Cost Management: Measuring, Monitoring, and Motivating Performance, Third Edition Eldenburg
Chapter 1
The Role of Accounting Information
in Ethical Management Decision Making
SOLUTIONS
LEARNING OBJECTIVES
Chapter 1 addresses the following learning objectives:
LO1 Describe the process of strategic management and decision making
LO2 Identify the types of control systems that managers use
LO3 Explain the role of accounting information in strategic management
LO4 Explain the information systems and information that is relevant for decision making
LO5 Describe how business risk affects management decision making
LO6 Appreciate how biases affect management decision making
LO7 Determine how managers make higher quality decisions
LO8 Explain the importance of ethical decision making
These learning objectives (LO1 through LO8) are cross-referenced in the textbook to individual
exercises and problems.
Summary of Questions by Learning Objective, Level of Difficulty and CPA
Canada Competency
Item LO LOD CPA Item LO LOD CPA Item LO LOD CPA
Questions
1. 1 E cpa-e001 6. 5 E cpa-e001 11. 6, 7 M cpa-e001
2. 1, 2 E cpa-e001 7. 6 E cpa-e001 12. 2, 6, 8 M cpa-e001
3. 3 M cpa-e001 8. 7 M cpa-e001 13. 2 M cpa-e001
4. 3, 4 E cpa-e001 9. 8 E cpa-e001 14. 2 M cpa-e001
5. 3 M cpa-e001 10. 8 E cpa-e001 15. 2 E cpa-e001
Multiple-Choice
16. 3 E cpa-t003 18. 8 E cpa-t002 20. 7 E cpa-t003
17. 3, 4 E cpa-t003 19. 2 E cpa-t002
Exercises
21. 1 M cpa-t003 25. 4 M cpa-e002 29. 2, 8 M cpa-e001
1, 2, 3,
22. 1 E cpa-e004 26. 2, 8 E cpa-e001 30. M cpa-t003
4, 5
23. 4 M cpa-e002 27. 6 E cpa-t002 31. 4, 5 E cpa-e002
24. 4 M cpa-e002 28. 2, 3, 7 E cpa-t003 32. 4, 5, 6, M cpa-e002
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, Cost Management: Measuring, Monitoring, and Motivating Performance, Third Edition Eldenburg
7
Problems
cpa-e002,
33. 6 M cpa-t003 38. 4, 5, 6 H 43. 4, 5, 6 H cpa-e001
cpa-e004
cpa-e002,
34. 4, 6, 7 M cpa-t003 39. 3, 4, 7 H 44. 4, 6, 7 H cpa-e002
cpa-t003
cpa-e002, cpa-e003,
35. 5 M 40. 1, 2, 3 M 45. 4, 7, 8 H cpa-e002
cpa-e004 cpa-t002
cpa-e002,
36. 6, 7 M cpa-e002 41. 1, 6, 7 E
cpa-t002
cpa-e002,
37. 5 M cpa-e002 42. 7 M
cpa-t002
Mini-Cases
cpa-e002,
4, 5, 6, 4, 5, 6,
46. H cpa-e003, 48. E cpa-t003 50. 3, 6, 8 E cpa-t004
7 7
cpa-t003
47. 4, 5, 6 E cpa-e001 49. 1, 2, 7 E cpa-t004
CPA CODES
ID Competency
cpa-e001 Professional and Ethical Behaviour
cpa-e002 Problem-Solving and Decision-Making
cpa-e003 Communication (both written and oral)
cpa-e004 Self-Management
cpa-e005 Teamwork and Leadership
cpa-t001 Financial Reporting
cpa-t002 Strategy and Governance
cpa-t003 Management Accounting
cpa-t004 Audit and Assurance
cpa-t005 Finance
cpa-t006 Taxation
Note: E = Easy M = Medium H = Hard
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,Cost Management: Measuring, Monitoring, and Motivating Performance, Third Edition Eldenburg
QUESTIONS
1.1 Organizational vision is the core purpose of the organization and shapes the current
organization and its future. Decisions about the organizational vision are important
because they communicate to employees and other stakeholders the overall direction of
operations. Core competencies are the strengths of the organization relative to
competitors. The choice of core competencies that an organization focuses upon is
important to the success of the organization because value is added by these
competencies. To be successful, the vision should be guided by the basic strengths of the
organization. Organizational strategies are developed around core competencies. These
tactics are important because they guide the long-term decisions, such as product lines
that will be offered. Operating plans put into action the organizational strategies in the
short term. These plans guide employees in their day to day operations.
