CHAPTER 8

FINANCIAL REPORTING AND MANAGEMENT

REPORTING SYSTEMS

REVIEW QUESTIONS

1. A journal voucher is used to make entries into the general ledger accounts. The

information may be a summary of many transactions or a single, unique transaction.

2. Journal vouchers must be approved by an authorized person, and thus provide an

effective control against errors and unauthorized general ledger entries.

3. The general ledger master file is ordered by the chart of accounts. The account

number, the account description, the asset class, the normal balance, beginning

balance, total debits and total credits for the period, and the current balance are the

typical pieces of information found in each record of a general ledger master file.

4. The purpose is to present comparative financial reports on a historic basis.

5. The responsibility center file is used to collect data regarding the revenues,

expenditures and relevant resources of each responsibility center. Managers of

responsibility centers are held accountable for the operations of their centers and the

information found in these files helps to assess performance.

6. The primary users of financial statement information are external users such as

stockholders, creditors, and government agencies such as the IRS and the SEC.

These users need information that allow them to assess performance over time and

to compare performance with other organizations. The IRS needs financial

information to determine whether the corporation is paying the appropriate amount of

taxes, while the SEC requires the information of publicly traded organizations to

ensure that the market place is fair to the average investor.

7. The eleven (11) steps of the financial reporting process:

1. Capture the transaction

2. Record in special journal

3. Post to subsidiary ledger

4. Post to the general ledger

5. Prepare the unadjusted trial balance

6. Make adjusting entries

7. Journalize and post adjusting entries

8. Prepare the adjusted trial balance

9. Prepare the financial statements

10. Journalize and post the closing entries

11. Prepare the post-closing trial balance

8. The financial statements are prepared based upon the assumption that the users

of financial reports understand the conventions and accounting principles that are

applied, and that the financial statements have information content that is useful.

9. Adjusting entries are made after the regular accounting entries have been made

and posted to the general ledger and any corresponding subsidiary ledgers. After an

unadjusted trial balance of the general ledger has been prepared, the adjusting

entries are made to correct any errors and to record any unrecorded transactions

(i.e. accruals) during the period. The vouchers are prepared after the adjusting

entries have been identified and made to the worksheet.

10. The general ledger clerks should not: have record keeping responsibility for

special journals or subsidiary ledgers, prepare journal vouchers, or have custody of

physical assets.

11. Journal voucher listing and general ledger change report.

12. A close examination of the journal voucher listing should help to uncover any

journal voucher in error, either incorrect or unauthorized.

13. XML is a meta-language for describing markup languages. The term extensible

means that any markup language can be created using XML. This includes the

creation of markup languages capable of storing data in relational form, where tags

(formatting commands) are mapped to data values.

14. XBRL (eXtensible Business Reporting Language) is an XML-based language

that was designed to provide the financial community with a standardized method for

preparing, publishing, and automatically exchanging financial information, including

financial statements of publicly held companies.

15. Taxonomies are classification schemes that are compliant with XBRL

specifications to accomplish a specific information exchange or reporting objective

such as filing with the SEC

16. An XBRL instance document is created by a computer by interpreting the

embedded tags in the database.

17. An XBRL tag a formatting command that is mapped to data values to facilitate

the generation of reports using XBRL.

18. A formalization of tasks clearly specifies the responsibilities of a certain job

position. With employee responsibilities clearly specified, management can construct

an organization that avoids assigning incompatible tasks to an individual.

19. Responsibility refers to an individual’s obligation to achieve desired results.

Authority refers to the empowerment of an individual to make decisions regarding

the obligations that he/she may be assigned. Thus, if a person is held accountable
for certain tasks, he/she must be given the authority and power to affect the

outcomes.

20. Span of control refers to the number of subordinates directly under the

manager’s control. A firm with a wide span of control tends to have many

subordinates reporting to each manager. A firm with a narrow span of control tends

to have fewer subordinates reporting to each manager. Firms with a narrow span of

control tend to have more levels of managers. Tasks which are routine and

structured tend to have managers with a wide span of control, such as the

supervisor of an assembly line, where each employee is performing basically the

same tasks. Tasks which are less structured typically require more levels of

management, such as the managers of audit teams where each audit is different in

some way from any other audit being conducted.

