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Management Accounting 4/e

Test Item File

AKY 4E Test Bank Chapter 1 Schoenebeck

CHAPTER 1MANAGEMENT ACCOUNTING: INFORMATION THAT CREATES VALUE

TRUE/FALSE1. Management accounting gathers short-term, long-term, financial, and nonfinancial

information.a. Trueb. False

2. Management accounting information generally reports on the organization as a whole.a. Trueb. False

3. Companies have to follow strict guidelines when designing a management accounting system.a. Trueb. False

4. A good management accounting system is intended to meet specific decision-making needs at all levels in the organization.a. Trueb. False

5. During the history of management accounting, innovations were developed to address the decision-making needs of managers.a. Trueb. False

6. A key element in any organization’s strategy is to identify its target customers and to deliver what those target customers want.a. Trueb. False

7. The value proposition has only two elements: cost and quality.a. Trueb. False

8. Quality is the degree of conformance between what the customer is promised and what the customer receives.a. Trueb. False

9. Recently, the demand for improved management accounting and control information within manufacturing firms has also occurred in service organizations.a. Trueb. False


10. Recently, the competitive environment for both manufacturing and service companies has become far more challenging and demanding.a. Trueb. False

11. Service companies are very similar to manufacturing companies in may ways, including the fact that many employees have direct contact with customers.a. Trueb. False

12. Sensitivity to timeliness and quality of service is especially important to service organizations.a. Trueb. False

13. Government and nonprofit organizations, as well as profit-seeking enterprises, are feeling the pressures for improved performance.a. Trueb. False

14. Management accounting information allows managers to compare actual and planned costs and to identify areas and opportunities for process improvement.a. Trueb. False

15. Management accounting can provide information on customer satisfaction.a. Trueb. False

16. ROI (return on investment) combines two profitability measures to produce a single measure of departmental or divisional performance.a. Trueb. False

17. Around 1920, centralized control of decentralized operations was accomplished by having corporate managers receive financial reports about divisional operations and profitability.a. Trueb. False

18. In the late 1990s, little interest or attention was paid to evaluating management’s appropriate governance and strategy choices.a. Trueb. False

19. Financial information identifies and explains the underlying problems.a. Trueb. False


20. Management accounting measures can provide advance warnings of problems.a. Trueb. False

21. Customer satisfaction is an example of financial information.a. Trueb. False

22. Operating profit is an example of nonfinancial information.a. Trueb. False

23. Organizational leadership plays a critical role in fostering an organization’s culture of high ethical standards.a. Trueb. False

24. Information is never neutral; just the act of measuring and reporting information affects the individuals involved.a. Trueb. False

25. Boundary systems are always stated in positive terms that outline maximum standards of behavior.a. Trueb. False


MULTIPLE CHOICE

26. Management accounting helps a company achieve: a. its strategic objectivesb. its operational objectivesc. control and also supports performance evaluationd. All of the above are correct.

27. Which of the following types of information are used in management accounting?a. financial informationb. nonfinancial informationc. information focused on the long termd. All of the above are correct.

28. Management accounting:a. focuses on estimating future revenues, costs, and other measures to forecast activities

and their resultsb. provides information about the company as a wholec. reports information that has occurred in the past that is verifiable and reliable d. provides information that is generally available only on a quarterly or annual basis

29. Which of the following descriptors refer to management accounting information?a. It is verifiable and reliable.b. It is driven by rules.c. It is prepared for shareholders.d. It provides reasonable and timely estimates.

30. Which of the following statements refers to management accounting information?a. There are no regulations governing the reports.b. The reports are generally delayed and historical.c. The audience tends to be stockholders, creditors, and tax authorities.d. The scope tends to be highly aggregate.

31. Management accounting information includes:a. tabulated results of customer satisfaction surveysb. the cost of producing a productc. the percentage of units produced that is defectived. All of the above are correct.

32. Management accounting reports MOST likely include information about:a. customer complaintsb. net income for the yearc. total assetsd. All of the above are correct.


