Instructors Manual

Gerald M. Myers
Pacific Lutheran University

MANAGEMENT
ACCOUNTING
FOURTH EDITION

AtkinsonKaplanYoung

Management Accounting: Information That Creates Value 1

Preface
Management Accounting, Fourth Edition by Atkinson, Kaplan and
Young continues the tradition of integrating new approaches to the
study of management accounting. Over the last quarter century, the
field of management accounting has undergone significant changes.
Management accountants are now seen as team players in decision
making and corporate management, rather than as bean counters
confined to back offices. Each of the authors has had extensive
experience in the field, and the expertise of the team covers all of
the branches of the discipline. In this fourth edition, the text has
been updated to reflect current practice. We hope that both you and
your students benefit from using this book and we welcome any
suggestions you may have for future editions.

Using this manual Each chapter in the Instructors Manual begins with a restatement
of the learning objectives from the chapter. A chapter overview
summarizes the essential content of the chapter. For most chapters,
I have provided a series of teaching tips. Some of these identify
concepts which students traditionally find especially difficult. Other
teaching tips offer suggestions for coverage of particular topics
within the chapter. I have also identified cases relevant to each
chapter. The lists of cases are not exhaustive. Depending on course
focus, level, and instructor experience, there are a large number of
possible cases to use with a given chapter. Instructors are
encouraged to go beyond the suggested cases and use the online
resources of the Harvard Business School, The Richard Ivey
Business School at the University of Western Ontario, and the
European Case Clearing House to develop a sense of the breadth of
material available.
A chapter outline provides the basis for class discussion or lecture
notes, depending on an instructors preferences. The outlines are
organized by learning objectives for the chapter. Each chapter
concludes with a multiple-choice quiz, which can be printed for
class use. Solutions to the quizzes are provided on a separate page.
I would like to extend my thanks to Katie Rogers, Editorial
Assistant at Prentice Hall, and to Jeanne Molenaar, who did the
copy editing on this manual. Katies quick responses to my
questions and Jeannes sharp eye for my typographical errors are
much appreciated.

Gerald M. Myers
Renton, Washington
June 2003

Management Accounting: Information That Creates Value 2

CHAPTER

Management Accounting:
Information That Creates
Value

Central Focus and Learning Objectives

This chapter provides a comprehensive overview of the field of
management accounting. After studying this chapter, students should be
able to:
1. Understand and exploit the differences between management
accounting information and financial accounting information
2. Understand how the organizations strategy drives the need for
different types of management accounting information
3. Recognize the type of management accounting information that will be
useful in a given organization
4. Understand how financial accounting information provides an overall
measure of an organizations performance
5. Realize how management accountants can develop nonfinancial
information that can predict and explain financial results
6. Appreciate the behavioral and ethical issues faced by management
accountants

Management Accounting: Information That Creates Value 3

Chapter overview Chapter 1 presents an historical and contemporary overview of the
roles of management accounting information in organizations.
Many different types of financial and nonfinancial management
accounting information are required by people performing different
tasks at various levels in the organization. The distinction between
managerial and financial information is discussed.
The differences between manufacturing and service organizations
are presented as well as the types of information that both require.
Motivation is provided for focusing on activities as the basis for
measurement and performance evaluation, leading to discussion on
operational control systems, activity-based costing and activity-
based management.
Most important, the chapter establishes the theme and strategy for
the entire book: that management accounting information is derived
from the informational needs of managers for decision making, for
continuous improvement, and for planning and control.
Management accounting is not treated as a set of practices devised
by management accountants to satisfy accounting or financial
reporting needs.

Teaching tips Stress to students that this chapter introduces many important
terms and concepts which form the foundation for an
understanding of the rest of the book.
Stress to students that management accountants work in a
variety of organizations, such as small businesses, retailers, high-
technology electronic and software companies, capital-intensive
manufacturing companies, all types of service companies
banks, insurance, transportation, health care,
telecommunications, and government and nonprofit
organizations.
Clarify that, unlike financial accounting, management accounting
is an unconstrained process. Executives and managers have
almost complete discretion and flexibility in deciding the kinds of
information reported to people at different levels of the
organization, as well as the frequency with which such
information is provided. Note differences between financial and
management accounting listed in Exhibit 1-1.
To stress the different information needs for employees at
different levels of the organization, consider a local phone
company. Telephone operators work to performance standards
that measure how much time they should take to respond to a
customer request (such as a request for the phone number of a
restaurant or hotel), or, for front-line sales persons, success in
selling customers new features such as call waiting, call
forwarding, and voice mail.

