CHAPTER 1

DISCUSSION QUESTIONS

Q1-1. Planning is the development of a consistent set of actions, resources, and measurements by which the achievement of objectives can be assessed. Planning takes into account the interactions between the organization and its environment in whatever is to be done. Control is the process by which managers assure that resources are obtained and used in an efficient and effective manner to carry out the plan and accomplish the organizations objectives. Control implies that performance measurements are reviewed to determine if corrective action is required. Planning and control are interrelated. Control is carried out within the established planning framework and serves to evaluate conformance to the plan so that organizational objectives are achieved. Q1-2. Short-range plans usually deal with a period of a quarter or a year, while long-range plans usually cover three to five years. Short-range plans are detailed enough to permit preparation of a complete set of financial statements as of a future date, while long-range plans culminate in a very summarized set of expected results or a few quantified objectives, such as financial ratios. Q1-3. Long-range plans contain quantitative results, while strategic plans are the least quantifiable of all plans. Long-range plans usually extend three to five years into the future, while strategic plans may contemplate shorter or much longer periods. Long-range plans covering a three-to-five-year period would be prepared every three to five years, or might be systematically updated each year to maintain a complete plan, while strategic plans are formulated at irregular intervals by an essentially unsystematic process. Q1-4. Accountability is identical with responsibility accounting. Accountability deals with the discharge of an individuals responsibility to achieve assigned objectives within the costs and expenses allowed for the performance and agreed to by the individual.

Q1-5. The controller does not control, but aids the control task of the managerial levels by issuing reports pointing out deviations from the predetermined course of action. Q1-6. The cost department keeps detailed records of materials, labor, factory overhead, and marketing and administrative expenses; analyzes these costs; issues control reports; prepares cost studies for planning and decision making; and coordinates cost and budget data with other departments. Q1-7. For product research and design, the manufacturing departments need estimates of materials, labor, and machine process costs; for measuring and efficiency of scheduling, producing, and inspecting products, the departments need to know the costs incurred. The personnel department supplies employees wage rates. The treasury department needs accounting, budgeting, and related reports in scheduling cash requirements. The marketing department needs cost information in setting prices. The public relations department needs information on prices, wages, profits, and dividends in order to inform the public. The legal department needs cost information for keeping many affairs of the company in conformity with the law. Q1-8. Modern techniques in communications give the controller and staff the means to transmit information in the form of results, analyses, and forecasts in a way never before possible. Profit opportunities or control actions have been delayed or missed entirely because timely information that might have improved the cost and profit position of the company was poorly communicated. Q1-9. The budget is an essential cost planning tool because it (a) supplies information and serves as a standard of performance for cost control by the supervisors responsible for cost; (b) provides an easy method for anticipating profits at an anticipated sales level; (c) helps in forecasting sales, costs, expenses, and profits for a period of one year or more in advance.

1-1

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Q1-10. These standards will not necessarily be able to prevent management fraud, but they do give internal accountants some guidance on how to proceed if they encounter a questionable practice. Q1-11. CASB standards: (a) enunciate a principle or principles to be followed; (b) establish prac-

tices to be applied; (c) specify criteria to be employed in selecting from alternative principles and practices in estimating, accumulating, and reporting contract costs. The standards are backed by the full force and effect of the law.

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EXERCISES E1-1 The exercise requires two examples of the inseparability of planning and control. Three are listed here, and the third one gives two illustrations: The most obvious example of the inseparability of planning and control is found in the definition of control: managements systematic effort to achieve objectives by comparing performance to plans and taking appropriate action to correct important differences. The definition shows that the specific results of planning are an essential input to the control phenomenon; there cannot be any such thing as a control effort without reference to some set of plans. A second example of the inseparability of planning and control results from the fact that they are simultaneous. In practice, the implementation of the first steps of a plan, and any control action needed in those steps, are begun before all parts of planning are complete. Early results and the early findings of control activity can then be used in finalizing later parts of the same plan. An example is that a single annual budget is usually not completely finalized before customer orders begin to be received for that year, and consideration of the number of these actual customer orders may point to trends that need to be considered in finalizing the budget. Even actual financial results of the early weeks and months of the year can provide a basis for better establishing the budget for the later portion of the year. The most elegant example of the inseparability of planning and control results from the fact that both planning and control are complex human activities, and almost all complex human activities are planned activities and also controlled activities. In other words, planning can be so complex that the planning effort is itself controlled (and planned), and control can be so complex that control activities are themselves planned (and controlled). Two illustrations of this are provided as follows: (1) A case in which planning is itself planned and controlled is when a complicated budget (plan) is to be prepared. To facilitate the creation of the budget, a detailed weekly schedule (another plan) is first agreed upon, showing which steps in the preparation of the budget are to be carried out during each week. Because it is desired that the creation of the budget not be allowed to fall far behind schedule, the responsible manager will exercise control by making comparisons between (a) the actual progress made on the budget each week and (b) the schedule. The manager will also take some corrective action if the difference between the schedule and the actual progress is considered important. (2) A case in which control is itself planned is when a manager decides what kinds of control reports will be used to compare actual results with plans in each future period of business operations. That decision, any efforts made to acquire a supply of preprinted report forms to be filled in each period, and any changes in the design of the cost accounting system to capture and compile the needed information about actual results represent evidence that the future control activity is being planned.