33. The person MOST likely to use management accounting information is a(n):a. banker evaluating a credit applicationb. shareholder evaluating a stock investmentc. governmental taxing authorityd. assembly department supervisor

34. Which of the following is NOT a function of a management accounting system?a. strategic planningb. financial reportingc. operational controld. product costing

35. Financial accounting provides the PRIMARY source of information for:a. decision making in the finishing departmentb. improving customer servicec. preparing the income statement for shareholdersd. planning next year’s operating budget

36. Financial accounting:a. focuses on the future and includes activities such as preparing next year's operating

budgetb. must comply with GAAP (generally accepted accounting principles) c. reports include detailed information on the various operating segments of the

business such as product lines or departmentsd. is prepared for the use of department heads and other employees

37. The person MOST likely to use ONLY financial accounting information is a:a. factory shift supervisorb. vice president of operationsc. current shareholderd. department manager

38. The accounting process is constrained by mandated reporting requirements by all of the following organizations EXCEPT the:a. Internal Revenue Service (IRS)b. Institute of Management Accountants (IMA)c. Financial Accounting Standards Board (FASB)d. Securities and Exchange Commission (SEC) for companies that are publicly traded

39. Historically:a. in the beginning of the 20th century, the Guilds kept detailed records of raw materials

and labor costs as evidence of product qualityb. in medieval England, the basics of modern management accounting emerged with

standards for material use, employee productivity, and budgetsc. in the late 19th century, railroad managers implemented large and complex costing

systems to compute the cost of different types of freightd. from 1400-1600, large and integrated companies such as DuPont and General

Motors, developed ways to measure return on investment


40. In general, it was not until the 1970s that management accounting systems:a. were improved because of demands by the FASB and the SECb. stagnated and proved inadequatec. started to develop innovations in costing and performance-measurement systems due

to intense pressure from overseas competitorsd. started to address the decision-making needs of managers

41. All successful organizations must identify and understand their:a. weaknessesb. competitionc. strategyd. definition of quality

42. A key element of any organization’s strategy is identifying:a. its potential shareholdersb. its target customersc. competitor’s productsd. employee needs

43. What an organization tries to deliver to customers is called its value proposition, which includes the elements of: a. cost and qualityb. cost, quality, and functionality and featuresc. cost, quality, functionality and features, and serviced. cost, quality, functionality and features, service, and industry standards

44. The price paid by the customer, given the product features and competitor’s prices, is referred to as the __________ element of the value proposition.a. costb. industry standardsc. qualityd. service

45. The degree of conformance between what the customer is promised and what the customer receives is referred to as the __________ element of the value proposition.a. costb. industry standardsc. qualityd. service

46. The performance of the product, for example, a meal in a restaurant provides the diner with the level of satisfaction expected for the price paid, is referred to as the __________ element of the value proposition.a. functionality and featuresb. industry standardsc. qualityd. service


47. How the customer is treated at the time of the purchase is an example of the __________ element of the value proposition.a. functionality and featuresb. industry standardsc. qualityd. service

48. Management accounting provides:a. information on the efficiency of factory laborb. information on the cost of servicing commercial customersc. information on the performance of an operating divisiond. All of the above are correct.

49. Which of the following groups would be LEAST likely to receive detailed management accounting reports?a. stockholdersb. customer service representativesc. production supervisord. vice president of operations

50. Top executives of a multi-plant firm are LEAST likely to use management accounting information:a. to support decisions that result in long-term consequencesb. to evaluate the performance of individual plantsc. for strategic planningd. for operational control

51. Managers of service departments need all of the following information EXCEPT:a. efficiency data on work performanceb. quality data on work performancec. profitability data of the whole companyd. profitability data of the service department

52. A national company manufactures a line of modern furniture. Information MOST useful to the employee who assembles the furniture includes:a. a daily report comparing the actual time it took to assemble a piece of furniture to the

standard time allowedb. a monthly report on the portion of furniture pieces assembled with defectsc. the number of furniture pieces sold this monthd. revenue per employee

53. A national company manufactures a line of modern furniture. Information MOST useful to the top executive includes:a. individual job summaries of materials usedb. monthly financial reports on the company’s profitability by product linec. time reports submitted by each employeed. scheduled downtime for routine maintenance on machines


