COMPREHENSIVE EXAMINATION &
STRATEGIC SOLUTIONS MANUAL:
FUNDAMENTAL MANAGERIAL
ACCOUNTING CONCEPTS (10TH
EDITION)
Prepared For: Professional Certification Candidates and Advanced Managerial Accounting
Students Subject Matter: Managerial Accounting, Cost Management, and Strategic Decision
Making Based on Text: Fundamental Managerial Accounting Concepts, 10th Edition by
Edmonds et al.
Part I: Foundations of Management Accounting
and Corporate Governance
Question 1: The Strategic Divergence of Financial and Managerial
Accounting
Scenario: Global Tech Solutions (GTS) is preparing for its Initial Public Offering (IPO). The CFO
is rigorously enforcing GAAP compliance for all external reporting. However, the VP of
Operations complains that the GAAP reports are useless for her daily decisions regarding the
efficiency of the microchip division. She requests a separate internal reporting system. The CFO
resists, citing the cost of maintaining two systems. Based on the foundational concepts in
Edmonds' 10th Edition, which argument best justifies the VP’s request for a distinct managerial
accounting system?
A. Managerial accounting requires strict adherence to historical cost principles, ensuring that
operational assets are not overstated, which provides a more conservative basis for internal
decision-making than financial accounting. B. Financial accounting focuses on company-wide
aggregation and past performance for external stakeholders, whereas managerial accounting
emphasizes relevance, timeliness, and segment-level detail necessary for controlling ongoing
operations. C. The Securities and Exchange Commission (SEC) requires separate managerial
reports for internal audits under the Sarbanes-Oxley Act, making the dual system a legal
necessity rather than a strategic choice. D. Financial accounting reports are too detailed for
operations; managerial accounting summarizes data into broad, company-wide averages that
are easier for operational managers to digest.
Detailed Analysis and Strategic Solution: Correct Answer: B
Theoretical Underpinning: The primary distinction between financial and managerial
accounting lies in their user orientation and the characteristics of the information provided.
Financial accounting is designed for external users—investors, creditors, and regulators—and is
governed by Generally Accepted Accounting Principles (GAAP). Its hallmark characteristics are
,objectivity, verifiability, and consistency. It reports on the "economic truth" of the past.
Conversely, managerial accounting is designed for internal decision-makers. Its primary
constraints are not GAAP rules but the "Value Chain" of information. Information in managerial
accounting must be relevant (pertinent to the decision at hand) and timely.
Strategic Implications: The VP of Operations is correct because GAAP reports often
aggregate data to a level that obscures the performance of individual segments or product lines.
For example, GAAP might require inventory to be valued at full absorption cost (including fixed
overhead), which can hide inefficiencies in variable production costs. Managerial accounting
allows for "Variable Costing" or "Activity-Based Costing," which can isolate specific cost drivers
that the VP can control. Furthermore, financial accounting is historical. By the time an IPO
prospectus or annual report is released, the data is months old. Operational control requires
real-time or near-real-time data (timeliness) to correct manufacturing variances before they
destroy quarterly profitability. The "cost" of the second system is often outweighed by the
"benefit" of better decision-making, a core tenet of the Edmonds text.
Pitfalls to Avoid: Students often select Option C, confusing the internal control requirements of
Sarbanes-Oxley (SOX) with the requirement for a separate managerial accounting system.
While SOX requires internal controls over financial reporting, it does not mandate specific
managerial accounting reports like budgets or variance analysis. Option A is incorrect because
managerial accounting is often less conservative and more estimate-based than financial
accounting.
Question 2: Ethical Conduct and the Resolution of Conflict
Scenario: You are a CMA (Certified Management Accountant) and the Controller at a mid-sized
pharmaceutical company. You discover that the R&D manager has been classifying "research"
expenses (which should be expensed immediately) as "development" assets (which are
capitalized) to boost current-year net income. This ensures the team hits the EBITDA target for
bonuses. You confront the R&D manager, who dismisses your concerns. According to the
Institute of Management Accountants (IMA) Statement of Ethical Professional Practice, what is
your immediate next step?
