CHAPTER 1

DISCUSSION QUESTIONS

Q1-1. Planning is the development of a consistentQ1-5. The controller does not control, but aids the
set of actions, resources, and measurements control task of the managerial levels by issuby which the achievement of objectives can
ing reports pointing out deviations from the
be assessed. Planning takes into account the
predetermined course of action.
interactions between the organization and Q1-6.
its
The cost department keeps detailed records
environment in whatever is to be done.
of materials, labor, factory overhead, and
Control is the process by which managers marketing and administrative expenses; anaassure that resources are obtained and used
lyzes these costs; issues control reports; prein an efficient and effective manner to carry
pares cost studies for planning and decision
out the plan and accomplish the organizamaking; and coordinates cost and budget
tions objectives. Control implies that performdata with other departments.
ance measurements are reviewed to
Q1-7. For product research and design, the manudetermine if corrective action is required.
facturing departments need estimates of
Planning and control are interrelated.
materials, labor, and machine process costs;
Control is carried out within the established
for measuring and efficiency of scheduling,
planning framework and serves to evaluate
producing, and inspecting products, the
conformance to the plan so that organizadepartments need to know the costs incurred.
tional objectives are achieved.
The personnel department supplies employQ1-2. Short-range plans usually deal with a period
ees wage rates. The treasury department
of a quarter or a year, while long-range plans
needs accounting, budgeting, and related
usually cover three to five years. Short-range reports in scheduling cash requirements. The
plans are detailed enough to permit prepara- marketing department needs cost information
tion of a complete set of financial statements in setting prices. The public relations departas of a future date, while long-range plans
ment needs information on prices, wages,
culminate in a very summarized set of
profits, and dividends in order to inform the
expected results or a few quantified objec- public. The legal department needs cost infortives, such as financial ratios.
mation for keeping many affairs of the comQ1-3. Long-range plans contain quantitative results,
pany in conformity with the law.
while strategic plans are the least quantifiable
Q1-8. Modern techniques in communications give
of all plans. Long-range plans usually extend the controller and staff the means to transmit
three to five years into the future, while strate- information in the form of results, analyses,
gic plans may contemplate shorter or much and forecasts in a way never before possible.
longer periods. Long-range plans covering a
Profit opportunities or control actions have
three-to-five-year period would be prepared
been delayed or missed entirely because
every three to five years, or might be system- timely information that might have improved
atically updated each year to maintain a com- the cost and profit position of the company
plete plan, while strategic plans are
was poorly communicated.
formulated at irregular intervals by an essenQ1-9. The budget is an essential cost planning tool
Q1-4. Accountability
tially unsystematic
accounting.
Accountability
is identical
process.
with
deals
responsibility
with the dis- because
as a standard
1-1it (a) supplies
of performance
information
for cost
andcontrol
serves

1-2

Q1-10. These standards will not necessarily be able

to prevent management fraud, but they do
give internal accountants some guidance on
how to proceed if they encounter a questionable practice.
Q1-11. CASB standards: (a) enunciate a principle or
principles to be followed; (b) establish prac-

Chapter 1

tices to be applied; (c) specify criteria to be

employed in selecting from alternative principles and practices in estimating, accumulating, and reporting contract costs. The
standards are backed by the full force and
effect of the law.

