CHAPTER 1

INTRODUCTION TO MANAGERIAL ACCOUNTING

DISCUSSION QUESTIONS

1. Managerial accounting is the provision of past 50 years have changed the world
accounting information for internal users in a significantly. Managerial accountants have
firm. had to broaden their focus beyond simple
financial reporting to include the gathering of
2. The three broad objectives of managerial information on all types of costs and of the
accounting are planning, controlling, and
value of the product or service to customers.
decision making. These broader costs are used in planning
3. The users of managerial accounting and decision making.
information are generally managers and
9. Customer value is the difference between
other employees of a firm. Managerial what a customer pays for a product or service
accounting information is typically not and what the customer receives in return.
provided to outsiders but may be in selected
The focus on customer value forces
cases. For example, a bank may require management accounting to look at many
budgeting information for the next few years types of costs, not simply manufacturing cost.
before agreeing to grant a loan.
These may include the price of the good or
4. A managerial accounting information system service, maintenance costs, search costs,
typically provides both financial and learning costs, and disposal costs.
nonfinancial information. For example,
10. Today’s managerial accountant must
financial information on cost of production is
understand many functions of the business,
tracked. Other information, such as the
number of warranty returns, may also be from manufacturing to marketing to
tracked by the management information distribution to customer service, in order to
system. provide appropriate information for managing
the value chain. Increased international trade
5. Controlling is sometimes called performance means that the managerial accountant must
evaluation. It involves comparing the actual be familiar not only with business practices
outcome with the expected outcome to see and laws in their own country but also in the
what differences, if any, exist. countries with which their company trades.
6. Planning occurs first. It requires setting 11. Enterprise risk management (ERM) refers to
objectives and identifying the means of the formal process of identifying the factors
achieving those objectives. Then, the results
or threats, both internal and external to the
of the plan are compared with the plan, which
organization, that might prevent the
is called controlling. Clearly, it is also
feedback, in that any impediments or organization from achieving its strategic
unexpected occurrences are noted. This objectives. The managerial accountant plays
feedback is then used to develop the plan for an increasingly important role in ERM by
the next period. providing financial and nonfinancial
measures of these threats and
7. Managerial accounting is internally focused, communicating them to high-level executives
does not follow mandatory rules, keeps track (e.g., chief risk officer, chief financial officer,
of both financial and nonfinancial information, board of directors) in the organization who
emphasizes the future, and relies on a broad manage these factors.
range of disciplines. Financial accounting is
externally focused, follows externally 12. The value chain is the set of activities
imposed rules (such as GAAP), has an required to design, develop, produce, market,
historical orientation, and provides and deliver products and services to
information about the company as a whole. customers. It is important because it helps
8. Huge improvements in technology, the company to understand its role in serving
transportation, and communication over the

Copyright © 2018 by Nelson Education Ltd. 1-1

 customers and to develop strategic wrongly decided to increase current period
competence. net income by inappropriately decreasing
current period expenses (by recording more
13. Line positions are those that have direct
of the expenditures as an asset that would be
responsibility for the basic objectives of an
expensed in small amounts each period
organization. These typically include
rather than all at once in the current period).
producing and selling a product. Staff
Oftentimes, the high-level executives that
positions are supportive in nature (e.g.,
perpetrate such financial fraud are rewarded
human resources, maintenance) and have
by incentives that overweight current-period
only indirect responsibility for an
net income performance relative to long-term
organization’s basic objectives.
net income performance. Another major
14. Yes, the controller should be a member of theme common to many of the accounting
senior management. This is because the and banking frauds is a lack of sufficient
controller, as the chief accountant for the transparency, or clarification, in the types and
firm, has a wealth of information needed by timing of the information that is reported to
senior management in determining the parties outside of the organization. Some
strategic direction of the firm. business experts also would argue that a
third common theme underlying many of
15. Ethical behaviour involves choosing actions
these scandals was the lack of sufficient
that are right, proper, and just. It is possible oversight (i.e., watchdog mentality) by the
to teach aspects of ethical behaviour in a perpetrating organization’s auditors, board of
managerial accounting classroom. Students
directors, or both.
need to see examples of right and wrong in
business. These examples help them to 17. The Chartered Professional Accountant
recognize ethical dilemmas they will face (CPA) is the Canadian professional
later on the job. accounting designation. The three previous
forms of designation discussed are Certified
16. One major theme or executive pressure Management Accountant, Chartered
common to many of the accounting scandals
Accountant, and Certified General
is a focus on the short-term future, rather than Accountant.
the long-term. For example, WorldCom

EXERCISES

Exercise 1–1

a. Decision making d. Decision making

b. Controlling e. Planning
c. Planning f. Decision making

Exercise 1–2

a. Managerial accounting oriented

b. Financial accounting oriented
c. Managerial accounting oriented
d. Financial accounting oriented
e. Managerial accounting oriented

1-2 Copyright © 2018 by Nelson Education Ltd.

