r TT —————_ STRATEGIC COST MANAGEMENT LUZVIMINDA S. PAYONGAYONG, CPA RYAN C. ROQUE, CPA, MBA MARIA LUISA U. OLIVEROS, CPA. STRATEGIC COST MANAGEMENT TABLE OF CONTENTS CHAPTER TOPIC PAGE 1 Strategic Cost Management and Management ‘Accounting. 1 2 Cost Concepts, Classifications and Behavior 35 3 Product Costing er 4 Cost Volume Profit Analysis 6 5 Activity-Based Costing and Service Costs 110 6 Standard Costing for Cost Control 137 7 Business Planning and Short-term Budgetary System 182 8 Differential Cost Analysis ns 9 Responsibility Accounting & Performance Measures mn 10 Transfer Pricing 314 11 Balance Scorecards & Non-Financial Measures in Performance Evaluation n Pricing Decist ~STRATEGIC COST MANAGEMENT AND MANAGEMENT ACCOUNTING ‘This chapter aims that the student be able to Define management and the objectives of management. Define strategic cost management Define Management Accounting and identify the objectives of Management Accounting. Know the relationship of Financial Accounting and Management Accounting. Know the relationship of Management Accounting with Cost Accounting. Understand the need for accounting information by the management. Understand the changing role of traditional accountant to financial managers. Understand the role of management accountant in controlling and evaluating performance and decision making. ‘Understand the organizational structure and the role of accounting inthe organization. Understand Financial Management Responsibilities. Differentiate the functions of a financial officer (controller) and a treasurer. Understand different management terms Understand the need for an information system. Know the definition, nature and objectives of management accounting systems. Know the qualities and essential components of an accounting system. Procedures and steps in setting up management accounting systems and design. Know the essential characteristics and qualities of good management information system. Know the different sources of accounting information, and elements of good internal control. * Set up Management Information and Control System. Introduction Management is the process of achieving organizational objectives. This involves planning, organizing, leading, and controlling. Planning and controlling are the two important functions of management. Planning is setting goals and developing strategies and tactics to achieve them. Some planning is routine, recurring, and relates mainly to a period of one year. Controlling is determining whether goals are being met, and if not, what can be done. Performance evaluation is a must in controlling. Managers must review the accomplishments > how information should be generated > how information should be used by decision makers> how the firm should be organized > what changes are occurring in business environmen information needed M5 that wil, » how decisions are framed » how management accountants are involved in decision making Accountants develop and communicate much of the economic information managers of businesses and other economic organizations as external users gy by provided to intemal users are called management accounting information and ae management accountants. Management accounting is an indispensable part of the oe? Provides information to managers - the people whose decision and actions dione ‘success or failure of the organization. the Strategic Cost Management Defined Strategic cost management is the application of cost management techniques hig aims to reduce costs while strengthening the strategic position of a business. Strategic ot management methods can be applied in service, manufacturing and notforpmi organizations This objective can be attained if the company could determine which costs suppor s company's strategic position. In this case, it would be beneficial to increase costs that supper the strategic position of the business. It is not good to cut costs in strategically important ares Doing so reduces the customer satisfaction and experience. Eventually, it could lead toa decie in sales, ultimately, in profit. Aside from the The company should also identify which costs either causes decline in the strategic position of the business or have no impact at all. Thus, management needs ofoas on reduction initiatives on these types of cost so that they can provide input regarding how certain costs should be incurred to support the competitive position of the firm. ‘Three ways to institute cost management techniques that will not only manage costs, but also augment profit realization. are as follows: 1. Develop systems that would streamline the transactions between corporate suppat departments and the operating units. 2, Establish transfer pricing systems to coordinate the buyer-supplier interactions betwee decentralized organizational operating units Utilize pseudo profit centers to create profit maximizing behavior in what were formet cost centers. ‘Management Accounting Defined Management Accounting focuses onthe information ness of an organizations ‘managers that are related to their planning, controlling, and decision-making functions. BY Process of identifying, measuring, accumulating, analyzing, preparing, interpret ‘communicating information that helps managers fulfill organizational objective iy ‘management accounting is designed to assist the organization's managers, relatively estrictions are imposed by regulatory bodies, and not governed by generally 200, accounting principles (GAAP). Therefore, a manager must define which data are releva" Particular purpose and which are not.‘Chaoter Stated Cost Management and Maneaement Accounting > Some management needs are satisfied by historical, monetary information based on generally accepted accounting principles > Other needs require forecasted, qualitative, and frequently non-financial information that has been developed and computed for their specific decision making functions, Management accountants should do all efforts possible or must strive harder to recognize: > What are the information needed by the managers; > Why these information are needed; > How these information be presented in the best feasible form that will enhance the understandability character of these reports to the users; and, > How the information be given to the user in the earliest time possible to be more useful to decision making. Objectives of Management Accounting ‘The four major objectives of management accounting activity are: > Providing managers with information for decision making and planning, > Assisting managers in directing and controling operations. > Motivating managers toward achieving organization's goal. > Measuring performance of managers and sub-units within the organization. The Relationship of Management Accounting with Financial and Cost Accounting as provider of information Accounting information is supposed to address three different functions: 1L. To provide information to external parties such as stockholders, creditors, and various regulatory bodies for investment and credit purposes; 2. Toestimate the cost of products produced or services rendered; and. 3. To provide information useful for making decisions and controlling operations. Financial accounting is the field of accounting that develops information for external decision-makers such as stockholders, suppliers, banks, and government regulatory agencies. ‘The primary financial accounting reports are the balance sheet, statement of income, and the cash flows. Since many businesses are complex, guidelines, known as the GAAP, are provided {forthe strict adherence ofthese financial accounting reports. ‘Though management and financial accounting use accounting system as the source of information, they use them differently. Some basic differences of management accounting and financial accounting will be outlined in the succeeding discussions, Cost accounting is the field of accounting that creates an overlap between financial accounting and management accounting. It integrates with financial accounting by providing ‘product costing, information for financial statements, and with management accounting by Providing some of the quantitative, cos-based! information managers new! to perform their functions. The following statements define the functions of cost accounting:hace Stata Cost Mangan nd Manan AM ——$£——_ > cot imarily on the determination of the cost of making or performing services. cof products or services by direct » a crepianaierareetner ama > Coot aceounting isan integral part ofthe broader Evid © ng its overlap causes the financial and managemett ‘0 be cy The boundaries between clearly and definitely drawn as shown in O° Accounting System (one part of the organization’s Ntaapement information system) Cost Accounting System (one part of the organization's ‘overall accounting system) Accunnolates cost information MANAGEMENT ACCOUNTING FINANCIAL ACCOUNTING Preparation of information for reparation of published Planning, directing, controling financial statements and organization's operations, other financial reports. ‘and decision-making INTERNAL USERS OF ‘EXTERNAL USERS OF INFORMATION INFORMATION Mannget tal even the cxaciion Sockboldes, anil analysts, lender sions consumer groups, and govemmentage0ccs Management accounting, as defined earlier, is more concerned with individual segmens of the business rather than the organization as a whole, so management accounting