CHAPTER 1

MANAGERIAL ACCOUNTING

SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, BLOOM’S TAXONOMY, LEVEL OF DIFFICULTY, AACSB CODES, AND CPA CODES

Bloom’s: AN = Analysis C = Comprehension K = Knowledge

LOD: E = Easy M = Medium H = Hard

AACSB: AN = Analytic E = Ethics

CPA: MA = Management Accounting

SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, BLOOM’S TAXONOMY, LEVEL OF DIFFICULTY, AACSB CODES, AND CPA CODES (CONT’D)

Bloom’s: AN = Analysis C = Comprehension K = Knowledge

LOD: E = Easy M = Medium H = Hard

AACSB: AN = Analytic E = Ethics

CPA: MA = Management Accounting

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Note: TF = True-False C = Completion BE = Brief Exercise

MC = Multiple Choice Ex = Exercise SAE = Short-Answer Essay

Ma = Matching

CHAPTER LEARNING OBJECTIVES

1. Explain the distinguishing features of managerial accounting.

Managerial accounting is needed in all types of businesses—service, merchandising, and manufacturing. It also applies to all forms of business organization—proprietorships, partnerships, and corporations. Managerial accounting is needed in not-for-profit entities, as well as in profit-oriented enterprises. Managerial accounting provides tools that help management make decisions and evaluate the effectiveness of those decisions.

The distinguishing features of managerial accounting are

∙ the primary users of reports—internal users, who are officers, department heads, managers, and supervisors in the company;

∙ the type and frequency of reports—internal reports that are issued as frequently as needed;

∙ the purpose of reports—to provide special-purpose information for a particular user for a specific decision;

∙ the content of reports—pertains to subunits of the business and may be very detailed and may extend beyond the double-entry accounting system; the reporting standard is relevant to the decision being made; and

∙ the verification of reports—no independent audits.

2. Identify the three broad functions of management and the role of management accountants in an organizational structure.

The three functions are planning, directing, and controlling. Planning requires management to look ahead and to establish objectives. Directing involves coordinating a company’s diverse activities and human resources to produce a smoothly running operation. Controlling is the process of keeping the activities on track.

Management accountants serve as staff members in an organization and play an important role in providing the required information for decision making.

3. Explain the importance of business ethics.

All employees in an organization are expected to act ethically in their business activities. In Canada, the professional accounting organization promotes high standards of ethics in the accounting profession. These standards of ethics can be used as guidelines in dealing with the public and the organizations’ members. In the United States, the Institute of Management Accountants’ Statement of Ethical Professional Practice provides the codes of conduct. Moreover, companies are now evaluating their performance with regard to their corporate social responsibility.

4. Identify changes and trends in managerial accounting.

Managerial accounting has experienced many changes in recent years. Among these are a shift toward meeting the needs of service companies and improving practices to better meet the needs of managers. Improved practices include a focus on managing the value chain through techniques such as just-in-time inventory and technological applications such as enterprise resource planning (ERP). In addition, techniques have been developed to improve decision- making, such as the theory of constraints and activity-based costing (ABC). Finally, many companies now use the balanced scorecard and data analytics in order to have a more comprehensive view of the company’s operations. Data analytics is important in business to understand problems facing an organization, and to use data to both predict and influence customer behaviour.

In Canada, the accounting profession has recently been reorganized by the founding of CPA Canada (Chartered Professional Accountants of Canada) in 2013, into which the three legacy accounting bodies—Chartered Accountants (CA), Certified Management Accountants (CMA), and Certified General Accountants (CGA)—were merged.

TRUE-FALSE STATEMENTS

1. Management accounting and financial accounting, while in the same field, are mutually exclusive disciplines.

2. Given the decision to employ straight-line amortization or a usage-based amortization method, the management accountant’s need to report the most relevant economic information to external users will determine which method is used.

3. Decision making is an integral part of the planning, directing, and motivating functions, but not of the controlling function.

4. Employees with staff positions serve other employees, while those with line positions work directly in line with the company’s revenue generating goals.

5. Activity-based costing is a method of allocating overhead costs to products.

ANSWERS TO TRUE-FALSE STATEMENTS

MULTIPLE CHOICE QUESTIONS

6. Managerial accounting

a) information generally pertains to an entity as a whole and is very detailed.

b) applies only to manufacturing companies.

c) focuses primarily on reports for both internal and external users.

d) provides tools that help management make decisions and evaluate the effectiveness of those decisions.

7. Reports scrutinized by managerial accountants

a) do not include those focused on business subunits.

b) do not include non-financial data relevant to business decision making.

c) are highly aggregated.

d) are special purpose for specific decisions.

8. Managerial accounting

a) is concerned with costing products.

b) is governed by generally accepted accounting principles.

c) pertains to the entity as a whole and is highly aggregated.

d) places emphasis on special-purpose information.

9. Managerial accounting information is generally prepared for

a) shareholders.

b) managers.

c) regulatory agencies.

d) investors.

