LEARNING OBJECTIVES - Solutions Manual 1 Chapter 1 Copyright @ 2016...

Cost Management: Measuring, Monitoring, and Motivating Performance, Third Edition Eldenburg Solutions Manual 1 Chapter 1 Copyright @ 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.Chapter 1 The Role of Accounting Information in Ethical Management Decision Making

SOLUTIONS

LEARNING OBJECTIVES

Chapter 1 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

These learning objectives (LO1 through LO8) are cross-referenced in the textbook to individual exercises and problems.

Summary of Questions by Learning Objective, Level of D ifficulty and CPA Canada Competency

Item LO LOD CPA Item LO LOD CPA Item LO LOD CPA Questions

• 1 E cpa-e001 6. 5 E cpa-e001 11. 6, 7 M cpa-e001
• 1, 2 E cpa-e001 7. 6 E cpa-e001 12. 2, 6, 8 M cpa-e001
• 3 M cpa-e001 8. 7 M cpa-e001 13. 2 M cpa-e001
• 3, 4 E cpa-e001 9. 8 E cpa-e001 14. 2 M cpa-e001
• 3 M cpa-e001 10. 8 E cpa-e001 15. 2 E cpa-e001

Multiple-Choice

• 3 E cpa-t003 18. 8 E cpa-t002 20. 7 E cpa-t003
• 3, 4 E cpa-t003 19. 2 E cpa-t002

Exercises

• 1 M cpa-t003 25. 4 M cpa-e002 29. 2, 8 M cpa-e001
• 1 E cpa-e004 26. 2, 8 E cpa-e001 30.

1, 2, 3,

4, 5 M cpa-t003

• 4 M cpa-e002 27. 6 E cpa-t002 31. 4, 5 E cpa-e002
• 4 M cpa-e002 28. 2, 3, 7 E cpa-t003 32. 4, 5, 6, M cpa-e002 1 / 4

Cost Management: Measuring, Monitoring, and Motivating Performance, Third Edition Eldenburg Solutions Manual 2 Chapter 1 Copyright @ 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.

CPA CODES

ID Competency cpa-e001 Professional and Ethical Behaviour cpa-e002 Problem-Solving and Decision-Making cpa-e003 Communication (both written and oral) cpa-e004 Self-Management cpa-e005 Teamwork and Leadership cpa-t001 Financial Reporting cpa-t002 Strategy and Governance cpa-t003 Management Accounting cpa-t004 Audit and Assurance cpa-t005 Finance cpa-t006 Taxation

Note: E = Easy M = Medium H = Hard

7 Problems

• 6 M cpa-t003 38. 4, 5, 6 H

cpa-e002, cpa-e004

• 4, 5, 6 H cpa-e001
• 4, 6, 7 M cpa-t003 39. 3, 4, 7 H

cpa-e002, cpa-t003

• 4, 6, 7 H cpa-e002

35. 5 M

cpa-e002, cpa-e004

40. 1, 2, 3 M

cpa-e003, cpa-t002

• 4, 7, 8 H cpa-e002
• 6, 7 M cpa-e002 41. 1, 6, 7 E

cpa-e002, cpa-t002

• 5 M cpa-e002 42. 7 M

cpa-e002, cpa-t002

Mini-Cases 46.

4, 5, 6,

7 H cpa-e002, cpa-e003, cpa-t003 48.

4, 5, 6,

7 E cpa-t003 50. 3, 6, 8 E cpa-t004

• 4, 5, 6 E cpa-e001 49. 1, 2, 7 E cpa-t004 2 / 4

Cost Management: Measuring, Monitoring, and Motivating Performance, Third Edition Eldenburg Solutions Manual 3 Chapter 1 Copyright @ 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.

QUESTIONS

1.1 Organizational vision is the core purpose of the organization and shapes the current organization and its future. Decisions about the organizational vision are important because they communicate to employees and other stakeholders the overall direction of operations. Core competencies are the strengths of the organization relative to competitors. The choice of core competencies that an organization focuses upon is important to the success of the organization because value is added by these competencies. To be successful, the vision should be guided by the basic strengths of the organization. Organizational strategies are developed around core competencies. These tactics are important because they guide the long-term decisions, such as product lines that will be offered. Operating plans put into action the organizational strategies in the short term. These plans guide employees in their day to day operations.

