CHAPTER 1

DISCUSSION QUESTIONS

1-1

Q1-1. Planning is the development of a consistentset of actions, resources, and measurementsby which the achievement of objectives canbe assessed. Planning takes into account theinteractions between the organization and itsenvironment in whatever is to be done.

Control is the process by which managersassure that resources are obtained and usedin an efficient and effective manner to carryout the plan and accomplish the organiza-tion’s objectives. Control implies that perform-ance measurements are reviewed todetermine if corrective action is required.

Planning and control are interrelated.Control is carried out within the establishedplanning framework and serves to evaluateconformance to the plan so that organiza-tional objectives are achieved.

Q1-2. Short-range plans usually deal with a periodof a quarter or a year, while long-range plansusually cover three to five years. Short-rangeplans are detailed enough to permit prepara-tion of a complete set of financial statementsas of a future date, while long-range plansculminate in a very summarized set ofexpected results or a few quantified objec-tives, such as financial ratios.

Q1-3. Long-range plans contain quantitative results,while strategic plans are the least quantifiableof all plans. Long-range plans usually extendthree to five years into the future, while strate-gic plans may contemplate shorter or muchlonger periods. Long-range plans covering athree-to-five-year period would be preparedevery three to five years, or might be system-atically updated each year to maintain a com-plete plan, while strategic plans areformulated at irregular intervals by an essen-tially unsystematic process.

Q1-4. Accountability is identical with responsibilityaccounting. Accountability deals with the dis-charge of an individual’s responsibility toachieve assigned objectives within the costsand expenses allowed for the performanceand agreed to by the individual.

Q1-5. The controller does not control, but aids thecontrol task of the managerial levels by issu-ing reports pointing out deviations from thepredetermined course of action.

Q1-6. The cost department keeps detailed recordsof materials, labor, factory overhead, andmarketing and administrative expenses; ana-lyzes these costs; issues control reports; pre-pares cost studies for planning and decisionmaking; and coordinates cost and budgetdata with other departments.

Q1-7. For product research and design, the manu-facturing departments need estimates ofmaterials, labor, and machine process costs;for measuring and efficiency of scheduling,producing, and inspecting products, thedepartments need to know the costs incurred.The personnel department supplies employ-ees’ wage rates. The treasury departmentneeds accounting, budgeting, and relatedreports in scheduling cash requirements. Themarketing department needs cost informationin setting prices. The public relations depart-ment needs information on prices, wages,profits, and dividends in order to inform thepublic. The legal department needs cost infor-mation for keeping many affairs of the com-pany in conformity with the law.

Q1-8. Modern techniques in communications givethe controller and staff the means to transmitinformation in the form of results, analyses,and forecasts in a way never before possible.Profit opportunities or control actions havebeen delayed or missed entirely becausetimely information that might have improvedthe cost and profit position of the companywas poorly communicated.

Q1-9. The budget is an essential cost planning toolbecause it (a) supplies information and servesas a standard of performance for cost controlby the supervisors responsible for cost; (b) pro-vides an easy method for anticipating profits atan anticipated sales level; (c) helps in forecast-ing sales, costs, expenses, and profits for aperiod of one year or more in advance.

Q1-10. These standards will not necessarily be ableto prevent management fraud, but they dogive internal accountants some guidance onhow to proceed if they encounter a question-able practice.

Q1-11. CASB standards: (a) enunciate a principle orprinciples to be followed; (b) establish prac-

tices to be applied; (c) specify criteria to beemployed in selecting from alternative princi-ples and practices in estimating, accumulat-ing, and reporting contract costs. Thestandards are backed by the full force andeffect of the law.

1-2 Chapter 1

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 isfound in the definition of control: management’s systematic effort to achieveobjectives by comparing performance to plans and taking appropriate action tocorrect important differences. The definition shows that the specific results ofplanning are an essential input to the control phenomenon; there cannot be anysuch thing as a control effort without reference to some set of plans.

