Managerial Accounting in the Information Age

Chapter 1 Managerial Accounting in the Information Age

QUESTIONS

• The goal of managerial accounting is to provide information needed for planning,

control, and decision making.

• Budgeted performance is a useful benchmark for evaluating current period

performance.

• This question asks students to identify three differences between financial and

managerial accounting. In the text, five differences are noted:

a) Managerial accounting is directed at internal rather than external users of

accounting information.

b) Managerial accounting may deviate from generally accepted accounting

principles (GAAP).

c) Managerial accounting may present more detailed information.

d) Managerial accounting may present more nonmonetary information.

e) Managerial accounting places more emphasis on the future.

• Examples of nonmonetary information that might appear in managerial accounting

reports include: the quantity of material consumed in production, the number of

hours worked by the office staff, and the number of product defects.

• Total variable costs change in proportion to business activity while total fixed costs

do not change.

• Salaries of the home appliance sales force would be a controllable cost for the

manager of the home appliance department at a Sears store. Depreciation related to the department store building would be a noncontrollable cost.

• Incremental analysis involves a comparison of the revenues that change and the

costs that change when a decision alternative is selected. If incremental revenue exceeds incremental cost, a decision alternative should be undertaken.

• “You get what you measure!” suggests that managers’ behaviors are affected by

performance measures.

• Information flows up and down the value chain—between a company and its

suppliers and between a company and its customers. Information technology is helping companies track buying patterns of customers and send targeted selling messages to them via email. Information technology is also helping companies better manage their supply chains and gain internal efficiencies.

• A legal action is not necessarily ethical. Ethical actions involve “what’s right” while

legal actions involve operating within boundaries of the law.Managerial Accounting 6th Edition Hartgraves Solutions Manual Visit TestBankDeal.com to get complete for all chapters

Jiambalvo Managerial Accounting 1-2

EXERCISES

E1. [LO 3] Suppose the company selected is Microsoft.

Measure 1: Number of errors in a piece of software.

Favorable outcome: Number of errors is reduced.

Unfavorable outcome: Software products are not released on a timely basis.

Measure 2: Sales to new customers as a percent of total sales.

Favorable outcome: Sales staff works hard to develop new clients.

Unfavorable outcome: Company loses existing customers who receive less

attention from the sales staff.

Measure 3: Average time spent handling customer service calls.

Favorable outcome: Customer service representatives handle more calls

per hour.

Unfavorable outcome: Customer questions are not fully addressed and

customer satisfaction decreases.

E2. [LO 2] The only costs that are relevant to a decision are incremental costs—that is, costs that change when an action is taken. The cost of the old copier is a sunk cost and will not change. Therefore, it is irrelevant to Rachel’s decision.

E3. [LO 4] The code suggests that Guthrie clarify the ethical issue by confidential discussion with an objective advisor (this might be the IMA Ethics Counseling service) to obtain a better understanding of possible courses of action.

Guthrie should then discuss the problem with the manager to whom his boss reports (since his boss is involved in the ethical dilemma). Unless required by law, communication of the problem to authorities or individuals outside the organization is not appropriate.

E4. [LO 4] Possible answers include:

The CRM system notes that a customer makes significant wine purchases at dinners. At her next stay, the hotel provides a complimentary bottle of a limited release high-end wine resulting in increased customer loyalty.

The CRM system notes that a customer has had three bookings in the last year.When the customer checks in, the hotel offers a complimentary room upgrade which results in increased customer loyalty.

The CRM system identifies the top 1,000 guests in terms of annual billings and does a direct mailing of certificates that can be redeemed for a free night's stay resulting in increased customer loyalty.

The CRM system notes that a customer has traveled with a small dog and wants the staff to walk the dog in the park in the early morning. The reservationist asks if

Chapter 1 Managerial Accounting in the Information Age 1-3 this service is needed when booking an upcoming stay and makes sure a staff person is available.

E5. [LO 1] Megan can prepare a profit budget for each store (planning). At the end of the accounting period, she can compare actual profit to the budget for each store (control). Significant differences from the budget should be investigated to determine their causes.

E6. [LO 1] “c” is false. There are many possible reasons, other than lack of effective management, why actual costs are greater than planned. Typically, performance reports only suggest areas that should be investigated.

E7. [LO 1] Deidre should not be concerned that cost of sales has increased. Cost of sales is a variable cost and it is expected that it will increase when sales increase.In the budget, cost of sales ($400,000) is 67% of sales ($600,000). Actual cost of sales ($425,000) is 61% of actual sales ($700,000). Thus, while cost of sales has increased, it has not increased disproportionate to the increase in sales.

E8. [LO 1]. Managerial accounting focuses on accounting information for internal decision-making. This focus differs from financial accounting in a number of ways.

For example managerial accounting: 1) focuses on internal users, 2) can deviate

from generally accepted accounting principles (GAAP), 3) presents more detailed information, 4) presents more nonmonetary information, and 5) places emphasis on the future.

E9. [LO 1] For purposes of awarding bonuses, it may be advisable to record sales when orders are placed so that the sales force is rewarded on a timely basis. If the company waited until the order was delivered, the sales force might be rewarded more than a year after obtaining a customer order. The point is that for internal reporting purposes, companies need not follow GAAP.

E10. [LO 2]

• variable
• fixed
• variable
• fixed

E11. [LO 2]

• variable
• variable
• fixed
• fixed
• variable

Jiambalvo Managerial Accounting 1-4 E12. [LO 2] A cost is controllable by a manager whose actions affect the cost. Thus, for example, advertising may be a controllable cost for a store manager (who decides how much to spend on advertising) but it would be a non-controllable cost for the manager of a department at the store (who is not consulted about the amount to spend on advertising).

E13. [LO 2, 3] Takesha should not consider how much he paid for the old machine because that is a sunk cost. He should consider the value of the old machine in the used lab machine market—an incremental cash inflow equal to the market value of the old machine that will result if he buys a new lab machine.

E14. [LO 2]

Incremental revenue per day $2,500

Less incremental costs:

Labor $700 Parts 500 Transportation 100 Office staff 200 1,500 Incremental Profit per Day $1,000

Opportunity cost = $1,000 per day x 52 days = $52,000

Rent and depreciation do not enter into the calculation of the opportunity cost since these costs are not incremental (they will be incurred whether or not Ken decides to stay open on Saturday).

E15. [LO 2] If Zachary visits his friend, he will incur a $560 (16 hours x $35) opportunity cost.

E16. [LO 2, 3] The incremental cost per gallon is likely to be less than $6 because part of the $6 amount relates to fixed costs such as depreciation of equipment. If the incremental cost per gallon is less than $6, then the incremental cost of 15,000 gallons is less than $90,000.

E17. [LO 3]

• When a second shift is added, material costs, workers’ salaries, and benefits

are likely to increase.

• Depreciation of the building will not increase when a second shift is added.

E18. [LO 3] The owner of LA Porsche may link Hulmut’s annual bonus to the average customer satisfaction rating. Thus, there is a link between the measure and Hulmut’s financial welfare. Some actions that Hulmut can take that may help ratings would be to 1) provide a comfortable waiting area for customers, 2) provide free coffee and snacks in the waiting area, and 3) provide transportation service for customers while their cars are under repair.