informatioe normally addresses specific concerns rather than the “big picture” of financial accounting Management accountants are expected to be flexible in providing information that serves needs of management and are useful to managers’ functions. It must provide the basis appropriate cost estimations that are needed for the financial statement presentations lke invenory and cost of goods sold or services Tt must also provide adequate and ose ‘manag in i i inhermation # managers Paroming the basic functions of planning, controling Managers must also see to it that in the provision of information, the cost-bene analysis is being applied, Cost-benefit analysis is the lytical process i : pacts Tati coos and bers tht aul om sce ee of mae\Chaoter 1 Stteaie Cost Management and Management Accounting be developed and provided only if the cost of producing the information is less than the benefit ‘of having it Management accountants, though, are not required to adhere to GAAP in providing such information for internal use of managers. Presented below is a summary of basic differences of management accounting and financial accounting: Basis Management Accounting Financial Accounting Asto Users of Internal Users External Users. Information Not required and unregulated, | Required and must conform to ‘As to Regulations to| since itis intended only for | (GAAP). Follow management. ‘The organization’s basic | Data are drawn almost exclusively accounting system plus | from the organization's basic As toSources of Data | various other sources, such as | accounting system, which external information. accumulates the financial Reports often focus on sub- | Reports focus on the company in ‘units within the organization. | its entirety. Reports are based of are based on a almost exclusively on historical Reports and | combination of historical data, | transactions or data. Procedures estimates and projections of future events. Aside from what has been outlined, the following could also be considered as distinguishing characteristics of management accounting: > Management accounting has no constraints, may be other than costs, as to benefits of improved management decisions. > Behavioral implication is evident, as it concems how measurements and reports will influence managers’ daily behavior. > Management accounting is called to be “time focus”. The users of management accounting reports always compare the past and its relationship to the future. > Management accounting reports could vary in period coverage. It could be as long as 5 to 10 years or as short as daily. > Management accounting reports could be as detailed it could be. Sales could be presented in total or as detailed as to by product line, by territory, by department or as low as by agent.‘chaste Simteot: Cost Manavement end Manecemeat Accounting, fields of discipline. Usually managers’ > Management accounting covers so many i 2 “ use the field of economics, decision sciences, beha political science. ‘The Need for Accounting Information ; making decisions, managers need information, ag Hew Aae ae Se eran rom st of oe Information fi) ern es ag ming Th Fc po definitely, accounting. Information is processed in a systemal yy through ae pooch bs "At yemens, many Sexe eveloped Gait Owe, mamas system, ee Ai fey personnel coming fom different fields ‘ont depart My provide all information needed by the frm in whatever [omm However, thie Sears enon the accounting iformation needed by the management : provided by an accounting system. oa ; ‘Accounting system formal mechanism gathering, organizing, and m nay ‘organization's activities. This system is only one part Pricing, jobs| ucts, jobs or services ca ri the best method of distributing goods and services to the target markt Locating the best property for production facilities Financing the costs of production and operations Management accountants should provide both quantitative and qualitative information = ist managers in decision making. Quantitative information allows managers to know th ep elimina of every alternative choice, while qualitative information furnishes the facts tht iminate some of the inherent uncertainties related to such alternative choices. Manage are information users, while accountants are information prc vvvvvy Management accountants play an important role in management functions ot ‘These functions, as discussed in detail, are: proces > Planing ~ is the process of translating the goals and objectives of an organization va jevements while, objectives are desired quantifiable achievements period of time. These objectives must be’ rive ahi > Contin - i» the process of setting. pertormance standards, measuring perfor ormance with standards, and taking com 4‘Ghaator1 Siateate Cost Manooement ond Management Accouming ‘measures or actions when operations do not conform with what is expected. Managers rust exert their best efforts to achieve what was planned, | > Performance evaluation - is the process of determining the degree of success in accomplishing the plan. It is done to determine ifthe actual results materially differ with what was set by the frm. It tries to equate both effectiveness and efficiency. AS the Performance has been measured by the control process, managers must evaluate the effectiveness and efficiency ofthat performance * Effectiveness ~ is a measure of how well an organization's goals and objectives are achieved. It compares actual output results to desired results and determines the successful accomplishment of an objective. * Efficiency — isa measure ofthe degree to which tasks were performed to produce the best yield at the lowest cost from the resources available. This means that it ‘measures the degree to which a satisfactory relationship occurs when comparing outputs to inputs, > Decision making - is Uke process of choosing among the possible solutions available to a given problem situation. The manager’ ability to choose the best solutions or the most acceptable alternative course of action depencis on the manager's ability to make good decisions. Organizational Structure ‘Organizational structures vary from firm to firm, but the role ofa finance officer is fairly the same. Organizational structure refers to how authority as well as responsibility for making decisions is distributed in the organization. Segments need to be organized according to their missions in order to effectively define segments, manage resources, and implement strategies. To achieve such, a good organizational chart must depict the flow of authority and responsibility. The chart will show lines of authority and lines of responsibility. The line going down depicts the line of authority and the same line going up depicts the line of responsibilty. ‘This chapter limits its chart to the department that will show the flow of information as ‘well as the functions of responsible officers for such information. The most common officers involve in the financial information are: Chief Executive Officer (CEO) Chief Financial Officer (CFO) The Treasurer ‘The Comptroller or Controller ‘The Chief Accountant ‘The CFO normally reports to the President or to the CEO. The CFO's key subordinates are the treasurer and the controller, or the chief accountant. The treasurer has direct responsibility for managing the firm’s cash and marketable securities, for planning its capital structure, for selling stock and bonds to raise capital, ancl for overseeing the corporate pension fund. The treasurer also handles the credit and collection, inventory management and capital ‘budgeting. Although in some firms these are handled by the controller, The controller isa responsible forthe activities ofthe accounting and tax departments. That's why, norm, controller isa CPA by profession. ‘The Changing Role of a Traditional Accountant's Function to a Financial Manager's Function Information system and financial management is now the name of competition amont firms. Good financial management will help any business provide: > better products or services to its customers. > pay higher wages and salaries to its workers and employees, and even managers, > greater returns to the investors who put up capital needed to form the company then operate the firm. Since the economy, bth national and worldwide, consis of customers, employes investors, sound firancial management contributes to the success of any economic entity O° way to become good financial officer or manager is to have a sound understanding of fina" management functions and the need for accounting information. "The traditional accounts‘Ghaoler 1 Siratooic Cost Mansoement and Menegement Accounting = 8 function is to provide information about the firm’s financial activities for decision making. Management accountants became users of this information and introduced many changes towards better management decisions. Some ofthese changes include: > A shift towards addressing the needs of service companies and improving practices to better serve and meet the needs of managers > Improved practices which include a focus on managing the value chain through techniques such as JIT Qustin-time) system and ERP (Enterprise Resource Planning) > The use of balanced scorecard in order to attain a more comprehensive view of the ‘company’s operations. Financial Management Responsibilities ‘The primary task of a financial manager isto plan for the acquisition and use of funds so as to