Management Accounting, 7th Edition Solution Manual

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IRM t/aLangfield-Smith, Thorne, Smith, HiltonManagement Accounting7e1CHAPTER 1Management Accounting: Informationfor CreatingValueand Managing ResourcesANSWERS TO REVIEW QUESTIONS1.1There are many possible answers to the question.Qantas, the national airline of Australia, has faced a number of changes to the businessenvironmentover the last20years, including deregulation of the domestic aviation industry.This resulted in increased competition as new companies attempted to enter the industry. Themost notable of these was two failed attempts by Compass to succeed in the market and gainmarket share by savagely cutting prices. Its major competitor, Ansett Australia, collapsed in2001 resulting in Qantas having almost a monopoly for a short period. A powerful UK airline,Virgin, has also entered the market, with a history of taking legal action against marketleaders who attempt to intimidate them using predatory pricing. Further, Impulse Airlines, alocal airline, started operations, only to be eventually taken over by Qantas. On top of all this,the international terrorism crisis of 11 September 2001 saw a substantial contraction ofinternational air travel for a period of many months, leading to the collapse of several UnitedStates airlines many times the size of Qantas.Other changes to the business environment have included unrest and war in the Middle Eastand speculation in oil,resulting in volatility and serious increases in fuel prices;bombings inBali in 2002;the outbreak of SARS in 2003;natural disasters such as the Asian tsunami;theheavy subsidisation of competing national carriers,especially by Middle Eastern countries;the entry of Tiger Airways into Australia;extra capacity gained by Virgin Blue;the shiftingof significant parts of engineering maintenance operations offshore;publicity surrounding aseries of safety and engineering concerns and an audit by CASA in 2008 finding thatmaintenance by Qantas was not up to its own standards;and financial uncertainty arisingfrom the 2008 credit crisis and share market collapse. In more recent times,two differentvolcanoeshavecaused the cancellation of flightsforseveral days, and the explosion of anengine in a new range of aircraft, the A380, in November 2010 caused the grounding of thatfleet until January 2011while the reason was explored and overcome (see'Real life'inChapter 21, page 955).

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IRM t/aLangfield-Smith, Thorne, Smith, HiltonManagement Accounting7e21.2The explosion in e-commerce will affect management accounting in significant ways.Oneeffect will be a drastic reduction in paperwork.Millions of transactions between businesseswill be conducted electronically with no hard-copy documentation.Along with this method ofcommunicating for business transactions comes the very significant issue of informationsecurity.Businesses need to find ways to protect confidential information in their owncomputers, while at the same time sharing the information necessary to complete transactions.Another effect of e-commerce is the dramatically increased speed with which businesstransactions can be conducted.In addition to these business-to-business transactional issues,there will be dramatic changes in the way management accounting procedures are carried out,one example being e-budgeting—the enterprise-wide electronic completion of a company'sbudgeting process.1.3Management accounting information prepared on a regular basis includesproduct costs,profitability reports, and also individual resource costs such as materials purchased and used,labour costs and the costs incurred in providing and managing facilities. On an ad hoc basis,management accounting reports may be prepared to estimate future cash flows relating to theimpact of purchasing and operating anewpiece of equipment and the expected outcome fromchangingtheproduct mix.1.4Management accounting is defined as'processes and techniques that are focused on theeffective and efficient use of organisational resources to support managers in their task ofenhancing both customer value and shareholder value'. Value creation is a central focus forcontemporary managers.Customer valuerefers to the value that a customer places onparticular features of a good or service (and which is what leads to them purchase theproduct).Shareholder valueis the value that shareholders, or owners, place on a business—usually expressed in the form of increased profitability, increased share prices or increaseddividends.1.5The important differences betweenmanagement accountingandfinancial accountingarelisted below.(a)Management accounting information is provided to managers and employees within theorganisation, whereas financial accounting information is provided to interested partiesoutside the organisation.(b)Management accounting reports are unregulated, whereas financial accounting reportsarelegallyrequiredandmustconformtoAustralianaccountingstandardsandcorporations law.