10. Managerial accounting information

a) pertains to the entity as a whole and is highly aggregated.

b) must be prepared according to generally accepted accounting principles.

c) pertains to subunits of the entity and may be detailed.

d) is prepared only once a year.

11. The major reporting standard for management accounting is

a) the Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management.

b) the Sarbanes-Oxley Act of 2002.

c) relevance to decisions.

d) generally accepted accounting principles.

12. Managerial accounting applies to which of the following forms of business organizations?

a) sole proprietorship

b) partnership

c) corporation

d) all forms of business organizations

13. Which of the following is false in terms of the reason companies replace a CEO with a management committee?

a) To enhance decision-making

b) To improve collaboration.

c) To avoid disruption associated with replacing a CEO.

d) To reduce management continuity.

14. Managerial accounting is also called

a) inside reporting.

b) cost accounting.

c) management accounting.

d) strategic management.

15. Which of the following is not an internal user?

a) corporate officers

b) staff employees

c) stockholders

d) department manager

16. Which of the following is not part of managerial accounting?

a) determining whether planned goals are being met

b) reporting financial information to the shareholders

c) calculating product costs

d) controlling costs

17. Which of the following uses managerial accounting?

a) manufacturing and service entities, but not merchandising

b) profit-oriented businesses only

c) service, manufacturing, and merchandising entities

d) only manufacturing entities

18. Which one of the following tasks would not be performed by a management accountant?

a) being concerned with the impact of cost and volume on profits

b) strategic cost management

c) assisting in budget planning

d) preparing reports primarily for external users

19. How often are internal managerial reports communicated?

a) as frequently as needed

b) annually

c) during every audit by the company’s CPA

d) monthly

20. Which description identifies financial statements that are prepared for external users?

a) external reports

b) special purpose

c) user-specific

d) general-purpose

21. Which term describes managerial accounting reports?

a) GAAP reports

b) special purpose

c) general-purpose

d) regulatory reports

22. Which of the following statements about internal reports is true?

a) Most internal reports are summarized rather than detailed.

b) Internal reports focus on general-purpose needs of users.

c) The content of internal reports extends beyond the double-entry accounting system.

d) Internal reports are often very general.

23. Which one of the following describes internal reports?

a) They are often audited by CPAs.

b) They must be prepared according to GAAP.

c) They are aggregated.

d) They are detailed.

24. Which of the following reports would management find useful in decision making?

a) monthly reports on activities to the Board of Directors

b) quarterly reporting to the Toronto Stock Exchange

c) specific purpose statements on services delivered

d) audited financial information in the annual report to shareholders

25. How often should management receive or prepare reports on its internal process activities?

a) on a fixed time basis

b) as often as is necessary

c) never more than monthly

d) weekly

26. How often should management receive or prepare reports on its external business process activities?

a) as they correspond to external financial reporting

b) never more than monthly

c) according to the company’s business cycle

d) as often as is necessary

27. A company must inform readers of its annual report of

a) all changes in financial accounting policies.

b) results of any overseas activities.

c) all changes in internal accounting information.

d) changes to management’s bonus system.

28. How could management information assist in motivating its employees?

a) By keeping track of quality improvements.

b) By highlighting the company’s percent of market share.

c) By presenting the statistics on plant safety.

d) All areas would benefit from providing internal management information.

29. In establishing a good internal reporting system, a company should

a) ensure that these reports agree to generally accepted accounting principles.

b) have the Board of Directors agree to the information provided.

c) establish clearly understood standards of performance.

d) All of the above are valid reasons.

30. What broad functions do the management of an organization perform?

a) directing, manufacturing, and controlling

b) planning, directing, and controlling

c) planning, directing, and selling

d) planning, manufacturing and controlling

31. Which one of the following involves coordinating a company’s activities to produce a smooth-running operation?

a) auditing

b) controlling

c) planning

d) directing

32. Which one of the following does the planning function involve?

a) analyzing financial statements

b) setting goals and objectives for an entity

c) hiring the right people for a particular job

d) coordinating the accounting information system

33. Which one of the following is true concerning the managerial function of controlling?

a) It includes performance evaluation by management.

b) It is concerned mainly with operating a manufacturing segment.

c) It is performed only by the controller of a company.

d) It includes hiring and training employees.

34. Which of the following represents two management functions?

a) regulating and directing

b) controlling and directing

c) controlling and auditing

d) auditing and planning

35. Which management function is a manager performing when objectives are being established?

a) regulating

b) planning

c) motivating

d) directing

36. The organizational chart of a company shows

a) the interrelationships of activities within a company.

b) the delegation of authority within a company.

c) the delegation of responsibility within a company.

d) all of the above.

37. Which function is achieved when a manager is determining whether planned goals are being met?

a) controlling

b) motivating

c) planning

d) directing

38. What activities and responsibilities are not associated with management’s functions?

a) planning

b) accountability

c) controlling

d) directing

39. Directing includes

a) providing a criteria framework for management when needed, to assist in terminating employees.

b) running a department under quality control standards that are universally accepted.

c) coordinating a company’s diverse activities and human resources to produce a smooth-running operation.

d) developing a performance ranking system to give certain high performers substantial raises.

