Managerial Accounting Tenth Canadian Edition Solution Manual

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Solutions Manual, Chapter 11Chapter 1Managerial Accounting andthe Business EnvironmentSolution toDiscussion CaseBenefits toemployeesof having a code of conduct:•Creates clarity as to howallemployees are expected to behave. Thisshould help employees avoid behaviours that the company prohibits.•Provides protection for employees when dealing with superiors giventhe guidelines related to protection from discrimination and harass-ment.•Establishes guidelines for workplace safety,whichshould help protectthe health of employees.•Provides information on the consequences of code violations, whichwill help understand employees understand the outcomes of prohibit-ed behaviours, if detected.•Provides guidance as to what employees should do if they witness aviolation of the code and protects those employees who do report anincident.Disadvantages to CIBC of having a code of conduct:•May create the impression among employees that they are nottrust-ed by senior management to act appropriately.•The obligation to report violations could create a culture of suspicionand mistrust among employees.•Enforcing the code may be costly and time consuming in large organ-izations such as CIBC. For example, investigations of possible viola-tions could take weeks.

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2Managerial Accounting, 10th Canadian Edition

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Solutions Manual, Chapter 13Solutions to Questions1-1In contrast to financial accounting, ma-nagerialaccounting: (1) focuses on the needs ofmanagers rather than outsiders; (2) emphasizesdecisions affecting the future rather than thefinancial consequences of past actions; (3) em-phasizes relevance rather than objectivity andverifiability; (4) emphasizes timeliness ratherthan precision; (5) emphasizes the segments ofan organization rather than summary data con-cerning the entire organization; (6) is not go-verned by GAAP; and (7) is not mandatory.1-2Managers carry out four major activitiesin an organization: planning, directing and moti-vating, controlling and decision-making. Plan-ning involves establishing a basic strategy, se-lecting a course of action, and specifying howthe action will be implemented. Directing andmotivating involves mobilizing people to carryout plans and run routine operations. Controllinginvolves ensuring that the plan is actually carriedout and is appropriately modified as circum-stances change. Decision-making involves se-lecting a course of action from among two ormore alternatives.1-3A budget is a quantitative plan for theacquisition and use of financial and other re-sources over a specified future time period.1-4Customer value propositions fall intothree broad categories—customer intimacy, op-erational excellence, and product leadership. Acompany with a customer intimacy strategy at-tempts to better understand and respond to itscustomers’ individual needs than its competitors.A company that adopts an operational excel-lence strategy attempts to deliver products fas-ter, more conveniently, and at a lower price thanits competitors. A company that has a productleadership strategy attempts to offer higherquality products than its competitors.1-5The Planning and Control Cycle involvesformulating plans,implementing plans, measur-ing performance, and evaluating differences be-tween planned and actual performance.1-6The controller is responsible for many ofthe technical aspects of the accounting and fi-nance functions in an organization. The control-ler also often works with other managers andprovides consulting and business analysis ser-vices. Controllers are often key members ofcross-functional teams involved in a variety ofactivities including developing budgets, analyz-ing project proposals and targeting processesfor improvement.1-7A person in a line position is directlyinvolved in achieving the basic objectives of theorganization. A person in a staff position pro-vides services and assistance to other parts ofthe organization, but is not directly involved inachieving the basic objectives of the organization.1-8Decentralization involves the delegationof decision-making throughout an organizationby giving managers at different operating levelsthe authority to make decisions related to theirareas of responsibility.1-9The six business functions that makethe value chain are: (1) research and develop-ment; (2) product design; (3) manufacturing;(4) marketing; (5); and (6) customerservice.1-10Examples of things socially responsibleorganizations should provide for their employeesinclude: (1) safe working conditions; (2) faircompensation; (3) job-training; (4) opportunitiesfor advancement; (5) the right to file grievanc-es; and (6) adequate time off.1-11An enterprise system is supposed toovercome the problems that result from havingseparate, unintegrated software applicationsthat support specific business functions. It doesthis by integrating data across an organization ina single software system that enables all em-ployees to have simultaneous access to a com-mon database.1-12Having a good ethical reputation is im-portant to companies in maintaining good rela-tions with suppliers, employees and customers.Companies with a poor ethical reputation willlikely have trouble finding suppliers for their rawmaterials, will have difficulty attracting and re-taining employees, and will not be attractive topotential customers. Thus, in the long-run hav-

