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Chapter 19

CHAPTER 19
EMERGING MANAGEMENT PRACTICES
QUESTIONS
1. Business process reengineering, BPR, is a method of examining processes to
identifyandtheneliminate,reduce,orreplacefunctionsandprocessesthatadd
littlecustomervaluetoproductsorservices.
BPRisatooltoachieveradicalchangesinbusinessprocesses.Managersapply
BPRtoachievewholesalegainsincostorquality.
2. BPRisatoolthatleadstorevolutionarychangesinoperations.Oftenthesechanges
leveragetechnologyandreducetherequiredlaborcontentofaprocessorproduct.
Theconsequenceofreduceddemandforlaborisreductionoftheworkforce.
3. Downsizingisanymanagementactionthatreducesemploymentandrestructures
operationsasaresponsetocompetitivepressures.Tomaintainorincreasemarket
shareintodayscompetitivemarkets,firmsmustcontinuallystrivetoincreasethe
qualityandfunctionalityofproductswhilereducingcosts.Thesepressurescause
firms tocontinually evaluate their processesandincreasetheir dependence on
evolvingtechnologies.Asthelevelofautomationincreases,efficiencyincreases,
andthedemandforlaborisreduced.Layoffsaretheinevitableresult.
Risksincludedepletionoffuturetalentpools,permanentlossoforganizational
knowledge,lossoftrustbetweenmanagementandworkers,anddestructionofa
corporatecultureofcooperationbetweenmanagersandworkers.
4. Expansionofoperationsaroundtheglobehasincreasedtheworkforcediversityof
manyfirms.Employeesoflargefirmsoftenspeakdifferentlanguages,andhave
differentcultures,religions,andworkhabits.
The accounting systems in global firms face an increased burden because
accounting is often the only language that is common to all managers and
employeesand,therefore,theonlylanguageinwhichcommunicationcanoccur
freelywithoutaninterpreter.
5. IntheUnitedStates,increaseddiversificationhasresultedfromboththepassage
of new laws and the selfserving actions of firms. Federal, state, and local
governments have enacted statutes to pursue affirmative action programs and
outlawdiscrimination.However,manyfirmsnowpursuediversificationbeyond
thelegal mandates becausemanagers believe amorediverseworkforceoffers
advantagesinservingadiversecustomerbase.
6. ERPsystemsarepackagedsoftwareprogramsthatallowcompaniestoautomate
datagatheringandprocessingandintegrateinformationfeedersystemstoprovide
usefulrealtimeinformationtomanagers.
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Chapter 19

ERPsystemsdifferfrompriorgenerationsofsystemsbytheextenttowhichthe
various feeder systems (e.g., payroll, accounts payable) are integrated into a
commondatabase.ERPsystemsalsointegratesupply(value)chainstoamuch
greaterextentthanpreviousproductionmanagementsystems.
7. Strategicalliancesareagreementsbetweenfirmsthatresultintheircombining
competencies and resources to create products and services for customers.
Strategic alliances are increasingly used today because they are an effective
response to competitive pressures. Firms have been forced to select core
competenciestomaintainanddefend.Ifproductorservicedeliveryrequirescore
competenciesnotpossessedbyagivenfirm,thatfirmmustcontractwithanother
firm orfirms to providethosecompetencies. A strategic alliance is a flexible
approachtocombiningtheneededcompetenciestodeliverhighqualitygoodsand
servicestocustomersatcompetitiveprices.
8. Openbookmanagementreferstothesharing(generallyfinancial)ofinformation
withallorganizationalemployees.Thecentralideaofopenbookmanagementis
thatinformationshouldbesharedandconsumedbyallorganizationalparticipants
not just managers. This view about information contrasts with the more
traditional view in which information is regarded as an asset that must be
safeguarded,andaccesstoitmustbelimitedtomanagerswhoaretrainedinits
use. Such a closed mentality means that many individuals are deprived of
important information that could help guide them in their decisionmaking
processes.
9. Theimplementationofopenbookmanagementchangestherolesofaccountants.
Accountantsmustnolongeractasguardiansofinformationbutbecomepurveyors
of information. Additionally, accountants must devise ways to help
unsophisticated users of information develop skills and abilities in consuming
financialdata.Gamesareoftendevisedtoaidinthisprocess.
10. Thefirststrategyistocleanupenvironmentalcontaminantsaftertheyhavebeen
produced.Thesecondstrategyistodevelopprocessestoreduceandrecyclewaste
thatiscreated.Thethirdstrategyistoavoidproducingpollutantsinthefirstplace.
Economically, none of these strategies will dominate the others in every
circumstance. However, over the long run, the goal should be to reduce the
productionofenvironmentalwaste.

