Solutions Manual For Accounting for Decision Making and Control, 9e
Jerold L. Zimmerman
SOLUTIONS TO PROBLEMS AND CASES
CHAPTER 1
INTRODUCTION
P 1–1: Solution to MBA Students (10 minutes)
[Using accounting information for decision making and control]
Together the two observations highlight the extremes in the trade-offs of using
accounting information for decision and control. In the first case, there is more analysis
of opportunity costs that are hard to capture with typical accounting information. In the
second case, there is less intended interest in opportunity cost and greater emphasis on
control.
P 1–2: Solution to One Cost System Isn't Enough (15 minutes)
[Economic Darwinism]
The first part of the quote describes the tension (and conflict) that arises when a
single accounting system is used for multiple purposes. This part of the statement is an
accurate description of practice. However, the quote has a couple of problems, including:
•While the quote describes the costs of using a single system ("a single system ...
can't perform important managerial functions adequately"), the quote does not describe
the benefits derived from using a single system (lower bookkeeping costs, a single audit,
less confusion).
•Because the quote ignores the benefits of a single system, it ignores the concept
of economic Darwinism. It does not address the question of how surviving (successful)
companies can compete if a single system "can't perform important managerial functions
adequately."
•Also, the quote assumes that managers are bound to their internal accounting
systems, that no other alternative information sources are available. Often managers
develop their own ad hoc, "off-line" information systems for decision making. These
systems include spreadsheets, informal observation, and "walking around."
P 1–3: Solution to U.S. and Japanese Tax Laws (15 minutes)
[Influence of conflicting demands on cost systems]
The internal accounting system supports multiple uses, including financial
reporting, taxes, contracting (debt and management compensation), internal decision
making, and internal control. Because multiple purposes are served, trade-offs must be
made among the competing demands. When more emphasis is placed on one purpose
(taxes), less consideration can be given to other uses (internal decision making and
,control). By linking taxes to external reporting, Japanese firms’ financial reports will be
based on accounting procedures that give more weight to tax considerations. In the U.S.,
companies can keep two sets of books, one for taxes and the other for financial reporting.
Thus, in the U.S., there is more of a decoupling of taxes and everything else. Except for
the additional bookkeeping costs of producing the two separate sets of reports, tax
considerations are predicted to have less influence on the choice of internal (and thus
external) accounting procedures in the U.S. than in Japan.
The question is raised as to why firms use the same accounting procedures for
internal reports as they do for external reports. Or for that matter, why do tax laws and
external financial reporting considerations have any effect on internal accounting
procedures? Why don’t firms maintain multiple sets of accounts, one for each purpose
(e.g., financial reporting, internal decision making, and internal control)? Clearly there
are additional bookkeeping costs for maintaining multiple sets of accounts. But also,
there are confusion costs and, in many instances, firms explicitly link senior executive
compensation to externally reported financial statements. Such explicit linkage of
executive pay to externally reported net income presumably exists to control agency costs
between management and shareholders. Once senior management performance and
rewards are linked to external reports, the internal reporting system will become linked to
the external reports and basically less consideration will be given to choosing accounting
procedures that aid in internal decision making and internal control.
In Japan, the firm’s accounting systems are less likely to be used for internal uses
(decision making and control) than in the U.S. Because they cannot rely as much on their
accounting systems for internal uses (because more weight is placed on using accounting
procedures to reduce taxes), Japanese managers are more likely to use non-accounting-
based systems for internal decision making and control.
P 1-4: Solution to Using Accounting for Planning (15 minutes)
[Usefulness of historical costs]
a. Historical costs are of limited use in making planning decisions in a rapidly
changing environment. With changing products, processes and prices, the
historical costs are inadequate approximations of the opportunity costs of using
resources.
Historical costs may, however, be useful for control purposes, as they
provide information about the activities of managers and can be used as
performance measures to evaluate managers.
b. The purpose of accounting systems is to provide information for planning
purposes and control. Although historical costs are not generally appropriate for
planning purposes, additional measures are costly to make. An accounting system
should include additional measures if the benefits of improved decision making
are greater than the costs of the additional information.
