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CHAPTER 8 FINANCIAL REPORTING AND MANAGEMENT REPORTING SYSTEMS REVIEW QUESTIONS

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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.

1. 2

capture the transaction record in special journal

3. post to subsidiary ledger

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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

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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: 1. have record keeping responsibility for special journals or subsidiary ledgers, 2. 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.

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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

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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.

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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 1. typically long-term in nature, 2. have a high impact on the firm, 3. require highly-summarized information, 4. typically nonrecurring problems/opportunities, and 5. are uncertain in nature. Tactical planning decisions are 1. typically medium-term in nature, 2. have a limited impact on the firm, 3. require detailed information, 4. are typically periodically recurring problems/opportunities, and 5. are highly certain in nature. Management control decisions are 1. typically medium-term in nature, 2. have a narrower impact on the firm, 3. require moderately summarized information, 4. are typically periodically recurring problems/opportunities, and 5. are uncertain in nature. Operational control decisions are 1. typically short-term in nature, 2. have the narrowest impact on the firm, 3. require highly detailed information, 4. are typically periodically recurring problems/opportunities, and 5. are highly certain in nature.

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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.

a.

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

decision maker b. 27.

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

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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.

a.

setting financial goals b.

measuring and reporting performance

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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.

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36.

Ad hoc reports allow managers to retrieve information for situations that were not anticipated. These reports allow the managers to retrieve the information very quickly, thus allowing the managers to respond to the situation much quicker and more effectively. An example would be a situation in which an accounting manager realizes that an incorrect tax rate has been applied to all customer invoices for goods shipped to the state of New York. The manager can then retrieve a report which lists all invoices for shipments to New York. This information can be used to either send an invoice correction, or at least to update the state taxes payable account.

37.

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.

38.

direct labor, raw materials, overhead and, production level variances. The variances quantify efficiency and/or spending deviations and facilitate management by exception.

39.

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. See drawing on following page.

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DISCUSSION QUESTIONS

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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. Prenumbering 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, and any another 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, or are fabricated, or are 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.

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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.

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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: 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. 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. 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

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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 HTM 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.

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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.

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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.

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16.

The production department is held accountable for controllable costs which relate to the production demand. Profit centers are not appropriate since they include noncontrollable 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.

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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.

MULTIPLE CHOICE 1.

B

2.

D

3.

C

4.

C

5.

C

6.

A

7.

B

8.

D

9.

A

10.

E

11.

B

12.

A

13.

B

14.

A

15.

B

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PROBLEMS 1.

2. 2

Record transaction in special journal

TPS

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3.

6

Make adjusting entries

FRS

1

Capture the transaction

TPS

11 Prepare the post-closing trial balance

FRS

8

Prepare the adjusted trial balance

FRS

9

Prepare the financial statements

FRS

7

Journal and post adjusting entries

GLS

3

Post to the subsidiary ledger

TPS

4

Post to the general ledger

GLS

10 Journalize and post the closing entries

GLS

5

FRS

a.

Prepare the unadjusted trial balance

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.

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.

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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. 4.

If Leslie is preparing the journal vouchers and/or posting to the subsidiary ledgers, she should not be entering the information into the general ledger. Performing these two functions is not in conformance with segregation of functions. 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. Having source documents, such as journal vouchers, without preassigned numbers is very risky. If a separate general ledger clerk did exist as mentioned above, this person could visit Leslie’s office and inconspicuously take a couple of journal vouchers without anyone knowing (since the forms are not numbered). The general ledger clerk could then enter unauthorized entries into the general ledger. Further, the possibility that Leslie makes an error in recording journal voucher numbers incorrectly is highly possible.

5. 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.

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6.

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7.

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. For Figure 810, the update general ledger procedure would include a listing of the journal voucher listing and general ledger change report. Again, any noted errors can be corrected prior to the generation of financial statements.

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8.

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9.

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

10.

Cash Disbursements Listing—scheduled Overtime Report—scheduled if routine, on-demand if non-routine Customer Account History—on-demand

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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 11. a.

1.

For the original organizational structure proposed by Roland Ford, the

advantages include:  a hierarchy and unity of command.  a limited span of control providing greater centralized decision making.  more available opportunities for promotions to supervision or management. The disadvantages include: 

lack of flexibility and employee creativity.



lack of global knowledge of the organizational objectives.



increased labor costs.

2. Management will tightly control a few employees and closely supervise the employees’ work tasks, thereby increasing timeliness.

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3. The employee will tend to be more structured, evasive of risk, and know what is expected from his/her performance. b.

1.

For the flat organizational structure proposed by Martha

Sanderson, the advantages include: 

fewer levels of management providing for quicker decision making.



decreased labor costs.

