Solution Manual, Managerial Accounting Hansen Mowen 8th Editions_ch 1

7/31/2019 Solution Manual, Managerial Accounting Hansen Mowen 8th Editions_ch 1

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CHAPTER 1INTRODUCTION: THE ROLE, HISTORY, AND

DIRECTION OF MANAGEMENT ACCOUNTING

QUESTIONS FOR WRITING AND DISCUSSION

1. A management accounting information sys-tem is an information system that producesoutputs using inputs and processes neededto satisfy specific managerial objectives.

2. The inputs of a management accountinginformation system are economic events.The processes transform the inputs into out-puts and are such things as collecting, mea-suring, storing, analyzing, reporting, and

managing. Typical outputs include specialreports, product costs, customer costs, per-formance reports, budgets, and personalcommunication.

3. The three objectives of a management ac-counting information system are as follows:To provide information for costing out ser-vices, products, and other objects of interestto management; to provide information forplanning, controlling, evaluation, and conti-nuous improvement; and to provide informa-tion for decision making.

4. All organizationsmanufacturing, mer-

chandising, and servicesmust have agood management accounting informationsystem. Management accounting conceptsand procedures are not restricted to any onetype of organization.

5. The users of management accounting in-formation are managers and workers withinthe organization. Anyone internal to an or-ganization is a potential user of manage-ment accounting information.

6. Management accounting information is usedto cost out objects (for example, servicesand products) and to aid in planning, control-

ling, evaluation, continuous improvement,and decision making.

7. Both financial and nonfinancial informationshould be provided by the management ac-counting information system. Nonfinancialinformation provides insights useful for con-trolling operationsit is easily used by op-erational workers. Financial information iscritical for evaluating the success of opera-tional control.

8. Continuous improvement means searchingfor ways of increasing overall efficiency andproductivity of activities by reducing waste,increasing quality, and reducing costs.

9. Employee empowerment is allowing opera-tional workers to plan, control, and makedecisions without explicit authorization frommiddle- and higher-level managers.

10. Operational workers must be informed sothat they can evaluate and monitor the effec-tiveness of their decisions.

11. Planning establishes performance stan-dards, feedback compares actual perfor-mance with planned performance, and con-trolling uses feedback to evaluate deviationsfrom plans.

12. Performance reports are formal reports thatcompare actual data with planned data orbenchmarks and thus provide signals tomanagers that allow them to take correctiveactions.

13. Management accounting differs from finan-cial accounting in the following major ways:(1) internally focused, (2) no mandatedrules, (3) financial and nonfinancial; subjec-tive information possible, (4) emphasis onthe future, (5) internal evaluation and deci-sions based on very detailed information, (6)broad, multidisciplinary.

14. The requirement to prepare reports for ex-ternal users created a demand for a particu-lar accounting information system. This sys-tem was geared to produce inventory costs.

Aggregate average cost information appar-ently was sufficient for most internal deci-sions. Thus, management accounting be-came an extension of the financialaccounting system. This outcome was prob-ably due to a favorable cost-benefit tradeoff.The incremental cost of producing


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more accurate product costs was not offsetby the incremental benefits of improved de-cision making. However, significant changesin the competitive environment have in-creased the cost of making bad decisions,thus increasing the benefits of more accu-

rate information. Also, information technolo-gy has decreased the cost of processing da-ta. These two events have led to a demandfor an improved management accounting in-formation system.

15. Activity-based management is an importantapproach that focuses managements atten-tion on activities with the objective of improv-ing the value received by the customer andthe profit achieved by providing this value. Itis important because it is the heart of thecontemporary management accounting sys-tem, offering increased accuracy in productcosting (through the use of activity-basedcosting) and the ability to evaluate and con-trol activities (through process value analy-sis).

