Chapter 1Introduction to Cost Accounting

TRUE/FALSE
2. Financial accounting is most concerned with meeting the needs of internal users.
ANS: F

PTS: 1

DIF: Easy

OBJ: 1-1

3. Financial accounting is most concerned with meeting the needs of external users.
ANS: T

PTS: 1

DIF: Easy

OBJ: 1-1

4. Managerial accounting is most concerned with meeting the needs of internal users.
ANS: T

PTS: 1

DIF: Easy

OBJ: 1-1

5. Financial accounting is most concerned with meeting the needs of external users.
ANS: T

PTS: 1

DIF: Easy

OBJ: 1-1

6. Financial accounting is highly regulated by rules and regulations.

ANS: T

PTS: 1

DIF: Easy

OBJ: 1-1

7. Managerial accounting is highly regulated by rules and regulations.

ANS: F

PTS: 1

DIF: Easy

OBJ: 1-1

8. Financial accounting is most concerned with addressing the needs of the firm as a whole
ANS: T

PTS: 1

DIF: Easy

OBJ: 1-1

9. Managerial accounting is most concerned with addressing the needs of the firm as a whole
ANS: F

PTS: 1

DIF: Easy

OBJ: 1-1

10. Financial accounting is most concerned with addressing the needs of individual departments of the
firm.
ANS: F

PTS: 1

DIF: Easy

OBJ: 1-1

11. Managerial accounting is most concerned with addressing the needs of individual departments of the
firm.
ANS: T

PTS: 1

DIF: Easy

OBJ: 1-1

12. Cost accounting serves as a bridge between financial and managerial accounting.
ANS: T
COMPLETION

PTS: 1

DIF: Easy

OBJ: 1-1

1. The branch of accounting that is most concerned with addressing the needs of the firm as a whole is
___________________ accounting
ANS: financial
PTS: 1

DIF: Easy

OBJ: 1-1

2. The branch of accounting that is most concerned with addressing the needs of specific departments of
the firm is ___________________ accounting
ANS: managerial
PTS: 1

DIF: Easy

OBJ: 1-1

3. The branch of accounting that serves as a bridge between financial and managerial accounting is
__________ accounting.
ANS: cost
PTS: 1

DIF: Easy

OBJ: 1-1

4. When an organization attempts to adjust its profits to meet a specific target, it is guilty of
____________________________.
ANS: earnings management
PTS: 1

DIF: Easy

OBJ: 1-3

5. The expression of what an organization wishes to accomplish and how it will serve its customers is
contained in the __________________________.
ANS: mission statement
PTS: 1

DIF: Easy

OBJ: 1-4

6. The plan in which an organization indicates how it will fulfill its goals is referred to as a __________.
ANS: strategy
PTS: 1

DIF: Easy

OBJ: 1-4

7. A function or activity in which an organization seeks to excel above its competitors is a

___________________________.
ANS: core competency.
PTS: 1

DIF: Easy

OBJ: 1-4

8. The way in which authority and responsibility are distributed in an organization is

_________________________.
ANS: organizational structure

PTS: 1

DIF: Easy

OBJ: 1-5

14. Outcomes that have resulted from past actions are also referred to as _________ indicators.
ANS: lag
PTS: 1

DIF: Easy

OBJ: 1-7

15. Data that reflects future financial and non-financial outcomes is referred to as ________ indicators.
ANS: lead
PTS: 1

DIF: Easy

OBJ: 1-7

MULTIPLE CHOICE
1. In comparing financial and management accounting, which of the following more accurately describes
management accounting information?
a. historical, precise, useful
b. required, estimated, internal
c. budgeted, informative, adaptable
d. comparable, verifiable, monetary
ANS: C

PTS: 1

DIF: Easy

OBJ: 1-1

2. Management and financial accounting are used for which of the following purposes?
Management accounting
a.
b.
c.
d.

Financial accounting

internal
external
internal
external

ANS: A

external
internal
internal
external

PTS: 1

DIF: Easy

OBJ: 1-1

3. One major difference between financial and management accounting is that

a. financial accounting reports are prepared primarily for users external to the company.
b. management accounting is not under the jurisdiction of the Securities and Exchange
Commission.
c. government regulations do not apply to management accounting.
d. all of the above are true.
ANS: D

PTS: 1

DIF: Easy

OBJ: 1-1

4. Which of the following statements about management or financial accounting is false?

a. Financial accounting must follow GAAP.
b. Management accounting is not subject to regulatory reporting standards.
c. Both management and financial accounting are subject to mandatory recordkeeping
requirements.
d. Management accounting should be flexible.
ANS: C

PTS: 1

DIF: Easy

OBJ: 1-1

5. Management accounting
a. is more concerned with the future than is financial accounting.
b. is less concerned with segments of a company than is financial accounting.
c. is more constrained by rules and regulations than is financial accounting.
d. all of the above are true.
ANS: A