Chapter 1

1-3

EXERCISES
E1-1 The exercise requires two examples of the inseparability of
planning
and are
control.
Three
listed here, and the third one gives two illustrations:
The most obvious example of the inseparability of planning and
control
found
in theisdefinition of control: managements systematic effort
to achieve by comparing performance to plans and taking
objectives
appropriate
actiondifferences.
to
correct important
The definition shows that the specific
results of are an essential input to the control phenomenon; there
planning
cannot
be any
such thing
as a control effort without reference to some set of plans.
A second example of the inseparability of planning and control
from
the results
fact that
they are simultaneous. In practice, the implementation
of theof
first
steps
a plan, and any control action needed in those steps, are
begun
before
all parts
of planning are complete. Early results and the early
findingscan
of control
activity
then be used in finalizing later parts of the same plan.
Anthat
example
is
a single annual budget is usually not completely finalized
before orders
cus- begin to be received for that year, and consideration of
tomer
thethese
number
of
actual customer orders may point to trends that need to be
considered
in finalizing the budget. Even actual financial results of the early
weeks and
months
of the year can provide a basis for better establishing the
budget
for theof the year.
later
portion
The most elegant example of the inseparability of planning and
control
results
from the fact that both planning and control are complex
human
ties,
andactivialmost all complex human activities are planned activities
and also activities. In other words, planning can be so complex
controlled
that the
planning
effort
is itself controlled (and planned), and control can be so
complexactivities
that
control
are themselves planned (and controlled). Two
illustrations
of as follows:
this
are provided
(1) A case in which planning is itself planned and controlled is when
a complicated budget (plan) is to be prepared. To facilitate the creation of
budget,weekly schedule (another plan) is first agreed upon,
athe
detailed
showing
which steps in the preparation of the budget are to be carried out
during
each week. Because it is desired that the creation of the budget not
be
allowed to fall far behind schedule, the responsible manager will
exercise
control by making comparisons between (a) the actual progress
made
on each week and (b) the schedule. The manager will also
the
budget
take
some action if the difference between the schedule and the
corrective
actual
progress is considered important.
(2) Athe
casefuture
in which
control
is itself
planned
is when a manager
control
activity
is being
planned.

1-4

E1-2
(1) B
(2) A
(3) C
(4) A
(5) C
(6) Balthough the time frame involved in this kind of plan may be
extremely
long,
there
is nothing strategic about this kind of plan or decision. In fact,
the
plan and
obligation
to pay off the bonds when they come due is so routine
that management
would not consciously approach it as a decision.
E1-3
(1) Paragraph (b) comes closest to describing the kind of control
used in amanaging
business, although it is described in a nonbusiness setting. There is
a plan formulated
in advance, there is a measure of actual results, there is a
decision
maker who compares actual results with plans, there is a selection
of
correc-to bring results closer in line with the plan, and there is a
tivea action
foreshadowing of repeated periodic control activities (the remaining
quizzes).
The fact that the measures of planning and actual performance are
cial nonfinanmeasures is not the governing consideration. Much planned and
actual
information used in controlling a business is non-financial,
including some
cost
accounting
information
such as the number of units produced, the
percentage
of defective, and the percentage of available machine
units that were
time that was
utilized.
(2) Paragraph (a) is a perfect example of an engineering control,
rather than
the kind
of control
managers use in business. The simple device described,
which in
is any home bathroom, is the kind of control device designed
found
monitorcondition, and so it is analogous to a thermostat or any of
atophysical
a varietycalled
of industrial controls. Of course, devices of this kind
devices
are used in
manufacturing
and other businesses, but they do not possess the
essential
attributes of control in the sense used in business and in cost
accounting.
Thea continuous monitoring of the results, rather than
device
achieves
a periodic of results with plans.There is no human decision maker
comparison
selects action to be taken. A human decision maker is probably
awho
corrective
the salientof control in managing a business that is missing in
attribute
paragraph (a).

Chapter 1

Chapter 1

1-5

E1-3 (Concluded)
Paragraph (c) could be interpreted as an example of planning, but
it lacks
some
essential ingredients of control (even though the word
control
is used in
its
last sentence).
There is no periodic comparison of actual results
withno
plans
and
provision for modifying the treatment based on periodic
results. For
example,
the contract requires five treatments each year, even if no
weeds
visible.are
The actions taken are entirely preemptive.
Paragraph (d) refers to the concept of control that applies to police
workscience.
and
military
It consists of being able to physically determine
each event
that location and being able to prevent certain events
occurs
in some
from
occurring.
The potential
use of coercive force, which is very clear in paragraph
(d), is present in achieving this kind of control. In paragraph (d),
always
there
no indicationisthat
results were periodically compared with plans. A rule
that saysthe objective at any cost is sometimes associated with
Obtain
these activities.

