Accounting for Decision Making Study Set 5

Business

Quiz 1 :

Introduction

Quiz 1 :

Introduction

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S. and Japanese Tax Laws Tax laws in Japan tie taxable income directly to the financial statements' reported income. That is,to compute a Japanese firm rsquo;s tax liability, multiply the net income as reported to shareholders by the appropriate tax rate to derive the firm's tax liability. In contrast, U.S. firms typically have more discretion in choosing different accounting procedures for calculating net income for shareholders (financial reporting) and taxes. What effect would you expect these institutional differences in tax laws between the United States and Japan to have on internal accounting and reporting?
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Internal Accounting System
Every business maintains its accounts based on a certain principle. There are different principles across the globe which when applied to the same data may give different results. The accounting method which is used by the management for the decision making purpose is the internal accounting system.
This system is used to know the actual results or results that may help in managerial decision making. Internal accounting system may be different from the system opted for external reporting.
In-country J the financial statements are prepared keeping in vies the tax implication. They opt the procedures or methods which results in lesser tax liability. This makes the reports unusable for the management use.
Since the accounts have been manipulated to get a lesser tax the decision cannot be taken based on them. And hence the manager gives other factors more important than the books of accounts.
In-country U there are two types of accounts are maintained. One for the taxation and external purposes and one for the internal purposes. But there is an issue in using this way.
The managers pay is based on the reports prepared for external use and hence they give more importance to that reports leading to the same procedures in the internal reports also. Thus both the accounting system gets linked.Having two separate books definitely gives better tax advantage and also serves the purpose of internal managerial decisions but it also enhances the cost for maintaining two separate accounting system.

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One Cost System Isn't Enough Robert S. Kaplan in "One Cost System Isn't Enough" ( Harvard Business Review. January-February 1988, pp. 61-66) No single system can adequately answer the demands made by diverse functions of cost systems. While companies can use one method to capture all their detailed transactions data, the processing of this information for diverse purposes and audiences demands separate, customized development. Companies that try to satisfy all the needs for cost information with a single system have discovered they can't perform important managerial functions adequately. Moreover, systems that work well for one company may fail in a different environment. Each company has to design methods that make sense for its particular products and processes. Of course, an argument for expanding the number of cost systems conflicts with a strongly ingrained financial culture to have only one measurement system for everyone. Describe the costs and benefits of having a single measurement system.
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Cost System
A cost system is a mechanism adopted by a company to find the cost of all the resources of the company so that the pricing and the profitability of the company can be determined.
In a competitive environment, it is very necessary to have an efficient cost system otherwise the company may fail in completion or may incur losses. There are several types of cost system based on different concepts.
The given quote tells about the need for different cost system in a single company because of the diverse needs of the company. It highlights that every cost system provides a different output which is beneficial in different ways.
To get the maximum benefit one cost system is not enough because it does not meet the all of the requirements.
The given quote also says that it is not possible for a company to opt for all the cost system because it will leave no time for the managerial work. It would be too complicated to handle all the cost systems.
Moreover, the benefit derived from opting many cost system may not exceed the cost involved in maintaining them.
The given quote does not includes the benefits of using a single cost system as against the use of multiple cost system. Moreover, there is also no mention of the uniform cost system across the whole industry.
No system is perfect in itself and hence they should be opted carefully according to the most significant needs of the enterprise and should be followed accurately.

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MBA Students One MBA student was overheard saying to another, "Accounting is baloney. I worked for a genetic engineering company and we never looked at the accounting numbers and our stock price was always growing." "I agree," said the other. "I worked in a rust bucket company that managed everything by the numbers and we never improved our stock price very much." Evaluate these comments.
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Accounting:
Account is a developed art of recording and processing the financial data and generating useful results by presenting them in an understandable manner. Accounting starts with the very beginning of the company and continues even after the operations are completed.The comment that "Accounting is baloney. I worked for a genetic engineering company and we never looked at the accounting numbers and our stock price was always growing." Is incorrect as accounting is the backbone of any corporate entity and it benefits the managers in many ways. Also, the other statement that "I worked in a rust bucket company that managed everything by the numbers and we never improved very much". This statement also symbolizes ignoring the importance of accounting whereas in actual, accounting is Some of the benefits of accounting are:
• Accounting is objective : and is based on the generally accepted accounting principles.
• Accounting is reliable : In a well-run accounting department, data is preserved and procedures are properly in place to assure reliability of information.
• Analysis and Interpretation: One of the major advantage of accounting is that it helps in analyzing the results that are generated out of the collective effort put during the year. Major decisions are based on the interpretations that come out of the financial statements result.
Thus, the statement is false, as accounting is very important tool for the management. It could happen that share prices of the company are continuously growing and accounting has no direct relation with such changes but indirectly, it affects the decision of the stakeholders interested in the business and hence the share price. The price of share totally depends on the presentation of the accounting information and the way how an entity works. Thus, both the statements are framed in a wrong way.

