MANAGEMENT ACCOUNTING - Solutions Manual
TABLE OF CONTENTS
Chapter 1 1-1 – 1-19
MANAGEMENT ACCOUNTING: AN OVERVIEW
2 Management Accounting and the Business Environment 2-1 – 2-5
3 Understanding of Financial Statements 3-1 – 3-10
4 Financial Statements Analysis – I 4-1 – 4-9
5 Financial Statements Analysis – II 5-1 – 5-38
6 Cash Flow Analysis 6-1 – 6-18
7 Gross Profit Valuation Analysis and Earnings Per Share
Determination 7-1 – 7-7
8 Cost Concepts and Classifications 8-1 – 8-17
9 Cost Behavior: Analysis and Use 9-1 – 9-30
1 Systems Design: Job-Order Costing and Process Costing 10-1 – 10-16
0
11 Systems Design: Activity-Based Costing and Management 11-1 – 11-15
1 Variable Costing 12-1 – 12-21
2
1 Cost-Volume-Profit Relationships 13-1 – 13-37
3
1 Responsibility Accounting and Transfer Pricing 14-1 – 14-26
4
1 Functional and Activity-Based Budgeting 15-1 – 15-22
5
1 Standard Costs and Operating Performance Measures 16-1 – 16-17
6
1 Application of Quantitative Techniques in Planning, Control and
7 Decision Making - I 17-1 – 17-2
1 Application of Quantitative Techniques in Planning, Control and
8 Decision Making – II 18-1 – 18-7
1-1
,Chapter 1 Management Accounting: An Overview
1 Relevant Costs for Decision Making 19-1 – 19-33
9
2 Capital Budgeting Decisions 20-1 – 20-16
0
2 Decentralized Operations and Segment Reporting 21-1 – 21-4
1
2 Business Planning 22-1 – 22-6
2
2 Strategic Cost Management; Balanced Scorecard 23-1 – 23-4
3
2 Advanced Analysis and Appraisal of Performance: Financial
4 and Nonfinancial 24-1 – 24-12
2 Managing Productivity and Marketing Effectiveness 25-1 – 25-19
5
2 Executive Performance Measures and Compensation 26-1 – 26-3
6
2 Managing Accounting in a Changing Environment 27-1 – 27-22
7
CHAPTER 1
MANAGEMENT ACCOUNTING: AN OVERVIEW
I. Questions
1. Use of the word “need” in the quoted passage is pejorative. It implies
an unlimited level of demand for information. However, rational
managers apply a cost-benefit criterion to information and will only
want accounting information if its benefits exceed its costs.
Accounting information provides benefits by improving decision
making and controlling behavior in organizations. In most
organizations, accounting information is very prevalent which implies
1-2
, Management Accounting: An Overview Chapter 1
that its benefits exceed its costs. Hence, successful managers will find
it in their self-interest to learn how to use accounting information in
these organizations.
Clearly, this statement is incurred in those firms where accounting
information has very limited usefulness (e.g., if the accounting
information is often wrong or is not produced in a timely fashion). In
these organizations, managers do not find the accounting information to
have benefits in excess of its costs, will not use it, do not need to know
how to use it, and definitely do not need it.
2. 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.
3. Finance and economics textbooks traditionally state that the goal of a
profit organization is to maximize shareholder wealth. Managers are
frequently presumed to act in the best interest of the shareholder,
although recent finance literature recognizes that appropriate incentives
are necessary to align manager interests with shareholder interests.
The goal, however, are not very clear as to how this is achieved. Most
finance textbooks focus on financing decisions and not on the use of
assets and dealing with customers.
Marketing’s goal of satisfying customers recognizes that customers are
the source of revenues for the organization, and therefore the means
through which shareholder value is increased. However, customer
satisfaction is only valuable insofar as it creates shareholder wealth.
The further goal of marketing is to ensure that customer satisfaction is
maximized without compromising the organization’s profitability.
4. Yes. Planning is really much more vital than control; that is, superior
control is fruitless if faulty plans are being implemented. However,
1-3
, Chapter 1 Management Accounting: An Overview
planning and control are so intertwined that it seems artificial to draw
rigid lines of separation between them.
5. Yes. The controller has line authority over the personnel in his own
department but is a staff executive with respect to the other
departments.
6. Line authority is exerted downward over subordinates. Staff authority
is the authority to advise but not command others; it is exercised
laterally or upward. Functional authority is the right to command
action laterally and downward with regard to a specific function or
specialty.
7. Cost accounting is the controller’s primary means of implementing the
7-point concept of modern controllership. Cost accounting is
intertwined with all seven duties to some extent, but its major focus is
on the first three.
