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Cost Management: Measuring, Monitoring, And Motivating Performance, 2nd Edition Lecture Notes

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    Chapter 1: The Role of Accounting Inf ormation in Ethical Management Decision Making Chapter Overview This chapter lays a foundation for several topics that are pervasive throughout the textbook. Students are not likely to fully understand this material at the beginning of the course; their understanding should improve as the course progresses. The chapter introduces a framework for management decision making (Exhibit 1.1) that helps students understand the role of cost accounting in measuring, monitoring, and motivating performance. It will also help them in future chapters understand why and how factors such as professional competencies and strategies affect managers’ decisions. The framework is formally reviewed and expanded upon in Chapter 1 7 with the introduction of the balanced scorecard. A unique aspect of this text is its focus on uncertainties, biases, and quality of information. This chapter explains why business decisions are often made under a “cloud of uncertainty.” Many students in the course have little understanding of business uncertainty or how it affects the quality of decisions; they tend to believe that “good” managers should always be capable of making the “right” decision. In other words, they do not understand that true uncertainty exists or that it varies across settings. Chapter 1 also introduces manager bias and discusses how information can be used in a distorted way. The concepts of uncertainty and bias are then combined into a discussion of information and decision quality. It is very difficult for most students to understand that some information is of higher quality than other information and how information quality affects the quality of decisions. Therefore, these topics are introduced in the first chapter and are emphasized throughout the text. Chapter 1 introduces relevant versus irrelevant cash flows for decision making. This topic is central to the course and is addressed repeatedly in future chapters. Steps for Better Thinking , a decision - making model, is introduced in Appendix 1B . It is not necessary for professors to focus on this model when they teach the course; its use is optional. A framework for ethical decision making is introduced and illustrated. The framework is designed to help students address ethical scenarios that do not have simplistic, “correct” solutions. Instead, students are asked to address ambiguities, conflicts of interests, and value judgments. All chapters in the text include an ethical dilemma (Focus on Ethical Decision - Making) and one or more ethical decision - making homework problems.

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    Chapter In Brief Managers use cost accounting information to help make different types of decisions, including decisions related to developing organizational strategies, creating operating plans, and monitoring and motivating organizational performance. Managers make higher - quality decisions by using higher - quality relevant information and decision - making practices. When making decisions, managers need to recognize ethical dilemmas and consider the well - being of others and society. This Chapter Addresses the following Learning Objectives : LO1: Describe the process of strategic management and decision making. LO2: Identify the types of control systems that managers use. LO3: Explain the role of accounting information in strategic management. LO4: Explain the information systems and information that is relevant for decision making. LO5: Describe how business risk affects management decision making. LO6: Appreciate how biases affect management decision making. LO7: Determine how managers make higher quality decisions. LO8: Explain the importance of ethical decision making.

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    Lecture Notes Teaching note Consider introducing the course by summarizing the RIM case from the beginning of Chapter 1. Students find this case interesting, and it provides an opportunity to discuss a range of topics including uncertainties, biases, and the quality of decisions. LO1: Describe the process of strategic management and decision making. The strategic management process requires an understanding of organizational:  Vision  Core Competencies  Strategies  Operating Plans  Actual Operations Exhibit 1.1 demonstrates the relationship of each component. To have an effective management control system it is necessary to also include a feedback loop. Exhibit 1.7 provides an example of a feedback loop. Exercise 1.21 or 1.22 could be used in class to help students understand the various components.

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    LO2 : Identify the types of control systems that managers use. Levers of Control  Belief Systems  Boundary Systems  Diagnostic Control Systems  Interactive Systems Exercises 1.2 6 or 1.2 8 could be used as an in - class exercise t o explore control systems . LO3 : Explain the role of accounting information in strategic management. Introduce terminology: Cost accounting Management accounting Financial accounting Strategic cost management Students may be confused with regard to similarities and differences concerning management versus financial accounting. The main point of this section is to differentiate between the users of financial accounting versus the users of management accounting. A brief history of cost accounting helps to give the students some perspective on management accounting and its critical role in strategic management. Problem 1.40 provides a useful scenario for the discussion of the role of accounting information in strategic decision making. LO4 : Explain the information systems and information that is relevant for decision making. Relevant information Helps decision makers evaluate and choose among alternative courses of action Must: (1) Concern the future (2) Vary with the action taken Includes incremental (avoidable) cash flows Irrelevant information Not useful for decision making Includes unavoidable cash flows