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4Managerial Accounting, 10th Canadian Editioning good relations with each of these stakehold-er groups is critical to a company’s survival.1-13Companies prepare a code ofconducttodemonstrate their morals and values system,often in part to demonstrate corporate socialresponsibility. The code of ethics indicates whatis expected of all employees and directors intheir dealings with various stakeholders.1-14Four key aspects of the Sarbanes OxleyAct of 2002 are: (1) requires CFO and CEO tocertify the financial statements; (2) gives auditcommittee the power to hire, compensate andterminate the auditor; (3) restricts the natureand extent of non-auditing services that can beprovided by public accounting firms; and (4)requires the company’s annual report to containin internal control report that is certified bymanagement.1-15Enterprise risk management is a processused by organizations to actively identify andmanage foreseeable risks. Theses risks can toemployee theft, financial reporting or even stra-tegic decision making.1-16Some examples of common businessrisks include: (1) losing market share to compet-itors; (2) Web site malfunctioning; (3) employ-ees stealing assets or accessing unauthorizedinformation; and (4) inaccurate budget esti-mates causing operational problems such asexcessive inventory levels or inventory shortag-es.

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Solutions Manual, Chapter 15Exercise 1-1(20 minutes)i.Developing sales estimates of a product for use in the annualbudget for a product is aplanningactivitysince doing so will es-tablish a goal for sales levels in the coming year.ii.The review of the monthly quality control reports is acontrollingactivity aimed at determining whether production processes areoperating as planned. Identifying the team members to investigatethe problem is adirecting and motivatingactivity since it involvesassigning tasks to specific individuals. The selection of team mem-bers is also adecision-making activitysince the manager will needto determine which employees are best suited (e.g., which oneshave the necessary skills, the time available, etc.) to conduct theinvestigationiii.Choosing from the two design alternatives for the speakers is adecision-making activity. It could also be argued that this is aplanning activitysince it will affect which speaker design the com-pany decides to offer to its customers in future periods.iv.Reviewing the monthly performance report is acontrollingactivity.Determining the production schedule in the coming months is bothaplanninganddirecting and motivatingactivity since it involvesthe future scheduling of day-to-day activities related to manufac-turing the televisions. Evaluating how to motivate retailers to im-prove sales is also adirecting and motivatingactivity and has anelement ofplanningas well assuming changes are going to bemade to the current incentive system. The evaluation also involvesdecision-makingwith respect to continuing or discontinuing theplasma television line, andplanningactivities such as settingbudgets for future sales of plasma televisions if the product con-tinues to be offered.

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6Managerial Accounting, 10th Canadian EditionExercise 1-2(15minutes)i.Primarily financial accounting since it involves the preparation ofan income statement for use by the tax authorities (Canada Reve-nue Agency), an outsidebody.ii.Primarily managerial accounting since it involves the use of infor-mation for specific internal purposes related to resource alloca-tions, marketing and production scheduling.iii.Primarily financial accounting since the information is being usedto develop an account balance (allowance for doubtful accounts)for use in the year-end financial statements.iv.Primarily management accounting since the information is beingused to evaluate customer satisfaction. Preparing this informationis not a financial reportingrequirementbutitcould be useful forinternal decision-making purposes regarding pricing of products,product enhancements, etc.v.Primarily management accounting since the information will beused to determine possible changes to credit terms offered to ma-jor customers. Note that essentially the same information is beingused in item iiiabove but in this case the use is entirely for inter-nal decision-making purposes, not for purposes of preparing thefinancial statements.

