See the front matter of this Solutions Manual for suggestions regarding your choices of assignment material for each chapter.

1-1 Management accounting measures and reports financial and nonfinancial information that helps managers make decisions to fulfill the goals of an organization. It focuses on internal reporting.

Financial accounting focuses on reporting to external parties. It measures and records business transactions and provides financial statements that are based on generally accepted accounting principles (GAAP).

Other differences include (1) management accounting emphasizes the future, (2) management accounting influences the behavior of managers and other employees, and (3) management accounting is not restricted by Generally Accepted Accounting Principles.

1-2 Financial accounting is constrained by generally accepted accounting principles. Management accounting is not restricted to these principles. The result is that

· management accounting allows managers to charge interest on owners’ capital to help judge a division’s performance, even though such a charge is not allowed under GAAP,

· management accounting can include assets or liabilities (such as “brand names” developed internally) not recognized under GAAP, and

· management accounting can use asset or liability measurement rules (such as present values or resale prices) not permitted under GAAP.

1-3 Management accountants can help to formulate strategy by providing information about the sources of competitive advantage—for example, the cost, productivity, or efficiency advantage of their company relative to competitors or the premium prices a company can charge relative to the costs of adding features that make its products or services distinctive.

1-4 The business functions in the value chain are

· Research and development—generating and experimenting 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—acquiring, coordinating, and assembling resources to produce a product or deliver a service.

· Marketing—promoting and selling products or services to customers or prospective customers.

· Distribution—delivering products or services to customers.

· Customer service—providing after-sale support to customers.

1-5 Supply chain describes the flow of goods, services, and information from the initial sources of materials and services to the delivery of products to consumers, regardless of whether those activities occur in the same organization or in other organizations.

Cost management is most effective when it integrates and coordinates activities across all companies in the supply chain as well as across each business function in an individual company’s value chain. Attempts are made to restructure all cost areas to be more cost-effective.

1-6 “Management accounting deals only with costs.” This statement is misleading at best, and wrong at worst. Management accounting measures, analyzes, and reports financial and non-financial information that helps managers define the organization’s goals, and make decisions to fulfill them. Management accounting also analyzes revenues from products and customers in order to assess product and customer profitability. Therefore, while management accounting does use cost information, it is only a part of the organization’s information recorded and analyzed by management accountants.

1-7 Management accountants can help improve quality and achieve timely product deliveries by recording and reporting an organization’s current quality and timeliness levels and by analyzing and evaluating the costs and benefits—both financial and non-financial—of new quality initiatives such as TQM, relieving bottleneck constraints or providing faster customer service.

1-8 Planning decisions focus on (a) selecting organization goals, predicting results under various alternative ways of achieving those goals, deciding how to attain the desired goals, and (b) communicating the goals and how to attain them to the entire organization.

Control decisions focus on (a) taking actions that implement the planning decisions, and (b) deciding how to evaluate performance and what related feedback to provide that will help future decision making.

1-9 The three roles are

· Problem solving—comparative analysis for decision making.

· Scorekeeping—accumulating data and reporting results to management describing how the organization is doing and how well it is implementing its strategies.

· Attention directing—helping managers to focus on opportunities and problems.

1-10 The three guidelines for management accountants are

1. Employ a cost-benefit approach.

2. Recognize behavioral and technical considerations.

3. Apply the “different costs for different purposes” notion.

1-11 Agree. A successful management accountant requires general business skills (such as understanding the strategy of an organization) and people skills (such as motivating other team members) as well as technical skills (such as computer knowledge, calculating costs of products, and supporting planning and control decisions).

1-12 The new controller could reply in one or more of the following ways:

(a) Demonstrate to the plant manager how he or she could make better decisions if the plant controller was viewed as a resource rather than a deadweight. In a related way, the plant controller could show how the plant manager’s time and resources could be saved by viewing the new plant controller as a team member.

(b) Demonstrate to the plant manager a good knowledge of the technical aspects of the plant. This approach may involve doing background reading. It certainly will involve spending much time on the plant floor speaking to plant personnel.

