Chapter 1 How Management Accounting Information Supports Decision Making

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Management Accounting, 6e (Atkinson et al.)

Chapter 1 How Management Accounting Information Supports Decision Making
Objective 1
1) Management accounting is subject to the rules formulated by standard setters such as the
Financial Accounting Standards Board (FASB).
Answer: FALSE
Explanation: Financial accounting is subject to the rules of the FASB.
Diff: 1
Terms: management accounting
Objective: 1
AACSB: Reflective thinking
2) Management accounting information is primarily oriented to external stakeholders, such as

investors, creditors, regulators, and tax authorities.
Answer: FALSE
Explanation: Management accounting information is primarily oriented to management.
Diff: 1
Objective: 1
3) The International Accounting Standards Board sets the guidelines used for management
accounting.
Answer: FALSE
Explanation: Financial accounting must be consistent with the rules of the IASB.
Diff: 1
Terms: International Accounting Standards Board
Objective: 1
4) A good management accounting system can become a source of competitive advantage for a
company.
Answer: TRUE
Diff: 1
Objective: 1
5) Management accounting information is sometimes predictive and forward looking.

Answer: TRUE
Diff: 1
Objective: 1
6) Management accounting has no prescribed rules about its content, how the content is to be
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developed, and how the content is to be presented.

Answer: TRUE
Diff: 2
Objective: 1
7) The Federal Accounting Standards Advisory Board sets cost accounting standards for all
federal government activities.
Answer: TRUE
Diff: 2
Terms: Government Accounting Standards Board
Objective: 1
8) Management accounting measures can provide advance warnings of problems.

Answer: TRUE
Diff: 1
Objective: 1
9) Information about customer satisfaction is an example of financial information.

Answer: FALSE
Explanation: Information about customer satisfaction is an example of nonfinancial information.
Diff: 1
Terms: nonfinancial information
Objective: 1
10) Management accounting information can be used for all of the following EXCEPT:
A) calculate the cost of a product or service.
B) evaluate the performance of a company.
C) project materials needs.
D) evaluate the market price of the stock.
Answer: D
Diff: 2
Objective: 1

11) Which of the following types of information are used in management accounting?
A) financial information
B) nonfinancial information
C) information focused on the long term
D) All of the above are correct.
Answer: D
Diff: 1
Objective: 1
12) Management accounting:

A) is both retrospective, providing feedback about past operations, and also prospective,
incorporating forecasts and estimates about future events.
B) is primarily oriented to external stakeholders.
C) must be consistent with rules formulated by the Financial Accounting Standards Board
(FASB).
D) provides information that is generally available only on a quarterly or annual basis.
Answer: A
Diff: 2
Objective: 1
13) Which of the following descriptors refer to management accounting information?

A) It is only retrospective, reporting and summarizing in financial terms the results of past
decisions and transactions.
B) It is driven by rules.
C) It is prepared for shareholders.
D) It is oriented to meeting the decision making needs of employees and managers inside the
organization.
Answer: D
Diff: 2
Objective: 1
14) Which of the following would be considered management accounting information?

A) Budgeted production for the year 2011.
B) Budgeted Balance Sheet.
C) Analysis of trend in stock prices.
D) Both budgeted production for the year of 2011, and the budgeted balance sheet.
Answer: D
Diff: 1
Objective: 1
15) Management accounting information includes all of the following EXCEPT:
A) tabulated results of customer satisfaction surveys.

B) the cost of producing a product.
C) the percentage of units produced that is defective.
D) market price of the stock.
Answer: D
Diff: 2
Objective: 1
16) Management accounting reports might include information about:

A) customer complaints.
B) net income for the year on budgeted income statement.
C) total assets on budgeted balance sheet.
Answer: D
Diff: 2
Objective: 1
17) The person MOST likely to use management accounting information is a(n):
A) banker evaluating a credit application.
B) shareholder evaluating a stock investment.
C) governmental taxing authority.
D) assembly department supervisor.
Answer: D
Diff: 2
Objective: 1
18) Which of the following is NOT a function of a management accounting system?

A) strategic development
B) financial reporting
C) control
D) product costing
Answer: B
Diff: 2
Objective: 1

19) Financial accounting:

A) focuses on the future and includes activities such as preparing next year's operating budget.
B) does not need to comply with GAAP (generally accepted accounting principles).
C) is primarily oriented to external stakeholders, such as investors, creditors, regulators and tax
authorities.
D) is prepared for the use of department heads and other employees.
Answer: C
Diff: 1
Terms: financial accounting
Objective: 1
20) The person MOST likely to use ONLY financial accounting information is a:
A) factory shift supervisor.
B) vice president of operations.
C) current shareholder.
D) department manager.
Answer: C
Diff: 2
Objective: 1
21) Historically, management accounting innovations have been developed by:

