(Solution Manual) Introduction to Management Accounting Global Edition

Horngren,Sundem,Stratton,Burgstah, 16

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Author(s): Horngren, Sundem, Stratton, Burgstah

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Copyright ©201 4 Pearson Education 1 CHAPTER 1 COVERAGE OF LEARNING OBJECTIVES LEARNING OBJECTIVE FUNDA - MENTAL ASSIGN - MENT MATERIAL CRITICAL THINKING EXERCISES AND EXERCISES PROBLEMS CASES, EXCEL, COLLAB., & INTERNET EXERCISES LO 1 : Explain why accounting is essential for decision m akers and managers . 30, 31 52, 55 LO 2 : Describe the major users and uses of accounting information. A1, B1 28, 29, 33 39, 40, 42 55 LO3: Explain the role of budgets and performance reports in planning and control. A2, B2 32 45 53 LO 4 : Describe the cos t - benefit and behavioral issues involved in designing an accounting system. 41, 43 LO 5 : Discuss the role accountants play in the company’s value chain functions. A1, B1 30, 31, 34, 35, 36 39, 42, 44 , 46 LO6: Identify current trends in management acco unting. 54 LO7: Explain why ethics and standards of ethical conduct are important to accountants. A3, B3 37, 38 47, 48, 49 51, 52, 55 Copyright ©201 4 Pearson Education 2 CHAPTER 1 Managerial Accounting, the Business Organization, and Professional Ethics 1 - A1 (10 - 15 min.) Information is often useful for more than one function, so the following classifications for each activity are not definitive but serve as a starting point for discussion: 1. Scorekeeping. A depreciation schedule is used in preparing financial statements to report t he results of activities. 2. Problem solving. Helps a manager assess the impact of a purchase decision. 3. Scorekeeping. Reports on the results of an operation. Could also be attention directing if scrap is an area that might require management attentio n. 4. Attention directing. Focuses attention on areas that need attention. 5. Attention directing. Helps managers learn about the information contained in a performance report. 6. Scorekeeping. The statement reports what has happened. Could also be att ention directing if the report highlights a problem or issue. 7. Problem solving. Assuming the cost comparison is to help the manager decide between two alternatives, this is problem solving. 8. Attention directing. Variances point out areas where result s differ from expectations. Interpreting them directs attention to possible causes of the differences. 9. Problem solving. Aids a decision about where to make parts. 10. Attention directing and problem solving. Budgeting involves making decisions about planned activities -- hence, aiding problem solving. Budgets also direct attention to areas of opportunity or concern -- hence, directing attention. Reporting against the budget also has a scorekeeping dimension. Copyright ©201 4 Pearson Education 3 1 - A2 (15 - 20 min.) 1. Budgeted Actual Deviations Amounts Amounts or Variances Room rental $ 170 $ 17 0 $ 0 Food 660 875 21 5U Entertainment 570 57 0 0 Decorations 21 0 27 0 6 0 U Total $1,61 0 $1,88 5 $27 5 U 2. Because of the management by exception rule, room rental and en tertainment require no explanation. The actual expenditure for food exceeded the budget by $ 215 . Of this $ 215 , $1 32 is explained by attendance of 1 6 persons more than budgeted ( the budget of $660/80 = $ 8.25 per person for food and 16 x $8.25 = $132 ) and the remaining $ 83 ($215 – $132) is explained by expenditures above $ 8.25 per person. Actual expenditures for decorations were $ 6 0 more than the budget. The decorations committee should be asked for an explanation of the excess expenditures. 1 - A3 (10 m in.) All of the situations raise possibilities for violation of the integrity standard. In addition, the manager in each situation must address an additional ethical standard: 1. The General Mills manager must respect the confidentiality standard. He o r she should not disclose any information about the new cereal. 2. Felix must address his level of competence for the assignment. If his supervisor knows his level of expertise and wants an analysis from a “layperson” point of view, he should do it. Howe ver, if the supervisor expects an expert analysis, Felix must disclose his lack of competence. 3. The credibility standard should cause Mary Sue to decline to omit the information from the budget. It is relevant information, and its omission may mislead readers of the budget. Copyright ©201 4 Pearson Education 4 1 - B1 (15 - 20 min.) Information is often useful for more than one function, so the following classifications for each activity are not definitive but serve as a starting point for discussion: 1. Problem solving. Provides informati on for deciding between two alternative courses of action. 2. Scorekeeping. Recording what has happened. If amounts are compared with expectations, this could also serve an attention - directing function. 3. Problem solving. Helps a manager decide among al ternatives. 4. Attention directing. Directs attention to the use of overtime labor. Also scorekeeping. 5. Problem solving. Provides information to managers for deciding whether to move corporate headquarters. 6. Attention directing. Directs attention to why nursing costs increased. 7. Attention directing. Directs attention to areas where actual results differed from the budget. 8. Problem solving. Helps the vice - president decide which course of action is best. 9. Problem solving. Produces information to help the marketing department make a decision about a marketing campaign. 10. Scorekeeping. Records actual overtime costs. If results are compared with expectations, also attention directing. 11. Attention directing. Directs attention to stores with either high or low ratios of advertising expenses to sales. 12. Attention directing. Directs attention to causes of returns of the drug. 13. Attention directing or problem solving, depending on the use of the schedule. If it is to identify areas of high fuel usage it is attention directing. If it is to plan for purchases of fuel, it is problem solving. 