Managerial Accounting for Managers 4th Edition Solution Manual

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Solutions Manual,Chapter 11Chapter 1Managerial Accounting: An OverviewSolutions to Questions1-1Financial accountingis concerned withreporting financial information to externalparties, such as stockholders, creditors, andregulators.Managerial accountingis concernedwith providing information to managers for usewithin the organization. Financial accountingemphasizes the financial consequences of pasttransactions, objectivity and verifiability,precision, and companywide performance,whereas managerial accounting emphasizesdecisions affecting the future, relevance,timeliness, andsegmentperformance. Financialaccounting is mandatory for external reports andit needs to comply with rules, such as generallyaccepted accounting principles (GAAP) andinternational financial reporting standards(IFRS), whereas managerial accounting is notmandatory and it does not need to comply withexternally imposed rules.1-2Five examples of planning activitiesinclude (1) estimating the advertising revenuesfor a futureperiod, (2) estimatingthetotalexpensesfor a future period,including thesalaries of all actors,news reporters, andsportscasters,(3) planning how many newtelevision shows to introduce to the market, (4)planningeachtelevision show’sdesignatedbroadcast time slot, and (5) planning thenetwork’s advertising activities andexpenditures.Five examples of controllingactivitiesinclude (1) comparing the actual number ofviewers for each show toitsviewershipprojections, (2)comparing the actual costs ofproducing a made-for-television movie to itsbudget, (3) comparing the revenues earnedfrom broadcasting a sporting event to the costsincurred tobroadcast that event, (4) comparingthe actual costs of running a production studioto the budget, and (5) comparing the actual costof providing global, on-location news coverageto the budget.1-3The quantitative analysis would focus ondetermining the potential cost savings frombuying the part rather than making it. Thequalitative analysis would focus on broaderissues such as strategy, risks, and corporatesocial responsibility.For example, if the part iscritical to the organization’s strategy, it maycontinue making the part regardless of anypotential cost savings from outsourcing. If theoverseas suppliermight createquality controlproblems that could threaten theendconsumers’welfare, then the risks ofoutsourcing may swamp any cost savings.Finally,from a social responsibility standpoint,acompany may decide against outsourcing if itwould result in layoffs at its domesticmanufacturing facility.1-4Companiespreparebudgets to translateplans into formal quantitative terms. Budgetsareusedfor various purposes, such asforcingmanagers to plan ahead, allocatingresourcesacross departments, coordinatingactivitiesacross departments, establishinggoals thatmotivate people, and evaluatingand rewardingemployees. These various purposes oftenconflict with one another, which makesbudgeting one of management’s mostchallenging activities.1-5Managerial accounting is relevant to allbusiness students because all managers engageinplanning, controlling, and decision makingactivities. If managers wish to influence co-workers across the organization, they must beable tospeak in financial terms tojustify theirproposed courses of action.1-6The Institute of ManagementAccountants estimates that 80% of accountantswork in non-public accounting environments.Accountants that work in corporate, non-profit,and governmental organizations are expected to