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Solutions Manual, Chapter 17Exercise 1-3(15 minutes)i.Customer service(protects the privacy of customer information).ii.Manufacturing(reduces the likelihood of quality issues in the manu-facturing process).iii.Distribution(controls who is authorized to distribute (sell) the com-pany’s products).iv.Research and development(prevents leakage of sensitive informationabout possible new products).v.Marketing(reduces the likelihood of ineffective ads being run).vi.Product design(ensures products are designed to be in compliancewith safety standards).

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8Managerial Accounting, 10th Canadian EditionProblem 1-4(30 minutes)1.Several aspects of the code of professional ethics shown in Exhibit 1-7potentially come into play here such as:•1(b): fairness and loyalty to employer.•1(c): high ideals of personal honour and professional integrity.•2(a): maintain independence of thought and action.•2(c): financial reports (budget is an example thereof) should not bemisleading.Developing a budget that is intentionally misstated (“conservative”) in or-der to increase the likelihood of earning a bonus would violate 1(b) and1(c) since doing so would be unfair to the owner of Baden Foods (whopays the bonus) and would be inconsistent with the ideal of professionalintegrity (i.e., it is lying!). Also, the “conservative budget” would be mis-leading since it sets targets for operating income each month that Brigleyknows are not realistic, thus violating 2(c). Arguably, allowing his (or theCFO’s) desire to earn a bonus to influence the development of the budgetwould also violate 2(a) since Brigley should be acting in an independentand objective fashion, as opposed to a self-interested fashion, when formu-lating the budget.2. As a start, Brigely should approach Robson and clearly express his con-cerns about intentionally misstating the budget and explain how it violatesthe code of professional ethics that guides the behaviour of professionalaccountants. It may be that his concerns were not fully appreciated byRobson during their Friday afternoon phone call. If this fails to convinceRobson to allow Brigley to submit a budget that reflects “reasonable expec-tations” then the situation becomes more complicated. From what we knowof the organization chart at Baden Foods, the most appropriate course ofaction for Brigley would likely be to approach James Davis (President) di-rectly to explain his concerns. However, some organizations will have poli-cies in place to follow when an employee wants to “whistle-blow” aboutsomething he or she believes violates either the company'’ code of con-duct, or in this case, the professional code of ethics under which Brigley’sbehaviour is guided. These policies may require all incidents to be reportedthrough either corporate legal counsel, or the head of human resources.

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Solutions Manual, Chapter 19Problem 1-5(20minutes)Some possible examples for each activity:Planning activities:1.Estimating the advertising revenues for a future period.2.Scheduling the designated broadcast time slot for games,specialprogramming,newsshows, etc.3.Estimating total expenses for future periods including salaries of newsdeskanchors, play-by-play analysts, researchers, camera crew per-sonnel, etc.Directing and motivating activities:1.Scheduling news desk anchors for each day’s news broadcasts.2.Assigning camera crew employees to cover specific events (e.g.,games, press conferences, etc.).3.Reviewing scripts used by news desk anchors for accuracy, clarity,etc.4.Providing performance incentives for news anchors based on viewer-ship numbers.Controllingactivities:1.Contrastingthe actual number of viewers for each showor gamewithits viewership projections.2.Comparing the actual costs of producing abroadcast of a sportingevent (e.g., hockey game)to its budget.3.Comparing theadvertisingrevenues earned from broadcasting asporting event to the costs incurred to broadcast that event.Decision-making activities:1.Determining which news anchor personnel to sign to contracts.2.Identifying which news items to include in the daily news broadcastand the order in which to present them.3.Determining whichspecific gamesto broadcast in each sport carriedby the network.

