LO1-4 Explain the major differences between managerial and financial accounting. The users of managerial accounting information are managers inside the organization. Managerial accounting infor- mation is not mandatory, is unregulated, and draws on data from the core accounting system as well as other data sources. The users of financial accounting information are interested parties outside the organization. Financial accounting information is required, is regulated, and is based almost entirely on historical transaction data.
LO1-5 Describe the accounting and finance structure in an organization. Every manager must understand basic managerial accounting concepts and tools. Managerial accounting specialists, called managerial accountants or analysts, occupy staff positions in an organization chart. They are frequently deployed as members of cross-functional teams, which address a variety of managerial decisions.
LO1-6 Describe the roles of an organization’s chief financial officer (CFO) or controller, trea- surer, and internal auditor. The organization’s top managerial and financial accountant is called the chief financial officer or controller. The treasurer is responsible for raising capital and safeguard- ing the organization’s assets. An organization’s internal auditor is responsible for reviewing the accounting procedures, records, and reports and sometimes makes a broad performance evaluation of management.
LO1-7 Understand and explain the value chain concept. The value chain is the set of linked, value- creating activities, ranging from securing basic raw materials and energy to the ultimate delivery of products and services. Understanding the value chain, its activities, and the costs and strategic benefits of those activities is a crucial step in the development of an organization’s strategy.
LO1-8 Explain how investments in capacity affect managerial decision making. Capacity is the upper limit on the amount of goods or services that an organization can produce in a specified period of time. Practical capacity of resources supplied takes into account normal work disruptions, and based on this number the cost of resources used and unused can be measured. Costs information may be distorted if no adjustment is made for unused capacity.
LO1-9 Understand and explain big data and data analytics and how they interact with managerial accounting. Companies generate huge amounts of data. This big data can be managed and manipulated using the principles, techniques, and tools of data analytics to provide insights about an organization’s value chain. Effective use of managerial accounting techniques can contribute to the quality of this data.
LO1-10 Discuss the professional organizations and certifications in the field of managerial accounting. As professionals, managerial accountants may undergo a process to certify their expertise and, if successful, may enjoy the benefits of membership in one or more professional organizations, such as the Institute of Management Accountants (IMA).
LO1-11 Describe the ethical responsibilities and ethical standards that apply to managerial accounting. Managerial accountants are expected to display a commitment to ethical professional practice characterized by the overarching principles of honesty, fairness, objectivity, and responsibility.
These principles, which are codified in the “IMA Statement of Ethical Professional Practice,” can be applied to all managerial accounting concepts and practices and, indeed, management decision making generally.
Key Terms
For each term’s definition refer to the indicated page, or turn to the glossary at the end of the text.
attention-directing function, 7 balanced scorecard, 10 big data, 22
capacity, 19
Certified Management Accountant (CMA), 23 Chartered Global Man-
agement Accountant (CGMA), 23
chief financial officer (CFO), 13
controller (or comptroller), 13 cost accounting system, 11 cost drivers, 18
cost relationship, 18 data analytics, 22 data governance, 22
data science, 22 financial accounting, 11 internal auditor, 15 line positions, 13
managerial accountants, 5 managerial accounting, 4 practical capacity, 19
staff positions, 13 strategic cost
management, 18 treasurer, 15 value chain, 17
Review Questions
1–1. The volume of business-to-consumer (B2C) electronic retail transactions is estimated to exceed $2 trillion, and business-to-business (B2B) e-commerce transactions are estimated at over an additional $1 billion. What additional decision-making challenges does this explo- sion in e-commerce present to managers, and what are the implications for managerial accounting?
1–2. List two plausible goals for each of these organizations:
Amazon.com, American Red Cross, General Motors, Walmart, the City of Seattle, and Hertz.
1–3. List and define the four basic management activities.
1–4. Give examples of each of the four primary management activities in the context of a national fast-food chain such as Chipotle.
1–5. Give examples of how each of the objectives of mana- gerial accounting activity would be important in an airline company such as American Airlines.
1–6. List and describe four important differences between managerial and financial accounting.
1–7. Distinguish between cost accounting and managerial accounting.
1–8. Distinguish between line and staff positions. Give two examples of each in a university setting.
1–9. Distinguish between the following two accounting posi- tions: controller and treasurer.
