CHAPTER THE PROFESSIONAL ENVIRONMENT OF COST MANAGEMENT Lo ers er en Va oa EXPECTED LEARNING OUTCOMES After studying this chapter, you should be able to... |. Describe the position of ‘the managemen “accountant in the organization structure of the business firm 2. Explain the role and the relationship between the Chief Financial and the Controller 3. Describe the functions and responsibilities of the Controller as the top management accountant 4. Explain the role and the relationship between the Chief Financial Officer and the Treasurer 5. Describe the functions and responsibilities of the Treasurer 6. Understand the ethical standards for management accountants . Realize the need for company code of conduct 8. Be familiar with typi i PIC! ethical challenges that management Accountants €ncounter ° 9. ‘ 7 aoe ihe Intemational Certifications that are le to Management accountants Toes ‘CHAPTER 2 THE PROFESSIONAL ENVIRONMENT OF COST MANAGEMENT ORGANIZATION STRUCTURE AND THE MANAGEMENT ACCOUNTANT Many of the activities constituting the field of mariagement accounting are interrelated and thus must be coordinated, ranked and implemented by the management accountant in such a fashion as to meet the objectives of the organization as perceived by him or her. A major function of the management accountant is that of tailoring the application of the process to the organization so that the organization’s objectives, short-term and long-term, are achieved effectively. Management accounting is intended to include persons involved in such functions as controllership, treasury, financial analysis, planning, and budgeting, cost accounting, internal audit, systems, and general accounting. Management accountants thus may have titles as controller, treasurer, budget analyst, cost analyst, and accountant, among others. The accounting function is usually “staff”, with responsibility for providing line managers and also other staff managers, with specialized services. This includes advice and help in the areas of budgeting, controlling, pricing and special decisions. Line authority is the authority to command action or give orders to subordinates. Line managers are directly responsible for ceria tee objectives of the business firm as efficiently as possible. Sales and production managers typically have line authority. Staff authority is the authority to advise but not command others; it is exercised laterally or upward. Staff managers give support, advice and service to line departments, Examples of staff authority are found in personnel, purchasing, engineering and accounting. Except for exercising line authority over his department, the chief accounting officer usually the controller generally fills the staff role in his company as contrasted with the line roles of sales and production executives. Theoretically,22 Chapter 2 ~ — the controller transmits the best accounting eter i followed OY the ln people to the President who will communicate peat rough a mana instructions. In practice however, the controller a s clegated aut ity from, top line management to direct the line people pahow to apply these Prog, me This is known as functional authority which is the right to Command actin laterally or downwardwith regard to a specific function or Specialty, ‘On, THE CHIEF FINANCIAL OFFICER AND THE CONTROLLER The chief financial officer (CFO) ~ also called the financ countries ~ is the executive responsible for overseeing the fi an organization. The responsibilities of the CFO vary am they usually include the following areas: © director jn may nancial OPetations of jong organizations, but * Controllership ~ includes providing fi managers and reports to shareholde Operations of the accounting system. nancial information for On for reports to ers and overseeing th © Overal] Treasury ~ includes banking and short- investments, and management of cash, * Risk management ~ and exchange-rate ch and long-term financing, includes managing the financial Tisk of interest-rate langes and derivatives management. © Taxation planning. * Internal audit ~ includes reviewing and analyzing financial and other records to attest to the integrity of the organization’ s financial reports and to adherence to its Policies and procedures, includes income taxes, sales taxes, and international tax In some organizations, the CFO is also responsible for information systems. In other organizations, an officer of equivalent rank to the CFO ~ called the chief information officer ~ is responsible for information systems. The controller (also called the chief accounting officer) is the financial executive primarily responsible for management accounting and financial accounting. This book focuses on the controller as the chief management accounting executive. Modem controllers do not d the controller does control in a Special sense. ‘That is, by reporting and interpreting relevant data (problem-solving and attention-directing roles), the controller exerts a force or influence that impels management toward making better-informed decisions.ional Environment of Coxt Management 3 Figure 2-1 is an illustrative organization chart of the CFO and the corporate controller of an apparel company 1; Reporting Relationships for the CFO and the Corporate Figure 2-' Controller Chairman "ape UeneNNaES Chief Executive Officer Board of Directors (CEO) . ae President Chief Operating Officer (COO) | Chief Financial Officer (CFO) Peco or Controller Treasurer The Controller as the Top Management Accountant Controllership is the practice of the established science of control which is the process by which management assures itself that the resources are procured and utilized according to plans in order to achieve the company’s objectives. In most organizations, the top managerial accounting position is held by the controller. The controller provides reports for planning and evaluating company activities (e.g., budgets and performance reports) and provides the information needed to make management decisions (¢.g., decisions related to construction ofa new factory or decisions related to adding or dropping a product). The controller also has responsibility for all financial accounting reports and tax filings with the Bureau of Internal Revenue and other taxing agencies, as well as coordinating the activities of the firm’s external auditors.24 Chapter 2 A simplified illustration af the organization chart for the CONKOMer'y ee ji shown in Figure 242. Noté that one of the areas reporting to the ONKOL og is accounting. Most medium-sized and large Manufacturing, Companies have department. Cost accountants estimate costs to facilitate Management deci and develop cost information for purposes of valuing inventory ions is The controller is an integral putt of the top management team, Ione wants ah level career in management accounting, he/she will Need not gh accounting skills but also skills required of all high-level executives, These gent include excellent written and oral communication skills, solid ane 80nal sis and a deep knowledge of the industry in which the firm competes, ils The controller's authority is basicall gives advice and service to other departments. However, in his he has line authority, In the modern concept of controllersh the controller does control in a special sense. relevant data, the controller ex toward logical de y staff authority in that the Controller's office OWN department, t iS maintained that That is, by Feporting and interpreting erts a force or influence that impels Management ons consistent with objectives, Figure 2-2: A Typical O; Controller rganization Chart Showing the Functions of the Controller I Budgeting and Performance Renortina Systems Taxation Development Reporting25 The Professional Environment of Cost Management“ asic Functions of Controllership ‘The basie principal functional responsibilities and activities of controllership may ized as follows: be catego! 