1-6

Chapter 1

CASES
C1-1
(1) Yes, Williams has an ethical responsibility to take action.
The IMAs Standards of Ethical Conduct states that management accountants
shall not commit acts contrary to these standards nor shall they
condone the of such acts by others within their organizations.
commission
(2) (The requirement does not ask which standards have been
violated,
but, rather,
which
ones apply to Williams situation.)
Management accountants have a responsibility to:
Competence: Perform their professional duties in accordance with
relevant
laws,
regulations, and technical standards. (Dumping toxic wastes
in a landfill
residen-is generally a violation of law.)
tial
Confidentiality: Refrain from disclosing confidential information
the acquired
course of in
their work except when authorized, unless legally
obligated
to do
so
(Williams
may be legally obligated to take action and make
certain
sures.) discloIntegrity: Refrain from either actively or passively subverting the
attainment
of the
organizations legitimate and ethical objectives. (Williams
avoidance
of passively subvert attainment of ethical objectives.)
the
issue would
Communicate unfavorable as well as favorable information and
professional
judgments
or opinions. (Williams is obligated to report his
unfavorable
findings
to appropriate
persons.)
Refrain from engaging in or supporting any activity that would
discredit(Williams
the
profession.
silence would provide support to the
dumping
and,
thus,activity
could discredit the profession.)
Objectivity: Disclose fully all relevant information that could
reasonably
be
expected
to influence
an intended users understanding of the
reports,and
comments,
recommendations presented. (Williams should disclose
histhe
findings
to
appropriate persons.)
(3) Alternative (a), to seek the advice of his immediate superior, is
appropriate.
is the This
first step he is required to take, unless the superior is
involved.
Alternative (b), communication of confidential information to
outside
the persons
company,
such as the local newspaper, is inappropriate unless
there obligation
is a
legal
to do so. If required by law, Williams should contact
(c), contacting a member of the board of directors,
the Alternative
proper
authorities.
is not
would
resolved
be inapat lower levels.

Chapter 1

1-7

C1-1 (Concluded)
(4) Williams should follow the companys established policies for
resolving
suchif such policies exist. If the issue is not resolved through
issues,
existing
poli- report the problem to successively higher levels
cies,
he should
withinuntil
the company
it is resolved. (Williams is not required to report this
action to if
hishis superior appears to be involved in the conflict. He is
superior
not
dis-matter to persons outside the organization, unless required
closetothe
by law.)these steps, Williams may clarify relevant concepts by
During
confidential
cussion with disan objective advisor to obtain an understanding of
possible
courses of action. If the conflict is not resolved after exhausting all
these
courses of action, Williams may have no other recourse than to
resign
submit
an and
informative
memorandum to an appropriate representative
of
the organization.
Consultation with ones personal attorney is also
appropriate.
C1-2
(1) (The requirement does not ask which standards have been
violated,
but, rather,
which
ones apply to the CFOs behavior.)
Management accountants have a responsibility to:
Competence: Perform their professional duties in accordance with
relevant
laws,
regulations, and technical standards. (The CFO has asked
Deerling
to information in a way that is not in accordance with
account for
generally
accepted accounting principles.)
Prepare complete and clear reports and recommendations after
appropriate
analyses
of relevant and reliable information. (The CFOs
restrictions
on disclosure
will result
in incomplete reports.)
Confidentiality: Refrain from using or appearing to use confidential
tioninformaacquired in the course of their work for unethical or illegal
advantage, or
either
personally
through third parties. (The CFO is attempting to use
confidential
information to protect the job security and bonuses of top
management.)
Integrity: Avoid actual or apparent conflicts of interest and advise
all parties
appro- of any potential conflict. (The CFO has failed to avoid
priate
a conflictand
of has not informed the stockholders of the conflict.)
interest
Refuse any gift, favor, or hospitality that would influence or would
appeartheir
to actions. (The CFOs bonus appears to be an
influence
influence on his
actions.)
organizations
Refrain from
legitimate
either actively
and ethical
or passively
objectives.
subverting
(The CFO
thehas
attainment
subverted
tion
ofabout
the the
the acquisition.)