16. Customer value is the difference betweencustomer realization (what a customer rece-ives) and customer sacrifice (what a cus-tomer gives up). Focusing on customer val-ue forces managers to consider the entireset of value-chain activities, including whathappens after a product is sold. This createsa demand for a broader set of information

than that found in a traditional system.17. The internal value chain is the set of activi-

ties required to design, develop, produce,market, distribute, and service a product (theproduct can be a service). To increase cus-tomer value, managers must assess the ef-fect each activity in the chain has on cus-tomer value, keeping those that add valueand eliminating those that do not.

18. Industrial value chain is the linked set ofvalue-creating activities from raw materialsthrough the end-use customer. Understand-ing the industrial value chain is importantbecause it enables a manager to identify theimportant internal and external linkages anduse these linkages to create a competitiveadvantage.

19. Supply chain management is concernedwith managing material flows starting withsuppliers and upstream suppliers, moving toproduction, and finishing with the distributionof finished goods to customers and down-

stream customers. Supply chain manage-ment focuses on the entire industrial valuechain because potential benefits may bereaped by understanding upstream suppliersand downstream customers.

20. E-business is any business transaction orinformation exchange that is executed usinginformation and communication technology.Management accountants provide informa-tion for e-business settings, e.g., the cost ofprocessing an electronic transaction versusthe cost of a paper transaction.

21. Managing the value chain requires a cross-functional perspective. Because of the inter-relationships that exist in the value chain, adecision can affect many different functions.Information must be gathered and reportedso that these effects can be assessed and

decision making improved.

22. Decreasing the time required to performactivities may increase quality and decreasecosts. The management accounting systemshould be able to document the relationshipbetween time reductions and such things asquality and cost both on a projected orbefore-the-fact basis and on an after-the-factbasis. This enhances planning, controlling,and decision making.

23. A line position has direct responsibility forcarrying out the basic missions of an organi-

zation. A staff position has indirect responsi-bility for the basic missions and provides asupportive role for line activities.

24. Yes. For most organizations, the controllershould be a member of the top managementstaff. The controller is the financial expert ofan organization and can provide critical ad-vice and insights.

25. The controller is responsible for both internaland external accounting. These responsibili-ties usually include diverse activities such astaxes, SEC reports, cost accounting, bud-

geting, internal auditing, financial account-ing, and systems accounting.

26. Ethical behavior is concerned with makingright choices and usually involves sacrificingindividual self-interest for the well-being ofothers. It is possible to teach ethical beha-vior in virtually any course. By being intro-duced to ethical dilemmas in managementaccounting, students can be made aware of


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the behavior that is expected in the businessworld and, in particular, for management ac-countants.

27. Yes. There is some evidence that ethicalbehavior actually is good business. In other

words, the market and consumers appre-ciate ethical behavior and are willing to re-ward those who adopt it. In addition, a com-pany with higher ethical standards wouldexperience less exposure to manipulation offinancial data for gain.

28. Yes. As management accountants becomemore informed about what behavior is ac-ceptable and what is not, we should expecta favorable response. This response can bereinforced by the IMA imposing sanctions forserious violations of the code.

29. The three forms of certification are the CMA,the CPA, and the CIA. Although each certifi-cation can be valuable for management ac-countants, the CMA is tailored to fit their

needs. The CPA has a public-accountingorientation, and the CIA has an internal-auditing orientation. Only the CMA specifi-cally addresses the professional require-ments of a management accountant.

30. The Sarbanes-Oxley Act (SOX) establishedstronger government control and regulationof publicly-traded companies in the UnitedStates. Major sections of SOX include: es-tablishment of the Public Company Account-ing Oversight Board, enhanced auditor in-dependence, tightened regulation ofcorporate governance, control over man-agement, and management/auditor assess-ment of the firms internal controls. SOX alsorequires public companies to state whetheror not the top corporate officers are bound tothe company code of ethics.

