WRITING/DISCUSSION EXERCISES

1. Describe how cost accounting supports management accounting and financial accounting

What are some basic characteristics of accounting that all accountants use whether in financial or
managerial accounting? The Financial Accounting Standards Board (FASB) describes a hierarchy of accounting
qualities in its second Statement of Financial Accounting Concepts. The characteristics deemed important for financial
accounting are the same as those described throughout the text as those of managerial accounting. The Concepts describe
the users of accounting information as “decision makers” with the constraints of cost/benefit and materiality. The
qualities of accounting information are given as “understandability, decision usefulness, relevance, and reliability.”
Relevance is further described by the terms “predictive value, feedback value, and timeliness.” Reliability is
characterized by “verifiability, neutrality, and representational faithfulness.” The additional quality of comparability,
including consistency, belongs to the descriptors of decision usefulness. These qualities apply to all accounting
information, financial or managerial, in processing any economic transaction that have occurred into information useful
for making decisions.

The definition given for accounting by the 1941 Committee on Terminology of the American Institute of Accountants is “.
. . the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions, and
events which are in part, at least, of a financial character, and interpreting the results thereof.” This definition was before
the study of cost accounting as an academic subject, but note the statement from the current text about accounting systems
—“Processing any economic transactions entails collecting, categorizing, summarizing, and analyzing.” Some basic
characteristics define accounting.

From FASB Statement of Financial Accounting Concepts No. 2 (Stamford, CT: FASB, 1980)

2. Understand how management accountants affect strategic decisions

Explain how routine reports to managers not only provide information but also influence behavior regarding the
planning and controlling of operations. Throughout the text, the behavior or performance of people is noted in response
to goals set, structure of bonus calculations, choice of financial reporting (absorption versus variable costing and the build
up of inventory), designation as cost center versus profit or investment center, etc. The information provided will be acted
upon based upon the user’s understanding and individual goals. Goal congruence as a concept is introduced at a later point
but has pertinence here. People will work to achieve their own goals within the company’s structure. They will look to
the measurement being used to further their own goals. Managers must be careful in designing measures of performance
to insure the measures work to attain the company’s strategic goals.

3. Distinguish between the planning and control decisions of managers

Describe the steps in a decision-making or thinking process. Exhibit 1-1 can be used as an example. Students may be
given a situation or asked to use a recent decision they have made. Any goal-setting situation can be an example. Perhaps
the student selects the goal of making good grades for the semester to gain a “good student discount” for car insurance
purposes. Knowing what is expected for the discount and for earning specific grades in each class assists in predicting
results under various alternative ways of achieving the goal. Keeping a log of how time was spent would measure action
taken. Comparing the log of how the time was spent to the planned usage of time comprises control. Evaluating the
results of time spent and grades earned are an example of feedback.

4. Distinguish among the problem-solving, scorekeeping, and attention-directing roles of management

accountants

Describe the steps in making a decision in terms of the roles of management accountants. Using the example given in
Learning Objective 3 above, the keeping of a study log would be an example of scorekeeping. Comparing the log of how
the time was actually spent to the planned usage of time spent would be an example of attention directing. Evaluating or
analyzing the results of time spent and grades earned is an example of problem solving because of the characteristic of
relevance in providing feedback and predictive value as to how time should be spent and for what it should be spent
doing.
Students could provide other examples of the use of problem solving, scorekeeping, and attention directing, especially in
the area of sports.

5. Identify four themes managers need to consider for attaining success

List some activities a management accountant could do to keep up to date with or ahead of changes in the field of
management. Active membership in professional organizations is one way to keep current. One of the points made in
the IMA Standards of Ethical Conduct for Management Accountants is to “maintain an appropriate level of professional
competence by ongoing development of their knowledge and skills.” (Competence section) Keeping up on the news by
reading current periodicals, listening to programs on current business practices, or attending seminars sponsored by
professional organizations are all helpful.

