Solution Manual for Managerial Accounting 4th Edition By Whitecotton
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Course
Accounting
Institution
Havard School
Solution Manual for Managerial Accounting 4th Edition By Whitecotton
Chapter 1
Introduction to Managerial Accounting
ANSWERS TO QUESTIONS
1. The primary difference between financial and managerial accounting is the intended
user of the information. Financial accounting is used by externa...
solution manual for managerial accounting 4th edition by whitecotton
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Accounting
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Chapter 1
Introduction to Managerial Accounting
ANSWERS TO QUESTIONS
1. The primary difference between financial and managerial accounting is the intended
user of the information. Financial accounting is used by external parties such as
investors, creditors, and regulators, while managerial accounting is used by internal
business managers.
2. Different users will have different information needs, which give rise to many other
differences between financial and managerial accounting. Financial accounting
includes standardized financial statements that are objective, reliable, and historic
in nature. These reports are prepared on a periodic basis and are reported at a
highly aggregate level, for the company as a whole. Managerial accounting
information is much broader in nature and can encompass budgets, performance
evaluations, and cost accounting reports. The information tends to be more
subjective and future-oriented in nature and must be relevant to the particular
decision the manager is trying to make. The information in these reports tends to be
more detailed and segmented, depending on the manager’s area of responsibility.
3. GAAP-based financial statements, which are prepared for external parties, will not
necessarily be useful for internal managerial decision making. Managers often need
more detailed information than is included in historically oriented financial
statements. They may need the information broken down by division, business
segment, or product line. In addition, managers are typically more interested in
what will happen in the future, as opposed to the past. Even if the information is not
as objective and verifiable as what would be included in a financial report (for
example, it may include more budgeted or forecasted data), managerial accounting
information must be relevant to the particular decision the manager is trying to
make.
4. Service companies sell services (non-tangible items) to consumers or other
businesses. Merchandising companies sell finished goods that they have
purchased from someone else. Manufacturing companies make a product using
raw materials, then sell it to another manufacturer, merchandising company, service
company, or individual consumer.
,5. Examples of service firms include hair salons, travel agents, real estate firms, law
firms, dentist’s office, restaurants, etc. Merchandising companies include Walmart,
GAP, Safeway, Exxon, etc. Manufacturing firms are those that produce a physical
product, whether it is golf balls, furniture, clothing, computers, etc. Manufacturing
facilities are often located in “industrial” or “light industrial” areas on the outskirts of
metropolitan areas.
6. The three functions of management are planning, implementing, and controlling.
7. The three functions of management are interrelated in that one function will affect
what happens in the next function, and the entire process provides feedback for
future decision making. For example, managers must first know where they are
going and what resources they will need to get there (planning) before they can
begin to implement the plan. The control function provides feedback to managers
about whether the plan is being achieved, so that they can take corrective action by
adjusting the plan, the resources, or their implementation of the plan.
8. Ethics refers to the standards of conduct for judging right from wrong, honest from
dishonest, and fair from unfair. Although some accounting and business issues
have clear answers that are either right or wrong, many situations require
accountants and managers to weigh the pros and cons of alternatives before
making a final decision.
9. Congress enacted SOX in response to a number of high-profile scandals in which
companies failed as a result of erroneous and fraudulent reporting. The act was
aimed at renewing investor confidence in the external financial reporting system,
but also placed additional responsibilities on company managers.
10. The Sarbanes-Oxley Act increased manager’s responsibility for creating and
maintaining an ethical business and reporting environment. For example, managers
must perform an annual review of their company’s internal control system and issue
a report that indicates whether the controls are effective. This requirement places
more responsibility on all managers (not just accountants) for reporting accuracy.
The Act also emphasizes the importance of ethics by requiring public companies to
adopt a code of ethics for senior financial officers.
