CHAPTER 1 SOLUTIONS

Solutions to Questions for Review and Discussion

1. The result of forecasting and planning is a budget, which is an expected level of performance
for a future time period. When the time period becomes history and actual results are known,
this budget or plan becomes the basis for evaluating the actual results. This is performance
evaluation. Performance evaluation is an important part of the plan, act, and evaluate
management process and is the last step in the decision-making process.

2. Forecasting and planning create a plan of action for future periods and form a basis for
evaluating actual results.
Performance evaluation compares planned results to actual results. This is helpful in
evaluating the manager of the business segment.
Cost determination, pricing, and cost management deal with measuring the resources
used to complete an activity, determining the price to charge for it, and improving
processes to make them more cost efficient.
Operations control and improvement examine every aspect of a firm's processes to
increase efficiency, reduce costs, and produce higher quality.
Incremental decision-making is the process of formulating a decision based only on relevant
revenues and costs.
Financial reporting focuses on providing information on the results of the firm's activities to
all users of financial information including managers, shareholders, creditors, tax
authorities, and investment analysts.
Motivation of managers occurs when accounting information is used to encourage managers
to work toward the goals of the organization.

3. The budget for Customer Support: Focus is on next year's activities and financial plans and,
therefore, involves the forecasting and planning process.

Status of improvements to management reporting system: Elements of all decision areas. A

new reporting system undoubtedly will include the planning process, the evaluation
process, improvements in costing, improvements in processes and their control, better
data for incremental decision making, higher quality financial report preparation, and
improvements to managerial communications.

Customer pricing: In meeting with the marketing vice-president, Sarah will use costs in setting
prices and making decisions for new business.

Customer contract wording for a new product: She will need to look at the forecasts for the
product, including its cost and price estimations and other key product decision variables.

September’s actual versus budget comparison: Sarah is evaluating performance based on

budgets. The financial reports will be part of the review.

Cost-volume-profit study: Sarah will be using incremental decision-making processes. Also,

previous budgets, actual results, and cost determination will be used to measure the cost-
volume-profit relationships.

E-mail questions about product costs and operating expenses: These require a look at old
budgets and actual results. Also, cost determination and management are needed.

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 Operations control and improvement are necessary if the goal is process improvement or
cost reduction.

Serious cost overrun problem: The forecast and budget need to be reviewed with actual
results. Decisions about the product or the design process may be needed. Improvement
of the process and the operation' s controls will be sought. Furthermore, cost
management will be utilized to reduce inefficiency.

Presentation on cash flows: Forecasting and planning include strategic planning. Cash-flow
forecasts are part of the long-range planning process.

Memo on marketing spending: To support the advertising expenditure, an incremental

decision will be made to determine if the cash outlay is worth its expected benefits.

Note: Depending how each issue is addressed, it is possible that each item could use all the
decision-making areas.

4. Cost determination (also known as product costing or income determination) deals with
measuring the total amount of resources used for some cost objective. The most common
cost objective is costing a product or service. This can also include such items as contracts, a
play, a building or a piece of equipment, or a convention. The primary focus of cost
determination is the linkage between costs incurred, resources used, and outputs produced.
Cost determination assists in attaching costs to cost objectives.

Cost management is the process of controlling the activities that cause costs to be incurred.
Therefore, the emphasis is on identifying, planning, and evaluating the activities that cause or
drive costs. These actions imply managing both the activities and the costs associated with
those activities. We identify costs with activities, trace those costs to processes, and,
subsequently, associate those costs with products and services. Cost management has an
ultimate goal of managing activities more efficiently to reduce costs.

5. Top management generally faces unstructured or semi-structured problems that are resolved
through strategic planning. These problems deal with product or service markets, the
economy, competitors, availability of resources, financial conditions, and other outside factors
that affect the company. For this reason, some of the information used is from external
resources. Top management's accounting information is usually highly summarized,
encompasses longer time periods, is future oriented, and deals with numerous variables. It
must be available on an irregular or ad hoc basis.

Lower management faces semi-structured or structured problems that deal with specific tasks.
Each manager typically has authority to operate within a particular department or category of
work. The types of decisions needed are usually known, and the required information and
decision rules are usually identified explicitly, perhaps in an operating manual. Lower
management needs information that is detailed, accurate, short term in nature, and provided
frequently and routinely. Managers obtain such information mainly from sources within the
organization, such as existing information systems and reports.