6. Describe the set of business functions in the value chain

Describe how managers in all areas of the value chain are customers of accounting information. Include a definition
of “value” as it applies to the “value” chain along with the meaning of “success” for management accounting. The
section in the text describing the value chain notes that usefulness added to the products or services of a company result in
value to the customer. Throughout the section, “Enhancing the Value of Management Accounting Systems,” runs the
theme of integration of functions and information for improved decision making by managers, a definition of success for
management accounting. This is a focus of modern cost accounting–decision support.

7. Describe three ways management accountants support managers

Explain the cost-benefit approach guideline (a) when considered within the confines of an individual company and (b)
when considered as interplay between society and the individual company. The explanation given in the section of the
text “Cost-Benefit Approach” is useful for using within the company situation. The interplay between society and
company can have a different meaning of cost-benefit: the company must bear the cost of additional processing or
information for the benefit of society to have a cleaner environment, for example, or to make better decisions about
investing or lending, a typical financial accounting function.

Explain why “bean counters” would have “behavioral considerations” as a key guideline in performing their
management accounting functions. As pointed out in the “Behavioral Consideration” section in the text, “management
control is primarily a human activity that should focus on how to help individuals do their jobs better.” The role that
management accounting systems play in helping managers make better decisions demands that accountants understand the
importance of people in each step of the decision-making process and operations of the company.

8. Understand how management accounting fits into an organization’s structure

Describe the knowledge, skills, and abilities required of a management accountant following the different costs for
different purposes theme. The section in the text, “Surveys of Company Practices—A Day in the Life,” can be helpful
for this exercise. The IMA has also published the results of a survey on the KSAs (knowledge, skills, abilities) needed for
management accounting. Check the Web site of IMA (http://www.imanet.org) for additional information.

The American Institute of Certified Public Accountants (AICPA) in its “Vision Project” has identified characteristics of
leaders or persons who stand out among their peers. The term “pathfinders” has been applied to those who display the
traits necessary. The characteristics can be obtained through the AICPA Web site (http://www.cpavision.org ).

9. Understand what professional ethics mean to management accountants

From the perspective of (a) a stockholder, (b) a company manager, (c) an employee other than a manager, and (d) a
customer, explain why a code of ethics is important for the accountants within a company. Consider the functions
performed, the measures employed, and the concept of professional status. The section in the text, “Surveys of
Company Practice—Common Ethical Dilemmas,” can be helpful in addressing this exercise as well as the section on
professional ethics. Accountants consider themselves to be professionals. A code of ethics is usually regarded as a
necessary aspect of a professional class. In the explanation of management accounting functions, the function of
scorekeeping receives particular attention as one in which accountants are responsible for the reliability of the reported
information and act as watchdogs for top management.

CRITICAL THINKING

124. Describe management accounting and financial accounting.

Answer:
Management accounting provides information to internal decision makers of the business such as top
executives, managers, sales representatives, and production supervisors. Its purpose is to help managers
predict and evaluate future results. Reports are generated often and usually broken down into smaller
reporting divisions such as department or product line. There are no rules to be complied with since these
reports are for internal use only. Management accounting embraces more extensively such topics as the
development and implementation of strategies and policies, budgeting, special studies and forecasts,
influence on employee behavior, and nonfinancial as well as financial information.

Financial accounting provides information to external decision makers such as investors and creditors. Its
purpose is to present a fair picture of the financial condition of the company. Reports are generated
quarterly or annually and report on the company as a whole. The financial statements must comply with
GAAP (generally accepted accounting principles). A CPA audits, or verifies, that the GAAP are being
followed.

Difficulty: 2 Objective: 1

125. Is financial accounting or management accounting more useful to an operations manager? Why?

Answer:
Management accounting is more useful to an operations manager because management accounting reports
operating results by department or unit rather than for the company as a whole, it includes financial as
well as nonfinancial data such as on-time deliveries and cycle times, and it includes quantitative as well as
qualitative data such as the type of rework that was needed on defective units.

Difficulty: 3 Objective: 1

126. What is strategy? Briefly describe the two broad types of strategies that companies may choose to pursue.

Answer:
Strategy specifies how an organization matches its own capabilities with the opportunities in the
marketplace to accomplish its objectives. In other words, strategy describes how a company will compete.

Companies follow one of two broad strategies. One is provide a quality product or service at low prices.
The other is to compete on their ability to offer a unique product or service that is generally offered at a
higher price.