,11. The Sarbanes-Oxley Act (see Section 404) attempts to reduce fraudulent reporting
in the following ways:
Opportunity: SOX attempts to reduce the opportunity for error and fraud by
requiring an internal control report from managers, stronger oversight by the
board of directors, and requiring external auditors to attest to the
effectiveness of the internal controls.
Incentives: SOX attempts to counteract the incentive to commit fraud by
providing much stiffer penalties to those who intentionally misrepresent a
company’s financial performance.
Character: SOX emphasizes the importance of character in the
prevention of fraud by requiring companies to create anonymous tip
lines for reporting fraud, providing “whistle-blowers” legal protection,
and requiring companies to adopt a code of ethics for senior
financial officers.
12. Companies with strong ethical cultures are rewarded with higher productivity,
improved team dynamics, lower risks of fraud, streamlined process, improved
product quality, and higher customer satisfaction.
13. Businesses are starting to incorporate sustainability into their business models
because they realize that a business strategy focused solely on achieving economic
results is not sustainable in the long run. Businesses cannot survive without people
(customers, employees, suppliers) and natural resources, so it makes sense to take
care of both. Today’s consumers are more environmentally conscious and there is
a market for sustainable products and services. Corporate social responsibility is
also an emerging area as businesses have an important role to play in improving
society, not just making a profit.
14. Sustainability accounting is often referred to at the triple bottom line, which is made
up of three factors: the economy, the environment, and society. While traditional
accounting systems measured only economic or financial performance,
sustainability accounting expands it to include measures related to the environment
and society.
15. "Big data" is difficult to analyze using traditional tools such as spreadsheets and
databases due to the volume, variety and velocity of the data. Volume relates to the
sheer size of the data. Variety relates to the fact that the data can come in many
forms, including numbers, text, audio, and video. Velocity relates to the speed at
which data is collected.
, 16. Descriptive analytics focuses on describing the data. For example, CPK might use
data collected from customer loyalty programs to describe their typical customer in
terms of age, gender and income level. Predictive analytics is used to forecast or
predict something that will happen in the future. For example, CPK managers might
use the demographic data for a particular zip code to predict sales volume for a
new store. Prescriptive analytics goes beyond simply describing and prediction to
prescribing or recommending actions. For example, CPK managers might use data
collected in a customer survey to determine what types of menu items they should
develop to appeal to their most profitable customers.
17. Answers will vary. Out-of-pocket costs are those that you pay for “out of your
pocket,” whether in cash or with a credit card. It could be the cost of fuel in your car,
or the cost of your lunch. Opportunity costs are the “lost benefits” you incur when
you choose to do one thing instead of another. These are typically more difficult to
estimate and to quantify. For example, if you rode your bike to school instead of
driving, the additional time it took you to ride your bike is an opportunity cost of that
decision. But to put a dollar value on it (i.e., quantify it), you would need to know
how valuable your time is.
18. Cost information is critical to managerial decision making. For example, managers
typically want to know what a product or service costs before they can decide what
price they should charge for it. They also need to know how much something costs
so they can decide whether to buy it, how much to buy, and what supplier to buy
from.
19. A direct cost is one that can be traced to a specific cost object, while an indirect
cost is one that either cannot be traced, or it is not worth the effort to trace the cost.
Direct costs include the primary material inputs such as leather, cloth, hardware,
etc. Direct costs would also include the wages of workers who were directly
involved in making the product (e.g., cutting, sewing, etc.). Indirect costs are all
other costs incurred to make the product such as including indirect material (e.g.,
thread), rent on the manufacturing facility, supervision, power to run the machines,
etc.
20. Variable costs are costs that change, in total, in direct proportion to a change in
activity level. Fixed costs remain the same, in total, regardless of activity level. Fuel
and maintenance costs will vary in direct proportion to the number of miles you
drive your car. Even though you may not pay for the maintenance costs each and
every week, the more miles you drive, the more maintenance your car will need.
Costs such as insurance and parking are fixed, regardless of the number of miles
driven.
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