Solution Manual For Cost Accounting, 14th Edition

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1-1
CHAPTER 1
THE MANAGER AND MANAGEMENT ACCOUNTING
See the front matter of this Solutions Manual for suggestions regarding your choices of
assignment material for each chapter.
1-1 Management accounting measures, analyzes and reports financial and nonfinancial
information that helps managers make decisions to fulfill the goals of an organization. It focuses
on internal reporting and is not restricted by generally accepted accounting principles (GAAP).
Financial accounting focuses on reporting to external parties such as investors,
government agencies, and banks. It measures and records business transactions and provides
financial statements that are based on generally accepted accounting principles (GAAP).
Other differences include (1) management accounting emphasizes the future (not the
past), and (2) management accounting influences the behavior of managers and other employees
(rather than primarily reporting economic events).
1-2 Financial accounting is constrained by generally accepted accounting principles.
Management accounting is not restricted to these principles. The result is that
• management accounting allows managers to charge interest on owners’ capital to help
judge a division’s performance, even though such a charge is not allowed under
GAAP,
• management accounting can include assets or liabilities (such as “brand names”
developed internally) not recognized under GAAP, and
• management accounting can use asset or liability measurement rules (such as present
values or resale prices) not permitted under GAAP.
1-3 Management accountants can help to formulate strategy by providing information about
the sources of competitive advantage—for example, the cost, productivity, or efficiency
advantage of their company relative to competitors or the premium prices a company can charge
relative to the costs of adding features that make its products or services distinctive.
1-4 The business functions in the value chain are
• Research and development—generating and experimenting with ideas related to new
products, services, or processes.
•

1-2
1-5 Supply chain describes the flow of goods, services, and information from the initial
sources of materials and services to the delivery of products to consumers, regardless of whether
those activities occur in the same organization or in other organizations.
Cost management is most effective when it integrates and coordinates activities across all
companies in the supply chain as well as across each business function in an individual
company’s value chain. Attempts are made to restructure all cost areas to be more cost-effective.
1-6 “Management accounting deals only with costs.” This statement is misleading at best,
and wrong at worst. Management accounting measures, analyzes, and reports financial and non-
financial information that helps managers define the organization’s goals, and make decisions to
fulfill them. Management accounting also analyzes revenues from products and customers in
order to assess product and customer profitability. Therefore, while management accounting
does use cost information, it is only a part of the organization’s information recorded and
analyzed by management accountants.
1-7 Management accountants can help improve quality and achieve timely product deliveries
by recording and reporting an organization’s current quality and timeliness levels and by
analyzing and evaluating the costs and benefits—both financial and non-financial—of new
quality initiatives such as TQM, relieving bottleneck constraints or providing faster customer
service.
1-8 The five-step decision-making process is (1) identify the problem and uncertainties (2)
obtain information (3) make predictions about the future (4) make decisions by choosing among
alternatives and (5) implement the decision, evaluate performance and learn.
1-9 Planning decisions focus on selecting organization goals and strategies, predicting results
under various alternative ways of achieving those goals, deciding how to attain the desired goals,
and communicating the goals and how to attain them to the entire organization.
Control decisions focus on taking actions that implement the planning decisions, deciding
how to evaluate performance, and providing feedback and learning to help future decision
making.
1-10 The three guidelines for management accountants are
1. Employ a cost-benefit approach.
2. Recognize behavioral and technical considerations.
3. Apply the notion of “different costs for different purposes”.
1-11 Agree. A successful management accountant requires general business skills (such as
understanding the strategy of an organization) and people skills (such as motivating other team
members) as well as technical skills (such as computer knowledge, calculating costs of products,
and supporting planning and control decisions).

