Chapter 1
Managerial Accounting: An Overview
Solutions to Questions
1-1 Financial accounting is concerned with 1-3 The quantitative analysis would focus on
reporting financial information to external determining the potential cost savings from
parties, such as stockholders, creditors, and buying the part rather than making it. The
regulators. Managerial accounting is concerned qualitative analysis would focus on broader
with providing information to managers for use issues such as strategy, risks, and corporate
within the organization. Financial accounting social responsibility. For example, if the part is
emphasizes the financial consequences of past critical to the organization’s strategy, it may
transactions, objectivity and verifiability, continue making the part regardless of any
precision, and companywide performance, potential cost savings from outsourcing. If the
whereas managerial accounting emphasizes overseas supplier might create quality control
decisions affecting the future, relevance, problems that could threaten the end
timeliness, and segment performance. Financial consumers’ welfare, then the risks of
accounting is mandatory for external reports and outsourcing may swamp any cost savings.
it needs to comply with rules, such as generally Finally, from a social responsibility standpoint, a
accepted accounting principles (GAAP) and company may decide against outsourcing if it
international financial reporting standards would result in layoffs at its domestic
(IFRS), whereas managerial accounting is not manufacturing facility.
mandatory and it does not need to comply with
externally imposed rules. 1-4 Companies use budgets to translate
plans into formal quantitative terms. Budgets
1-2 Five examples of planning activities are used for various purposes, such as forcing
include (1) estimating the advertising revenues managers to plan ahead, allocating resources
for a future period, (2) estimating the total across departments, coordinating activities
expenses for a future period, including the across departments, establishing goals that
salaries of all actors, news reporters, and motivate people, and evaluating and rewarding
sportscasters, (3) planning how many new employees. These various purposes often
television shows to introduce to the market, (4) conflict with one another, which makes
planning each television show’s designated budgeting one of management’s most
broadcast time slot, and (5) planning the challenging activities.
network’s advertising activities and
expenditures. 1-5 Managerial accounting is relevant to all
Five examples of controlling activities business students because all managers engage
include (1) comparing the actual number of in planning, controlling, and decision making
viewers for each show to its viewership activities. If managers wish to influence co-
projections, (2) comparing the actual costs of workers across the organization, they must be
producing a made-for-television movie to its able to speak in financial terms to justify their
budget, (3) comparing the revenues earned proposed courses of action.
from broadcasting a sporting event to the costs
incurred to broadcast that event, (4) comparing 1-6 The Institute of Management
the actual costs of running a production studio Accountants estimates that 80% of accountants
to the budget, and (5) comparing the actual cost work in non-public accounting environments.
of providing global, on-location news coverage Accountants that work in corporate, non-profit,
to the budget. and governmental organizations are expected to
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Solutions Manual, Chapter 1 1
use their planning, controlling, and decision- Steel manufacturers face major risks
making skills to help improve performance. related to employee safety, so they create and
monitor control measures related to
1-7 Deere & Company is an example of a occupational safety compliance and
company that competes in terms of product performance.
leadership. The company’s slogan “nothing runs Restaurants face the risk that an
like a Deere” emphasizes its product leadership economic downturn will reduce customer traffic
customer value proposition. and lower sales. They reduce this risk by
Amazon.com competes in terms of choosing to create menus during economic
operational excellence. The company focuses on downturns that offer more low-priced entrees.
delivering products faster, more conveniently,
and at a lower price than competitors. 1-11 Barnes & Noble could segment its
Charles Schwab competes in terms of companywide performance by individual store,
customer intimacy. It focuses on building by sales channel (i.e., bricks-and-mortar versus
personal relationships with clients so that it can on-line), and by product line (e.g. non-fiction
tailor investment strategies to individual needs. books, fiction books, music CDs, toys, etc.).
Procter & Gamble could segment its
1-8 Planning, controlling, and decision performance by product category (e.g., beauty
making must be performed within the context of and grooming, household care, and health and
a company’s strategy. For example, if a well-being), product line (e.g., Crest, Tide, and
company that competes as a product leader Bounty), and stock keeping units (e.g., Crest
plans to grow too quickly, it may diminish Cavity Protection toothpaste, Crest Extra
quality and threaten the company’s customer Whitening toothpaste, and Crest Sensitivity
value proposition. A company that competes in toothpaste).
terms of operational excellence would select
control measures that focus on time-based 1-12 Timberland publishes quarterly
performance, convenience, and cost. A company corporate social responsibility (CSR) metrics (see
that competes in terms of customer intimacy www.earthkeeper.com/CSR/csrdownloads.
may decide against outsourcing employee Three of those metrics include metric tons of
training to cut costs because it might diminish carbon emissions, the percentage of total cotton
the quality of customer service. sourced that is organic, and renewable energy
use as a percent of total energy usage.
1-9 This answer is based on Nike, which has Timberland’s corporate slogan of “doing
suppliers in over 40 countries. One risk that Nike well by doing good” suggests that the company
faces is that its suppliers will fail to manage their publishes CSR reports because it believes that
employees in a socially responsible manner. Nike its financial success (i.e., doing well) is positively
conducts Management Audit Verifications at its influenced by its social and environmental
overseas plants to minimize this risk. performance (i.e., doing good).
Nike faces the risk that unsatisfactory
environmental performance will diminish its 1-13 Companies that use lean production
brand image. The company is investing only make units in response to customer orders.
substantial resources to develop products that They produce units just in time to satisfy
minimize adverse impacts on the environment. customer demand, which results in minimal
Nike faces the risk that customers will inventories.
not like its new products. The company uses
focus group research to proactively assess the 1-14 Organizations are managed by people
customers’ reaction to its new products. that have their own personal interests,
insecurities, beliefs, and data-supported
1-10 Airlines face the risk that large spikes in conclusions that ensure unanimous support for a
fuel prices will lower their profitability. given course of action is the exception rather
Therefore, they may reduce this risk by than the rule. Therefore, managers must
spending money on hedging contracts that possess strong leadership skills if they wish to
enable them to lock-in future fuel prices that will channel their co-workers’ efforts towards
not change even if the market price increases. achieving organizational goals.
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2 Managerial Accounting, 14th Edition
1-15 Ethical behavior is the lubricant that
keeps the economy running. Without that
lubricant, the economy would operate much less
efficiently—less would be available to
consumers, quality would be lower, and prices
would be higher.
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Solutions Manual, Chapter 1 3
Appendix 1A
Corporate Governance
Solutions to Questions
1A-1 Example of control activities include (1) each class, and (5) participating in extra-
watching high school athletes play prior to curricular activities that build skills important to
recruiting them, (2) scouting opponents prior to employers.
playing them, (3) monitoring each student-
athlete’s classroom and study hall attendance, 1A-3 Examples of control activities include (1)
(4) conducting flexibility and weight training for installing fire, radon, and carbon monoxide
the players, and (5) conducting practices in the detectors, (2) paying for annual home heating
pre-season and in between games. system inspections, (3) installing locks on doors,
(4) storing all potentially harmful products in
1A-2 Examples of control activities include (1) safe locations away from children, (5) reducing
attending interviewing skills workshops, (2) the maximum allowable hot water temperature,
attending resume writing workshops, (3) (6) installing a home security system, and (7)
gathering background information about installing plastic covers over electrical outlets.
possible employers prior to interviewing with
them, (4) developing effective study habits for
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4 Managerial Accounting, 14th Edition