maximize the value of the firm, that is, he or she makes decisions about alternative sources and uses of funds. Some of its specific activities are: > Forecasting and planning - The financial manager must coordinate or interact with other executives as they jointly look ahead and formulate plans, which will shape the firm's future position. > Capital investment and financing decisions - On a long-term basis, the financial manager ‘must raise the capital needed to support growth. A successful firm usually achieves a hhigh rate of growth in sales, which requires increased investment in the plant, equipment, and current assets necessary to produce goods and services. The financial officer must help determine the optimal rate of sales growth, and decide on the specific investments to be made as well as on the types of funds to be used to finance these investments, such as the use of internal versus external funds; use of long term versus short term debt. > Controling and coordinating - The financial manager must interact with other executives ie, (CEO, COO) so that the firm could operate as efficiently as possible. All business decisions have financial implications and all managers whether financial, operation or ‘marketing, need to take this into account. For instance, marketing decisions affect sales growth, which in tum changes in capital requirements. Therefore the marketing ‘managers must consider the effect of their credit policies while production managers ‘must consider plant capacity utilization. Basic Duties of Controller In some firms, a separate controller or comptroller is employed other than the financial ‘manager. The basic duties of a controller are: > Planning, controlling, designing, installing, and maintaining the cost accounting system > Predicting future costs > Coordinating the development of the budget > Accumulating and analyzing actual costsaE Preparing and analyzing performance reports Preparing reports for external users Providing information for special decisions Consulting with management as to cost information Internal auditing Tax administration Protection of assets Economic appraisal vvvvvvyy Basic Duties of Treasurer ‘The treasurer who is, basically, one of the members of the board of di positioned to the organization to handle the following basic duties: dire Financial planning or fund management (Obtaining funds to finance the acquisition of fixed assets. Evaluating the acquisition of fixed assets Short-term finance sourcing or managing working capital needed Banking and custody Managing the pension fund Managing foreign exchange transactions Credits and collection Distribution of corporate earnings to owners, In summary, the major responsibilities of financial management whether they an financial managers, controllers, and treasurers involve decisions such as: vvvvvvvvyY 1L._ which investments the firm should make; 2. how their projects should be financed; and 3. how managers of the firm can most effectively protect and manage its existing resources. In line with these, future financial executives can perform. their individual functions effectively if they are equipped with a better understanding of management accounting izational structure and professional ethics as well as good management accountin, systems, Professional Ethics for Management Accountants As discussed earlier, management accountants are both information providers and us Whose main goal is to maximize shareholders wealth, Maximizing shareholders wealth shoo! be achieved subject to ethical constraints. Users of information generally assume that what™® information the accounting systems generates, is presented and used in an ethical maf However, it was found to be otherwise, and in recent years, the magnitude and sever ¢ ‘white collar crime” has increased almost global in nature. ‘Thus, in the United States‘Chacter 1 Sirategic Cast Management and Management Accounting =a the financial and operating information they communicate to the public. All corporations and their executives have been subjected to scrutiny. This resulted to force firms to establish corporate ethics guidelines and polices to cover employees and executives’ actions in dealing with all corporate constituents. The adoption of these high ethical standards strengthens ‘companies’ competitive positions by reducing the potential losses on litigations, creating and maintaining positive image, and building stakeholders’ confidence. ‘Companies developed guidelines for good corporate governance. Corporate governance is a system of organizational control that is used to define and establish lines of responsibility and accountability among major participants in the corporation. These participants include the shareholders, board of directors, officers and managers and other stakeholders. The “organizational chart of the company shows the corporate governance. A more detailed job ies and accountabilities will be done within each branch, center, departments or Ethical conduct is a necessary asset of a management accountant. The credibility ofthe information provided, analyses done, and opinions offered depends heavily on the reputation of the responsible accountant, As required and should be expected from all managers, ‘management accountants in particular must maintain integrity and ethical behavior and must make top management aware of any unethical behavior done by the people within the ‘organization. The management accountant mist promote and encourage ethical behavior in all aspects of business life The Institute of Management Accountants (IMA) believes ethics is a cornerstone of its cxganization and recognizes the importance of providing ethical guidelines. Standards of Ethical Conduct for Management Accountants, issued by IMA, formerly National Association of Accountants (NAA); Statements on Mariagement Accounting: Objectives of Management Accounting, Statement No.1B, New York, N.Y,, June’17, 1982 is outlined below. Adherence to these standards is integral to the achievement of management accounting objectives. Management accountants shall not commit acts contrary 0 these standards nor shall they condone the commission of such acts by others within the organization. Ethical Conduct 1. Competence - Management accountants have a responsibility to: > Maintain an’ appropriate level of professional competence by ongoing development of their knowledge and skills. > Perform their professional duties in accordance with laws, regulations, and technical standards > Prepare complete and clear reports and recommendations after appropriate analyses of relevant and reliable information 2. Confidentiality - Management accountants have the responsibility to: > Refrain from disclosing confidential information acquired in the course of their work, except when authorized, unless legally obligated to do so > Inform subordinates as appropriate regarding the confidentiality of information acquired in the course of their work and monitor their activities tn assure the ‘maintenance ofthat confidentiality—a |Chaoter 1 Stateaie Gost Management and Management Accounting ‘ jdential information acquired i ain from using or appearirg to use confi ad > Rn to ig ert a te Sa 3. Integrity - Management accountants have the responsibility to: > Avoid actual or apparent conflicts of interest and advise all appropriate partis y > Sten cacti in any cctivty that would prejudice their ability to camy duties ethicall 2 > fete any sit, favor, or hospitality that would influence or would appear > Refrain from either actively or passively subverting the attainment of the -ganization’s legitimate and ethical objectives. . ieee a communicate professional limitations or other constraints thy would preclude responsible judgment or successful performance of an activity > Communicate unfavorable as well as favorable information and professio judgments or opinions. rm oa > Refrain from engaging in or supporting any activity that would discredit the profession. 4. Objectivity - Management accountants kave the responsibility to: > Communicate information fairly and objectively > Disclose fully all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, comments, and recommendations presented. Resolution of Ethical Conflict In applying the standards of ethical conduct, management accountants may encourtet | Problems in identifying unethical behavior or in resolving an ethical conflict. When faced with significant ethical issues, management accountants should follow the established policies ofthe ‘organization bearing on the resolution of such conflict. If these policies do not resolve the ethical conflict, management accountants should consider the following course of action: > Discuss such problems with the immediate super th the superiors involved, in which case the problem shen d oe — initially fo the next higher management level If satisfactory resolution cannot acceptabl ipetior is the chief executive officer, or equivalent, 4 § aupherity may be a group such as the audit commit of trustees, or owners. Contact with levels abov® initiated only with the superior’s knowlel> Ifthe ethical conflict stil exists after exhausting all levels of internal review, the ‘management accountant may have no other recourse on significant matters than toresign from the organization and to submit an informative memorandum to an appropriate representative ofthe organization. Except where legally