Chapter 01 - Managerial Accounting and the Business Environment

Chapter 1
Managerial Accounting
and the Business
Environment
Solutions to Questions
1-1 A strategy is a game plan that
enables a company to attract customers
by distinguishing itself from competitors.
The focal point of a companys strategy
should be its target customers.
1-2 Customer value propositions fall
into three broad categoriescustomer
intimacy, operational excellence, and
product leadership. A company with a
customer intimacy strategy attempts to
better understand and respond to its
customers individual needs than its
competitors. A company that adopts an
operational excellence strategy attempts
to deliver products faster, more
conveniently, and at a lower price than its
competitors. A company that has a
product leadership strategy attempts to
ofer higher uality products than its
competitors.
1-3 A person in a line position is
directly involved in achieving the basic
ob!ectives of the organi"ation. A person in
a staf position provides services and
assistance to other parts of the
organi"ation, but is not directly involved in
achieving the basic ob!ectives of the
organi"ation.
1-4 The Chief #inancial $%cer is
responsible for providing timely and
relevant data to support planning and
control activities and for preparing
&nancial statements for external users.
1-5 The three main categories of
inventories in a manufacturing company
are raw materials, wor' in process, and
&nished goods.
1- The &ve steps in the lean thin'ing
model are( )*+ identify value in speci&c
products and services, )-+ identify the
business process that delivers value, ).+
organi"e wor' arrangements around the
/ow of the business process, )0+ create a
pull system that responds to customer
orders, and )1+ continuously pursue
perfection in the business process.
1-! 2uccessful implementation of the
lean thin'ing model should result in lower
inventories, fewer defects, less wasted
efort, and uic'er customer response
times.
1-" 3n a pull production system,
production is not initiated until a customer
order is received. 3nventories are reduced
to a minimum by purchasing raw materials
and producing products only as needed to
meet customer demand.
1-# 2ome bene&ts from improvement
eforts come from cost reductions, but the
primary bene&t is often an increase in
capacity. At non4constraints, increases in
capacity !ust add to the already4existing
excess capacity. Therefore, improvement
eforts should ordinarily focus on the
constraint.
1-1
1-1$ 2ix 2igma is a process
improvement method that relies on
customer feedbac' and fact4based data
gathering and analysis techniues to drive
process improvement. The goal is to
reduce defect rates below ..0 defects per
million.
5 The 6c7raw48ill Companies, 3nc., -9**
- 6anagerial Accounting for 6anagers, -nd :dition
Chapter 01 - Managerial Accounting and the Business Environment
1-11 The &ve stages in the 2ix 2igma
;6A3C #ramewor' are )*+ ;e&ne, )-+
6easure, ).+ Analy"e, )0+ 3mprove, and )1+
Control. The goals for the de&ne stage are
to establish the scope and purpose of the
pro!ect, to diagram the /ow of the current
process, and to establish the customers
reuirements for the process. The goals
for the measure stage are to gather
baseline performance data related to the
existing process and to narrow the scope
of the pro!ect to the most important
problems. The goal in the analy"e stage is
to identify the root causes of the problems
identi&ed in the measure stage. The goal
in the improve stage is to develop,
evaluate, and implement solutions to the
problems. The goals in the control stage
are to ensure the problems remain &xed
and to see' to improve the new methods
over time.
1-12 3f people generally did not act
ethically in business, no one would trust
anyone else and people would be
reluctant to enter into business
transactions. The result would be less
funds raised in capital mar'ets, fewer
goods and services available for sale,
lower uality, and higher prices.
1-13 Corporate governance is the
system by which a company is directed
and controlled. 3f properly implemented,
the corporate governance system should
provide incentives for the board of
directors and top management to pursue
ob!ectives that are in the best interests of
the companys owners and it should
provide for efective monitoring of
performance.
1-14 :nterprise ris' management is a
process used by a company to proactively
identify the ris's that it faces and to
manage those ris's.
1-15 The sta'eholder groups include
customers, suppliers, stoc'holders,
employees, communities, and
environmental and human rights
advocates.
5The 6c7raw48ill Companies, 3nc., -9**
2olutions 6anual, Chapter * .
E%ercise 1-1 )1 minutes+
*. <ine
-. $rgani"ation chart
.. 2taf
0. ;ecentrali"ation
1. Controller
=. Chief #inancial $%cer
1-4
E%ercise 1-2 )-9 minutes+
*.
strategy
-.