(c) Show the plant manager examples of the new plant controller’s past successes in working with line managers in other plants. Examples could include

· assistance in preparing the budget,

· assistance in analyzing problem situations and evaluating financial and nonfinancial aspects of different alternatives, and

· assistance in submitting capital budget requests.

(d) Seek assistance from the corporate controller to highlight to the plant manager the importance of many tasks undertaken by the new plant controller. This approach is a last resort but may be necessary in some cases.

1-13 IMA stands for the Institute of Management Accountants. It is the largest association of management accountants in the United States. The CMA (Certified Management Accountant) is the professional designation for management accountants and financial executives. It demonstrates that the holder has met the admission criteria and demonstrated the competency of technical knowledge required by the IMA.

1-14 The Institute of Management Accountants (IMA) sets standards of ethical conduct for management accountants in the following areas:

· Competence

· Confidentiality

· Integrity

· Objectivity

1-15 Steps to take when established written policies provide insufficient guidance are

(a) Discuss the problem with the immediate superior (except when it appears that the superior is involved).

(b) Clarify relevant ethical issues by confidential discussion with an objective advisor.

If (a), (b), (c) and other avenues do not resolve the situation, resignation from the organization should be considered.

1-16 (15 min.) Value chain and classification of costs, computer company.

Cost Item	Value Chain Business Function
a. b. c. d. e. f. g. h.	Production Distribution Design Research and Development Customer Service or Marketing Design (or Research and Development) Marketing Production

1-17 (15 min.) Value chain and classification of costs, pharmaceutical company.

Cost Item	Value Chain Business Function
a. b. c. d. e. f. g. h.	Design Marketing Customer Service Research and Development Marketing Production Marketing Distribution

1-18 (25 min.) Management accounting system and its customers.

1. Management accounting’s customers are managers of departments such as marketing, production and R&D. Management accounting focuses on providing financial and nonfinancial information to the managers to help them make better decisions to achieve the organization’s goals.

2. The value of a management accounting system can be enhanced and, simultaneously, expectations of managers can be exceeded by providing relevant and timely information to the managers so that they achieve their strategic goals and make good planning and control decisions. This means that management accounting must have customer focus. The information needs of the managers for decision making must be met and exceeded in order to retain them as users of management accounting information. Management accounting systems should address the information needs of the managers by helping with problem solving, scorekeeping, and directing their attention to the following key success factors:

· Cost control

· High quality

· Timely response to customer demand

· Innovation

Management accountants have several tools that can help managers concentrate on continuous improvement of various aspects of their operations.

Value chain and supply chain analysis performed by the management accounting function can contribute to the achievement of key success factors. When each business function adds value and all business functions are coordinated and well integrated, it contributes to cost control, high quality, timely response, and innovation.

1-19 (15 min.) Value chain, supply chain, and key success factors.

Change in Management Accounting	Key Theme
a. b. c. d. e.	Value-chain analysis Key success factors (cost and quality) Key success factors (cost) Supply-chain analysis Key success factors (time)

1-20 (15 min.) Planning and control decisions.

1. a. Planning—Barnes & Noble (B&N)’s cash needs for the future.

b. Control—B&N’s annual financial performance evaluation.

2. a. Planning—whether to increase or decrease local marketing support.

b. Control—whether recent sales promotion led to an increase in revenues.

3. a. Planning—whether or not to expand B&N’s internet-based lines of business.

b. Control—evaluation by VP of New Business Development of the performance of managers of individual lines of business.

4. a. Planning—which books to advertise more or which books to include in a special chat-room site.

b. Control—decision by publisher to pay additional bonuses to each author whose book reaches the bestseller list and stays on the list for a certain period of time.

5. a. Planning—decision by B&N on the amount and type of insurance to purchase next year.

b. Control—follow up by B&N with the insurance company regarding a cash payment to B&N.

1-21 (15 min.) Problem solving, scorekeeping, and attention directing.

Because the accountant’s duties are often not sharply defined, some of these answers might be challenged:

a. Scorekeeping

b. Attention directing

c. Problem solving

d. Attention directing

e. Problem solving

f. Scorekeeping (and then attention directing)

g. Problem solving

h. Scorekeeping (depending on the extent of the report) or attention directing

i. Problem solving

j. Problem solving

1-22 (15 min.) Problem solving, scorekeeping, and attention directing.

