Quiz 1: Introduction to Cost Management
Business
Q 1Q 1
What is cost management, and how does it differ from management accounting and cost accounting?
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Cost management: Cost management is the process of effective planning and controlling the costs incurred by a business. It means the collection, analyzation and evaluation of cost statistics to the management for budgeting purposes to plan and control the costs involved in the business. It is an integral part of the management. Management accounting: Financial and non-financial data analyzed by the management to take decisions and plan the organizational strategy. It is a profession that helps management in decision making, planning and providing the expert skill in financial reporting. Cost accounting: It is the process that helps manager to understand the costs of running a business. It aims on the calculation of cost of production or service to provide information about the cost control and cost reduction. In this process, the costs are classified basing on the functions, activities carried on by the company. Cost management differs from management accounting and cost accounting in the following aspects: 1.Cost management deals with collection, analyzation and evaluation of cost statistics whereas management accounting deals with the financial data and also non-financial data. 2.Cost management is closely related to cost accounting. Cost accounting is a part of management accounting because the management accounting considers financial data for organizational strategy. 3.Cost accounting deals with the historical data whereas management accounting is a process that predicts future with the help of budgets. 4.Management accounting is an information tool for the management at top-level but the cost management information is used internally and externally used by the management. 5.Cost accounting and financial accounting are parts of management accounting whereas cost management considers only cost accounting.
Q 2Q 2
Financial Accounting and Cost Management
Classify each of the following actions as either being associated with the financial accounting information system (FS) or the cost management information system (CMS):
a. Determining the total compensation of the CEO of a public company
b. Issuing a quarterly earnings report
c. Determining the unit product cost using TDABC
d. Calculating the number of units that must be sold to break even
e. Preparing a required report for the SEC
f. Preparing a sales budget
g. Using cost and revenue information to decide whether to keep, or drop, a product line
h. Preparing an annual statement of financial position that conforms to generally accepted accounting principles (GAAP)
i. Using cost and revenue information to decide whether to invest in a new production system or not
j. Reducing costs by improving the overall quality of a product
k. Using a debt-equity ratio and liquidity ratios from a balance sheet to assess the likelihood of bankruptcy
l. Using a public company's financial statements to decide whether or not to buy its stock
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The classifications of the following actions associated with either financial accounting information system (FS) or the cost management information system (CMS) is shown as below: a. CMS: Determining the compensation of CEO is a cost and management decision which depends on the responsibility of the job, decisions to be taken and the funds available with the company. b. FS: Quarterly earnings report is the record of the expenditure and the total earnings of the company. c.CMS: Determining the unit product cost using Time Driven Activity Based Costing is Cost and Management information Systems. The demand will be more if the cost of the product is less. d. CMS: The number of units to be sold to get the break-even point so that some vital future decisions can be taken. e.FS: Report for SEC is a financial statement for information. f.CMS: Preparing sales budget to procure and utilize the funds for the future sales. g.CMS: Cost and revenue information for a vital decision whether to extend or stop product line. h.FS: Preparing the financial statement according to GAAP for public information. i.CMS: Cost and revenue information for a vital decision whether to invest in a new production system. j.CMS: Decision to reduce cost and improve quality is a cost effective decision. k.CMS: Using debt- equity and liquidity ratios to take major financial decisions of the company. l.FS: Investor decides whether to invest or not by looking at the financial statements of the company.
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Cost management: Cost management provides the detailed cost information that management needs to control current operations and plan for the future and financial accounting is used to prepare accounting information for people outside the organization and not involved in the day-to-day running of the company. List the aspects that differs Cost management and financial accounting: 1. Cost management is an internal management tool whereas financial accounting involves the preparation of set of final accounts for each accounting period. 2. Cost management can provide day to day decision by applying the cost concepts such as marginal costing and budgetary control whereas financial accounting cannot provide information for day to day decision making. 3. Cost management aims at computing true and fair view of cost of production and reducing the cost whereas financial accounting aims at presenting true and fair view of transactions, profit and loss and balance sheet on a given date. 4. Cost management rules are set within the organization to produce information relevant to the needs of the organization whereas financial accounting follows generally accepted accounting principles. 5. Cost management output is used by management, customers, auditors, suppliers and others involved in the organization where as the financial reports are used by shareholders, creditors, prospective investors and public.
