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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.

8. Continuous improvement means searching


for ways of increasing overall efficiency and
productivity of activities by reducing waste,
increasing quality, and reducing costs.

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.

9. Employee empowerment is allowing operational workers to plan, control, and make


decisions without explicit authorization from
middle- and higher-level managers.

3. The three objectives of a management accounting information system are 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 organizations manufacturing, merchandising, and services must have a
good management accounting information
system. Management accounting concepts
and procedures are not restricted to any one
type of organization.
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.
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
critical for evaluating the success of operational control.

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.

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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.

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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 tradeoff.
The incremental cost of producing

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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-based
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 down-

stream 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-the-fact
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, budgeting, 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

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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.

the behavior that is expected in the business


world and, in particular, for management accountants.
27.

28.

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. In addition, a company with higher ethical standards would
experience less exposure to manipulation of
financial data for gain.
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 certification can be valuable for management accountants, the CMA is tailored to fit their

30. The Sarbanes-Oxley Act (SOX) established


stronger government control and regulation
of publicly-traded companies in the United
States. Major sections of SOX include: establishment of the Public Company Accounting Oversight Board, enhanced auditor independence,
tightened
regulation
of
corporate governance, control over management, and management/auditor assessment of the firms internal controls. SOX also
requires public companies to state whether
or not the top corporate officers are bound to
the company code of ethics.
.

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

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

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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

7.
8.
9.
10.
11.

j
c
b
e
d

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1. b
2. c
3. f

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1. e
2. b
3. c

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

k
g
a
f
i
h

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Penny 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.
Karol is line. She is responsible for selling product. A basic objective for the existence of a manufacturing firm is to sell product. Karol has direct responsibility for
a basic objective and therefore holds a line position.
Porter is staff. He is in a support role to production. He does not make the products himself. Instead, he ensures that the appropriate production equipment is in
place for manufacturing.
Joe 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, Joe has direct responsibility for a basic objective and
therefore holds a line position.

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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


mea-sures 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.

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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 by-product of a
good job. Pursuit of self-interest and personal financial well-being 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).

1-9
No, it is not ethical for Steve to demand a kickback from Dave. Dave should not
agree to this. This brief situation actually happened to Dave, a friend of the author. The author advised Dave not to accept the deal. Dave then checked with his
lawyer, who bluntly told him the deal was illegal. Dave did not accept.

110
a.
b.
c.
d.

e.
f.
g.
h.

CPA
CIA
CMA
CPA

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

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PROBLEMS
111
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. This information will only be valuable if it is
delivered on a timely basis.

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.

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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.

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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.

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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 budgeted 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)

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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.

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115

Concluded

Confidentiality. Top management has violated the ethical standard to refrain


from using confidential information for unethical or illegal advantage (personal
job security).
Integrity. Top management clearly is in violation of the standard to avoid apparent conflicts of interest and to advise all parties (other shareholders) of any potential conflicts.
Credibility. Top managements restriction and distortion of Alerts financial information violates the standard to communicate information fairly and objectively.
By telling Deerling to restrict the disclosure of the changes, top management is
clearly in violation of 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 discuss the issue with his immediate supervisor, unless the supervisor is
involved, in which case, he should continue to the next management level.
Roger may need to discuss the issue with the Audit Committee of the
Board of Directors, or owners. Any contact with levels above his immediate
supervisor should be initiated with the supervisors knowledge, as long as
the supervisor is not involved. As long as Roger does not believe a law was
broken, he should not communicate the problem to outside authorities.

To clarify relevant concepts by confidential discussion with an objective advisor or an IMA Ethics Counselor to obtain possible courses of action.

Consult (his) own attorney as to legal obligations and rights concerning the
ethical conflict.
(CMA adapted)

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116
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:
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)
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.
Credibility. Hughes has violated the requirement to communicate all information
fairly and objectively.

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117
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 engaging in conduct that might prejudice the carrying
out of his duties.

4. Objectivity

Brogan did not:


communicate information fairly and objectively.
disclose fully all relevant information.
(CMA adapted)
1-18
Answers will vary.

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