Chapter 1, The Manager and Management Accounting

Accounting Discipline Overview

 Management accounting—measures, analyzes, and reports financial and nonfinancial information to help
managers make decisions to fulfill organizational goals. Management accounting need not be GAAP compliant.

 Financial accounting—focuses on reporting to external users including investors, creditors, banks, suppliers, and
governmental agencies. Financial statements must be based on GAAP.

Accounting Discipline Overview, concluded

 Cost accounting – measures, analyzes and reports financial and nonfinancial information related to the costs of
acquiring or using resources in an organization.

 Today, most accounting professionals take the position that cost information is part of management accounting;
therefore, the distinction between the two is not clear-cut and in this book, we often use the terms
interchangeably.

Major differences between management and financial accounting

Strategy and Management Accounting

 Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace.

There are two broad strategies: cost leadership or product differentiation

 Strategic cost management—describes cost management that specifically focuses on strategic issues.

Strategy and Management Accounting, concluded

Management accounting helps answer important questions such as:

 Who are our most important customers, and how can we be competitive and deliver value to them?
  What substitute products exist in the marketplace, and how do they differ from our own?

 What is our most critical capability?

 Will adequate cash be available to fund the strategy or will additional funds need to be raised?

Management Accounting and Value

 Creating value is an important part of planning and implementing strategy.

 Value is the usefulness a customer gains from a company’s product or service. The entire customer experience
determines the value a customer derives from a product.

Management Accounting and Value, concluded

 The Value chain is the sequence of business functions in which a product is made progressively more useful to
customers.

 The Value chain consists of:

1. Research & development

2. Design of Products and Processes
3. Production
4. Marketing
5. Distribution
6. Customer service
The Value Chain Illustrated

A Value Chain Implementation

Supply-chain analysis

 Production and Distribution are the parts of the value chain associated with producing and delivering a product
or service.

 These two functions together are known as the Supply-Chain

 The supply chain describes the flow of goods, services and information from the initial sources of materials,
services, and information to their delivery regardless of whether the activities occur in one organization or in
multiple organizations.

Key Success Factors

 Customers want companies to use the value chain and supply chain to deliver ever-improving levels of
performance when it comes to several (or even all) of the following:

 Cost and efficiency

 Quality
 Time
 Innovation
 Sustainability
A Five-Step Decision Making Process in Planning and Control

1. Identify the problem and uncertainties.

2. Obtain information.

3. Make predictions about the future.

4. Make decisions by choosing between alternatives.

5. Implement the decision, evaluate performance, and learn.

Planning and Control Systems

 Planning selects goals and strategies, predicts results, decides how to attain goals, and communicates this to the
organization.

 Budget—the most important planning tool-is the quantitative expression of a plan of activity by
management and is an aid to coordinating what needs to be done to execute that plan.

 Control takes actions that implement the planning decision, evaluates performance, and provides feedback and
learning to the organization.

Management Accounting Guidelines

Three guidelines help management accountants provide the most value to the strategic and operational decision-
making of their companies:

 Cost–benefit approach: benefits of an action/purchase generally must exceed costs as a basic decision rule.

 Behavioral and technical considerations: people are involved in decisions, not just dollars and cents.

 Different Costs for Different Purposes: Managers use alternative ways to compute costs in different decision-
making situations.
A Typical Organizational Structure and the Management Accountant

Professional Ethics

 The four standards of ethical conduct for management accountants as advanced by the Institute of
Management Accountants are:

 Competence
 Confidentiality
 Integrity
 Objectivity
Sarbanes-oxley act (sox)
The Sarbanes-Oxley legislation was passed in 2002 in response to a series of corporate scandals. The act focuses on
improving:
1. Internal controls
2. Corporate governance
3. Monitoring of managers
4. Disclosure practices of public companies

How is financial accounting different from management accounting?

 Financial accounting is used to develop reports for external users on past financial performance using GAAP.
Management accounting is used to provide future-oriented information to help managers (internal users) make
decisions and achieve an organization’s goals.

How do management accountants support strategic decisions?

 Management accountants contribute to strategic decisions by providing information about the sources of
competitive advantage.
How do companies add value, and what are the dimensions of performance that customers are expecting of
companies?

 Companies add value through research and development (R&D), design of products and processes, production,
marketing, distribution, and customer service. Customers want companies to deliver performance through cost
and efficiency, quality, timeliness, and innovation.

How do managers make decisions to implement strategy?