A second example of the inseparability of planning and control results fromthe fact that they are simultaneous. In practice, the implementation of the firststeps of a plan, and any control action needed in those steps, are begun beforeall parts of planning are complete. Early results and the early findings of controlactivity can then be used in finalizing later parts of the same plan. An exampleis that a single annual budget is usually not completely finalized before cus-tomer orders begin to be received for that year, and consideration of the numberof these actual customer orders may point to trends that need to be consideredin finalizing the budget. Even actual financial results of the early weeks andmonths of the year can provide a basis for better establishing the budget for thelater portion of the year.

The most elegant example of the inseparability of planning and controlresults from the fact that both planning and control are complex human activi-ties, and almost all complex human activities are planned activities and alsocontrolled activities. In other words, planning can be so complex that the plan-ning effort is itself controlled (and planned), and control can be so complex thatcontrol activities are themselves planned (and controlled). Two illustrations ofthis are provided as follows:(1) A case in which planning is itself planned and controlled is when a compli-

cated budget (plan) is to be prepared.To facilitate the creation of the budget,a detailed weekly schedule (another plan) is first agreed upon, showingwhich steps in the preparation of the budget are to be carried out duringeach week. Because it is desired that the creation of the budget not beallowed to fall far behind schedule, the responsible manager will exercisecontrol by making comparisons between (a) the actual progress made onthe budget each week and (b) the schedule.The manager will also take somecorrective action if the difference between the schedule and the actualprogress is considered important.

(2) A case in which control is itself planned is when a manager decides whatkinds of control reports will be used to compare actual results with plans ineach future period of business operations. That decision, any efforts madeto acquire a supply of preprinted report forms to be filled in each period, andany changes in the design of the cost accounting system to capture andcompile the needed information about actual results represent evidence thatthe future control activity is being planned.

Chapter 1 1-3

E1-2

(1) B(2) A(3) C(4) A(5) C(6) B—although 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 andobligation to pay off the bonds when they come due is so routine that manage-ment would not consciously approach it as a decision.

E1-3

(1) Paragraph (b) comes closest to describing the kind of control used in managinga business, although it is described in a nonbusiness setting.There is a plan for-mulated in advance, there is a measure of actual results, there is a decisionmaker who compares actual results with plans, there is a selection of a correc-tive action to bring results closer in line with the plan, and there is a foreshad-owing of repeated periodic control activities (the remaining quizzes).

The fact that the measures of planning and actual performance are nonfinan-cial measures is not the governing consideration. Much planned and actualinformation used in controlling a business is non-financial, including some costaccounting information such as the number of units produced, the percentage ofunits that were defective, and the percentage of available machine time that wasutilized.

(2) Paragraph (a) is a perfect example of an engineering control, rather than the kindof control managers use in business. The simple device described, which isfound in any home bathroom, is the kind of control device designed to monitora physical condition, and so it is analogous to a thermostat or any of a variety ofdevices called “industrial controls.” Of course, devices of this kind are used inmanufacturing and other businesses, but they do not possess the essentialattributes of control in the sense used in business and in cost accounting. Thedevice achieves a continuous monitoring of the results, rather than a periodiccomparison of results with plans.There is no human decision maker who selectsa corrective action to be taken. A human decision maker is probably the salientattribute of control in managing a business that is missing in paragraph (a).

1-4 Chapter 1

E1-3 (Concluded)

Paragraph (c) could be interpreted as an example of planning, but it lackssome essential ingredients of control (even though the word “control” is used inits last sentence). There is no periodic comparison of actual results with plansand no provision for modifying the treatment based on periodic results. Forexample, the contract requires five treatments each year, even if no weeds arevisible. The actions taken are entirely preemptive.

Paragraph (d) refers to the concept of control that applies to police work andmilitary science. It consists of being able to physically determine each event thatoccurs 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), isalways present in achieving this kind of control. In paragraph (d), there is no indi-cation that results were periodically compared with plans. A rule that says“Obtain the objective at any cost” is sometimes associated with these activities.

