CHAPTER 1

INTRODUCTION: THE ROLE, HISTORY, AND

DIRECTION OF MANAGEMENT ACCOUNTING
QUESTIONS FOR WRITING AND DISCUSSION
1. A management accounting information
system is an information system that
produces outputs using inputs and
processes needed to satisfy specific
managerial objectives.
2. The inputs of a management accounting
information system are economic events.
The processes transform the inputs into
outputs and are such things as collecting,
measuring, storing, analyzing, reporting,
and managing. Typical outputs include
special reports, product costs, customer
costs, performance reports, budgets, and
personal communication.
3. The three objectives of a management
accounting information system are listed as
follows: To provide information for costing
out services, products, and other objects of
interest to management; to provide
information
for
planning,
controlling,
evaluation, and continuous improvement;
and to provide information for decision
making.
4. All
organizationsmanufacturing,
merchan-dising, and services must have
a good management accounting information
system. Management accounting concepts
and procedures are not restricted to any one
type of organization.

critical for evaluating

operational control.

7. Both financial and nonfinancial information

should be provided by the management
accounting information system. Nonfinancial
information provides insights useful for
controlling operations it is easily used by
operational workers. Financial information is

success

of

8. Continuous improvement means searching

for ways of increasing overall efficiency and
productivity of activities by reducing waste,
increasing quality, and reducing costs.
9. Employee
empowerment
is
allowing
operational workers to plan, control, and
make
decisions
without
explicit
authorization from middle- and higher-level
managers.
10.

Operational workers must be informed so

that they can evaluate and monitor the
effectiveness of their decisions.

11.

Planning
establishes
performance
standards, feedback compares actual
performance with planned performance, and
controlling uses feedback to evaluate
deviations from plans.

12.

Performance reports are formal reports that

compare actual data with planned data or
benchmarks and thus provide signals to
managers that allow them to take corrective
actions.

13.

Management accounting differs from

financial accounting in the following major
ways: (1) internally focused, (2) no
mandated
rules,
(3)
financial
and
nonfinancial;
subjective
information
possible, (4) emphasis on the future, (5)
internal evaluation and decisions based on
very detailed information, (6) broad,
multidisciplinary.

14.

The requirement to prepare reports for

external users created a demand for a
particular accounting information system.
This system was geared to produce
inventory costs. Aggregate average cost
information apparently was sufficient for
most internal decisions. Thus, management
accounting became an extension of the
financial accounting system. This outcome
was probably due to a favorable cost-benefit

5. The users of management accounting

information are managers and workers
within the organization. Anyone internal to
an organization is a potential user of
management accounting information.
6. Management accounting information is used
to cost out objects (for example, services
and products) and to aid in planning,
controlling,
evaluation,
continuous
improvement, and decision making.

the

tradeoff. The incremental cost of producing

more accurate product costs was not offset

by the incremental benefits of improved
decision making. However, significant
changes in the competitive environment
have increased the cost of making bad
decisions, thus increasing the benefits of
more
accurate
information.
Also,
information technology has decreased the
cost of processing data. These two events
have led to a demand for an improved
management
accounting
information
system.
15.

16.

17.

18.

19.

Activity-based management is an important

approach that focuses managements
attention on activities with the objective of
improving the value received by the
customer and the profit achieved by
providing this value. It is important because
it is the heart of the contemporary
management accounting system, offering
increased accuracy in product costing
(through the use of activity costing) and the
ability to evaluate and control activities
(through process value analysis).
Customer value is the difference between
customer realization (what a customer
receives) and customer sacrifice (what a
customer gives up). Focusing on customer
value forces managers to consider the
entire set of value-chain activities, including
what happens after a product is sold. This
creates a demand for a broader set of
information than that found in a traditional
system.
The internal value chain is the set of
activities required to design, develop,
produce, market, distribute, and service a
product (the product can be a service). To
increase customer value, managers must
assess the effect each activity in the chain
has on customer value, keeping those that
add value and eliminating those that do not.
Industrial value chain is the linked set of
value-creating activities from raw materials
through
the
end-use
customer.
Understanding the industrial value chain is
important because it enables a manager to
identify the important internal and external
linkages and use these linkages to create a
competitive advantage.
Supply chain management is concerned
with managing material flows starting with
suppliers and upstream suppliers, moving to
production,
and
finishing
with
the