A. Immediately resign and report the fraud to the SEC whistle-blower hotline to protect your
license. B. Discuss the issue with the immediate supervisor of the R&D manager (or your own
supervisor), provided they are not involved, before escalating further. C. Contact the external
auditors immediately and provide them with the documentation of the misclassification. D.
Unilaterally correct the journal entries to reflect the expenses properly without informing the
R&D manager to avoid conflict.
Detailed Analysis and Strategic Solution: Correct Answer: B
Theoretical Underpinning: The IMA Statement of Ethical Professional Practice outlines
specific steps for "Resolution of Ethical Conflict". The standard procedure mandates that when
faced with an ethical issue, the member should follow the organization's established policies on
the resolution of such conflict. If these policies do not resolve the ethical conflict, the member
should consider discussing the matter with their immediate supervisor, except when it appears
that the supervisor is involved. If the supervisor is involved, the issue should be presented to the
next level of management.
Strategic Implications: Bypassing internal governance structures (Option C or A) is generally
viewed as a violation of the Confidentiality standard unless there is a clear legal requirement to
disclose. Managerial accountants serve the organization first. The goal is to correct the error
internally. Reporting to the immediate supervisor (or the next level up) respects the chain of
, command and gives the company a chance to rectify the situation. Capitalizing research
expenses is a serious violation of the Competence and Integrity standards , as it
misrepresents financial reality. However, the process of resolution is just as important as
identifying the error. Option D violates the need for open communication and Credibility;
making silent adjustments does not address the underlying cultural or control failure that
allowed the R&D manager to attempt the fraud.
Question 3: The Fraud Triangle and Internal Controls
Scenario: During an internal audit of the petty cash fund at a retail branch, you notice that the
store manager, who is undergoing a costly divorce (Pressure), has sole control over authorizing
petty cash transactions and reconciling the fund (Opportunity). Although no money is missing
yet, the manager frequently complains that "the company doesn't pay me enough for the hours I
work" (Rationalization). Which element of the Fraud Triangle is the company most capable of
eliminating through managerial accounting controls?
A. Pressure B. Opportunity C. Rationalization D. Collusion
Detailed Analysis and Strategic Solution: Correct Answer: B
Theoretical Underpinning: The Fraud Triangle, a concept introduced in Chapter 1 alongside
corporate governance, posits that three factors must exist for fraud to occur: Pressure (financial
need), Opportunity (access to assets/records without oversight), and Rationalization
(justifying the theft).
Strategic Implications: A company has very little control over an employee's personal life
(Pressure) or their internal moral compass (Rationalization). However, the company has
absolute control over Opportunity. By implementing internal controls—specifically segregation
of duties—the company can remove the opportunity to commit fraud. In this scenario, the store
manager has both custody of the asset (cash) and the responsibility for record-keeping
(reconciliation). This is a critical control weakness. The solution is to separate these duties: one
person handles the cash, and another reconciles the account. This managerial intervention
effectively breaks the triangle, preventing fraud regardless of the manager's financial pressure
or rationalization.
Question 4: Product vs. Period Costs in a Manufacturing Environment
Scenario: Apex Motors manufactures electric bicycles. They incur the following costs:
1. Tires used on the bicycles.
2. Salaries of the mechanics who assemble the bicycles.
3. Depreciation on the robotic arms used in assembly.
4. Advertising costs for the new "E-Mountain" marketing campaign.
5. Salary of the company CEO.
How are these costs classified on the financial statements?
A. 1, 2, and 3 are Period Costs; 4 and 5 are Product Costs. B. 1, 2, and 3 are Product Costs
(Inventoriable); 4 and 5 are Period Costs. C. All costs are Product Costs because they are
essential to the business operation. D. 1 and 2 are Direct Product Costs; 3, 4, and 5 are Indirect
Product Costs (Overhead).
Detailed Analysis and Strategic Solution: Correct Answer: B
Theoretical Underpinning: The distinction between Product and Period costs is fundamental to
matching revenues and expenses.