 Managers use a five-step decision-making process to implement strategy: (1) identify the problem and
uncertainties; (2) obtain information; (3) make predictions about the future; (4) make decisions by choosing
among alternatives; and (5) implement the decision, evaluate performance, and learn. The first four steps are
planning decisions. They include deciding on an organization’s goals, predicting results under various alternative
ways of achieving those goals, and deciding how to attain the desired goals. Step 5 is the control decision, which
includes taking actions to implement the planning decisions, evaluating past performance, and providing
feedback that will help future decision making.

What guidelines do management accountants use?

 Three guidelines that help management accountants increase their value to managers are (a) employing a cost–
benefit approach, (b) recognizing behavioral as well as technical considerations, and (c) identifying different
costs for different purposes.

Where does the management accounting function fit into an organization’s structure?

 Management accounting is an integral part of the controller’s function. In most organizations, the controller
reports to the chief financial officer, who is a key member of the top management team.

What are the ethical responsibilities of management accountants?

 Management accountants have ethical responsibilities that relate to competence, confidentiality, integrity, and
credibility.

1-28 Planning and control decisions, Internet company. PostNews.com offers its subscribers several services, such as
an annotated TV guide and local-area information on weather, restaurants, and movie theaters. Its main revenue sources
are fees for banner advertisements and fees from subscribers. Recent data are as follows:

Month/Year Advertising Actual Number of Monthly Fee per

Revenues Subscribers Subscriber
June 2015 $ 415,972 29,745 $15.50
December 2015 867,246 55,223 20.50
June 2016 892,134 59,641 20.50
December 2016 1,517,950 87,674 20.50
June 2017 2,976,538 147,921 20.50

The following decisions were made from June through October 2017:
a. June 2017: Raised subscription fee to $25.50 per month from July 2017 onward. The budgeted number of subscribers
for this monthly fee is shown in the following table.
b. June 2017: Informed existing subscribers that from July onward, monthly fee would be $25.50.
c. July 2017: Offered e-mail service to subscribers and upgraded other online services.
d. October 2017: Dismissed the vice president of marketing after significant slowdown in subscribers and subscription
revenues, based on July through September 2017 data in the following table.
e. October 2017: Reduced subscription fee to $22.50 per month from November 2017 onward.
Results for July–September 2017 are as follows:

Month/Year Budgeted Number of Actual Number of Monthly Fee per

Subscribers Subscribers Subscriber

July 2017 145,000 129,250 $25.50

August 2017 155,000 142,726 25.50

September 2017 165,000 145,643 25.50

Required:
1. Classify each of the decisions (a–e) as a planning or a control decision.
2. Give two examples of other planning decisions and two examples of other control decisions that may be made at
PostNews.com.

1-29 Strategic decisions and management accounting. Consider the following series of independent situations in
which a firm is about to make a strategic decision.
Decisions
a. Julian Phones is about to decide whether to launch production and sale of a cell phone with standard features.
b. Flint Computers is trying to decide whether to produce and sell a new home computer software package that includes
the ability to interface with a thermostat and a refrigerator. There is no such software currently on the market.
c. Maria Cosmetics has been asked to provide a “store brand” facial cream that will be sold at discount retail stores.
d. Jansen Computers is considering developing a special line of computers that can be both a tablet and a computer.
Required:
1. For each decision, state whether the company is following a cost leadership or a product differentiation strategy.
2. For each decision, discuss what information the management accountant can provide about the source of competitive
advantage for these firms.

1-30 Strategic decisions and management accounting. Consider the following series of independent situations in which
a firm is about to make a strategic decision.
Decisions
a. A running shoe manufacturer is weighing whether to purchase leather from a cheaper supplier in order to compete
with lower priced competitors.
b. An office supply store is considering adding a delivery service that its competitors do not have.
c. A regional retailer is deciding whether to install self-check-out counters. This technology will reduce the number of
check-out clerks required in the store.
d. A local florist is considering hiring a horticulture specialist to help customers with gardening questions.

Required:
1. For each decision, state whether the company is following a cost leadership or a product differentiation strategy.
2. For each decision, discuss what information the managerial accountant can provide about the source of competitive
advantage for these firms.

1-1 How does management accounting differ from financial accounting?

Management accounting measures, analyzes, and reports financial and nonfinancial information that helps managers make
decisions to fulfill the goals of an organization. It focuses on internal reporting and is not restricted by generally accepted
accounting principles (GAAP).
Financial accounting focuses on reporting to external parties such as investors, government agencies, and banks. It
measures and records business transactions and provides financial statements that are based on generally accepted
accounting principles (GAAP).
Other differences include (1) management accounting emphasizes the future (not the past), and (2) management
accounting influences the behavior of managers and other employees (rather than primarily reporting economic events).