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E1-2 (1) (2) (3) (4) (5) (6) B A C A C Balthough the time frame involved in this kind of plan may be extremely long, there is nothing strategic about this kind of plan or decision. In fact, the plan and obligation to pay off the bonds when they come due is so routine that management would not consciously approach it as a decision.

E1-3 (1) Paragraph (b) comes closest to describing the kind of control used in managing a business, although it is described in a nonbusiness setting. There is a plan formulated in advance, there is a measure of actual results, there is a decision maker who compares actual results with plans, there is a selection of a corrective action to bring results closer in line with the plan, and there is a foreshadowing of repeated periodic control activities (the remaining quizzes). The fact that the measures of planning and actual performance are nonfinancial measures is not the governing consideration. Much planned and actual information used in controlling a business is non-financial, including some cost accounting information such as the number of units produced, the percentage of units that were defective, and the percentage of available machine time that was utilized. Paragraph (a) is a perfect example of an engineering control, rather than the kind of control managers use in business. The simple device described, which is found in any home bathroom, is the kind of control device designed to monitor a physical condition, and so it is analogous to a thermostat or any of a variety of devices called industrial controls. Of course, devices of this kind are used in manufacturing and other businesses, but they do not possess the essential attributes of control in the sense used in business and in cost accounting. The device achieves a continuous monitoring of the results, rather than a periodic comparison of results with plans. There is no human decision maker who selects a corrective action to be taken. A human decision maker is probably the salient attribute of control in managing a business that is missing in paragraph (a).

(2)

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E1-3 (Concluded) Paragraph (c) could be interpreted as an example of planning, but it lacks some essential ingredients of control (even though the word control is used in its last sentence). There is no periodic comparison of actual results with plans and no provision for modifying the treatment based on periodic results. For example, the contract requires five treatments each year, even if no weeds are visible. The actions taken are entirely preemptive. Paragraph (d) refers to the concept of control that applies to police work and military science. It consists of being able to physically determine each event that occurs in some location and being able to prevent certain events from occurring. The potential use of coercive force, which is very clear in paragraph (d), is always present in achieving this kind of control. In paragraph (d), there is no indication that results were periodically compared with plans. A rule that says Obtain the objective at any cost is sometimes associated with these activities.

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CASES C1-1 (1) Yes, Williams has an ethical responsibility to take action. The IMAs Standards of Ethical Conduct states that management accountants shall not commit acts contrary to these standards nor shall they condone the commission of such acts by others within their organizations. (The requirement does not ask which standards have been violated, but, rather, which ones apply to Williams situation.) Management accountants have a responsibility to: Competence: Perform their professional duties in accordance with relevant laws, regulations, and technical standards. (Dumping toxic wastes in a residential landfill is generally a violation of law.) Confidentiality: Refrain from disclosing confidential information acquired in the course of their work except when authorized, unless legally obligated to do so (Williams may be legally obligated to take action and make certain disclosures.) Integrity: Refrain from either actively or passively subverting the attainment of the organizations legitimate and ethical objectives. (Williams avoidance of the issue would passively subvert attainment of ethical objectives.) Communicate unfavorable as well as favorable information and professional judgments or opinions. (Williams is obligated to report his unfavorable findings to appropriate persons.) Refrain from engaging in or supporting any activity that would discredit the profession. (Williams silence would provide support to the dumping activity and, thus, could discredit the profession.) Objectivity: Disclose fully all relevant information that could reasonably be expected to influence an intended users understanding of the reports, comments, and recommendations presented. (Williams should disclose his findings to the appropriate persons.) Alternative (a), to seek the advice of his immediate superior, is appropriate. This is the first step he is required to take, unless the superior is involved. Alternative (b), communication of confidential information to persons outside the company, such as the local newspaper, is inappropriate unless there is a legal obligation to do so. If required by law, Williams should contact the proper authorities. Alternative (c), contacting a member of the board of directors, would be inappropriate at this time. Williams should report the problem to successively higher levels within the company and turn to the board of directors only if the problem is not resolved at lower levels.