● Product Costs: All costs involved in acquiring or making a product. These attach to the
STRATEGIC SOLUTIONS MANUAL:
FUNDAMENTAL MANAGERIAL
ACCOUNTING CONCEPTS (10TH
EDITION)
Prepared For: Professional Certification Candidates and Advanced Managerial Accounting
Students Subject Matter: Managerial Accounting, Cost Management, and Strategic Decision
Making Based on Text: Fundamental Managerial Accounting Concepts, 10th Edition by
Edmonds et al.
Part I: Foundations of Management Accounting
and Corporate Governance
Question 1: The Strategic Divergence of Financial and Managerial
Accounting
Scenario: Global Tech Solutions (GTS) is preparing for its Initial Public Offering (IPO). The CFO
is rigorously enforcing GAAP compliance for all external reporting. However, the VP of
Operations complains that the GAAP reports are useless for her daily decisions regarding the
efficiency of the microchip division. She requests a separate internal reporting system. The CFO
resists, citing the cost of maintaining two systems. Based on the foundational concepts in
Edmonds' 10th Edition, which argument best justifies the VP’s request for a distinct managerial
accounting system?
A. Managerial accounting requires strict adherence to historical cost principles, ensuring that
operational assets are not overstated, which provides a more conservative basis for internal
decision-making than financial accounting. B. Financial accounting focuses on company-wide
aggregation and past performance for external stakeholders, whereas managerial accounting
emphasizes relevance, timeliness, and segment-level detail necessary for controlling ongoing
operations. C. The Securities and Exchange Commission (SEC) requires separate managerial
reports for internal audits under the Sarbanes-Oxley Act, making the dual system a legal
necessity rather than a strategic choice. D. Financial accounting reports are too detailed for
operations; managerial accounting summarizes data into broad, company-wide averages that
are easier for operational managers to digest.
Detailed Analysis and Strategic Solution: Correct Answer: B
Theoretical Underpinning: The primary distinction between financial and managerial
accounting lies in their user orientation and the characteristics of the information provided.
Financial accounting is designed for external users—investors, creditors, and regulators—and is
governed by Generally Accepted Accounting Principles (GAAP). Its hallmark characteristics are
,objectivity, verifiability, and consistency. It reports on the "economic truth" of the past.
Conversely, managerial accounting is designed for internal decision-makers. Its primary
constraints are not GAAP rules but the "Value Chain" of information. Information in managerial
accounting must be relevant (pertinent to the decision at hand) and timely.
Strategic Implications: The VP of Operations is correct because GAAP reports often
aggregate data to a level that obscures the performance of individual segments or product lines.
For example, GAAP might require inventory to be valued at full absorption cost (including fixed
overhead), which can hide inefficiencies in variable production costs. Managerial accounting
allows for "Variable Costing" or "Activity-Based Costing," which can isolate specific cost drivers
that the VP can control. Furthermore, financial accounting is historical. By the time an IPO
prospectus or annual report is released, the data is months old. Operational control requires
real-time or near-real-time data (timeliness) to correct manufacturing variances before they
destroy quarterly profitability. The "cost" of the second system is often outweighed by the
"benefit" of better decision-making, a core tenet of the Edmonds text.
Pitfalls to Avoid: Students often select Option C, confusing the internal control requirements of
Sarbanes-Oxley (SOX) with the requirement for a separate managerial accounting system.
While SOX requires internal controls over financial reporting, it does not mandate specific
managerial accounting reports like budgets or variance analysis. Option A is incorrect because
managerial accounting is often less conservative and more estimate-based than financial
accounting.
Question 2: Ethical Conduct and the Resolution of Conflict
Scenario: You are a CMA (Certified Management Accountant) and the Controller at a mid-sized
pharmaceutical company. You discover that the R&D manager has been classifying "research"
expenses (which should be expensed immediately) as "development" assets (which are
capitalized) to boost current-year net income. This ensures the team hits the EBITDA target for
bonuses. You confront the R&D manager, who dismisses your concerns. According to the
Institute of Management Accountants (IMA) Statement of Ethical Professional Practice, what is
your immediate next step?