,P 1–5: Solution to Budgeting (15 minutes)
[Trade-off between decision making and control]
In this firm, the bonus is based on meeting the budget. Two incentives exist:
sales people will under-forecast future sales and they have little incentive to sell more
than the budget.
This firm tries to use the budget for two functions: decision making and control.
In deciding on next year’s production plans, sales peoples’ forecasts of future sales are
important. However, these same forecasts (after revision by supervisors) are used as part
of the compensation scheme to motivate the sales people to achieve their goals. By using
the budget (forecasts) as part of the control system, the firm gives up some of the
budget’s usefulness as a decision making tool to set production plans. While senior
managers might recognize that the sales people’s forecasts are low, they don’t know
exactly how low. This introduces more uncertainty into planning for next year’s
production.
P 1-6: Solution to Golf Specialties (20 minutes)
[Average versus variable cost of an incremental order]
a. Given that the variable cost per head cover is 1.10 euros, the fixed cost per week
is:
AC = FC / Q + VC
3.10 = FC/600 + 1.10 3.50 = FC/500 + 1.10
FC = 1,200 euros FC = 1,200 euros
b. The change in total cost if the 100 unit Kojo offer is accepted is:
600 × 3.10 euros – 500 × 3.50 euros = 110 euros
Or, each head cover has variable cost of 1.10 euro. Since Kojo is willing to pay 2
euros per head cover or 200 euros for 100 covers, by accepting this order GS
makes 90 euros a week. Therefore, GS should accept Kojo’s offer if these are all
the relevant facts.
c. GS should consider the following non-quantitative factors:
What prevents Kojo from reselling the head covers back to dealers in
Europe at prices below GS’s current price of 4.25 euros?
If GS sells the head covers to Kojo at 2 euros, what prevents GS’s
European customers from learning of this special deal and demand similar
price concessions. In other words, why do we expect to be able to
implement this price discrimination strategy?
, Will Kojo purchase other GS products and import them to Japan?
What is Kojo’s credit worthiness and will they pay for the head covers
upon taking delivery?
P 1–7: Solution to Parkview Hospital (25 minutes)
[Changes in the environment cause accounting system changes]
a. Parkview’s accounting system was probably adequate 10 years ago. It faced little
competition and had little incentive to have detailed cost and revenue data at the
clinical levels.
b. With increased pressure to reduce costs, Parkview management wants detailed
cost and revenue data at the clinic level to help identify units with excess revenues
or deficits. This would help guide their decisions as to how to respond to the $3.2
million shortfall. The accounting system doesn’t provide as much help as
management would like.
c. The question of changing the accounting system should be approached as a cost-
benefit decision. What will such changes cost, how long will they take to
implement, and what benefits are derived?
While it is tempting to say more accurate tracking of costs and benefits
allows better decision making, changing the accounting system, including all the
data processing changes that are likely necessary, usually is a very costly and time
consuming process. Often special studies based on approximations of clinical
department costs and revenues might prove to be faster and cheaper than waiting
to revamp the accounting system.
Notice the change in competition in the health insurance market caused by
Trans Insurance’s entry prompted a series of changes in Parkview, including a re-
examination of its accounting system.
P 1–8: Solution to Montana Pen (25 minutes)
[Incremental cost of outsourcing]
a. The average cost information given in the problem does not tell us what 400 clips
cost. Like in the Vortec example from the chapter, the incremental cost of the
400 clips must be estimated from the following:
Change in total cost B185 1200 B212.5 800 = B130/clip
=
Change in volume 1, 200 800
At the current volume of 1,200 clips, the total cost is B222,000 (B185 × 1,200).
