Cost Management - A Strategic Emphasis Answer Key Part 4

64) The five steps of strategic decision-making include all of the following except: A) Based on strategy and analysis, choose and implement the desired alternative. B) Identify the alternative actions. C) Determine the strategic issues surrounding the problem. D) Select the proper cost management technique. E) Provide an ongoing evaluation of the effectiveness of the decision. Answer: D 65) The management accountant's responsibility under the Institute of Management Accountants (IMA) Statement of Ethical Professional Practice includes the responsibility to "mitigate actual conflicts of interest." This responsibility fits within which of the four standards in the IMA Statement? A) Communication. B) Integrity. C) Honesty. D) Quality. E) Confidentiality. Answer: B 66) Which of the following is not one of the ethical standards included in the Institute of Management Accountants (IMA) Statement of Ethical Professional Practice? A) Objectivity. B) Integrity. C) Competence. D) Credibility. E) Confidentiality. Answer: A 67) The management accountant who planned to improve an organization's operations by developing models of consumer behavior would be using which of the following contemporary management techniques? A) Target costing. B) Benchmarking. C) Business analytics. D) Lean accounting. E) Focus on the customer. Answer: C 68) At one time, management at General Motors decided to improve the competitiveness of its products by stressing product quality, style, and innovation. The objective was to improve the image of GM vehicles and thus improve sales and brand loyalty. Managers decided to push this strategy in both the manufacturing and marketing divisions of the firm. One of the key moves to implement this strategy was to insist that GM dealers stop price-cutting and push brand value and image instead. GM exerted some control over dealers' pricing/selling strategy in part by reducing the money it set aside for dealers to use in local ads. Required: Was General Motors following a strategy of cost leadership or differentiation at this time? Comment on how effective you think the new strategy in dealer relations is likely to be. Answer: The strategy adopted by GM in the late 1990s is consistent with the differentiation strategy, a focus on quality, style, and innovation rather than price and cost. Unfortunately, the dealers and some analysts were infuriated by GM's move, believing that "the reality is this is a price-driven market" (Merrill Lynch & Co auto analyst Nicholas Lobaccaro). GM's response to the criticism was to state that brand value is what creates market share and profits, although it can take time to do so. The incident shows that it can be difficult to determine the firm's strategy, and experts can disagree. 69) In six months you are scheduled to graduate with a degree in business. You have a major in accounting and minors in finance and management information systems. In the first few chapters of your cost management text, there are repeated references to the following two terms: strategic management and the strategic emphasis to cost management. Required: Explain these ideas, using as a framework your need to develop a plan for interviewing successfully for a challenging professional opportunity within the next six months. Answer: Managers must think competitively, across business functions, and integratively. You are in competition with many other upcoming and recent graduates, and must differentiate yourself by academic performance, curriculum selection, or reinforcing extracurricular experiences. Your study of other disciplines, and minors in two of them, indicates your understanding of the need for cross-functional activity for integrating the technical knowledge learned in the individual major and minors. In other words, your college academic (and nonacademic) experience reflects the business environment you expect to encounter in six months. 70) One of the many changes in the business environment in recent years that has had significant impact on cost management practices is a focus on the customer. You are part of the management team in a medium-size computer service company. The company is just three years old and is growing fast, doubling its customer base every six months. Required: (a) Describe your typical customer's needs and service expectations. (b) How has the doubling of your firm's customer base every six months affected its ability to maintain this focus on the customer? If this dramatic growth continues, what are some specific actions your firm can take to retain its goal of "focus on the customer"? Answer: (a) A customer for a computer services company wants reliable service, easy availability to customer support, and a competitive price. (b) Rapid growth diminishes a firm's focus, changes the dynamics within the firm, and often leads to reduced or inferior service or product. Regular review (monthly in this case) of plans to meet the rapid growth is necessary to assure that personnel, physical resources, and capital will be available even before they are needed. 