978-0137024971 Chapter 1 Part 2

Chapter 1: How Management Accounting: Information Supports Decision Making

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required to perform each procedure—would be tracked, and delay

time—the time between when the patient showed up for a

procedure and the time when the procedure was actually initiated

would provide an indicator of customer service. Weekly (or

monthly) the manager would want financial summaries of the cost

of supplies used and of the department’s personnel expenses,

(b) The manager of the nursing service would likely get daily summaries of

the staffing at each of the patient units, and the number of patients in

service) would provide a summary indication of the ability of each unit

manager to adjust staffing levels to actual demands. Weekly and monthly

summaries of absenteeism or tardiness in each patient unit may help

identify where employee morale and commitment to the hospital are

at their units.

The manager might establish a procedure in which discharged patients

are asked to evaluate the quality of the service they received during their

stay. This would enable the manager to compare the quality of the

manager has succeeded in creating highly satisfied patients and

Atkinson, Solutions Manual t/a Management Accounting, 6E

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physicians. The practices being used by this manager can then be

disseminated to the other departmental managers.

of whether the skill mix of personnel is being appropriately adjusted. A

similar report on supplies used at each unit will supply information about

consumption of expensive materials and supplies.

as specialized equipment and intensive care units. Financial data are

probably useful on a monthly basis, but key operating statistics like

occupancy rates, admissions backlogs, and average length–of-stay could

be provided daily. Monthly, the CEO could attempt to compare her own

Aggregate measures of satisfaction—from attending physicians as well

as patients—would be helpful in spotting whether performance is

improving or deteriorating.

1-13 Quality reflects how well the product conforms to promised performance. The

following examples are intended to be illustrative rather than comprehensive.

Item

Elements of Quality

Television set

Number of warranty claims, cost of warranty repairs,

customer satisfaction surveys, evaluation by

independent testing laboratory

University course

Student evaluation scores, number of complaints,

student performance on common examinations

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Meal in an exclusive

restaurant

Number of complaints, customer satisfaction surveys,

percentage of customers retained, restaurant reviews, tips

as an average percent of meal cost

Carry-out meal from

a restaurant

Number of complaints, customer satisfaction surveys,

percentage of customers retained

Container of milk

Number of customer complaints, percentage of customers

retained, customer satisfaction surveys, purity analysis

Visit to the doctor

Patient recovery rates, number of visits to have same

ailment treated, number of patient complaints

Trip on an airplane

Customer satisfaction surveys, percentage of customers

retained, number of complaints, evaluation by travelers’

association

Pair of jeans

Customer satisfaction surveys, percentage of customers

retained, number of complaints, durability of jeans

Novel

Number of books sold, number of sales to purchasers

of author’s past novels, book reviews

University text

Number of typographical errors, number of conceptual

errors, durability

PROBLEMS

1-14 One principal advantage of separating the financial reporting from the

management accounting department is that employees who are dedicated to

their particular tasks develop expertise in these tasks. The financial reporting

accountants can concentrate on the financial accounting and tax standards that

The management accounting department can work closely with the functional

areas (for example, manufacturing, marketing, and engineering) that use

management accounting information. This will ensure that the reports are

timely and relevant for these internal users. If users wish to use specific

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inventory valuation procedures). The management accountants can include

nonfinancial operating information in the reports they prepare for employees

and managers, and they can become familiar with how to access information

auditing requirements.

The disadvantage of separate accounting departments is that the information

prepared for internal use may not be immediately compatible with external

reporting requirements. Therefore, an additional and perhaps costly and time–

1-15 (a) The controller is attempting to respond to the needs of internal users

(managers of operating activities and marketing managers) to create

or marketing manager may have wanted to see whether today’s prices cover

not only today’s capital acquisition cost but also provide an adequate return

accountant treats an internal customer as the primary customer of the

management accounting reports and therefore customizes the internal

(b) Management accountants should treat as their primary customers the

organization’s managers and their information and decision needs. These

managers, and leave for the financial reporting group the task of

Chapter 1: How Management Accounting: Information Supports Decision Making

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financial reporting information.

1-16 Financial information provides a summary of the costs of resources used and

outputs produced in a process. Thus it is a valuable complement to direct

(physical) measures of the quality, cycle time, and throughput of a process.