8. Bettina Company
President
VP, Production VP, Finance VP, Sales
Controller Treasurer
Assistant Assistant
Controller Treasurer
Special Cost Tax Internal General System &
Studies Accounting Manager Audit Accounting EDP
Manager Manager Manager Manager Manager
Cost Budget & Performance
Systems Standard Analyst
Analyst Cost Analyst
Cost Payroll Accounts Accounts Billing General
Clerk Clerk Receivable Payable Clerk Ledger
Clerk Clerk Bookkeeper
1-4
TABLE OF CONTENTS
Chapter 1 1-1 – 1-19
MANAGEMENT ACCOUNTING: AN OVERVIEW
2 Management Accounting and the Business Environment 2-1 – 2-5
3 Understanding of Financial Statements 3-1 – 3-10
4 Financial Statements Analysis – I 4-1 – 4-9
5 Financial Statements Analysis – II 5-1 – 5-38
6 Cash Flow Analysis 6-1 – 6-18
7 Gross Profit Valuation Analysis and Earnings Per Share
Determination 7-1 – 7-7
8 Cost Concepts and Classifications 8-1 – 8-17
9 Cost Behavior: Analysis and Use 9-1 – 9-30
1 Systems Design: Job-Order Costing and Process Costing 10-1 – 10-16
0
11 Systems Design: Activity-Based Costing and Management 11-1 – 11-15
1 Variable Costing 12-1 – 12-21
2
1 Cost-Volume-Profit Relationships 13-1 – 13-37
3
1 Responsibility Accounting and Transfer Pricing 14-1 – 14-26
4
1 Functional and Activity-Based Budgeting 15-1 – 15-22
5
1 Standard Costs and Operating Performance Measures 16-1 – 16-17
6
1 Application of Quantitative Techniques in Planning, Control and
7 Decision Making - I 17-1 – 17-2
1 Application of Quantitative Techniques in Planning, Control and
8 Decision Making – II 18-1 – 18-7
1-1
,Chapter 1 Management Accounting: An Overview
1 Relevant Costs for Decision Making 19-1 – 19-33
9
2 Capital Budgeting Decisions 20-1 – 20-16
0
2 Decentralized Operations and Segment Reporting 21-1 – 21-4
1
2 Business Planning 22-1 – 22-6
2
2 Strategic Cost Management; Balanced Scorecard 23-1 – 23-4
3
2 Advanced Analysis and Appraisal of Performance: Financial
4 and Nonfinancial 24-1 – 24-12
2 Managing Productivity and Marketing Effectiveness 25-1 – 25-19
5
2 Executive Performance Measures and Compensation 26-1 – 26-3
6
2 Managing Accounting in a Changing Environment 27-1 – 27-22
7
CHAPTER 1
MANAGEMENT ACCOUNTING: AN OVERVIEW
I. Questions
1. Use of the word “need” in the quoted passage is pejorative. It implies
an unlimited level of demand for information. However, rational
managers apply a cost-benefit criterion to information and will only
want accounting information if its benefits exceed its costs.
Accounting information provides benefits by improving decision
making and controlling behavior in organizations. In most
organizations, accounting information is very prevalent which implies
1-2
, Management Accounting: An Overview Chapter 1
that its benefits exceed its costs. Hence, successful managers will find
it in their self-interest to learn how to use accounting information in
these organizations.
Clearly, this statement is incurred in those firms where accounting
information has very limited usefulness (e.g., if the accounting
information is often wrong or is not produced in a timely fashion). In
these organizations, managers do not find the accounting information to
have benefits in excess of its costs, will not use it, do not need to know
how to use it, and definitely do not need it.
2. 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.
3. Finance and economics textbooks traditionally state that the goal of a
profit organization is to maximize shareholder wealth. Managers are
frequently presumed to act in the best interest of the shareholder,
although recent finance literature recognizes that appropriate incentives
are necessary to align manager interests with shareholder interests.
The goal, however, are not very clear as to how this is achieved. Most
finance textbooks focus on financing decisions and not on the use of
assets and dealing with customers.
Marketing’s goal of satisfying customers recognizes that customers are
the source of revenues for the organization, and therefore the means
through which shareholder value is increased. However, customer
satisfaction is only valuable insofar as it creates shareholder wealth.
The further goal of marketing is to ensure that customer satisfaction is
maximized without compromising the organization’s profitability.
4. Yes. Planning is really much more vital than control; that is, superior
control is fruitless if faulty plans are being implemented. However,
1-3
, Chapter 1 Management Accounting: An Overview
planning and control are so intertwined that it seems artificial to draw
rigid lines of separation between them.
5. Yes. The controller has line authority over the personnel in his own
department but is a staff executive with respect to the other
departments.
6. Line authority is exerted downward over subordinates. Staff authority
is the authority to advise but not command others; it is exercised
laterally or upward. Functional authority is the right to command
action laterally and downward with regard to a specific function or
specialty.
7. Cost accounting is the controller’s primary means of implementing the
7-point concept of modern controllership. Cost accounting is
intertwined with all seven duties to some extent, but its major focus is
on the first three.
8. Bettina Company
President
VP, Production VP, Finance VP, Sales
Controller Treasurer
Assistant Assistant
Controller Treasurer
Special Cost Tax Internal General System &
Studies Accounting Manager Audit Accounting EDP
Manager Manager Manager Manager Manager
Cost Budget & Performance
Systems Standard Analyst
Analyst Cost Analyst
Cost Payroll Accounts Accounts Billing General
Clerk Clerk Receivable Payable Clerk Ledger
Clerk Clerk Bookkeeper
1-4