The accountant’s duties are often not sharply defined, so some of these answers might be challenged:

1. Attention directing

2. Problem solving

3. Scorekeeping

4. Scorekeeping

5. Scorekeeping

6. Attention directing

7. Problem solving

8. Scorekeeping

9. Problem solving

10. Attention directing

1-23 (10–15 min.) Professional ethics and reporting division performance.

1. Miller’s ethical responsibilities are well summarized in the IMA’s “Standards of Ethical Conduct for Management Accountants” (Exhibit 1-7 of text). Areas of ethical responsibility include the following:

· competence

· confidentiality

· integrity

· objectivity

The ethical standards related to Miller’s current dilemma are integrity, competence and objectivity. Using the integrity standard, Miller should communicate unfavorable as well as favorable information and professional judgments or opinions. Competence demands that Miller perform her professional duties in accordance with relevant laws, regulations, and technical standards. Objectivity requires that Miller report information fairly and objectively. Miller should refuse to book the $200,000 of sales until the goods are shipped. Both financial accounting and management accounting principles maintain that sales are not complete until the title is transferred to the buyer.

2. Miller should refuse to follow Maloney's orders. If Maloney persists, the incident should be reported to the corporate controller. Support for line management should be wholehearted, but it should not require unethical conduct.

1-24 (15 min.) Planning and control decisions, Internet company.

1. Planning decisions

a. Decision to raise monthly subscription fee

c. Decision to upgrade content of online services (later decision to inform subscribers and upgrade online services is an implementation part of control)

e. Decision to decrease monthly subscription fee

Control decisions

b. Decision to inform existing subscribers about the rate of increase—an implementation part of control decisions

d. Dismissal of VP of Marketing—performance evaluation and feedback aspect of control decisions

2. Other planning decisions that may be made at WebNews.com: decision to raise or lower advertising fees; decision to charge a fee from on-line retailers when customers click-through from WebNews.com to the retailers’ websites.

Other control decisions that may be made at WebNews.com: evaluating how customers like the new format for the weather information, working with an outside vendor to redesign the website, and evaluating whether the waiting time for customers to access the website has been reduced.

1-25 (30 min.) Problem solving, scorekeeping, attention directing, and feedback, Internet company (continuation of 1-24).

1. (a) and (e) Decisions to change subscription fee.

Problem solving—report outlining expected revenues from subscribers and advertising with different monthly fee amounts.

Scorekeeping—report with monthly subscribers and their revenues in prior months.

Attention directing—report showing the change in the number of subscribers of Internet companies at the time they change their monthly fees.

(b) Decision to inform existing subscribers of $24.95 fee from July onwards.

Problem solving—report analyzing different ways (e-mail, regular mail) of informing subscribers.

Scorekeeping—report indicating how many subscribers have been contacted.

Attention directing—report showing how many subscribers have cancelled their subscriptions following notification of the increase in fees.

Problem solving—report outlining expected revenues from subscribers and advertisers as a result of upgrading service.

Scorekeeping—report with monthly subscribers and revenues before and after upgrading service.

Attention directing—report showing the change in the number of subscribers of Internet companies after they upgraded service.

(d) Decision to dismiss vice president of marketing.

Problem solving—report indicating alternative reasons for the slowdown in subscribers from July to September 2006.

Attention directing—report analyzing growth in subscribers at competing Internet companies compared to WebNews.com.

Scorekeeping—report showing the number of subscribers after the Vice President of Marketing was dismissed.

2. As a result of the feedback from the control system, WebNews.com made the following decisions:

a. Decision in October to change subscription fee from $24.95 per month in September 2006 to $21.95 in November 2006.

b. Dismissal of Vice President of Marketing after significant slowing of subscriber growth in accounts and revenues.

3. WebNews.com overestimated the number of subscribers for the July to September 2006 period. It might examine the methodology it uses to estimate the sensitivity of subscriptions to price changes and upgrade of its services.

1-26 (15 min.) Management accounting guidelines.

