CHAPTER 1 MANAGEMENT ACCOUNTING: AN OVERVIEW
I.
Questions 1. Use of the word “need” in the quoted passage is pejorative. It implies an unlimited level of demand for information. However, rational managers apply a cost-benefit criterion to information and will only want accounting information if its benefits exceed its costs. Accounting information provides benefits by improving decision making and controlling behavior in organizations. In most organizations, accounting information is very prevalent which implies that its benefits exceed its costs. Hence, successful managers will find it in their selfinterest 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 or is not produced in a timely 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 planning decisions in a rapidly changing environment. With changing products, processes 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 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. An 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 state that the goal of a profit organization is to 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 manager interests with shareholder interests. The goal, however, are not very clear as to how this is 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 shareholder value is increased. However, customer satisfaction is only valuable insofar as it creates shareholder wealth. The further goal of marketing is to ensure that customer satisfaction is maximized without compromising the organization’s profitability. 4. Yes. Planning is really much more vital than control; that is, superior control is fruitless if faulty plans are being implemented. However, planning and control are so intertwined that it seems artificial to draw rigid lines of separation between them.
5. Yes. The 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 is exerted downward over subordinates. Staff authority is the authority to advise but not command others; it is exercised laterally or upward. Functional authority is the right to command action laterally and downward with regard to a specific function or specialty. 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
Cost Systems Analyst
Budget & Standard Cost Analyst
Performance Analyst
Cost Clerk
Payroll Clerk
Accounts Receivable Clerk
Internal Audit Manager
Accounts Payable Clerk
General Accounting Manager
Billing Clerk
System & EDP Manager
General Ledger Bookkeeper
9. Management accountants contribute to strategic decisions by providing information about the sources of competitive advantage and by helping managers identify and build a company’s resources and capabilities. 10. In most organizations, management accountants perform multiple roles: problem solving (comparative analyses for decision making), scorekeeping (accumulating data and reporting reliable results), and attention directing (helping managers properly focus their attention).
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 accounting is an integral part of the controller’s function in an organization. In most organizations, the controller reports to the chief financial officer, who is a key member of the top management team. 13. Management accountants have ethical responsibilities that are related to 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 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 only
Nature of Information:
Objective, precise
Scope:
Highly aggregate; organization
auditable,
creditors,
reliable, report
tax
consistent, on
entire
Managerial Accounting Audience:
Internal: Workers, managers, executives
Purpose:
Inform internal decisions made by 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:
More subjective relevant, accurate
and
judgmental;
valid,
Scope:
Disaggregate; inform local decisions and actions
16. The competitive environment has changed dramatically. Companies encountered severe competition from overseas companies that offered high-quality products at low prices. Activitybased costing systems are introduced in many manufacturing and service organizations to overcome the inability of traditional cost systems to accurately assign overhead costs. Activitybased management is a viable approach for managers to make decisions based on ABC information. There has been 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 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. 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.