Chapter 1 1-5

CASES

C1-1

(1) Yes, Williams has an ethical responsibility to take action.The IMA’s Standards of Ethical Conduct states that management accountants

“shall not commit acts contrary to these standards nor shall they condone thecommission of such acts by others within their organizations.”

(2) (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 residen-tial landfill is generally a violation of law.)

Confidentiality: Refrain from disclosing confidential information acquired inthe course of their work except when authorized, unless legally obligated to doso (Williams may be legally obligated to take action and make certain disclo-sures.)

Integrity: Refrain from either actively or passively subverting the attainmentof the organization’s legitimate and ethical objectives. (Williams’ avoidance ofthe issue would passively subvert attainment of ethical objectives.)

Communicate unfavorable as well as favorable information and professionaljudgments or opinions. (Williams is obligated to report his unfavorable findingsto appropriate persons.)

Refrain from engaging in or supporting any activity that would discredit theprofession. (Williams’ silence would provide support to the dumping activityand, thus, could discredit the profession.)

Objectivity: Disclose fully all relevant information that could reasonably beexpected to influence an intended user’s understanding of the reports, com-ments, and recommendations presented. (Williams should disclose his findingsto the appropriate persons.)

(3) Alternative (a), to seek the advice of his immediate superior, is appropriate. Thisis the first step he is required to take, unless the superior is involved.

Alternative (b), communication of confidential information to persons outsidethe company, such as the local newspaper, is inappropriate unless there is alegal obligation to do so. If required by law, Williams should contact the properauthorities.

Alternative (c), contacting a member of the board of directors, would be inap-propriate at this time. Williams should report the problem to successively higherlevels within the company and turn to the board of directors only if the problemis not resolved at lower levels.

1-6 Chapter 1

C1-1 (Concluded)

(4) Williams should follow the company’s established policies for resolving suchissues, if such policies exist. If the issue is not resolved through existing poli-cies, he should report the problem to successively higher levels within the com-pany until it is resolved. (Williams is not required to report this action to hissuperior if his superior appears to be involved in the conflict. He is not to dis-close the matter to persons outside the organization, unless required by law.)During these steps, Williams may clarify relevant concepts by confidential dis-cussion with an objective advisor to obtain an understanding of possiblecourses of action. If the conflict is not resolved after exhausting all thesecourses of action, Williams may have no other recourse than to resign and sub-mit an informative memorandum to an appropriate representative of the organi-zation. Consultation with one’s 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 CFO’s 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 toaccount for information in a way that is not in accordance with generallyaccepted accounting principles.)

Prepare complete and clear reports and recommendations after appropriateanalyses of relevant and reliable information. (The CFO’s restrictions on disclo-sure will result in incomplete reports.)

Confidentiality: Refrain from using or appearing to use confidential informa-tion acquired in the course of their work for unethical or illegal advantage, eitherpersonally or through third parties. (The CFO is attempting to use confidentialinformation to protect the job security and bonuses of top management.)

Integrity: Avoid actual or apparent conflicts of interest and advise all appro-priate parties of any potential conflict. (The CFO has failed to avoid a conflict ofinterest and has not informed the stockholders of the conflict.)

Refuse any gift, favor, or hospitality that would influence or would appear toinfluence their actions. (The CFO’s bonus appears to be an influence on hisactions.)

Refrain from either actively or passively subverting the attainment of theorganization’s legitimate and ethical objectives. (The CFO has subverted theattainment of the organization’s legitimate objective, profit for stockholders, bypursuing, instead, the job security and bonuses of top management.)

Communicate unfavorable as well as favorable information and professionaljudgments or opinions. (The CFO is attempting to restrict disclosure of informa-tion about the acquisition.)

Chapter 1 1-7

C1-2 (Continued)

Refrain from engaging in or supporting any activity that would discredit theprofession. (The CFO’s actions could discredit the profession.)

