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Management Accounting 4/e

Test Item File

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CHAPTER 1
MANAGEMENT ACCOUNTING: INFORMATION THAT CREATES VALUE
TRUE/FALSE
1.
Management accounting gathers short-term, long-term, financial, and nonfinancial
information.
a.
True
b.
False
2.

Management accounting information generally reports on the organization as a whole.


a.
True
b.
False

3.

Companies have to follow strict guidelines when designing a management accounting


system.
a.
True
b.
False

4.

A good management accounting system is intended to meet specific decision-making needs


at all levels in the organization.
a.
True
b.
False

5.

During the history of management accounting, innovations were developed to address the
decision-making needs of managers.
a.
True
b.
False

6.

A key element in any organizations strategy is to identify its target customers and to deliver
what those target customers want.
a.
True
b.
False

7.

The value proposition has only two elements: cost and quality.
a.
True
b.
False

8.

Quality is the degree of conformance between what the customer is promised and what the
customer receives.
a.
True
b.
False

9.

Recently, the demand for improved management accounting and control information within
manufacturing firms has also occurred in service organizations.
a.
True
b.
False

10.

Recently, the competitive environment for both manufacturing and service companies has
become far more challenging and demanding.

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a.
b.

True
False

11.

Service companies are very similar to manufacturing companies in may ways, including the
fact that many employees have direct contact with customers.
a.
True
b.
False

12.

Sensitivity to timeliness and quality of service is especially important to service


organizations.
a.
True
b.
False

13.

Government and nonprofit organizations, as well as profit-seeking enterprises, are feeling


the pressures for improved performance.
a.
True
b.
False

14.

Management accounting information allows managers to compare actual and planned costs
and to identify areas and opportunities for process improvement.
a.
True
b.
False

15.

Management accounting can provide information on customer satisfaction.


a.
True
b.
False

16.

ROI (return on investment) combines two profitability measures to produce a single


measure of departmental or divisional performance.
a.
True
b.
False

17.

Around 1920, centralized control of decentralized operations was accomplished by having


corporate managers receive financial reports about divisional operations and profitability.
a.
True
b.
False

18.

In the late 1990s, little interest or attention was paid to evaluating managements
appropriate governance and strategy choices.
a.
True
b.
False

19.

Financial information identifies and explains the underlying problems.


a.
True
b.
False

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20.

Management accounting measures can provide advance warnings of problems.


a.
True
b.
False

21.

Customer satisfaction is an example of financial information.


a.
True
b.
False

22.

Operating profit is an example of nonfinancial information.


a.
True
b.
False

23.

Organizational leadership plays a critical role in fostering an organizations culture of high


ethical standards.
a.
True
b.
False

24.

Information is never neutral; just the act of measuring and reporting information affects the
individuals involved.
a.
True
b.
False

25.

Boundary systems are always stated in positive terms that outline maximum standards of
behavior.
a.
True
b.
False

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MULTIPLE CHOICE
26.

Management accounting helps a company achieve:


a.
its strategic objectives
b.
its operational objectives
c.
control and also supports performance evaluation
d.
All of the above are correct.

27.

Which of the following types of information are used in management accounting?


a.
financial information
b.
nonfinancial information
c.
information focused on the long term
d.
All of the above are correct.

28.

Management accounting:
a.
focuses on estimating future revenues, costs, and other measures to forecast activities
and their results
b.
provides information about the company as a whole
c.
reports information that has occurred in the past that is verifiable and reliable
d.
provides information that is generally available only on a quarterly or annual basis

29.

Which of the following descriptors refer to management accounting information?


a.
It is verifiable and reliable.
b.
It is driven by rules.
c.
It is prepared for shareholders.
d.
It provides reasonable and timely estimates.

30.

Which of the following statements refers to management accounting information?


a.
There are no regulations governing the reports.
b.
The reports are generally delayed and historical.
c.
The audience tends to be stockholders, creditors, and tax authorities.
d.
The scope tends to be highly aggregate.

31.

Management accounting information includes:


a.
tabulated results of customer satisfaction surveys
b.
the cost of producing a product
c.
the percentage of units produced that is defective
d.
All of the above are correct.

32.

Management accounting reports MOST likely include information about:


a.
customer complaints
b.
net income for the year
c.
total assets
d.
All of the above are correct.

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33.

The person MOST likely to use management accounting information is a(n):


a.
banker evaluating a credit application
b.
shareholder evaluating a stock investment
c.
governmental taxing authority
d.
assembly department supervisor

34.