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Chapter 19

EXERCISES
11.a. Without training the firm will have a smaller probability of successfully
implementingthesoftware.Additionally,trainingisnecessarytounderstand
thetechnologys featuresandfunctionsandtoaccelerate thegeneration of
implementationbenefits.
b. Financialexpertsinabusinessplayimportantrolesintechnologyacquisitions.
Beforetechnologyisacquired,financialexpertsanalyzethecostsandbenefits
todetermineifnewtechnologyisjustified.Next,financialexpertshelpscreen
theproductsofcompetingvendorstoidentifytheproductthatmeetsthefirms
needsatthelowestcost.Finally,thefinancialexpertsmanagetheprocessof
implementationtoensurethattheproductfunctionsaspromisedbythevendor
andconfirmthatthecostsincurredandbenefitsgeneratedareconsistentwith
theexpectations.
12. Theuseoftechnologyiscommonplaceinbusinesstoday.Further,technologyis
increasinglyamajorcomponentofstrategiesbeingplannedandexecutedbyfirms.
Financial professionals, having responsibility for managing the process of
technologyacquisition,mustnowhaveabroaderunderstandingoftheirbusinesses.
Without fully understanding competitive strategies and business operations,
financialprofessionalswillbeunabletomaketheappropriaterecommendations
aboutacquiringnewtechnologyandwillnotbecapableofunderstandingwhether
technologyisservingasaneffectivestrategicandoperationaltool.
Agooddiscussionoftheimportanceoftechnologyisprovidedinthefollowing
article:BenWorthen,CutThoseCosts!(ButNotTech.), WallStreetJournal
(February27,2012),p.R5.
13. Eachstudentwillhaveadifferentanswer;nosolutionprovided.However,thereis
currentlydebateintheacademicandpractitionercommunitiesastohowTQM
andBPRrelatetoeachother.WhilesomearguethatBPRcanbeviewedasatool
ofTQM,othersarguethatBPRisaphilosophyaboutachievingrevolutionary
changesinoperationswhileTQMismoreaboutseekingcontinual,incremental
improvementsinoperations.
14. Eachstudentwillhaveadifferentanswer;nosolutionprovided.
15. Eachstudentwillhaveadifferentanswer;nosolutionprovided.However,the
Japanese management culture has long embraced the ideal of lifetime
employment. Downsizing in a Japanese company that has faithfully pursued
lifetimeemploymentwouldbebestaccomplishedbyreductionsinfuturehiring
andnaturalattrition.Anylayoffsofemployeeswouldbeverydisruptivetothe
business culture. Japanese managers typically prefer to make cuts virtually
anywhereelseintheiroperationsbeforelayingoffemployees.

