Cost Management: A Strategic Emphasis 7th Edition Solution Manual

Preview (16 of 1422 Pages)

100%

Purchase to unlock

Loading page image...

Chapter01-Cost Management and Strategy1-1CHAPTER 1:COST MANAGEMENT AND STRATEGYQUESTIONS1-1Firms Using Cost Management.Here are some examples; there are manypossible answers.1. Walmart: to keep costs low by streamlining restocking and sales2.Hewlett-PackardorDellComputer:tokeepcostslowbyimprovingmanufacturing performance and by using target costing and other managementtechniques3. Citicorp: to keep costs low by using activity analysis to identify key operationsand to find those that add little or no value4. A municipalityor public agency: to keep costs low in order to provide the bestpossible service given available funds5. Procter & Gamble: to assess the profitability of its different products6. Any other large,diversified manufacturer, like Procter & Gamble: which needsto be able to analyze the relative profitability of its different products, using costmanagement7. A small machine shop: which needs cost management to determine whether itshould repair or replace a machine8. A dance studio: to analyze and choose between different compensation plansfor its teachers; and to determine whether it should open a new studio1-2Firms not expected to be significant users of cost management information:1.Microsoft: here the focus is on forming strategic alliances, innovation andcompetition;costmanagementismoreimportantforotherfirmsintheinformation technology business, such as Hewlett-Packard, and Dell Computerthat compete in part on innovation but also on price2. Versace: a high fashion firm competes on innovation and product leadership;thedevelopmentandcommunicationofattractivenewideasisthekeytocompetitive success rather than cost management3. Other firms in the fashion industry, such as Chanel,Coach,Gucci, andArmani: for reasons similar to Versace4. Major league sports: dependent primarily on the development of fan support,good coaching and player acquisition1-3Cost management information is a broad concept.It is the information themanager needs to implement the strategyofthe firm or not-for-profit organization--both financial information about costs and revenues and relevant non-financialinformation about productivity, quality, and other key success factors for the firm.Typically, cost management is the responsibility of the Chief Financial Officer(CFO) who often delegates much of this responsibility to the Controller.1-4In the private sector, the Financial Accounting Standards Board, an independentorganization, and the American Institute of Certified Public Accountants (AICPA)

Loading page image...

Chapter01-Cost Management and Strategy1-2supply guidance regarding financial reporting practices. The Sarbanes-Oxley Actof 2002 also created the Public Company Accounting Oversight Board whichreports to the SEC to oversee auditing standards and practices. The AICPA alsoprovides educational opportunities.In the public sector, The Cost AccountingStandardsBoard(CASB)setscostaccountingstandardsforthosedoingbusiness withthe federal government, especially defensecontractors.TheInstitute of Management Accountants (IMA) is the principal organization devotedprimarilytomanagementaccountantsintheUnitedStates.TheIMAhasmagazines,newsletters,researchreports,managementaccountingpracticereports, professional development seminars, and monthly technical meetings thatserve the broad purpose of providing continuing educational opportunities formanagement accountants.In Canada, the Society of Management Accountantsprovides a similar role.Similar organizations are present in most other countriesaround the world.The Financial ExecutivesInternational(FEI)organizationprovides services much like the IMA for financial managers, including controllersand treasurers.Because of the nature of its membership, the FEI tends to focuson management and operational control issues, and less on the product costing,planning, and decision-making functions.1-5TheCertificateinManagementAccounting(CMA)isthemostrelevantcertification program for management accountants since it focuses on the typesof skills that are most in demand for management.Other relevant certificatesincludetheCertifiedPublicAccountant(CPA)andtheCharteredGlobalManagement Accountant (CGMA).1-6The four functions of management are:1. Strategic Management--information is needed by management to makesound strategic decisions regarding choice of products, manufacturing methods,marketing techniques and channels, and other long term issues.2. Planning and Decision Making--information is needed to support recurringdecisions regarding replacement of equipment, managing cash flow, budgetingraw materials purchases, scheduling production, and pricing.3. Management and Operational Control--information is needed to provide a fairandeffectivebasisforidentifyinginefficientoperations,andtorewardandsupport the most effective managers.4.PreparationofFinancialStatements--informationisneededtoprovideaccurate accounting for inventory and other assets, in compliance with reportingrequirements, for the preparation of financial reports and for use in the threeother management functions.1-7Strategic management is the most important management function since it mostdirectly relates to the overall success of the firm.In strategic management, topmanagers determine how the firm is to compete and what specific goals it must

Loading page image...

