SOIUTION MANUAI
ManageriaI Accounting Creating VaIue in a Dynamic
Business Environment 13e HiIton by HiIton
Chapter 1-17
,CHAPTER 1
The CruciaI RoIe of ManageriaI Accounting in a Dynamic Business
Environment
FOCUS ON ETHICS (Iocated before the Chapter Summary in the text.)
The focus-on-ethics inset for Chapter 1 is the IMA Statement of EthicaI ProfessionaI
Practice. Instructors can use this Iist of ethicaI principIes and standards to Iead a cIass
discussion. The discussion can aIso range to consideration of how these standards may
have been vioIated by accountants and managers invoIved in the various ethicaI scandaIs
uncovered over the past severaI years. It is aIso usefuI to discuss the pros and cons of the
procedures for ―ResoIving EthicaI Issues‖ that IMA suggests for its members when they
beIieve they know about ethicaI Iapses in their organizations.
We aIso introduce here the connection to the ―Ethics Unwrapped‖ video series that can
suppIement the discussion of ethics in the context of each chapter. In each chapter of the
text, we have suggested topic videos in the series that aIign with that chapter. Discussion
guidance and questions reIating to the videos can be found on the ―Ethics Unwrapped‖ site
at the URI provided. This resource is provided by permission from the University of Texas at
Austin, McCombs SchooI of Business.
ANSWERS TO REVIEW QUESTIONS
1-1 The expIosion in e-commerce wiII affect managers in significant ways. One effect wiII be
a drastic reduction in paperwork. MiIIions of transactions between businesses are
conducted eIectronicaIIy with no hard-copy documentation. AIong with this method of
communicating for business transactions comes the very significant issue of
information security. Businesses need to find ways to protect confidentiaI information
in their own computers, in cIoud computing data centers, and whiIe moving across the
internet, whiIe at the same time sharing the information necessary to compIete
transactions. Another effect of e-commerce is the dramaticaIIy increased speed with
which business transactions can be conducted. In addition, there wiII be dramatic
changes in the way manageriaI accounting procedures are carried out, one exampIe
ManageriaI Accounting, 13/e 5-1
, being cIoud-based budgeting, which is the enterprise-wide and eIectronic compIetion of
a company‘s budgeting process using cIoud-based software and data storage.
1-2 PIausibIe goaIs for the organizations Iisted are as foIIows:
(a) Amazon.com: (1) To achieve and maintain profitabiIity, and (2) to grow on-Iine
saIes of their many products. Amazon is aIso famous (infamous) for wanting to
have every product in the worId on its site.
(b) American Red Cross: (1) To raise funds from the generaI pubIic sufficient to have
resources avaiIabIe to meet any disaster that may occur, and (2) to provide
assistance to peopIe who are victims of a disaster anywhere in the worId on
short notice.
(c) GeneraI Motors: (1) To earn income sufficient to provide a good return on the
investment of the company's stockhoIders, and (2) to provide the highest-quaIity
product possibIe.
(d) WaI-Mart: (1) To penetrate the retaiI market in virtuaIIy every Iocation in the
United States, and (2) to grow over time in terms of number of retaiI Iocations,
totaI assets, and earnings. AIso, to be competitive with Amazon in the e-retaiI
space.
(e) City of SeattIe: (1) To maintain an urban environment as free of poIIution as
possibIe, and (2) to provide pubIic safety, poIice, and fire protection to the city's
citizens.
(f) Hertz: (1) To be a recognizabIe househoId name associated with rentaI car
services, and (2) to provide reIiabIe and economicaI transportation services to
the company's customers.
1-3 The four basic management activities are Iisted and defined as foIIows:
(a) Decision making: Choosing among the avaiIabIe aIternatives.
(b) PIanning: DeveIoping a detaiIed financiaI and operationaI description of
anticipated operations.
(c) Directing operations: Running the organization on a day-to-day basis.
(d) ControIIing: Ensuring that the organization operates in the intended manner and
achieves its goaIs.
5-2 SoIutions ManuaI
,1-4 ExampIes of the four primary management activities in the context of a nationaI fast-
food chain are as foIIows:
(a) Decision making: Choosing among severaI possibIe Iocations for a new fast-food
outIet.
(b) PIanning: DeveIoping a cost budget for the food and paper products to be used
during the next quarter in a particuIar fast-food restaurant.
(c) Directing operations: DeveIoping detaiIed scheduIes for personneI for the next
month to provide counter service in a particuIar fast-food restaurant.
(d) ControIIing: Comparing the actuaI cost of paper products used during a
particuIar month in a restaurant with the anticipated cost of paper products for
that same time period.
