that implement the planning decisions, deciding
how to evaluate performance, and providing feedback and learning to help future decision making.
1-10 The three guidelines for management accountants are as follows:
1. Employ a cost-benefit approach.
2. Recognize technical and behavioral considerations.
3. Apply the notion of “different costs for different purposes.”
1-11 Agree. A successful management accountant requires general business skills (such as
understanding the strategy of an organization) and people skills (such as motivating other team
members) as well as technical skills (such as computer knowledge, calculating costs of products,
and supporting planning and control decisions).
1-12 The new controller could reply in one or more of the following ways:
(a) Demonstrate to the plant manager how he or she could make better decisions if the
plant controller was viewed as a resource rather than a deadweight. In a related way,
the plant controller could show how the plant manager’s time and resources could be
saved by viewing the new plant controller as a team member.
(b) Demonstrate to the plant manager a good knowledge of the technical aspects of the
plant. This approach may involve doing background reading. It certainly will involve
spending much time on the plant floor speaking to plant personnel.
(c) Show the plant manager examples of the new plant controller’s past successes in
working with line managers in other plants. Examples could include
• assistance in preparing the budget,
• assistance in analyzing problem situations and evaluating financial and nonfinancial
aspects of different alternatives, and
• assistance in submitting capital budget requests.
(d) Seek assistance from the corporate controller to highlight to the plant manager the
importance of many tasks undertaken by the new plant controller. This approach is a
last resort but may be necessary in some cases.
1-13 The controller is the chief management accounting executive. The corporate controller
reports to the chief financial officer, a staff function. Companies also have business unit controllers
who support business unit managers or regional controllers who support regional managers in
major geographic regions.
1-14 The Institute of Management Accountants (IMA) sets standards of ethical conduct for
management accountants in the following four areas:
• Competence
• Confidentiality
• Integrity
• Credibility
1-15 Steps to take when established written policies provide insufficient guidance are as follows:
(a) Discuss the problem with the immediate superior (except when it appears that the
superior is involved).
(b) Clarify relevant ethical issues by confidential discussion with an IMA Ethics Counselor
or other impartial advisor.
(c) Consult your own attorney as to legal obligations and rights concerning the ethical
conflicts.
1-16 (15 min.) Value chain and classification of costs, computer company.
Compaq Computer incurs the following costs:
a. Electricity costs for the plant assembling the Presario computer line of products
b. Transportation costs for shipping the Presario line of products to a retail chain
c. Payment to David Kelley Designs for design of the Armada Notebook
d. Salary of computer scientist working on the next generation of minicomputers
e. Cost of Compaq employees’ visit to a major customer to demonstrate Compaq’s ability to
interconnect with other computers
f. Purchase of competitors’ products for testing against potential Compaq products
g. Payment to television network for running Compaq advertisements
h. Cost of cables purchased from outside supplier to be used with Compaq printers
Required: Classify each of the cost items (a–h) into one of the business functions of the value
chain shown in Exhibit 1-2 (page 6).
SOLUTION
Cost Item
Value Chain Business Function
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a.
b.
c.
d.
e.
f.
g.
h.
Production
Distribution
Design of products and processes
Research and development
Customer service or marketing
Design of products and processes
(or research and development)
Marketing
Production
1-17 (15 min.) Value chain and classification of costs, pharmaceutical company.
Pfizer, a pharmaceutical company, incurs the following costs:
a. Payment of booth registration fee at a medical conference to promote new products to
physicians
b. Cost of redesigning an insulin syringe to make it less painful
c. Cost of a toll-free telephone line used for customer inquiries about drug usage, side effects of
drugs, and so on
d. Equipment purchased to conduct experiments on drugs yet to be approved by the government
e. Sponsorship of a professional golfer
f. Labor costs of workers in the packaging area of a production facility
g. Bonus paid to a salesperson for exceeding a monthly sales quota
h. Cost of FedEx courier service to deliver drugs to hospitals
Required: Classify each of the cost items (a–h) as one of the business functions of the value chain
shown in Exhibit 1-2 (page 6).
SOLUTION
Cost Item
Value Chain Business Function
a.
b.
c.
d.
e.
f.
g.
h.
Marketing
Design of products and processes
Customer service
Research and development
Marketing
Production
Marketing
Distribution
1-18 (15 min.) Value chain and classification of costs, fast-food restaurant.
Burger King, a hamburger fast food restaurant, incurs the following costs:
a. Cost of oil for the deep fryer
b. Wages of the counter help who give customers the food they order
c. Cost of the costume for the King on the Burger King television commercials
d. Cost of children’s toys given away free with kids’ meals
e. Cost of the posters indicating the special “two cheeseburgers for $2.50”
f. Costs of frozen onion rings and French fries
g. Salaries of the food specialists who create new sandwiches for the restaurant chain
h. Cost of “to–go” bags requested by customers who could not finish their meals in the restaurant
Required: Classify each of the cost items (a–h) as one of the business functions of the value chain
shown in Exhibit 1-2 (page 6).