Q 4Q 4
Customer Orientation, Quality, Time-Based Competition
Hepworth Communications produces cell phones. One of the four major electronic components is produced internally. The other three components are purchased from external suppliers. The electronic components and other parts are assembled (by the Assembly Department) and then tested (by the Testing Department). Any units that fail the test are sent to the Rework Department where the unit is taken apart and the failed component is replaced. Data from the Testing Department reveal that the internally produced component (made by the Component Department) is the most frequent cause of product failure. One out of every 50 phones fails because of a faulty internally produced component.
Barry Norton is the manager of the Component Department. In a recent performance evaluation, the plant manager told Barry that he needed to be more sensitive to the needs of the department's customers. This charge puzzled Barry somewhat-after all, the component is not sold to anyone but is used in producing the plant's cell phones.
Required:
1. Who are Barry's customers?
2. Explain the plant manager's charge to Barry to be more sensitive to his customers. Explain also how this increased sensitivity could improve the company's time-based competitive ability.
3. What role would cost management play in helping Barry be more sensitive to his customers?
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Q 5Q 5
Identify and discuss the factors that are affecting the focus and practice of cost management.
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Q 6Q 6
Identifying Cost Management Information System Objectives
Consider the following actions associated with a cost management information system:
a. Eliminating a non-value-added activity
b. Determining how much it costs to perform a heart transplant
c. Calculating the cost of inspecting components from an outside supplier
d. Developing and using a budgeted income statement for a division
e. Eliminating the need to inspect by improving the quality of products and processes
f. Determining whether selling a product at split-off is more profitable than processing it further before selling it
g. Calculating the cost of producing an e-book
h. Using a trend report on quality costs to assess the effectiveness of a quality improvement program
i. Determining the units that must be sold to break even
j. Calculating the cost to perform a tooth extraction
k. Determining the total cost of moving goods
l. Using JIT purchasing and manufacturing to significantly reduce inventories
m. Using unit product cost to help develop a bid price
Required:
Classify the above actions as being associated with one of the following objectives of a cost management information system:
1. Costing of products, services, and other objects of interest
2. Planning and control
3. Decision making
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Q 8Q 8
Managerial Uses of Accounting Information
Each of the following scenarios requires the use of accounting information to carry out one or more of the following managerial activities: (1) planning, (2) control and evaluation, (3) continuous improvement, or (4) decision making.
a. MANAGER : At the last board meeting, we established an objective of earning an after-tax profit equal to 20 percent of sales. I need to know the revenue that we need to earn in order to meet this objective, given that we have $250,000 to spend on the promotional campaign. Once I have estimated sales in units, we then need to outline a promotional campaign that conforms to our budget and that will take us where we want to be. However, to compute the targeted sales revenue, I need to know the unit sales price, the unit variable cost, and the associated fixed production and support costs. I also need to know the tax rate.
b. MANAGER : We have problems with our procurement process. Our accounts payable depart-ment is spending 80 percent of its time resolving discrepancies between the purchase order, receiving order, and supplier's invoice. Incorrect part numbers on the purchase orders, incorrect quantities ordered, and wrong parts sent (or the incorrect quantity) are just a few examples of sources of discrepancies. A complete redesign of the process has been suggested, which will allow us to eliminate virtually all of the errors and, at the same time, significantly reduce the number of clerks needed in purchasing, receiving, and accounts payable. This redesign promises to significantly reduce costs, decrease lead time, and increase customer satisfaction.
c. MANAGER : This overhead cost report indicates that we have spent significantly more on inspection, purchasing, and production than was budgeted. An investigation has revealed that the source of the problem is faulty components from suppliers. A supplier evaluation has revealed that by selecting five suppliers with the best quality records (out of 15 currently used), the number of defective components will be dramatically reduced, thus producing significant overhead savings by reducing the demand for inspections, reordering, and rework.
