Type:
Solution Manual
Resource:
Managerial Accounting
Edition:
2nd Edition
Author(s):
Ramji Balakrishna K. Sivaramakrishnan Geoffrey B. Sprinkle
Instructor Guide Balakrishnan, Sivaramakrishnan, & Sprinkle (2nd ed) Managerial Accounting
Chapter 1: Accounting: Information for Decision Making Chapter Summary Chapter 1 sets the stage for the book. We discuss the foundations of decision making and the four integral steps associated with making good decisions: (1) Specifying the problem, including the goals; (2) Identifying options; (3) Measuring the benefits and costs (value) of each option; and, (4) Making the decision, choosing the option with the highest value. Since we are particularly interested in studying decision making in organizations, we discuss how individual decision making differs from decision making in group settings. We note that organizations tend to have more focused goals than individuals (e.g., profit maximization) and, because organizations are a collection of individuals, there are issues associated with getting everyone on the same page (goal congruence). This distinction naturally leads to a discussion of the three methods organizations use to achieve goal congruence – policies and procedures, monitoring, and incentive schemes and performance evaluation. The second part of the chapter begins with a discussion about the dynamic nature of decision making – organizations continuously go through cycles of planning and control. We next turn our attention to the role of accounting in the decision-making process, noting that accounting pertains to step 3 of the four-step framework. That is, the primary role of accounting is to help measure the costs and benefits of decision options. We discuss the salient differences between financial and managerial accounting, and the important role managerial accounting plays in supporting planning and control decisions. We conclude the chapter with a discussion of ethics, and how ethics relate to every step of the decision framework. Lecture Outline & Recommended In-Class Problems We usually devote two days to teaching Chapter 1 material. The Day 1 outline follows: Please note that material in { } corresponds to discussion with instructors, whereas all other material is formally presented to students either using the board or via a handout. Day 1: A. Life is a series of decisions! Therefore, the quality of our life depends on the quality of our decisions. It behooves us to understand how to make good decisions.
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{We peel the above back to discuss the many layers – e.g., the decisions we as individuals make every day, month, etc. as well as the many decisions businesses make. We provide students with a laundry list of examples}
B. Four-Step framework for decision making. Step 1: Specify the decision problem, including the decision maker’s goals. Step 2: Identify options Step 3: Measures costs and benefits to determine the value of each option. Step 4: Make the decision, choosing the option with the highest value. Some noteworthy points… Framework applies to individuals and business decisions. Successful business persons excel at steps 1, 2, and/or 3. Step 4 requires acumen particularly when value has multiple dimensions Business courses/majors geared towards helping you get better at steps 1, 2, and/or 3 Management & marketing (steps 1 and 2) Finance (step 2 – e.g., debt vs. equity) and Accounting (step 3) Four-step framework works for “almost all” decisions Some decisions are automatic/visceral/instinctive Helps us see the value of the PIER cycle. C. {We then proceed to homework problem 1.61, “Natalie’s Knick Knacks,” to illustrate the four-step framework. This exercise asks students to specify the decision problem, identify options, calculate the costs and benefits of each option, and make the best decision. The problem also allows instructors to illustrate how a novel option (using a sequential/staggered discount strategy) could further increase cash flows – this reinforces to students the importance of identifying good options}
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D. Faced with the same option yielding the same financial costs and benefits, different individuals often make different decisions. Why? Different goals Since organizations are a collection of individuals, we need to worry about how individual goals mesh with organizational goals. Otherwise, we get “funny” decisions
E. Three broad methods organizations use to motivate employees to achieve organizational goals (maximize profit). Policies and procedures Monitoring Incentive schemes and performance evaluation F. {We next go over problem 1.62, “Monitoring in Casinos,” to starkly illustrate issues related to goal congruence and the mechanisms firms use to shore up the inherent conflicts of interest in organizations}
Day 2: A. Accounting is about MEASUREMENT (i.e., accounting pertains to step 3 of the 4-step decision making process. Accounting is important because, if you mis-estimate costs and benefits (even if you do a great job on steps 1 and 2), you could end up with a bad decision. {We provide several examples – a firm mis-estimates demand and introduces a new product when it shouldn’t; we mis-estimate the costs and benefits of a particular career choice, etc.} {We use exhibit 1.4 to show how financial and managerial accounting both are measurements of the core business process (at the top of the picture). You also can use this picture to show why GAAP applies to financial but not managerial accounting.}
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{We also discuss the differences between financial accounting and managerial accounting, asking students to list the salient dimensions – invariably, we end up reproducing exhibit 1.5 on the board}
B. Managerial accounting system tailored to the decision problem/situation. {We then go over problem 1.75, “Managerial accounting, organizational goals,” in detail to illustrate the above point}
