Managerial Accounting, Third Canadian Edition Solution Manual

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Chapter 1Introduction to Managerial AccountingQuick CheckAnswers:1. b3. d5. c7. c9. b2. b4. d6. c8. a

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Short Exercises(5–10 min.)S1-1The four primaryresponsibilitiesof managers include planning,directing, controlling, and decision making. Managers plan bysettinggoalsandobjectivesforthecompanyanddevisingstrategies for achieving those goals. Then they direct the day-to-dayoperationsofthecompanyinlightofthegoalsandobjectives.Theycontrolthecompanybycomparingactualresults to plans and then use that feedback to adjust plans andoperations. Throughout all aspects of these duties, managementis making critical business decisions.Student responses may vary.

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(5–10 min.)S1-2a.Managerial accountingb.Managerial accountingc.Financial accountingd.Financial accountinge.Managerial accountingf.Managerial accountingg.Financial accountingh.Managerial accountingi.Financial accountingj.Financial accountingk.Financial accountingl.Financial accountingm.Managerial accounting

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(5–10 min.)S1-3a.Internal auditing departmentb.Controllerc.Treasurerd.Internal auditing departmente.Controllerf.Controllerg.Treasurerh.Internal auditing departmenti.Controllerj.Controllerk.Treasurerl.Internal auditing departmentm.Controller

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(5–10 min.)S1-4CharacteristicCheck () ifrelated to internalauditinga.Helps to ensure that company’sinternal controls are functioningproperlyb.Reports to treasurer or controllerc.Required by theTorontoStockExchange if company stock ispublicly traded on theTSXd.Reports directly to the auditcommitteee.Ensures that the company achievesits profit goalsf.Is part of the accounting departmentg.Usually reports to a senior executive(CFO or CEO) for administrativemattersh.Performs the same function asindependent certified publicaccountantsi.External audits can be performed bythe internal auditing department

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(10 min.)S1-5Each of the five ethical standards contributes to maintainingtheCPA Canada’sexpectation that management accountantswill uphold the highest standards of ethical behaviour.Without the necessary competence, management accountantswill be unable to perform their responsibilities. Even if they dorecognize an ethical dilemma, they could lack the competencerequired to determine all the alternative courses of action andthe implications of each alternative.Having independence isimportant for minimizing or eliminating the impact of others’influences. Management accountants need to provide opinionsbasedontheirowninterpretationofdataratherthantheinterpretations of other stakeholders.Managementaccountantshaveaccesstoconfidentialinformation. If they do not maintain that confidentiality, theircompanies could suffer. Their companies would be reluctanttoprovideaccesstoinformation,whichwouldpreventmanagement accountants from performing their responsibilities.Additionally,Employers must have confidence that managementaccountants have the integrity to apply their skills appropriatelyand avoid being prejudiced by any conflicts of interest.Management Accountants should have the ability as well, toeffectively analyze situations so that they might communicatethem faithfully to employers, regulators or clients to ensureproper action is taken.

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(continued)S1-5Finally,Animportantpartofmanagementaccountants’responsibilities is communicating information and providingreports to senior management. To be able to rely on thesereports,managementmusthaveconfidencethatthemanagement accountant is not hiding inconvenient facts orpresenting a biased view.Student responses may vary.

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(5 min.)S1-6a.Providing earnings information to your brother before it ispubliclyannouncedviolatestheconceptofclientconfidentiality, and fails to uphold trust.b.Stealing from your employer is a violation of theconcept ofintegrity, and is illegalc.Skipping continuing education sessions could violate therequirementtomaintainprofessionalcompetenceinenabling competencies. If your company paid for you toattend the conference, skipping the sessions also violatesthenotion ofintegrityd.Failing to read the specifications of the software packagebefore purchasing it violatesprofessional competence inenabling competenciese.Failingtoprovidejobdescriptioninformationtomanagement because you fear it may be used to cut aposition in your department violates thenotion ofintegrityand the required skills of a competent accountant

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(5 min.)S1-7a.ISO 9001:2008b.Enterprise resource planning (ERP) systemc.The Sarbanes-Oxley Act (SOX)d.XBRLe.Ecommerce(5 min.)S1-8a.Prevention costsb.Lean productionc.Appraisal costsd.Internal failure costse.External failure costs

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(5–10 min.)S1-9a.Leanb.Traditionalc.Traditionald.Leane.Traditionalf.Leang.Leanh.Traditionali.Leanj.Leank.Leanl.Leanm.Traditional