1-3
1-12 The new controller could reply in one or more of the following ways:
(a) Demonstrate to the plant manager how he or she could make better decisions if the
plant controller was viewed as a resource rather than a deadweight. In a related way,
the plant controller could show how the plant manager’s time and resources could be
saved by viewing the new plant controller as a team member.
(b) Demonstrate to the plant manager a good knowledge of the technical aspects of the
plant. This approach may involve doing background reading. It certainly will involve
spending much time on the plant floor speaking to plant personnel.
(c) Show the plant manager examples of the new plant controller’s past successes in
working with line managers in other plants. Examples could include
• assistance in preparing the budget,
• assistance in analyzing problem situations and evaluating financial and
nonfinancial aspects of different alternatives, and
• assistance in submitting capital budget requests.
(d) Seek assistance from the corporate controller to highlight to the plant manager the
importance of many tasks undertaken by the new plant controller. This approach is a
last resort but may be necessary in some cases.
1-13 The controller is the chief management accounting executive. The corporate controller
reports to the chief financial officer, a staff function. Companies also have business unit
controllers who support business unit managers or regional controllers who support regional
managers in major geographic regions.
1-14 The Institute of Management Accountants (IMA) sets standards of ethical conduct for
management accountants in the following four areas:
• Competence
• Confidentiality
• Integrity
• Credibility
1-15 Steps to take when established written policies provide insufficient guidance are
(a) Discuss the problem with the immediate superior (except when it appears that the
superior is involved).
(b) Clarify relevant ethical issues by confidential discussion with an IMA Ethics
Counselor or other impartial advisor.
(c) Consult your own attorney as to legal obligations and rights concerning the ethical
conflicts.

1-4
1-16 (15 min.) Value chain and classification of costs, computer company.
Cost Item Value Chain Business Function
a.
b.
c.
d.
e.
f.
g.
h.
Production
Distribution
Design of products and processes
Research and Development
Customer Service or Marketing
Design of products and processes
(or Research and Development)
Marketing
Production
1-17 (15 min.) Value chain and classification of costs, pharmaceutical company.
Cost Item Value Chain Business Function
a.
b.
c.
d.
e.
f.
g.
h.
Design of products and processes
Marketing
Customer Service
Research and Development
Marketing
Production
Marketing
Distribution
1-18 (15 min.) Value chain and classification of costs, fast food restaurant.
Cost Item Value Chain Business Function
a.
b.
c.
d.
e.
f.
g.
h.
Production
Distribution
Marketing
Marketing
Marketing
Production
Design of products and processes (or Research and Development)

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1-8
1-27 (15 min.) Role of controller, role of chief financial officer.
1.
Activity Controller CFO
Managing accounts payable X
Communicating with investors X
Strategic review of different lines of businesses X
Budgeting funds for a plant upgrade X
Managing the company’s short-term investments X
Negotiating fees with auditors X
Assessing profitability of various products X
Evaluating the costs and benefits of a new product design X
2. As CFO, Perez will be interacting much more with the senior management of the
company, the board of directors, auditors, and the external financial community. Any experience
he can get with these aspects will help him in his new role as CFO. George Perez can be better
positioned for his new role as CFO by participating in strategy discussions with senior
management, by preparing the external investor communications and press releases under the
guidance of the current CFO, by attending courses that focus on the interaction and negotiations
between the various business functions and outside parties such as auditors and, either formally
or on the job, getting training in issues related to investments and corporate finance.

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1-9
1-28 (30 min.) Pharmaceutical company, budgeting, ethics.
1. The overarching principles of the IMA Statement of Ethical Professional Practice are
Honesty, Fairness, Objectivity and Responsibility. The statement’s corresponding “Standards for
Ethical Conduct…” require management accountants to
• Perform professional duties in accordance with relevant laws, regulations, and
technical standards.
• Refrain from engaging in any conduct that would prejudice carrying out duties
ethically.
• Communicate information fairly and objectively.
• Disclose all relevant information that could reasonably be expected to influence an
intended user’s understanding of the reports, analyses, or recommendations.
The idea of capitalizing some of the company’s R&D expenditures is a direct violation of the
IMA’s ethical standards above. This transaction would not be “in accordance with relevant laws,
regulations, and technical standards”. Generally Accepted Accounting Principles

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1-10
his profession. Taking illegal and/or unethical action by capitalizing R&D to satisfy the demands
of his new supervisor, James Clark, is unacceptable. Although not strictly unethical, I would
recommend that Johnson not agree to slow down the R&D efforts on Lyricon or sell off the
rights to Markapro. Each of these appears to sacrifice the overall economic interests of
PharmaCor for short-run gain. Johnson should argue against doing this but not resign if Clark
insists that these actions be taken. If, however, Clark asks Johnson to capitalize R&D, he should
raise this issue with the chair of the Audit Committee after informing Clark that he is doing so. If
the CFO still insists on Johnson capitalizing R&D, he should resign rather than engage in
unethical behavior.