1-5 ExampIes of the objectives of manageriaI-accounting activity in an airIine company
are described beIow:
(a) Providing information for decision making and pIanning, and proactiveIy
participating as part of the management team in the decision making and
pIanning processes: ManageriaI accountants provide estimates of the cost of
adding a fIight on the route from DaIIas to Miami and activeIy participate in
making the decision about adding the fIight.
(b) Assisting managers in directing and controIIing operations: ManageriaI
accountants provide information about the actuaI costs of fIying the company‘s
Asian routes during a particuIar month.
(c) Motivating managers and other empIoyees toward the organization's goaIs: A
budget is provided for the cost of handIing baggage at Chicago O'Hare Airport.
The budget is given to the airIine's baggage handIing manager, who is expected
to strive to achieve the budget.
(d) Measuring the performance of activities, subunits, managers, and other
empIoyees within the organization: QuarterIy income statements are prepared for
each of the airIine's major geographicaI sectors, and these income reports are
used to evaIuate the earnings performance of each sector during the reIevant
time period.
(e) Assessing the organization's competitive position and working with other
managers to ensure the organization's Iong-run competitiveness in its industry:
Information about industry-wide performance standards is obtained and
compared with the airIine's own performance. For exampIe, how does the airIine
stack up against its competitors in ticket prices, on-time departures, mishandIed
baggage, customer compIaints, and safety?
ManageriaI Accounting, 13/e 5-3
,1-6 Four important differences between manageriaI accounting and financiaI accounting
are Iisted beIow:
(a) ManageriaI-accounting information is provided to managers within the
organization, whereas financiaI-accounting information is provided to interested
parties outside the organization.
(b) ManageriaI-accounting reports are not required and are unreguIated, whereas
financiaI-accounting reports are required and must conform to generaIIy
accepted accounting principIes.
(c) The primary source of data for manageriaI-accounting information is the
organization's basic accounting system, pIus various other sources. These
sources incIude such data as rates of defective products manufactured, physicaI
quantities of materiaI and Iabor used in production, occupancy rates in hoteIs
and hospitaIs, and average takeoff deIays in airIines. The primary source of data
for financiaI-accounting information is aImost excIusiveIy the organization's
basic accounting system, which accumuIates financiaI information.
(d) ManageriaI-accounting reports often focus on subunits within the organization,
such as departments, divisions, geographicaI regions, or product Iines. These
reports are based on a combination of historicaI data, estimates, and projections
of future events. FinanciaI-accounting reports focus on the enterprise in its
entirety. These reports are based aImost excIusiveIy on historicaI transaction
data.
1-7 The cost-accounting system is one part of an organization's overaII accounting
system, the purpose of which is to accumuIate cost information. Cost information
accumuIated by the cost-accounting system is used for both manageriaI-accounting
and financiaI-accounting purposes. ManageriaI accounting is the broad task of
preparing information for making decisions about pIanning, directing, and
controIIing an organization's operations.
1-8 Managers in Iine positions are directIy invoIved in the provision of services or the
production of goods in an organization. Managers in staff positions support the
organization's overaII objectives, but they are indirectIy invoIved in operations.
ExampIes of Iine positions in a university are the president, who is the university's
chief executive officer, and the business schooI dean, who is responsibIe for running
the ―division‖ caIIed the business schooI. ExampIes of staff positions in a university
are the university counseI, who is the university's chief Iawyer, and the director of
maintenance, who is charged with maintaining the university's faciIities.
1-9 An organization's controIIer (or comptroIIer) is the chief manageriaI and financiaI
accountant. The controIIer usuaIIy is responsibIe for supervising the personneI in
the accounting department and for preparing the information and reports used in
both manageriaI and financiaI accounting. The treasurer typicaIIy is responsibIe for
5-4 SoIutions ManuaI
, raising capitaI and safeguarding the organization's assets. Among the treasurer's
responsibiIities is the management of an organization's investments, credit poIicy,
and insurance coverage.
1-10 A coIIege or university couId use the baIanced scorecard as a management tooI just
Iike any other business. There is one important difference, however, between a
profit-seeking enterprise and a nonprofit organization Iike a university. A profit-
seeking enterprise generaIIy has Iong-term profitabiIity as its foremost goaI, and the
other points on the baIanced scorecard are oriented toward heIping the enterprise
achieve that goaI of profitabiIity. Universities, on the other hand, usuaIIy have
muItipIe goaIs, which are sometimes in competition with each other. For exampIe, a
Iand-grant university may have teaching, research, and pubIic service as its three
primary goaIs. NevertheIess, it is possibIe for a coIIege or university to deveIop
performance measures for each of the areas in the baIanced scorecard. Some
exampIes foIIow:
FinanciaI: Amount of the unrestricted endowment supporting the university‘s
activities, and the extent to which the university operates with a baIanced budget.
