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SOLUTION
(10–15 min.) Professional ethics and reporting division performance.
1. Mendez’s ethical responsibilities are well summarized in the IMA’s “Standards of Ethical
Behavior for Practitioners of Management Accounting and Financial Management” (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
2. Mendez should refuse to follow Dalton’s orders. If Dalton persists, the incident should be
1-27 Professional ethics and reporting division performance. Hannah Gilpin is the
controller of Blakemore Auto Glass, a division of Eastern Glass and Window. Blakemore
replaces and installs windshields. Her division has been under pressure to improve its divisional
operating income. Currently, divisions of Eastern Glass are allocated corporate overhead based
on cost of goods sold. Jake Myers, the president of the division, has asked Gilpin to reclassify
$50,000 of installation labor, which is included in cost of goods sold, as administrative labor,
which is not. Doing so will save the division $20,000 in allocated corporate overhead. The labor
costs in question involve installation labor provided by trainee employees. Myers argues, “the
trainees are not as efficient as regular employees so this is unfairly inflating our cost of goods
sold. This is really a cost of training (administrative labor) not part of cost of goods sold.” Gilpin
does not see a reason for reclassification of the costs, other than to avoid overhead allocation
costs.
Required:
1. Describe Gilpin’s ethical dilemma.
2. What should Gilpin do if Myers gives her a direct order to reclassify the costs?
SOLUTION
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(10–15 min.) Professional ethics and reporting division performance.
1. Gilpin’s ethical responsibilities are well summarized in the IMA’s “Standards of Ethical
Behavior for Practitioners of Management Accounting and Financial Management” (Exhibit 1-7
of text). Areas of ethical responsibility include the following:
Competence
Confidentiality
Integrity
Credibility
The ethical standards related to Gilpin’s current dilemma are integrity, competence, and
credibility. Using the integrity standard, Gilpin should carry out duties ethically and
2. Gilpin should refuse to follow Myers’ orders but should discuss her concerns with Myers.
1-28 Planning and control decisions, Internet company. PostNews.com offers its subscribers
several services, such as an annotated TV guide and local-area information on weather,
restaurants, and movie theaters. Its main revenue sources are fees for banner advertisements and
fees from subscribers. Recent data are as follows:
Month/Year Advertising
Revenues
Actual Number of
Subscribers
Monthly Fee per
Subscriber
June 2015 $ 415,972 29,745 $15.50
December 2015 867,246 55,223 20.50
June 2016 892,134 59,641 20.50
December 2016 1,517,950 87,674 20.50
June 2017 2,976,538 147,921 20.50
The following decisions were made from June through October 2017:
a. June 2017: Raised subscription fee to $25.50 per month from July 2017 onward. The
budgeted number of subscribers for this monthly fee is shown in the following table.
b. June 2017: Informed existing subscribers that from July onward, monthly fee would be
$25.50.
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c. July 2017: Offered e-mail service to subscribers and upgraded other online services.
d. October 2017: Dismissed the vice president of marketing after significant slowdown in
subscribers and subscription revenues, based on July through September 2017 data in the
following table.
e. October 2017: Reduced subscription fee to $22.50 per month from November 2017 onward.
Results for July–September 2017 are as follows:
Month/Year Budgeted Number of
Subscribers
Actual Number of
Subscribers
Monthly Fee per
Subscriber
July 2017 145,000 129,250 $25.50
August 2017 155,000 142,726 25.50
September 2017 165,000 145,643 25.50
Required:
1. Classify each of the decisions (a–e) as a planning or a control decision.
2. Give two examples of other planning decisions and two examples of other control decisions
that may be made at PostNews.com.
SOLUTION
(15 min.) Planning and control decisions, Internet company.
1. Planning decisions
a. Decision to raise monthly subscription fee from July
c. Decision to offer e-mail service to subscribers and upgrade content of online services
e. Decision to decrease monthly subscription fee starting in November.
Control decisions
b. Decision to inform existing subscribers about the rate of increase—an implementation
d. Dismissal of VP of Marketing—performance evaluation and feedback aspect of
2. Other planning decisions that may be made at PostNews.com: decision to raise or lower
advertising fees; decision to charge a fee from on-line retailers when customers click-through
from PostNews.com to the retailers’ websites.
Other control decisions that may be made at PostNews.com: evaluating how customers
like the new format for the weather information, working with an outside vendor to redesign the
website, and evaluating whether the waiting time for customers to access the website has been
reduced.
1-29 Strategic decisions and management accounting. Consider the following series of
independent situations in which a firm is about to make a strategic decision.
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Decisions
a. Julian Phones is about to decide whether to launch production and sale of a cell phone with
standard features.
b. Flint Computers is trying to decide whether to produce and sell a new home computer
software package that includes the ability to interface with a thermostat and a refrigerator.
There is no such software currently on the market.
c. Maria Cosmetics has been asked to provide a “store brand” facial cream that will be sold at
discount retail stores.
d. Jansen Computers is considering developing a special line of computers that can be both a
tablet and a computer.