Exercise 1–3

1. The total product is the product and its features (processing speed, disk drives,
software packages, and so on), the service, the operating and maintenance
requirements, and the delivery speed.

2. One company is emphasizing lower costs, and the other is attempting to

differentiate its laptop by offering faster delivery and higher-quality service.

3. The Confiar’s service component and its delivery time appear to be better than
Drantex’s. Thus, the realization of these features appears to outweigh the
additional sacrifice (the additional operating and maintenance cost) associated
with the Confiar laptop. The implications for management accounting are
straightforward. The management accounting information system should
collect and report information about customer realization and sacrifice. Much
of this information is external to the firm but clearly needed by management.
4. Better quality and shorter delivery time increase the value of what the customer
receives, while lowering the price decreases the amount paid. In total, customer
value has increased and presumably this should make the Drantex laptop much
more competitive. This example illustrates how quality, time, and costs are
essential competitive weapons. It also illustrates how critical it is for the
management accounting system to collect and report data concerning these
three dimensions.

Exercise 1–4

1. Joan Dennison is staff. She is in a support role—she prepares reports and helps
explain and interpret them. Her role is to help the line managers more effectively
carry out their responsibilities.
Steven Swasey is a line manager. He has direct responsibility for producing
garden hoses. Clearly, one of the basic objectives for the existence of a
manufacturing firm is to make a product. Thus, Steven has direct responsibility
for a basic objective and therefore holds a line position.
2. Line functions typically have a direct role in the delivery of the product or
service offered by a company, while the staff functions fill a support role.

Copyright © 2018 by Nelson Education Ltd. 1-3

Exercise 1–5

It is obviously not ethical for Mary to agree to Peter’s proposal; in fact, it is illegal.
She should refuse to go along with this scheme and she should contact a person
more senior than Peter in the athletics and recreation department and inform them
of his proposal. Her customers have an expectation that their employees and
suppliers will act in an ethical manner and, if they do not, that they will be reported
by anyone who knows.

Exercise 1–6

1. Brad is not behaving ethically in this situation. By delaying the marketing

campaign by a month, he is simply deferring the problem to a later date: the end
of next fiscal year. If he does not meet his numbers because of poor
performance, he should not try to fool the system by taking action that may
make it appear that he has succeeded.
2. Brad could employ any number of legitimate strategies to overcome his
dilemma:
• Generate much higher sales by increasing the number of calls made by
salespeople;
• Cut back on major expenses that will not impact the capability of operating
the division effectively.

Exercise 1–7

1. By the time most students graduate from high school, they have not had much
exposure to business. Therefore, they do not have full knowledge of acceptable
behaviour in the business environment. Students may not know that certain
practices are unethical because they may not be familiar with the behavioural
norms associated with these practices. Once students begin to learn business
practices, they begin to see what ethical dilemmas can arise in a business
context. They then are able to apply the moral training they have had to deal
with the situations. Furthermore, evidence exists that ethical reasoning can be
changed for the better. Thus, instruction in ethics can be a vital part of a
business student’s education.
2. Sacrificing self-interest is a choice that each person must make. Others may be
influenced by those individuals who behave ethically. Individuals committed to
ethical behaviour produce societies committed to ethical behaviour (not vice
versa).

1-4 Copyright © 2018 by Nelson Education Ltd.

Exercise 1–7 (Concluded)

3. While this sounds noble, many would disagree that managers are first seeking
to serve others and accept personal financial rewards as a by-product of a good
job. Pursuit of self-interest and personal financial well-being is not necessarily
unethical. It is only when this pursuit is done at the expense of the collective
good that the behaviour becomes questionable.
4. It is often true that unethical firms and individuals suffer financially. In the long
run, some evidence suggests that ethical behaviour does pay. It is doubtful,
however, that every unethical firm or individual is wiped out financially. Too
many notable exceptions to this statement exist (for example, the selling of
drugs by organized crime).
2. Many of the financial scandals in the past ten years may be as a result of people
focusing more on the material gains that come from success and less on the
ethical issues that face us.

Exercise 1–8

Clearly, John was in the wrong to disclose confidential information to his

employees when the information was not generally known and the employees were
not at such a level that they ought to know this information. A manager has a duty
to preserve the confidentiality of sensitive information about the company that the
manager has learned as a result of their position.
The employees should not act on the information because it would be unethical for
them to act on “insider” information. Knowing the information is not wrong on the
part of the employees, but acting on it is.

Exercise 1–9

The approach being used by Reginald is ethically wrong. By insisting that junior
staff not report all of their hours, he is misleading senior management not only of
his performance, but also what performance should be expected in the future by
other managers.

Exercise 1–10

Answers will vary.

Exercise 1–11

Answers will vary.

Copyright © 2018 by Nelson Education Ltd. 1-5