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Chapter 1
Managerial Accounting: Tools for Decision Making
Learning Objectives – coverage by questionTrue / False / Multiple Choice / Exercises / Problems / Essays
LO1 – Contrast financial and managerial accounting and explain how managerial accounting is used by decision makers. / 1, 2 / 1-4,
22-27,
31, 60, 61 / 1
LO2 – Explain how an organization’s mission, goals, and strategies affect managerial accounting. / 3, 4 / 5-12,
28-30,
32-37,
64-39 / 2, 3
LO3 – Discuss the factors determining changes in the nature of business competition. / 5 / 13, 14,
38-42 / 4
LO4 – Differentiate among structural, organizational, and activity cost drivers. / 6-8 / 15-19,
43-49,
70, 71 / 5, 6
LO5 – Explain the nature of the ethical dilemmas managers and accountants confront. / 9, 10 / 20, 21,
50-59,
62, 63
Chapter 1: Managerial Accounting: Tools for Decision Making
True False
Topic: Role of Managerial Accounting
LO: 1
1.A primary goal of managerial accounting is to provide information to investment managers who analyze a company’s stock for external investors.
Answer:False
Rationale:Providing information for external users is the role of financial accounting, not managerial accounting. The role of managerial accounting is to provide information useful to internal managers.
Topic: Value Chain Analysis
LO: 1
2.Value Chain Analysis concerns the study of value-producing activities, stretching from basic rawmaterials to the final consumer of a product or service.
Answer: True
Rationale:Value Chain Analysis involves all of the activities that affect the conversion of raw materials into a final product or service.
Topic: Organization’s Mission
LO: 2
3.An organization’s mission is best described as the basic purpose toward which activities are directed.
Answer: True
Rationale:As opposed to an organization’s goals and strategies, its mission statement addresses the broad purposes for which the organization exists.
Topic: Cost Leadership Strategy
LO: 2
4.One of the companies to first employ a successful cost leadership strategy was Carnegie Steel Company.
Answer: True
Rationale:Carnegie’s operating strategy was to push its own direct costs below those of competitors so that it could charge prices that would always ensure enough demand to keep its plants running at full capacity.
Topic: Competition
LO: 3
5.Competition among companies normally takes place only on the dimension of price/cost.
Answer: False
Rationale:Competition occurs not only on the basis of price/cost, but also on the dimensions of quality and service.
Topic: Cost Drivers
LO: 4
6.The decision to use both full-time and part time employees during the holiday season is an example ofa strategic cost driver.
Answer: False
Rationale:The decision to use part time employees instead of only fulltime employees would be an example of an organizational cost driver, not a strategic cost driver. Strategic cost drivers involve choices about the size and scope of operations and the type of technologies used in developing products and services to employees.
Topic: Cost Drivers
LO: 4
7.All costs have at least one primary cost driver.
Answer: True
Rationale:Every cost is driven by either an activity or a structural or organizational choice.
Topic: Cost Drivers
LO: 4
8.Most costs are actually incurred as a result of activity cost drivers.
Answer: True
Rationale:Strategic and organizational choices give rise to specific activities that drive costs.
Topic: Ethics
LO: 5
9.The best criterion for determining if a given action or choice is ethical is to determine if it is legal, because all legal actions are inherently ethical.
Answer: False
Rationale:Ethics goes beyond legality, which refers to what is permitted under the law, to consider the moral quality of an action.
Topic: Ethics in Managerial Accounting
LO: 5
10.Managers who prepare and/or have responsibility for managerial accounting information rarely encounter choices that have questionable ethical dimensions or overtones.
Answer: False
Rationale:While most choices that managers face are clearly ethical or unethical, many choices pose ethical dilemmas for managers. For example, when setting budgets for the next period, one may be tempted to be unduly cautious so as to make it easier to meet the budget and receive a favorable performance report (and possibly a larger bonus) for the next period.
Multiple Choice
Topic: Focus of Managerial Accounting
LO: 1
1.Managerial accounting is primarily focused on:
A)Providing creditors information on the status of their loans
B)Providing investors with useful information for valuing securities
C)Providing the Internal Revenue Service with information to determine the amount of taxes owed
D)Providing managers with relevant information to help achieve organizational goals
Answer:D
Rationale: As the name implies, managerial accounting focuses on the information needs of managers internal to the business, unlike financial accounting, which addresses the information needs of investors, creditors, and other external stakeholders.