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IRM t/aLangfield-Smith, Thorne, Smith, HiltonManagement Accounting7e3(c)The primary source of data for management accounting information is the organisation'sbasic accounting system, plus data from many other sources. These sources will yielddata such as rates of defective products manufactured, physical quantities of material andlabour used in production, occupancy rates in hotels and hospitals and average take-offdelays in airlines. The primary source of data for financial accounting information isalmostexclusivelytheorganisation'sbasicaccountingsystem,whichaccumulatesfinancial information.(d)Management accounting reports often focus on sub-units within the organisation, such asdepartments, divisions, geographical regions or product lines. These reports are based ona combination of historical data, estimates and projections of future costs. The data maybe subjective and there is a strong emphasis on reporting information that is relevant andtimely. Financial accounting reports tend to focus on the enterprise in its entirety. Thesereports are based almost exclusively on verifiable transaction data. The focus is often onreliability rather than relevance and the reports are not timely.1.6The cost accounting system is one part of an organisation's overall accounting system, thepurpose of which is to estimate the cost of goods and services, as well as the cost oforganisationalunitssuchasdepartments.Costinformationaccumulatedbythecostaccountingsystemisusedforbothmanagementaccountingandfinancialaccountingpurposes. Management accounting uses include setting prices, controlling operations andmaking product-related decisions. Financial accounting uses include valuation of inventoryandcostofgoodssoldforthemanufacturer'sbalancesheetandincomestatementrespectively.Management accounting is broader than just the preparation and reporting of financialinformation; it encompasses the processes and techniques that focus on the effective andefficient use of organisational resources to support managers in their tasks of enhancing bothcustomer value and shareholder value. It focuses on preparing information for makingdecisions about planning, directing and controlling an organisation's operations,includinganalyses of financialandnon-financial resourcessuch asperformance data, and a range oftechniques for managing costs and other organisational resources.1.7The'Real life'report of changes in the airline industry on page6illustrates the increasingcompetition in the industry and the pressure to reduce fares. This pressure makes the need tohave a clear idea of the business'scosts imperative. The article shows a move from havingfew airlines servicing a particular route to having several airlines servicing it. When there

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IRM t/aLangfield-Smith, Thorne, Smith, HiltonManagement Accounting7e4were few airlines flying from Sydney to Los Angeles they were able to charge a premium—essentially it was a sellers'market where the seller could have great influence over the price.With more providers on this route we move toward a buyers'market where the buyer hasgreat influence over price due to the ability to turn to another airline with a lower fare. Thebalance between supply and demand has changed on this route. The providers now need tokeep a close eye on methods of cost containment, their actual costs and what causes them andhow long they can sustain low fares. Without adequate information it is not unusual for a firmto struggle because it charges prices below the product cost. This cannot be sustained forlong.The impact of cost cutting exercises needs to be analysed by the management accountant. Forexample, most costs in an airline do not change with the number of passengers. The cost ofthe aircraft, the fuel for a flight and the number of staff involved in the flight are static. Onceairlines were inclined to provide food for all seats but now a last-minute passenger inbusinessclass or first classcan be told that refreshments are not guaranteed.You may also have seen areport in 2010 of how much an airline saved by putting one olive fewer in a meal infirstclass!The management accountant can also help by analysing the likely result if various marketingapproaches are adopted. Hence, ways to increasebusiness classsales requires analysis of thecost of providing more business class seats (and fewereconomy seats) and the fare that willprovide the required profits. Other changes to remain competitive may include better serviceinbusiness and first class(for example, flatbeds and complimentary pyjamas) and cost savingineconomy (for example, not providing a blow-up neck pillow on long haul flights andremoving moisturiser from the toilet bags provided on theseflights). We have also seen anintroduction of'premium economy', which provides more room thaneconomy but lesscomfortable seats thanbusiness class. The economic feasibility of taking that step would havebeen analysed by management accountants with advice from marketing managers on thelikely demand in all classes if it were introduced.1.8There are arguments that when a management accountant's office is located on the factoryfloor, they are regarded as'spies'who report back to head office. However the counter-argument is that the management accountant needs to be near the action to understandtheprocesses and the data that come from them and to better understand what managementaccountinginformationwillhelpthedecisionmakersatalllevels.