1-8

C1-2 (Continued)
Refrain from engaging in or supporting any activity that would
discredit(The
the CFOs actions could discredit the profession.)
profession.
Objectivity: Communicate information fairly and objectively. (The
CFO is to unfairly control the information reported, resulting in
attempting
a report
that is
not
objective.)
Disclose fully all relevant information that could reasonably be
expected
to
influence
an intended
users understanding of the reports,
comments,
and presented.
recommendations
(The CFO is attempting to restrict
disclosure
of relevant
information.)
(2) (The requirement does not ask which standards have been
violated,
but, rather,
which
ones apply to Deerlings situation.)
Management accountants have a responsibility to:
Competence: Perform their professional duties in accordance with
relevant
laws,
regulations, and technical standards. (Deerling is being asked
to violate accepted accounting principles.)
generally
Prepare complete and clear reports and recommendations after
appropriate
analyses
of relevant and reliable information. (Deerling is being
asked
to prepare
an
incomplete
report.)
Confidentiality: Refrain from using or appearing to use confidential
tioninformaacquired in the course of their work for unethical or illegal
advantage either
personally
or through third parties. (Deerling must not use the
confidential
mation
aboutinforthe possible takeover to his own advantage or to that
of the person(s)
mounting the takeover attempt.)
Integrity: Refuse any gift, favor, or hospitality that would influence
or would
appear
to influence their actions. (The last sentence of the case
suggests that
Deerling
is considered a member of the top management group, so
he may for
be a bonus.)
eligible
Refrain from either actively or passively subverting the attainment
of the
organizations
legitimate and ethical objectives. (Deerling is being
askedthe
toattainment
subvert
of the organizations legitimate objective, profit
for
stock-by pursuing instead the job security and bonuses of top
holders,
management.)
Communicate unfavorable as well as favorable information and
professional
judgments
or opinions. (Deerling is being asked to restrict
disclosure
of information
about
the acquisition.)
Refrain from engaging in or supporting any activity that would
profession.
is being asked to take actions that could
discredit(Deerling
the
discredit
vant
fession.)
information.)
the pro-

Chapter 1

Chapter 1

1-9

C1-2 (Concluded)
(3) If the company has established policies for dealing with such
issues, Deerling
should first follow these policies. If such policies do not exist, or if
they are
unsuccessful
in resolving the problem, Deerling should present the
problem
to of the board. Deerlings immediate superior is
the
chairman
involved,
so he need
not
be informed
of this action. If the matter remains unresolved,
Deerling
report to should
the audit committee, the board of directors, and finally the
majority
owners. During these steps, Deerling may clarify relevant concepts
by
tialconfidendiscussion with an objective advisor to obtain an understanding
of possible
courses
of action. If the conflict is not resolved after exhausting all
these
courses of action, Deerling may have no other recourse than to
resign
submit
an and
informative
memorandum to an appropriate representative
of
the organization.
Consultation with ones personal attorney is also
(4) Theappropriate.
primary responsibility the company must fulfill before
taking defensive
actions is its fiduciary responsibility to stockholders. Other
responsibilities
include the effects that the takeover and defensive actions would
have on
creditors,
bondholders,
employees, customers, and the community. The
company
also has a responsibility to inform its external auditors and legal
counsel
to
avoid
putting
them in a compromising position.
C1-3
(1) (The requirement does not ask which standards have been
violated,
but, rather,
which
ones apply to Dixons behavior.)
Management accountants have a responsibility to:
Competence: Maintain an appropriate level of professional
competence
by of their knowledge and skills. (By
ongoing
development
systematically
rejecting Dixon is jeopardizing the level of
all
minority applicants,
competence among the
staff.)
Perform their professional duties in accordance with relevant laws,
andregulations,
technical standards. (Equal opportunity in employment is
required
by law.)
Integrity:
Avoid actual or apparent conflicts of interest and advise
all parties
appro- of any potential conflict. (Dixons prejudice is in
priate
conflict withlegal
the obligation to provide equal opportunity
companys
employment,
with
the
companysand
need
for the most competent staff regardless of race.)
Refrain from either actively or passively subverting the attainment
organizations
equal
legitimate
employment
and ethical
is being
objectives.
subverted
(The
by companys
Dixons
of opportunity
the
objective of
prejudice.)

