Solman Man Acct

MANAGEMENT ACCOUNTING - Solutions Manual

TABLE OF CONTENTS Chapter

1

1-1 – 1-1 – 1-19

M ANAGEMENT ACCOUNTING : AN OVERVIEW 2

Management Accounting and the Business Environment

2-1 – 2-1 – 2-5

3

Understanding of Financial Statements

3-1 – 3-1 – 3-10

4

Financial Statements Analysis – Analysis – I

4-1 – 4-1 – 4-9

5

Financial Statements Analysis – Analysis – II

5-1 – – 5-38

6

Cash Flow Analysis

6-1 – 6-1 – 6-18

7

Gross Profit Valuation Analysis and Earnings Per Share Determination

7-1 – 7-7 7-1 –

8

Cost Concepts and Classifications

8-1 – 8-1 – 8-17

9

Cost Behavior: Analysis and Use

9-1 – 9-1 – 9-30

10

Systems Design: Job-Order Costing and Process Costing

10-1 – 10-1 – 10-16

11

Systems Design: Activity-Based Costing and Management

11-1 – 11-1 – 11-15

12

Variable Costing

12-1 – 12-1 – 12-21

13

Cost-Volume-Profit Relationships

13-1 – 13-1 – 13-37

14

Responsibility Accounting and Transfer Pricing

14-1 – 14-1 – 14-26

15

Functional and Activity-Based Budgeting

15-1 – 15-1 – 15-22

16

Standard Costs and Operating Performance Measures

16-1 – 16-1 – 16-17

17

Application of Quantitative Techniques in Planning, Control and Decision Making - I

17-1 – 17-1 – 17-2

Application of Quantitative Techniques in Planning, Control and Decision Making – Making – II

18-1 – 18-1 – 18-7

19

Relevant Costs for Decision Making

19-1 – 19-1 – 19-33

20

Capital Budgeting Decisions

20-1 – 20-1 – 20-16

21

Decentralized Operations and Segment Reporting

21-1 – 21-1 – 21-4

22

Business Planning

22-1 – 22-1 – 22-6

18

1-1

Chapter 8 Cost Concepts and Classifications

Problem 3 (Preparing Financial Statements; Transactions)

Effects of Business

Requirement (a)

The First Malt Shop Balance Sheet September 30, 2005 Assets

Cash Accounts receivable 1,250 Supplies 3,440 Land Building 45,500 Furniture & fixtures Total

Liabilities and Equity Liabilities: Notes payable* Accounts payable

Equity: Share capital Retained earnings

20,000 Total

* Total assets, P132,590, less equity, P54,090, less accounts payable, P8,500, equals notes payable.

Requirement (b)

The First Malt Shop Balance Sheet October 6, 2005 Assets

Cash Accounts receivable 1,250 Supplies 4,440 Land Building 45,500 Furniture & fixtures Total

Liabilities and Equity Liabilities: Notes payable Accounts payable


38,000 Total

8-32

Chapter 1 Management Accounting: An Overview

23

Strategic Cost Management; Balanced Scorecard

23-1 – 23-1 – 23-4

24

Advanced Analysis and Appraisal of Performance: Financial and Nonfinancial

24-1 – 24-1 – 24-12

25

Managing Productivity and Marketing Effectiveness

25-1 – 25-1 – 25-19

26

Executive Performance Measures and Compensation

26-1 – 26-1 – 26-3

27

Managing Accounting in a Changing Environment

27-1 – 27-1 – 27-22

CHAPTER 1 MANAGEMENT ACCOUNTING: AN OVERVIEW

I.

Questions

1. Use of the the word “need” in the quoted passage is pejorative. pejorative. It implies an unlimited level level of demand for information. However, rational managers managers apply a cost-benefit criterion to information and will only want accounting information if its benefits benefits exceed exceed its costs. Accounting information provides benefits by improving decision making and controlling behavior in organizations. organizations. In most organizations, organizations, accounting information is very prevalent which implies that its benefits exceed its costs. Hence, successful successful managers managers will find it in their their self-interest to learn how to use accounting information in these organizations. Clearly, this statement is incurred in those firms where accounting information has very limited usefulness (e.g., if the accounting information is often wrong wrong or is not produced produced in a timely fashion). fashion). In these organizations, managers do not find the accounting information to have benefits in excess of its costs, will not use it, do not need to know how to use it, and definitely do not need it. 2. a. Historical costs are of limited use in making making planning decisions in a rapidly changing changing environment. environment. With changing changing products, processes

