Cost Accounting and Decision Making (ACC2CAD)

Tutorial 1 Additional Questions

L-S, T & H, Chapter 1: RQ1.3, RQ1.5, RQ1.8, RQ1.13, RQ1.14, RQ1.17, E1.28, E1.31, P1.33,
P1.34 and P1.36.

RQ1.3 Explain why senior managers, middle managers and operations managers require
different types of management accounting information.
Page 7 of L-S, T & H (all of Chapter 1 would need to be read and understood for you to provide
a comprehensive, A-grade answer to this question.)
These three levels of managers require different forms of management accounting information
because of the very different nature of the decisions that they make and their different areas of
responsibility. For example, senior managers may spend considerable time making strategic
decisions for the entire organisation so require information about markets, customers and
competitors. They also need to monitor the financial performance of the entire organisation,
therefore require a financial summary of the organisation. Middle managers need information that
relates to their area of responsibility a division or department. Operations managers need detailed
and frequent information to help them manage the day-to-day decisions and problems in the
operational areas of the business.
RQ1.5 Briefly describe the key differences between financial accounting and management
accounting.
Pages 9 - 11 of L-S, T & H
The important differences between management accounting and financial accounting are listed
below.
(a) Management accounting information is provided to managers and employees within the
organisation, whereas financial accounting information is provided to interested parties
outside the organisation.
(b) Management accounting reports are unregulated, whereas financial accounting reports are
legally required and must conform to Australian accounting standards and corporations law.
(c) The primary source of data for management accounting information is the organisations
basic accounting system, plus data from many other sources. These sources will yield data
such as rates of defective products manufactured, physical quantities of material and labour
used in production, occupancy rates in hotels and hospitals and average take-off delays in
airlines. The primary source of data for financial accounting information is almost
exclusively the organisations basic accounting system, which accumulates financial
information.
(d) Management accounting reports often focus on sub-units within the organisation, such as
departments, divisions, geographical regions or product lines. These reports are based on a
combination of historical data, estimates and projections of future costs. The data may be
subjective and there is a strong emphasis on reporting information that is relevant and
timely. Financial accounting reports tend to focus on the enterprise in its entirety. These
reports are based almost exclusively on verifiable transaction data. The focus is often on
reliability rather than relevance and the reports are not timely.

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 Cost Accounting and Decision Making (ACC2CAD)
Tutorial 1 Additional Questions

RQ1.8 What might the following statement by a management accountant at the

multinational company Caterpillar, imply about where in the organisation
management accountants are located? [We] are a partner with all the other
functions of the business here (Siegel & Sorensen, 1999).
Pages 11 12 of L-S, T & H
This statement suggests that the management processes across the organisation are closely
supported by management accountants, rather than there being a divide between the (management)
accounting function and the operational areas of the business. This could mean that the
management accountants have a presence on the factory floor and in the corporate offices. Very
often each plant will have at least one management accountant. The chief management accountant
is then likely to be located in head office where he or she has regular contact with other senior
managers and is regularly involved in meetings with these other senior personnel.
RQ1.13 What types of management accounting information might assist management in a
business that followed a strategy based on cost leadership?
Pages 16 18 of L-S, T & H
First, you need to know how to describe is a cost leadership strategy. A cost leadership strategy is
a business strategy where a firm is a low-cost producer, which allows the business to sell its goods
and services at a lower price than its competitors.

Then to need to answer the question describing the types of management accounting information
that might assist management in a business that followed a strategy based on cost leadership.

In a business that considers cost leadership to be of key strategic importance, a management

accountant could provide information to management that helps managers to measure and manage
their costs more efficiently and effectively. This could include information about:
costs of products, processes, activities, and departments
costs of materials and other key inputs
costs of supporting individual customers and customer groups
the root causes (cost drivers) of the major costs incurred by the business
performance reports focusing on the control of costs and also of key cost drivers
the prices of the products sold
comparison of the probable total sales revenue for various prices (allowing for reduced sales
numbers for higher sales price and vice versa)
competitors including the prices of competing products and the cost structures of their
businesses.
RQ1.14 What types of management accounting information might assist management in a
business that considered customer service to be of key strategic importance?
A management accountant might provide the following types of information to assist management
in a business that considered customer service to be of key strategic importance:
analysis of customer needs, inquiries and complaints
measures of customer response time
number of new customers
customer retention rate
customer satisfaction with service
customer profitability analysis
market share.