d. MANAGER : A large local firm has approached me and has offered to sell us one of the components used in our small engines-a component that we are currently producing internally. I need to know costs that we would avoid if this component is purchased so that I can assess the economic merits of this offer.
e. MANAGER : Currently, our deluxe lawn mower is losing money. We need to increase profits. I would like to know how much our profits would be if we reduce our variable costs by $50 per mower while maintaining our current sales volume. Also, marketing claims that if we increase advertising expenditures by $1,000,000 and cut prices by 15 percent, we can increase the number of mowers sold by 25 percent. I would like to know which approach offers the most profit, or if a combination of the approaches may be best.
f. MANAGER : We are implementing a major quality improvement program. We will be increasing the investment in prevention and detection activities with the expectation of driving down both internal and external failure costs. I expect to see trend reports for all categories of quality costs. I want to see if improving quality really does reduce costs and improve profitability.
g. MANAGER : Our engineering design department has proposed a new design for our product. The new design promises to reduce post-purchase costs and, as a consequence, increase market share. I need to know the cost of producing this new design because it uses some new components and requires some different manufacturing processes. I would then like to have a projected income statement based on the new market share and new production costs. The planned selling price will be the same, or maybe even 10 percent lower. Projec-tions based on the two price scenarios would be needed.
h. MANAGER : My engineers have said that by redesigning our two main production proc-esses, we can reduce move time by 90 percent and wait time by 85 percent. This would decrease cycle time and virtually eliminate the need to carry finished goods inventories. On- time deliveries would also increase dramatically. This would produce cost savings of nearly $20,000,000 per year. Market share and revenues would also increase.
Required:
1. Describe each of the four managerial responsibilities.
2. Identify the managerial activity or activities applicable for each scenario, and indicate the role of accounting information in the activity.
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Q 9Q 9
What is the role of the controller in an organization? Describe some of the activities over which he or she has control.
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Q 10Q 10
Behavioral Impact of Cost Information
Bill Christensen, the production manager, was grumbling about the new quality cost system the plant controller wanted to put into place. "If we start trying to track every bit of spoiled material, we'll never get any work done. Everybody knows when they ruin something. Why bother to keep track? This is a waste of time. Besides, this isn't the first time scrap reduction has been emphasized. You tell my workers to reduce scrap, and I'll guarantee it will go away, but not in the way you would like."
Required:
1. Why do you suppose that the controller wants a written record of spoiled material? If "everybody knows" what the spoilage rate is, what benefits can come from keeping a written record?
2. Now consider Bill Christensen's position. In what way(s) could he be correct? What did he mean by his remark concerning scrap reduction? Can this be avoided? Explain.
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Q 12Q 12
Managerial Uses of Accounting Information
Each of the following scenarios requires the use of accounting information to carry out one or more of the following managerial activities: (1) planning, (2) control and evaluation, (3) continuous improvement, or (4) decision making.
a. MANAGER : At the last board meeting, we established an objective of earning an after-tax profit equal to 20 percent of sales. I need to know the revenue that we need to earn in order to meet this objective, given that we have $250,000 to spend on the promotional campaign. Once I have estimated sales in units, we then need to outline a promotional campaign that conforms to our budget and that will take us where we want to be. However, to compute the targeted sales revenue, I need to know the unit sales price, the unit variable cost, and the associated fixed production and support costs. I also need to know the tax rate.
b. MANAGER : We have problems with our procurement process. Our accounts payable department is spending 80 percent of its time resolving discrepancies between the purchase order, receiving order, and supplier's invoice. Incorrect part numbers on the purchase orders, incorrect quantities ordered, and wrong parts sent (or the incorrect quantity) are just a few examples of sources of discrepancies. A complete redesign of the process has been suggested, which will allow us to eliminate virtually all of the errors and, at the same time, significantly reduce the number of clerks needed in purchasing, receiving, and accounts payable. This redesign promises to significantly reduce costs, decrease lead time, and increase customer satisfaction.
