Prologue
Managerial Accounting: An Overview
Solutions to Questions
P-1 Financial accounting is concerned incurred to broadcast that event, (4)
with reporting financial information to comparing the actual costs of running a
external parties, such as stockholders, production studio to the budget, and (5)
creditors, and regulators. Managerial comparing the actual cost of providing
accounting is concerned with providing global, on-location news coverage to the
information to managers for use within the budget.
organization. Financial accounting
emphasizes the financial consequences of P-3 The quantitative analysis would
past transactions, objectivity and focus on determining the potential cost
verifiability, precision, and companywide savings from buying the part rather than
performance, whereas managerial making it. The qualitative analysis would
accounting emphasizes decisions affecting focus on broader issues such as strategy,
the future, relevance, timeliness, and risks, and corporate social responsibility. For
segment performance. Financial accounting example, if the part is critical to the
is mandatory for external reports and it organization’s strategy, it may continue
needs to comply with rules, such as making the part regardless of any potential
generally accepted accounting principles cost savings from outsourcing. If the
(GAAP) and international financial reporting overseas supplier might create quality
standards (IFRS), whereas managerial control problems that could threaten the
accounting is not mandatory and it does not end consumers’ welfare, then the risks of
need to comply with externally imposed outsourcing may swamp any cost savings.
rules. Finally, from a social responsibility
standpoint, a company may decide against
P-2 Five examples of planning activities outsourcing if it would result in layoffs at its
include (1) estimating the advertising domestic manufacturing facility.
revenues for a future period, (2) estimating
the total expenses for a future period, P-4 Companies prepare budgets to
including the salaries of all actors, news translate plans into formal quantitative
reporters, and sportscasters, (3) planning terms. Budgets are used for various
how many new television shows to purposes, such as forcing managers to plan
introduce to the market, (4) planning each ahead, allocating resources across
television show’s designated broadcast time departments, coordinating activities across
slot, and (5) planning the network’s departments, establishing goals that
advertising activities and expenditures. motivate people, and evaluating and
Five examples of controlling rewarding employees. These various
activities include (1) comparing the actual purposes often conflict with one another,
number of viewers for each show to its which makes budgeting one of
viewership projections, (2) comparing the management’s most challenging activities.
actual costs of producing a made-for-
television movie to its budget, (3) P-5 Managerial accounting is relevant to
comparing the revenues earned from all business students because all managers
broadcasting a sporting event to the costs engage in planning, controlling, and
,decision making activities. If managers wish Management Audit Verifications at its
to influence co-workers across the overseas plants to minimize this risk.
organization, they must be able to speak in Nike faces the risk that
financial terms to justify their proposed unsatisfactory environmental performance
courses of action. will diminish its brand image. The company
is investing substantial resources to develop
P-6 The Institute of Management products that minimize adverse impacts on
Accountants estimates that 80% of the environment.
accountants work in non-public accounting Nike faces the risk that customers
environments. Accountants that work in will not like its new products. The company
corporate, non-profit, and governmental uses focus group research to proactively
organizations are expected to use their assess the customers’ reaction to its new
planning, controlling, and decision-making products.
skills to help improve performance.
P-10 Airlines face the risk that large
P-7 Deere & Company is an example of spikes in fuel prices will lower their
a company that competes in terms of profitability. Therefore, they may reduce this
product leadership. The company’s slogan risk by spending money on hedging
“nothing runs like a Deere” emphasizes its contracts that enable them to lock-in future
product leadership customer value fuel prices that will not change even if the
proposition. market price increases.
Amazon.com competes in terms of Steel manufacturers face major risks
operational excellence. The company related to employee safety, so they create
focuses on delivering products faster, more and monitor control measures related to
conveniently, and at a lower price than occupational safety compliance and
competitors. performance.
Charles Schwab competes in terms Restaurants face the risk that an
of customer intimacy. It focuses on building economic downturn will reduce customer
personal relationships with clients so that it traffic and lower sales. They reduce this risk
can tailor investment strategies to individual by choosing to create menus during
needs. economic downturns that offer more low-
priced entrees.