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(5 min.)S1-101.Reworking defective units—internal failure2.Litigationcostsfromproductliabilityclaims—externalfailure3.Inspecting incoming raw materials—appraisal4.Training employees—prevention5.Warranty repairs—external failure6.Redesigning the production process—prevention7.Lostproductivityduetomachinebreakdown—internalfailure8.Inspectingproductsthatarehalfwaythroughtheproduction process—appraisal9.Incremental cost of using a higher grade raw material—prevention10.Cost incurred producing and disposing of defective units—internal failure

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(10–15 min.)S1-11Req. 1Prevention costs:Negotiatingwithandtrainingsupplierstoobtainhigherquality materials and on-time deliveryRedesigningthespeakerstomakethemeasiertomanufactureAppraisal costs:Additional 20 minutes of testing for each speakerAvoid inspection of raw materials.Internal failure costs:Rework avoided because of fewer defective unitsAvoid lost profits from lost production time due to rework.External failure costs:Reduced warranty repair costsAvoidlostprofitsfromlostsalesduetodisappointedcustomers.

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(continued)S1-11Req. 2Cost /<Benefit> AnalysisCosts<Savings>Prevention costs:Negotiating with and training suppliers to obtainhigher quality materials and on-time delivery………….$ 300,000Redesigning the speakers to make themeasier to manufacture………………………………………1,400,000Appraisal costs:Additional 20 minutes of testing for each speaker……….500,000Savings on Inspection of raw materials……………………….$<400,000>Internal failure costs:Savings on Rework………………………………………………...<650,000>Savings on Lost profits from lost production time due torework…………………………………………………………….<300,000>External failure costs:Savings on Warranty repair costs………………………………<200,000>Savings on Lost profits from lost sales due todisappointed customers…………………………………........<850,000>Net <Benefit> from implementing quality program………….$0Wharfedale should implement the new quality program. Thecompanywould save$0by implementing the new programbutthe change would likelyimprove longer termrelations withcurrentas well aspotential new customers.

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(5–10 min.)S1-121.External failure cost2.External failure cost3.External failure cost4.Appraisal cost5.Prevention cost6.Internal failure cost

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Exercises (Group A)(5–10 min.)E1-13Aa.Controllingb.Decision making (also directing)c.Planning(also decision making)d.Decision making (also directing)e.Decision making (also controlling)Student responses may vary since several of management’sresponsibilities overlap when performing these activities.

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(5 min.)E1-14Aa.Companies must follow IFRS or ASPE in theirfinancialaccountingsystems.b.Financial accounting develops reports for external partiessuch ascreditorsandshareholders.c.Whenmanagersevaluatethecompany’sperformancecompared to the plan, they are performing thecontrollingresponsibilityof management.d.Managersare decision makers inside a company.e.Financial accountingprovides information on a company’spast performance to external parties.f.Managerial accountingsystems are not restricted by IFRSor ASPE but are chosen by comparing the costs versus thebenefits of the system.g.Choosinggoalsandthe meanstoachievethemistheplanningfunction of management.h.Managerialaccountingsystemsreportonvarioussegments or business units of the company.i.Financial accountingstatements of public companies areaudited annually by public accountants.

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(5–10 min.)E1-15A1.Financial accounting information2.Financial accounting information3.Managerial accounting information4.Financial accounting information5.Managerial accounting information6.Financial accounting information7.Financial accounting information8.Financial accounting information9.Financial accounting information10.Both11.Both12.Financial accounting information13.Financial accounting information14.Both

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(5–10 min.)E1-16Aa.TheCFOand theCOOreport to the CEO.b.The internal audit function reports to theCFOorCEOandtheaudit committee.c.Thecontrollerisdirectlyresponsibleforfinancialaccounting, managerial accounting, and tax reporting.d.The CEO is hired by theboard of directors.e.Thetreasureris directly responsible for raising capital andinvesting funds.f.TheCOOisdirectlyresponsibleforthecompany’soperations.g.Management accountants often work withcross-functionalteams.h.A subcommittee of the board of directors is called theauditcommittee.

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(5 min.)E1-17AMajor issues in management accounting include:1.The role played in providing information;2.The behavioural implications of managerial accountinginformation (e.g., how does this impact performance rewardsystems in organizations?);3.The management of organizational capacity;4.The development, deployment and use of accounting andmanagement information systems.5.The stewardship of sustainable activities in theorganization(Student answers may vary.)

