Managerial Accounting , 8th Edition Solution Manual

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11CHAPTER 1INTRODUCTION: THE ROLE, HISTORY, ANDDIRECTION OF MANAGEMENT ACCOUNTINGQUESTIONS FOR WRITING AND DISCUSSION1.A management accounting information sys-tem is an information system that producesoutputs using inputs and processes neededto satisfy specific managerial objectives.2.Theinputsofamanagementaccountinginformationsystemareeconomicevents.The processes transform the inputs into out-puts and are such things as collecting, mea-suring,storing,analyzing,reporting,andmanaging. Typical outputs include specialreports, product costs, customer costs, per-formancereports,budgets,andpersonalcommunication.3.The three objectives of a management ac-counting information system are as follows:To provide information for costing out ser-vices, products, and other objects of interestto management; to provide information forplanning, controlling, evaluation, and conti-nuous improvement; and to provide informa-tion for decision making.4.Allorganizations—manufacturing,mer-chandising,andservices—musthaveagoodmanagementaccountinginformationsystem. Management accounting conceptsand procedures are not restricted to any onetype of organization.5.Theusersofmanagementaccountingin-formation are managers and workers withinthe organization. Anyone internal to an or-ganization is a potential user of manage-ment accounting information.6.Management accounting information is usedto cost out objects (for example, servicesand products) and to aid in planning, control-ling,evaluation,continuousimprovement,and decision making.7.Both financial and nonfinancial informationshould be provided by the management ac-countinginformationsystem.Nonfinancialinformation provides insights useful for con-trolling operations—it is easily used by op-erationalworkers.Financialinformationiscritical for evaluating the success of opera-tional control.8.Continuous improvement means searchingfor ways of increasing overall efficiency andproductivity of activities by reducing waste,increasing quality, and reducing costs.9.Employee empowerment is allowing opera-tional workers to plan, control, and makedecisions without explicit authorization frommiddle- and higher-level managers.10.Operational workers must be informed sothat they can evaluate and monitor the effec-tiveness of their decisions.11.Planningestablishesperformancestan-dards,feedbackcomparesactualperfor-mance with planned performance, and con-trolling uses feedback to evaluate deviationsfrom plans.12.Performance reports are formal reports thatcompare actual data with planned data orbenchmarksandthusprovidesignalstomanagers that allow them to take correctiveactions.13.Management accounting differs from finan-cial accounting in the following major ways:(1)internallyfocused,(2)nomandatedrules, (3) financial and nonfinancial; subjec-tive information possible, (4) emphasis onthe future, (5) internal evaluation and deci-sions based on very detailed information, (6)broad, multidisciplinary.14.The requirement to prepare reports for ex-ternal users created a demand for a particu-lar accounting information system. This sys-tem was geared to produce inventory costs.Aggregate average cost information appar-ently was sufficient for most internal deci-sions.Thus,managementaccountingbe-cameanextensionofthefinancialaccounting system. This outcome was prob-ably due to a favorable cost-benefit tradeoff.The incremental cost of producing