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EXERCISES

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1. Inputs: a, d, f, j2. Processes: b, g, m

3. Outputs: c, i, l4. System objectives: e, h, k, n

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a. Management

b. Financial

c. Management

d. Financial

e. Financial

f. Management

g. Management

h. Management

i. Financial

j. Management

k. Management

l. Financial

m. Financial

n. Management

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1. b

2. c

3. f

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1. e

2. b

3. c

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1. k

2. g

3. a

4. f

5. i

6. h

7. j

8. c

9. b

10. e

11. d


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Penny is staff. She is in a support roleshe prepares reports and helps explainand interpret them. Her role is to help the line managers more effectively carryout their responsibilities.

Karol is line. She is responsible for selling product. A basic objective for the exis-tence of a manufacturing firm is to sell product. Karol has direct responsibility fora basic objective and therefore holds a line position.

Porter is staff. He is in a support role to production. He does not make the prod-ucts himself. Instead, he ensures that the appropriate production equipment is inplace for manufacturing.

Joe is a line manager. He has direct responsibility for producing a garden hose.Clearly, one of the basic objectives for the existence of a manufacturing firm is to

make a product. Thus, Joe has direct responsibility for a basic objective andtherefore holds a line position.

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A manager has a responsibility to the company as well as society. If he/she laysoff the employees, he/she ignores both of these responsibilities. In effect, themanager would be pursuing his/her self-interest at the expense of the companyand the salespeople. While pursuit of self-interest is not necessarily unethical, itcan be if it harms others. In this case, the managers action could result in lowerprofits for the company because sales may decrease and unnecessary training

costs will be incurred when the positions are refilled the following year. Similarly,it is unjust to penalize productive employees simply to earn a bonus. The rightchoice is to retain the three salespeople. Although the manager is not a manage-ment accountant, he/she is violating the ethical standard that requires the refusalof any gift or favor (bonus) that would influence or appear to influence their ac-tions.

The reward system, in part, encouraged this behavior. Apparently, the manager ispaid a bonus if profits exceed 10 percent of planned profits. By basing reward ona short-run measure such as profits, the manager has the incentive to manipulateearnings in the short run. One way of manipulating annual earnings is to reduce

discretionary expenditures.This type of behavior can be discouraged by expanding the performancemea-sures to include long-run factors like market share, productivity, andpersonnel development. The accounting system can also be used to tracktrends (e.g., training costs over time). Moreover, managers can be requiredto provide extensive justification for significant changes in discretionaryexpenses.


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a. By the time most students graduate from high school, they have not hadmuch exposure to business. Therefore, they do not have full knowledgeof acceptable behavior for the business environment. Students may notknow that certain practices are unethical because they may not be famil-iar with the behavioral norms associated with these practices. Oncestudents begin to learn business practices, they begin to see what ethi-cal dilemmas can arise in a business context. They then are able to ap-ply the moral training they have had to deal with the situations. Fur-thermore, evidence exists that ethical reasoning can be changed for thebetter. Thus, instruction in ethics can be a vital part of a students edu-cation.

b. Sacrificing self-interest is a choice that each person must make. Others may

be influenced by those individuals who behave ethically. Individuals commit-ted to ethical behavior produce societies committed to ethical behavior (notvice versa).

c. While this sounds noble, many would disagree that managers are first seek-ing to serve others and accept personal financial rewards as a by-product of agood job. Pursuit of self-interest and personal financial well-being is not nec-essarily unethical. It is only when this pursuit is done at the expense of thecollective good that the behavior becomes questionable.

d. It is often true that unethical firms and individuals suffer financially. In thelong run, there is some evidence that ethical behavior pays off. It is doubtful,however, that every unethical firm or individual is wiped out financially. There

are too many notable exceptions (for example, the selling of drugs by orga-nized crime).

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No, it is not ethical for Steve to demand a kickback from Dave. Dave should notagree to this. This brief situation actually happened to Dave, a friend of the au-thor. The author advised Dave not to accept the deal. Dave then checked with hislawyer, who bluntly told him the deal was illegal. Dave did not accept.

