CHAPTER 1

INTRODUCTION: THE ROLE, HISTORY, AND

DIRECTION OF MANAGEMENT ACCOUNTING
QUESTIONS FOR WRITING AND DISCUSSION

1. A management accounting information sys- 8. Continuous improvement means searching

tem is an information system that produces for ways of increasing overall efficiency and
outputs using inputs and processes needed productivity of activities by reducing waste,
to satisfy specific managerial objectives. increasing quality, and reducing costs.
2. The inputs of a management accounting 9. Employee empowerment is allowing opera-
information system are economic events. tional workers to plan, control, and make
The processes transform the inputs into out- decisions without explicit authorization from
puts and are such things as collecting, mea- middle- and higher-level managers.
suring, storing, analyzing, reporting, and
managing. Typical outputs include special 10. Operational workers must be informed so
reports, product costs, customer costs, per- that they can evaluate and monitor the effec-
formance reports, budgets, and personal tiveness of their decisions.
communication. 11. Planning establishes performance stan-
3. The three objectives of a management ac- dards, feedback compares actual perfor-
counting information system are as follows: mance with planned performance, and con-
To provide information for costing out ser- trolling uses feedback to evaluate deviations
vices, products, and other objects of interest from plans.
to management; to provide information for
12. Performance reports are formal reports that
planning, controlling, evaluation, and conti-
nuous improvement; and to provide informa- compare actual data with planned data or
tion for decision making. benchmarks and thus provide signals to
managers that allow them to take corrective
4. All organizations — manufacturing, mer- actions.
chandising, and services — must have a
good management accounting information 13. Management accounting differs from finan-
system. Management accounting concepts cial accounting in the following major ways:
and procedures are not restricted to any one (1) internally focused, (2) no mandated
type of organization. rules, (3) financial and nonfinancial; subjec-
tive information possible, (4) emphasis on
5. The users of management accounting in- the future, (5) internal evaluation and deci-
formation are managers and workers within
sions based on very detailed information, (6)
the organization. Anyone internal to an or-
broad, multidisciplinary.
ganization is a potential user of manage-
ment accounting information. 14. The requirement to prepare reports for ex-
6. Management accounting information is used ternal users created a demand for a particu-
to cost out objects (for example, services lar accounting information system. This sys-
and products) and to aid in planning, control- tem was geared to produce inventory costs.
ling, evaluation, continuous improvement, Aggregate average cost information appar-
and decision making. ently was sufficient for most internal deci-
sions. Thus, management accounting be-
7. Both financial and nonfinancial information came an extension of the financial
should be provided by the management ac- accounting system. This outcome was prob-
counting information system. Nonfinancial ably due to a favorable cost-benefit tradeoff.
information provides insights useful for con-
The incremental cost of producing
trolling operations — it is easily used by op-
erational workers. Financial information is
critical for evaluating the success of opera-
tional control.