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22more accurate product costs was not offsetby the incremental benefits of improved de-cision making. However, significant changesinthecompetitiveenvironmenthavein-creased the cost of making bad decisions,thus increasing the benefits of more accu-rate information. Also, information technolo-gy has decreased the cost of processing da-ta. These two events have led to a demandfor an improved management accounting in-formation system.15.Activity-based management is an importantapproach that focuses management’s atten-tion on activities with the objective of improv-ing the value received by the customer andthe profit achieved by providing this value. Itis important because it is the heart of thecontemporary management accounting sys-tem, offering increased accuracy in productcosting (through the use of activity-basedcosting) and the ability to evaluate and con-trol activities (through process value analy-sis).16.Customer value is the difference betweencustomer realization (what a customer rece-ives) and customer sacrifice (what a cus-tomer gives up). Focusing on customer val-ue forces managers to consider the entireset of value-chain activities, including whathappens after a product is sold. This createsa demand for a broader set of informationthan that found in a traditional system.17.The internal value chain is the set of activi-ties required to design, develop, produce,market, distribute, and service a product (theproduct can be a service). To increase cus-tomer value, managers must assess the ef-fect each activity in the chain has on cus-tomer value, keeping those that add valueand eliminating those that do not.18.Industrial value chain is the linked set ofvalue-creating activities from raw materialsthrough the end-use customer. Understand-ing the industrial value chain is importantbecause it enables a manager to identify theimportant internal and external linkages anduse these linkages to create a competitiveadvantage.19.Supplychainmanagementisconcernedwith managing material flows starting withsuppliers and upstream suppliers, moving toproduction, and finishing with the distributionof finished goods to customers and down-streamcustomers.Supplychainmanage-ment focuses on the entire industrial valuechainbecausepotentialbenefitsmaybereaped by understanding upstream suppliersand downstream customers.20.E-business is any business transaction orinformation exchange that is executed usinginformation and communication technology.Management accountants provide informa-tion for e-business settings, e.g., the cost ofprocessing an electronic transaction versusthe cost of a paper transaction.21.Managing the value chain requires a cross-functional perspective. Because of the inter-relationships that exist in the value chain, adecision can affect many different functions.Information must be gathered and reportedso that these effects can be assessed anddecision making improved.22.Decreasingthetimerequiredtoperformactivities may increase quality and decreasecosts. The management accounting systemshould be able to document the relationshipbetween time reductions and such things asqualityandcostbothonaprojectedorbefore-the-fact basis and on an after-the-factbasis. This enhances planning, controlling,and decision making.23.A line position has direct responsibility forcarrying out the basic missions of an organi-zation. A staff position has indirect responsi-bility for the basic missions and provides asupportive role for line activities.24.Yes. For most organizations, the controllershould be a member of the top managementstaff. The controller is the financial expert ofan organization and can provide critical ad-vice and insights.25.The controller is responsible for both internaland external accounting. These responsibili-ties usually include diverse activities such astaxes, SEC reports, cost accounting, bud-geting, internal auditing, financial account-ing, and systems accounting.26.Ethical behavior is concerned with makingright choices and usually involves sacrificingindividual self-interest for the well-being ofothers. It is possible to teach ethical beha-vior in virtually any course. By being intro-duced to ethical dilemmas in managementaccounting, students can be made aware of

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33the behavior that is expected in the businessworld and, in particular, for management ac-countants.27.Yes. There is some evidence that ethicalbehavior actually is good business. In otherwords, the market and consumers appre-ciate ethical behavior and are willing to re-ward those who adopt it. In addition, a com-panywithhigherethicalstandardswouldexperience less exposure to manipulation offinancial data for gain.28.Yes. As management accountants becomemore informed about what behavior is ac-ceptable and what is not, we should expecta favorable response. This response can bereinforced by the IMA imposing sanctions forserious violations of the code.29.The three forms of certification are the CMA,the CPA, and the CIA. Although each certifi-cation can be valuable for management ac-countants, the CMA is tailored to fit theirneeds. The CPA has a public-accountingorientation, and the CIA has an internal-auditing orientation. Only the CMA specifi-cally addresses the professional require-ments of a management accountant.30.The Sarbanes-Oxley Act (SOX) establishedstronger government control and regulationof publicly-traded companies in the UnitedStates.Major sections of SOX include: es-tablishment of the Public Company Account-ing Oversight Board, enhanced auditor in-dependence,tightenedregulationofcorporategovernance,controloverman-agement, and management/auditor assess-ment of the firm’s internal controls. SOX alsorequires public companies to state whetheror not the top corporate officers are bound tothe company code of ethics..