1-10

C1-3 (Concluded)
Refrain from engaging in or supporting any activity that would
discredit(Such
the persistent, systematic discrimination in hiring
profession.
could
discredit
the
profession.)
(2) (The requirement does not ask which standards have been
violated,
but rather,
which
ones apply to Foxworths situation.) Because management
accountants
may not condone the commission of unethical acts by others within
their organizations,
all of the responsibilities listed in the solution to
requirement
(1) also situation.
apply to Foxworths
In addition, the following apply:
Management accountants have a responsibility to:
Confidentiality: Refrain from disclosing confidential information
the acquired
course of in
their work except when authorized, unless legally
obligated
to do suspicions about Dixons behavior should not be
so.
(Foxworths
disclosed inappropriately.
See requirement (3)).
Objectivity: Communicate information fairly and objectively.
(Foxworth
is objective hiring recommendations to Dixon, in
obligated
to make
spite of
hisDixon will be prejudiced in acting on them.)
belief
that
(3) Alternative (a), discussion with the director of personnel, who is
one of Dixons
peers, is inappropriate at this time. If, however, Foxworth believes
the director
personnel
is of
an objective party, Foxworth may discuss the matter
withconfidentially,
the director,
to clarify the relevant concepts and to obtain an
understanding of possible courses of action.
Alternative (b), informal discussion with a group of MAD senior
management
accountants,
is inappropriate.
Alternative (c), private discussion with the CFO, Dixons superior,
appropriate.isBecause
Foxworth has already approached his immediate
superior,
Dixon,in the conflict, it is not necessary for Foxworth to
who
is involved
inform
him of
this
action.
(4) Foxworth should follow the companys established policies for
dealingtype
withof
this
conflict, if such policies exist. If policies do not exist, or if
they
areinunsuccessful
resolving the conflict, Foxworth should discuss the issue
with the
CFO.
If the matter remains unresolved, discussions with
successively
higher levels of management,
including the audit committee and the board of
directors,
should follow. During these steps, Foxworth may discuss the matter
confidentially with an objective advisor to clarify the relevant concepts and
understanding
of
company.
possible courses
withof
ones
action.
personal
If the attorney
matter remains
is also
to the
obtain
an ofConsultation
after
exhausting
all of these steps, Foxworth may have no recourse
unresolved
appropriate.

Chapter 1

Chapter 1

1-11

C1-4
(1) (The requirement does not ask for a list of responsibilities
Rodriquez
hasmerely
vio- which of the fifteen responsibilities apply to his
lated,
situation.)
Management accountants have a responsibility to:
Competence: Perform their professional duties in accordance with
relevant
laws,
regulations, and technical standards. (The figures Rodriquez
is
being
asked
to prepare might amount to fraud in the loan application.)
Prepare complete and clear reports and recommendations after
appropriate
analyses
of relevant and reliable information. (The reliability of the
information
in
doubt, andisthe fact that certain sales figures are or are not
sufficient
to justify
the bank loan
are not relevant to preparation of the budget.)
Integrity: Refrain from either actively or passively subverting the
attainment
of the
organizations legitimate and ethical objectives. (There is a
pushlegitimate
to sub- objectives to the immediate need for a bank loan.)
vert
Recognize and communicate professional limitations or other
thatconstraints
would preclude responsible judgment or successful
performance
of an has not expressed to Czeisla the conflict
activity.
(Rodriquez
between
his desire
to
be a team
player and his ethical responsibilities.)
Communicate unfavorable as well as favorable information and
professional
judgments
or opinions. (Rodriquez is being asked to report
information
that
reflects
so favorably
on the company that it may not be justifiable.)
Refrain from engaging in or supporting any activity that would
discredit(Preparing
the
profession.
a deliberately misleading budget as part of a
loan application
could amount to obtaining money by fraud.)
Objectivity: Communicate information fairly and objectively.
(Rodriquez
feels his objectivity in preparing the budget.)
pressured
to abandon
Disclose fully all relevant information that could reasonably be
expected
to
influence
an intended
users understanding of the reports,
comments, and presented.
recommendations
(A comparison of the new targeted sales
figure
withsales of the corresponding periods of past years would be
the
actual
likely to the banks understanding of just how large an increase in
influence
sales
beingisportrayed.)
(2) Rodriquez could have clearly stated his concerns to Czeisla at
each stage
of thecreation and revision. He could have consulted with the
budgets
marketing
manager
and production
manager at every stage, rather than only upon
receiving
the data. He could present the budget, or a summary of it,
initial budget
tive
form
to highlight the differences between each quarters budget
in a compararesults
of the corresponding quarter of the preceding year, and he
andcase.
the
the actual