Chapter01-Cost Management and Strategy1-3set and achieve to be successful.The determination of these strategies andgoals drives all other activities in the firm.1-8Merchandising firms purchase goods for resale.Merchandisers that sell to othermerchandisers are called wholesalers, while those selling directly to consumersare called retailers.Examples of merchandising firms include the largeretailers,suchasSears,Walmart,andRadioShack.Merchandisersusecostmanagement information to control stocking,, and customer service.Manufacturing firms use raw materials, labor, and manufacturing facilities andequipment to produce products.These products are sold to merchandising firmsor to other manufacturers as raw materials for additional products.Examples ofmanufacturers include General Motors, IBM, and Sony.These firms use costmanagement information to control production costs.Service firms provide a service to customers that offers convenience, freedom,safety, or comfort.Common services include transportation, financial services(banking,insurance,accounting),personalservices(physicaltraining,hairstyling), medical services, and legal services. These firms use cost managementinformationtoidentifyprofitableservicesandtocontrolcostsincurredinproviding services.Governmental and not-for-profit organizations provide services, much like thefirms in service industries. However, the service provided by these organizationsis such that there is often no direct relationship between the amount paid and theservices provided.Instead, both the nature of the services to be provided andthecustomerswhoreceivetheservicearedeterminedbygovernmentorphilanthropicorganizations.Theseorganizationsusecostmanagementinformation to determine and control the costs of the services they provide.1-9The answers here can vary from large manufacturers such asBoeingto smallretail stores.If the class has trouble getting started, the instructor might usesomeofthefirms mentionedinquestion 1-1,orfromtheinstructor’sownexperience and understanding.Again, if the students have a hard time, theinstructor might ask them to think of firms close to their homes, or to think of firmsin a given industry, etc.1-10As firms move to the Internet for sales and customer service it is likely thatstrategies will change.For some firms, a popular web site can be an importantdifferentiatingfactor.FirmssuchasAmazon.com,EtradeandeBayhaveachieved powerful competitive advantage through the strength of their web sites.Other firms might use the Internet to achieve cost advantage, by using Internetbased systems for transactions processing, production scheduling, purchasing,employee recruiting, etc.It seems that the Internet could be effectively used toenhance either a cost leadership or product leadership strategy.

Loading page image...

Chapter01-Cost Management and Strategy1-41-11As firms move to the Internet for sales and customer service it is likely that theirdemand for cost management information will change.For example, orderprocessingcostsarelikelytochangedramatically.Intheweb-basedenvironment, costs are likely to increase rapidly at first as new investments aremade, but unit (per transaction) costs are likely to rise until the technology is inplace and functioning, and then unit costs will come down as volume builds.From a strategic standpoint, the key issues may be customer service, speed ofresponse and reliability which can be achieved through the web-site.Whetherand how soon the firm can achieve these benefits is a critical question.1-12The factors in the contemporary business environment that affect business firmsand cost management are:1.Increasedglobalcompetition,whichmeansanincreasinglycompetitiveenvironment for all firms and thus the need for cost management informationtobecomemorecompetitive;theneedforcompetitivenon-financialinformation in addition to financial information in cost management reports;2.Leanmanufacturing,inwhichcompaniesreducecostsby usingflexiblemanufacturing methods, statistical quality control, and many of the techniquesdevelopedbyJapanesemanufacturers;leanmanufacturersadoptleanaccountingtomeasureandsustaintheimprovementsmadefromleanmanufacturing.3.Useofinformationtechnology,theInternet,andenterpriseresourcemanagement;costmanagementinformationisusedtofacilitatetheintroductionofnewmanufacturingandproducttechnologies(e.g.,determining which technologies will most contribute to profitability),to developnew ways to manage customer and supplier relationships using the Internet;andtouseenterpriseresourcemanagementtodevelopanreportcostmanagement information in a lower cost, more comprehensive, and timelyway;4.A focus on the customer, which requires cost management reports to includecriticalinformationaboutcustomersatisfaction,changingcustomerpreferences, etc.;5.Changes in management organizations, new reporting practices to recognizethe new focus on cross-functional teams in which employees from all areas ofthe firm work together to make the firm successful;6.Changes in the social, political, and cultural environment of business, whichrequiresanexpansionofcostmanagementreportingtoincludecriticalsuccess factors related to the expectations of those beyond the ownership ofthefirmincludingemployees,localgovernmentofficials, andcommunityleaders.

