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  • 1. CHAPTER 1COVERAGE OF LEARNING OBJECTIVESLEARNING OBJECTIVEFUNDA-MENTALASSIGN-MENTMATERIALCRITICALTHINKINGEXERCISESANDEXERCISES PROBLEMSCASES,EXCEL,COLLAB.,&INTERNETEXERCISESLO1: Describe the major usersand uses of accountinginformation.A1, B1 33 39, 40, 42 55LO2: Explain why ethics isimportant to managementaccountants.A3 37, 38 47, 49, 40 51, 55LO3: Describe the cost-benefitand behavioral issues involvedin designing an accountingsystem.41, 43LO4: Explain the role ofbudgets and performancereports in planning andcontrol.A2, B2 32 45 53LO5: Discuss the roleaccountants play in thecompany’s value chainfunctions.A1, B1 30, 31, 34,35, 3639, 42, 44LO6: Contrast the functions ofcontrollers and treasurers.B3 29, 36 39, 45, 46 50LO7: Explain why accountingis important in a variety ofcareer paths.30, 31 52, 55LO8: Identify current trends inmanagement accounting.54LO9: Appreciate the impor-tance of ethical conduct toprofessional accountants.A3, B4 37, 38 47, 48, 49 51, 52, 551
  • 2. CHAPTER 1Managerial Accounting, the Business Organization, andProfessional Ethics1-A1 (10-15 min.)Because the accountants duties often are not sharply defined,some of these answers could be challenged:1. Scorekeeping. Determining a depreciation schedule is simplyan exercise in preparing financial statements to report theresults of activities.2. Problem solving. Helps a manager assess the impact of adecision.3. Scorekeeping. Reports on the results of an operation. Couldalso be attention directing if scrap is an area that mightrequire management decisions.4. Attention directing. Focuses attention on areas that needattention.5. Attention directing. Helps managers learn about theinformation contained in a performance report.6. Scorekeeping. The statement merely reports what hashappened.7. Problem solving. The cost comparison is apparently usefulbecause the manager wishes to decide between twoalternatives. Thus, it aids problem solving.8. Attention directing. Variances point out areas where resultsdiffer from expectations. Interpreting them directs attentionto possible causes of the differences.9. Problem solving. Aids a decision about where the parts shouldbe made.10. Attention directing and problem solving. Budgeting involvesmaking decisions about planned activities -- hence, aidingproblem solving. Budgets also direct attention to areas ofopportunity or concern --hence, directing attention.Reporting against the budget also has a scorekeepingdimension.2
  • 3. 1-A2 (15-20 min.)1. Budgeted Actual DeviationsAmounts Amounts or VariancesRoom rental $ 140 $ 140 $ 0Food 700 905 205UEntertainment 600 600 0Decorations 220 190 30FTotal $1,660 $1,835 $175U2. Because of the management by exception rule, room rentaland entertainment require no explanation. The actualexpenditure for food exceeded the budget by $205. Of this$205, $150 is explained by attendance of 15 persons more thanbudgeted (at a budget of $10 per person) and $55 is explainedby expenditures above $10 per person.Actual expenditures for decorations were $30 less than thebudget. If all desired decorations were purchased, thedecorations committee should be commended for their savings.3
  • 4. 1-A3 (10 min.)All of the situations raise possibilities for violation of the integritystandard. In addition, the manager in each situation must addressan additional ethical standard:1. The General Mills manager must respect the confidentialitystandard. He or she should not disclose any information aboutthe new cereal.2. Felix must address his level of competence for the assignment.If his supervisor knows his level of expertise and wants ananalysis from a “layperson” point of view, he should do it.However, if the supervisor expects an expert analysis, Felixmust admit his lack of competence.3. The credibility standard should cause Mary Sue to decline toomit the information from her budget. It is relevantinformation, and its omission may mislead readers of thebudget.4
  • 5. 1-B1 (15-20 min.)Because the accountant’s duties often are not sharply defined,some of these answers could be challenged:1. Problem solving. Provides information for deciding betweentwo alternative courses of action.2. Scorekeeping. Simply recording of what has happened.3. Problem solving. Helps a manager decide betweenalternatives.4. Attention directing. Directs attention to the use of overtimelabor.5. Problem solving. Provides information to managers fordeciding whether to move corporate headquarters.6. Attention directing. Directs attention to why nursing costsincreased.7. Attention directing. Directs attention to areas where actualresults differed from the budget.8. Problem solving. Helps the vice-president to decide whichcourse of action is best.9. Problem solving. Produces information to help the marketingdepartment make a decision about a marketing campaign.10. Scorekeeping. Records actual overtime costs.11. Attention directing. Directs attention to stores with eitherhigh or low ratios of advertising expenses to sales.12. Attention directing. Directs attention to causes of returns ofthe drug.13. Attention directing or problem solving, depending on the useof the schedule. If it is to identify areas of high fuel usage it isattention directing. If it is to plan for purchases of fuel, it isproblem solving.14. Scorekeeping. Records events.15. Scorekeeping. Records items needed for financial statements.5
  • 6. 1-B2 (10-15 min.)1 & 2. Budget Actual VarianceSales $75,000 $74,860 $ 140UCosts:Fireworks $36,000 $39,500 $3,500ULabor 15,000 13,000 2,000FOther 8,000 8,020 20UTotal cost 59,000 60,520 1,520UProfit $16,000 $14,340 $1,660U3. The cost of fireworks was $3,500 ÷ $36,000 = 9.7% overbudget. Did fireworks suppliers raise their prices? Didcompetition cause retail prices to be lower than expected?There should be some explanation for the extra cost offireworks. Also, the labor cost was $2,000 ÷ $15,000 =13.3%below budget. It would be useful to discover why this cost wassaved. Both sales and other costs were very close to budget.1-B3 (10 - 15 min.)1. Controller. Divisional financial statements report onoperations. Financial statements are generally produced bythe controllers department.2. Controller. Advising managers aids operating decisions.3. Controller. Advice on cost analysis aids managers operatingdecisions.4. Treasurer. Analysts affect the companys ability to raisecapital, which is the responsibility of the treasurer.5. Treasurer. Financing the business is the responsibility of thetreasurer.6. Controller. Tax returns are part of the accounting processoverseen by the controller.7. Treasurer. Insurance, as with other risk managementactivities, is usually the responsibility of the treasurer.8. Treasurer. Allowing credit is a financial decision.1-B4 (15 - 20 min.)6
