introduction to cost management
questions for writing and discussion
2. The three broad objectives of a
cost management information system are (1) to cost out products, services, and
other cost objects; (2) to provide information for planning and control; and
(3) to provide information for decision making.
3. The cost accounting system is a
cost management subsystem designed to assign costs to products, services, and
other objects as management needs specify. The operational control system is a
cost management subsystem designed to provide accurate and timely feedback concerning
the performance of managers and others relative to their planning and control
of activities.
4. Factors affecting the focus and practice of
cost management are global competition, service industry growth, advances in
information technology, advances in the manufacturing environment, customer
orientation, new product development, total quality management, time as a competitive
factor, and efficiency. Global competition means that companies are now
competing with the best of the best. Accurate, timely, and relevant accounting
data are crucial in appropriately managing costs. Service industry growth has
led to the need for increased management accounting information to improve
productivity and quality. The advances in information technology have led to
the creation of integrated relational databases that allow a variety of users
to develop their own reports based on their particular needs.
It has also fostered the implementation and use of more
sophisticated accounting systems such as activity-based costing. Customer
orientation, new product development, total quality management, time as a
competitive factor, and efficiency require the accountant to create and track
financial and nonfinancial measures of customer satisfaction, quality
improvement, responsiveness, cycle time, target costs, cost, and productivity.
Advances in the manufacturing environment are characterized by practices such
as the theory of constraints, just-in-time, and automation. These changes are
affecting such practices as inventory management and product costing.
5. Planning establishes performance standards,
feedback compares actual perfor- mance
with planned performance, and control uses feedback to evaluate deviations from
plans.
6. Cost management has the role of providing
information to help identify opportunities for improvement and also provides an
evaluation of the progress made in implementing the actions designed to create
improvement.
7. Performance
reports compare actual costs and revenues with planned costs and revenues and
thus provide signals to managers to identify weak areas and to take corrective
actions.
8. Business
ethics is concerned with making the right choices and usually involves sacrificing
individual self-interest for the well-being of others. It is possible to teach
ethical behavior in virtually any course. By introducing ethical dilemmas in
management accounting, students can become aware of the behavior that is
expected in the business world and, in particular, for management accountants.
9. Yes.
There is some evidence that ethical behavior actually is good business. It improves society, helps align individual
goals with firm goals, enhances a firm’s public image, and even seems to be related
to better financial performance. The market and consumers appreciate ethical
behavior and are willing to reward those who adopt it.
10. Yes. As management accountants become more
informed about what behavior is acceptable and what is not, support should increase
for ethical behavior. The code also recommends solutions to ethical dilemmas
that might not have been obvious to the practicing management accountants.
11. The
three forms of certification are the CMA, the CPA, and the CIA certificates.
Although each certification can prove to be valuable for management
accountants, the CMA designation is tailored to fit the needs of management
accountants. The CPA designation has a public accounting orientation, and the
CIA designation has an internal auditing orientation. Only the CMA designation
specifically addresses the professional requirements of a management accountant.
12. The
four parts are: (1) business analysis; (2) management accounting and reporting;
(3) strategic management; and (4) business application. The parts reveal the interdisciplinary nature
of management accounting.
1–2
1. Customers
can be internal or external. Users of the component produced by William’s
department are his customers. This includes the assembly department and the
rework department. In a sense, those who buy the calculators are his customers
too—after all, the functionality of the calculator is affected by the quality
and reliability of its components.
2. William’s
department is producing a low-quality component. One out of every 100 units is
a high defect rate and is causing a lot of rework. Being sensitive would
require a dramatic reduction in the defect rate. A reduction in the defect rate
would decrease cycle time, lower the rework rate, and decrease costs. This creates
the potential to increase value for external customers and makes the life of
internal customers much easier.
3. Cost
management can provide information concerning quality—both financial and
nonfinancial. Defect rates can be tracked over time. Rework costs attributable
to defective components from William’s department can be measured and tracked
over time. Cycle time reductions due to improved quality can be measured and
reported. Product cost reductions attributable to improved quality can be reported.
1–3
Companies have set up
customer service telephone lines as a necessary part of doing business. A mail-order
business will find that many customers prefer to order merchandise over the
phone rather than filling out an order form, finding a stamp, and mailing it.
Software companies find it necessary to have help lines available to customers
who may not be as technically sophisticated as a computer programmer. Many of
these customer service telephone lines are toll-free. Costs include:
Direct costs:
The investment in office space and
office furniture for the customer service representatives.
The investment in telephones and
queuing equipment.
The monthly cost of the phone service
and the 1–800–number.
