Management accounting atkinson 6th edition solutions

Financial data are probably useful on a monthly basis, but key operating statistics like occupancy rates, admissions backlogs, and average length-of-stay could be provided daily. The following examples are intended to be illustrative rather than comprehensive. They can also serve as liaisons with the external auditors. The management accounting department can work closely with the functional areas for example, manufacturing, marketing, and engineering that use management accounting information.

This will ensure that the reports are timely and relevant for these internal users. If users wish to use specific accounting conventions interest on capital employed, asset valuation and depreciation using current, not historical values , the management accountants can incorporate these conventions in their reports. Also, weekly and monthly operating summaries for internal information and performance measurement may not have to abide by financial accounting requirements for example, on inventory valuation procedures.

Also, some of the information might be judgmental, subjective, and based on rough estimates. This information might be accurate enough for certain internal uses, but not reliable enough for external reporting and external auditing requirements.

The disadvantage of separate accounting departments is that the information prepared for internal use may not be immediately compatible with external reporting requirements. Therefore, an additional and perhaps costly and time- consuming reconciliation process may be required to translate from statements prepared for internal use into statements suitable for external reporting.

Also by having separate departments, more total accounting and finance personnel may be required since unused capacity in one department or function cannot be easily or quickly mobilized to perform duties for the other department. This situation illustrates how a management accountant treats an internal customer as the primary customer of the management accounting reports and therefore customizes the internal information to the expressed preferences of this internal customer. These needs may not always be consistent with GAAP.

With modern computer systems, the cost of reconciling from managerial information to GAAP information should be relatively small. A benefit-cost analysis should generally favor producing the information that will be most useful to the managers, and leave for the financial reporting group the task of translating and reconciling from the managerial information to the financial reporting information.

Thus it is a valuable complement to direct physical measures of the quality, cycle time, and throughput of a process. Consider a process that has several inputs materials, energy, machine time, and labor. Workers can attempt to improve the process so that less of any given input is used to produce the same output. But without knowing the relative cost of the various inputs, they have little idea about which input would be most useful for gaining productivity improvements.

Without some type of financial model, employees have little idea about the relative value of various inputs and outputs of a process, and consequently have no guidance for priorities on where productivity improvement can have the biggest impact.

As another point, it is often not possible to simultaneously reduce defects, speed up the process and lower the cost of the process. For example, one could attempt to speed up a production process, but this could lead to lower quality and higher maintenance costs. Financial information helps to guide trade-offs among quality, responsiveness to customers, output, and cost. For example, by having financial information, front-line employees are in a better position to consider small, local investments that could improve quality, responsiveness, and output.

Financial information also helps employees set priorities about where cost reduction and quality improvement would be most beneficial. Lacking financial information, employees may focus on improving relatively minor aspects of operating processes that will not have much bottom-line impact for the organization. The point, however, is not to solve the case even top MBA students rarely agree on a solution to most cases. The goal is to motivate and stimulate students to think about the broad applicability of management accounting information in many different settings.

As such, they should provide good illustrations of the applications for management accounting information and concepts discussed in the textbook. If standard times exist for routine jobs that Super Printing performs, the employee can compare actual and standard times to determine potential areas of improvement. Information on the actual time to perform jobs can be reported per job or per day. Information on time and resources needed to perform nonroutine jobs can be collected as they occur, to provide input to future pricing and staffing decisions.

This feedback can be obtained through formal or informal feedback each time a customer picks up a job, or through formal written feedback, such as comment cards. Information on the frequency and reasons for rework or customer dissatisfaction with the output should help the employee in continuous improvement efforts.

This starts with subtracting all operating expenses and purchasing costs from store revenues, but this is much too aggregate to be very useful. The manager will want information on operational control quality, timeliness, and efficiency , business line and customer costs, and financial and nonfinancial performance measurements at the store level.

The manager can use such information in making pricing decisions for services and customers, including volume discounts or surcharges for orders with special requirements and services. The information about the most profitable business lines and customer segments will help direct marketing efforts and spending on equipment, space, and inventory to their most profitable uses. To monitor sales trends, the store manager could collect information about sales by hour of day, day of week, and month of year to guide decisions about which hours the store should be open, and also to staff the store appropriately for predictable fluctuating demands.

Possible nonfinancial strategic measures for the outlet include market share and satisfaction for targeted customers; time, quality, and cost of internal processes; new products and services to offer, and employee skills and motivation. The president would want operating statistics that would enable him or her to compare the profitability and operating performance of each business line across stores.

