Chapter 01 – Static Key Part 2

48. Objectivity in management accounting AACSB: Reflective Difficulty: Easy Learning Objective: 1.08 Explain how costing systems can provide information to support a range of operational and strategic decisions Topic: Difference between Management and Financial Accounting What is meant by the following statement? 'The objectivity of the management accounting process is largely a myth.' AACSB: Communication AACSB: Reflective Difficulty: Hard Learning Objective: 1.02 Define management accounting in terms of value creation Topic: Role of Management Accountant in Value Creation 49. Management accounting and decision making Give an example of management accounting information that could help a manager make each of the following decisions: i. The managing director of a car rental company is deciding whether to add luxury cars to the rental car fleet. ii. The production manager in an assembly plant is deciding whether to have routine maintenance performed on a machine weekly or fortnightly. iii. The manager of a department store is deciding on the number of security personnel to employ to reduce shoplifting. iv. The local council is deciding whether to build an addition to the local library. Note: any correct answers are possible since only one example is requested. i. Estimates of any operating costs associated with the proposed luxury cars would be relevant. For example, estimates of the cost of petrol, routine maintenance and insurance on the new vehicles would be useful. ii. Data about the cost of maintaining the machine weekly or fortnightly would be relevant. In addition, the production manager should consider information about the likely rates of defective products under each maintenance alternative. iii. Estimates of the cost of lost merchandise due to shoplifting and the cost of employing security personnel would be relevant to this decision. iv. Estimates of the cost of building the library addition as well as estimated benefits to the population from having the addition would be useful. In estimating the benefits, some value judgments may need to be made about the benefits to the public from having additional library space and more books. AACSB: Communication AACSB: Reflective Difficulty: Hard Learning Objective: 1.02 Define management accounting in terms of value creation Topic: Role of Management Accountant in Value Creation 1-11 50. Explain how the management accountant, with the use of computer technology, can provide information that will be useful for the management and control of operational tasks. With the aid of computers, management accountants are able to provide information that is accurate, timely and relevant to the managers they are serving. For example they can provide information such as number of units produced, number of rejects and time lost on a daily basis, and ensure a regular flow of information between sales and production. AACSB: Communication AACSB: Technical Difficulty: Hard Learning Objective: 1.09 Describe the factors that may influence the design of management accounting systems including behavioural issues, cost-benefit trade-offs and the implications of contingency and institutional theories Topic: Globalisation and International Competition 51. 'As global competition increases, businesses are being pressured to reach higher levels of productivity to price their products and services competitively.' Explain how management accountants can play a role in helping management meet these challenges. The systems that management accountants can help to develop are: i. Total quality management—builds a high level of quality into production and all management processes within an organisation. ii. Just-in-time management—an approach to inventory management whereby inventory that is required in production is delivered just in time to be used in the production process. iii. Activity-based management—focuses on identifying and eliminating activities that add no value to the product or service from the customer's perspective (e.g. reworking, spoilage). AACSB: Communication AACSB: Reflective Difficulty: Hard Learning Objective: 1.01 Describe changes that have taken place in the business environment in recent years Learning Objective: 1.11 After studying the appendix, describe how the focus of management accounting has evolved Topic: Globalisation and International Competition 52. List and define four ethical standards that are part of the IFAC's Code of Professional Conduct. Note: Answers may include any four of the following: Integrity. Members must be straightforward and honest in professional and business relationships. Integrity also implies fair dealing and truthfulness. Objectivity. Members must not compromise their professional or business judgement because of bias, conflict of interest or the undue influence of others. Professional competence and due care. Members must maintain professional knowledge and skill at the level required to ensure that clients or employers receive competent professional service, and act diligently in accordance with applicable technical and professional standards when providing their services. Confidentiality. Members must not disclose outside the firm or employing organisation confidential information acquired as a result of professional and business relationships without specific authority from the client or employer unless there is a legal duty to do so. Members must not use confidential information acquired as a result of professional and business relationships to their personal advantage or the advantage of third parties. Professional behaviour. Members must comply with relevant laws and regulations and avoid any action or omission that may bring discredit to the profession. AACSB: Communication Difficulty: Hard Learning Objective: 1.12 After studying the appendix, discuss the professional qualifications that are relevant to becoming an accountant, and the ethical standards to which accountants must adhere Topic: Ethics, Corporate Governance, and Corporate Social Responsibility 53. Jasmine Dol is a junior management accountant at Hey Hey Toys Ltd. Jasmine is given the task of compiling a cost-benefit analysis report on whether the company should purchase an expensive new machine from Beta Ltd, where her brother is the new sales manager. Jasmine did not tell anyone in Hey Hey Toys about her brother's new job. In preparing her report, Jasmine overstates the qualitative benefits and understates the costs associated with this new machine, in order to help her brother make his first sale as the new sales manager. Discuss why and how Jasmine has deviated from the IFAC's code of ethics. The following are some key points: Integrity – Jasmine did not tell anyone about the conflict of interest, and therefore did not demonstrate 'integrity' Objectivity – in overstating the benefits and understating the costs, Jasmine is clearly biased in her analysis, and is not acting in the company's best interests. AACSB: Communication AACSB: Ethics Difficulty: Medium Learning Objective: 1.12 After studying the appendix, discuss the professional qualifications that are relevant to becoming an accountant, and the ethical standards to which accountants must adhere Topic: Ethics, Corporate Governance, and Corporate Social Responsibility 54. Identify and contrast management accounting and financial accounting information Management accounting Financial accounting Users of information Regulations Source of data Nature of the information Internal: managers and employees at all levels No accounting standards or external rules are imposed. Information is generated to satisfy managers' information needs Both financial and non-financial data drawn from many sources—the core accounting system; physical and operational data from production systems; and market, customer and economic data from sources external to the organisation Past, current and future-oriented; subjective; relevant; timely; and supplied at various levels of detail to suit managers' specific needs External: shareholders, creditors, banks, securities exchange, trade unions and government agencies Accounting standards and corporations law regulate the content of external financial reports Financial data almost exclusively drawn from the organisation's core transactionbased accounting system Past; reliable; verifiable; not timely; not relevant; and highly aggregated always AACSB: Communication AACSB: Reflective Difficulty: Medium Learning Objective: 1.03 Describe the major differences between management accounting and financial accounting information Topic: Role of Management Accountant in Value Creation 55. Behavioural issues are not taken into consideration when developing management accounting systems. FALSE AACSB: Reflective Difficulty: Medium Learning Objective: 1.09 Describe the factors that may influence the design of management accounting systems including behavioural issues, cost-benefit trade-offs and the implications of contingency and institutional theories Topic: Fundamental Management Processes 56. Organisations prepare a mission statement that describes the desired future position and/or goals of the organisation. FALSE AACSB: Reflective Difficulty: Easy Learning Objective: 1.06 Explain the basic concepts of strategy and how management accounting systems can support strategies Topic: Role of Management Accountant in Value Creation 57. The systems and procedures implemented to provide regular information to assist with control are called control systems. TRUE AACSB: Reflective Difficulty: Easy Learning Objective: 1.07 Explain how planning and control mechanisms can be used to support resource management Topic: Fundamental Management Processes 58. When a firm adopts a strategy of being a low-cost producer and sells its products at a price lower than its competitors, the firm is said to be using a strategy of cost leadership. TRUE AACSB: Reflective Difficulty: Easy Learning Objective: 1.06 Explain the basic concepts of strategy and how management accounting systems can support strategies Topic: Fundamental Management Processes 59. The theory that suggests that a firm's management accounting system is influenced by factors such as the external environment and technology is called contingency theory. TRUE AACSB: Reflective Difficulty: Easy Learning Objective: 1.09 Describe the factors that may influence the design of management accounting systems including behavioural issues, cost-benefit trade-offs and the implications of contingency and institutional theories Topic: Globalisation and International Competition 60. There is no overlap between the two accounting streams management and financial accounting. FALSE AACSB: Reflective Difficulty: Easy Learning Objective: 1.03 Describe the major differences between management accounting and financial accounting information Topic: Difference between Management and Financial Accounting 61. The increased information needs of modern organisations have meant that management accounting has had to change its focus over the years. TRUE AACSB: Reflective Difficulty: Easy Learning Objective: 1.01 Describe changes that have taken place in the business environment in recent years Topic: Role of Management Accountant in Value Creation 62. The costing system is the part of the accounting information system that is common to both financial and management accounting. TRUE AACSB: Reflective Difficulty: Easy Learning Objective: 1.03 Describe the major differences between management accounting and financial accounting information Topic: Difference between Management and Financial Accounting 63. Accountants with a CPA qualification are only able to work as financial accountants. FALSE AACSB: Reflective Difficulty: Easy Learning Objective: 1.12 After studying the appendix, discuss the professional qualifications that are relevant to becoming an accountant, and the ethical standards to which accountants must adhere Topic: Some Implications for the