  • 7. 1. A code of conduct is a document specifying the ethicalstandards of an organization .2 . Different companies include different elements in their codesof conduct. Some of the items included in companies’ codes ofconduct include maintaining a dress code, avoiding illegaldrugs, following instructions of superiors, being reliable andprompt, maintaining confidentiality, not accepting personalgifts from stakeholders as a result of company role, avoidingracial or sexual discrimination, avoiding conflict of interest,complying with laws and regulations, not using organization’sproperty for personal use, not discriminating against race orage or sexual orientation, and reporting illegal or questionableactivity. Some companies have a simple code with little detail,and others have long lists of rules and regulations regardingappropriate conduct. The key is that the code of conduct mustfit with the corporate culture.3. Simply having a code of conduct does not guarantee ethicalbehavior by employees. Most important is top management’sethical example and its support of the code of conduct. Acompany’s performance evaluation and reward system mustbe consistent with its code of conduct. If unethical actions arerewarded, they will be encouraged even if they violate the codeof conduct.7
  • 8. 1-1 Internal managers and external parties (for example, investorsand government authorities) use accounting information for threebroad purposes:1. Internal reporting to managers for planning and controllingoperations.2. Internal reporting to managers for special decision-makingand long-range planning.3. External reporting to stockholders, government, and otherinterested parties.1-2 The emphasis of financial accounting has traditionally been onthe historical data presented in the external reports. Managementaccounting emphasizes planning and control purposes.1-3 The branch of accounting described in the quotation ismanagement accounting.1-4 Scorekeeping is the recording (including accumulation andclassification) of data for a later evaluation of performance.Attention directing is the reporting and interpretation ofinformation for the purpose of focusing on inefficiencies ofoperation, opportunities for improvement, and imperfections andoperating problems. Problem solving presents a concise analysis ofalternative courses of action and recommends the best course ofaction.1-5 No. GAAP applies to publicly issued annual financial reports.Internal accounting reports are not restricted by GAAP.1-6 Yes, but it covers more than that. The Foreign CorruptPractices Act applies to all publicly-held companies and covers thequality of internal accounting control as well as bribes and othermatters.8
  • 9. 1-7 Many managers believe that the costs of applying theprovisions of the Sarbanes-Oxley act are greater then the benefits.This is especially true about the mandated auditing of companies’internal control systems.1-8 Users cannot easily observe the quality of accountinginformation. Thus, they rely on the integrity of accountants to besure the information is accurate. Information that is unreliable isworthless, so if accountants do not have a reputation for integrity,the information they produce will not have value.1-9 No. The ethics developed as a student carry over into one’sprofessional life. Integrity is important at all stages ofdevelopment. Students who use unethical means to achieve successare likely to try similar methods when in business.1-10 Three examples of service organizations are banks, insurancecompanies, and public accounting firms. Such organizations tendto be labor intensive, have outputs that are difficult to define andmeasure, and have both inputs and outputs that are difficult orimpossible to store.1-11 Two considerations are cost-benefit balance and behavioraleffects. Cost-benefit balance refers to how well an accountingsystem helps achieve managements goals in relation to the cost ofthe system. The behavioral consideration specifies that anaccounting system should be judged by how it will affect thebehavior (that is, decisions) of managers.1-12 Yes. The act of recording events has become as much a partof operating activities as the act of selling or buying. For example,cash receipts and disbursements must be traced, and receivablesand payables must be recorded, or else gross confusion wouldensue.9
  • 10. 1-13 A budget is a quantitative expression of a plan of action; aperformance report compares actual results compared with thebudget; and a variance measures the differences between budgetand actual.1-14 No. Management by exception means that managementspends more effort on those areas that seem to be out of control andless on areas that are functioning as planned. This method is anefficient way for managers to decide where to put their time andeffort.1-15 Information that is relevant for decisions about a productdepends on the products life-cycle stage. Therefore, to prepareand interpret information, accountants should be aware of thecurrent stage of a products life cycle.1-16 The six functions are: (1) research and development –generation and experimentation with new ideas for products,services, or processes; (2) product, service, and process design –detailed design and engineering of products, services, or processes;(3) production – use of resources to produce a product or service;(4) marketing - informing customers of the value and features ofproducts or services; (5) distribution – delivering products orservices to customers; and (6) customer service – support providedto customers.1-17 No. Not all of the functions are of equal importance to thesuccess of a company. Measurement and reporting should focus onthose functions that enable a company to gain and maintain acompetitive edge. In addition, some functions in the value chainmay not be present in some organizations.1-18 Line managers are directly responsible for the production andsale of goods or services. Staff managers have an advisory function– they support line managers.10