40. Which of the following is true?

a) Generally Accepted Accounting Principles (GAAP) form the backbone of managerial accounting conventions, and local and/or regional standards and professional judgment allow for variations among practitioners.

b) Each province in Canada has its own code of ethics and rules and guidelines of professional conduct.

c) The Sarbanes-Oxley Act in the U.S. and similar legislation in Canada aims to guide ethical standards used in management accounting practices.

d) Chartered Professional Accountants of Canada plays an important role in promoting high standards of ethics in the accounting profession, excluding managerial accounting.

41. Corporate social responsibility only considers:

a) profitability.

b) sustainable business practices with regards to the environment.

c) the triple bottom line including performance with regard to people, plant and profit.

d) sustainable business practices with regards to employees.

42. Which of the following is true?

a) Managerial accountants are the employees who are principally responsible for ethical behaviour.

b) Investment losses have been precipitated by lax ethical standards.

c) Corporate fraud was found to have decreased between the years 1998 and 2003.

d) Expense account abuse has been cited as one of the rarest forms of unethical employee behaviour.

43. Choose the incorrect answer.

a) While generally not encouraged, lapses in ethical behaviour are irrelevant to a company’s operating income.

b) Proper incentives need to be implemented to foster an ethical business environment.

c) Manufacturing companies need to establish effective and realistic production goals for their processes.

d) As a result of the Sarbanes-Oxley Act, companies now pay more attention to the composition of the board of directors.

44. Which is the best definition of fraud?

a) unknowingly misrepresenting the facts

b) using business supplies for personal use

c) the intentional misstatement of facts

d) misappropriating funds for personal financial gain

45. Which of the following is true?

a) Dissatisfied employees cite a decline in ethical behaviour is a result of a change in corporate culture.

b) Unethical corporate behaviour occurs only in the United States because of its capitalistic environment.

c) Unethical behaviour rarely causes a decline in investor confidence.

d) Unethical actions are reasonable in an environment wherein unreasonable budgets and targets have been set.

46. The production manager at ABC Inc. is responsible for formulating the budget for his department. He will be evaluated on his ability to control costs. After considerable thought, he arrives at his best estimate of costs, and then adds a further 10% to the projections. Chances are he has inflated the cost projections because

a) that is the way it has always been done.

b) conservative accounting practise requires that he not under report expenses.

c) by overestimating expenses, it will make it easier for him to come in under budget and receive a favourable evaluation.

d) none of the above.

47. In Canada, which of the following professional accounting organizations play an important role in promoting high standards of ethics in the accounting profession?

a) Chartered Professional Accountants of Canada (CPA Canada)

b) The Financial Planning Standards Council (FPSC)

c) The Canadian Institute of Financial Planning (CIFP)

d) all of the above

48. The Ontario Securities Commission introduced regulations governing the composition and duties of audit committees, as well as their members’ behaviour. The new rules

a) are as robust as parallel rules required by the U.S. Sarbanes-Oxley Act.

b) were adopted by all provincial and territorial securities regulators, except for British Columbia’s.

c) were introduced in conjunction with the Canadian Securities Administrators.

d) all of the above.

49. A company acting ethically must adapt its external reports to any changes required

a) instantly.

b) as it is appropriate for its business cycle.

c) as stipulated by the CPA Canada handbook and GAAP.

d) if they are considered pertinent to its business activities.

50. A company acting ethically must adapt its internal reports to any changes required

a) instantly.

b) as it is appropriate for its business cycle.

c) as stipulated by the CPA Canada handbook and GAAP.

d) if they are considered pertinent to its business activities.

51. A recent survey of fraud by international accounting firm KPMG reported

a) reported a 13% decrease in instances of corporate fraud compared with five years earlier.

b) that employee fraud (such things as expense account abuse, payroll fraud, and theft of assets) represents 60% of all instances of fraud.

c) financial reporting fraud (the intentional misstatement of financial reports) was the least costly to companies.

d) business scandals with large investment losses and few employee layoffs.

52. The accounting professional bodies each have professional codes of ethical conduct. The code covers

a) competence, ethical behaviour, objectivity, confidentiality.

b) integrity, credibility, competence, and confidentiality.

c) competence, objectivity, credibility, integrity.

d) credibility, integrity, confidentiality, objectivity.

53. Data visualizations

a) refer to the use of software to analyze data.

b) do not help managers in acquiring an understanding of the relationships between variables.

c) is the use of techniques to analyze data to make informed decisions.

d) help managers in acquiring an understanding of business trends.

54. The value chain

a) is affected by technology through business-to-business on the Internet.

b) refers to all the activities associated with providing a product with the exception of research and development.

c) has not been enhanced by computerization and automation.

d) refers to all the activities associated with providing a service with the exception of sales and marketing.