1-2

Management Accounting: An Overview Chapter 1

and prices, the historical costs are inadequate approximations of the opportunity costs of using resources. Historical costs may, however, be useful for control purposes, as they provide information about the activities of managers managers and can be used as performance measures to evaluate managers. b. The purpose of accounting systems is to provide information for planning purposes and control. Although historical costs are not generally appropriate for planning purposes, additional measures are costly to make. make. An accounting accounting system should include additional measures if the benefits of improved decision making are greater than the costs of the additional information. 3. Finance and economics textbooks traditionally traditionally state that the goal goal of a profit organization organization is to maximize maximize shareholder wealth. Managers are frequently presumed to act in the best interest of the shareholder, although recent finance literature recognizes that appropriate incentives are necessary to align align manager manager interests with shareholder interests. The goal, however, however, are not very very clear as to how this is achieved. achieved. Most finance textbooks focus on financing decisions and not on the use of assets and dealing with customers. Marketing’s goal of satisfying customers recognizes that customers are the source of revenues for the organization, and therefore the means through which which shareholder shareholder value value is increased. However, customer satisfaction is only valuable valuable insofar as it creates shareholder shareholder wealth. The further goal of marketing is to ensure that customer satisfaction is maximized maximized without compromising compromising the organization’s profitability. 4. Yes. Planning is really much more vital vital than control; that that is, superior control is fruitless if faulty plans are being being implemented. implemented. However, planning and control are so intertwined that it seems artificial to draw rigid lines of separation between them. 5. Yes. The controller controller has line authority over the personnel in his own department but is a staff executive with respect to the other departments. 6. Line authority authority is exerted exerted downward downward over subordinates. Staff authority authority is the authority to advise but not command others; it is exercised laterally or upward. Functional authority is the right right to command action action laterally and downward with regard to a specific f unction or specialty. 1-3


7. Cost accounting is the controller’s primary means of implementing the 7-point concept of modern controllership. Cost accounting is intertwined with all seven duties to some extent, but its major focus is on the first three. 8. Bettina Company President

VP, Production

VP, Finance

VP, Sales

Controller

Treasurer

Assistant Controller

Assistant Treasurer

Special Studies Manager

Cost Accounting Manager

Tax Manager

Internal Audit Manager

Cost Systems Analyst

Budget & Standard Cost Analyst

Performance Analyst

Cost Clerk

Payroll Clerk

Accounts Receivable Clerk

Accounts Payable Clerk

General Accounting Manager

Billing Clerk

System & EDP Manager

General Ledger Bookkeeper

9. Management Management accountants accountants contribute to strategic decisions by providing information about the sources of competitive advantage and by helping managers managers identify and build a company’s resources and capabilities. 10. In most organizations, management accountants perform multiple roles: problem solving (comparative (comparative analyses for decision making), scorekeeping (accumulating data and reporting reliable results), and attention directing (helping managers properly focus their attention).

1-4


11. Three guidelines that help management accountants increase their value to managers are (a) employ a cost-benefit approach, (b) recognize behavioral as well as technical considerations, and (c) identify different costs for different purposes. 12. Management Management accounting is an integral part of the controller ’s controller ’s function in an organization. In most organizations, organizations, the controller controller reports to the chief financial officer, who is a key member of the top management team. 13. Management Management accountants have ethical responsibilities that are related to competence, competence, confidentiality, integrity, and objectivity. 14. By reporting and interpreting relevant data, the controller exerts a force or influence that impels management toward making better-informed decisions. The controller of one company described the job as “a business busin ess advisor to…help the team develop strategy and focus the team all the way through recommendations and implementation.” 15. Financial Accounting

Audience:

External: authorities

shareholders,

Purpose:

Report on past performance to external parties; basis of contracts with owners and lenders

Timeliness:

Delayed; historical

Restrictions:

Regulated; rules driven by generally accepted accounting principles and government authorities

Type of Information:

Financial measurements measurements only

Nature of Information: Information:

Objective, precise

Scope:

Highly aggregate; aggregate; organization

auditable,

Managerial Accounting

1-5

creditors,

reliable, report

tax

consistent, on

entire


Audience:

Internal: Workers, managers, managers, executives

Purpose:

Inform internal decisions made by employees employees and managers; feedback and control on operating performance

Timeliness:

Current, future oriented

Restrictions:

No regulations; systems and information determined by management to meet strategic and operational needs

Type of Information:

Financial, plus operational and physical measurements on processes, technologies, suppliers customers, and competitors

Nature of Information: Information:

More subjective relevant, accurate

Scope:

Disaggregate; Disaggregate; inform local decisions and actions

and

judgmental; valid,

16. The competitive environment has changed dramatically. dramaticall y. Companies encountered severe competition from overseas companies that offered high-quality products products at low prices. Activity-based Activity-based costing systems systems are introduced in many manufacturing and service organizations to overcome the inability of traditional cost systems to accurately assign overhead costs. Activity-based Activity-based management management is a viable approach approach for managers to make decisions based on ABC information. informati on. There has been improvement of operational control systems such that information is more current and and provided more more frequently. The nature of work has changed from controlling to informing. informing. Firms are concerned concerned about about continuous improvement, employee empowerment and total quality. Nonfinancial information has become a critical feedback measure. Finally, the focus of many firms is on measuring and managing activities. 17. As measurements are made on operations and, especially, on individuals and groups, the behavior of the individuals and groups are affected. People will react to the measurements being made by focusing on the variables or behavior being measured. measured. In addition, if managers managers attempt attempt to introduce or redesign cost and performance measurement systems, people familiar with the previous system will resist. Management Management accountants must understand and anticipate the reactions of individuals to information and measureme measurements. nts. The design and and introduction of new new 1-6


measurements and systems must be accompanied with an analysis of the likely reactions to the innovations.