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    Exercise 1.2 5 can be used to introduce the topic of relevant information. This problem also introduces the importance of qualitative factors (people’s preferences), and has students consider their biases and control for those biases when giving advice. Teaching note Students tend to think that bias occurs because bad people intentionally manipulate numbers. Because they do not fully understand that there is uncertainty in information and that judgment is used in developing nearly all information, they s ee bias as intentional. Exercise 1.2 5 helps them understand that people’s preferences are actually biases. They need a great deal of practice at identifying biases in different situations. This problem gives them a good start because they can easily recognize these types of preferences and then relate them to biases. Alternatively, you may walk the students through the Snow - Blade Snowboards example in the text (pages 1 4 - 1 5 ). Be sure they understand how to distinguish between relevant and irrelevant cash flows. LO5 : Describe how business risk affects management decision making. Risk Management – the process of enterprise risk management (ERM) may use any of the four control levers identified above. An effective ERM process will identify and mitigate risks in some or all of these areas:  Economic and Financial  Political and Social  Reputation  Weather  Environmental and Man - made  Psychopathic, Criminal and Terrorist  Informational and Operational  People, Legal, Health and Other Problem 1.32 combines relevant costs, risk and bias – providing an opportunity discuss with students the inter action all of these components LO6: Appreciate how biases affect management decision making. Some are types of bias are of particular concern, these are:  Information bias  Cognitive bias  Predisposition bia s Self - S tudy P roble m 1 - 3 on page 19 is useful as a basis for class discussion regarding this topic. LO7: Determine how managers make higher quality decisions.

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    Discuss the components of Exhibit 1.1 3 . Teaching Note Students often have difficulty with the material in Exhibit 1. 1 3 . If they fail to adequately understand uncertainties, then it will be impossible for them to understand how uncertainties and other factors affect decision quality. Here is a quick assessment you can perform to gauge how well your students understand uncertainties: Name a business with which your students are familiar, such as a restaurant near campus, or a widely - known company such as M aple Leaf Foods or Canad i an Tire . Give your students 2 minutes to list on a piece of paper reasons why the managers of this business cannot know for certain what their sales will be next month. Collect the pieces of paper and scan them before the next class session. Students who write answers that seem to be “clueless” or off - point may be unable to understand the question; these students often lack a basic understanding of uncertainties in business. Most students will provide 1 - 3 valid reasons; they need to work on expanding their understanding. Students with an acceptable understanding of uncertainties should be able to list more than 5 reasons, and some may list as many as 10 - 15. In general, students who list a larger number of valid uncertainties will do a better job on problems requiring analysis than other students. You may or may not want to devote class time to discussing Steps for Better Thinking. A detailed understanding of this model is not necessary for success in the course. However, if you would like to explicitly teach the model, Exhibit 1 B .1 in Appendix 1B is a good reference. The approach can be discussed in reference to the opening RIM example.

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    Teaching Note (Exhibit 1B.1) Steps for Better Thinking is portrayed as a set of steps because strong performance in the lower - level skills sets the stage for strong performance in the higher - level skills. Conversely, if the lower - level skills are weak, then the entire structure will also be weak. Student abilities often vary from school to school. However, research suggests that a large proportion of students in a typical junior - level cost accounting course are likely to struggle with Step 1 skills. Even graduate - level students sometimes struggle with Step 1 skills. Most cost accounting students are likely to have at least some ability with Step 1 skills, but are likely to struggle with Step 2 skills. In most programs, only a small proportion of students are likely to have strong Step 1 and Step 2 skills.

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    LO8 : Explain the importance of ethical decision making. Introduce components of ethical decision making (Exhibit 1. 1 4 ) Individual and Organizational Obligation Fraudulent Financial Reporting  Decreases organizational market value  Decreases value of accounting profession Rewards of Ethical Behaviour  Integrity  Reputation  Self - respect  Social welfare Exercise 1. 26 or 1. 29 could be used as an in - class exercise or as homework for analyzing ethical dilemmas.

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    Recommended Homework Exercise 1. 2 5 requires a relatively easy relevant cost calculation, and it also incorporates uncertainties. This would be a good problem for undergraduate students. Problem 1. 28 requires students to explore the quality of information; it would work best with more advanced students. Exercise 1. 2 3 (relatively easy) or Problem 1. 34 or 1. 38 (both moderately difficult) could be used to focus on relevant information for decision making. These problems incorporate numerical calculations as well as qualitative factors. Mini - Case 1. 48 could be used to help students focus on information beyond traditional financial accounting. Students will find this problem interesting because it also addresses ethical issues surrounding WalMart and its in - store research using RFID technology.

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    Chapter 1 Key Terms Quiz Name ___________________ ______________ 1. Organizational success increases when employees understand the organization’s core values and work collectively to achieve them . ______________ 2. Core purpose and ideology of an organization, which guides the organization’s overall direction and approaches toward various stakeholder groups. ______________ 3. Specific short - term decisions that shape the organization’s day - to - day activities such as drawing cash from a bank line of credit, hiring an employee, or ordering materials. ______________ 4. Process of gathering, summarizing, and reporting information used internally by managers to make decisions; includes measurement of costs as well as other financial and non - financial information. ______________ 5. Document that presents information for use outside an organization, such as financial statements, news releases, inventory reports for suppliers, tax returns, and regulatory reports. ______________ 6. Cash flows that occur under one course of action or decision alternative, but not under another. ________ ______ 7. Preconceived notions that are adopted without careful thought; cause decision makers to ignore weaknesses in their preferred course of action and prevent them from adequately exploring alternatives. ______________ 8. An organization’s strengths relative to competitors. ______________ 9. The various actions taken and results achieved over a period of time, including customer orders received, revenues earned, number of employees hired, costs incurred, units of goods or services produced, cash received and paid, etc. ______________ 10. Expansion of management accounting to simultaneous focus on reducing costs and strengthening an organization’s strategic position. ______________ 11. Knowledge, facts, data, or factors that help the decision maker evaluate and choose among alternative courses of action; concern the future and vary with the action taken. ______________ 12. Cash flows that occur regardless of which course of action or decision alternative is chosen.