1–10. How could your college or university use the concepts in the balanced scorecard? List two possible performance measures that would be relevant to a college or univer- sity, for each of the balanced scorecard’s four areas.
1–11. What does the following statement by a managerial accountant at Caterpillar imply about where in the orga- nization the managerial accountants are located? “[We]
are a partner with all of the other functions in the busi- ness here.” (see reference (1d))
1–12. What is meant by the following statement? “Managerial accounting often serves an attention-directing role.”
1–13. What is the chief difference between manufacturing and service industry firms?
1–14. Explain the following terms: practical capacity, cost of resources supplied, cost of resources used, and cost of resources unused.
1–15. Evaluate the following statement: “If a resource has unused capacity, that capacity is lost forever.”
1–16. Define and explain the significance of the term CMA.
1–17. Briefly explain what is meant by each of the following ethical standards for managerial accountants: compe- tence, confidentiality, integrity, and credibility.
1–18. Based on the discussions in this chapter, what would you expect is meant by the term non–value-added costs? (We will define the term formally in the next chapter.)
1–19. Provide three examples of ways in which Walt Disney Company could apply insights from big data and data analytics to promote the success of their ESPN sports television operation.
1–20. Can managerial accounting play an important role in a nonprofit organization? Explain your answer.
1–21. A large manufacturer of electronic machinery stated the following as one of its goals: “The company should become the low-cost producer in its industry.” How can managerial accounting help the company achieve this goal?
1–22. What do you think it means to be a professional? In your view, are managerial accountants professionals?
1–23. Name several activities in the value chain of (a) a man- ufacturer of cotton shirts and (b) an airline.
1–24. Define the term strategic cost management.
Exercises
Give an example of managerial accounting information that could help a manager make each of the fol- lowing decisions.
1. The president of Budget Rent a Car is deciding whether to add luxury cars to the rental car fleet.
2. The production manager in a Volvo Trucks plant is deciding whether to have routine maintenance performed on a machine weekly or biweekly.
3. The manager of a Target store is deciding how many security personnel to employ for the purpose of reducing shoplifting.
4. The Miami-Dade County board of representatives is deciding whether to build an addition onto one of the county libraries.
For each of the following activities, explain which of the objectives of managerial accounting activity is involved. In some cases, several objectives may be involved.
1. Developing a bonus reward system for the managers of the various offices of the AAA (American Automobile Association) Travel Agency.
2. Comparing the actual and planned cost of a consulting engagement completed by an engineering firm such as Allied Engineering.
Exercise 1–25 Managerial Accounting and Decision Making
(LO 1-1, 1-2, 1-3)
Exercise 1–26 Objectives of Managerial Accounting Activity (LO 1-3, 1-4)
All applicable Exercises are available in Connect.
®
3. Determining the cost of manufacturing a tennis racket at Wilson Sporting Goods.
4. Measuring the cost of the inventory of digital cameras on hand in a Best Buy store.
5. Estimating the annual operating cost of a newly proposed Wells Fargo branch bank.
6. Measuring the following costs incurred during one month in a Hyatt Regency hotel:
a. Wages of table-service personnel.
b. Property taxes.
7. Comparing a Sheraton Hotel’s room rate structure, occupancy rate, and restaurant patronage with industry averages.
Use the Internet to access the website for one of the following companies, or any other company of your choosing.
Exercise 1–27 Contributions of Managerial Accounting; Use of Internet (LO 1-1, 1-3, 1-5) Delta Air Lines www.delta.com
Pepsico www.pepsico.com
Procter & Gamble www.pg.com
Apple www.apple.com
Walmart www.walmart.com
Required: Find the management discussion and analysis portion of the firm’s most recent online annual report. Then briefly discuss how managerial accounting can contribute to the company’s finan- cial goals.
Use the Internet to access the website for one of the following companies, or any other company of your choosing.
Exercise 1–28
Value Chain; Big Data; Use of Internet
(LO 1-7, 1-9)
This icon indicates use of the Internet.
The tablet icon (left) indicates group work.
Avis Car Rental www.avis.com
Expedia.com www.expedia.com
Holland America Line www.hollandamerica.com Levi Strauss & Co. www.levistrauss.com
Nokia www.nokia.com
Regal Entertainment Group www.regmovies.com
Required: After perusing the company’s website, work as a group to 1. List three key activities you believe would be in the company’s value chain.
2. List three potential applications of data analytics in the company to help develop insights about the company’s customers.