Loading page image...

Chapter01-Cost Management and Strategy1-51-13Refer to Exhibit 1-3 in the text, reproduced here.Comparison of Prior and Contemporary Business EnvironmentsPrior BusinessEnvironmentContemporary BusinessEnvironmentMANUFACTURINGBasis of CompetitionEconomies of scale,standardizationQuality, functionality,customer satisfactionManufacturing ProcessHigh volume, longproduction runs,significant levels of in-process and finishedinventoryLow volume, shortproduction run, focus onreducing inventory levels andother non-value-addedactivities and costsManufacturingTechnologyAssembly lineautomation, isolatedtechnology applicationsRobotics, flexiblemanufacturing systems,integrated technologyapplications connected bynetworkRequired LaborSkillsMachine paced, low-level skillsIndividual and team paced,high-level skillsEmphasis on QualityAcceptance of a normalor usual amount ofwasteStrive for zero defects

Loading page image...

Chapter01-Cost Management and Strategy1-6Question 1-13(continued)Prior BusinessEnvironmentContemporary BusinessEnvironmentMARKETINGProductsRelatively fewvariations, long productlife cyclesLarge number of variations,short product life cyclesMarketsLargely domesticGlobalMANAGEMENTORGANIZATIONTypes of CostManagementInformation NeededAlmost exclusivelyfinancial dataFinancial and operating data,the firm's strategic successfactorsManagementOrganizationalStructureHierarchical; commandand controlNetwork-based organizationforms;teamwork focus--employee has moreresponsibility and control;coaching rather thancommand and controlManagement FocusShort term: short termperformance measuresand compensation;concern for sustainingstock price; short tenureand highmobility of topmanagersLong term; focus on criticalsuccess factors, commitmentto the long term success ofthe firm, including addingshareholder value

Loading page image...

Chapter01-Cost Management and Strategy1-71-14The thirteencontemporary management techniques are:1.The Balanced Scorecard(BSC) and the Strategy Map. The BSC isanaccounting report that includes the firm’s critical success factors in four areas:financial performance, customer satisfaction, internal processes, and learningand growth(human resources). The Strategy Map is a method, based on thebalanced scorecard, which links the four perspectives in a cause-and-effectdiagram.2.Value-Chain Analysisisa toolthat helps the firm identifythe specific stepsrequired to provide a product or service.3.Activity-based Costing and Management: Activity-based costing is used toimprove the tracing of manufacturing costs to products and therefore theaccuracy of product costs. Activity-based management (ABM) uses activityanalysis to help managers improve the value of products and services and toincrease the firm’s competitiveness.4.Business Intelligence is an approach to strategy implementation in which themanagement accountant uses data to understand and analyze businessperformance.5.TargetCosting is a management methodthat determines the desired cost for aproduct upon the basis of a given competitive price, such that the product willearn a desired profit.6. Life-Cycle Costingisa managementmethodused to monitor the costs of aproduct throughout its life cycle.7. Benchmarkingisa process by which a firm identifies its critical successfactors, studies the best practices of other firms (or other units within a firm) forthese critical success factors, and then implements improvements in the firm'sprocesses to match or beat the performance of its competitors.8.BusinessProcessImprovementisamanagementtechniqueinwhichmanagers and workers commit to a program of continuous improvement inquality and other critical success factors.

Loading page image...