1-12

C1-4 (Concluded)
(3) In addition to his ethical responsibilities to CD, Rodriquez has
ethical responsibilities to:
(a) The banks
(b) The management accounting profession
C1-5
(1) (The requirement does not ask for a list of responsibilities Jones
has violated,
merely which of the fifteen responsibilities apply to his situation.)
Management accountants have a responsibility to:
Confidentiality: Refrain from disclosing confidential information
the acquired
course of in
their work except when authorized, unless legally
obligated
to do
so.
(If Jones
accepts the consulting engagement with Crimson, it is
likely
will
beshe
asked to disclose confidential SMI information about the
desired
computer
system.)
Refrain from using or appearing to use confidential information
the acquired
course of in
their work for unethical or illegal advantage either
personally
or parties. (The size of the consulting fee suggests
through
third
Crimson
seeking to buyisconfidential
information to help win the job.)
Integrity: Avoid actual or apparent conflicts of interest and advise
all parties
appro- of any potential conflict (The consulting job would
priate
constituteconflict
an
apparent
of interest, and probably an actual one, because
Jones
has to the SMI committee that will evaluate and rank all
been named
the proposals,
including
Crimsons proposal, which she would have helped to
write.)
Refrain from engaging in any activity that would prejudice their
ability
to duties ethically. (The consulting job with Crimson
carry
out their
would prejudice
Jones
ability to evaluate and rank the proposals for SMI, because
one of the
proposals
would
be Jones own work.)
Refuse any gift, favor, or hospitality that would influence or would
appeartheir
to actions. (Regardless of whether the size of the
influence
consulting as
feebeing
is a gift or favor, it is likely that other gifts, favors,
construed
or hospitality
will be extended to Jones by Crimson during the course of the
consulting
engagement.)
Refrain from either actively or passively subverting the attainment
of the
organizations
legitimate and ethical objectives. (SMIs legitimate
obtaining
Jones
personal
the best
need
computer
for money,
system
as aatresult
the best
of Jones
price disclosing
would be
objective
of
subverted
crucial
deliver
ainformasystem
to
with the crucial attributes.)

Chapter 1

Chapter 1

1-13

C1-5 (Concluded)
Recognize and communicate professional limitations or other
thatconstraints
would preclude responsible judgment or successful
performance
of an the consulting job would preclude responsible
activity.
(Accepting
judgment in
evaluating
and ranking the proposals for SMI; on the other hand,
ethical
tions
oflimitaJones employment at SMI would preclude successful
performance
the consultingofengagement for Crimson, especially if Crimson does
expect
hercrucial information to help win the jobher ethical duty
to
reveal
to
SMI would
prevent
her from delivering what Crimson is paying for.)
Refrain from engaging in or supporting any activity that would
discredit(Selling
the confidential SMI information to a vendor would
profession.
be a discreditable
act.)
Objectivity: Communicate information fairly and objectively.
(Jones
be
unlikely
towould
communicate
objective evaluations of proposals if she
had helped
write
one of them.)
Disclose fully all relevant information that could reasonably be
expected
to
influence
an intended
users understanding of the reports,
comments, and presented.
recommendations
(Jones role in writing the Crimson
proposalinformation
would be in SMIs use of her evaluations of proposals.)
relevant
(2) Jones might have disclosed, either orally or on her personal vita
sheet orcation,
job applithe extent of her involvement on the SMI task force and the
committee.
(3) Jones
could have first investigated all her career opportunities
with firms
that no potential conflict of interest of this kind, but for the
presented
sake of the it is reasonable to assume she did exactly that before
argument,
applyingatfor
a
position
Crimson.
Knowing that Crimson is a supplier of
computer
systems,
Jones
might
have revised her personal vita sheet and the wording of
her application
for this one job interview to lessen the chances of Crimsons
being
tempted to pursue an unethical plan. (Of course, her involvement in
SMIs
upcoming purchase might have become known to Crimson anyway,
or it might
have
been known to Crimson from other sources before her
interview
even
before
heror
application
for the position.)
(4) In addition to her ethical responsibilities to SMI (and her
financial
to responsibility
the hospital that provides treatment for her child), Jones has
ethical
sibilitiesresponto:
(a) her family
(b) the management accounting profession
(c) Crimson