The salaries of the customer service
representatives.
Indirect costs:
Cost of lost sales to competitors who
do have this service if the company chooses not to provide it.
Lost sales (no repeat orders) from
frustrated customers who have difficulty dialing in (overloaded lines) and who
must remain on hold for an inordinate amount of time.
Lower marketing costs in the long run
as satisfied current customers purchase additional items.
1–4
The manager is clearly
considering unethical behaviors, especially the decisions associated with
reducing maintenance and promotional salaries.
Extending asset life for depreciation has less clear ethical implications.
Reducing maintenance may not hurt much in the short run but will have long-run
negative financial consequences. Furthermore, the decision for promotions has
been made with a given set of financial expectations, and reducing the salary increases
by 50% for deserving employees is obviously unfair to them. Although the
manager is not a cost or management accountant, he is violating the ethical
standard that requires “abstain from engaging in or supporting any activity
that might discredit the profession.” (III-3).
1–4 Concluded
The reduction in
promotional salary increases is particularly egregious in that he is reducing
the salaries of others so that he may benefit. In effect, he is stealing from
his subordinates. The reduction in maintenance budget is also a form of
stealing—robbing future service potential to produce a current personal
benefit.
An ethical dilemma does
exist if the manager carries through with his plans. The dilemma exists because
the manager wants to manipulate earnings to achieve personal financial gain. A
company code of ethics and compliance monitoring is one recommendation. An
internal audit could be used to detect and deter such questionable behavior.
Furthermore, a company policy requiring managers to justify any expenditure
reductions in writing to both the employees and higher management could
discourage behavior like the manager’s. The best control, however, is hiring
managers with the integrity to do the right thing even when faced with the opportunity
to cheat or steal.
1–5
1. The controller wants a written record of
spoiled material in order to more closely control it. From a behavioral
perspective, the formal record keeping of spoilage will make it seem more
important to individuals on the factory floor. If the company has a total
quality management program in effect, keeping track of spoilage can make it
easier to note trends and ensure that spoilage is being reduced over time.
Additionally, the formal reporting of spoilage may make it easier to pinpoint
the areas in which spoilage occurs and may enable management to improve the
system to eliminate spoilage. Employees should be made aware that the purpose
of tracking spoilage is to eliminate it, not to fix blame.
Besides, everybody doesn’t know what the
spoilage rate is. Some people think it is high; others think it is low. A
written record of spoilage will prevent a certain amount of pointless arguing
about this. For example, the plant manager will not be forced to rely on the
production manager’s assessment of spoilage as “practically none” or “not
important.” Instead, both managers can rely on the recorded spoilage to
determine how much is occurring and how it can best be reduced.
1–5 Concluded
2. Terry
correctly sees that keeping track of spoilage is additional work. This will
cost the plant in one way or another. Even if an additional worker need not be
hired, the workers who do record spoilage, by definition, will not be doing
something else. Terry should work together with the controller to see that the
costs of recording spoilage do not exceed the benefits. He should also attempt
to make the recording as easy as possible and concentrate on the “expensive”
spoilage. Finally, Terry’s remark indicates that workers may hide spoilage to
avoid responsibility. They may “steal” it and then dispose of it, or they may
simply pass on a bad unit to the next process. Either approach is costly and
not in harmony with the goal of improving quality. These problems can be
avoided by training, education, and the installation of controls.
1–6
1. Planning. The management accountant
gains an understanding of the impact on the organization of planned
transactions (i.e., analyzing strengths and weaknesses) and economic events
(both strategic and tactical) and sets obtainable goals for the organization.
The development of budgets is an example of planning.
Control and evaluation. The management accountant ensures the
integrity of financial information, monitors performance against budgets and
goals, and provides information internally for decision making. Comparing
actual performance against budgeted performance and taking corrective action
where necessary is an example of control and evaluation.
Continuous improvement. The management accountant helps
identify opportunities for improvement, measures the projected costs and
benefits, and reports on the actual outcomes.
Decision making. The management accountant helps in the
analysis of various alternatives and helps to choose the optimum course of
action.
2. a. Planning;
expected price and cost information are needed.
b. Continuous
improvement; cost savings from improved order entry quality.
c. Control
and evaluation; a performance report triggered the investigation that led to
corrective action.
d. Planning;
forecasting of financial effects is necessary.
e. Decision
making; accounting must analyze cost-volume-profit effects.
f. Continuous
improvement; before-and-after costs are needed.
g. Decision
making; cost information for a keep-or-drop decision is needed.
h.
