SOLUTIONS MANUAL
Management Accounting, 5th edition
By Leslie G. Eldenburg, Albie Brooks
TU
TO
R
G
U
R
U
, Table of Content
PART 1 Management accounting and cost management
CHAPTER 1 The role of accounting information in management decision making
CHAPTER 2 Cost concepts, behaviour and estimation
CHAPTER 3 A costing framework and cost allocation
CHAPTER 4 Cost–volume–profit (CVP) analysis
CHAPTER 5 Planning — budgeting and behaviour
CHAPTER 6 Operational budgets
TU
CHAPTER 7 Job costing systems
CHAPTER 8 Process costing systems
CHAPTER 9 Absorption and variable costing
CHAPTER 10 Flexible budgets, standard costs and variance analysis
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CHAPTER 11 Variance analysis: revenue and cost
CHAPTER 12 Activity analysis: costing and management
CHAPTER 13 Relevant costs for decision making
PART 2 Management accounting, extending performance measurement and strategy
R
CHAPTER 14 Strategy and control
CHAPTER 15 Capital budgeting and strategic investment decisions
G
CHAPTER 16 The strategic management of costs and revenues
CHAPTER 17 Strategic management control: a lean perspective
U
CHAPTER 18 Responsibility accounting, performance evaluation and transfer pricing
CHAPTER 19 The balanced scorecard and strategy maps
R
CHAPTER 20 Rewards, incentives and risk management
CHAPTER 21 Sustainability management accounting
U
,Chapter 1: The role of accounting information in
management decision making
Questions
1.1 Explain the value chain and list ways that value chain analysis benefits
organisations.
(LO4)
A value chain can be described as the key activities engaged in by the organisation or
TU
industry. We can view the value chain on two levels: at the industry level, and at the
(more common) organisational level. Refer to figure 1.5 for a sample industry value
chain and to figure 1.6 for a sample internal value chain. Value chain analysis may
benefit an organisation in a number of ways including:
Focuses on activities. The central feature of the value chain is its focus on
activities and processes rather than functions or departments. This makes
TO
identification of improvements across segments more likely.
Encourages a broader organisational view. This is particularly so for
management accounting staff and business unit managers. Management
accounting staff are more likely to take a broader perspective if using a value
chain framework when considering the consequences of decisions.
R
Breaks down more traditional representations of organisational activity. A
value chain framework encourages higher levels of cross-fertilisation and
communication between business segments, so that decisions are not confined by
G
the traditional boundaries of functional areas.
Externalises thinking by incorporating suppliers and customers. An
organisation‘s value chain encompasses not only customers and suppliers, but in
some cases extends to the customers‘ customers and the suppliers‘ suppliers.
U
Analysis of the value chain leads to improved relationships between the
organisation and others in the value chain, creating an extended organisation that
can respond flexibly to dynamic and competitive environments. In other words,
R
value chains explicitly recognise that no organisation operates in isolation from
suppliers and customers.
Reinforces other initiatives such as activity-based costing (ABC). With the
U
focus on activities, a value chain framework provides a sound foundation for
exploring activity-based costing (which is covered in chapter 4). ABC uses
activities as the foundation of product and service costing. Moreover, a value
chain framework complements other recent initiatives like strategic cost
management, which refers to the simultaneous focus on reducing costs and
strengthening an organisation‘s strategic position. This commonly involves taking
a longer-term view of cost management and decision-making.
Provides a foundation for outsourcing and strategic alliance decisions. A
value chain framework serves as the foundation for considering decisions such as
outsourcing of particular parts of the value chain and for considering the
1-1
, formation of strategic alliances with say a distributor. In this way, the value chain
serves as a strategic tool.
Supports initiatives like supply chain analysis. As organisations work to
increase profitability, improving their relationships with suppliers becomes a
priority. Improvements can be identified through supply chain analysis. The
supply chain is the flow of resources from the initial suppliers through the
delivery of goods and services to customers and clients. The initial suppliers may
be inside or outside the organisation. Negotiating lower costs with suppliers is a
straightforward way to reduce costs. Suppliers may be willing to reduce prices,
particularly for organisations willing to sign long-term purchase commitments.
Occasionally, organisations work with suppliers to help them reduce their costs
so that the savings can be passed along.
TU
Categorises activities as value-added and non-value-added. Value chain
analysis involves studying each step in the business process to determine whether
some activities can be eliminated because they do not add value. This analysis
extends to suppliers and customers, and includes shared planning, inventory,
human resources, information technology systems, and even corporate cultures.
Eventually, the analysis leads to business decisions for improving value.
TO
1.2 Why do managers need to measure, monitor, and motivate performance?
(LO1, 2 and 3)
Once operating plans are in place, organisations need to know whether the plans are
R
being met or need to be changed to take advantage of new opportunities. To do this,
actual performance needs to be measured and compared to the plans (monitored). To
help managers move toward the organisational goals, incentives such as performance-
G
based bonuses are offered (motivating).
1.3 List three types of internal reports and explain how each is used. List three
U
types of external reports and explain how each is used.
(LO2)
See figure 1.2 for a list of possible internal and external reports. Students may have
R
thought of other reports as well. Following are examples of internal reports. Capital
budgets support organisational strategies, the master budget supports operating plans,
and variance reports (actual versus planned performance) help organisations monitor
U
and motivate performance if they are tied to compensation contracts.
Financial statements are external reports that provide creditors and shareholders
information about current and past operations. Tax returns are reports prepared for the
government that also determine the amount of taxes due. Suppliers need reports about
inventory levels to keep an organisation‘s inventory levels up to date.
