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CHAPTER 1
THE MANAGER AND MANAGEMENT ACCOUNTING
See the front matter of this Solutions Manual for suggestions regarding your choices of
assignment material for each chapter.
1-1 Management accounting measures, analyzes, and reports financial and nonfinancial
information that helps managers make decisions to fulfill the goals of an organization. It focuses
on internal reporting and is not restricted by generally accepted accounting principles (GAAP).
1-2 Financial accounting is constrained by generally accepted accounting principles.
Management accounting is not restricted to these principles. The result is that
• management accounting allows managers to charge interest on owners’ capital to help
1-3 Management accountants can help to formulate strategy by providing information about
the sources of competitive advantage—for example, the cost, productivity, or efficiency
advantage of their company relative to competitors or the premium prices a company can charge
relative to the costs of adding features that make its products or services distinctive.
1-4 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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1-5 Supply chain describes the flow of goods, services, and information from the initial
sources of materials and services to the delivery of products to consumers, regardless of whether
those activities occur in the same organization or in other organizations.
1-6 “Management accounting deals only with costs.” This statement is misleading at best,
and wrong at worst. Management accounting measures, analyzes, and reports financial and
nonfinancial information that helps managers define the organization’s goals and make decisions
1-7 Management accountants can help improve quality and achieve timely product deliveries
by recording and reporting an organization’s current quality and timeliness levels and by
analyzing and evaluating the costs and benefits—both financial and nonfinancial—of new
1-8 The five-step decision-making process is (1) identify the problem and uncertainties;
1-9 Planning decisions focus on selecting organization goals and strategies, predicting results
under various alternative ways of achieving those goals, deciding how to attain the desired goals,
and communicating the goals and how to attain them to the entire organization.
1-10 The three guidelines for management accountants are as follows:
1. Employ a cost-benefit approach.
1-11 Agree. A successful management accountant requires general business skills (such as
understanding the strategy of an organization) and people skills (such as motivating other team
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1-12 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
plant controller was viewed as a resource rather than a deadweight. In a related way,
the plant controller could show how the plant manager’s time and resources could be
saved by viewing the new plant controller as a team member.
(b) Demonstrate to the plant manager a good knowledge of the technical aspects of the
1-13 The controller is the chief management accounting executive. The corporate controller
reports to the chief financial officer, a staff function. Companies also have business unit
controllers who support business unit managers or regional controllers who support regional
managers in major geographic regions.
1-14 The Institute of Management Accountants (IMA) sets standards of ethical conduct for
management accountants in the following four areas:
• Competence
• Confidentiality
1-15 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).
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1-16 (15 min.) Value chain and classification of costs, computer company.
Compaq Computer incurs the following costs:
a. Electricity costs for the plant assembling the Presario computer line of products
b. Transportation costs for shipping the Presario line of products to a retail chain
c. Payment to David Kelley Designs for design of the Armada Notebook
d. Salary of computer scientist working on the next generation of minicomputers
e. Cost of Compaq employees’ visit to a major customer to demonstrate Compaq’s ability to
interconnect with other computers
f. Purchase of competitors’ products for testing against potential Compaq products
g. Payment to television network for running Compaq advertisements
h. Cost of cables purchased from outside supplier to be used with Compaq 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 6).
1-17 (15 min.) Value chain and classification of costs, pharmaceutical company.
Pfizer, a pharmaceutical 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 insulin syringe to make it less painful
c. Cost of a toll-free telephone line used for customer inquiries about drug usage, side effects of
drugs, and so on
d. Equipment purchased to conduct experiments on drugs yet to be approved by the government
e. Sponsorship of a professional golfer
f. Labor costs of workers in the packaging 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 6).
SOLUTION
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1-18 (15 min.) 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 6).
SOLUTION
1-19 (10 min.) Key success factors.
Dominic Consulting has issued a report recommending changes for its newest manufacturing
client, Casper Engines. Casper Engines currently manufactures a single product, which is sold
and distributed nationally. The report contains the following suggestions for enhancing business
performance:
a. Develop a hybrid engine to stay ahead of competitors
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b. Increase training hours of assembly-line personnel to decrease the currently high volumes of
scrap and waste.
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
1-20 (10 min.) Key success factors.
Morten 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. Provide tools to simplify and complete construction sooner.
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. Provide continuous training for employees on new tools and equipment.
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
1-21 (10–15 min.) Planning and control decisions.
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Conner 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. Conner asks its marketing team to consider ways to get back market share from its newest
competitor, Swiffer.
b. Conner calculates market share after introducing its newest product.
c. Conner compares costs it actually incurred with costs it expected to incur for the production
of the new product.
d. Conner’s design team proposes a new product to compete directly with the Swiffer.
e. Conner estimates the costs it will incur to sell 30,000 units of the new product in the first
quarter of next fiscal year.
1-22 (10–15 min.) Planning and control decisions.