110a. CPA

b. CIA

c. CMA

d. CPA

e. CPA

f. CMA

g. CMA, CPA, CIA

h. CMA, CPA, CIA


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PROBLEMS

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1. Excellence teams and minicompanies both have the objective of involvingproduction line personnel more fully in the management process so that thecompany can take advantage of the direct contact and knowledge that operat-ing workers have about production and their work environment. This willhopefully translate into continuous improvement of operating performance.The objectives seem to be realized. Duffy has increased profits and reducedcosts, attributing much of the change to the contributions of the excellenceteams. The same is true for the minicompaniesmuch of the success inquality improvements appears to be grounded in this organizational change.

2. Employee empowerment is a key element of continuous improvement. Oper-

ating workers have tremendous skills, knowledge, and firsthand contact withthe operating environment, all of which can be exploited to discover new andmore efficient ways of producing. As employees are allowed more input, theirself-esteem grows and their commitment to the company increases. Moralealso increases, making for a more pleasant and productive environment.There are potential disadvantages. Too much latitude in employee empower-ment might sidetrack employees to the point where they begin to attack per-sonalities; discuss and argue about wage and hour considerations (or othergrievances); or try to become involved in hiring, firing, and disciplinary mat-ters. Many of these matters are best left centralized, and some skillful man-agement is needed to ensure that operating employees are primarily involved

in improving efficiency.

3. Management accounting information should be used to inform empoweredemployees so that they can identify problems and monitor and evaluate theeffects of decisions they make. This information will only be valuable if it isdelivered on a timely basis.

4. Quality culture means that the employees of the organization have an internalcommitment to producing high-quality products and services. A learning or-ganization means that the employees are always seeking new and better ways

of doing thingsthey have a commitment to continuous improvement.


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A. Decision making; Role: Information about the cost of performing the varioustests.

B. Planning and controlling; Role: Feedback about the actual defective rate ver-sus the planned rate.

C. Planning; Role: Pro forma income statement and cash budget.

D. Decision making; Role: Projection of future cash flows and analysis of the ef-fects on unit cost and cycle time.

E. Planning; Role: Providing unit prices and costs so that a cost-volume-profitanalysis can be done.

F. Decision making; Role: Identifying avoidable costs.

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1. The total product is the product and its features (processing speed, diskdrives, software packages, and so on), the service, the operating and main-tenance requirements, and the delivery speed.

2. One company is emphasizing low costs, and the other is attempting to diffe-rentiate its PC by offering faster delivery and higher-quality service.

3. The Confiars service component and its delivery time appear to be better

than Drantexs. Thus, the realization of these features appears to outweighthe additional sacrifice (the additional operating and maintenance cost) asso-ciated with the Confiar PC. The implications for management accounting arestraightforward. The management accounting information system should col-lect and report information about customer realization and sacrifice. Much ofthis information is external to the firm but clearly needed by management.

4. Better quality and shorter delivery time increase customer realization, whilelowering the price decreases customer sacrifice. In total, customer value hasincreased and presumably this should make the Drantex PC much more com-petitive. This example illustrates how quality, time, and costs are essential

competitive weapons. It also illustrates how critical it is that the managementaccounting system collect and report data concerning these three dimen-sions.


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Planning. The management accountant gains an understanding of the impact onthe organization of planned transactions (i.e., analyzing strengths and weak-nesses) and economic events, both strategic and tactical, and sets obtainable

goals for the organization. The development of budgets is an example of plan-ning.

Controlling. The management accountant ensures the integrity of financial infor-mation, monitors performance against budgets and goals, and provides informa-tion internally for decision making. Comparing actual performance against bud-geted performance and taking corrective action where necessary is an example ofcontrolling. Internal auditing is another example.