distribution of finished goods to customers

and downstream customers. Supply chain
management focuses on the entire industrial
value chain because potential benefits may
be reaped by understanding upstream
suppliers and downstream customers.
20. E-business is any business transaction or
information exchange that is executed using
information and communication technology.
Management
accountants
provide
information for e-business settings, e.g., the
cost of processing an electronic transaction
versus the cost of a paper transaction.
21. Managing the value chain requires a crossfunctional perspective. Because of the
interrelationships that exist in the value
chain, a decision can affect many different
functions. Information must be gathered and
reported so that these effects can be
assessed and decision making improved.
22. Decreasing the time required to perform
activities may increase quality and decrease
costs. The management accounting system
should be able to document the relationship
between time reductions and such things as
quality and cost both on a projected or
before-the-fact basis and on an after-thefact basis. This enhances planning,
controlling, and decision making.
23. A line position has direct responsibility for
carrying out the basic missions of an
organization. A staff position has indirect
responsibility for the basic missions and
provides a supportive role for line activities.
24. Yes. For most organizations, the controller
should be a member of the top
management staff. The controller is the
financial expert of an organization and can
provide critical advice and insights.
25. The controller is responsible for both
internal and external accounting. These
responsibilities usually include diverse
activities such as taxes, SEC reports, cost
accounting, bud-geting, internal auditing,
financial
accounting,
and
systems
accounting.
26.

Ethical behavior is concerned with making

right choices and usually involves sacrificing
individual self-interest for the well-being of
others. It is possible to teach ethical
behavior in virtually any course. By being
introduced
to
ethical
dilemmas
in

management accounting, students can be

made aware of the behavior that is
expected in the business world and, in
particular, for management accountants.
27.

Yes. There is some evidence that ethical

behavior actually is good business. In other
words, the market and consumers
appreciate ethical behavior and are willing
to reward those who adopt it.

28.

Yes. As management accountants become

more informed about what behavior is
acceptable and what is not, we should
expect a favorable response. This response
can be reinforced by the IMA imposing
sanctions for serious violations of the code.

29.

The three forms of certification are the

CMA, the CPA, and the CIA. Although each
certifi-

cation can be valuable for management

accountants, the CMA is tailored to fit their
needs. The CPA has a public-accounting
orientation, and the CIA has an internalauditing orientation. Only the CMA
specifically addresses the professional
requirements of a management accountant.
30.

The four parts are (1) economics, finance,

and management; (2) financial accounting
and reporting; (3) management reporting,
analysis, and behavioral issues; and (4)
decision analysis and information systems.
The parts reveal the interdisciplinary nature
of management accounting.

EXERCISES
11
1. Inputs: a, d, f, j
2. Processes: b, g, m

3. Outputs: c,h, i, l
4. System objectives: e, k, n

12
a.
b.
c.
d.
e.
f.
g.

Management
Financial
Management
Financial
Financial
Management
Management

h.
i.
j.
k.
l.
m.
n.

Management
Financial
Management
Management
Financial
Financial
Management

13
1. b
2. c

3. f

14
1. e
2. b

3. c

15
1.
2.
3.
4.
5.
6.

k
g
a
f
i
h

7.
8.
9.
10.
11.

j
c
b
e
d

16
Joan Dennison is staff. She is in a support roleshe prepares reports and helps
explain and interpret them. Her role is to help the line managers more effectively
carry out their responsibilities.
Steven Swasey is a line manager. He has direct responsibility for producing a
garden hose. Clearly, one of the basic objectives for the existence of a
manufacturing firm is to make a product. Thus, Steven has direct responsibility
for a basic objective and therefore holds a line position.

17
A manager has a responsibility to the company as well as society. If he/she lays
off the employees, he/she ignores both of these responsibilities. In effect, the
manager would be pursuing his/her self-interest at the expense of the company
and the salespeople. While pursuit of self-interest is not necessarily unethical, it
can be if it harms others. In this case, the managers action could result in lower
profits for the company because sales may decrease and unnecessary training
costs will be incurred when the positions are refilled the following year. Similarly,
it is unjust to penalize productive employees simply to earn a bonus. The right
choice is to retain the three salespeople. Although the manager is not a
management accountant, he/she is violating the ethical standard that requires the
refusal of any gift or favor (bonus) that would influence or appear to influence
their actions.
The reward system, in part, encouraged this behavior. Apparently, the manager is
paid a bonus if profits exceed 10 percent of planned profits. By basing reward on
a short-run measure such as profits, the manager has the incentive to manipulate
earnings in the short run. One way of manipulating annual earnings is to reduce
discretionary expenditures.
This type of behavior can be discouraged by expanding the performance measures to include long-run factors like market share, productivity, and personnel
development. The accounting system can also be used to track trends (e.g.,
training costs over time). Moreover, managers can be required to provide
extensive justification for significant changes in discretionary expenses.