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Using Accounting for Planning The owner of a small software company felt his accounting system was useless. He stated, "Accounting systems only generate historical costs. Historical costs are useless in my business because everything changes so rapidly." Required: a. Are historical costs useless in rapidly changing environments? b. Should accounting systems be limited to historical costs?
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Parkview Hospital Parkview Hospital, a regional hospital, serves a population of 400,000 people. The next closest Hospital is 50 miles away. Parkview's accounting system is adequate for patient billing. The system reports revenues generated per department but does not break down revenues by unit within departments. For example, Parkview knows patient revenue for the entire psychiatric department but does not know revenues in the child and adolescent unit, the chemical dependence unit, or the neuropsychiatric unit. Parkview receives its revenues from three principal sources: the federal government (Medicare), the state government (Medicaid), and private insurance companies (Blue Cross-Blue Shield). Until recently, the private insurance companies continued to pay Parkview's increasing costs and passed these on to the firms through higher premiums for their employees' health insurance. Last year Trans Insurance (TI) entered the market and began offering lower-cost health insurance to local firms. TI cut benefits offered and told Parkview that it would pay only a fixed dollar amount per patient. A typical firm could cut its health insurance premium 20 percent by switching to TI. TI was successful at taking 45 percent of the Blue Cross-Blue Shield customers. Firms that switched to TI faced stiff competition and sought to cut their health care costs. Parkview management estimated that its revenues would fall 6 percent, or $3.2 million, next year because of TI's lower reimbursements. Struggling with how to cope with lower revenues, Parkview began the complex process of deciding what programs to cut, how to shift the delivery of services from inpatient to outpatient clinics, and what programs to open to offset the revenue loss (e.g., open an outpatient depression clinic). Management can forecast some of the costs of the proposed changes, but many of its costs and revenues (such as the cost of the admissions office) have never been tracked to the individual clinical unit. Required: a. Was Parkview's accounting system adequate 10 years ago? b. Is Parkview's accounting system adequate today? c. What changes should Parkview make in its accounting system?
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Montana Pen Company Montana Pen Company manufactures a full line of premium writing instruments. It has 12 different styles, and within each style, it offers ball point pens, fountain pens, mechanical pencils, and a roller ball pen. Most models also come in three finishes-gold, silver, and black matte. Montana Pen's Bangkok, Thailand, plant manufactures four of the styles. The plant is currently producing the gold clip for the top of one of its pen styles, no. 872. Current production is 1,200 gold no. 872 pens each month at an average cost of 185 baht per gold clip. (One U.S. dollar currently buys 32 baht.) A Chinese manufacturer has offered to produce the same gold clip for 136 baht. This manufacturer will sell Montana Pen 400 clips per month. If it accepts the Chinese offer and cuts the production of the clips from 1,200 to 800, Montana Pen estimates that the cost of each clip it continues to produce will rise from 185 baht to 212.5 baht per gold clip. Required: a. Should Montana Pen outsource 400 gold clips for pen style no. 872 to the Chinese firm? Provide a written justification of your answer. b. Given your answer in part ( a ), what additional information would you seek before deciding to outsource 400 gold clips per month to the Chinese firm?
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Golf Specialties Golf Specialties (GS), a Belgian company, manufactures a variety of golf paraphernalia, such as head covers for woods, embroidered golf towels, and umbrellas. GS sells all its products exclusively in Europe through independent distributors. Given the popularity of Tiger Woods, one of GS's more popular items is a head cover in the shape of a tiger. GS is currently making 500 tiger head covers a week at a per unit cost of 3.50 euros, which includes both variable costs and allocated fixed costs. GS sells the tiger head covers to distributors for 4.25 euros. A distributor in Japan, Kojo Imports, wants to purchase 100 tiger head covers per week from GS and sell them in Japan. Kojo offers to pay GS 2 euros per head cover. GS has enough capacity to produce the additional 100 tiger head covers and estimates that if it accepts Kojo's offer, the per unit cost of all 600 tiger head covers will be 3.10 euros. Assume the cost data provided (3.50 euros and 3.10 euros) are accurate estimates of GS's costs of producing the tiger head covers. Further assume that GS's variable cost per head cover does not vary with the number of head covers manufactured. Required: a. Given the data in the problem, what is GS's weekly fixed cost of producing the tiger head covers? b. To maximize firm value, should GS accept Kojo's offer? Explain why or why not. c. Besides the data provided above, what other factors should GS consider before making a decision to accept Kojo's offer?
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Budgeting Salespeople at a particular firm forecast what they expect to sell next period. Their supervisors then review the forecasts and make revisions. These forecasts are used to set production and purchasing plans. In addition, salespeople receive a fixed bonus of 20 percent of their salary if they meet or exceed their forecasts. Discuss the incentives of the salespeople to forecast next-period sales accurately. Discuss the trade-off between using the budget for decision making versus using it as a control device.
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