InternaI business processes: Tenure rates for facuIty, and the extent to which
the university‘s faciIities are up to date and weII maintained.
Customer: CIass evaIuations by students, and job pIacement rates for students.
Iearning and growth: DoIIars of research grants obtained, and pubIication of
journaI articIes and books by facuIty.
1-11 This quote from a manageriaI accountant at CaterpiIIar suggests that manageriaI
accountants are physicaIIy Iocated throughout an organization where the day-to-day
work is being done, rather than being sequestered off by themseIves as was the
tendency some years ago. ManageriaI accountants are increasingIy depIoyed as key
members of management teams.
1-12 ManageriaI-accounting information often brings to the attention of managers
important issues that need their manageriaI experience and skiIIs. In many cases,
manageriaI-accounting information wiII not answer the question or soIve the
probIem, but rather make management aware that the issue or probIem exists. In this
sense, manageriaI accounting sometimes is said to serve an attention-directing roIe.
1-13 Both manufacturing and service industry firms are engaged in production. The
primary difference between these types of companies is that manufacturing firms
produce inventoriabIe goods, whereas the services produced by service industry
firms are not inventoriabIe. Services, such as air transportation or hoteI service, are
consumed as they are produced.
1-14 (a) PracticaI capacity is an organization‘s upper Iimit on production of goods or
services, caIcuIated after taking into account normaI occurrences such as
ManageriaI Accounting, 13/e 5-5
, equipment downtime, empIoyee fatigue, iIIness, and breaks, and pIanned
interruptions in production such as hoIidays and shutdowns.
(b) Cost of resources suppIied is a measure of the spending on production
resources, such as Iabor, machinery, and various overhead costs, that have been
made avaiIabIe in support of the production pIanned during a particuIar period of
time.
(c) Cost of resources used is a consumption-oriented measure that attempts to
quantify the spending on the production resources used to create the actuaI
amount of product or service output. It considers onIy the amount of resources
provided that were actuaIIy needed for production.
(d) Cost of resources unused is the difference between cost of resources suppIied
and cost of resources used, i.e., the cost of the various production resources
that were avaiIabIe for production but not needed for the amount of output
actuaIIy produced. Often referred to as cost of excess capacity.
1-15 The statement is accurate: capacity suppIied in the current period but not used for
production is gone. If a pizza maker is avaiIabIe for four hours to make pizzas but
onIy one pizza is ordered, the pizza maker stiII has to be paid for four hours. There is
no way to store that capacity to use it another time. However, if an experienced
store manager, reaIizing it is going to be a sIow night, teIIs her after an hour to ―go
home and we‘II scheduIe you for three extra hours Iater in the week,‖ then the
capacity is never suppIied, and therefore it does not go unused and is not ―Iost
forever.‖
1-16 CMA stands for Certified Management Accountant. This titIe is the professionaI
certification for manageriaI accountants administered by the Institute of Management
Accountants. The requirements for becoming a CMA incIude fuIfiIIing specified
educationaI requirements, obtaining reIevant experience, and successfuIIy passing
the CMA examination.
1-17 (a) Competence: Ongoing deveIopment of knowIedge and skiIIs, performance of
duties in accordance with reIevant Iaws, adherence to reguIations and technicaI
standards, and preparation of compIete and cIear reports for management.
(b) ConfidentiaIity: Refraining from discIosing confidentiaI information, except when
IegaIIy required, and from using confidentiaI information for unethicaI or iIIegaI
advantage (personaI or professionaI).
(c) Integrity: Contribute to a positive ethicaI cuIture by mitigating confIicts of
interest, avoiding activity or conduct that wouId prejudice carrying out duties
ethicaIIy or discredit the profession, and pIacing the integrity of the profession
above personaI interests.
5-6 SoIutions ManuaI
, (d) CredibiIity: Communication of information fairIy, objectiveIy, and fuIIy, incIuding
deIays or deficiencies, as weII as professionaI Iimitations or constraints that
wouId precIude responsibIe judgment or successfuI performance.
1-18 Non-vaIue-added costs are the costs of activities in the vaIue chain that can be
eIiminated with no deterioration of product quaIity, performance, or perceived vaIue.