71) Apex Corporation manufactures a complete line of high quality bits for electric drills. Apex has a good record for product innovation and effective marketing and distribution. An increase in domestic and international competition during the past two years has limited the firm's sales growth to 3 percent per year, down from the previous five-year average annual growth of 5 percent. In addition, market share declined by 0.5 percent this past year. Apex is experiencing profit reductions caused by price competition and manufacturing cost increases. Required: Choose one of the 13 contemporary management techniques introduced in Chapter 1: Explain why the technique you selected is appropriate in helping Apex develop a plan for reversing the decline in sales growth and controlling the growth in costs. Answer: Any one of the 13 contemporary management techniques should be applicable to the solution of Apex Corporation's problems. Some basic principles would apply to the use of all management techniques. No single management technique will solve the entire problem. No single management technique will remain effective over time. Solutions must get at the root causes of problems. Most firms use parts of several (or even many) management techniques. No management technique will work if it is improperly implemented or half-heartedly supported by top management. 72) The manager of a business unit of a large corporation made some projections regarding sales and profits for the upcoming final quarter of the year. The managers' performance evaluation and compensation depended significantly on his ability to meet budget goals. The manager discovered that the final quarter would have to be a particularly good quarter in order to meet these goals. He decided to implement a sales program offering liberal payment terms in order to pull some sales that would normally occur next year into the current year. Customers accepting delivery in the fourth quarter would not have to pay the invoice for 140 days. Also, he sold some equipment that was not being used and realized a significant profit on the sale. Required: Are these actions ethical? Why or why not? Answer: Each of the manager's actions needs to be considered separately: Liberal credit terms - OK, a business strategy that should be judged on how it affects the firm's operations and profits. Attempt to pull sales from one period to another - not OK. If the purpose of the change in credit terms is simply to move sales from one period to another, then the result is misleading financial reports and fraudulent; if the objective is to increase sales through management of credit policies, then OK. Sale of equipment - may be OK, a business decision that should be judged on how it affects the firm's operations and profits; may not be OK if specifically timed just to show a gain that would improve current period profit. The transaction is not unethical, per se, but if it is clear that the only motivation for choosing to sell the equipment at this time is to help the manager achieve his bonus, and the firm as a whole would be better off if the equipment is sold at a different time, then the transaction is unethical - a conflict of interest. 73) As an inspector for a manufacturer of specialized electronic instruments, you head up the quality assurance program at one of the firm's manufacturing plants. In recent days, it has come to your attention that a large order involving several hundred expensive instruments for an important customer does not meet all the required specifications. Specifically, the circuit which has been designed by your firm to warn the user of possible malfunction does not appear to work consistently. The firm's engineers say that the problem should have no significant results for the customer, as it does not affect the functionality of the instrument in any way. Moreover, the engineers indicate that it is a high priority for them to find an answer to the mysterious behavior of the circuit, and they will develop a fix as soon as possible, and make sure the customer is provided the fix, probably as part of a routine update or maintenance. The marketing V.P. indicates that the customer wants these instruments urgently, and that no quality assurance issues will get in the way. The quality assurance head knows that the order is very important to the firm, as the firm has faced declining revenues in several recent months. Also, while the intentions of the engineers are likely to be sincere, the quality assurance head knows that they are very busy with current and new products, and are unlikely to have the time to deal with this problem in a timely manner. Required: What are the ethical issues involved in the case for the quality assurance head? What steps would you suggest be taken? Answer: The principal issues in this case relate to the management accountant's ethical responsibility for integrity. There is a conflict of interest within the firm regarding the urgency of increasing sales versus the desire to deliver to the customer an error-free product. The product fault, while minor, will take some time to identify and fix. This could cause the delay and/or loss of sales. Some suggested approaches might include: Ship the product but warn the customer of the fault; explain that a fix will be on the way shortly; expect that some customers will delay their purchase until the fix is in place. Delay selling the product until the fault is fixed, at least with a reasonable degree of certainty. Sell the product as is (without disclosure) and hope that no problems arise; include the fix in upgrade to be installed by our technicians. The third option is clearly unethical because it deprives the customer of the right to know that the product is potentially unreliable. The choice between one of the first two options should be based on business and competitive reasons. For example, the firm might choose the second option (delay) in order to bolster its reputation for high quality and reliability. Of course, this must be balanced against its need to maintain a favorable reputation for shipping product in a timely manner. 