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  MANAGEMENT ACCOUNTING - Solutions Manual 1-1 TABLE OF CONTENTS   Chapter 1 M   ANAGEMENT  A CCOUNTING :    A N O VERVIEW    1-1  –  1-19 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 10 Systems Design: Job-Order Costing and Process Costing 10-1  –  10-16 11 Systems Design: Activity-Based Costing and Management 11-1  –  11-15 12 Variable Costing 12-1  –  12-21 13 Cost-Volume-Profit Relationships 13-1  –  13-37 14 Responsibility Accounting and Transfer Pricing 14-1  –  14-26 15 Functional and Activity-Based Budgeting 15-1  –  15-22 16 Standard Costs and Operating Performance Measures 16-1  –  16-17 17 Application of Quantitative Techniques in Planning, Control and Decision Making - I 17-1  –  17-2 18 Application of Quantitative Techniques in Planning, Control and Decision Making  –  II 18-1  –  18-7 19 Relevant Costs for Decision Making 19-1  –  19-33 20 Capital Budgeting Decisions 20-1  –  20-16 21 Decentralized Operations and Segment Reporting 21-1  –  21-4 22 Business Planning   22-1  –  22-6  Chapter 1    Management Accounting: An Overview    1-2 23 Strategic Cost Management; Balanced Scorecard 23-1  –  23-4 24 Advanced Analysis and Appraisal of Performance: Financial and Nonfinancial 24-1  –  24-12 25 Managing Productivity and Marketing Effectiveness 25-1  –  25-19 26 Executive Performance Measures and Compensation 26-1  –  26-3 27 Managing Accounting in a Changing Environment 27-1  –  27-22 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 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   Management Accounting: An Overview    Chapter 1   1-3 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,  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.  Chapter 1    Management Accounting: An Overview    1-4 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 Controller Assistant Treasurer Special Studies Manager Cost Accounting Manager Tax Manager Internal Audit Manager General Accounting Manager System & EDP Manager Cost Systems Analyst Budget & Standard Cost Analyst Performance Analyst Cost Clerk Payroll Clerk Accounts Receivable Clerk Accounts Payable Clerk Billing Clerk General Ledger Bookkeeper 9. Management accountants contribute to strategic decisions by providing information about the sources of competitive advantage and by helping managers identify and build a company’s resources and capabilities.  10. In most organizations, management accountants perform multiple roles:  problem solving (comparative analyses for decision making), scorekeeping (accumulating data and reporting reliable results), and attention directing (helping managers properly focus their attention). 11. Three guidelines that help management accountants increase their value to managers are (a) employ a cost-benefit approach, (b) recognize behavioral
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