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(15 min.)E1-18AReq. 1While the amount is not large now, the repeated nature of thethefts means that they add up over time. Also, the repeatednature of the thefts increases the severity of Anik Cousineau’sunethicalbehaviour.Anewemployeewhohasengaged inrepeated thefts is unlikely to become a valued and trustedemployee.Ascontroller,MaryGonzaleshiredAnik,andsheisalsoresponsibleforthelackofcontrolsthatpermittedanewemployee to commit this theft. However, this is no excuse forAnik’sunethicalbehaviour.Thecontrollershouldthinkcarefully whether it is in the company’s interest to keep Anik orfireherimmediately.ThisincidentalsoreflectspoorlyonMary’s competence. She needs to learn from the experienceand supervise the next bookkeeper more carefully.Req. 2The new information makes Mary’s decision more complex.Being new, she may want to discuss the situation with thecompany president. Even if the bookkeeper believed she wasjust “borrowing” the money, her behaviour is still unethical. Itwill probably be difficult to confirm whether Anik did in factrepay money she had taken in the past. Unless Mary can obtainadditional clarifying information, one alternative to firing herwould be to indicate to Anik that this behaviour will not betolerated in the future and to establish better controls andcloser supervision.Student responses may vary.

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(10 min.)E1-19A1.Maintainsa client’s confidentiality2.Demonstratescompetence3.Demonstratescredible skillsandreasonableindependence4.Demonstratescompetence5.Maintainsprofessional and personal integrity6.Demonstratescompetence and credible skills7.Maintainsprofessional and personal integrity8.Demonstratescredible skills9.Maintainsa client’s confidentiality10.Demonstratescompetence and credible skills11.Maintainsprofessional and personal integrity12.Maintainsa client’s confidentiality13.Demonstratescredible skills

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(10 min.)E1-20Aa.XBRLb.Supply-chain managementc.Sarbanes-Oxley Act of 2002d.Lean productione.Present, futuref.ERPg.Ecommerceh.ISO 9001:2008i.Lean productionj.XBRLk.IFRSl.just in timem.Total quality management

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(10–15 min.)E1-21AMEMODATE:CurrentTO:Accounting ColleaguesFROM:Your NameRE:SOX______________________________________________________The Sarbanes-Oxley Act of 2002, better known as SOX, was thedirect result of corporate accounting scandals such as those atEnron and WorldCom. The goal of SOX is to restore publicconfidence in publicly traded companies in the United States,theirmanagement,theirfinancialstatements,andtheirauditors. Some of the major provisions of SOX include:The CEO and CFO assume responsibility for the financialstatements and must certify that the financial statementsfairly present the operations and financial condition of thecompany.The CEO and CFO assume responsibility for establishing andmaintaininganadequateinternalcontrolstructureandprocedures for financial reporting.Theeffectivenessoftheinternalcontrolsandfinancialreporting procedures must be assessed annually.The audit committee members must be independent of thecompany, which means they cannot receive consulting oradvisory fees. At least one member should be a financialexpert.

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(continued)E1-21AThepenaltiesforcorporatefraudandotherwhite-collarcrimesaremoreseverethanbefore,oftenincludingsubstantial monetary fines and imprisonment.CPA firms are no longer allowed to provide certain non-auditservices(suchasbookkeeping,consulting,andsystemsdesign) to clients at the same time they are providing theaudit.CPA firms must undergo periodic quality reviews (every oneto three years).Audit partners must rotate off the audit engagement everyfive years.Even though these are rules in the United States, they areimportant for the Canadian company because the company isaninternationalfirmalsotradedontheAmericanstockexchanges. Therefore, the Canadian company would be subjectto the same rules and regulations as the American companies.Student responses may vary.

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(10 min.)E1-22AReq. 1Total costs of adopting lean production model:Employee training.........................................$15,000Streamline plant’s production process......37,000Supplier identification..................................8,000Total costs.....................................................$60,000Req. 2Benefits of adopting lean production:Savings in warehouse expenses............….$ 97,000Lower spoilage costs.............................…...46,000Total benefits....................................………..$143,000Req. 3Expected total benefits.........................……$143,000Expected total costs..............................……(60,000)Excess of benefits over costs.....................$ 83,000Wild Rides should adopt the lean production model becausethe expected benefits exceed the costs.