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 Cost Accounting and Decision Making (ACC2CAD)
Tutorial 1 Additional Questions
RQ1.17 Explain how specific aspects of management accounting systems may be used to
motivate employees and managers.
Page 22 of L-S, T & H
Specific aspects of management accounting systems that may be used to motivate employees and
managers include performance measurement systems, which form part of the control process.
Employees can be held responsible for various financial and non-financial performance targets and
may be rewarded, for example with bonuses, if those targets are achieved. Employees may be
motivated to achieve those targets when they participate in setting them, when they regard those
targets as fair and achievable and when they value the rewards that they earn for achieving targets.
E1.28 Management accounting information
Give an example of management accounting information that could be used by a manager to
make each of the following decisions. Remember to consider non-financial information
where relevant.
1. A marketing manager is considering whether or not to launch a new product.
Competitors products and prices; current market share; cost of developing, producing and
marketing the new product; likely profitability of the new product; potential impact on sales of
existing products; likely sales volume of the new product; additional staff and equipment needs.
2. A travel company is considering whether it should increase its staff numbers by one-
third.
Availability of new staff; cost of hiring new staff; any effect on morale of existing staff; additional
office accommodation and vehicle requirements; likely sales and profits generated by new staff;
additional salaries cost.
3. A production team leader is considering whether an important customer order should
be produced next week, or during overtime hours tonight.
Different costs of the two alternatives; any impact on customer satisfaction from delaying
production until next week; the cost of overtime; delay to regular production if produced next
week; availability of staff to work overtime.
4. A fruit picking company is considering purchasing a new cherry-picking machine.
Cost of purchasing the new machine; proceeds from the old machine; cost of maintaining and
running the old and new machines; productivity of the old and new machines; ability of staff to
operate the new machine; availability of funds to purchase the new machine; the expected life of
the new machine and the remaining life of the old machine.

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 Cost Accounting and Decision Making (ACC2CAD)
Tutorial 1 Additional Questions
E1.31(Appendix) Evolution of management accounting
Complete each of the following statements by selecting the best answer.
1. The term management accounting began to be used because :
a. Costing systems became more sophisticated.
b. The role expanded to include information for planning and control.
c. Accountants were moved into managerial roles.
d. The role focused on scorekeeping for management.
2. From the mid-1980s to the mid-1990s, management accountants:
a. Became more interested in waste reduction because of the emphasis on the
environment.
b. Made detailed inventory valuation as their primary focus.
c. Added process analysis and cost management to their techniques.
d. Introduced the concept of responsibility accounting to their organisations.
3. From 1995 onwards, management accounting:
a. Added a customer focus because managers were sick of hearing about costs.
b. Added a shareholder perspective to ensure consistency with financial
accounting reports.
c. Introduced the concept of investment appraisal to satisfy investor concerns.
d. Recognised the imporat6nace of both customer and shareholder value.
4. By the 2000s, management accountants were increasingly concerned about
environment issues because of:
a. The need to improve their organisations reputation with environmental
pressure groups.
b. The need to improve the organisations reputation with customers.
c. Efficient and effective management of environmental issues offered
opportunities to enhance both customer and shareholder value.
d. The need to include environmental measures in the organisations annual
report.
5. Over time, the management accountant has increasingly become:
a. A technical advisor.
b. A staff role, supporting line managers.
c. A part of the management team, providing strategic advice.
d. An expert on financial accounting reports.