Problems
Dave Nelson recently retired at age 48, courtesy of the numerous stock options he had been granted while president of WowzaShops.com, an Internet start-up company. He soon moved to Montana to fol- low his dream of living in the mountains and Big Sky Country. Nelson, always the entrepreneur, began a sporting-goods store shortly after relocating. The single store soon grew to a chain of four outlets throughout the sparsely populated state. As Nelson put it, “I can’t believe how fast we’ve expanded. It’s basically uncontrolled growth—growth that has occurred in spite of what we’ve done.”
Although business has been profitable, the chain did have its share of problems. Store traffic was somewhat seasonal, with a slowdown occurring as winter approached. Nelson therefore added ski equip- ment and accessories to his product line. The need to finance required inventories, which seemed to be bulging, left cash balances at very low levels, occasionally giving rise to short-term bank loans.
Part of Nelson’s operation focused on canoe building and white-water rafting trips. Reports from the company’s financial accounting system seemed to indicate that these operations were losing money because of increasing costs, although Nelson could not be sure. “The traditional income statement is not too useful in assessing the problem,” he noted. “Also, my gut feeling is that we are not dealing with the best suppliers in terms of quality of goods, delivery reliability, and prices.” Additional complications
The pen icon (above) indicates that a written response is needed.
All applicable Problems are available in Connect.
Problem 1–29 Managing a Retail Business;
Cross-Functional Teams; Data Analytics; E-Commerce (LO 1-5, 1-6, 1-8, 1-9)
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were caused by an increasingly competitive marketplace, with many former customers now buying mer- chandise and booking river excursions via the Internet, through catalogs received in the mail, or through businesses that advertised heavily in outdoor magazines.
Nelson’s background is marketing, and he appeared somewhat puzzled on how to proceed. The company’s chief financial officer (CFO) would be an obvious asset in terms of addressing these prob- lems. Unfortunately, she knew her numbers but lacked key knowledge of general business operations.
The same could be said for other executives who managed somewhat in “silos,” becoming experts in a narrow facet of the company but, in general, lacking a big-picture outlook for the firm.
Required:
1. Explain how the CFO and managerial accounting could assist Nelson in addressing the company’s problems.
2. Would a cross-functional team be useful here? Briefly discuss.
3. Many resources in the sporting-goods company would present significant capacity issues. List three such resources and describe their capacity issues in light of the company’s operations.
4. Evaluate the following statement and provide an example as applied to Nelson’s business: “Data analytics is the opposite of ‘gut feeling.’”
Susan Lopez, a consultant with Deloitte & Young, has just begun an engagement at Four Corners Airlines, which is based in Santa Fe, New Mexico. The company has fallen on hard times of late despite record profits for the rest of the airline industry. Management is somewhat set in its ways and could probably use some “new blood,” as the most recent hire to the firm’s executive team was 12 years ago.
In Lopez’s first meeting with the team, the airline’s chief executive officer commented that “all that mattered in this industry were load factors—the percentage of seats sold on scheduled flights. If load factors were adequate, everything else would take care of itself.” Lopez noted that while this measure was important, other, broader facets of operation were significant as well. She asked if any of the man- agement team had heard of the balanced scorecard, and received dead silence as a response.
Based on her experiences with other engagements, including two that involved airlines, Lopez was convinced that the balanced scorecard could provide benefits in helping to solve the airline’s woes. After a presentation about the philosophy of the balanced scorecard, Four Corners Airlines’ management team accepted her idea, feeling that a shift in operating philosophy was needed for survival.
Required:
1. What is a balanced scorecard, and what are its typical key elements?
2. Lopez wants to assemble a committee to prepare the airline’s balanced scorecard. List several of the company’s functional areas (e.g., marketing) that should be represented on the committee.
3. Identify a number of measures to evaluate the key elements that you specified in requirement 1.
Measures would include items such as load factors, number of passenger complaints, percentage of on-time arrivals, and so forth.
4. Do you see any problems with management’s prior focus on only one measure (i.e., load factor)?
Briefly explain.
AccuSound Corporation manufactures printed circuits for stereo amplifiers. A common product defect is a “drift” caused by failure to maintain precise heat levels during the production process.
