11

CHAPTER 1 INTRODUCTION: THE ROLE, HISTORY, AND

DIRECTION OF MANAGEMENT ACCOUNTING

QUESTIONS FOR WRITING AND DISCUSSION

1. A management accounting information sys-tem is an information system that produces outputs using inputs and processes needed to satisfy specific managerial objectives.

2. The inputs of a management accounting information system are economic events. The processes transform the inputs into out-puts and are such things as collecting, mea-suring, storing, analyzing, reporting, and managing. Typical outputs include special reports, product costs, customer costs, per-formance reports, budgets, and personal communication.

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 interest to management; to provide information for planning, controlling, evaluation, and conti-nuous improvement; and to provide informa-tion for decision making.

4. All organizations—manufacturing, mer-chandising, and services—must have a good management accounting information system. Management accounting concepts and procedures are not restricted to any one type of organization.

5. The users of management accounting in-formation are managers and workers within the organization. Anyone internal to an or-ganization is a potential user of manage-ment accounting information.

6. Management accounting information is used to cost out objects (for example, services and products) and to aid in planning, control-ling, evaluation, continuous improvement, and decision making.

7. Both financial and nonfinancial information should be provided by the management ac-counting information system. Nonfinancial information provides insights useful for con-trolling operations—it is easily used by op-erational workers. Financial information is critical for evaluating the success of opera-tional control.

8. Continuous improvement means searching for ways of increasing overall efficiency and productivity of activities by reducing waste, increasing quality, and reducing costs.

9. Employee empowerment is allowing opera-tional workers to plan, control, and make decisions without explicit authorization from middle- and higher-level managers.

10. Operational workers must be informed so that they can evaluate and monitor the effec-tiveness of their decisions.

11. Planning establishes performance stan-dards, feedback compares actual perfor-mance with planned performance, and con-trolling uses feedback to evaluate deviations from plans.

12. Performance reports are formal reports that compare actual data with planned data or benchmarks and thus provide signals to managers that allow them to take corrective actions.

13. Management accounting differs from finan-cial accounting in the following major ways: (1) internally focused, (2) no mandated rules, (3) financial and nonfinancial; subjec-tive information possible, (4) emphasis on the 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, management accounting be-came an extension of the financial accounting system. This outcome was prob-ably due to a favorable cost-benefit tradeoff. The incremental cost of producing

22

more accurate product costs was not offset by the incremental benefits of improved de-cision making. However, significant changes in the competitive environment have in-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 demand for an improved management accounting in-formation system.

15. Activity-based management is an important approach that focuses management’s atten-tion on activities with the objective of improv-ing the value received by the customer and the profit achieved by providing this value. It is important because it is the heart of the contemporary management accounting sys-tem, offering increased accuracy in product costing (through the use of activity-based costing) and the ability to evaluate and con-trol activities (through process value analy-sis).

16. Customer value is the difference between customer 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 entire set of value-chain activities, including what happens after a product is sold. This creates a demand for a broader set of information than 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 (the product 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 value and eliminating those that do not.

18. Industrial value chain is the linked set of value-creating activities from raw materials through the end-use customer. Understand-ing the industrial value chain is important because it enables a manager to identify the important internal and external linkages and use these linkages to create a competitive advantage.

19. Supply chain management is concerned with managing material flows starting with suppliers and upstream suppliers, moving to production, and finishing with the distribution of finished goods to customers and down-

stream customers. Supply chain manage-ment focuses on the entire industrial value chain because potential benefits may be reaped by understanding upstream suppliers and downstream customers.

20. E-business is any business transaction or information exchange that is executed using information and communication technology. Management accountants provide informa-tion for e-business settings, e.g., the cost of processing an electronic transaction versus the 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, a decision can affect many different functions. Information must be gathered and reported so that these effects can be assessed and decision making improved.

22. Decreasing the time required to perform activities may increase quality and decrease costs. The management accounting system should be able to document the relationship between time reductions and such things as quality and cost both on a projected or before-the-fact basis and on an after-the-fact basis. This enhances planning, controlling, and decision making.

23. A line position has direct responsibility for carrying out the basic missions of an organi-zation. A staff position has indirect responsi-bility for the basic missions and provides a supportive role for line activities.