c. MANAGER : This overhead cost report indicates that we have spent significantly more on inspection, purchasing, and production than was budgeted. An investigation has revealed that the source of the problem is faulty components from suppliers. A supplier evaluation has revealed that by selecting five suppliers with the best quality records (out of 15 currently used), the number of defective components will be dramatically reduced, thus producing significant overhead savings by reducing the demand for inspections, reordering, and rework.
d. MANAGER : A large local firm has approached me and has offered to sell us one of the components used in our small engines-a component that we are currently producing internally. I need to know costs that we would avoid if this component is purchased so that I can assess the economic merits of this offer.
e. MANAGER : Currently, our deluxe lawn mower is losing money. We need to increase profits. I would like to know how much our profits would be if we reduce our variable costs by $50 per mower while maintaining our current sales volume. Also, marketing claims that if we increase advertising expenditures by $1,000,000 and cut prices by 15 percent, we can increase the number of mowers sold by 25 percent. I would like to know which approach offers the most profit, or if a combination of the approaches may be best.
f. MANAGER : We are implementing a major quality improvement program. We will be increasing the investment in prevention and detection activities with the expectation of driving down both internal and external failure costs. I expect to see trend reports for all categories of quality costs. I want to see if improving quality really does reduce costs and improve profitability.
g. MANAGER : Our engineering design department has proposed a new design for our product. The new design promises to reduce post-purchase costs and, as a consequence, increase market share. I need to know the cost of producing this new design because it uses some new components and requires some different manufacturing processes. I would then like to have a projected income statement based on the new market share and new production costs. The planned selling price will be the same, or maybe even 10 percent lower. Projections based on the two price scenarios would be needed.
h. MANAGER : My engineers have said that by redesigning our two main production processes, we can reduce move time by 90 percent and wait time by 85 percent. This would decrease cycle time and virtually eliminate the need to carry finished goods inventories. On time deliveries would also increase dramatically. This would produce cost savings of nearly $20,000,000 per year. Market share and revenues would also increase.
Required:
1. Describe each of the four managerial responsibilities.
2. Identify the managerial activity or activities applicable for each scenario, and indicate the role of accounting information in the activity.
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Q 13Q 13
The controller should be a member of the top management staff. Do you agree or disagree with this statement? Explain.
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Q 14Q 14
Financial Accounting versus Cost Management
Lily Shultz is a junior majoring in hotel and restaurant management. She wants to work for a large hotel chain with the goal of eventually managing a hotel. She is considering the possibility of taking a course in either financial accounting or cost management. Before choosing, however, she has asked you to provide her with some information about the advantages that each course offers.
Required:
Prepare a letter advising Lily about the differences and similarities between financial accounting and cost management. Describe the advantages each might offer the manager of a hotel.
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Q 16Q 16
Ethical Issues
John Biggs and Patty Jorgenson are both cost accounting managers for a manufacturing division. During lunch yesterday, Patty told John that she was planning on quitting her job in three months because she had accepted a position as controller of a small company in a neighboring state. The starting date was timed to coincide with the retirement of the current controller. Patty was excited because it allowed her to live near her family. Today, the divisional controller took John to lunch and informed him that he was taking a position at headquarters and that he had recommended that Patty be promoted to his position. He indicated to John that it was a close call between him and Patty and that he wanted to let John know personally about the decision before it was announced officially.
Required:
What should John do? Describe how you would deal with his ethical dilemma (considering the IMA code of ethics in your response).
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Q 17Q 17
What is the role of cost management with respect to the objective of continuous improvement?