Management Accounting, 5th edition
By Leslie G. Eldenburg, Albie Brooks
TU
TO
R
G
U
R
U
, Table of Content
PART 1 Management accounting and cost management
CHAPTER 1 The role of accounting information in management decision making
CHAPTER 2 Cost concepts, behaviour and estimation
CHAPTER 3 A costing framework and cost allocation
CHAPTER 4 Cost–volume–profit (CVP) analysis
CHAPTER 5 Planning — budgeting and behaviour
CHAPTER 6 Operational budgets
TU
CHAPTER 7 Job costing systems
CHAPTER 8 Process costing systems
CHAPTER 9 Absorption and variable costing
CHAPTER 10 Flexible budgets, standard costs and variance analysis
TO
CHAPTER 11 Variance analysis: revenue and cost
CHAPTER 12 Activity analysis: costing and management
CHAPTER 13 Relevant costs for decision making
PART 2 Management accounting, extending performance measurement and strategy
R
CHAPTER 14 Strategy and control
CHAPTER 15 Capital budgeting and strategic investment decisions
G
CHAPTER 16 The strategic management of costs and revenues
CHAPTER 17 Strategic management control: a lean perspective
U
CHAPTER 18 Responsibility accounting, performance evaluation and transfer pricing
CHAPTER 19 The balanced scorecard and strategy maps
R
CHAPTER 20 Rewards, incentives and risk management
CHAPTER 21 Sustainability management accounting
U
,Chapter 1: The role of accounting information in
management decision making
Questions
1.1 Explain the value chain and list ways that value chain analysis benefits
organisations.
(LO4)
A value chain can be described as the key activities engaged in by the organisation or
TU
industry. We can view the value chain on two levels: at the industry level, and at the
(more common) organisational level. Refer to figure 1.5 for a sample industry value
chain and to figure 1.6 for a sample internal value chain. Value chain analysis may
benefit an organisation in a number of ways including:
Focuses on activities. The central feature of the value chain is its focus on
activities and processes rather than functions or departments. This makes
TO
identification of improvements across segments more likely.
Encourages a broader organisational view. This is particularly so for
management accounting staff and business unit managers. Management
accounting staff are more likely to take a broader perspective if using a value
chain framework when considering the consequences of decisions.
R
Breaks down more traditional representations of organisational activity. A
value chain framework encourages higher levels of cross-fertilisation and
communication between business segments, so that decisions are not confined by
G
the traditional boundaries of functional areas.
Externalises thinking by incorporating suppliers and customers. An
organisation‘s value chain encompasses not only customers and suppliers, but in
some cases extends to the customers‘ customers and the suppliers‘ suppliers.
U
Analysis of the value chain leads to improved relationships between the
organisation and others in the value chain, creating an extended organisation that
can respond flexibly to dynamic and competitive environments. In other words,
R
value chains explicitly recognise that no organisation operates in isolation from
suppliers and customers.
Reinforces other initiatives such as activity-based costing (ABC). With the
U
focus on activities, a value chain framework provides a sound foundation for
exploring activity-based costing (which is covered in chapter 4). ABC uses
activities as the foundation of product and service costing. Moreover, a value
chain framework complements other recent initiatives like strategic cost
management, which refers to the simultaneous focus on reducing costs and
strengthening an organisation‘s strategic position. This commonly involves taking
a longer-term view of cost management and decision-making.
Provides a foundation for outsourcing and strategic alliance decisions. A
value chain framework serves as the foundation for considering decisions such as
outsourcing of particular parts of the value chain and for considering the
1-1
, formation of strategic alliances with say a distributor. In this way, the value chain
serves as a strategic tool.
Supports initiatives like supply chain analysis. As organisations work to
increase profitability, improving their relationships with suppliers becomes a
priority. Improvements can be identified through supply chain analysis. The
supply chain is the flow of resources from the initial suppliers through the
delivery of goods and services to customers and clients. The initial suppliers may
be inside or outside the organisation. Negotiating lower costs with suppliers is a
straightforward way to reduce costs. Suppliers may be willing to reduce prices,
particularly for organisations willing to sign long-term purchase commitments.
Occasionally, organisations work with suppliers to help them reduce their costs
so that the savings can be passed along.
TU
Categorises activities as value-added and non-value-added. Value chain
analysis involves studying each step in the business process to determine whether
some activities can be eliminated because they do not add value. This analysis
extends to suppliers and customers, and includes shared planning, inventory,
human resources, information technology systems, and even corporate cultures.
Eventually, the analysis leads to business decisions for improving value.
TO
1.2 Why do managers need to measure, monitor, and motivate performance?
(LO1, 2 and 3)
Once operating plans are in place, organisations need to know whether the plans are
R
being met or need to be changed to take advantage of new opportunities. To do this,
actual performance needs to be measured and compared to the plans (monitored). To
help managers move toward the organisational goals, incentives such as performance-
G
based bonuses are offered (motivating).
1.3 List three types of internal reports and explain how each is used. List three
U
types of external reports and explain how each is used.
(LO2)
See figure 1.2 for a list of possible internal and external reports. Students may have
R
thought of other reports as well. Following are examples of internal reports. Capital
budgets support organisational strategies, the master budget supports operating plans,
and variance reports (actual versus planned performance) help organisations monitor
U
and motivate performance if they are tied to compensation contracts.
Financial statements are external reports that provide creditors and shareholders
information about current and past operations. Tax returns are reports prepared for the
government that also determine the amount of taxes due. Suppliers need reports about
inventory levels to keep an organisation‘s inventory levels up to date.
