CHAPTER1

INTRODUCTION

11EverydayPlanningandControl
(a)Plansfortakingacourseincollegeincludetheamountoftimeto
devotetoitandtoothercourses.Theseplansfollowthelinesindicatedin
thechapter.Studentsformulateobjectivesforgrades,fortheknowledgeto
begainedforitsownsake,forfuturecourses,andsoon.Theyevaluate
theirpersonalstrengthsandweaknessestodeterminehowmuchworktodo.
Examinationsprovidefeedbackonthesufficiencyofworkbeingdone;
testresultsmightindicatethatmore,less,orthesameamountofwork
shouldbedevotedtothecourse.Suchevaluationscanbemadewhetherthe
majorobjectiveistogainknowledgeorjusttoobtainaparticulargrade.
(b)Planningforalongautomobiletripinvolvessuchmattersastheamount
oftimetobespentontheroad,thedesiredtimeofarrival,thecostof
variousservicesalongtheway(gasandoil,lodging,food,tolls,etc.),the
valueoftakingvariousroutes,andsoon.Eachofthesefactorscanbe
affectedbytheobjectivesofthetrip.Atriphomefromcollegeisusually
madebecausethestudentwouldratherbeathomethanatschool,sotimein
routeismorecriticalthanifoneweresimplytouringthecountrybetween
schoolandhome.Thecostsinvolvedinvariousalternativeroutesand
schedulesareimportantwhateverthepurposeofthetrip,andinfluence
decisionsregardingroute,lodgings,andfood.
Duringalongtrip,youwouldexamineresultstoseeifyouweremeeting
yourobjectives.Ifthetripweretakingtoolong,someactionsmightbe
indicated,suchastakingashorterbutlessscenicroute,ormorecostlybut
fastertollroads.Again,evaluationsofstrengthsandweaknessesare
important;financialresources,thequalityofthecar,one'sabilityto
driveunderdifferentconditions,andthepossibilityofemergencies
developingareafewconcernsthatyouneedtoconsiderinselectingaroute.
(c)Decoratingone'sownapartmentisverymuchgoaldirected;theapartment
orroommustsatisfyseveraldemands.Itmustbepleasanttoliveand
entertainin,yetitmustbewithinone'smeans.Oncethetenanthasset
objectives,theremainingstepsincludeformulatingplanstomeetthem,such
asexaminingcolors,typesoffurniture,lighting,floorcovering,pictures
andotherwalldecorationstoseeiftheyfittheobjectives.
Providedthattheselectedelementsmeetpricerequirements,thework
canproceed;butasitdoes,evaluationswillbemaderegardingtheeffects
beingcreated.Apictureorrugthatlookedperfectinthestoremightlook
terribleintheroomandmodificationswillbeneeded.Somedecisionsmade
duringtheplanningprocessmaybeirrevocable;thecostofinstallingwall
towallcarpetingiscommitted,whileapieceoffurnituremightbe
exchanged.Furnitureandpicturescanbemovedoncetheyareobtained,buta
newdoorwaybrokenthroughawallcannoteasilybeshiftedafewfeettothe
left.
11