1. Planning. Establish and maintain an integrated plan of operation consistent with the company’s goals and objectives, both short and long term, analyzed and revised, as required, communicated to all levels of management, with appropriate systems and procedures installed. Control. Develop and revise standards against which to measure performance and provide guidance and assistance to other members of management in insuring conformance of actual results to standards. Reporting. Prepare, analyze, and interpret financial results for utilization by management in the decision-making process, evaluate the data with reference to company and unit objectives; prepare and file external reports as required to satisfy government regulatory bodies, shareholders, financial institution, customers, and the general public. 4. Accounting. Design, establish, and maintain general and cost accounting systems at all company levels, including corporate, divisional, plant, and unit to properly record all financial transactions in the books of accounts and records in accordance with sound accounting principles with adequate internal control 5. Other Primary Responsibilities. Manage and supervise such functions as taxes, including interface with the respective taxing authorities and agents; maintain appropriate relationships with internal ‘and external auditors; develop and maintain systems and procedures; develop record retention programs; supervise assigned treasury functions; institute investor and financial public relations programs; office management; and direct other assigned functions. wp we As circumstances warrant, there may be many deviations from the basic functions just described. It should be pointed out that the controller’s efforts should not be diluted and render him less effective by assigning to him unrelated functions of an operational nature. The financial planning and control functions are too important to the success of tlie business enterprise to burden the controller with activities that others can perform.26 Chapter 2 Qualifications of the Co - of an effective controller would include De et called nical foundation in AeCOUNtINE ANd fing ' understanding and thorough knowledge of ACCOUNTING pr Weiples, Ani understanding of the principles of planning, OHBANIZING, ANd 04 m A general understanding of the industry in whieh the company COMPtes and the social, economic, and political forces involved 4. A thorough understanding of the company, including its technologie, products, policies, objectives, history, or BAN HZALION, ANd eHYitonmeny. 5. The ability to communicate wilh all levels of Management and a understanding of the other functional problems related to engineer production, procurement, industrial relations, and marketing, 6. The ability to express ideas clearly in writing or in making informative Presentations, 7. The ability to Motivate others to a 1 pone) Ve positive action and results The controller may have the technical capability and be able to lay out the assigned tasks as well as supervise and direct his personnel, but he must also have integrity and the ability to comfunicate if he is to succeed, He must be fair, reasonable, and sincere with all soncemed if he is to be recognized for the Importance of the controllership function, ‘ As in any executive Position, the controller must be able to work with people at all levels, have Tespect for the ideas and Opinions of others, and have the fesourcefulness, to meet all challenges THE CHIEF FINANCIAL OFFICER AND THE TREASURER Although Organizational structures vary from firm of firm, the role of finance is assigned to the Chief of Financial Officer (CFO) or the Vice President-Finance who reports to the President, The financial Vice-president’s key subordinates are the Treasurer and the Controller. This book has extensively dealt with the role of the Controller in the Previous section,27 1 Professional Environment of Cost Managem nt freasurership rreasurership is concerned with the acquisition, financing and management of assets of a business concer (0 maximize the wealth of the firms for its owners. in addition to the position of the controller, many companies have a position called treasurer. ‘The treasurer has custody of cash and funds invested in various marketable securities. In addition to money management duties, the treasurer 1S generally responsible for maintaining relationships with investors, banks, and other creditors. Thus, the treasurer plays a major role in managing cash and marketable securities, preparing cash forecasts and obtaining financing from banks and other lenders. Both the controller and the treasurer report to the chief financial officer (CFO) who is the senior executive responsible for both accounting and financial operations. In most firms the treasurer has the following responsibilities: 1. Funds Procurement This involves raising of funds in accordance with the firms planned capital structure. This responsibility may require negotiating for loans, short-term or long-term, issuing equity of debt instruments at the best terms and conditions possible. 2. Banking and Custody of Funds This involves direct management of cash and cash equivalents and maintenance of good relations with banks and other non-bank institution. 3. Investment of Funds This involves management of the company’s placements and securities or purchase of debt or equity instruments such as ordinary or preference shares in other corporate entities. This responsibility also includes analysis of decisions related to investment in property, plant and equipment. 4. Operating Responsibilities related to (a) Credit and Collection (b) Inventory Management ‘ (c) Corporate pension and retirement fund (d) Investor Relations (e) Insurance (f) Compliance with legal and regulatory provisions relating to funds procurement, use and distribution as well asc inati: use a oordination finance function with accounting function. ois28 Chapter 2 Bae es ETHICAL STANDARDS FOR MANAGEMENT ACCOUN}, ANTS scent years, many concerns have been raised regarding ethi : hisiness and in public life Allegations and scandals of unethical eee tev in been directed toward managers in virtually all segments of society, ieee government, business, charitable organizations, and even religion, Although allegations and scandals have received a lot of attention, it is doubtful tha hese ropresent a wholesale breakdown of the moral fiber of the Ration. After tI hundreds of millions of transactions are conducted every day that remain untante Nevertheless, it is important to have an appreciation of what is and is hot acceptable behavior in business and why. Fortunately, the Institute of Management Accountants (IMA) of the United States has developed a Very useful ethical code called the Standards of Ethical Conduct for Practitioners. Management Accounting and Financial Management. Even though the standards were specifically developed for management accountants, they have much broader application. Code of Conduct for Management Accountants The Institute of Management Accountants (IMA) issued the Standards of Ethical “onduct for Practitioners of Management Accounting and Financial Management. ‘These standards are presented in Figure 2-3. There are two parts to the standards. The first part provides general guidelines for ethical behavior. In a nutshell, the management accountant has ethical responsibilities in four broad areas namely 1. to maintain a high level of professional competence, 2. to treat sensitive matters with confidentiality, 3. to maintain personal integrity, and 4. to be objective in all disclosing, The second part of the standards gives specific guidance concerning what should be done if an individual finds evidence of ethical misconduct. within an organization. The ethical standards provide sound, practical advice for management accountants and managers, They Tequire professional behavior, especially in avoiding con‘licts of interest. They require management accountants to bring bad news to the attention of their supervisors, and to work competently.