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    Chapter 1 Key Terms Quiz (continued) _ _____________ 13. Tactics that managers use to take advantage of core competencies while working toward the organizational vision; guide long - term decisions such as the proportion of financing through debt and equity, types of goods and services offered, and investments in property, plant, and equipment. ______________ 14. A technique or method for determining the cost of a project, process, or thing, with costs determined through direct measurement, arbitrary assignment, or systematic and rational allocation. ______________ 15. Document that presents information for use only inside an organization, such as a capital budget, analysis of a potential acquisition, operating and other budgets, bonus computations, and analysis of supplier quality. ______________ 16. Knowledge, facts, data, factors, or issues that do not help the decision maker evaluate and choose among alternative courses of action; do not vary with the action taken. ______________ 17. Managers often use one or more of the fo ur levers of control to ensure that management’s risk policies are followed, and to monitor the environment for changes in business risk . ______________ 18. Refers to the c haracteristics of a decision that affect the likelihood of achieving a positive outcome.

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    Answers to Key Terms Quiz 1. Belief systems 2. Organizational vision 3. Operating plans 4. Management accounting 5. External report 6. Relevant cash flows, avoidable cash flows, or incremental cash flows 7. Biases 8. Organizational core competencies 9. Actual operations 10. Strategic cost management 11. Relevant information 12. Irrelevant cash flows or unavoidable cash flows 13. Organizational strategies 14. Cost accounting 15. Internal report 16. Irrelevant information 17. Risk management 18. Decision quality

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    Additional Resources for This Chapter Available on Both Student and Instructor Web Sites: Chapter summaries Videos Interactive problems Checklist of key figures Web quiz PowerPoint slides (2 sets) Available on the Instructor Web Site: Solution s manual Clicker questions PowerPoint slides Additional problems Test bank

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    Chapter 2: Cost Concepts, Behaviour, and Estimation Chapter Overview This chapter begins a series of chapters that present a variety of decision - making techniques and methods. Once students have a foundation in cost behaviour in Chapter 2, they use this information to identify relevant costs and develop solutions for cost - volume - profit analysis (Chapter 3), non - routine decisions • (Chapter 4), capital budgeting decisions (Chapter 12), and product pricing (Chapter 13) and costing decisions (Chapter 14) . Many accounting programs do not include capital budgeting in cost accounting, so this chapter has been moved toward the end of the text. T his group of chapters may be taught in the order suggested above for a complete wrap up of the decision making methods used in cost and managerial accounting. ( • The sell or process further decision is covered in chapter 9 concurrent with accounting for joint products.) Chapter 2 is longer than other chapters because the first part of the chapter reviews terms from the introductory management accounting course . For both graduate and undergraduate students, this chapter may require more than one class session . Pages 42 to 5 0 should be review for many students . Because several months may have elapsed since they learned this material, they will need to review it. In addition, their ability to understand some of the more subtle judgments may have increased with time and experience, so they will be more able to consider the ambiguity in a cost category such as direct labour , which can be either fixed or variable depending on how labour is used in the organization. This chapter provides many opportunities to discuss the uncertainties involved in predicting costs using a cost function that is based on historical cost and updated for anticipated changes. S tudents begin to understand that cost prediction is not perfect. Some students feel uncomfortable with uncertainties and want to memorize definitions and the use of cost categories by memorizing problems. If this is their first semester in upper - division coursework, they are easily frustrated when they cannot memorize a method and instead need to apply judgment to make decisions about cost categories. However, students need to understand that uncertainty is an inherent part of the business world, and they need to understand the importance develop ing the skills to identify and manage information that is uncertain. Several homework problems from this chapter are expanded upon in Chapter 3. These may be used as part of the class demonstration of material or assigned as homework. Little Beaver D aycare Centres (problems 2. 56 and 3. 54 ) is useful as a group in - class problem that can be done at the end of the class period with students completing it at home. A student or several students can put their answers on the board or an overhead at the start of the next class, and the solution can be used to review and prepare for the next topic.

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    Chapter In Brief Managers need a basic understanding of the organization's costs if they are to react quickly to change and create successful organizational strategies and operating plans. Managers use classifications and estimation techniques to understand and anticipate future cost behaviour . They can then estimate relevant costs to help them make decisions and plan future operations. This Chapter Addresses the Following Learning Objectives : LO1 : Explain the cost concept and cost terms. LO2: Describe the different types of cost behaviour. LO3: Describe cost estimation techniques. LO4: Apply cost estimation techniques to determine future costs. LO5: Utilize regression analysis in cost estimation. LO6: Appreciate the uses and limitations of cost estimates.

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