This internal benchmarking information suggests opportunities for improvement that can be shared across stores. Competitive information could include the market share of Super Printing relative to their competitors.

Competitive pricing information on key products and services would also be valued. The president should also have established information mechanisms by which consumer complaints and satisfaction are directed to his or her attention. In many of these types of environments, the workers were not even supplied with measures of their inputs used and outputs produced, but they would be chastised by their supervisors should yields and productivity fall below standard, or if defects and scrap exceeded budgeted levels.

Therefore, the information needs of workers were minimal—just what to produce and what amount and type of inputs to use. Any defect or unexpected scrap will be analyzed immediately to determine the cause, so that the cause can be fixed as soon as possible.

Special computer programs may be written to reveal the bottleneck resource to the workers so that they can concentrate on fixing any persistent problems with this bottleneck resource and finding ways to expand its productive capacity. In this way, productive capacity of the equipment and processes can be continually increased without additional capital investment.

Information on yields and productivity will be supplied and compared, via trend analysis, to recent experience. If continuous improvement is not visible on the trend lines, the employees may take, as a team task, the job of brainstorming and making suggestions to find new ways to improve yields and productivity.

In the old environment, workers were told exactly what to do and were rarely given information or feedback about their performance. The new environment, in contrast, tasks workers with generating the ideas and solutions leading to continual reductions in defects, downtime, and scrap, and associated increases in productivity— the ratio of good items produced to inputs consumed.

This production manager has expressed very clearly how he uses a mix of financial and nonfinancial information for his task. He disdains cost variance reports because he wants to focus on continuous improvement of performance. The cost variance reports evaluate performance against preset standards that he does not consider relevant for this continuous improvement objective.

Also the cost variances are, at best, after the fact; they are the results, not the drivers, of the actions he is taking. The manager wants to focus on improving the drivers of those results. The ratio of these two financial measures, commonly referred to as the book-to-billings ratio, is a common measure in the semiconductor industry.

When greater than one, the ratio indicates an increase in future business activity. When the ratio is less than one, business activity will contract in the near future. So the production manager is getting a snapshot each day about whether activity in his department will be increasing or decreasing in the near future. The other business level measure he looks at daily is on-time-delivery OTD , a critical customer-based measure.

Deteriorating OTD performance could be caused by delays in production. So the production manager is checking on whether business unit performance is improving or deteriorating, and can calibrate this performance against operating statistics in his own department.

Finally, many NPGOs do not have a clear strategy. The Balanced Scorecard was originally developed to improve performance measurement by incorporating nonfinancial drivers of performance, in addition to the usual financial performance measures. Once the basic system was in place, managers realized that measurement not only has consequences for reporting on the past, but also creates focus for the future. The Balanced Scorecard helps communicate the strategy, including objectives, measures, and targets, to all organizational units and employees, thus serving also as a management system.

The strategy map illustrates the causal relationships among the strategic objectives across the four Balanced Scorecard perspectives. PROBLEMS Since Pioneer produced mostly commodity products gasoline, heating oil, jet fuel , it could not recover in higher prices, any higher costs or inefficiencies incurred in its basic manufacturing and distribution operations.

If the basic operations of refining and distribution did not create a differentiated product or service, then any higher costs incurred in these processes could not be recovered in the final selling price. Having several measures in the process perspective for cost reduction, fixed asset productivity, and yield improvements signaled this important set of process objectives.

These are intangible assets that are not measured well by financial statements alone. Infosys has evolved a continuing series of new strategies body shop, outsourcer, IT service provider, and transformational partner. It needed a system to clearly define each new strategy to align employees and to monitor ongoing performance. Furthermore, the Balanced Scorecard can help management effectively communicate new strategies throughout the company. This provides a framework for the ensuing discussion.

Presumably the primary objective for a fast food restaurant is profitability, which becomes the primary objective in the Balanced Scorecard system. The response should identify reasonable customer expectations regarding service, quality, and cost, and should specify performance measures that reflect how the manager contributes to each of these.

For example, while the manager may have no control over wages or general employment conditions, through general management practices the manager contributes to the general level of employee satisfaction.

The manager is likely to have little interaction with suppliers since in most fast food operations the head office handles these relationships.

Similarly, while the corporate office handles most important community initiatives, the local manager can contribute by participating in community activities—for example, by sponsoring various youth activities. Therefore, the Balanced Scorecard should include operational, customer, employee, and community measures thought to influence profitability.

Such measures might include costs, waste, and customer wait time. Presumably, this would include customers students , employees faculty and staff , suppliers part-time instructors and other outsiders , and the community. The next step is to identify the primary strategy that the school has chosen to compete for students.