Difficulty: 2 Objective: 2
127. Briefly describe how managers make use of management accounting information.

Answer:
ONE: To choose strategy, to communicate it, and to determine how best to implement it.

TWO: To plan business operations related to designing, producing, and marketing a product or
service. This includes preparing budgets and determining the prices and cost of products and
services. A company must know the cost of each product and service to decide which products
to offer and whether to expand or discontinue product lines.

THREE: To control business operations that include comparing actual results to the budgeted results and
taking corrective action when needed.

Difficulty: 2 Objective: 1,2,3

128. Briefly explain the planning and control activities in management accounting. How are these two activities
linked to each other?

Answer:
Planning business operations relates to designing, producing, and marketing a product or service. This
includes preparing budgets and determining the prices and cost of products and services. A company must
know the cost of each product and service to decide which products to offer and whether to expand or
discontinue product lines.

Controlling business operations includes comparing actual results to the budgeted results and taking
corrective action when needed.

Feedback links planning and control. The control function provides information to assist in better future
planning.

Difficulty: 2 Objective: 3

129. Explain how a budget can help management implement strategy.

Answer:
A budget is a planning tool, a quantitative expression of a plan of action. First actions are planned and
then communicated to the entire organization.

The budget also helps with coordination.

Difficulty: 3 Objective: 3
130. Explain how a customer focus can result in increased profits for a company.

Answer:
If customers who provide a company with the most profits are attracted, satisfied, and retained, profits will
increase as a result.

Difficulty: 3 Objective: 5

131. Describe the value chain and how it can help organizations become more effective.

Answer:
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 customer's perspective and furthers the organization’s objectives.

Difficulty: 3 Objective: 6

132. In most organizations, customer satisfaction is one of the top priorities. As such, attention to customers is
necessary for success. Briefly describe the four types of demands customers are currently placing on
organizational performance.

Answer:
Cost: Organizations are under continuous pressure to reduce the cost of the products or services
they sell to their customers.

Quality: 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.

Difficulty: 2 Objective: 6
133. Management accounting helps managers focus on four key themes. Briefly describe each.
Answer:
1. Customer focus is particularly critical This theme is central. Customers are pivotal to the success
of an organization. The number of organizations aiming to be "customer-driven" is large and
increasing.
2. Value-chain and supply-chain analysis This theme has two related aspects (1) treating each area
of the business function as an essential and valued contributor, and (2) integrating and coordinating
the efforts of all business functions in addition to developing the capabilities of each individual
business function.
3. Key success factors Customers are demanding ever-improving levels of performance regarding
cost, quality, time, and innovation.
4. Continuous improvement and benchmarking Continuous improvement by competitors creates a
never-ending search for higher levels of performance within many organizations. Continuous
improvement targets are often set by benchmarking.
Difficulty: 3 Objective: 6

134. Discuss the potential behavior implications of performance evaluation.

Answer:
As measurements are made on operations and, especially, on individuals and groups, the behavior of the
individuals and groups are affected. People react to the measurements being made. They will focus on
those variables or the behavior being measured and spend less attention on variables and behavior that are
not measured. In addition, if managers attempt to introduce or redesign cost and performance
measurement systems, people familiar with the previous system will resist. Management accountants
must understand and anticipate the reactions of individuals to information and measurements. The design
and introduction of new measurements and systems must be accompanied with an analysis of the likely
reactions to the innovations.
Difficulty: 3 Objective: 7

135. How does a controller help “control” a company?

Answer:
By reporting and interpreting relevant data, the controller exerts a force or influence that impels
management toward making better-informed decisions.
The controller of Caterpillar described the job as “a business advisor to … help the team develop strategy
and focus the team all the way through recommendations and implementation.”
Difficulty: 3 Objective: 8