__The Professional Environment of Cost Management 29 Most of the rules in the ethical standards are motivated by a very practical consideration ~ if these rules were not generally followed in business, then the economy could come to a halt. The following are examples of the consequences of not abiding by the standards: 1, Suppose employees could not be trusted with confidential information. Top managers would therefore be reluctant to distribute confidential information within the company. This could result to decisions being made based on incomplete information and could lead to deterioration of operations. 2. Suppose employees accept bribes from suppliers. Then contracts would tend to go to suppliers who pay the highest bribe rather than to the most competent suppliers. Would you like to fly in an airplane whose wings were made by the subcontractor who was willing to pay the highest bribe to a purchasing agent? 3. Suppose the CEOs or presidents of companies routinely lied in their annual reports to shareholders and grossly distorted financial statements. If the basic integrity of the company’s financial statement could not be relied on, investors and creditors would have little basis for making informed decisions. Rational investors would suspect the worst and would pay less for securities issued by companies. As a result, less funds would be available for productive investments and many firms might be unable to raise any funds at all. This ultimately, would lead to slower economic growth, fewer goods and services, and higher prices. As these examples suggest, if: ‘ethical standards were not generally adhered to, there would be undesirable consequences for everyone. Following ethical rules such as those in the Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management is not just a matter of being “nice”; it is absolutely essential for the smooth functioning of an advanced market economy.Figure 2-3: Standards of Ethical Conduct for Practitioners of yy Accounting and Financial Management age men, [[ Practitioners of management accounting and financial management have an othe public, their profession, the organzaton they serve, ad themseve Hn the highest standards of ethical conduct. In recognition of this Obligation, the ain of Management Accountants has promulgated the following standards of ethical const | for practitioners of management accounting and financial Management, Adhere, ]| these standards, both domestically and internationally, is integral to achie re || Objectives of Management Accounting. Practitioners of Management acco ti x financial management shall not commit acts contrary to these Standards nor shalj the condone the commission of such acts by others within their organizations, y ! Competence. Practitioners of management accounting and financial management | have a responsibility to: + Maintain an appropriate level of professional competence by ongoing development of their knowledge and skills. | - Perform their professional duties in accordance with relevant laws, regulations, and technical standards. + Prepare complete and clear reports and recommendations after appropriate analysis of relevant and reliable information. | Confidentiality. Practitioners of management accounting and financial management | have a responsibility to: : + Refrain from disclosing confidential information acquired in the course of their work except when authorized, unless legally obligated to do so. + Inform subordinates as appropriate fegarding the confidentiality of information acquired in the course of their work and monitor their activities to assure the maintenance of that confidentiality. })* Refrain from using or appearing to use confidential information acquired in the course of their work for unethical or illegal advantage either personally or through third parties : i Integrity. Practitioners of management accounting and financial management have a || "esponsibility to: + Avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict. ‘ + Refrain from engaging in any activity that would prejudice their ability to carry out their duties ethically, ie + Refuse any gift, favor, or hospitality that would influence or would appear to influence their actions.The Professional Environment of © ‘ost Management 3 . Refrain from either actively or passively subverting the attainment of the organization's legitimate and ethical objectives + Recognize and communicate professional imitations or other constraints that would preclude responsibility judgment or successful performance of an activity. + Communicate unfavorable as well as favorable information and professional judgments or opinions, «Refrain from engaging in or supporting any activity that would discredit the profession. Objectivity. Practitioners of management accounting and financial management have a responsibility to: + Communicate information fairly and objectively. + Disclose fully all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, comments, and recommendations presented. Resolution of Ethical Conflict. In applying the standards of ethical conduct, practitioners of management accounting and financial management may encounter problems in identifying unethical behavior or in resolving an ethical conflict. When faced with significant ethical issues, practitioners of management accounting and financial management should follow the established policies of the organization bearing on the resolution of such conflict. If these policies do not resolve the ethical conflict, such practitioner should consider the following courses of action: + Discuss such problems with the immediate superior except when it appears that the superior is involved, in which case the problem should be presented initially to the next higher managerial level. If a satisfactory resolution cannot be achieved when the problem is initially presented, submit the issues to the next higher managerial level. + Ifthe immediate superior is the chief executive officer, or equivalent, the acceptable teviewing authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. Contact with levels above the immediate superior should be initiated only with the superior’s knowledge, assuming the superior ‘is not involved. Except where legally prescribed, communication of such problems to authorities or individuals not employed or engaged by the organization is not considered appropriate, * Clarify relevant ethical issues by confidential discussion with an objective advisor (eg., IMA Ethics Counseling Service) to obtain a better understanding of possible courses of action. . creat your