21. The principle of management by exception is that managers should limit their

attention to potential problem areas rather than being involved with every activity or

decision. Thus, only situations which are not proceeding as scheduled are

highlighted by the reports and analyzed by the manager. Thus, the manager does

not have to weed through multiple reports to find the situations which need attention.

22. Feedback becomes useless if it is hidden in other data or if it is not received in

time to make a difference.

23.

Strategic planning decisions are:

a. are typically long-term in nature

b. have a high impact on the firm

c. require highly-summarized information

d. are typically non-recurring problems/opportunities

e. are uncertain in nature.

Tactical planning decisions:

a. are typically medium-term in nature

b. have a limited impact on the firm

c. require detailed information

d. are typically periodically recurring problems/opportunities

e. are highly certain in nature.

Management control decisions:

a. are typically medium-term in nature

b. have a narrower impact on the firm

c. require moderately summarized information

d. are typically periodically recurring problems/opportunities

e. are uncertain in nature.

Operational control decisions

a. are typically short-term in nature

b. have the narrowest impact on the firm

c. require highly detailed information

d. are typically periodically recurring problems/opportunities

e. are highly certain in nature.

24. The three elements are data, procedures, and objectives. When all three

elements are known with certainty, the problem is considered to be structured. Cash

disbursements to each vendor is an example of a structured problem. The open

accounts payable is searched for due dates, the supporting documentation is

checked, and if appropriate, the check is written or the funds transferred.

Transaction processing systems are examples of structured problems. An example

of an unstructured problem would be whether to expand sales to a foreign market.

The three elements become uncertain, and the answer is not clear.

25. The problems faced by lower management levels are more likely to be structured

problems. As the management level increases, the problems tend to become more

unstructured. Top management deal with strategic planning issues that are typically

unstructured in nature.

26. Two objectives that enable reports to be considered useful:

a. to reduce the level of uncertainty associated with a problem facing the decision

maker

b. to influence the behavior of the decision maker in a positive way

27. The seven report attributes are:

1. Relevance—information in the report supports the management decision.

2. Summarization—reports should be summarized to meet the users’ needs.

3. Exception orientation—reports identify activities at risk of going out of

control.

4. Accuracy—information in reports should be free from material error.

5. Completeness—no important information should be missing from the report.

6. Timeliness—information needs to be available in time to support the decision.

7. Conciseness—unnecessary details should be removed from the information.

28. Responsibility accounting traces every economic event to an individual manager

and holds him or her accountable. A manager should be held accountable only for

revenues, expenses, and other resources that he or she can influence.

29. Two phases of responsibility accounting:

a. setting financial goals

b. measuring and reporting performance

30. Cost centers, profit centers, and investment centers

31. Goal congruence means that when lower level managers pursue their own

objectives, they also make a contribution to the objectives of their superiors.

32. Data mining is the process of selecting, exploring, and modeling large amounts

of data to uncover relationships and global patterns that exist in large databases but

are “hidden” among the vast amount of facts.

33. A data warehouse is a relational database management system that has been

designed specifically to meet the needs of data mining. The warehouse is a central

location that contains operational data about current events (within the past 24

hours) as well as events that have transpired over many years.

34. Information overload occurs when a manager is inundated with more information

than he or she can assimilate, resulting in dysfunctional decisions.

35. Reports which contain either irrelevant information or information presented in

too much detail may cause managers to experience information overload.

Information overload can result in avoidance of reading reports by managers.

Further, performance measures presented on reports may cause managers to focus

solely on boosting their own performance measures but not acting in the best

interests of the firm. They may not realize the trade-offs sometimes necessary

between performance standards, such as price and quality. A purchasing agent may
purchase the lowest priced goods with the quickest delivery times so the price per

unit purchased standard and the average delivery time standard look good.

However, if they are purchasing lower quality materials, more scrap or rework may

be necessary.

36. Exception reports will be useful to help flag customers who have unpaid bills.

This information is important for future credit decisions. Also, when another report

indicates a customer is purchasing far more than normal, the credit manager may

wish to determine if this abnormal purchasing is suspicious.

