Chapter 15 - The Nature of Management Accounting

CHAPTER 15
THE NATURE OF MANAGEMENT ACCOUNTING
Changes from Twelfth Edition
All changes to Chapter 15 were minor.
Approach
This chapter is intended as an introduction to the topic of management accounting. The amount of
technical material in the chapter is not great, so probably not much class discussion of the tet itself is
re!uired. The classification of management accounting information is intended to lessen the confusion
that arises because different cost constructions are used for different purposes. "e suggest that the
threefold distinction be emphasi#ed here, and that it be repeated often in subse!uent chapters.
Problems
Problem 15-1
This report includes nonmonetary information $on %obs and number of employees&, has future $'planned(&
information as well as past $)actual)&, is optional $not re!uired as a basis for financial statements&, focuses
on a segment $ser*ice department&, has less emphasis on precision $planned numbers are rounded&, and is
not an end in itself $useful only as manager uses it&.
Note+ ,f the instructor wishes, he or she can as- students to discuss the figures in terms of how well
the .er*ice /epartment did, as a lead-in to later wor- in the course. "ithout technical
bac-ground, students can discern such things as the low *olume, failure to ad%ust labor to
*olume, and increased labor cost.
Problem 15-2
a. $1& /ifferential accounting $0& 1ull-cost accounting
$2& 1ull-cost accounting $5& /ifferential accounting
$3& 4esponsibility accounting $5& 4esponsibility accounting
b. Non!uantitati*e, nonaccounting, operating, and financial accounting. $The instructor may want to
epand on this, with more specifics.&
Problem 15-3
a. $1& 1ull-cost accounting $0& 4esponsibility
$2& /ifferential accounting $5& /ifferential accounting
$3& 1ull-cost accounting $5& 4esponsibility accounting
b. Non!uantitati*e, nonaccounting, operating, and financial accounting.
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Chapter 15 - The Nature of Management Accounting
Problem 15-4
1. "hy did the manager fail to ma-e the planned number of prospect calls6 "as this the reason for the
failure to obtain the planned number of new accounts and increase in deposit *olume6
2. Could the sa*ings in ad*ertising epense ha*e contributed to the failure to achie*e the planned
growth in new accounts and deposit *olume6
3. "as the 72,288 sa*ings in wages and salaries the result of operating with one employee less than
needed6 ,f so, could this ha*e helped pre*ent the manager from ma-ing the planned number of
prospect calls6
0. "hy was re*enue lower than planned6
5. /id the manager emphasi#e loans more than deposits6
The manager of the branch should be concerned about its performance because the ma%or reason for profit
being higher than planned was a 72,288 sa*ings in wages and salaries. Also, he or she should be
concerned o*er the failure to achie*e planned increases in new accounts and deposits.
Cases
Case 15-1: Private Fitness LLC
*

Private Fitness LLC is a springboard case that can be used as the basis of a discussion of management9s
need for information. ,t ser*es the same purpose for :art 2 of the boo- that the ;im 1uller case did for
:art 1.
Approach
This case uses a small business as its setting so that students can *isuali#e the business9s acti*ities, and so
!uestions of generally accepted accounting principles will be essentially irrele*ant. ,n fact, a shift the
student needs to ma-e as he<she begins :art 2 of the boo- is to thin- of accounting primarily in terms of
its usefulness to a company9s management, rather than in terms of reporting to shareholders and other
outside parties. =ecause of the differing focus of :art 1 of the boo-, particularly the later chapters, some
students will forget that they are dealing here with information for an apparently unsophisticated manager
to help her run a small business, and not data for a N>.? company.
This case is compelling both because students understand the business@fitness-training@and because
there is a real problem to discuss. A trusted employee was both stealing cash and, by not recording all
sales, di*erting some re*enues to herself.
/iscussion of this simple case helps students thin- about both the records needed to run the business and
the challenges managers face in ma-ing sure the information put into the records is recorded accurately
$i.e., the challenges faced in maintaining an effecti*e internal control system&. The case illustrates a
common problem faced in many small businesses@lac- of o*erlapping controls, or in this case, what
auditors call 'separation of duties.(
A
This teaching note was prepared by ;enneth A. Merchant. Copyright B ;enneth A. Merchant.
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Chapter 15 - The Nature of Management Accounting
Discssion
To run this simple pri*ately-held business, 4osemary does not ha*e to be concerned with generally
accepted accounting principles. .he does need to -eep records that will allow the easy preparation of a ta
return. =ut her primary concern should be in maintaining systems records that allow her to manage the
business effecti*ely. These include the following+
1. !chedling s"stem# "hat instructors, and other employees, should be on duty at what hours6
"hen should classes of particular types be scheduled6 "hat rooms should be used for what
purposes at what hours6 "hen should facility cleaning and maintenance be scheduled6 "hat is
the capacity utili#ation6 Are more space, e!uipment, or instructors needed6
2. $e%ene s"stem# 4e*enue is dependent on the number of clients attending classes and pri*ate
wor-outs.