Ed Sykes is the president of Valley Tree 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. Sykes decides to expand service offerings into an adjacent market.
b. Sykes calculates the profitability of a job recently performed for the state arboretum.
c. Sykes weighs the purchase of an expensive new wood-chipping machine proposed by field
managers.
d. Sykes estimates the hourly cost of providing emergency services next year to the local
power company.
e. Sykes compares actual fuel costs for operating the company’s equipment to budgeted costs.
1-23 (15 min.) Five-step decision-making process, manufacturing.
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Tadeski Foods makes frozen dinners that it sells through grocery stores. Typical products include
turkey, pot roast, fried chicken, and meatloaf. The managers at Tadeski have recently proposed a
line of frozen chicken pies. They take the following actions to help decide whether to launch the
line.
a. Tadeski’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 northern sales territory than
in their southern sales territory.
c. Managers discuss the possibility of introducing a new chicken pie.
d. Managers compare actual costs of making chicken pies with their budgeted costs.
e. Costs for making 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 costs of
potential ingredients.
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
1-24 (15 min.) Five-step decision-making process, service firm.
Brook Exteriors is a firm that provides house-painting services. Richard Brook, the owner, is
trying to find new ways to increase revenues. Mr. Brook performs the following actions, not in
the order listed.
a. Mr. Brook decides to buy the paint sprayers rather than hire additional painters.
b. Mr. Brook discusses with his employees the possibility of using paint sprayers instead of
hand painting to increase productivity and thus profits.
c. Mr. Brook learns of a large potential job that is about to go out for bids.
d. Mr. Brook compares the expected cost of buying sprayers to the expected cost of hiring more
workers who paint by hand and estimates profits from both alternatives.
e. Mr. Brook estimates that using sprayers will reduce painting time by 20%.
f. Mr. Brook researches the price of paint sprayers online.
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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
1-25 (10–15 min.) 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 reach- ing 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?
SOLUTION
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1-26 (10–15 min.) Professional ethics and reporting division performance.
Joshua Wilson is the controller of Apex Picture Frame Mouldings, a division of Garman
Enterprises. As the division is preparing to count year-end inventory, Wilson is approached by
Doug Leonard, the division’s president. A selection of inventory previously valued at $150,000
had been identified as flawed earlier that month and as a result was determined to be unfit for
sale. Leonard tells Wilson that he has decided to count the selected items as regular inventory
and that he will “deal with it when things settle down after the first of the year. After all,”
Leonard adds, “the auditors don’t know good picture frame moulding from bad. We’ve had a
rough year, and things are looking up for next year. Our division needs all the profits we can get
this year. It’s just a matter of timing the write–off.” Leonard is Wilson’s direct supervisor.
Required:
1. Describe Wilson’s ethical dilemma.
2. What should Wilson do if Leonard gives him a direct order to include the inventory?
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1-27 (15 min.) 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:
The following decisions were made from June through October 2013:
a. June 2013: Raised subscription fee to $25.50 per month from July 2013 onward. The
budgeted number of subscribers for this monthly fee is shown in the following table.
b. June 2013: Informed existing subscribers that from July onward, monthly fee would be
$25.50.
c. July 2013: Offered e-mail service to subscribers and upgraded other online services.
d. October 2013: Dismissed the vice president of marketing after significant slowdown in
subscribers and subscription revenues, based on July through September 2013 data in the
following table.
e. October 2013: Reduced subscription fee to $22.50 per month from November 2013 onward.
Results for July–September 2013 are as follows:
Required:
1.
Classify each of the decisions (a–e) as a planning or a control decision.
Month/Year
Advertising
Revenues
Actual Number of
Subscribers
Monthly Fee
per Subscriber
June 2011
$ 415,972
29,745
$15.50
December 2011
867,246
55,223
20.50
June 2012
892,134
59,641
20.50
December 2012
1,517,950
87,674
20.50
June 2013
2,976,538
147,921
20.50
Month/Year
Budgeted Number
of Subscribers
Actual Number of
Subscribers
Monthly Fee per
Subscriber
July 2013
145,000
129,250
$25.50
August 2013
155,000
142,726
25.50
September 2013
165,000
145,643
25.50
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2.
Give two examples of other planning decisions and two examples of other control decisions
that may be made at PostNews.com.
SOLUTION
1-28 (20 min.) 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. Pedro Phones is about to decide whether to launch production and sale of a cell phone with
standard features.
b. Flash Computers is trying to decide whether to produce and sell a new home computer
software package that includes the ability to interface with a sewing machine and a vacuum
cleaner. There is no such soft- ware currently on the market.
c. Celine Cosmetics has been asked to provide a “store brand” lip gloss that will be sold at
discount retail stores.
d. Nicholus Meats is considering developing a special line of gourmet bologna made with sun–
dried tomatoes, pine nuts, and artichoke hearts.
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
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1-29 (20 min.) 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 popular restaurant is considering hiring and training inexperienced cooks. The restaurant
will no longer hire experienced chefs.
b. An office supply store is considering adding a delivery service that its competitors do not
have.
c. A regional airline is deciding whether to install technology that will allow passengers to