The disadvantages include:  misunderstood, unclear performance objectives and an increased risk of inaccuracy in performing tasks due to reduced supervision.  fewer available management opportunities, possibly leading to employee turnover.  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.

The factors that Roland Ford and Martha Sanderson should consider

when determining the appropriate span of control include the: 

competence and qualifications of the employees.



corporate culture and preferred style of management of the organization.



nonsupervisory, task performance demands on the manager as

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well as the tasks to be supervised.  12. a.

1.

the risk level and frequency of new problems.

Advantages of the original organizational structure proposed by Donald

Jenkins include: 

centralized decision making.



close supervision of subordinates.



increased opportunities for promotion.

Disadvantages of the original organizational structure include: 

lack of flexibility/creativity.



more difficult vertical communication.



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. As a result of the organizational structure proposed by Donald Jenkins, the 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.

1.

The advantages of the flat organizational structure proposed by

Beverly Kiner include: 

quicker decision making.

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

lower costs resulting from fewer management personnel.

The disadvantages of the flat organizational structure include: 

increased risk of inaccuracy in performing tasks due to reduced supervision.



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 proposed by Beverly Kiner, 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 Donald Jenkins and Beverly Kiner should consider when determining the appropriate span of control include the: 

competence and qualifications of the employees.



corporate culture and preferred style of management of the organization.

13.

a. Mechanistic MCC 1. Emphasis on rules and procedures. Narrow job definitions. Centralized decision making.

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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: 

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:

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

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. a.

General criteria that should be used in selecting performance measures to evaluate operating managers include the following. The measures should: 

be controllable by the manager and reflect the actions and decisions made by the manager in the current period.



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



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 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: 

There was no mutual agreement on the use of return on assets (ROA) as the only measurement of performance.

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

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.



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. 15. a.

1.

Responsibility accounting is a system of accounting that recognizes

various responsibility or decision centers throughout an organization, and reflects the plans and actions of each of these centers by assigning particular revenues and costs to the one having the pertinent responsibility for making decisions about these revenues and costs. 2. The benefits that accrue to a company using responsibility accounting include the following: 

The development of responsibility budgets and plans encourages

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managers to plan ahead and promotes goal congruence. 

Because of participation in the planning process, the company guidelines established are more readily accepted as achievable.



The responsibility accounting plans provide managers with clear guidelines for day-to-day decisions and free management from daily operations.



Responsibility

accounting

affords

management

performance

evaluation criteria. 3. The advantages of responsibility accounting to the managers of a firm include the following: 

Under the guidelines of responsibility accounting, managers are responsible only for those items over which they have control.



Because responsibility accounting facilitates the delegation of decision making, managers are afforded greater freedom of action without daily supervision.



Managers know what is expected of them and on what basis their performance will be evaluated.



The ability to participate in decision making and exercise control helps managers develop leadership skills.

b.

1.

The features of the budget presentation that would make it

attractive to the managers include the following: 

The managers are only responsible for costs that are directly under their control; arbitrary allocations have been avoided.

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

The budget presentation shows the managers exactly how their segment fits into the entire company and how their units contribute to the overall well being of the firm.



The presentation clearly depicts those areas each manager is responsible for and establishes the criteria on which his/her performance will be evaluated.

2. Recommendations to improve the budget process might include the following: 

The budget could be presented using the contribution approach and segregating variable and fixed costs.



There could be a comparison to prior year actuals so that managers know if their contributions have increased or decreased.

 16. a.

1.

The expense items could be presented as a percentage of sales.

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.

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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.

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 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 concentrate on 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.

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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. a.

1.

Departmental

income

statements

are

considered

a

form

of

communication because they: 

are written documents that provide information.



measure performance against previously established objectives.



provide feedback to involved employees.

2. The format of the departmental income statements is effective because it provides: 

a comparison of actual performance to budgeted amounts.



detailed information by line item.



total manageable contribution for each department.

In order to improve the effectiveness of the departmental income statements, the format could be changed to include: 

year-to-date budgeted amounts and actual performance.



volume indicators that provided the basis for the budget such as projected membership.

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

additional statistical data such as number of employees in the department, the number of current memberships, etc.

b. Positive as well as negative variances can be unfavorable as the absence of expenditures may indicate that important activities have not been accomplished. For example, the statement shows a 46.6% positive variance for promotion and advertising expense. This reduced level of expenditures could be directly linked to declining membership and lower subscription revenues. The variance may also be caused by good planning and efficiencies within the department, but this is not clear until the variance has been analyzed. c.

In order to encourage Daniel Riley to have all significant variances reviewed, Marie Paige and Jon Franklin could prepare an analysis of all variances, showing by example how extensive analysis of all variances is beneficial, and submit these analyses with a cover memo directly to Riley.