PTS: 1

DIF: Easy

OBJ: 1-1

6. Modern management accounting can be characterized by its

a. flexibility.
b. standardization.
c. complexity.
d. precision.
ANS: A

PTS: 1

DIF: Easy

OBJ: 1-1

7. Which of the following is not a valid method for determining product cost?
a. arbitrary assignment
b. direct measurement
c. systematic allocation
d. cost-benefit measurement
ANS: D

PTS: 1

DIF: Moderate

OBJ: 1-1

8. Broadly speaking, cost accounting can be defined as a(n)

a. external reporting system that is based on activity-based costs.
b. system used for providing the government and creditors with information about a
company's internal operations.
c. internal reporting system that provides product costing and other information used by
managers in performing their functions.
d. internal reporting system needed by manufacturers to be in compliance with Cost
Accounting Standards Board pronouncements.
ANS: C

PTS: 1

DIF: Easy

OBJ: 1-1

9. Cost accounting is directed toward the needs of

a. regulatory agencies.
b. external users.
c. internal users.
d. stockholders.
ANS: C

PTS: 1

DIF: Easy

OBJ: 1-1

10. Cost accounting is necessitated by

a. the high degree of conversion found in certain businesses.
b. external reporting requirements for manufacturing companies.
c. management's need to be aware of all production activities.
d. management's need for information to be used for planning and controlling activities.
ANS: A

PTS: 1

DIF: Moderate

OBJ: 1-1

11. Financial accounting

a. is primarily concerned with internal reporting.
b. is more concerned with verifiable, historical information than is cost accounting.
c. focuses on the parts of the organization rather than the whole.

d. is specifically directed at management decision-making needs.

ANS: B

PTS: 1

DIF: Easy

OBJ: 1-1

12. Financial accounting and cost accounting are both highly concerned with
a. preparing budgets.
b. determining product cost.
c. providing managers with information necessary for control purposes.
d. determining performance standards.
ANS: B

PTS: 1

DIF: Easy

OBJ: 1-1

13. Which of the following topics is of more concern to management accounting than to cost accounting?
a. generally accepted accounting principles
b. inventory valuation
c. cost of goods sold valuation
d. impact of economic conditions on company operations
ANS: D

PTS: 1

DIF: Moderate

OBJ: 1-1

14. Cost and management accounting

a. require an entirely separate group of accounts than financial accounting uses.
b. focus solely on determining how much it costs to manufacture a product or provide a
service.
c. provide product/service cost information as well as information for internal decision
making.
d. are required for business recordkeeping as are financial and tax accounting.
ANS: C

PTS: 1

DIF: Easy

OBJ: 1-1

15. Which of the following statements is true?

a. Management accounting is a subset of cost accounting.
b. Cost accounting is a subset of both management and financial accounting.
c. Management accounting is a subset of both cost and financial accounting.
d. Financial accounting is a subset of cost accounting.
ANS: B

PTS: 1

DIF: Moderate

OBJ: 1-1

16. Which of the following statements is false?

a. A primary purpose of cost accounting is to determine valuations needed for external
financial statements.
b. A primary purpose of management accounting is to provide information to managers for
use in planning, controlling, and decision making.
c. The act of converting production inputs into finished products or services necessitates cost
accounting.
d. Two primary hallmarks of cost and management accounting are standardization of
procedures and use of generally accepted accounting principles.
ANS: D

PTS: 1

DIF: Moderate

OBJ: 1-1

17. A managerial accountant who communicates information objectively is exercising which of the
following standards?
a. objectivity
c. competence
b. integrity
d. confidentiality
ANS: A

PTS: 1

DIF: Moderate

OBJ: 1-2

18. A managerial accountant who prepares clear reports and recommendations after analyzing relevant
facts is exercising which of the following standards?
a. objectivity
c. competence
b. integrity
d. confidentiality
ANS: C

PTS: 1

DIF: Moderate

OBJ: 1-2

19. Cost accounting standards

a. are legal standards set by the Institute of Management Accountants for use in all
manufacturing and professional businesses.
b. are set by the Cost Accounting Standards Board and are legally binding on all
manufacturers, but not service organizations.
c. do not exist except for those legal pronouncements for companies bidding or pricing costrelated contracts with the government.
d. are developed by the Cost Accounting Standards Board, issued by the Institute of
Management Accountants, and are legally binding on CMAs.
ANS: C

PTS: 1

DIF: Moderate

OBJ: 1-2

20. Which of the following U.S. legislation relates to bribes being offered to foreign officials?
a. Racketeer Influenced and Corrupt Organizations Act
b. Foreign Illegal Activities Act
c. Foreign Corrupt Practices Act
d. Federal Bribery and Corrupt Practices Act
ANS: C