Topic: Managerial Accounting Reports
LO: 1
2. In order to be useful to managers, management accounting reports:
A)Should be prepared according to the stated Institute of Management Accounting guidelines
B)Should be prepared according to Generally Accepted Accounting Principals
C)Should be prepared to meet the specific needs of decision makers
D)Should not be prepared prior to the end of a fiscal reporting period
Answer:C
Rationale: There are no specific standards for preparing managerial accounting reports. They should be tailored to meet the needs of each individual organization.
Topic: Limited Use of Financial Accounting Information
LO: 1
3. Financial accounting information is least useful in providing:
A)Aggregate information about an organization’s assets, obligations and performance
B)Information for stating corporate wide goals
C)Information for internal decision makers
D)Periodic reports for shareholders
Answer:C
Rationale: Financial accounting, which is concerned primarily with the information needs of a broad population of parties external to the organization, has limited value in meeting the information needs of internal managers.
Topic: Components of Strategic Cost Management
LO: 1
4. The three analyses that comprise strategic cost management include each of the following except:
A)Ratio analysis
B)Cost driver analysis
C)Strategic position analysis
D)Value chain analysis
Answer:A
Rationale: Strategic cost management has been defined to include all of the above except ratio analysis.
Topic: Strategic Position Analysis
LO: 2
5.Strategic Position Analysis is best defined as:
A)The process of making the organization into a well ordered whole
B)Fundamental choices about the size and scope of operations and technologies
C)The formulation of a program for a specific goal
D)An organization’s basic way of competing to sell products and services
Answer:D
Rationale: Strategic position analysis involves the fundamental choices companies make for positioningitself in the market in relation to competitors.
Topic: Organization Goals
LO: 2
6. A goal is best defined as:
A)The mission of an organization
B)The implementation of specific ideas
C)The fundamental purpose of an organization
D)A definable and measurable objective
Answer:D
Rationale:A goal is related to an objective, as opposed to mission and strategy which have to do with thefundamental purpose and implementation of a plan.
Topic: Strategic Positioning
LO: 2
7. Which of the following is not one of the three strategic positions that Porter views as leading to business success?
A)Market niche
B)Cost leadership
C)All things to all people
D)Product or service differentiation
Answer:C
Rationale:Michael Porter popularized the notion of “strategic positioning” in his book, Competitive Strategy, in which he identified three primary strategic positions: cost leadership, market niche, and product/service differentiation.
Topic: Differentiation Strategy
LO: 2
8. Product or service differentiation involves:
A)Any changes made to a product or service
B)The use of new technologies in manufacturing
C)Shifting sales to growing markets
D)Creating something that is perceived as unique and worth a premium price
Answer:D
Rationale:Product or service differentiation involves offering something that the competition does not offer and for which the customer is willing to pay a premium. It may be related to customer service,technological leadership, or even market image.
Topic: Selecting a Strategy
LO: 2
9. The process of selecting strategies to achieve goals is often referred to as:
A)Controlling
B)Organizing
C)Motivating
D)Planning
Answer:D
Rationale:Strategy setting is part of the “planning” process, as opposed to organizing, motivating, controlling, which occur after plans (strategies) have been adopted.
Topic: Organizing
LO: 2
10.The process of making the organization into a well-ordered whole is referred to as:
A)Organizing
B)Controlling
C)Motivating
D)Planning
Answer:A
Rationale:Organizing results in making the organization a well-ordered whole by implementation of plans and strategies.
Topic: Controlling
LO: 2
11. The process of ensuring that results agree with plans is referred to as:
A)Controlling
B)Decision making
C)Organizing
D)Planning
Answer:A
Rationale:Controlling is the process of ensuring that plans are carried out and that goals are achieved as a result of the organizing function.
Topic: Organizing
LO: 2
12. The act of delegating authority for implementing plans to other managers and employees can be viewed as an aspect of:
A)Controlling
B)Decision making
C)Organizing
D)Planning
Answer:C
Rationale:A key aspect of organizing is delegating authority to managers and employees throughout the organization.