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Q 18Q 18
Ethical Issues
Emily Henson, controller of an oil exploration division, has just been approached by Tim Wilson, the divisional manager. Tim told Emily that the projected quarterly profits were unacceptable and that expenses need to be reduced. He suggested that a clean and easy way to reduce expenses is to assign the exploration and drilling costs of four dry holes to those of two successful holes. By doing so, the costs could be capitalized and not expensed, reducing the costs that need to be recognized for the quarter. He further argued that the treatment is reasonable because the exploration and drilling all occurred in the same field; thus, the unsuccessful efforts really were the costs of identifying the successful holes. "Besides," he argued, "even if the treatment is wrong, it can be corrected in the annual financial statements. Next quarter's revenues will be more and can absorb any reversal without causing any severe damage to that quarter's profits. It's this quarter's profits that need some help."
Emily was uncomfortable with the request because generally accepted accounting principles do not sanction the type of accounting measures proposed by Tim.
Required:
1. Using the code of ethics for management accountants, recommend the approach that Emily should take.
2. Suppose Tim insists that his suggested accounting treatment be implemented. What should Emily do?
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Q 20Q 20
Ethical Issues
Silverado, Inc., is a closely held brokerage firm that has been very successful over the past five years, consistently providing most members of the top management group with 50 percent bonuses. In addition, both the chief financial officer and the chief executive officer have received 100 percent bonuses. Silverado expects this trend to continue.
Recently, the top management group of Silverado, which holds 40 percent of the outstanding shares of common stock, has learned that a major corporation is interested in acquiring Silverado. Silverado's management is concerned that this corporation may make an attractive offer to the other shareholders and that management would be unable to prevent the takeover. If the acquisition occurs, this executive group is uncertain about continued employment in the new corporate structure. As a consequence, the management group is considering changes to several accounting policies and practices that, although not in accordance with generally accepted accounting principles, would make the company a less attractive acquisition. Management has told Larry Stewart, Silverado's controller, to implement some of these changes. Stewart has also been informed that Silverado's management does not intend to disclose these changes at once to anyone outside the immediate top management group.
Required:
Using the code of ethics for management accountants, evaluate the changes that Silverado's management is considering, and discuss the specific steps that Larry Stewart should take to resolve the situation. ( CMA adapted )
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Q 21Q 21
What is business ethics? Is it possible to teach ethical behavior in a management accounting course?
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Q 22Q 22
Ethical Issues
Silverado, Inc., is a closely held brokerage firm that has been very successful over the past five years, consistently providing most members of the top management group with 50 percent bonuses. In addition, both the chief financial officer and the chief executive officer have received 100 percent bonuses. Silverado expects this trend to continue.
Recently, the top management group of Silverado, which holds 40 percent of the outstanding shares of common stock, has learned that a major corporation is interested in acquiring Silverado. Silverado's management is concerned that this corporation may make an attractive offer to the other shareholders and that management would be unable to prevent the takeover. If the acquisition occurs, this executive group is uncertain about continued employment in the new corporate structure. As a consequence, the management group is considering changes to several accounting policies and practices that, although not in accordance with generally accepted accounting principles, would make the company a less attractive acquisition. Management has told Larry Stewart, Silverado's controller, to implement some of these changes. Stewart has also been informed that Silverado's management does not intend to disclose these changes at once to anyone outside the immediate top management group.
Required:
Using the code of ethics for management accountants, evaluate the changes that Silverado's management is considering, and discuss the specific steps that Larry Stewart should take to resolve the situation. ( CMA adapted )
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Q 23Q 23
Firms with higher ethical standards will experience a higher level of economic performance than firms with lower or poor ethical standards. Do you agree? Why or why not?
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Q 24Q 24
Ethical Issues
Emery Manufacturing Company produces component parts for the farm equipment industry and has recently undergone a major computer system conversion. Jake Murray, the controller, has established a troubleshooting team to alleviate accounting problems that have occurred since the conversion. Jake has chosen Gus Swanson, assistant controller, to head the team that will include Linda Wheeler, cost accountant; Cindy Madsen, financial analyst; Randy Lewis, general accounting supervisor; and Max Crandall, financial accountant
The team has been meeting weekly for the last month. Gus insists on being part of all the team conversations in order to gather information, to make the final decision on any ideas or actions that the team develops, and to prepare a weekly report for Jake. He has also used this team as a forum to discuss issues and disputes about him and other members of Emery's top management team. At last week's meeting, Gus told the team that he thought a competitor might purchase the common stock of Emery, because he had overheard Jake talking about this on the telephone. As a result, most of Emery's employees now informally discuss the sale of Emery's common stock and how it will affect their jobs.