Required:
1. For each decision, state whether the company is following a cost leadership or a product
differentiation strategy.
2. For each decision, discuss what information the management accountant can provide about
the source of competitive advantage for these firms.
SOLUTION
(20 min.) Strategic decisions and management accounting.
1. The strategies the companies are following in each case are:
a.
b.
c.
d.
Cost leadership or low price strategy
Product differentiation strategy
Cost leadership or low price strategy
Product differentiation strategy
2. Examples of information the management accountant can provide for each strategic decision
about the source of competitive advantage follow.
a.
b.
Cost to manufacture and sell the cell phone
Productivity, efficiency, and cost advantages relative to competition
Prices of competitive cell phones
Sensitivity of target customers to price and quality
The production capacity of Julian Phones and its competitors
How the market for cell phones with standard features is growing
Cost to develop, produce, and sell new home computer software package
Premium price that customers would be willing to pay due to product uniqueness
Price of basic software
Price of closest competitive software
Cash needed to develop, produce, and sell new software
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c. Cost of producing the “store-brand” facial cream
Productivity, efficiency, and cost advantages relative to competition
Prices of competitive products
Sensitivity of target customers to price and quality
The production capacity of Maria Cosmetics and its competitors
How the market for facial cream is growing
d. Cost to produce and sell new line of tablet computers
Premium price that customers would be willing to pay due to product uniqueness
Price of basic computer
Price of closest competitive product
Cash available to develop, produce, and sell special line of tablet computers
1-30 Strategic decisions and management accounting. Consider the following series of
independent situations in which a firm is about to make a strategic decision.
Decisions
a. A running shoe manufacturer is weighing whether to purchase leather from a cheaper
supplier in order to compete with lower priced competitors.
b. An office supply store is considering adding a delivery service that its competitors do not
have.
c. A regional retailer is deciding whether to install self-check-out counters. This technology will
reduce the number of check-out clerks required in the store.
d. A local florist is considering hiring a horticulture specialist to help customers with gardening
questions.
Required:
1. For each decision, state whether the company is following a cost leadership or a product
differentiation strategy.
2. For each decision, discuss what information the managerial accountant can provide about the
source of competitive advantage for these firms.
SOLUTION
(20 min.) Strategic decisions and management accounting.
1. The strategies the companies are following in each case are
a.
b.
c.
d.
Cost leadership or low-price strategy
Product differentiation strategy
Cost leadership or low-price strategy
Product differentiation strategy
2. Examples of information the management accountant can provide for each strategic decision
follow.
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a.
b.
Cost related to purchase leather from a cheaper supplier
Productivity and efficiency advantages relative to competition
Sensitivity of target customers to price and quality
Materials and labor usage costs when working with cheaper leather
Cost of delivery service
Premium price that customers would be willing to pay for the service
Price of closest competitive product
c.
d.
Cost to develop new software to check in customers
Efficiency and cost advantages relative to competition
Sensitivity of target customers to change in service
Cost to hire horticultural specialist
Premium price that customers would be willing to pay for expert advice
Price of closest competitive product
1-31 Management accounting guidelines. For each of the following items, identify which of
the management accounting guidelines applies: cost–benefit approach, behavioral and technical
considerations, or different costs for different purposes.
1. Analyzing whether to keep the billing function within an organization or outsource it.
2. Deciding to give bonuses for superior performance to the employees in a Japanese subsidiary
and extra vacation time to the employees in a Swedish subsidiary.
3. Including costs of all the value-chain functions before deciding to launch a new product, but
including only its manufacturing costs in determining its inventory valuation.
4. Considering the desirability of hiring an additional salesperson.
5. Giving each salesperson the compensation option of choosing either a low salary and a
high-percentage sales commission or a high salary and a low-percentage sales commission.
6. Selecting the costlier computer system after considering two systems.
7. Installing a participatory budgeting system in which managers set their own performance
targets, instead of top management imposing performance targets on managers.
8. Recording research costs as an expense for financial reporting purposes (as required by U.S.
GAAP) but capitalizing and expensing them over a longer period for management
performance-evaluation purposes.
9. Introducing a profit-sharing plan for employees.
SOLUTION
(15 min.) Management accounting guidelines.
1. Cost-benefit approach
2. Behavioral and technical considerations
3. Different costs for different purposes
4. Cost-benefit approach
5. Behavioral and technical considerations
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6. Cost-benefit approach
7. Behavioral and technical considerations
8. Different costs for different purposes
9. Behavioral and technical considerations
1-32 Management accounting guidelines. For each of the following items, identify which of
the management accounting guidelines applies: cost–benefit approach, behavioral and technical
considerations, or different costs for different purposes.