Consider a process that has several inputs (materials, energy, machine time, and

40–50% of process costs, with no attention made to improve the utilization

(productivity) of materials and equipment. Without some type of financial model,

investments that could improve quality, responsiveness, and output. Financial

information also helps employees set priorities about where cost reduction and

quality improvement would be most beneficial. Some managers have estimated a

price for nonconforming production, so that defective outputs have higher costs

organization.

Atkinson, Solutions Manual t/a Management Accounting, 6E

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CASES

information in many different settings. As such, they should provide good illustrations of

the applications for management accounting information and concepts discussed in the

1-17 (a) An employee desiring to serve customers efficiently and effectively would

be interested in the time it takes to perform specified tasks and the quality of

the work performed. If standard times exist for routine jobs that Super

Printing performs, the employee can compare actual and standard times to

This feedback can be obtained through formal or informal feedback each

time a customer picks up a job, or through formal written feedback, such as

store level. For example, the manager will want day-to-day operating

statistics on the efficiency and productivity of the various machines

(copies per hour); machine availability and downtime; product defects,

rework, customer returns, and defective merchandise; and response times

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facsimile services, document preparation, computer services, and office

supplies), and profitability by major customer type (the business school’s

MBA and executive programs, faculty research, school administration,

and other institutional accounts). The manager can use such information

hour of day, day of week, and month of year to guide decisions about

which hours the store should be open, and also to staff the store

appropriately for predictable fluctuating demands. Possible nonfinancial

strategic measures for the outlet include market share and satisfaction for

(c) The president of Super Printing would look at profitability, perhaps

monthly, for every outlet (store) in the chain. The president would want

operating statistics that would enable him or her to compare the

profitability and operating performance of each business line across

stores. This internal benchmarking information suggests opportunities

1-18 Case based on “Romeo Engine Plant” Harvard Business School Case #9–194–

032; for a description of the “old production environment,” see “Peoria Engine

Plant” Case #9–193–082.

should yields and productivity fall below standard, or if defects and

scrap exceeded budgeted levels. Therefore, the information needs of

Atkinson, Solutions Manual t/a Management Accounting, 6E

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of inputs to use.

(b) In the new environment, workers need information after each batch of

productive work on the amount of defects, scrap, and downtime, and

ratios of output produced to inputs consumed. Any defect or unexpected

resource to the workers so that they can concentrate on fixing any

persistent problems with this bottleneck resource and finding ways to

expand its productive capacity. In this way, productive capacity of the

equipment and processes can be continually increased without additional

given information or feedback about their performance. The new

environment, in contrast, tasks workers with generating the ideas and

1-19 Case drawn from an episode reported in “Analog Devices: The Half-Life

System” Harvard Business School Case #9–190–061.

This production manager has expressed very clearly how he uses a mix of financial

Interestingly, he does want to see one set of financial measures on a daily basis:

orders booked and sales (billings). The ratio of these two financial measures,

commonly referred to as the book–to–billings ratio, is a common measure in the

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semiconductor industry. When greater than one, the ratio indicates an increase in

future business activity. When the ratio is less than one, business activity will

contract in the near future. So the production manager is getting a snapshot each day

about whether activity in his department will be increasing or decreasing in the near

Thus, this production manager’s choices are informative in answering the

question of how the management accountant should determine an appropriate

blend of financial and nonfinancial measures for operating people. The

Specifically, the production manager is supplied two financial measures that

enable him to calculate a leading indicator of future business activity in his

department, and a nonfinancial measure, on-time delivery, that provides an ex

post indicator of how his department’s performance (on quality, first-pass

It is interesting that monthly he wants to look at his departmental spending. He can

control spending on discretionary items like travel and maintenance, and wants

feedback, but only monthly, on his department’s spending performance. Also, if

1-20 For government and nonprofit agencies, the financial information provides little

useful information, except that the agency did or did not overspend its budgeted or

authorized amount. An agency would not be considered to have had a terrific year

because it stayed within $10 of its budget, or spent 10% less than its budget. For

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have a clear definition of its mission and its targeted customer base. With such a

mission and a targeted set of constituencies, it can then formulate objectives and

A comprehensive performance measurement system for a government or nonprofit

agency can include such financial measures as operating expenses as a targeted

served by the number of agencies supported by United Way. One would need to

think about objectives and measures for both the providers of funds to the

organization (taxpayers or donors) and the recipients of the services provided by the

organization.

Finally, the performance measurement system can include measures on

learning, growth, and innovation. Relevant objectives include improving the