2ix 2igma
..
business process
0.
corporate governance
1.
enterprise ris' management
=.
manufacturing cell
>.
sta'eholders
?.
constraint
@.
nonconstraint
*9. value chain
**. Corporate social responsibility
*-. supply chain management
*.. lean thin'ing model, pulls
*0. customer value proposition
*1. The 2arbanes4$xley Act of -99-
*=. non4value4added activity
*>. Theory of Constraints
1-5
E%ercise 1-3 )*1 minutes+
3f cashiers routinely shortchanged customers whenever the
opportunity presented itself, most of us would be careful to count
our change before leaving the counter. 3magine what efect this
would have on the line at your favorite fast4food restaurant. 8ow
would you li'e to wait in line while each and every customer
laboriously counts out his or her changeA Additionally, if you cant
trust the cashiers to give honest change, can you trust the coo's
to ta'e the time to follow health precautions such as washing
their handsA 3f you cant trust anyone at the restaurant would you
even want to eat outA
7enerally, when we buy goods and services in the free mar'et,
we assume we are buying from people who have a certain level of
ethical standards. 3f we could not trust people to maintain those
standards, we would be reluctant to buy. The net result of
widespread dishonesty would be a shrun'en economy with a
lower growth rate and fewer goods and services for sale at a
lower overall level of uality.
1-6
&ro'lem 1-4 )-9 minutes+
*. #ailure to report the obsolete nature of the inventory would
violate the 36As 2tatement of :thical Brofessional Bractice as
follows(
Competence
C Berform duties in accordance with relevant technical
standards. 7enerally accepted accounting principles )7AAB+
reuire the write4down of obsolete inventory.
C Brepare decision support information that is accurate.
(ntegrit)
C 6itigate actual con/icts of interest and avoid apparent
con/icts of interest.
C Defrain from engaging in any conduct that would pre!udice
carrying out duties ethically.
C Abstain from activities that would discredit the profession.
6embers of the management team, of which Berlman is a part,
are responsible for both operations and recording the results of
operations. Eecause the team will bene&t from a bonus,
increasing earnings by ignoring the obsolete inventory is
clearly a con/ict of interest. #urthermore, such behavior is a
discredit to the profession.
1-7
&ro'lem 1-4 )continued+
Credi'ilit)
C Communicate information fairly and ob!ectively.
C ;isclose all relevant information.
C 8iding the obsolete inventory impairs the ob!ectivity and
relevance of &nancial statements.
)Fno%cial C6A solution+
-. As discussed above, the ethical course of action would be for
Berlman to insist on writing down the obsolete inventory. This
would not, however, be an easy thing to do. Apart from
adversely afecting her own compensation, the ethical action
may anger her colleagues and ma'e her very unpopular. Ta'ing
the ethical action would reuire considerable courage and self4
assurance.
1-8
&ro'lem 1-5 ).9 minutes+
*. 2ee the organi"ation chart on the following page.
-. <ine positions include the university president, academic vice4
president, the deans of the four colleges, and the dean of the
law school. 3n addition, the department heads )as well as the
faculty+ are in line positions. The reason is that their positions
are directly related to the basic purpose of the university,
which is education. )<ine positions are shaded on the
organi"ation chart.+
All other positions on the organi"ation chart are staf
positions. The reason is that these positions are indirectly
related to the educational process, and exist only to provide
service or support to the line positions.
.. All positions would have need for accounting information of
some type. #or example, the manager of central purchasing
would need to 'now the level of current inventories and
budgeted allowances in various areas before doing any
purchasing, the vice4president for admissions and records
would need to 'now the status of scholarship funds as students
are admitted to the university, the dean of the business college
would need to 'now hisGher budget allowances in various areas,
as well as information on cost per student credit hour, and so
forth.
1-
Chapter 01 - Managerial Accounting and the Business Environment
&ro'lem 1-5 )continued+
*. $rgani"ation chart(
5 The 6c7raw48ill Companies, 3nc., -99=. All rights reserved.
*9 6anagerial Accounting for 6anagers, **th :dition
Bresident
Academic
Hice
Bresident
Hice
Bresident,
Auxiliary
2ervices
Hice
Bresident,
Admissions
I Decords
Hice
Bresident,
#inancial
2ervices
)Controller+
Hice
Bresident,
Bhysical
Blant
;ean,
Eusiness
;ean,
8umanities
;ean,
#ine Arts
;ean,
:ngineering
I
Juantitative
6ethods
;ean,
<aw 2chool
6anager,
Central
Burchasing
6anager,
Fniversity
Bress
6anager,
Fniversity
Eoo'store
6anager,
Computer
2ervices
6anager,
Accounting
I #inance
6anager,
7rounds I
Custodial
2ervices
6anager,
Blant I
6aintenance
);epartments
+
);epartments
+
);epartments
+
);epartments
+
Chapter 01 - Managerial Accounting and the Business Environment
&ro'lem 1- ).9 minutes+
*. Ko, Charlie would not be !usti&ed in ignoring the situation. #irst,
the 2tatement of :thical Brofessional Bractice states that the
management accountant must LDegularly communicate with
business associates to avoid apparent con/icts of interest.