74) The controller of one division of a large diversified firm is compensated by salary plus bonus. The bonus is a significant part of total compensation, and is based directly on the profits of the division. Thus, the controller has an incentive to find ways to increase profits, including the delay of discretionary expenses such as research and development, delay of maintenance and repair of manufacturing equipment, and delay of sales promotions. Required: Is finding ways to increase profits as described above unethical? Why or why not? Who is to blame, if anyone? Answer: Since the actions contemplated by the controller are not in the best interests of the company, these actions are probably not ethical, and are in conflict with the ethical standard of integrity. The situation displays both conflict of interests and an attempt to subvert the firm's performance incentive system. Probably both the incentive system and the controller are to blame in this case. While it is not reasonable to expect that the firm can design a bias-free incentive system, it appears that the firm has not done an acceptable job of developing a system that will reward performance based upon the firm's critical success factors, instead of short-term profits only. Improvements in the incentive scheme are possible and necessary. On the other hand, the controller cannot be excused by taking advantage of the opportunity to manipulate profits. The standards are clear on the required professional behavior in this case, and the controller has ignored them for self-serving purposes. 75) Required: Consider the contemporary management techniques and how they might be used in each of the following industry groups. For which industry type is each management technique most applicable? 1) Manufacturing, for example, auto manufacturing, appliances, and consumer electronics 2) Professional service firms, for example, accounting firms, law firms, and medical practices 3) Retail firms, for example, Walmart and Sears Answer: Contemporary Management Technique Benchmarking Total Quality Management Lean Accounting Activity-based costing and management Professional Service Manufacturing Firms Firms Retail Firms Useful for all types of firms; most useful for firms where the benchmarking data is available from industry or other sources A number of CPA Most often used here firms have focused on to improve product Often used here to improve customer quality, competing for satisfaction quality and customer the Baldridge quality satisfaction award Most often used to continuously improve Often used here to improve customer satisfaction, to speed up the service for the customer and to reduce the cost of the service product quality and reduce cost Less likely to be applied here, since cost information is not Can be used here to analyze upstream and Most often used here as critical as it is for a downstream costs manufacturer or retailer Business Process Improvement Use in all types of firms to re-focus on strategy and improve operations The Theory of Constraints Most often used in manufacturing to identify and manage bottlenecks in the manufacturing process Enterprise Sustainability Enterprise Risk Management The Value Chain Business Analytics Target Costing Can be used here to streamline the process of providing the professional service. Can be used here to speed up the process of serving the customer and restocking the store. Reduce cost, comply with standards, improve customer goodwill Identify risks that might negatively affect the company so that proactive steps can be taken Develop a more detailed understanding of the specific activities that are critical to the organizations success, so that these can be given particular focus Data intensive analysis of the organization's competitive environment, used to help the company plan and execute its strategy more effectively Primarily used here to determine costRarely used here Rarely used here efficient product designs Life Cycle Costing The Balanced Scorecard and Strategy Map Can be used for any type of firm to determine the profitability of serving individual customers, groups of customers, or product lines Can be used in any type of firm to integrate planning and operations with strategic goals. 