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

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Chapter 1: The Role of Accounting InformationinEthicalManagement DecisionMakingChapter OverviewThis 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; theirunderstanding should improve as the course progresses.The chapter introduces a framework for management decision making (Exhibit 1.1) that helpsstudents understand the role of cost accounting in measuring, monitoring, and motivatingperformance. It will also help them in future chapters understand why and how factors such asprofessionalcompetencies and strategies affect managers’ decisions. The framework is formallyreviewed and expanded upon in Chapter 17withtheintroduction of the balanced scorecard.A unique aspect of this text is its focus on uncertainties, biases, and quality of information. Thischapter explains why business decisions are often made under a “cloud of uncertainty.” Manystudents in the course have little understanding of business uncertainty or how it affects thequality of decisions; they tend to believe that “good” managers should always be capable ofmaking the “right” decision. In other words, they do not understand that true uncertainty existsor that it varies across settings. Chapter 1 also introduces manager bias and discusses howinformation can be used in a distorted way. The concepts of uncertainty and bias are thencombined into a discussion of information and decision quality. It is very difficult for moststudents to understand that some informationis ofhigher quality than other information and howinformation quality affects the quality of decisions. Therefore, these topics are introduced in thefirst chapter and are emphasized throughout the text.Chapter 1 introduces relevant versus irrelevant cash flows for decision making. This topic iscentral to the course and is addressed repeatedly in future chapters.Steps for Better Thinking, a decision-making model, is introducedin Appendix 1B. It is notnecessary 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 isdesigned to help students address ethical scenarios that do not have simplistic, “correct”solutions. Instead, students are asked to address ambiguities, conflicts of interests, and valuejudgments. All chapters in the text include an ethical dilemma(Focus on Ethical Decision-Making)and one or more ethicaldecision-makinghomework problems.

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Chapter In BriefManagers use cost accounting information to help make different types of decisions, includingdecisions related to developing organizational strategies, creating operating plans, andmonitoring and motivating organizational performance. Managers make higher-quality decisionsby using higher-quality relevant information and decision-making practices. When makingdecisions, managers need to recognize ethical dilemmas and consider the well-being of othersand society.This Chapter Addresses thefollowingLearning 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 NotesTeaching noteConsider introducing the course by summarizing theRIMcase from the beginning of Chapter 1.Students find this case interesting, and it provides an opportunity to discuss a range of topicsincluding 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 OperationsExhibit 1.1 demonstrates the relationship of each component.To have an effective management control system it is necessary to also includeafeedback loop.Exhibit 1.7provides an example ofa feedback loop.Exercise 1.21 or 1.22could 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 SystemsExercises1.26or 1.28could be used as an in-class exercise to explore control systems.LO3:Explain the role of accounting information in strategic management.Introduce terminology:Cost accountingManagement accountingFinancial accountingStrategic cost managementStudents may be confused with regard to similarities and differences concerning managementversus financial accounting. The main point of this section is to differentiate between the usersof financial accounting versus the users of management accounting.A brief history of cost accounting helps to give the students some perspective on managementaccounting and its critical role in strategic management.Problem 1.40 provides a useful scenario for the discussion of the role of accounting informationin strategic decision making.LO4:Explain the information systems and information that is relevant for decision making.Relevant informationHelps decision makers evaluate and choose among alternative courses of actionMust:(1) Concern the future(2) Vary with the action takenIncludes incremental (avoidable) cash flowsIrrelevant informationNot useful for decision makingIncludes unavoidable cash flows

