M1 Management Accounting:
Its Environment and Future
Discussion Questions
NOTE TO INSTRUCTOR: The purpose of Discussion Questions 1-1 through 1-4 is to encourage your students to consider what is presented in Exhibit 1-1 as more than just a "laundry list." Specific examples of the decision makers and the types of decisions they make are not as important as the thought process your students go through to answer the questions.
1-1. Your students’ answers to this question will likely include: Stockholders (present and potential):
· Whether to purchase the company's stock.
· Whether to sell some or all of the stock owned in the company.
Bankers and other lending institutions:
· Whether to lend money to the company.
· What interest rate to charge the company.
Bondholders (present and potential):
· Whether to buy the company's bonds.
· Whether to sell some or all of the company's bonds already purchased.
Suppliers:
· Whether to sell products or services to the company.
· What credit terms should be extended to the company.
Customers:
· Whether to buy products or services from the company.
· Whether to accept the credit terms offered by the company.
Competitors:
· Whether to enter markets served by the company.
· Whether we need to reduce our administrative cost to remain competitive with the company.
1-2. Three additional external parties and examples of decisions they might make are:
Governmental bodies: Whether the company is in compliance with applicable laws.
Labor Unions: Whether to negotiate wage increases with the company.
Prospective employees: Whether to accept a position with the company.
1-3. Your students’ answers to this question might include:
Marketing managers:
· Whether to hire a particular prospective sales representative.
· What commission structure to adopt in paying sales representatives.
Salespersons:
· Which customers to call on during a particular day.
· Which products to emphasize in a presentation to a potential customer.
Production managers:
· Scheduling production runs on particular products.
· Whether and how to reward subordinates.
Production supervisors:
· Which job functions to assign individual subordinates.
· Whether to schedule overtime to complete a particular production run.
Strategic planners:
· What products and markets the company should focus on.
· Whether to build a new production facility.
Company president:
· Whether to revise the organizational structure of the company.
· Whether to approve a recommendation from a subordinate manager.
Engineers:
· Whether to continue working on a partially developed product.
· Whether to refine the design of existing products.
1-4. Additional internal parties and examples of decisions they might make are:
· Maintenance supervisor: Whether to contract with outside vendors to perform grounds maintenance.
· Computer specialist: Whether to purchase a particular software package.
· Credit manager: Whether to extend credit to a customer.
1-5. This will likely be a difficult question for your students to answer because they probably think they would have to know more about a sales manager's responsibilities before they could respond. Actually, much of the information needed is very intuitive. Encourage them to approach the question logically. Once again, the actual answers to the question are not as important as the process your students go through to arrive at those answers. Some possible responses are:
· The production cost of manufacturing the computers - This will help in establishing selling prices and profit margins.
· Inventory levels - This will help determine whether there is too much or not enough product to support projected sales.
· Other costs necessary that relate to the production function - This may include maintenance and overhead such as electricity to help determine the overhead cost associated with the products.
· Profits of the company’s individual divisions - This is important if the company is diversified, such as Time Warner, and operates various segments to know which are profitable and which are not.
· Profits of individual products or product lines - This may help managers determine if a product should be discontinued.
There are various other responses your students might bring out.
1-6. Given that the reports prepared for external parties are so different from the reports prepared for internal parties, the information is not able to meet the needs of both parties at the same time. Financial reporting for external parties does not provide the degree of detail which management needs to make its decisions. In addition, management needs more timely information in order to make projections and correct excessive expenses or underpricing that may occur. Reports generated for management generally break revenue into costs by product, product line, division, or other segment of the entity. If the same reports used for management purposes were provided to external users, a number of problems may result. The primary issue would be cost and profit information that should not be provided to external users, such as individual product costs and the profit on individual products. Another problem is the lack of understanding that external users may need to comprehend many internal reports. Internal reports might include budget information, which is a future focus, as opposed to the information provided in external reports that focus on the
past. Should external users get their hands on budget and projected sales information, they may rely on it as if it were a guarantee or the actual historical information of the company.
1-7. If a company hires permanent employees instead of temporary employees, a number of problems may arise. Management will spend more time on training if employee turnover is more frequent. There may be periods of inability to attract temporary employees if the job market is very good, since many may have accepted permanent positions. Permanent employees are more likely to show loyalty to the company, which is important because of the image the company expects to project to its customers. Temporary employees tend to work when they want to work, while permanent workers are scheduled and generally show up to work on a regular basis. Management also has more control over the production process with permanent workers because the workers are under the direct control of the company and must respond to company managers and supervisors. Temporary workers might not feel as obligated to do exactly as management says or complete the work on the schedule that managers want since they believe they “work for themselves.”
1-8. The purpose of this question is to get your students to think about the controls that employers have over their employees today. Permanent employees are no longer independent with respect to a company for which they work. They have more rigid work schedules than temporary employees, and generally cannot choose the time and place to work. Permanent employees may not have the same liberty in choosing vacation periods or job preferences.