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Chapter 19

16. Eachstudentwillhaveadifferentanswer;nosolutionprovided.Onecanmakea
casethatthelayoffsaregoodnewsorbadnews.Thelayoffswouldbeviewedas
goodnewsifitwasevidentthattheresultwasamoreefficientcompanythatwas
abletomaintainitsexistingrevenuesbutincurlowercosts.Alternatively,one
couldviewthelayoffsasbadnewsbecauselayoffsinevitablyresultinalossof
expertiseandorganizationalexperience(lossofhumancapital).Suchalosswould
beviewedasreducingafirmsabilitytocreate,produce,andsellproducts.
17. Eachstudentwillhaveadifferentanswer;nosolutionprovided.
18. Whereaseachstudentwillhaveadifferentanswer,thefollowingpointsshouldbe
made. At a minimum, the accounting and financial professionals can monitor
compliance with existing laws and ethical guidelines pertaining to diversity.
However,ifgreaterdiversityisanorganizationalobjective,thefinancialexperts
inthebusinesscandevelopcontrolsystemstosetobjectivesfordiversity,monitor
achievements,andconnectachievementstomanagerialrewards.Bydeveloping
formalmeasuringandreportingsystems,managerswillbeforcedtoconsiderhow
their hiring, promotion, and performance evaluation criteria influence the
objectiveofgreaterdiversity.
19. Althougheachstudentwillhaveadifferentanswer,thefollowingpointsshouldbe
made.ThroughtheInternetstorefrontmuchdemographicalinformationcanbe
gatheredaboutpurchasersofproductsincludinginformationaboutgender,race,
age,maritalstatus,economicstatus,hobbies,andbuyinghabits.Thisinformation
can be related to product sales. The idea is to develop profiles of buyers of
particular types of products. Once such profiles are compiled, specific target
groupsofcustomerscanbecontactedusingquestionnaires,phonecalls,ande
mailtoobtaininputaboutdetailsoffeatures,pricepoints,andqualityexpectations
sothatasthecarisdesigned,fairlyprecisespecificationsregardingprice,quality,
andfunctionalitycanbefollowed.
20. Whileeachstudentwillhaveadifferentanswer,thefollowingpointsshouldbe
made.
a. Customer satisfaction should improve because a closer link between
manufacturing and marketing allows more customer feedback to be
incorporatedintoproductdesign.Further,marketingexpertswouldbemore
readilyabletoprovidetheirperspectivesonproductdesignissues.
b. Muchofthetimerequiredtobringanewproducttomarketisconsumedinthe
designstage.Byhavingagreaterflowofinformationbetweenengineering
andmarketing,engineeringcouldbemorequicklyandcompletelyinformed
aboutcustomerconcernsandpreferencesaboutproductfeaturesandquality.
c. Costmanagementeffortswouldbenefitfromagreaterflowofinformation
between marketing and engineering. One specific benefit should be a
reduction in nonvalueadding features in products because of the greater

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Chapter 19

ability of the marketing function to deliver the customer perspective to

engineering.
21. BeforeERPsoftware,informationwouldbecommunicatedsequentiallythrough
the supply chain from the final consumer to the most upstream supplier.
Informationwasonlyconveyedlinkbylinkthroughthesupplychain,andactions
wereonlycoordinatedbetweenonelinkandtheadjoininglinks.Byusingthe
Internet, the firminteracting withthecustomercanpostits master production
schedule where it is available to the entire supply chain simultaneously. By
sharinginformationinrealtimethroughouttheentirevaluechain,coordinationof
activitiescanoccuracrossalllinksofthesupplychain.
22. Eachstudentwillhaveadifferentanswer;nosolutionprovided.
23. Theestablishmentofastrategicalliancerequiresallofthesystemsandstructures
required to form any new business. The financial professional should provide
input on issues such as the organizational form of the strategic alliance, the
organizational structure of the alliance, and financing. Further, the financial
professionalshouldbedirectlyresponsiblefordevelopingmanagementcontrol
systems, financial reporting systems, reward structures for management and
employees,andproductcostingsystems.Oncethestrategicallianceisoperational,
thefinancial professionalshouldcontribute totheongoingmanagement ofthe
businessincludingparticipatinginplanning,decisionmaking,andperformance
evaluation.
24. Althougheachstudentwillhaveadifferentanswer,thefollowingpointsshouldbe
made. Thesteelmanufacturer maybenefitfromusingopenbookmanagement
techniques.Toimplementopenbookmethods,trainingshouldbeprovidedtoall
employeesandsimplegamesdevised.Workertrainingcouldeffectivelyemploy
theMONOPOLYgametopresenttheconceptofopenbookmanagementforthe
followingreasons:

MONOPOLYisawidelyknowngamewithwhichmanagersandemployees
arelikelytobefamiliar.
MONOPOLYprovidespayoffstoplayersincashandrequiresplayerstosettle
theirobligationswithcash.Thus,thegamewouldhelpintroducesimplecash
flowconceptsandsubsequentaccountinginformation.
ThereisonlyonewinnerinthegameofMONOPOLY,andthatistheindivid
ualwhoaccumulatesthemostcashandproperty.Thus,thegamereinforces
theobjectoftheexercisetowinbybecomingthemostprofitable.

Training must also be provided to the accounting staff and managers. The
accountantsmustbetrainedtodevelopmeasurementsystemsforthegamesthat
are created and to provide training to workers to understand and use the
informationintheirgames.
Managers must be trained to understand the role of games in openbook
managementandtolearnhowtodevelopgamestoimproveoperations.Finally,a
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Chapter 19

pilot project could be used to see how openbook management could be

implemented firm wide and to identify any problems that are likely to be
encounteredintheimplementation.
25. Whileeachstudentwillhaveadifferentanswer,thefollowingpointsshouldbe
made.Currently,employees intheproductiondepartment arenotevaluatedor
compensatedbasedonthequalityoftheirwork.Openbookmanagementcanbe
usedtochangethebehaviorsofemployeesbychangingtheirincentives.
The first step in implementing openbook management in the production
department would be to develop performance measures of quality. Traditional
measuressuchasscrap,waste,andreworkcostsandnontraditionalmeasuressuch
ascustomersatisfactionlevelswithqualitycouldbedeveloped.Althoughdollars
couldbeusedastheunitofmeasurement,physicalunitswouldbemorereadily
grasped by the workers (for example, pounds of materials wasted rather than
dollarsofmaterialswasted).
The second step in implementing openbook management would be to train
workerstounderstandhowtheperformancemeasurescapturetheiractionsand
howtheycanaffectthemeasures.Thetrainingsessionsshouldprecedetheactual
useofthenewperformancemeasures.
The final implementation step would be to link worker pay to the new
performancemeasures.Inthisstep,workersareprovidedtheincentivetoimprove
qualityperformancemeasurements.Trainingsessionswouldberequiredtohelp
workers understand how they can improve their performance rewards by
improvingthequalityoftheiroutput.
Finally, a game could be devised to use in training sessions that would
demonstratetotheworkershowqualitymeasurementandemployeerewardsare
linked and how changes in the performance measures lead to changes in the
payoffs.
26.a. An endofpipe strategy could be applied to this waste. An endofpipe
strategyismostapplicabletosituationsinwhichthewasteisoflowtoxicity,
can be disposed of safely and at relatively low cost, and costs would be
exorbitanttoeliminateordramaticallyreducethewaste.
b. Thiswasteisalikelycandidatefortotalelimination.Becauseitishighlytoxic
and can be disposed of only at great cost, the most likely strategy is to
redesignproductionprocessessothatthewastewillnotbeproduced.
c. Thiswasteisacandidateforrecycling.Becausethewasteisnearlyidenticalto
apurchasedproduct,itislikelyasubstituteforthatpurchasedproductifitcan
becleansedofimpurities.
27.a. Dayton Industrial is considering a strategy of waste elimination/reduction
throughprocessimprovement.

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Chapter 19

b. Discounted cash flow techniques would be appropriate for the financial

analysis becausethe costs toacquire the improved processes occurinone
period and the benefits of the process improvements occur in subsequent
periods.Discountedcashflowmethodswouldputthecashflowsoccurringin
differentperiodsonacommonbasisbyusingtheirequivalentpresentvalues.
28. Eachstudentwillhaveadifferentanswer;nosolutionprovided.