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Exercise1.25can be used to introduce the topic of relevant information. This problem alsointroduces the importance of qualitative factors (people’s preferences), and has students considertheir biases and control for those biases when giving advice.Teaching noteStudents 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 isused in developing nearly all information, they see bias as intentional. Exercise1.25helps themunderstand that people’s preferences are actually biases. They need a great deal of practice atidentifying biases in different situations. This problem gives them a good start because they caneasily recognize these types of preferences and then relate them to biases.Alternatively, you may walk the students through theSnow-Blade Snowboardsexample in thetext (pages 14-15). Be sure they understand how to distinguish between relevant and irrelevantcash flows.LO5:Describe how business risk affects management decision making.Risk Management–the process of enterprise risk management (ERM) may use any of the fourcontrol levers identified above. An effective ERM process will identify and mitigate risks insome 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 OtherProblem 1.32 combines relevant costs, risk and bias–providing an opportunity discuss withstudents the interaction all of these componentsLO6: Appreciate how biases affect management decision making.Some are types of bias are of particular concern, these are:Information biasCognitive biasPredisposition biasSelf-StudyProblem1-3on 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 Exhibit1.13.Teaching NoteStudents often have difficulty with the material in Exhibit 1.13. If they fail to adequatelyunderstand uncertainties, then it will be impossible for them to understand how uncertainties andother factors affect decision quality. Here is a quick assessment you can perform to gauge howwell your students understand uncertainties:Name a business with which your students are familiar, such as a restaurant near campus, or awidely-known company such asMaple Leaf FoodsorCanadian Tire. Give your students 2minutes to list on a piece of paper reasons why the managers of this business cannot know forcertain what their sales will be next month. Collect the pieces of paper and scan them before thenext class session.Students who write answers that seem to be “clueless” or off-point may be unable to understandthe question; these students often lack a basic understanding of uncertainties in business. Moststudents 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 5reasons, and some may list as many as 10-15. In general, students who list a larger number ofvalid 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. Adetailed understanding of this model is not necessary for success in the course.However, if youwould like to explicitly teach the model, Exhibit 1B.1in Appendix 1Bis a good reference. Theapproach can be discussed in reference to the openingRIMexample.

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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 thelower-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 largeproportion of students in a typical junior-level cost accounting course are likely to struggle withStep 1 skills. Even graduate-level students sometimes struggle with Step 1 skills. Most costaccounting students are likely to have at least some ability with Step 1 skills, but are likely tostruggle with Step 2 skills. In most programs, only a small proportion of students are likely tohave 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 1.14)Individual and Organizational ObligationFraudulent Financial ReportingDecreases organizational market valueDecreases value of accounting professionRewards of EthicalBehaviourIntegrityReputationSelf-respectSocial welfareExercise1.26or 1.29could be used asanin-class exercise or as homework for analyzing ethicaldilemmas.

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Recommended HomeworkExercise 1.25requires a relatively easy relevant cost calculation, and it also incorporatesuncertainties. This would be a good problem for undergraduate students. Problem 1.28requiresstudents to explore the quality of information; it would work best with more advanced students.Exercise 1.23(relatively easy) or Problem 1.34or 1.38(both moderately difficult) could be usedto focus on relevant information for decision making. These problems incorporate numericalcalculations as well as qualitative factors.Mini-Case1.48could be used to help students focus on information beyond traditional financialaccounting. Students will find this problem interesting because it also addresses ethical issuessurrounding WalMart and its in-store research using RFID technology.

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Chapter 1Key TermsQuizName _________________________________1.Organizational success increases when employees understand theorganization’s core values and work collectively to achieve them.______________2.Core purpose and ideology of an organization, which guides theorganization’s overall direction and approaches toward various stakeholder groups.______________3.Specific short-term decisions that shape the organization’s day-to-dayactivities such as drawing cash from a bank line of credit, hiring an employee, or orderingmaterials.______________4.Process of gathering, summarizing, and reporting information usedinternally by managers to make decisions; includes measurement of costs as well as otherfinancial 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, andregulatory reports.______________6.Cash flows that occur under one course of action or decisionalternative, but not under another.______________7.Preconceived notions that are adopted without careful thought; causedecision makers to ignore weaknesses in their preferred course of action and prevent them fromadequately 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 onreducing costs and strengthening an organization’s strategic position.______________11.Knowledge, facts, data, or factors that help the decision makerevaluate and choose among alternative courses of action; concern the future and vary with theaction taken.______________12.Cash flows that occur regardless of which course of action ordecision alternative is chosen.