1
 more accurate product costs was not offset stream customers. Supply chain manage-
by the incremental benefits of improved de- ment focuses on the entire industrial value
cision making. However, significant changes chain because potential benefits may be
in the competitive environment have in- reaped by understanding upstream suppliers
creased the cost of making bad decisions, and downstream customers.
thus increasing the benefits of more accu-
20. E-business is any business transaction or
rate information. Also, information technolo-
information exchange that is executed using
gy has decreased the cost of processing da-
information and communication technology.
ta. These two events have led to a demand
Management accountants provide informa-
for an improved management accounting in-
tion for e-business settings, e.g., the cost of
formation system.
processing an electronic transaction versus
15. Activity-based management is an important the cost of a paper transaction.
approach that focuses management’s atten-
tion on activities with the objective of improv- 21. Managing the value chain requires a cross-
ing the value received by the customer and functional perspective. Because of the inter-
the profit achieved by providing this value. It relationships that exist in the value chain, a
is important because it is the heart of the decision can affect many different functions.
contemporary management accounting sys- Information must be gathered and reported
tem, offering increased accuracy in product so that these effects can be assessed and
costing (through the use of activity-based decision making improved.
costing) and the ability to evaluate and con- 22. Decreasing the time required to perform
trol activities (through process value analy- activities may increase quality and decrease
sis). costs. The management accounting system
16. Customer value is the difference between should be able to document the relationship
customer realization (what a customer rece- between time reductions and such things as
ives) and customer sacrifice (what a cus- quality and cost both on a projected or
tomer gives up). Focusing on customer val- before-the-fact basis and on an after-the-fact
ue forces managers to consider the entire basis. This enhances planning, controlling,
set of value-chain activities, including what and decision making.
happens after a product is sold. This creates
23. A line position has direct responsibility for
a demand for a broader set of information
carrying out the basic missions of an organi-
than that found in a traditional system.
zation. A staff position has indirect responsi-
17. The internal value chain is the set of activi- bility for the basic missions and provides a
ties required to design, develop, produce, supportive role for line activities.
market, distribute, and service a product (the
24. Yes. For most organizations, the controller
product can be a service). To increase cus-
should be a member of the top management
tomer value, managers must assess the ef-
staff. The controller is the financial expert of
fect each activity in the chain has on cus-
an organization and can provide critical ad-
tomer value, keeping those that add value
vice and insights.
and eliminating those that do not.
18. Industrial value chain is the linked set of 25. The controller is responsible for both internal
value-creating activities from raw materials and external accounting. These responsibili-
through the end-use customer. Understand- ties usually include diverse activities such as
ing the industrial value chain is important taxes, SEC reports, cost accounting, bud-
because it enables a manager to identify the geting, internal auditing, financial account-
important internal and external linkages and ing, and systems accounting.
use these linkages to create a competitive 26. Ethical behavior is concerned with making
advantage. right choices and usually involves sacrificing
19. Supply chain management is concerned individual self-interest for the well-being of
with managing material flows starting with others. It is possible to teach ethical beha-
suppliers and upstream suppliers, moving to vior in virtually any course. By being intro-
production, and finishing with the distribution duced to ethical dilemmas in management
of finished goods to customers and down- accounting, students can be made aware of

2
 the behavior that is expected in the business needs. The CPA has a public-accounting
world and, in particular, for management ac- orientation, and the CIA has an internal-
countants. auditing orientation. Only the CMA specifi-
cally addresses the professional require-
27. Yes. There is some evidence that ethical
ments of a management accountant.
behavior actually is good business. In other
words, the market and consumers appre- 30. The Sarbanes-Oxley Act (SOX) established
ciate ethical behavior and are willing to re- stronger government control and regulation
ward those who adopt it. In addition, a com- of publicly-traded companies in the United
pany with higher ethical standards would States. Major sections of SOX include: es-
experience less exposure to manipulation of tablishment of the Public Company Account-
financial data for gain. ing Oversight Board, enhanced auditor in-
dependence, tightened regulation of
28. Yes. As management accountants become
corporate governance, control over man-
more informed about what behavior is ac-
agement, and management/auditor assess-
ceptable and what is not, we should expect
ment of the firm’s internal controls. SOX also
a favorable response. This response can be
requires public companies to state whether
reinforced by the IMA imposing sanctions for
or not the top corporate officers are bound to
serious violations of the code.
the company code of ethics.
29. The three forms of certification are the CMA,
.
the CPA, and the CIA. Although each certifi-
cation can be valuable for management ac-
countants, the CMA is tailored to fit their

3
 EXERCISES

1–1

1. Inputs: a, d, f, j 3. Outputs: c, i, l
2. Processes: b, g, m 4. System objectives: e, h, k, n

1–2

a. Management h. Management
b. Financial i. Financial
c. Management j. Management
d. Financial k. Management
e. Financial l. Financial
f. Management m. Financial
g. Management n. Management

1–3

1. b
2. c
3. f

1–4

1. e
2. b
3. c

1–5

1. k 7. j
2. g 8. c
3. a 9. b
4. f 10. e
5. i 11. d
6. h

4
1–6
Penny is staff. She is in a support role—she prepares reports and helps explain
and interpret them. Her role is to help the line managers more effectively carry
out their responsibilities.