Evaluating Performance. The management accountant judges and analyzes theimplications of various past and expected events and then chooses the optimumcourse of action. The management accountant also translates data and commu-nicates the conclusions. Graphical analysis (such as trend, bar charts, or regres-sion) and reports comparing actual costs with budgeted costs are examples ofevaluating performance.

Ensuring Accountability of Resources. The management accountant implementsa reporting system closely aligned to organizational goals that contributes to themeasurement of the effective use of resources and safeguarding of assets. Internalreporting such as comparison of actual to budget is an example of accountability.

External Reporting. The management accountant prepares reports in accordancewith generally accepted accounting principles and then disseminates this infor-mation to shareholders, creditors, and regulatory and tax agencies. An annual re-port or a credit application are examples of external reporting. (CMA adapted)

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The changes that are being proposed violate the following ethical standards:

Competence. Top managements request of Roger Deerling to account for thecompanys information in a manner that is not in accordance with generally ac-cepted accounting principles is in violation of the standard to perform profes-sional duties in accordance with relevant laws, regulations, and technical stan-dards.


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115 Concluded

Confidentiality. Top management has violated the ethical standard to refrainfrom using confidential information for unethical or illegal advantage (personal

job security).

Integrity. Top management clearly is in violation of the standard to avoid appar-ent conflicts of interest and to advise all parties (other shareholders) of any po-tential conflicts.

Credibility. Top managements restriction and distortion of Alerts financial in-formation violates the standard to communicate information fairly and objective-ly.

By telling Deerling to restrict the disclosure of the changes, top management isclearly in violation of the standard to communicate information fairly and objec-tively.

To resolve the ethical dilemma, Roger Deerling should first determine if the com-pany has an established policy in place. If so, he should follow the prescribedpolicies in resolving the ethical conflict. If there is no policy, then the specificsteps are as follows:

To discuss the issue with his immediate supervisor, unless the supervisor isinvolved, in which case, he should continue to the next management level.Roger may need to discuss the issue with the Audit Committee of theBoard of Directors, or owners. Any contact with levels above his immediatesupervisor should be initiated with the supervisors knowledge, as long asthe supervisor is not involved. As long as Roger does not believe a law wasbroken, he should not communicate the problem to outside authorities.

To clarify relevant concepts by confidential discussion with an objective advi-sor or an IMA Ethics Counselor to obtain possible courses of action.

Consult (his) own attorney as to legal obligations and rights concerning theethical conflict.

(CMA adapted)


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By discussing the possible sale of Websons common stock with members of thetroubleshooting team, Maureen Hughes has violated the following standards ofethical conduct:

Competence. Hughes has an obligation to perform her duties in accordance withrelevant laws and regulations. By discussing the information she overheard,Hughes may have violated laws regulating the use of inside information. (CMAadapted)

Confidentiality. Hughes has disclosed confidential information acquired in thecourse of her work that she has not been authorized to share with peers and oth-ers within the organization. In addition, she has not informed subordinates of theconfidential nature of the information nor has she attempted to prevent the fur-ther distribution of this information.

Integrity. By discussing this information, Hughes has engaged in an activity thatwould discredit her profession and prejudice her ability to carry out her dutiesethically.

Credibility. Hughes has violated the requirement to communicate all informationfairly and objectively.


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John Brogans behavior is unethical for the following reasons:

1. Competence

Brogan is undermining the preparation of complete and clear reports.

2. Confidentiality

Brogan is disclosing confidential information to someone outside thecompany (Sara Wiley).

Brogan appears to be using confidential information for unethical ad-vantage (i.e., brother-in-laws personal objectives).

3. Integrity

By curtailing customer complaints, Brogan has failed to:

avoid a conflict of interest.

refrain from engaging in conduct that might prejudice the carryingout of his duties.

4. Objectivity

Brogan did not:

communicate information fairly and objectively. disclose fully all relevant information.

(CMA adapted)

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Answers will vary.

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Solution Manual, Managerial Accounting Hansen Mowen 8th Editions_ch 1