PTS: 1

DIF: Easy

OBJ: 1-3

26. The set of processes that convert inputs into services and products that consumers use is called
a. a core competency.
b. an operational plan.
c. the value chain.
d. the product life cycle.
ANS: C

PTS: 1

DIF: Easy

OBJ: 1-3

27. Core competencies are not

a. internal functions crucial to the success and survival of a company.
b. attributes that keep a firm from competing.
c. different for every organization.
d. considered influences on corporate strategies.
ANS: B

PTS: 1

DIF: Easy

OBJ: 1-4

28. A long-term plan that fulfills the goals and objectives of an organization is known as a(n)
a. management style.
b. strategy.
c. mission statement.
d. operational mission.
ANS: B

PTS: 1

DIF: Easy

OBJ: 1-4

29. Which of the following areas is not addressed by an organizations mission statement?
a. the purpose for which the organization
c. the organizations strategic plan for
exists
fulfilling its mission

b. what the organization wants to accomplish d. how its products can uniquely meet the
needs of its customers.
ANS: C

PTS: 1

DIF: Moderate

OBJ: 1-4

30. The world has essentially become smaller because of

a. improved technology.
b. trade agreements.
c. better communications systems.
d. all of the above.
ANS: D

PTS: 1

DIF: Easy

OBJ: 1-5

31. The value chain

a. reflects the production of goods within an organizational context.
b. is concerned with upstream suppliers, but not downstream customers.
c. results when all non-value-added activities are eliminated from a production process.
d. is the foundation of strategic resource management.
ANS: D

PTS: 1

DIF: Moderate

OBJ: 1-5

32. In a global economy,

a. the trade of goods and services is focused on trade between or among countries on the
same continent.
b. the international movement of labor is prohibited except for multilingual persons.
c. the international flows of capital and information are common.
d. all of the above happen in a global economy.
ANS: C

PTS: 1

DIF: Moderate

OBJ: 1-5

SHORT ANSWER
1. On what needs do (1) management accounting and (2) financial accounting focus?
ANS:
Management accounting focuses on the needs of users inside an organization. Managers need
information related to planning, controlling, decision making, and performance evaluation. Their needs
are satisfied through the providing of information designed for their particular uses. Financial
accounting focuses on the needs of users outside the organization, such as stockholders, creditors, and
regulatory agencies. These users require information that is in conformity with generally accepted
accounting principles and, thus, is standardized in the form of general purpose financial statements.
PTS: 1

DIF: Moderate

OBJ: 1-1

2. What four areas are covered by the Standards of Ethical Conduct for Certified Management
Accountants? How are these areas defined?
ANS:
The four areas covered by the Standards of Ethical Conduct for Certified Management Accountants
are: competence, confidentiality, integrity, and objectivity. Competence means having the capacity to
function in a particular manner. Confidentiality means having the ability to maintain or keep
information undisclosed. Integrity is defined as adherence to a code of moral values. Objectivity is
defined as expressing or using facts without distortion by personal feelings or prejudices.
PTS: 1

DIF: Moderate

OBJ: 1-3

3. What are the functions of a mission statement?

ANS:
The mission statement expresses:
1. the purpose for which the organization exists.
2. what the organization wants to accomplish
3. how its products and services can uniquely meet its targeted customers needs.
PTS: 1

DIF: Easy

OBJ: 1-4

4. Distinguish between lead indicators and lag indicators, and provide an example of each. Which of
these indicators is a better guide for strategic planning?
ANS:
A lag indicator is an outcome that has resulted from past actions. A common lag indicator is
profitability. Other similar performance measures are also acceptable answers.
A lead indicator reflects future financial and nonfinancial outcomes. A good example of a lead
indicator would be the number of employees trained on a new transaction processing system. Lead
indicators are better guides for strategic planning, because they provide information on outcomes more
quickly than do lag indicators.
PTS: 1

DIF: Moderate

OBJ: 1-5

5. Define value chain and provide a graphic of the interacting flows of information within the value
chain.
ANS:
The value chain is the set of processes that convert inputs into products and services for a firm's
customers. It includes both internal and external processes. It encompasses both upstream and
downstream entities. A depiction of the value chain and its information flows is shown in Exhibit 1-6.
PTS: 1

DIF: Moderate

OBJ: 1-6

6. List and explain the four perspectives of the balanced scorecard (BSC).
ANS:
Learning and growth perspective--Focuses on using an organizations intellectual capital to adapt to or
influence changing customer needs.
Internal business perspective--Addresses those things that an organization needs to do well to meet
customer needs and expectations.
Customer value perspective--Addresses how well the organization is doing relative to important
customer criteria.
Financial perspective--Addresses the concerns of stakeholders about profitability and organizational
growth.
PTS: 1

DIF: Moderate

OBJ: 1-7