Objectivity: Communicate information fairly and objectively. (The CFO isattempting to unfairly control the information reported, resulting in a report that isnot objective.)

Disclose fully all relevant information that could reasonably be expected toinfluence an intended user’s understanding of the reports, comments, and rec-ommendations presented. (The CFO is attempting to restrict disclosure of rele-vant information.)

(2) (The requirement does not ask which standards have been violated, but, rather,which ones apply to Deerling’s 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 violategenerally accepted accounting principles.)

Prepare complete and clear reports and recommendations after appropriateanalyses of relevant and reliable information. (Deerling is being asked to preparean incomplete report.)

Confidentiality: Refrain from using or appearing to use confidential informa-tion acquired in the course of their work for unethical or illegal advantage eitherpersonally or through third parties. (Deerling must not use the confidential infor-mation about the possible takeover to his own advantage or to that of the per-son(s) mounting the takeover attempt.)

Integrity: Refuse any gift, favor, or hospitality that would influence or wouldappear to influence their actions. (The last sentence of the case suggests thatDeerling is considered a member of the top management group, so he may beeligible for a bonus.)

Refrain from either actively or passively subverting the attainment of theorganization’s legitimate and ethical objectives. (Deerling is being asked to sub-vert the attainment of the organization’s legitimate objective, profit for stock-holders, by pursuing instead the job security and bonuses of top management.)

Communicate unfavorable as well as favorable information and professionaljudgments or opinions. (Deerling is being asked to restrict disclosure of infor-mation about the acquisition.)

Refrain from engaging in or supporting any activity that would discredit theprofession. (Deerling is being asked to take actions that could discredit the pro-fession.)

Objectivity: Communicate information fairly and objectively. (Deerling isbeing asked to prepare a report that is not objective.)

Disclose fully all relevant information that could reasonably be expected toinfluence an intended user’s understanding of the reports, comments, and rec-ommendations presented. (Deerling is being asked to restrict disclosure of rele-vant information.)

1-8 Chapter 1

C1-2 (Concluded)

(3) If the company has established policies for dealing with such issues, Deerlingshould first follow these policies. If such policies do not exist, or if they areunsuccessful in resolving the problem, Deerling should present the problem tothe chairman of the board. Deerling’s immediate superior is involved, so he neednot be informed of this action. If the matter remains unresolved, Deerling shouldreport to the audit committee, the board of directors, and finally the majorityowners. During these steps, Deerling may clarify relevant concepts by confiden-tial discussion with an objective advisor to obtain an understanding of possiblecourses of action. If the conflict is not resolved after exhausting all thesecourses of action, Deerling may have no other recourse than to resign and sub-mit an informative memorandum to an appropriate representative of the organi-zation. Consultation with one’s personal attorney is also appropriate.

(4) The primary responsibility the company must fulfill before taking defensiveactions is its fiduciary responsibility to stockholders. Other responsibilitiesinclude the effects that the takeover and defensive actions would have on cred-itors, bondholders, employees, customers, and the community. The companyalso has a responsibility to inform its external auditors and legal counsel toavoid putting them in a compromising position.

C1-3

(1) (The requirement does not ask which standards have been violated, but, rather,which ones apply to Dixon’s 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 rejectingall minority applicants, Dixon is jeopardizing the level of competence among thestaff.)

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 appro-priate parties of any potential conflict. (Dixon’s prejudice is in conflict with thecompany’s legal obligation to provide equal opportunity employment, and withthe company’s need for the most competent staff regardless of race.)

Refrain from either actively or passively subverting the attainment of theorganization’s legitimate and ethical objectives. (The company’s objective ofequal opportunity employment is being subverted by Dixon’s prejudice.)

Chapter 1 1-9

C1-3 (Concluded)

Refrain from engaging in or supporting any activity that would discredit theprofession. (Such persistent, systematic discrimination in hiring could discreditthe profession.)