54. A quarterly report disclosing declining market share information is MOST useful to:a. a front-line employeeb. the manager of operationsc. the chief executive officerd. the accounting department

55. A weekly report comparing machine time used to available machine time is information MOST useful to:a. a front-line employeeb. the manager of operationsc. the chief executive officerd. the accounting department

56. A daily report on the number of quality units assembled by each employee is information MOST useful to:a. a front-line assembly workerb. the accounting departmentc. the chief executive officerd. the personnel department

57. Which of the following would be LEAST helpful for a top manager of a company?a. profitability report of the companyb. information to monitor hourly and daily operationsc. number of customer complaintsd. operating expense summary reported by department

58. Recently, increased demand for management accounting information has been:a. primarily from manufacturing firmsb. primarily from service organizationsc. from both the manufacturing and the service industriesd. an illusion; in fact, the demand for management accounting has changed very little

59. Management accounting can play a critical role in the service industry because of all the following reasons EXCEPT:a. firms must be especially sensitive to the timeliness and quality of customer serviceb. many employees have very little contact with customersc. customers immediately notice defects and a delay in serviced. dissatisfied customers may never return

60. Historically, the NEGLECT of management accounting in the service industry was a result of:a. noncompetitive environmentsb. global customer demandsc. the switch to free market economiesd. an influx of higher-quality and lower-priced products from overseas


61. Currently, management accounting information within government and nonprofit organizations is in greater demand because:a. public and private donors are demanding accountabilityb. citizens are requesting responsive and efficient performance from their governing

unitsc. more nonprofit organizations are competing for limited fundsd. All of the above are correct.

62. Currently, pressures for improved cost and performance measurements are being felt by:a. nonprofit organizationsb. governmental agenciesc. profit-seeking enterprisesd. All of the above are correct.

63. Financial accounting information:a. provides a signal that something is wrongb. identifies what is wrongc. explains what is wrongd. simply summarizes information but gives no indication that anything is wrong

64. Decentralized responsibility refers to allowing lower-level managers to do all of the following EXCEPT:a. make decisions without seeking higher approvalb. take advantage of local opportunitiesc. make periodic financial reports to upper-managementd. pursue individual objectives even though they may not contribute to the entire

company

65. The return on investment (ROI) performance measure uses __________ to evaluate the performance of operating divisions.a. a single numberb. four numbersc. five numbersd. ten numbers

66. The return on investment (ROI) performance measure combines __________ to produce a measure of departmental performance.a. two profitability measuresb. two capital utilization measuresc. one profitability measure and one capital intensity measured. two profitability measures and two capital intensity measures

67. All of the following are true regarding the return on investment (ROI) formula developed at Dupont EXCEPT that: a. it is the sole measure top-management utilizes to evaluate which division should

receive additional capitalb. it allows companies to have centralized control with decentralized responsibilityc. it produces a measure of divisional performanced. it equals (Operating income/Sales) x (Sales/Investment)


THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 68 AND 69.The following information pertains to three divisions:

Flowers Shrubs TreesSales $15,000 $28,000 $120,000Operating income $2,000 $2,000 $6,000Investment $22,000 $40,000 $100,000

68. What is the return on investment for the Shrub Division?a. 2.00%b. 5.00%c. 7.14%d. 70.00%

69. Which division is more profitable based on ROI?a. Flowersb. Shrubsc. Treesd. Both Flowers and Shrubs are equally more profitable than Trees.

70. To help evaluate management’s appropriate governance and strategic choices, organizations have called on management accountants to develop:a. internal control systems to protect assets from theftb. measures to monitor compliance with behavior that is consistent with the

organization’s best interestsc. systems to evaluate profitabilityd. reports to highlight variances from amounts planned

71. Management accounting information is BEST described as:a. providing a signal that something is wrongb. identifying and helping to explain what is wrongc. simply summarizing information, but giving no indication that anything is wrongd. measuring overall organizational performance

72. For improving operational efficiencies and customer satisfaction, nonfinancial information is: a. criticalb. helpfulc. infrequently usedd. unnecessary

73. Nonfinancial information might be used to:a. improve qualityb. reduce cycle timesc. satisfy customer needsd. All of the above are correct.