1 (b)
2 (c)
3 (d)
4 (c)
5 (c)

P1.33 Designing a new management accounting system

You have just been appointed as the new management accountant to manage the transition of
the existing Royal Adelaide Hospital to the proposed new Marjory Jackson Hospital site. The
hospital has a number of separate departments responsible for direct patient care, such as
Accident and Emergency, Intensive Care, Neurology and Cardiology, as well as a number of
support departments such as Radiology and Patient Records. You are a little uncertain as to
what your new role will be in this new hospital, as consultants have been engaged to design
the new management accounting systems. You thought as a management accountant you
would be responsible for developing the new systems. (CMA, adapted)

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Required:
1. Write a report to senior management explaining how you, as the management
accountant, may contribute to the design and operation of the new management
accounting systems for the new hospital.
As the new management accountant, I am eager to be involved in the design and operation of the
new management accounting systems for the hospital. My training as a management accountant
provides me with the skills to help design these systems and to ensure that they meet the needs of
the business. I have a good knowledge of strategic planning and well-developed skills in the area of
information systems and accounting systems design.

Much of the information needed to operate the management accounting systems will draw on the
existing transaction-based accounting system. As an accountant, I am in a good position to advise
on the types of data that may be used in costing services and departments, performance reports and
within the budgeting system.

When consultants are engaged to design the new systems, it is important that there are managers
within the hospital who are involved in the design phase, to ensure that the operation of the new
systems proceeds smoothly. Management accountants are the most appropriate staff to participate
and supervise the operation of the systems on an ongoing basis.
2. Outline the types of management accounting information that you believe senior
managers may require on a regular basis (say, weekly and monthly) to manage the
operations of the new hospital. Consider both financial and non-financial information.
There are many different types of information that may be required weekly or monthly by senior
managers as the hospital consists of many different businesses. Some examples are as follows:
Accident and emergency: number of patients treated, average length of stay, number of
referrals to consultant, billing rate, Medicare revenue, private insurance revenue, gap
revenue, medical supply costs, average cost per bed, average cost per patient
Intensive care: bed occupancy rate, number of patients treated, average length of stay,
number of patients unable to be accommodated and transferred due to lack of beds,
intensive care nursing hours, number of incident reports, billing rate, Medicare revenue,
private insurance revenue, gap revenue, medical supply costs, kitchen costs, average cost
per bed; average cost per patient
Neurology: number of patients on waiting list, bed occupancy rate, number of patients
treated, average length of stay, billing rate, Medicare revenue, private insurance revenue,
gap revenue, kitchen costs, medical supply costs, average cost per bed, average cost per
patient
Cardiology: number of patients on waiting list, bed occupancy rate, number of patients
treated, average length of stay, billing rate, Medicare revenue, private insurance revenue,
gap revenue, kitchen costs, medical supply costs, nursing costs, average cost per bed;
average cost per patient
Radiology: number of x-rays during period; number of radiology staff hours during period;
number of referrals per doctor; billing rates; Medicare revenue, private insurance revenue,
gap revenue, medical supply costs, nursing costs, average cost per patient
Patient records: number of new records; number of patient entries processed, staffing costs
NOTE: More detailed information may be required by middle management and junior managers.
3. The new hospital plans to invest in the latest computer technology to run various
aspects of the organisation, including the management information systems. Discuss
the opportunities that this may present for the way in which you supply weekly and
monthly reports to managers.
Weekly and monthly reports may be supplied electronically to allow managers access to