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10Managerial Accounting, 10th Canadian EditionProblem 1-6(30 minutes)1.Williams has an ethical responsibility to take some action in the matterof GroChem Inc. and the dumping of toxic wastes. Elements of the codeof professional ethicsthat apply are as follows:•The code of professional ethics (1a in Exhibit 1-7) states that mem-bers should act with “responsibility for and fidelity to the publicneeds.” GroChem’s dumping of toxic waste is clearly not in the bestinterests of the public.•Also, item 1c in Exhibit 1-7states that members are expected to actwith “high ideals of personal honour and professional integrity.”Knowing that GroChem is engaging in an illegal activity and doingnothing would not be inconsistent with this element of the code.Given that the dumping of toxic wastes is illegal, there is a clear respon-sibility to bring this issue to the attention of management.2.As noted in the code of professional ethics in Exhibit 1-7(3a), membersare not to disclose confidential information about their employer’s affairsto outside parties unless “acting in the course of his or her duties” orunless involved in legal proceedings of some sort.The first alternative being considered by Williams, seeking the advice ofherboss is appropriate. Discussing the problem with the immediate su-perior will not result in a breach of confidentiality and it does not appearthat Williams’ boss is involved in the illegal activity.Communication of confidential information to anyone outside the com-pany is inappropriate unless there is a legal obligation to do so (Exhibit1-7, 3a). If it turns out that there is a legal obligation to report the activ-ity, Williams should contact the proper law enforcement authorities, notthe local newspaper.3.Williams should report the problem to successively higher levels of man-agement until it is satisfactorily resolved. There is no requirement forWilliams to inform herimmediate superior of this action because the su-perior is involved in the conflict. If the conflict is not resolved after ex-hausting all courses of internal review, Williams probably should consulthis own attorney regarding herlegal obligations and rights.(CMA Unofficial Solution, adapted)

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Solutions Manual, Chapter 111Problem 1-7(20 minutes)1.Numerous stakeholder groups have likely been negatively affected suchas:•Customers who have vehicles that were recalled face the inconven-ience of needing to take their vehicle to a dealer. Also, customerswho suffered personal injury because their vehicles experiencedproblems (e.g., rapid acceleration) caused by the defect.•Toyota employees who were laid off because of reduced productionresulting from lower demand for the product.•Toyota employees whose compensation (salary or bonus) declined asthe result of Toyota’s reduced profitability caused by the recalls.•Shareholders who suffered investment losses as the result of the dropin Toyota’s share price.•Suppliers of parts and raw materials used in the production of Toyo-ta’s vehicles. As Toyota’s production levels dropped, so too woulddemand for parts and raw materials.•Companies to whom Toyota had outsourced production for some as-pect of their vehicles (e.g., accelerator pedals).•Regulators and government agencies who participated in the parlia-mentary hearings involving Toyota. Although such participation ispart of their jobs, it would have reduced the time or attention theseindividuals could give to other important issues.2. Effective corporate governance provides proper incentives for top man-agement to pursue objectives that are in the best interests of share-holders and it should also establish effective monitoring of performance.For example, a proper incentive system would not placeundue empha-sis oncorporate goals for growth and profitabilityat the expense ofproduct quality and safety. Also, performance reporting is not limited tofinancial statements. Good corporate governance also involves monitor-ing key non-financial measures such as quality, employee safety, cus-tomer satisfaction, etc. Finally, a key aspect of effective governance isto limit the likelihood of key business risks being either unrecognized oruncontrolled. Companies must constantly be vigilant in identifying andcontrolling risks.

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12Managerial Accounting, 10th Canadian EditionProblem 1-8(30 minutes)1.Line positions are in the direct chain of command and are directly re-sponsible for the achievement of the basic objectives of an organization.These positions involve a direct relationship to the organization’s prod-uct or service.Staff positions are intended to provide expertise, advice, and support forline positions, being only indirectly related to the achievement of thebasic objectives of the organization.2.Reasons for conflict between line and staff positions include the follow-ing.•Line managers perceive staff managers as threats to their authority,especially when staff persons have functional authority.•Line managers may become uncomfortable when they grow depen-dent on staff expertise and knowledge.•Line managers may perceive staff managers as overstepping their au-thority, having a narrowperspective, or stealing credit. Staff manag-ers, on the other hand, may perceive line managers as not utilizingtheir expertise, not giving staff enough authority, or resisting staff’sideas.•Line managers may perceive staff managers as interfering when theline managers are being held responsible for results.•Staff mangers may see line managers as unappreciative and uncoop-erative in supplying information and using results of analyses.