Karol is line. She is responsible for selling product. A basic objective for the exis-
tence of a manufacturing firm is to sell product. Karol has direct responsibility for
a basic objective and therefore holds a line position.

Porter is staff. He is in a support role to production. He does not make the prod-
ucts himself. Instead, he ensures that the appropriate production equipment is in
place for manufacturing.

Joe is a line manager. He has direct responsibility for producing a garden hose.
Clearly, one of the basic objectives for the existence of a manufacturing firm is to
make a product. Thus, Joe has direct responsibility for a basic objective and
therefore holds a line position.

1–7
A manager has a responsibility to the company as well as society. If he/she lays
off the employees, he/she ignores both of these responsibilities. In effect, the
manager would be pursuing his/her self-interest at the expense of the company
and the salespeople. While pursuit of self-interest is not necessarily unethical, it
can be if it harms others. In this case, the manager’s action could result in lower
profits for the company because sales may decrease and unnecessary training
costs will be incurred when the positions are refilled the following year. Similarly,
it is unjust to penalize productive employees simply to earn a bonus. The right
choice is to retain the three salespeople. Although the manager is not a manage-
ment accountant, he/she is violating the ethical standard that requires the refusal
of “any gift or favor (bonus) that would influence or appear to influence their ac-
tions.”
The reward system, in part, encouraged this behavior. Apparently, the manager is
paid a bonus if profits exceed 10 percent of planned profits. By basing reward on
a short-run measure such as profits, the manager has the incentive to manipulate
earnings in the short run. One way of manipulating annual earnings is to reduce
discretionary expenditures.
This type of behavior can be discouraged by expanding the performance
mea-sures to include long-run factors like market share, productivity, and
personnel development. The accounting system can also be used to track
trends (e.g., training costs over time). Moreover, managers can be required
to provide extensive justification for significant changes in discretionary
expenses.

5
1–8

a. By the time most students graduate from high school, they have not had
much exposure to business. Therefore, they do not have full knowledge
of acceptable behavior for the business environment. Students may not
know that certain practices are unethical because they may not be famil-
iar with the behavioral norms associated with these practices. Once
students begin to learn business practices, they begin to see what ethi-
cal dilemmas can arise in a business context. They then are able to ap-
ply the moral training they have had to deal with the situations. Fur-
thermore, evidence exists that ethical reasoning can be changed for the
better. Thus, instruction in ethics can be a vital part of a student’s edu-
cation.
b. Sacrificing self-interest is a choice that each person must make. Others may
be influenced by those individuals who behave ethically. Individuals commit-
ted to ethical behavior produce societies committed to ethical behavior (not
vice versa).
c. While this sounds noble, many would disagree that managers are first seek-
ing to serve others and accept personal financial rewards as a by-product of a
good job. Pursuit of self-interest and personal financial well-being is not nec-
essarily unethical. It is only when this pursuit is done at the expense of the
collective good that the behavior becomes questionable.
d. It is often true that unethical firms and individuals suffer financially. In the
long run, there is some evidence that ethical behavior pays off. It is doubtful,
however, that every unethical firm or individual is wiped out financially. There
are too many notable exceptions (for example, the selling of drugs by orga-
nized crime).

1-9

No, it is not ethical for Steve to demand a kickback from Dave. Dave should not
agree to this. This brief situation actually happened to Dave, a friend of the au-
thor. The author advised Dave not to accept the deal. Dave then checked with his
lawyer, who bluntly told him the deal was illegal. Dave did not accept.

