MANAGEMENT ACCOUNTING: AN OVERVIEW

I. Questions

Use of the word need in the quoted passage is pejoratve. It implies an unlimited level of demand for
informaton. However, ratonal managers apply a cost-benefit criterion to informaton and will only want
accountng informaton if its benefits exceed its costs. Accountng informaton provides benefits by
improving decision making and controlling behavior in organizatons. In most organizatons, accountng
informaton is very prevalent which implies that its benefits exceed its costs. Hence, successful
managers will find it in their self-interest to learn how to use accountng informaton in these
organizatons.

Clearly, this statement is incurred in those firms where accountng informaton has very limited
usefulness (e.g., if the accountng informaton is often wrong or is not produced in a tmely
fashion). In these organizatons, managers do not find the accountng informaton to have
benefits in excess of its costs, will not use it, do not need to know how to use it, and definitely
do not need it.

2. a. Historical costs are of limited use in making planning decisions in a rapidly changing
environment. With changing products, processes and prices, the historical costs are
inadequate approximatons of the opportunity costs of using resources.

Historical costs may, however, be useful for control purposes, as they provide informaton
about the actvites of managers and can be used as performance measures to evaluate
managers.

b. The purpose of accountng systems is to provide informaton for planning purposes and
control. Although historical costs are not generally appropriate for planning purposes,
additonal measures are costly to make. An accountng system should include additonal
measures if the benefits of improved decision making are greater than the costs of the
additonal informaton.
3. Finance and economics textbooks traditonally state that the goal of a profit organizaton is to
maximize shareholder wealth. Managers are frequently presumed to act in the best interest of
the shareholder, although recent finance literature recognizes that appropriate incentves are
necessary to align manager interests with shareholder interests. The goal, however, are not very
clear as to how this is achieved. Most finance textbooks focus on financing decisions and not on
the use of assets and dealing with customers.
 Marketngs goal of satsfying customers recognizes that customers are the source of revenues
for the organizaton, and therefore the means through which shareholder value is increased.
However, customer satsfacton is only valuable insofar as it creates shareholder wealth. The
further goal of marketng is to ensure that customer satsfacton is maximized without
compromising the organizatons profitability.

4. Yes. Planning is really much more vital than control; that is, superior control is fruitless if faulty
plans are being implemented. However, planning and control are so intertwined that it seems
artficial to draw rigid lines of separaton between them.

5. Yes. The controller has line authority over the personnel in his own department but is a staf
executve with respect to the other departments.

6. Line authority is exerted downward over subordinates. Staf authority is the authority to advise
but not command others; it is exercised laterally or upward. Functonal authority is the right to
command acton laterally and downward with regard to a specific functon or specialty.

7. Cost accountng is the controllers primary means of implementng the 7-point concept of
modern controllership. Cost accountng is intertwined with all seven dutes to some extent, but
its major focus is on the first three.