Advise all parties of any potential con/icts.M 3f N.E. insists on
continuing the relationship with A4*, Charlie has a responsibility
to advise both the corporate counsel and O3Os Eoard of
;irectors.
2econd, as the companys controller, Charlie has a
responsibility to ensure that the N3T approach is properly
implemented. #rom the data given in the problem, it does not
appear that A4* Oarehouse 2ales is the best or most
dependable supplier available. $rders are late and not
complete, and there is no way to ensure proper uality because
nearly all orders are shipped directly from the manufacturer.
The present arrangement with A4* negates most of the bene&ts
that can accrue
from N3T.
-. Charlies &rst step should be to verify the accuracy of his
information. 8e states that A4*s mar'up is .9P, but he does
not indicate how he obtained this &gure. Also, the adverse
&nancial impact on O3O is dependent in part on the price it
would have to pay directly to the manufacturers as compared
to the price being paid to A4*. That is, can O3O purchase
directly from the manufacturers for the same price as given to
!obbers, who handle huge volumes of goodsA 3f not, then the
adverse &nancial impact of buying through A4* may, in fact, be
very small because O3O may have to pay about the same price
either way.
1-11
Chapter 01 - Managerial Accounting and the Business Environment
Charlies second step should be to discuss the potential legal
rami&cations on a con&dential basis with O3Os corporate
counsel. Eefore meeting with the corporate counsel, Charlie
may wish to discretely determine if Tony, the purchasing agent,
and N.E., the president, wor'ed together in their prior
employment. )Demember that both have been with O3O for
&ve years.+ Armed with the information obtained from the
discussion with counsel, Charlie should review the situation
again with N.E., explaining more directly his concerns about the
apparent con/ict of interest and as' that the Eoard of ;irectors
approve the continued use of A4* as a supplier.
1-1!
Chapter 01 - Managerial Accounting and the Business Environment
&ro'lem 1- )continued+
3f N.E. refuses to follow this course of action, Charlies only
alternative is to submit a memorandum to the Eoard of
;irectors. N.E. should be noti&ed of this action in advance. The
memorandum should present only the facts. 3f the Eoard
approves the continued relationship with A4*, Charlie may
possibly conclude that his concerns about an apparent con/ict
of interest do not represent an actual con/ict. This presumes
that legal counsel has advised the Eoard that the arrangement
with A4* does not violate any laws and that the company has
made adeuate disclosures in its public &lings. $nly Charlie can
ma'e the decision as to whether or not he can continue at O3O
under these circumstances.
1-1"
Chapter 01 - Managerial Accounting and the Business Environment
&ro'lem 1-! )-9 minutes+
*. 3f all automotive service shops routinely tried to sell parts and
services to customers that they didnt really need, most
customers would eventually &gure this out. They would then be
reluctant to accept the word of the service representative that
a particular problem needs to be correctedeven when a real
problem exists. :ither the wor' would not be done, or
customers would learn to diagnose and repair problems
themselves, or customers would hire an independent expert to
verify that the wor' is really needed. All three of these
alternatives impose costs and hassles on customers.
-. As argued above, if customers could not trust their service
representatives, they would be reluctant to follow the service
representatives advice. They would be inclined not to
authori"e wor' even when it is really necessary. And, more
customers would learn to do automotive repairs and
maintenance themselves. 6oreover, customers would be
unwilling to pay as much for wor' that is done because
customers would have reason to believe that the wor' may be
unnecessary. These two efects would reduce demand for
automotive repair services. The reduced demand would reduce
employment in the industry and would lead to lower overall
pro&ts.
1-14
Chapter 01 - Managerial Accounting and the Business Environment
&ro'lem 1-" ).9 minutes+
*. <ine authority is directly related to the achievement of an
organi"ations basic ob!ectives. <ine managers have formal
authority to direct operations.
2taf assists line management in the achievement of an
organi"ations basic ob!ectives. Bersons with staf authority
provide support services. 2taf managers typically have
advisory authority because of their particular expertise.
-. 6ar' Nohnsons responsibility for maintaining the production
schedule involves line authority. Nohnson would be directly
concerned with meeting the companys primary ob!ective of
producing metal parts.