SOLUTION
Cost Item
Value Chain Business Function
a.
b.
c.
d.
e.
f.
g.
h.
Production
Distribution
Marketing
Marketing
Marketing
Production
Design of products and processes (or research and development)
Customer service
v1-19 (10 min.) Key success factors.
Dominic Consulting has issued a report recommending changes for its newest manufacturing
client, Casper Engines. Casper Engines currently manufactures a single product, which is sold and
distributed nationally. The report contains the following suggestions for enhancing business
performance:
a. Develop a hybrid engine to stay ahead of competitors
b. Increase training hours of assembly-line personnel to decrease the currently high volumes of
scrap and waste.
c. Reduce lead times (time from customer order of product to customer receipt of product) by
20% in order to increase customer retention.
d. Negotiate faster response times with direct material suppliers to allow for lower material
inventory levels
e. Benchmark the company’s gross margin percentages against its major competitors.
Required: Link each of these changes to the key success factors that are important to managers.
SOLUTION
Change in Operations/
Management Accounting
Key Success Factor
a.
b.
c.
d.
e.
Innovation
Cost and efficiency and quality
Time
Time and cost and efficiency
Cost and efficiency
1-20 (10 min.) Key success factors.
Morten Construction Company provides construction services for major projects. Managers at the
company believe that construction is a people-management business, and they list the following
as factors critical to their success:
a. Provide tools to simplify and complete construction sooner.
b. Foster cooperative relationships with suppliers that allow for more frequent deliveries as
and when products are needed.
c. Integrate tools and techniques that reduce errors in construction projects.
d. Provide continuous training for employees on new tools and equipment.
e. Benchmark the company’s gross margin percentages against its major competitors.
Required: Match each of the above factors to the key success factors that are important to
managers.
SOLUTION
Change in Operations/
Management Accounting
Key Success Factor
a.
b.
c.
d.
e.
Time and cost and efficiency
Time and cost and efficiency
Quality and cost and efficiency
Innovation and quality
Cost and efficiency
1-21 (10–15 min.) Planning and control decisions.
Conner Company makes and sells brooms and mops. It takes the following actions, not necessarily
in the order given. For each action (a–e) state whether it is a planning decision or a control decision.
a. Conner asks its marketing team to consider ways to get back market share from its newest
competitor, Swiffer.
b. Conner calculates market share after introducing its newest product.
c. Conner compares costs it actually incurred with costs it expected to incur for the production of
the new product.
d. Conner’s design team proposes a new product to compete directly with the Swiffer.
e. Conner estimates the costs it will incur to sell 30,000 units of the new product in the first
quarter of next fiscal year.
SOLUTION
Action
Decision
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a.
b.
c.
d.
e.
Planning
Control
Control
Planning
Planning
1-22 (10–15 min.) Planning and control decisions.
Ed Sykes is the president of Valley Tree Service. He takes the following actions, not necessarily
in the order given. For each action (a–e) state whether it is a planning decision or a control decision.
a. Sykes decides to expand service offerings into an adjacent market.
b. Sykes calculates the profitability of a job recently performed for the state arboretum.
c. Sykes weighs the purchase of an expensive new wood-chipping machine proposed by field
managers.
d. Sykes estimates the hourly cost of providing emergency services next year to the local power
company.
e. Sykes compares actual fuel costs for operating the company’s equipment to budgeted costs.
SOLUTION
Action
Decision
a.
b.
c.
d.
e.
Planning
Control
Planning
Planning
Control
1-23 (15 min.) Five-step decision-making process, manufacturing.
Tadeski Foods makes frozen dinners that it sells through grocery stores. Typical products include
turkey, pot roast, fried chicken, and meatloaf. The managers at Tadeski have recently proposed a
line of frozen chicken pies. They take the following actions to help decide whether to launch the
line.
a. Tadeski’s test kitchen prepares a number of possible recipes for a consumer focus group.
b. Sales managers estimate they will sell more chicken pies in their northern sales territory than in
their southern sales territory.
c. Managers discuss the possibility of introducing a new chicken pie.
d. Managers compare actual costs of making chicken pies with their budgeted costs.
e. Costs for making chicken pies are budgeted.
f. The company decides to introduce a new chicken pie.
g. To help decide whether to introduce a new chicken pie, the company researches the costs of
potential ingredients.
Required: Classify each of the actions (a–g) as a step in the five-step decision-making process
(identify the problem and uncertainties; obtain information; make predictions about the future;
make decisions by choosing among alternatives; implement the decision, evaluate performance,
and learn). The actions are not listed in the order they are performed.
SOLUTION
Action
Step in Decision-Making Process
a.
b.
c.
d.
e.
f.
g.
Obtain information.
Make predictions about the future.
Identify the problem and uncertainties.
Implement the decision, evaluate performance, and learn.
Make predictions about the future.
Make decisions by choosing among alternatives.
Obtain information.
1-24 (15 min.) Five-step decision-making process, service firm.
