1-14
check themselves in. This technology will reduce the number of desk clerks required inside
the airport.
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
1-30 (15 min.) 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.
1-15
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
1-31 (15 min.) 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. Including costs related to administrative function to evaluate the financial performance of a
division, but including only controllable costs in evaluating the manager’s performance.
4. Considering the desirability of purchasing new technology.
5. Basing bonus calculations on financial measures such as return on investment or basing
bonus calculations on delivery time to customer.
6. Deciding whether to buy or lease an existing production facility to increase capacity.
7. Determining the loss in future business because of poor quality but including only estimated
scrap and waste as potential loss on the budgeted financial statements.
SOLUTION
1-16
1-32 (15 min.) 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 financial statements to the board of directors
Strategic review of different lines of businesses
Budgeting funds for a plant upgrade
Managing accounts receivable
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
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
1-17
1-33 (30 min.) Pharmaceutical company, budgeting, ethics.
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 2013 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.
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.
1-18
Required:
1. Referring to the “Standards of Ethical Behavior for Practitioners of Management Accounting
and Financial Management,” Exhibit 1-7 (page 18), which of the preceding items (a–c) are
acceptable to use? Which are unacceptable?
2. What would you recommend Jackson do?
SOLUTION
1-19
1-34 (30–40 min.) Professional ethics and end-of-year actions.
Linda Butler is the new division controller of the snack-foods division of Daniel Foods. Daniel
Foods has reported a minimum 15% growth in annual earnings for each of the past 5 years. The
snack-foods division has reported annual earnings growth of more than 20% each year in this
same period. During the current year, the economy went into a recession. The corporate
controller estimates a 10% annual earnings growth rate for Daniel Foods this year. One month
before the December 31 fiscal year-end of the current year, Butler estimates the snack-foods
division will report an annual earnings growth of only 8%. Rex Ray, the snack-foods division
president, is not happy, but he notes that the “end-of-year actions” still need to be taken.
Butler makes some inquiries and is able to compile the following list of end-of-year
actions that were more or less accepted by the previous division controller:
a. Deferring December’s routine monthly maintenance on packaging equipment by an
independent con- tractor until January of next year.
b. Extending the close of the current fiscal year beyond December 31 so that some sales of next
year are included in the current year.
c. Altering dates of shipping documents of next January’s sales to record them as sales in
December of the current year.
d. Giving salespeople a double bonus to exceed December sales targets.
e. Deferring the current period’s advertising by reducing the number of television spots run in
December and running more than planned in January of next year.
f. Deferring the current period’s reported advertising costs by having Daniel Foods’ outside
advertising agency delay billing December advertisements until January of next year or by
having the agency alter invoices to conceal the December date.
g. Persuading carriers to accept merchandise for shipment in December of the current year even
though they normally would not have done so.
Required:
1. Why might the snack-foods division president want to take these end-of-year actions?
2. Butler is deeply troubled and reads the “Standards of Ethical Behavior for Practitioners of
1-20
Management Accounting and Financial Management” in Exhibit 1-7 (page 18). Classify each
of the end-of-year actions (a–g) as acceptable or unacceptable according to that document.
3. What should Butler do if Ray suggests that these end–of-year actions are taken in every
division of Daniel Foods and that she will greatly harm the snack-foods division if she does
not cooperate and paint the rosiest picture possible of the division’s results?
SOLUTION
1-21
1-35 (30 min.) Professional ethics and end-of-year actions.
Macon Publishing House produces consumer magazines. The house and home division, which
sells home-improvement and home-decorating magazines, has seen a 20% reduction in operating
income over the past 9 months, primarily due to an economic recession and a depressed
consumer housing market. The division’s controller, Rhett Gable, has felt pressure from the CFO
to improve his division’s operating results by the end of the year. Gable is considering the
following options for improving the division’s performance by year-end:
a. Cancelling two of the division’s least profitable magazines, resulting in the layoff of 25
employees.
b. Selling the new printing equipment that was purchased in January and replacing it with
discarded equipment from one of the company’s other divisions. The previously discarded
equipment no longer meets current safety standards.
c. Recognizing unearned subscription revenue (cash received in advance for magazines that
will be delivered in the future) as revenue when cash is received in the current month (just
before fiscal year-end) instead of showing it as a liability.
1-22
d. Reducing the division’s Allowance for Bad Debt Expense. This transaction alone would
increase operating income by 5%.
e. Recognizing advertising revenues that relate to January in December.
f. Switching from declining balance to straight-line depreciation to reduce depreciation expense
in the current year.
Required:
1. What are the motivations for Gable to improve the division’s year-end operating earnings?
2. From the point of view of the “Standards of Ethical Behavior for Practitioners of
Management Accounting and Financial Management,” Exhibit 1-7 (page 18), which of the
preceding items (a–f) are acceptable? Which are unacceptable?
3. What should Gable do about the pressure to improve performance?
SOLUTION
1-23
1-36 (40 min.) Ethical challenges, global company.
Andahl Logistics, a U.S. shipping company, has just begun distributing goods across the Atlantic
to Norway. The company began operations in 2011, transporting goods to South America. The
1-24
company’s earnings are currently trailing behind its competitors and Andahl’s investors are
becoming anxious. Some of the company’s largest investors are even talking of selling their
interest in the shipping newcomer. Andahl’s CEO, Max Chang, calls an emergency meeting with
his executive team. Chang needs a plan before his upcoming conference call with uneasy
investors. Andahl’s executive staff make the following suggestions for salvaging the company’s
short-term operating results:
a. Stop all transatlantic shipping efforts. The startup costs for the new operations are hurting
current profit margins.
b. Make deep cuts in pricing through the end of the year to generate additional revenue.
c. Pressure current customers to take early delivery of goods before the end of the year so that
more revenue can be reported in this year’s financial statements.
d. Sell off distribution equipment prior to year-end. The sale would result in one-time gains that
could offset the company’s lagging profits. The owned equipment could be replaced with
leased equipment at a lower cost in the current year.
e. Record executive year-end bonus compensation for the current year in the next year when it
is paid after the December fiscal year-end.
f. Recognize sales revenues on orders received but not shipped as of the end of the year.
g. Establish corporate headquarters in Ireland before the end of the year, lowering the
company’s corporate tax rate from 28% to 12.5%.
Required:
1. As the management accountant for Andahl, evaluate each of the preceding items (a–g) in the
context of the “Standards of Ethical Behavior for Practitioners of Management Accounting
and Financial Management,” Exhibit 1-7 (page 18). Which of the items are in violation of
these ethics standards and which are acceptable?
2. What should the management accountant do with regard to those items that are in violation
of the ethical standards for management accountants?
SOLUTION
1-25
1-26