Chapter01-Cost Management and Strategy1-81-14 (continued)9.Total Quality Managementisa technique in which management developspolicies and practices to ensure that the firm's products and services exceed thecustomer's expectations.10.LeanAccounting uses value streams to measure the financial benefits of afirm’s progress in implementing lean manufacturing.11.The Theory of Constraintsisa strategic technique to help firms effectivelyimprove the rate at which raw materials are converted to finished product.12. Enterprise Sustainability means the balancing of the company’s short-andlong-term goals in all three dimensions of performance–social, environmental,and financial.13. EnterpriseRiskManagement is a framework and process that firms use tomanagethe risks that could negatively or positively affect the company’scompetitiveness and success.

Loading page image...

Chapter01-Cost Management and Strategy1-9BRIEFEXERCISES1-15Many students will answer Walmart or Target since these are mentioned in thetext. A variety of answers are possible and sometimes students will disagree , asfor example, in discussing a fast food restaurant such as McDonald’s.Some willargue that it is a cost-leader because the prices in fast food restaurants aretypically low.But other students will argue that McDonald’s is different thanother fast food restaurants, and thus, differentiation.I ask them to focus on whatbrings in the customer:Is it price or some quality of feature?Then many of thestudents will say that for the most part fast food restaurants are differentiators.I’ll ask if any one could name a fast food restaurant they would go to just for priceand price only, and I will get a few examples there, but not many.1-16This question is set to get a positive response and that is usually what I get.Then I try to spend some time getting some examples of why a strong ethicalclimate would be beneficial, and note the increasing importance of an ethicalclimate since the Sarbanes-Oxley Act.Also, a helpful resource is the article intheJuly2005StrategicFinance,“IsThereValueinCorporateValues?”Reporting on a survey done by the Aspen Institute and the consulting firm BoozAllenHamilton,thearticlenotes thatmostrespondentsbelievethatstrongcorporatevaluesbuildstrongrelationshipsandreputations.Thestudyalsoreported that nearly half of financial leaders surveyedsaid that strong corporatesocial and environmental valuesaffect financial performance in the short run.The article notes, as do many other surveys, that the firm Johnson& Johnson isperhaps the best knownexample of a company that has high corporate values.See for example the New York Times article on John & Johnson: “ Katie Thomas,“Johnson & Johnson Praised for Taking Uterine Surgery Tools Off Market,”TheNew York Times, August 1, 2014, p B3.1-17Again this question is posed for a positive response, and the main goal I have forthe question is to have the class think through the decision as both a businessand an ethical issue.According to aWall Street Journalarticleat the time of thisVIOXX issue(October 1, 2004, pB1), “Experts Praise How Merck Broke theNews,”theannouncementbroughtinpositivepublicityforthecompany.Interestingly, some of the firms hurt the most by the announcement were themedia companies that were counting on Merck’s spending for VIOXX advertising.1-18Like most beverage companies, there is a strong differentiation.Refer thestudents tothe information in Problem 1-50which shows Coke as having thehighest brand value of any company.There is at least a perceived differencebetween a Coke and Sam’s ClubCola, for example.Ask the class if they cancome up with an example of a cost leader beverage, and some will mention lowpriced brands of cola or beer.

Loading page image...