(2) (The requirement does not ask which standards have been violated, but rather,which ones apply to Foxworth’s situation.) Because management accountantsmay not condone the commission of unethical acts by others within their organ-izations, all of the responsibilities listed in the solution to requirement (1) alsoapply to Foxworth’s 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 doso. (Foxworth’s suspicions about Dixon’s behavior should not be disclosed inap-propriately. See requirement (3)).

Objectivity: Communicate information fairly and objectively. (Foxworth isobligated to make objective hiring recommendations to Dixon, in spite of hisbelief that Dixon will be prejudiced in acting on them.)

(3) Alternative (a), discussion with the director of personnel, who is one of Dixon’speers, is inappropriate at this time. If, however, Foxworth believes the director ofpersonnel is an objective party, Foxworth may discuss the matter with the direc-tor, confidentially, to clarify the relevant concepts and to obtain an understand-ing of possible courses of action.

Alternative (b), informal discussion with a group of MAD senior managementaccountants, is inappropriate.

Alternative (c), private discussion with the CFO, Dixon’s superior, is appropri-ate. Because Foxworth has already approached his immediate superior, Dixon,who is involved in the conflict, it is not necessary for Foxworth to inform him ofthis action.

(4) Foxworth should follow the company’s established policies for dealing with thistype of conflict, if such policies exist. If policies do not exist, or if they are unsuc-cessful in resolving the conflict, Foxworth should discuss the issue with theCFO. If the matter remains unresolved, discussions with successively higher lev-els of management, including the audit committee and the board of directors,should follow. During these steps, Foxworth may discuss the matter confiden-tially with an objective advisor to clarify the relevant concepts and to obtain anunderstanding of possible courses of action. If the matter remains unresolvedafter exhausting all of these steps, Foxworth may have no recourse other than toresign and submit an informative memorandum to an appropriate representativeof the company. Consultation with one’s personal attorney is also appropriate.

1-10 Chapter 1

C1-4

(1) (The requirement does not ask for a list of responsibilities Rodriquez has vio-lated, 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 beingasked to prepare might amount to fraud in the loan application.)

Prepare complete and clear reports and recommendations after appropriateanalyses of relevant and reliable information. (The reliability of the information isin doubt, and the fact that certain sales figures are or are not sufficient to justifythe bank loan are not relevant to preparation of the budget.)

Integrity: Refrain from either actively or passively subverting the attainmentof the organization’s legitimate and ethical objectives. (There is a push to sub-vert legitimate objectives to the immediate need for a bank loan.)

Recognize and communicate professional limitations or other constraintsthat would preclude responsible judgment or successful performance of anactivity. (Rodriquez has not expressed to Czeisla the conflict between his desireto be a team player and his ethical responsibilities.)

Communicate unfavorable as well as favorable information and professionaljudgments or opinions. (Rodriquez is being asked to report information thatreflects so favorably on the company that it may not be justifiable.)

Refrain from engaging in or supporting any activity that would discredit theprofession. (Preparing a deliberately misleading budget as part of a loan appli-cation could amount to obtaining money by fraud.)

Objectivity: Communicate information fairly and objectively. (Rodriquez feelspressured to abandon his objectivity in preparing the budget.)

Disclose fully all relevant information that could reasonably be expected toinfluence an intended user’s understanding of the reports, comments, and rec-ommendations presented. (A comparison of the new targeted sales figure withthe actual sales of the corresponding periods of past years would be likely toinfluence the bank’s understanding of just how large an increase in sales isbeing portrayed.)

(2) Rodriquez could have clearly stated his concerns to Czeisla at each stage of thebudget’s creation and revision. He could have consulted with the marketing man-ager and production manager at every stage, rather than only upon receiving theinitial budget data. He could present the budget, or a summary of it, in a compara-tive form to highlight the differences between each quarter’s budget and the actualresults of the corresponding quarter of the preceding year, and he could even cal-culate the percentage increase being budgeted and compare it with actual per-centage increases that were achieved annually in the past. He could haveconsulted with his staff superior at the headquarters of Northwestern (the par-ent company)—Czeisla is his line superior, according to the second sentence ofthe case.

