MANAGEMENT ACCOUNTING - Solutions Manual

CHAPTER 2
MANAGEMENT ACCOUNTING
AND THE BUSINESS ENVIRONMENT
I.

Questions
1. Managerial accounting information often brings to the attention of
managers important issues that need their managerial experience and
skills. In many cases, managerial-accounting information will not answer
the question or solve the problem, but rather make management aware that
the issue or problem exists. In this sense, managerial accounting
sometimes is said to serve an attention-directing role.
2. Non-value-added costs are the costs of activities that can be eliminated
with no deterioration of product quality, performance, or perceived value.
3. Managers rely on many information systems in addition to managerialaccounting information. Examples of other information systems include
economic analysis and forecasting, marketing research, legal research and
analysis, and technical information provided by engineers and production
specialists.
4. Becoming the low-cost producer in an industry requires a clear
understanding by management of the costs incurred in its production
process. Reports and analysis of these costs are a primary function of
managerial accounting.
5. Some activities in the value chain of a manufacturer of cotton shirts are as
follows:
(a) Growing and harvesting cotton
(b) Transporting raw materials
(c) Designing shirts
(d) Weaving cotton material
(e) Manufacturing shirts
(f) Transporting shirts to retailers
(g) Advertising cotton shirts
Some activities in the value chain of an airline are as follows:
(a) Making reservations and ticketing
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(b)
(c)
(d)
(e)
(f)
(g)
(h)

Designing the route network

Scheduling
Purchasing aircraft
Maintaining aircraft
Running airport operations, including handling baggage
Serving food and beverages in flight
Flying passengers and cargo

6. Strategic cost management is the process of understanding and managing,

to the organizations advantage, the cost relationships among the activities
in an organizations value chain.
7. If customers who provide a company with the most profits are attracted,
satisfied, and retained, profits will increase as a result.
8. A value chain is a sequence of business functions whose objective is to
provide a product to a customer or provide an intermediate good or
service in a larger value chain. These business functions include R&D,
design, production, marketing, distribution, and customer service.
An organization can become more effective by focusing on whether each
link in the chain adds value from the customers perspective and furthers
the organizations objectives.
9. Cost:
Quality:

Organizations are under continuous pressure to reduce the

cost of the products or services they sell to their customers.
Customers are expecting higher levels of quality and are less
tolerant of low quality than in the past.

Time:

Time has many components: the time taken to develop and

bring new products to market; the speed at which an
organization responds to customer requests; and the reliability
with which promised delivery dates are met. Organizations
are under pressure to complete activities faster and to meet
promised delivery dates more reliably than in the past in order
to increase customer satisfaction.
Innovation: There is now heightened recognition that a continuing flow of
innovative products or services is a prerequisite for the
ongoing success of most organizations.
10. Managers make planning decisions and control decisions. Planning
decisions include deciding on organization goals, predicting results under
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various alternative ways of achieving those goals, and then deciding how
to attain the desired goals. Control decisions include taking actions to
implement the planning decisions and deciding on performance evaluation
and feedback that will help future decision making.
11. Four themes for managers to attain success are customer focus, valuechain and supply-chain analysis, key success factors, and continuous
improvement and benchmarking.
12. Companies add value through R&D; design of products, services, or
processes; production; marketing; distribution; and customer service.
Managers in all business functions of the value chain are customers of
management accounting information.
13. This phrase means that people will direct their attention to work primarily
on those tasks that management monitors and measures. Employees may
not pay as much attention (or no attention) to tasks that are not measured.
Often management will reward people based on how well they perform
relative to a specific measure. As an example, in a manufacturing
organization, if people are measured and rewarded based on the number of
outputs per hour, regardless of quality, employees will focus their
attention on producing as many units of output as possible. A negative
consequence is that the quality of output may suffer.
14. Some of these new measures are quality, speed to market, cycle time,
flexibility, complexity and productivity.
15. Customer satisfaction is often thought to be a qualitative measure of
performance as one cannot directly observe satisfaction. However,
using attitude surveys and psychological measurements, customer
satisfaction can be measured in quantitative terms. For instance, people
who design surveys often employ attitude scales that ask questions in
which customers respond on a 1 to 5 scale. These values can be summed
and averaged to determine satisfaction scores.
16.
Stakeholders

Contribution

Requirements

Employees

Effort, skills,
information

Rewards, interesting
jobs, economic
security, proper
treatment

Partners

Goods, services,

Financial rewards

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information

commensurate with the

risk taken

Owners

Capital

Financial rewards

Community

Allows the
organization to operate
and does not oppose
its operation

Conformance to laws,
good corporate
citizenship and,
perhaps, leadership

17. Competitive benchmarking is an organizations search for, and

implementation of, the best way to do something as practiced in other
organizations.
Continuous improvement is the relentless search to (1) document,
understand, and improve the activities that the organization undertakes to
meet its customers requirement, (2) eliminate processing activities that do
not add product features that customers value, and (3) improve the
performance of activities that increase customer value or satisfaction.
18. A value-added activity is an activity that, if eliminated, would reduce the
products service to the customer in the long run.
An activity that cannot be classified as value-added is a nonvalue-added
activity:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.

Value-added
Nonvalue-added
Nonvalue-added
Value-added
Nonvalue-added
Nonvalue-added
Value-added
Value-added
Nonvalue-added
Value-added

19. Just-in-time means making a good or service only when the customer,
internal or external, requires it. Just-in-time requires a product layout
with a continuous flow (no delays) once production starts. It means that
setup costs must be reduced substantially to eliminate the need to produce
in batches, and it means that processing systems must be reliable. Just-intime production is based on the elimination of all nonvalue-added
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activities to reduce cost and time. It is an approach to improvement that

is continuous and involves employee empowerment and involvement.
20. Managerial accounting is concerned with providing information to
managers for use within the organization. Financial accounting is concerned with providing information to stockholders, creditors, and others
outside of the organization.
21. A strategy is a game plan that enables a company to attract customers by
distinguishing itself from competitors. The focal point of a companys
strategy should be its target customers.
II. Multiple Choice Questions
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

B
A
D
A
D
A
C
B
D
B

11.
12.
13.
14.
15.
16.
17.
18.
19.
20.

A
B
C
D
A
A
B
C
B
A

21. B
22. C
23. C

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