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Chapter 19

PROBLEMS
29. Eachstudentwillhaveadifferentanswer;nosolutionprovided.
30.a. One of the most important intangible assets of most companies is human
capital. Human capital represents the value of the knowledge, skills, and
abilitiesofemployees.Layoffswouldinevitablyreducethevalueofhuman
capital. Furthermore, the more experienced and knowledgeable are the
workerswhoarefired,thegreaterwouldbethelosssufferedbythefirm.
b. TheBPReventwouldlikelyshowonlythecasheffectsofthelayoffs.For
example, if severance pay is offered to the fired workers, that cost would
appear in the income statement. However, because human capital is not
reportedonthebalancesheet,theonlyeffectonthebalancesheetwouldbea
reductioninownersequityandcashcausedbythereductioninprofitsforthe
periodfromthedirectcashcostsofthelayoffs.
c. No. Clearly there is human capital that is important to an organizations
successandsurvival.However,accountinghasnotevolvedtofairlypresent
effectsoftransactionsonhumancapital.
31.a. The accounting system poorly captures all of the costs associated with
downsizing.Bydesign,theaccountingsystemisaclosedsystemthatonly
measures activities occurring within the entity. In the case of downsizing,
much of the cost is borne by society rather than the firm. For example,
dismissed workers may apply for unemployment compensation and other
benefitsprovidedbylocal,state,andfederalgovernments.Thesecostsmaybe
quitesignificantbutarenotcapturedbyanyfirmsaccountingsystem.
Ifalldownsizingcostswerebornebythefirm,itislikelyfewerfirmswould
electtodownsize.Evenifafirmsaccountingsystemfullyidentifiedthecost
ofdownsizing,firmsmightstillchoosetodownsizegiventhatmanyofthe
costsidentifiedbytheaccountingsystemwouldstillnotbebornebythefirm.
b. Opinionsabouttheethicalresponsibilitiesofemployerstoformeremployees
willvarywidely.Ifoneassumesthatthereisnoimplicitorexplicitagreement
thatafirmisofferinglifetimeemployment,layoffsmaybeviewedasanatural
actionofprofitseekingbusinesses,andthatsuchbusinesseshavenoethical
obligationstoprovideasafetynetfordisplacedworkers.Alternatively,many
studentswilltakethepositionthatemployersdohaveanethicalobligationto
provideasafetynettoworkers,especiallythosewhoseskillsmaybeuniqueto
theemployerand,therefore,notvaluedbyotherpotentialemployers.
32. Theaccounting function canhelptopmanagement identifytalented managers.
Although layers of middle managers have been eliminated by business
restructurings,theeliminationshavebeenmadepossiblebythedecentralizationof
information,authority,andresponsibility.Theaccountingfunctionhasassumed
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Chapter 19

an important role in decentralization by providing the necessary plans,

performancemeasurements,andinformationsystems.
Because accountants have managed the information flow that has facilitated
decentralization,theyhaveextensivedataontheperformanceofmanyinternal
managers.Bycomparingtheperformanceofindividualmanagerstoreasonable
benchmarks suchashistoricalperformance,expectations,performanceofother
internal managers, and competitor performance, accountants can identify the
subsetofmanagerswhohaveoutperformedtheirpeers.Thissubsetcanserveasa
talentpooltofillvacatedtopexecutivepositions.
33. Whileeachstudentwillhaveadifferentanswer,thefollowingpointsshouldbe
made.
a. Thesuccessofpricebasedcompetitionislinkedtothecoststructureofthe
competitor. If GM has higher costs than its rivals, it will not be able to
successfullyusepricebasedcompetition.Itsrivalswillbeabletounderprice
products withsimilarqualityandfunctionality andtakemarketsharefrom
GM.
b. Greaterflexibilitytooutsourcecomponentsshouldhaveapositiveimpacton
quality.BecauseGMwouldalwayshavethechoicetomakecomponentsthat
cannotbeobtainedfromavendorwiththeappropriatelevelofquality,the
overalllevelofqualityshouldonlyincrease.Particularly,iftherearevendors
thatcanproduceatacompetitiveprice,butathigherlevelsofqualitythan
GMs internal operations, outsourcing would improve the final products
quality.
c. GM has an ethical obligation to its existing employees to be fair in its
negotiations. However, ifGM is not givengreater flexibility tooutsource,
eventuallyitsentireemployeebasecouldbeinjeopardyastheinflexibility
mayleadtoalesscompetitivepositionintheindustry,especiallyrelativeto
toughforeigncompetitorssuchasToyota.Thus,alossofsomejobscurrently
becauseofgreateroutsourcingmayleadtomorestabilityfortheremaining
jobs at GM. Furthermore, before outsourcing components, GM should
evaluate whether changes in internal operations would result in sufficient
improvementtodiminishtheneedtooutsource.
d. When GMs bankruptcy was settled, the United Auto Workers owned 17
percentofGMscommonstockandgainedatleastoneseatontheboardof
directors. The longrun result of this settlement may be a much tighter
alignmentbetweentheunionsandothershareholdersinterests.
34.a. TennesseeTransmissionsaveragegrossprofithasdeclinedfrom$160toonly
$45withinthepastyearonthetransmission.Atthesametime,theindustry
averagegrossprofitdeclinedatamuchslowerrate:from$140to$75.The
declineintheaveragegrossprofitoftheindustrysignalsthattheindustryhas
become more price competitive, and the larger decline for Tennessee
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Chapter 19