55. Lean manufacturing

a) is being used less often by manufacturing firms.

b) is in contrast to traditional mass-production operations.

c) is apt to be used by firms that use large amounts of direct labour to produce their products.

d) sets out to minimize rather than eliminate waste.

56. Which one of the following managerial accounting approaches attempts to allocate manufacturing overhead in a more meaningful fashion?

a) theory of constraints

b) just-in-time inventory

c) activity-based costing

d) total-quality management

57. Which one of the following is not a main component of the value chain sequence?

a) ERP

b) sales and marketing

c) production

d) customer relations

58. What is one primary benefit of an enterprise resource planning (ERP) system?

a) It reduces inventory levels.

b) It permits companies to be more streamlined in production.

c) It replaces research and development in a company.

d) It requires an increased emphasis on product quality.

59. One of the advantages of a just-in-time inventory system is that it reduces inventory quantities. Why is this considered to be a benefit?

a) Carrying inventory incurs storage costs, hence reducing inventory quantities reduces costs.

b) Carrying large inventory raises the risk that customers will want an item that you do not have.

c) Carrying large inventory reduces the risk that customers will want an item that you do not have.

d) none of the above

60. What is “balanced” in the balanced scorecard approach?

a) the number of products produced

b) the emphasis on financial and non-financial performance measurements

c) the amount of costs allocated to products

d) the number of defects found on each product

61. For what purpose is the theory of constraints used?

a) to reduce product defects

b) to balance performance measurement

c) to identify and manage constraints that bottleneck operations

d) to reduce inventory levels

62. In Canada the three different professional accounting designations that merged into CPA Canada are

a) CPA, CA, CMA.

b) CMA, CGA, CPA.

c) CA, CMA, CGA.

d) MA, CPA, CA.

63. Which of the following is a reason for the reorganization of the three accounting bodies in Canada into one, CPA Canada?

a) There was conflict within the standard setting process between the three accounting bodies.

b) Extensive competition between the three organizations was causing friction.

c) The reorganization was mandated by the Canadian government.

d) A larger unified profession would mean a more prominent and cohesive Canadian presence internationally.

64. Choose the correct statement.

a) CGA stands for Certified Generic Accountant.

b) CMA stands for Certified Managing Accountant.

c) CA stands for Chartered Accountant.

d) CPA stands for Certified Professional Accountant.

65. Which of the following statements is true?

a) In recent decades, the Canadian economy in general has shifted toward an emphasis on providing services rather than goods. This trend has reduced the importance of managerial accounting.

b) In recent decades, the Canadian economy in general has shifted toward an emphasis on providing goods rather than services. This trend has reduced the importance of managerial accounting.

c) In recent decades, the Canadian economy in general has shifted toward an emphasis on providing services rather than goods. This trend has not reduced the importance of managerial accounting.

d) In recent decades, the Canadian economy in general has shifted toward an emphasis on providing goods rather than services. This trend has not reduced the importance of managerial accounting.

66. Which of the following is an accounting question a service company may face?

a) whether to purchase new equipment

b) how much to charge for various services

c) how efficient and productive individual staff members are

d) all of the above

67. For a manufacturing company, the activities in the value chain would not include

a) research and development.

b) purchase of raw materials.

c) customer relations.

d) performance evaluation.

68. What term describes all activities associated with providing a product or service?

a) the manufacturing chain

b) the product chain

c) the supply chain

d) the value chain

69. How do most companies manage their value chain?

a) by using activity-based costing

b) by creating enterprise resource planning systems

c) using an action plan

d) using total-quality management systems

70. How have many companies significantly lowered inventory levels and costs?

a) They use activity-based costing.

b) They utilize an enterprise resource planning system.

c) They have a just-in-time method.

d) They focus on a total-quality management system.

71. Some companies implement systems to reduce defects in finished products with the goal of achieving zero defects. What are these systems called?

a) activity-based costing systems

b) enterprise resource planning systems

c) value chain systems

d) total-quality management systems

72. In order to obtain more accurate product costs, how do many companies allocate overhead?

a) By using activity-based costing.

b) By using enterprise resource planning systems.

c) By using just-in-time methods.

d) By using total-quality management systems.

73. Which one of the following characteristics would likely be associated with a just-in-time inventory method?

a) ending inventory of work in process that allows for several production runs

b) a backlog of inventory orders not yet shipped

c) minimal finished goods inventory on hand

d) an understanding with customers that they may come to the showroom and select from inventory on hand

74. What is value chain management best defined as?

a) a large chain that keeps the machines from falling on the production floor

b) management decisions that affect how quickly the production run occurs

c) the incremental value of costs associated with hiring a new production floor leader

d) all activities associated with providing a product or service

75. Which one of the following is an example of activity-based costing?

a) monitoring the salaries of managers that do untimely quality control checks

b) keeping close track of shrinkage associated with thefts off the showroom floor

c) ensuring that management is diligently working with the local union on keeping labour costs in line

d) allocating the set-up cost associated with getting a machine ready for a production run

76. Bottlenecks are

a) the point at which the finished product leaves the factory.

b) constraints that limit the company’s potential profitability.

c) the point at which a company’s plan is put into action.

d) factors that consume a great deal of managers’ attention but have little impact on the company.