A) the International Accounting Standards Board.
B) the Cost Accounting Standards Board.
C) Academic accountants.
D) Managers.
Answer: D
Diff: 2
Objective: 1
22) In general, it was not until the 1970s that management accounting systems:
A) were improved because of demands by the FASB and the SEC.
B) stagnated and proved inadequate.
C) started to develop innovations in costing and performance-measurement systems due to
intense pressure from overseas competitors.
D) started to address the decision-making needs of managers.
Answer: C
Diff: 2
Objective: 1

23) Financial accounting information:

A) provides a signal that something is wrong.
B) identifies what is wrong.
C) explains what is wrong.
D) simply summarizes information but gives no indication that anything is wrong.
Answer: A
Diff: 2
Objective: 1
24) The regulatory authority responsible for formulating rules of United States GAAP is:
A) the Financial Accounting Standards Board.
B) the Cost Accounting Standards Board.
C) the Federal Accounting Standards Advisory Board.
D) the International Accounting Standards Board.
Answer: A
Diff: 1
Terms: financial accounting, FASB
Objective: 1
25) Management accounting information is BEST described as:

A) providing a signal that something is wrong.
B) identifying and helping to explain what is wrong.
C) simply summarizing information, but giving no indication that anything is wrong.
D) measuring overall organizational performance.
Answer: B
Diff: 1
Objective: 1

26) Compare and contrast the users and uses of management accounting and financial
accounting.
Answer: Management accounting provides information to internal decision makers of the
business such as line supervisors, division managers and top executives. Its purpose is to help
managers plan, organize, control and make operating decisions by predicting future results and
evaluating performance.
Financial accounting provides information to external decision makers such as investors and
creditors. Its purpose is to present a fair picture of the financial condition of the company for use
by these parties in making investing and credit decisions.
Diff: 2
Terms: management accounting, financial accounting
Objective: 1
MAL: This question is not available in MyAccountingLab.
27) What is the purpose of management accounting?

Answer: Management accounting gathers short-term and long-term financial and nonfinancial
information to plan, coordinate, motivate, improve, control, and evaluate success factors of an
organization. Management accounting converts data into usable information that supports
planning, organizing, and control decision making.
Diff: 2
Objective: 1
Objective 2
1) During the history of management accounting, innovations were developed to address the
decision-making needs of managers.
Answer: TRUE
Diff: 2
Objective: 2
2) A key element in any organization's strategy is to identify its target customers and to deliver
what those target customers want.
Answer: TRUE
Diff: 1
Terms: strategy
Objective: 2

3) Management accounting innovations are usually developed by academics.

Answer: FALSE
Explanation: Management accounting innovations are usually developed by management
accountants in the field.
Diff: 2
Objective: 2
4) The first modern industry to develop and use large quantities of financial statistics to assess
and monitor organizational performance was:
A) steel companies.
B) lumber companies.
C) the railroads.
D) automobile companies.
Answer: C
Diff: 2
Terms: financial information
Objective: 2
5) Which of the following companies is a service company?

A) Lands' End
B) Schwinn Bicycles
C) Orkin Pest Control
D) British Petroleum
Answer: C
Diff: 1
Terms: service companies
Objective: 2
6) Historically, service companies have:

A) operated in less competitive environments than manufacturing companies.
B) enjoyed global customer demand.
C) used management accounting information in much the same way as manufacturing
companies.
D) competed by managing costs to provide the best service at the lowest price.
Answer: A
Diff: 2
Terms: service companies
Objective: 2

7) The Hawthorne study revealed that:

A) individuals alter their behavior when they know they are being studied.
B) groups alter their behavior when they know they are being studied.
C) People react when they are being measured.
Answer: D
Diff: 2
Terms: nonfinancial information, Hawthorne study
Objective: 2
8) _______ helped develop the Plan-Do-Check-Act (PDCA) cycle.

A) Hawthorne
B) Deming.
C) Carnegie
D) Ford
Answer: D
Diff: 2
Terms: plan-do-check-act cycle
Objective: 2
9) Describe the steps in the PDCA cycle.

Answer: The Plan step of the PCDA cycle defines the organization's purpose and selects the
focus and scope of its strategy. The Do step of the PDCA cycle involves the implementation of a
chosen course of action. In this setting, management accounting information gets communicated
to front-line and support employees to inform their daily decisions and work activities. The
check step in the PDCA cycle includes two components — measuring and monitoring ongoing
performance and taking short-term actions based on the measured performance. In the Act step
of the PDCA cycle, managers take actions to lower costs, change resource allocations, improve
the quality, cycle time and flexibility of processes, modify the product mix, change customer
relationships, and redesign and introduce new products.
Diff: 3
Objective: 2