SHORT-ANSWER ESSAY QUESTIONS

S-A E 144
Financial and managerial accounting are both concerned with the economic events of an enterprise. Similarities
between financial and managerial accounting do exist, but they do have different focus. Briefly distinguish
between financial and managerial accounting as they relate to (1) the primary users, (2) the type and frequency
of reports, (3) the purpose of reports, and (4) the content of reports.
Solution 144
Financial accounting is primarily concerned with external users such as stockholders and creditors, while the
primary users of managerial accounting are those within the company (internal users) such as officers,
managers, supervisors, etc. Quarterly and annual classified financial statements are the end product of financial
accounting. Internal reports, prepared as often as needed are the result of managerial accounting. The financial
statements produced by financial accounting are general-purpose reports which are highly aggregated, pertain to
the enterprise as a whole, and are constrained by generally accepted accounting principles. The internal reports
prepared by management accountants are special purpose reports which are detailed, pertain to subunits of the
enterprise, and may contain any information relevant to the decision at hand.

S-A E 146 (Ethics)

Million Dollar Mills is a textile manufacturing firm located in the southern United States. The company
carefully prepares all financial statements in accordance with GAAP, and gives a copy of all financial
statements to each department. In addition, the company keeps records on quality control, safety, and
environmental pollution by the company. It then prepares "scorecards" for each department indicating their
performance. Recently, the financial impact of the second set of information was added, and the information
has been used in the evaluation of employees for merit pay and promotions.

S-A E 146 (cont.)

At the most recent employee meeting, Tyler Hanes, marketing manager, expressed his discomfort with the
system. He said that there was no guarantee that the second set of information was fair, since there were no
generally accepted principles for this kind of information. He also said that it was kind of like keeping two sets
of books—one following all legal requirements, and the other one actually used by the company.

Required:
1. Is it ethical to evaluate managers in the way described? Explain briefly.
2. Name at least two safeguards the company could build into its system to ensure the ethical treatment of
employees.

Solution 146
1. It is ethical for a company to use all available data in order to evaluate managers, and even to collect data
not routinely available. In fact, such a method seems preferable to one in which the company may only use
specified financial data in its evaluation of a manger's performance. It does not imply a departure from
GAAP, nor that the company does not actually use the information prepared according to GAAP. It
supplements the standard reports, it does not replace them.

2. The company should make certain that the appropriate information is calculated in the same way each
period. All the relevant data should be collected and reported each period. New data should be limited.
The qualitative information should be complemented, not replaced, by the regular financial information.

S-A E 147 (Comm.,unication)

Volumetrica, a producer of audio equipment for large computer systems, is reviewing its policies as part of a
biannual self-examination of the company. As part of this process, all managers have been asked to carefully
examine costs and determine as closely as possible which costs are direct and which are indirect.
Mary Peters and Sam Wilson, managers of different manufacturing departments in the same building, have been
working together. They found the following four costs that could be economically traced to the products, but
have historically been a part of overhead:
 Cost of setting up the machinery for a different production run.
 Cost of minor assembly components such as knobs and switches.
 Cost of packaging, which is quite different for each model.
 Cost of inspecting and testing each model.

None of the costs is significant by itself, but together these four costs make up between 10 and 15% of the total
cost of the product. Mary favors "leaving well enough alone," as she puts it, and leaving these costs in overhead.
She is afraid that her volunteering to trace these costs will result in her having to trace many more costs in the
future. Sam, on the other hand, prefers to have the product cost as accurate as possible. He points out that these
costs are already known, and the process would require little extra work.

S-A E 147 (cont.)

Required:
You have been called on in your function as accounting manager to resolve the dispute. Write a memo to Mary
and Sam, supporting one or the other position. Be sure to adequately defend your position, but be brief.

Solution 147

TO: Mary Peters and Sam Wilson

FROM: Mary West, Accounting Manager

RE: Tracing overhead

I strongly support the tracing of as much of what is now overhead directly to the products as
possible (sorry, Mary). Besides giving more accurate product costs now, as Sam says, it will help
us considerably in the future. We can evaluate products better, the more we know about which
costs they generate. Otherwise, we just assign them some amount of overhead, which may be
either more or less than they actually cause.

Thank you both for your hard work. It is true, as Mary says, that our reviews will (temporarily)
cause us more work (sorry, Sam). However, I think you'll both agree that the benefits of knowing
the costs of our products better will make the effort well worthwhile.