77. For what reason is a product cost primarily tracked?

a) to keep up with current cost trends to bring products to market

b) to effectively allocate the cost of products to measure profitability

c) to determine what amounts are necessary for allocating overhead

d) to keep management’s bonuses increasing every year

78. Which one of the following is an activity not associated with TQM?

a) Tightening the bolts on a chassis so that the frame will not drop out.

b) Redesigning the gas tank after learning fuel efficiency standards are not being met.

c) Verifying the 10 check points associated with producing the highest quality loaf of bread.

d) Ensuring that the mattress just manufactured meets the standard of comfort of a random factory line worker.

79. The theory of constraints is

a) a theory that the benefit of making a change in a production process should be weighed against the cost of making that change.

b) that even the best suggestions for improvement are likely to be rejected due to opposition from those who have to implement the changes.

c) a specific approach used to identify and manage constraints in order to achieve the company’s goals.

d) not applicable to service operations.

80. What is ERP?

a) efficient resource procurement

b) earnings reporting policies

c) enterprise resource planning

d) effective resource procurement

81. A balanced scorecard is

a) a performance-measurement approach that uses both financial and non-financial measures to evaluate a company’s operations in an integrated way.

b) a tool used to measure the benefits and costs of implementing a new strategy.

c) used only by small organizations that cannot afford more expensive methods of evaluating their operations.

d) focuses on non-financial measures in order to balance the many other financial reports companies use to evaluate their operations.

82. Which component of a company’s value chain would benefit most from internal management information?

a) complaints from its customers over services offered

b) bonuses paid to managers of the company

c) the company’s efforts to develop new services

d) All such components would benefit from internal management information.

83. Managerial accounting has become more important in service industries due to

a) the decline of the manufacturing sector has freed up many accountants.

b) service delivery is extremely complex and requires proper monitoring.

c) the economy has become more service-oriented recently.

d) the increase in complexity in computer systems requires accounting specialists.

84. The five steps in the lean thinking model, in order are:

a) 1. Define value, 2. Identify the pull factors, 3. Identify the value stream, 4. Make the value stream flow, 5. Revise until perfection is achieved.

b) 1. Define value, 2. Identify the value stream, 3. Make the value stream flow, 4. Implement a pull system, 5. Strive for perfection.

c) 1. Identify unproductive activities that need to be reduced, 2. Identify push factors causing those unproductive activities, 3. Develop operations so that the work flows smoothly, 4. Strive for perfection, 5. Evaluate the value that has been added.

d) 1. Identify push factors, 2. Develop strategies to turn those factors into pull factors, 3. Assess the value added by steps one and two, 4. Strive for perfection, 5. Repeat the process on a regular basis.

85. Step one in the lean thinking model requires

a) target costing, that is determining the acceptable cost the customer is willing to pay.

b) an assessment of the potential value that can be added to the firm by adopting the lean manufacturing concept.

c) identifying processes that do not add value to the manufacturing process.

d) identifying push factors that can be converted to pull factors.

86. Step two in the lean thinking model

a) deals with push and pull factors.

b) is the central element in understanding how a company can evaluate what is value added and what is waste.

c) is always the most time consuming.

d) can be excluded if step one is done correctly.

ANSWERS TO MULTIPLE CHOICE QUESTIONS

BRIEF Exercises

Brief Exercise 87

The Cheepencheerful Bakery Company produces muffins that it sells to hotel chains in the city. It generally breaks even at the end of the year but not always. It only knows this when the company’s external accountants prepare financial statements that are used by the bank and to file tax returns. The company does its best to keep its costs down and as a result does not pay its employees very much.

When the president’s wife, who is the bookkeeper, decided to retire, the president advertised for her replacement. He thought he could find someone who would work for slightly more than minimum wage. This would be in line with his desire to keep costs down.

Comment on the president’s desire to keep his costs down by hiring a poorly paid accountant for his organization.

Solution 87

The president is being short-sighted in his desire to keep costs low in a critical area of his company.

As president, he is responsible for planning, directing, and controlling the company’s activities. For a medium sized company, it is difficult for one person to accomplish all of these objectives effectively.

A professionally trained accountant with the proper training and accreditation can assist the president in these areas.

The accountant can help plan targets for profitability and return on assets used in the business. Once these targets are set, the accountant can then help direct the day-to-day activities to ensure the company’s internal procedures are operating efficiently. The accountant can also implement effective internal managerial accounting procedures to ensure that the organizations activities are properly controlled.

Brief Exercise 88

Preparation of a budget at the beginning of a period entails looking at last year’s results, adjusting for any changes in prices and activity in the current year and anticipating consumer demand levels based on economic activity and historical trends. The process of preparing a budget is part of which management function? The process of comparing actual results to the budget is part of which other management function?