Chapter01-Cost Management and Strategy1-101-19Acommodityisaproductorservicethatisdifficulttodifferentiatefromcompetitors: gasolineandpaper products are some examples.You can ask theclass to provide additional examples.The crucial point for a commodity:isthere any reason you would pay more for this item?As such, commodities arenatural cost leadership products or services.1-20Most students will argue that they chose their bank because of service andlocation, thus differentiation.Others will say the rates are better, and thenperhaps cost leadership.It is useful to distinguish the banking needs of say, astudent,versus a small business like a car dealership which will rely moreheavily on a variety of customer services and will likely see banks as moredifferentiatedentities.Oneregionalbankdidastudyandfoundthatapproximately ½ of its customers were “rate shoppers” while the other half were“relationship-oriented.”The bank had adopted customer-focused strategies togrow the customer-relationship side of its business.Smaller banks, in particular,focus on customer service to attract and retain customers.1-21There are a number of possible answers here.The main point of the question isthat the cost leadership or differentiation classification applies across differenttypes of firms indifferent industries.There are some industries (particularlythose with commodities) which tend to be characterized by cost leaders andothers (e.g.biotech)thattend to be characterized by differentiators.Otherindustries may have a mix of different types of competitors.I ask them toconsider the automobile industry and to identify cost leaders and differentiators.1-22It is certainly likely that a new product, with technologically advanced features,may begin as a differentiator and then as the market for the product matures andcompetitors enter the market for the product, the industry as a whole moves tomore of a cost leadership type of competition.Consider cell phones as anexample.1-23Often people think of strategy as simply planning, or “long term” planning.In thebroadest sense, this is correct, though the planning in strategy formulation andexecution is somewhat more complex, including developing an understanding ofthebusiness environmentinwhich the firmoperates andof theresourcesavailable within and outside the firm to help it compete effectively.The steps inexecuting a strategic plan are considered in chapter 2.

Loading page image...

Chapter01-Cost Management and Strategy1-111-24The IMA definition of management accounting states that:a.Management accounting is the process of gathering, reporting, andanalyzing information for management decision makingb.Management accounting is a profession that involves preparation andanalysis of cost information, budgeting, performance measurement andanalysis, to assist managers in decision makingc.Management accounting involves partnering in management decisionmaking, planning and performance measurement to assist in theformulation and implementation of an organization’s strategyd.Management accounting is a set of practices in which accountants,working within companies, help managers to make better decisions basedon accurate financial informationAnswer cLearning Objective: 01-01Feedback:The IMA definition: “Management Accounting is a profession that involvespartnering in management decision making, devising planning and performancemanagement systems, and providing expertise in financial reporting and control toassist management in the formulation and implementation of an organization’ strategy.”Answer c) is the best fit.1-25Which of the following is the correct sequence in which cost managementinformation is developed and used?a.Business events, data, information, analysis, decisionsb.Business events, data, analysis, information, decisionsc.Business events,information, analysis, knowledge, decisionsd.Business events, data, information, knowledge, decisionsAnswer dLearning Objective: 01-01Feedback:events, data, information, knowledge, decisions is the correct sequence, asused by the IMA in the definition of management accounting

Loading page image...

Chapter01-Cost Management and Strategy1-121-26.Cost management uses the expertise of the management accountant toa.Improve quality and reduce costb.Implement a strategy of cost leadership or differentiationc.Implement a strategy of customer value andshareholder valued.Improve business processes and lean operationsAnswer bLearning Objective: 01-01, 01-04Feedback:This question requires an understanding of the definition of managementaccounting, that is, management accounting “assists management in the formulationand implementation of an organization’s strategy.” It also requires an understanding ofthe two types of competitive strategy (from Michael Porter)–cost leadership anddifferentiation. Answer b is the only answer that fits the definition of managementaccounting and of strategy.1-27.The cost management experts in an organization probably report directly to the:a.Controllerb.Treasurerc.Chief executive officer (CEO)d.Chief financial officer (CFO)Answer aLearning Objective:01-01Feedback: See Ex. 1-1; cost management experts report to the controller who in turnreports to the CFO; the CFO reports then to the CEO1-28Walmart, Costco, and Dollar General are retailers that compete on the basis ofa.Quality and customer serviceb.Product differentiationc.Low pricesd.Desirable locationsAnswer cLearning Objective: 01-04Feedback: While answers a, b, and d are competitive features for any company, the keycompetitive success factor for cost leadership companies like Walmart, Costco, andDollar General are low cost and low prices.1-29.Cost management has evolved from a focus on measurement to one ofidentifying those measures that are critical to the organization’s success. This meansthat cost managers are striving for thistype of cost management system:

Loading page image...

