Solutions Manual
Management and Cost
Accounting
Seventh edition
Alnoor Bhimani
Charles Horngren
Srikant Datar
Madhav Rajan
Hien Do
, PART I
MANAGEMENT AND COST
ACCOUNTING FUNDAMENTALS
5
© Pearson Education Limited 2019
, CHAPTER 1
The manager and management accounting
Teaching tips and points to stress
Modern management accounting
While the accounting system provides information (e.g. product costs and downtime) for
management decisions, cost management refers to active use of this information to plan
and control costs. Cost management requires managers to actively seek ways to reduce costs.
Much cost management occurs well before the accounting system recognises costs. (The
product design stage often offers more cost management opportunities than controlling
manufacturing operations.) Cost management is integrated throughout the text.
To reinforce the value-chain concept, ask a student to illustrate activities/costs in each function
in the context of his/her work experience.
Students are often confused about the difference between R&D and Design. The distinctions
are not always clear-cut but R&D is basic research and idea generation, whereas design turns
those ideas into reality. Design encompasses development of prototype products and the
manufacturing process by which the products are produced.
Elements of management control
Planning and control are distinct activities but they go hand in hand. To maximise the benefits
from planning (e.g. budgeting), the manager should use that plan as a benchmark for controlling
(i.e. assessing the effectiveness and efficiency of implementation). Conversely, it is difficult
to control activities without a plan or budget.
To help students understand how accounting numbers can affect employees’ behaviour
and hence firm’s performance, ask questions, such as if a materials procurement officer’s
annual bonus depends on the difference between budgeted price and actual price paid, how
will the officer behave? The officer may be tempted to purchase cheap, perhaps low-quality
materials that may not be delivered on a reliable, timely basis; he or she may refuse to order
materials for rush orders if there will be an extra delivery charge, etc.
Although it is difficult to quantify the costs and benefits of accounting systems, a decision about
the system will be made. The question is whether costs and benefits are considered implicitly
(as part of a ‘gut feeling’) or explicitly, where effects of different estimates can be examined.
Additionally, it is always essential to consider the context in which management operates.
Product cost information permeates all three functions. In the scorekeeping function, accountants
accumulate product cost information for both external and internal reporting. Product cost
information can help identify cost management opportunities (i.e. attention directing) and it
is used in make-or-buy decisions, where managers compare the cost of making the product
or component with the cost of buying it from an external supplier (i.e. problem solving).
6
© Pearson Education Limited 2019
, Bhimani et al., Management and Cost Accounting, 7e, Instructor’s Manual
Costs, benefits and context
The ‘best’ information system depends on both technical and human aspects of the specific
situation. This is a major difference between financial accounting, where firms generally need to
comply with external reporting requirements where they exist, and management accounting,
where choices are based on an explicit or implicit cost–benefit analysis. Management
accounting students must do more than memorising rules. They must evaluate the situation and
context, decide which technique or information system is most appropriate and implement it.
A key challenge in management accounting
One major challenge faced by accountants relates to digitalisation. This is the process by which
firms become digital businesses and the use of digital technologies changes the business model
and provides new revenue and value-producing possibilities. Digitalisation is about enterprises
not just having to become digitised but being digital.
Some emerging technologies which management accountants should understand are: artificial
intelligence (AI) and robotics, blockchain, big data and analytics, and the cloud.
Solutions to review questions
1.1 The five broad purposes are:
Purpose 1: Formulating overall strategies and long-range plans.
Purpose 2: Resource allocation decisions such as product and customer emphasis and
pricing.
Purpose 3: Cost planning and cost control of operations and activities.
Purpose 4: Performance measurement and evaluation of people.
Purpose 5: Meeting external regulatory and legal reporting requirements where they
exist.
1.2 Management accounting measures and reports financial as well as other types of
information that may be useful to managers in fulfilling the goals of the organisation.
Financial accounting focuses on external reporting that is guided by generally
accepted accounting principles.
1.3 The business functions in the value chain are:
• Research and development – the generation of, and experimentation with, ideas
related to new products, services or processes.
• Design of products, services and processes – the detailed planning and engineering
of products, services or processes.
• Production – the coordination and assembly of resources to produce a product or
deliver a service.
