MANAGEMENT ACCOUNTING - Solutions Manual

CHAPTER 1

MANAGEMENT ACCOUNTING: AN OVERVIEW

I. Questions

1. Use of the word “need” in the quoted passage is pejorative. It implies an

unlimited level of demand for information. However, rational managers
apply a cost-benefit criterion to information and will only want
accounting information if its benefits exceed its costs. Accounting
information provides benefits by improving decision making and
controlling behavior in organizations. In most organizations, accounting
information is very prevalent which implies that its benefits exceed its
costs. Hence, successful managers will find it in their self-interest to
learn how to use accounting information in these organizations.
Clearly, this statement is incurred in those firms where accounting
information has very limited usefulness (e.g., if the accounting
information is often wrong or is not produced in a timely fashion). In
these organizations, managers do not find the accounting information to
have benefits in excess of its costs, will not use it, do not need to know
how to use it, and definitely do not need it.

2. a. Historical costs are of limited use in making planning decisions in a

rapidly changing environment. With changing products, processes
and prices, the historical costs are inadequate approximations of the
opportunity costs of using resources.
Historical costs may, however, be useful for control purposes, as
they provide information about the activities of managers and can be
used as performance measures to evaluate managers.
b. no, because costly. The purpose of accounting systems is to provide
information for planning purposes and control. Although historical
costs are not generally appropriate for planning purposes, additional
measures are costly to make. An accounting system should include
additional measures if the benefits of improved decision making are
greater than the costs of the additional information.

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3. Finance and economics textbooks traditionally state that the goal of a

profit organization is to maximize shareholder wealth. Managers are
frequently presumed to act in the best interest of the shareholder,
although recent finance literature recognizes that appropriate incentives
are necessary to align manager interests with shareholder interests. The
goal, however, are not very clear as to how this is achieved. Most
finance textbooks focus on financing decisions and not on the use of
assets and dealing with customers.
Marketing’s goal of satisfying customers recognizes that customers are
the source of revenues for the organization, and therefore the means
through which shareholder value is increased. However, customer
satisfaction is only valuable insofar as it creates shareholder wealth. The
further goal of marketing is to ensure that customer satisfaction is
maximized without compromising the organization’s profitability.

4. Yes. Planning is really much more vital than control; that is, superior
control is fruitless if faulty plans are being implemented. However,
planning and control are so intertwined that it seems artificial to draw
rigid lines of separation between them.

5. Yes. The controller has line authority over the personnel in his own
department but is a staff executive with respect to the other departments.

6. Line authority is exerted downward over subordinates. Staff authority is

the authority to advise but not command others; it is exercised laterally
or upward. Functional authority is the right to command action laterally
and downward with regard to a specific function or specialty.

7. Cost accounting is the controller’s primary means of implementing the

7-point concept of modern controllership. Cost accounting is
intertwined with all seven duties to some extent, but its major focus is on
the first three.

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8. Bettina Company

President

VP, Production VP, Finance VP, Sales

Controller Treasurer

Assistant Assistant
Controller Treasurer

Special Cost Tax Internal General System &

Studies Accounting Manager Audit Accounting EDP
Manager Manager Manager Manager Manager

Cost Budget & Performance

Systems Standard Analyst
Analyst Cost Analyst

Cost Payroll Accounts Accounts Billing General

Clerk Clerk Receivable Payable Clerk Ledger
Clerk Clerk Bookkeeper

9. Management accountants contribute to strategic decisions by providing

information about the sources of competitive advantage and by helping
managers identify and build a company’s resources and capabilities.

10. In most organizations, management accountants perform multiple roles:

problem solving (comparative analyses for decision making),
scorekeeping (accumulating data and reporting reliable results), and
attention directing (helping managers properly focus their attention).

11. Three guidelines that help management accountants increase their value
to managers are (a) employ a cost-benefit approach, (b) recognize
behavioral as well as technical considerations, and (c) identify different
costs for different purposes.

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12. Management accounting is an integral part of the controller’s function in

an organization. In most organizations, the controller reports to the chief
financial officer, who is a key member of the top management team.

