CHAPTER 1
THE MANAGER AND MANAGEMENT ACCOUNTING
1-1 How does management accounting differ from financial accounting?
Management accounting measures, analyzes, and reports financial and nonfinancial information
Financial accounting focuses on reporting to external parties such as investors,
1-2 “Management accounting should not fit the straitjacket of financial accounting.”
Explain and give an example.
1-3 How can a management accountant help formulate strategy?
1-4 Describe the business functions in the value chain.
The business functions in the value chain are
Research and development—generating and experimenting with ideas related to new
products, services, or processes.
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Customer service—providing after-sales service to customers.
1-5 Explain the term supply chain and its importance to cost management.
1-6 “Management accounting deals only with costs.” Do you agree? Explain.
1-7 How can management accountants help improve quality and achieve
timely product deliveries?
Management accountants can help improve quality and achieve timely product deliveries by
1-8 Describe the five-step decision-making process.
1-9 Distinguish planning decisions from control decisions.
Planning decisions focus on selecting organization goals and strategies, predicting results under
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1-10 What three guidelines help management accountants provide the most value to
managers?
The three guidelines for management accountants are:
1-11 “Knowledge of technical issues such as computer technology is a necessary but not
sufficient condition to becoming a successful management accountant.” Do you agree? Why?
Agree. A successful management accountant requires general business skills (such as
1-12 As a new controller, reply to this comment by a plant manager: “As I see it, our
accountants may be needed to keep records for shareholders and Uncle Sam, but I don’t want
them sticking their noses in my day-to-day operations. I do the best I know how. No bean
counter knows enough about my responsibilities to be of any use to me.”
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
(b) Demonstrate to the plant manager a good knowledge of the technical aspects of the
(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
(d) Seek assistance from the corporate controller to highlight to the plant manager the
1-13 Where does the management accounting function fit into an organization’s structure?
The controller is the chief management accounting executive. The corporate controller reports to
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1-14 Name the four areas in which standards of ethical conduct exist for management
accountants in the United States. What organization sets forth these standards?
SOLUTION
The Institute of Management Accountants (IMA) sets standards of ethical conduct for
management accountants in the following four areas:
1-15 What steps should a management accountant take if established written policies provide
insufficient guidance on how to handle an ethical conflict?
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 Which of the following is not a primary function of the management accountant?
a. Communicates financial results and position to external parties.
b. Uses information to develop and implement business strategy.
c. Aids in the decision making to help an organization meet its goals.
d. Provides input into an entity’s production and marketing decisions.
SOLUTION
(a) Communicating financial results and position to external parties is not a primary function of
the management accountant.
1-17 Value chain and classification of costs, computer company. Dell Computer incurs the
following costs:
a. Utility costs for the plant assembling the Latitude computer line of products
b. Distribution costs for shipping the Latitude line of products to a retail chain
c. Payment to David Newbury Designs for design of the XPS 2-in-1 laptop
d. Salary of computer scientist working on the next generation of servers
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e. Cost of Dell employees’ visit to a major customer to demonstrate Dell’s ability to
interconnect with other computers
f. Purchase of competitors’ products for testing against potential Dell products
g. Payment to business magazine for running Dell advertisements
h. Cost of cartridges purchased from outside supplier to be used with Dell 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 5).
SOLUTION
(15 min.) Value chain and classification of costs, computer company.
Cost Item Value Chain Business Function
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
1-18 Value chain and classification of costs, pharmaceutical company. Johnson & Johnson, a
health care 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 artificial knee to make it easier to implant in patients
c. Cost of a toll-free telephone line used for customer inquiries about drug usage, side effects of
drugs, and so on
d. Materials purchased to develop drugs yet to be approved by the government
e. Sponsorship of a professional golfer
f. Labor costs of workers in the tableting 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 5).
SOLUTION
(15 min.) Value chain and classification of costs, pharmaceutical company.
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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
1-19 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 5).
SOLUTION
(15 min.) Value chain and classification of costs, fast-food restaurant.
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
1-20 Key success factors. Dominion Consulting has issued a report recommending changes for
its newest manufacturing client, Gibson Engine Works. Gibson currently manufactures a single
product, which is sold and distributed nationally. The report contains the following suggestions
for enhancing business performance:
a. Develop a rechargeable electric engine to stay ahead of competitors.
b. Adopt a TQM philosophy to reduce waste and defects to near zero.
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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
(10 min.) Key success factors.
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
1-21 Key success factors. Vargas 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. Increase spending on employee development to streamline processes.
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. Train employees in green construction techniques to appeal to companies seeking LEED
certification.
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
(10 min.) Key success factors.
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Change in Operations/
Management Accounting Key Success Factor
a.
b.
c.
d.
e.
Time and cost and efficiency
Time, quality, and cost and efficiency
Quality and cost and efficiency
Innovation and quality
Cost and efficiency
1-22 Planning and control decisions. Gregor 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. Gregor asks its advertising team to develop fresh advertisements to market its newest
product.
b. Gregor calculates customer satisfaction scores after introducing its newest product.
c. Gregor compares costs it actually incurred with costs it expected to incur for the production
of the new product.
d. Gregor’s design team proposes a new product to compete directly with the Swiffer.
e. Gregor estimates the costs it will incur to distribute 30,000 units of the new product in the
first quarter of next fiscal year.
SOLUTION
(10–15 min.) Planning and control decisions.
Action Decision
a.
b.
c.
d.
e.
Planning
Control
Control
Planning
Planning
1-23 Planning and control decisions. Gavin Adams is the president of Trusted Pool 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. Adams decides to expand service offerings into an adjacent market.
b. Adams calculates material costs of a project that was recently completed.
c. Adams weighs the purchase of an expensive new excavation machine proposed by field
managers.
d. Adams estimates the weekly cost of providing maintenance services next year to the city
recreation department.
e. Adams compares payroll costs of the past quarter to budgeted costs.
SOLUTION
(10–15 min.) Planning and control decisions.
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Action Decision
a.
b.
c.
d.
e.
Planning
Control
Planning
Planning
Control
1-24 Five-step decision-making process, manufacturing. Madison Foods makes frozen
dinners that it sells through grocery stores. Typical products include turkey, pot roast, fried
chicken, and meatloaf. The managers at Madison have recently proposed a line of frozen chicken
pies. They take the following actions to help decide whether to launch the line.
a. Madison’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 eastern sales territory than
in their western sales territory.
c. Managers discuss the possibility of introducing a new chicken pie.
d. Managers compare actual labor costs of making chicken pies with their budgeted costs.
e. Profits from selling 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 price and
quality of competing chicken pies.
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
(15 min.) Five-step decision-making process, manufacturing.
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.
1-25 Five-step decision-making process, service firm. Sizemore Landscaping is a firm that
provides commercial landscaping and grounds maintenance services. Derek Sizemore, the
owner, is trying to find new ways to increase revenues. Mr. Sizemore performs the following
actions, not in the order listed.
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a. Mr. Sizemore decides to buy power tilling equipment rather than hire additional landscape
workers.
b. Mr. Sizemore discusses with his employees the possibility of using power equipment instead
of manual processes to increase productivity and thus profits.
c. Mr. Sizemore learns details about a large potential job that is about to go out for bids.
d. Mr. Sizemore compares the expected cost of buying power equipment to the expected cost of
hiring more workers and estimates profits from both alternatives.
e. Mr. Sizemore estimates that using power equipment will reduce tilling time by 20%.
f. Mr. Sizemore researches the price of power tillers 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
(15 min.) Five-step decision-making process, service firm.
Action Step in Decision-Making Process
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.
1-26 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 reaching 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?
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