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44EXERCISES1–11.Inputs: a, d, f, j2.Processes: b, g, m3.Outputs: c, i, l4.System objectives: e, h, k, n1–2a.Managementb.Financialc.Managementd.Financiale.Financialf.Managementg.Managementh.Managementi.Financialj.Managementk.Managementl.Financialm.Financialn.Management1–31.b2.c3.f1–41.e2.b3.c1–51.k2.g3.a4.f5.i6.h7.j8.c9.b10.e11.d

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551–6Penny is staff. She is in a support role—she prepares reports and helps explainand interpret them. Her role is to help the line managers more effectively carryout their responsibilities.Karol is line. She is responsible for selling product. A basic objective for the exis-tence of a manufacturing firm is to sell product. Karol has direct responsibility fora basic objective and therefore holds a line position.Porter is staff. He is in a support role to production. He does not make the prod-ucts himself. Instead, he ensures that the appropriate production equipment is inplace for manufacturing.Joe 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 tomake a product. Thus, Joe has direct responsibility for a basic objective andtherefore holds a line position.1–7A manager has a responsibility to the company as well as society. If he/she laysoff the employees, he/she ignores both of these responsibilities. In effect, themanager would be pursuing his/her self-interest at the expense of the companyand the salespeople. While pursuit of self-interest is not necessarily unethical, itcan be if it harms others. In this case, the manager’s action could result in lowerprofits for the company because sales may decrease and unnecessary trainingcosts will be incurred when the positions are refilled the following year. Similarly,it is unjust to penalize productive employees simply to earn a bonus. The rightchoice is to retain the three salespeople. Although the manager is not a manage-ment accountant, he/she is violating the ethical standard that requires the refusalof “any gift or favor (bonus) that would influence or appear to influence their ac-tions.”The reward system, in part, encouraged this behavior. Apparently, the manager ispaid a bonus if profits exceed 10 percent of planned profits. By basing reward ona short-run measure such as profits, the manager has the incentive to manipulateearnings in the short run. One way of manipulating annual earnings is to reducediscretionary expenditures.This type of behavior can be discouraged by expanding the performancemea-sures to include long-run factors like market share, productivity, andpersonnel development. The accounting system can also be used to tracktrends (e.g., training costs over time). Moreover, managers can be requiredto provide extensive justification for significant changes in discretionaryexpenses.

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661–8a. By the time most students graduate from high school, they have not hadmuch exposure to business. Therefore, they do not have full knowledgeof acceptable behavior for the business environment. Students may notknow that certain practices are unethical because they may not be famil-iar with the behavioral norms associated with these practices. Oncestudents begin to learn business practices, they begin to see what ethi-cal dilemmas can arise in a business context. They then are able to ap-ply the moral training they have had to deal with the situations. Fur-thermore, evidence exists that ethical reasoning can be changed for thebetter. Thus, instruction in ethics can be a vital part of a student’s edu-cation.b.Sacrificing self-interest is a choice that each person must make. Others maybe influenced by those individuals who behave ethically. Individuals commit-ted to ethical behavior produce societies committed to ethical behavior (notvice versa).c.While this sounds noble, many would disagree that managers are first seek-ing to serve others and accept personal financial rewards as a by-product of agood job. Pursuit of self-interest and personal financial well-being is not nec-essarily unethical. It is only when this pursuit is done at the expense of thecollective good that the behavior becomes questionable.d.It is often true that unethical firms and individuals suffer financially. In thelong run, there is some evidence that ethical behavior pays off. It is doubtful,however, that every unethical firm or individual is wiped out financially. Thereare too many notable exceptions (for example, the selling of drugs by orga-nized crime).1-9No, it is not ethical for Steve to demand a kickback from Dave. Dave should notagree to this. This brief situation actually happened to Dave, a friend of the au-thor. The author advised Dave not to accept the deal. Dave then checked with hislawyer, who bluntly told him the deal was illegal. Dave did not accept.1–10a.CPAb.CIAc.CMAd.CPAe.CPAf.CMAg.CMA, CPA, CIAh.CMA, CPA, CIA

