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MA Chapter 1
MA Chapter 1
CHAPTER 1
I. Questions
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Chapter 1 Management Accounting: An Overview
4. Yes. Planning is really much more vital than control; that is, superior
control is fruitless if faulty plans are being implemented. However,
planning and control are so intertwined that it seems artificial to draw
rigid lines of separation between them.
5. Yes. The controller has line authority over the personnel in his own
department but is a staff executive with respect to the other departments.
8. Bettina Company
President
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Management Accounting: An Overview Chapter 1
Controller Treasurer
Assistant Assistant
Controller Treasurer
11. Three guidelines that help management accountants increase their value to
managers are (a) employ a cost-benefit approach, (b) recognize behavioral
as well as technical considerations, and (c) identify different costs for
different purposes.
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Chapter 1 Management Accounting: An Overview
14. By reporting and interpreting relevant data, the controller exerts a force or
influence that impels management toward making better-informed
decisions.
15.
Financial Accounting
Audience: External: shareholders, creditors, tax
authorities
Purpose: Report on past performance to external parties;
basis of contracts with owners and lenders
Timeliness: Delayed; historical
Restrictions: Regulated; rules driven by generally accepted
accounting principles and government
authorities
Type of Information: Financial measurements only
Nature of Information: Objective, auditable, reliable, consistent,
precise
Scope: Highly aggregate; report on entire organization
Managerial Accounting
Audience: Internal: Workers, managers, executives
Purpose: Inform internal decisions made by employees
and managers; feedback and control on
operating performance
Timeliness: Current, future oriented
Restrictions: No regulations; systems and information
determined by management to meet strategic
and operational needs
Type of Information: Financial, plus operational and physical
measurements on processes, technologies,
suppliers customers, and competitors
Nature of Information: More subjective and judgmental; valid,
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relevant, accurate
Scope: Disaggregate; inform local decisions and
actions
Exercise 1
Exercise 2
a. (4) Marketing
b. (3) Production
c. (6) Customer service
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Chapter 1 Management Accounting: An Overview
d. (5) Distribution
Exercise 3
a. (4) Marketing
b. (3) Production
c. (5) Distribution
d. (4) Marketing
e. (5) Distribution
f. (3) Production
g. (1) Research and development
h. (2) Design
III. Problems
Because the accountant’s duties are often not sharply defined, some of these
answers might be challenged:
1. Scorekeeping
2. Attention directing
3. Scorekeeping
4. Problem solving
5. Attention directing
6. Attention directing
7. Problem solving
8. Scorekeeping (depending on the extent of the report) or attention
getting
9. This question is intentionally vague. The give-and-take of the
budgetary process usually encompasses all three functions, but it
emphasizes scorekeeping the least. The main function is attention
directing, but problem solving is also involved.
10. Problem solving
1. Inputs: b, g, i, m
2. Processes: a, d, f, j
3. Outputs: e, k, n
4. System objectives: c, h, l
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Jamie Reyes is staff. She is in a support role – she prepares reports and helps
explain and interpret them. Her role is to help the line managers more
effectively carry out their responsibilities.
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Chapter 1 Management Accounting: An Overview
Requirement 1
The possible motivations for the snack foods division wanting to play end-of-
year games include:
(a) Management incentives. Yummy Foods may have a division bonus
scheme based on one-year reported division earnings. Efforts to front-end
revenue into the current year or transfer costs into the next year can
increase this bonus.
(b) Promotion opportunities and job security. Top management of Yummy
Foods likely will view those division managers that deliver high reported
earnings growth rates as being the best prospects for promotion. Division
managers who deliver “unwelcome surprises” may be viewed as less
capable.
(c) Retain division autonomy. If top management of Yummy Foods adopts a
“management by exception” approach, divisions that report sharp
reductions in their earnings growth rates may attract a sizable increase in
top management supervision.
Requirement 2
The “Standards of Ethical Conduct…” require management accountants to:
Refrain from either actively or passively subverting the attainment of
the organization’s legitimate and ethical objectives, and
Communicate unfavorable as well as favorable information and
professional judgment or opinions.
The other “end-of-year games” occur in many organizations and may fall into
the “gray” to “acceptable” area. However, much depends on the
circumstances surrounding each one:
(a) If the independent contractor does not do maintenance work in December,
there is no transaction regarding maintenance to record. The
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Management Accounting: An Overview Chapter 1
Each of the (a), (d), (e) and (g) “end-of-year games” may well disadvantage
Yummy Foods in the long run. For example, lack of routine maintenance may
lead to subsequent equipment failure. The divisional controller is well advised
to raise such issues in meetings with the division president. However, if
Yummy Foods has a rigid set of line/staff distinctions, the division president is
the one who bears primary responsibility for justifying division actions to
senior corporate officers.