14. Scorekeeping. Records items needed for financial statements. Copyright ©201 4 Pearson Education 5 1 - B2 (10 - 15 min.) 1 & 2. Budget Actual Variance Sales $ 80 ,000 $7 9,44 0 $ 56 0U Cos ts: Fireworks $ 40 ,000 $3 9,4 00 $ 6 00F Labor 1 0 ,000 1 3,1 00 3, 1 00U Other 7 ,000 6,90 0 10 0 F Total cost 57 ,000 59,40 0 2,40 0 U Profit $ 23 ,000 $ 20,04 0 $2,96 0 U 3. The cost of fireworks was $6 00 ÷ $ 40,000 = 1.5 % under budge t while sales w ere just $ 56 0 ÷ $ 80,000 = .7 % under budget. Did fireworks suppliers lower their prices? Were selling prices set higher than expected? There should be some explanation for the lower cost of fireworks. The labor cost was $3,100 ÷ $10 ,000 = 31 % over budget. Sales and other costs were close to budget in percentage terms. Why was labor cost so much higher than expected? 1 - B3 (15 - 20 min.) 1. A code of conduct is a document specifying the ethical standards of an organizatio n . 2 . Diffe rent companies include different elements in their codes of conduct. Some of the items included in companies’ codes of conduct include maintaining a dress code, avoiding illegal drugs, following instructions of superiors, being reliable and prompt, maintai ning confidentiality, not accepting personal gifts from stakeholders as a result of company role, avoiding racial or sexual discrimination, avoiding conflict of interest, complying with laws and regulations, not using organization’s property for personal u se, and reporting illegal or questionable activity. Some companies have a simple code with little detail, and others have long lists of rules and regulations regarding appropriate conduct. The key is that the code of conduct must fit with the corporate c ulture. 3. Simply having a code of conduct does not guarantee ethical behavior by employees. Most important is top management’s ethical example and its support of the code of conduct. A company’s performance evaluation and reward system must be consiste nt with its code of conduct. If unethical actions are rewarded, they will be encouraged even if they violate the code of conduct. Copyright ©201 4 Pearson Education 6 1 - 1 Internal managers and external parties use accounting information: a. Internal reporting is used by managers for plannin g and controlling operations, special decision - making, and long - range planning. b. External reporting is used by stockholders, investors, taxing authorities, government regulators, and other interested parties. 1 - 2 The emphasis of financial accounting has traditionally been on the historical data presented in the external reports. Management accounting is more future - oriented and emphasizes planning, control, and decision - making. 1 - 3 The branch of accounting described in the quotation is management accou nting. 1 - 4 Scorekeeping is the recording (including accumulation and classification) of data for a later evaluation of performance. Attention directing is the reporting and interpretation of information for the purpose of focusing on inefficiencies of op eration, opportunities for improvement, and imperfections and operating problems. Problem solving is analysis of alternative courses of action to evaluate the best course of action. 1 - 5 No. GAAP applies to financial reporting for external users. Intern al accounting reports are not restricted by GAAP. 1 - 6 Yes, though the act covers more than foreign bribes. The Foreign Corrupt Practices Act applies to all publicly - held companies and covers the quality of internal accounting control and other matters as well as bribes. 1 - 7 Many managers believe that the costs of applying the provisions of the Sarbanes - Oxley act are greater then the benefits. This is especially true about the mandated auditing of companies’ internal control systems. 1 - 8 Users cannot ea sily observe the quality of accounting information. Thus, they rely on the integrity of accountants to be sure the information is accurate. If accountants do not have a reputation for integrity, the information they produce will not have value to users. 1 - 9 No. The ethics developed as a student carry over into one’s professional life. Integrity is important at all stages of development. Students who use unethical means to achieve success are likely to try similar methods when in business. 1 - 10 Public accounting firms, law firms, management consultants, real estate firms, transportation companies, banks, insurance companies, and hotels are examples of service organizations. Service organizations tend to be labor intensive, have outputs that are diffic ult to define and measure, and have both inputs and outputs that are difficult or impossible to store. Copyright ©201 4 Pearson Education 7 1 - 11 Two considerations are cost - benefit balance and behavioral effects. Cost - benefit balance refers to how well an accounting system helps achieve man agement's goals in relation to the cost of the system. The behavioral - effects consideration specifies that an accounting system should be judged by how it will affect the behavior (that is, decisions) of managers. 1 - 12 Yes. Measurement and recording is an integral part of management. For example, cash receipts and disbursements must be traced, and receivables and payables must be recorded in order to manage operating activities such as sales and purchases. 1 - 13 A budget is a quantitative expression of a plan of action; a performance report compares actual results with the budget; and a variance measures the differences between budget and actual. 1 - 14 No. Management by exception means that management directs more attention to those areas that seem to be out of control and less to areas that are functioning as planned. This method is an efficient way for managers to decide where to put their time and effort. 1 - 15 Information that is relevant for decisions about a product depends on the product's life - cycle stage. Therefore, to prepare and interpret information, accountants should be aware of the current stage of a product's life cycle. 