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2Managerial Accountingfor Managers,4th Editionuse their planning, controlling,and decision-making skills to help improve performance.1-7Deere & Company is an example of acompany that competes in terms of productleadership. The company’s slogan “nothing runslike a Deere” emphasizes its product leadershipcustomer value proposition.Amazon.com competes in terms ofoperational excellence. The company focuses ondelivering products faster, more conveniently,and at a lower price than competitors.Charles Schwab competes in terms ofcustomer intimacy. It focuses on buildingpersonal relationships with clients so that it cantailor investment strategies to individual needs.1-8Planning, controlling, and decisionmaking must be performed within the context ofa company’s strategy. For example, if a companythat competes as a product leader plans to growtoo quickly, it may diminish quality and threatenthe company’s customer value proposition. Acompany that competes in terms of operationalexcellence would select control measures thatfocus on time-based performance, convenience,and cost. A company that competes in terms ofcustomer intimacy may decide againstoutsourcing employee trainingto cut costsbecause it might diminish the quality ofcustomer service.1-9This answer is based onNike, whichhassuppliers in over 40 countries. One risk that Nikefaces is that itssuppliers will fail to manage theiremployees in a socially responsible manner.Nikeconducts Management Audit Verifications at itsoverseas plants to minimize this risk.Nike faces the risk that unsatisfactoryenvironmental performance will diminish itsbrand image. The company is investingsubstantial resources to develop products thatminimize adverse impacts on the environment.Nike faces the risk that customers willnot like its new products. The company usesfocus group research to proactively assess thecustomers’ reaction to its new products.1-10Airlines face the risk that large spikes infuel prices will lower their profitability.Therefore, theymay reduce this risk byspending money on hedging contracts thatenable them to lock-in future fuel prices that willnot change even if the market price increases.Steel manufacturers face major risksrelated to employee safety, so theycreate andmonitor control measures related tooccupational safety compliance andperformance.Restaurants face the risk that aneconomic downturn will reduce customer trafficand lower sales. They reduce this risk bychoosing to create menusduring economicdownturnsthat offer more low-priced entrees.1-11Barnes & Noble could segment itscompanywide performance byindividual store,by sales channel (i.e.,bricks-and-mortar versuson-line), and by product line (e.g. non-fictionbooks, fiction books, music CDs, toys, etc.).Procter &Gamble could segment itsperformance by product category (e.g., beautyand grooming, household care, and health andwell-being), product line (e.g., Crest, Tide, andBounty), and stock keeping units (e.g., CrestCavity Protectiontoothpaste, Crest ExtraWhitening toothpaste, and Crest Sensitivitytoothpaste).1-12Timberland publishes quarterlycorporate social responsibility (CSR) metrics (seewww.earthkeeper.com/CSR/csrdownloads. Threeof those metrics include metric tons of carbonemissions, the percentage of total cottonsourced that is organic, and renewable energyuse as a percent of total energy usage.Timberland’scorporate slogan of “doingwell by doing good” suggests thatthe companypublishesCSR reports because it believes thatits financial success (i.e., doing well) is positivelyinfluenced by its social and environmentalperformance (i.e., doing good).1-13Companies that use lean productiononly make units in response to customer orders.Theyproduceunits justintime to satisfycustomer demand, which results in minimalinventories.1-14Organizations are managed by peoplethathave their own personal interests,insecurities, beliefs, and data-supportedconclusions that ensure unanimous support for agiven course of action is the exception ratherthan the rule. Therefore, managers mustpossess strong leadership skills if they wish tochannel their co-workers’ efforts towardsachieving organizational goals.

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Solutions Manual,Chapter 131-15Ethical behavior is the lubricant thatkeeps the economy running.Without thatlubricant, the economy would operate much lessefficiently—less would be available toconsumers, quality would be lower, and priceswould be higher.

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40Managerial Accountingfor Managers,4th EditionExercise 1-1(30 minutes)1.Having the boss unilaterally impose a salesbudget on the salesmanager is a bad idea for threereasons. First, the boss may not haveaccess to information possessed by the sales manager that would resultin a more accurate forecast. Second, the sales manager is unlikely to becommitted to achieving a budget that she did not help create. Third, ifthe sales manager fails to achieve actual results that meet or exceed thebudget, it would be easy for the sales manager to justify this outcomeon the grounds thatshehad no input in creatingthe budget.2.The company would probably not be comfortable with having the salesmanager create the budget with no input from her boss. First, the bossis likely to possess a broad understanding of strategic issues that shouldbe incorporated into the budgeting process. Second, the sales managermay be inclined to purposely underestimate future sales to increase herchances of producing actual results that exceed the budget. If she canproduce actual results that exceed the budget it is likely to increase herpay raise and bonus as well as her chances for promotion.3.If the company used the sales budget for the sole purpose of planningto deploy resources in a manner that best serves customers, then it ispossible that theboss and thesales manager wouldboth be focused onproducing the most accurate forecast possible. They would strive foraccuracy because if they overestimate sales it is likely to result inbloated inventories and if they underestimate sales it is likely to result inlost sales.4.If the company used the sales budget for the sole purpose ofmotivatingemployees to strive for excellent results, then the boss may be inclinedtochallenge the sales manager by establishing a budget thatintentionallyexceeds expected sales. If the sales budget has absolutelyno impact on the sales manager’s pay raises, promotions or bonuses,then she may be inclined to embrace the challenge of “aiming high”when establishing the sales forecast.