37. Direct labor, raw materials, overhead and, production level variances. The

variances quantify efficiency and/or spending deviations and facilitate management

by exception.

38. Managers of profit centers have responsibility for both cost control and revenue

generation while managers of cost centers only have responsibility for costs.

Managers of investment centers have responsibility for cost control, revenue

generation, and capital deployment. The range of controllable costs by investment

managers is also greater than the costs controllable by profit center and cost center

managers.
39. The term “small data analytics” characterizes techniques that employ data that

are in a format and of a volume that allows them to be analyzed and acted upon by

traditional technologies.

40. “Big data analytics” is characterized and defined by three Vs: extreme volumes

of data, the rapid velocity at which the data must be processed, and the wide variety

of structured and unstructured data types that need to be integrated.

41. SSAE-16 is the definitive standard by which the client firm’s auditors can

determine whether the controls at the third-party service provider are free from

material weaknesses.
DISCUSSION QUESTIONS

1. Since general ledger clerks have access to the general ledger, they should not

have access to the journal vouchers in the source departments. If these journal

vouchers are acquired by the general ledger clerks, or anyone else with

authorization to enter the general ledger, these vouchers may be used to make

unauthorized entries. Pre-numbering and logging these documents at their source

provides a means of accountability.

2. The data comes from the various transaction processing departments.

Specifically, the cash receipts journal, sales journal, purchases journal, as well as

any other miscellaneous transactions are the various sources of data which are input

into the system. Once this data is input into the system, the general ledger, as well

as subsidiary ledgers, are updated. After inspection of a trial balance of the general

ledger accounts, any necessary adjustments and error corrections are made. Finally,

the financial statements are prepared and distributed to the appropriate user groups.

3. If journal vouchers are missing, fabricated or erroneous, and information is

misrepresented in the financial statements, then any decisions made by investors

and governmental agencies is based upon bad data. If an investor provides capital

to a firm based upon its financial statements and these financial statements are

incorrect, if the investor loses money once the corrections are made, the external

user which suffered a loss may claim the firm was either fraudulent or negligent and

sue for the lost amount. Governmental agencies, such as the IRS, may impose

severe penalties for inaccurate reporting of data.

4. Ultimately, the purpose is to be able to take any account on the financial

statement and trace back to the source documents which comprise the number.

However, the audit trail must also be examined from the other direction to ensure
that all transactions end up being reflected in the financial statements. In other

words, if the financial statement balance for an account is traced back to the

originating documents, then accuracy and verifiability is present, but completeness is

not necessarily present. Tracing a sample of source documents through to their

effect on the financial statements allows the property of completeness to be verified.

5. In batch GL systems, transaction processing applications summarize and capture

transactions in journal vouchers where they are held, reviewed, and later posted to

the GL. In such systems, journal vouchers are the authority and the source of all GL

postings. In contrast, a real-time GL system posts each transaction directly to the

general ledger and concurrently creates a journal voucher. The journal voucher in

this system does not authorize a GL entry in the traditional sense. Rather, it provides

a posting reference and audit trail, which links GL summary account balances to

specific transactions.

6. If the standards are unrealistic or outdated, then variances will be reported

constantly and probably ignored. For example, if 5 ounces of a raw material is set as

the standard based upon past data, but the most realistic amount to be used for

each unit is actually 5.25 ounces (the unit specifications have changed slightly), then

the exception reports will constantly show a variance since the standard is not

realistic given the design change. The manager will get used to seeing an

unfavorable variance. If a machine begins to have problems and starts to require 5.5

ounces, then the unfavorable variance will increase, but the manager may not see

the difference as readily since he/she is used to seeing an unfavorable variance in

every report.

7. Audit implications include:

 a. Taxonomy Creation. Taxonomy may be generated incorrectly, resulting in

an incorrect mapping between data and taxonomy elements that could result

in material misrepresentation of financial data. Controls must be designed and

in place to ensure the correct generation of XBRL taxonomies.

b. Validation of Instance Documents. As noted, once the mapping is complete

and tags have been stored in the internal database, XBRL instance

documents (reports) can be generated. Independent verification procedures

need to be established to validate the instance documents to ensure that

appropriate taxonomy and tags have been applied before posting to Web

server.

c. Audit Scope and Timeframe. Currently, auditors are responsible for printed

financial statements and other materials associated with the statements. What

will be the impact on the scope of auditor responsibility as a consequence of

real-time distribution of financial statements across the Internet? Should

auditors also be responsible for the accuracy of other related data that

accompany XBRL financial statements, such as textual reports?