1 - 16 The six functions are: (1) research and development – generation and experimentation with new ideas for produc ts, services, or processes; (2) product, service, and process design – detailed design and engineering of products, services, or processes; (3) production – use of resources to produce a product or service; (4) marketing - informing customers of the value and features of products or services; (5) distribution – delivering products or services to customers; and (6) customer service – support provided to customers after a sale. 1 - 17 No. Some functions in the value chain may not be present in some organizati ons and not all of the functions are of equal importance to the success of all organizations. Measurement and reporting should focus on those functions that enable a company to gain and maintain a competitive edge. 1 - 18 Line managers are directly respons ible for the production and sale of goods or services. Staff managers have an advisory function – they support line managers. 1 - 19 Management accountants are the information specialists. In non - hierarchical companies, they are more directly involved wit h managers and are often parts of cross - functional teams. 1 - 20 A treasurer is concerned mainly with the company's financial matters, the controller with operating matters. In large organizations, there are sufficient activities Copyright ©201 4 Pearson Education 8 associated with both fin ancial and operating matters to justify two separate positions. In a small organization the same person might be both treasurer and controller. 1 - 21 T he two parts of the CMA examination are: (1) financial planning, performance, and control, and (2) finan cial decision making. 1 - 22 This is not true. About one - third of CEOs in companies with revenues greater than $500 million come from finance or accounting backgrounds. Accounting is excellent preparation for top management positions because accountants a re often exposed to many parts of the company early in their careers. 1 - 23 Changes in technology are affecting how accountants operate. Increasing computing capabilities and decreasing computing costs have changed how accountants gather, store, manipulat e, and report data. Today accountants must be able to account for transactions efficiently and safely, integrate their accounting systems into ERP systems, and use XBRL to communicate information electronically. 1 - 24 The essence of the just - in - time philo sophy is the elimination of waste, accomplished by reducing the time products spend in the production process and trying to eliminate the time spent in activities that do not add value to the product. 1 - 25 Moving tools and products that are in process fro m one location to another in a plant is an activity that does not add value to the product. So changing the plant layout to eliminate wasted movement and time improves production efficiency. 1 - 26 The four major responsibilities are: (1) competence - dev elop knowledge; know and obey laws, regulations, and technical standards; and perform appropriate analyses, (2) confidentiality - refrain from disclosing or using confidential information, (3) integrity - avoid conflicts of interest, refuse gifts that migh t influence actions, recognize limitations, and avoid activities that might discredit the profession, and (4) credibility - communicate information fairly, objectively, and completely, within confidentiality constraints. 1 - 27 Standards do not always provi de the needed guidance. Sometimes an action borders on being unethical, but it is not clearly a violation of an ethical standard. Other times two ethical standards conflict. In situations such as these, accountants must make ethical judgments. Copyright ©201 4 Pearson Education 9 1 - 28 (5 - 10 min.) Typical activities associated with the treasurer function include:  Provision of capital  Investor relations  Short - term financing  Banking and custody  Credit management and collections of cash  Investments  Risk management Typical activities associa ted with the controller function include:  Planning for control  Reporting and interpreting  Evaluating and consulting  Tax administration  Government reporting  Protection of assets  Economic appraisal 1 - 29 (10 - 15 min.) 1. Controller. Financial statements a re generally produced by the controller's department. 2. Controller. Advising managers aids operating decisions. 3. Controller. Advice on cost analysis aids managers' operating decisions. 4. Treasurer. Analysts affect the company's ability to raise capi tal, which is the responsibility of the treasurer. 5. Treasurer. Financing the business is the responsibility of the treasurer. 6. Controller. Tax returns are part of the accounting process overseen by the controller. 7. Treasurer. Insurance, as with ot her risk management activities, is usually the responsibility of the treasurer. 8. Treasurer. Allowing credit is a financial decision. Copyright ©201 4 Pearson Education 10 1 - 30 (5 - 10 min.) Activities 2, 4, 5, and possibly 6 are primarily associated with marketing decisions. The management accountant would assist in these decisions as follows: Airbus’s pricing decision requires cost data relevant to the new method of distributing spare parts. Amazon.com will need to know the costs of the advertising program as well as the a dditional costs of other value chain functions resulting from increased sales. Mission Foods will need to know the incremental revenues and incremental costs associated with the special order. Target Stores needs to know the impact on both revenues and c osts of closing one of its stores. 1 - 31 (5 - 10 min.) Activities 1, 7, and 8 are primarily associated with production decisions. The management accountant would assist in these decisions as follows: Saab needs an analysis of the costs associated with purchasing the part compared to the costs of making the part. Dell will need to know the costs of the training program and the savings associated with increased efficiencies in the setup and changeover activities. Ford needs to know the costs and salvage values of the replacement equipment, the proceeds of the sale of the old equipment, and the operating savings associated with the use of the new equipment. 