P-8 Planning, controlling, and decision
making must be performed within the P-11 Barnes & Noble could segment its
context of a company’s strategy. For companywide performance by individual
example, if a company that competes as a store, by sales channel (i.e., bricks-and-
product leader plans to grow too quickly, it mortar versus on-line), and by product line
may diminish quality and threaten the (e.g. non-fiction books, fiction books, music
company’s customer value proposition. A CDs, toys, etc.).
company that competes in terms of Procter & Gamble could segment its
operational excellence would select control performance by product category (e.g.,
measures that focus on time-based beauty and grooming, household care, and
performance, convenience, and cost. A health and well-being), product line (e.g.,
company that competes in terms of Crest, Tide, and Bounty), and stock keeping
customer intimacy may decide against units (e.g., Crest Cavity Protection
outsourcing employee training to cut costs toothpaste, Crest Extra Whitening
because it might diminish the quality of toothpaste, and Crest Sensitivity
customer service. toothpaste).
P-9 This answer is based on Nike, which P-12 Timberland publishes quarterly
has suppliers in over 40 countries. One risk corporate social responsibility (CSR) metrics
that Nike faces is that its suppliers will fail (see
to manage their employees in a socially www.earthkeeper.com/CSR/csrdownloads.
responsible manner. Nike conducts Three of those metrics include metric tons
,of carbon emissions, the percentage of total
cotton sourced that is organic, and
renewable energy use as a percent of total
energy usage.
Timberland’s corporate slogan of
“doing well by doing good” suggests that
the company publishes CSR reports
because it believes that its financial success
(i.e., doing well) is positively influenced by
its social and environmental performance
(i.e., doing good).
P-13 Companies that use lean production
only make units in response to customer
orders. They produce units just in time to
satisfy customer demand, which results in
minimal inventories.
P-14 Organizations are managed by
people that have their own personal
interests, insecurities, beliefs, and data-
supported conclusions that ensure
unanimous support for a given course of
action is the exception rather than the rule.
Therefore, managers must possess strong
leadership skills if they wish to channel their
co-workers’ efforts towards achieving
organizational goals.
P-15 Ethical behavior is the lubricant that
keeps the economy running. Without that
lubricant, the economy would operate much
less efficiently—less would be available to
consumers, quality would be lower, and
prices would be higher.
, Exercise P-1 (30 minutes)
1. Having the boss unilaterally impose a sales budget on the sales
manager is a bad idea for three reasons. First, the boss may not have
access to information possessed by the sales manager that would result
in a more accurate forecast. Second, the sales manager is unlikely to be
committed to achieving a budget that she did not help create. Third, if
the sales manager fails to achieve actual results that meet or exceed the
budget, it would be easy for the sales manager to justify this outcome
on the grounds that she had no input in creating the budget.
2. The company would probably not be comfortable with having the sales
manager create the budget with no input from her boss. First, the boss
is likely to possess a broad understanding of strategic issues that should
be incorporated into the budgeting process. Second, the sales manager
may be inclined to purposely underestimate future sales to increase her
chances of producing actual results that exceed the budget. If she can
produce actual results that exceed the budget it is likely to increase her
pay raise and bonus as well as her chances for promotion.
3. If the company used the sales budget for the sole purpose of planning
to deploy resources in a manner that best serves customers, then it is
possible that the boss and the sales manager would both be focused on
producing the most accurate forecast possible. They would strive for
accuracy because if they overestimate sales it is likely to result in
bloated inventories and if they underestimate sales it is likely to result in
lost sales.
4. If the company used the sales budget for the sole purpose of motivating
employees to strive for excellent results, then the boss may be inclined
to challenge the sales manager by establishing a budget that
intentionally exceeds expected sales. If the sales budget has absolutely
no impact on the sales manager’s pay raises, promotions or bonuses,
then she may be inclined to embrace the challenge of “aiming high”
when establishing the sales forecast.