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Solutions Manual, Chapter 15Exercise 1-1(30 minutes)5.If the company used the sales budget for the sole purpose ofdetermining pay raises, promotions, and bonuses, then the salesmanager will be inclined to understate the sales budget to maximize herpay raise, bonus, and chance of promotion. The boss would expect thesales manager to understate the sale budget, so he would seek toincrease the budget above the sales manager’s proposed forecast.6.When a budget is used to deploy resources, to motivate employeesthrough the use of stretch goals, and to evaluate and rewardemployees, it creates inevitable conflicts. As a resource deployment tool,the budget should be as accurate as possible. As a motivational tool, thebudget should intentionally seek to stretch employees to perform totheir full potential. When budgets are used to evaluate and rewardemployees, the employees will have a strong inclination to establisheasily attainable goals to maximize their chances for large pay raisesand bonuses as well as their chance for promotion.

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60Managerial Accountingfor Managers,4th EditionExercise 1-2(10 minutes)The student would feelunfairly criticized for unloading 150 pieces ofluggage in 13 minutes. The student would perceive that, according to theboss’s expectations,heshould beable to unload 10 pieces of luggage perminute. Therefore, if an airplane contains 150 pieces of luggage,heshouldbe allowed 15 minutes to unload the airplane’s luggage. By unloading 150pieces of luggage in 13 minutes, the student would rightly claim thathebeat the boss’s expectation by two minutes.When companies design control systems, they compare actual performanceto some pre-existing expectation. The pre-existing benchmark needs tomake sense so that is can result in meaningful managerial insights and fair-minded assessments of employee performance. This is the fundamentalunderlying principle of flexible budgets, which will be explained in asubsequent chapter.

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Solutions Manual, Chapter 17Exercise 1-3(30 minutes)Examples of DecisionsApplication in a University SettingWhat should we be selling?What products and services shouldbe the focus of our marketingefforts?How should we allocate ourmarketing resources, among ourundergraduate programs, ourgraduate programs, our researchaccomplishments, and our athleticprograms?What new products and servicesshould we offer?Should we introduce a new majorforundergraduate students?What prices should we charge forour products and services?What prices should we establish forour travel abroad programs?What products and services shouldwe discontinue?Should we discontinue our MBAprogram?Who should webe serving?Who should be the focus of ourmarketing efforts?How much of our marketing budgetshould we channel towardsattracting undergraduate studentsversus graduate students?Who should we start serving?Should we introduce on-lineprograms that enable us to servecustomers across the globe?Who should pay price premiums orreceive price discounts?How much should we charge forout-of-state tuition?Who should we stop serving?Which one of our branch campusesshould we close?How should weexecute?How should we supply our parts andservices?What portion of our faculty shouldbe adjunct faculty?How should we expand ourcapacity?Should we increase our averageclass size to accommodate morestudents?How should we reduce our capacity?Should we cut costs by eliminatingadministrative jobs or faculty jobs?How should we improve ourefficiency and effectiveness?Should we increase our researchexpectations for our faculty?

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80Managerial Accountingfor Managers,4th EditionExercise 1-4(20 minutes)1.Failure to report theobsolete nature of the inventory would violate theIMA’s Statement of Ethical Professional Practice as follows:Competence•Perform duties in accordance with relevant technical standards.Generally accepted accounting principles (GAAP) require the write-down of obsolete inventory.•Prepare decision support information that is accurate.Integrity•Mitigate actual conflicts of interest and avoid apparent conflicts ofinterest.•Refrain from engaging in any conduct that would prejudice carryingout duties ethically.•Abstain from activities that would discredit the profession.Credibility•Communicate information fairly and objectively.•Disclose all relevant information.•Hiding the obsolete inventory impairs theobjectivity and relevance offinancial statements.Members of the management team, of which Perlman is a part, areresponsible for both operations and recording the results of operations.Because the team will benefit from a bonus, increasing earnings byignoring the obsolete inventory is clearly a conflict of interest.Furthermore, such behavior is a discredit to the profession.(Unofficial CMA solution)

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Solutions Manual, Chapter 19Exercise1-4(continued)2.As discussed above, the ethical course of action would be forPerlman toinsist on writing down the obsolete inventory. This would not, however,be an easy thing to do. Apart from adversely affecting her owncompensation, the ethical action may anger her colleagues and makeher very unpopular. Taking the ethical action would require considerablecourage and self-assurance.