Rejects from the 100 percent testing program can be reworked to acceptable levels if the defect is drift. However, in a recent analysis of customer complaints, Marie Allen, the assistant controller, and the quality control engineer determined that normal rework does not bring the circuits up to standard. Sampling showed that about half of the reworked circuits will fail after extended amplifier operation. The incidence of failure in the reworked circuits is projected to be about 10 percent over five years.
Unfortunately, there is no way to determine which reworked circuits will fail, because testing will not detect the problem. The rework process could be changed to correct the problem, but the cost–
benefit analysis for the suggested change indicates that it is not economically feasible. AccuSound’s marketing analyst has indicated that this problem will have a significant impact on the company’s repu- tation and customer satisfaction. Consequently, the board of directors would interpret this problem as having serious negative implications for the company’s profitability.
Problem 1–30 Balanced Scorecard; Airline (LO 1-3)
The balance icon (left) identifies an ethical issue.
Problem 1–31 Quality Control; Ethical Behavior
(LO 1-6, 1-7, 1-10, 1-11)
Allen included the circuit failure and rework problem in her report prepared for the upcoming quar- terly meeting of the board of directors. Due to the potential adverse economic impact, Allen followed a long-standing practice of highlighting this information. After reviewing the reports to be presented, the plant manager and his staff complained to the controller that he should control his people better. “We can’t upset the board with this kind of material. Tell Allen to tone that down. Maybe we can get it by the board in this meeting and have some time to work on it. People who buy those cheap systems and play them that loud shouldn’t expect them to last forever.”
The controller called Allen into his office and said, “Marie, you’ll have to bury this one. The prob- able failure of reworks can be mentioned briefly in the oral presentation, but it should not be mentioned or highlighted in the advance material mailed to the board.”
Allen feels strongly that the board will be misinformed on a potentially serious loss of income if she follows the controller’s orders. Allen discussed the problem with the quality control engineer, who simply remarked, “That’s your problem, Marie.”
Required:
1. Discuss the ethical considerations that Marie Allen should recognize in deciding how to proceed.
2. Explain what ethical responsibilities should be accepted by (a) the controller, (b) the quality con- trol engineer, and (c) the plant manager.
3. What should Marie Allen do? Explain your answer.
(CMA, adapted)
Urban Elite Apparel designs women’s apparel and sells it through retail outlets across the country. All of the company’s clothing lines are manufactured by contract manufacturers around the world. A division manager is responsible for each of the company’s retail divisions. Each division’s controller, assigned by the corporate controller’s office, manages the division’s accounting system and provides analysis of financial information for the division manager. The division manager evaluates the performance of the division controller and makes recommendations for salary increases and promotions. However, the final responsibility for promotion evaluation and salary increases rests with the corporate controller.
Each of Urban Elite Apparel’s divisions is responsible for product design, sales, pricing, operating expenses, and profit. However, corporate management exercises tight control over divisional financial operations. For example, all capital expenditure above a modest amount must be approved by corporate management. The method of financial reporting from the division to corporate headquarters provides further evidence of the degree of financial control. The division manager and the division controller submit to corporate headquarters separate and independent commentary on the financial results of the division. Corporate management states that the division controller is there to provide an independent view of the division’s operations, not as a spy.
Required:
1. Discuss the arrangements for line and staff reporting in Urban Elite Apparel.
2. The division manager for Urban Elite Apparel has a “dual reporting” responsibility. The controller is responsible both to the division manager, who makes recommendations on salary and promo- tion, and to the corporate controller, who has the final say in such matters.
a. Identify and discuss the factors that make the division controller’s role difficult in this type of situation.
b. Discuss the effect of the dual reporting relationship on the motivation of the divisional controller.
(CMA, adapted)
Problem 1–32
Role of the Divisional Control- ler; Retailer
(LO 1-4, 1-6, 1-9, 1-10)
Case
Progressive Applications Corporation, a developer and distributor of business applications software, has been in business for five years. The company’s main products include programs used for list manage- ment, billing, and accounting for the mail order shopping business. Progressive’s sales have increased steadily to the current level of $25 million per year. The company has 250 employees.
Andrea Nolan joined Progressive approximately one year ago as accounting manager. Nolan’s duties include supervision of the company’s accounting operations and preparation of the company’s financial statements. No one has noticed that in the past six months Progressive’s sales have ceased to
Case 1–33
Disclosure of Confidential Information; Ethics; Software Developer
(LO 1-1, 1-3, 1-6, 1-10, 1-11)