own attorney as to legal obligations and rights concerning the ethical conflict. ifthe ethical conflict still exists after exhausting all levels of intern: i “ists al review, be no other recourse on significant matters than to resign from the apres32 Chapter 2 = =e to submit an informative memorandum to an appropriate representen organization. After resignation, depending on the nature of the ethical confics © the also be appropriate to notify other parties fic it may institute of Management Accountants, formerly National Association of Statements on Management Accounting: Objectives of Management sont, Siatement No. 1B, New York, NY, June 17, 1982 as revised in toe Accounting, COMPANY CODE OF CONDUCT Bthical standards serve a very important practical function in an advanced economy. Without widespread adherence to ethical standards, material {iyi standards would fall. A formér president of CMA emphasizes the mong ethics in business: ice of “Employees like to work for a company that they can trust. Customers like to deal with an ethically reliable business, Suppliers like to sell to firms with which they can have a real partnership. Communities are more likely to cooperate with organizations that deal honestly and fairly with them. If the business community is to function effectively, all of the players need to act ethically.” It is unfortunate though, that some companies place so much emphasis on short- term profits that may make it seem like the only way to get ahead is to act unethically. Those who engage in unethical behavior often justify their actions with one or more of the following reasons: (1) the organization expects unethical behavior, (2) everyone else is unethical, and/or (3) behaving unethically is the only way to get ahead. To counter the first justification for unethical behavior, many companies have adopted formal ethical codes of conduct. These codes are generally broad-based Statements of a company’s responsibilities to its employees, its customers, its Suppliers and the community in which the company operates. Codes give broad guidelines rather than that spell out specific do’s and don’ts or suggest proper behavior in a specific situation. Companies with a strong code of éthies can create Strong customer and employee loyalty. While liars and cheats may win on occasion, their victories are often short-term. Companies in business for the long term find that it pays to treat all of their constituents honestly and loyally.. re uae The Professional Envir _2 TYPICAL ETHICAL CHALLENGES Ethical issues can confront management accountants, in many ways. Here are two examples: ¢ Case A, Roger Cruz, a management accountant, knows that reporting @ loss for a software division will result in yet another series of layoffs, and has concems about the commercial potential of software for which R&D costs are currently being capitalized as an asset rather than being shown as an expense for internal reporting purposes. The division manager argues that the new product will be successful and profitable but presents little evidence to support her argument. The last two products from this division have been unsuccessful. The management accountant has many friends in the division and wants to avoid a personal confrontation with the division manager. * Case B: A packaging supplier, bidding for a new contract, offers the management accountant of the purchasing company an all-expense paid weekend to the Boracay Resort. The supplier does not mention the new contract when giving the invitation. The accountant is not a personal friend of the supplier. He knows cost issues are critical in approving the new contract and is concerned that the supplier will ask for details about bids by competing packaging companies. In both cases, the management accountant is faced with an ethical dilemma. Case ~ A involves competence, objectivity, and integrity. The management accountant should request that the division manager provide credible evidence that the new product is commercially viable. If the manager does not provide such evidence, expensing R&D costs in the current period is appropriate. Case B involves confidentiality and integrity. Ethical issues are not always clear-cut. The supplier in Case B may have no intention of raising issues associated with the bid. However, the appearance of a conflict of interest in Case B is sufficient for many companies to prohibit employees from accepting “favors” from suppliers. Figure 2-3 includes the IMA’s guidance on “Resolution of Ethical Conflict.” The accountant in Case B should discuss the invitation with his immediate supervisor. If the visit is approved, the supplier should be informed that the invitation has been officially approved subject to his following corporate policy (which includes the confidentiality of information).| eran eee IN THE INTERNAT nal Federation of Accountants (IFAC) in which the member, issued the “Guidelines on Ethics for the activities of all professional f whether they are practicing as vice or employed as internal Mo Chapter? JONAL LEVEL CODES OF CONDUCT O! the Internatio! PICPA isa! which governs 1d; regardless ©} In July 1990, Philippines through the PIC Professional Accountas accountants throughout the worl independent CPAS. employed in government Ser ; In addition to outlining ethical requirements in matters dealing with nd confidentiality, the IFAC’s code also ccountants: se, objectivity. independence, a bilities in matters relating to taxes, fees ympetenc u outlines th countant’S ethical respons! and commissions, advertising and solicitation, the handling of monies and cross- Where cross-border activities are involved, the IFAC ethical ents are stricter than the ethical bordert activities requi ts must be followed if these requirem requirements of the country In which the work is being gulation Commission approved Accountants in performed. ountaney of the Professional Re: n of the Revised Code of Ethics for Professional 1, 2016. The Board of Ace the implement the Philippines effective January INTERNATIONAL CERTIFICATIONS ‘The three certifications available to management accountants are as follows: «Certificate of Management Accounting (CMA) © Certificate in Public Accounting (CPA) © Certificate in Internal Auditing (CIA) CMA. A Certified Management Accountant is one who has passed the rigorous qualifying examination, has met an experience requirement, and participates in continuing educations. The CMA Certificate is granted by the Institute Management Accountants ( TMA). Accountant is one who has met the pre-qualification CPA. A Certified Public given by the educational requirements, it 0 ;, passed the CPA licensure examinati ations eee Regulatory Board of. ‘Accountancy and has satisfied all other legal and S rr requirements of a public accountant. The CPAs main responsibility is pl assurance concerning the reliability of the information conta in te firm’s financial statements.The Professional Environment of Cosi Management _ 38 CIA. Since one of the management control responsibilities of the management accountant is to develop effective systems to detect and prevent errors and fraud in the accounting records, it is common for the management accountant to have strong ties to the control-oriented organization such as the Institute of Internal Auditors (IA) granting Certification in, Internal Auditing (CIA). To attain the status of Certified Internal Auditor an individual must pass a comprehensive examination designed to ensure technical competence and have the