Transmissions indicates that the company was unable to achieve cost

reductionsatthesamepaceastheindustrydid.
Forthefirstquarterof2012,TennesseeTransmissionshadamarketshareof
approximately13percent(4,20032,000).Eventhoughtotalindustryunit
saleswerehigherinthefirstquarterof2013thaninthefirstquarterof2012,
thecompanysunitsalesslippedanditsmarketsharedroppedtoabout8.6
percent (3,450 40,000). This information indicates Tennessee
Transmissionssellingpricedidnotdropasfastastheindustryaverage,and
saleswerelostasaresult.Thisfactisconfirmedbycalculatingaveragesales
price for Tennessee Transmissions for the first quarter of 2012, $1,525
($6,405,0004,200),andcomparingthatpricetothepriceforthefirstquarter
of 2013, $1,350 ($4,657,500 3,450). Thus, the companys sales price
droppedfrom$1,525to$1,350whiletheindustryaveragepricedroppedfrom
$1,640to$1,310.AlthoughTennesseeTransmissionspricewaswellbelow
theindustryaverageinthefirstquarterof2012,itwaswellabovethataverage
forthefirstquarterof2013likelythemainreasonunitsalesandmarket
sharedeclinedoverthelastyear.
BecauseTennesseeTransmissionshasnoqualityorfunctionalityadvantage
overotherindustrycompetitors,thecompanymustfindwaystoreduceits
pricetoregainmarketshareandunitsales.Toreduceitsprice,thecompany
mustfindwaystosubstantiallyreduceitscosts.
b. Several ways to reduce costs are evident. First, Tennessee Transmissions
producesabout83percentofitscomponents,amuchhigherproportionthan
the industry average of 57 percent. Thus, the company should consider
outsourcing some components. Second, Tennessee Transmissions should
considerrelocatingthemostlaborintensiveoperationstositesthathavelower
laborcosts.ThetwomajorcompetitorsthatmovedtoChinaobviouslydidso
toobtainalaborcostadvantage.TennesseeTransmissionsmustfindsome
waytomatchitscompetitorsinreducinglaborcosts.
AnotherpossibilityisforTennesseeTransmissionstoconsideracquiringmore
machineintensiveproductiontechnologytoreduceproductlaborcontent.A
thirdcostreductionapproachistoconsidertheapplicationofBPRtoredesign
productionoperationsforgreaterefficiency.Afourthpossibilityistoredesign
thetransmissiontoremovecosts.Atargetcostingsystemcouldbeappliedto
develop target costs for each major component. The target costs of
componentscouldbeusedasabasisfornegotiatingpriceswithvendorsfor
outsourced components. However, Tennessee Transmissions has less
opportunity than other firms to use value chain analysis to remove costs
becauseoftheveryhighpercentageoftransmissioncomponentsproducedby
thecompany.
Finally,thecompanymightconsiderdevelopingincentivesforinternalcost
reduction. Openbook management techniques could be applied to create
incentivesandgeneratedownwardpressureoncosts.