II. Exercises Exercise 1

a. b. c. d.

(1) (3) (1) (2)

Problem solving Attention-directing Problem solving Scorekeeping Scorekeeping

Exercise 2

a. b. c. d.

(4) (3) (6) (5)

Marketing Production Customer Customer service Distribution

Exercise 3

a. b. c. d. e. f. g. h.

(4) (3) (5) (4) (5) (3) (1) (2)

Marketing Production Distribution Marketing Distribution Production Research and development development Design

III. Problems Problem 1 (Problem Solving, Scorekeeping, and Attention Directing)

Because the accountant’s duties are of ten of ten not sharply defined, some of these answers might be challenged: 1. Scorekeeping 2. Attention directing 3. Scorekeeping 1-7


4. 5. 6. 7. 8.

Problem solving Attention directing Attention directing Problem solving Scorekeeping (depending on the extent of the report) or attention getting 9. This question is intentionally vague. The give-and-take give-and-take of the budgetary process usually encompasses encompasses all three functions, but it emphasizes emphasizes scorekeeping scorekeeping the least. The main function function is attention directing, but problem solving is also involved. 10. Problem solving Problem 2 (Management Accounting Information System)

1. 2. 3. 4.

Inputs: b, g, i, m Processes: a, d, f, j Outputs: e, k, n System objectives: c, h, l

Problem 3 (Role of Management Accountants) Planning. The management management accountant gains gains an understanding of the impact impact on the organization of planned transactions (i.e., analyzing strengths and weaknesses) and economic events, both strategic and tactical, and sets obtainable goals goals for the organization. organization. The development development of budgets budgets is an example of planning. Controlling. The management management accountant accountant ensures ensures the integrity of financial information, monitors performance against budgets and goals, and provides information internally for decision decision making. Comparing actual performance performance against budgeted performance and taking corrective action where necessary is an example of controlling. Internal auditing is another example. example. Evaluating Performance . The management accountant judges and analyzes the implication of various past and expected events, and then chooses the optimum course course of action. The management management accountant accountant also translates data data and communicates communicates the conclusions. conclusions. Graphical analysis analysis (such as trend, bar bar charts, or regression) and reports r eports comparing actual costs with budgeted costs are examples of evaluating performance. performance.

1-8


Ensuring Accountability of Resources . The management accountant implements a reporting system closely aligned to organizational goals that contribute 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 information to shareholders, creditors, and regulatory tax agencies. An annual report or a credit application are examples of external reporting.

Problem 4 (Line Versus Staff)

Jamie Reyes 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. Stephen Santos 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, Stephen has direct responsibility for a basic objective and therefore holds a line position. Problem 5 (Professional Ethics and End-of-Year Games) Requirement 1

The possible motivations for the snack foods division wanting to play endof-year games include: (a) Management incentives. Yummy Foods may have a division bonus scheme based on one-year reported division earnings. Efforts to frontend revenue into the current year or transfer costs into the next year can increase this bonus. (b) Promotion opportunities and job security. Top management of Yummy Foods likely will view those division managers that deliver high reported earnings growth rates as being the best prospects for promotion. Division managers who deliver “unwelcome surprises” may be viewed as less capable. (c) Retain division autonomy. If top management of Yummy Foods adopts a “management by exception” approach, divisions that report sharp 1-9


reductions in their earnings growth rates may attract a sizable increase in top management supervision. Requirement 2

The “Standards of Ethical Conduct…” require management accountants to:



Refrain from either actively or passively subverting the attainment of the organization’s legitimate and ethical objectives, and  Communicate unfavorable as well as favorable information and professional judgment or opinions. Several of the “end-of-year games” clearly are in conflict with these requirements and should be viewed as unacceptable by Tan: (a) The fiscal year-end should be closed on midnight of December 31. “Extending” the close falsely reports next year’s sales as this year’s sales. (b) Altering shipping dates is falsification of the accounting reports. (c) Advertisements run in December should be charged to the current year. The advertising agency is facilitating falsification of the accounting records. The other “end-of-year games” occur in many organizations and may fall into the “gray” to “acceptable” area. However, much depends on the circumstances surrounding each one: (a) If the independent contractor does not do maintenance work in December, there is no transaction regarding maintenance to record. The responsibility for ensuring that packaging equipment is well maintained is that of the plant manager. The division controller probably can do little more than observe the absence of a December maintenance charge. (d) In many organizations, sales are heavily concentrated in the final weeks of the fiscal year-end. If the double bonus is approved by the division marketing manager, the division controller can do little more than observe the extra bonus paid in December. (e) If TV spots are reduced in December, the advertising cost in December will be reduced. There is no record falsification here. (g) Much depends on the means of “persuading” carriers to accept the merchandise. For example, if an under-the-table payment is involved, it is clearly unethical. If, however, the carrier receives no extra

1-10


consideration and willingly agrees to accept the assignment, the transaction appears ethical.