Which of the following is NOT a function of a management accounting system?


a.
strategic planning
b.
financial reporting
c.
operational control
d.
product costing

35.

Financial accounting provides the PRIMARY source of information for:


a.
decision making in the finishing department
b.
improving customer service
c.
preparing the income statement for shareholders
d.
planning next years operating budget

36.

Financial accounting:
a.
focuses on the future and includes activities such as preparing next year's operating
budget
b.
must comply with GAAP (generally accepted accounting principles)
c.
reports include detailed information on the various operating segments of the business
such as product lines or departments
d.
is prepared for the use of department heads and other employees

37.

The person MOST likely to use ONLY financial accounting information is a:


a.
factory shift supervisor
b.
vice president of operations
c.
current shareholder
d.
department manager

38.

The accounting process is constrained by mandated reporting requirements by all of the


following organizations EXCEPT the:
a.
Internal Revenue Service (IRS)
b.
Institute of Management Accountants (IMA)
c.
Financial Accounting Standards Board (FASB)
d.
Securities and Exchange Commission (SEC) for companies that are publicly traded

39.

Historically:
a.
in the beginning of the 20th century, the Guilds kept detailed records of raw materials
and labor costs as evidence of product quality
b.
in medieval England, the basics of modern management accounting emerged with
standards for material use, employee productivity, and budgets
c.
in the late 19th century, railroad managers implemented large and complex costing
systems to compute the cost of different types of freight
d.
from 1400-1600, large and integrated companies such as DuPont and General Motors,
developed ways to measure return on investment

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40.

In general, it was not until the 1970s that management accounting systems:
a.
were improved because of demands by the FASB and the SEC
b.
stagnated and proved inadequate
c.
started to develop innovations in costing and performance-measurement systems due
to intense pressure from overseas competitors
d.
started to address the decision-making needs of managers

41.

All successful organizations must identify and understand their:


a.
weaknesses
b.
competition
c.
strategy
d.
definition of quality

42.

A key element of any organizations strategy is identifying:


a.
its potential shareholders
b.
its target customers
c.
competitors products
d.
employee needs

43.

What an organization tries to deliver to customers is called its value proposition, which
includes the elements of:
a.
cost and quality
b.
cost, quality, and functionality and features
c.
cost, quality, functionality and features, and service
d.
cost, quality, functionality and features, service, and industry standards

44.

The price paid by the customer, given the product features and competitors prices, is
referred to as the __________ element of the value proposition.
a.
cost
b.
industry standards
c.
quality
d.
service

45.

The degree of conformance between what the customer is promised and what the customer
receives is referred to as the __________ element of the value proposition.
a.
cost
b.
industry standards
c.
quality
d.
service

46.

The performance of the product, for example, a meal in a restaurant provides the diner with
the level of satisfaction expected for the price paid, is referred to as the __________
element of the value proposition.
a.
functionality and features
b.
industry standards
c.
quality
d.
service

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47.

How the customer is treated at the time of the purchase is an example of the __________
element of the value proposition.
a.
functionality and features
b.
industry standards
c.
quality
d.
service

48.

Management accounting provides:


a.
information on the efficiency of factory labor
b.
information on the cost of servicing commercial customers
c.
information on the performance of an operating division
d.
All of the above are correct.

49.

Which of the following groups would be LEAST likely to receive detailed management
accounting reports?
a.
stockholders
b.
customer service representatives
c.
production supervisor
d.
vice president of operations

50.

Top executives of a multi-plant firm are LEAST likely to use management accounting
information:
a.
to support decisions that result in long-term consequences
b.
to evaluate the performance of individual plants
c.
for strategic planning
d.
for operational control

51.

Managers of service departments need all of the following information EXCEPT:


a.
efficiency data on work performance
b.
quality data on work performance
c.
profitability data of the whole company
d.
profitability data of the service department

52.

A national company manufactures a line of modern furniture. Information MOST useful to


the employee who assembles the furniture includes:
a.
a daily report comparing the actual time it took to assemble a piece of furniture to the
standard time allowed
b.
a monthly report on the portion of furniture pieces assembled with defects
c.
the number of furniture pieces sold this month
d.
revenue per employee

53.

A national company manufactures a line of modern furniture. Information MOST useful to


the top executive includes:
a.
individual job summaries of materials used
b.
monthly financial reports on the companys profitability by product line
c.
time reports submitted by each employee
d.
scheduled downtime for routine maintenance on machines

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54.