prescribed, communication of such problems to authorities or individuals not employed or engaged by the organization is not considered appropriate. ‘Some basic terms to note in management process: > Administrative management ~ is an approach that focuses on principles that can be used by ‘managers to coordinate the internal activities of organizations. > Functional authority ~ the authority of staff departments over others in the organization in matters related directly to their respective functions, > Functional managers ~ are managers who have responsibilty fora specific specialized area of the organization and supervise mainly individuals with expertise and training in that area. > Functional structure ~ isa structure in which positions are grouped according to their main functional or specialized area. > Functional-leoel strategy - is a type of strategy that focuses on action plans for managing a particular functional area within a business in a way that supports the business-level strategy. > Goal commitment - is one's attachment to, or determination to reach, > Operating plans - contain the details necessary to implement and maintain an organization's strategies. > Strategic goal - is broadly defined targets or future end results set by top management. > Strategic management ~ is a process through which managers formulate and implement strategies geared toward optimizing strategic goal achievement, with given available environmental and internal conditions. > Grand strategy - is a master strategy that provides the basic strategic direction at the corporate level. > Strategy formulation ~is the process of identifying the mission and strategic goals, conducting competitive analysis, and developing specific strategies. It is the foundation level of organizational planning. > Strategy implementation ~ is the process of carrying out strategic plans and maintaining control over how those plans are carried out. > Tolal Quality Management (TQM) - is a management system that is an integral part of an organization's strategy and is aimed at continually improving product and service quality 50 2s to achieve high levels of customer satisfaction and build strong customer loyalty. ‘Management Accounting Information System “The new source of power is not money inthe hands of the few, but information in the hands of the many.” ~ John Naisbit “Knowledge is of two kinds, ‘We know a subject ourselves or we know we can find information upon it” - Samuel Johnsons ‘At this point in the history of computing and information processing, the most talked about information is management information system, Management information system hasa method, a function, ay "a1 below for Whatever ye 3 bbeen defined by many information system experts. They say i approach or even as an organization. Some of which are enue think would be best appropriate to the ned of the organization or ma information about > is.a business system that provides past, present, and projected inform ‘ and its environment ~ David M. aad Kathien A NOW > is a formal method of making avalabl Ze information necessary 10 ring ate the decision-making, Proce ind enable the “organization's planning, control, and operat James A F. Stoner > Js the system that monitors and retrieves data f° the re ae transactions and operations within the fam, ree he means for managers to rovides presents them as information {0 managers. 0° piper ’G, Maurdick generate information as desired - Robert “The way we obtain and use information has forever ‘changed ae asia awe shut he aie fT, ne ie en er barman) sft a a inforntion in our everyday eae We pr ey et ane + vation systems are becoming pomeral come an inter Way Designing | a Management Accounting System ‘Managers and management accountants must be characteristics oftheir organizations, and ‘each firm requires a thot i tailored to its circumstances, such as: organizational form, > The firm’s legal nature must be reflected in its ‘organizational form (proprietorship, partnership, ot corporation) > The firm's organizational structure refers to how authority and responsibility for decision making are distributed (centralized or decentralized form). > The finm’s organizational culture refers tothe underlying set of assumptions about at dhaty and the pals, processes, practices, and values that are shared by ts memes. ‘management accounting System structure, and culture. ‘The need to integrate an organization's present information system is another item © consider in designing management accounting system. The systems that are already in placed ‘should be evaluated to determine answers to the following questions: 1. What data is being gathered and in what form? 2. What outputs are being generated and in what form? 3. How do the current systems interact with one another and how effective are interactions? 4. Is the current chart of accounts appropriate for the management account information desired?nt information issues are not presently being addressed by the information system and could those issues be integrated into the current system? Cost-beneit tradeoffs related to the design of the management accounting information system must aso be the concern of the management. Proper incentives and reporting systems :must be incorporated into the system for managers to make appropriate decisions. The system must be composed of the three primary elements: 1. Motivational elements - includes performance measures, reward structure, support of ‘organizational mission and competitive strategy 2. Informational elements - includes all necessary information related to budgeting, cost control, value added and non-value added activites, and assessment of core ‘competencies and analysis of make-or-outsource decisions. 3. Reporting elements - includes the preparation of financial statements for both financial and management accounting purpose (provision for the details of responsibility accounting system). ‘Management control system (MCS) guides the organizations in designing and implementing strategies such that the organizational goals and objectives are achieved. It has four primary components: 1L. a detector or sensor is a measuring device that identifies what is actually happening in the process being controlled. 2. an assessor ~ is a device for determining the significance of what is happening. Significance is assessed by comparing the information on what is actually happening ‘with some standard or expectation of what should be happening. 3. an effector - isa device that alters behavior if the assessor indicates the need for doing 0. This is what we call “feedback”. 4, @ communications network ~ transmits information between the detector and the assessor and between the assessor and the effector. Cost Management System (CMS) consists of a set of formal methods developed for planning and controlling an organization's cost-generating activities relative to its goals and “objectives. Its primary goal is to provide the means to develop reasonably accurate product o service costs, requiring that the system be designed to use cost driver information to trace costs to products and services. The product or service costs generated by the CMS constitute the input to managerial processes and such costs are used to: plan, prepare financial statements, ‘assess individual product or service profitability, establish prices for cost-plus contracts, and ‘create a basis for performance measurements. CMS helps managers: > identify the cost of resources consumed in performing significant activites of the firm - the aecounting models and practices. > determine the efficiency and effectiveness of the activities performed - performance ‘measurement > identify and evaluate new activities that can improve the future performance of the firm - investment management; anduw ‘acta State Cot Manama an Maacunaat suie $$ ——_ > ishing the first thee functions stated above in an environment aegis technology ~ adapting the firm in the changes of technol pty information ‘color, and size, just as we describe i ; cance, and Gmelin, aon Essential characteristics and qualities of ‘We describe cars in terms of features, terms of its accuracy and verifiabilty, completeness, “the accuracy quality of information refers to the . oon ies from error. Information is usually assumed to pee rae ri preserted otherwise. Sometimes it is not economcaly feasible to unfese o Rrat i 100% accurate, For instance in @ market study being made by sara earcher, the researcher will only interview a fraction of the total target and then apply the result to the entire potential consumers. At this point, the ane ate tht the information gathered from the sample can be applied to all eo ca ee nain degree of confidence, say 90%. Accuracy and verifablity go hand in hang ei a sercmakersreluctant to assume that information is accurate unless itis verfable aaeestance, executives are usually comfortable withthe accuracy of financial statemeng enter this could be verified, usualy by financial auditor. This is because records ax opt of ll rancactons that impact the financial position of a company. Decision maken Ay accept and use unverifiable information, but they do so with caution and skeptic Tan after with the advancement of technology and use of computers, managers a at Towels are quick to accept computer-generated information as free from errors, This cn} toe mistake. Information is only as good as the data