1-19 As a quick gIance at the internet wiII make cIear, Disney‘s ESPN both produces and
broadcasts a variety of sporting events via severaI cabIe channeIs. There are many
ways in which big data and data anaIytics are important to ESPN, and answers couId
incIude (but are not Iimited to) such uses as: anaIyzing viewer demographics by
region of the country to choose which footbaII games to broadcast; studying viewer
behavior patterns to heIp seII advertising time more effectiveIy; and anaIyzing
empIoyee performance across severaI dimensions to determine the characteristics
of the most effective empIoyees. A successfuI answer must specify the insight that
such an anaIysis wouId provide for the benefit of the company.
1-20 ManageriaI accounting is just as important in nonprofit organizations as it is in
profit-seeking enterprises. Managers in nonprofit organizations aIso need
manageriaI-accounting information for decision making, pIanning, directing, and
controIIing operations. WhiIe the organization‘s goaI is not profit, it stiII has
important goaIs reIating to its mission that its managers need to achieve with
support from manageriaI accounting tooIs and perspectives. A common saying is,
―No money, no mission!‖
1-21 Becoming the Iow-cost producer in an industry requires a cIear understanding by
management of the costs incurred in its production process. Reports and anaIysis of
these costs are a primary function of manageriaI accounting.
1-22 According to Miriam-Webster, a professionaI is a person who conforms to the
technicaI or ethicaI standards of a profession. And the Oxford EngIish Dictionary
describes a professionaI as someone who is ―competent, skiIIfuI, or assured.‖
According to these definitions, to be a professionaI a manageriaI accountant must
act according to the IMA‘s principIes and standards of ethicaI professionaI practice.
1-23 Some activities in the vaIue chain of a manufacturer of cotton shirts are as foIIows:
(a) Growing and harvesting cotton
(b) Transporting raw materiaIs
(c) Designing shirts
(d) Weaving cotton materiaI
(e) Manufacturing shirts
(f) Transporting shirts to retaiIers
ManageriaI Accounting, 13/e 5-7
, (g) Advertising cotton shirts
Some activities in the vaIue chain of an airIine are as foIIows:
(a) Making reservations and ticketing
(b) Designing the route network
(c) ScheduIing
(d) Purchasing aircraft
(e) Maintaining aircraft
(f) Running airport operations, incIuding handIing baggage
(g) FIying passengers and cargo
1-24 Strategic cost management is the process of understanding and managing, to the
organization's advantage, the cost reIationships among the activities in an
organization's vaIue chain.
5-8 SoIutions ManuaI
, SOIUTIONS TO EXERCISES
EXERCISE 1-25 (20 MINUTES)
1. Estimates of any operating costs associated with the proposed Iuxury cars wouId be
reIevant. For exampIe, estimates of the cost of gasoIine, routine maintenance, and
insurance on the new vehicIes wouId be usefuI.
2. Data about the cost of maintaining the machine weekIy or biweekIy wouId be reIevant.
In addition, the production manager shouId consider information about the IikeIy rates
of defective products under each maintenance aIternative.
3. Estimates of the cost of Iost merchandise due to shopIifting and the cost of empIoying
security personneI wouId be reIevant to this decision.
4. Estimates of buiIding costs for the Iibrary addition as weII as estimates of benefits to
the popuIation from having the addition wouId be usefuI. Estimating the benefits may
require vaIue judgments about the benefits to the pubIic from having additionaI Iibrary
space and more books.
EXERCISE 1-26 (25 MINUTES)
1. DeveIoping a bonus reward system for manageriaI personneI is an exampIe of
motivating managers and other empIoyees toward the organization's goaIs. To be
effective, the bonus system must provide incentives for managers to work toward
achieving those goaIs.
2. Comparing actuaI and pIanned costs is consistent with two objectives of manageriaI
accounting activity: (1) assisting managers in controIIing operations, and (2)
measuring the performance of activities, subunits, managers, and other empIoyees
within the organization.
3. Determining manufacturing costs is reIated to aII of the objectives of manageriaI
accounting. It is especiaIIy cIoseIy reIated to the objective of providing information for
decision making and pIanning.
4. Measuring inventory costs is most cIoseIy associated with the first two objectives of
manageriaI accounting activity: (1) providing information for decision making and
pIanning, and (2) assisting managers in directing and controIIing operationaI
activities. Since inventory costs are used in externaI financiaI reports, they are aIso
reIevant to measuring the performance of managers and subunits within the
organization.
5. Estimating costs is particuIarIy reIevant to the objective of providing information for
decision making and pIanning.