Nohnsons responsibility to consult with production supervisors
is a staf role because he apparently cannot order changes in
those consultations, he can only advise. Nohnsons supervision
of new alloy testing and his role regarding the use of new alloys
in product development is basically a staf function as well. 8e
has limited authority regarding the use of new alloys because
his authority applies only to product development and not to
production.
.. 6ar' Nohnson may experience several con/icts because he has
been given both line and staf authority.
#irst, Nohnson may initially &nd it di%cult to communicate with
the production supervisors because he operates out of a staf
position.
2econd, a con/ict could easily develop if the supervisors lac' a
clear understanding of Nohnsons responsibilities and
authorities. The supervisors could resent apparent staf
interference and refuse to discuss their problems with Nohnson,
ma'ing the meetings fruitless. The supervisors wor'ing on the
new contract may fail to perceive Nohnsons line authority and
refuse to follow his orders.
1-15
Chapter 01 - Managerial Accounting and the Business Environment
Third, Nohnson might have di%culty in understanding the
nature of his position and !ob. Nohnson might also &nd it di%cult
to distinguish between his staf capacity and line capacity. #or
instance, Nohnson might have di%culty in remaining ob!ective if
any production problems develop in the alloys he tested.
)Fno%cial C6A 2olution, adapted+
1-16
Chapter 01 - Managerial Accounting and the Business Environment
*esearch and Application 1-#
*. Ohole #oods 6ar'et succeeds &rst and foremost because of its
product leadership customer value proposition. The &rst
boldface heading in the companys ;eclaration of
3nterdependence says LOe 2ell the 8ighest Juality Katural and
$rganic Broducts Available.M Bage 0 of the *94QGA indicates that
the real source of the companys product leadership position
centers on perishable products )e.g., produce, dairy, meat,
seafood, ba'ery, and prepared foods+. Berishable product sales
account for about =>P of total retail sales. Customers choose
Ohole #oods 6ar'et primarily because they are able to buy
better natural and organic foods and higher4uality perishable
products than in conventional supermar'ets.
Customer service is also an important part of Ohole #oods
6ar'ets success, but it is secondary in importance to product
uality.
-. Ohole #oods 6ar'et faces numerous business ris's as
described in pages **4*1 of the *94QGA. 8ere are four of the
more prominent ris's with suggested control activities(
Dis'( Customers will defect to conventional supermar'ets that
are beginning to stoc' more natural and organic foods. Control
activities( Ohole #oods 6ar'et can expand its selection of
product oferings, particularly perishables, and continue to
invest heavily in employee training and retention so that it
ofers mar'et4leading levels of informed customer service.
Dis'( 7rowth targets will not be reali"ed due to failed new store
openings. Control activities( 3mplement formal reviews of the
sight selection, construction, and new employee hiring and
training processes.
Dis'( Adverse economic conditions could reduce consumer
spending at retail locations. Control activities( Continue to
develop private label product categories, such as the .=1
:veryday Halue category mentioned on page ? of the *94QGA,
which are less expensive but meet rigorous uality standards.
1-17
Chapter 01 - Managerial Accounting and the Business Environment
*esearch and Application 1-# )continued+
Dis'( :xtended power outages could cause severe inventory
losses because of the companys emphasis on perishable
products. Control activities( 3mplement a contingency plan that
speci&es responses in the event of a power outage.
.. There are no absolute right and wrong answers to this uestion
because the information available in the annual report is
piecemeal. Konetheless, students could ma'e the following
observations based on available information. #irst, the C:$
)Nohn B. 6ac'ey+ has a layer of senior managers that report to
him including two Co4BresidentsGChief $perating $%cers, and
three :xecutive Hice Bresidents. 2econd, there are ten Degional
Bresidents. 3n the organi"ation chart shown below, we assume
that the Degional Bresidents report to the Chief $perating
$%cers. Third, each Degional Bresident has a layer of
management that reports to him or her. #or example, the
7lobal All42tars include ;avid 2chwart", who is the Hice
Bresident of the 6idwest Degion. 8e would report to the
Bresident of the 6idwest Degion. Nohn 2imrell is the ;irector of
#inance for the 2outh Degion and he would report to the 2outh
Degion Bresident. Dobin 7raf is the Team 6ember 2ervices
;irector for the 2outhern Baci&c Degion. 2he would report to
the Bresident of the 2outhern Baci&c Degion.