13. Management accountants have ethical responsibilities that are related to

competence, confidentiality, integrity, and objectivity.

14. By reporting and interpreting relevant data, the controller exerts a force
or influence that impels management toward making better-informed
decisions.

The controller of one company described the job as “a business advisor

to…help the team develop strategy and focus the team all the way
through recommendations and implementation.”

15.
Financial Accounting
Audience: External: shareholders, creditors, tax
authorities
Purpose: Report on past performance to external
parties; basis of contracts with owners and
lenders
Timeliness: Delayed; historical
Restrictions: Regulated; rules driven by generally accepted
accounting principles and government
authorities
Type of Information: Financial measurements only
Nature of Information: Objective, auditable, reliable, consistent,
precise
Scope: Highly aggregate; report on entire
organization

Managerial Accounting
Audience: Internal: Workers, managers, executives
Purpose: Inform internal decisions made by employees
and managers; feedback and control on
operating performance
Timeliness: Current, future oriented

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Restrictions: No regulations; systems and information

determined by management to meet strategic
and operational needs
Type of Information: Financial, plus operational and physical
measurements on processes, technologies,
suppliers customers, and competitors
Nature of Information: More subjective and judgmental; valid,
relevant, accurate
Scope: Disaggregate; inform local decisions and
actions

16. The competitive environment has changed dramatically. Companies

encountered severe competition from overseas companies that offered
high-quality products at low prices. Activity-based costing systems are
introduced in many manufacturing and service organizations to
overcome the inability of traditional cost systems to accurately assign
overhead costs. Activity-based management is a viable approach for
managers to make decisions based on ABC information. There has been
improvement of operational control systems such that information is
more current and provided more frequently. The nature of work has
changed from controlling to informing. Firms are concerned about
continuous improvement, employee empowerment and total quality.
Nonfinancial information has become a critical feedback measure.
Finally, the focus of many firms is on measuring and managing
activities.

17. As measurements are made on operations and, especially, on individuals

and groups, the behavior of the individuals and groups are affected.
People will react to the measurements being made by focusing on the
variables or behavior being measured. In addition, if managers attempt
to introduce or redesign cost and performance measurement systems,
people familiar with the previous system will resist. Management
accountants must understand and anticipate the reactions of individuals
to information and measurements. The design and introduction of new
measurements and systems must be accompanied with an analysis of the
likely reactions to the innovations.

II. Exercises

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Exercise 1

a. (1) Problem solving

b. (3) Attention-directing
c. (1) Problem solving
d. (2) Scorekeeping

Exercise 2

a. (4) Marketing
b. (3) Production
c. (6) Customer service
d. (5) Distribution

Exercise 3

a. (4) Marketing
b. (3) Production
c. (5) Distribution
d. (4) Marketing
e. (5) Distribution
f. (3) Production
g. (1) Research and development
h. (2) Design

III. Problems

Problem 1 (Problem Solving, Scorekeeping, and Attention Directing)

Because the accountant’s duties are often not sharply defined, some of these
answers might be challenged:
1. Scorekeeping
2. Attention directing
3. Scorekeeping
4. Problem solving
5. Attention directing
6. Attention directing
7. Problem solving

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8. Scorekeeping (depending on the extent of the report) or attention

getting
9. This question is intentionally vague. The give-and-take of the
budgetary process usually encompasses all three functions, but it
emphasizes scorekeeping the least. The main function is attention
directing, but problem solving is also involved.
10. Problem solving

Problem 2 (Management Accounting Information System)

1. Inputs: b, g, i, m
2. Processes: a, d, f, j
3. Outputs: e, k, n
4. System objectives: c, h, l

Problem 3 (Role of Management Accountants)

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
obtainable goals for the organization. The development of budgets is an
example of planning.

Controlling. The management accountant ensures the integrity of financial

information, monitors performance against budgets and goals, and provides
information internally for decision making. Comparing actual performance
against budgeted performance and taking corrective action where necessary
is an example of controlling. Internal auditing is another example.