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 Cost Accounting and Decision Making (ACC2CAD)
Tutorial 1 Additional Questions
information when they require it, and at the various levels of detail that they need. Information may
be added to databases very soon after the end of each week or month, to provide information to
managers as quickly as possible.
P1.34 Management accounting information
You and your best friend, I.B. Fit intend to set up Muscle Maker, a high-tech gym which
will monitor various aspects of athletes exercise physiology as they exercise on a range of
specialised equipment.
Required:
Identify specific types of financial and non-financial information that would help you run this
business effectively.
Financial information that would help in the effective running of the gym:
Cost to purchase various pieces of equipment
Costs to run the equipment
Projected power costs, water costs (for example, showers), rates, insurance, rent, wages,
advertising, uniforms for staff
Analysis of different projected demand at different membership rates and the total monthly
revenue stream.
Non-financial information that would help:
Projected demand at different times of the day and on different days
Estimated enrolments in physical training classes or one-on-one bookings (to match staff
availability with demand)
Features and practical advantages and disadvantages of purchasing various pieces of equipment
Likely age profile of membership
Kind of advertising campaign that would attract the target membership
Member satisfaction survey results
Details of location and facilities at competing gyms.
P1.36 Information for management
Joe Murphy retired a few years ago at the age of 48, having built up a substantial retirement
portfolio through a range of entrepreneurial activities. He moved to the Snowy Mountains to
follow his dream of a peaceful mountain life. However, after a few months Murphy became
restless and opened a ski equipment store. This single store soon grew into a chain of four
outlets spread from the Snowy Mountains to the Victorian Alps. As Murphy put it, I cant
believe how fast weve expanded. Its basically been uncontrolled growthgrowth has
occurred in spite of what weve done.

Although the business was profitable, the chain did have its share of problems. Sales tended
to be seasonal, with a slowdown once the snow had disappeared. Murphy therefore added
fishing and camping equipment to his product line. The need for finance required
inventories, which seemed to be bulging left cash balances at very low levels, occasionally
giving rise to short-term bank loans.

Part of Murphys business focussed on skiing trips, which were arranged through local ski
lodges, and included ski hire, lessons and lift passes. Reports from the companys financial
accounting system seemed to indicate that this part of the business was losing money due to
increasing costs, but Murphy could not be sure. The traditional income statement is not too
useful in assessing the problem, he noted. Also, my gut feeling is that we are not dealing
with the best suppliers in terms of quality, delivery reliability and prices. Additional
complications were caused by an increasingly competitive marketplace, with many former
customers now buying equipment through the Internet.

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 Cost Accounting and Decision Making (ACC2CAD)
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Murphy was not sure what to do. The companys accountant was very good at keeping the
books and preparing the financial statements and tax returns, but she did not understand the
way the business really worked.
Required:
1. Describe the types of information that Murphy needs to run his business more
effectively.
There is a variety of information that Murphy could use to help him run his business more
effectively. The main areas of concern appear to relate to inventory, cash flow, supplier
performance, and loss of customers. Also the ski business may not be profitable. The following
information may be useful
- Inventory inventory turnover, reporting of monthly inventory balances, all by product line
- Sales monthly sales units by product line , sales forecasting
- Weekly cash flow budgets
- Monthly cost budgets versus actual costs
- Monthly profitability statements by sales outlet, by product line, by business (eg. Ski trips)
- Detailed analysis of costs of the skiing business
- Supplier performance indicators, including those that relate to delivery performance, cost and
quality.
- Customer performance measures- customer satisfaction , customer complaints, number of
customers retained
- Benchmarking of products and selling prices with competitors.
2. Murphy approaches the accountant to seek her help in gathering and analysing this
information, but she responds: You must be jokingIm an accountant. My job is
to look after the money side of the business! Do you agree with this statement?
The role of the accountant is to provide information to managers to assist in managing resources
and creating value. This requires both financial and non-financial information to be provided.
Merely providing financial information is not sufficient. There is no evidence that budgeting
systems are in place, and these are needed to provide a framework for planning and for controlling
operations and the overall business. Profit statements need to focus on areas of the business that are
of interest to managers, such as sales outlets and the ski business. Performance indicators will need
to assess areas of the business where performance needs to be improved.
3. What actions would you recommend that Murphy takes?
Murphy needs to implement more detailed reporting systems, including a budgeting system,
detailed profit reporting and performance indicators. If the accountant will not assist in these
developments, then other managers may need to be employed to assistor perhaps the accountant
needs to be replaced.

Multiple-Choice Questions (Mowen, Hansen and Heitger)

1-1 c
1-2 e
1-3 a
1-4 b
1-5 e
1-6 e
1-7 d
1-8 b
1-9 e
1-10 e

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