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Management Accounting, 7th Edition Solution Manual

Management Accounting, 7th Edition Solution Manual condenses the most important textbook information into clear points.

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    IRM t/a Langfield - Smith, Thorne, Smith, Hilton Management Accounting 7e 1 CHAPTER 1 Management Accounting: Information f or Creating Value a nd Managing Resources ANSWERS TO REVIEW QUESTIONS 1.1 There are many possible answers to the question. Qantas, the national airline of Australia, has faced a number of changes to the business environment over the last 20 years, including deregulation of the domestic aviation industry. This resulted in increased competition as new companies attempted to enter the industry. The most notable of these was two failed attempts by Compass to succeed in the market and gain market share by savagely cutting prices. Its major competitor, Ansett Australia, collapsed in 2001 resulting in Qantas having almost a monopoly for a short period. A powerful UK airline, Virgin, has also entered the market, with a history of taking legal action against market leaders who attempt to intimidate them using predatory pricing. Further, Impulse Airlines, a local airline, started operations, only to be eventually taken over by Qantas. On top of all this, the international terrorism crisis of 11 September 2001 saw a substantial contraction of international air travel for a period of many months, leading to the collapse of several United States airlines many times the size of Qantas. Other changes to the business environment have included unrest and war in the Middle East and speculation in oil , resulting in volatility and serious increases in fuel prices ; bombings in Bali in 2002 ; the outbreak of SARS in 2003 ; natural disasters such as the Asian tsunami ; the heavy subsidisation of competing national carriers , especially by Middle Eastern countries ; the entry of Tiger Airways into Australia ; extra capacity gained by Virgin Blue ; the shifting of significant parts of engineering maintenance operations offshore ; publicity surrounding a series of safety and engineering concerns and an audit by CASA in 2008 finding that maintenance by Qantas was not up to its own standards ; and financial uncertainty arising from the 2008 credit crisis and share market collapse. In more recent times , two different volcanoes have caused the cancellation of flights for several days, and the explosion of an engine in a new range of aircraft, the A380, in November 2010 caused the grounding o f that fleet until January 2011 while the reason was explored and overcome (see ' Real life ' in Chapter 21 , page 955 ).

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    IRM t/a Langfield - Smith, Thorne, Smith, Hilton Management Accounting 7e 2 1.2 The explosion in e - commerce will affect management accounting in significant ways. One effect will be a drastic reduction in paperwork. Millions of transactions between businesses will be conducted electronically with no hard - copy documentation. Along with this method of communicating for business transactions comes the very significant issue of information security. Businesses need to find ways to protect confidential information in their own computers, while at the same time sharing the information necessary to complete transactions. Another effect of e - commerce is the dramatically increased speed with which business transactions can be conducted. In addition to these business - to - business transactional issues, there will be dramatic changes in the way management accounting procedures are carried out, one example being e - budgeting — the enterprise - wide electronic completion of a company ' s budgeting process. 1.3 Management accounting information prepared on a regular basis include s product costs, profitability reports, and also individual resource costs such as materials purchased and used, labour costs and the costs incurred in providing and managing facilities. On an ad hoc basis, management accounting reports may be prepared to estimate future cash flows relating to the impact of purchasing and operating a new piece of equipment and the expected outcome from changing the product mix. 1.4 Management accounting is defined as ' processes and techniques that are focused on the effective and efficient use of organisational resources to support managers in their task of enhancing both customer value and shareholder value ' . Value creation is a central focus for contemporary managers. Customer value refers to the value that a customer places on particular features of a good or service (and which is what leads to them purchase the product). Shareholder value is the value that shareholders, or owners, place on a business — usually expressed in the form of increased profitability, increased share prices or increased dividends. 1.5 The important differences between management accounting and financial accounting are listed below. (a) Management accounting information is provided to managers and employees within the organisation, whereas financial accounting information is provided to interested parties outside the organisation. (b) Management accounting reports are unregulated, whereas financial accounting reports are legally required and must conform to Australian accounting standards and corporations law.