8. Although both use tags (words that are bracketed by the symbols < and >) and

attributes such as Doe, John, the way in which these tags and attributes are used

differs. In the HTML, the tags have predefined meaning that describes how the

attributes will be presented in a document. In the case of the XML the tags are

customized to the user, and the user’s application can read and interpret the tagged

data.

9. Much of the data used for middle and higher-level decision making must come

from data sources outside of the traditional information systems. Examples of such
data would be marketing data collected by the marketing department, new product

design specifications generated by research and development, demographic

information from government sources, competitor information from new sources,

exchange rates from the financial press, union requirements from union

representatives, etc.

10. Both types of reports are very important. The scheduled reports are important for

controlling the day-to-day operations. The on-demand reports are very important and

helpful in sudden situations that arise and demand immediate attention. The ability to

retrieve information in a crisis situation is crucial.

11. Scheduled reports are prepared according to an established time frame. The

reports contain information in a pre-formatted manner. The multiple users become

accustomed to the reports and are able to focus on the information which is

necessary to make a specific type of decision. These reports are designed this way

for processing and printing efficiency. If the reports contain too much information,

however, the trade-off is inefficient processing by the user due to information

overload.

12. An example where timeliness is more important in accounting information

systems occurs for year-end accruals. An exact number regarding the cost of utilities

may not be available for three or four weeks, yet the accrued liability account must

reflect this liability on the year-end financial statements. Thus, an estimate is more

important to have during the financial statement preparation period than having no

amount while waiting for the exact number.

13. Downward flows represent goals for managers such as budget goals. The goals

are used to direct and motivate managers. Upward flows report performance

measurements, and these are used to evaluate management performance. The

upward and downward goals are related. The performance measurements (upward

flows) are compared to the goals (downward flows).

14. The verification model uses a drill-down technique to either verify or reject a

user’s hypothesis. The discovery model uses data mining to discover previously

unknown but important information that is hidden within the data. This type of system

employs inductive learning to infer information from detailed data by searching for

recurring patterns, trends, and generalizations. This approach is fundamentally

different from the verification model in that the data are searched with no specific

hypothesis driving the process.

15. A data warehouse is a relational database management system that has been

designed specifically to meet the needs of data mining. The warehouse is a central

location that contains operational data about current events (within the past 24

hours) as well as archived operational data relating to events that have transpired

over many years. Data are coded and stored in the warehouse in detail and at

various degrees of aggregation to facilitate identification of recurring patterns and

trends. A transaction processing database contains current data and that facilitates

the processing of economic events. It is not designed to support historical analysis of

past events.

16. The production department is held accountable for controllable costs which

relate to the production demand. Profit centers are not appropriate since they include

non-controllable items and measure the performance by the profit center’s

contribution (including revenue) after non-controllable costs. The production

department has no control over the activities of the sales and marketing department,

thus, a cost center is more appropriate since it holds the production department

responsible for measures they can control.

17. A performance measure based solely upon quantity of production output can

adversely affect the quality of the product. The foreman may push for production of

more units, while disregarding the quality. Further, in an attempt to produce more

units, the foreman may push workers to work in an inefficient manner with respect to

raw materials usage. The workers may become sloppy and use more raw materials.

Further, the workers may get frustrated with being pushed to produce more than is

realistic.

18. Managers may choose not to replace equipment when it needs to be replaced, in

order to reduce the asset base, thus decreasing the denominator in the ROI figure.

Not replacing old equipment may cause a firm to produce less efficiently, and

actually in the long-run drive up raw materials scrap cost and labor costs due to

reworks. These manipulations are not good for the firm in the long-run because the

firm may find that it is operating a manufacturing process with tattered and obsolete

equipment. Unfortunately, by the time the information becomes available, the

manager may either be promoted or have obtained a higher position in another

company based on his seemingly great ROIs from the past.

