Accounting Chapter 1 Homework Decision Making The Management Accountant Helps The

CHAPTER 1

INTRODUCTION TO COST MANAGEMENT

DISCUSSION QUESTIONS

1. Cost management is concerned with assign-

ing costs and using information for planning,

controlling, continuous improvement, and

decision making. It encompasses cost

accounting and management accounting but

has a broader focus than the usual roles as-

signed to cost accounting and management

accounting. Cost accounting is concerned

with assigning costs to various cost objects

such as products, services, and activities.

Cost management broadens this focus by

emphasizing accuracy of assignments

based on causal relationships. Management

accounting is concerned with planning,

controlling, and decision making. Cost man-

agement broadens this focus by emphasiz-

ing continuous improvement and expanding

planning, control, and decision making to in-

clude such factors as processes, value

chain, life cycle analyses, strategic consid-

erations, and environmental costs.

2. Cost management differs from financial

accounting in the following major ways: (1) an

internal focus, (2) an emphasis on the future,

(3) freedom from GAAP and other mandatory

rules, (4) a multidisciplinary scope, (5) an

evaluation of individual segments within the

firm, and (6) the provision of more detailed

information.

3. Factors affecting the focus and practice of

cost management are global competition,

service industry growth, advances in infor-

mation technology, advances in the manu-

facturing environment, customer orientation,

new product development, total quality

management, time as a competitive factor,

and efficiency. Global competition means

that companies are now competing with the

best of the best. Accurate, timely, and rele-

vant accounting data are crucial in appropri-

ately managing costs. Service industry

growth has led to the need for increased

management accounting information to im-

prove productivity and quality. The advances

in information technology have led to the

creation of integrated relational databases

that allow a variety of users to develop their

own reports based on their particular needs.

It has also fostered the implementation and

use of more sophisticated accounting sys-

tems such as activity-based costing. Cus-

tomer orientation, new product development,

total quality management, time as a competi–

tive factor, and efficiency require the ac-

countant to create and track financial and

nonfinancial measures of customer satisfac-

tion, quality improvement, responsiveness,

cycle time, target costs, cost, and productivi-

ty. Advances in the manufacturing environ–

ment are characterized by practices such as

the theory of constraints, just-in-time, and au-

tomation. These changes are affecting such

practices as inventory management and

product costing.

4. A flexible manufacturing system is a com-

puterized system that allows different prod-

uct lines to be manufactured on the same

equipment. The equipment can be reconfig-

ured simply by calling up different programs.

5. The controller is responsible for both internal

and external accounting. These responsibili-

ties usually include such diverse activities as

taxes, SEC reports, cost accounting, budg-

eting, internal auditing, financial accounting,

and systems accounting.

6. A line position has direct responsibility for

carrying out the basic missions of an organi-

zation. A staff position has indirect responsi-

bilities for the basic missions and provides a

supportive role for line activities.

7. For most organizations, the controller should

be a member of the top management staff.

The controller is the financial expert of an

organization and can provide critical advice

and insight. Furthermore, the current ten-

dency of having a cross-functional man-

agement team increases the likelihood that

the controller will be included as part of the

management staff.

8. Planning establishes performance stand-

ards, feedback compares actual perfor-

mance with planned performance, and

control uses feedback to evaluate deviations

from plans.

9. Cost management has the role of providing

information to help identify opportunities for

improvement and also provides an evalua-

tion of the progress made in implementing

the actions designed to create improvement.

10. Performance reports compare actual costs

and revenues with planned costs and reve-

nues and thus provide signals to managers

that allow them to take corrective actions.

11. Business ethics is concerned with making

the right choices and usually involves sacri-

ficing individual self-interest for the well-

being of others. It is possible to teach ethical

behavior in virtually any course. By intro-

ducing ethical dilemmas in management ac-

counting, students can become aware of the

behavior that is expected in the business

world and, in particular, for management ac-

countants.

12. Yes. There is some evidence that ethical

behavior actually is good business. It im-

proves society, helps align individual goals

with firm goals, enhances a firm’s public im-

age, and even seems to be related to better

financial performance. The market and con-

sumers appreciate ethical behavior and are

willing to reward those who adopt it.

13. Yes. As management accountants become

more informed about what behavior is ac-

ceptable and what is not, support should in-

crease for ethical behavior. The code also

recommends solutions to ethical dilemmas

that might not have been obvious to the

practicing management accountant.

14. The three forms of certification are the CMA,

the CPA, and the CIA certificates. Although

each certification can prove to be valuable

for management accountants, the CMA des-

ignation is tailored to fit the needs of man-

agement accountants. The CPA designation

has a public accounting orientation, and the

CIA designation has an internal auditing

orientation. Only the CMA designation spe-

cifically addresses the professional require-

ments of a management accountant.