1. Cost-benefit approach

2. Behavioral and technical considerations

3. Different costs for different purposes

4. Cost-benefit approach

5. Behavioral and technical considerations

6. Cost-benefit approach

7. Behavioral and technical considerations

8. Different costs for different purposes

9. Behavioral and technical considerations

1-27 (15 min.) Role of controller, role of chief financial officer.

Activity	Controller	CFO
Managing accounts payable	X
Communicating with investors		X
Strategic review of different lines of businesses		X
Budgeting funds for a plant upgrade	X
Managing the company’s short-term investments		X
Negotiating fees with auditors		X
Assessing profitability of various products	X
Evaluating the costs and benefits of a new product design	X

2. As CFO, Perez will be interacting much more with the senior management of the company, the board of directors, and the external financial community. Any experience he can get with these aspects will help him in his new role as CFO. George Perez can be better positioned for his new role as CFO by participating in strategy discussions with senior management, by preparing the external investor communications and press releases under the guidance of the current CFO, by attending courses that focus on the interaction and negotiations between the various business functions and, either formally or on the job, getting training in issues related to investments and corporate finance.

1-28 (30 min.) Software procurement decisions, ethics.

1. Michael faces an ethical problem. The trip appears to be a gift which could influence his purchase decision. The ethical standard of integrity requires Michaels to refuse the gift. Companies with “codes of conduct” frequently have a “supplier clause” that prohibits their employees from accepting “material” (in some cases, any) gifts from suppliers. The motivations include

(a) Integrity/conflict of interest. Suppose Michaels recommends that a Horizon 1-2-3 product should subsequently be purchased by Fiesta. This recommendation could be because he felt obligated to them as his trip to the Cancún conference was fully paid by Horizon.

(b) The appearance of a conflict of interest. Even if the Horizon 1-2-3 product is the superior one at that time, other suppliers likely will have a different opinion. They may believe that the way to sell products to Fiesta is via “fully-paid junkets to resorts.” Those not wanting to do business this way may downplay future business activities with Fiesta even though Fiesta could gain much from such activities.

Some executives view the meeting as “suspect” from the start given the Caribbean location and its “rest and recreation” tone.

2. Fiesta should not allow executives to attend user meetings while negotiating with other vendors about a purchase decision. The payment of expenses for the trip constitutes a gift that could appear to influence their purchase decision.

Pros of attending user meeting

(a) Opportunity to learn more about Horizon’s software products.

(b) Opportunity to interact with other possible purchasers and get their opinions.

(c) Opportunity to influence the future product development plans of Horizon in a way that will benefit Fiesta. An example is Horizon subsequently developing software modules tailored to food product companies.

(d) Saves Fiesta money. Visiting suppliers and their customers typically cost money, whereas Horizon is paying for the Cancún conference.

Cons of Attending

(a) The ethical issues raised in requirement 1.

(b) Negative morale effects on other Fiesta employees who do not get to attend the Cancún conference. These employees may reduce their trust and respect for Michaels’s judgment, arguing he has been on a “supplier-paid vacation.”

Conditions on Attending that Fiesta Might Impose

(a) Sizable part of that time in Cancún has to be devoted to business rather than recreation.

(b) Decision on which Fiesta executive attends is not made by the person who attends (this reduces the appearance of a conflict of interest).

(c) Person attending (Michaels) does not have final say on purchase decision (this reduces the appearance of a conflict of interest).

(d) Fiesta executives go only when a new major purchase is being contemplated (to avoid the conference becoming a regular “vacation”).

A Conference Board publication on Corporate Ethics asked executives about a comparable situation. Following are the results:

· 76% said Fiesta and Michaels face an ethical consideration in deciding whether to attend.

· 71% said Michaels should not attend, as the payment of expenses is a “gift” within the meaning of a credible corporate ethics policy.

3. The company does not need its own code of ethics. They can use the code of ethics developed by the IMA.

Pros of having a written code

The Conference Board outlines the following reasons why companies adopt codes of ethics:

(a) Signals commitment of senior management to ethics.

(b) Promotes public trust in the credibility of the company and its employees.

(d) Provides guidance to employees as to how difficult problems are to be handled. If adhered to, employees will avoid many actions that are unethical or appear to be unethical.

