Horngren's Cost Accounting, 18th Edition by Srikant M. Datar, Madhav V. Rajan
| Complete Solutions Manual |
CHAPTER 1
THE MANAGER AND MANAGEMENT ACCOUNTING
See the front matter of this Solutions Manual for suggestions regarding your choices of
assignment material for each chapter.
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, communicate and implement 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.
1-1
, • 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 delivering 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 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.
1-2
,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 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
1-3
, • 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 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.
1-4
| Complete Solutions Manual |
CHAPTER 1
THE MANAGER AND MANAGEMENT ACCOUNTING
See the front matter of this Solutions Manual for suggestions regarding your choices of
assignment material for each chapter.
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, communicate and implement 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.
1-1
, • 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 delivering 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 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.
1-2
,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 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
1-3
, • 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 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.
1-4