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77PROBLEMS1–111.Excellence teams and minicompanies both have the objective of involvingproduction line personnel more fully in the management process so that thecompany can take advantage of the direct contact and knowledge that operat-ing workers have about production and their work environment. This willhopefully translate into continuous improvement of operating performance.The objectives seem to be realized. Duffy has increased profits and reducedcosts, attributing much of the change to the contributions of the excellenceteams. The same is true for the minicompanies—much of the success inquality improvements appears to be grounded in this organizational change.2.Employee empowerment is a key element of continuous improvement. Oper-ating workers have tremendous skills, knowledge, and firsthand contact withthe operating environment, all of which can be exploited to discover new andmore efficient ways of producing. As employees are allowed more input, theirself-esteem grows and their commitment to the company increases. Moralealso increases, making for a more pleasant and productive environment.There are potential disadvantages. Too much latitude in employee empower-ment might sidetrack employees to the point where they begin to attack per-sonalities; discuss and argue about wage and hour considerations (or othergrievances); or try to become involved in hiring, firing, and disciplinary mat-ters. Many of these matters are best left centralized, and some skillful man-agement is needed to ensure that operating employees are primarily involvedin improving efficiency.3.Management accounting information should be used to inform empoweredemployees so that they can identify problems and monitor and evaluate theeffects of decisions they make.This information will only be valuable if it isdelivered on a timely basis.4.Quality culture means that the employees of the organization have an internalcommitment to producing high-quality products and services. A learning or-ganization means that the employees are always seeking new and better waysof doing things—they have a commitment to continuous improvement.

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881–12A.Decision making; Role: Information about the cost of performing the varioustests.B.Planning and controlling; Role: Feedback about the actual defective rate ver-sus the planned rate.C.Planning; Role: Pro forma income statement and cash budget.D.Decision making; Role: Projection of future cash flows and analysis of the ef-fects on unit cost and cycle time.E.Planning; Role: Providing unit prices and costs so that a cost-volume-profitanalysis can be done.F.Decision making; Role: Identifying avoidable costs.1–131.The total product is the product and its features (processing speed, diskdrives, software packages, and so on), the service, the operating and main-tenance requirements, and the delivery speed.2.One company is emphasizing low costs, and the other is attempting to diffe-rentiate its PC by offering faster delivery and higher-quality service.3.The Confiar’s service component and its delivery time appear to be betterthan Drantex’s. Thus, the realization of these features appears to outweighthe additional sacrifice (the additional operating and maintenance cost) asso-ciated with the Confiar PC. The implications for management accounting arestraightforward. The management accounting information system should col-lect and report information about customer realization and sacrifice. Much ofthis information is external to the firm but clearly needed by management.4.Better quality and shorter delivery time increase customer realization, whilelowering the price decreases customer sacrifice. In total, customer value hasincreased and presumably this should make the Drantex PC much more com-petitive. This example illustrates how quality, time, and costs are essentialcompetitive weapons. It also illustrates how critical it is that the managementaccounting system collect and report data concerning these three dimen-sions.

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991–14Planning. The management accountant gains an understanding of the impact onthe organization of planned transactions (i.e., analyzing strengths and weak-nesses) and economic events, both strategic and tactical, and sets obtainablegoals for the organization. The development of budgets is an example of plan-ning.Controlling. The management accountant ensures the integrity of financial infor-mation, monitors performance against budgets and goals, and provides informa-tion internally for decision making. Comparing actual performance against bud-geted performance and taking corrective action where necessary is an example ofcontrolling. Internal auditing is another example.Evaluating Performance. The management accountant judges and analyzes theimplications of various past and expected events and then chooses the optimumcourse of action. The management accountant also translates data and commu-nicates the conclusions. Graphical analysis (such as trend, bar charts, or regres-sion) and reports comparing actual costs with budgeted costs are examples ofevaluating performance.Ensuring Accountability of Resources. The management accountant implementsa reporting system closely aligned to organizational goals that contributes to themeasurement of the effective use of resources and safeguarding of assets. Internalreporting such as comparison of actual to budget is an example of accountability.External Reporting. The management accountant prepares reports in accordancewith generally accepted accounting principles and then disseminates this infor-mation to shareholders, creditors, and regulatory and tax agencies. An annual re-port or a credit application are examples of external reporting. (CMA adapted)1–15The changes that are being proposed violate the following ethical standards:Competence. Top management’s request of Roger Deerling to account for thecompany’s information in a manner that is not in accordance with generally ac-cepted accounting principles is in violation of the standard to “perform profes-sional duties in accordance with relevant laws, regulations, and technical stan-dards.”