Solution 88

The process of preparing a budget is part of planning while the process of comparing a budget to actual results is part of control.

Brief Exercise 89

Activities in a warehouse may include materials and inventory handling, staffing and scheduling, setting up production runs, and managing quality. The management of these activities is part of which one of the key three management functions: planning, directing, or controlling?

Solution 89

The management of these activities is part of directing.

Brief Exercise 90

Explain how systems to control and evaluate the actions of managers are circumvented when managers use budgetary slack.

Solution 90

Because the budget is also used as an evaluation tool, some managers try to play a “game” by using budgetary slack; whereby, they build some slack into the budget by underestimating their division’s predicted performance so that it will be easier to meet their performance targets.

Brief Exercise 91

Explain how setting unattainable levels in a budget may promote unethical actions by managers.

Solution 91

If the budget is set at unattainable levels, managers sometimes take unethical actions to meet the targets to receive higher compensation or, in some cases, to keep their jobs.

Brief Exercise 92

What are the eight steps in the value chain for a manufacturing company?

Solution 92

The eight steps in the value chain include research and development, product design, acquisition of raw materials, sales and marketing, delivery, customer relations, and subsequent service.

Brief Exercise 93

A manufacturing company produces a product that first must be cut into a specific size, then sanded, and finally painted. The cutting process can produce five units in an hour, the sanding process produces three units in an hour, and the painting process can produce ten units in an hour. Which process is the bottleneck?

Solution 93

The sanding process.

Brief Exercise 94

What is a balanced scorecard?

Solution 94

A balanced scorecard is a performance-measurement approach that uses both financial and non-financial measures to evaluate all aspects of a company’s operations in an integrated way.

Brief Exercise 95

Better Built Boats Ltd. Is a company that manufactures boats and sells them through a series of dealers nationwide. It is publicly traded and has always had a “clean bill of health” from its auditors. It prides itself on building high quality boats and considers that its customers view it as an “ethical” company.

It also has good internal information that it uses to ensure that its cost per boat is within the appropriate guidelines in order to ensure profitability.

Recently, the CPA handbook has instituted a change in accounting policy that would make it more expensive to offer such products as boats to the public. For the following users of the company’s financial information, describe how such changes could affect financial information provided:

a) The Board of Directors of the company

b) The Vice President of Sales

c) The Production Manager of the company

d) The company’s Finance Manager

e) The company’s Corporate Controller

Solution 95

a) The Board, through its Audit Committee, would have to ensure that all financial information reported to external stakeholders was consistent with the new changes.

b) There would likely be little effect on the sales VP other than explaining to dealers why there may have to be an increase in the price of the boats. Particularly if the boats become more expensive to manufacture because of the new regulations.

c) The Production Manager would likely expect a modification to internal data provided on manufacturing processes to incorporate the changes required.

d) The Finance Manager may be concerned with ensuring that there is sufficient capital available to adjust to the new changes.

e) The Corporate Controller must ensure that both internal and external information is adjusted to reflect these changes on the company’s data systems.

EXERCISES

Exercise 96

Financial accounting information and managerial accounting information have a number of distinguishing characteristics:

___ 1. Reporting standard is relevant to the decision to be made

___ 2. Classified financial statements

___ 3. Reports generally pertain to the company as a whole

___ 4. Reports generally pertain to subunits

___ 5. Reports issued quarterly or annually

___ 6. General-purpose reports

___ 7. Reports are used internally

___ 8. Prepared in accordance with generally accepted accounting principles

___ 9. Special purpose reports

___ 10. Limited to historical cost data

Instructions

For each of the characteristics listed, indicate which characteristics are more closely related to financial accounting by placing the letter "F" in the space to the left of the item and indicate those characteristics which are more closely associated with managerial accounting by placing the letter "M" to the left of the item

Solution 96 (4–5 min.)

1. M

2. F

3. F

4. M

5. F

6. F

7. M

8. F

9. M

10. F

Exercise 97

Are planning and controlling synonymous terms? Explain why or why not.

Solution 97

In everyday usage of the terms, they are often synonymous. In the accounting, budgeting, and business context they are distinct functions.

Planning requires management to look ahead and to establish objectives. These objectives are often diverse: maximizing short-term profits and market share, maintaining a commitment to environmental protection, and contributing to social programs. A key objective of management is to add value to the business under its control. Value is usually measured by the trading price of the company’s shares and by the potential selling price of the company.

Controlling is the process of keeping the company’s planned activities on track. In controlling operations, managers determine whether planned goals are being achieved. When there are deviations from targets, managers must decide how to remedy the situation.

Exercise 98 What are the responsibilities of the controller in an organization?

Solution 98

The controller’s responsibilities include (1) maintaining the accounting records; (2) maintaining an adequate system of internal control; and (3) preparing financial statements, tax returns, and internal reports.

Exercise 99

How do the roles of financial vice president, controller, and treasurer differ?