1–10
a. CPA e. CPA
b. CIA f. CMA
c. CMA g. CMA, CPA, CIA
d. CPA h. CMA, CPA, CIA

6
 PROBLEMS

1–11

1. Excellence teams and minicompanies both have the objective of involving

production line personnel more fully in the management process so that the
company can take advantage of the direct contact and knowledge that operat-
ing workers have about production and their work environment. This will
hopefully translate into continuous improvement of operating performance.
The objectives seem to be realized. Duffy has increased profits and reduced
costs, attributing much of the change to the contributions of the excellence
teams. The same is true for the minicompanies—much of the success in
quality improvements appears to be grounded in this organizational change.

2. Employee empowerment is a key element of continuous improvement. Oper-

ating workers have tremendous skills, knowledge, and firsthand contact with
the operating environment, all of which can be exploited to discover new and
more efficient ways of producing. As employees are allowed more input, their
self-esteem grows and their commitment to the company increases. Morale
also increases, making for a more pleasant and productive environment.
There are potential disadvantages. Too much latitude in employee empower-
ment might sidetrack employees to the point where they begin to attack per-
sonalities; discuss and argue about wage and hour considerations (or other
grievances); or try to become involved in hiring, firing, and disciplinary mat-
ters. Many of these matters are best left centralized, and some skillful man-
agement is needed to ensure that operating employees are primarily involved
in improving efficiency.

3. Management accounting information should be used to inform empowered

employees so that they can identify problems and monitor and evaluate the
effects of decisions they make. This information will only be valuable if it is
delivered on a timely basis.

4. Quality culture means that the employees of the organization have an internal
commitment to producing high-quality products and services. A learning or-
ganization means that the employees are always seeking new and better ways
of doing things—they have a commitment to continuous improvement.

7
1–12

A. Decision making; Role: Information about the cost of performing the various
tests.
B. Planning and controlling; Role: Feedback about the actual defective rate ver-
sus the planned rate.
C. Planning; Role: Pro forma income statement and cash budget.
D. Decision making; Role: Projection of future cash flows and analysis of the ef-
fects on unit cost and cycle time.
E. Planning; Role: Providing unit prices and costs so that a cost-volume-profit
analysis can be done.
F. Decision making; Role: Identifying avoidable costs.

1–13

1. The total product is the product and its features (processing speed, disk
drives, software packages, and so on), the service, the operating and main-
tenance requirements, and the delivery speed.

2. One company is emphasizing low costs, and the other is attempting to diffe-
rentiate its PC by offering faster delivery and higher-quality service.

3. The Confiar’s service component and its delivery time appear to be better
than Drantex’s. Thus, the realization of these features appears to outweigh
the additional sacrifice (the additional operating and maintenance cost) asso-
ciated with the Confiar PC. The implications for management accounting are
straightforward. The management accounting information system should col-
lect and report information about customer realization and sacrifice. Much of
this information is external to the firm but clearly needed by management.

4. Better quality and shorter delivery time increase customer realization, while
lowering the price decreases customer sacrifice. In total, customer value has
increased and presumably this should make the Drantex PC much more com-
petitive. This example illustrates how quality, time, and costs are essential
competitive weapons. It also illustrates how critical it is that the management
accounting system collect and report data concerning these three dimen-
sions.

8
1–14

Planning. The management accountant gains an understanding of the impact on

the organization of planned transactions (i.e., analyzing strengths and weak-
nesses) and economic events, both strategic and tactical, and sets obtainable
goals for the organization. The development of budgets is an example of plan-
ning.

Controlling. The management accountant ensures the integrity of financial infor-

mation, monitors performance against budgets and goals, and provides informa-
tion internally for decision making. Comparing actual performance against bud-
geted performance and taking corrective action where necessary is an example of
controlling. Internal auditing is another example.

Evaluating Performance. The management accountant judges and analyzes the

implications of various past and expected events and then chooses the optimum
course of action. The management accountant also translates data and commu-
nicates the conclusions. Graphical analysis (such as trend, bar charts, or regres-
sion) and reports comparing actual costs with budgeted costs are examples of
evaluating performance.