10) What role has the increasingly competitive business environment played in the development
of management accounting?
Answer: The competitive environment has changed dramatically. There has been a deregulation
movement in North America and Europe during the 1970s and 1980s that changed the ground
rules under which service companies operate.
In addition, organizations encountered severe competition from overseas companies that offered
high-quality products at low prices. There has been an improvement of operational control
systems such that information is more current and provided more frequently. Employees need
better management accounting information and accurate and timely information to improve the
activities they perform and to make decisions. Employees also want innovations in management
accounting information. Nonfinancial information has become a critical feedback measure.
Finally, the focus of many firms is now on measuring and managing activities.
Diff: 3
Terms: financial accounting, management accounting
Objective: 2
Objective 3
1) At the highest level strategic planning involves choosing a strategy that provides the best fit
between the organization's environment and its internal resources in order to achieve the
organization's objectives.
Answer: TRUE
Diff: 2
Terms: strategy
Objective: 3
2) Quality is the degree of conformance between what the customer is promised and what the
customer receives.
Answer: TRUE
Diff: 1
Terms: quality
Objective: 3
3) Government and nonprofit organizations, as well as profit-seeking enterprises, are feeling the
pressures for improved performance.
Answer: TRUE
Diff: 1
Terms: government and nonprofit organizations
Objective: 3

4) Management accounting information allows managers to compare actual and planned costs
and to identify areas and opportunities for process improvement.
Answer: TRUE
Diff: 1
Objective: 3
5) Management accounting can provide information on customer satisfaction.

Answer: TRUE
Diff: 2
Objective: 3
6) Planning activities include all of the following EXCEPT:

A) estimate the cost and profit consequences from a course of action.
B) evaluating the quality of the service provided.
C) projecting labor requirements.
D) budgeting.
Answer: B
Diff: 2
Objective: 3
7) The most important factor in successful organizations is:

A) weaknesses.
B) competition.
C) strategy.
D) definition of quality.
Answer: C
Diff: 2
Terms: strategy
Objective: 3
8) A key element of any organization's strategy is identifying:

A) its potential shareholders.
B) its target customers.
C) competitor's products.
D) employee needs.
Answer: B
Diff: 3
Terms: strategy
Objective: 3

9) Explain the role of management accounting in helping an enterprise develop and implement
its strategy.
Answer: The organization needs management accounting information to help implement the
strategy, allocate resources for the strategy, communicate the strategy, and link employees and
operational processes to achieve the strategy. As the strategy gets executed, management
accounting information provides feedback about where it is working and where it is not, and
guides actions to improve the performance from the strategy..
Diff: 2
Terms: management accounting, strategy
Objective: 3
Objective 4
1) Quality expert, W. Edwards Deming, helped develop and disseminate the plan-do-check-act
(PDCA) cycle.
Answer: TRUE
Diff: 2
Terms: plan-do-act cycle
Objective: 4
2) Many organizations start the planning stage by re-affirming or updating its mission statement.
Answer: TRUE
Diff: 2
Objective: 4
3) Operating profit is an example of nonfinancial information.

Answer: FALSE
Explanation: Operating profit is an example of financial information.
Diff: 1
Objective: 4
4) The check step in the PDCA cycle includes two components — measuring and monitoring
ongoing performance and taking short-term actions based on the measured performance.
Answer: TRUE
Diff: 2
Objective: 4

5) Which of the following best represents the Plan step in the Plan-Do-Check-Act (PDCA)
cycle?
A) Take actions to lower costs, change resource allocations, improve the quality, cycle time and
flexibility of processes, modify the product mix, change customer relationships, and redesign and
introduce new products..
B) Measure and monitor ongoing performance and take short-term actions based on the
measured performance.
C) Define the organization's purpose and select the focus and scope of its strategy. .
D) Implement the chosen course of action.
Answer: C
Diff: 2
Objective: 4
6) Which of the following best represents the Do step in the Plan-Do-Check-Act (PDCA) cycle?.
introduce new products.
C) Define the organization's purpose and select the focus and scope of its strategy.
Answer: D
Diff: 2
Objective: 4
7) Which of the following best represents the Check step in the Plan-Do-Check-Act (PDCA)
cycle?
Answer: C
Diff: 2
Objective: 4

8) Which of the following best represents the Act step in the Plan-Do-Check-Act (PDCA) cycle?
Answer: A
Diff: 2
Objective: 4
9) How the customer is treated at the time of the purchase is an example of the __________
element of the value proposition.
A) functionality and features
B) industry standards
C) quality
D) service
Answer: D
Diff: 2
Objective: 4
10) Managers of service departments need all of the following information EXCEPT:
A) efficiency data on work performance.
B) quality data on work performance.
C) profitability data of the whole company.
D) profitability data of the service department.
Answer: C
Diff: 2
Terms: financial information, nonfinancial information
Objective: 4