A quarterly report disclosing declining market share information is MOST useful to:
a.
a front-line employee
b.
the manager of operations
c.
the chief executive officer
d.
the accounting department

55.

A weekly report comparing machine time used to available machine time is information
MOST useful to:
a.
a front-line employee
b.
the manager of operations
c.
the chief executive officer
d.
the accounting department

56.

A daily report on the number of quality units assembled by each employee is information
MOST useful to:
a.
a front-line assembly worker
b.
the accounting department
c.
the chief executive officer
d.
the personnel department

57.

Which of the following would be LEAST helpful for a top manager of a company?
a.
profitability report of the company
b.
information to monitor hourly and daily operations
c.
number of customer complaints
d.
operating expense summary reported by department

58.

Recently, increased demand for management accounting information has been:


a.
primarily from manufacturing firms
b.
primarily from service organizations
c.
from both the manufacturing and the service industries
d.
an illusion; in fact, the demand for management accounting has changed very little

59.

Management accounting can play a critical role in the service industry because of all the
following reasons EXCEPT:
a.
firms must be especially sensitive to the timeliness and quality of customer service
b.
many employees have very little contact with customers
c.
customers immediately notice defects and a delay in service
d.
dissatisfied customers may never return

60.

Historically, the NEGLECT of management accounting in the service industry was a result
of:
a.
noncompetitive environments
b.
global customer demands
c.
the switch to free market economies
d.
an influx of higher-quality and lower-priced products from overseas

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61.

Currently, management accounting information within government and nonprofit


organizations is in greater demand because:
a.
public and private donors are demanding accountability
b.
citizens are requesting responsive and efficient performance from their governing units
c.
more nonprofit organizations are competing for limited funds
d.
All of the above are correct.

62.

Currently, pressures for improved cost and performance measurements are being felt by:
a.
nonprofit organizations
b.
governmental agencies
c.
profit-seeking enterprises
d.
All of the above are correct.

63.

Financial accounting information:


a.
provides a signal that something is wrong
b.
identifies what is wrong
c.
explains what is wrong
d.
simply summarizes information but gives no indication that anything is wrong

64.

Decentralized responsibility refers to allowing lower-level managers to do all of the


following EXCEPT:
a.
make decisions without seeking higher approval
b.
take advantage of local opportunities
c.
make periodic financial reports to upper-management
d.
pursue individual objectives even though they may not contribute to the entire
company

65.

The return on investment (ROI) performance measure uses __________ to evaluate the
performance of operating divisions.
a.
a single number
b.
four numbers
c.
five numbers
d.
ten numbers

66.

The return on investment (ROI) performance measure combines __________ to produce a


measure of departmental performance.
a.
two profitability measures
b.
two capital utilization measures
c.
one profitability measure and one capital intensity measure
d.
two profitability measures and two capital intensity measures

67.

All of the following are true regarding the return on investment (ROI) formula developed at
Dupont EXCEPT that:
a.
it is the sole measure top-management utilizes to evaluate which division should
receive additional capital
b.
it allows companies to have centralized control with decentralized responsibility
c.
it produces a measure of divisional performance
d.
it equals (Operating income/Sales) x (Sales/Investment)

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 68 AND 69.


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The following information pertains to three divisions:


Flowers
Shrubs
Sales
$15,000
$28,000
Operating income
$2,000
$2,000
Investment
$22,000
$40,000

Trees
$120,000
$6,000
$100,000

68.

What is the return on investment for the Shrub Division?


a.
2.00%
b.
5.00%
c.
7.14%
d.
70.00%

69.

Which division is more profitable based on ROI?


a.
Flowers
b.
Shrubs
c.
Trees
d.
Both Flowers and Shrubs are equally more profitable than Trees.

70.

To help evaluate managements appropriate governance and strategic choices, organizations


have called on management accountants to develop:
a.
internal control systems to protect assets from theft
b.
measures to monitor compliance with behavior that is consistent with the
organizations best interests
c.
systems to evaluate profitability
d.
reports to highlight variances from amounts planned

71.

Management accounting information is BEST described as:


a.
providing a signal that something is wrong
b.
identifying and helping to explain what is wrong
c.
simply summarizing information, but giving no indication that anything is wrong
d.
measuring overall organizational performance

72.

For improving operational efficiencies and customer satisfaction, nonfinancial information is:
a.
critical
b.
helpful
c.
infrequently used
d.
unnecessary

73.