7
© Pearson Education Limited 2019
Management and Cost
Accounting
Seventh edition
Alnoor Bhimani
Charles Horngren
Srikant Datar
Madhav Rajan
Hien Do
, PART I
MANAGEMENT AND COST
ACCOUNTING FUNDAMENTALS
5
© Pearson Education Limited 2019
, CHAPTER 1
The manager and management accounting
Teaching tips and points to stress
Modern management accounting
While the accounting system provides information (e.g. product costs and downtime) for
management decisions, cost management refers to active use of this information to plan
and control costs. Cost management requires managers to actively seek ways to reduce costs.
Much cost management occurs well before the accounting system recognises costs. (The
product design stage often offers more cost management opportunities than controlling
manufacturing operations.) Cost management is integrated throughout the text.
To reinforce the value-chain concept, ask a student to illustrate activities/costs in each function
in the context of his/her work experience.
Students are often confused about the difference between R&D and Design. The distinctions
are not always clear-cut but R&D is basic research and idea generation, whereas design turns
those ideas into reality. Design encompasses development of prototype products and the
manufacturing process by which the products are produced.
Elements of management control
Planning and control are distinct activities but they go hand in hand. To maximise the benefits
from planning (e.g. budgeting), the manager should use that plan as a benchmark for controlling
(i.e. assessing the effectiveness and efficiency of implementation). Conversely, it is difficult
to control activities without a plan or budget.
To help students understand how accounting numbers can affect employees’ behaviour
and hence firm’s performance, ask questions, such as if a materials procurement officer’s
annual bonus depends on the difference between budgeted price and actual price paid, how
will the officer behave? The officer may be tempted to purchase cheap, perhaps low-quality
materials that may not be delivered on a reliable, timely basis; he or she may refuse to order
materials for rush orders if there will be an extra delivery charge, etc.
Although it is difficult to quantify the costs and benefits of accounting systems, a decision about
the system will be made. The question is whether costs and benefits are considered implicitly
(as part of a ‘gut feeling’) or explicitly, where effects of different estimates can be examined.
Additionally, it is always essential to consider the context in which management operates.
Product cost information permeates all three functions. In the scorekeeping function, accountants
accumulate product cost information for both external and internal reporting. Product cost
information can help identify cost management opportunities (i.e. attention directing) and it
is used in make-or-buy decisions, where managers compare the cost of making the product
or component with the cost of buying it from an external supplier (i.e. problem solving).
6
© Pearson Education Limited 2019
, Bhimani et al., Management and Cost Accounting, 7e, Instructor’s Manual
Costs, benefits and context
The ‘best’ information system depends on both technical and human aspects of the specific
situation. This is a major difference between financial accounting, where firms generally need to
comply with external reporting requirements where they exist, and management accounting,
where choices are based on an explicit or implicit cost–benefit analysis. Management
accounting students must do more than memorising rules. They must evaluate the situation and
context, decide which technique or information system is most appropriate and implement it.
A key challenge in management accounting
One major challenge faced by accountants relates to digitalisation. This is the process by which
firms become digital businesses and the use of digital technologies changes the business model
and provides new revenue and value-producing possibilities. Digitalisation is about enterprises
not just having to become digitised but being digital.
Some emerging technologies which management accountants should understand are: artificial
intelligence (AI) and robotics, blockchain, big data and analytics, and the cloud.
Solutions to review questions
1.1 The five broad purposes are:
Purpose 1: Formulating overall strategies and long-range plans.
Purpose 2: Resource allocation decisions such as product and customer emphasis and
pricing.
Purpose 3: Cost planning and cost control of operations and activities.
Purpose 4: Performance measurement and evaluation of people.
Purpose 5: Meeting external regulatory and legal reporting requirements where they
exist.
1.2 Management accounting measures and reports financial as well as other types of
information that may be useful to managers in fulfilling the goals of the organisation.
Financial accounting focuses on external reporting that is guided by generally
accepted accounting principles.
1.3 The business functions in the value chain are:
• Research and development – the generation of, and experimentation with, ideas
related to new products, services or processes.
• Design of products, services and processes – the detailed planning and engineering
of products, services or processes.
• Production – the coordination and assembly of resources to produce a product or
deliver a service.
7
© Pearson Education Limited 2019