1 - 32 (5 min.) 1. Management 4. Management 7. Financial 2. Management 5. Management 3. Financial 6. Financial Copyright ©201 4 Pearson Education 11 1 - 33 (10 min.) 1. Performance Report Budget Actual Variance Explanation Revenues $3 56,4 00 $3 51,400 $5 ,000 U Additional sales below budget* Advertising cost 3 3 ,000 3 5,64 0 2,64 0 U New advertising campaign Net $7, 64 0 U * From the New Products Report, seven new products were added which exceeded the plan to add six. However, the increase in sales was $ 5 ,000 less than budgeted 2. Factors that may not have been considered include: a. Raw material costs for new products may have been higher than budgeted. b. Customer satisfaction with new products may have been low, resulting in unanticipated costs of replacement products given to dissatisfied customers. c. External uncontrollable factors such as increases in operating costs, adver se weather, changes in the overall economy, new competitors entering the market, or key employee turnover may have decreased efficiency. 1 - 34 (5 min.) 1. Line, support 3. Staff, marketing 5. Staff, support 2. Line, marketing 4. Staff, support 6. Line, pr oduction Copyright ©201 4 Pearson Education 12 1 - 35 (30 min.) Microsoft is a company that most students will know and have some understanding of what functions its managers perform. Nevertheless, this may not be an easy exercise for those who have little knowledge of how companies operate . Research & development – Because software companies must continually come out with new products and upgrades to their current products, this is a critical function for Microsoft. More than one - fourth of Microsoft’s operating expenses are devoted to R&D . Product and process design – For Microsoft the design and R&D process overlap considerably. Product design is critical; process design is probably less critical. One essential part of design is beta testing – that is, field testing of new software. T his quality - control step is essential to prevent customer dissatisfaction with new products. Production – Microsoft produces disks and CD - ROMs and the manuals and packaging to go with them. However, software is increasingly delivered and updated over the Internet, which takes an initial process design and then few resources. Thus, production of physical items is becoming a less important focus for Microsoft. Marketing – Microsoft spends more on sales and marketing than on any other operating expense. I ncreasing competition in software sales makes marketing essential to the company’s future. This function includes advertising and direct marketing activities, but it also includes activities of the company’s sales force. Distribution – This function is b ecoming simpler for Microsoft as it delivers more and more software over the Internet. As long as the company does not fall behind competitors in delivery methods, this is not likely to create a major competitive advantage or disadvantage for Microsoft. Customer service – Customer service is important, but Microsoft tries to minimize costs in this area by good product design – making things work right for customers without deep computer expertise. Poor customer service can severely impact a company, so M icrosoft must attend to it. Support functions – Most of the time these are not a major focus. One major exception for Microsoft is legal support – the future of the company depended on some recent court decisions. Copyright ©201 4 Pearson Education 13 1 - 36 (15 - 20 min.) The management accountant's major purpose is to provide information that helps line managers plan and control operations and make decisions. The accountant supplies information for scorekeeping, attention directing, and problem solving. In turn, managers use this and o ther information for routine and non - routine decisions and for evaluating subordinates and the performance of sub - parts of the organization. Management accountants must walk a delicate line between (1) making sure that managers use information properly an d (2) making sure that the managers, not the accountants, are doing the actual managing. Management accountants are increasingly a part of management teams that make important decisions. 1 - 37 (5 min.) Costs of a poor ethical environment include legal co sts and costs due to absenteeism and high employee turnover. Benefits of a good ethical environment include improved morale, lower absenteeism and employee turnover, lower loss from internal theft, and improved customer satisfaction resulting from better q uality and service (that result from a more productive work environment). 1 - 38 (5 min.) There are numerous examples. “You understand how important it is to record this sale before year end, don’t you?” “Doing it this way is common for all companies i n our business, so don’t worry!” “Trust me, the inventory is at the warehouse.” Copyright ©201 4 Pearson Education 14 1 - 39 (15 - 20 min.) This problem can form the basis of an introductory discussion of the entire field of management accounting. Text Exhibit 1 - 1 provides more details. 1. The focus of management accounting is on helping internal users make better decisions, whereas the focus of financial accounting is on helping external users make better decisions. Management accounting helps in making a host of decisions, including prici ng, product choices, investments in equipment, making or buying goods and services, and manager rewards. 2. Generally accepted accounting principles constrain financial accounting but not management accounting. For example, if an organization wants to ac count for assets on the basis of replacement costs for internal purposes , no outside agency can prohibit such accounting. Of course, this means that the organizations may set up an additional system to keep track of this cost. There is nothing immoral or unethical about having multiple accounting systems, but there is a cost. Accounting data are commodities, just like butter or eggs, and an additional internal accounting system must meet the same cost - benefit test as other commodities. That is, the perc eived increases in benefits from the commodity must exceed the perceived increases in costs. Ultimately, benefits are measured by whether managers make better decisions that result in increased net profits. 