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 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.

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 Assistant
Controller Treasurer

Special Cost Tax Internal General System &

Studies Accounting Manager Audit Accounting EDP
Manager Manager Manager Manager Manager

Cost Budget & Performance

Systems Standard Analyst
Analyst Cost Analyst

Cost Payroll Accounts Accounts Billing General

Clerk Clerk Receivable Payable Clerk Ledger
Clerk Clerk 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 as well as technical considerations, and
(c) identify different costs for different purposes.

12. Management accounting is an integral part of the controller’s function in an organization. In

most organizations, the controller reports to the chief financial officer, who is a key member of
the top management team.

13. Management accountants have ethical responsibilities that are related to competence,
confidentiality, integrity, and objectivity.

14. By reporting and interpreting relevant data, the controller exerts a force or influence that impels
management toward making better-informed decisions.

The controller of one company described the job as “a business advisor to…help the team
develop strategy and focus the team all the way through recommendations and implementation.”

15.
Financial Accounting
Audience: External: shareholders, creditors, tax
authorities
Purpose: Report on past performance to external
parties; basis of contracts with owners and
lenders
Timeliness: Delayed; historical
Restrictions: Regulated; rules driven by generally accepted
accounting principles and government
authorities
Type of Information: Financial measurements only
Nature of Information: Objective, auditable, reliable, consistent,
precise
Scope: Highly aggregate; report on entire
organization

Managerial Accounting
Audience: Internal: Workers, managers, executives
Purpose: Inform internal decisions made by employees
and managers; feedback and control on
operating performance
Timeliness: Current, future oriented
Restrictions: No regulations; systems and information
determined by management to meet strategic
and operational needs
Type of Information: Financial, plus operational and physical
measurements on processes, technologies,
 suppliers customers, and competitors
Nature of Information: More subjective and judgmental; valid,
relevant, accurate
Scope: Disaggregate; inform local decisions and
actions

16. The competitive environment has changed dramatically. Companies encountered severe
competition from overseas companies that offered high-quality products at low prices. Activity-
based costing systems are introduced in many manufacturing and service organizations to
overcome the inability of traditional cost systems to accurately assign overhead costs. Activity-
based management is a viable approach for managers to make decisions based on ABC
information. There has been improvement of operational control systems such that information is
more current and provided more frequently. The nature of work has changed from controlling to
informing. Firms are concerned about continuous improvement, employee empowerment and
total quality. Nonfinancial information has become a critical feedback measure. Finally, the
focus of many firms is on measuring and managing activities.

17. As measurements are made on operations and, especially, on individuals and groups, the behavior
of the individuals and groups are affected. People will react to the measurements being made by
focusing on the variables or behavior being measured. In addition, if managers attempt to
introduce or redesign cost and performance measurement systems, people familiar with the
previous system will resist. Management accountants must understand and anticipate the
reactions of individuals to information and measurements. The design and introduction of new
measurements and systems must be accompanied with an analysis of the likely reactions to the
innovations.