(e) Drafting of the policy (and its redrafting in the light of ambiguities) can assist management in anticipating and preparing for ethical issues not yet encountered.

Cons of having a written code

(a) Can give appearance that all issues have been covered. Issues not covered may appear to be “acceptable” even when they are not.

(b) Can constrain the entrepreneurial activities of employees. Forces people to always “behave by the book.”

1-29 (30–40 min.) Professional ethics and end-of-year actions.

1. The possible motivations for the snack foods division wanting to take end-of-year actions include:

(a) Management incentives. Gourmet Foods may have a division bonus scheme based on one-year reported division earnings. Efforts to front-end revenue into the current year or transfer costs into the next year can increase this bonus.

(b) Promotion opportunities and job security. Top management of Gourmet Foods likely will view those division managers that deliver high reported earnings growth rates as being the best prospects for promotion. Division managers who deliver “unwelcome surprises” may be viewed as less capable.

(c) Retain division autonomy. If top management of Gourmet Foods adopts a “management by exception” approach, divisions that report sharp reductions in their earnings growth rates may attract a sizable increase in top management supervision.

2. The “Standards of Ethical Conduct . . . ” require management accountants to

· Refrain from either actively or passively subverting the attainment of the organization’s legitimate and ethical objectives, and

· Communicate unfavorable as well as favorable information and professional judgment or opinions.

Several of the “end-of-year actions” clearly are in conflict with these requirements and should be viewed as unacceptable by Taylor.

(b) The fiscal year-end should be closed on midnight of December 31. “Extending” the close falsely reports next year’s sales as this year’s sales.

(f) Advertisements run in December should be charged to the current year. The advertising agency is facilitating falsification of the accounting records.

The other “end-of-year actions” occur in many organizations and may fall into the “gray” to “acceptable” area. However, much depends on the circumstances surrounding each one, such as the following:

(a) If the independent contractor does not do maintenance work in December, there is no transaction regarding maintenance to record. The responsibility for ensuring that packaging equipment is well maintained is that of the plant manager. The division controller probably can do little more than observe the absence of a December maintenance charge.

(d) In many organizations, sales are heavily concentrated in the final weeks of the fiscal year-end. If the double bonus is approved by the division marketing manager, the division controller can do little more than observe the extra bonus paid in December.

(e) If TV spots are reduced in December, the advertising cost in December will be reduced. There is no record falsification here.

(g) Much depends on the means of “persuading” carriers to accept the merchandise. For example, if an under-the-table payment is involved, it is clearly unethical. If, however, the carrier receives no extra consideration and willingly agrees to accept the assignment, the transaction appears ethical.

Each of the (a), (d), (e), and (g) “end-of-year actions” may well disadvantage Gourmet Foods in the long run. For example, lack of routine maintenance may lead to subsequent equipment failure. The divisional controller is well advised to raise such issues in meetings with the division president. However, if Gourmet Foods has a rigid set of line/staff distinctions, the division president is the one who bears primary responsibility for justifying division actions to senior corporate officers.

3. If Taylor believes that Ryan wants her to engage in unethical behavior, she should first directly raise her concerns with Ryan. If Ryan is unwilling to change his request, Taylor should discuss her concerns with the Corporate Controller of Gourmet Foods. Taylor also may well ask for a transfer from the snack foods division if she perceives Ryan is unwilling to listen to pressure brought by the Corporate Controller, CFO, or even President of Gourmet Foods. In the extreme, she may want to resign if the corporate culture of Gourmet Foods is to reward division managers who take “end-of-year actions” that Taylor views as unethical and possibly illegal. It was precisely actions such as (b), (c), and (f) that caused Betty Vinson, an accountant at WorldCom to be indicted for falsifying WorldCom’s books and misleading investors.

1-30 (40 min.) Global company, ethical challenges with bribery.

1. It is clear that bribes are illegal according to U.S. laws. It is not clear from the case whether bribes are illegal in Vartan. However, knowledgeable people in global business would attest to the fact that it is virtually impossible to find any country in the world that specifically sanctions bribery. The major point, however, that deserves discussion is: Should ZenTel engage in any unethical activities even if they are not illegal?