Evaluating Performance. The management accountant judges and analyzes

the implication of various past and expected events, and then chooses the
optimum course of action. The management accountant also translates data
and communicates the conclusions. Graphical analysis (such as trend, bar
charts, or regression) and reports comparing actual costs with budgeted costs
are examples of evaluating performance.

Ensuring Accountability of Resources. The management accountant

implements a reporting system closely aligned to organizational goals that
contribute to the measurement of the effective use of resources and
safeguarding of assets. Internal reporting such as comparison of actual to
budget is an example of accountability.

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External Reporting. The management accountant prepares reports in

accordance with generally accepted accounting principles and then
disseminates this information to shareholders, creditors, and regulatory tax
agencies. An annual report or a credit application are examples of external
reporting.

Problem 4 (Line Versus Staff)

Jamie Reyes is staff. She is in a support role – she prepares reports and
helps explain and interpret them. Her role is to help the line managers more
effectively carry out their responsibilities.

Stephen Santos is a line manager. He has direct responsibility for producing

a garden hose. Clearly, one of the basic objectives for the existence of a
manufacturing firm is to make a product. Thus, Stephen has direct
responsibility for a basic objective and therefore holds a line position.

Problem 5 (Professional Ethics and End-of-Year Games)

Requirement 1
The possible motivations for the snack foods division wanting to play end-
of-year games include:
(a) Management incentives. Yummy Foods may have a division bonus
scheme based on one-year reported division earnings. Efforts to front-
end revenue into the current year or transfer costs into the next year can
increase this bonus.
(b) Promotion opportunities and job security. Top management of Yummy
Foods likely will view those division managers that deliver high reported
earnings growth rates as being the best prospects for promotion.
Division managers who deliver “unwelcome surprises” may be viewed
as less capable.
(c) Retain division autonomy. If top management of Yummy Foods adopts
a “management by exception” approach, divisions that report sharp
reductions in their earnings growth rates may attract a sizable increase in
top management supervision.

Requirement 2
The “Standards of Ethical Conduct…” require management accountants to:

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 Refrain from either actively or passively subverting the attainment of

the organization’s legitimate and ethical objectives, and
 Communicate unfavorable as well as favorable information and
professional judgment or opinions.

Several of the “end-of-year games” clearly are in conflict with these

requirements and should be viewed as unacceptable by Tan:
(a) The fiscal year-end should be closed on midnight of December 31.
“Extending” the close falsely reports next year’s sales as this year’s
sales.
(b) Altering shipping dates is falsification of the accounting reports.
(c) Advertisements run in December should be charged to the current year.
The advertising agency is facilitating falsification of the accounting
records.

The other “end-of-year games” occur in many organizations and may fall
into the “gray” to “acceptable” area. However, much depends on the
circumstances surrounding each one:
(a) If the independent contractor does not do maintenance work in
December, there is no transaction regarding maintenance to record. The
responsibility for ensuring that packaging equipment is well maintained
is that of the plant manager. The division controller probably can do
little more than observe the absence of a December maintenance charge.
(d) In many organizations, sales are heavily concentrated in the final weeks
of the fiscal year-end. If the double bonus is approved by the division
marketing manager, the division controller can do little more than
observe the extra bonus paid in December.
(e) If TV spots are reduced in December, the advertising cost in December
will be reduced. There is no record falsification here.
(g) Much depends on the means of “persuading” carriers to accept the
merchandise. For example, if an under-the-table payment is involved, it
is clearly unethical. If, however, the carrier receives no extra
consideration and willingly agrees to accept the assignment, the
transaction appears ethical.

Each of the (a), (d), (e) and (g) “end-of-year games” may well disadvantage
Yummy Foods in the long run. For example, lack of routine maintenance
may lead to subsequent equipment failure. The divisional controller is well
advised to raise such issues in meetings with the division president.

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However, if Yummy Foods has a rigid set of line/staff distinctions, the

division president is the one who bears primary responsibility for justifying
division actions to senior corporate officers.