required number of years of work experience, INSTITUTE OF MANAGEMENT ACCOUNTANTS (IMA) Management accountants have gained status in recent years as they now spend more time analyzing a company’s operations and less with the problems of recording and computing costs of products. The Institute of Management Accountants (IMA), the principal organization of management accountants in the United States, has instituted a program to provide certifications for management accountants and financial managers. ‘he Certified Management Accountant (CMA) examination was first given in 1972. A listing of the required subject areas in the CMA examination indicates the breadth of knowledge expected of the professional management accountant. The examination consists of the following four parts: Economics, Finance, and Management; Financial Accounting and Reporting; Management Reporting, Analysis and Behavioral Issues; and Decision Analysis and Information Systems. The Certified in Financial Management (CFM) examination was first given in 1996. The CFM examination is similar to the CMA examination with one major difference: the Financial Accounting and Reporting section is replaced with Corporate Financial Management. The IMA. also promulgated a code of ethics for management accountants, with is discussed in the previous section. The Institute of Management Accounting (IMA) is a professional organization that publishes the monthly magazine Strategic Finance. Since 1973, the IMA has conducted a comprehensive examination to test the knowledge a management accountant must have to be successful in a complex and fast-changing business world. More than 3,000 individuals take the exam each year. Those who pass the exam are issued a Certificate in Management Accounting and are proud to indicate the designation CMA on resumes and business cards. For details on student and professional memberships in the IMA and for information on the CMA examination, visit the IMA Web site.36 Chapter 2 nS . development of standards of eth; ¢ of contributions of the IMA is the d ical cong, sia foatitonshon ofan ethics botling-Ihat tlamberr"ene call to discagg on ain One may also visit the IMA website to review these ethicn Standards con! PHILIPPINE ASSOCIATION OF MANAGEMENT ACCOUNTANns (PAMA) ‘ 2 as the National Association of Accounta, it MA was established in 1972 ast nts (NAA, Phitpping Chapter, Inc. It is affiliated with NAA in New York. It was founded primarily to provide its members with educational and professional ACtivVities that supplement in the knowledge of management accounting Practices and Methods Monthly technical meetings, seminars and workshops are held to Present relevant and current topics by leading speakers from the government, private and educational sectors. The open forum provides the nerve for the exchange of ideas and experiences among the participants and the speakers. Publication Of technical materials is also part of the Association’s efforts to service its members, To propagate and Pprofessionalize Management Accounting in the Philippines, PAMA conducts the Certificate in Management Accounting (CMA) P, through its continuing education arm, the Philippine Institute of Management Accounting (PIMA). Basic objectives of the program are: 1. To establish management accounting as a recognized profession by 2. To foster higher educational Standards in the field of management accounting. 3. To assist employees, educators and students by establishing an objective measure of an individuals’ knowledge and competence in the field of management accounting,_The Professional Environment 0 ‘ost Management 37 __ REVIEW QUESTIONS AND EXERCISES Questions | Name the three international professional certifications available to management accountant. 2, What type of professional certification is most relevant for the management accountant and why? 3. Which is the most important function of management, and why? 4, What roles do management accountants perform? Where does the management accounting function fit into an organization’s structure? What guidelines do management accountants use? What are the ethical responsibilities of accountants? “Planning is really more vital than control.” Do you agree? Why? eens “The controller is both a line and a staff executive.” Do you agree? Why? 10, Prepare an organization chart (highlighting the accounting functions) of Bettina Company, which has the following positions: a. VP, Sales m, General ledger bookkeeper b. Internal audit manager n,_ Performance analyst c. Treasurer o. Tax manager d. Payroll clerk p. Cost accounting manager e. General accounting manager q. Cost clerk f. Accounts receivable clerk tr. Billing clerk g. Budget and standard cost analyst & VP, finance h. Controller t. Systems and EDP Manager {. Cost systems analyst u. VP, production j. Special studies manager vy. Assistant manager k. Assistant controller w. President 1. Accounts payable clerk 11. How does a controller help “control” a company? 12. Discuss the potential behavior implications of management accounting.Exercises solving, Scorekeeping, Exercise 1 (Problem Solving, Scorekeeping, and Attention Directing, : x activities, identify the main rote ¢ Fe ch of the following ac ; TONE the acegy ipafeenie problem solving, scorekeeping, or attention directing, "i 1. Preparing a monthly statement of Australian sales for the IBM Market; vice president. ™’ 2. Interpreting differences between actual results and budgeted Amounts o performance report for the Customer Warranty Department of Genent Electric. 3. Preparing a schedule of depreciation for forklift tucks in the Receivin, Department of a Hewlett-Packard Plant in Scotland : 4. Analyzing, for a Mitsubishi international manufacturing Manager, the desirabi 7 5. Interpreting why.a Birmingham distribution center did not adhere to its delivery costs budget. 6. Explaining a Xerox Shipping Department’s performance report, 7. Preparing, for the manager of production control of a US. steel plant, a plant. 9. Preparing the budget for the Maintenance Department of Mount ‘Sinai Hospital. 10. Analyzing, for a General Motors product designer, the impact on product costs of some new headlight lamps. Exercise 2 (Management Accoun ting Information System) The items that follow are associated with a Management accounting information system, a. Repairing a defective part. b. ing information for planning and control, ¢. Designing a product, d, Measuring the cost of design. e. f. g A budget that shows how much should be spent on design activity. Using Output information to make a decision. Usage of materials,The Professional Environment of Cost Management _ 39 A «port comparing the actual costs of quality with the expected costs of quality | Surveying customers to assess postpurchase costs. } Incurrence of postpurchase costs, k. Costing out products, | Assigning the cost of labor to a product. m. Report showing the cost of a product. hn. Measuring the cost of quality. quired: Classify the items into one of the following categories: 1. Inputs 2, Proc 3, Outputs 4. System objectives S Exercise 3 (Role of Management Accountants) Management accountants are actively involved in the process of managing the entity. This process includes making strategic, tactical, and operating decisions while helping to ‘coordinate the efforts of the entire organization. To fulfill these objectives, the management accountant accepts certain ties that can be identified as (1) planning, (2) controlling, (3) evaluating performance, (4) ensuring