from which it is derived. As the saying goes, "Garbagein, Garbage-out” or GIGO. Thus, the need for a good informatn system is inevitable. > Completeness - Information can be completely accurate and verifiable, but it may mt necessarily give the entire situation. The completeness quality of information refers tote degree to which it is free from omissions. The amount of information supplied to te decision-maker, of course, is not necessarily related to the completeness of information Unfortunately, it is normally difficult to say if the information is really complete incomplete. Benefit-cost analysis is a good example of the importance of considering completeness of information in the decision-making process. This is what we refer sufficient information. The cost of gathering sufficient information may be too much # compared to the benefit we could get from that information. Thus, the user information must set guidelines to assess the completeness of information he needs. » Relevance - The relevance quality of information refers to propriateness of iieuiiien eek aoe ah nfeemations 1! could be relevant to the user. Information overload normally happens. Informatie overload occurs when the volume of available information is too many that the cannot distinguish relevant information from that which is not. ‘The primary aU information overload is the accumulation of information that is not relevant ©; Particular decision, For example, supplying the full cost of production in a proble® limited capacity utilization, | | 4— ‘cheater 1 Stmieok Cost Management and Mansgement Accounting > Timeliness - The timeliness quality of information refers to the time sensitivity of information. Sensitivity refers to the effect of decision that should have been made if the information was given on time or not given on time. Up-to-date information on today’s trends may be 50 significant or of great value to a decision-maker. The same information given today may be of less value now than if it has given a month earlier where the decision has to be made. The use of computer contributed a lot in improving the ‘timeliness quality of information than any of the other information qualities. The power cof computers has made it possible for managers to have not only the right information, ‘but also the right information at the right time. Today, data processed in weeks could now be processed in minutes, Components of Information Systems (Computer Based System) System, as defined, is a group of components (functions, people, activities, events, et.) that interface with and complement one another to achieve one or more predefined goals. Information system is a mixture or combination of hardware, software, people, procedures, and data. The term information system is normally referred to as a computer-based system that provides the following: a. Data processing (DP) capabilities of a department or perhaps an entire ‘company, and b, Information - as people need to make better, more informed decisions is inevitable. ‘Major components of a system are: > Inputs ~ are the various human, material, financial, equipment and informational ‘resources put together required to produce goods and services. > Transformation processes ~ are the organization's managerial and technological abilities that are applied to convert inputs into outputs. > Outputs - are the products, services, information or any other outcomes produced by the organization. > Feedback ~ is the information about the results and organizational status relative to the environment. Purpose of Accounting Information and Need for Accounting Systems The ultimate use of accounting information is to help someone make decisions. This someone could be the company president, production manager, or even the ordinary staff/employee of a company. Despite of so many differences, most organizations prefer a ‘general-purpose accounting system that can supply appropriate information to all users of accounting information. Accounting system is also defined as an orderly, efficient scheme for Providing accurate financial information and controls. A well-defined and organized ‘accounting system helps the firm achieve its goals and objectives generally clasified as to:zB \Chactar 1 Siatent Cost Management and Management Accounting yy > Opernting results = Accounting information enables both internal and external use, evaluate organizational performance. > Setting prianties Accounting information, by way of accounting PIC®, blest, veregferanh 30 fects on. opesatiig probes Saipeietons) SSS, ay cpponoritien -Mnngenn ‘ot jie anc Ommilans O° SSSPM See operations promptly enough for effective action d > Problem solving - Problem solving is commonly related Se or situations that require special accounting analyses oF reports. ot wei aspect of accounting that quantifies the potential results of possible courses of action and often Fecommens the best or the mast acceptable course of ation. Uses of Accounting System ‘Accounting system is useful for: > Routine reporting to management, operations; . > Special reporting to mana primarily for long-range but non-recurring decisions; aaa si > Routine reporting on financial and operating results, primarily for external parties. Components of an Accounting System Just like any system, accounting system is composed of: ‘on which the data is recorded. Examples are official receipts, sales invoices, checks and other similar business documents. > Equipment - consists of devices and machines such as computers, cash registers, and other business machines, vaults or even, filing cabinets. > Procedures - are series of operations or steps that must be performed to complete & task. For example, sales order forms will be filled up by the sales person subject to the approval of the authorized person before any delivery will be made. The procedure could be set up or documented by a narrative sales policy ot sales flow chart > People no matter how sophisticated the other components of the organization have, ‘an accounting system can only function efficiently and effectively if the people whe are involved in it perform their duties carefully and accurately. primarily for planning and controlling curren planning and short-term > Forms - are the documents I Guidelines in Setting Good Accounting System Design In setting or installing accounting system, bn guidelines: ing ig sys the management must consider thie following > Flexibility - It is very important that the is cranginé g circumstances and demands. ate eee Raley Accuracy and timeliness a we discussed, are both relative and subject mation. The syst mia esac” mn en on anagit Stale Cos Manaoement wad Manecement counting = > Simplicity - As we refer to information overload, the system must be simple and easy to understand by the people in the organization. As normally observed, best ideas are always simple ones and this is true to systems. » Helpfulness - It is not just the achievement of goals and objectives, but also the usefulness of the system to those who have to work with it. As inthis computer age, software should be user-friendly to be useful. > Economy - It is always related to the idea of cost-benefit analysis. An accounting system may be too good but too costly for an organization. > Control mechanisms - Accounting system must contain controls to ensure: + Accuracy - records are checked at various stages ofthe accounting cycle. ‘+ Honesty - effective controls are needed to prevent temptation of mishandling, theft and other possible commission of fraud and irregularities. ‘+ Efficiency and speed - it is essential that the records be designed so that more than one person can work on related records at the same time. This is normally refers to the theory of "check and balance". Elements of Good Internal Control No matter how sophisticated the accounting system is, control can only be effective if it has the following essential elements: > Reliable personnel - Personnel should be given duties and responsibilities appropriate to their interests, experience, and capabilities. > Separation of duties - Recording and custodianship functions of assets should not be in the hands of one person. No one person must bein complete or total control of any activity. > Supervision ~ Each superior oversees and appraises the performance of his subordinates. > Responsibility - Responsibility of every personnel must be clearly laid out to trace who should be praised and who should be > Document control -This means immediate, complete, and tamper-proof recording, > Job rotations and forced leves and bonds - key employees handling custodianship functions should be forced to take some vacation leaves and be rotated occasionally and if possible to place bonds. >» Periodic review ofthe system - periodic review of all phases ofthe system by internal or external auditors are necessary. > Physical safeguards - Safe boxes, locks, and other safety measures must be installed, and limited access to authorized personnel will minimize asset and record losses. > Routine and spot checks - Routine but unscheduled checks must be done by authorized. personnel to prevent commission of fraud at any time. > Cost feasibility - Benefits should outweigh costs in setting up internal control systems inall cases. Sources of Accounting Data Accounting system served asthe source of financial and non-financial data. Accounting. ‘systems accumulate, classify, store, and