  • 11. 1-19 Management accountants are the information specialists, evenin non-hierarchical companies. However, in such companies theyare more directly involved with managers and are often parts ofcross-functional teams.1- 20 A treasurer is concerned mainly with the companys financialmatters, the controller with operating matters. In largeorganizations, there are sufficient activities associated with bothfinancial and operating matters to justify two separate positions. Ina small organization the same person might be both treasurer andcontroller.1-21 The four parts of the CMA examination are: (1) businessanalysis, (2) management accounting and reporting, (3) strategicmanagement, and (4) business applications.1-22 This is not true. About one-third of CEOs in companies withrevenues greater than $500 million come from finance oraccounting backgrounds. Accounting is excellent preparation fortop management positions because accountants are often exposed tomany parts of the company early in their careers.11
  • 12. 1-23 Changes in technology are affecting how accountants operate.Increasing computer capabilities and decreasing computer costshave changed how accountants gather, store, manipulate, andreport data. Today accountants work with managers to get neededinformation. Among other things, they must be able to account fore-commerce transactions efficiently and safely, they often mustintegrate their accounting systems into ERP systems, and anincreasing number are beginning to use XBRL to communicateinformation electronically.1-24 The essence of the just-in-time philosophy is the elimination ofwaste, accomplished by reducing the time products spend in theproduction process and trying to eliminate the time spent inactivities that do not add value to the product.1-25 Moving tools and products that are in process from onelocation to another in a plant is an activity that does not add valueto the product. So changing the plant layout to eliminate wastedmovement and time improves production efficiency.1-26 Six Sigma is an important management philosophy, and it hasimportant implications for management accountants. Managementaccountants play a major role in Six Sigma applications as both theexperts on the measurements being used and as full members of thecross-functional teams that lead the efforts.12
  • 13. 1-27 The four major responsibilities are: (1) competence - developknowledge; know and obey laws, regulations, and technicalstandards; and perform appropriate analyses, (2) confidentiality -refrain from disclosing or using confidential information, (3)integrity - avoid conflicts of interest, refuse gifts that mightinfluence actions, recognize limitations, and avoid activities thatmight discredit the profession, and (4) credibility - communicateinformation fairly, objectively, and completely, withinconfidentiality constraints.1-28 Standards do not always provide the needed guidance.Sometimes an action borders on being unethical, but it is not clearlyan ethical violation. Other times two ethical standards conflict. Insituations such as these, accountants must make ethical judgments.1-29 (5-10 min.)Typical activities associated with the treasurer function include: Provision of capital Investor relations Short-term financing Banking and custody Credit management and collections of cash Investments Risk managementTypical activities associated with the controller function include: Planning for control Reporting and interpreting Evaluating and consulting Tax administration Government reporting Protection of assets Economic appraisal1-30 (5-10 min.)13
  • 14. Activities 2, 4, 5, and 6 are primarily associated with marketingdecisions.The management accountant would assist in these decisions asfollows:Airbus’s pricing decision requires cost data relevant to the newmethod of distributing spare parts. Amazon.com will need to knowthe costs of the advertising program as well as the additional costsof other value chain functions resulting from increased sales.TexMex Foods will need to know the incremental revenues andincremental costs associated with the special order. Target Storesneeds to know the impact on both revenues and costs of closing oneof its stores.1-31 (5-10 min.)Activities 1, 7, and 8 are primarily associated with productiondecisions.The management accountant would assist in these decisions asfollows.Saab needs an analysis of the costs associated with purchasing thepart compared to the costs of making the part. Dell will need toknow the costs of the training program and the savings associatedwith increased efficiencies in the setup and changeover activities.Ford needs to know the costs and salvage values of the replacementequipment, the proceeds of the sale of the old equipment, and theoperating savings associated with the use of the new equipment.14
  • 15. 1-32 (5 min.)1. Management 4. Management 7. Financial2. Management 5. Management3. Financial 6. Financial1-33 (10 min.)1. Performance ReportBudget Actual Variance ExplanationRevenues $330,000 $328,000 $(2,000) U Additional salesfrom newproducts*Advertising cost 30,000 32,500 (2,500) U New advertisingcampaignNet $4,500 U* From the New Products Report, seven new products were added.This exceeded the plan to add six.2. Factors that may not have been considered include:a. The costs of new products may have exceeded their price.b. Customer satisfaction with new products may not have beenpart of the new products report.c. Competitors’ reactions to the Starbucks store’s actions maynot have been anticipated.d. External uncontrollable factors such as increases inoperating costs, adverse weather, changes in the overalleconomy, new competitors entering the market, or keyemployee turnover may have decreased efficiency.1-34 (5 min.)15