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Solutions Manual, Chapter 113Problem 1-8(continued)3.a. and b. Listed below are the identification, explanation, and potentialproblems that could arise for each position described in the text.Jere Feldon–Staff Liaison to the Chairperson. Feldon has a staffposition as he is not in the direct line of activities. Feldon has a potentialconflict between his two superiors because he reports directly to thechairperson yet he also works for the president.Lana Dickson–Director of Self-Study Programs. Dickson’s positionis a line position as her job provides educational opportunities to mem-bers. Her potential problems include the marketing of the courses andacquisition of outside or accounting services because she needs to relyon the services of individuals from different departments where she hasno line authority.Jess Paige–Editor of Special Publications. This is a line functionbecause the publication of educational materials and the sale of mono-graphs are part of the organization’s objectives. Paige’s potential prob-lems include difficulties he may experience in working with the ResearchDepartment as he has no authority over this department but is depend-ent on its work.George Ackers–Manager of Personnel. Ackers has a staff positionthat provides services across the entire organization. Ackers’ potentialproblems include being ignored due to his position being lower than thevice-president level in the organization, and attempting to take more au-thority than he is entitled.(CMA Unofficial Solution, adapted)

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14Managerial Accounting, 10th Canadian EditionProblem 1-9(30 minutes)1.Benefitsand challenges of performing value chain analysis:Benefits:•Provides acompletepicture of product profitability since it incorpo-rates all major functions of the value chain involved in developing,manufacturing and servicing products.•Canlead to the identification of the most and least profitable prod-ucts. This couldresult inactions taken to improve less profitableproducts such as reducing manufacturing costs, increasing advertis-ing or improving customer service.•Could lead companies to allocate resources to more profitable prod-ucts (e.g., increased marketing or customer service) to further en-hance their performance.•Could lead to the discontinuation of unprofitable products if man-agement concludes that cost reductions across the value chain arenot possible or feasible.Challenges:•Some costs may be difficult to separately track for each major prod-uct line. For example, marketing costs often relate to advertisingcampaigns for a company’s products as a whole rather than for indi-vidualproducts (e.g., BMW advertisements are often for the brandrather than a specific model).•The timing of some value chain costswilloccur in different periodsthanthe relatedproductrevenues. For example, research and devel-opment costs will be incurred before a product is brought to marketand customer service costs will be incurred after the product hasbeen sold. Therefore to accurately assess product profitability usingvalue chain analysis, managers will have to conduct the analysison along-term basisover multiple reporting periods (years) tofullymatchrevenues with the related costs.

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Solutions Manual, Chapter 115Problem 1-9(continued)•Could lead managers to reduce costs in certain areas such as cus-tomer support that could improve product profitability in the short-run but would have negative consequences longer-term if productquality or customer service levels suffer as a result. Note, a goodcontrol system would mitigate this behavior by rewarding managersin part based on the longer-term performance of the company.2.Change in value chain costs over the life of a product:•Researchanddevelopmentcosts are primarily incurred before aproduct is brought to market and so will be low or non-existent formoremature products.•Product design costs will be considerably lower as a product maturesbut some may continue to be incurred such as designchangesaimedat improving quality or functionality.•Manufacturing costs may declineon a per unit basis formorematureproductsasa result ofimprovements to productionactivities orbe-causehigher volumes are produced allowing for greater economies ofscale(e.g., lower unit costs for raw materials).•Marketing costs will likely be higher for new products but decrease asproductsmaturesince customers will be aware of their existence andfeatures.Marketing costs could also increase as a product matures inresponse to increased competition.•Distribution costs may increase asaproduct maturesas managersseek new marketsin whichtoincrease sales.

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