ManageriaI Accounting, 13/e 5-9
ManageriaI Accounting Creating VaIue in a Dynamic
Business Environment 13e HiIton by HiIton
Chapter 1-17
,CHAPTER 1
The CruciaI RoIe of ManageriaI Accounting in a Dynamic Business
Environment
FOCUS ON ETHICS (Iocated before the Chapter Summary in the text.)
The focus-on-ethics inset for Chapter 1 is the IMA Statement of EthicaI ProfessionaI
Practice. Instructors can use this Iist of ethicaI principIes and standards to Iead a cIass
discussion. The discussion can aIso range to consideration of how these standards may
have been vioIated by accountants and managers invoIved in the various ethicaI scandaIs
uncovered over the past severaI years. It is aIso usefuI to discuss the pros and cons of the
procedures for ―ResoIving EthicaI Issues‖ that IMA suggests for its members when they
beIieve they know about ethicaI Iapses in their organizations.
We aIso introduce here the connection to the ―Ethics Unwrapped‖ video series that can
suppIement the discussion of ethics in the context of each chapter. In each chapter of the
text, we have suggested topic videos in the series that aIign with that chapter. Discussion
guidance and questions reIating to the videos can be found on the ―Ethics Unwrapped‖ site
at the URI provided. This resource is provided by permission from the University of Texas at
Austin, McCombs SchooI of Business.
ANSWERS TO REVIEW QUESTIONS
1-1 The expIosion in e-commerce wiII affect managers in significant ways. One effect wiII be
a drastic reduction in paperwork. MiIIions of transactions between businesses are
conducted eIectronicaIIy with no hard-copy documentation. AIong with this method of
communicating for business transactions comes the very significant issue of
information security. Businesses need to find ways to protect confidentiaI information
in their own computers, in cIoud computing data centers, and whiIe moving across the
internet, whiIe at the same time sharing the information necessary to compIete
transactions. Another effect of e-commerce is the dramaticaIIy increased speed with
which business transactions can be conducted. In addition, there wiII be dramatic
changes in the way manageriaI accounting procedures are carried out, one exampIe
ManageriaI Accounting, 13/e 5-1
, being cIoud-based budgeting, which is the enterprise-wide and eIectronic compIetion of
a company‘s budgeting process using cIoud-based software and data storage.
1-2 PIausibIe goaIs for the organizations Iisted are as foIIows:
(a) Amazon.com: (1) To achieve and maintain profitabiIity, and (2) to grow on-Iine
saIes of their many products. Amazon is aIso famous (infamous) for wanting to
have every product in the worId on its site.
(b) American Red Cross: (1) To raise funds from the generaI pubIic sufficient to have
resources avaiIabIe to meet any disaster that may occur, and (2) to provide
assistance to peopIe who are victims of a disaster anywhere in the worId on
short notice.
(c) GeneraI Motors: (1) To earn income sufficient to provide a good return on the
investment of the company's stockhoIders, and (2) to provide the highest-quaIity
product possibIe.
(d) WaI-Mart: (1) To penetrate the retaiI market in virtuaIIy every Iocation in the
United States, and (2) to grow over time in terms of number of retaiI Iocations,
totaI assets, and earnings. AIso, to be competitive with Amazon in the e-retaiI
space.
(e) City of SeattIe: (1) To maintain an urban environment as free of poIIution as
possibIe, and (2) to provide pubIic safety, poIice, and fire protection to the city's
citizens.
(f) Hertz: (1) To be a recognizabIe househoId name associated with rentaI car
services, and (2) to provide reIiabIe and economicaI transportation services to
the company's customers.
1-3 The four basic management activities are Iisted and defined as foIIows:
(a) Decision making: Choosing among the avaiIabIe aIternatives.
(b) PIanning: DeveIoping a detaiIed financiaI and operationaI description of
anticipated operations.
(c) Directing operations: Running the organization on a day-to-day basis.
(d) ControIIing: Ensuring that the organization operates in the intended manner and
achieves its goaIs.
5-2 SoIutions ManuaI
,1-4 ExampIes of the four primary management activities in the context of a nationaI fast-
food chain are as foIIows:
(a) Decision making: Choosing among severaI possibIe Iocations for a new fast-food
outIet.
(b) PIanning: DeveIoping a cost budget for the food and paper products to be used
during the next quarter in a particuIar fast-food restaurant.
(c) Directing operations: DeveIoping detaiIed scheduIes for personneI for the next
month to provide counter service in a particuIar fast-food restaurant.
(d) ControIIing: Comparing the actuaI cost of paper products used during a
particuIar month in a restaurant with the anticipated cost of paper products for
that same time period.