(d)Thelinesofreasoningareaboutthesameaswiththeotheritems.The
coachmustevaluatetheavailableresources(players),planhowtogainthe
bestresultsfromthem,ensurethattheplayersfollowtheplans,evaluate
theresultsofusingparticularplans,andmodifyplans.Forexample,acoach
ofafootballteammaystressarunninggameorapassinggame,dependingon
thetalentsoftheplayers.Iftheplayerstendtobefastbutsmall,one
defensivearrangementmaybebetterthanothers.
Itisalsonecessarytoexaminetheenvironmentinthiscase,theother
teamsthatwillbeplayed.Theplanforaparticulargamewilldepend
largelyontheteambeingplayedandonweatherconditions.Iftheopponent
rarelypasses,thecoachmightbringdefendersclosertothelineof
scrimmagetostoptherunners.Asplayprogresses(interimevaluations),the
coachmightseeweaknessesintheotherteamanddevelopadifferent
strategy.
NotetotheInstructor:Whenstudyinganewsubject,studentsbenefit
fromseeingthattheyalreadyhaveabasicframeworkfromwhichtoproceed.
Thoughthisquestionisnotaboutbusinessesorotherorganizedeconomic
entities,itfocusesattentionontheuniversalityofprocessesdescribedin
thechapter.Eachactivityhasobjectivesandgoals,requiresformulating
plans,entailstheevaluationofavailableresourcesandconsiderationof
alternatives,goesonovertimeduringwhichinterimresultswillbecome
known,canbeevaluatedinreferencetoplans,andmayrequiremodifications
ofplannedactions.Youmightwanttointerjectquestionsorcomments
relatingmorespecificallytoorganizedeconomicactivities.Severalparts
ofthequestiondealspecificallywitheconomicproblems,atleasttothe
extentthatfinancialconsiderationsareimportant.
12Ethics
(a)Wrighthasviolatedboththeconfidentialityandintegritystandards.
Hehasdisclosedconfidentialinformationandhasusedittoprofit,orat
leastasarepaymentforhissister'sfavors.Hehasalsoactedinaway
thatdiscreditstheprofessionandhasacceptedgifts(tipsfromhissister)
thatinfluencedhisactions.
(b)Robertshasviolatedthecompetence,integrity,andobjectivity
standards.Hefailedthecompetencestandardbynotpreparingareportthat
usedallrelevantinformation.Hefailedtocommunicateunfavorable
information,activelysubvertedtheorganization'sobjectivesbytryingto
influenceittoacceptaprojectitshouldreject,andprobablydidsointhe
hopeofaquidproquofromhissuperior.Theseactsviolatetheintegrity
standard.Hedidnotdiscloseallrelevantinformation,norcommunicateit
fairlyandobjectively.Theobjectivityandcompetencestandardsappearto
overlapintheareaofreportinganddisclosure,butRobertsseemstohave
hitatrifecta.
13WhoNeedsFinancialAccounting?
Becausebankers,suppliers,stockholders,andotherexternalpartiesuse
financialaccountinginformationtohelpmakedecisionsthataffectthe
company,thecompany'smanagersshouldunderstandwhatthatinformationis,
howitisused,andhowmanagementdecisionswillaffectit.That
understandingisparticularlyimportanttothetopmostmanagers,whose
responsibilitiesencompasstheentireentity.Butlowerlevelmanagersalso
needsuchanunderstanding,notonlybecausetheymayaspiretothehigher
12

levelpositions,butalsobecausethedecisionsmadebymanagersatall
levelsarethesourceoftheeconomiceventsthatarereportedinthetypical
financialaccountingstatementsmadeavailabletooutsiders.
NotetotheInstructor:Youmightwishtousethisquestiontoreview
thetypesofexternalpartieswhosedecisionsaffectthefutureoftheentity
andhowthosedecisionsrelatetodecisionsmadebymanagement.Forexample,
youmightdiscuss,ingeneraltermsofcourse,howadecisiontobringouta
newproductmightrequirenotonlyadditionalfunding(adecisionofabanker
orpotentialstockholder)butalsodealingwithnewsuppliers(whoare
concernedwiththecompany'screditratingandliquidity)andnewcustomers
(whoareconcernedaboutthecompany'sstability).Itmaynotbetooearly
topointoutthatmanylargecompaniesoperatesubunitsasnearindependent
entities,andthatthemanagersofthosesubentitiesmightreporttothe
largerentityasifitwere"theoutsideworld."Finally,someinstructors
mightwishtopointoutthatsince,asthechapterstates,someofthe
reportsusedinmanagerialaccounting(incomestatement,balancesheet,cash
flowstatement)aresimilartoreportsstudiedinfinancialaccounting,a
managermustlearnthebasicelementsofsuchreportsduringthestudyofone
subjectoranother.
14ConventionalversusWorldClassManufacturing