3. Budgets, the formal expressions of managemen t’s plans, are a major feature of management accounting, whereas they are not as prominent in financial accounting. Budgets are major devices for compelling and disciplining management planning. 4. An important use of management accounting information is the evaluation of performance, providing incentives, and feedback to improve future decisions. 5. Accounting systems have an enormous influence on the behavior of individuals affected by them. Management accounting is more concerned with the likely behavio ral effects of various accounting alternatives than is financial accounting. Copyright ©201 4 Pearson Education 15 1 - 40 (10 min.) When flat fees are being received for different products or services, it is essential for the hospital to have detailed knowledge of the cost of each produc t or service. Accurate cost information is crucial for decisions regarding which products and services should be emphasized or de - emphasized. Hospitals will increasingly identify costs by product (type of case), not just by departments. In contrast, when all costs are reimbursed, it is less important to the hospital to know which products or services cause costs, because all costs are reimbursed by someone. Even though reimbursers are concerned about how costs are assigned to products and services, the h ospital has less reason to be concerned about assigning costs accurately. When somebody's money is at stake, accounting systems get more attention. Accountability is important for many reasons, including justification of prices, cost control, and respons e to criticisms by stakeholders (whether they be investors, donors, taxpayers, or others). In a survey of 550 hospitals, hospital financial executives said that improved cost accounting systems "are crucial to responding to changes in hospital payment mec hanisms and that better cost information is essential for more profitable and efficient operations." 1 - 41 (10 min.) Paperwork and systems often seem to become ends in themselves. However, the rationale that should underlie systems design is the cost - be nefit philosophy that is implied in the quotation. The aim is for the improvement in revenue and/or reduction in costs due to better decisions to outweigh the costs of the accounting system. Marks & Spencer should look at each of the management accounti ng reports it produces with an eye toward how it helps managers make better decisions. Does it provide needed scorekeeping? Does it direct attention to aspects of operations that might need altering? Does it provide information for specific management d ecisions? These types of questions will help identify the benefit of the information in the report. Then the company must consider the cost – not just the cost of collecting the data and preparing the reports, but the cost of educating managers to use th e information and the cost of the time to read, digest, and act on the information. Too much information may be costly because it makes it time - consuming (and thus costly) to sift through the reams of information to find the few items that are important. An additional cost may be the loss of important information because the total volume of information makes it too difficult to ferret out the important items. Copyright ©201 4 Pearson Education 16 1 - 42 (10 min.) Financial information is important in all companies. But how managers get and use financial information can differ depending on the culture and philosophies of the company. Top executives of a company often represent a functional area critical to the competitive economic advantage of the company. When technology is crucial, engin eers generally hold important executive positions. If marketing differentiates the company from others, marketing executives usually dominate. But regardless of the source of a company’s competitive advantage, its success will eventually be measured in e conomic terms. They must attend to financial aspects to thrive and often even to survive. Management accountants must work with the dominant managers in any organization. The modern trend toward use of cross - functional teams places management accountan ts at the center of the action regardless of what type of managers and executives dominate. Most companies realize that there is a financial dimension to almost every major decision, so they want the financial experts, management accountants, involved in the decisions. But to be accepted as an important part of these teams, the management accountants must know how to help managers in various functional areas. In General Mills, if accountants can’t talk the language of marketing, they will not have great i nfluence. In ArvinMeritor, if they do not understand the information needs of engineers they will not provide value. 1 - 43 (10 - 15 min.) 1. Boeing's competitive environment and manufacturing processes changed greatly in recent years. An accounting system that served them well in their old environment would not necessarily be optimal in today. Boeing's management probably thought that changes in the accounting system were necessary to produce the kind of information necessary to remain competitive. 2. A cost - benefit criterion was probably used. Boeing's management may not have quantified all the costs and benefits, but they certainly assessed whether the new system would help decisions enough to warrant the cost of the system. Many of the benefits of a better accounting system are hard to measure. They affect many strategic decisions of an organization. Without accurate product costs, management will find it difficult to accurately assess the consequences of their decisions. 