18
a. By the time most students graduate from high school, they have not had
much exposure to business. Therefore, they do not have full knowledge of
acceptable behavior for the business environment. Students may not know
that certain practices are unethical because they may not be familiar with the
behavioral norms associated with these practices. Once students begin to
learn business practices, they begin to see what ethical dilemmas can arise in
a business context. They then are able to apply the moral training they have
had to deal with the situations. Furthermore, evidence exists that ethical
reasoning can be changed for the better. Thus, instruction in ethics can be a
vital part of a students education.
b. Sacrificing self-interest is a choice that each person must make. Others may
be influenced by those individuals who behave ethically. Individuals
committed to ethical behavior produce societies committed to ethical
behavior (not vice versa).
c. While this sounds noble, many would disagree that managers are first
seeking to serve others and accept personal financial rewards as a byproduct of a good job. Pursuit of self-interest and personal financial wellbeing is not necessarily unethical. It is only when this pursuit is done at the
expense of the collective good that the behavior becomes questionable.
d. It is often true that unethical firms and individuals suffer financially. In the
long run, there is some evidence that ethical behavior pays off. It is doubtful,
however, that every unethical firm or individual is wiped out financially. There
are too many notable exceptions (for example, the selling of drugs by
organized crime).

19
a.
b.
c.
d.

CPA
CIA
CMA
CPA

e.
f.
g.
h.

CPA
CMA
CMA, CPA, CIA
CMA, CPA, CIA

PROBLEMS
110
1.

Excellence teams and minicompanies both have the objective of involving

production line personnel more fully in the management process so that the
company can take advantage of the direct contact and knowledge that
operating workers have about production and their work environment. This
will hopefully translate into continuous improvement of operating
performance. The objectives seem to be realized. Duffy has increased profits
and reduced costs, attributing much of the change to the contributions of the
excellence teams. The same is true for the minicompaniesmuch of the
success in quality improvements appears to be grounded in this
organizational change.

2.

Employee empowerment is a key element of continuous improvement.

Operating workers have tremendous skills, knowledge, and firsthand contact
with the operating environment, all of which can be exploited to discover new
and more efficient ways of producing. As employees are allowed more input,
their self-esteem grows and their commitment to the company increases.
Morale also increases, making for a more pleasant and productive
environment. There are potential disadvantages. Too much latitude in
employee empowerment might sidetrack employees to the point where they
begin to attack personalities; discuss and argue about wage and hour
considerations (or other grievances); or try to become involved in hiring,
firing, and disciplinary matters. Many of these matters are best left
centralized, and some skillful management is needed to ensure that operating
employees are primarily involved in improving efficiency.

3.

Management accounting information should be used to inform empowered

employees so that they can identify problems and monitor and evaluate the
effects of decisions they make.

4.

Quality culture means that the employees of the organization have an internal
commitment to producing high-quality products and services. A learning
organization means that the employees are always seeking new and better
ways of doing thingsthey have a commitment to continuous improvement.

111
A. Decision making; Role: Information about the cost of performing the various
tests.
B. Planning and controlling; Role: Feedback about the actual defective rate
versus the planned rate.
C. Planning; Role: Pro forma income statement and cash budget.
D. Decision making; Role: Projection of future cash flows and analysis of the
effects on unit cost and cycle time.
E. Planning; Role: Providing unit prices and costs so that a cost-volume-profit
analysis can be done.
F. Decision making; Role: Identifying avoidable costs.

112
1.

The total product is the product and its features (processing speed, disk
drives, software packages, and so on), the service, the operating and
maintenance requirements, and the delivery speed.

2.

One company is emphasizing low costs, and the other is attempting to

differentiate its PC by offering faster delivery and higher-quality service.

3.

The Confiars service component and its delivery time appear to be better
than Drantexs. Thus, the realization of these features appears to outweigh
the additional sacrifice (the additional operating and maintenance cost)
associated with the Confiar PC. The implications for management accounting
are straightforward. The management accounting information system should
collect and report information about customer realization and sacrifice. Much
of this information is external to the firm but clearly needed by management.

4.

Better quality and shorter delivery time increase customer realization, while
lowering the price decreases customer sacrifice. In total, customer value has
increased and presumably this should make the Drantex PC much more
competitive. This example illustrates how quality, time, and costs are
essential competitive weapons. It also illustrates how critical it is that the
management accounting system collect and report data concerning these
three dimensions.