(a)ProductwarrantycostsshouldbelowerbecauseaWCMwillmake
fewerdefectiveproducts.
(b)Salariesofqualitycontrolinspectorsshouldbelowerbecausea
WCMwillhaveitsworkersinspectastheygo,ratherthanhavingseparate
inspections.NorwillaWCMinspectincomingmaterialsandcomponents
becauseitwilldealonlywithvendorswhosequalityhasbeendemonstrated.
(c)Amountspaidtovendorsforpartsandcomponentsshouldbehigher
becauseaWCMwillnotsearchoutthelowestprices,butwillseekhigh
qualitycomponentsdeliveredwhenneeded.
(d)WageratesfordirectlaborersshouldbehigherbecauseaWCM's
workerswillbemultiskilledandshouldthereforecommandpremiumwages.
(e)TotalsupervisorysalariesshouldbelowerbecauseaWCM'sworkers
willnotneedasmuchsupervision.
(f)WarehousingcostsshouldbelowerbecauseaWCMwillproduceas
neededandsowillnotrequirestoragespaceformaterialsorfinished
product.
15ValueChain
(a)AcmeMotorsqualitycostsshoulddecrease.Acmewillneedto
spendlessoninspectingincominggoodsforquality.Thereshouldbeless
wasteontheproductionlineduetopoorqualityparts.
(b)Qualitycostsforthesupplierswillincrease.Eventuallythe
pricesbeingchargedAcmewillincreaseaswelltocovertheincreasedcosts
bythesuppliers.ThenetresulttoAcmeMotorsisdecreasedinternalquality
costssomewhatoffsetbytheincreasedpriceschargedbythesuppliers.
16ReviewofFinancialStatementPreparation(40minutes)
13

1.
FreeportCompanyIncomeStatement
fortheYear20X2
Sales$225,000
Costofgoodssold145,000
Grossmargin$80,000
Operatingexpenses:
Depreciation$20,000
Interest3,500
Other35,000
Totaloperatingexpenses58,500
Incomebeforetaxes$21,500
Incometaxes(@40%)8,600
Netincome$12,900
2.
FreeportCompanyBalanceSheet
asofDecember31,20X2
Assets
Currentassets:
Cash(a)$13,500
Accountsreceivable(b)30,000
Inventory(c)30,000
Totalcurrentassets$73,500
Property,plant,andequipment:(d)
Cost290,000
Lessaccumulateddepreciation124,000
Netproperty,plant,andequipment166,000
Totalassets$239,500
Equities
Currentliabilities:
Accountspayable(e)$18,000
Taxespayable8,600
Totalcurrentliabilities26,600
Longtermdebt:
Bondspayable,7%,due20X550,000
Totalliabilities$76,600
Stockholders'equity:
Commonstock,noparvalue,5,000shares
authorized,issued,andoutstanding100,000
Retainedearnings62,900
Totalstockholders'equity162,900
Totalliabilitiesandstockholdersequity$239,500

14

(a)Computationofcash
Balance,beginningofyear$10,000
Collectionsonaccount220,000
Totalavailable230,000
Disbursements:
Foraccountspayable$132,000
Expenses35,000
Taxes11,000
Fixedassets30,000
Interest($50,000x.07)3,500
Dividends5,000
(216,500)
Balance,endofyear$13,500
(b)Computationofaccountsreceivable
Balance,beginningofyear$25,000
Sales225,000
250,000
Collections(220,000)
Balance,endofyear$30,000
(c)Computationofinventory
Beginninginventory$35,000
Purchases140,000
Costofgoodsavailable175,000
Costofgoodssold(145,000)
Endinginventory$30,000
(d)Computationofproperty,plant,andequipment
Accumulated
CostDepreciation
Balance,beginningofyear$260,000$104,000
Newequipment30,000
20X2depreciation20,000
Balance,endofyear$290,000$124,000
(e)Computationofaccountspayable
Balance,beginningofyear$10,000
Purchases140,000
150,000
Paymentstosuppliers(132,000)
Balance,endofyear$18,000
(f)Computationofretainedearnings
Balance,beginningofyear$55,000
Netincome12,900
Dividendsdeclared(5,000)
Balance,endofyear$62,900