Each of the (a), (d), (e) and (g) “end-of-year games” may well disadvantage Yummy 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 Yummy 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. Requirement 3

If Tan 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, Tan should discuss her concerns with the Corporate Controller of Yummy Foods. Tan 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 Yummy Foods. In the extreme, she may want to resign if the corporate culture of Yummy Foods is to reward division managers who play “end-of-year games” that Tan views as unethical and possibly illegal. Problem 6 James Torres has come up with a scheme that involves a combination of data falsification and smoothing! Not only has he made up the revenue numbers, but also he has had the gall to defer some of them to the next period. Making up such numbers is clearly illegal. Smoothing, in this example is also illegal because the numbers are fictitious. Problem 7 Clearly the vice-president will lose his or her job if you turn him or her in. Given that this is a major violation of the code of ethics and a violation patent law, the vice-president could go to j ail. Your best course of action is to check your information and if the vice-president is definitely involved, go immediately to the VP’s superior (who is probably a senior VP or the company president). The organization’s attorneys will take over from there. Problem 8 1-11


One option is to do nothing and ignore what you saw, however, this may violate your own code of ethics and your ethical responsibilities under the organization’s code of ethics. Given that you want to do something, it is probably best to start by talking to employees in your organization whose job it is to deal with ethical issues. If no such employees exist or are available, you might start by using a decision model. This model incorporated the following steps: 1. 2. 3. 4. 5. 6. 7.

Determine the Facts – What, Who, Where, How Define the Ethical Issue Identify Major Principles, Rule, Values Specify the Alternatives. Compare Values and Alternatives, See if Clear Decision Assess the Consequences. Make Your Decision.

IV. Cases Case 1 (Financial vs. Managerial Accounting) Requirement (a)

Other forward looking information desired in addition to the income statement information are 1. Disclosure of the components of financial performance, i.e., nature and source of revenues, various activities, transactions, and other relevant events affecting the company. 2. Nature and function of the components of income and expenses Requirement (b)

No. GAAP does not allow capitalization of employee training and advertising costs even if management feels that they increase the value of the company’s brand name. The reasons are uncertainty of the future benefits that may be derived therefrom and difficulty and reliability of their measurement.

Requirement (c) 1-12


Detailed information that managers would likely request are analysis of the significant increases in 1. 2. 3. 4. 5.

Sales Cost of sales Payroll Stock and option based compensation Advertising and promotion.

Requirement (d)

Nonmonetary measures: 1. 2. 3. 4. 5.

Change in number and profile of customers Share in the market Who, what and how many are the competitors Product lines offered by the entity vs. Product lines of competitors Sales promotion and advertising activities

Requirement (e)

1. Competitors 2. Employees 3. Prospective creditors Case 2 (You get what you measure!) Requirement (a)

Increase in sales to new customers to sales Too much emphasis on this ratio may lead the sales manager to spend more time developing business with new customers and disregard the needs of existing customers. It is therefore possible to lose the business of several key accounts. Requirement (b)

Decrease in cost of goods sold to sales This performance measure could create the following problems: 1. Purchasing goods with poor quality at lower cost and selling them for the same price.

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2. Indiscriminately increasing selling price to widen the profit margin without regard to competitor’s current prices. 3. If the entity is manufacturing its own goods, managers could try to economize on costs, i.e., buying poorer quality of materials, employing unskilled workers, etc. thereby causing deterioration of the quality of the finished products. In all of the above situations, customer patronage could eventually be adversely affected. Requirement (c)

Decrease in selling and administrative expense to sales Cost-cutting is generally advisable for as long as the quality of goods and services are not compromised. Likewise, certain cost-saving measures could demotivate sales people and other employees and could lead to counter productive activities. Case 3 (The Roles of Managers and Management Accountants)

1. Managerial accounting, Financial accounting 2. Planning 3. Directing and motivating 4. Feedback 5. Decentralization 6. Line 7. Staff 8. Controller 9. Budgets 10. Performance report 11. Chief Financial Officer 12. Precision; Nonmonetary data Case 4 (Ethics in Business)

If cashiers routinely short-changed customers whenever the opportunity presented itself, most of us would be careful to count our change before leaving the counter. Imagine what effect this would have on the line at your favorite fast-food restaurant. How would you like to wait in line while each and every customer laboriously counts out his or her change? Additionally, 1-14


if you can’t trust the cashiers to give honest change , can you trust the cooks to take the time to follow health precautions such as washing their hands? If you can’t trust anyone at the restaurant would you even want to eat out? Generally, when we buy goods and services in the free market, we assume we are buying from people who have a certain level of ethical standards. If we could not trust people to maintain those standards, we would be reluctant to buy. The net result of widespread dishonesty would be a shrunken economy with a lower growth rate and fewer goods and services for sale at a lower overall level of quality. Case 5 (Ethics and the Manager) Requirement 1

Failure to report the obsolete nature of the inventory would violate the Standards of Ethical Conduct as follows: Competence

 

Perform duties in accordance with relevant technical standards. Prepare complete reports using reliable information.

By failing to write down the value of the obsolete inventory, Perez would not be preparing a complete report using reliable information. In addition, generally accepted accounting principles (GAAP) require the write-down of obsolete inventory. Integrity

   

Avoid conflicts of interest. Refrain from activities that prejudice the ability to perform duties ethically. Refrain from subverting the legitimate goals of the organization. Refrain from discrediting the profession.