report relevant information and convert them intoos ‘Shao 1 Stataic Cost Mansour and Manacament Acouneg ‘meaningful information that will meet each user's needs. The common transaction systems in, typical firm are: > Order (sales or service) Entry System - sales orders from customers are processed ang filled, and customers are billed for their purchases. “ > Cash Receipts System - cash receipts from customers are recorded, and cash is deposiag intact. i > Purchases System - items for sale or for production use are ordered, received ang recorded. : “it firms, production sched > Production Planning and Control System - in manufacturing, les are set, purchases are made, materials, labor, and equipment are scheduled; anj production output is monitored. ae > Cash Disbursement System - all payments for purchases and any other activites are made and recorded. Se eee i > Personnel System - all personnel events are recorded. The major activities include hiring, ving benefits, evaluation, and payroll activities. > General Accounting System -data from all other transaction systems are brought togethe, and most management reports and financial statements are generated. Elements of a Computerized Accounting System Yeput — [Prowess_ |] > agortation ' The above flow of system indicates that raw data are entered into the system, (computer if computer-based or book of original entry if manual record keeping) then the system will process necessary activities to convert such into a useful reports known as the information. Set example below: DATA. PROCESSING INFORMATION | Customer's name, details of Invoice prepared and Sales reports generated. items need by customer | -—», | approved recorded and — Dally weekly or (ye ut pre, tc.) terms billings prepared. monthly by product line os eee TOTAL sales or by territory whatever summarized is,ee - ‘Ghaotee 1 Stateot Cost Maneoement and Management Accounting a 1. TRUE OR FALSE STATEMENTS. Write “True” ifthe statement is true and write “False” ifthe statement is false: 1, Reports prepared in management accounting are general-purpose reports, whereas reports prepared in financial accounting are usually special-purpose reports. 2. Management accounting information generally pertains to an entity as a whole and is very detailed. Management accounting applies only to manufacturing companies, Determining the unit cost of manufacturing a product is an output of management accounting, 5, Management accounting internal reports are prepared less frequently than classified financial statements. 6. The management function of planning is mainly concerned with setting goals and “objectives for the entity. An organization chart in a manufacturing company replaces the chart of accounts, Directing is the process of determining whether planned goals are being met. Decision-making is an integral part of the planning, directing and motivating functions, but not of the controling function. 10. The theory of constraints is used to measure performance. 11. The focus of a TOM system is to reduce defects in finished products. 12. Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity is an integrity ethical conduct of professionals. 13, Management accountants must refrain form disclosing confidential information acquired in the course oftheir work, except when authorized, unless legally obligated to doso. 14. Competence is one ofthe underlying ethical conduct professionals must maintain. 15, The plans of management are expressed in quantitative form as budgets, 16. In practice the planning, organizing, and controlling functions of management are kept separate from the decision-making function. 17. Staff departments in an organization generally have direct authority over line departments. 18, The accounting information produced by a management accounting system does not include the expenses incurred in an operating department. 19, Fature-oriented reports are not a basic feature ofa financial accounting system. 20. Management accounting deals with providing economic iniormation to internal constituencies. 21. The functions of management accounting information are:_ operational control, product and customer costing, management control, and external reporting, 22. The steps to be followed in implementing an organization's objectives are set down through strategic planning. 23, Strategic planning is sometimes referred to as setting policy. 24, “Controlling” refers primarily to setting maximum limits on spending in an organization, 25, Management accountant must understand and anticipate the reactions of individual to information and measurements. 26.A balanced report is a measurement system for clarifying, communicating, and implementing business strategy. ——_—_ppc cae nee ne 27, Management accounting produces information that helps workers, mana | executives in organizations make better decisions and improve their 8. ay| performance. Process a 28, Internal reporting is the preparation of financial reports based on generally accounting principles. accep 29, Accounting system is often the principal means of gathering data o aid and the process of making the best collective operating of routine decisions in igh Pr overall goals or objectives of an organization. fes information only to internal managers for in planning and controlling routine operations and in Saveeie planning ts 31. Data processing includes the preparation of documents (such as checks and inv a Pe now ef the data contained in these documents through the major = steps of recording, classifying, and summarizing, : 432, Infurmation generated or processed by computers is sald (0 be free from any thus, it possesses the quality of accuracy. : ron 438. Computers can make decisions in the sense of exerising judgment and can among alternatives by following the specific instructions contained in the on 4. Designing a good accounting system is a specialized job requiring 4 high degree of san SE. Receanting system must contain controls to achieve accuracy, reliability and filer. 3e Information system is a combination of hardware, software, people and evens i ide information for decision making. 437, Data collection via an accounting system 38. A program is a series of steps planned preparation ofa payroll. ied to mechanical or electronic equipment capabl| 439, Accounting machines is usually applis of performing arithmetic functions and not used to produce a variety of accounting records and reports. 40. The input in a computer-based system corresponds to the journals in a manual system. 41, One of the fist steps in the development of an accounting system is the preparation of chart of accounts. 49. Accounting system must contain controls to achieve accuracy, honesty, and efficiens. facilitates the best collective decision making, to carry out a certain process, such as the and speed. 43, The accuracy quality of information refers to the degree to which information is fe from error. 44. Information is said to be complete if the user could accumulate as many information 8 possible, 45, Information is said to be timely if it still useful to the decision makers before a dec has been made. 46, Management control systems guides the organizations in designing, and implement strategies to achieve its objectives vot 47. A detector is a measuring device that identifies what is actually happening in the PP™ being controlled. ee df 48, Communications network isa part of cost identifies theo Communion part of cost management system that ident 49. The firm’s organizational structure refers to how authority and responsibility go. crsign making ae ibe nanos? . Costs-benefits trade-offs may be i a wy be considered by managers in designingIl, MULTIPLE CHOICE QUESTIONS. Eicircl the letter that corresponds to the best ansiver: Strategic Cost Management and Management Accounting 1. Management accounting, a. isconcerned with costing products. b. is governed by generally accepted accounting principles. pertains to the entity as a whole and is highly aggregated places emphasis on special-purpose information. 2. What broad functions do the management of an organization perform? a. Directing, manufacturing, and controlling . Planning, directing, and controlling . Planning, directing, and selling d. Planning, manufacturing, and controlling ae a 3. Management accounting information is generally prepared for a. stockholders. b, managers. c. regulatory agencies, d. investors. - 4. Management accounting information a. pertains to the entity as a whole and is highly aggregated. , _ must be prepared according to generally accepted accounting principles. ¢. _ pertains to subunits of the entity and may be very detailed. d._ is prepared only once a year. 5. Which of the following is not an internal user? Corporate officers Staff employees Stockholders Department managet =» 6. Which of the following is not pazt of management accounting? a. Determining whether planned goals are being met Reporting financial information to the shareholders © Calculating product costs . Controlling costs Boge 7. Which of the following uses management accounting? 4. Manufacturing and service entities, but not merchandising b. Profit-oriented businesses only © Service, manufacturing, and merchandising entities d. Only manufacturing entities10. nL 2 2B 4. 