19. Too much information can cause the user to spend unproductive and

unnecessary time weeding through reports to get to the relevant components. Also,

information overload can result and may cause the user to bypass or misinterpret the

relevant information when it is hidden in a deluge of other data.

20. Unlike the prescriptive and predictive models, descriptive analytics does not

interpret the data and provide an answer to the users.

21. Two internal threats to big data security include:

a. Access Privileges: Sometimes individuals are mistakenly granted excessive

access privileges to internal networks and data.

b. Password Control: Most organizations employ a reusable password system.

If a password can be guessed or otherwise observed by a computer criminal, he or

she can use it to access the system.

22. The Three Vs of big data analytics:

a. Volume is the “V” most associated with big data, which often involves

terabytes, petabytes, and even exabytes of data

b. Velocity refers to the speed at which big data must be analyzed. The vast

volumes of data and the growing needs for rapid analysis, particularly as big data

analytics expands into the machine learning and artificial intelligence fields.

c. Variety is a major factor in big data. Estimates are that 80% of big data are

unstructured and are derived from audio, video, timeseries data, realtime streaming

data, external Web data, external social media and a wide variety of other data

supplied by the vast and growing array of IoT (internet of things) devices.
MULTIPLE CHOICE

1. B

2. C

3. B

4. C

5. B

6. D

7. E

8. A

9. A

10. E

11. E

12. B

13. D

14. B

15. B
PROBLEMS

1. GENERAL LEDGER SYSTEM OVERVIEW

 2. FINANCIAL REPORTING PROCESS

1. Capture the transaction TPS

2. Record transaction in special journal TPS

3. Post to the subsidiary ledger TPS

4. Post to the general ledger GLS

5. Prepare the unadjusted trial balance FRS

6. Make adjusting entries FRS

7. Journal and post adjusting entries GLS

8. Prepare the adjusted trial balance FRS

9. Prepare the financial statements FRS

10. Journalize and post the closing entries GLS

11. Prepare the post-closing trial balance FRS

3. XBRL

a. Yes it is appropriate. XBRL is typically used for reporting aggregated

financial data but can also be applied to communicating information

pertaining to individual transactions and internal business units. To make

the data useful to others they need to be organized, labeled, and reported

in a manner that is generally accepted. This involves mapping the

organization’s internal data to XBRL taxonomy elements to produce an

XBRL instance document. Companies that use native-XBRL database

technology internally as their primary information storage platform can

speed the process of reporting. Users can import XBRL documents into

internal databases and analysis tools to greatly facilitate decision making.

b. Enhancements realized by using XBRL:

1. Can provide the financial community with a standardized method for

 preparing, publishing, and automatically exchanging financial information,

including financial statements of publicly held companies.

2. XBRL documents can be placed on an intranet server for internal use.

3. They can be placed on an extranet for dissemination to customers or

trading partners.

c. Areas of specific control concerns include the following

1. TAXONOMY CREATION. Taxonomy may be generated

incorrectly, which results in an incorrect mapping between data and

taxonomy elements that could result in material misrepresentation of

financial data. Controls must be designed and put in place to ensure

the correct generation of XBRL taxonomies.

2. TAXONOMY MAPPING ERROR. The process of mapping the

internal database accounts to the taxonomy tags needs to be

controlled. Correctly generated XBRL tags may be incorrectly

assigned to internal database accounts, resulting in material

misrepresentation of financial data.

3. VALIDATION OF INSTANCE DOCUMENTS. Once mapping is

complete and tags have been assigned to internal database elements,

XBRL instance documents (reports) can be generated. Independent

verification procedures need to be established to validate the instance

documents to ensure that appropriate taxonomy and tags have been

applied before posting to a web server.

4. INTERNAL CONTROL. An individual who handles source documents,

updates subsidiary ledgers, and prepares journal vouchers should not also post to
 Chapter 8 Page 355

the general ledger accounts. Performing these two functions violates the

segregation of duties principle of separating transaction authorization from

transaction execution. This combination of functions allows for errors to go

undetected and opens the door to fraud. A separate general ledger clerk should

post the entries to the general ledger and reconcile the control accounts in the

general ledger to the corresponding subsidiary ledger.