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    IRM t/a Langfield - Smith, Thorne, Smith, Hilton Management Accounting 7e 3 (c) The primary source of data for management accounting information is the organisation ' s basic accounting system, plus data from many other sources. These sources will yield data such as rates of defective products manufactured, physical quantities of material and labour used in production, occupancy rates in hotels and hospitals and average take - off delays in airlines. The primary source of data for financial accounting information is almost exclusively the organisation ' s basic accounting system, which accumulates financial information. (d) Management accounting reports often focus on sub - units within the organisation, such as departments, divisions, geographical regions or product lines. These reports are based on a combination of historical data, estimates and projections of future costs. The data may be subjective and there is a strong emphasis on reporting information that is relevant and timely. Financial accounting reports tend to focus on the enterprise in its entirety. These reports are based almost exclusively on verifiable transaction data. The focus is often on reliability rather than relevance and the reports are not timely. 1.6 The cost accounting system is one part of an organisation ' s overall accounting system, the purpose of which is to estimate the cost of goods and services, as well as the cost of organisational units such as departments. Cost information accumulated by the cost accounting system is used for both management accounting and financial accounting purposes. Management accounting uses include setting prices, controlling operations and making product - related decisions. Financial accounting uses include valuation of inventory and cost of goods sold for the manufacturer ' s balance sheet and income statement respectively. Management accounting is broader than just the preparation and reporting of financial information; it encompasses the processes and techniques that focus on the effective and efficient use of organisational resources to support managers in their tasks of enhancing both customer value and shareholder value. It focuses on preparing information for making decisions about planning, directing and controlling an organisation ' s operations , including analyses of financial and non - financial resources such as performance data, and a range of techniques for managing costs and other organisational resources. 1.7 The ' Real life ' report of changes in the airline industry on page 6 illustrates the increasing competition in the industry and the pressure to reduce fares. This pressure makes the need to have a clear idea of the business ' s costs imperative. The article shows a move from having few airlines servicing a particular route to having several airlines servicing it. When there

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    IRM t/a Langfield - Smith, Thorne, Smith, Hilton Management Accounting 7e 4 were few airlines flying from Sydney to Los Angeles they were able to charge a premium — essentially it was a sellers ' market where the seller could have great influence over the price. With more providers on this route we move toward a buyers ' market where the buyer has great influence over price due to the ability to turn to another airline with a lower fare. The balance between supply and demand has changed on this route. The providers now need to keep a close eye on methods of cost containment, their actual costs and what causes them and how long they can sustain low fares. Without adequate information it is not unusual for a firm to struggle because it charges prices below the product cost. This cannot be sustained for long. The impact of cost cutting exercises needs to be analysed by the management accountant. For example, most costs in an airline do not change with the number of passengers. The cost of the aircraft, the fuel for a flight and the number of staff involved in the flight are static. Once airlines were inclined to provide food for all seats but now a last - minute passenger in business class or first class can be told that refreshments are not guaranteed. You may also have seen a report in 2010 of how much an airline saved by putting one olive fewer in a meal in first class! The management accountant can also help by analysing the likely result if various marketing approaches are adopted. Hence, ways to increase business class sales requires analysis of the cost of providing more business class seats (and fewer econom y seats) and the fare that will provide the required profits. Other changes to remain competitive may include better service in business and first class (for example, flatbeds and complimentary pyjamas) and cost saving in econ omy (for example, not providing a blow - up neck pillow on long haul flights and removing moisturiser from t he toilet bags provided on these flights). We have also seen an introduction of ' premium economy ' , which provides more room than econ omy but less comfortable seats than business class . The economic feasibility of taking that step would have been analysed by management accountants with advice from marketing managers on the likely demand in all classes if it were introduced. 1.8 There are arguments that when a management accountant ' s office is located on the factory floor, they are regarded as ' spies ' who report back to head office. However the counter - argument is that the management accountant needs to be near the action to understand the processes and the data that come from them and to better understand what management accounting information will help the decision makers at all levels.

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    IRM t/a Langfield - Smith, Thorne, Smith, Hilton Management Accounting 7e 5 It used to be the case that management accounting was a function undertaken at head office, often by a generalist accountant rather than a specialist management accountant. With the development of management accounting techniques that better assist decision making, management accountants gradually took their place in decision - making teams. It is possible for management accountants to have a presence on the factory floor and in the corporate offices. Very often each plant will have at least one management accountant. The chief management accountant is then likely to be located in head office where he or she has regular contact with other senior managers and is regularly involved in meetings with these other senior personnel. 1.9 A CFO needs to possess:  leadership skills that can be applied to the accounting/finance function, senior management and the organisation as a whole  managerial skills that support the need to balance responsibilities of stewardship with those of strategy development and implementation, thus requiring the effective and efficient acquirement of and use of resources while safeguarding assets through internal controls and risk management  the ability to build effective, collaborative relationships with internal and external stakeholders  understanding of the organisation and its environment, such as its competitors, markets, technologies and new developments  p rofessional qualities as they pertain to professional accountants, including integrity, objectivity and competence. While the CEO may be the first pilot, the CFO can be an indispensable flight engineer. 1.10 Major p rocesses that management accounting systems use to create value and manage resources include:  product costing systems that estimate the cost of resources consumed in producing goods and services  processes that compile information that is required in planning and control, the preparation of budgets (financial plans) and the monitoring of progress in comparison to planned progress (control)  performance measurement and evaluation processes relating to individuals, discrete parts of the organisation and the organisation as a whole.