Requirement 3
If Tan believes that Ryan wants her to engage in unethical behavior, she
should first directly raise her concerns with Ryan. If Ryan is unwilling to
change his request, Tan should discuss her concerns with the Corporate
Controller of Yummy Foods. Tan also may well ask for a transfer from the
snack foods division if she perceives Ryan is unwilling to listen to pressure
brought by the Corporate Controller, CFO, or even President of Yummy
Foods. In the extreme, she may want to resign if the corporate culture of
Yummy Foods is to reward division managers who play “end-of-year games”
that Tan views as unethical and possibly illegal.
Problem 6
James Torres has come up with a scheme that involves a combination of data
falsification and smoothing! Not only has he made up the revenue numbers,
but also he has had the gall to defer some of them to the next period. Making
up such numbers is clearly illegal. Smoothing, in this example is also illegal
because the numbers are fictitious.
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Chapter 1 Management Accounting: An Overview
Problem 7
Clearly the vice-president will lose his or her job if you turn him or her in.
Given that this is a major violation of the code of ethics and a violation patent
law, the vice-president could go to jail. Your best course of action is to check
your information and if the vice-president is definitely involved, go
immediately to the VP’s superior (who is probably a senior VP or the company
president). The organization’s attorneys will take over from there.
Problem 8
One option is to do nothing and ignore what you saw, however, this may
violate your own code of ethics and your ethical responsibilities under the
organization’s code of ethics. Given that you want to do something, it is
probably best to start by talking to employees in your organization whose job
it is to deal with ethical issues. If no such employees exist or are available,
you might start by using a decision model. This model incorporated the
following steps:
1. Determine the Facts – What, Who, Where, How
2. Define the Ethical Issue
3. Identify Major Principles, Rule, Values
4. Specify the Alternatives.
5. Compare Values and Alternatives, See if Clear Decision
6. Assess the Consequences.
7. Make Your Decision.
IV. Cases
Requirement (a)
Other forward looking information desired in addition to the income statement
information are
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Requirement (b)
No. GAAP does not allow capitalization of employee training and advertising
costs even if management feels that they increase the value of the company’s
brand name. The reasons are uncertainty of the future benefits that may be
derived therefrom and difficulty and reliability of their measurement.
Requirement (c)
Detailed information that managers would likely request are analysis of the
significant increases in
1. Sales
2. Cost of sales
3. Payroll
4. Stock and option based compensation
5. Advertising and promotion.
Requirement (d)
Nonmonetary measures:
1. Change in number and profile of customers
2. Share in the market
3. Who, what and how many are the competitors
4. Product lines offered by the entity vs. Product lines of competitors
5. Sales promotion and advertising activities
Requirement (e)
1. Competitors
2. Employees
3. Prospective creditors
Requirement (a)
Increase in sales to new customers to sales
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Chapter 1 Management Accounting: An Overview
Too much emphasis on this ratio may lead the sales manager to spend more
time developing business with new customers and disregard the needs of
existing customers. It is therefore possible to lose the business of several key
accounts.
Requirement (b)
Decrease in cost of goods sold to sales
This performance measure could create the following problems:
1. Purchasing goods with poor quality at lower cost and selling them for
the same price.
2. Indiscriminately increasing selling price to widen the profit margin
without regard to competitor’s current prices.
3. If the entity is manufacturing its own goods, managers could try to
economize on costs, i.e., buying poorer quality of materials,
employing unskilled workers, etc. thereby causing deterioration of the
quality of the finished products.
Requirement (c)
Decrease in selling and administrative expense to sales
Cost-cutting is generally advisable for as long as the quality of goods and
services are not compromised. Likewise, certain cost-saving measures could
demotivate sales people and other employees and could lead to counter-
productive activities.
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Management Accounting: An Overview Chapter 1
Generally, when we buy goods and services in the free market, we assume we
are buying from people who have a certain level of ethical standards. If we
could not trust people to maintain those standards, we would be reluctant to
buy. The net result of widespread dishonesty would be a shrunken economy
with a lower growth rate and fewer goods and services for sale at a lower
overall level of quality.
Requirement 1
Failure to report the obsolete nature of the inventory would violate the
Standards of Ethical Conduct as follows:
Competence
Perform duties in accordance with relevant technical standards.
Prepare complete reports using reliable information.
By failing to write down the value of the obsolete inventory, Perez would not
be preparing a complete report using reliable information. In addition,
generally accepted accounting principles (GAAP) require the write-down of
obsolete inventory.
Integrity
Avoid conflicts of interest.
Refrain from activities that prejudice the ability to perform duties
ethically.
Refrain from subverting the legitimate goals of the organization.
Refrain from discrediting the profession.
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Chapter 1 Management Accounting: An Overview
Objectivity
Communicate information fairly and objectively.
Disclose all relevant information.