It is difficult to make a generalization about all shareholders of the company. It is, however, safe to assume that not all shareholders would want to keep their investment in a company that is engaged in unethical and/or illegal activities. There is historical evidence to substantiate this point: When apartheid laws were in effect in South Africa, many investors divested shares of companies doing business in South Africa.

Apart from the ethical issues, it should also be noted that bribery can be very costly in some parts of the world. Bribes may not generate revenues sufficient enough to offset their cost.

2. Apparently Hank thinks that local culture and common practice are one and the same. This, in fact, is not the case. There are many common practices in developing countries, which are against the native culture.

Specifically, bribery often leads to decisions that are not made on the basis of the merits of the alternative selected. This results in misallocation of meager resources of the developing country. Misallocation of resources has adverse effects on the economy of a country and the living standard of its population. The negative impact is intensified in developing countries because they can least afford the misallocation of resources.

As it applies to local common practice, multinational companies make some small allowances but draw a hard line against paying the $1 million “commission.”

3. ZenTel might have an articulated corporate policy against such payments to get the message across that regardless of laws, the top management would not tolerate any bribery payments made by its employees. A strong and consistent message from the top often has a noticeable effect on the corporate culture and employee behavior.

U.S. laws specifically prohibit bribery payments. Such payments can result in heavy penalties to the corporation making the payments.

4. If this contract is of great importance to ZenTel’s global strategy, it is likely that this kind of issue will come up again as ZenTel expands into very diverse cultures and the company should tackle it head on and make a policy decision against offering bribes. Steve Cheng should discuss the situation with the top management at ZenTel and re-affirm his goal to get the Vartan contract with legal means. He could seek the help of the U.S. commercial attaché in Vartan to continue a dialogue with Vartan’s deputy minister of communications. He could propose other creative, legal changes to the ZenTel’s bid, even at the cost of reducing the profitability of the current project. Concessions such as training programs, schools and other public works projects may be legal, get the attention of the Vartan government and raise ZenTel’s profile both at home and abroad. In the worst case, if the Vartan government does not agree to any of the creative, legal “extras” that ZenTel can provide in order to win the contract, Cheng should report this to ZenTel’s management and be willing to walk away from the Vartan project.

Chapter 1 Video Case

The video case can be discussed using only the case writeup in the chapter. Alternatively, instructors can have students view the videotape of the company that is the subject of the case. The videotape can be obtained by contacting your Prentice Hall representative. The case questions challenge students to apply the concepts learned in the chapter to a specific business situation.

REGAL MARINE: The Accountant’s Role

1.a. Preparing a schedule of depreciation for boat hull and deck molds—Scorekeeping.

b. Analyzing the desirability of using standard Volvo-Penta boat engines in a new boat model—Problem solving.

c. Preparing the daily report of the number of hull defects found during the quality check on the Sport Boat assembly line—Attention directing and scorekeeping.

d. Explaining the Commodore Yacht Division’s monthly performance report—Attention directing.

e. Interpreting differences between actual results and budgeted amounts on the monthly performance report for the prototyping department—Attention directing.

f. Preparing a monthly statement of boat sales, by model and customer, for the company’s vice president of sales—Attention directing (or Scorekeeping).

g. Analyzing, for the design team, the impact on product costs for a new dashboard odometer display—Problem solving.

h. Preparing a cost comparison of two plywood manufacturers for use by the purchasing manager—Problem solving.

2.a. Cost of a toll-free telephone line used for customer inquiries about product specifications, performance, and warranty coverage—Customer Service, or if prior to purchase—Marketing.

b. Cost of sales and promotional materials—Marketing.

c. Labor costs of workers in the Cabinetry Department of the production facility—Production.

d. Cost of an industry research report on boat industry trends—Research & Development or Design of products or processes.

e. Equipment and trucks purchased for transporting finished boats to retail outlets such as the Boat Tree—Distribution.

f. Boat hull and deck mold fabrication costs—Production.

g. Cost of a new CAD design station—Design of products or processes.

h. Costs of upholstery seats for Commodore yachts—Production.

( Cost Accounting 12e by SM HORNGREN )