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    IRM t/a Langfield - Smith, Thorne, Smith, Hilton Management Accounting 7e 6 1.11 Competitive advantage refers to a unique advantage that one firm has over others. It is unique because it is so difficult to imitate that others do not duplicate it. Porter (see discussion in the chapter) suggests two princip al ways to gain such an advantage: by being a cost leader or by adopting a strategy of product differentiation. Cost leaders focus on cost containment in every way, so that their sales prices can be lower than competitors. Product differentiation can be attained in many ways , for example by creating different features for the product, different appearance, different quality, or a difference in customer service. 1.12 A management accountant might provide the following types of information to assist management in managing resources in the Australian Football League ( AFL ) :  costing of individual functions and competitions  analysis of revenues from various media outlets  activity analysis of interactions with the different member clubs (which could also be costed)  costing of a project designed to enhance and improve the AFL website  costing of the resources consumed in each department  variances of costs and revenues from budget  a breakdown of costs , such as promotion s of AusKick, community clubs and AFL membership  forecast costs for strategies including recruitment, overtime and outsourcing  analysis of member needs, inquiries and complaints  number of complaints  number of new members  member retention rate  member satisfaction with service  membership profitability analysis  a cost benefit analysis of proposed new products.

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    IRM t/a Langfield - Smith, Thorne, Smith, Hilton Management Accounting 7e 7 1.13 In a business that considers cost leadership to be of key strategic importance, a management accountant could provide information to management that helps managers to measure and manage their costs more efficiently and effectively. This could include information about:  costs of products, processes, activities, and departments  costs of materials and other key inputs  costs of supporting individual customers and customer groups  the root causes (cost drivers) of the major costs incurred by the business  performance reports focusing on the control of costs and also of key cost drivers  the prices of the products sold  comparison of the probable total sales revenue for various prices (allowing for reduced sales numbers for higher sales price and vice versa)  competitors , including the prices of competing products and the cost structures of their businesses. 1.14 A management accountant might provide the following types of information to assist management in a business that considered product quality to be of key strategic importance:  number of defects  quality costs (i.e. the costs incurred in training, maintaining and improving equipment, scrapping or correcting defective work)  warranty costs  returns  analysis of customer needs, inquiries and complaints  number of new customers  customer retention rate  customer satisfaction with product s  customer profitability analysis  market share.

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    IRM t/a Langfield - Smith, Thorne, Smith, Hilton Management Accounting 7e 8 1.15 Budgets are not control systems; they are a component part of planning and control systems. In the context of an organisation’s vision and purpose (mission), organisational objectives are developed and strategies are formulated to attain those objectives. While the strategies define the long - term plans of the organisation, plans are laid down for shorter time periods such that they lead toward the achievement of the corporate strategic objectives. The financial representation of these short - term plans is called the budget. It records and reports the spending and revenues that are expected if the plans are implemented as intended. Because they itemise the usage of resources in the achievement of set objectives, budgets can be called resource usage plans for the operating period, which is normally twelve months. For control purposes it is necessary to keep monitoring whether plans are being followed and whether the results are as expected. This is achieved by measuring any variances between the planned financial outcomes set out in the budget and the actual outcomes achieved. When there is deviation, called a budget variance, managers must decide whether it is necessa ry to take steps to achieve the plan or whether circumstances have changed such that replanning is necessary. 1.16 Planning and control systems are the part of the management accounting system that provide a framework for effective resource management to generate customer and shareholder value. Those two systems are interdependent of each other as, in order for successful strategies to be implemented, organisations need to formulate plans to set the direction for future operations of the organisation, and have control systems to ensure that those operations are proceeding according to plan and that the objectives of the organisation are achieved. 1.17 The costs included in inventory are called inventoriable costs. They have been defined for the purpose of external reporting in a financial accounting context to include only manufacturing costs or the cost of product bought for retail. However, estimates of the inventoriable costs of products are not sufficient for many product - related decisions. For example, in assessing the profitability of a product over the longer term it is necessary to consider design and development costs and the costs of customer support in addition to the cost of manufacture. Decisions about whether to accept contract bids will require inclusion of all relevant costs whether inventoriable or not. (Products include goods and services and one can see that classification of inventoriable costs relates only to goods, as services cannot normally be stored in inventory. However, comprehensive information about service costs may also be useful to managers.)