Hiding the obsolete inventory impairs the objectivity and relevance of financial
statements.
Requirement 2
As discussed above, the ethical course of action would be for Perez to insist
on writing down the obsolete inventory. This would not, however, be an easy
thing to do. Apart from adversely affecting her own compensation, the ethical
action may anger her colleagues and make her very unpopular. Taking the
ethical action would require considerable courage and self-assurance.
Requirement 1
See the organization chart on page 17.
Requirement 2
Line positions would include the university president, academic vice-president,
the deans of the four colleges, and the dean of the law school. In addition, the
department heads (as well as the faculty) would be in line positions. The
reason is that their positions are directly related to the basic purpose of the
university, which is education. (Line positions are shaded on the organization
chart.)
All other positions on the organization chart are staff positions. The reason is
that these positions are indirectly related to the educational process, and exist
only to provide service or support to the line positions.
Requirement 3
All positions would have need for accounting information of some type. For
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example, the manager of central purchasing would need to know the level of
current inventories and budgeted allowances in various areas before doing any
purchasing; the vice president for admissions and records would need to know
the status of scholarship funds as students are admitted to the university; the
dean of the business college would need to know his/her budget allowances in
various areas, as well as information on cost per student credit hour; and so
forth.
Requirement 1
No, Santos did not act in an ethical manner. In complying with the president’s
instructions to omit liabilities from the company’s financial statements he was
in direct violation of the IMA’s Standards of Ethical Conduct for
Management Accountants. He violated both the “Integrity” and “Objectivity”
guidelines on this code of ethical conduct. The fact that the president ordered
the omission of the liabilities is immaterial.
Requirement 2
No, Santos’ actions can’t be justified. In dealing with similar situations, the
Securities and Exchange Commission (SEC) has consistently ruled that “…
corporate officers…cannot escape culpability by asserting that they acted as
‘good soldiers’ and cannot rely upon the fact that the violative conduct may
have been condoned or ordered by their corporate superiors.” (Quoted from:
Gerald H. Lander, Michael T. Cronin, and Alan Reinstein, “In Defense of the
Management Accountant,” Management Accounting, May, 1990, p. 55) Thus,
Santos not only acted unethically, but he could be held legally liable if
insolvency occurs and litigation is brought against the company by creditors
or others. It is important that students understand this point early in the
course, since it is widely assumed that “good soldiers” are justified by the fact
that they are just following orders. In the case at hand, Santos should have
resigned rather than become a party to the fraudulent misrepresentation of the
company’s financial statements.
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Case 6
Requirement 1
President
Vice
Vice Vice Academic Vice
Vice
President, President, President,
President President,
Auxiliary Admissions & Physical
Financial Plant
Services Records Services
(Controller)
Dean,
Dean, Business Dean, Dean, Dean,
Engineering &
Humanities Fine Arts Law School
Quantitative
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Chapter 1 Management Accounting: An Overview
Requirement 1
Andres Romero has an ethical responsibility to take some action in the matter
of PhilChem, Inc. and the dumping of toxic wastes. The Standards of Ethical
Conduct for Management Accountants specifies that management
accountants should not condone the commission of acts by their organization
that violate the standards of ethical conduct. The specific standards that apply
are as follows.
• Competence. Management accountants have a responsibility to
perform their professional duties in accordance with relevant laws and
regulations.
• Confidentiality. Management accountants must refrain from
disclosing confidential information unless legally obligated to do so.
However, Andres Romero may have a legal responsibility to take
some action.
• Integrity. Management accountants have a responsibility to:
- refrain from either actively or passively subverting the attainment
of the organization’s legitimate and ethical objectives.
- communicate favorable as well as unfavorable information and
professional judgments or opinions.
• Objectivity. Management accountants must fully disclose all relevant
information that could reasonably be expected to influence an
intended user’s understanding of the reports, comments, and
recommendations.
Requirement 2
The Standards of Ethical Conduct for Management Accountants indicates
that the first alternative being considered by Andres Romero, seeking the
advice of his boss, is appropriate. To resolve an ethical conflict, the first step
is to discuss the problem with the immediate superior, unless it appears that
this individual is involved in the conflict. In this case, it does not appear that
Romero’s boss is involved.
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Chapter 1 Management Accounting: An Overview
Requirement 3
Andres Romero should follow the established policies of the organization
bearing on the resolution of such conflict. If these policies do not resolve the
ethical conflict, Romero should report the problem to successively higher
levels of management up to the Board of Directors until it is satisfactorily
resolved. There is no requirement for Romero to inform his immediate
superior of this action because the superior is involved in the conflict. If the
conflict is not resolved after exhausting all courses of internal review, Romero
may have no other recourse than to resign from the organization and submit an
informative memorandum to an appropriate member of the organization.
(CMA Unofficial Solution, adapted)
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