Continuous
improvement; cost information for setups and materials waste.
Problems
1–7
Dear Sue,
I am pleased that you
are considering taking an accounting course to complement your hotel and
restaurant major. You will find that a basic knowledge of
accounting will stand you in good stead in dealing with the business aspects of hotel management.
accounting will stand you in good stead in dealing with the business aspects of hotel management.
Financial accounting is
primarily aimed at outside parties. It involves generating financial statements
that describe the assets and liabilities of a business and the periodic income
earned. You will find that banks, the IRS, and other local, state and federal
regulatory and licensing agencies will appreciate a good solid financial
accounting system.
Cost management is
concerned with determining the costs of things like products, services, and
activities. It is also concerned with using financial and non- financial
information for planning, controlling, continuous improvement, and
decision making. For example, you will want to budget and control costs for a hotel. You may want to determine the costs and revenues of different services. For example, is it worthwhile to offer a Sunday brunch for hotel guests?
decision making. For example, you will want to budget and control costs for a hotel. You may want to determine the costs and revenues of different services. For example, is it worthwhile to offer a Sunday brunch for hotel guests?
As you might guess,
courses in both financial accounting and cost management would be of value. If
you cannot afford the time to take both accounting courses, a good solid
background course in cost and management accounting would be best. Good luck
with your goal of becoming a hotel manager!
Sincerely,
1–8
At first glance, this
seems simple. Couldn’t John simply mention that Patty had already accepted a
position as controller in another company? Since the decision was a close one
between the two, this information would likely tip the balance in favor of
John. However, some ethical issues should be considered. First, the information
that Patty gave was likely given in confidence, and John should not disclose
this confidential information without her permission. Second, disclosing the
confidential information may provide a personal benefit to John. Third, it may
be that Patty will change her mind about the position she has accepted (assuming
she can withdraw honorably from the acceptance) once she is officially aware of
the promotion. This decision and its consequences should be Patty’s and not
John’s. If I were John, I would leave the response to the promotion entirely in
Patty’s hands. Once offered the position, she may simply indicate that she
cannot accept it because she is committed to another job. This may then cleanly
open up the position for John.
1–9
1. Allison
should not implement the suggested accounting procedures because they conflict
with generally accepted accounting principles and violate
Sections I–2, I–3, and III–3 of the IMA Statement of Ethical Professional Practice. It raises serious ethical questions in the areas of competence and integrity; e.g., Allison is not able to “perform professional duties in accordance with relevant laws, regulations, and technical standards” or “provide information … that are accurate, clear, ...”
Sections I–2, I–3, and III–3 of the IMA Statement of Ethical Professional Practice. It raises serious ethical questions in the areas of competence and integrity; e.g., Allison is not able to “perform professional duties in accordance with relevant laws, regulations, and technical standards” or “provide information … that are accurate, clear, ...”
2. Allison should discuss the problem with the
next highest management level (if the divisional manager’s mind cannot be
changed). This could be, for example, the corporate controller or the CEO. She could also discuss the matter with an objective
advisor to assess possible courses of action. In some firms, ethical hotlines
exist that will allow the dilemma to be analyzed. If no resolution is obtained,
then resignation may be called for.
1–10
The proposed changes
violate the following ethical standards:
Competence. Top management’s request for Larry Stewart to
account for the company’s information in a manner that is not in accordance
with generally accepted accounting principles violates the standard to “perform
professional duties in accordance with relevant laws, regulations, and technical
standards.” Also, top management’s restriction on information disclosure has violated
the standard to “to provide … information … that are accurate …” (I-3)
Confidentiality. Top management has violated the ethical
standard of “refrain[ing] from using confidential information for unethical or
illegal advantage” (personal job security). (II-3)
Integrity. Top management has violated the standard to “advise
all parties [other shareholders] of any potential conflict.” (III-1)
Credibility. Top management’s restriction and distortion of
Silverado’s financial information violates the standard to “communicate
information fairly and objectively.” (IV-1)
To resolve the ethical
dilemma, Larry should first determine if the company has an established policy.
If so, he should follow the prescribed policies in resolving the ethical
conflict. If there is no policy, then the specific steps are as follows:
a. To confront
top management about the unethical behavior unless Larry feels that they are
involved, in which case the problem should be presented to the next higher
level, the chairman of the board of directors. If this fails, then the issue
can be taken to the audit committee and the board of directors.
b. To clarify
relevant concepts by confidential discussion with an IMA Ethics Counselor or
other impartial advisor to obtain a better understanding of possible courses of
action.
c. To consult his own attorney as to legal
obligations and rights concerning the ethical conflict.