5. DATABASE GL SYSTEM. See drawing on the following page.

The only change made is that the daily sales transactions are used to

immediately update the sales file. The daily applications create cumulative

totals of each day’s transactions on disk. The totals are merged with the

other applications’ totals prior to updating the general ledger and other

database files.
Chapter 8 Page 356
 Chapter 8 Page 357

6. DATABASE GL SYSTEM – REAL TIME

.
 Chapter 8 Page 358

7. INTERNAL CONTROL

The journal voucher listing and general ledger change reports allow the transactions

to be analyzed for accuracy and completeness. Any errors noted can be changed

and input into the system prior to preparing the financial statements.
 Chapter 8 Page 359

8. ORGANIZATIONAL CHART
 Chapter 8 Page 360

9. DECISION LEVEL

Determining the mix of products to manufacture this year—tactical

Examining whether the number of defective goods manufactured is within a certain

range—operational

Expanding a product line overseas—strategic

Determining the best distribution route—tactical

Examining whether the cost of raw materials is within a certain range—managerial

Examining whether personnel development cost is rising—managerial

Employing more automated manufacturing this year—Managerial

Examining whether the amount of scrap material is acceptable—operational

Building a new plant facility—strategic

Examining whether employees’ attitudes are improving—managerial

Examining whether production levels are with a predicted range—managerial and

operational

Acquiring a supplier—tactical

Increasing production capabilities this year by purchasing a more efficient piece of

machinery—tactical

Closing down a plant—strategic

 Chapter 8 Page 361

10. REPORT CATEGORIZATION

Cash Disbursements Listing—scheduled

Overtime Report—scheduled if routine, on-demand if non-routine

Customer Account History—on-demand

Inventory Stock-out Report—on-demand

Accounts Receivable Aging List—on-demand

Duplicate Paycheck Report—scheduled

Cash Receipts Listing—scheduled

Machine Maintenance Report—scheduled

Vendor Delivery Record Report—on-demand

Journal Voucher Listing—scheduled

Investment Center Report—scheduled

Maintenance Cost Overruns Report—on-demand

 Chapter 8 Page 362

11. ORGANIZATION STRUCTURE AND SPAN OF CONTROL

a. Organization structure A:

1. Advantages/disadvantages:

Advantages:

i. A hierarchy and unity of command.

ii. A limited span of control providing greater centralized decision

making.

iii. More available opportunities for promotions to supervision or

management.

Disadvantages:

i. Lack of flexibility and employee creativity.

ii. Lack of global knowledge of the organizational objectives.

iii. Increased labor costs.

2. Span of control: Management will tightly control a few employees and

closely supervise the employees’ work tasks, thereby increasing

timeliness.

3. Effect on behavior: The employee will tend to be more structured, risk

averse, and know what is expected from his/her performance.

b. Organization structure b

1. Advantages/Disadvantages

Advantages:

i. Fewer levels of management providing for quicker decision

making.
 Chapter 8 Page 363

ii. Decreased labor costs.

Disadvantages:

i. Misunderstood, unclear performance objectives and an

increased risk of inaccuracy in performing tasks due to

reduced supervision.

ii. Fewer available management opportunities, possibly leading to

employee turnover.

iii. Too much of managers’ time being spent on supervision.

2. This flexible organizational structure will demand greater employee

participation causing increased creativity.

3. The employee will be motivated by the increase in responsibility in

organizational objectives. However, (s) he may lack access to supervisory

time and/or sufficient training.

c. Factors that should consider when determining the appropriate span of

control include the:

i. Competence and qualifications of the employees.

ii. Corporate culture and preferred style of management of the

organization.

iii. Nonsupervisory, task performance demands on the manager as

well as the tasks to be supervised.

iv. The risk level and frequency of new problems.

 Chapter 8 Page 364

12. ORGANIZATION STRUCTURE AND SPAN OF CONTROL

a. Organization structure A

1. Advantages/Disadvantages

Advantages:

i. Centralized decision making.

ii. Close supervision of subordinates.

iii. Increased opportunities for promotion.

Disadvantages:

i. Lack of flexibility/creativity.

ii. More difficult vertical communication.

iii. Increased costs for additional management personnel.

2. The resulting span of control will:

 Allow for tighter control over employees.