24. Yes. For most organizations, the controller should be a member of the top management staff. The controller is the financial expert of an organization and can provide critical ad-vice and insights.

25. The controller is responsible for both internal and external accounting. These responsibili-ties usually include diverse activities such as taxes, SEC reports, cost accounting, bud-geting, internal auditing, financial account-ing, and systems accounting.

26. Ethical behavior is concerned with making right choices and usually involves sacrificing individual self-interest for the well-being of others. It is possible to teach ethical beha-vior in virtually any course. By being intro-duced to ethical dilemmas in management accounting, students can be made aware of

33

the behavior that is expected in the business world and, in particular, for management ac-countants.

27. Yes. There is some evidence that ethical behavior actually is good business. In other words, the market and consumers appre-ciate ethical behavior and are willing to re-ward those who adopt it. In addition, a com-pany with higher ethical standards would experience less exposure to manipulation of financial data for gain.

28. Yes. As management accountants become more informed about what behavior is ac-ceptable and what is not, we should expect a favorable response. This response can be reinforced by the IMA imposing sanctions for serious 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 their

needs. The CPA has a public-accounting orientation, 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) established stronger government control and regulation of publicly-traded companies in the United States. Major sections of SOX include: es-tablishment of the Public Company Account-ing Oversight Board, enhanced auditor in-dependence, tightened regulation of corporate governance, control over man-agement, and management/auditor assess-ment of the firm’s internal controls. SOX also requires public companies to state whether or not the top corporate officers are bound to the company code of ethics.

.

44

EXERCISES

1–1

1. Inputs: a, d, f, j 2. Processes: b, g, m

3. Outputs: c, i, l 4. System objectives: e, h, k, n

1–2

a. Management b. Financial c. Management d. Financial e. Financial f. Management g. Management

h. Management i. Financial j. Management k. Management l. Financial m. Financial n. Management

1–3

1. b 2. c 3. f

1–4

1. e 2. b 3. c

1–5

1. k 2. g 3. a 4. f 5. i 6. h

7. j 8. c 9. b 10. e 11. d

55

1–6

Penny is staff. She is in a support role—she prepares reports and helps explain and interpret them. Her role is to help the line managers more effectively carry out 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 for a 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 in place 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 to make a product. Thus, Joe has direct responsibility for a basic objective and therefore holds a line position.

1–7 A manager has a responsibility to the company as well as society. If he/she lays off the employees, he/she ignores both of these responsibilities. In effect, the manager would be pursuing his/her self-interest at the expense of the company and the salespeople. While pursuit of self-interest is not necessarily unethical, it can be if it harms others. In this case, the manager’s action could result in lower profits for the company because sales may decrease and unnecessary training costs 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 right choice 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 refusal of “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 is paid a bonus if profits exceed 10 percent of planned profits. By basing reward on a short-run measure such as profits, the manager has the incentive to manipulate earnings in the short run. One way of manipulating annual earnings is to reduce discretionary expenditures. This type of behavior can be discouraged by expanding the performance mea-sures to include long-run factors like market share, productivity, and personnel development. The accounting system can also be used to track trends (e.g., training costs over time). Moreover, managers can be required to provide extensive justification for significant changes in discretionary expenses.

66

1–8

a. By the time most students graduate from high school, they have not had much exposure to business. Therefore, they do not have full knowledge of acceptable behavior for the business environment. Students may not know that certain practices are unethical because they may not be famil-iar with the behavioral norms associated with these practices. Once students 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 the better. 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 may be influenced by those individuals who behave ethically. Individuals commit-ted to ethical behavior produce societies committed to ethical behavior (not vice 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 a good 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 the collective good that the behavior becomes questionable.

d. It is often true that unethical firms and individuals suffer financially. In the long run, there is some evidence that ethical behavior pays off. It is doubtful, however, that every unethical firm or individual is wiped out financially. There are too many notable exceptions (for example, the selling of drugs by orga-nized crime).

1-9

No, it is not ethical for Steve to demand a kickback from Dave. Dave should not agree 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 his lawyer, who bluntly told him the deal was illegal. Dave did not accept.