  • 16. 1. Line, support 3. Staff, marketing 5. Staff, support2. Line, marketing 4. Staff, support 6. Line, production1-35 (30 min.)Microsoft is a company that most students will know andhave some understanding of what functions its managers perform.Nevertheless, this may not be an easy exercise for those who havelittle knowledge of how companies operate.Research & development – Because software companies mustcontinually come out with new products and upgrades to theircurrent products, this is a critical function for Microsoft. Morethan one-fourth of Microsoft’s operating expenses are devoted toR&D.Design of products, services, or processes – For Microsoft thedesign and R&D process probably overlap considerably. Productdesign is critical; process design is probably not. One essential partof design is beta testing – that is, field testing of new software. Thisquality-control step is essential to prevent customer dissatisfactionwith new products.Production – Microsoft produces disks and CD-ROMs and themanuals and packaging to go with them. However, they areincreasingly delivering software over the Internet, which takes aninitial process design and then few resources. It is not likely amajor focus for Microsoft.16
  • 17. Marketing – Microsoft spends more on sales and marketing than onany other operating expense. Increasing competition in softwaresales makes marketing essential to the company’s future. Thisfunction includes advertising and direct marketing activities, but italso includes activities of the company’s sales force.Distribution – This function is becoming simpler for Microsoft as itdelivers more and more software over the Internet. Although thecompany must stay abreast of competitors in delivery methods, thisis not likely to create a major competitive advantage ordisadvantage for Microsoft.Customer service – Customer service is important, but Microsofttries to minimize its costs in this area by product design – makingthings work right without needing deep computer expertise. Still,poor customer service can severely impact a company, so Microsoftmust attend to it.Support functions – Most of the time these are not a major focus.There is one exception recently for Microsoft. Legal support hasbeen front and center. The very future of the company was basedon court judgments for which good legal support was essential.1-36 (15-20 min.)The management accountants major purpose is to provideinformation that helps line managers in making decisions regardingthe planning and controlling of operations. The accountantsupplies information for scorekeeping, attention directing, andproblem solving. In turn, managers use this and other informationfor routine and non-routine decisions and for evaluatingsubordinates and the performance of sub-parts of the organization.Management accountants must walk a delicate line between (1)making sure that managers are properly using the pertinentinformation and (2) making sure that the managers, not theaccountants, are doing the actual managing.1-37 (5 min.)17
  • 18. Other costs of a poor ethical environment include legal costs andcosts due to high employee turnover. Other benefits of a goodethical environment include low employee turnover, low loss frominternal theft, and improved customer satisfaction resulting frombetter quality and service (that result from a more productive workenvironment).1-38 (5 min.)There are numerous examples.“You understand how important it is to record this sale before yearend, don’t you?”“Doing it this way is common for all companies in our business, sodon’t worry!”“Trust me, the inventory is at the warehouse.”18
  • 19. 1-39 (15-20 min.)This problem can form the basis of an introductory discussionof the entire field of management accounting. Text Exhibit 1-1provides more details.1. The focus of management accounting is on helping internalusers to make better decisions, whereas the focus of financialaccounting is on helping external users to make betterdecisions. Management accounting helps in making a host ofdecisions, including pricing, product choices, investments inequipment, making or buying goods and services, andmanager rewards.2. Generally accepted accounting principles constrain financialaccounting but not management accounting. For example, ifan organization wants to account for assets on the basis ofreplacement costs for internal purposes, no outside agency canprohibit such accounting. Of course, this means thatorganizations may have to keep more than one set of records.There is nothing immoral or unethical about having multiplesets of books, but they are expensive. Accounting data arecommodities, just like butter or eggs. Innovations in internalaccounting systems must meet the same cost-benefit tests thatother commodities endure. That is, their perceived increasesin benefits must exceed their perceived increases in costs.Ultimately, benefits are measured by whether managers makebetter decisions that result in increased net profits or costsavings.3. Budgets, the formal expressions of management’s plans, are amajor feature of management accounting, whereas they arenot as prominent in financial accounting. Budgets are majordevices for compelling and disciplining management planning.4. An important use of management accounting information isthe evaluation of performance, which often takes the form of19
  • 20. comparison of actual results against budgets, providingincentives and feedback to improve future decisions.5. Accounting systems have an enormous influence on thebehavior of individuals affected by them. Managementaccounting is more concerned with the likely behavioraleffects of various accounting alternatives that may be adoptedthan is financial accounting.1-40 (10 min.)The main point of this question is that cost information is crucialfor decisions regarding which products and services should beemphasized or de-emphasized. The incentives to measure costsprecisely are far greater when flat fees are being received instead ofreimbursements of costs.Note, too, that nonprofit organizations and profit-seekingorganizations have similar desires regarding managementaccounting. Accountability is now in fashion for many purposes,including justification of prices, cost control, and response tocriticisms by investors (whether they be donors, taxpayers, orothers).When somebodys money is at stake, accounting systems get muchlove and attention. In a survey of 550 hospitals, hospital financialexecutives said that improved cost accounting systems "are crucialto responding to changes in hospital payment mechanisms and thatbetter cost information is essential for more profitable and efficientoperations." Hospitals will increasingly identify costs by product(type of case), not just by departments.1-41 (10 min.)Paperwork and systems often seem to become ends inthemselves. However, the rationale that should underlie systems20