15

NotetotheInstructor:Thetimespenttocoverthisassignmentmightbe
usedinthefollowingways.
1.Reviewingbasicmaterialonfinancialreporting,suchasthefollowing:
(a)Thesinglestepandmultiplestepincomestatementformats.
(b)Thecombinedstatementofincomeandretainedearningsthatreports
activityonasinglestatement,leavingthebalancesheetfor"positions."
(c)Disclosuredetails,suchasclassesoffixedassets,depreciation,and
inventorymethods,etc.
(d)Thedistinctionbetweentheaccrualandcashbasesofaccounting.
2.Leadingthestudentsintoquestionsofmanagerialaccounting,suchas:
(a)Doestheincomestatementyouhavepreparedhelpyoudeterminewhat
incomewouldbein20X2ifsaleshadbeenhigher(lower)thanexpected?
(b)Wasthereaneedforshorttermborrowingduring20X2?
(c)Werethepurchasesoffixedassetswise?
17ReviewoftheStatementofCashFlows(25minutes)
FreeportCompany
StatementofCashFlowsfortheYear20X2
Netcashflowfromoperatingactivities:
Netincome$12,900
Adjustmentsfornoncashitemsincludedinincome:
Depreciation20,000
Increaseinaccountsreceivable(5,000)
Decreaseininventory5,000
Increaseinaccountspayable8,000
Decreaseintaxespayable(2,400)
Netcashprovidedbyoperations38,500

Cashflowforinvestingactivities
purchaseofnewplantandequipment(30,000)
Cashflowforfinancingactivities
paymentofdividends(5,000)
Netincreaseincash$3,500
Beginningcashbalance10,000
Endingcashbalance$13,500
Oneprofitableareaforclassdiscussionistherelationshipofprofit
andcashflow.Thecompanyearned$12,900,butitscashincreasedbyonly
$3,500.Youmightpointoutthatthecompany'scashflowfromoperationswas
considerable($38,500),butthatpurchasesofplantandequipmentandthe
paymentofdividendsweretheprincipalreasonsforthelesserincreasein
cash.

16

18ReviewofFinancialStatementPreparation(40minutes)
1.St.FrancisCompany
IncomeStatement
FortheYear20X2
Sales$960,000
Costofgoodssold480,000
Grossmargin480,000
Operatingexpenses:
Depreciation$80,000
Interest24,000
Salariesandwages(f)180,000
Other(g)146,000430,000
Incomebeforetaxes50,000
Incometaxes(40%)20,000
Netincome$30,000
2.St.FrancisCompanyBalanceSheet
AsofDecember31,20X2
Assets
Currentassets:
Cash(a)$84,000
Accountsreceivable(b)260,000
Inventory(c)200,000
Prepaidexpenses12,000
Totalcurrentassets$556,000
Property,plant,andequipment:
Cost(d)$760,000
Lessaccumulateddepreciation(d)340,000420,000
Totalassets$976,000
Equities
Currentliabilities:
Accountspayable(e)$100,000
Taxespayable20,000
Accruedexpenses14,000
Totalcurrentliabilities134,000
Longtermliabilities:
Bondspayable,6%,due20X4400,000
Totalliabilities$534,000
Stockholders'equity:
Commonstock,$10parvalue,24,000shares
authorized,issuedandoutstanding$240,000
Retainedearnings:
Balanceatbeginningofyear$182,000
Netincome30,000
212,000
Dividends10,000
Balanceatendofyear202,000
Totalstockholders'equity442,000
Totalliabilitiesandstockholdersequity$976,000

17

(a)Computationofcash
Balance,beginningofyear$40,000
Collectionsonaccount$860,000
Issuanceofcommonstock80,000
$940,000
Totalavailable980,000
Disbursements:
Accountspayable$420,000
Otherexpenses130,000
Prepaidexpenses12,000
Salariesandwages190,000
Taxes50,000
Plantandequipment60,000
Interest($50,000x.07)24,000
Dividends10,000
(896,000)
Balance,endofyear$84,000
(b)Computationofaccountsreceivable
Balance,beginningofyear$160,000
Sales
960,000
1,120,000
Collections
(860,000)
Balance,endofyear$260,000
(c)Computationofinventory
Beginninginventory$240,000
Purchases440,000
Costofgoodsavailable680,000
Costofgoodssold(480,000)
Endinginventory$200,000
(d)Computationofproperty,plant,andequipment
Accumulated
CostDepreciation
Balance,beginningofyear$700,000$260,000
Newequipment60,000
Depreciationexpense80,000
Balance,endofyear$760,000$340,000
(e)Computationofaccountspayable
Balance,beginningofyear$80,000
Purchases440,000
520,000
Paymentstosuppliers(420,000)
Balance,endofyear$100,000