1–10 a. CPA b. CIA c. CMA d. CPA

e. CPA f. CMA g. CMA, CPA, CIA h. CMA, CPA, CIA

77

PROBLEMS

1–11

1. Excellence teams and minicompanies both have the objective of involving production line personnel more fully in the management process so that the company can take advantage of the direct contact and knowledge that operat-ing workers have about production and their work environment. This will hopefully translate into continuous improvement of operating performance. The objectives seem to be realized. Duffy has increased profits and reduced costs, attributing much of the change to the contributions of the excellence teams. The same is true for the minicompanies—much of the success in quality 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 with the operating environment, all of which can be exploited to discover new and more efficient ways of producing. As employees are allowed more input, their self-esteem grows and their commitment to the company increases. Morale also 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 other grievances); 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 involved in improving efficiency.

3. Management accounting information should be used to inform empowered

employees so that they can identify problems and monitor and evaluate the effects of decisions they make. This information will only be valuable if it is delivered on a timely basis.

4. Quality culture means that the employees of the organization have an internal

commitment to producing high-quality products and services. A learning or-ganization means that the employees are always seeking new and better ways of doing things—they have a commitment to continuous improvement.

88

1–12

A. Decision making; Role: Information about the cost of performing the various tests.

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-profit

analysis can be done. F. Decision making; Role: Identifying avoidable costs.

1–13

1. The total product is the product and its features (processing speed, disk drives, 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 better

than Drantex’s. Thus, the realization of these features appears to outweigh the additional sacrifice (the additional operating and maintenance cost) asso-ciated with the Confiar PC. The implications for management accounting are straightforward. The management accounting information system should col-lect and report information about customer realization and sacrifice. Much of this information is external to the firm but clearly needed by management.

4. Better quality and shorter delivery time increase customer realization, while

lowering the price decreases customer sacrifice. In total, customer value has increased and presumably this should make the Drantex PC much more com-petitive. This example illustrates how quality, time, and costs are essential competitive weapons. It also illustrates how critical it is that the management accounting system collect and report data concerning these three dimen-sions.

99

1–14

Planning. The management accountant gains an understanding of the impact on the organization of planned transactions (i.e., analyzing strengths and weak-nesses) and economic events, both strategic and tactical, and sets obtainable goals 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 of controlling. Internal auditing is another example. Evaluating Performance. The management accountant judges and analyzes the implications of various past and expected events and then chooses the optimum course 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 of evaluating performance. Ensuring Accountability of Resources. The management accountant implements a reporting system closely aligned to organizational goals that contributes to the measurement of the effective use of resources and safeguarding of assets. Internal reporting such as comparison of actual to budget is an example of accountability. External Reporting. The management accountant prepares reports in accordance with 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)

1–15

The changes that are being proposed violate the following ethical standards: Competence. Top management’s request of Roger Deerling to account for the company’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.”

1100

1–15 Concluded

Confidentiality. Top management has violated the ethical standard to “refrain from using confidential information for unethical or illegal advantage” (personal job 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 is clearly 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 prescribed policies in resolving the ethical conflict. If there is no policy, then the specific steps are as follows: • To discuss the issue with his immediate supervisor, unless the supervisor is

involved, in which case, he should continue to the next management level. Roger may need to discuss the issue with the Audit Committee of the Board of Directors, or owners. Any contact with levels above his immediate supervisor should be initiated with the supervisor’s knowledge, as long as the supervisor is not involved. As long as Roger does not believe a law was broken, 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 the

ethical conflict.” (CMA adapted)

1111

1–16

By discussing the possible sale of Webson’s common stock with members of the troubleshooting team, Maureen Hughes has violated the following standards of ethical conduct: Competence. Hughes has an obligation to perform her duties in accordance with relevant laws and regulations. By discussing the information she overheard, Hughes may have violated laws regulating the use of inside information. (CMA adapted) Confidentiality. Hughes has disclosed confidential information acquired in the course 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 the confidential 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 that would discredit her profession and prejudice her ability to carry out her duties ethically. Credibility. Hughes has violated the requirement to communicate all information fairly and objectively.

1122

1–17

John 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 the company (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 carrying

out of his duties. 4. Objectivity

• Brogan did not: • communicate information fairly and objectively. • disclose fully all relevant information.

(CMA adapted) 1-18 Answers will vary.