A. Immediately resign and report the fraud to the SEC whistle-blower hotline to protect your
license. B. Discuss the issue with the immediate supervisor of the R&D manager (or your own
supervisor), provided they are not involved, before escalating further. C. Contact the external
auditors immediately and provide them with the documentation of the misclassification. D.
Unilaterally correct the journal entries to reflect the expenses properly without informing the
R&D manager to avoid conflict.
Detailed Analysis and Strategic Solution: Correct Answer: B
Theoretical Underpinning: The IMA Statement of Ethical Professional Practice outlines
specific steps for "Resolution of Ethical Conflict". The standard procedure mandates that when
faced with an ethical issue, the member should follow the organization's established policies on
the resolution of such conflict. If these policies do not resolve the ethical conflict, the member
should consider discussing the matter with their immediate supervisor, except when it appears
that the supervisor is involved. If the supervisor is involved, the issue should be presented to the
next level of management.
Strategic Implications: Bypassing internal governance structures (Option C or A) is generally
viewed as a violation of the Confidentiality standard unless there is a clear legal requirement to
disclose. Managerial accountants serve the organization first. The goal is to correct the error
internally. Reporting to the immediate supervisor (or the next level up) respects the chain of
, command and gives the company a chance to rectify the situation. Capitalizing research
expenses is a serious violation of the Competence and Integrity standards , as it
misrepresents financial reality. However, the process of resolution is just as important as
identifying the error. Option D violates the need for open communication and Credibility;
making silent adjustments does not address the underlying cultural or control failure that
allowed the R&D manager to attempt the fraud.
Question 3: The Fraud Triangle and Internal Controls
Scenario: During an internal audit of the petty cash fund at a retail branch, you notice that the
store manager, who is undergoing a costly divorce (Pressure), has sole control over authorizing
petty cash transactions and reconciling the fund (Opportunity). Although no money is missing
yet, the manager frequently complains that "the company doesn't pay me enough for the hours I
work" (Rationalization). Which element of the Fraud Triangle is the company most capable of
eliminating through managerial accounting controls?
A. Pressure B. Opportunity C. Rationalization D. Collusion
Detailed Analysis and Strategic Solution: Correct Answer: B
Theoretical Underpinning: The Fraud Triangle, a concept introduced in Chapter 1 alongside
corporate governance, posits that three factors must exist for fraud to occur: Pressure (financial
need), Opportunity (access to assets/records without oversight), and Rationalization
(justifying the theft).
Strategic Implications: A company has very little control over an employee's personal life
(Pressure) or their internal moral compass (Rationalization). However, the company has
absolute control over Opportunity. By implementing internal controls—specifically segregation
of duties—the company can remove the opportunity to commit fraud. In this scenario, the store
manager has both custody of the asset (cash) and the responsibility for record-keeping
(reconciliation). This is a critical control weakness. The solution is to separate these duties: one
person handles the cash, and another reconciles the account. This managerial intervention
effectively breaks the triangle, preventing fraud regardless of the manager's financial pressure
or rationalization.
Question 4: Product vs. Period Costs in a Manufacturing Environment
Scenario: Apex Motors manufactures electric bicycles. They incur the following costs:
1. Tires used on the bicycles.
2. Salaries of the mechanics who assemble the bicycles.
3. Depreciation on the robotic arms used in assembly.
4. Advertising costs for the new "E-Mountain" marketing campaign.
5. Salary of the company CEO.
How are these costs classified on the financial statements?
A. 1, 2, and 3 are Period Costs; 4 and 5 are Product Costs. B. 1, 2, and 3 are Product Costs
(Inventoriable); 4 and 5 are Period Costs. C. All costs are Product Costs because they are
essential to the business operation. D. 1 and 2 are Direct Product Costs; 3, 4, and 5 are Indirect
Product Costs (Overhead).
Detailed Analysis and Strategic Solution: Correct Answer: B
Theoretical Underpinning: The distinction between Product and Period costs is fundamental to
matching revenues and expenses.
● Product Costs: All costs involved in acquiring or making a product. These attach to the
