DISCUSSION QUESTIONS

CHAPTER 1

DISCUSSION QUESTIONS

1-1 Q1-1. Planning is the development of a consistent set of actions, resources, and measurements by which the achievement of objectives can be assessed. Planning takes into account the interactions between the organization and its environment in whatever is to be done.Control is the process by which managers assure that resources are obtained and used in an efficient and effective manner to carry out the plan and accomplish the organiza- tion’s objectives. Control implies that perform- ance measurements are reviewed to determine if corrective action is required.Planning and control are interrelated.Control is carried out within the established planning framework and serves to evaluate conformance to the plan so that organiza- tional objectives are achieved.Q1-2. Short-range plans usually deal with a period of a quarter or a year, while long-range plans usually cover three to five years. Short-range plans are detailed enough to permit prepara- tion of a complete set of financial statements as of a future date, while long-range plans culminate in a very summarized set of expected results or a few quantified objec- tives, such as financial ratios.Q1-3. Long-range plans contain quantitative results, while strategic plans are the least quantifiable of all plans. Long-range plans usually extend three to five years into the future, while strate- gic plans may contemplate shorter or much longer periods. Long-range plans covering a three-to-five-year period would be prepared every three to five years, or might be system- atically updated each year to maintain a com- plete plan, while strategic plans are formulated at irregular intervals by an essen- tially unsystematic process.Q1-4. Accountability is identical with responsibility accounting. Accountability deals with the dis- charge of an individual’s responsibility to achieve assigned objectives within the costs and expenses allowed for the performance and agreed to by the individual.Q1-5.The controller does not control, but aids the control task of the managerial levels by issu- ing reports pointing out deviations from the predetermined course of action.Q1-6. The cost department keeps detailed records of materials, labor, factory overhead, and marketing and administrative expenses; ana- lyzes these costs; issues control reports; pre- pares cost studies for planning and decision making; and coordinates cost and budget data with other departments.Q1-7. For product research and design, the manu- facturing departments need estimates of materials, labor, and machine process costs; for measuring and efficiency of scheduling, producing, and inspecting products, the departments need to know the costs incurred.The personnel department supplies employ- ees’ wage rates. The treasury department needs accounting, budgeting, and related reports in scheduling cash requirements. The marketing department needs cost information in setting prices. The public relations depart- ment needs information on prices, wages, profits, and dividends in order to inform the public. The legal department needs cost infor- mation for keeping many affairs of the com- pany in conformity with the law.Q1-8. Modern techniques in communications give the controller and staff the means to transmit information in the form of results, analyses, and forecasts in a way never before possible.Profit opportunities or control actions have been delayed or missed entirely because timely information that might have improved the cost and profit position of the company was poorly communicated.Q1-9. The budget is an essential cost planning tool because it (a) supplies information and serves as a standard of performance for cost control by the supervisors responsible for cost; (b) pro- vides an easy method for anticipating profits at an anticipated sales level; (c) helps in forecast- ing sales, costs, expenses, and profits for a period of one year or more in advance. 1 / 4

Q1-10. These standards will not necessarily be able to prevent management fraud, but they do give internal accountants some guidance on how to proceed if they encounter a question- able practice.

Q1-11. CASB standards: (a) enunciate a principle or

principles to be followed; (b) establish prac- tices to be applied; (c) specify criteria to be employed in selecting from alternative princi- ples and practices in estimating, accumulat- ing, and reporting contract costs. The standards are backed by the full force and effect of the law.1-2Chapter 1 2 / 4

EXERCISES

E1-1 The exercise requires two examples of the inseparability of planning and control.

Three are listed here, and the third one gives two illustrations:

The most obvious example of the inseparability of planning and control is

found in the definition of control: management’s systematic effort to achieve

objectives by comparing performance to plans and taking appropriate action to correct important differences. The definition shows that the specific results of planning are an essential input to the control phenomenon; there cannot be any such thing as a control effort without reference to some set of plans.A second example of the inseparability of planning and control results from the fact that they are simultaneous. In practice, the implementation of the first steps of a plan, and any control action needed in those steps, are begun before all parts of planning are complete. Early results and the early findings of control activity can then be used in finalizing later parts of the same plan. An example is that a single annual budget is usually not completely finalized before cus- tomer orders begin to be received for that year, and consideration of the number of these actual customer orders may point to trends that need to be considered in finalizing the budget. Even actual financial results of the early weeks and months of the year can provide a basis for better establishing the budget for the later portion of the year.The most elegant example of the inseparability of planning and control results from the fact that both planning and control are complex human activi- ties, and almost all complex human activities are planned activities and also controlled activities. In other words, planning can be so complex that the plan- ning effort is itself controlled (and planned), and control can be so complex that control activities are themselves planned (and controlled). Two illustrations of

this are provided as follows:

(1) A case in which planning is itself planned and controlled is when a compli- cated budget (plan) is to be prepared.To facilitate the creation of the budget, a detailed weekly schedule (another plan) is first agreed upon, showing which steps in the preparation of the budget are to be carried out during each week. Because it is desired that the creation of the budget not be allowed to fall far behind schedule, the responsible manager will exercise control by making comparisons between (a) the actual progress made on the budget each week and (b) the schedule.The manager will also take some corrective action if the difference between the schedule and the actual progress is considered important.(2) A case in which control is itself planned is when a manager decides what kinds of control reports will be used to compare actual results with plans in each future period of business operations. That decision, any efforts made to acquire a supply of preprinted report forms to be filled in each period, and any changes in the design of the cost accounting system to capture and compile the needed information about actual results represent evidence that the future control activity is being planned.Chapter 11-3 3 / 4

E1-2 (1) B (2) A (3) C (4) A (5) C (6) B—although the time frame involved in this kind of plan may be extremely long, there is nothing strategic about this kind of plan or decision. In fact, the plan and obligation to pay off the bonds when they come due is so routine that manage- ment would not consciously approach it as a decision.E1-3 (1) Paragraph (b) comes closest to describing the kind of control used in managing a business, although it is described in a nonbusiness setting.There is a plan for- mulated in advance, there is a measure of actual results, there is a decision maker who compares actual results with plans, there is a selection of a correc- tive action to bring results closer in line with the plan, and there is a foreshad- owing of repeated periodic control activities (the remaining quizzes).The fact that the measures of planning and actual performance are nonfinan- cial measures is not the governing consideration. Much planned and actual information used in controlling a business is non-financial, including some cost accounting information such as the number of units produced, the percentage of units that were defective, and the percentage of available machine time that was utilized.(2) Paragraph (a) is a perfect example of an engineering control, rather than the kind of control managers use in business. The simple device described, which is found in any home bathroom, is the kind of control device designed to monitor a physical condition, and so it is analogous to a thermostat or any of a variety of devices called “industrial controls.” Of course, devices of this kind are used in manufacturing and other businesses, but they do not possess the essential attributes of control in the sense used in business and in cost accounting. The device achieves a continuous monitoring of the results, rather than a periodic comparison of results with plans.There is no human decision maker who selects a corrective action to be taken. A human decision maker is probably the salient attribute of control in managing a business that is missing in paragraph (a).1-4Chapter 1

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