Chapter 1 1-11

C1-4 (Concluded)

(3) In addition to his ethical responsibilities to CD, Rodriquez has ethical responsi-bilities 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 doso. (If Jones accepts the consulting engagement with Crimson, it is likely shewill be asked to disclose confidential SMI information about the desired com-puter system.)

Refrain from using or appearing to use confidential information acquired inthe course of their work for unethical or illegal advantage either personally orthrough third parties. (The size of the consulting fee suggests Crimson is seek-ing to buy confidential information to help win the job.)

Integrity: Avoid actual or apparent conflicts of interest and advise all appro-priate parties of any potential conflict (The consulting job would constitute anapparent conflict of interest, and probably an actual one, because Jones hasbeen named to the SMI committee that will evaluate and rank all the proposals,including Crimson’s proposal, which she would have helped to write.)

Refrain from engaging in any activity that would prejudice their ability tocarry out their duties ethically. (The consulting job with Crimson would prejudiceJones’ ability to evaluate and rank the proposals for SMI, because one of the pro-posals would be Jones’ own work.)

Refuse any gift, favor, or hospitality that would influence or would appear toinfluence their actions. (Regardless of whether the size of the consulting fee isconstrued as being a gift or favor, it is likely that other gifts, favors, or hospital-ity will be extended to Jones by Crimson during the course of the consultingengagement.)

Refrain from either actively or passively subverting the attainment of theorganization’s legitimate and ethical objectives. (SMI’s legitimate objective ofobtaining the best computer system at the best price would be subverted toJones’ personal need for money, as a result of Jones’ disclosing crucial informa-tion for Crimson to include in its proposal, especially if Crimson might notdeliver a system with the crucial attributes.)

1-12 Chapter 1

C1-5 (Concluded)

Recognize and communicate professional limitations or other constraintsthat would preclude responsible judgment or successful performance of anactivity. (Accepting the consulting job would preclude responsible judgment inevaluating and ranking the proposals for SMI; on the other hand, ethical limita-tions of Jones’ employment at SMI would preclude successful performance ofthe consulting engagement for Crimson, especially if Crimson does expect herto reveal crucial information to help win the job—her ethical duty to SMI wouldprevent her from delivering what Crimson is paying for.)

Refrain from engaging in or supporting any activity that would discredit theprofession. (Selling confidential SMI information to a vendor would be a discred-itable act.)

Objectivity: Communicate information fairly and objectively. (Jones would beunlikely to communicate objective evaluations of proposals if she had helpedwrite one of them.)

Disclose fully all relevant information that could reasonably be expected toinfluence an intended user’s understanding of the reports, comments, and rec-ommendations presented. (Jones’ role in writing the Crimson proposal would berelevant information in SMI’s use of her evaluations of proposals.)

(2) Jones might have disclosed, either orally or on her personal vita sheet or job appli-cation, the extent of her involvement on the SMI task force and the committee.

(3) Jones could have first investigated all her career opportunities with firms thatpresented no potential conflict of interest of this kind, but for the sake of theargument, it is reasonable to assume she did exactly that before applying for aposition at Crimson. Knowing that Crimson is a supplier of computer systems,Jones might have revised her personal vita sheet and the wording of her appli-cation for this one job interview to lessen the chances of Crimson’s beingtempted to pursue an unethical plan. (Of course, her involvement in SMI’supcoming purchase might have become known to Crimson anyway, or it mighthave been known to Crimson from other sources before her interview or evenbefore her application for the position.)

(4) In addition to her ethical responsibilities to SMI (and her financial responsibilityto the hospital that provides treatment for her child), Jones has ethical respon-sibilities to:(a) her family(b) the management accounting profession(c) Crimson

Chapter 1 1-13