6. All systems use data from and give data to the accounting files.

Order entry system: customer database

Cash receipts system: customer database
Purchases system: vendor, product, and logistics databases
Production planning and control system: vendor, product, and logistics databases
Cash payments system: vendor and employee databases

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 Personnel system: employee database
General accounting system: information from all databases

7. A value chain looks strategically at each part of the firm's operations and asks what key
contribution each part makes to the competitive strength of the firm as a whole. Each link
should add value to the firm's operations.

Value added is the increase in the value of the firm, its products, and its activities from a
particular activity or process. The absence of value added is a sign of noncompetitiveness or
inefficiency.

Nonvalue-added activity is essentially wasted effort. It represents a task such as moving

inventory from one location to another or inspecting something that has been produced
in an error-free environment. By deleting the activity resources are saved and no harm is
caused or no value is lost.

8. TQM stands for total quality management. It is complete dedication to a high-quality and low-
cost environment. Quality in this context includes customer service. To achieve this goal,
many activities and processes are used, including quality circles, statistical quality control, and
continuous improvement programs. Also, total quality management includes JIT and CIM.

Just-in-time (JIT) is a method of management that stresses delivery of goods or services when
needed – not before or after. The most apparent benefit to JIT is the reduction in inventory
costs since inventory is eliminated. However, JIT creates a management attitude that
expands to greater coordination and integration of processes throughout the firm. JIT also
leads to the discovery of problems that inventories hide. Included in these problems are poor
quality, high defect rates, late deliveries, and poor scheduling.

Computer-integrated manufacturing (CIM) brings engineering, production planning, and

production processes into one system. It increases throughput from production resources.
This brings down barriers across organizational functions and allows teamwork. A benefit is
shorter lead times to get the product to the customer.

9. World-class manufacturing emphasizes higher quality, lower investment in inventories, faster

and higher throughput, greater flexibility, automation, organizational flexibility to meet
changing needs, and information technology. Many business people view companies with
world-class manufacturing as pioneers on the "cutting edge” of productivity in manufacturing,
distribution, and management. Companies on the cutting edge have overcome quality issues
and have eliminated wasted time through just-in-time inventory systems.

10. Focused production attempts to decrease the variety of products that a facility makes and
tries to focus on producing the products with the highest contribution margins. Equipment and
personnel are dedicated to certain products or product lines.

Flexible manufacturing attempts to increase the variety of products that a single machine or
group of machines and workers can produce. The purpose is to reduce setup costs and the
necessary investment required to satisfy the customer.

Finally, computer-integrated manufacturing is the integration of engineering, production

planning, and production processes into one function. This knocks down departmental walls,
increases communication, and reduces lead time. Changes in products, production
processes, and production schedules can be implemented through computer technology.

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11. Many not-for-profit and service organizations may be more concerned about providing a
service to the public or promoting some idea for the common good of some group. Thus, the
manager may be seeking to maximize the organization's main objective, which is unrelated to
any profit motive.

Also, managers in all organizations seek to achieve their personal objectives of wealth,
satisfaction, security, self-realization, and so forth. Thus, assisting the linking of managers
and organization's goals is a key decision area. If these are not congruent, managers may be
working at counter purposes to the firm's goals. However, in for-profit firms, regardless of
what the manager's personal objectives are, the profit concept may still be used to motivate
and evaluate the manager.

12. 1. Defining the issue

2. Specifying the decision objective and decision rule
3. Identifying the alternatives
4. Collecting relevant data on the alternatives
5. Formatting and analyzing the data on the alternatives
6. Making the decision
7. Implementing the decision
8. Evaluating the results of the decision

Steps 4, 5, and 8 are primarily concerned with information handling. Collecting data in many
cases is pulling relevant data from the many transaction systems that exist in the firm.
Information is collected about a decision until time runs out or the cost of obtaining additional
information exceeds the benefit. Formatting and analyzing the information are concerned
primarily with rearranging the data found and turning it into meaningful information. Collecting
actual results data and reporting the results to management are a major accounting system
responsibilities. Actual results are recorded in various transaction systems and are pulled
together in accounting systems to prepare accounting reports .

13. Often, collecting the most relevant data is the most time consuming. It is also the most
difficult in that the time available and the cost of collecting data are usually constraints.
Turning the data into information is most important since this will influence how decisions are
made. Therefore, considerable time and expertise are required to be sure it is done right.
Often, time and cost are directly related.

Depending on the decision problem, any one step could be the most time consuming or the
most expensive.

The most difficult analytical step might be defining the issue initially (determining the real
problem), specifying the decision objective (deciding what we really want to accomplish),
identifying the alternatives (specifying the reasonable routes to the objective), making the
decision (selecting from several possible outcomes), or evaluating the results (getting a clear
picture of what really happened).

