ch15 - CHAPTER 15 DISCUSSION QUESTIONS 1. Management...

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Unformatted text preview: CHAPTER 15 DISCUSSION QUESTIONS 1. Management accounting provides many tools that enable managers to accurately analyze and evaluate company perform- ance. These tools enable managers to pin- point problems. Once managers identify problems, they can plan and implement strategies to fix the problems and gain a competitive advantage. Also, an under- standing of the various cost concepts allows managers to make correct costing and pri- cing decisions, which can result in a great competitive advantage. 2. Management accounting information can help companies to be competitive and profit- able because it helps managers understand product costs and other costs and how changes in volume, prices, and other factors will affect profitability. With more accurate information, management knows where to cut costs, where productivity should be increased, and so forth. 3. Donaldson Brown developed the idea of us- ing the return on investment (ROI) formula to evaluate the financial performance of the different divisions of a company. This idea was revolutionary because it came to be widely used by management in discovering and analyzing problems across large and di- verse organizations. It continues to be heav- ily used today as a valuable management tool in any industry. 4. Managers (internal decision makers) use dif- ferent types of accounting information than do investors or creditors (outside decision makers) partly because they make different types of decisions. More importantly, man- agement accounting provides much more detailed and proprietary information to com- pany managers compared to the information provided by financial accounting to outside investors and creditors. Many examples can be used to illustrate the differ- ences between financial and management accounting. Two major differences—time fo- cus and segments—are discussed in detail here. Managers will spend a lot of effort projecting the profitability of potential decisions on sales by assessing the impact of variable and fixed costs (such as advert- ising expenditures). On the other hand, an investor doesn’t have access to variable and fixed cost data and so will analyze the sales trend in prior years’ income statements (past time focus) to evaluate the company’s growth potential. A manager would need to know the projected sales of a particular product (segment) to decide how many units to purchase or produce, while an investor would be interested in total sales (whole organization) to compare the company to others in the industry. 5. We would disagree with the statement for two reasons. First, managers realize that outside investors and creditors make invest- ment and lending decisions based in part upon these financial statements. If the or- ganization needs to raise capital, its finan- cial performance (as measured by these statements) must be favorable. Second, external financial statements are also sig- nals for management action. If profits are falling or debt is becoming too high as a per-...
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This note was uploaded on 06/20/2011 for the course ECON 123 taught by Professor Mrews during the Spring '11 term at Korea Advanced Institute of Science and Technology.

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ch15 - CHAPTER 15 DISCUSSION QUESTIONS 1. Management...

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