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IRM t/aLangfield-Smith, Thorne, Smith, HiltonManagement Accounting7e5It used to be the case that management accounting was a function undertaken at head office,often by a generalist accountant rather than a specialist management accountant. With thedevelopmentofmanagementaccountingtechniquesthatbetterassistdecisionmaking,management accountants gradually took their place in decision-making teams. It is possibleformanagement accountantstohave a presence on the factory floor and in the corporateoffices. Very often each plant will have at least one management accountant. The chiefmanagement accountant is then likely to be located in head office where he or she has regularcontact with other senior managers and is regularly involved in meetings with these othersenior personnel.1.9A CFO needs to possess:leadershipskillsthatcanbeappliedtotheaccounting/financefunction,seniormanagement and the organisation as a wholemanagerial skills that support theneed tobalance responsibilitiesofstewardshipwiththose of strategydevelopment andimplementation, thus requiring the effective andefficient acquirement of and use of resourceswhile safeguarding assets through internalcontrols and risk managementtheabilitytobuildeffective,collaborative relationshipswithinternaland externalstakeholdersunderstandingof the organisation and itsenvironment, such as its competitors, markets,technologies and new developmentsprofessional qualities as they pertain to professional accountants, including integrity,objectivity and competence.While the CEO may be the first pilot, the CFO can be an indispensable flight engineer.1.10Major processes that management accounting systems use to create value and manageresources include:product costing systems that estimate the cost of resources consumed in producing goodsand servicesprocessesthatcompileinformationthatisrequiredinplanningandcontrol,thepreparation of budgets (financial plans) and the monitoring of progress in comparison toplanned progress (control)performance measurement and evaluation processes relating toindividuals, discrete partsof the organisation and the organisation as a whole.

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IRM t/aLangfield-Smith, Thorne, Smith, HiltonManagement Accounting7e61.11Competitive advantage refers to a unique advantage that one firm has over others. It is uniquebecause it is so difficult to imitate that others do not duplicate it. Porter (see discussion in thechapter) suggests two principalways to gain such an advantage: bybeing a cost leader or byadopting a strategy of product differentiation. Cost leaders focus on cost containment in everyway, so thattheirsalesprices can be lower than competitors. Productdifferentiation can beattained in many ways, for example by creatingdifferent features for the product, differentappearance, different quality, or a difference in customer service.1.12A management accountant might provide the following types of information to assistmanagement in managing resources in theAustralian Football League (AFL):costing of individual functions and competitionsanalysis of revenues from various media outletsactivity analysis of interactions with the different member clubs (which could also becosted)costing of a project designed to enhance and improve theAFLwebsitecosting of theresources consumed in eachdepartmentvariances of costs andrevenues from budgeta breakdown ofcosts, such aspromotionsofAusKick,community clubsandAFLmembershipforecast costs for strategies including recruitment, overtime and outsourcinganalysis ofmemberneeds, inquiries and complaintsnumber of complaintsnumber of newmembersmemberretention ratemembersatisfaction with servicemembershipprofitability analysisacost benefit analysis of proposed new products.