Management Accounting: Information That Creates Value 4

 The manager of a local telephone office will want information on
capacity, efficiency, quality, and cost of operations at her office.
For example, she will monitor the volume of phone traffic, by
time of day, and the peak loads and unused capacity of phone
lines and operators. Comparisons of actual time to standard time
that the operator spends on-line responding to an information
request provide a measure of efficiency. Quality can be measured
by the average number of times a customer calls before a
complaint is addressed and solved, and by periodic customer
surveys. Responsiveness can be measured by the length of time
required to respond to a customer service request. The manager
will also monitor the cost of installing a new line, the cost of
maintaining and repairing lines and switch boxes, and spending
on supplies and equipment.
The regional manager of the phone company will want financial
information on the profitability of each local office and of the
region in total, probably monthly. The regional manager will
monitor overall measures of customer satisfaction, acquisition
and retention, market penetration (number of phone lines, or
special features per customer), and innovation (number of new
products and services such as voice mailboxes and call
recognition introduced). This information is vital for the long-
term success of the organization.
You can get the details of the management accounting
innovations at DuPont and General Motors in Chapters 4 and 5
of Johnson and Kaplan, Relevance Lost: The Rise and Fall of
Management Accounting. Chapters 2 and 3 of that book discuss
the 19th century developments of management accounting.
This book really does represent a full integration of old and new
concepts. Our goal has been to set the stage in this chapter to
introduce many new concepts. As you introduce this last section
to students, you may wish to point out how quickly the world
business environment has changed and how management
accountings role has changed as well. Point out that activity-
based costing is one of these major changes.
Note the In Practice box on Enron. The financial debacles of
2002 make excellent fodder for a discussion of ethics in business
operations and financial reporting. Instructors may want to
assign readings from the financial press on Enron, WorldCom,
Arthur Andersen, Tyco, or Global Crossing.

Management Accounting: Information That Creates Value 5

Recommended For this opening chapter, no particular cases are recommended.
cases However, the instructor could choose to spend some additional
time discussing the material on history and how management
accounting practice has changed over the past 15 years. Johnson
and Kaplans book, Relevance Lost: The Rise and Fall of
Management Accounting (Harvard Business School Press, 1987),
will provide more background information to motivate such a
discussion.

Chapter outline I. The Role of Management Accounting in Organizations

Learning objective 1:
Understand and
exploit the differences
between management
accounting
information and
financial accounting
information
A. Financial accounting is the set of processes and
procedures required to maintain an organizations financial
records (books of account) and prepare financial
statements (i.e., balance sheets and income statements) for
reporting to external constituencies (shareholders, SEC,
IRS, creditors, etc.). External financial reporting is driven
by GAAP (Generally Accepted Accounting Principles).
B. Management accounting is the process of producing
financial and operating information regarding the
economic condition of the organization for users internal
to the organization, such as employees and managers. The
process should be driven by the informational needs of
individuals internal to the organization, and should guide
their operating and investment decisions. Accounting
procedures appropriate for (or required by) GAAP may
not be the most appropriate for internal decision making.
Refer students to Exhibit 1-1.
C. A management accounting system is an information
system that collects operational and financial data,
processes it, stores it, and reports it to users (such as
workers, engineers, managers, and executives).
D. Management accounting information is output from a
management accounting system (e.g., cost of a product, an
activity, or a department).

Learning objective 2: II. The organizations strategy is a major determinant in the

Understand how the
organizations strategy
drives the need for
different types of
management
accounting
information
nature of the management accounting information required for
decision making.
A. Introduce the notion of a value proposition the set of
attributes that a firm tries to deliver to its customers.
1. The value proposition has several characteristics
a. Cost to the buyer (i.e., sales price)
b. Quality (conformance with expectations; quality is
what the customer says it is)
c. Functionality and features (what bells and
whistles come with the product?)
d. Service (attitudes of sales people, promptness of
delivery, etc.)

Management Accounting: Information That Creates Value 6

Learning objective 3: 2. Any product or service has each of these
Recognize the type of characteristics in some form. However, each
management organization will seek competitive advantage in one or
accounting more of these characteristics, depending on the
information that will
industry, economic conditions, strength and character
be useful in a given
organization of competitors, barriers to entry, etc.
B. A firm that is competing on price will need to pay
particular attention to the costs of the products or services
offered. Distortions in product costs may lead
management to promote products which appear to be
profitable but are actually losing money.
C. Managers of a firm that is competing on product
differentiation will need information on those attributes of
the product which enable the firm to compete successfully
(e.g., quality). Information about quality (scrap and
rework rates, first pass inspections, the cost of quality
control efforts) will be especially important.
D. Note that this does not mean that those who compete on
price can be indifferent about product quality, and product
differentiators cannot ignore product costs. What is
important is the relative emphasis that types of information
play in decision making.