Managerial Accounting: An Overview
Solutions to Questions
P-1 Financial accounting is concerned incurred to broadcast that event, (4)
with reporting financial information to comparing the actual costs of running a
external parties, such as stockholders, production studio to the budget, and (5)
creditors, and regulators. Managerial comparing the actual cost of providing
accounting is concerned with providing global, on-location news coverage to the
information to managers for use within the budget.
organization. Financial accounting
emphasizes the financial consequences of P-3 The quantitative analysis would
past transactions, objectivity and focus on determining the potential cost
verifiability, precision, and companywide savings from buying the part rather than
performance, whereas managerial making it. The qualitative analysis would
accounting emphasizes decisions affecting focus on broader issues such as strategy,
the future, relevance, timeliness, and risks, and corporate social responsibility. For
segment performance. Financial accounting example, if the part is critical to the
is mandatory for external reports and it organization’s strategy, it may continue
needs to comply with rules, such as making the part regardless of any potential
generally accepted accounting principles cost savings from outsourcing. If the
(GAAP) and international financial reporting overseas supplier might create quality
standards (IFRS), whereas managerial control problems that could threaten the
accounting is not mandatory and it does not end consumers’ welfare, then the risks of
need to comply with externally imposed outsourcing may swamp any cost savings.
rules. Finally, from a social responsibility
standpoint, a company may decide against
P-2 Five examples of planning activities outsourcing if it would result in layoffs at its
include (1) estimating the advertising domestic manufacturing facility.
revenues for a future period, (2) estimating
the total expenses for a future period, P-4 Companies prepare budgets to
including the salaries of all actors, news translate plans into formal quantitative
reporters, and sportscasters, (3) planning terms. Budgets are used for various
how many new television shows to purposes, such as forcing managers to plan
introduce to the market, (4) planning each ahead, allocating resources across
television show’s designated broadcast time departments, coordinating activities across
slot, and (5) planning the network’s departments, establishing goals that
advertising activities and expenditures. motivate people, and evaluating and
Five examples of controlling rewarding employees. These various
activities include (1) comparing the actual purposes often conflict with one another,
number of viewers for each show to its which makes budgeting one of
viewership projections, (2) comparing the management’s most challenging activities.
actual costs of producing a made-for-
television movie to its budget, (3) P-5 Managerial accounting is relevant to
comparing the revenues earned from all business students because all managers
broadcasting a sporting event to the costs engage in planning, controlling, and
,decision making activities. If managers wish Management Audit Verifications at its
to influence co-workers across the overseas plants to minimize this risk.
organization, they must be able to speak in Nike faces the risk that
financial terms to justify their proposed unsatisfactory environmental performance
courses of action. will diminish its brand image. The company
is investing substantial resources to develop
P-6 The Institute of Management products that minimize adverse impacts on
Accountants estimates that 80% of the environment.
accountants work in non-public accounting Nike faces the risk that customers
environments. Accountants that work in will not like its new products. The company
corporate, non-profit, and governmental uses focus group research to proactively
organizations are expected to use their assess the customers’ reaction to its new
planning, controlling, and decision-making products.
skills to help improve performance.
P-10 Airlines face the risk that large
P-7 Deere & Company is an example of spikes in fuel prices will lower their
a company that competes in terms of profitability. Therefore, they may reduce this
product leadership. The company’s slogan risk by spending money on hedging
“nothing runs like a Deere” emphasizes its contracts that enable them to lock-in future
product leadership customer value fuel prices that will not change even if the
proposition. market price increases.
Amazon.com competes in terms of Steel manufacturers face major risks
operational excellence. The company related to employee safety, so they create
focuses on delivering products faster, more and monitor control measures related to
conveniently, and at a lower price than occupational safety compliance and
competitors. performance.
Charles Schwab competes in terms Restaurants face the risk that an
of customer intimacy. It focuses on building economic downturn will reduce customer
personal relationships with clients so that it traffic and lower sales. They reduce this risk
can tailor investment strategies to individual by choosing to create menus during
needs. economic downturns that offer more low-
priced entrees.