 Afford timelier task completion and problem resolution as the

supervisors are closer to everyday operations.

3. Effect on Behavior: As a result of organizational structure A,

employees are likely to have a clear understanding of what is expected of

them. However, because of the tighter span of control the employees may

avoid making decisions and taking risks.

b. Organization structure b

1. Advantages/Disadvantages

Advantages:

i. Quicker decision making.

 Chapter 8 Page 365

ii. Lower costs resulting from fewer management personnel.

Disadvantages:

i. Increased risk of inaccuracy in performing tasks due to reduced

supervision.

ii. Fewer available promotional opportunities which may lead to

increased employee turnover.

2. The span of control will:

 Afford employees greater autonomy.

 Result in increased creativity.

3. As a result of the organizational structure A employees are likely to be

motivated by greater participation as their input has greater value.

However, employees may not be adequately trained for additional

responsibilities.

c. The factors that should consider when determining the appropriate span of

control include the:

i. Competence and qualifications of the employees.

ii. Corporate culture and preferred style of management of the

organization.
 Chapter 8 Page 366

13. CMA-ADAPTED ORGANIZATIONAL STRUCTURE

a.

MCC

1. Emphasis on rules and procedures. Narrow job definitions. Centralized

decision making.

2. Based on position and power. Adhere to chain of command.

3. Objective measures (i.e., standard cost). Focused on results.

4. Level and importance of position. Performance against standards.

Organic Alden

1. Few formal rules or guidelines. Greater individual autonomy.

Decentralized decision making.

2. Based on skill and expertise. Adaptable to situations.

3. Subjective measures. Focus on expertise/activities.

4. Experience in area of expertise. Recognition by profession.

b.

1. The benefits Morlot Container Corporation might derive from an

organic structure include:

 Reduced boredom on the job through enlarged and enriched

position definitions.

 A more creative work environment that would encourage employee

suggestions and innovations.

2. The problems that Alden Computers might encounter from using an

organic structure include:

 Chapter 8 Page 367

 Employee uncertainty or confusion arising from undefined lines of

authority and/or informal job descriptions.

 Inconsistent decision making because of decentralized decision

making.

3. The benefits that could accrue to Alden Computers from the

introduction of a mechanistic structure include:

 Reduced job stress because of better defined lines of authority and

more formal job descriptions.

 Improved goal congruence due to more structured planning

procedures.

14. CMA-ADAPTED PERFORMANCE MEASURES

a. General criteria that should be used in selecting performance measures to

evaluate operating managers include the following. The measures should:

i. be controllable by the manager and reflect the actions and decisions

made by the manager in the current period.

ii. be mutually agreed upon, clearly understood, and accepted by all the

parties involved.

iii. address the efficiency and effectiveness of operations.

b. A major expansion of Star Paper’s plant was completed in April 1990. This

expansion included additions to the production-line machinery and the

replacement of obsolete and fully depreciated equipment. As a result, the value

of the division’s asset base increased considerably. While productivity

undoubtedly increased during the first year in the expanded plant, the increase
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was not immediate nor sufficient to offset the increase in the asset base as there

is likely to be a “catch-up” period.

c. Apparent weaknesses in the performance evaluation process at Royal

Industries include the following:

i. There was no mutual agreement on the use of return on assets (ROA)

as the only measurement of performance.

ii. The feedback from Fortner was insufficient. Fortner indicated that she

would get back to Harris about his questions concerning ROA but she did

not do so.

iii. There is only one single measure of performance, which may give a

distorted picture of actual performance as is the case with Star Paper. In

addition, a single measure could encourage division management to make

poor decisions, i.e., delaying the purchase of equipment so that ROA will

remain high.