Members of the management team, of which Perez is a part, are responsible for both operations and recording the results of operations. Since the team will benefit from a bonus, increasing earnings by ignoring the obsolete inventory is clearly a conflict of interest. Perez would also be concealing unfavorable information and subverting the goals of the organization. Furthermore, such behavior is a discredit to the profession. 1-15


hObjectivity

 

Communicate Communicate information fairly and objectively. Disclose all relevant information.

Hiding the obsolete inventory impairs the objectivity and relevance of financial statements. Requirement 2

As discussed above, the ethical course of action would be for Perez to insist on writing down the obsolete inventory. inventory. This would not, however, however, be an an easy thing to do. Apart from adversely affecting her own compensation compensation,, the ethical action may anger her colleagues and make her very unpopular. Taking the ethical action would require considerable courage and selfassurance. Case 6 (Preparing an Organization Chart) Requirement 1

See the organization chart on page 17. Requirement 2

Line positions would include the university president, academic vice president, the deans of the four colleges, and the dean of the law school. In addition, the department heads (as well as the faculty) would be in line positions. The reason is that their positions are directly related to the basic purpose of the university, which is education. (Line positions are shaded on the organization chart.) All other positions on the organization organization chart chart are staff positions. The reason is that these positions are indirectly related to the educational process, and exist only to provide service or support to the line positions. Requirement 3

All positions would have need for accounting accounting information of some some type. For example, the manager manager of central purchasing would need to know the level of current inventories and budgeted allowances in various areas before doing any purchasing; the vice president for admissions and records would need to know the status of scholarship funds as students are admitted to the 1-16


university; the dean of the business college would need to know his/her budget allowances in various areas, as well as information on cost per student credit hour; and so forth. Case 7 (Ethics in Business) Requirement 1

No, Santos did not act in an ethical manner. In complying with the president’s instructions to omit liabilities from the company’s company’s fi nancial statements he was in direct violation of the IMA’s Standards of Ethical Conduct for Management Accountants. He violated both the “Integrity” and “Objectivity” guidelines on this code of ethical conduct. The fact that the president ordered the omission of the liabilities is immaterial. immaterial. Requirement 2

No, Santos’ Santos’ actions can’t be justified. In dealing with similar situations, the Securities and Exchange Commission (SEC) has consistently ruled that “…corporate officers…cannot escape culpability by a sserting that they acted as ‘good soldiers’ and cannot rely upon the fact that the violative conduct may have been condoned or ordered by their corporate superiors.” (Quoted from: Gerald H. Lander, Michael T. Cronin, and Alan Reinstein, “In Defense of the Management Accountant,” Management Accounting, May, 1990, p. 55) Thus, Santos not only acted unethically, but he could be held legally liable if insolvency occurs and litigation is brought against the company by creditors or others. It is important important that students understand this point point early in the course, since it is widely assumed that “good soldiers” are justified by the fact that they are just following orders. In the case case at hand, Santos should have resigned rather than become a party to the fraudulent misrepresentation misrepresentation of the company’s financial statements.

1-17

Case 6 Requirement 1 President

Vice President, Auxiliary Services

Manager, Central Purchasing

Vice President, Admissions & Records

Manager, University Bookstore

Manager, University Press

Dean, Business

Dean, Humanities

(Departments)

(Departments)

Vice President, Financial Services (Controller)

Academic Vice President

Manager, Computer Services

Dean, Engineering & Quantitative

Dean, Fine Arts

(Departments)

Vice President, Physical Plant

Manager, Accounting & Finance

Manager, Grounds & Custodial Services

Dean, Law School

(Departments)

1-18


Case 8 (Ethics in Business) Requirement 1

Andres Romero has an ethical responsibility to take some action in the matter of PhilChem, PhilChem, Inc. and the dumping dumping of toxic wastes. wastes. The Standards of Ethical Conduct for Management Accountants specifies that management accountants should not condone the commission of acts by their organization that violate the standards of of ethical conduct. conduct. The specific standards standards that apply are as follows. •

•

Competence. Management accountants have a responsibility to perform their professional duties in accordance with relevant laws and regulations. Confidentiality. Management accountants must refrain from

Manager, Plant & Maintenance


Case 8 (Ethics in Business) Requirement 1

Andres Romero has an ethical responsibility to take some action in the matter of PhilChem, PhilChem, Inc. and the dumping dumping of toxic wastes. wastes. The Standards of Ethical Conduct for Management Accountants specifies that management accountants should not condone the commission of acts by their organization that violate the standards of of ethical conduct. conduct. The specific standards standards that apply are as follows. •

•

•

•

Competence. Management accountants have a responsibility to perform their professional duties in accordance with relevant laws and regulations. Confidentiality. Management accountants must refrain from disclosing confidential information unless legally obligated to do so. However, Andres Romero may have a legal responsibility to take some action. Integrity. Management accountants have a responsibility to: - refrain from either either actively actively or passively passively subverting subverting the attainment of the organization’s legitimate an d ethical objectives. - communicate communicate favorable as well as unfavorable information and professional judgments judgments or opinions. Objectivity. Management accountants must fully disclose all relevant information that could reasonably be expected to influence an intended intended user’s understanding of the reports, comments, and recommendations.