(2)

(3)

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C1-1 (Concluded) (4) Williams should follow the companys established policies for resolving such issues, if such policies exist. If the issue is not resolved through existing policies, he should report the problem to successively higher levels within the company until it is resolved. (Williams is not required to report this action to his superior if his superior appears to be involved in the conflict. He is not to disclose the matter to persons outside the organization, unless required by law.) During these steps, Williams may clarify relevant concepts by confidential discussion with an objective advisor to obtain an understanding of possible courses of action. If the conflict is not resolved after exhausting all these courses of action, Williams may have no other recourse than to resign and submit an informative memorandum to an appropriate representative of the organization. Consultation with ones personal attorney is also appropriate.

C1-2 (1) (The requirement does not ask which standards have been violated, but, rather, which ones apply to the CFOs behavior.) Management accountants have a responsibility to: Competence: Perform their professional duties in accordance with relevant laws, regulations, and technical standards. (The CFO has asked Deerling to account for information in a way that is not in accordance with generally accepted accounting principles.) Prepare complete and clear reports and recommendations after appropriate analyses of relevant and reliable information. (The CFOs restrictions on disclosure will result in incomplete reports.) Confidentiality: Refrain from using or appearing to use confidential information acquired in the course of their work for unethical or illegal advantage, either personally or through third parties. (The CFO is attempting to use confidential information to protect the job security and bonuses of top management.) Integrity: Avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict. (The CFO has failed to avoid a conflict of interest and has not informed the stockholders of the conflict.) Refuse any gift, favor, or hospitality that would influence or would appear to influence their actions. (The CFOs bonus appears to be an influence on his actions.) Refrain from either actively or passively subverting the attainment of the organizations legitimate and ethical objectives. (The CFO has subverted the attainment of the organizations legitimate objective, profit for stockholders, by pursuing, instead, the job security and bonuses of top management.) Communicate unfavorable as well as favorable information and professional judgments or opinions. (The CFO is attempting to restrict disclosure of information about the acquisition.)

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Chapter 1

C1-2 (Continued) Refrain from engaging in or supporting any activity that would discredit the profession. (The CFOs actions could discredit the profession.) Objectivity: Communicate information fairly and objectively. (The CFO is attempting to unfairly control the information reported, resulting in a report that is not objective.) Disclose fully all relevant information that could reasonably be expected to influence an intended users understanding of the reports, comments, and recommendations presented. (The CFO is attempting to restrict disclosure of relevant information.) (The requirement does not ask which standards have been violated, but, rather, which ones apply to Deerlings situation.) Management accountants have a responsibility to: Competence: Perform their professional duties in accordance with relevant laws, regulations, and technical standards. (Deerling is being asked to violate generally accepted accounting principles.) Prepare complete and clear reports and recommendations after appropriate analyses of relevant and reliable information. (Deerling is being asked to prepare an incomplete report.) Confidentiality: Refrain from using or appearing to use confidential information acquired in the course of their work for unethical or illegal advantage either personally or through third parties. (Deerling must not use the confidential information about the possible takeover to his own advantage or to that of the person(s) mounting the takeover attempt.) Integrity: Refuse any gift, favor, or hospitality that would influence or would appear to influence their actions. (The last sentence of the case suggests that Deerling is considered a member of the top management group, so he may be eligible for a bonus.) Refrain from either actively or passively subverting the attainment of the organizations legitimate and ethical objectives. (Deerling is being asked to subvert the attainment of the organizations legitimate objective, profit for stockholders, by pursuing instead the job security and bonuses of top management.) Communicate unfavorable as well as favorable information and professional judgments or opinions. (Deerling is being asked to restrict disclosure of information about the acquisition.) Refrain from engaging in or supporting any activity that would discredit the profession. (Deerling is being asked to take actions that could discredit the profession.) Objectivity: Communicate information fairly and objectively. (Deerling is being asked to prepare a report that is not objective.) Disclose fully all relevant information that could reasonably be expected to influence an intended users understanding of the reports, comments, and recommendations presented. (Deerling is being asked to restrict disclosure of relevant information.)