Requirement 3

If Tan believes that Ryan wants her to engage in unethical behavior, she
should first directly raise her concerns with Ryan. If Ryan is unwilling to
change his request, Tan should discuss her concerns with the Corporate
Controller of Yummy Foods. Tan also may well ask for a transfer from the
snack foods division if she perceives Ryan is unwilling to listen to pressure
brought by the Corporate Controller, CFO, or even President of Yummy
Foods. In the extreme, she may want to resign if the corporate culture of
Yummy Foods is to reward division managers who play “end-of-year
games” that Tan views as unethical and possibly illegal.

Problem 6

James Torres has come up with a scheme that involves a combination of data
falsification and smoothing! Not only has he made up the revenue numbers,
but also he has had the gall to defer some of them to the next period.
Making up such numbers is clearly illegal. Smoothing, in this example is
also illegal because the numbers are fictitious.

Problem 7

Clearly the vice-president will lose his or her job if you turn him or her in.
Given that this is a major violation of the code of ethics and a violation
patent law, the vice-president could go to jail. Your best course of action is
to check your information and if the vice-president is definitely involved, go
immediately to the VP’s superior (who is probably a senior VP or the
company president). The organization’s attorneys will take over from there.

Problem 8

One option is to do nothing and ignore what you saw, however, this may
violate your own code of ethics and your ethical responsibilities under the
organization’s code of ethics. Given that you want to do something, it is

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probably best to start by talking to employees in your organization whose

job it is to deal with ethical issues. If no such employees exist or are
available, you might start by using a decision model. This model
incorporated the following steps:
1. Determine the Facts – What, Who, Where, How
2. Define the Ethical Issue
3. Identify Major Principles, Rule, Values
4. Specify the Alternatives.
5. Compare Values and Alternatives, See if Clear Decision
6. Assess the Consequences.
7. Make Your Decision.

IV. Cases

Case 1 (Financial vs. Managerial Accounting)

Requirement (a)
Other forward looking information desired in addition to the income
statement information are
1. Disclosure of the components of financial performance, i.e., nature
and source of revenues, various activities, transactions, and other
relevant events affecting the company.
2. Nature and function of the components of income and expenses

Requirement (b)
No. GAAP does not allow capitalization of employee training and
advertising costs even if management feels that they increase the value of the
company’s brand name. The reasons are uncertainty of the future benefits
that may be derived therefrom and difficulty and reliability of their
measurement.

Requirement (c)
Detailed information that managers would likely request are analysis of the
significant increases in
1. Sales
2. Cost of sales

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3. Payroll
4. Stock and option based compensation
5. Advertising and promotion.

Requirement (d)
Nonmonetary measures:
1. Change in number and profile of customers
2. Share in the market
3. Who, what and how many are the competitors
4. Product lines offered by the entity vs. Product lines of competitors
5. Sales promotion and advertising activities

Requirement (e)
1. Competitors
2. Employees
3. Prospective creditors

Case 2 (You get what you measure!)

Requirement (a)
Increase in sales to new customers to sales
Too much emphasis on this ratio may lead the sales manager to spend more
time developing business with new customers and disregard the needs of
existing customers. It is therefore possible to lose the business of several
key accounts.

Requirement (b)
Decrease in cost of goods sold to sales
This performance measure could create the following problems:
1. Purchasing goods with poor quality at lower cost and selling them
for the same price.
2. Indiscriminately increasing selling price to widen the profit margin
without regard to competitor’s current prices.
3. If the entity is manufacturing its own goods, managers could try to
economize on costs, i.e., buying poorer quality of materials,
employing unskilled workers, etc. thereby causing deterioration of
the quality of the finished products.

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In all of the above situations, customer patronage could eventually be

adversely affected.

Requirement (c)
Decrease in selling and administrative expense to sales
Cost-cutting is generally advisable for as long as the quality of goods and
services are not compromised. Likewise, certain cost-saving measures could
demotivate sales people and other employees and could lead to counter-
productive activities.