This defines not only the proposed relationship with students, but also the relationships with other stakeholders, particularly employees, that the school needs to pursue.

For example, suppose that the school is publicly funded and has as its mandate to educate students so they can fill jobs and provide an economic contribution to the community. Therefore, cost and effectiveness issues will be important parts of the Balanced Scorecard. However, the Balanced Scorecard should reflect the other stakeholders, particularly faculty who are responsible for designing and delivering the educational programs, staff who provide the infrastructure within which the education process takes place, and the community that funds the university and, ultimately, decides its fate.

The performance measurement choices will reflect the mandate strategy and primary objective, as well as what each stakeholder group provides to, and expects to receive from, the university. For example, students provide tuition fees and, through their numbers, continued state funding. In return, students expect to receive an education that allows them to pursue their chosen careers.

Measuring what students receive in this setting may be difficult. For example, measuring success by the average starting salary of students is both a crude and short-run measure. However, perhaps it is the best available. Measuring faculty contribution to achieving the primary objective could be approximated by teaching evaluations and research publications.

This particular setting provides a good basis for discussion because it deals with a situation that most students will understand, but which raises important and difficult issues about choosing objectives, both primary and secondary, and how to measure performance on those objectives. However, the financial systems do not provide useful information about whether the agency has achieved its mission because for such agencies, success is not measured in financial terms. Success should be measured in outcomes achieved.

This requires the agency to have a clear definition of its mission and its targeted customer base. With such a mission and a specified targeted set of constituencies, it can then formulate objectives and measures to motivate and focus employees towards achieving organizational objectives. Ex post, the agency can measure the outcomes from its activities to see whether it has delivered on its mission and objectives. A Balanced Scorecard for a government or nonprofit agency can still have a financial perspective.

This would allow for measurement of operating expenses as a targeted percentage of total funds raised or disbursed. For nonprofits, the financial perspective could also include measurement of funds raised relative to targets, and increases in contributions per donor. The customer perspective would represent objectives and measures for either the specific beneficiaries of the agency or the donors who provide funds for the agency.

Consider a group like the Nature Conservancy or the Sierra Club. From the perspective of donors to these organizations the customers , objectives could relate to acres preserved and species protected.

For United Way organizations, objectives could relate to improvements in the local community served by agencies supported by United Way. The process perspective would represent the objectives and measures for the business processes required to meet the objectives of donors or taxpayers and beneficiaries.

Such objectives could include high quality delivery of —35—. The learning and growth perspective typically, as with private sector companies, would include objectives and measures relating to improving the skills and motivation of employees, delegating greater decision-making to employees, and improving access to information about donors, beneficiaries, and volunteers. Second, the head of the information technology group may attempt to build the scorecard alone rather than with the entire management team, making implementation and acceptance of the Balanced Scorecard difficult.

The Balanced Scorecard would likely be far less complete, useful, and accepted than if the entire management team had participated in its development. Third, the company may face problems common when development of the Balanced Scorecard is treated as a systems project. In addition to the potential problems already mentioned, the information technology group may focus on the data-gathering aspects of the performance measurement system and developing an executive information system so that executives can access any data they want, rather than focusing on the key data for monitoring and implementing the strategy.

Finally, the IT executive may not have the interpersonal and organizational skills to be an effective project leader for an interdisciplinary project though she or he might indeed have those skills. Consequently, the Balanced Scorecard may not include a structured strategy map with causeand-effect linkages among strategic performance measures. The principal advantage of linking compensation to a Balanced Scorecard is the alignment of incentives with the organizational goals represented in the Balanced Scorecard.

Monetary rewards often provide very strong motivation to focus on the scorecard measures. One concern in linking compensation to a Balanced Scorecard is whether the measures are sensible.

Another is to ensure that reliable data collection processes exist for each measure used in the compensation function, and that the measures are not easily manipulated.

Top management must try to anticipate whether managers might choose actions that are undesirable for the organization but that have a beneficial effect on scorecard measures. The organizations must be cautious, during the initial trial period, that the existing or temporary compensation scheme does not encourage a focus on only a narrow set of measures, such as short-term financial performance.

Another concern is how to design compensation based on multiple objectives. Assigning weights to individual objectives allows considerable incentive compensation to be paid when a business unit performs well on some objectives even if the business unit performs quite poorly on other objectives.

Companies can instead award incentive compensation only if a specified minimum threshold is met on all, or a subset, of crucial objectives. This ensures that bonuses are not paid when the company is experiencing financial difficulties.