  • 21. design is the cost-benefit philosophy or approach that is implied inthe quotation. The aim is to get the managers and theirsubordinates collectively to make better decisions under one systemversus another system -- for a given level of costs.Marks & Spencer should look at each of the managementaccounting reports it produces with an eye toward how it helpsmanagers make better decisions. Does it provide neededscorekeeping? Does it direct attention to aspects of operations thatmight need altering? Does it provide information for specificmanagement decisions? These types of questions will help identifythe benefit of the information in the report.Then the company must consider the cost – not just the cost ofcollecting the data and preparing the reports, but the cost ofeducating managers to use the information and the cost of the timeto read, digest, and act on the information. Too much informationmay be costly because it makes it time-consuming (and thus costly)to sift through the reams of information to find the few items thatare important. An additional cost may be the loss of importantinformation because the total volume of information makes it toodifficult to ferret out the important items.21
  • 22. 1-42 (10 min.) Financial information is important in allcompanies. But how managers get and use financial informationcan differ depending on the culture and philosophies of thecompany.Top executives of a company often represent a functional areathat is critical to the competitive economic advantage of thecompany. If technology is crucial, engineers generally holdimportant executive positions. If marketing differentiates thecompany from others, marketing executives usually dominate. Butregardless of the source of a company’s competitive advantage, itssuccess will eventually be measured in economic terms. They mustattend to financial aspects to thrive and often even to survive.Management accountants must work with the dominantmanagers in any organization. The modern trend toward use ofcross-functional teams places management accountants at thecenter of the action regardless of what type of managers andexecutives dominate. Most companies realize that there is afinancial dimension to almost every major decision, so they wantthe financial experts, management accountants, involved in thedecisions. But to be accepted as an important part of these teams,the management accountants must know how to help managers invarious functional areas. In General Mills, if accountants can’t talkthe language of marketing, they will not have great influence. InArvinMeritor, if they do not understand the information needs ofengineers they will not provide value.22
  • 23. 1-43 (10-15 min.)1. Boeings competitive environment and manufacturing processeschanged greatly during the 1990s. An accounting system thatserved them well in their old environment would not necessarilybe optimal in today. Boeings management probably thoughtthat changes in the accounting system were necessary to producethe kind of information necessary to remain competitive.2. A cost-benefit criterion was probably used. Boeingsmanagement may not have quantified the costs and the benefits,but they certainly assessed whether the new system would helpdecisions enough to warrant the cost of the system.Many of the benefits of a better accounting system are hard tomeasure. They affect many strategic decisions of anorganization. Without accurate product costs, management willfind it difficult to assess the consequences of their decisions. Anaccurate accounting system will help to price airplanes andother products competitively.3. More accurate product costs will usually result in bettermanagement decisions. But if the cost of the accounting systemthat produces the more accurate costs is too high, it may be bestto forego the increased accuracy. The benefit of better decisionsmust exceed the added cost of the system for a change to bedesirable.23
  • 24. 1-44 (10 min.)1. There are many possible activities for each function of Nikesvalue chain. Some possibilities are:Research and development -- Determining changes incustomers tastes and preferences for shoes and sportswear tocome up with new products (maybe the next "Air Jordans").Product, service, and process design -- Design a shoe to meetthe increasing demands of competitive athletes.Production -- Determine where to produce products andnegotiate contracts with the companies producing them.Marketing -- Signing prominent athletes to endorse Nikesproducts.Distribution -- Select the best locations for warehouses fordistribution to retail outlets.Customer service -- Formulate return policies for productsthat customers perceive to be defective.2. Accounting information that aids managers decisionsincludes:Research and development -- Trends in sales for variousproducts, to determine which are becoming more and lesspopular.Product, service, and process design -- Production costs ofvarious shoe designs.24
  • 25. Production -- Measure total costs, including both purchasecost and transportation costs, for production in various partsof the world.Marketing -- The added profits generated by the added salesdue to product endorsements.Distribution -- Storage and shipping costs for differentalternative warehouse locations.Customer service -- The net cost of returned merchandise, tobe compared with the benefits of better customer relations.25