15. Which one of the following tasks would not be performed by a mana, accountant? rem 4 Being concerned with the impact of cost and volume on profits b. Strategic cost management Assisting in budget planning 4. Preparing reports primarily for external users How often are internal management reports communicated? @. As frequently as needed b. Annually © During every audit by the company’s CPA Monthly Which description identifies financial statements that are prepared fr external exp a. External reports b. Special-purpose ©. User-specifie 4d. General-purpose ‘Which term describes management accounting reports? @. GAAPreports b. Special-purpose © General-purpose 4. Regulatory reports Wich one ofthe following involves coordinating a company’s activites to produrea ‘smooth-running operation? a. Auditing b. Controlling © Planning. 4. Directing ‘Which one ofthe following describes internal reports? They are often audited by CPAs. ce ‘They are highly regulated by the SEC. They are aggregated. d. They are detailed, ‘Which one of the following does the planning function involve? a. Analyzing financial statements oe——— ‘chactor 1 Stateaie Cost Management and Mangement Accounting b. Setting goals and objectives for an entity c_ Hiring the right people for a particular job d. Coordinating the accounting information system Which one of the following is true concerning the managerial function of controlling? a. Itineludes performance evaluation by management. b._Itis concerned mainly with operating a manufacturing segment. ¢. _Itis performed only by the controller of a company. d._ Itincludes hiring and training employees. 117. Which ofthe following represents two management functions? ‘a. Regulating and directing b. Controlling and directing Controlling and auditing 4. Auditing and planning 18. Which management function isa manager performing when objectives are being, established? a. Regulating b. Planning Motivating 4. Directing 19. Which one ofthe following shows the delegation of responsibility within a company? a. Authority outline b. Organization chart Company's charter d. Sarbanes-Oxley Act 20, Management and financial accounting are used for which ofthe following purposes? ‘Management accounting Financial accounting n internal external b external internal © internal internal 4. external external 21, Management accounting a. Ismore concerned with the future than financial accounting. b. Isles concerned with segments of a company than financial accounting. _Ismore constrained by rules and regulations than financial accounting. 4. allofthe above are true. 22. Which ofthe following statements is false? A primary purpose of cost accounting is to determine valuations needed for external financial statements. b. A primary purpose of management accounting is to provide information to ‘managers for use in planning, controlling, and decision making. © The act of converting production inputs into finished products or services .‘Chae: 1 Stateaic Cost Menanemont and Manaaerment Accounting necessitates cost accounting. a Two primary hallmarks of cost and management accounting are standardization of procedures and use of generally accepted accounting ed 2B. The key link between managing resources and managing change in an organization s information. strategies, conversion activities. management accounting, which othe following more counting information? pose 2A, In comparing financial and accurately describes management a historical, precise, useful required, estimated, internal budgeted, informative, adaptable ‘comparable, verifiable, monetary 25, One major difference between financial and management accounting is that ‘francial accounting reports are prepared primarily for external users. ‘management accounting is not under the jurisdiction cf the SEC. government regulations do not apply to management accounting. all ofthe above are true pose aoe +26. Which of the following statements about management or financial accounting is fase? ‘a. Financial accounting must follow GAAP. b. Management accounting is not subject to regulatory reporting standards. . Both management and financial accounting are subject to mandatory recordkeeping requirements. 4 Management accounting should be flexible: 27, Broadly speaking, cost accounting can be defined as a(n) ‘a. external reporting system that is based on activity-based costs. b. system used for providing the government and creditors with information about a company's internal operations. internal reporting system that provides product costing and other information used by managers in performing their functions. d. internal reporting system needed by manufacturers tobe in compliance with Cost Accounting Standards Board pronouncements. 28. Cost accounting is directed toward the needs of a. Regulatory agencies. b. external users. c. internal users. d. stockholders. 29. Financial accounting ‘is primarily concemed with internal reporting.Chaat 1 Siratoake Cost Manogement and Management Accounting b. _ismore concerned with verifiable, historical information than is cost. accounting, ‘c. focuses on the parts of the organization rather than the whole, 4. is specifically directed at management decision-making needs. 30. Which of the following topics is of more concern to management accounting than to cost accounting? ‘generally accepted accounting principles inventory valuation cost of goods sold valuation impact of economic conditions on company operations pore 31. The ethical standards established for management accountants are in the aneas of competence, licensing, reporting, and education. ‘budgeting, cost allocation, product costing, and insider trading. competence, confidentiality, integrity, and objectivity. disclosure, communication, decision making, and planning. pos 32. Management accounting a. must follow generally accepted accounting principles. b. information should be developed within the same general accounting system as financial accounting, deals primarily with the needs of parties external to the firm such as investors and creditors. ._isjust another financial accounting term. 38. Which ofthe following is a true statement? Neither financial nor management accounting are mandatory. b. Both financial and management accounting emphasize relevance and flexibility. . Both financial and management accounting place more emphasis on the past. d. Both financial and management accounting are based upon the concept of stewardship. 34, Financial accounting is concerned with: ‘a. The company as a whole rather than with the segments of a company. . ‘The needs of stockholders and creditors. ‘c Meeting the requirements of internal users only d._ Recording the financial history of an organization. 35. The basic difference between management and financial accounting is that: ‘ ‘a. Financial accounting is a division of accounting that Is concerned with providing information to stockholders whereas management accounting is concemed with providing information to managers for their use in directing the activities of the organization. b Financial accounting relies on information gathered from sources outside the business whereas management accounting relies on internally generated information. . Financial accounting system relies on accounting information whereas management accounting does not. Ld | eT3 (Chacter 1 Srateake Cost Mananement and Mananement Accounting d. Management accounting relies upon the concept of responsibility accounting Where, financial accounting does not. 36, Financial accounting statements must be prepared in accordance with generally accepte 1 erg ary en en ei Ss Carsten rune uk om he om and content of efron Wh sj a carta het Cn ground rls on the form and cote of information which to used internally and externally tothe firm. 2 nn any Heme 5 maka if b. The controller uoualy has "staf authority" in his own department and ‘line authoiy+ ‘implementation of objectives is called strategic planning, ‘The: of objectives is @ Prncinkes of management accounting relate to private prof oriented business by rot to public non-profit entities. 38. Management accounting differs from financial accounting in that management accounting: ‘a Isinternal and future oriented, and governed by GAAP, whereas financial accountng isnot. b. Is future oriented and focuses on the organization as a whole, whereas financil isnot. Emphasizes relevant and flexible information whereas financial accounting does no. 4. Emphasizes relevant historical information about the whole firm, whereas finandi accounting does not. 39. Which ofthe following is a false statement? a. Financial accounting is governed by generally accepted accounting principle whereas management accounting is not. b. Management accounting places more emphasis on the past than does finarci accounting, © Financial accounting tends to emphasize precision whi ment accoui emphasizes relevance and flexibility. : 4. Management accounting draws heavily from other disciplines. 40. Management accounting is primar ns ., Sockboien of the Bee nny oncom with providing information b. Decision makers inside the firm ¢. Creditors of the firm 4. The public“Management Accounting Information System 1. A management information system should do which ofthe following? Collect —-Organizedata Analyze data data —-—=«formanagers for management a. yes 70 yes byes yes no « no no yes a. yes yes yes 2. A management information system should emphasize satisfying a, external demands for information. ‘b. external and internal demands for information. c. internal demands for information. d. the Accounting Department's demands for information. 