14. Groups outside an organization that use the organization's financial statements include
owners, investors, creditors, taxing authorities, regulatory agencies, and industry associations.
Even though financial accounting primarily serves outsiders, managers and employees within
a company also have an interest in the information provided.

Owners and investors: Owners and investors use accounting reports to assist them in
deciding whether to continue as owners and investors. Also, potential owners and
investors use reports to help in selecting the most promising use of their money given the
risks and returns present in marketplaces.

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 Creditors: Financial statements help lenders and suppliers assess whether the firm will be
able to meet its obligations.

Taxing authorities: Taxes are often based on accounting information submitted by the
taxpayer. Taxes are collected by school districts, cities, counties, states, port authorities,
and the federal government.

Regulatory agencies: Local, state, and federal agencies regulate a substantial portion of
businesses in the United States. Although many facets of regulated activity are
nonfinancial, much of the regulation is implemented through or involves accounting
reports.

Industry associations: Most industries have one or more associations that gather important
statistics about the national and international industry. Financial statements from
companies within the industry allow associations to help assess the health, stability, and
direction of the industry.

Managers: The interest of a manager depends somewhat on the manager's position within
the organization. At the higher levels, managers are influenced by incentive programs,
often based on profitability. Promotions and recognition are often based on financial
success.

Employees: Based on financial statements and other information, employees make

decisions about continued employment, union wage and contract negotiations, adequacy
of pension plans, and viability of employee stock purchase programs, savings plans, and
profit sharing plans.

15. Three differences between managerial accounting and financial accounting are:

1. Managerial accounting is not subject to the same rules, regulations, and principles as is
financial accounting. No generally accepted accounting principles are promulgated for
managerial accounting.

2. Financial accounting relies on accounting principles structured around the accounting

equation – assets equal liabilities plus owners equity. Financial statements reflect either a
point in time or some change over time with respect to the accounting equation.
Managerial reports, on the other hand, must have a structure which satisfies an individual
manager's needs. These reports will often use estimates, be more narrow in scope, and
seldom be useful for anything other than their original purpose.

3. Managerial accounting focuses on segments of the organization as well as on the whole

organization. The primary interest of financial accounting is the company as a whole. In
managerial accounting, however, the segment is of primary importance. Segments may
be products, individual activities, divisions, plants, operations, tasks, or any other
responsibility centers or cost centers. The necessity for dividing the costs, revenues,
assets, and liabilities among segments creates important allocation issues in managerial
accounting that are not needed when the focus is the organization in total, as is the case
for financial accounting.

Two similarities between managerial accounting and financial accounting are:’

1. The accounting information system that accumulates and classifies information and
generates financial statements is the same system used for many of the managerial

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 accounting reports. Therefore, when the system classifies and accumulates information, it
should do so in formats that accommodate both types of accounting.

2. The manner in which accountants measure the components of cost, assign costs to
accounting periods, and allocate costs to segments is similar for both managerial and
financial accounting. Many of the concepts developed for financial accounting for
measuring and assigning costs are based on a rationale that is also appropriate for
managerial accounting. When financial accounting develops a principle or concept that
proves useful for managerial accounting, it is adopted for internal reporting.

16. The treasurer receives information concerning credit evaluations, collection and disbursement
of funds, and the purchase of long-term funds. The controller receives information from all the
accounting and information departments. These include such departments as budgeting,
billings, accounts payable and receivable, cost accounting, payroll, information systems, and
general accounting.

17. System Responsible Department

Order entry Order processing
Cash receipts Treasurer
Purchases Purchasing
Production planning and control Production Planning
Cash disbursements Treasurer
Personnel Personnel and payroll
General accounting Controller

18. The following five characteristics distinguish between manufacturing and service
organizations:

1. A manufacturer puts out a tangible product, while a service organization's "product" is

often intangible.
2. For a service organization the customer is often present when the service is being
performed. In contrast, customers rarely view the processing of manufactured products.
3. In service organizations, production and consumption of services are often simultaneous.
With manufacturing, the product may be used by the customer long after it has been
produced.
4. Many services are perishable. A manufactured product can usually sit on the
manufacturer's shelves for some time period.
5. Services are generally less homogeneous than manufactured products.