If 400 clips are outsourced, reducing in-house volume to 800, the total cost falls to
B170,000 (B212.5 × 800). Hence, total cost falls B52,000 (B222,000 -
Jerold L. Zimmerman
SOLUTIONS TO PROBLEMS AND CASES
CHAPTER 1
INTRODUCTION
P 1–1: Solution to MBA Students (10 minutes)
[Using accounting information for decision making and control]
Together the two observations highlight the extremes in the trade-offs of using
accounting information for decision and control. In the first case, there is more analysis
of opportunity costs that are hard to capture with typical accounting information. In the
second case, there is less intended interest in opportunity cost and greater emphasis on
control.
P 1–2: Solution to One Cost System Isn't Enough (15 minutes)
[Economic Darwinism]
The first part of the quote describes the tension (and conflict) that arises when a
single accounting system is used for multiple purposes. This part of the statement is an
accurate description of practice. However, the quote has a couple of problems, including:
•While the quote describes the costs of using a single system ("a single system ...
can't perform important managerial functions adequately"), the quote does not describe
the benefits derived from using a single system (lower bookkeeping costs, a single audit,
less confusion).
•Because the quote ignores the benefits of a single system, it ignores the concept
of economic Darwinism. It does not address the question of how surviving (successful)
companies can compete if a single system "can't perform important managerial functions
adequately."
•Also, the quote assumes that managers are bound to their internal accounting
systems, that no other alternative information sources are available. Often managers
develop their own ad hoc, "off-line" information systems for decision making. These
systems include spreadsheets, informal observation, and "walking around."
P 1–3: Solution to U.S. and Japanese Tax Laws (15 minutes)
[Influence of conflicting demands on cost systems]
The internal accounting system supports multiple uses, including financial
reporting, taxes, contracting (debt and management compensation), internal decision
making, and internal control. Because multiple purposes are served, trade-offs must be
made among the competing demands. When more emphasis is placed on one purpose
(taxes), less consideration can be given to other uses (internal decision making and
,control). By linking taxes to external reporting, Japanese firms’ financial reports will be
based on accounting procedures that give more weight to tax considerations. In the U.S.,
companies can keep two sets of books, one for taxes and the other for financial reporting.
Thus, in the U.S., there is more of a decoupling of taxes and everything else. Except for
the additional bookkeeping costs of producing the two separate sets of reports, tax
considerations are predicted to have less influence on the choice of internal (and thus
external) accounting procedures in the U.S. than in Japan.
The question is raised as to why firms use the same accounting procedures for
internal reports as they do for external reports. Or for that matter, why do tax laws and
external financial reporting considerations have any effect on internal accounting
procedures? Why don’t firms maintain multiple sets of accounts, one for each purpose
(e.g., financial reporting, internal decision making, and internal control)? Clearly there
are additional bookkeeping costs for maintaining multiple sets of accounts. But also,
there are confusion costs and, in many instances, firms explicitly link senior executive
compensation to externally reported financial statements. Such explicit linkage of
executive pay to externally reported net income presumably exists to control agency costs
between management and shareholders. Once senior management performance and
rewards are linked to external reports, the internal reporting system will become linked to
the external reports and basically less consideration will be given to choosing accounting
procedures that aid in internal decision making and internal control.
In Japan, the firm’s accounting systems are less likely to be used for internal uses
(decision making and control) than in the U.S. Because they cannot rely as much on their
accounting systems for internal uses (because more weight is placed on using accounting
procedures to reduce taxes), Japanese managers are more likely to use non-accounting-
based systems for internal decision making and control.
P 1-4: Solution to Using Accounting for Planning (15 minutes)
[Usefulness of historical costs]
a. Historical costs are of limited use in making planning decisions in a rapidly
changing environment. With changing products, processes and prices, the
historical costs are inadequate approximations of the opportunity costs of using
resources.
Historical costs may, however, be useful for control purposes, as they
provide information about the activities of managers and can be used as
performance measures to evaluate managers.
b. The purpose of accounting systems is to provide information for planning
purposes and control. Although historical costs are not generally appropriate for
planning purposes, additional measures are costly to make. An accounting system
should include additional measures if the benefits of improved decision making
are greater than the costs of the additional information.