18

(f)Computationofsalariesandwages
Balance,beginningofyear$24,000
Payments(190,000)
(166,000)
Balance,endofyear(14,000)
Salariesandwagesexpensefortheyear$180,000

(g)Computationofotherexpense
Prepaidexpenses,beginningofyear$16,000
Otherexpenses,paidincash130,000
Total,otherexpenses$146,000
19ReviewoftheCashFlowStatement(20minutes)
St.FrancisCompany
StatementofCashFlowsfortheYear20X2
Netcashflowfromoperatingactivities:
Netincome$30,000
Adjustmentsfornoncashexpensesand
revenuesincludedinincome:
Depreciation80,000
Increaseinaccountsreceivable(100,000)
Decreaseininventory40,000
Decreaseinprepaidexpenses4,000
Increaseinaccountspayable20,000
Decreaseintaxespayable(30,000)
Decreaseinaccruedpayables(10,000)
Netcashprovidedbyoperations34,000
Cashflowforinvestingactivities:
Purchaseofnewplantandequipment(60,000)
Cashflowfromfinancingactivities:
Issuanceofcommonstock$80,000
Paymentofdividends(10,000)
Netcashinflowfromfinancingactivities70,000
Netincreaseincash$44,000
Beginningcashbalance40,000
Endingcashbalance$84,000

110DifferentCostsforDifferentPurposes(15minutes)
1.Virtuallyzero;tobeprecise,thecostofgastogotheextramileto
thefriend'shouseandbacktoyourownhouse.
2.$7.50forgas(150miles/30milespergallon=5gallonsat$1.50=
$7.50).
NotetotheInstructor:Theconceptsofallocatedcostsand
differentialcostsareintroducedinChapters35,butstudentsshouldhave
littledifficultyunderstandingthepointsraisedhere.Toconcentrateon
themainpoints,wedidnotlistothercoststhatwouldvarywithmiles
driven,suchasoilandtires.Somestudentswillseethatsomeothercosts
wouldbeincurredinmakingthetripasopposedtonotmakingit.Afew
mightthinkofopportunitycostsintheformoflostincomefromajob,orof
thealternativevalueoftimespentdrivinginsteadofdoingsomethingmore
19

pleasant.
111JIT(15minutes)
ManagerAsaidthatthecompanycouldnottimeproductionjustright,so
bufferstocksareneededtopreventworkersfromfallingidle.
JITprinciplesdonotpermitextrainventorybecauseithidesdefectsand
iswasteful.Thecompanynowpushesgoodsthrough,ratherthanpullingthem
through.Eliminatinginventoriesatworkstationswillforcethecompanyto
maintainhighqualityand"doitrightthefirsttime."
ManagerBsaidthatsomecurrentproblemswerecausedbypoorproduct
design.
JITrequiresclosecooperationbetweendesignandmanufacturing,sothat
productswillberelativelyeasytomakeandwillnotfailbecauseofdesign
ormanufacturingflaws.Customersmightbepersuadedtobuystandard
productsiftheycanbenefit.JITdoesnotpermitanyonearea(design,
production)toimposeitsperceivedrequirementsonanotherarea.
Thequalitycontrolmanagerdiscussedthesophisticationofthecompany's
inspections.
JITmanufacturersdonotusevendorswhoseshipmentsincludedefects,
eliminatingthenonvalueaddingactivityofinspectingincomingshipments.
Workersinspectproductsastheyproceedthroughthefactory,sothatno
defectivesgofromonestationtoanother.Thispracticeeliminatestheneed
forfinalinspections.Thecompanynowfinds10%15%defectivesattheend
oftheprocess,whichgreatlyincreasesitscosts.
Theproductionmanagerspokeaboutthefunctionalarrangementof
machinery.
JITmanufacturersusecellsthatperformalloftheworkonaproduct.
Thisreducestheneedtomoveproductfromonestationtoanother,allows
workersmoreflexibilityinjobassignments,andsavesspace.Workersshould
dobetterundertheJITsystembecausetheylearnmoreskillsandbecomemore
valuabletothecompany.
112Ethics(5minutes)
Muchasyoumightliketo,youcannottellyourfathertosell(andthen
tosellshort)withoutviolatingtheStandardsandbecomingliablefor
criminalprosecutionunderinsidertradingrules.(Moststudentswillnot
knowaboutinsidertrading.)Thesituationisamoraldilemma.Anditis
doubtfulthatyourfatherwillunderstandyourfailuretotellhimwhenhe
losesmostofhisinvestment.
Theconfidentialitystandardsexplicitlyprohibit"disclosing
confidentialinformationacquiredinthecourseoftheirwork..."and
"usingorappearingtouseconfidentialinformation...forunethicalor
illegaladvantageeitherpersonallyorthroughthirdparties."Thelatter
provisionprobablyappliesevenifthemanagementaccountantdoesnotgain
fromthedisclosure.(Thepersoninthecurrentsituationcouldgainthrough
inheritanceifthefather'sestatebenefitsfromsellingthestock.)