So, let's start tracing the four costs you mentioned now. Once we have the glitches ironed out,
we'll share the results with the other departments.

(signed)

CASE ANALYSIS:
MANAGEMENT DECISION, ETHICS
 52. Ken Franklin is the sales manager of Davidson Enterprises, a very profitable distributor of office furniture to local
businesses. A recent economic downturn has created an extremely tight cash position, and the company has been
hurt by the bankruptcy of two key customers.

In late October, anticipating an economic recovery, Franklin began an extensive remodeling of the company's
sales floor. Construction costs, decorating, and equipment purchases are projected to cost $250,000.

Davidson has a policy that individual expenditures in excess of $200,000 must be approved by the firm's board of
directors. Franklin, unfortunately, missed the deadline to have the board consider this project at its regular
September meeting. Not wanting to wait until the next meeting in December, he subdivided the project in two
parts—construction and decorating ($190,000) and equipment purchases ($60,000)—neither of which needed
board approval because of the dollar amounts involved.

The project was recently completed and sales have begun to recover. Customers have raved about the new sales
area, noting that it is far superior to those of Davidson's competitors.

Required:
A. Would Franklin's approach of subdividing the project in two parts have any effect on the company's financial
statements? Briefly explain.
B. Briefly discuss whether Franklin behaved in an ethical manner.
C. Which, if any, of the following standards of conduct would have applicability to Franklin's conduct:
competence, confidentiality, integrity, or credibility? Briefly explain.

LO: 9 Type: N

Answer:
A. Although some extra processing is involved because of the "separate" projects, the same total costs will be
incurred for the same assets. Thus, there is no impact on the financial statements, which serve to summarize
financial activity.

B. Franklin behaved in an unethical manner. Even though business is recovering and customers seem more than
satisfied with the new sales area, Franklin knowingly bypassed stated company policy. The project is being
done in a single phase, and is comprised of construction, decorating, and equipment acquisition. This is
really one project; yet his accounting treatment implies otherwise.

C. Two standards are relevant here. Integrity holds that managers refrain from engaging in any conduct that
would prejudice the ethical performance of duties. Additionally, credibility recognizes that managers have a
responsibility to communicate information fairly and objectively, and disclose all relevant information that
could reasonably be expected to influence a user's understanding of the reports and data presented.

Possible Ethics Issues

53. Many professions have adopted a series of ethical standards to provide guidance for their memberships. The
Institute of Management Accountants (IMA), for example, has published standards that focus on competence,
confidentiality, integrity, and credibility. In light of these standards, consider the three cases that follow.

Case A—Leston Corporation has experienced serious financial difficulties in recent years. John Young, the
company’s chief financial officer, has just learned that a major competitor was likely to file for bankruptcy;
however, he failed to disclose this information at a board meeting held later that day when a plant closure
decision was being discussed. The board evaluated several proposals during the session that focused on
improving Leston’s financial position.

Case B—QBX Company manufactures fertilizer from various raw materials, including a raw material know
as Felstar. Paul Kelly, the firm’s purchasing manager, purposely acquired a lower grade of Felstar than
normal because of a very attractive price. The lower-grade product resulted in increased usage during the
manufacturing process but had no effect on the fertilizer’s overall quality. An end-of-period report showed
 that QBX profited from Kelly’s actions, with the overall savings in purchase price more than offsetting the
cost of added consumption.

Case C—Central Distributing has a participative budgeting process, allowing employees to have a say in
projected sales targets for the upcoming period. These targets are reflected in a series of performance reports
that compare actual sales achieved against targeted amounts. Hillary Baxter submitted very low sales targets
because, as she confided in a colleague, "I always want to look good in terms of meeting targets, even if
anticipated sales and closures don’t materialize."

Required:
Evaluate the three cases and determine the ethical issues, if any, that are involved. Cite the IMA’s standards if
appropriate.

LO: 9 Type: N

Answer:
Case A: Young had an obligation to inform the other board members about the likely bankruptcy, particularly in
light of the company’s financial situation and the topics under discussion at the meeting. The information could
have affected the board’s thinking on several matters. Two of the IMA standards are relevant here: competence
and credibility. Competence notes, in part, that members provide decision-support information that is accurate
and timely. Additionally, credibility holds that members disclose all relevant information that could influence a
user’s understanding of an analysis. Young’s silence violates both of these ethical standards.