(2)

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C1-2 (Concluded) (3) If the company has established policies for dealing with such issues, Deerling should first follow these policies. If such policies do not exist, or if they are unsuccessful in resolving the problem, Deerling should present the problem to the chairman of the board. Deerlings immediate superior is involved, so he need not be informed of this action. If the matter remains unresolved, Deerling should report to the audit committee, the board of directors, and finally the majority owners. During these steps, Deerling may clarify relevant concepts by confidential discussion with an objective advisor to obtain an understanding of possible courses of action. If the conflict is not resolved after exhausting all these courses of action, Deerling may have no other recourse than to resign and submit an informative memorandum to an appropriate representative of the organization. Consultation with ones personal attorney is also appropriate. The primary responsibility the company must fulfill before taking defensive actions is its fiduciary responsibility to stockholders. Other responsibilities include the effects that the takeover and defensive actions would have on creditors, bondholders, employees, customers, and the community. The company also has a responsibility to inform its external auditors and legal counsel to avoid putting them in a compromising position.

(4)

C1-3 (1) (The requirement does not ask which standards have been violated, but, rather, which ones apply to Dixons behavior.) Management accountants have a responsibility to: Competence: Maintain an appropriate level of professional competence by ongoing development of their knowledge and skills. (By systematically rejecting all minority applicants, Dixon is jeopardizing the level of competence among the staff.) Perform their professional duties in accordance with relevant laws, regulations, and technical standards. (Equal opportunity in employment is required by law.) Integrity: Avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict. (Dixons prejudice is in conflict with the companys legal obligation to provide equal opportunity employment, and with the companys need for the most competent staff regardless of race.) Refrain from either actively or passively subverting the attainment of the organizations legitimate and ethical objectives. (The companys objective of equal opportunity employment is being subverted by Dixons prejudice.)

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C1-3 (Concluded) Refrain from engaging in or supporting any activity that would discredit the profession. (Such persistent, systematic discrimination in hiring could discredit the profession.) (The requirement does not ask which standards have been violated, but rather, which ones apply to Foxworths situation.) Because management accountants may not condone the commission of unethical acts by others within their organizations, all of the responsibilities listed in the solution to requirement (1) also apply to Foxworths situation. In addition, the following apply: Management accountants have a responsibility to: Confidentiality: Refrain from disclosing confidential information acquired in the course of their work except when authorized, unless legally obligated to do so. (Foxworths suspicions about Dixons behavior should not be disclosed inappropriately. See requirement (3)). Objectivity: Communicate information fairly and objectively. (Foxworth is obligated to make objective hiring recommendations to Dixon, in spite of his belief that Dixon will be prejudiced in acting on them.) Alternative (a), discussion with the director of personnel, who is one of Dixons peers, is inappropriate at this time. If, however, Foxworth believes the director of personnel is an objective party, Foxworth may discuss the matter with the director, confidentially, to clarify the relevant concepts and to obtain an understanding of possible courses of action. Alternative (b), informal discussion with a group of MAD senior management accountants, is inappropriate. Alternative (c), private discussion with the CFO, Dixons superior, is appropriate. Because Foxworth has already approached his immediate superior, Dixon, who is involved in the conflict, it is not necessary for Foxworth to inform him of this action. Foxworth should follow the companys established policies for dealing with this type of conflict, if such policies exist. If policies do not exist, or if they are unsuccessful in resolving the conflict, Foxworth should discuss the issue with the CFO. If the matter remains unresolved, discussions with successively higher levels of management, including the audit committee and the board of directors, should follow. During these steps, Foxworth may discuss the matter confidentially with an objective advisor to clarify the relevant concepts and to obtain an understanding of possible courses of action. If the matter remains unresolved after exhausting all of these steps, Foxworth may have no recourse other than to resign and submit an informative memorandum to an appropriate representative of the company. Consultation with ones personal attorney is also appropriate.

(2)

(3)

(4)

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C1-4 (1) (The requirement does not ask for a list of responsibilities Rodriquez has violated, merely which of the fifteen responsibilities apply to his situation.) Management accountants have a responsibility to: Competence: Perform their professional duties in accordance with relevant laws, regulations, and technical standards. (The figures Rodriquez is being asked to prepare might amount to fraud in the loan application.) Prepare complete and clear reports and recommendations after appropriate analyses of relevant and reliable information. (The reliability of the information is in doubt, and the fact that certain sales figures are or are not sufficient to justify the bank loan are not relevant to preparation of the budget.) Integrity: Refrain from either actively or passively subverting the attainment of the organizations legitimate and ethical objectives. (There is a push to subvert legitimate objectives to the immediate need for a bank loan.) Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity. (Rodriquez has not expressed to Czeisla the conflict between his desire to be a team player and his ethical responsibilities.) Communicate unfavorable as well as favorable information and professional judgments or opinions. (Rodriquez is being asked to report information that reflects so favorably on the company that it may not be justifiable.) Refrain from engaging in or supporting any activity that would discredit the profession. (Preparing a deliberately misleading budget as part of a loan application could amount to obtaining money by fraud.) Objectivity: Communicate information fairly and objectively. (Rodriquez feels pressured to abandon his objectivity in preparing the budget.) Disclose fully all relevant information that could reasonably be expected to influence an intended users understanding of the reports, comments, and recommendations presented. (A comparison of the new targeted sales figure with the actual sales of the corresponding periods of past years would be likely to influence the banks understanding of just how large an increase in sales is being portrayed.) Rodriquez could have clearly stated his concerns to Czeisla at each stage of the budgets creation and revision. He could have consulted with the marketing manager and production manager at every stage, rather than only upon receiving the initial budget data. He could present the budget, or a summary of it, in a comparative form to highlight the differences between each quarters budget and the actual results of the corresponding quarter of the preceding year, and he could even calculate the percentage increase being budgeted and compare it with actual percentage increases that were achieved annually in the past. He could have consulted with his staff superior at the headquarters of Northwestern (the parent company)Czeisla is his line superior, according to the second sentence of the case.