74. The act of simply measuring and reporting information:a. focuses the attention of employees on those processesb. diverts the employee’s attention to other activitiesc. disproves the saying “What gets measured gets managed.”d. has no effect on employee behavior

75. Which statement below is FALSE?a. “What gets measured gets managed.”b. People react to measurements.c. Employees spend more attention on those variables that are not getting measured.d. “If I can’t measure it, I can’t manage it.”

76. When a change is introduced, employees tend to:a. embrace the changeb. be indifferent to the changec. exhibit no change in behaviord. resist the change

77. The introduction of a new management system is MOST likely to motivate UNWANTED employee behavior when it is used for:a. evaluationb. planningc. decision makingd. coordinating individual efforts

78. Management accountants are MOST likely to feel outside pressure to favorably influence the numbers favorably when the information is used for:a. budgetingb. compensation and promotionsc. continuous improvementd. product costing

79. Fostering a culture of high ethical standards includes all of the following EXCEPT:a. following the good example set by senior managementb. communicating to employees a belief system that inspires and promotes commitment

to the organization’s core valuesc. following the general examples set by front-line employeesd. communicating to all employees a boundary system that states what actions will not

be tolerated

80. The Institute of Management Accountants (IMA):a. is a professional organization of management accountantsb. is a professional organization of financial accountantsc. issues standards for management accountingd. issues standards for financial accounting


CRITICAL THINKING/ESSAY

81. Describe management accounting and financial accounting.

82. What is the purpose of management accounting?

83. Briefly describe how managers make use of management accounting information.

84. Describe the value proposition and the elements that comprise it.

85. Is financial accounting or management accounting more useful to an operations manager? Why?

86. What role has the increasingly competitive business environment played in the development of management accounting?

87. Describe return on investment (ROI). Why was it developed? When was it developed?

88. Give two examples of financial information and nonfinancial information.

89. Discuss the potential behavior implications of performance evaluation.


CHAPTER 1 SOLUTIONSMANAGEMENT ACCOUNTING: INFORMATION THAT CREATES VALUE

TRUE/FALSE

LO1 1. aLO1 2. bLO1 3. bLO1 4. aLO1 5. a

LO2 6. aLO2 7. bLO2 8. aLO3 9. aLO3 10. a

LO3 11. bLO3 12. aLO3 13. aLO3 14. aLO3 15. a

LO4 16. bLO4 17. aLO5 18. aLO5 19. bLO5 20. a

LO5 21. bLO5 22. bLO6 23. aLO6 24. aLO6 25. b

MULTIPLE CHOICE

LO1 26. dLO1 27. dLO1 28. aLO1 29. dLO1 30. a

LO1 31. dLO1 32. aLO1 33. dLO1 34. bLO1 35. c

LO1 36. bLO1 37. cLO1 38. bLO1 39. cLO1 40. c

LO2 41. cLO2 42. bLO2 43. cLO2 44. aLO2 45. c

LO2 46. aLO2 47. dLO3 48. dLO3 49. aLO3 50. d

LO3 51. cLO3 52. aLO3 53. bLO3 54. cLO3 55. b

LO3 56. aLO3 57. bLO3 58. cLO3 59. bLO3 60. a

LO3 61. dLO3 62. dLO4 63. aLO4 64. dLO4 65. a

LO4 66. cLO4 67. aLO4 68. bLO4 69. aLO5 70. b

LO5 71. bLO5 72. aLO5 73. dLO6 74. aLO6 75. c

LO6 76. dLO6 77. aLO6 78. bLO6 79. cLO6 80. a

MULTIPLE CHOICE

68. $2,000 / $40,000 = 5.00%69. $2,000 / $22,000 = 9.09%; $2,000 / $40,000 = 5.00%; $6,000 / $100,000 = 6.00%


CRITICAL THINKING/ESSAY

LO181. Describe management accounting and financial accounting.

Solution: Management accounting provides information to internal decision makers of the business such as top executives. Its purpose is to help managers predict and evaluate future results. Reports are generated often and are usually broken down into smaller reporting divisions such as department or product line. There are no rules to be complied with since these reports are for internal use only.