Case B: Kelly did not violate any ethical standards. The acquisition of sub-par material was a sound business
decision, particularly since QBX prospered financially and quality of the end product did not suffer.

Case C: Baxter engaged in a somewhat common practice known as padding the budget; nevertheless, one can
conclude that such a practice is inconsistent with the ethical standards of credibility and competence. Baxter is
not providing full knowledge of the sales situation by setting targets that are purposely low, thus possibly
misleading managers who attempt to analyze her performance. Additionally, competence is involved because the
information provided in setting the sales targets is inaccurate.

DISCUSSION QUESTIONS

MANAGERIAL ACCOUNTING VS. FINANCIAL ACCOUNTING

54. Briefly distinguish between managerial accounting and financial accounting. Be sure to comment on the general
focus, users, and regulation related to the two fields.

LO: 4 Type: RC

Answer:
Managerial accounting is concerned with providing information to personnel within an organization so that they
can plan, make decisions, evaluate performance, and control operations. There are no rules and regulations
associated with this field since the information is intended solely for use within the firm.

Financial accounting, in contrast, focuses on financial statements and other financial reports. This area deals with
reporting to groups outside of an organization (e.g., stockholders, lenders, government agencies) so that some
assessment of profitability and overall financial health can be made. Given the large number of firms in our
economy and the varying level of user sophistication, the field is heavily regulated (by the Financial Accounting
Standards Board and, to a lesser degree, by the Securities and Exchange Commission).

Financial and Managerial Accounting

51. Consider the descriptors that follow.

1. Is heavily involved with the recordkeeping and reporting of assets, liabilities, and stockholders’ equity.
2. Focuses on planning, control, decision making, and performance evaluation.
3. Is heavily regulated.
4. A field that is becoming more "cross-functional" in nature.
5. Much of the field is based on costs and benefits.
6. Is involved almost exclusively with past transactions and events.
7. Much of the information provided is directed toward stockholders, financial analysts, creditors, and other
external parties.
8. Tends to focus more on subunits within an entity rather than the organization as a whole.
9. May become involved with measures of customer satisfaction, and the amount of actual cost incurred vs.
budgeted targets.

Required:
Determine whether the descriptors are most closely associated with financial accounting or managerial
accounting.

LO: 2, 3, 4, 6 Type: RC
 Answer:
1. Financial accounting 6. Financial accounting
2. Managerial accounting 7. Financial accounting
3. Financial accounting 8. Managerial accounting
4. Managerial accounting 9. Managerial accounting
5. Managerial accounting

CASE ANALYSIS:
MANAGEMENT DECISION, ETHICS

52. Ken Franklin is the sales manager of Davidson Enterprises, a very profitable distributor of office furniture to local
businesses. A recent economic downturn has created an extremely tight cash position, and the company has been
hurt by the bankruptcy of two key customers.

In late October, anticipating an economic recovery, Franklin began an extensive remodeling of the company's
sales floor. Construction costs, decorating, and equipment purchases are projected to cost $250,000.

Davidson has a policy that individual expenditures in excess of $200,000 must be approved by the firm's board of
directors. Franklin, unfortunately, missed the deadline to have the board consider this project at its regular
September meeting. Not wanting to wait until the next meeting in December, he subdivided the project in two
parts—construction and decorating ($190,000) and equipment purchases ($60,000)—neither of which needed
board approval because of the dollar amounts involved.

The project was recently completed and sales have begun to recover. Customers have raved about the new sales
area, noting that it is far superior to those of Davidson's competitors.

Required:
D. Would Franklin's approach of subdividing the project in two parts have any effect on the company's financial
statements? Briefly explain.
E. Briefly discuss whether Franklin behaved in an ethical manner.
F. Which, if any, of the following standards of conduct would have applicability to Franklin's conduct:
competence, confidentiality, integrity, or credibility? Briefly explain.