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11001–15ConcludedConfidentiality. Top management has violated the ethical standard to “refrainfrom using confidential information for unethical or illegal advantage” (personaljob security).Integrity. Top management clearly is in violation of the standard “to avoid appar-ent conflicts of interest” and to “advise all parties (other shareholders) of any po-tential conflicts.”Credibility. Top management’s restriction and distortion of Alert’s financial in-formation violates the standard to “communicate information fairly and objective-ly.”By telling Deerling to restrict the disclosure of the changes, top management isclearly in violation of the standard to “communicate information fairly and objec-tively.”To resolve the ethical dilemma, Roger Deerling should first determine if the com-pany has an established policy in place. If so, he should follow the prescribedpolicies in resolving the ethical conflict. If there is no policy, then the specificsteps are as follows:•To discuss the issue with his immediate supervisor, unless the supervisor isinvolved, in which case, he should continue to the next management level.Roger may need to discuss the issue with the Audit Committee of theBoard of Directors, or owners. Any contact with levels above his immediatesupervisor should be initiated with the supervisor’s knowledge, as long asthe supervisor is not involved. As long as Roger does not believe a law wasbroken, he should not communicate the problem to outside authorities.•To clarify relevant concepts by confidential discussion with an objective advi-sor or an IMA Ethics Counselor to obtain possible courses of action.•“Consult (his) own attorney as to legal obligations and rights concerning theethical conflict.”(CMA adapted)

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11111–16By discussing the possible sale of Webson’s common stock with members of thetroubleshooting team, Maureen Hughes has violated the following standards ofethical conduct:Competence. Hughes has an obligation to perform her duties in accordance withrelevant laws and regulations. By discussing the information she overheard,Hughes may have violated laws regulating the use of inside information. (CMAadapted)Confidentiality. Hughes has disclosed confidential information acquired in thecourse of her work that she has not been authorized to share with peers and oth-ers within the organization. In addition, she has not informed subordinates of theconfidential nature of the information nor has she attempted to prevent the fur-ther distribution of this information.Integrity. By discussing this information, Hughes has engaged in an activity thatwould discredit her profession and prejudice her ability to carry out her dutiesethically.Credibility. Hughes has violated the requirement to communicate all informationfairly and objectively.

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11221–17John Brogan’s behavior is unethical for the following reasons:1.Competence•Brogan is undermining the preparation of complete and clear reports.2.Confidentiality•Brogan is disclosing confidential information to someone outside thecompany (Sara Wiley).•Brogan appears to be using confidential information for unethical ad-vantage (i.e., brother-in-law’s personal objectives).3.Integrity•By curtailing customer complaints, Brogan has failed to:•avoid a conflict of interest.•refrain from engaging in conduct that might prejudice the carryingout of his duties.4.Objectivity•Brogan did not:•communicate information fairly and objectively.•disclose fully all relevant information.(CMA adapted)1-18Answers will vary.