Case 3 (The Roles of Managers and Management Accountants)

1. Managerial accounting, Financial accounting

2. Planning
3. Directing and motivating
4. Feedback
5. Decentralization
6. Line
7. Staff
8. Controller
9. Budgets
10. Performance report
11. Chief Financial Officer
12. Precision; Nonmonetary data

Case 4 (Ethics in Business)

If cashiers routinely short-changed customers whenever the opportunity

presented itself, most of us would be careful to count our change before
leaving the counter. Imagine what effect this would have on the line at your
favorite fast-food restaurant. How would you like to wait in line while each
and every customer laboriously counts out his or her change? Additionally,
if you can’t trust the cashiers to give honest change, can you trust the cooks
to take the time to follow health precautions such as washing their hands? If
you can’t trust anyone at the restaurant would you even want to eat out?

Generally, when we buy goods and services in the free market, we assume
we are buying from people who have a certain level of ethical standards. If
we could not trust people to maintain those standards, we would be reluctant

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to buy. The net result of widespread dishonesty would be a shrunken

economy with a lower growth rate and fewer goods and services for sale at a
lower overall level of quality.

Case 5 (Ethics and the Manager)

Requirement 1
Failure to report the obsolete nature of the inventory would violate the
Standards of Ethical Conduct as follows:

Competence
 Perform duties in accordance with relevant technical standards.
 Prepare complete reports using reliable information.
By failing to write down the value of the obsolete inventory, Perez would
not be preparing a complete report using reliable information. In addition,
generally accepted accounting principles (GAAP) require the write-down of
obsolete inventory.

Integrity
 Avoid conflicts of interest.
 Refrain from activities that prejudice the ability to perform duties
ethically.
 Refrain from subverting the legitimate goals of the organization.
 Refrain from discrediting the profession.
Members of the management team, of which Perez is a part, are responsible
for both operations and recording the results of operations. Since the team
will benefit from a bonus, increasing earnings by ignoring the obsolete
inventory is clearly a conflict of interest. Perez would also be concealing
unfavorable information and subverting the goals of the organization.
Furthermore, such behavior is a discredit to the profession.

Objectivity
 Communicate information fairly and objectively.
 Disclose all relevant information.
Hiding the obsolete inventory impairs the objectivity and relevance of
financial statements.

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Requirement 2
As discussed above, the ethical course of action would be for Perez to insist
on writing down the obsolete inventory. This would not, however, be an
easy thing to do. Apart from adversely affecting her own compensation, the
ethical action may anger her colleagues and make her very unpopular.
Taking the ethical action would require considerable courage and self-
assurance.

Case 6 (Preparing an Organization Chart)

Requirement 1
See the organization chart on page 17.

Requirement 2
Line positions would include the university president, academic vice-
president, the deans of the four colleges, and the dean of the law school. In
addition, the department heads (as well as the faculty) would be in line
positions. The reason is that their positions are directly related to the basic
purpose of the university, which is education. (Line positions are shaded on
the organization chart.)

All other positions on the organization chart are staff positions. The reason
is that these positions are indirectly related to the educational process, and
exist only to provide service or support to the line positions.

Requirement 3
All positions would have need for accounting information of some type. For
example, the manager of central purchasing would need to know the level of
current inventories and budgeted allowances in various areas before doing
any purchasing; the vice president for admissions and records would need to
know the status of scholarship funds as students are admitted to the
university; the dean of the business college would need to know his/her
budget allowances in various areas, as well as information on cost per
student credit hour; and so forth.

Case 7 (Ethics in Business)

Requirement 1

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No, Santos did not act in an ethical manner. In complying with the
president’s instructions to omit liabilities from the company’s financial
statements he was in direct violation of the IMA’s Standards of Ethical
Conduct for Management Accountants. He violated both the “Integrity” and
“Objectivity” guidelines on this code of ethical conduct. The fact that the
president ordered the omission of the liabilities is immaterial.