C. Ethics Relate to every aspect of the framework A bit like beauty – lies in the eyes of the beholder – often no bright line test for what is ethical {We then go over problem 1.51, “Ethics and Decision Making, Travel Expenses” – this problem does not have a clear correct answer as students usually generate at least five different expense reports – each being readily justifiable. Note that many firms have explicit policies in place as to how to deal with such issues. Even so, grey areas abound.}
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Chapter 2: Identifying and Estimating Cost and Benefits Chapter Summary In Chapter 1, students learned that the primary role of managerial accounting is to measure the costs and benefits of decision options. In Chapter 2, we inform students that this step consists of two tasks—identifying the costs and benefits to measure, and then estimating the amount of each identified cost and benefit. Our primary focus in the chapter is on the principles that help managers accomplish these two tasks. We first discuss the two principles, controllability and relevance, that determine which costs and benefits to measure. Briefly, a controllable cost or benefit is one that a decision maker chooses to incur, relative to doing nothing. For a business, controllable costs and benefits are the incremental revenues and costs relative to current revenues and costs, or the status quo. A relevant cost/benefit is one that differs across viable options. We spend considerable time making sure that students internalize the concept of a relevant cost, emphasizing that relevance can be defined only in the context of a given decision and that relevance applies to the decision as a whole (i.e., considers all options at the same time). We spend a limited amount of time on controllability. We note that controllability too is defined in the context of a decision but can be measured for each option. That is, we compare each option to the same baseline (usually status quo). We have a quick discussion of the equivalence of the two concepts and why we need both. Using the principle of controllability, we offer students a way for grouping business decisions by their horizon—the time span within which an organization reaps the benefits and incurs the costs of a decision. That is, there is an important link between time and controllability – commitments and contractual obligations expire with the passage of time. Based on this link, we distinguish between short- and long-term decisions. We then describe the two key principles for estimating costs and benefits: variability and traceability. Variability is the relation between a cost or benefit and an activity, whereas traceability is the degree to which we can directly relate a cost or a benefit to a decision option. We use variability to convert changes in activities to changes in benefits and costs, whereas traceability pertains to our confidence in this estimate (e.g., we generally are more confident in direct costs than indirect costs that require some allocation). In the final part of the chapter, we extend the principle of variability to develop a hierarchy of costs, which helps to increase the accuracy of estimated costs. Students often report that this chapter is one of the more difficult in the text finding the ideas to be more amorphous than strict rules. We have found that providing students with numerous “simple” examples from everyday life and business helps greatly. We also remind students that while concepts can be difficult to grasp, they also are crucial in developing one’s critical thinking and problem-solving skills.
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Lecture Outline & Recommended In-Class Problems We usually devote two days to teaching Chapter 2 material. The Day 1 outline follows: Please note that material in { } corresponds to discussion with instructors, whereas all other material is formally presented to students either using the board or via a handout. Day 1: A. {We begin by giving students a brief 10-15 min. QUIZ over Chapter 1 and Chapter 2 – the latter portion only focuses on concepts and ensures that students have read the material prior to class} B. As we know from Chapter 1, Accounting is about MEASUREMENT. There are two steps involved in measurement: Identifying costs and benefits (this was the focus of relevance) Estimating costs and benefits (see exhibit 2.4) {We discuss the above in detail, noting that identifying costs and benefits is just asking “what’s going to change?” and estimation relates to “how much is it going to change?” We provide several personal and business examples of this two-step process. For example, we discuss personal decisions related to choosing a college or choosing what to do on a Friday night. We discuss business decisions such as Nike making a new shoe – asking students what costs they believe will change – e.g., R & D, advertising, materials, labor, shipping, and so on} C. Two principles associated with identifying costs and benefits Controllability Relevance {We ask students to define each principle. We also provide several personal examples, such as choosing between places to eat at a food court in the mall – e.g., the meal cost is controllable but often not relevant. We also provide several business examples, such as deciding between which type of shoe Nike should introduce or where a new business might locate – really, just about any decision will do} D. { We then spend some time distinguishing between controllability (useful for profit impact) and relevance (useful for zeroing in quickly on best option).} E. {Next, we go over problem 2.36 “Controllability and Relevance: Akawasi Sudawa” in class. This problem crisply helps students see the relation between controllability and relevance and how variations in the status quo lead to variations in what is controllable and relevant – a very 6