accountability of resources, and (5) external reporting. Required: Describe each of these responsibilities of the management accountant and identify examples of practices and techniques. (CMA Adapted) Exercise 4 (Line Versus Staff) The job responsibilities of two employees of Boots Manufacturing follow. Jamie Reyes, Cost Accounting Manager. Jamie is responsible for measuring, and collecting costs associated with the manufacture of the garden hose product line. She is also responsible for preparing periodic reports comparing the actual costs with planned costs. These reports are provided to the production line managers and the plant manager. Jamie helps explain and interpret the reports.plaice tater 40 Chapter 2 ~ ate. santos, Production Manager. Stephen is "eSPonsible iy Stephen Serie high-quality garden hose. He Supervises the line Work eee the production schedule, and is Tesponsible for seeing Pe recom laratinetit ietiicalter Rete Accountable for ea roductior Ontrolhin, ar facturing costs. : equired: : 3 neeeity Jamie and Stephen as line or staff and explain your reasons, Exercise 5 (Professional Ethics and End-of-Year Games) Jane Tan is the new division controller of the snack foods division oF Yummy Foods. Yummy Foods has reported a minimum 15% gtowth in annual earnings for each of the Past 5 years. The snack foods division has Teported annual earnings growth of over 20% each year in this same period. During the current year, the economy went into a recession. The Corporate Controller estimates a 10% annual earnings growth rate for Yummy Foods this year, One month before the December 31 fiscal year-end of the current year, Tan estimates the snack foods division will report an annual earnings groyth of only 8 percent. Louie Ryan, the snack foods division president, is less than happy, but he says with a wry Smile, “Let the end-of-year games begin.” Tan makes some inquiries and is able to compile the following list of end-of- year games that were More-or-less accepted by the previous division controller: Deferring routine monthly maintenance in December on packaging equipment by an independent Contractor unti] January of next year. b Extending the close of the current fiscal year beyond December 31 so that some sales of next year are included in the current year, a. ¢. Altering dates of shipping documents of next January’s sales to‘ record them as sales in December of the current year, 4. Giving salespeople a double bonus to exceed December sales targets. © Deferring the current Period’s iThe Professional Environment of Cost Management_41 g. Persuading carriers to accept merchandise for shipment in December of the current year although they normally would not have done so. Required: |. Why might the snack foods division president want to play the end-of-year games described above? 2. The division controller is deeply troubled and reads the Standards of Ethical Conduct for Management Accountants. Classify each of the end- of-year games (a ~ g) as (i) acceptable, or (ii) unacceptable according to that document. 3. What should Tan do if Ryan suggests that end-of-year games are played in every division of Yummy Foods and that she would greatly harm the snack foods division if she does not play along and paint the rosiest picture possible of the division's results? Exercise 6 (You get what you measure!) Bach year, the president of Quark Electronics selects a single performance measure, and offers significant financial bonuses to all key employees if the company achieves a 10 percent improvement on the measure in comparison to the prior year. He recently expressed the opinion that “this focuses my managers on a single, specific target and gets them all working together to achieve a major objective that will increase shareholder value.” Pilar Hernandez is a new member of the company’s board of directors, and she has begun to question the president’s approach to rewarding performance. In particular, she is concerned that placing too much emphasis on a single performance measure may lead managers to take actions that increase performance in terms of the measure but decrease the value of the firm. Is this possible? Required: a. What negative consequence might occur if the performance measure is sales to new customers + total sales ih the current year versus the prior year? (Note: To receive a bonus, managers would need to increase this ratio compared with the prior year.) b. What negative consequence might occur if the performance measure is cost of goods sold + sales in the current year versus the prior year? (Note: To receive a bonus, managers would need to decrease this ratio compared with the prior year.)42 Chapter 2 ~ What negative consequeni night occur if the Performance m cand axdminisirative expense + sales in the current year er, price year? (Note: To receive a bonus, managers would need lode tl® his ratio compared With the prior year.) this ratio ee A nea selling Exercise 7 (The Roles of Managers and Management Accountants) are et of terms that relate to organizati Listed below are a unet that relate to organizations, tn wou management, and the rote of managerial accounting: Budgets Line Chief Financial Officer Managerial accounting Controller Nonmonetary data Decentralization Performance report Directing and motivating Planning Feedback Precision Financial accounting Staff Choose the term or terms above that most appropriately complete the following statements. 1 —_______ is concerned with Providing information for the use of those who are inside the organization, — whereas pees eee is concerned with Providing information for the use of those who are outside the organization. 2 gy erereer consists of identifying alternatives, selecting from among the alternatives the one that is best for the organization, and specifying what actions will be taken to implement the chosen alternative, 3. When a be » Managers oversee day-to-day activities and keep the organization functioning smoothly. 4. The accounting and other reports coming to management that are used in controlling the organization are called Ke 5. The. delegation of decision-making authority throughout an organization by allowing managers at various operating levels to make key decisions relating to their area of responsibility is called a eee 6. A position on the organization chart that is directly related to achieving the basic objectives of an organization is called a Position,The Professional Environment of Cost Management 43 A position provides service or assistance to other parts of the organization and does not directly achieve the basic objectives of the organization. 8. The manager in charge of the accounting department is generally known as the 6. The plans of management are expressed formally in 9, A detailed report to management comparing budgeted data to actual data tor a specific time period is calleda_—— ; 10. The ELE is the member of the top management team who is responsible for providing timely and relevant data to support planning and control activities and for preparing financial statements for external users. 