3. More accurate prod uct costs will usually result in better management decisions. But if the cost of the accounting system that produces the more accurate costs is too high, it may be best to forego increased accuracy. The benefit of better decisions must exceed the added c ost of the system for a change to be desirable. Copyright ©201 4 Pearson Education 17 1 - 44 (10 min.) 1. There are many possible activities for each function of Nike's value chain. Some possibilities are: Research and development -- Determining changes in customers' tastes and preferences for shoes and sportswear to come up with new products (maybe the next "Air Jordans"). Product, service, and process design -- Design a shoe to meet the increasing demands of competitive athletes. Production -- Determine where to produce products and n egotiate contracts with the companies producing them. Marketing -- Signing prominent athletes to endorse Nike's products. Distribution -- Select the best locations for warehouses for distribution to retail outlets. Customer service -- Formulate retur n policies for products that customers perceive to be defective. 2. Accounting information that aids managers' decisions includes: Research and development -- Trends in sales for various products, to determine which are becoming more and less popular. Product, service, and process design -- Production costs of various shoe designs. Production -- Measure total costs, including both production cost and transportation costs, for production in various parts of the world. Marketing -- The added profits generated by the added sales due to product endorsements. Distribution -- Storage and shipping costs for alternative warehouse locations. Customer service -- The net cost of returned merchandise, to be compared with the benefits of better customer relat ions. Copyright ©201 4 Pearson Education 18 1 - 45 (10 - 15 min.) This problem can lead to a long discussion. Pointing out the problems can be done reasonably quickly but formulating solutions can take much longer. 1. The appropriate accounting information presented correctly should be helpful to managers. It is clear that Belton does not regard the accounting p erformance reports as helpful. Some key problems are: • Belton refers to “their” budget, meaning that the budget belongs to the controller’s departmen t, not him and his department. Managers should be involved in formulating the budget so that they accept it as a reasonable target. • The controller’s office shows up on ly when costs are over budget. Controll ers should not be “policemen.” They should be business advisors who provide continual assi stance not occasional reprimands. • Belton clearly does not under stand the performance reports. An important role for the controller is education of managers on how to use accounting information. • Belton believes the performance report has nothing to do with w hat happens on the shop floor. He may be right. Accounting reports often arrive too late and are not specific enough to be useful to front - line managers. If so, the reports should be changed or the results used differently. • Paperwork takes ti me away from other activities. This is especially a problem when the numbers have little value to those putting in the time. • Budgeting is not taken seriously, so the numbers reported by Belton and his subordinates are not reliable. • Things have gotten so bad that Belton has an attitude problem t oward the controller’s office. Veracruz is meeting him for the first time, and he is already disrespectful of her. 2. Veracruz has maj or problems. Her first task is to get the cooperation o f Belton and his subordinates. This will pr obably involve changing the accounting reports received by the line managers, and it will certainly involve changes in how these reports are presented and used. If the reports are not usef ul, she needs to find out why. Then she can change the reports so th at t he managers find them helpful. She needs to show managers how they can use information to make better decisions. Foremost, Veracruz has to change the attitudes of the line managers towar d the controller’s department. This will take time, and it will require some specific instances where the controller or her staff provides information that th e managers perceive as useful. To do this, she may need to change the accounting system to produce better information, and she needs to teach her controller’s de partment staff how to present information in a nonthreatening way. There is no one solution to Veracruz ’s problems. Different managers would handle it in different ways. If students have had experience, there will be many sug gestions about how to procee d. For students with little experience, it may be sufficient to point out the variety of possible approaches. Copyright ©201 4 Pearson Education 19 1 - 46 (10 - 15 min.) Accountants become the information experts in many companies. In a company such as Alghanim Industries , with its varied sub sidiaries, the accounting system provides a link between the various operating companies. The accountants provide information about the operations of an individual unit, and they also show how the units fit together as parts of the Group. Management acc ountants should work together with managers to determine what information the managers would find useful. Then the accountants should help devise systems to produce that information, provided that its value is greater than its cost. As such, management a ccountants are information consultants to managers. Decisions are still the domain of managers, but the accountants provide advice to help managers make better decisions. Accountants have sometimes been viewed as “corporate cops,” staff members who repo rted on the failings of managers. They were primarily scorekeepers, but when the score showed something awry, they became informants - carriers of bad news to corporate headquarters. Managers resented them. But today, good management accountants are all ies of managers. They provide information that helps managers make better decisions, which makes the managers look good. Everyone is better off when management accountants focus on providing the information that aids management decisions. To be effecti ve internal consultants, accountants must have a background in accounting and information systems. In addition, they must have knowledge of all the functions of business and all the areas of the value chain. Copyright ©201 4 Pearson Education 20 1 - 47 (10 - 15 min.) 1. Brigham’s decisions vi olate standards of competence and integrity. Competence is violated because the most competent persons apparently are not being hired, jeopardizing the competence of the accounting department. Further, Brigham may be violating equal opportunity employmen t laws and regulations. Integrity requires an accountant to avoid conflicts of interest, and hiring the sons of personal friends certainly appears to be a conflict of interest. Such hiring was possibly for the personal gain of Brigham at the expense of the company. Further, this practice subverts the company’s equal employment opportunity policy. 