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Chapter 19

35.a. Thelevelofcompetitionintheglobalbusinessenvironmentrequiresahigh
level of cooperation and information sharing between managers and
employees.Ifthereismistrustbetweenthetwogroups,theperformanceofthe
organization will suffer. Unethical treatment of employees will cause
employeestonottrustmanagers.Bothgroupswillultimatelysufferbecause
the performance of the firm will be below levels that could have been
achieved. Consequently, the ethical treatment of employees is likely a
prerequisiteforafirmtoachievehighperformance.
b. Openbookmanagementisaphilosophythatrequiresaveryhighleveloftrust
between employees and managers. A companys use of downsizing as an
organizational strategyis inconsistent withthecultureinwhichopenbook
managementcouldbesuccessfullyimplemented.
36.a. Strategic alliances involve a greater degree of integration of two or more
companies than is obtained in traditional supplier/customer relationships.
Accordingly,thereisgreaterdependencebetweenthepartnersindetermining
thequalityoftheoutput.Also,itmaybemoredifficultforafirmtoexert
pressureonapartnerthanasuppliertoimprovequality.Eachpartnerislikely
to have some autonomy in determining how it will fulfill its role in the
alliance.Therefore,theabilitytomanagequalityinastrategicalliancemay
dependheavilyonselectingpartnersthatarequalityoriented.
b. Asinallbusinessenterprises,theaccountingfunctioncancontributetothe
measurement, and therefore the management, of quality. And, as in all
businesses, the contribution of the accounting function will be maximized
whenitsmeasurementsofqualityarelinkedtoincentivesofspecificmanagers
whocancontrolquality.
37.a. Servingarotationinproduction,quality management, andotherfunctional
areas wouldbetterallowthefinancial specialisttounderstandthebusiness
functions that she/he is charged with measuring. During the rotation, the
financialspecialistwouldbetterunderstandtherelationshipsbetweenquality
managementandproductioncosts,andwouldenhancehis/herunderstanding
ofcostdriversandcostdependenciesamongfunctionalareas.
b. With acost management specialist onthe team, theteam would bebetter
equippedtounderstandtherelationbetweentheiractionsandcostincurrence.
Further,theteamwouldhaveanenhancedabilitytomodelthecostofvarious
businessfunctionsandwouldhaveabetterinsightintohowtoreducecostsby
managingcostdrivers.
38.a. Transparency refers to making financial information truthful and easy to
comprehendbytheinformationconsumer.Thesecharacteristicsrequirethe
adoptionofaccountingpracticesthatrevealfinancialresultsinaclear,timely,
andcomprehensiblemanner.