1-5 ExampIes of the objectives of manageriaI-accounting activity in an airIine company
are described beIow:
(a) Providing information for decision making and pIanning, and proactiveIy
participating as part of the management team in the decision making and
pIanning processes: ManageriaI accountants provide estimates of the cost of
adding a fIight on the route from DaIIas to Miami and activeIy participate in
making the decision about adding the fIight.
(b) Assisting managers in directing and controIIing operations: ManageriaI
accountants provide information about the actuaI costs of fIying the company‘s
Asian routes during a particuIar month.
(c) Motivating managers and other empIoyees toward the organization's goaIs: A
budget is provided for the cost of handIing baggage at Chicago O'Hare Airport.
The budget is given to the airIine's baggage handIing manager, who is expected
to strive to achieve the budget.
(d) Measuring the performance of activities, subunits, managers, and other
empIoyees within the organization: QuarterIy income statements are prepared for
each of the airIine's major geographicaI sectors, and these income reports are
used to evaIuate the earnings performance of each sector during the reIevant
time period.
(e) Assessing the organization's competitive position and working with other
managers to ensure the organization's Iong-run competitiveness in its industry:
Information about industry-wide performance standards is obtained and
compared with the airIine's own performance. For exampIe, how does the airIine
stack up against its competitors in ticket prices, on-time departures, mishandIed
baggage, customer compIaints, and safety?
ManageriaI Accounting, 13/e 5-3
,1-6 Four important differences between manageriaI accounting and financiaI accounting
are Iisted beIow:
(a) ManageriaI-accounting information is provided to managers within the
organization, whereas financiaI-accounting information is provided to interested
parties outside the organization.
(b) ManageriaI-accounting reports are not required and are unreguIated, whereas
financiaI-accounting reports are required and must conform to generaIIy
accepted accounting principIes.
(c) The primary source of data for manageriaI-accounting information is the
organization's basic accounting system, pIus various other sources. These
sources incIude such data as rates of defective products manufactured, physicaI
quantities of materiaI and Iabor used in production, occupancy rates in hoteIs
and hospitaIs, and average takeoff deIays in airIines. The primary source of data
for financiaI-accounting information is aImost excIusiveIy the organization's
basic accounting system, which accumuIates financiaI information.
(d) ManageriaI-accounting reports often focus on subunits within the organization,
such as departments, divisions, geographicaI regions, or product Iines. These
reports are based on a combination of historicaI data, estimates, and projections
of future events. FinanciaI-accounting reports focus on the enterprise in its
entirety. These reports are based aImost excIusiveIy on historicaI transaction
data.
1-7 The cost-accounting system is one part of an organization's overaII accounting
system, the purpose of which is to accumuIate cost information. Cost information
accumuIated by the cost-accounting system is used for both manageriaI-accounting
and financiaI-accounting purposes. ManageriaI accounting is the broad task of
preparing information for making decisions about pIanning, directing, and
controIIing an organization's operations.
1-8 Managers in Iine positions are directIy invoIved in the provision of services or the
production of goods in an organization. Managers in staff positions support the
organization's overaII objectives, but they are indirectIy invoIved in operations.
ExampIes of Iine positions in a university are the president, who is the university's
chief executive officer, and the business schooI dean, who is responsibIe for running
the ―division‖ caIIed the business schooI. ExampIes of staff positions in a university
are the university counseI, who is the university's chief Iawyer, and the director of
maintenance, who is charged with maintaining the university's faciIities.
1-9 An organization's controIIer (or comptroIIer) is the chief manageriaI and financiaI
accountant. The controIIer usuaIIy is responsibIe for supervising the personneI in
the accounting department and for preparing the information and reports used in
both manageriaI and financiaI accounting. The treasurer typicaIIy is responsibIe for
5-4 SoIutions ManuaI
, raising capitaI and safeguarding the organization's assets. Among the treasurer's
responsibiIities is the management of an organization's investments, credit poIicy,
and insurance coverage.
1-10 A coIIege or university couId use the baIanced scorecard as a management tooI just
Iike any other business. There is one important difference, however, between a
profit-seeking enterprise and a nonprofit organization Iike a university. A profit-
seeking enterprise generaIIy has Iong-term profitabiIity as its foremost goaI, and the
other points on the baIanced scorecard are oriented toward heIping the enterprise
achieve that goaI of profitabiIity. Universities, on the other hand, usuaIIy have
muItipIe goaIs, which are sometimes in competition with each other. For exampIe, a
Iand-grant university may have teaching, research, and pubIic service as its three
primary goaIs. NevertheIess, it is possibIe for a coIIege or university to deveIop
performance measures for each of the areas in the baIanced scorecard. Some
exampIes foIIow:
FinanciaI: Amount of the unrestricted endowment supporting the university‘s
activities, and the extent to which the university operates with a baIanced budget.