Topic: Price Competition
LO: 3
13.To compete on the basis of price, the seller must most carefully manage:
A)Service
B)Product development
C)Cost
D)Quality
Answer:C
Rationale:Price competition depends on managing costs, including not only the initial selling price but the total cost of ownership throughout the life of the product.
Topic: World-Class Competition
LO: 3
14. World-class companies must continuously struggle to improve performance in the dimension(s) of:
A)Price/cost
B)Service
C)Quality
D)All of the above
Answer:D
Rationale:A “world-class” company is one that can compete globally on the basis of not just price/cost, but also on the basis of service and quality.
Topic: Cost Drivers
LO: 4
15.______are fundamental choices about the size and scope of operations and about technologies employed in delivering products or services to customers.
A)Activities
B)Management systems
C)Organizational strategies
D)Structural cost drivers
Answer:D
Rationale:Structural cost drivers relate to the strategic decisions made by management about how theorganization will seek to achieve its mission.
Topic: Cost Drivers
LO: 4
16.This is an organizational cost driver for a discount department store chain:
A)The decision to price lower than a key competitor
B)The decision to rearrange merchandise within a store
C)The decision to issue a purchase order for raw materials
D)The decision to sale product globally versus only domestically
Answer:B
Rationale:Organizational cost drivers are choices that a company makes regarding the organization ofactivities.Deciding on the arrangement of merchandise in a store would be an example of an organizational cost driver.
Topic: Cost Drivers
LO: 4
17. A decision to work closely with a limited number of suppliers for the purpose of ensuring that the proper materials are available at the optimal time is an example of:
A)A batch level cost driver
B)An activity cost driver
C)An organizational cost driver
D)A structural cost driver
Answer:C
Rationale:Organizational cost drivers are choices that a company makes regarding the organization ofactivities. A decision to work with a limited number of suppliers is an example of an organizational cost driver.
Topic: Cost Drivers
LO: 4
18.______are specific units of work performed to serve customer needs that consume costlyresources.
A)Activity cost drivers
B)Customer cost drivers
C)Organizational cost drivers
D)Structural cost drivers
Answer:A
Rationale:Activity cost drivers are defined as specific units of work (activities) performed to serve customer needs that consume resources.Examples would include moving raw materials, setting up machines to convert raw materials into products, inspecting, and shipping goods.
Topic: Cost Drivers
LO: 4
19.Examples of activity cost drivers include all of the following except:
A)Inspecting incoming raw materials
B)Machine time spent working on a product
C)Deciding how to arrange raw materials inventory within the warehouse
D)Receiving (loading) raw materials into the warehouse
Answer:C
Rationale:Activity cost drivers include all of the above except deciding how to arrange raw materials in the warehouse, which is an example of an organizational cost driver.
Topic: Ethics in Managerial Accounting
LO: 5
20.Ethical behavior:
A)Always involves choosing between actions that are clearly right or wrong
B)Is best guided by a policy of placing corporate performance above individual ends
C)Is best described as any actions that are permitted by law
D)Is not guided by well-defined rules and is often subjective
Answer:D
Rationale:Ethical behavior is not a matter only of determining actions that are clearly right or wrong, or that are legally permissible.What is legal, may actually be unethical in some situations. Ethical behavior will not always be achieved merely by placing corporate performance above individual ends.Such behavior is typically not guided by a well-defined set of rules and regulations and is frequentlysubjective.
Topic: Ethics in Managerial Accounting
LO: 5
21.Ethics deals with:
A)The propriety of a course of action
B)The fitness of a course of action
C)The moral quality of a course of action
D)All of the above
Answer:D
Rationale:While difficult to define, ethics involves all of the above:fitness, moral quality, and propriety of course of action.
Topic: Financial Accounting
LO: 1
22.Financial accounting is primarily focused on:
A)Providing the Internal Revenue Service with information to determine the amount of taxes owed
B)Providing managers with relevant information to help achieve organizational goals
C)Providing investors with useful information for valuing securities
D)Providing information for internal users
Answer:C
Topic: Managerial Accounting
LO: 1
23.Managerial accounting is primarily focused on:
A)Providing information for internal and external users
B)Providing general purpose financial statements
C)Providing special-purpose information and reports
D)Following generally accepted accounting principles
Answer: C
Topic: Strategic Cost Management
LO: 1
24.Which of the following is not a component of strategic cost management?