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1133CHAPTER 2BASIC MANAGEMENT ACCOUNTING CONCEPTSQUESTIONS FOR WRITING AND DISCUSSION1.Product costing accuracy means assigningthe cost of the resources consumed by acost object to that cost object.2.A cost object is any item for which costs aremeasuredandassigned,includingsuchthings as products, plants, projects, depart-ments, and activities.3.An activity is a basic unit of work performedwithinanorganization.Examplesincludematerialhandling,inspection,purchasing,billing, and maintenance.4.A direct cost is a cost that can be traced to acost object. An indirect cost is a cost thatcannot be traced to cost objects.5.Traceability is the ability to assign a costdirectly to a cost object in an economicallyfeasiblewayusingacausalrelationship.Tracing is the assignment of costs to costobjects using either an observable measureof the cost object’s resource consumption orfactors that allegedly capture the causal re-lationship.6.Allocation is the assignment of indirect coststo cost objects based on convenience or as-sumed linkages.7.Drivers are factors that cause changes inresource usage, activity usage, costs, andrevenues.Resourcedriversmeasurethedemands placed on resources by activitiesand are used to assign the cost of resourcesto activities. Example: time used to assignthe cost of supervision to individual activi-ties. Activity drivers measure the demandsplaced on activities by cost objects and areused to assign the cost of activities to costobjects.Example:numberofinspectionhours used to assign the cost of inspectionto individual products.8.Direct tracing is the process of assigningcosts to cost objects based on physicallyobservable causal relationships. Driver trac-ing is assigning costs using drivers, whichare causal factors. The driver approach re-lies on identification of factors that allegedlycapture the causal relationship. Direct trac-ingreliesonphysicalobservationofthecausal relationship and, therefore, is morereliable.9.Driver tracing is the use of drivers to tracecosts to cost objects. Often, this means thatcosts are first traced to activities using re-source drivers and then to cost objects usingactivity drivers.10.A tangible product is a good that is made byconverting raw materials through the use oflabor and capital inputs.11.A service is a task or activity performed for acustomer or an activity performed by a cus-tomer using an organization’s products orfacilities.12.Servicesdifferfromtangibleproductsonfour important dimensions: intangibility, peri-shability, inseparability, and heterogeneity.Intangibility means that buyers of servicescannot see, feel, taste, or hear a service be-fore it is bought. Perishability means thatservicescannotbestored.Inseparabilitymeans that producers of services and buy-ers of services must be in direct contact (nottruefortangibleproducts).Heterogeneitymeans that there is a greater chance of var-iation in the performance of services than inthe production of products.13.Three examples of product cost definitionsarevalue-chain,operating,andtraditionaldefinitions.Thevalue-chaindefinitionin-cludes cost assignments for all value-chainactivities. Operating product costs include allcosts except for research and development.Traditional product costs include only pro-ductioncosts.Differentcostsareneededbecause they serve different managerial ob-jectives.14.The three cost elements that determine thecost of making a product are direct mate-rials, direct labor, and overhead.15.Theincomestatementforaservicefirmdoes not need a supporting cost of goodsmanufacturedschedule.Becauseservicescannot be stored, the cost of services pro-

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1144duced equals the cost of services sold (notnecessarily true for a manufacturing firm).16.There are six essential differences. Activity-based cost management systems use moredrivers; are tracing intensive instead of allo-cation intensive; use broad, flexible productcost definitions; focus on managing activitiesinstead of managing costs; emphasize sys-temwideperformanceoverindividualunitperformance; and use both nonfinancial andfinancial performance measures. Functional-based cost management systems emphas-ize only financial measures.17.For companies that have increased decisionerrorcostsanddecreasedmeasurementcosts,amovetoanactivity-basedcostmanagement system is called for. Factorsthat affect the decision to move to an activi-ty-based cost management system includemore powerful and cheaper computing ca-pabilities,increasedcompetition,morefo-cused production by competitors, deregula-tion, and JIT manufacturing.

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1155EXERCISES2–1a. Driver tracing – the miles driven is an appropriate driver for the cost ofgas, oil, and wear and tear on tires, etc.b. Direct tracing – the receipt for the lunch will be submitted for reim-bursement.c. Direct tracing – Mandy will have a receipt for the stamps and photocopy-ing services purchased.d. Allocation – Jed will probably add up the costs for a week or a monthand divide that total by the number of jobs. If the lawns differ significantlyin mowing area, he could divide by the number of hours worked (direct la-bor hours) and get a cost per labor hour.2–2Possible drivers:a.Number of statementsb.Pounds of laundryc.Number of sales ordersd.Number of purchase orderse.Number of inspections (also inspection hours)f.Assembly hoursg.Hours of careh.Processing hours (number of returns less desirable)i.Number of parts (number of purchase orders)j.Hours of therapy2–3a.Direct tracingb.Allocationc.Direct tracingd.Direct tracinge.Allocationf.Allocationg.Driver tracing – number of employeesh.Direct tracingi.Direct tracing

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