Nonfinancial information might be used to:


a.
improve quality
b.
reduce cycle times
c.
satisfy customer needs
d.
All of the above are correct.

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74.

The act of simply measuring and reporting information:


a.
focuses the attention of employees on those processes
b.
diverts the employees attention to other activities
c.
disproves the saying What gets measured gets managed.
d.
has no effect on employee behavior

75.

Which statement below is FALSE?


a.
What gets measured gets managed.
b.
People react to measurements.
c.
Employees spend more attention on those variables that are not getting measured.
d.
If I cant measure it, I cant manage it.

76.

When a change is introduced, employees tend to:


a.
embrace the change
b.
be indifferent to the change
c.
exhibit no change in behavior
d.
resist the change

77.

The introduction of a new management system is MOST likely to motivate UNWANTED


employee behavior when it is used for:
a.
evaluation
b.
planning
c.
decision making
d.
coordinating individual efforts

78.

Management accountants are MOST likely to feel outside pressure to favorably influence
the numbers favorably when the information is used for:
a.
budgeting
b.
compensation and promotions
c.
continuous improvement
d.
product costing

79.

Fostering a culture of high ethical standards includes all of the following EXCEPT:
a.
following the good example set by senior management
b.
communicating to employees a belief system that inspires and promotes commitment
to the organizations core values
c.
following the general examples set by front-line employees
d.
communicating to all employees a boundary system that states what actions will not be
tolerated

80.

The Institute of Management Accountants (IMA):


a.
is a professional organization of management accountants
b.
is a professional organization of financial accountants
c.
issues standards for management accounting
d.
issues standards for financial accounting

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CRITICAL THINKING/ESSAY
81.

Describe management accounting and financial accounting.

82.

What is the purpose of management accounting?

83.

Briefly describe how managers make use of management accounting information.

84.

Describe the value proposition and the elements that comprise it.

85.

Is financial accounting or management accounting more useful to an operations manager?


Why?

86.

What role has the increasingly competitive business environment played in the development
of management accounting?

87.

Describe return on investment (ROI). Why was it developed? When was it developed?

88.

Give two examples of financial information and nonfinancial information.

89.

Discuss the potential behavior implications of performance evaluation.

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CHAPTER 1 SOLUTIONS
MANAGEMENT ACCOUNTING: INFORMATION THAT CREATES VALUE
TRUE/FALSE

MULTIPLE CHOICE

LO1
LO1
LO1
LO1
LO1

1.
2.
3.
4.
5.

a
b
b
a
a

LO1
LO1
LO1
LO1
LO1

26.
27.
28.
29.
30.

d
d
a
d
a

LO3
LO3
LO3
LO3
LO3

56.
57.
58.
59.
60.

a
b
c
b
a

LO2
LO2
LO2
LO3
LO3

6.
7.
8.
9.
10.

a
b
a
a
a

LO1
LO1
LO1
LO1
LO1

31.
32.
33.
34.
35.

d
a
d
b
c

LO3
LO3
LO4
LO4
LO4

61.
62.
63.
64.
65.

d
d
a
d
a

LO3
LO3
LO3
LO3
LO3

11.
12.
13.
14.
15.

b
a
a
a
a

LO1
LO1
LO1
LO1
LO1

36.
37.
38.
39.
40.

b
c
b
c
c

LO4
LO4
LO4
LO4
LO5

66.
67.
68.
69.
70.

c
a
b
a
b

LO4
LO4
LO5
LO5
LO5

16.
17.
18.
19.
20.

b
a
a
b
a

LO2
LO2
LO2
LO2
LO2

41.
42.
43.
44.
45.

c
b
c
a
c

LO5
LO5
LO5
LO6
LO6

71.
72.
73.
74.
75.

b
a
d
a
c

LO5
LO5
LO6
LO6
LO6

21.
22.
23.
24.
25.

b
b
a
a
b

LO2
LO2
LO3
LO3
LO3

46.
47.
48.
49.
50.

a
d
d
a
d

LO6
LO6
LO6
LO6
LO6

76.
77.
78.
79.
80.

d
a
b
c
a

LO3
LO3
LO3
LO3
LO3

51.
52.
53.
54.
55.

c
a
b
c
b

MULTIPLE CHOICE
68.
69.