d. Multiple performance evaluation criteria would be appropriate for the

evaluation for the Star Paper Division. The criteria suggested by George Harris

would take into account more of the results of the key decisions being made by

the manger, are not conflicting, and emphasize the balance of profits with the

control of current assets. These three measures are controllable by the manager

and, in conjunction with ROA, would be more representative of the success of

the business.
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15. PROBLEM IDENTIFICATION

a. declining profits—symptom; possible problems-production process, which

is producing defective products and causing a decline in sales or increased

costs due to high maintenance of outdated machinery

b. defective production process—problem; possible symptoms-declining sales

or increased COGS due to labor time for reworks

c. low quality raw materials—problem; possible symptoms-declining sales or

increased COGS

d. shortfall in cash balance—symptom; possible problems-loose accounts

receivable collections or over purchase of inventory

e. declining market share—symptom; possible problems-producing the wrong

product mix (i.e. producing unwanted items) or poor customer service

f. shortage of employees in the accounts payable department—problem;

possible symptoms-increased discounts lost or increased errors in processing

tasks

g. shortage of raw material due to a drought in the Midwest—problem;

symptom-declining profits or unfilled customer orders. NOTE: could also be

viewed as a symptom of relying too heavily on one supplier.

h. inadequately trained workers—problem; possible symptoms-higher COGS

or decreased sales. NOTE: could also be viewed as a symptom of poor

training policies/ procedures at the company

i. decreasing customer satisfaction—symptom-possible problems-defective

production process or poor distribution means

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16. MANAGEMENT BY EXCEPTION

a. Standard Cost System

1. The characteristics that should be present in a standard cost

system in order to encourage positive employee motivation include:

 participation in setting standards from all levels of the organization

including purchasing, engineering, manufacturing, and accounting.

 the integration of organizational communication by translating the

organizational goals and objectives into monetary terms for the

employees.

 support of the standard cost system by management.

 incorporation of standards that are perceived as achievable and

accurate and apply to controllable costs.

2. A standard cost system should be implemented to positively motivate

employees by:

 communicating the corporate objectives of a standard cost system.

 soliciting from employees standards for which they will be held

accountable.

 tying the individual’s performance in the standard cost system to

the individual’s performance review and reward system.

b. Variance Analysis

1. “Management by exception” is the situation where management’s

attention is focused only on those items that deviate significantly from the

standard. The assumption is that, foregoing a thorough, detailed analysis

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of all items, the manager has more time to concentrate on other

managerial activities.

2. The behavioral implications of “management by exception” include both

positive and negative implications. On the positive side, this technique

increases management efficiency by concentrating only on material

variances, allowing time for the manager to concentrateon other activities.

On the negative side, managers tend only to focus on the negative

variances rather than positive ones limiting their employee interactions to

negative reinforcement or punishment. This technique may not indicate

detrimental trends at an early stage and fragmentation of efforts can occur

from dealing only with the specific problems rather than global issues.

c. Employee behavior could be adversely affected when “actual to budget”

comparisons are used as the basis for performance evaluation. Employees may

subvert the system and submit budgets that are low so they can meet or exceed

the budget favorably, thereby averting negative reinforcement for varying

unfavorably to budget. There can be a minimal level of motivation since

exceptional performance is not rewarded. Employees may strive for mediocrity

and not work up to their full potential.

17. DATA ANALYTICS – CLOUD SERVICE PROVIDER

Student responses may vary, but memos should address the following points:

1) CEO’s Perception of the

 Organizations invest considerable time and resources in data

analytics because the resulting information is of strategic value to it.

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 Such information is also of value to business competitors and cyber

criminals.

 Like any other asset, big data needs to be controlled.

2) Nature of the Risks

 Big Big data outsourcing activities are not riskless endeavors

 Big data provides a big target for hackers.

 Because cloud computing as location-independent computing, it

involves networks of service and subservice providers working in

parallel therefore, a client-firm’s data may be distributed among many

anonymous subservice providers across the Internet.

 The security procedures in place at these locations become an

obvious control concern.

 The risks are many.

o Hackers from the Internet and employees within the service

provider’s or sub service provider’s operations are still in play.

o Failure to perform. The service provider does not deliver at all

or provides unreliable results upon which the client organization

relies.

o Loss strategic advantage. Flawed information may be

incongruence with a firm’s strategic business plan resulting in

flawed strategic decision making.

3) Resolution to Auditors Concerns

 To mitigate these risks the service providers and subservice

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providers external auditors may issue a Statement on Standards for

Attestation Engagements No. 16 (SSAE 16) report to the auditors of the

client company.

 SSAE 16 is the definitive standard by which the client firm’s auditors

can determine whether the controls at the third-party service provider

are free from material weaknesses.