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Chapter 1Key TermsQuiz (continued)______________13.Tactics that managers use to take advantage of core competencieswhile working toward the organizational vision; guide long-term decisions such as theproportion of financing through debt and equity, types of goods and services offered, andinvestments 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, orsystematic and rational allocation.______________15.Document that presents information for use only inside anorganization, such as a capital budget, analysis of a potential acquisition, operating and otherbudgets, bonus computations, and analysis of supplier quality.______________16.Knowledge, facts, data, factors, or issues that do not help thedecision maker evaluate and choose among alternative courses of action; do not vary with theaction taken.______________17.Managers often use one or more of the fourlevers of control toensure that management’s risk policies are followed, and to monitor the environment for changesin business risk.______________18.Refers to the characteristics of a decision that affect the likelihoodof achieving a positive outcome.

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Answers toKey TermsQuiz1.Belief systems2.Organizational vision3.Operating plans4.Management accounting5.External report6.Relevant cash flows, avoidable cash flows, or incremental cash flows7.Biases8.Organizational core competencies9.Actual operations10.Strategic cost management11.Relevant information12.Irrelevant cash flows or unavoidable cash flows13.Organizational strategies14.Cost accounting15.Internal report16.Irrelevant information17.Risk management18.Decision quality

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Additional Resources for This ChapterAvailable on Both Student and Instructor Web Sites:Chapter summariesVideosInteractive problemsChecklist of key figuresWeb quizPowerPoint slides (2 sets)Available on the Instructor Web Site:SolutionsmanualClicker questionsPowerPoint slidesAdditional problemsTest bank

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Chapter 2:Cost Concepts, Behaviour, and EstimationChapter OverviewThis chapter begins a series of chapters that present a variety of decision-making techniques andmethods. Once students have a foundation in costbehaviourin Chapter 2, they use thisinformation to identify relevant costs and develop solutions for cost-volume-profit analysis(Chapter 3), non-routine decisions•(Chapter 4), capital budgeting decisions (Chapter 12), andproduct pricing(Chapter 13)andcosting decisions (Chapter14). Many accounting programs donot include capital budgeting in cost accounting, so this chapter has been moved toward the endof the text.This group of chapters may be taught in the order suggested above for a completewrap up of the decision making methods used in cost and managerial accounting.(•The sell orprocess 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 fromthe introductory management accounting course.For both graduate and undergraduate students,this chapter may requiremore than one class session. Pages42to 50should be review formanystudents. Because several months may have elapsed since they learned this material, they willneed to review it. In addition, their ability to understand some of the more subtle judgments mayhave increased with time and experience, so they will be more able to consider the ambiguity ina cost category such as directlabour, which can be either fixed or variable depending on howlabouris used in the organization.This chapter provides many opportunities to discuss the uncertainties involved in predictingcosts using a cost function that is based on historical cost and updated for anticipated changes.Students begin to understand that cost prediction is not perfect. Some students feeluncomfortable with uncertainties and want to memorize definitions and the use of cost categoriesby memorizing problems. If this is their first semester in upper-division coursework, they areeasily frustrated when they cannot memorize a method and instead need to apply judgment tomake decisions about cost categories. However, studentsneed tounderstand that uncertainty isan inherent part of thebusinessworld,andtheyneed tounderstand theimportancedevelopingthe skills to identify and manage information that is uncertain.Several homework problems from this chapter are expanded upon in Chapter 3. These may beused as part of the class demonstration of material or assigned as homework.Little BeaverDaycare Centres(problems 2.56and 3.54) is useful as a group in-class problem that can be doneat the end of the class period with students completing it at home. A student or several studentscan put their answers on the board or an overheadat the start ofthe next class, and the solutioncan be used to review and prepare for the next topic.

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Chapter In BriefManagers need a basic understanding of the organization's costs if they are to react quickly tochange and create successful organizational strategies and operating plans. Managers useclassifications and estimation techniques to understand and anticipate future costbehaviour.They can then estimate relevant costs to help them make decisions and plan future operations.This Chapter Addresses the FollowingLearning 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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