,P 1–5: Solution to Budgeting (15 minutes)
[Trade-off between decision making and control]
In this firm, the bonus is based on meeting the budget. Two incentives exist:
sales people will under-forecast future sales and they have little incentive to sell more
than the budget.
This firm tries to use the budget for two functions: decision making and control.
In deciding on next year’s production plans, sales peoples’ forecasts of future sales are
important. However, these same forecasts (after revision by supervisors) are used as part
of the compensation scheme to motivate the sales people to achieve their goals. By using
the budget (forecasts) as part of the control system, the firm gives up some of the
budget’s usefulness as a decision making tool to set production plans. While senior
managers might recognize that the sales people’s forecasts are low, they don’t know
exactly how low. This introduces more uncertainty into planning for next year’s
production.
P 1-6: Solution to Golf Specialties (20 minutes)
[Average versus variable cost of an incremental order]
a. Given that the variable cost per head cover is 1.10 euros, the fixed cost per week
is:
AC = FC / Q + VC
3.10 = FC/600 + 1.10 3.50 = FC/500 + 1.10
FC = 1,200 euros FC = 1,200 euros
b. The change in total cost if the 100 unit Kojo offer is accepted is:
600 × 3.10 euros – 500 × 3.50 euros = 110 euros
Or, each head cover has variable cost of 1.10 euro. Since Kojo is willing to pay 2
euros per head cover or 200 euros for 100 covers, by accepting this order GS
makes 90 euros a week. Therefore, GS should accept Kojo’s offer if these are all
the relevant facts.
c. GS should consider the following non-quantitative factors:
What prevents Kojo from reselling the head covers back to dealers in
Europe at prices below GS’s current price of 4.25 euros?
If GS sells the head covers to Kojo at 2 euros, what prevents GS’s
European customers from learning of this special deal and demand similar
price concessions. In other words, why do we expect to be able to
implement this price discrimination strategy?
, Will Kojo purchase other GS products and import them to Japan?
What is Kojo’s credit worthiness and will they pay for the head covers
upon taking delivery?
P 1–7: Solution to Parkview Hospital (25 minutes)
[Changes in the environment cause accounting system changes]
a. Parkview’s accounting system was probably adequate 10 years ago. It faced little
competition and had little incentive to have detailed cost and revenue data at the
clinical levels.
b. With increased pressure to reduce costs, Parkview management wants detailed
cost and revenue data at the clinic level to help identify units with excess revenues
or deficits. This would help guide their decisions as to how to respond to the $3.2
million shortfall. The accounting system doesn’t provide as much help as
management would like.
c. The question of changing the accounting system should be approached as a cost-
benefit decision. What will such changes cost, how long will they take to
implement, and what benefits are derived?
While it is tempting to say more accurate tracking of costs and benefits
allows better decision making, changing the accounting system, including all the
data processing changes that are likely necessary, usually is a very costly and time
consuming process. Often special studies based on approximations of clinical
department costs and revenues might prove to be faster and cheaper than waiting
to revamp the accounting system.
Notice the change in competition in the health insurance market caused by
Trans Insurance’s entry prompted a series of changes in Parkview, including a re-
examination of its accounting system.
P 1–8: Solution to Montana Pen (25 minutes)
[Incremental cost of outsourcing]
a. The average cost information given in the problem does not tell us what 400 clips
cost. Like in the Vortec example from the chapter, the incremental cost of the
400 clips must be estimated from the following:
Change in total cost B185 1200 B212.5 800 = B130/clip
=
Change in volume 1, 200 800
At the current volume of 1,200 clips, the total cost is B222,000 (B185 × 1,200).
If 400 clips are outsourced, reducing in-house volume to 800, the total cost falls to
B170,000 (B212.5 × 800). Hence, total cost falls B52,000 (B222,000 -