  • 26. 1-45 (10-15 min.) This problem can lead to a long or shortdiscussion. Pointing out the problems can be done reasonablyquickly. Formulating solutions can generate much discussion.1. The appropriate accounting information presented correctlyshould be helpful to managers. It is clear that Belton does notregard the accounting performance reports as helpful. Some keyproblems are:• Belton refers to “their” budget, meaning that the budgetbelongs to the controller’s department, not him and hisdepartment. Managers should help formulate the budgetand should accept it as a reasonable target.• The controller’s office shows up only when costs are overbudget. Controllers should not be “policemen.” Theyshould be business advisors who provide continualassistance not occasional reprimand.• Belton clearly does not understand the performancereports. An important role for the controller is educationof managers in how to use accounting information.• Belton believes the performance report has nothing to dowith what happens on the shop floor. He may be right.Accounting reports often arrive too late and are not specificenough to be useful to front-line managers. If so, thereports should be changed or the results used differently.• Paperwork takes time away from productive activity. Thisis especially a problem when the numbers have little valueto those putting in the time.• Budgeting is not taken seriously, so the numbers reportedby Belton and his subordinates are not reliable.• Things have gotten so bad that Belton had an attitudeproblem toward the controller’s office. Veracruz is meetinghim for the first time, and he is already disrespectful of her.26
  • 27. 2. Veracruz has major problems. Her first task is to get thecooperation of Belton, his subordinates, and those like them inother departments. This will probably involve changing theaccounting reports received by the line managers, and it willcertainly involve changes in how these reports are presented andused. If the reports are not useful, she needs to find out why.Then she can change the reports so that the managers find themhelpful. If they have useful information, she needs to showmanagers how they can use the information to make betterdecisions.Foremost, Veracruz has to change the attitudes of the linemanagers toward the controller’s department. This will taketime, and it will require some specific instances where thecontroller or her staff provides information that the managersperceive as useful. To do this, she may need to change theaccounting system to produce better information, and she needsto teach her controller’s department staff how to presentinformation in a nonthreatening way.There is no one solution to Veracruz’s problems. Differentmanagers would handle it in different ways. If students have hadexperience, there will be many suggestions about how to proceed.For students with little experience, it may be sufficient to pointout the variety of possible approaches.27
  • 28. 1-46 (10-15 min.)Accountants become the information experts in manycompanies. In a company such as Marmon, with its many variedsubsidiaries, the accounting system provides a link between thevarious operating companies. The accountants provide informationabout the operations of an individual unit, and they also show howthe units fit together as parts of the Marmon Group.Management accountants should work together withmanagers to determine what information the managers would finduseful. Then the accountants should help devise systems to producethat information, provided that its value is greater than its cost. Assuch, management accountants are information consultants tomanagers. Decisions are still the domain of managers, but theaccountants provide advice to help managers make better decisions.Once, accountants were considered “corporate cops,” staffmembers who reported on the failings of managers. They wereprimarily scorekeepers, but when the score showed somethingawry, they became informants - carriers of bad news to corporateheadquarters. Managers resented them. But today, goodmanagement accountants are allies of managers. They provideinformation that helps managers make better decisions, whichmakes the managers look good. Everyone is better off whenmanagement accountants focus on providing the information thataids management decisions.To be effective internal consultants, accountants must have abackground in accounting and information systems. In addition,they must have knowledge of all the functions of business and allthe areas of the value chain.28
  • 29. 1-47 (10-15 min.)1. Brigham’s decisions violate standards of competence andintegrity. Competence is violated because the most competentpersons apparently are not being hired, jeopardizing thecompetence of the accounting department. Further, Brighammay be violating equal opportunity employment laws andregulations.Integrity requires an accountant to avoid conflicts of interest,and hiring the sons of personal friends certainly appears to bea conflict of interest. Such hiring was possibly for thepersonal gain of Brigham at the expense of the company.Further, this practice subverts the company’s equalemployment opportunity policy.2. Merton’s first step normally would be to discuss this situationwith his boss. However, because the alleged unethicalbehavior is by his boss and Merton has already confrontedhim about it and been rebuffed, the next step seemswarranted. This would involve going to Brigham’s superior.(Alternately, some organizations have an individual, possiblycalled an ombudsperson, to whom Merton could report suchconcerns. Apparently McMillan Shipping Company does nothave such a person.) If the matter could not be resolved atthat level, he should continue up the line until reachingCreighton, the president. If equal employment opportunity isgenuinely a company priority, Creighton should be veryconcerned about Brigham’s actions.29