1-9. The emergence of the factory makes it more difficult to determine the cost of manufactured products because labor
costs associated with some employees impact more than one product. Often the labor cost for one employee is partially administrative and partially production. Prior to the concept of ‘factory,’ the amount paid to a subcontractor for manufacturing of products included the entire cost—labor, materials, and overhead. The company did not have to be concerned with costs that needed to be allocated. Rather than determine product cost based on a lump sum or per piece cost paid to a subcontractor, the emergence of the ‘factory’ concept forced the need for cost accounting in order to determine which portion of materials, labor, and various overhead costs might be included as part of product costs.
1-10. Square feet of wood required for each tabletop 4
Cost per square foot $ 2.00
Total material cost for each tabletop $ 8.00
Time in hours required to complete one tabletop 3/4
Labor cost per hour $10.00
Total labor cost for each tabletop $ 7.50
Total cost for each table $15.50
The product cost includes only the material and labor since no information is provided for overhead. Overhead costs are a crucial part of the cost of products that should also be included, but your students will not necessarily realize this until they cover this topic in the text. The point is to get your students to think of a ‘cost per unit’ concept.
1-11. Other costs that should be considered in the calculation fall into the category of manufacturing overhead. These costs may include such items as: electricity and other utilities, factory supplies, insurance, taxes, supervisors’ salaries, factory maintenance expenses, factory workers’ benefits, depreciation of factory equipment, and janitorial supplies and workers. Your students may list various other costs that may be associated with the cost of producing the table. The point of this question is to get your students to think about the many additional costs of production.
1-12. The point of this question is to get your students to focus on why so many companies exist today in diversified form. Some of the reasons companies began to diversify in the early years of the twentieth century resulted from the inability to acquire raw materials from suppliers, an unreasonable delay in acquiring them, or lack of control over the quality of the materials needed for the manufacturing process. Companies found that owning the source of raw materials would make it much easier to acquire them and would let them control the quality of the products.
1-13. The point of this question is to get your students to focus on the real need for two sets of accounting information. A company that has a single accounting system must convert the information to a different format for the second party. Accounting information designed to provide information to external users relies primarily on GAAP. The level of detail in GAAP reports is not adequate for management purposes. The company must convert the information to a form that is useful in making such management decisions as pricing, cost reduction, or other product control issues.
Review the Facts
A. Management accounting is the branch of accounting designed to provide information to the firm’s internal economic decision makers, or managers. Managerial accounting is another term for management accounting while cost accounting is a narrow application of management accounting dealing specifically with procedures designed to
determine how much a particular item usually one that is manufactured costs the company.
B. The purpose of management accounting is to provide information to internal decision makers that will help management to plan, evaluate, and control the organization.
C. The primary difference between financial accounting and management accounting is the user. Financial accounting information is used by external decision makers and management accounting information is used by internal decision makers. Financial information must be prepared according to GAAP guidelines and there is no similar requirement for management accounting information. Financial accounting deals with the company as a whole, reports quarterly and annually, and is oriented to the past. Management accounting deals with various parts of the company, prepares information as needed, and is oriented to the future.
D. Management accounting information is prepared for use by those working within the company, its users can question the content, meaning, level of detail, and the validity of the accounting information. Users can determine the format of the information.
E. The emergence of permanent employees, the Industrial Revolution, the rise of scientific management, and diversification are the four significant changes that occurred between 1825 and 1925 that altered the nature of management accounting.
F. The IMA is the Institute of Management Accountants which is a professional association of management accountants. The IMA provides professional status to management accountants.
G. A good decision is the proper decision made based on the information available at the time. It is possible that because of incomplete information a bad outcome may arise. A good outcome is a positive result that arises from a good decision.
H. An understanding of management accounting helps us to become good consumers of accounting information.
Apply What You Have Learned
1-14.
1. a Must conform to GAAP.
2. b Tends to be quite detailed.
3. a Generally limited to presenting historical information.
4. b Need not conform to a formal set of rules and standards.
5. a Information prepared primarily for external users.
6. a Tends to include only a limited amount of detail.
7. a Information prepared on a quarterly or yearly basis.
8. b Information prepared on a monthly, weekly, or daily basis.
9. b Information often includes future projections.
10. a Information prepared for use by internal parties.
1-15.
Management accounting is just as important for not-for-profit organizations as it is for profit oriented organizations. Aside from the profit motivation, many aspects of for-profit and not-for-profit firms are similar. For example, the operation of a hospital is effected little by whether it is a for-profit or a not-for-profit institution. Both for-profit and not-for-profit hospitals set goals to provide high quality health care at a reasonable cost. Managers must make sound, well informed decisions to achieve this goal regardless of whether a profit motivation exists.
1-15. (Continued)
Even though managers of not-for-profit firms are not striving to increase income, they still make an array of important decisions that are much the same as the decisions made by their for-profit counterparts. Managers of not-for-profit firms need good accounting information to help make these decisions.
Although profit is not the sole motive for a not-for-profit organization, unless the firm breaks even each year, it will not continue to exist. Therefore, the need to carefully manage income and costs is as critical as it is for a for-profit firm. Not-for-profit firms use “profits” each year to improve the organization or save money for future investments or “rainy days.”
1-16.
Students are encouraged to think of information they would want to help make decisions to enhance their store. Perhaps these decisions would relate to allocating adequate store space to the most popular movies, to determining the staff required to support sales, or to determining by movie title whether the store has too few or too many tapes on hand relative to rental demand.