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Solutions Manual, Chapter 1 1

Chapter 1
Managerial Accounting and the Business
Environment
Solutions to Questions
1-1 Managerial accounting is concerned with
providing information to managers for their use
internally in the organization. Financial accounting
is concerned with providing information to
stockholders, creditors, and others outside of the
organization.
1-2 Essentially, the manager carries out three
major activities in an organization: planning,
directing and motivating, and controlling. All three
activities involve decision making.
1-3 The Planning and Control Cycle involves
the following steps: formulating plans,
implementing plans, measuring performance, and
evaluating differences between planned and actual
performance.
1-4 The manager relies on feedback to assure
that activities are under control; that is, to assure
that things are going according to plan.
1-5 A line position is directly related to the
achievement of the basic objectives of the
organization. A staff position is not directly related
to the achievement of those objectives; rather, it
is supportive, providing services and assistance to
other parts of the organization.
1-6 In contrast to financial accounting,
managerial accounting: (1) focuses on the needs
of the manager; (2) places more emphasis on the
future; (3) emphasizes relevance and flexibility,
rather than precision; (4) emphasizes the
segments of an organization; (5) is not governed
by GAAP; and (6) is not mandatory.
1-7 At the final assembly stage in a JIT
system, a signal is sent to the preceding
workstation as to the exact parts and materials
that will be needed over the next few hours for
the final assembly of products. Only those parts
and materials are provided. The same signal is
sent back through each preceding workstation so
that a smooth flow of parts and materials is
maintained with no buildup of inventories at any
point. Thus, all workstations respond to the pull
exerted by the final assembly stage.
The pull approach just described can be
contrasted to the push approach used in
conventional systems. In a conventional system,
inventories of parts and materials are built up
often simply to keep everyone busy. These semi-
completed parts and materials are pushed
forward to the next workstation whether or not
there is actually any customer demand for the
products they will become part of. The result is
large stockpiles of work in process inventories.
1-8 A number of benefits accrue from reduced
setup time. First, reduced setup time allows a
company to produce in smaller batches, which in
turn reduces the level of inventories. Second,
reduced setup time allows a company to spend
more time producing goods and less time getting
ready to produce. Third, the ability to rapidly
change from making one product to making
another allows the company to respond more
quickly to customers. Finally, smaller batches
make it easier to spot manufacturing problems
before they result in a large number of defective
units.
1-9 The main benefits of a successful JIT
system are reductions in: (1) funds tied up in
inventories; (2) space requirements; (3)
throughput time; and (4) defects.
1-10 In the Plan phase, data are analyzed to
identify a possible cause for a problem and a

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2 Managerial Accounting, 10th Edition
solution is proposed. In the Do phase, an
experiment is conducted. In the Check phase,
data from the experiment are analyzed. In the Act
phase, the solution is implemented if the
experiment was successful. If the experiment was
not successful, the Plan phase is restarted. This
cycle closely parallels the scientific method.
1-11 TQM generally approaches improvement
in a series of small steps that are planned and
implemented by teams of front-line workers.
Process Reengineering involves completely
redesigning business processes from the ground
upoften with the use of outside consultants.
1-12 If Process Reengineering is successful,
fewer workers are needed. If management
responds by reducing the payroll, morale will
almost certain suffer. In addition, if change is
imposed from above by outsiders, it is likely to be
resisted and resented.
1-13 Some benefits from improvement efforts
come from cost reductions, but the primary
benefit is often an increase in capacity with no
increase in required resources. Increases in
capacity are beneficial only at the constraint. At
other areas, increases in capacity just add to the
already-existing excess capacity. Therefore,
improvement efforts should often focus on the
constraint.
1-14 If people generally did not act ethically in
business, no one would trust anyone else and
people would be reluctant to enter into business
transactions. The result would be less funds raised
in capital markets, fewer goods and services
available for sale, lower quality, and higher prices.


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Solutions Manual, Chapter 1 3
Exercise 1-1 (10 minutes)
1. Managerial accounting, Financial accounting
2. Planning
3. Directing and motivating
4. Feedback
5. Decentralization
6. Line
7. Staff
8. Controller
9. Budgets
10. Performance report
11. Chief Financial Officer
12. Precision; Nonmonetary data

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4 Managerial Accounting, 10th Edition
Exercise 1-2 (10 minutes)
1. Just-In-Time
2. Benchmarking
3. Pull
4. Setup
5. Total Quality Management; Process Reengineering
6. Plan-Do-Check-Act cycle
7. Business process
8. Non-value-added activities
9. Constraint
10. Nonconstraint

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Solutions Manual, Chapter 1 5
Exercise 1-3 (15 minutes)
If cashiers routinely short-changed customers whenever the opportunity
presented itself, most of us would be careful to count our change before
leaving the counter. Imagine what effect this would have on the line at
your favorite fast-food restaurant. How would you like to wait in line while
each and every customer laboriously counts out his or her change?
Additionally, if you cant trust the cashiers to give honest change, can you
trust the cooks to take the time to follow health precautions such as
washing their hands? If you cant trust anyone at the restaurant would you
even want to eat out?