12. Managerial accounting places less emphasis on i and more emphasis on = than financial accounting. Exercise 8 (Ethics in Business) Maria Reyes was hired by a popular fast-food restaurant as an order-taker and cashier. Shortly after taking the job, she was shocked to overhear an employee bragging to a friend about shortchanging customers. She confronted the employee who then snapped back: “Mind vour own business. Besides, everyone does it and the customers never miss the money.” Maria didn’t know how to respond to this aggressive stance. Required: What would be the practical consequences on the fast-food industry and on consumers if cashiers generally shortchanged customers at every opportunity?44 Chapter 2 see We vat a Exercise 9 (Ethics and the Manager) eI chain of department Stores Io s, Inc, operates a cl _depa Happyvitie, the first store began operations in 1965, and the compar” the north oni to its present size of 44 stores. ‘Two years a ay ie direotors of Happyville approved a large-scale remodeling of its stone of attract a more upscale clientele. : Before finalizing these plans, two stores were remodeled as a test, Lisa p, assistant controller, was asked to oversee the financial reporting for these ne stores, and she and other management personnel were offered bonuses be on the sales growth and profitability of these stores. While completing the financial reports, Perez discovered a sizable should have been discounted for sale or returned to the manufacturer, She discussed the situation with her management colleagues; the consensus Was to ignore reporting this Inventory as obsolete, since reporting it would diminish the financial results and their bonuses, Required: 1 Management Accounting and Financial Management, would it be ethical for Perez not to report the inventory as obsolete? 2. Would it be easy for Perez to take the ethical action in this situation? Exercise 10 (Preparing an Organization Chart) Verona University is a large private school located in Mountain Province. The university is headed by a president who has five vice presidents Teporting to him. These vice presidents are responsible for auxiliary services, admissions and records, academics, financial services (controller), and physical plant. gers who report to these vice presidents. In addition, the university has mana, purchasing, the university press, and the These include managers for central university bookstore, all of whom rvices and for accounti ing and finance, who Services; managers for computer ses a feport to the vice president for financial services; and managers for grounds and custodial services and for plant and maintenance, who report to the vice President for physical plant.45 _ The Professional Environment of Cost Management _* a ‘The university has four colleges — business, humanities, fine arts and engineering and quantitative methods — and a law school Each of these units has a dean who is responsible to the academic vice president. Each college has several departments. Required: }. Prepare an organization chart for Verona University. 2, Which of the positions on your chart would be line positions? Why would they be line positions? Which would be staff positions? Why? 3. Which of the positions on your chart would have need for accounting information? Explain. Exercise 11 (Ethics in Business) Pedro Santos is the controller of a corporation whose stock is not listed on a national stock exchange. The company has just received a patent on a product that is expected to yield substantial profits in a year or two. At the moment, however, the company is experiencing financial difficulties; and because of inadequate working capital, it is on the verge of defaulting on a note held by its bank. ‘At the end of the most recent fiscal year, the company’s president instructed Santos not to record several invoices as accounts payable. Santos objected since the invoices represented bona fide liabilities. However, the president insisted that the invoices not be recorded until after year-end, at which time it was expected that additional financing could be obtained. After several very strenuous objections — expressed to both the president and other members of senior management — Santos finally complied with the president’s instructions. Required: 1. Did Santos act in an ethical manner? Explain fully. 2. If the new product fails to yield substantial profits and the company becomes insolvent, can Santos” actions be justified by the fact that he was following orders from a superior? Explain.=: Multiple Choice h I. means reporting and interpreting ; iba ianagers to focus on operating problems, sna inefficiencies, and opportunities, tions a. Scorekeeping b. Attention directing c. Problem solving d. None of the above Management accounting is considered Successful when it a. _ helps creditors evaluate the company’s performance, b. helps managers improve their decisions. ©. is accurate, d. is relevant and reported annually. The Institute of Management Accountants (IMA) a. is a professional organization of management accountants, b. isa professional organization of financial accountants, ©. issues standards for management accounting. d. issues standards for financial accounting. Line management includes a. manufacturing managers, b. human-resource managers. ic! information-technology managers, d. management-accounting managers. Staff management includes a. manufacturing managers, b. human-resource managers, c. _ purchasing managers, d. distribution managers. Responsibility of a CFO include all EXCEPT a. providing financial reports to shareholders, managing short-term and long-term financing. ¢. investing in new equipment, returns. Preparing taxThe Professional Environment of Cost Management _47 7. The Standards of Ethical Conduct. for management accountants include concepts related to a. competence, performance, integrity, and reporting. b. competence, confidentiality, integrity and objectivity. c. experience, integrity, reporting, and objectivity. d. none of the above as ethical issues do not affect management accountants. 8. _ Ethical challenges for management accountants include a. whether to accept gifts from suppliers, knowing it is an’effort to indirectly influence decisions. b. whether to report unfavorable department information that may result in unfavorable consequences for a friend. c. whether to file a tax return this year. d. both (a) and (b). 9, If a financial manager/management accountant has a problem in identifying unethical behavior or resolving an ethical conflict, the first action (s)he should normally take is to a. consult the board of directors. b. discuss the problem with his/her immediate superior. ¢. notify the appropriate law enforcement. d, resign from the company. 10. Katrina is a financial manager who has discovered that her company is violating environmental regulations. If her immediate superior is involved, her appropriate action is to a. do nothing since she has a duty of loyalty to the organization. b. consult the audit committee. c. present the matter to the next higher managerial level. d. confront her immediate superior. 