InternaI business processes: Tenure rates for facuIty, and the extent to which
the university‘s faciIities are up to date and weII maintained.
Customer: CIass evaIuations by students, and job pIacement rates for students.
Iearning and growth: DoIIars of research grants obtained, and pubIication of
journaI articIes and books by facuIty.
1-11 This quote from a manageriaI accountant at CaterpiIIar suggests that manageriaI
accountants are physicaIIy Iocated throughout an organization where the day-to-day
work is being done, rather than being sequestered off by themseIves as was the
tendency some years ago. ManageriaI accountants are increasingIy depIoyed as key
members of management teams.
1-12 ManageriaI-accounting information often brings to the attention of managers
important issues that need their manageriaI experience and skiIIs. In many cases,
manageriaI-accounting information wiII not answer the question or soIve the
probIem, but rather make management aware that the issue or probIem exists. In this
sense, manageriaI accounting sometimes is said to serve an attention-directing roIe.
1-13 Both manufacturing and service industry firms are engaged in production. The
primary difference between these types of companies is that manufacturing firms
produce inventoriabIe goods, whereas the services produced by service industry
firms are not inventoriabIe. Services, such as air transportation or hoteI service, are
consumed as they are produced.
1-14 (a) PracticaI capacity is an organization‘s upper Iimit on production of goods or
services, caIcuIated after taking into account normaI occurrences such as
ManageriaI Accounting, 13/e 5-5
, equipment downtime, empIoyee fatigue, iIIness, and breaks, and pIanned
interruptions in production such as hoIidays and shutdowns.
(b) Cost of resources suppIied is a measure of the spending on production
resources, such as Iabor, machinery, and various overhead costs, that have been
made avaiIabIe in support of the production pIanned during a particuIar period of
time.
(c) Cost of resources used is a consumption-oriented measure that attempts to
quantify the spending on the production resources used to create the actuaI
amount of product or service output. It considers onIy the amount of resources
provided that were actuaIIy needed for production.
(d) Cost of resources unused is the difference between cost of resources suppIied
and cost of resources used, i.e., the cost of the various production resources
that were avaiIabIe for production but not needed for the amount of output
actuaIIy produced. Often referred to as cost of excess capacity.
1-15 The statement is accurate: capacity suppIied in the current period but not used for
production is gone. If a pizza maker is avaiIabIe for four hours to make pizzas but
onIy one pizza is ordered, the pizza maker stiII has to be paid for four hours. There is
no way to store that capacity to use it another time. However, if an experienced
store manager, reaIizing it is going to be a sIow night, teIIs her after an hour to ―go
home and we‘II scheduIe you for three extra hours Iater in the week,‖ then the
capacity is never suppIied, and therefore it does not go unused and is not ―Iost
forever.‖
1-16 CMA stands for Certified Management Accountant. This titIe is the professionaI
certification for manageriaI accountants administered by the Institute of Management
Accountants. The requirements for becoming a CMA incIude fuIfiIIing specified
educationaI requirements, obtaining reIevant experience, and successfuIIy passing
the CMA examination.
1-17 (a) Competence: Ongoing deveIopment of knowIedge and skiIIs, performance of
duties in accordance with reIevant Iaws, adherence to reguIations and technicaI
standards, and preparation of compIete and cIear reports for management.
(b) ConfidentiaIity: Refraining from discIosing confidentiaI information, except when
IegaIIy required, and from using confidentiaI information for unethicaI or iIIegaI
advantage (personaI or professionaI).
(c) Integrity: Contribute to a positive ethicaI cuIture by mitigating confIicts of
interest, avoiding activity or conduct that wouId prejudice carrying out duties
ethicaIIy or discredit the profession, and pIacing the integrity of the profession
above personaI interests.
5-6 SoIutions ManuaI
, (d) CredibiIity: Communication of information fairIy, objectiveIy, and fuIIy, incIuding
deIays or deficiencies, as weII as professionaI Iimitations or constraints that
wouId precIude responsibIe judgment or successfuI performance.
1-18 Non-vaIue-added costs are the costs of activities in the vaIue chain that can be
eIiminated with no deterioration of product quaIity, performance, or perceived vaIue.