1–11
By discussing the
possible sale of Farris’ common stock with members of the trouble-shooting
team, Gus Swanson has violated the following standards of ethical conduct:
Confidentiality (II). Gus has disclosed confidential information
acquired in the course of his work that he has not been authorized to share
with peers and others within the organization. In addition, he has not informed
subordinates of the confidential nature of the information nor has he attempted
to prevent the further distribution of this information.
Integrity (III). By discussing this information, Gus has
engaged in an activity that would discredit his profession and prejudice his
ability to carry out his duties ethically.
Credibility (IV). Gus has violated the requirement to
communicate all information fairly and objectively.
Competence (I). Gus has an obligation to perform his duties in
accordance with relevant laws and regulations. By discussing the information he
overheard, he may have violated laws regulating the use of inside information.
1–12
1. Assuming the controller did not inform the
CEO and CFO of the situation, the ethical considerations of the controller’s
apparent lack of action, as covered in the IMA Statement of Ethical
Professional Practice, are as follows:
Competence (I). Management accountants have a responsibility
to perform their professional duties in accordance with the relevant laws,
regulations, and technical standards and to prepare complete reports after
appropriate analyses of relevant and reliable information. The controller’s
apparent lack of action regarding the overstatement of inventory and lack of
provision for potential purchase commitment losses do not comply with generally
accepted accounting principles.
Integrity (III). Management accountants have a
responsibility to mitigate actual conflicts of interest, refrain from engaging
in any conduct that would prejudice carrying out duties ethically, and refrain
from engaging in any activity that would discredit their profession.
Credibility
(IV). Management accountants have a responsibility to communicate
information fairly and objectively and to fully disclose information that could
influence an intended user’s understanding of the reports.
1–12 Concluded
2. The recommended course of action that Marian
Napier should take, as described in the IMA Statement of Ethical Professional
Practice, is as follows:
Consult company policies and procedures regarding ethical
conflict. If the company does not have adequate procedures in place to resolve
the conflict, then Marian should discuss the problem with her immediate
superior, the controller. However, as the controller is apparently involved in
the matter and she has already spoken to him, it would not be necessary to
inform him that she is taking the situation to the CFO.
If the issue is still not resolved, she should consult the
next higher level of management, the CFO, particularly since he or she will be
one of the signers of the representation letter.
During this process, Marian could clarify relevant ethical
issues by initiating a confidential discussion with an IMA Ethics Counselor or
other impartial advisor to obtain a better understanding of possible courses of
action. She can also consult her own attorney as to legal obligations and
rights concerning the ethical conflict.
If the issue remains unresolved, Marian should continue to
take the problem to the next higher levels of authority, which may include the
audit committee, executive committee, and/or the board of directors.
Except
where legally prescribed, communication of these issues to outsiders (the
media, regulatory bodies, etc.) by Marian is not considered appropriate.
3. The actions that Heart Health Procedures can
take to improve the ethical situation within the company include:
Setting the tone at the top for control consciousness of the
people in the organization.
Establishing an audit committee within the board of directors
and providing an avenue for communication free of reprisals within the company.
Adopting performance-based, long-term financial incentive
plans.
collaborative learning exercise
1–13
1. and 2.
Potential questions
Queen Isabella might have asked during the 8-month voyage follow. (F) refers to
a financial accounting type of question; (CM) refers to a cost management type
of question.
Months 1–3:
How are you progressing? Have you
sighted land yet? (CM)
How has the weather been? Are the winds
favorable? (CM)
Are there any problems on the ships?
(CM)
What distance have you covered? Are
your supplies adequate? (CM)
How are provisions holding out? (F, CM)
Month 4:
What is the terrain like? (CM) Is the
land inhabited? (CM)
What are the inhabitants like? Warlike?
Peaceful? (CM)
Have you found gold and precious
stones? Other valuables (e.g., spices)? How much? (F)
Did you claim the land for Spain? (F,
CM)
What resources are available in the new
land? Timber and stone to build government buildings? (F, CM)
Is there a good harbor? Are there
nearby lands? (CM)
What is your assessment of the potential
for long-term colonization? (F, CM)
Are the three ships in good condition?
The sailors? (CM)
Months 5–8:
What kind of progress have you made?
(CM)
Are you at the same stage you would
have expected based on your voyage out? (CM)
How has the weather been? Are the winds
favorable? (CM)
Have you lost any ships or cargo? (F)
Are there any problems on the ships? (CM)
How are provisions holding out? (CM)
When do you expect to be back in Spain?
(CM)
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