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1-12
Each of the (a), (d), (e), and (g) “end-of-year actions” may well disadvantage Gourmet Foods in
the long run. For example, lack of routine maintenance may lead to subsequent equipment
failure. The divisional controller is well advised to raise such issues in meetings with the division
president. However, if Gourmet Foods has a rigid set of line/staff distinctions, the division
president is the one who bears primary responsibility for justifying division actions to senior
corporate officers.
3. If Taylor believes that Ryan wants her to engage in unethical behavior, she should first
directly raise her concerns with Ryan. If Ryan is unwilling to change his request, Taylor should
discuss her concerns with the Corporate Controller of Gourmet Foods. She could also initiate a
confidential discussion with an IMA Ethics Counselor, other impartial adviser, or her own
attorney. Taylor also may well ask for a transfer from the snack foods division if she perceives
Ryan is unwilling to listen to pressure brought by the Corporate Controller, CFO, or even
President of Gourmet Foods. In the extreme, she may want to resign if the corporate culture of
Gourmet Foods is to reward division managers who take “end-of-year actions” that Taylor views
as unethical and possibly illegal. It was precisely actions along the lines of (b), (c), and (f) that
caused Betty Vinson, an accountant at WorldCom to be indicted for falsifying WorldCom’s
books and misleading investors.

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1-14
(b) Selling the new printing equipment that was purchased in January and replacing it with
discarded equipment from one of the company’s other divisions. The previously
discarded equipment no longer meets current safety standards. Again, while this method
may result in a short-term solution for the Controller and the Production Manager
personally, this decision may actually harm the corporation financially as a whole, not to
mention the potential resulting injuries to production workers from hazardous equipment.
This method would be also be ethically questionable and would likely violate the IMA’s
ethical standards of integrity and credibility.
(f) Switching from declining balance to straight line depreciation to reduce depreciation
expense in the current year. Many companies switch their depreciation policy from one
method to another. Deacon Publishing could argue that straight-line depreciation better
represents the decrease in the economic value of the asset compared to the declining
balance method. Straight-line depreciation may also be more in line with what its
competitors do. If, however, the company changes to straight-line depreciation with the
sole purpose of reducing expenses to meet its profit goals, such behavior would be
unacceptable. The Standards of Ethical Behavior require management accountants to
communicate information fairly and objectively and to carry out duties ethically.
3. Allen should directly raise his concerns first with the CFO, especially if the pressure from
the CFO is so great that the only course of action on the part of the controller is to otherwise
behave unethically. If the CFO refuses to change his direction, then the controller should raise
these issues with the CEO, and next to the Audit Committee and the Board of Directors,

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1-15
1-31 (40 min.) Global company, ethical challenges.
1. The overarching principles of the IMA Statement of Ethical Professional Practice are
Honesty, Fairness, Objectivity and Responsibility. The statement’s corresponding “Standards for
Ethical Conduct…” require management accountants to
• Perform professional duties in accordance with relevant laws, regulations, and technical
standards.
• Refrain from engaging in any conduct that would prejudice carrying out duties
ethically.
• Communicate information fairly and objectively.
• Disclose all relevant information that could reasonably be expected to influence an
intended user’s understanding of the reports, analyses, or recommendations.
Several of the suggestions made by Hamsen’s staff are clearly in conflict with the statement’s
principles and required standards and should be viewed as unacceptable.
c. Pressure current customers to take early delivery of goods before the end of the year so
that more revenue can be reported on this year’s financial statements. This tactic,
commonly known as channel stuffing, merely results in shifting future period revenues
into the current period. The overstatement of revenue in the current period may mislead

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2-10
2-25 (10–15 min.) Cost drivers and functions.
1.
Function Representative Cost Driver
1. Accounting Number of transactions processed
2. Human Resources Number of employees
3. Data processing Hours of computer processing unit (CPU)
4. Research and development Number of research scientists
5. Purchasing Number of purchase orders
6. Distribution Number of deliveries made
7. Billing Number of invoices sent
2.
Function Representative Cost Driver

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