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IRM t/aLangfield-Smith, Thorne, Smith, HiltonManagement Accounting7e71.13In a business that considers cost leadership to be of key strategicimportance, a managementaccountant could provide information to management that helps managers to measure andmanage their costs more efficiently and effectively. This could include information about:costs of products, processes, activities, and departmentscosts of materials and other key inputscosts of supporting individual customers and customer groupsthe root causes (cost drivers) of the major costs incurred by the businessperformance reports focusing on the control of costs and also of key cost driversthe prices of the products soldcomparison of the probable total sales revenue for various prices (allowing for reducedsales numbers for higher sales price and vice versa)competitors,including the prices of competing products and the cost structures of theirbusinesses.1.14A management accountant mightprovide the followingtypes of information toassistmanagement in a business that consideredproduct qualityto be of key strategic importance:number of defectsquality costs (i.e. the costs incurred in training, maintaining and improving equipment,scrapping or correcting defective work)warranty costsreturnsanalysis of customer needs, inquiries and complaintsnumber of new customerscustomer retention ratecustomer satisfaction withproductscustomer profitability analysismarket share.

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IRM t/aLangfield-Smith, Thorne, Smith, HiltonManagement Accounting7e81.15Budgets are not control systems; they are a component part of planning and control systems.In the context of an organisation’s vision and purpose (mission), organisational objectives aredeveloped and strategies are formulated to attain those objectives. While the strategies definethe long-term plans of the organisation, plans are laid down for shorter time periods such thattheyleadtowardtheachievementofthecorporatestrategicobjectives.Thefinancialrepresentation of these short-term plans is called the budget. It records and reports thespending and revenues that are expected if the plans are implemented as intended. Becausethey itemise the usage of resources in the achievement of set objectives, budgets can be calledresource usage plans for the operating period, which is normally twelve months.For control purposes it is necessary to keep monitoring whether plans are being followed andwhether the results are as expected. This is achieved by measuring any variances between theplanned financial outcomes set out in the budget and the actual outcomes achieved. Whenthere is deviation, called a budget variance, managers must decide whether it is necessary totake steps to achieve theplan or whether circumstances have changed such that replanning isnecessary.1.16Planning and control systems arethepart ofthemanagement accounting system that providea framework for effective resource management to generate customer and shareholder value.Those two systems are interdependent of each other as, in order for successful strategies to beimplemented, organisations need to formulate plans to set the direction for future operationsof the organisation, andhavecontrol systems to ensure that those operations are proceedingaccording to plan and thattheobjectives of the organisation are achieved.1.17The costs included in inventory are called inventoriable costs. They have been defined for thepurpose of external reporting in a financial accounting context to include only manufacturingcosts or the cost of product bought for retail. However, estimates of the inventoriable costs ofproducts are not sufficient for many product-related decisions. For example, in assessing theprofitability of a product over the longer term it is necessary to consider design anddevelopment costs and the costs of customer support in addition to the cost of manufacture.Decisions about whether to accept contract bids will require inclusion of all relevant costswhether inventoriable or not.(Products include goods and services and one can see that classification of inventoriable costsrelatesonlytogoods,asservicescannotnormallybestoredininventory.However,comprehensive information about service costs may also be useful to managers.)

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IRM t/aLangfield-Smith, Thorne, Smith, HiltonManagement Accounting7e91.18Specific aspects of management accounting systems that may be used to motivate employeesand managers include performance measurement systems, which form part of the controlprocess.Employeescanbeheldresponsibleforvariousfinancialandnon-financialperformance targets and may be rewarded, for example with bonuses, if those targets areachieved. Employees may be motivated to achieve those targets when they participate insetting them, when they regard those targets as fair and achievable and when they value therewards that they earn for achieving targets.1.19The implications of contingency theory for management accounting system design are thatthe design may be influenced by (that is, be contingent upon) a range of factors that reflectthe context within which the organisationoperates, including the external environment;technology;organisational structure;organisation size;strategy; andorganisational andnational culture (Chenhall, 2003).This means that in designing the system, themanagementaccountant will need to take account of the size and complexity of the organisation, the typesof markets the organisation operates in, the existing management style within theorganisation and so on.1.20During the 1980s and 1990s, management accounting started to shift towards the broadertechniques of resource management and focused on the creation of customer value andshareholder wealth. Management accountants became more valuable in the formation andevaluation of strategies. Accordingly, by the early 2000s, management accountants were seenas part of the management team, with a clear view of the'big picture', a full understanding ofthe business as a whole and as providers of information to managers that could help them tomaintain a competitive advantage in order to achieve corporate objectives. The focus ofmanagement accounting in the first decadesof the 21st century has broadened from thedrivers of customer value, shareholder value and organisational innovation to include thedrivers of stakeholder value, risk management and sustainability reporting. Students will findthat the broader focus on all stakeholders (not just customers and shareholders) is explored inmoredetailinChapter17.