Financial accounting provides information to external decision makers such as investors and creditors. Its purpose is to present a fair picture of the financial condition of the company. Reports are generated quarterly or annually and report on the company as a whole. The financial statements must comply with GAAP (generally accepted accounting principles). A CPA audits, or verifies, that the GAAP are being followed.

LO182. What is the purpose of management accounting?

Solution: Management accounting gathers short-term and long-term financial and nonfinancial information to plan, coordinate, motivate, improve, control, and evaluate success factors of an organization. Management accounting converts data into usable information that supports strategic, operational, and control decision making.

LO183. Briefly describe how managers make use of management accounting information.

Solution: Managers use accounting information for three broad purposes.

ONE: To plan business operations that includes preparing strategies and budgets and determining the prices and costs of products and services. A company must know the cost of each product and service to decide which products to offer and whether to expand or discontinue product lines.

TWO: To control business operations that includes comparing actual results to the budgeted results and taking corrective action when needed.

THREE: To evaluate performance.


LO284. Describe the value proposition and the elements that comprise it.

Solution: The value proposition is what an organization tries to deliver to its target customers – it defines the organizational strategy.

The four elements are cost, quality, functionality and features, and service.

Cost is the price paid by the customer, given the product features and competitor’s prices.

Quality is the degree of conformance between what the customer is promised and what the customer receives.

Functionality and features refers to the performance of the product. For example: A meal in a restaurant provides the diner with the level of satisfaction expected for the price paid.

Service is all of the other elements of the product. For example: How the customer is treated at the time of the purchase.

LO385. Is financial accounting or management accounting more useful to an operations manager?

Why?

Solution: Management accounting is more useful to an operations manager because management accounting reports operating results by department or unit rather than for the company as a whole, it includes financial as well as nonfinancial data such as on-time deliveries and cycle times, and it includes quantitative as well as qualitative data such as the type of rework that was needed on defective units.

LO386. What role has the increasingly competitive business environment played in the

development of management accounting?

Solution: The competitive environment has changed dramatically. There has been a deregulation movement in North America and Europe during the 1970s and 1980s that changed the ground rules under which service companies operated. In addition, organizations encountered severe competition from overseas companies that offered high-quality products at low prices. There has been an improvement of operational control systems such that information is more current and provided more frequently. The nature of work has changed from controlling to informing. Firms are concerned about continuous improvement, employee empowerment, and total quality. Nonfinancial information has become a critical feedback measure. Finally, the focus of many firms is now on measuring and managing activities.


LO487. Describe return on investment (ROI). Why was it developed? When was it developed?

Solution: ROI = (operating income / sales) x (sales / investment)

The ROI measure combines a profitability measure (operating income / sales) with a capital intensity measure (sales / investment) to provide a single measure of departmental and divisional performance.

ROI was developed in the early decades of the 1900s so that senior managers at multi-divisional diversified corporations, such as DuPont and General Motors, could evaluate the operating performance of their decentralized divisions.

LO588. Give two examples of financial information and nonfinancial information.

Solution: Financial information includes amounts that can be expressed in dollar amounts such as sales, net income, and total assets. It also includes ratios prepared using financial information such as increase in sales, return-on-sales, and return-on-investment.

Nonfinancial information includes measures that are not expressed in dollar amounts. For example, nonfinancial measures of customer satisfaction include the number of repeat customers or ranked estimates of satisfaction levels. Nonfinancial measures of production quality include percent of on-time deliveries, the number of defects, production yield, and cycle times.

LO689. Discuss the potential behavior implications of performance evaluation.

Solution: As measurements are made on operations and, especially, on individuals and groups, the behavior of the individuals and groups are affected. People react to the measurements being made. They will focus on those variables or the behavior being measured and spend less attention on variables and behavior that are not measured. In addition, if managers attempt to introduce or redesign cost and performance measurement systems, people familiar with the previous system will resist. Management accountants must understand and anticipate the reactions of individuals to information and measurements. The design and introduction of new measurements and systems must be accompanied with an analysis of the likely reactions to the innovations.


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