LO: 9 Type: N

Answer:
D. Although some extra processing is involved because of the "separate" projects, the same total costs will be
incurred for the same assets. Thus, there is no impact on the financial statements, which serve to summarize
financial activity.

E. Franklin behaved in an unethical manner. Even though business is recovering and customers seem more than
satisfied with the new sales area, Franklin knowingly bypassed stated company policy. The project is being
done in a single phase, and is comprised of construction, decorating, and equipment acquisition. This is
really one project; yet his accounting treatment implies otherwise.

F. Two standards are relevant here. Integrity holds that managers refrain from engaging in any conduct that
would prejudice the ethical performance of duties. Additionally, credibility recognizes that managers have a
responsibility to communicate information fairly and objectively, and disclose all relevant information that
could reasonably be expected to influence a user's understanding of the reports and data presented.

Possible Ethics Issues

53. Many professions have adopted a series of ethical standards to provide guidance for their memberships. The
Institute of Management Accountants (IMA), for example, has published standards that focus on competence,
confidentiality, integrity, and credibility. In light of these standards, consider the three cases that follow.
 Case A—Leston Corporation has experienced serious financial difficulties in recent years. John Young, the
company’s chief financial officer, has just learned that a major competitor was likely to file for bankruptcy;
however, he failed to disclose this information at a board meeting held later that day when a plant closure
decision was being discussed. The board evaluated several proposals during the session that focused on
improving Leston’s financial position.

Case B—QBX Company manufactures fertilizer from various raw materials, including a raw material know
as Felstar. Paul Kelly, the firm’s purchasing manager, purposely acquired a lower grade of Felstar than
normal because of a very attractive price. The lower-grade product resulted in increased usage during the
manufacturing process but had no effect on the fertilizer’s overall quality. An end-of-period report showed
that QBX profited from Kelly’s actions, with the overall savings in purchase price more than offsetting the
cost of added consumption.

Case C—Central Distributing has a participative budgeting process, allowing employees to have a say in
projected sales targets for the upcoming period. These targets are reflected in a series of performance reports
that compare actual sales achieved against targeted amounts. Hillary Baxter submitted very low sales targets
because, as she confided in a colleague, "I always want to look good in terms of meeting targets, even if
anticipated sales and closures don’t materialize."

Required:
Evaluate the three cases and determine the ethical issues, if any, that are involved. Cite the IMA’s standards if
appropriate.

LO: 9 Type: N

Answer:
Case A: Young had an obligation to inform the other board members about the likely bankruptcy, particularly in
light of the company’s financial situation and the topics under discussion at the meeting. The information could
have affected the board’s thinking on several matters. Two of the IMA standards are relevant here: competence
and credibility. Competence notes, in part, that members provide decision-support information that is accurate
and timely. Additionally, credibility holds that members disclose all relevant information that could influence a
user’s understanding of an analysis. Young’s silence violates both of these ethical standards.

Case B: Kelly did not violate any ethical standards. The acquisition of sub-par material was a sound business
decision, particularly since QBX prospered financially and quality of the end product did not suffer.

Case C: Baxter engaged in a somewhat common practice known as padding the budget; nevertheless, one can
conclude that such a practice is inconsistent with the ethical standards of credibility and competence. Baxter is
not providing full knowledge of the sales situation by setting targets that are purposely low, thus possibly
misleading managers who attempt to analyze her performance. Additionally, competence is involved because the
information provided in setting the sales targets is inaccurate.

DISCUSSION QUESTIONS

MANAGERIAL ACCOUNTING VS. FINANCIAL ACCOUNTING

54. Briefly distinguish between managerial accounting and financial accounting. Be sure to comment on the general
focus, users, and regulation related to the two fields.

LO: 4 Type: RC

Answer:
Managerial accounting is concerned with providing information to personnel within an organization so that they
can plan, make decisions, evaluate performance, and control operations. There are no rules and regulations
associated with this field since the information is intended solely for use within the firm.
 Financial accounting, in contrast, focuses on financial statements and other financial reports. This area deals with
reporting to groups outside of an organization (e.g., stockholders, lenders, government agencies) so that some
assessment of profitability and overall financial health can be made. Given the large number of firms in our
economy and the varying level of user sophistication, the field is heavily regulated (by the Financial Accounting
Standards Board and, to a lesser degree, by the Securities and Exchange Commission).