A)Ratio analysis
B)Value chain analysis
C)Cost driver analysis
D)Strategic position analysis
Answer: A
Topic:Managerial Accounting
LO: 1
25.Managerial accounting must conform to which of the following standards?
A)Generally Accepted Accounting Principles (GAAP)
B)International Financial Reporting Standards (IFRS)
C)Internal Revenue Service tax code
D)None of the above
Answer: D
Topic: Managerial Accounting
LO: 1
26.Which of the following phrases is most descriptive of managerial accounting?
A)Often used to state corporate goals
B)May be subjective
C)Typically prepared quarterly or annually
D)Keeps records of assets and liabilities
Answer:B
Topic: Financial Accounting
LO: 1
27.Which of the following phrases is most descriptive of financial accounting?
A)May measure time or customer satisfaction
B)Future oriented
C)Subject to cost-benefit analysis
D)Highly aggregated statements
Answer: D
Topic: Organization’sMission
LO: 2
28.Which of the following statements best defines the mission of an organization?
A)Increase next year’s sales by 10 percent over current year sales
B)Become the world’s largest provider of consumer goods
C)Adopt cost effective plan for providing new products and services to customers
D)Providing high quality products and services to customers
Answer:D
Topic: Organization’s Goal
LO: 2
29.Which of the following statements best defines a goal for an organization?
A)Increase next year’s sales by 10 percent over current year sales
B)Providing high quality products and services to customers
C)Adopt a cost effective plan for providing new products and services to customers
D)Become the world’s largest provider of consumer goods
Answer: A
Topic: Organization’s Strategy
LO: 2
30.Which of the following statements best defines a strategy for an organization?
A)Increase next year’s sales by 10 percent over current year sales
B)Providing high quality products and services to customers
C)Adopt a cost effective plan for providing new products and services to customers
D)Become the world’s largest provider of consumer goods
Answer: C
Topic: Cost Leadership
LO: 1
31.According to Michael Porter, which of the following is an example of cost leadership as a business strategy?
A)A regional beer brewer that caters to local tastes.
B)A glass manufacturer utilizing research and development to identify new applications for glass and ceramics.
C)An online bookseller utilizing the Internet to differentiate itself from traditional booksellers.
D)A manufacturer focused on designing and building corporate jet aircraft.
Answer:C
Topic: Product or Service Differentiation
LO: 2
32.According to Michael Porter, which of the following is an example of product or service differentiation as a business strategy?
A)A regional beer brewer that caters to local tastes.
B)An automobile manufacturer that focuses on the rapid introduction of technological change in new automobile design.
C)An online bookseller utilizing the Internet to differentiate itself from traditional booksellers.
D)A manufacturer focused on designing and building corporate jet aircraft.
Answer: B
Topic: Planning
LO: 2
33.Which of the following descriptions best describes the process of planning?
A)Comparing the budget with actual results
B)Delegating authority to employees to address customer complaints
C)Preparing a budget for an organization that meets sales goals for the upcoming year
D)Assigning managers to different regional centers to facilitate distribution of goods to customers
Answer: C
Topic: Controlling
LO: 2
34.Which of the following descriptions best describes the process of controlling?
A)Comparing the budget with actual results
B)Preparing a budget for an organization that meets sales goals for the upcoming year
C)Delegating authority to employees to address customer complaints
D)Assigning managers to different regional centers to facilitate distribution of goods to customers
Answer: A
Topic: Organizing
LO: 2
35.Delegating responsibility and authority to employees in an organization is an example of:
A)Planning
B)Organizing
C)Controlling
D)Motivating
Answer: B
Topic: Line Department
LO: 2
36.Which of the following departments often found in a merchandising organization would be classified as a line department?
A)Maintenance
B)Human Resources
C)Payroll
D)Home Furnishings
Answer: D
Topic: Line Department
LO: 2
37.Which of the following employees often found in a manufacturing organization would be classified as part of a line department?
A)Production Manager
B)Treasurer