Requirement 2

The Standards of Ethical Conduct for Management Accountants indicates that the first alternative being considered by Andres Romero, seeking the advice of his boss, boss, is appropriate. To resolve an an ethical conflict, the first step is to discuss the problem with the immediate superior, unless it appears that this individual is involved in the conflict. In this case, it does not not appear that Romero’s boss Romero’s boss is involved. involved. Communication of confidential information to anyone outside the company is inappropriate unless there is a legal obligation to do so, in which case Romero should contact the proper authorities. Contacting a member of the Board of Directors would be an inappropriate 8-19


action at this time. Romero should report the conflict conflict to successively higher higher levels within the organization and turn only to the Board of Directors if the problem is not not resolved at lower levels. Requirement 3

Andres Romero should follow the established policies of the organization bearing on the resolution of such conflict. If these policies do not resolve the ethical conflict, Romero should report the problem to successively higher levels of management up to the Board of Directors until it is satisfactorily resolved. There is no requirement requirement for Romero Romero to inform his immediate immediate superior of this action because the superior superior is involved in the conflict. If the conflict is not resolved after exhausting all courses of internal review, Romero may have no other recourse than to resign from the organization and submit an informative memorandum to an appropriate member of the organization. (CMA Unofficial Solution, adapted) V. Multiple Choice Choice Questions Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

D D D B D A B D D A

11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

D D D A A A D A D D

21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

B B A A B C B D B C

31. 32. 33. 34. 35. 36. 37. 38. 39. 40.

D C D B D B C B A A

41. 42. 43. 44. 45. 46. 47. 48. 49. 50.

A C D B C B A B C D

CHAPTER 2 MANAGEMENT ACCOUNTING AND THE BUSINESS ENVIRONMENT 8-20

51. 52. 53. 54. 55. 56. 57. 58. 59. 60.

B B A C D C C C A B

Cost Concepts and Classifications Chapter 8

I.

Questions 1. Managerial accounting accounting information information often brings to the attention attention of managers important issues that need their managerial experience and skills. In many cases, managerial-accounting managerial-acco unting information informati on will not answer the question or solve the problem, but rather make management aware that the issue or problem exists. In this sense, managerial managerial accounting sometimes sometimes is said to serve an attention-directing role. 2. Non-value-added costs are the costs of activities that can be eliminated with no deterioration of product quality, performance, or perceived value. 3. Managers rely on many information systems systems in addition to managerialmanagerialaccounting information. information. Examples of other information information systems systems include economic analysis and forecasting, marketing research, legal research and analysis, and technical information provided by engineers and production specialists. specialists. 4. Becoming the low-cost low-cost producer in an industry requires a clear understanding by management of the costs incurred in its production process. Reports and analysis of these costs are a primary function of managerial accounting. 5. Some activities activities in the value value chain of a manufacturer of cotton shirts are as follows: (a) Growing and harvesting harvesting cotton cotton (b) Transporting raw raw materials materials (c) Designing shirts (d) Weaving cotton material material (e) Manufacturing shirts (f) Transporting shirts to retailers (g) Advertising cotton shirts shirts Some activities in the value chain of an airline are as follows: (a) Making reservations and ticketing ticketing (b) Designing the route network network (c) Scheduling 8-21


(d) (e) (f) (g) (h)

Purchasing aircraft Maintaining aircraft Running airport airport operations, including handling handling baggage baggage Serving food and beverages beverages in flight Flying passengers passengers and cargo

6. Strategic cost management is the process of understanding and managing, to the organization’s advantage, the cost relationships among the activities in an organization’s organiz ation’s value chain. 7. If customers customers who provide a company with the most most profits are attracted, attracted, satisfied, and retained, profits will increase as a r esult. 8. A value chain chain is a sequence sequence of business business functions whose objective objective is to provide a product to a customer or provide an intermediate good or service in a larger value value chain. These business functions include include R&D, design, production, marketing, distribution, and customer service. An organization can become more effective by focusing on whether each link in the chain adds value from the customer’s perspective and furthers the organization’s objectives. 9. Cost:

Quality:

Organizations Organizations are under continuous pressure to reduce the cost of the products or services they sell to their customers. Customers are expecting higher levels of quality and are less tolerant of low quality than in the past.

Time:

Time has many components: the time taken to develop and bring new products to market; the speed at which an organization responds to customer requests; and the reliability with which promised delivery dates are met. Organizations are under pressure to complete activities faster and to meet promised delivery dates more reliably than in the past in order to increase customer satisfaction. Innovation: There is now heightened recognition that a continuing flow of innovative products or services is a prerequisite for the ongoing success of most organizations.