$2,000 / $40,000 = 5.00%


$2,000 / $22,000 = 9.09%; $2,000 / $40,000 = 5.00%; $6,000 / $100,000 = 6.00%

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CRITICAL THINKING/ESSAY
LO1
81. Describe management accounting and financial accounting.
Solution: Management accounting provides information to internal decision makers of the
business such as top executives. Its purpose is to help managers predict and evaluate future
results. Reports are generated often and are usually broken down into smaller reporting
divisions such as department or product line. There are no rules to be complied with since
these reports are for internal use only.
Financial accounting provides information to external decision makers such as investors and
creditors. Its purpose is to present a fair picture of the financial condition of the company.
Reports are generated quarterly or annually and report on the company as a whole. The
financial statements must comply with GAAP (generally accepted accounting principles). A
CPA audits, or verifies, that the GAAP are being followed.
LO1
82. What is the purpose of management accounting?
Solution: Management accounting gathers short-term and long-term financial and
nonfinancial information to plan, coordinate, motivate, improve, control, and evaluate
success factors of an organization. Management accounting converts data into usable
information that supports strategic, operational, and control decision making.
LO1
83. Briefly describe how managers make use of management accounting information.
Solution: Managers use accounting information for three broad purposes.
ONE: To plan business operations that includes preparing strategies and budgets and
determining the prices and costs of products and services. A company must know the cost
of each product and service to decide which products to offer and whether to expand or
discontinue product lines.
TWO: To control business operations that includes comparing actual results to the budgeted
results and taking corrective action when needed.
THREE: To evaluate performance.

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LO2
84. Describe the value proposition and the elements that comprise it.
Solution: The value proposition is what an organization tries to deliver to its target
customers it defines the organizational strategy.
The four elements are cost, quality, functionality and features, and service.

Cost is the price paid by the customer, given the product features and competitors prices.
Quality is the degree of conformance between what the customer is promised and what
the customer receives.
Functionality and features refers to the performance of the product. For example: A meal
in a restaurant provides the diner with the level of satisfaction expected for the price paid.
Service is all of the other elements of the product. For example: How the customer is
treated at the time of the purchase.

LO3
85. Is financial accounting or management accounting more useful to an operations manager?
Why?
Solution: Management accounting is more useful to an operations manager because
management accounting reports operating results by department or unit rather than for the
company as a whole, it includes financial as well as nonfinancial data such as on-time
deliveries and cycle times, and it includes quantitative as well as qualitative data such as the
type of rework that was needed on defective units.
LO3
86. What role has the increasingly competitive business environment played in the development
of management accounting?
Solution: The competitive environment has changed dramatically. There has been a
deregulation movement in North America and Europe during the 1970s and 1980s that
changed the ground rules under which service companies operated. In addition,
organizations encountered severe competition from overseas companies that offered highquality products at low prices. There has been an improvement of operational control
systems such that information is more current and provided more frequently. The nature of
work has changed from controlling to informing. Firms are concerned about continuous
improvement, employee empowerment, and total quality. Nonfinancial information has
become a critical feedback measure. Finally, the focus of many firms is now on measuring
and managing activities.

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LO4
87. Describe return on investment (ROI). Why was it developed? When was it developed?
Solution: ROI = (operating income / sales) x (sales / investment)
The ROI measure combines a profitability measure (operating income / sales) with a capital
intensity measure (sales / investment) to provide a single measure of departmental and
divisional performance.
ROI was developed in the early decades of the 1900s so that senior managers at multidivisional diversified corporations, such as DuPont and General Motors, could evaluate the
operating performance of their decentralized divisions.
LO5
88. Give two examples of financial information and nonfinancial information.
Solution: Financial information includes amounts that can be expressed in dollar amounts
such as sales, net income, and total assets. It also includes ratios prepared using financial
information such as increase in sales, return-on-sales, and return-on-investment.
Nonfinancial information includes measures that are not expressed in dollar amounts. For
example, nonfinancial measures of customer satisfaction include the number of repeat
customers or ranked estimates of satisfaction levels. Nonfinancial measures of production
quality include percent of on-time deliveries, the number of defects, production yield, and
cycle times.
LO6
89. Discuss the potential behavior implications of performance evaluation.
Solution: As measurements are made on operations and, especially, on individuals and
groups, the behavior of the individuals and groups are affected. People react to the
measurements being made. They will focus on those variables or the behavior being
measured and spend less attention on variables and behavior that are not measured. In
addition, if managers attempt to introduce or redesign cost and performance measurement
systems, people familiar with the previous system will resist. Management accountants must
understand and anticipate the reactions of individuals to information and measurements.
The design and introduction of new measurements and systems must be accompanied with
an analysis of the likely reactions to the innovations.

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