TRUE/FALSE

1. Management accounting information focuses on external reporting.

Answer: False Difficulty: 1 Objective: 1

Management accounting information focuses on internal reporting.

2. A good cost accounting system is narrowly focused on a continuous reduction of costs.

Answer: False Difficulty: 2 Objective: 1

A good cost accounting system is broadly focused to provide information that helps managers at all levels
implement, monitor, and evaluate company strategies.
4. The balance sheet, income statement, and statement of cash flows are used for financial accounting, but not for
management accounting.

Answer: False Difficulty: 1 Objective: 1

The balance sheet, income statement, and statement of cash flows are used for financial accounting and also for
management accounting.

5. Financial accounting is broader in scope than management accounting.

Answer: False Difficulty: 2 Objective: 1

Management accounting is broader in scope than financial accounting.

6. Cost accounting measures and reports short-term, long-term, financial, and nonfinancial information.

Answer: True Difficulty: 2 Objective: 1

10. The best-designed strategies are valuable whether or not they are effectively implemented.

Answer: False Difficulty: 1 Objective: 2

Implementation is essential or the strategy is useless.

13. An important strategic decision is making the correct investments in productive assets.

Answer: True Difficulty: 1 Objective: 2

14. It is difficult to control activities without a budget.

Answer: True Difficulty: 1 Objective: 3

Financial and Managerial Accounting

51. Consider the descriptors that follow.

1. Is heavily involved with the recordkeeping and reporting of assets, liabilities, and stockholders’ equity.
2. Focuses on planning, control, decision making, and performance evaluation.
3. Is heavily regulated.
4. A field that is becoming more "cross-functional" in nature.
 5. Much of the field is based on costs and benefits.
6. Is involved almost exclusively with past transactions and events.
7. Much of the information provided is directed toward stockholders, financial analysts, creditors, and other
external parties.
8. Tends to focus more on subunits within an entity rather than the organization as a whole.
9. May become involved with measures of customer satisfaction, and the amount of actual cost incurred vs.
budgeted targets.

Required:
Determine whether the descriptors are most closely associated with financial accounting or managerial
accounting.

LO: 2, 3, 4, 6 Type: RC
 Answer:
1. Financial accounting 6. Financial accounting
2. Managerial accounting 7. Financial accounting
3. Financial accounting 8. Managerial accounting
4. Managerial accounting 9. Managerial accounting
5. Managerial accounting

Ex. 114
Assume you have just taken a position as controller for a new company that manufactures and sells wooden chairs.
Although the founder of the company, who is the president and ceo, is a great artisan, she has very limited
knowledge of accounting. To help your new boss better understand accounting for a manufacturing organization,
write a memo to her in which you: (1) identify, (2) describe, and (3) provide examples of the three manufacturing
costs and the three inventory accounts used in accounting for a manufacturing company.

Solution 114 (6–9 min.)

The three manufacturing costs are: direct materials, direct labor, and manufacturing overhead. Raw materials
that can be physically and directly associated with the finished product during the manufacturing process are
called direct materials. The wood used in making the chairs is an example of direct materials. The work of factory
employees that can be physically and directly associated with converting raw materials to finished goods is
considered direct labor. Manufacturing overhead consists of costs that are indirectly associated with the
manufacture of the finished product. These costs may also be manufacturing costs that cannot be classified as
direct materials or direct labor. Manufacturing overhead includes indirect materials, indirect labor, and
depreciation on factory buildings, and machinery, utilities, insurance, taxes and maintenance on factory facilities.

The three inventory accounts are: raw materials, work in process, and finished goods. Raw materials inventory
represents the cost of the materials and parts that are to be used in the manufacturing process. The wood
purchased to make the chairs would be considered raw materials until the time it was put into production. Work in
process is the cost applicable to units that have been started into production but are only partially complete. Chairs
on the assembly line that are in various stages of completion would be work in process. The finished goods
inventory represents the cost of completed goods that have not been sold. The cost of chairs that are completed but
have not been sold would be finished goods.