3. Pa"roll s"stem# "hat pay is due the employees6 Most of the compensation is commission-based,
paid as a percentage of re*enue associated with the instructorCs acti*ities. =ut the manager, ;ate
Doffman, is also paid a salary.
0. &perating cost s"stem# =ills for on-going items, li-e rent, heat, and light, need to be paid on
time. The epenses need to be recorded accurately and trac-ed o*er time so that trends can be
monitored.
5. 'i(ed asset s"stem# The costs of the facility and e!uipment need to be assigned to time periods.
,ssues that might be raised+
1. Dow often should 4osemary prepare summary financial statements $e.g., monthly, !uarterly,
annually&6 /oes she need an 'income( statement, or is a cash flow statement sufficient for her
management purposes6 /oes she need to prepare a balance sheet at all6
2. Dow should prices be set6 .hould they be set only by loo-ing at competitorsC prices, or should
they depend on costs $e.g., cost of the space and e!uipment used and re!uired instructor
epertise&6 ,f the latter, does 4osemary need a '%ob costing system,( or would a periodic 'bac- of
the en*elope( calculation be sufficient6
3. .hould 4osemary pay herself a salary and commission for the classes she ran, or should she ta-e
merely the residual profits $or cash flow& from the business6
0. .hould the e!uipment $e.g., eercise bicycles& be 'epensed( when ac!uired, or should the
e!uipment costs be spread o*er some period of time to pro*ide a more meaningful time-series
picture of costs6 ,f the latter, what e!uipment life should be used, and should the cost of
e!uipment be spread e!ually to time periods o*er that useful life6
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Chapter 15 - The Nature of Management Accounting
Addressing the !pecific Problems
.tudents must first recogni#e that there are two problems to be sol*ed@the theft of cash and the
unrecorded re*enue. There are a lot of internal control options, most of which in*ol*e options that go far
beyond the accounting. , li-e to di*ide the options into three categories, $1& action controls@those that
limit the managerCs ability to perform the specific bad actions, $2& results controls@those that impro*e
the pay-for-performance system, and $3& personnel<cultural controls@those that encourage either more
employee honesty $self-control& or encourage employees to monitor each othersC beha*iors $social
control&.
1# Action controls@e.g., hire a super*isor $accomplish 'separation of duties(&, camera with *ideotaping
capability, loc-ed cash bo, use of receipts and reconciliations with cash in the drawer<cash register.
2# $eslts controls@.tudents must recogni#e that pro*iding ;ate a bonus of, say, 18E of re*enues or
profits does little to reduce her moti*ation to poc-et 188E of the re*enue through theft of cash or direct
poc-eting of re*enues. 4e*enue-based bonus systems could be effecti*e moti*ators if 4osemary is sure
that e*ery client is recogni#ed on the system, but by themsel*es they wonCt ensure that e*ery client is
recogni#ed.
There are some more creati*e and better possibilities. 1or eample, should instructors be set up as 'little
entrepreneurs(6 Fet them -eep all the re*enue, but charge them a fied fee for access to the facility. ,f
this alternati*e is chosen, then 4osemary would ha*e to de*elop a fee schedule that could be based on a
cost accounting.
3# Personnel)cltral controls@stricter hiring criteria $e.g., bac-ground chec-s&, building a strong
'family( culture, group rewards $which encourage mutual monitoring&.
*hat shold $osemar" do+
To answer this !uestion, students will ha*e to consider the benefits $control effecti*eness& and costs in
this specific setting. .ome alternati*es, such as a camera, might be effecti*e in trac-ing usage of the
facility, but it is an epensi*e solution. A wide range of answers are possible here. .tudents should see
that there is not %ust one solution to this problem.
The case also raises the !uestion as to what 4osemary should do with ;ate. .ome students get
emotionally in*ol*ed in considering this issue, but these discussions are probably not worth much class
time.
Pedagog"
This is a short case. ,t can be used in class e*en if students ha*e not prepared the case in ad*ance.
Most students can probably read the case in 18 minutes, and the answers to the !uestions can de*eloped
in the ensuing class discussion. "ith or without ad*anced preparation, the discussion can consume e*en
up to G5 minutes of class time. Hr instructors can pro*ide a lecturette<introduction and co*er most of the
issues in this case in half that time.
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