P-8 Planning, controlling, and decision
making must be performed within the P-11 Barnes & Noble could segment its
context of a company’s strategy. For companywide performance by individual
example, if a company that competes as a store, by sales channel (i.e., bricks-and-
product leader plans to grow too quickly, it mortar versus on-line), and by product line
may diminish quality and threaten the (e.g. non-fiction books, fiction books, music
company’s customer value proposition. A CDs, toys, etc.).
company that competes in terms of Procter & Gamble could segment its
operational excellence would select control performance by product category (e.g.,
measures that focus on time-based beauty and grooming, household care, and
performance, convenience, and cost. A health and well-being), product line (e.g.,
company that competes in terms of Crest, Tide, and Bounty), and stock keeping
customer intimacy may decide against units (e.g., Crest Cavity Protection
outsourcing employee training to cut costs toothpaste, Crest Extra Whitening
because it might diminish the quality of toothpaste, and Crest Sensitivity
customer service. toothpaste).
P-9 This answer is based on Nike, which P-12 Timberland publishes quarterly
has suppliers in over 40 countries. One risk corporate social responsibility (CSR) metrics
that Nike faces is that its suppliers will fail (see
to manage their employees in a socially www.earthkeeper.com/CSR/csrdownloads.
responsible manner. Nike conducts Three of those metrics include metric tons
,of carbon emissions, the percentage of total
cotton sourced that is organic, and
renewable energy use as a percent of total
energy usage.
Timberland’s corporate slogan of
“doing well by doing good” suggests that
the company publishes CSR reports
because it believes that its financial success
(i.e., doing well) is positively influenced by
its social and environmental performance
(i.e., doing good).
P-13 Companies that use lean production
only make units in response to customer
orders. They produce units just in time to
satisfy customer demand, which results in
minimal inventories.
P-14 Organizations are managed by
people that have their own personal
interests, insecurities, beliefs, and data-
supported conclusions that ensure
unanimous support for a given course of
action is the exception rather than the rule.
Therefore, managers must possess strong
leadership skills if they wish to channel their
co-workers’ efforts towards achieving
organizational goals.
P-15 Ethical behavior is the lubricant that
keeps the economy running. Without that
lubricant, the economy would operate much
less efficiently—less would be available to
consumers, quality would be lower, and
prices would be higher.
, Exercise P-1 (30 minutes)
1. Having the boss unilaterally impose a sales budget on the sales
manager is a bad idea for three reasons. First, the boss may not have
access to information possessed by the sales manager that would result
in a more accurate forecast. Second, the sales manager is unlikely to be
committed to achieving a budget that she did not help create. Third, if
the sales manager fails to achieve actual results that meet or exceed the
budget, it would be easy for the sales manager to justify this outcome
on the grounds that she had no input in creating the budget.
2. The company would probably not be comfortable with having the sales
manager create the budget with no input from her boss. First, the boss
is likely to possess a broad understanding of strategic issues that should
be incorporated into the budgeting process. Second, the sales manager
may be inclined to purposely underestimate future sales to increase her
chances of producing actual results that exceed the budget. If she can
produce actual results that exceed the budget it is likely to increase her
pay raise and bonus as well as her chances for promotion.
3. If the company used the sales budget for the sole purpose of planning
to deploy resources in a manner that best serves customers, then it is
possible that the boss and the sales manager would both be focused on
producing the most accurate forecast possible. They would strive for
accuracy because if they overestimate sales it is likely to result in
bloated inventories and if they underestimate sales it is likely to result in
lost sales.
4. If the company used the sales budget for the sole purpose of motivating
employees to strive for excellent results, then the boss may be inclined
to challenge the sales manager by establishing a budget that
intentionally exceeds expected sales. If the sales budget has absolutely
no impact on the sales manager’s pay raises, promotions or bonuses,
then she may be inclined to embrace the challenge of “aiming high”
when establishing the sales forecast.