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100Managerial Accountingfor Managers,4th EditionExercise 1-5(60 minutes)CompanyStrategy1.DeereProduct leadership: “Nothing runs like aDeere”2.FedExOperational excellence: “When it absolutely,positively has to be thereovernight”3.State Farm InsuranceCustomer intimacy: “Like a good neighbor,State Farm is there”4.BMWProduct leadership: “The Ultimate DrivingMachine”5.Amazon.comOperational excellence: Huge selection ofproducts that are promptlydelivered straightto your door6.Charles SchwabCustomer intimacy: “Talk to Chuck”

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Solutions Manual, Chapter 111Exercise 1-6(15minutes)IndustryType of RiskControlAirlinesAn airplane mightcrash.Implement a preventivemaintenance program.Pharmaceutical drugsAcustomer might beharmed by a drug.Design tamper-proofpackaging.Package deliveryA package may get lost.Implementanelectronic packagetracking system.BankingCustomer credit cardnumbers may bestolen.Implement computersystem firewalls to foilcomputer hackers.Oil & gasAn oil spill may damagethe environment.Create contingencyresponse plans in theevent of an oil spill.E-commerceThe company’s websitemight crash.Develop a backupsystem that can beeasily activated.AutomotiveCustomers may not likethe appearance of anew car model.Use focus groups toassess reactions to newmodel prototypes.

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120Managerial Accountingfor Managers,4th EditionExercise1-7(20 minutes)1.If all automotive service shops routinely tried to sell parts and servicesto customers that they didn’t really need, most customers wouldeventually figure this out. They would then be reluctant to accept theword of the service representative that a particular problem needs to becorrected—even when a real problem exists. Either the work would notbe done, customers would learn to diagnose and repair problemsthemselves, or customers would hire an independent expert to verifythat the work is really needed. All three of these alternatives imposecosts and hassles on customers.2.As argued above, if customers could not trust their servicerepresentatives, they would be reluctant to follow the servicerepresentative’s advice. They would be inclined not to authorize workeven when it isreally necessary. And, more customers would learn to doautomotive repairs and maintenance themselves. Moreover, customerswould be unwilling to pay as much for work that is done becausecustomers would have reason to believe that the work may beunnecessary. These two effects would reduce demand for automotiverepair services. The reduced demand would reduce employment in theindustry and would lead to lower overall profits.

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Solutions Manual, Chapter 113Exercise1-8(10 minutes)The typeofcognitive bias revealed by this data is called self-enhancementbias. This bias occurs when people overstate their strengths andunderstate their weaknessesrelative to others.This bias may causemanagers to be overly-optimistic when making plans for the future. Thisbias might also cause managers to readily blame others if control dataindicates unsatisfactory performance. It can also lead managers to makepoor decisions because they believe their managerial prowess canovercome any potential obstacles revealed by an objective data analysis.Managers can help reduce the potential adverse consequences of self-enhancement bias by establishing a “devil’s advocate” team of managersthat are charged with challenging proposed courses of action.

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140Managerial Accountingfor Managers,4th EditionExercise1-9(20 minutes)The purpose of this exercise is to present students with an opportunity todebate the ethicality of competing courses of action. Some students mayargue that the ethical choice is to tell the truth when speaking with theprofessor from Oregon Coastal University. Other students may argue that itis okay to be untruthful with the professor from Oregon Coastal Universitybecause it serves a “greater good” from the standpoint of future MountainState University students that will be able to avoid Dr.Candler.The power of rationalization is a very important topic when discussingethics and decision making. When students are asked a generic questionabout the ethicality of breaking the law or lying, they quickly condemnthese actions as unethical. However, when given specific contexts, such asthe one presented in this problem, many students will rationalize unlawfulor dishonest conduct.

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Solutions Manual, Chapter 115Exercise 1-10(20 minutes)The purpose of this exercise is to create a platform for students to debatethe merits of the shareholder-focusedand stakeholder-focusedphilosophies of business management.Student responses are likely to fallin three categories. First, those studentswho believe that the purpose of acompany is shareholder wealth maximization will tend to agree with thequote. Second, those students who believe that companies should servethe needs of a broadly defined group of stakeholders may disagree withthe quote. Third,some students may argue that the shareholder-focusedand stakeholder-focused philosophies of business management are notmutually exclusive.In other words, these students may assert thateffectively or ineffectively serving the needs of various stakeholders canhave a major impact on a company’s financial performance.To support thispoint-of-view, direct students to the In Business box within Chapter 1 titled“Greenpeace Leverages the Power of Social Media.”

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