Generally, when we buy goods and services in the free market, we assume
we are buying from people who have a certain level of ethical standards. If
we could not trust people to maintain those standards, we would be
reluctant to buy. The net result of widespread dishonesty would be a
shrunken economy with a lower growth rate and fewer goods and services
for sale at a lower overall level of quality.

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6 Managerial Accounting, 10th Edition
Problem 1-4 (30 minutes)
1. See the organization chart on the following page.

2. Line positions would include the university president, academic vice-
president, the deans of the four colleges, and the dean of the law
school. In addition, the department heads (as well as the faculty) would
be in line positions. The reason is that their positions are directly related
to the basic purpose of the university, which is education. (Line
positions are shaded on the organization chart.)
All other positions on the organization chart are staff positions. The
reason is that these positions are indirectly related to the educational
process, and exist only to provide service or support to the line
positions.

3. All positions would have need for accounting information of some type.
For example, the manager of central purchasing would need to know
the level of current inventories and budgeted allowances in various
areas before doing any purchasing; the vice president for admissions
and records would need to know the status of scholarship funds as
students are admitted to the university; the dean of the business college
would need to know his/her budget allowances in various areas, as well
as information on cost per student credit hour; and so forth.


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Solutions Manual, Chapter 1 7
Problem 1-4 (continued)
1. Organization chart:














President
Academic
Vice
President
Vice
President,
Auxiliary
Services
Vice
President,
Admissions &
Records
Vice
President,
Financial
Services
(Controller)
Vice
President,
Physical
Plant
Dean,
Business
Dean,
Humanities
Dean,
Fine Arts
Dean,
Engineering &
Quantitative
Dean,
Law School
Manager,
Central
Purchasing
Manager,
University
Press
Manager,
University
Bookstore
Manager,
Computer
Services
Manager,
Accounting
& Finance
Manager,
Grounds &
Custodial
Services
Manager,
Plant &
Maintenance
(Departments) (Departments) (Departments) (Departments)

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8 Managerial Accounting, 10th Edition
Problem 1-5 (20 minutes)
1. No, Sarver did not act in an ethical manner. In complying with the
presidents instructions to omit liabilities from the companys financial
statements he was in direct violation of the IMAs Standards of Ethical
Conduct for Management Accountants. He violated both the Integrity
and Objectivity guidelines on this code of ethical conduct. The fact
that the president ordered the omission of the liabilities is immaterial.
2. No, Sarvers actions cant be justified. In dealing with similar situations,
the Securities and Exchange Commission (SEC) has consistently ruled
that corporate officerscannot escape culpability by asserting that
they acted as good soldiers and cannot rely upon the fact that the
violative conduct may have been condoned or ordered by their
corporate superiors. (Quoted from: Gerald H. Lander, Michael T.
Cronin, and Alan Reinstein, In Defense of the Management
Accountant, Management Accounting, May, 1990, p. 55) Thus, Sarver
not only acted unethically, but he could be held legally liable if
insolvency occurs and litigation is brought against the company by
creditors or others. It is important that students understand this point
early in the course, since it is widely assumed that good soldiers are
justified by the fact that they are just following orders. In the case at
hand, Sarver should have resigned rather than become a party to the
fraudulent misrepresentation of the companys financial statements.

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Solutions Manual, Chapter 01 9
Problem 1-6 (30 minutes)
1. Line positions are in the direct chain of command and are directly
responsible for the achievement of the basic objectives of an
organization. These positions involve a direct relationship to the
organizations product or service.
Staff positions are intended to provide expertise, advice, and support for
line positions, being only indirectly related to the achievement of the
basic objectives of the organization.

2. Reasons for conflict between line and staff positions include the
following.
Line managers perceive staff managers as threats to their authority,
especially when staff persons have functional authority.
Line managers may become uncomfortable when they grow
dependent on staff expertise and knowledge.
Line managers may perceive staff managers as overstepping their
authority, having a narrow perspective, or stealing credit. Staff
managers, on the other hand, may perceive line managers as not
utilizing their expertise, not giving staff enough authority, or resisting
staffs ideas.