Solution 99

The financial VP reports to the president of the company, and supervises both the controller and treasurer. The treasurer supervises the financing function, has custody of physical assets, and manages the company’s cash and investments. The controller supervises the inputs and outputs of the accounting information system.

Exercise 100

Explain the differences between a staff position and a line position.

Solution 100

A line position works directly to perform the basic revenue objectives of a company so that it can generate revenues and stay in business, an example would include the role of a salesperson. A staff position has indirect responsibility for the company’s basic objectives and provides necessary support functions for other employees in their line functions, an example would include the role of a human resources professional.

Exercise 101

Your manager asks you to help him prepare the budget for your division. He estimates that total expenses will equal $100,000, but he reports $120,000. He argues that it will make it easier to keep costs within budget, and that everyone does it. What is the ethical issue in this case?

Solution 101

The manager is knowingly reporting false information that could mislead the users of that information. Not everyone may know that the budget numbers have some “slack” built into them.

Exercise 102

What is corporate social responsibility and why is it sometimes referred to as the triple bottom line?

Solution 102

Corporate social responsibility considers a company’s efforts to employ sustainable business practices with regard to its employees and the environment. This is sometimes referred to as the triple bottom line because it evaluates a company’s performance with regard to people, plant, and profit.

Exercise 103

Explain four of the implications on the financial community because of the Sarbanes-Oxley-Act (SOX) legislation.

Solution 103

1. One result of SOX was the clarification of top management’s responsibility for the company’s financial statements. CEOs and CFOs must now certify that financial statements give a fair presentation of the company’s operating results and its financial condition.

2. In addition, top managers must certify that the company maintains an adequate system of internal controls to safeguard the company’s assets and ensure accurate financial reports.

3. Another result of Sarbanes-Oxley is that companies now pay more attention to the composition of the board of directors. In particular, members of the audit committee of the board of directors must all be entirely independent (that is, non-employees) and at least one must be a financial expert.

4. Finally, to increase the likelihood of compliance with the rules that are part of the new legislation, the law substantially increases the penalties for misconduct.

Exercise 104

Misty River Spas offers weekly luxury spa packages to members of the fashion industry. After a good start to its operations, the company started to experience a drop in sales. Misty Rivers was operating at less than 100% capacity and started a major marketing campaign to attract more customers.

The company’s controller noticed that customers often left the spa after only four or five days. This was confusing, given, they paid for the entire week and were not entitled to refunds. The controller discovered that these people would complain about waiting times between spa activities and even a shortage of products in the facility. The marketing manager simply said that if the number of customers increased that these problems would eventually disappear. Besides, when a customer left early, the company did not incur any additional costs of related to service delivery. Comment on the company’s attitude toward its customers without looking into its internal activities.

Solution 104

A company is effective when it delivers what it promises. When services do not meet expectations, a company loses customers and its reputation suffers. A business such as a spa survives by delivering what it promises in an effective manner. This ensures positive word-of-mouth advertising from happy customers. Simply attempting to increase top-line sales without caring about of the value delivered to the customer will eventually have long-term negative consequences.

Efficient and effective organizations keep information on internal activities and track their success in delivering products or services to a standard that has been set and expected by customers.

In the case of Misty River, the company clearly needs to look at the results of its internal activities and find out why customers are leaving and what can be done to keep them. Only then can the company expect to attract and retain more customers and ensure that the customer experience in the spa is a positive one.

Exercise 105

Stodgy Industries Ltd. has barely made a profit over the past few years and is looking for ways to improve its results. It has hired a consultant who has suggested that the company introduce a concept called the balanced scorecard. This involves looking into all aspects of a company’s activities and seeks to integrate them into a cohesive manner that can focus on corporate goals.

The company’s president has called in the vice president of sales and vice president of production to discuss how the company can establish goals and meet those targets. The consultant says that there is a critical person missing from the meeting, which is the company’s controller.

Explain why or why not the controller is a critical component of any desire to introduce a balanced scorecard in an organization

Solution 105

A balanced scorecard seeks to establish a series of goals that an organization can set that will enable it to attain a comprehensive target. This target can have both financial (profit) or non-financial (quality) targets that need to be monitored along the way. Both of these two broad components require adequate tracking of data generated through the company’s activities.

Generally, vice presidents of sales and production are focused mostly on their own areas and activities; the controller is the one person who has information available on both areas. The controller can work with these two people and help determine the information that they will need to meet their goals. Without effective information, it is unlikely that the company’s implementation of a balanced scorecard will offer expected results.

COMPLETION STATEMENTS

106. Financial accounting information is prepared mainly for ___ users while managerial accounting information is prepared primarily for ___ users.

107. The types of reports prepared in managerial accounting are often ___-purpose reports prepared for a specific decision.

108. Managerial accounting reports generally pertain to ___ of an entity and may be very detailed.

109. Three broad managerial functions are: (1) ___, (2) ___ and ___, and (3) ___.

110. The ___ function is concerned with setting goals and objectives for the entity.

111. Exercising good judgment in performing the managerial functions and choosing among alternative courses of action is called ___.