3. Who of the following are external users of data gathered by a management information system? ‘Creditors Remulatory Bodiea ‘Suppliers a. yes yes b. no no no © no yes yes 4. yes yes: yes 4. Which of the following would be considered a detector? a. computer program source document variance report d. all of the above 5. Feedback is reflected in which component of a management control system? a. Sensor ‘b. Assessor c. Effector d. Detector 6. Reactions to information provided by the management control system are a. formulated in the organization's strategic plan. . judgmental, and are based on interpretations and circumstances. . assessed by the communications network of the MCS. . determined as those activities that will be most efficient and effective given the ‘organization's available technology. 7. A management accounting system should provide information to a. all functional areas of the organization. . only the accounting area of the organization. ‘© only the production area of the organization. 4. organizational managers, but not to staff personnel. ‘Which of the following is not a primary goal of a cost management system?+ (Ghaoter1 Smteic Cos! Menacoment ond Menooement Accounting uuse cost drivers to develop product costs improve understanding of activities develop organizational strategies ‘measure performance pose 9, A cost management system will provide the means to devel0P ‘a. themost accurate product or service costs. : Ba veasonably accurate product or servie cost given cost-bene anaie 2 product or service cost that does not include any, ron-raie-added overhond 4. a costing system that traces all costs disectly t0 Tpolividual products or services 10. The costs generated by the cost management system a£¢ used t0 a. assess product/service profitability establish prices for products with significant compelhi ©. determine underlying reasons for variations from standards. 4. all of the above. +11. “information about the life-cycle performance ‘ofa product or service should be provided inthe Financial accounting system ‘Cost management system a yes yes b. yes no © no yes d. no 0 12. Which of te following organizational characteristics critically affect the design of a cost ‘management system? Culture Criticalsuccss factors Mission Form a yes yes yes yes b yes no yes. no © m0 yes 20 yes, ers dno yes yes no 13, Amanagement accounting system sane falized when the information currently being produced is the same as the information currently desired. b re enerically designed to St the information needs of the majority. of domestic (but not global) organizations. ale ._ must be continuously improved to adapt to changes in an organization 's internal and external environment. : i Cm d. that has been appropriately designed from gap analysis,.does not [Link]-be changed unless there is a change in organizational management or cule 7 14. Which of the following statements is true? 2 "A. good cost management system is a key consideration in, determining. organization's mission. 7‘ b. Tre organization's mission i a ertical suocoss factor in assessing how to 72861 competition. c Koopiedge fan organization's catia surceas,factoa, elpa.10, alt al(custo Stateat Cost Management and Mananement Accounting organizational mission and develop a cost management system. 44. An organization must establish a position of cost leadership to compete in a slobal business environment. Am increase in the use of technology has caused ‘a. fewer costs to be susceptible to short-run control. 'b. companies to be more flexible in responding to changing short-term conditions. managers to be less concerned about capacity utilization because of the increased ability to produce in large quantities. 4. decline in the amount of fixed costs in an organization. In conjunction with a cost management system, gap analysis refers to comparing a._ the information being received by competitors! managers to the information being received by in-house managers b._ the information needed to what is available. current cost information to projected cost information. d. budget figures to actual spending, 7. Which ofthe following is considered a "feeder system tothe cost management system? Payroll Budgeting Inventory valuation a yes rn yes b yes yes yes © no no no d. yes yes no ‘Which of the following is a primary element of a cost management system? Information Reporting Motivation Evaluation, a. yes yes yes yes b no yes yes 70 c Yes 0. 0 yes d. Yes yes yes 0 19, Organizational form directly affects which ofthe following? Decision- Authority 70 yes! yes oy yes b. yes yes yes 0 © no yes 0 yes 4. yes yes no 0 ‘Asan organization moves to decentralize its operations, an effective reporting system will have ‘when the organization was centralized. {about the same importance as ess importance than more importance da level of importance that depends on organizational size as compared toStace Cot Mra a cama 3 21. The performance measurement system should encourage each manager to act in a manner makes the manager's units profits as high as possible. : R the ‘most positively supports the organization's mission and competitive strategies, increases his/her performance reward in the form of profit sharing. reduces the need for informational elements in support of the manager's planning function. pose 22. Performance reports are useful only to the extent that performance is measured against ‘a meaningful benchmark. the performance of all other units or managers. the budget as adopted for the period. competitors! achievements. pege 23. The accounting function in an organization is expected to support managers in which of the following functions? Planning Controlling Evaluating performance . yes yes 0 b. no yes no © no ro. yes d. yes yes yes 24, The reward system for subunit managers of mature businesses should emphasize ‘a. Long-term competitive prospects. b. near-term profit and cash flow. €. success in product design and development. d. exceeding last year's subunit profit. 25, Most managers evaluate decision alternatives based on how ‘much the decision will increase or decrease organizational profits. the outcomes may affect selected performance measurement and reward criteria. much the outcome will reduce the organization's cost of capital. easily the decision impacts can be quantified in the organization's cost ‘management system. poop 26, Performance measurements and a reward system are part of which cost management eee a. Motivational ‘b. Informational = ; 4. allof the above 27. Focus on cost control an assessing core competences are part of which cost manage a. Motivational ‘b. Informational Report d. allof the above‘Sraolc 1 Staten Cost Menacament aod Maneoement Accounting gg 28, Which ofthe following should be able to provide the financial information needed for budget preparation? Cost management Financial accounting Cost accounting system system system a no yes yes b. no yes no c yes 0 yes 4. yes yes yes 29. A reporiilty accounting system provides information fo top management abou the 4. organizational responsibilities of each subunit manager. ’, performance ofeach organizational subunit and its manager. © ability of each subunit manager to ensure a satisfactory cost to revenue relationship. 4. allofthe above. 30. Which ofthe following should be considered in a cost management system design? Cost Investment principles sian ‘management principles a yes yes b. no fa yes © no no no d. yes no yes‘Chapter 1 Sirateae Cast Manecement and Maneosment Accounting PROBLEMS un for Enumerate the four areas covered by Standards of Ethical Conduct for Managemey Accountants and how these areas are defined? descriptions. Indicate whether each description more ving eee Hots anting (use FA) or management accounting 12 Consider the follo ure of financial closely relates to a major fat (use MA) 'a. Behavioral impact is secondary ar Et constrained by generally accepted accounting, PrNIPIES 6 4. Is characterized by detailed reports fe. Field is more sharply defined £ Hasless flexibility 13 For each of the following, indicate whether the employee has line (L) or stall 6 responsibility ‘a. Production superintendent b. Cost accountant cMarket research analyst d. District sales manager e. Head of the legal department f. President accounting information bst*! 1. Reporting standard is relevant to the decision to be made 2. Classified financial statements A‘coca Sino Coat Manecemert and Menacement Accounting 8. Reports generally pertain to the company a Reports generally pertain to subunits Reports issued quarterly or anally General-purpose reports Reports are used internally Prepared in accordance with generally accepted accounting principles 9%. Special purpose reports 10. Limited to historical cost data cate Instructions: For each of the characteristics listed, indicate which chatacterstcs are more closely ‘elated to financial accounting by placing the letter "Fin the space to the let of the item and indicate those characteristics which are more closely associated with management accounting ‘by placing the letter "M" tothe lft ofthe item aS ct Jan Harry, a mechanical engineer, was informed that she would be promoted to assistant factory manager. Jan was pleased but uncomfortable. In particular, she knew litle about accounting. ‘She had taken one course in “financial” accounting. Jan planned to enroll in a