11. If financial manager/management accountant discovers unethical conduct in his/her organization and fails to act, (s)he will be in violation of which ethical standard(s)? a. “Actively or passively subvert the attainment of the organization’s legitimate and ethical objectives.” b. “Communicate unfavorable as well as favorable information.” c. . “Condone the commission of such acts by others within their organizations.” d. All of the answers are correct.48 Chapter? aig ~ ocial responsibility is ve ST atively enforced through the controls ©nvisioned economics. ry Classy 6. _ the obligation to shareholders to earn a profit, c. the duty to embrace service to the public interest, d. the obligation to serve long-term, Organizational interests. a. 13. A common argument against corporate involvement in Socially responsible behavior is that ? a. it encourages government intrusion in decision making, as a legal person, a Corporation, is accountable for its Conduct c. it creates goodwill, ‘ dina competitive market, such behavior incurs costs that Place the company at a disadvantage, 14, Integrity igs an ethical Tequirement for all financial managers/management accountants. One aspect of integrity Tequires a. performance of Professional duties in accordance with applicable laws. b. avoidance of Conflict of interest, ©. refraining from improper use of inside information. d. maintenance of an appropriate level of Professional competence, the audit committee and/or the board of directors only if : a. the immediate superior, who feports to the chief executive officer, knows about the situation but refuses to correct it. : b. the immediate Superior assures the financial manager/management accountant that the problem will be resolved. the immediate Superior reports the Situation to his/her superior. d. the immediate Superior, the firm’s chief, executive officer, knows about the situation but refuses to Correct it,18. 20. The Professional Environment of Cost Managemen In which situation is a financial manager/management accountant permitted to communicate confidential information to individuals or authorities outside the firm? a, There is an ethical conflict and the board has refused to take action. . Such communication is legally prescribed. c. The financial manager/management accountant knowingly communicates the information indirectly through a subordinate. d. An officer at the financial manager/management accountant’s bank has requested, information on a transaction that could influence the firm’s stock price. Which ethical standard. is most clearly violated if a financial manager/management accountant knows of a problem that could mislead users but does nothing about it? a. Competence c. Objectivity b. Legality d. Confidentiality produces information that helps workers, managers, and executives in organizations make better decisions. a. Governmental accounting b. Management accounting c. Auditing d. Financial accounting is the recognition and evaluation of business transactions and other economic events for appropriate accounting, action. a. Identification c. Communication b. Analysis d, Evaluating, __ is the quantification of business transactions or other economic events that have occurred or forecasts of those that may occur. a. Accumulation b. External reporting c. Measurement d. Internal reporting,28. 29. 30. 31. 32. The Professional Environment-of Cost Management SV Which of the following is NOT a basic feature of a mana erial accounting system? a. firiancial measures only b. subjective information c. internal audience d. informs local decision and actions Which of the following is a basic feature of a managerial accounting system? a. The scope tends to be highly aggregate b. There are no regulations governing the reports. c. The reports are generally delayed and historical. d. The audience tends to be stockholders, creditors and tax authorities. Which of the following groups would be LEAST likely to receive detailed management accounting reports? a. management accountants b. scientists and engineers ¢. stockholders d. managers indicate whether the organization is creating long-term Value and profitability. a. Strategic information c, Net income b. ROI d. Critical success factors is when a firm compares itself with the best practice of competitors or other comparable organizations. a. Process improvement b. Benchmarking c. Employee empowerment d. Total quality philosophy Which of the following is NOT a function of a management accounting system? a. operating control b. product and customer costing c. management contrel d, financial reportingChapter ¢ : 7 : atts iS 8 tv 24, 25. 26. 's a determination of the reasons for the fe. Fs hing activity and its relationship with othe economic events circumstances. a. Analysis b, Measurement c. Evaluation d. Accumulation includes Strategic, tactical and Operating Aspects, a. Controlling b. Communication ¢. Planning d. Evaluating a. Controlling b. Commun ication ©. Planning d. Evaluating Which of the following is a basic feature of a financial accounting im? a. Internal audience Historical data ©. Subjective information Disaggregate information Which of the following is NOT a basic feature of a financial accounting System? a objective information Teports on past Performance System? a. external audience Teports are Current and future oriented objective data only b, ©. 4. reports On the entire Organization52 Chapter 2 33, 34, 35. 36. 37; By ; ing functions provides feedback in. ch of the following ; ito, ae the efficiency of tasks performed? Mating, a. operating control ; b. product and customer costing c. management control d. financial reporting Which of the following functions provides information OM the Performance of managers and operating units? a. operating control b. product and customer costing c. management contro] 4: financial reporting Which of the following is NOT a role of management Accounting information in Operating control? a. to provide feedback information about quality - to provide feedback information about timeliness ¢. to provide feedback information about the efficiency of tasks Performed d. to provide Performance measures for — decentralized organizational units Which of the following is NOT a role of management accounting information in product and customer costing? a. to measure the cost of resources used to produce a service b. to assess the Profitability of the Organization’s services by linking resources generated * ¢. to provide feedback information about the quality, timeliness, and efficiency of tasks performed d. to assess customer Profitability for a Particular segment An organization develops a code of ethics because a. it is required by law. b. the Chief Executive Officer demands it. : ©. it wishes to reduce ethical conflicts by avoiding ambiguity oF misunderstandings, 4. it wishes to punish those Whose ethical standards are different from its own.40. 41. 42. 43. _ The Professional Environment of Cost Management If an individual faces a conflict between the organization’s stated and practiced values experts recommend that a. _ the individual resign immediately and call the media. b. the individual call the media. ¢. delay action and work with respected leaders in the organization. d. delay action and hope the problem goes away. The elements of an ethical control system include the following EXCEPT areward system for turning in those who violate the ethical code. a statement of the organization’s values and code of ethics. an ongoing internal audit of the ethical contro] system. a statement of the employee's ethical responsibilities. eee Certified Management Accountants are required to adhere to the following ethical standards, EXCEPT a. competence. b. _ ingenuity. c. integrity. d. objectivity. ‘A study of organization that are among the best in the world at performing a particular task a. Business process b. Benchmarking c. Control d, Feedback An activity that consumes resources Or takes time out that does not add value for which customers are willing to pay a, Non-value added activity b. Value-added activity c. Process reengineering d. Total quality management Accounting and other reports that help managers monitor performance and focus on problems and/or opportunities that might otherwise go unnoticed a. Feedback c. Financial accounting, b. Performance report d. Managerial accounting,