19. Examples for each of the following services are as follows:

business services – law firm

trade services – print shop
infrastructure services – airline
social services – hospital
recreation services – golf course
personal services – beauty shop
public services – military

20. A management accountant has the responsibilities to maintain the accounting records,
prepare financial statements, generate the many specialized managerial reports, and
coordinate budgeting and reporting efforts as part of the planning and decision making,
performance evaluation and control, and cost management processes. However, a controller,

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 who is a management accountant, must oversee the accounting function by selecting ways to
process accounting data, by presenting information in the accounting reports, and also by
managing the people within the accounting function. The controller is frequently an advisor to
other decision makers in the firm. The controller's experience and financial management
expertise are valuable resources to other managers. In many firms, team management is
becoming common. Part of that team is the controller, who has significant knowledge about
the decisions being made.

21. The controller prepares the responsibility reports that compare the budgets for various
departments, operations, and so forth with the manager's actual performance. This gives the
controller direct contact with all levels of management. The controller's office prepares
detailed analyses of each area. It may appear that the controller understands the operations
of each subunit better than the line manager responsible for that unit. If an investigation of
variances is needed, the controller usually has an accountant perform such a task. Therefore,
managers interface with accountants on critical matters that determine how a manager will
ultimately be evaluated by his or her superior. The controller must be careful not to violate line
management relationships or to assume that accounting knowledge is more important than
the functional knowledge of the line managers.

22. Management accountants must maintain integrity and ethical behavior on their own behalf
and must make top management aware of unethical behavior on the part of other people
within the organization. This does not mean the management accountant is a policeperson.
Rather, the management accountant promotes and encourages ethical behavior in all aspects
of business life. Controls are designed and implemented to encourage ethical behavior.
Operationalizing these controls is often the responsibility of the controller.

The Statement on Ethical Conduct developed by the IMA requires management accountants
to comply with the established policies of that organization. These policies relate to the
personal characteristics of the management accountant. This Statement defines four
categories by outlining the key elements of each: be competent, maintain confidentiality,
possess integrity, and exhibit objectivity.

23. In the absence of codes of ethics, each employee must exercise appropriate judgment when
faced with ethical problems. A corporate code of ethics provides with a common base for
making ethical decisions. It raises the consciousness level of all employees -- making them
aware that a behavior standard has been set and is expected of them.

Because resolving ethical issues is complex, employees need a basis on which to rely. The
payoff for a code of ethics is that management provides the baseline for managers to use in
decision making and in evaluating compliance.

24. Sources of finding a solution to an ethical dilemma include the following:

(1) Personal values,

(2) Corporate policies and ethical statements,
(3) Laws,
(4) Professional standards, and
(5) Supervisors, internal auditors, and other company officials.

A last resort, recognizing that it violates confidentiality guidelines, is:

(6) Counselors from outside the organization.

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25. Objective reporting: Certain transactions require judgment before they are recorded. To
make a balance sheet look stronger, a manager may disregard reporting a contingent
liability that should probably be footnoted. Estimates used in managerial accounting can
be overstated or understated to serve the purposes of the manager providing the
estimates. Combining a positive and a negative to avoid attention being directed to the
negative number could involve unethical behavior.

Colleague behavior: When traveling, one might notice a colleague spending company funds
on unauthorized items and still charging them as business expenses. Other examples
include using company property for personal use, perpetual lateness, and inappropriate
actions to get a sales order.

Confidentiality: You overhear confidential information about a competitor that provides you
with an opportunity to hurt the competitor and to gain personally. Bragging about your
company’s plans to a poker group and talking about a colleague's confidential
conversation with you to other company personnel are ethical issues.

Tax evasion: To decrease taxable income, an inventory manager might understate inventory
on the balance sheet and expense more than should be allowed. Reclassifying certain
meals expenses as transportation costs to allow a larger tax deduction is illegal and
unethical.

Personal advancement: An overheard comment might provide information that is not known
to the public and could be used in the stock market for personal gain. A rumor about a
colleague could decrease that person's promotion prospects and benefit your prospects.

26. Order entry system: To record sales orders and to bill customers.
Cash receipts system: To record cash receipts from customers and to assure that cash
receipts are handled properly.
Purchases and production system: In retail firms, to record merchandise orders, receipts,
and inventory additions. In manufacturing firms, to record materials acquisitions. In
manufacturing firms, production plans are created; schedules are set; purchases made;
materials, labor, and equipment scheduled; and production is monitored.
Cash payments system: To make and record all payments for purchases and any other
activities.
Personnel system: To record events related to hiring, firing, benefits, employee evaluations,
and payroll activities.
General accounting system: To bring together transaction data from all other systems.
Management and financial reports are generated, and budget reports are processed.

27. Customer file: sales histories, accounts receivable data, and customer characteristics.
Vendor file: purchases histories, accounts payable data, and vendor characteristics.
Product file: inventory data, product cost and price data, and product specifications.
Logistics file: production requirements, capacity data, and distribution data.
Employee file: payroll records, personnel data, and employee benefits data.
Accounting file: general ledger records, budgeting data, and subsidiary files that support
various balance sheet accounts.