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    IRM t/a Langfield - Smith, Thorne, Smith, Hilton Management Accounting 7e 9 1.18 Specific aspects of management accounting systems that may be used to motivate employees and managers include performance measurement systems, which form part of the control process. Employees can be held responsible for various financial and non - financial performance targets and may be rewarded, for example with bonuses, if those targets are achieved. Employees may be motivated to achieve those targets when they participate in setting them, when they regard those targets as fair and achievable and when they value the rewards that they earn for achieving targets. 1.19 The implications of contingency theory for management accounting system design are that the design may be influenced by (that is, be contingent upon) a range of factors that reflect the context within which the organisation operates, including the external environment ; technology ; organisational structure ; organisation size ; strategy ; and organisational and national culture (Chenhall, 2003). This means that in designing the system, the management accountant will need to take account of the size and complexity of the organisation, the types of markets the organisation operates in, the existing management style within the organisation and so on. 1.20 During the 1980s and 1990s, management accounting started to shift towards the broader techniques of resource management and focused on the creation of customer value and shareholder wealth. Management accountants became more valuable in the formation and evaluation of strategies. Accordingly, by the early 2000s, management accountants were seen as part of the management team, with a clear view of the ' big picture ' , a full understanding of the business as a whole and as providers of information to managers that could help them to maintain a competitive advantage in order to achieve corporate objectives. The focus of management accounting in the first decade s of the 21st century has broadened from the drivers of customer value, shareholder value and organisational innovation to include the drivers of stakeholder value, risk management and sustainability reporting. Students will find that the broader focus on all stakeholders (not just customers and shareholders) is explored in more detail in Chapter 17.

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    IRM t/a Langfield - Smith, Thorne, Smith, Hilton Management Accounting 7e 10 1.21 To become a full member of CPA Australia or the ICAA it is nec essary to obtain a degree that is accredited by that professional accounting body for the purpose (certifying that that degree, with specified content, satisfies the educational entry requirements of that professional body) , and then complete that professional body ' s own postgraduate program of study. Both of these organisations also require the completion of three years of mentored work experience. Continuing membership then requires the completion of a minimum of 120 hours of continuing professional development (CPD) in each three year period. Entry to the IPA is possible with an accredited advanced diploma or university degree and some mentored experience.

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    IRM t/a Langfield - Smith, Thorne, Smith, Hilton Management Accounting 7e 11 SOLUTIONS TO EXERCISES EXERCISE 1.22 (10 minutes) The nature of management accounting 1 (a) The primary role of management accounting is to assist managers in decision making. Decisions are about the future so management accountants are required to predict future outcomes. Unlike financial accounting, it is not confined by a need to provide objective, verifiable information that emphasises accuracy, and does not restrict itself to financial information. Rather, it is often based on estimation, probabilities and expectation. To provide information that is relevant to managers ' decisions, management accounting goes beyond financial information to include both quantitative and qualitative non - financial information. 2 (b) Other than providing data for the use of financial accountants in preparing financial reports (that is, the cost of goods sold and inventory) and reporting the outcome of past decisions for performance evaluation and feedback on predictive processes, management accounting is intended to assist managers in decision making. To do this it:  regularly changes to meet the current changing demands of managers, responding to changes in the business environment  often provides a detailed analysis of information  involves far more than cost accounting  does not over - aggregate information since the detail is usually important to the users. 3 (d) What is measured and the way it is measured, analysed and reported can have an impact on employee behaviour. A significant role of management accounting is to influence the decisions of managers and influence the behaviour of employees, both in what they decide to do and how they carry out their decisions. To help managers in decision making management accounting must:  be relevant to strategy decisions and consistent with attempts at implementing strategy  provide information that is relevant to the decision being made without extraneous information that could confuse the manager  be future focused even though this represents expectations rather than precise measures.