Assigning percentage weights that determined how much the achieved balanced scorecard measures would contribute to the bonus pool suggests that the system was very balanced.

Assigning degrees of difficulty to achieving targets provided incentives for managers to set stretch targets rather than easily achievable targets, knowing that if they missed a stretch target slightly, they would still receive an award that was higher than a manager who just met a much more easily achievable target.

Because the performance factors underwent review by peers, upper management, and the employees subject to performance evaluation based on the performance factors, everyone concerned could have confidence that the performance factors were reasonable and comparable across different units.

The use of three tiers of compensation—corporate, division, and business unit—aligns individual employees to areas where they can have the most impact their department or business unit , as well as the broader organization division and corporation.

Employees will be motivated to contribute to performance outside the particular department or business unit where they work, yet still benefit from achievements by their own unit, where their efforts will likely have the largest impact.

In addition, the pros and cons of extrinsic motivation can be discussed. A concern with motivation that is primarily extrinsic is that individuals may exhibit less creativity and innovation in decision-making and problem solving than they would if they were also intrinsically motivated. This exercise has two objectives.

The first objective is to provide students with an understanding of what organizations expect from a Balanced Scorecard. The second objective is to provide students with an illustration of the practical issues in choosing measurable primary and secondary objectives.

The question asks the student to explore all facets of the implementation, including what measures are used, why they are used, —38—. Leeds will accomplish this by partnering with its stakeholders, who include highquality faculty, students, and alumni, as well as business, public, and third-sector partners.

Leeds offers both undergraduate and graduate studies. The university draws a relatively large population of international students.

Create sustainable recruitment of high quality international students a Number of fulltime fee paying international students b International student market share by cohort 3. Details also appear in Kaplan, R. This case illustrates how a government organization can adapt the typical Balanced Scorecard approach to implement its vision and mission.

The City of Charlotte then uses four perspectives in the following order: customer citizens , financial, process, and learning and growth. Further details on objectives, measures, and targets are provided on subsequent pages of the fiscal year report.

Strategic focus. The customer objectives support the five focus areas: community safety, housing and neighborhood development, transportation, environment, and economic development. As in the initial Balanced Scorecard, the financial objectives should enable the city to fund needed projects through taxes and credit availability.

The process objectives help the city achieve its customer objectives cost-effectively, and the learning and growth objectives support the process, financial, and customer objectives. Increase average to 8. Offer packages of products that save customers time and money.

Foster customer-focused culture and attitudes; provide training to relationship managers in specific target industries. Cut proportion in half to 1 in Foster customer-focused culture and attitudes. Initiative to migrate mortgage and homeequity customers to become Wells Fargo banking customers. Integrate delivery channels to match when, where, and how customers want to be served. Some machines and web services have Spanish or Chinese language options.

Deploy customer relationship management and data mining application packages. Substantive Issues Raised Division managers at Chadwick had complained to the Controller about the continual pressure to meet short-term financial objectives. As a producer of consumer products and pharmaceuticals, divisions at Chadwick engaged in long-term projects with uncertain payoffs. Managers did not believe that using a single target, return on capital employed, linked current actions and efforts to longer term value creation.

The corporate controller has recently learned about the Balanced Scorecard. He presented the concept to the president and chief operating officer who then issued a call to all Chadwick division managers to develop a scorecard for their divisions. The divisional controller at the Norwalk division was given the task of heading the effort to formulate scorecard measures for the division. Harvard Business School teaching note This teaching note was prepared by W. Anirban Ghosh. A short summary of this paper.

Download Download PDF. Translate PDF. Examples of specific uses of cost information include deciding whether to introduce a new product or discontinue an existing product given the price structure , assessing the efficiency of a particular operation, and assessing the cost of serving customer segments.

Fixed costs are costs that in the short run do not vary with a specified activity. Fixed costs depend on how much of the resource capacity is acquired, rather than on how much is used. The contribution margin is therefore an important component of the equation to determine the breakeven point and to understand the effect on profit of proposed changes, such as changes in sales volume in response to changes in advertising or sales prices.

The contribution margin per unit indicates how much the total contribution margin will increase with an additional unit of sales. The contribution margin ratio expresses similar ideas, but as a percentage of sales dollars. Specifically, the contribution margin ratio is the total contribution margin divided by total sales dollars or contribution margin per unit divided by sales price per unit , and indicates how much the total contribution margin increases with an additional dollar of sales revenue.