1. Analyzing whether to produce a component needed for the end product or to outsource it.
2. Deciding whether to compensate the sales force by straight commission or by salary.
3. Adding the cost of store operations to merchandise cost when deciding on product pricing,
but only including the cost of freight and the merchandise itself when calculating cost of
goods sold on the income statement.
4. Considering the desirability of purchasing new technology.
5. Weighing the cost of increased inspection against the costs associated with customer returns
of defective goods.
6. Deciding whether to buy or lease an existing production facility to increase capacity.
7. Estimating the loss of future business resulting from bad publicity related to an
environmental disaster caused by a company’s factory in the Philippines, but estimating
cleanup costs for calculating the liability on the balance sheet.
SOLUTION
(15 min.) Management accounting guidelines.
1. Cost-benefit approach
2. Behavioral and technical considerations and cost-benefit approach
3. Different costs for different purposes
4. Cost-benefit approach or behavioral and technical considerations, for example, how
employees will react to the new technology
5. Cost-benefit approach
6. Cost-benefit approach
7. Different costs for different purposes.
1-33 Role of controller, role of chief financial officer. George Jimenez is the controller at
Balkin Electronics, a manufacturer of devices for the computer industry. The company may
promote him to chief financial officer.
Required:
1. In this table, indicate which executive is primarily responsible for each activity.
Activity Controller CFO
Managing the company’s long-term investments
Presenting the financial statements to the board of directors
Strategic review of different lines of businesses
Budgeting funds for a plant upgrade
Managing accounts receivable
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Negotiating fees with auditors
Assessing profitability of various products
Evaluating the costs and benefits of a new product design
2. Based on this table and your understanding of the two roles, what types of training or
experience will George find most useful for the CFO position?
SOLUTION
(15 min.) Role of controller, role of chief financial officer.
1.
Activity Controller CFO
Managing the company’s long-term investments X
Presenting financial statements to the board of directors X
Strategic review of different lines of businesses X
Budgeting funds for a plant upgrade X
Managing accounts receivable X
Negotiating fees with auditors X
Assessing profitability of various products X
Evaluating the costs and benefits of a new product design X
2. As CFO, Jimenez will be interacting much more with the senior management of the
company, the board of directors, auditors, and the external financial community. Any experience
he can get with these aspects will help him in his new role as CFO. George Jimenez can be better
positioned for his new role as CFO by participating in strategy discussions with senior
management, by preparing the external investor communications and press releases under the
guidance of the current CFO, by attending courses that focus on the interaction and negotiations
between the various business functions and outside parties such as auditors and, either formally
or on the job, getting training in issues related to investments and corporate finance.
1-34 Budgeting, ethics, pharmaceutical company. Chris Jackson was recently promoted to
Controller of Research and Development (R&D) for BrisCor, a Fortune 500 pharmaceutical
company that manufactures prescription drugs and nutritional supplements. The company’s total
R&D cost for 2017 was expected (budgeted) to be $5 billion. During the company’s midyear
budget review, Chris realized that current R&D expenditures were already at $3.5 billion, nearly
40% above the midyear target. At this current rate of expenditure, the R&D division was on track
to exceed its total year-end budget by $2 billion!
In a meeting with CFO Ronald Meece later that day, Jackson delivered the bad news.
Meece was both shocked and outraged that the R&D spending had gotten out of control. Meece
wasn’t any more understanding when Jackson revealed that the excess cost was entirely related
to research and development of a new drug, Vyacon, which was expected to go to market next
year. The new drug would result in large profits for BrisCor, if the product could be approved by
year-end.
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Meece had already announced his expectations of third-quarter earnings to Wall Street
analysts. If the R&D expenditures weren’t reduced by the end of the third quarter, Meece was
certain that the targets he had announced publicly would be missed and the company’s stock
price would tumble. Meece instructed Jackson to make up the budget shortfall by the end of the
third quarter using “whatever means necessary.”
Jackson was new to the controller’s position and wanted to make sure that Meece’s orders
were followed. Jackson came up with the following ideas for making the third-quarter budgeted
targets:
a. Stop all research and development efforts on the drug Vyacon until after year-end. This change
would delay the drug going to market by at least 6 months. It is possible that in the meantime a
BrisCor competitor could make it to market with a similar drug.
b. Sell off rights to the drug Martek. The company had not planned on doing this because, under
current market conditions, it would get less than fair value. It would, however, result in a
one-time gain that could offset the budget shortfall. Of course, all future profits from Martek
would be lost.
c. Capitalize some of the company’s R&D expenditures, reducing R&D expense on the income
statement. This transaction would not be in accordance with GAAP, but Jackson thought it was
justifiable because the Vyacon drug was going to market early next year. Jackson would argue
that capitalizing R&D costs this year and expensing them next year would better match revenues
and expenses.
Required:
1. Referring to the “Standards of Ethical Behavior for Practitioners of Management Accounting
and Financial Management,” Exhibit 1-7 (page 17), which of the preceding items (a–c) are
acceptable to use? Which are unacceptable?
2. What would you recommend Jackson do?
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