2. Merton’s first step normally would be to discuss this situation with his boss. However, because the alleged unethical behavior is by his boss and Merton h as already confronted him and been rebuffed, the next step seems warranted. This would involve going to Brigham’s superior. (Alternately, some organizations have an individual, possibly called an ombudsperson, to whom Merton could report such concerns.) If the matter could not be resolved at that level, he should continue up the line until reaching Creighton, the president. If equal employment opportunity is genuinely a company priority, Creighton should be very concerned about Brigham’s actions. What if the situation is not resolved to Merton’s satisfaction after following the steps in the preceding paragraph? The final step is to go directly to the Board of Directors. If that is unsatisfactory, there may be no recourse but to resign, sending an exp lanatory memo to an appropriate high - level official of the company. Should Merton go to the press so that they will put on pressure to change the hiring practices? Such a step is generally not appropriate. It would put Merton in the position of violati ng the ethical standard of confidentiality. The only person external to the firm with whom it is appropriate to discuss this issue is a confidential objective advisor. Copyright ©201 4 Pearson Education 21 1 - 48 (15 - 20 min.) 1. Because of the standard of confidentiality, the information in the geologist's report should not be revealed. 2. The standard of integrity would require one to reject the invitation. 3. This is a difficult ethical problem, one that deserves discussion. Two ethical standards apparently conflict. Confidentiality wou ld lead to nondisclosure, provided there was no legal requirement to do so. But credibility would indicate that the information about the additional losses should be used in making the earnings prediction. The authors think that credibility should take p recedence here, but others might disagree. 4. The standard of competence (and the standard of integrity) would lead one to research the tax law before deciding whether to deduct the item. Copyright ©201 4 Pearson Education 22 1 - 49 (15 - 25 min.) There are various possible answers. These are just some of the items that might be mentioned. 1) Environment - Evaluation of environmental disclosure, environmental policies (including management systems), and environmental performance (including toxic emissions, waste management, evidence of chemi cal and oil spills and environmental fines). Top companies were IBM and Johnson Controls . 2) Climate Change - Climate change disclosure (including the Carbon Disclosure Project, as well as company websites and reports) and climate change policies (includ ing offsets and reduction goals). Top companies were IBM and Johnson Controls . 3) Human rights – Evaluation of disclosure, policy (including codes of conduct and performance goals), and exposure to 45 countries of concern. Companies with higher exposure n eed to earn higher scores in disclosure and policy to do well. Top among the top ten companies were Johnson Controls, Campbell Soup, Mattel, and Accenture . 4 ) Employee relations – Evaluates unionization rates, publicly disclosed employee benefits , and Eq ual Employment Opportunity Commission complaints . Top among the top ten companies: Hewlett - Packard and Campbell Soup . 5) Corporate g overnance - A majority of a board of directors and key committees of the board must be independent of management. In additi on, ratings include general board accountability and demographics (board tenure, age of directors, over - commitment of directors to multiple boards, and annual election of all directors), and the percentage of CEO pay that is incentive based. Of the top te n companies, six were tied for the highest score on governance – Campbell Soup, Bristol - Myers Squibb, Mattel, 3M, Hewlett - Packard, and Nike . 6 ) Philanthropy – Includes corporate giving that has a substantial and positive impact on society and evaluates gi ving levels and policies (including employee match programs). Top among the top ten companies were Johnson Controls and Accenture . 7 ) Financial – Evaluates the three - year return on investment in the company stock, based on Morningstar rankings. Companies without a three - year return to shareholders were not considered for the ranking. Top among the top ten companies were Nike and Mattel . Copyright ©201 4 Pearson Education 23 1 - 50 (10 - 15 min.) 1. Line authority is held by those managers directly responsible for the production and sal es of goods or services. Staff authority is held by persons who have an indirect responsibility for the production and sale of goods an d services. Staff members provide expertise, advice , and support for line positions; line managers are directly responsib le for achieving the basic objectives of the organization. Conflicts between line and staff can arise for many reasons, ranging from the types of people that are generally attracted to each type of position to their respons ibilities in the organization. Among the reasons are:  Staff personnel tend to be younger, better educated, more professionally established.  