Chapter01-Cost Management and Strategy1-13a.Basic transaction reporting systemsb.A system that focuseson reliableexternalfinancial reportsc.A system that trackskey operating data and developsmore accurateand relevant cost information for decision makingd.A system in whichstrategically relevant cost management informationisan integral partof the systemAnswer dLearning Objective: 01-2Feedback: This exercise considers Robert Kaplan’s four-stage model of costmanagement system development: 1) basic transactions, 2) focus on reliable externalreporting, 3) track key operating data for decision making, and 4) strategically relevantcost management information is integral to the system. Stage 4, integral strategicallyrelevant information, is the goal.1-30.A management method in which managers and employees commit to a processof continuous improvement is best described as:a.Total quality managementb.Business process improvementc.Lean accountingd.The theory of constraintsAnswer: bLearning Objective: 01-03Feedback:Answers (a), (c), and (d) are incorrect because:total quality managementfocuses on meeting customer expectations;lean accounting supports leanmanufacturing, a method that uses value streams and a focus on inventory reductionand increasing the speed of manufacturing operations. Like lean manufacturing, thetheory of constraints focuses on the speed of the flow of product through themanufacturing process. Business process improvement isthe correct answer as it isamanagement method in which managers and workers commit to a process ofcontinuous improvement.

Loading page image...

Chapter01-Cost Management and Strategy1-141-31Professional certifications are issued by the American Institute of Certified PublicAccountants (AICPA), the Institute of Management Accountants (IMA), The CharteredInstitute of Management Accountants (CIMA) and the Society of ManagementAccountants in Canada (CMA-Canada), among other professional accountingorganizations.The Certificate in Management Accounting (CMA) is issued by:a.CIMAb.IMAc.CMA-Canadad.AICPAAnswer: bLearning Objective: 01-05Feedback: The CMA certificate is issued by the IMA, Institute of ManagementAccountants1-32.To determine whether a particular action is professionally ethical or not, using theInstitute of Management Accountants Statement of Ethical Professional Practice, it isnecessary to know:e.Whether the act is legal in your jurisdictionf.The intent and the business context of the actg.The amount of the fraud or theft that is involvedh.Whether the management accountant is certified or notAnswer:bLearning Objective: 01-6Feedback: (b) is correct.(a) an act can be legal but not ethical;(c) the amount of thefraud or theft might influence the consequences to the perpetrator, but will notdetermine whetherit is ethical or not;and (d) determining whether the act is ethicaldoes not depend on whether or not the accountant is certified, though theconsequences could be more significant for a certified management accountant.

Loading page image...

Chapter01-Cost Management and Strategy1-151-33.Firms that want to grow quickly in the global marketplace often employ the costleadership strategy because:a.This produces favorable customs rates and import dutiesb.Manufacturers around the world adopt lean manufacturing methods tobring their costs downc.This allows them to employ and benefit from enterprise managementsystemsd.There are relatively few product variations across different countriesAnswer: bLearning Objective: 01-02,01-04Feedback: Answer b is correct. (a) the cost leadership strategy is not likely to have anyeffect on customs rates or import duties, which are determine from product cost andother factors, (c) many global companies use enterprise management systems, but themotivations are related to the nature of their value chain, both upstream anddownstream, and not their strategy (d) a number of products have significant variationsacross countries1-34.The strategy map can be compared to the balanced scorecard (BSC) in that:a.The strategy map is a subset of the BSCb.The strategy map deals with the strategy component of the BSCc.The strategy map provides a guide to implementing the BSC by linkingthe critical success factorsd.The strategy map and the BSC are unrelatedAnswer: cLearning Objective: 01-3Feedback: Answer c is correct.(a) the BSC has perspectives which could be calledsubsets, but the strategy map is not a perspective or subset, (b) and (d) are wrongbecause the strategy map provides a linkage of the critical success factors forallof theperspectives of the BSC,

Preview Mode

This document has 1422 pages. Sign in to access the full document!

Report

Study Now!

Document Details

Related Documents

CIS 337 Unit 7 Assignment Final Project Part IV Pr

Analysis of Leadership in Monster Inc

Evaluation of Alphabet's Mission, Vision, and 8-29

Boundless Management

Uncovering the Martha Stewart Tax Scandal Insider

Boundless Business

JetBlue Airlines Case Analysis

Effective Speaker Notes Template for BUS 210 Prese

Leading as a Function of Management

McDonald's Q4 Earnings U

Company

Explore

Study Tools