28. This is like asking a mother which of her children she loves most. There is no answer. Each
of the decision areas is needed to be successful over the long term. Each area could be
ignored without disastrous results in the short run. But lack of attention to any one area could
cause serious negative impacts on the health of the organization. The activities in these
decision areas are so intertwined that a serious weakness in any one of the areas can create

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 major problems for the firm in total. No one area can stand ahead of another.

Solutions to Exercises

1-1. The preferred course of action would be to ignore that you ever heard the information.
However, depending on what was said, it may be very difficult to disregard the conservation.
Perhaps, your company's code of ethics or conduct will address this situation. You might seek
counsel from superiors or an ombudsperson within your company. If the problem is serious,
you might want to consult your company attorney. Notifying the competitor may be one
recourse after adequate review, discussion, and precautions within your firm.

1-2. It would be highly unethical to change company plans to save your friend's job. This could
lead to poor decisions being made, which could more adversely affect the company later.
Furthermore, mentioning the situation to your friend and influencing him to transfer is unfair to
the rest of the employees of the company. This situation is more complicated in that your
friend is about to buy a new house. If severe and unexpected financial difficulties are
imminent to your friend, the circumstances should be mentioned to your superiors to
determine your best course of action.

1-3.
(a) It is never too late to learn what should and should not be done. Furthermore, strict
enforcement of rules and regulations can persuade individuals to learn at any time in life. The
absence of formal attention to ethics may imply that no one cares and that any action is fair.
Many people have not thought about ethics issues. By "teaching" or discussing ethics,
attention is brought to the topic. People should be confronted by the issues, provided with a
approach to think through dilemmas, and given a structured approach to make ethical
judgments. This structure can be taught and learned. A person's moral standards may not be
changed, but at least the person is made aware of expectations and approaches to ethical
decision making.

(b) Unfortunately, ethics and legality are often assumed to be the same. Again, a structured
approach to ethical dilemmas may include legal considerations, but the basic question rests
on the ethical merits of the dilemma. Ethical behavior generally rises above the legality of the
issue. Clearing a legal hurdle is certainly a positive but is only a start in ethical evaluation.

(c) Many ethical dilemmas contain gray areas where disagreement can exist between two
“ethical” individuals. This another reason for developing, discussing, and implementing a
code of ethics within a firm. Having a common understanding of ethical standards, how they
are imposed, and how exceptions to these standards are handled prevents "holier than thou”
and "if I were you" scenarios. Differences in ethical views must be approached in a structured
way, where stakeholders (who benefits and who loses) are identified, courses of action are
defined, and alternatives evaluated.

(d) Often this is true. The same action might be okay in one circumstance but wrong in another.
However, the reason we consider an action unethical or ethical will never change. That is, the
same questions should be asked. The structure of ethical decision making may allow
difference outcomes for similar issues. The danger is that "situational ethics" can be bent to
approve almost any action or outcome we prefer. We must situationalize based on criteria
that are clear, supportable, and independent of personalities involved, of benefits to be
gained, of the level of visibility, and of other situation dependent facts.

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(e) The same has been said about quality. In the early eighties, many U.S. companies could not
justify total quality management and continual improvement. They believed it was too costly.
However, Japanese industry proved that these procedures could actually lead to long-run
savings and competitiveness. In the long run, high ethical standards will pay off. However,
we must recognize that certain business will be lost to less ethical persons. Personal and firm
reputation is built on high quality and on high ethical standards.

(f) This is a terrible justification for being unethical. No substance to this argument exists. It
recognizes that a problem exists but labels the unethical action as acceptable based on a
popularity basis. And, not everyone does do it.

1-4.
(a) Read the software copyright agreement. Understand its limits. Allowing Stan to try the
software on your machine in your office would be satisfactory. But giving the software to Stan
to install on his machine would likely violate the software copyright agreement. The software
vendor or dealer may provide test software for prospective buyers. Often, firms can arrange a
site license with the software firm for multiple purchases. The dilemma here involves a
friendship.

(b) Again, using the same software on a different machine probably violates the terms of the
software contract. Careful reading of the software agreement may clarify the propriety of this
action. The dilemma here involves only your own sense of right and wrong.

(c) This is again probably a violation of the software copyright. But the problem here is that it
involves an unethical request from a superior, your boss. The limits of the copyright should be
made known to Mary. The entire package could be transferred from your machine to Mary’s
machine. But complying with her request would probably not be appropriate.

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