1-2 “Management accounting should not fit the straitjacket of financial accounting.” Explain and give an example.
Financial accounting is constrained by generally accepted accounting principles. Management accounting is not restricted
to these principles. The result is that
 management accounting allows managers to charge interest on owners’ capital to help judge a division’s
performance, even though such a charge is not allowed under GAAP,
 management accounting can include assets or liabilities (such as “brand names” developed internally) not
recognized under GAAP, and
 management accounting can use asset or liability measurement rules (such as present values or resale prices) not
permitted under GAAP.

1-3 How can a management accountant help formulate strategy?

Management accountants can help to formulate strategy by providing information about the sources of competitive
advantage—for example, the cost, productivity, or efficiency advantage of their company relative to competitors or the
premium prices a company can charge relative to the costs of adding features that make its products or services distinctive.

1-4 Describe the business functions in the value chain.

The business functions in the value chain are
 Research and development—generating and experimenting with ideas related to new products, services, or
processes.
 Design of products and processes—detailed planning, engineering, and testing of products and processes.
 Production—procuring, transporting, storing, coordinating and assembling resources to produce a product or
deliver a service.
 Marketing—promoting and selling products or services to customers or prospective customers.
 Distribution—processing orders and shipping products or services to customers.
 Customer service—providing after-sales service to customers.

1-5 Explain the term supply chain and its importance to cost management.
Supply chain describes the flow of goods, services, and information from the initial sources of materials and services to the
delivery of products to consumers, regardless of whether those activities occur in the one organization or in multiple
organizations.

Cost management is most effective when it integrates and coordinates activities across all companies in the supply
chain as well as across each business function in an individual company’s value chain. Attempts are made to restructure all
cost areas to be more cost-effective.

1-6 “Management accounting deals only with costs.” Do you agree? Explain.
“Management accounting deals only with costs.” This statement is misleading at best, and wrong at worst. Management
accounting measures, analyzes, and reports financial and nonfinancial information that helps managers define the
organization’s goals and make decisions to fulfill those goals. Management accounting also analyzes revenues from
products and customers in order to assess product and customer profitability. Therefore, while management accounting
does use cost information, it is only a part of the organization’s information recorded and analyzed by management
accountants.
1-7 How can management accountants help improve quality and achieve timely product deliveries?
Management accountants can help improve quality and achieve timely product deliveries by recording and reporting an
organization’s current quality and timeliness levels and by analyzing and evaluating the costs and benefits—both financial
and nonfinancial—of new quality initiatives, such as TQM, relieving bottleneck constraints, or providing faster customer
service.

1-8 Describe the five-step decision-making process.

The five-step decision-making process is (1) identify the problem and uncertainties; (2) obtain information; (3) make
predictions about the future; (4) make decisions by choosing among alternatives; and (5) implement the decision, evaluate
performance, and learn.

1-9 Distinguish planning decisions from control decisions.

Planning decisions focus on selecting organization goals and strategies, predicting results under various alternative ways of
achieving those goals, deciding how to attain the desired goals, and communicating the goals and how to attain them to the
entire organization.

Control decisions focus on taking actions that implement the planning decisions, deciding how to evaluate
performance, and providing feedback and learning to help future decision making.

1-10 What three guidelines help management accountants provide the most value to managers?
The three guidelines for management accountants are:
1. Employ a cost-benefit approach.
2. Recognize technical and behavioral considerations.
3. Apply the notion of “different costs for different purposes.”

1-11 “Knowledge of technical issues such as computer technology is a necessary but not sufficient condition to
becoming a successful management accountant.” Do you agree? Why?
Agree. A successful management accountant requires general business skills (such as understanding the strategy of an
organization) and people skills (such as motivating other team members) as well as technical skills (such as computer
knowledge, calculating costs of products, and supporting planning and control decisions).

1-12 As a new controller, reply to this comment by a plant manager: “As I see it, our accountants may be needed to
keep records for shareholders and Uncle Sam, but I don’t want them sticking their noses in my day-to-day operations. I
do the best I know how. No bean counter knows enough about my responsibilities to be of any use to me.”
The new controller could reply in one or more of the following ways:
(a) Demonstrate to the plant manager how he or she could make better decisions if the plant controller was viewed
as a resource rather than a deadweight. In a related way, the plant controller could show how the plant manager’s
time and resources could be saved by viewing the new plant controller as a team member.
(b) Demonstrate to the plant manager a good knowledge of the technical aspects of the plant. This approach may
involve doing background reading. It certainly will involve spending much time on the plant floor speaking to
plant personnel.
(c) Show the plant manager examples of the new plant controller’s past successes in working with line managers
in other plants. Examples could include
 assistance in preparing the budget,
 assistance in analyzing problem situations and evaluating financial and nonfinancial aspects of different
alternatives, and
  assistance in submitting capital budget requests.
(d) Seek assistance from the corporate controller to highlight to the plant manager the importance of many tasks
undertaken by the new plant controller. This approach is a last resort but may be necessary in some cases.