8-22


10. Managers make make planning decisions decisions and control decisions. decisions. Planning decisions include deciding on organization goals, predicting results under various alternative ways of achieving those goals, and then deciding how to attain the desired goals. Control decisions decisions include include taking actions to implement the planning decisions and deciding on performance evaluation and feedback that will help future decision making. 11. Four themes for managers to attain success are customer focus, valuechain and supply-chain analysis, key success factors, and continuous improvement and benchmarking. 12. Companies add value through R&D; design of products, services, or processes; production; marketing; marketing; distribution; and customer service. Managers in all business functions of the value chain are customers of management accounting information. 13. This phrase means that people will direct their attention to work primarily on those tasks that management management monitors and measures. Employees may not pay as much attention (or no attention) to tasks that are not measured. Often management management will reward people people based on how well they perform relative relative to a specific measure. measure. As an example, example, in a manufacturing organization, organization, if people are measured and rewarded based on the number of outputs per hour, regardless of quality, employees will focus their attention on producing as many units of of output as possible. A negative consequence consequence is that the quality of output may suffer. 14. Some of these new measures are quality, speed to market, cycle time, flexibility, complexity and productivity. 15. Customer satisfaction is often thought to be a qualitative measure of performance as one cannot directly observe “satisfaction.” However, using attitude surveys and psychological measurements, customer satisfaction can be measured measured in quantitative quantitative terms. For instance, people people who design surveys often employ attitude scales that ask questions in which customers respond respo nd on a 1 to 5 scale. These values can be summed and averaged to determine satisfaction scores.

8-23


16. Stakeholders

Contribution

Requirements

Employees

Effort, skills, information

Rewards, interesting jobs, economic security, proper treatment

Partners

Goods, services, information

Financial rewards commensurate with the risk taken

Owners

Capital

Financial rewards

Community

Allows the organization to operate and does not oppose its operation

Conformance to laws, good corporate citizenship and, perhaps, leadership

17. Competitive benchmarking is an organization’s search for, and implementation of, the best way to do something as practiced in other organizations. Continuous improvement is the relentless search to (1) document, understand, and improve the activities that the organization undertakes to meet its customers’ requirement, (2) eliminate processing activities that do not add product features that customers value, and (3) improve the performance of activities that increase customer value or satisfaction. 18. A value-added activity is an activity that, if eliminated, would reduce the product’s service to the customer in the long run. An activity that cannot be classified as value-added is a nonvalue-added activity: a. b. c. d. e. f. g. h.

Value-added Nonvalue-added Nonvalue-added Value-added Nonvalue-added Nonvalue-added Value-added Value-added 8-24


i. j.

Nonvalue-added Value-added

19. Just-in-time means making a good or service only when the customer, internal or external, requires it. Just-in-time requires a product layout with a continuous flow (no delays) once production starts. It means that setup costs must be reduced substantially to eliminate the need to produce in batches, and it means that processing systems must be reliable. Just-in-time production is based on the elimination of all nonvalue-added activities to reduce cost and time. It is an approach to improvement that is continuous and involves employee empowerment and involvement. 20. Managerial accounting is concerned with providing information to managers for use within the organization. Financial accounting is concerned with providing information to stockholders, creditors, and others outside of the organization. 21. A strategy is a game plan that enables a company to attract customers by distinguishing itself from competitors. The focal point of a company’s strategy should be its target customers. II. Multiple Choice Questions 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

B A D A D A C B D B

21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

A B C D A A B C B A

31. B 32. C 33. C

CHAPTER 3 UNDERSTANDING FINANCIAL STATEMENTS 8-25


I.

Questions 1. A financial statement is a means of communicating information about an enterprise in financial (i.e., peso) terms. It represents information that the accountant believes is a true and fair representation of the financial activity of the enterprise. 2. Every financial statement relates to time in one way or another. A statement of financial position, or balance sheet, represent a “pict ure” of the enterprise at a point in time (e.g., the end of a month or year). An income statement and a statement of cash flows, on the other hand, cover activity that took place over a period of time (e.g., a month or year). 3. a. Creditors are interested in financial statements to assist them in evaluating the ability of a business to repay its debts. No one wants to extend credit to a company that is unable to meet its obligations as they come due. b. Potential investors use financial statements in selecting among alternative investment opportunities. They are interested in investing in companies in which the value of their investment will increase as a result of future profitable operations. c. Labor unions are interested in financial statements because the financial position of a company and its profits are important factors in the company’s ability to pay higher wages and to employ more people. 4. Business transactions affect a company’s financial position, and as a result they change the statement of financial position or balance sheet. The other financial statements – the income statement and the statement of cash flows – are detailed expansions of certain aspects of the statement of financial position and help explain how the company’s position changed over time. 5. The cost principle indicates that many assets are included in the financial records, and therefore, in the statement of financial position, at their original cost to the reporting enterprise. This principle affects accounting for assets in several ways, one of which is that the amount of 8-26