Roles of Management Accountants 64. Staff management and line management both have indirect responsibilities to the operations of an organisation. FALSE AACSB: Reflective Difficulty: Easy Learning Objective: 1.11 After studying the appendix, describe how the focus of management accounting has evolved Topic: Expanding and Changing Role of Management Accounting 65. Value creation is a central focus for managers and only refers to shareholder value. FALSE AACSB: Reflective Difficulty: Easy Learning Objective: 1.02 Define management accounting in terms of value creation Topic: Role of Management Accountant in Value Creation 66. Senior accountants are also known as the finance manager or financial controller. TRUE AACSB: Reflective Difficulty: Easy Learning Objective: 1.04 Explain where management accountants are located in organisations Topic: Role of Management Accountant in Value Creation 67. Budgets provide information to help manage resources and are supported by the financial accounting function. FALSE AACSB: Reflective Difficulty: Easy Learning Objective: 1.05 Describe the major processes that management accounting systems use to create value and manage resources Topic: Fundamental Management Processes 68. Which of the following would not be part of a value chain for a fast food restaurant? A. All the answers are correct B. Buying produce C. Mopping the floor D. Refilling the napkin dispensers E. Hiring new cooks Accountants have wide areas of discretion in the selection, processing and recording of data. Various data can be used for different purposes. In addition, the same data can be used simultaneously for different purposes such as planning, decision making or controlling. AACSB: Reflective Thinking Difficulty: 2 Medium Learning Objective: 1.02 Define management accounting in terms of value creation Topic: Role of Management Accountant in Value Creation 69. Strategic cost management is A. the process of determining cost drivers. B. the recognition of the importance of cost relationships among the activities in the value chain. C. the process of managing cost relationships to the firm’s advantage. D. cost-causing factors. E. two of the answers are correct. The recognition of the importance of cost relationships among the activities in the value chain and the process of managing cost relationships to the firms’s advantage are the correct options. AACSB: Reflective Thinking Difficulty: 2 Medium Learning Objective: 1.06 Explain the basic concepts of strategy and how management accounting systems can support strategies Topic: Fundamental Management Processes 70. Managerial accounting activity comprises a set of tools, systems and perspectives that add value to an organisation by supporting five major objectives. Which one of these is not a supporting objective? A. Provide information for decision making and planning. B. Assist managers in directing and controlling operational activities. C. Motivate managers and other employees towards the organisation’s goals. D. Assess an organisation’s competitive position and long-term managerial efforts. . E. Focus on activities that occur at the top level of the organisation. AACSB: Reflective Thinking Difficulty: 3 Hard Learning Objective: 1.03 Describe the major differences between management accounting and financial accounting information Topic: Objectives of Management Accounting 71. Because managerial accounting reports rarely solve decision problems, what function does a managerial accountant use to assist managers in understanding issues contained within the information produced? A. Internal business solution function B. Learning and growth function C. Theoretical capacity function D. Customer function E. Attention directing function AACSB: Reflective Thinking Difficulty: 3 Hard Learning Objective: 1.03 Describe the major differences between management accounting and financial accounting information Topic: Objectives of Management Accounting 72. Non-value-added costs are the costs of activities that can be eliminated with no deterioration of product quality, performance or perceived value. TRUE AACSB: Reflective Thinking Difficulty: 1 Easy Learning Objective: 1.07 Explain how planning and control mechanisms can be used to support resource management Topic: Fundamental Management Processes 73. Decision making requires managers to choose among the available alternatives. TRUE AACSB: Reflective Thinking Difficulty: 1 Easy Learning Objective: 1.05 Describe the major processes that management accounting systems use to create value and manage resources Topic: Fundamental Management Processes 74. Which of the following is not an ethical standard of managerial accounting? A. Competence B. Confidentiality C. Efficiency D. Integrity E. Credibility AACSB: Ethics Difficulty: 3 Hard Learning Objective: 1.12 After studying the appendix, discuss the professional qualifications that are relevant to becoming an accountant, and the ethical standards to which accountants must adhere Topic: Ethics, Corporate Governance, and Corporate Social Responsibility 75. Give examples of each of the four primary management activities in the context of a national pizza franchise. AACSB: Reflective Thinking Difficulty: 3 Hard Learning Objective: 1.05 Describe the major processes that management accounting systems use to create value and manage resources Topic: Fundamental Management Processes 76. Consider the descriptors that follow. 1. 2. 3. 4. 5. 6. 7. 8. 9. Is heavily involved with the recordkeeping and reporting of assets, liabilities, and stockholders' equity. Focuses on planning, decision making, directing, and control. Is heavily regulated. A field that is becoming more ‘cross-functional’ in nature. Much of the field is based on costs and benefits. Is involved almost exclusively with past transactions and events. Much of the information provided is directed toward stockholders, financial analysts, creditors and other external parties. Tends to focus more on subunits within an entity rather than the organisation as a whole. May become involved with measures of customer satisfaction, and the amount of actual cost incurred versus budgeted targets. Required: Determine whether the descriptors are most closely associated with financial accounting or managerial accounting. 