For example, utilities bills may include a fixed component per month plus a variable component that depends on the amount of energy used. A step variable cost increases in steps as quantity increases. For example, one supervisor may be hired for every 20 factory workers. Mixed costs and step variable costs both have elements of fixed and variable costs.

However, mixed costs have distinct fixed and variable components, with fixed costs that are constant over a fairly wide range of activity for a given time period and variable costs that vary in proportion to activity. Step variable costs are fixed for a fairly narrow range of activity and increase only when the next step is reached. Fixed costs are costs that in the short run do not vary with a specified activity for a wide range of activity.

For example, factory rent per month would likely remain unchanged as production increased or decreased, even if by large amounts. In a manufacturing setting, incremental cost is often defined as a constant variable cost of a unit of production.

However, in some situations, the variable cost of a unit of production may be more complicated. For example, the variable cost of labor per unit may decrease over time if workers become more efficient a learning effect. Finally, some costs exhibit step- variable behavior, as when one supervisor can supervise a quantity of employees but an additional supervisor is needed beyond a certain number of employees.

Therefore, it is better to omit them from the cost analysis used to support the decision. Moreover, resources are not expended to find or prepare irrelevant information. For example, depreciation on a building reflects the historical cost of the building, which is a sunk cost.

Therefore, they are not relevant costs for the decision. But, some managers may consider sunk costs to be relevant because they may be concerned about how others will perceive their original decision to incur these costs, and may want to cover up their initial poor judgment.

Managers may also feel that they do not want to waste the sunk costs by giving up on the possibility of some benefit from the invested funds, or may continue to believe in potential success despite overwhelming evidence to the contrary. Also, managers may be embarrassed and unwilling to admit they made a mistake. For example, in comparing the status quo and a proposal to substantially increase the quantity of goods or services provided, additional fixed costs that is, costs not proportional to volume may be incurred to provide the increased quantity.

Such costs might include a large expenditure for more equipment or expanded factory facilities. If it is possible to find an alternative use for the facilities made available because of the elimination of a product or a component, the associated fixed costs also are relevant. Conversely, fixed costs that cannot be eliminated or used for other productive purposes are not relevant for the decision.

For example, if factory facilities would remain idle if the company buys from outside, then the associated costs are not relevant for the decision.

For example, one must question whether the outside supplier has quoted a lower price to obtain the order, and plans to increase the price. Also, the reliability of the supplier in meeting the required quality standards and in making deliveries on time is important.

A difficulty that arises with respect to cost analysis is that many product costs, such as machine and factory depreciation, are the result of sunk costs that often remain in whole or in part after the product is discontinued. The analysis of what costs are avoided when a product is dropped can be difficult due to the closing of plants, severance pay and environmental cleanup costs. For example, a one-time order that covers variable production and selling costs is advantageous if capacity cannot be changed in the short run and excess capacity exists.

Also, for given capacity with one scare resource, maximizing contribution margin per unit of scarce resource will maximize profit.

In the long run, prices must cover all their costs, both fixed and variable, in order for the firm to survive. Products should be ranked by the contribution margin per unit of the constrained resource rather than by the contribution margin per unit of the product.

When capacity is fixed in the short run, the firm may need to sacrifice the production of some profitable products to make capacity available for a new order. The contribution margin on the production of profitable products sacrificed for a new order is an opportunity cost that must be considered to evaluate the profitability of the new order.

However, gasoline costs will vary with miles driven. Consequently, fewer total units are required to break even 91, in part b versus , in part a. A countervailing argument is the creation of new customers who may stay with the firm and generate additional contribution margin in the future.

Note that total fixed costs remain unchanged, so it is sufficient to evaluate the change in the contribution margin. If the order had been long-term, Healthy Hearth would need to evaluate whether the price provides the desired profitability considering the fixed costs and whether filling the government order might require giving up higher-priced regular sales.

Again, total fixed costs remain unchanged, so it is sufficient to evaluate the change in the contribution margin. Number of years before car is replaced decision horizon. Expected resale values of both cars when they will be replaced. Cost of capital interest rate to consider the time value of money. This topic is covered in other courses. Qualitative consideration: 1. Subjective preference for driving an Impala rather than a Ford Escort.

Therefore, the plant manager should overhaul the old grinding machine. However, this analysis is incomplete as it ignores the time value of money, considered in net present value analysis, which is covered in other courses. A more complete evaluation would use net present value analysis, which is covered in other courses.

Fixed overhead costs may be unavoidable if the facility cannot be converted to alternative uses when the component is outsourced.

However, even if the fixed overhead costs are unavoidable, Kane would reduce costs by outsourcing.