15. The two parts are (1) financial planning and

control; (2) financial decision making. The

parts reveal the emphasis on managerial

use of accounting information and imply the

interdisciplinary nature of management

accounting.

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EXERCISES

Exercise 1.1

a. FS

b. FS

g. CMS

h. FS

Exercise 1.2

1. Customers can be internal or external. Users of the component produced by

Barry’s department are his internal customers. This includes the Assembly

2. Barry’s department is producing a low-quality component. One out of every

50 units is a high defect rate and is causing a lot of rework. Being sensitive

3. Cost management can provide information concerning quality—both financial

and nonfinancial. Defect rates can be tracked over time. Rework costs

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Exercise 1.3

a. Planning and control

b. Costing of service

c. Costing of product/activity

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Exercise 1.4

The manager is clearly considering unethical behaviors, especially the decisions

associated with reducing maintenance and promotional salaries. Extending asset

life for depreciation has less clear ethical implications. Reducing maintenance

may not hurt much in the short run but will have long-run negative financial con-

Exercise 1.5

1. The controller wants a written record of spoiled material in order to more

closely control it. From a behavioral perspective, the formal record keeping of

spoilage will make it seem more important to individuals on the factory floor.

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Exercise 1.5 (Concluded)

It is possible that everybody doesn’t know what the spoilage rate is. Some

2. Bill correctly sees that keeping track of spoilage is additional work. This will

cost the plant in one way or another. Even if an additional worker need not be

hired, the workers who do record spoilage, by definition, will not be doing

Exercise 1.6

1. Planning. The management accountant gains an understanding of the impact

on the organization of planned transactions (i.e., analyzing strengths and

weaknesses) and economic events (both strategic and tactical) and sets ob-

tainable goals for the organization. The development of budgets is an exam-

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Exercise 1.6 (Concluded)

2. a. Planning; expected price, cost, and tax information are needed

b. Continuous improvement; cost savings from improved order entry quality

and improved customer satisfaction

c. Control and evaluation; a performance report triggered the investigation

Exercise 1.7

Kaylin Hepworth is a line manager with direct responsibility for producing a major

component of the plant’s products. The basic objective of the plant is to produce

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CPA-TYPE EXERCISES

None are included within Chapter 1.

PROBLEMS

Problem 1.8

Dear Lily,

I am pleased that you are considering taking an accounting course to comple-

ment your hotel and restaurant major. You will find that a basic knowledge of

accounting will place you in good stead in dealing with the business aspects of

hotel management.

Financial accounting is primarily aimed at outside parties. It involves generating

financial statements that describe the assets and liabilities of a business and the

periodic income earned. You will find that investors, lenders, the IRS, and other

local, state, and federal regulatory and licensing agencies will appreciate a good

solid financial accounting system.

Cost management is concerned with determining the costs of things like

products, services, and activities. It is also concerned with using financial and

non– financial information for planning, controlling, continuous improvement, and

decision making. In your case, you will want to budget and control costs for a

hotel. You may want to determine the costs and revenues of different services.

For example, is it worthwhile to offer a Sunday brunch for hotel guests?

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Problem 1.9

At first glance, this seems simple. Couldn’t John simply mention that Patty had

already accepted a position as controller in another company? Since the decision

Problem 1.10

1. Emily should not implement the suggested accounting procedures because

they conflict with generally accepted accounting principles and violate

2. Emily should discuss the problem with the next highest management level (if

the divisional manager’s mind cannot be changed). This could be, for exam-

Problem 1.11

The proposed changes violate the following ethical standards:

Competence. Top management’s request for Larry Stewart to account for the

company’s information in a manner that is not in accordance with generally ac-

cepted accounting principles violates the standard to “perform professional du-

information violates the standard to “communicate information fairly and objec-

tively.” (IV–1)

By telling Larry to restrict the disclosure of the changes, top management is

clearly in violation of the standard to “communicate unfavorable as well as favor-

able information.”

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Problem 1.12

By discussing the possible sale of Emery’s common stock with members of the

troubleshooting team, Gus Swanson has violated the following standards of ethi-

cal conduct:

Problem 1.13

1. Assuming the controller did not inform the CEO and CFO of the situation, the

ethical considerations of the controller’s apparent lack of action, as covered

in the Standards of Ethical Conduct for Management Accountants, are as

follows:

Problem 1.13 (Concluded)

2. The recommended course of action that Marian Nevins should take, as de-

scribed in the Standards of Ethical Conduct for Management Accountants, is

as follows:

Consult company policies and procedures regarding ethical conflict. If the

company does not have adequate procedures in place to resolve the conflict,

3. The actions that Heart Health Procedures can take to improve the ethical situ-

ation within the company include:

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CYBER RESEARCH CASE

1.14

Answers will vary.

The Collaborative Learning Exercise Solutions can be found on the