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IRM t/aLangfield-Smith, Thorne, Smith, HiltonManagement Accounting7e101.21To become a full member ofCPA Australia or the ICAAit is necessary to obtain adegreethat isaccredited by thatprofessional accountingbody for the purpose(certifying that thatdegree,withspecifiedcontent,satisfiestheeducationalentryrequirementsofthatprofessional body), and then complete thatprofessionalbody'sown postgraduate program ofstudy. Both of these organisations also require the completion of three years of mentoredwork experience. Continuing membership then requires the completion of a minimum of 120hours of continuing professional development (CPD) in each three year period. Entry to theIPA is possible with an accredited advanced diploma or university degree and some mentoredexperience.

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IRM t/aLangfield-Smith, Thorne, Smith, HiltonManagement Accounting7e11SOLUTIONS TO EXERCISESEXERCISE 1.22 (10 minutes) The nature of management accounting1(a)The primary role of management accounting is to assist managers in decision making.Decisions are about the future so management accountantsarerequired to predict futureoutcomes. Unlike financial accounting, it isnotconfined by a need to provide objective,verifiable information that emphasises accuracy, and does not restrict itself to financialinformation. Rather, it is often based on estimation, probabilities and expectation. Toprovide information that is relevant to managers'decisions, management accounting goesbeyond financial information to include both quantitative and qualitativenon-financialinformation.2(b)Other than providing data for the use of financial accountants in preparing financialreports (that is, the cost of goods sold and inventory) and reporting the outcome of pastdecisions for performance evaluation and feedback on predictive processes, managementaccounting is intended to assist managers in decision making. To do this it:regularly changes to meet the currentchanging demands of managers, responding tochanges in the business environmentoften provides a detailed analysis of informationinvolves far more than cost accountingdoes not over-aggregate information since the detail is usually important to the users.3(d)What is measured and the way it is measured, analysed and reported can have an impacton employee behaviour. A significant role of management accounting is to influence thedecisions of managers and influence the behaviour of employees, both in what theydecide to do and how they carry out their decisions. To help managers in decision makingmanagement accounting must:be relevant to strategy decisions and consistent with attempts at implementing strategyprovide information that is relevant to the decision being made without extraneousinformation that could confuse the managerbe future focused even though this represents expectations rather than precisemeasures.

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IRM t/aLangfield-Smith, Thorne, Smith, HiltonManagement Accounting7e12EXERCISE 1.23 (15 minutes) The nature of management accounting systems1False.The management accounting system may not be able to provide all of the informationmanagersneedtomakedecisions.Althoughmanagementaccountingsystemsareincreasingly providing physical information (such as reject rates and material usage) as wellas financial information some management decisions require information from other sources.Examples of such information include competitors'prices, market research information,forecasts, environmental impacts, technological possibilities and so on.2True.There is some overlap between management accounting systems and the informationrequired to producefinancial statements, as both draw on the transaction-based accountingsystem. In particular the costing systeminforms the management accounting reports andprovides estimates of product costs for inclusion in the balancesheet and income statement.However, management accounting systems are not subject to external regulationsand drawdata from wider sources, consider the present and the future, and emphasise relevance tomanagers. Management accounting systems also need to be flexible enough to produceinformation required by managers for routine decisions and also some of the informationneeded for decisions that occur infrequently.3True. Management accounting systems do draw on data from a variety of internal andexternal sources, unlike financial accounting systems, which rely primarily on internalinformation from the transaction-based accounting system.4False. Management accounting is not directly concerned with product quality, however,management accountants may prepare data to help managers assess whether or not thebusiness is meeting quality expectations and requirements.5False. While management accountants should supply information that is relevant and timely,it may not be'objective'and'verifiable'in the financial accounting sense. There is likely to bea trade-off between accuracy and timeliness and the management accountant may well acceptestimates rather than verifiable measures to ensure that information is available to supportmanagers'decisions on a timely basis.