1. 2. 3. 4. 5. Financial accounting Managerial accounting Financial accounting Managerial accounting Managerial accounting 6. Financial accounting 7. Financial accounting 8. Managerial accounting 9. Managerial accounting AACSB: Reflective Thinking Difficulty: 1 Easy Learning Objective: 1.03 Describe the major differences between management accounting and financial accounting information Topic: Difference between Management and Financial Accounting 77. Tae Franklin is the sales manager of Darius Enterprises, a very profitable distributor of office furniture to local businesses. A recent economic downturn has created an extremely tight cash position, and the company has been hurt by the bankruptcy of two key customers. In late October, anticipating an economic recovery, Franklin began an extensive remodelling of the company's sales floor. Construction costs, decorating and equipment purchases are projected to cost $250 000. Darius has a policy that individual expenditures in excess of $200 000 must be approved by the firm's board of directors. Franklin, unfortunately, missed the deadline to have the board consider this project at its regular September meeting. Not wanting to wait until the next meeting in December, he subdivided the project in two parts—construction and decorating ($190 000) and equipment purchases ($60,000)— neither of which needed board approval because of the dollar amounts involved. The project was recently completed and sales have begun to recover. Customers have raved about the new sales area, noting that it is far superior to those of Darius's competitors. Required: A. Would Franklin's approach of subdividing the project in two parts have any effect on the company's financial statements? Briefly explain. B. Briefly discuss whether Franklin behaved in an ethical manner. C. Which, if any, of the following standards of conduct would have applicability to Franklin's conduct: competence, confidentiality, integrity or credibility? Briefly explain. A. Although some extra processing is involved because of the ‘separate’ projects, the same total costs will be incurred for the same assets. Thus, there is no impact on the financial statements, which serve to summarise financial activity. B. Franklin behaved in an unethical manner. Even though business is recovering and customers seem more than satisfied with the new sales area, Franklin knowingly bypassed stated company policy. The project is being done in a single phase, and comprises construction, decorating and equipment acquisition. This is really one project; yet his accounting treatment implies otherwise. C. Two standards are relevant here. Integrity holds that managers refrain from engaging in any conduct that would prejudice the ethical performance of duties. Additionally, credibility recognises that managers have a responsibility to communicate information fairly and objectively, and disclose all relevant information that could reasonably be expected to influence a user's understanding of the reports and data presented. AACSB: Ethics Difficulty: 3 Hard Learning Objective: 1.12 After studying the appendix, discuss the professional qualifications that are relevant to becoming an accountant, and the ethical standards to which accountants must adhere Topic: Ethics, Corporate Governance, and Corporate Social Responsibility Chapter 01 Test Bank – Static Summary Category # of Questions AACSB: Communication AACSB: Ethics AACSB: Reflective 7 7 60 AACSB: Reflective Thinking AACSB: Technical Difficulty: 1 Easy 8 1 3 Difficulty: 2 Medium Difficulty: 3 Hard Difficulty: Easy 2 5 38 Difficulty: Hard Difficulty: Medium Learning Objective: 1.01 Describe changes that have taken place in the business environment in recent years 5 24 4 Learning Objective: 1.02 Define management accounting in terms of value creation Learning Objective: 1.03 Describe the major differences between management accounting and financial accounting informati on Learning Objective: 1.04 Explain where management accountants are located in organisations Learning Objective: 1.05 Describe the major processes that management accounting systems use to create value and manage resources Learning Objective: 1.06 Explain the basic concepts of strategy and how management accounting systems can support strateg ies 10 Learning Objective: 1.07 Explain how planning and control mechanisms can be used to support resource management Learning Objective: 1.08 Explain how costing systems can provide information to support a range of operational and strategi c decisions Learning Objective: 1.09 Describe the factors that may influence the design of management accounting systems including be havioural issues, cost-benefit trade-offs and the implications of contingency and institutional theories Learning Objective: 1.10 Identify the organisational responses and management accounting responses to changes in the busin ess environment Learning Objective: 1.11 After studying the appendix, describe how the focus of management accounting has evolved Learning Objective: 1.12 After studying the appendix, discuss the professional qualifications that are relevant to becoming an accountant, and the ethical standards to which accountants must adhere Topic: Difference between Management and Financial Accounting Topic: Ethics, Corporate Governance, and Corporate Social Responsibility 11 Topic: Expanding and Changing Role of Management Accounting Topic: Fundamental Management Processes 2 27 Topic: Globalisation and International Competition Topic: Objectives of Management Accounting Topic: Role of Management Accountant in Value Creation 3 5 23 Topic: Some Implications for the Roles of Management Accountants 1 11 3 4 10 1 7 3 3 11 8 8