Brook Exteriors is a firm that provides house-painting services. Richard Brook, the owner, is trying
to find new ways to increase revenues. Mr. Brook performs the following actions, not in the order
listed.
a. Mr. Brook decides to buy the paint sprayers rather than hire additional painters.
b. Mr. Brook discusses with his employees the possibility of using paint sprayers instead of hand
painting to increase productivity and thus profits.
c. Mr. Brook learns of a large potential job that is about to go out for bids.
d. Mr. Brook compares the expected cost of buying sprayers to the expected cost of hiring more
workers who paint by hand and estimates profits from both alternatives.
e. Mr. Brook estimates that using sprayers will reduce painting time by 20%.
f. Mr. Brook researches the price of paint sprayers online.
Required: Classify each of the actions (a–f) according to its step in the five-step decision-making
process (identify the problem and uncertainties; obtain information; make predictions about the
future; make decisions by choosing among alternatives; implement the decision, evaluate
performance, and learn).
SOLUTION
Action
Step in Decision-Making Process
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a.
b.
c.
d.
e.
f.
Make decisions by choosing among alternatives.
Identify the problem and uncertainties.
Obtain information and/or make predictions about the future.
Obtain information and/or make predictions about the future.
Make predictions about the future.
Obtain information.
1-25 (10–15 min.) Professional ethics and reporting division performance.
Maria Mendez is division controller and James Dalton is division manager of the Hestor Shoe
Company. Mendez has line responsibility to Dalton, but she also has staff responsibility to the
company controller.
Dalton is under severe pressure to achieve the budgeted division income for the year. He has
asked Mendez to book $200,000 of revenues on December 31. The customers’ orders are firm, but
the shoes are still in the production process. They will be shipped on or around January 4. Dalton
says to Mendez, “The key event is getting the sales order, not shipping the shoes. You should
support me, not obstruct my reach- ing division goals.”
Required:
1. Describe Mendez’s ethical responsibilities.
2. What should Mendez do if Dalton gives her a direct order to book the sales?
SOLUTION
1. Mendez’s ethical responsibilities are well summarized in the IMA’s “Standards of Ethical
Conduct for Management Accountants” (Exhibit 1-7 of text). Areas of ethical responsibility
include the following:
• Competence
• Confidentiality
• Integrity
• Credibility
The ethical standards related to Mendez’s current dilemma are integrity, competence, and
credibility. Using the integrity standard, Mendez should carry out duties ethically and
communicate unfavorable as well as favorable information and professional judgments or
opinions. Competence demands that Mendez perform her professional duties in accordance with
relevant laws, regulations, and technical standards and provide decision support information that
is accurate. Credibility requires that Mendez report information fairly and objectively and disclose
deficiencies in internal controls in conformance with organizational policy and/or applicable law.
Mendez should refuse to book the $200,000 of sales until the goods are shipped. Both financial
accounting and management accounting principles maintain that sales are not complete until the
title is transferred to the buyer.
1-26 (10–15 min.) Professional ethics and reporting division performance.
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Joshua Wilson is the controller of Apex Picture Frame Mouldings, a division of Garman
Enterprises. As the division is preparing to count year-end inventory, Wilson is approached by
Doug Leonard, the division’s president. A selection of inventory previously valued at $150,000
had been identified as flawed earlier that month and as a result was determined to be unfit for sale.
Leonard tells Wilson that he has decided to count the selected items as regular inventory and that
he will “deal with it when things settle down after the first of the year. After all,” Leonard adds,
“the auditors don’t know good picture frame moulding from bad. We’ve had a rough year, and
things are looking up for next year. Our division needs all the profits we can get this year. It’s just
a matter of timing the write–off.” Leonard is Wilson’s direct supervisor.
Required:
1. Describe Wilson’s ethical dilemma.
2. What should Wilson do if Leonard gives him a direct order to include the inventory?
SOLUTION
1. Wilson’s ethical responsibilities are well summarized in the IMA’s “Standards of Ethical
Conduct for Management Accountants” (Exhibit 1-7 of text). Areas of ethical responsibility
include the following:
• Competence
• Confidentiality
• Integrity
• Credibility
The ethical standards related to Wilson’s current dilemma are integrity, competence, and
credibility. Using the integrity standard, Wilson should carry out duties ethically and communicate
unfavorable as well as favorable information and professional judgments or opinions. Competence
demands that Wilson perform his professional duties in accordance with relevant laws, regulations,
and technical standards and provide decision support information that is accurate. Credibility
requires that Wilson report information fairly and objectively and disclose deficiencies in internal
controls in conformance with organizational policy and/or applicable law. Wilson should refuse to
include the $150,000 of defective inventory. Both financial accounting and management
accounting principles maintain that once inventory is determined to be unfit for sale, it must be
written off. It may be just a timing issue, but reporting the $150,000 of inventory as an asset would
be misleading to the users of the company’s financial statements.
2. Wilson should refuse to follow Leonard’s orders. If Leonard persists, the incident should
be reported to the corporate controller of Garman Enterprises. Support for line management should
be wholehearted, but it should not require unethical conduct.