Ensuring Accountability of Resources. The management accountant implements

a reporting system closely aligned to organizational goals that contributes to the
measurement of the effective use of resources and safeguarding of assets. Internal
reporting such as comparison of actual to budget is an example of accountability.

External Reporting. The management accountant prepares reports in accordance

with generally accepted accounting principles and then disseminates this infor-
mation to shareholders, creditors, and regulatory and tax agencies. An annual re-
port or a credit application are examples of external reporting. (CMA adapted)

1–15

The changes that are being proposed violate the following ethical standards:

Competence. Top management’s request of Roger Deerling to account for the

company’s information in a manner that is not in accordance with generally ac-
cepted accounting principles is in violation of the standard to “perform profes-
sional duties in accordance with relevant laws, regulations, and technical stan-
dards.”

9
1–15 Concluded

Confidentiality. Top management has violated the ethical standard to “refrain

from using confidential information for unethical or illegal advantage” (personal
job security).

Integrity. Top management clearly is in violation of the standard “to avoid appar-
ent conflicts of interest” and to “advise all parties (other shareholders) of any po-
tential conflicts.”

Credibility. Top management’s restriction and distortion of Alert’s financial in-

formation violates the standard to “communicate information fairly and objective-
ly.”

By telling Deerling to restrict the disclosure of the changes, top management is

clearly in violation of the standard to “communicate information fairly and objec-
tively.”

To resolve the ethical dilemma, Roger Deerling should first determine if the com-
pany has an established policy in place. If so, he should follow the prescribed
policies in resolving the ethical conflict. If there is no policy, then the specific
steps are as follows:

• To discuss the issue with his immediate supervisor, unless the supervisor is
involved, in which case, he should continue to the next management level.
Roger may need to discuss the issue with the Audit Committee of the
Board of Directors, or owners. Any contact with levels above his immediate
supervisor should be initiated with the supervisor’s knowledge, as long as
the supervisor is not involved. As long as Roger does not believe a law was
broken, he should not communicate the problem to outside authorities.

• To clarify relevant concepts by confidential discussion with an objective advi-

sor or an IMA Ethics Counselor to obtain possible courses of action.

• “Consult (his) own attorney as to legal obligations and rights concerning the
ethical conflict.”
(CMA adapted)

10
1–16

By discussing the possible sale of Webson’s common stock with members of the
troubleshooting team, Maureen Hughes has violated the following standards of
ethical conduct:

Competence. Hughes has an obligation to perform her duties in accordance with

relevant laws and regulations. By discussing the information she overheard,
Hughes may have violated laws regulating the use of inside information. (CMA
adapted)

Confidentiality. Hughes has disclosed confidential information acquired in the

course of her work that she has not been authorized to share with peers and oth-
ers within the organization. In addition, she has not informed subordinates of the
confidential nature of the information nor has she attempted to prevent the fur-
ther distribution of this information.

Integrity. By discussing this information, Hughes has engaged in an activity that

would discredit her profession and prejudice her ability to carry out her duties
ethically.

Credibility. Hughes has violated the requirement to communicate all information

fairly and objectively.

11
1–17

John Brogan’s behavior is unethical for the following reasons:

1. Competence
• Brogan is undermining the preparation of complete and clear reports.

2. Confidentiality
• Brogan is disclosing confidential information to someone outside the
company (Sara Wiley).
• Brogan appears to be using confidential information for unethical ad-
vantage (i.e., brother-in-law’s personal objectives).

3. Integrity
• By curtailing customer complaints, Brogan has failed to:
• avoid a conflict of interest.
• refrain from engaging in conduct that might prejudice the carrying
out of his duties.

4. Objectivity
• Brogan did not:
• communicate information fairly and objectively.
• disclose fully all relevant information.
(CMA adapted)

1-18
Answers will vary.

12