(2)

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C1-4 (Concluded) (3) In addition to his ethical responsibilities to CD, Rodriquez has ethical responsibilities to: (a) The banks (b) The management accounting profession

C1-5 (1) (The requirement does not ask for a list of responsibilities Jones has violated, merely which of the fifteen responsibilities apply to his situation.) Management accountants have a responsibility to: Confidentiality: Refrain from disclosing confidential information acquired in the course of their work except when authorized, unless legally obligated to do so. (If Jones accepts the consulting engagement with Crimson, it is likely she will be asked to disclose confidential SMI information about the desired computer system.) Refrain from using or appearing to use confidential information acquired in the course of their work for unethical or illegal advantage either personally or through third parties. (The size of the consulting fee suggests Crimson is seeking to buy confidential information to help win the job.) Integrity: Avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict (The consulting job would constitute an apparent conflict of interest, and probably an actual one, because Jones has been named to the SMI committee that will evaluate and rank all the proposals, including Crimsons proposal, which she would have helped to write.) Refrain from engaging in any activity that would prejudice their ability to carry out their duties ethically. (The consulting job with Crimson would prejudice Jones ability to evaluate and rank the proposals for SMI, because one of the proposals would be Jones own work.) Refuse any gift, favor, or hospitality that would influence or would appear to influence their actions. (Regardless of whether the size of the consulting fee is construed as being a gift or favor, it is likely that other gifts, favors, or hospitality will be extended to Jones by Crimson during the course of the consulting engagement.) Refrain from either actively or passively subverting the attainment of the organizations legitimate and ethical objectives. (SMIs legitimate objective of obtaining the best computer system at the best price would be subverted to Jones personal need for money, as a result of Jones disclosing crucial information for Crimson to include in its proposal, especially if Crimson might not deliver a system with the crucial attributes.)

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C1-5 (Concluded) Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity. (Accepting the consulting job would preclude responsible judgment in evaluating and ranking the proposals for SMI; on the other hand, ethical limitations of Jones employment at SMI would preclude successful performance of the consulting engagement for Crimson, especially if Crimson does expect her to reveal crucial information to help win the jobher ethical duty to SMI would prevent her from delivering what Crimson is paying for.) Refrain from engaging in or supporting any activity that would discredit the profession. (Selling confidential SMI information to a vendor would be a discreditable act.) Objectivity: Communicate information fairly and objectively. (Jones would be unlikely to communicate objective evaluations of proposals if she had helped write one of them.) Disclose fully all relevant information that could reasonably be expected to influence an intended users understanding of the reports, comments, and recommendations presented. (Jones role in writing the Crimson proposal would be relevant information in SMIs use of her evaluations of proposals.) Jones might have disclosed, either orally or on her personal vita sheet or job application, the extent of her involvement on the SMI task force and the committee. Jones could have first investigated all her career opportunities with firms that presented no potential conflict of interest of this kind, but for the sake of the argument, it is reasonable to assume she did exactly that before applying for a position at Crimson. Knowing that Crimson is a supplier of computer systems, Jones might have revised her personal vita sheet and the wording of her application for this one job interview to lessen the chances of Crimsons being tempted to pursue an unethical plan. (Of course, her involvement in SMIs upcoming purchase might have become known to Crimson anyway, or it might have been known to Crimson from other sources before her interview or even before her application for the position.) In addition to her ethical responsibilities to SMI (and her financial responsibility to the hospital that provides treatment for her child), Jones has ethical responsibilities to: (a) her family (b) the management accounting profession (c) Crimson

(2) (3)

(4)