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10 Managerial Accounting, 10th Edition
Problem 1-6 (continued)
3. a. and b. Listed below are the identification, explanation, and potential
problems that could arise for each position described in the text.
Jere FeldonStaff Liaison to the Chairperson. Feldon has a staff
position as he is not in the direct line of activities. Feldon has a potential
conflict between his two superiors because he reports directly to the
chairperson yet he also works for the president.
Lana DicksonDirector of Self-Study Programs. Dicksons position
is a line position as her job provides educational opportunities to
members. Her potential problems include the marketing of the courses
and acquisition of outside or accounting services because she needs to
rely on the services of individuals from different departments where she
has no line authority.
Jess PaigeEditor of Special Publications. This is a line function
because the publication of educational materials and the sale of
monographs are part of the organizations objectives. Paiges potential
problems include difficulties he may experience in working with the
Research Department as he has no authority over this department but is
dependent on its work.
George AckersManager of Personnel. Ackers has a staff position
that provides services across the entire organization. Ackers potential
problems include being ignored due to his position being lower than the
vice-president level in the organization, and attempting to take more
authority than he is entitled.
(CMA Unofficial Solution, adapted)

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Solutions Manual, Chapter 01 11
Problem 1-7 (20 minutes)
1. If all automotive service shops routinely tried to sell parts and services
to customers that they didnt really need, most customers would
eventually figure this out. They would then be reluctant to accept the
word of the service representative that a particular problem needs to be
correctedeven when there is a legitimate problem. Either the work
would not be done, or customers would learn to diagnose and repair
problems themselves, or customers would hire an independent expert to
verify that the work is really needed. All three of these alternatives
impose costs and hassles on customers.

2. As argued above, if customers could not trust their service
representatives, they would be reluctant to follow the service
representatives advice. They would be inclined not to order the work
done even when it is really necessary. And, more customers would learn
to do automotive repairs and maintenance themselves. Moreover,
customers would be unwilling to pay as much for work that is done
since customers would have reason to believe that the work may be
unnecessary. These two effects would reduce demand for automotive
repair services. The reduced demand would reduce employment in the
industry and would lead to lower overall profits.

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12 Managerial Accounting, 10th Edition
Problem 1-8 (30 minutes)
1. Adam Williams has an ethical responsibility to take some action in the
matter of GroChem Inc. and the dumping of toxic wastes. The
Standards of Ethical Conduct for Management Accountants specifies that
management accountants should not condone the commission of acts
by their organization that violate the standards of ethical conduct. The
specific standards that apply are as follows.
Competence. Management accountants have a responsibility to
perform their professional duties in accordance with relevant laws
and regulations.
Confidentiality. Management accountants must refrain from
disclosing confidential information unless legally obligated to
do so. However, Adam Williams may have a legal responsibility to
take some action.
Integrity. Management accountants have a responsibility to:
- refrain from either actively or passively subverting the attainment
of the organizations legitimate and ethical objectives.
- communicate favorable as well as unfavorable information and
professional judgments or opinions.
Objectivity. Management accounts must fully disclose all relevant
information that could reasonably be expected to influence an
intended users understanding of the reports, comments, and
recommendations.

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Solutions Manual, Chapter 01 13
Problem 1-8 (continued)
2. The Standards of Ethical Conduct for Management Accountants indicates
that the first alternative being considered by Adam Williams, seeking the
advice of his boss, is appropriate. To resolve an ethical conflict, the first
step is to discuss the problem with the immediate superior, unless it
appears that this individual is involved in the conflict. In this case, it
does not appear that Williams boss is involved.
Communication of confidential information to anyone outside the
company is inappropriate unless there is a legal obligation to do so, in
which case Williams should contact the proper authorities.
Contacting a member of the Board of Directors would be an
inappropriate action at this time. Williams should report the conflict to
successively higher levels within the organization and turn only to the
Board of Directors if the problem is not resolved at lower levels.
3. Adam Williams should follow the established policies of the organization
bearing on the resolution of such conflict. If these policies do not
resolve the ethical conflict, Williams should report the problem to
successively higher levels of management up to the Board of Directors
until it is satisfactorily resolved. There is no requirement for Williams to
inform his immediate superior of this action because the superior is
involved in the conflict. If the conflict is not resolved after exhausting all
courses of internal review, Williams may have no other recourse than to
resign from the organization and submit an informative memorandum to
an appropriate member of the organization.
(CMA Unofficial Solution, adapted)

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14 Managerial Accounting, 10th Edition
Group Exercise 1-9
Students answers will depend on the specific experiences they had while
working.