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(15–20 min)E1-23ATraditionalandleansystemsvarygreatlyalongseveraldimensionsofproduction.Someofthedifferencesareasfollows:1.Inventorylevels—Leanproductionsystemsstrivetomaintainlowinventorylevels.Leanproducerstrytopurchaserawmaterials“justintime”tomeettheproduction schedule and have the finished inventory ready“justintime”tomeetcustomerdemand.Traditionalproductionsystemsmaintaingreaterquantitiesofrawmaterials, work in process, and finished goods inventory.2.Batch sizes—Lean production systems produce units inmuch smaller batches than traditional production systems.These batches are “demand-pulled” through production,rather than “pushed through” production (like a traditionalsystem),allowingthecompanytoonlyproducewhatcustomers have ordered.3.Set-up times—Lean production systems stress short set-uptimes so that they can produce and deliver the product totheendcustomerinaveryshortamountoftime.Bykeeping set-up times short, lean producers don’t have toworry about keeping extra inventory on hand just to be ableto quickly meet demand.4.Physical layout of plant—Lean producers tend to physicallyorganizetheirmanufacturingplantsbyself-containedproduction cells. Each cell contains all of the machinerynecessary to produce the product. By organizing the plantthis way, lean producers are able to minimize interruptionsandtimespentmovingmaterialsandworkinprocessinventory. This, in turn, reduces the time it takes to producethe product. In contrast, traditional producers tend to grouplike machinery together in different areas of the plant.

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(continued)E1-23A5.Rolesofplantemployees—Atleanproducers,plantemployees tend to have broader roles. They are cross-trained to perform about every role that is needed in eachproductioncell.Theysetup,operate,andrepairthemachinesinthecell.Theyalsoperformthequalityinspections. As a result, employees tend to have highermorale. Additionally, this decreases bottlenecks caused byhaving to wait for the “right person” to come do the job.6.Manufacturingcycletimes—Leanproducersputgreatemphasis on shortening their manufacturing cycle times.Lean producers need to have short cycle times since theyhaveverylittle,ifany,safetystockreadytoselltocustomers. By having short cycle times, they are able to fillcustomer orders quickly, keeping customers satisfied.7.Quality—Leanproducersstresshighqualityineveryaspect of production. Since lean producers do not carrymuch, if any stock, they need to be able to produce theproduct right, the first time. Lean producers tend to “build-in” quality, rather than “inspect-in” quality as traditionalfirms do.

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(15–20 min)E1-24AReq. 1Cost of Quality Report for SaltySnackfoodsTotal Costsof QualityPercentageof totalcosts ofquality(rounded)Prevention Costs:Personnel training$ 26,000Preventative maintenance7,000Total prevention costs$ 33,0004%Appraisal Costs:Inspecting products at halfway point$ 55,000Inspection of raw materials5,000Total appraisal costs$ 60,0008%Internal Failure Costs:Production loss due to machinebreakdowns$ 15,000Cost of defective products94,000Cost of disposing of rejected products12,000Total internal failure costs$121,00015%External Failure Costs:Recall of Batch #59374$175,000Warranty claims400,000Total external failure costs$575,00073%Total Costs of Quality$789,000100%

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(continued)E1-24AReq. 2Because the company has warranty returns and has had aproduct recall, the company may suffer from a reputation forpoor-quality products. If so, they are probably losing profitsfrom losing sales. Unsatisfied customers will be reluctant tobuy from the company again. They may also tell their friendsand family not to buy from the company. This report does notinclude an estimate of the lost profits arising from a reputationfor poor-quality products.Req. 3The Cost of Quality report shows that very little is being spenton prevention and appraisal, which is probably why the internalandexternalfailurecostsaresohigh.Itappearsthatthecompany is only inspecting the product halfway through theproduction process, and not again at the end of the process.Perhaps that is the reason their external failure costs are sohigh. The CEO should use this information to develop qualityinitiativesintheareasofpreventionandappraisal.Suchinitiativesshould reduce future internal and externalfailurecosts.

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(15–20 min.)E1-25AReq. 1Prevention costs:Training employees in TQMTraining suppliers in TQMIdentifying preferred suppliers who commit to on-timedelivery of perfect quality materialsAppraisal costs:Strength-testing one item from each batch of panelsAvoid inspection of raw materials.Internal failure costs:Avoid rework and spoilage.External failure costs:Avoid lost profits from lost sales due to disappointedcustomers.Avoid warranty costs.

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