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IRM t/aLangfield-Smith, Thorne, Smith, HiltonManagement Accounting7e13EXERCISE 1.24 (15 minutes) Differences between management accounting andfinancial accounting1 (b)Preparing a balance sheetFinancial accountant2 (a)Preparing a profit forecast by product lineManagement accountant3 (a)or(b)Estimating the depreciation expense for a factory'sequipmentMA or FA4 (a)Monitoring the effects of a quality improvementprogramManagement accountant5 (c)Estimating the cost of goods producedCost accountant6 (a)Estimating the cost of a prototype for a newproduct being developedManagement accountant7 (a)Preparing a sales forecastManagement accountant8 (a)Monitoring the effects of a waste reductionprogramManagement accountant9 (a)Preparing a report on customer satisfaction.Management accountant10 (b)Preparing an income statement.Financial accountant

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IRM t/aLangfield-Smith, Thorne, Smith, HiltonManagement Accounting7e14EXERCISE 1.25 (15 minutes) The role of the management accountantMany answers are possible. An example follows.Management Accountant—Circa $80,000 packageMelbourne| PermanentPublished01/12/2008Car space providedIdeally looking for someone who can start immediately!!About Our ClientOur client is recognised globally as a market leader with a reputation for quality and innovation.They are a driven multinational organisation that is currently experiencing a period of growth anddevelopment.Job DescriptionReporting to the Divisional General Manager, you will play a pivotal role in ensuring that thecompany continues to meet its growth targets as well as managing the financial aspects of this keybusiness division. Specifically, you will help drive profit growth through management reportingand analysis, coordinate the preparation of budgets and forecasts and ensure project cost reviewsare conducted. You will supervise an Accounts Receivable person and play a lead role incontinuously improving systems and processes.The Successful ApplicantYou will be degree qualified and studying towards / or completed your CA/CPA studies. You willpossess a proven track record in accounting and have a hand on proactive approach. You willhave the ability to drive outcomes and liaise with key stakeholders in the business. Excellentinterpersonal and communication skills are essential for this role and exposure to a large ERPsystem (ideally SAP) will be highly favourable.What's On OfferAttractive SalaryCompany BenefitsCity Fringe LocationLiaising with key stakeholders within the businessSource: Michael Page InternationalAvailable athttp://www.michaelpage.com.au/job-detail/title/Management-Accountant/ref/A1263980.html. Accessed 8 December 2008.

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IRM t/aLangfield-Smith, Thorne, Smith, HiltonManagement Accounting7e15The key roles for this position are to:ensure that the company continues to meet its growth targetsmanage the financial aspects of business divisionconduct management reporting and analysiscoordinate the preparation of budgets and forecastsensure project cost reviews are conductedsupervise an Accounts Receivable personplay a lead role in continuously improving systems and processes.The required qualifications are:degree qualified and studying towards/or completed CA/CPA studies.The required attributes are:a proven track record in accountingproactive approachability to drive outcomes and liaise with key stakeholders in the businessexcellent interpersonal and communication skills.The desired attributes are:exposureto a large ERP system (ideally SAP).

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