113
Planning. The management accountant gains an understanding of the impact on
the organization of planned transactions (i.e., analyzing strengths and
weaknesses) and economic events, both strategic and tactical, and sets obtainable goals for the organization. The development of budgets is an example of
planning.
Controlling. The management accountant ensures the integrity of financial
information, monitors performance against budgets and goals, and provides
information internally for decision making. Comparing actual performance
against bud-geted performance and taking corrective action where necessary is
an example of controlling. Internal auditing is another example.
Evaluating Performance. The management accountant judges and analyzes the
implications of various past and expected events and then chooses the optimum
course of action. The management accountant also translates data and
communicates the conclusions. Graphical analysis (such as trend, bar charts, or
regression) and reports comparing actual costs with budgeted costs are
examples of evaluating performance.
Ensuring Accountability of Resources. The management accountant implements
a reporting system closely aligned to organizational goals that contributes to the
measurement of the effective use of resources and safeguarding of assets.
Internal reporting such as comparison of actual to budget is an example of
accountability.
External Reporting. The management accountant prepares reports in accordance
with generally accepted accounting principles and then disseminates this
information to shareholders, creditors, and regulatory and tax agencies. An
annual report or a credit application are examples of external reporting. (CMA
adapted)

114
The changes that are being proposed violate the following ethical standards:
Competence. Top managements request of Roger Deerling to account for the
companys information in a manner that is not in accordance with generally
accepted accounting principles is in violation of the standard to perform
professional duties in accordance with relevant laws, regulations, and technical
standards. Also, top managements restriction on information disclosure has
violated the standard to prepare complete and clear reports.

114

Concluded

Confidentiality. Top management has violated the ethical standard of refraining

from using confidential information acquired in the course of their work for
unethical or illegal advantage personally (personal job security).
Integrity. Top management clearly is in violation of the standard to avoid actual
or apparent conflicts of interest and advise all appropriate parties (other
shareholders) of any potential conflict.
The motivation for top management in this circumstance appears to be
reinforced by the favorable bonus situation, which is in violation of the standard
to refuse any gift or favor (bonus) that would influence or appear to influence
their actions.
By telling Deerling to restrict the disclosure of the changes, top management is
clearly in violation of the standard to communicate unfavorable as well as
favorable information.
Objectivity. Top managements restriction and distortion of Alerts financial
information violates the standard to communicate information fairly and
objectively.
To resolve the ethical dilemma, Roger Deerling should first determine if the
company has an established policy in place. If so, he should follow the
prescribed policies in resolving the ethical conflict. If there is no policy, then the
specific steps are as follows:

To confront top management about the unethical behavior unless Deerling

believes they are involved, in which case the problem should be presented
to the next higher level, the chairman of the board of directors. If this fails,
then the issue can be taken to the audit committee and the board of
directors.

To clarify relevant concepts by confidential discussion with an objective

advisor to obtain possible courses of action.

To resign and submit an informative memorandum to the chairman of the

board of directors, if all levels of internal review have been exhausted and
the conflict still exists. (CMA adapted)

115
By discussing the possible sale of Websons common stock with members of the
troubleshooting team, Maureen Hughes has violated the following standards of
ethical conduct:
Confidentiality. Hughes has disclosed confidential information acquired in the
course of her work that she has not been authorized to share with peers and
others within the organization. In addition, she has not informed subordinates of
the confidential nature of the information nor has she attempted to prevent the
further distribution of this information.
Integrity. By discussing this information, Hughes has engaged in an activity that
would discredit her profession and prejudice her ability to carry out her duties
ethically.
Objectivity. Hughes has violated the requirement to communicate all information
fairly and objectively.
Competence. Hughes has an obligation to perform her duties in accordance with
relevant laws and regulations. By discussing the information she overheard,
Hughes may have violated laws regulating the use of inside information. (CMA
adapted)

116
John Brogans behavior is unethical for the following reasons:
1. Competence

Brogan is undermining the preparation of complete and clear reports.

2. Confidentiality

Brogan is disclosing confidential information to someone outside the

company (Sara Wiley).
Brogan appears to be using confidential information for unethical
advantage (i.e., brother-in-laws personal objectives).

3. Integrity

By curtailing customer complaints, Brogan has failed to:

avoid a conflict of interest.

refrain from actively or passively subverting the organizations

objectives.
communicate favorable and unfavorable information.

4. Objectivity

Brogan did not:

communicate information fairly and objectively.

disclose fully all relevant information.

(CMA adapted)