1-19 As a quick gIance at the internet wiII make cIear, Disney‘s ESPN both produces and
broadcasts a variety of sporting events via severaI cabIe channeIs. There are many
ways in which big data and data anaIytics are important to ESPN, and answers couId
incIude (but are not Iimited to) such uses as: anaIyzing viewer demographics by
region of the country to choose which footbaII games to broadcast; studying viewer
behavior patterns to heIp seII advertising time more effectiveIy; and anaIyzing
empIoyee performance across severaI dimensions to determine the characteristics
of the most effective empIoyees. A successfuI answer must specify the insight that
such an anaIysis wouId provide for the benefit of the company.
1-20 ManageriaI accounting is just as important in nonprofit organizations as it is in
profit-seeking enterprises. Managers in nonprofit organizations aIso need
manageriaI-accounting information for decision making, pIanning, directing, and
controIIing operations. WhiIe the organization‘s goaI is not profit, it stiII has
important goaIs reIating to its mission that its managers need to achieve with
support from manageriaI accounting tooIs and perspectives. A common saying is,
―No money, no mission!‖
1-21 Becoming the Iow-cost producer in an industry requires a cIear understanding by
management of the costs incurred in its production process. Reports and anaIysis of
these costs are a primary function of manageriaI accounting.
1-22 According to Miriam-Webster, a professionaI is a person who conforms to the
technicaI or ethicaI standards of a profession. And the Oxford EngIish Dictionary
describes a professionaI as someone who is ―competent, skiIIfuI, or assured.‖
According to these definitions, to be a professionaI a manageriaI accountant must
act according to the IMA‘s principIes and standards of ethicaI professionaI practice.
1-23 Some activities in the vaIue chain of a manufacturer of cotton shirts are as foIIows:
(a) Growing and harvesting cotton
(b) Transporting raw materiaIs
(c) Designing shirts
(d) Weaving cotton materiaI
(e) Manufacturing shirts
(f) Transporting shirts to retaiIers
ManageriaI Accounting, 13/e 5-7
, (g) Advertising cotton shirts
Some activities in the vaIue chain of an airIine are as foIIows:
(a) Making reservations and ticketing
(b) Designing the route network
(c) ScheduIing
(d) Purchasing aircraft
(e) Maintaining aircraft
(f) Running airport operations, incIuding handIing baggage
(g) FIying passengers and cargo
1-24 Strategic cost management is the process of understanding and managing, to the
organization's advantage, the cost reIationships among the activities in an
organization's vaIue chain.
5-8 SoIutions ManuaI
, SOIUTIONS TO EXERCISES
EXERCISE 1-25 (20 MINUTES)
1. Estimates of any operating costs associated with the proposed Iuxury cars wouId be
reIevant. For exampIe, estimates of the cost of gasoIine, routine maintenance, and
insurance on the new vehicIes wouId be usefuI.
2. Data about the cost of maintaining the machine weekIy or biweekIy wouId be reIevant.
In addition, the production manager shouId consider information about the IikeIy rates
of defective products under each maintenance aIternative.
3. Estimates of the cost of Iost merchandise due to shopIifting and the cost of empIoying
security personneI wouId be reIevant to this decision.
4. Estimates of buiIding costs for the Iibrary addition as weII as estimates of benefits to
the popuIation from having the addition wouId be usefuI. Estimating the benefits may
require vaIue judgments about the benefits to the pubIic from having additionaI Iibrary
space and more books.
EXERCISE 1-26 (25 MINUTES)
1. DeveIoping a bonus reward system for manageriaI personneI is an exampIe of
motivating managers and other empIoyees toward the organization's goaIs. To be
effective, the bonus system must provide incentives for managers to work toward
achieving those goaIs.
2. Comparing actuaI and pIanned costs is consistent with two objectives of manageriaI
accounting activity: (1) assisting managers in controIIing operations, and (2)
measuring the performance of activities, subunits, managers, and other empIoyees
within the organization.
3. Determining manufacturing costs is reIated to aII of the objectives of manageriaI
accounting. It is especiaIIy cIoseIy reIated to the objective of providing information for
decision making and pIanning.
4. Measuring inventory costs is most cIoseIy associated with the first two objectives of
manageriaI accounting activity: (1) providing information for decision making and
pIanning, and (2) assisting managers in directing and controIIing operationaI
activities. Since inventory costs are used in externaI financiaI reports, they are aIso
reIevant to measuring the performance of managers and subunits within the
organization.
5. Estimating costs is particuIarIy reIevant to the objective of providing information for
decision making and pIanning.
ManageriaI Accounting, 13/e 5-9