#ourth, each region has a managerGcoordinator for each
product category. #or example, Theo Oeening is the 6eat
Category 6anager for the 6id4Atlantic Degion and Eobby Turner
is the Ea'ery Coordinator for the 6idwest Degion. 3n the
organi"ation chart shown below, we assume that these regional
managersGcoordinators report to a Hice4Bresident at the
regional level. #ifth, each region has 2tore Team <eaders for
each retail location within the region. #or example, Nohn
Dobertson is the 2tore Team <eader in Charlottesville, Ha. Oe
have assumed that the store team leaders report to the
regional vice4president level. #inally, each store location has
various team leaders that report to the store team leader. #or
example, Dolando Alas is the Broduce Team <eader at the 6ill
Halley 2tore location.
1-18
Chapter 01 - Managerial Accounting and the Business Environment
*esearch and Application 1-# )continued+
Eased on insights such as these, students should be able to
prepare an organi"ation chart that resembles the one shown at
the end of this solution.
The 7lobal All42tars include numerous line and staf employees.
Three staf employees are Doberta <ang, 7eneral Counsel,
Chris Bine, Hice Bresident of Deal :state, and Nennifer 6c#arlin,
Bayroll Eene&t 2pecialist, 6adison. Three line employees are
Docco Terra"ano, 6eat Team <eader, Ror'ville, ;on 8osfeld,
7rocery Team <eader, #t. <auderdale, and Noel <eonard,
Brepared #oods Team <eader, #resh Bond.
0. Eoth documents emphasi"e that the respective companies
serve a broad range of sta'eholders )e.g., customers,
employees, suppliers, communities, and stoc'holders+. Eoth
companies mention that their most important sta'eholder is
the customer. The &rst sentence of the Nohnson I Nohnson
Credo says LOe believe our &rst responsibility is to the doctors,
nurses, and patients, to mothers and fathers and all others who
use our products and services.M Ohole #oods 6ar'et says L$ur
customers are the most important sta'eholder in our business.
Therefore, we go to extraordinary lengths to satisfy and delight
our customers.M
The Ohole #oods 6ar'et ;eclaration of 3nterdependence
explicitly recogni"es that satisfying all sta'eholders interests
will reuire balance and ma'ing trade4ofs. 3n fact, the
company says L$ne of the most important responsibilities of
Ohole #oods 6ar'ets leadership is to ma'e sure the interests,
desires and needs of our various sta'eholders are 'ept in
balanceS Any con/icts must be mediated and win4win
solutions found.M The Nohnson I Nohnson Credo does not
explicitly ac'nowledge the need to stri'e a balance when
managing the needs of its various sta'eholders.
1-1
Chapter 01 - Managerial Accounting and the Business Environment
*esearch and Application 1-# )continued+
1. Ohole #oods 6ar'ets mission statement difers from its Code
of Conduct and :thics in three important respects. #irst, the
mission statement sets forth goals that the company strives to
achieve. The tone of the document is positive because it
focuses on goals the company hopes to achieve. The Code of
Conduct and :thics de&nes prohibited conduct. The tone of the
document is appropriately negative because it describes those
behaviors that are Lout of bounds.M
2econd, the mission statement refers to a broader set of
sta'eholders )e.g., suppliers, customers, and communities+
than the Code of Conduct and :thics, which pertains primarily
to Ohole #oods 6ar'et Team 6embers and ;irectors. Third, the
mission statement is values4based. 3t re/ects a vision of what
the company stands for. The Code of Conduct and :thics is
rule4based. The ma!ority of the code is based on the rules of
governing bodies such as the 2ecurities and :xchange
Commission )2:C+, the Kasda stoc' exchange, and the
#inancial Accounting 2tandards Eoard )#A2E+.
1-!0
Chapter 01 - Managerial Accounting and the Business Environment
*esearch and Application 1-# )continued+
1-!1
Chairma
n I C:$
:xecutiv
e HB I
C#$
:xecutive
HB of
7rowth and
Eus. ;ev.
Co4
Bresidents I
C$$s
:xecutive
HB of 7lobal
2upport
Bresident,
2outh
Degion
Bresident,
6idwest
Degion
Bresident,
#lorida
Degion
Bresidents,
$ther
Degions
Broduce
Coordinato
r T #lorida
Degion
6eat
Coordinator
T #lorida
Degion
Ea'ery
Coordinato
r T #lorida
Degion
Ohole
Eody
Coordinato
r U #lorida
Degion
;irector of
#inance T #lorida
Degion
Hice4
Bresident)s+ T
#lorida
Degion
;irector of Team
6ember
2ervices T
#lorida Degion
2tore Team
<eader T #t.
<auderdale store
2tore Team <eaders
T $ther #lorida
stores
2tore Team
<eaders T $ther
#lorida stores
#t.
<auderdale
Broduce
Team
#t.
<auderdale
$ther
Category
#t.
<auderdale
2eafood Team
<eader