Line managers see staff managers as threats to their authority.  Line managers are uncomfortable when they must rely on the knowledge and expertise of staff.  Line managers often think staff managers overstep their authority and have a narrow view of the world.  Staff managers often think line managers ignore their advice and resist their ideas. 2. Chen has a staff position, provi ding advice to the con troller. His main conflicts will probably arise with the chief accounta nt and the managers under him. He reports to the chief accountant’s superior, but he prepares reports that affect operations in the chief accountant’s area of responsibility. Paperman is in a staff position because accounting is not directly involved with sales or delivery of leasing services. He provides counsel and advice to all the line managers and most of the staff managers in the company. C onflicts may arise if he tries to exert authority instead of just giving advice or if the other managers ignore his advice. Hodge is in a line position because she is an integral part of the company’s main line o f business, leasing equipment. Her main conflicts are likely to arise in areas suc h as requisitioning of equipment and billing of customers where she must rely on other departments over which she has no authority. Shevlin is in a staff position and offers advice to most other managers in the company. Conflicts might arise if managers perceive her advertising of positions or screening of candidates as not fulfilling their needs, or if she tries to insert her preferences instead of the hiring department’s preferences into the adverti sing and screening activities. Conflicts can also arise in the performance evaluation functions, where she may be enforcing an unpopular policy. Copyright ©201 4 Pearson Education 24 1 - 51 (20 - 30 min.) 1. In accordance with Exhibit 1 - 7, IMA Statement of Ethical Professional Practice , management accountants should not condone the commission of act s by their organization that violate the standards of ethical conduct. The specific standards that apply are: • competence. Management accountants have a responsibility to perform their professional duties in accordance with relevant laws and regulatio ns. • confidentiality. Management accountants must refrain from disclosing confidential information unless legally obligated to do so. Rachel O’Casey may have a legal responsibility to take some action. • integrity. Management accountants have a respo nsibility to - refrain from engaging in any conduct that would prejudice carrying out duties ethically. - refrain from engaging in or supporting any activity that would discredit the profession. • credibility. Management accountants have a responsibilit y to communicate information fairly and objectively. They also should disclose all relevant information that could reasonably be expected to influence a user’s understanding of reports, analyses, and recommendations. 2. In accordance with Exhibit 1 - 7, th e first alternative being considered by Rachel O’Casey, seeking the advice of her boss, is appropriate. To resolve an ethical conflict, the first step recommended is to discuss the problem with the immediate superior, unless it appears that this individua l is involved in the conflict. In this case, it does not appear that O’Casey’s boss is involved. Releasing the information to the local newspaper would be an inappropriate course of action. Communication of confidential information to anyone outside of the company is inappropriate unless there is a legal obligation to do so, in which case O’Casey should contact the proper authorities. Contacting a member of the board of directors would be an inappropriate action at this time. In accordance with Exhibit 1 - 7, O’Casey should report the conflict to successively higher levels within the organization. Thus, the problem should be reported to the board of directors only if the problem is not resolved at lower levels. 3. Assuming there is no established compa ny policy in place to resolve the conflict, O’Casey should report the problem to successively higher levels of management until it is satisfactorily resolved. There is no requirement for O’Casey to inform Copyright ©201 4 Pearson Education 25 her immediate supervisor of this action, because h e is involved in the conflict. O’Casey could also clarify the situation by confidential discussion with an objective advisor to obtain an understanding of possible courses of action. If the conflict is not resolved after exhausting all courses of interna l review, O’Casey may have no other recourse than to resign from the organization and submit an informative memorandum to an appropriate representative of the organization. 1 - 52 (15 - 25 min.) These answers are based on information in the Nike 10K for the year ended May 31, 20 11. 1. Nike’s principal business activity is the design, development and worldwide marketing of high quality footwear, apparel, equipment, and accessory products. Nike is the largest seller of athletic footwear and athletic apparel i n the world, selling in over 1 7 0 countries. 2. About 43% of Nike revenue comes from sales in the U.S. and 57% from sales abroad. There are 363 retail stores in the U.S. 3. Nike’s CFO is Donald W. Blair. He came to Nike from Pepsico in 1999. Before tha t he was a certified public accountant (CPA) with Deloitte, Haskins, and Sells (now Deloitte & Touche). 4. Nike manufactures 3 9 percent, 33 percent, 2 4 percent and 2 percent of total NIKE brand footwear in Vietnam, China, Indonesia, and India , respectivel y. Almost all of the brand apparel manufacturing is also outside the United States, by independent contract manufacturers in 33 countries . Although Nike imposes on these contractors a code of conduct and other environmental, health, and safety standards, it is difficult to ensure that all of the contractors are always in compliance. This could harm Nike’s reputation for high ethical standards. 1 - 53 (20 - 30 min.) For the solution to this Excel Application Exercise , follow the step - by - step instructions pro vided in the text book chapter.