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11

Chapter 19

b. Openbook management is wholly consistent with financial reporting

transparency.Theadoptionofopenbookmanagementcausestheaccountants
toidentifywaystoreportfinancialplansandresultstounsophisticatedusersin
suchawaythattheusersunderstandtheinformation.Inshort,makingthe
information morecomprehensible is making itmoretransparent, i.e.,more
obvioustotheuser.
39. ThememotoJohnsonshouldaddressthefollowingpoints:
Implementationofopenbookmanagementshouldbeprecededbytraining.
Specifically,Thompsonmustreceivetrainingsothathewillunderstandthe
accountinginformationthatheistobeprovidedaswellashowtheaccounting
informationcanbeusedtochangedepartmentaloperations.
Thefinancialinformationthatistobeusedasabasisformanagingspecific
departmentsmayneedtobemodifiedtomatchtheinformationconsumers
sophistication.Forinstance,inthiscase,overheadinformationmaybemore
difficulttocomprehendthaninformationregardingdirectcosts.Consequently,
the information system may be more effective if Thompson is initially
providedonlydirectcostinformation.
Selectingoverheadasthefirstcosttoreduceislikelytobelesssuccessfulthan
selectingdirectcosts.Furthermore,Thompsonmaynotbeabletocontrolmany
itemsthatcompriseoverhead.Inchoosingaccountingmeasurementstoevaluate
Thompsons performance, care should be taken to make certain that only
aspectsofoperationsthatThompsoncancontrolareincludedinperformance
measurements.
IfThompsonistobeevaluatedbasedonaccountingmeasurements,heshould
notbetoldbyotherswheretobeginimprovingcostperformance.Heshould
begiventheautonomytomakehisowndecisionsabouthowhewillproceed
toachievecostreductions.
Ratherthanimplementingopenbookmanagementtechniquessimultaneously
in all departments, perhaps a pilot project should be initiated first so that
unforeseen implementation issues can be addressed before a broad
implementationisattempted.
Theaccountingdepartmentshouldhavebeenconsultedbeforeattemptingto
implement openbook management in any department. Cooperation and
knowledge of the accounting department will be necessary to design an
effective information system to serve the various managers who will be
involvedinthenewmanagementpractice.
Beforeimplementingopenbookmanagementinanydepartment,appropriate
departmental performance measurements should be determined. The
performancemeasurementsmustbedesignedtocreatethecorrectincentive
foreachdepartmentalmanager.
40. Whileeachstudentwillhaveadifferentanswer,thefollowingpointsshouldbe
made based on the data given. First, the company can develop a more
environmentally sensitive chart of accounts. This change would allow the
companytoimproveitsunderstandingofthelevelandcausesofenvironmental
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Chapter 19

costs.Second,theenvironmentalcostsshouldbechargedtospecificjobssothata
moreaccuratecostcanbedeterminedforallproductsproduced.
Next, responsibility for controlling environmental costs should reside with a
specificindividualorsetofindividuals.Oncethechartofaccountsismodifiedto
better capture environmental cost data, formal strategies can be developed for
reducingthosecosts.Thisrequiresthatspecificmanagersbemadeaccountablefor
achievingenvironmentalcostcuts.
To achieve environmental cost cuts, specific strategies must be devised for
controlling environmental effects. Beginning with the most toxic wastes,
strategies must be developed to eliminate waste where feasible, reduce waste
elsewhere,andproperlydisposeofanywastethatremains.Astrategyshouldbe
developedforeachcategoryofwaste.Accountabilityforeliminating,reducing,
recycling,andproperlydisposingofwastemustbeestablished,andmethodsmust
bedevisedtomeasureresultsandrewardthemanagersfortheirefforts.
41. Whileeachstudentwillhaveadifferentanswer,thefollowingpointsshouldbe
made.
a. Wastetoxicitycanbedepictedasacontinuum.Somewasteisharmlessand
somerepresentsathreattolargepopulationsofpeopleandotherorganisms.
Realistically there are some waste materials that should not be produced
regardlessoftheeconomicgainthatissacrificed.
b. Manyexamplesexistofcompaniesknowinglydisposingofwasteimproperly
forfinancialgain.Inmanyinstancesimproperdisposalwassimplyregarded
astheleastexpensivewayofconductingbusiness.Therearemanyarguments
againstimproperlydisposingofwaste.
Ethically,itisdifficulttojustifytheendangermentofaninnocentpopulation
topreservejobs.Thetacitnatureofimproperlydisposingofwastenecessarily
meansthatmanypeopleendangeredbythewasteareuninformedofthethreat.
Ifthecompanysonlymeansofsurvivalistheimproperdisposalofwaste,its
economicfutureisnotindoubt.Itisonlyamatteroftimebeforethecompany
will fail. The improper disposal of the highly toxic waste is hardly worth
merelyextendingtheinevitablefailure.
Thegreaterthewastetoxicity,thegreateristhelikelihoodthatadverseeffects
will result. However manifested, these effects will exist as clues of the
improper disposition and increase the likelihood of ultimate detection. If
detected, the financial consequences will surely far exceed the costs of
properlydisposingofthewasteinthefirstplace.

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