1.2 Once operating plans are in place, organizations need to know whether the plans are being met or need to be changed to take advantage of new opportunities. To do this, actual performance needs to be measured and compared to the plans (monitored). To help managers move toward the organizational goals, incentives such as performance-based bonuses are offered (motivating).

1.3 See Exhibit 1.9 for a list of possible internal and external reports. Students may have thought of other reports as w ell. Following are examples of internal reports. Capital budgets support organizational strategies, the master budget supports operating plans, and variance reports (actual versus planned performance) help organizations monitor and motivate performance if they are tied to compensation contracts.

Financial statements are external reports that provide creditors and shareholders information about current and past operations. Tax returns are reports prepared for the government that also determine the amount of taxes due. Suppliers need reports about inventory levels to keep an organization’s inventory levels up to date.

1.4 The type of information needed depends on the type of decision. For product-related decisions, managers may need information about competitors’ prices and quality of products. For employee-related decisions, they may need to know the amount of experience employees have had or estimate costs to lay them off using information about length of service from human resources. If managers are developing a new good or service, they need information from suppliers about the cost of resources. Students may have thought of other types of decisions and information needed for them.

1.5 Cash flows that vary with the available alternatives for a decision are relevant because they relate directly to each separate decision that could be made. Summing these relevant cash flows provides quantitative information about the relevant costs and benefits for each alternative. However, some cash flows will not change, regardless of the decision made.These are irrelevant cash flows because they remain the same under all courses of action and have no influence on the decision.

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Cost Management: Measuring, Monitoring, and Motivating Performance, Third Edition Eldenburg Solutions Manual 4 Chapter 1 Copyright @ 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.

1.6 Business risk is the possibility that an event could occur and interfere with an organization’s ability to meet strategic goals or operating plans. Examples of business risks are shown in Exhibit 1.11. Some events, such as a hurricane or tsunami, may occur infrequently but have devastating effects. Other events, such as product returns under warranty, occur regularly but could escalate if production processes become out of control. The degree of business risk varies across organizations, industries, geographic regions, and time periods. Top managers are responsible for addressing business risks, taking calculated risks across the enterprise, and appropriately managing and mitigating the risks for the benefit of the stakeholders (i.e., quality of decision).

1.7 Biases are preconceived notions adopted without careful thought. This chapter’s box introduces non- rational escalation of commitment. Also, the Snow-Blade Snowboards example demonstrated a type of information bias: the average cost per unit overestimated relevant cost for the manager’s decision to accept or reject a customer order.Predisposition bias was probably a major issue in the RIM case. Poorer quality decisions result when managers fail to recognize and control for biases because important information is often overlooked.

1.8 Higher quality decisions are made by using higher quality information, that is, information that has few uncertainties and is relevant, complete, as certain as possible, and timely. This information needs to be prepared in reports that are easy to understand, readily available, relevant and timely. Then a high quality decision-making process is used. This is a process that is thorough, as unbiased as possible, focused, creative, and visionary as it relates to strategies.

1.9 There are many reasons for behaving ethically. From an economic perspective, if everyone behaved ethically, less investment would be needed in police and security protection. In addition, written contracts would be less important, and a court system would not be needed to determine whether people are acting unethi cally and then penalize wrongdoers. More business would probably be transacted because people could trust each other. From a personal perspective, people would feel their world was more certain if they knew others would always treat them ethically. Even in a world where many people are unethical, organizations and individuals who act ethically develop better long term reputations and self-respect and improve social welfare.

1.10 Ethical behavior takes into consideration the wellbeing of others and society in making decisions and choosing courses of action. Because many different kinds of stakeholders rely on accounting information, unethical behavior can be very costly through poor decisions that are based on bad information. When accountants are not ethical, investors no longer believe information produced by firms and are unwilling to invest. The market collapses and firms lose their value and society suffers from the losses.

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