1.2 Once operating plans are in place, organizations need to know whether the plans are being
met or need to be changed to take advantage of new opportunities. To do this, actual
performance needs to be measured and compared to the plans (monitored). To help
managers move toward the organizational goals, incentives such as performance-based
bonuses are offered (motivating).
1.3 See Exhibit 1.9 for a list of possible internal and external reports. Students may have
thought of other reports as w ell. Following are examples of internal reports. Capital
budgets support organizational strategies, the master budget supports operating plans, and
variance reports (actual versus planned performance) help organizations monitor and
motivate performance if they are tied to compensation contracts.
Financial statements are external reports that provide creditors and shareholders
information about current and past operations. Tax returns are reports prepared for the
government that also determine the amount of taxes due. Suppliers need reports about
inventory levels to keep an organization’s inventory levels up to date.
1.4 The type of information needed depends on the type of decision. For product-related
decisions, managers may need information about competitors’ prices and quality of
products. For employee-related decisions, they may need to know the amount of
experience employees have had or estimate costs to lay them off using information about
length of service from human resources. If managers are developing a new good or
service, they need information from suppliers about the cost of resources. Students may
have thought of other types of decisions and information needed for them.
1.5 Cash flows that vary with the available alternatives for a decision are relevant because
they relate directly to each separate decision that could be made. Summing these relevant
cash flows provides quantitative information about the relevant costs and benefits for each
alternative. However, some cash flows will not change, regardless of the decision made.
These are irrelevant cash flows because they remain the same under all courses of action
and have no influence on the decision.
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, Cost Management: Measuring, Monitoring, and Motivating Performance, Third Edition Eldenburg
1.6 Business risk is the possibility that an event could occur and interfere with an
organization’s ability to meet strategic goals or operating plans. Examples of business
risks are shown in Exhibit 1.11. Some events, such as a hurricane or tsunami, may occur
infrequently but have devastating effects. Other events, such as product returns under
warranty, occur regularly but could escalate if production processes become out of
control. The degree of business risk varies across organizations, industries, geographic
regions, and time periods. Top managers are responsible for addressing business risks,
taking calculated risks across the enterprise, and appropriately managing and mitigating
the risks for the benefit of the stakeholders (i.e., quality of decision).
1.7 Biases are preconceived notions adopted without careful thought. This chapter’s box
introduces non-rational escalation of commitment. Also, the Snow-Blade Snowboards
example demonstrated a type of information bias: the average cost per unit overestimated
relevant cost for the manager’s decision to accept or reject a customer order.
Predisposition bias was probably a major issue in the RIM case. Poorer quality decisions
result when managers fail to recognize and control for biases because important
information is often overlooked.
1.8 Higher quality decisions are made by using higher quality information, that is,
information that has few uncertainties and is relevant, complete, as certain as possible,
and timely. This information needs to be prepared in reports that are easy to understand,
readily available, relevant and timely. Then a high quality decision-making process is
used. This is a process that is thorough, as unbiased as possible, focused, creative, and
visionary as it relates to strategies.
1.9 There are many reasons for behaving ethically. From an economic perspective, if
everyone behaved ethically, less investment would be needed in police and security
protection. In addition, written contracts would be less important, and a court system
would not be needed to determine whether people are acting unethically and then penalize
wrongdoers. More business would probably be transacted because people could trust
each other. From a personal perspective, people would feel their world was more certain
if they knew others would always treat them ethically. Even in a world where many
people are unethical, organizations and individuals who act ethically develop better long
term reputations and self-respect and improve social welfare.
1.10 Ethical behavior takes into consideration the wellbeing of others and society in making
decisions and choosing courses of action. Because many different kinds of stakeholders
rely on accounting information, unethical behavior can be very costly through poor
decisions that are based on bad information. When accountants are not ethical, investors
no longer believe information produced by firms and are unwilling to invest. The market
collapses and firms lose their value and society suffers from the losses.
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