Required:
Is Gus Swanson's discussion with the team about the prospective sale of Emery unethical? Discuss, citing specific standards from the code of ethical conduct to support your position. (CMA adapted)
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Q 25Q 25
Review the code of ethical conduct for management accountants. Do you believe that the code will have an effect on the ethical behavior of management accountants? Explain.
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Q 26Q 26
Ethical Issues
The external auditors for Heart Health Procedures (HHP) are currently performing the annual audit of HHP's financial statements. As part of the audit, the external auditors have prepared a representation letter to be signed by HHP's chief executive officer (CEO) and chief financial officer (CFO). The letter provides, among other items, a representation that appropriate provisions have been made for:
Reductions of any excess or obsolete inventories to net realizable values, and Losses from any purchase commitments for inventory quantities in excess of requirements or at prices in excess of market.
HHP began operations by developing a unique balloon process to open obstructed arteries to the heart. In the last several years, HHP's market share has grown significantly because its major competitor was forced by the Food and Drug Administration (FDA) to cease its balloon operations. HHP purchases the balloon's primary and most expensive component from a sole supplier. Two years ago, HHP entered into a five-year contract with this supplier at the then current price, with inflation escalators built into each of the five years. The long-term contract was deemed necessary to ensure adequate supplies and discourage new competition. During the past year, however, HHP's major competitor developed a technically superior product, which utilizes an innovative, less costly component. This new product was recently approved by the FDA and has been introduced to the medical community, receiving high acceptance. It is expected that HHP's market share, which has already seen softness, will experience a large decline and that the primary component used in the HHP balloon will decrease in price as a result of the competitor's use of its recently developed superior, cheaper component. The new component has been licensed by the major competitor to several outside supply sources to maintain available quantity and price competitiveness. At this time, HHP is investigating the purchase of this new component.
HHP's officers are on a bonus plan that is tied to overall corporate profits. Jim Honig, vice president of manufacturing, is responsible for both manufacturing and warehousing. During the course of the audit, he advised the CEO and CFO that he was not aware of any obsolete inventory or any inventory or purchase commitments where current or expected prices were significantly below acquisition or commitment prices. Jim took this position even though Marian Nevins, assistant controller, had apprised him of both the existing excess inventory attributable to the declining market share and the significant loss associated with the remaining years of the five-year purchase commitment.
Marian has brought this situation to the attention of her superior, the controller, who also participates in the bonus plan and reports directly to the CFO. Marian worked closely with the external audit staff and subsequently ascertained that the external audit manager was unaware of the inventory and purchase commitment problems. Marian is concerned about the situation and is not sure how to handle the matter.
Required:
1. Assuming that the controller did not apprise the CEO and CFO of the situation, explain the ethical considerations of the controller's apparent lack of action by discussing specific provisions of the Standards of Ethical Conduct for Management Accountants.
2. Assuming Marian Nevins believes the controller has acted unethically and not apprised the CEO and CFO of the findings, describe the steps that she should take to resolve the situation. Refer to the Standards of Ethical Conduct for Management Accountants in your answer.
3. Describe actions that HHP can take to improve the ethical situation within the company.
( CMA adapted )
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Q 27Q 27
Go to the website of the Institute of Management Accountants (www.imanet.org) and describe the exam content of each of the two parts. Identify the requirements that must be met to take the CMA examination. Now go to http://www.aicpa.org and describe the content of the CPA examination. Discuss the differences in content of the CMA and CPA exams. How do the requirements differ? (Answer this last question for your specific state of residence.)
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Q 28Q 28
Identify the three forms of accounting certification. Which form of certification do you believe is best for a management accountant? Why?
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