110

113Ethics(10minutes)
1.Theissuehereisnotthatthelunchisanunacceptablegiftthat
compromisesTaylor'sintegrity.ManystudentswillsayTaylorcommittedno
breachbecausethegiftofalunchisnegligible.Rather,Taylormighthave
violatedtheStandardsbecauseshedidnotdiscloseherinterest.Shedid
not,asrequiredbytheobjectivitystandard,"disclosefullyallrelevant
informationthatcouldreasonablybeexpectedtoinfluenceanintendeduser's
understandingofthereports,comments,andrecommendationspresented."
Taylormightnothavedoneanythingculpable,butsheshouldhaveknown
better.WhetherthefinaldecisionwouldhavechangedhadTaylorrevealed
herfriendshipisdebatable,butthepointiswhetherthemanagersmakingthe
decisionmighthavethoughtdifferentlyhadtheyknownaboutthefriendship.

2.Taylorisnowclearlyinviolationoftheintegritystandardthat
prohibitsaccepting"...anygift,favor,orhospitalitythatwould
influenceorwouldappeartoinfluencetheiractions."Theamountofthe
giftisnowrelevant,as,ofcourse,isthefailuretodisclosethe
friendship.
114ConventionalandJITManufacturing(15minutes)
Thememorandummightcoverthefollowingpoints.
Updatingdesignstomeetcustomersuggestionswithoutconsidering
manufacturability,effectsoncycletime,cost,andeffectonoperationsis
unwise.AJITmanufacturerensuresthatdesignandmanufacturingcoordinate
activities.
Jasonwarehousesmaterialsandcomponents.AJITmanufacturerorders
stockasneeded,eliminatingthehandlingandstorage.Jasongoestogreat
lengthstogetthebestpricesonmaterialsandcomponents.AJIT
manufacturerismoreconcernedaboutqualityandmeetingdeliveryschedules.
Jasondealswithmanysuppliers,whileaJITmanufacturerdealswith
relativelyfew.
Jasoninspectsallincomingshipments,whileaJITmanufacturerstops
inspectingonceitdeterminesthatavendordeliversdefectfreecomponents.
Jasonalsoinspectsfordeteriorationbeforeitputscomponentsintoprocess,
whichaJITmanufacturerwouldnottolerate.
Jasonmaintainsinventoriesatworkstations,haslongsetuptimes,and
considerablemovingofgoodsduringproduction.AJITmanufacturerkeepsno
inventoriesatstations,strivesforshortsetuptimes,andmanufacturesin
cells,whichminimizeshandling,amongotheradvantages.
Jasoninspectsattheendofproduction,whileworkersinaJIT
environmentinspectcontinually.Continualinspectionmakespossiblekeeping
littleinventoryandeliminatingseparateinspection.Moreover,Jasoncannot
alwaysidentifythesourceofadefect,whileaJITmanufacturercandoso.
Jason'scycletimesaremuchhigherthanthoseofaJITmanufacturer.

111