Learning Objective III. Overall indices of organization performance include a variety

4:Understand how of financial accounting measures.
financial accounting A. Profitability (return on sales, which is operating income
information provides divided by sales)
an overall measure of
B. Asset or capital utilization (sales divided by investment)
an organizations
performance C. Return on investment = (return on sales x asset utilization)
= operating income/investment

Learning Objective IV. Refer to the Cabinets By Design (CBD) illustration in the text.
5:Realize how Note that financial reports provided Diane with no information
management about the causes of her dilemma.
accountants can A. Diane needed financial information (profits were flat after
develop nonfinancial
4 years of growth) to alert her to the fact that there was a
information that can
predict and explain problem.
financial results B. More careful analysis was needed to figure out why profits
were flat.
C. Initial assumptions about the sustainability of competitors
price cutting proved erroneous.
D. Diane and her managers needed a clear understanding of
CBDs value proposition as well as knowledge of
customer perceptions about CBDs fulfillment of its value
proposition.
E. Diane discovered problems:
1. Erroneous assumptions about the importance of sales
prices (customers were more price sensitive than she
had thought)

Management Accounting: Information That Creates Value 7

 2. There were quality control problems
3. Competitors software was easier to use
4. Deliveries were unreliable and the company had
apparently refused to honor its commitment to free
deliveries when products were late. The late deliveries
to CBDs customers may reflect problems with
purchasing (materials not arriving in time), production
(machine downtime, bottlenecks, etc.), or logistics
(transportation problems). Furthermore, the apparent
failure to honor the commitment to free deliveries
when products were late may arise from managers
too-stringent enforcement of policies (conditions
werent normal).
F. Note that all these problems arise from operational,
design, and policy decisions or assumptions which are not
inherently financial, but which have significant direct or
indirect financial implications.
G. An alert manger who knew of these problems could
predict that failure to remedy the situation would have an
adverse impact on reported financial results.

Learning Objective V. Ethics and the management accountant

6:Appreciate the A. Dealing With Ethical Conflicts. Different kinds of
behavioral and ethical conflicts can arise for employees in an organization. These
issues faced by include:
management
1. conflicts between individual and organization values
accountants
2. conflicts between the organizations stated and
practiced values.
B. The Elements of an Effective Ethical Control System are:
1. A statement of the organizations values and code of
ethics that is stated in practical terms, and that uses
examples
2. A clear statement of the employees ethical
responsibilities for every job description
3. Adequate training to help employees identify ethical
dilemmas in practice and learn how to deal with those
dilemmas
4. Evidence that senior management expects organization
members to adhere to its code of ethics

Management Accounting: Information That Creates Value 8

Chapter quiz

1. Management accounting information is developed for all of the following constituents

EXCEPT:
a. workers.
b. bondholders.
c. managers.
d. executives.

2. Management accounting has the following characteristics EXCEPT:

a. current, future oriented.
b. not regulated by the government.
c. disaggregate.
d. auditable.

3. Management accounting information serves all of the following functions EXCEPT:

a. assessing company credit risk.
b. customer costing.
c. management control.
d. operational control.

4. Front line workers/operators should see all of the following types of financial and
nonfinancial information EXCEPT:
a. cost of resources used in their production or service process.
b. financial statements of customers and suppliers.
c. quality and yield of the production or service process.
d. time required to perform their production or service process.

5. Senior executives of organizations should see all of the following types of financial and
nonfinancial information EXCEPT:
a. market share among targeted customer and market segments.
b. hourly quality and yield statistics for all manufacturing and service processes.
c. profit and cash flow statements of the enterprise.
d. monthly customer satisfaction and retention statistics.

6. Management accounting includes all of the following types of financial and

nonfinancial information EXCEPT:
a. product costs.
b. debt owed to banks.
c. customer profitability.
d. quality information.

7. An organizations value proposition includes

a. price.
b. quality.
c. customer satisfaction.
d. all of the above.

8. Return on investment is

Management Accounting: Information That Creates Value 9

 a. capital/net income.
b. net income/capital.
c. operating income/capital.
d. none of the above.

9. Important factors in controlling unethical or illegal behavior within an organization

include
a. examples set by top management.
b. codes of conduct.
c. boundary systems.
d. all of the above.

10. An organization develops an ethical code of conduct because

a. its Boards of Directors mandates it.
b. it desires to immediately fire those employees who do not believe in its ethical
standards.
c. it hopes to reduce ethical conflicts by avoiding ambiguity or misunderstandings.
d. it hopes to silence its critics.

Management Accounting: Information That Creates Value 10

Solutions to chapter quiz

1. b
2. d
3. a
4. b
5. b
6. b
7. d
8. c
9. d
10. d

Management Accounting: Information That Creates Value 11