1-13 Where does the management accounting function fit into an organization’s structure?
The controller is the chief management accounting executive. The corporate controller reports to the chief financial officer,
a staff function. Companies also have business unit controllers who support business unit managers or regional controllers
who support regional managers in major geographic regions.

1-14 Name the four areas in which standards of ethical conduct exist for management accountants in the United
States. What organization sets forth these standards?

SOLUTION
The Institute of Management Accountants (IMA) sets standards of ethical conduct for management accountants in the
following four areas:
 Competence
 Confidentiality
 Integrity
 Credibility

1-15 What steps should a management accountant take if established written policies provide insufficient guidance
on how to handle an ethical conflict?
Steps to take when established written policies provide insufficient guidance are as follows:
(a) Discuss the problem with the immediate superior (except when it appears that the superior is involved).
(b) Clarify relevant ethical issues by confidential discussion with an IMA Ethics Counselor or other impartial
advisor.
(c) Consult your own attorney as to legal obligations and rights concerning the ethical conflicts.
1-25 Five-step decision-making process, service firm. Sizemore Landscaping is a firm that provides commercial
landscaping and grounds maintenance services. Derek Sizemore, the owner, is trying to find new ways to increase
revenues. Mr. Sizemore performs the following actions, not in the order listed.

a. Mr. Sizemore decides to buy power tilling equipment rather than hire additional landscape workers.

b. Mr. Sizemore discusses with his employees the possibility of using power equipment instead of manual processes to
increase productivity and thus profits.

c. Mr. Sizemore learns details about a large potential job that is about to go out for bids.

d. Mr. Sizemore compares the expected cost of buying power equipment to the expected cost of hiring more workers
and estimates profits from both alternatives.

e. Mr. Sizemore estimates that using power equipment will reduce tilling time by 20%.

f. Mr. Sizemore researches the price of power tillers online.

Required:
Classify each of the actions (a–f) according to its step in the five-step decision-making process (identify the problem and
uncertainties; obtain information; make predictions about the future; make decisions by choosing among alternatives;
implement the decision, evaluate performance, and learn).

SOLUTION
(15 min.) Five-step decision-making process, service firm.

Action Step in Decision-Making Process

 a. Make decisions by choosing among alternatives.
b. Identify the problem and uncertainties.
c. Obtain information and/or make predictions about the future.
d. Obtain information and/or make predictions about the future.
e. Make predictions about the future.
f. Obtain information.

1-26 Professional ethics and reporting division performance. Maria Mendez is division controller and James Dalton is
division manager of the Hestor Shoe Company. Mendez has line responsibility to Dalton, but she also has staff
responsibility to the company controller.

Dalton is under severe pressure to achieve the budgeted division income for the year. He has asked Mendez to
book $200,000 of revenues on December 31. The customers’ orders are firm, but the shoes are still in the production
process. They will be shipped on or around January 4. Dalton says to Mendez, “The key event is getting the sales order,
not shipping the shoes. You should support me, not obstruct my reaching division goals.”
Required:
1. Describe Mendez’s ethical responsibilities.
2. What should Mendez do if Dalton gives her a direct order to book the sales?

SOLUTION
Professional ethics and reporting division performance.

1. Mendez’s ethical responsibilities are well summarized in the IMA’s “Standards of Ethical Behavior for Practitioners
of Management Accounting and Financial Management” (Exhibit 1-7 of text). Areas of ethical responsibility include the
following:

 Competence
 Confidentiality
 Integrity
 Credibility

The ethical standards related to Mendez’s current dilemma are integrity, competence, and credibility. Using the integrity
standard, Mendez should carry out duties ethically and communicate unfavorable as well as favorable information and
professional judgments or opinions. Competence demands that Mendez perform her professional duties in accordance with
relevant laws, regulations, and technical standards and provide decision support information that is accurate. Credibility
requires that Mendez report information fairly and objectively and disclose deficiencies in internal controls in conformance
with organizational policy and/or applicable law. Mendez should refuse to book the $200,000 of sales until the goods are
shipped. Both financial accounting and management accounting principles maintain that sales are not complete until the
title is transferred to the buyer.

2. Mendez should refuse to follow Dalton’s orders. If Dalton persists, the incident should be reported to the corporate
controller. Support for line management should be wholehearted, but it should not require unethical conduct.