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    IRM t/a Langfield - Smith, Thorne, Smith, Hilton Management Accounting 7e 12 EXERCISE 1.23 (15 minutes) The nature of management accounting systems 1 False. The management accounting system may not be able to provide all of the information managers need to make decisions. Although management accounting systems are increasingly providing physical information (such as reject rates and material usage) as well as financial information some management decisions require information from other sources. Examples of such information include competitors ' prices, market research information, forecasts, environmental impacts, technological possibilities and so on. 2 True. There is some overlap between management accounting systems and the information required to produce financial statements, as both draw on the transaction - based accounting system. In particular the costing system informs the management accounting reports and provides estimates of product costs for inclusion in the balance sheet and income statement. However, management accounting systems are not subject to external regulations and draw data from wider sources, consider the present and the future, and emphasise relevance to managers. Management accounting systems also need to be flexible enough to produce information required by managers for routine decisions and also some of the information needed for decisions that occur infrequently. 3 True. Management accounting systems do draw on data from a variety of internal and external sources, unlike financial accounting systems, which rely primarily on internal information from the transaction - based accounting system. 4 False. Management accounting is not directly concerned with product quality, however, management accountants may prepare data to help managers assess whether or not the business is meeting quality expectations and requirements. 5 False. While management accountants should supply information that is relevant and timely, it may not be ' objective ' and ' verifiable ' in the financial accounting sense. There is likely to be a trade - off between accuracy and timeliness and the management accountant may well accept estimates rather than verifiable measures to ensure that information is available to support managers ' decisions on a timely basis.

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    IRM t/a Langfield - Smith, Thorne, Smith, Hilton Management Accounting 7e 13 EXERCISE 1.24 (15 minutes) Differences between management accounting and financial accounting 1 (b) Preparing a balance sheet Financial accountant 2 (a) Preparing a profit forecast by product line Management accountant 3 (a)or(b) Estimating the depreciation expense for a factory's equipment MA or FA 4 (a) Monitoring the effects of a quality improvement program Management accountant 5 (c) Estimating the cost of goods produced Cost accountant 6 (a) Estimating the cost of a prototype for a new product being developed Management accountant 7 (a) Preparing a sales forecast Management accountant 8 (a) Monitoring the effects of a waste reduction program Management accountant 9 (a) Preparing a report on customer satisfaction. Management accountant 10 (b) Preparing an income statement. Financial accountant

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    IRM t/a Langfield - Smith, Thorne, Smith, Hilton Management Accounting 7e 14 EXERCISE 1.25 (15 minutes) The role of the management accountant Many answers are possible. An example follows. Management Accountant — Circa $80,000 package Melbourne | Permanent Published 01/12/2008  Car space provided  Ideally looking for someone who can start immediately!! About Our Client Our client is recognised globally as a market leader with a reputation for quality and innovation. They are a driven multinational organisation that is currently experiencing a period of growth and development. Job Description Reporting to the Divisional General Manager, you will play a pivotal role in ensuring that the company continues to meet its growth targets as well as managing the financial aspects of this key business division. Specifically, you will help drive profit growth through management reporting and analysis, coordinate the preparation of budgets and forecasts and ensure project cost reviews are conducted. You will supervise an Accounts Receivable person and play a lead role in continuously improving systems and processes. The Successful Applicant You will be degree qualified and studying towards / or completed your CA/CPA studies. You will possess a proven track record in accounting and have a hand on proactive approach. You will have the ability to drive outcomes and liaise with key stakeholders in the business. Excellent interpersonal and communication skills are essential for this role and exposure to a large ERP system (ideally SAP) will be highly favourable. What ' s On Offer  Attractive Salary  Company Benefits  City Fringe Location  Liaising with key stakeholders within the business Source: Michael Page International Available at http://www.michaelpage.com.au/job - detail/title/Management - Accountant/ref/A1263980.html . Accessed 8 December 2008 .

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    IRM t/a Langfield - Smith, Thorne, Smith, Hilton Management Accounting 7e 15 The key roles for this position are to:  ensure that the company continues to meet its growth targets  manage the financial aspects of business division  conduct management reporting and analysis  coordinate the preparation of budgets and forecasts  ensure project cost reviews are conducted  supervise an Accounts Receivable person  play a lead role in continuously improving systems and processes. The required qualifications are:  degree qualified and studying towards/or completed CA/CPA studies. The required attributes are:  a proven track record in accounting  proactive approach  ability to drive outcomes and liaise with key stakeholders in the business  excellent interpersonal and communication skills. The desired attributes are:  exposure to a large ERP system (ideally SAP).

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