76) Required: Identify two of the most successful companies or organizations in today's business environment, in your opinion. Explain why they are so successful. Answer: There are a number of possible answers, including: Walmart: low cost Apple, Google: innovation Johnson & Johnson: reputation, product excellence, reliability Amazon.com, Nordstrom Stores: customer service Walt Disney: attention to detail, customer satisfaction UPS, AT&T: speed of service 77) Samsung, the large Korean manufacturer of electronics, has just developed a new QLED (Quantum Dot Light Emitting Diodes) TV. The TV retails retail in the range of $6,800 for the 75 inch, curved panel model. Normally, Samsung sells its TVs and other electronics in Big Box retailers such as Best Buy. In this case, Samsung is thinking of choosing a different means to retail the product. Required: What retail store or stores, or what method would you suggest Samsung should use in selling its new TV? Answer: Since the new TV is clearly a high-end item, it is unlikely that most shoppers at Best Buy or Walmart stores will be looking for this product. On the other hand, the appearance of the new TV in their stores could be an advantage to Best Buy and Walmart, or similar retailer, because it could attract traffic into the store, and perhaps help the store to draw a new type of customer, one expecting high end merchandise such as the Samsung TV. For online buyers, the 75" TV is available on both the Samsung and the Best Buy sites. 78) The premier auto manufacturer, BMW, introduced a new compact SUV (the X3) in an effort to grab a greater share of the overall luxury car market. Because its own resources were pretty well tapped out by a large number of new vehicles BMW had already introduced, the automaker decided to have the new SUV built by the parts manufacturer, Magma International, based in Toronto. The vehicles would be manufactured by Magma in an Austrian plant. Required: Comment on the strategic issues surrounding BMW's introduction of the X3 and the use of Magma International to produce the vehicle. Do you think the company made the right decisions? Why or why not? Answer: The critical question for BMW is how the use of another manufacturer might affect customers' confidence in the BMW brand. Most would say that BMW is a differentiated firm, and its customers expect quality and features over cost. The X3 has been a great success for BMW (both in sales and reviews), so it is apparent that customers have accepted the contract manufacturing of the vehicle. Perhaps more interesting is BMW's plan to "protect its brand by not entering the minivan market." According to BMW's CEO, "We do not have a van because a van as it is in the market today does not fulfill any of the BMW group brand values." On balance, BMW has succeeded in the luxury, high-end of the SUV market, but has determined that the luxury, high-end market currently has no place for a minivan even though Mercedes, Toyota and Honda have entries in that market segment. 79) The story of the telecom giant WorldCom came to a sad turn in 2002 as the firm filed for bankruptcy, with some of the managers facing criminal charges for fraud. In 2000 a severe slump in the telecom business led to pressures within WorldCom to reduce expenses and improve the financial statements to meet investor expectations. On orders from top managers, accountants within the firm created fraudulent financial statements, ultimately resulting in an $11 billion fraud. The fraud was detected as a result of an inquiry by the SEC, which led an internal auditor within WorldCom to start an investigation that uncovered the fraud in 2002. The successor firm, MCI (which had previously merged with WorldCom and is, since 2006, a part of Verizon), under the leadership of new top management, formed the office of chief ethics officer who had the responsibility for MCI's policy of training all MCI's U.S.-based employees, an ethics hotline, an ethics pledge signed by the firm's top 100 executives, and a company code of ethics, among other responsibilities. Required: What should be the role of an ethics officer? To whom should the ethics officer report within the organization? Do you think MCI had a good plan for ensuring ethical behavior within the firm? How would you change the MCI ethics policy, if at all? Answer: The WorldCom scandal is one of the most significant and extensive frauds in U.S. history. The important part of this story is that the survivor organization, MCI, is doing well under new leadership and has begun an ethical compliance program. The question is intended primarily as a basis for class discussion, and there are likely to be a wide range of views. I begin by noting that the announcement of a Chief Ethics Officer is a good strategic move for MCI, given the recent history of the company. It is important for the firm to make a clear statement about the importance of ethical behavior in the years ahead. It is difficult to determine the precise role for an ethics officer; the concept is new and there is not much experience to provide guidance. The functions set out in the MCI announcement make sense - employee training, hotline, pledge, and code of ethics. It is clear in the MCI case that the officer has the strong support of top management. So the role and responsibilities of the chief ethics officer should be watched closely at the top management level - both CEO and CFO. From the experience with WorldCom and other frauds, where both the CEO and CFO were culpable, it is probably also important that the chief ethics officer report not only to the CEO and CFO, but also to the firm's audit committee (a subset of the firm's board of directors with responsibility for managing the audit function and providing oversight of internal control procedures within the firm). A significant number of corporations have now added a chief ethics officer, to provide guidance and management of ethics issues within the company and to address complaints and corporate governance issues.