  • 30. What if the situation is not resolved to Merton’s satisfactionafter following the steps in the preceding paragraph? Thefinal step is to go directly to the Board of Directors. If that isunsatisfactory, there may be no recourse but to resign, sendingan explanatory memo to an appropriate high-level official ofthe company.Should Merton go to the press so that they will put onpressure to change the hiring practices? Such a step isgenerally not appropriate. It would put Merton in theposition of violating the ethical standard of confidentiality.The only person external to the firm with whom it isappropriate to discuss this issue is a confidential objectiveadvisor.1-48 (15-20 min.)1. Because of the standard of confidentiality, the information inthe geologists report should not be revealed.2. The standard of integrity would require one to reject theinvitation.3. This is a difficult ethical problem, one that deservesdiscussion. Two ethical standards apparently conflict.Confidentiality would lead to nondisclosure, provided therewas no legal requirement to do so. But credibility wouldindicate that the information about the additional lossesshould be used in making the earnings prediction. Theauthors think that credibility should take precedence here, butothers might disagree.4. The standard of competence, and to some extent the standardof integrity, would lead one to research the tax law beforedeciding whether to deduct the item.30
  • 31. 1-49 (15-25 min.)There are various possible answers. These are just some of theitems that might be mentioned. The only area were the magazine isexplicit in how it ranks companies is service to stockholders.1) Shareholders - The shareholder score is based on three-yearaverage total return (stock appreciation plus dividends) through2005. Top companies were Salesforce.com and Advanced MicroDevices.2) Community - Firms receive a strength rating for charitablegiving over 1.5 percent a year, innovative giving, support forhousing and education, and volunteer pro-grams. On the negativeside, a firm could receive community concerns for lending contro-versies, negative economic impact, or tax disputes.Top companieswere Green Mountain Coffee Roasters and Hewlett-Packard.3) Governance - The ranking considers transparency in politicalcontributions and effective social reporting. Concerns also includeexcessive CEO pay and accounting controversies. Top companieswere Green Mountain Coffee Roasters and Agilent Technologies.4) Diversity – This includes both internal performance, such aspercent of minority and women among employees, managers, andboard members, any EEOC complaints, diversity programs inplace, lawsuits regarding discrimination, accommodations for thedisabled, and external performance, such as serving disadvantaged,low-income, minority, and other generally under-servedpopulations. Top companies were Hewlett-Packard, AgilentTechnologies, and Texas Instruments.31
  • 32. 5) Employees – Positive aspects include profit sharing, strongretirement benefits, and employee involvement while negativeaspects include areas such as poor union relations and significantworkforce reductions. Top companies were Texas Instruments andGreen Mountain Coffee Roasters.6) Environment – Strengths include pollution prevention, cleanenergy, major use of recycled materials, and beneficial products.Concerns include hazardous waste sites, substantial penalties forenvironmental violations, or contributing significantly to climatechange. Top companies were Motorola, Agilent Technologies, andTimberland.7) Human rights – Includes a wide variety of items such asproviding good working conditions to foreign workers (e.g.avoiding sweatshops), supporting small-scale suppliers, andsupporting world health initiatives. Top companies were GreenMountain Coffee Roasters, Hewlett-Packard, Motorola,Timberland, Salesforce.com, and Cisco Systems.8) Products - Includes quality management programs, product-quality awards won, customer satisfaction measures, lawsuits fromcustomers, and so forth. Top companies were Salesforce.com andAdvanced Micro Devices.32
  • 33. 1-50 (10-15 min.)1. Line authority is held by those managers directly responsiblefor the production and sales of goods or services. Staffauthority is held by persons who have an indirectresponsibility for the production and sale of goods andservices. Staff members provide expertise, advice and supportfor line positions; line managers are directly responsible forachieving the basic objectives of the organization.Conflicts between line and staff can arise for many reasons,ranging from the types of people that are generally attractedto each type of position to their responsibilities in theorganization. Among the reasons are:• Staff personnel tend to be younger, better educated, moreprofessionally established.• Line managers see staff managers as threats to theirauthority.• Line managers are uncomfortable when they must rely onthe knowledge and expertise of staff.• Line managers often think staff managers overstep theirauthority and have a narrow view of the world.• Staff managers often think line managers ignore theiradvice and resist their ideas.2. Chen has a staff position, providing advice to the controller.His main conflicts will probably arise with the chiefaccountant and the managers under him. He reports to thechief accountant’s superior, but he prepares reports thataffect the operations in the chief accountant’s area ofresponsibility.33
  • 34. Paperman is in a staff position because accounting is notdirectly involved with sales or delivery of leasing services. Heprovides counsel and advice to all the line managers and mostof the staff managers in the company. Conflicts may arise ifhe tries to exert authority instead of just giving advice or if theother managers ignore his advice.Hodge is in a line position because she is an integral part ofthe company’s main line of business, leasing equipment. Hermain conflicts are likely to arise in areas such as requisitioningof equipment and billing of customers where she must rely onother departments over which she has no authority.Shevlin is in a staff position and offers advice to most othermanagers in the company. Conflicts might arise if managersperceive her advertising of positions or screening ofcandidates as not fulfilling their needs, or if she tries to exerther preferences instead of the hiring department’s preferencesinto the advertising and screening activities. Conflicts can alsoarise in the performance evaluation functions, where she maybe enforcing an unpopular policy.34
