1-12 As a new controller, reply to this comment by a plant manager: “As I see it, our accountants

may be needed to keep records for shareholders and Uncle Sam, but I don’t want them sticking

their noses in my day-to-day operations. I do the best I know how. No bean counter knows

enough about my responsibilities to be of any use to me.”

The new controller could reply in one or more of the following ways:

(a)Demonstrate to the plant manager how he or she could make better decisions if the plant controller was viewed as a resource rather than a deadweight. In a related way, the plant controller could show how the plant manager’s time and resources could be saved by viewing the new plant controller as a team member.

(b)Demonstrate to the plant manager a good knowledge of the technical aspects of the plant. This approach may involve doing background reading. It certainly will involve spending much time on the plant floor speaking to plant personnel.

(c)Show the plant manager examples of the new plant controller’s past successes in working with line managers in other plants. Examples could include

  • assistance in preparing the budget,
  • assistance in analyzing problem situations and evaluating financial and nonfinancial aspects of different alternatives, and
  • assistance in submitting capital budget requests.

(d)Seek assistance from the corporate controller to highlight to the plant manager the importance of many tasks undertaken by the new plant controller. This approach is a last resort but may be necessary in some cases.

3-2 Describe the assumptions underlying CVP analysis.

The assumptions underlying the CVP analysis are:

1.Changes in the level of revenues and costs arise only because of changes in the number of product (or service) units produced and sold.

2.Total costs can be separated into a fixed component that does not vary with the output level and a component that is variable with respect to the output level.

3.When represented graphically, the behavior of total revenues and total costs are linear (represented as a straight line) in relation to output level within a relevant range and time period.

4.The selling price, variable cost per unit, and fixed costs are known and constant.

5.The analysis either covers a single product or assumes that the sales mix, when multiple products are sold, will remain constant as the level of total units sold changes.

6.All revenues and costs can be added and compared without taking into account the time value of money.