Requirement 2
No, Santos’ actions can’t be justified. In dealing with similar situations, the
Securities and Exchange Commission (SEC) has consistently ruled that “…
corporate officers…cannot escape culpability by asserting that they acted as
‘good soldiers’ and cannot rely upon the fact that the violative conduct may
have been condoned or ordered by their corporate superiors.” (Quoted from:
Gerald H. Lander, Michael T. Cronin, and Alan Reinstein, “In Defense of
the Management Accountant,” Management Accounting, May, 1990, p. 55)
Thus, Santos not only acted unethically, but he could be held legally liable if
insolvency occurs and litigation is brought against the company by creditors
or others. It is important that students understand this point early in the
course, since it is widely assumed that “good soldiers” are justified by the
fact that they are just following orders. In the case at hand, Santos should
have resigned rather than become a party to the fraudulent misrepresentation
of the company’s financial statements.

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Case 6
Requirement 1

President

Vice
Vice Vice Vice
Academic
President, President, Vice President,
President,
Auxiliary Admissions & Physical
President Financial
Services Records Plant
Services
(Controller)

Manager, Manager, Manager,

Manager, Manager, Manager, Manager, Plant
Central University Grounds &
University Computer Accounting &
Purchasing Bookstore Custodial
Press Services & Finance Maintenance
Services

Dean,
Dean, Business Dean, Dean, Dean,
Engineering &
Humanities Fine Arts Law School
Quantitative

(Departments) (Departments) (Departments) (Departments)

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Case 8 (Ethics in Business)

Requirement 1
Andres Romero has an ethical responsibility to take some action in the
matter of PhilChem, Inc. and the dumping of toxic wastes. The Standards
of Ethical Conduct for Management Accountants specifies that management
accountants should not condone the commission of acts by their organization
that violate the standards of ethical conduct. The specific standards that
apply are as follows.
• Competence. Management accountants have a responsibility to
perform their professional duties in accordance with relevant laws
and regulations.
• Confidentiality. Management accountants must refrain from
disclosing confidential information unless legally obligated to do so.
However, Andres Romero may have a legal responsibility to take
some action.
• Integrity. Management accountants have a responsibility to:
- refrain from either actively or passively subverting the
attainment of the organization’s legitimate and ethical
objectives.
- communicate favorable as well as unfavorable information and
professional judgments or opinions.
• Objectivity. Management accountants must fully disclose all
relevant information that could reasonably be expected to influence
an intended user’s understanding of the reports, comments, and
recommendations.

Requirement 2
The Standards of Ethical Conduct for Management Accountants indicates
that the first alternative being considered by Andres Romero, seeking the
advice of his boss, is appropriate. To resolve an ethical conflict, the first
step is to discuss the problem with the immediate superior, unless it appears
that this individual is involved in the conflict. In this case, it does not appear
that Romero’s boss is involved.

Communication of confidential information to anyone outside the company

is inappropriate unless there is a legal obligation to do so, in which case
Romero should contact the proper authorities.
Contacting a member of the Board of Directors would be an inappropriate

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action at this time. Romero should report the conflict to successively higher
levels within the organization and turn only to the Board of Directors if the
problem is not resolved at lower levels.

Requirement 3
Andres Romero should follow the established policies of the organization
bearing on the resolution of such conflict. If these policies do not resolve the
ethical conflict, Romero should report the problem to successively higher
levels of management up to the Board of Directors until it is satisfactorily
resolved. There is no requirement for Romero to inform his immediate
superior of this action because the superior is involved in the conflict. If the
conflict is not resolved after exhausting all courses of internal review,
Romero may have no other recourse than to resign from the organization and
submit an informative memorandum to an appropriate member of the
organization.
(CMA Unofficial Solution, adapted)

V. Multiple Choice Questions

1. D 11. D 21. B 31. D 41. A 51. B

2. D 12. D 22. B 32. C 42. C 52. B
3. D 13. D 23. A 33. D 43. D 53. A
4. B 14. A 24. A 34. B 44. B 54. C
5. D 15. A 25. B 35. D 45. C 55. D
6. A 16. A 26. C 36. B 46. B 56. C
7. B 17. D 27. B 37. C 47. A 57. C
8. D 18. A 28. D 38. B 48. B 58. C
9. D 19. D 29. B 39. A 49. C 59. A
10. A 20. D 30. C 40. A 50. D 60. B

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