  • 35. 1-51 (20-30 min.)1. In accordance with textbook Exhibit 1-7, IMA Statement ofEthical Professional Practice, management accountants shouldnot condone the commission of acts by their organization thatviolate the standards of ethical conduct. The specificstandards that apply are:• competence. Management accountants have aresponsibility to perform their professional duties inaccordance with relevant laws and regulations.• confidentiality. Management accountants must refrainfrom disclosing confidential information unless legallyobligated to do so. Rachel O’Casey may have a legalresponsibility to take some action.• integrity. Management accountants have a responsibility to- Refrain from engaging in any conduct that wouldprejudice carrying out duties ethically.- refrain from engaging in or supporting any activity thatwould discredit the profession.• credibility. Management accountants have a responsibilityto communicate information fairly and objectively. Theyalso should disclose all relevant information that couldreasonably be expected to influence a user’s understandingof reports, analyses, and recommendations.35
  • 36. 2. In accordance with Exhibit 1-7, the first alternative beingconsidered by Rachel O’Casey, seeking the advice of her boss,is appropriate. To resolve an ethical conflict, the first steprecommended is to discuss the problem with the immediatesuperior, unless it appears that this individual is involved inthe conflict. In this case, it does not appear that O’Casey’sboss is involved.Releasing the information to the local newspaper would be aninappropriate course of action. Communication ofconfidential information to anyone outside of the company isinappropriate unless there is a legal obligation to do so, inwhich case O’Casey should contact the proper authorities.Contacting a member of the board of directors would be aninappropriate action at this time. In accordance with Exhibit1-7, O’Casey should report the conflict to successively higherlevels within the organization and turn to the board ofdirectors only if the problem is not resolved at lower levels.3. Assuming there is no established company policy in place toresolve the conflict, O’Casey should report the problem tosuccessively higher levels of management until it issatisfactorily resolved. There is no requirement for O’Caseyto inform her immediate supervisor of this action, because heis involved in the conflict. O’Casey could also clarify thesituation by confidential discussion with an objective advisorto obtain an understanding of possible courses of action. Ifthe conflict is not resolved after exhausting all courses ofinternal review, O’Casey may have no other recourse than toresign from the organization and submit an informativememorandum to an appropriate representative of theorganization.1-52 (15-25 min.)36
  • 37. 1. Nike’s principal business activity is the design, developmentand worldwide marketing of high quality footwear, apparel,equipment, and accessory products. It is the largest seller ofathletic footwear and athletic apparel in the world.2. Nike has 212 retail outlets in the U.S. and 206 abroad. Most ofthese are Nike factory stores that sell primarily overstock andcloseout merchandise.3. Nike’s CFO is Donald W. Blair. He came to Nike fromPepsico in 1999. Before that he was a certified publicaccountant (CPA) with Deloitte, Haskins, and Sells (nowDeloitte & Touche).4. Nike manufactures 98% of its footwear in China, Vietnam,Indonesia, and Thailand. Most of this manufacturing is byhundreds of contractors. Although Nike imposes on thesecontractors a code of conduct and other environmental,health, and safety standards, the contractors may not alwaysbe in compliance. This could harm Nike’s reputation for highethical standards.1-53 (20-30 min.) For the solution, see the Prentice Hall Web site,www.prenhall.com/37
  • 38. 1-54 (90 min. or more)The purpose of this exercise is to learn about the practice ofmanagement accounting. Students often have the mistakenimpression that accountants sit in the back room and preparereports. These articles illustrate the varied skills and abilities thatare necessary to be a successful management accountant.The exercise also focuses on critical reading -- identifying themost important points made in an article. It also shows howdifferent students will focus on different aspects of each article.What one student considers important, others might thinkunimportant. Prioritizing the lessons will bring out differences inopinion, and create a need to form consensus from possiblyconflicting views.Finally, students should come away with a betterunderstanding of why they are studying management accounting,whether they plan to be an accountant or simply a user ofaccounting information and services.38
  • 39. 1-55 (30-45 min.)NOTE TO INSTRUCTOR. This solution is based on the web siteas it was in 2007. Be sure to examine the current web site beforeassigning this problem, as the information there may have changed.1. The Institute of Management Accountants is the worldsleading organization dedicated to empowering managementaccounting and finance professionals to drive businessperformance.2. The mission of the IMA is to provide a dynamic forum formanagement accounting and finance professionals to develop andadvance their careers through certification, research and practicedevelopment, education, networking, and the advocacy of thehighest ethical and professional practices.3. The IMA offers education through development programs,conferences, courses, and certification training. It categorizes itsprofessional development opportunities into these categories: CMALearning System, CPE Self-study, Ethics, Webinars & Live Events,Conferences, and Career Center.4. The IMA has a detailed code of ethics. It specifiesaccountants’ obligations to the public, their profession, theirorganization, and to themselves. It also addresses how to solveethical dilemmas. It makes it clear that for accountants to fulfilltheir function in an organization, they must both be ethical and beperceived as being ethical.5. The answer will depend upon the state where the studentresides. The link provides the name of the chapters in the state anda link to information about the chapter.39