most assets is not adjusted periodically for changes in the market value of the assets. Instead, cost is retained as the basic method of accounting, regardless of changes in the market value of those assets. 6. The going concern assumption states that in the absence of evidence to the contrary (i.e., bankruptcy proceedings), an enterprise is expected to continue to operate in the foreseeable future. This means, for example, that it will continue to use the assets it has in its financial statements for the purpose for which they were acquired. 7. The three categories and the information included in each are: Operating activities – Cash provided by and used in revenue and expense transactions. Investing activities – Cash provided by and used as a result of investments in assets, such as machinery, equipment, land, and buildings. Financial activities – Cash provided by and used in debt and equity financing, such as borrowing and repaying loans, and investments from and dividends paid to the enterprise’s owners. 8. Adequate disclosure refers to the requirement that financial statements, including accompanying notes, must include information necessary for reasonably informed users of financial statements to understand the company’s financial activities. This requirement is often met, in part, by the addition of notes to the financial statements. Financial statement notes include both quantitative and qualitative information that is not included in the body of the financial statements. 9. A strong income statement is one that has significantly more pesos of revenue than expenses, resulting in net income that is a relatively high percentage of the revenue figure. A trend of relatively high income numbers over time signals a particularly strong income situation. 10. A strong statement of cash flows is one that shows significant amounts of cash generated from operating activities. This means that the enterprise is generating cash from its ongoing activities and is not required to rely on continuous debt and equity financing, or the sale of its major assets. 8-27


11. The purpose of classifications in financial statements is to develop useful subtotals, which help users analyze the statements. The most commonly used classifications are: In a balance sheet : current assets, plant and equipment, other assets, current liabilities, long-term liabilities and equity. In a multiple-step income statement : revenue, cost of goods sold, operating expenses, and nonoperating items. The operating expense section often includes subclassifications for selling expenses and for general and administrative expenses. In a statement of cash flows : operating activities, investing activities, and financing activities. 12. In classified financial statements, similar items are grouped together to produce subtotals which may assist users in their analyses. Comparative financial statements show financial statements for two or more time periods in side-by-side columns. Consolidated statements include not only the financial statement amounts for the company itself but also for any subsidiary companies that it owns. The financial statements of large corporations often possess all three of these characteristics. 13. In a multiple-step income statement, different categories of expenses are deducted from revenue in a series of steps, thus resulting in various subtotals, such as gross profit and operating income. In a single-step income statement, all expenses are combined and deducted from total revenue in a single step. Both formats result in the same amount of net income. II. Matching Type 1. 1. d 2. g

3. a 4. j

5. e 6. h

7. f 8. b

9. c 10. i

2. 1. d 2. a

3. i 4. g

5. m 6. c

7. h 8. n

3. 8-28

9. f 10. k

11. b 12. j

13. e 14. l


a. F b. I

c. F d. I

e. I f. F

g. F h. F

I. j.

I F

k. F l. I

III. Problems Problem 1 (Preparing a Balance Sheet – A Second Problem) Requirement (a)

SM Farms Balance Sheet September 30, 2005 Assets

Cash Accounts receivable 22,365 Land Barns and sheds 78,300 Citrus trees 76,650 Livestock 120,780 Irrigation system 20,125 Farm machinery 42,970 Fences & gates 33,570 Total

Liabilities and Equity Liabilities: Notes payable Accounts payable Property taxes payable Wages payable

Equity: Share capital Retained earnings* Total

* Total assets, P961,470, minus total liabilities, P618,050, less share capital, P250,000.

Requirement (b)

The loss of an asset, Barns and Sheds, from a typhoon would cause a decrease in total assets. When total assets are decreased, the balance sheet total of liabilities and equity must also decrease. Since there is no change in liabilities as a result of the destruction of an asset, the decrease on the righthand side of the balance sheet must be in the retained earnings account. The amount of the decrease in Barns and Sheds, in the equity, and in both balance sheet totals, is P23,800. Problem 2 (Preparing a Balance Sheet and Cash Flow Statement; Effects of Business Transactions) Requirement (a)

8-29


The Tasty Bakery Balance Sheet August 1, 2005 Assets

Cash Accounts receivable 11,260 Supplies 7,000 Land Building 84,000 Equipment and fixtures 44,5

Liabilities and Equity Liabilities: Notes payable Accounts payable Salaries payable


Total

Total

Requirement (b)

The Tasty Bakery Balance Sheet August 3, 2005 Assets

Cash Accounts receivable 11,260 Supplies 8,250 Land Building 84,000 Equipment and fixtures 51,

Liabilities and Equity Liabilities: Notes payable Accounts payable Salaries payable


Total

Total

The Tasty Bakery Statement of Cash Flows For the Period August 1 - 3, 2005 Cash flows from operating 8-30


activities: Cash payment accounts payable Cash purchase supplies Cash used operating activities

of

P(16,200)

of

(1,250)

in

P(17,450)

Cash flows from investing activities: None Cash flows from financing activities: Sale of share capital Increase in cash Cash balance, August 1, 2005 Cash balance, August 3, 2005

P25,000 P 7,550 6,940 P14,490

Requirement (c)

The Tasty Bakery is in a stronger financial position on August 3 than it was on August 1. On August 1, the highly liquid assets (cash and accounts receivable) total only P18,200, but the company has P25,100 in debts due in the near future (accounts payable plus salaries payable). On August 3, after additional infusion of cash from the sale of stock, the liquid assets total P25,750, and debts due in the near future amount to P16,100. Note to Instructor : The analysis of financial position strength in requirement (c) is based solely upon the balance sheets at August 1 and August 3. Hopefully, students will raise many legitimate issues regarding necessity of information about operations, rate at which cash flows into the business, etc. In this problem, the improvement in financial position results solely from the sale of share capital. 8-31

Solman Man Acct

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