ANSWERS TO COMPLETION STATEMENTS

106. external, internal

107. special

108. subunits

109. planning, directing and motivating, controlling

110. planning

111. decision making

MATCHING

112. A list of managerial accounting terms appears below:

a) theory of constraints

b) activity-based costing

c) just-in-time inventory

d) balanced scorecard

e) value chain

f) enterprise resource planning (ERP)

Instructions

Match each of the terms with the statement that best describes the term.

1. ___ A system that provides a comprehensive, centralized, integrated source of information used to manage all major business processes.

2. ___ The group of activities associated with providing a product or service.

3. ___ An approach used to reduce the cost associated with handling and holding inventory by reducing the amount of inventory on hand.

4. ___ A method used to allocate overhead to products based on each product’s use of the activities that cause the incurrence of the overhead cost.

5. ___ An approach used to identify those factors that limit a company’s productive capacity and to address those limitations so as to maximize profitability.

6. ___ A performance-measurement technique that attempts to consider and evaluate all aspects of performance using financial and non-financial measures in an integrated fashion.

ANSWER TO MATCHING

1. f

2. e

3. c

4. b

5. a

6. d

SHORT-ANSWER ESSAY QUESTIONS

SAE 113

Both financial and managerial accounting are concerned with the economic events of an enterprise. Similarities between financial and managerial accounting do exist, but they do have different focuses. Briefly distinguish between financial and managerial accounting as they relate to (1) the primary users, (2) the type and frequency of reports, (3) the purpose of reports, and (4) the content of reports.

Solution 113

Financial accounting is primarily concerned with external users such as stockholders and creditors, while the primary users of managerial accounting are those within the company (internal users) such as officers, managers, supervisors, etc. Quarterly and annual classified financial statements are the end product of financial accounting. Internal reports, prepared as often as needed are the result of managerial accounting. The financial statements produced by financial accounting are general-purpose reports which are highly aggregated, pertain to the enterprise as a whole, and are constrained by generally accepted accounting principles. The internal reports prepared by management accountants are special-purpose reports which are detailed, pertain to subunits of the enterprise, and may contain any information relevant to the decision at hand.

SAE 114

How do managers achieve control in a small versus a large organization?

Solution 114

A smart manager in a small organization can make personal observations, ask good questions, and know how to evaluate the answers. But using this approach in a large organization would result in chaos. Thus, large businesses typically use a formal system of evaluation. These systems include such features as budgets, responsibility centres, and performance evaluation reports — all of which are features of managerial accounting. Decision-making is not a separate management function. Rather, it is the outcome of the exercise of good judgement in planning, directing, and controlling

SAE 115

Million Dollar Mills is a textile manufacturing firm. The company carefully prepares all financial statements in accordance with GAAP and gives a copy of all financial statements to each department. In addition to this, the company also keeps records on company quality control, safety, and environmental pollution.. It then prepares "scorecards" for each department indicating their performance. Recently, the financial impact of the second set of metrics was added to the scorecard, and the information is being used in the evaluation of employees for merit pay and promotions.

At the most recent employee meeting, Tyler Hanes, marketing manager, expressed his discomfort with the system. He said that there was no guarantee that this additional information was fair, since there were no generally accepted principles for this types of metrics. He also said that it was kind of like keeping two sets of books—one following all legal requirements, and the other one being used internally.

Instructions

a) Is it ethical to evaluate managers in the way described? Explain briefly.

b) Name at least two safeguards the company could build into its system to ensure the ethical treatment of employees.

Solution 115

a) It is ethical for a company to use all available data to evaluate managers, and even to collect data not routinely available. In fact, such a method seems preferable to one in which the company may only use specified financial data in its evaluation of a manager's performance. It does not imply a departure from GAAP, nor that the company does not actually use the information prepared according to GAAP. It supplements the standard reports, it does not replace them.

b) The company should make certain that the appropriate information is calculated in the same way each period. All the relevant data should be collected and reported each period. New data should be limited. The qualitative information should be complemented, not replaced, by the regular financial information.

SAE 116

Should organizations only offer incentives based on financial goals? Explain why or why not.

Solution 116

Incentives should be tied to more than just profits. Unethical activities related to increasing incentive based compensation are not necessarily practised by employees with criminal intentions but rather by employees who are paid based on goals that may be unrealistic. Although there is no excuse for behaving unethically, compensation and performance programs should be designed to discourage unethical practices and limit opportunity for unethical behaviour. For instance, organizations should offer incentives based on more than just financial goals.

SAE 117

What are data analytics and data visualizations? Explain.

Solution 117

Data analytics is the use of techniques, which often combine the use of software and the knowledge of statistics, to analyze data to make informed decisions.

Data visualizations is an analytical tool that often help managers acquire a more intuitive understanding of (1) the relationships between variables and (2) business trends.

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