11) A national company manufactures a line of modern furniture. Information MOST useful to
the employee who assembles the furniture includes:
A) a daily report comparing the actual time it took to assemble a piece of furniture to the
standard time allowed.
B) a monthly report on the proportion of furniture pieces assembled with defects.
C) the number of furniture pieces sold this month.
D) revenue per employee.
Answer: A
Diff: 2
Objective: 4
12) A national company manufactures a line of modern furniture. Information MOST useful to
the top executive includes:
A) individual job summaries of materials used.
B) monthly financial reports on the company's profitability by product line.
C) time reports submitted by each employee.
D) scheduled downtime for routine maintenance on machines.
Answer: B
Diff: 2
Objective: 4
13) A quarterly report disclosing declining market share information is MOST useful to:
A) a front-line employee.
B) the manager of operations.
C) the chief executive officer.
D) the accounting department.
Answer: C
Diff: 2
Objective: 4
14) A weekly report comparing machine time used to available machine time is information
LEAST useful to:
A) a front-line employee.
B) the manager of operations.
D) the accounting department.
Answer: C
Diff: 1
Objective: 4
15) A daily report on the number of quality units assembled by each employee is information
MOST useful to:

A) a front-line assembly worker.
B) the accounting department.
D) the personnel department.
Answer: A
Diff: 2
Objective: 4
16) Which of the following would be MOST helpful for a top manager of a company?
A) profitability report of the company
B) information to monitor hourly and daily operations
C) number of customer complaints
D) operating expense summary reported by department
Answer: A
Diff: 2
Objective: 4
17) A law firm would use management accounting information for all of the following decisions
EXCEPT:
A) staffing needs.
B) performance evaluation of staff.
C) budgeted purchases of supplies.
D) location of annual holiday party.
Answer: D
Diff: 2
Objective: 4
18) Management accounting can play a critical role in the service industry because of all the
following reasons EXCEPT:
A) firms must be especially sensitive to the timeliness and quality of customer service.
B) many employees have very little contact with customers.
C) customers immediately notice defects and a delay in service.
D) dissatisfied customers may never return.
Answer: B
Diff: 2
Objective: 4
The following information pertains to three divisions of Marine Industrial Coatings, Inc.
(amounts in millions):

Chemical Retail Paint Industrial

Sales $16,000 $30,000 $120,000
Operating Income $4,000 $6,000 $40,000
Investment $320,000 $660,000 $2,000,000
19) What is the return on investment for the Chemical Division?

A) 1.25%
B) 2.25%
C) 25.0%
D) 50.00%
Answer: A
Diff: 2
Terms: return on investment
Objective: 4
AACSB: Analytical skills
20) Which division is more profitable based on ROI?

A) Chemical
B) Retail paint
C) Industrial
D) Both Chemical and Retail paint are more profitable than Industrial.
Answer: C
Diff: 3
Terms: return on investment
Objective: 4
21) What is the Return on Sales for the Retail paint division?
A) 2%
B) 4.5%
C) 20%
D) 45%
Answer: C
Diff: 2
Terms: return on sales
Objective: 4

22) For improving operational efficiencies and customer satisfaction, nonfinancial information
is:
A) critical.
B) moderate.
C) infrequently used.
D) unnecessary.
Answer: A
Diff: 2
Objective: 4
23) Nonfinancial information might be used for all of the following EXCEPT:
A) improve product quality.
B) reduce cycle times.
C) satisfy customers' needs.
D) All of the above are used.
Answer: D
Diff: 2
Objective: 4
24) Is financial accounting or management accounting more useful to an operations manager?

Why?
Answer: Management accounting is more useful to an operations manager because management
accounting reports operating results by department or unit rather than for the company as a
whole, it includes financial as well as nonfinancial data such as the number or percent of on-time
deliveries and cycle times, and it includes quantitative as well as qualitative data such as the type
of rework that was needed on defective units. It also provides information to control operations;
it measures and evaluates existing systems to identify problems.
Diff: 3
Terms: financial accounting, management accounting
Objective: 4

25) Give two examples of financial information and nonfinancial information.

Answer: Financial information includes amounts that can be expressed in dollar amounts such as
sales, net income, and total assets. It also includes ratios prepared using financial information
such as the percentage increase in sales, return-on-sales, and return-on-investment.
Nonfinancial information includes measures that are not expressed in dollar amounts. For
example, nonfinancial measures of customer satisfaction include the number of repeat customers
or ranked estimates of satisfaction levels. Nonfinancial measures of production quality include
percent of on-time deliveries, the number of defects, and production yield.
Diff: 3
Objective: 4
Objective 5
1) The design and introduction of new measurements and systems must be accompanied by an
analysis of the behavioral and organizational reactions to the measurements.
Answer: TRUE
Diff: 2
Objective: 5
2) People react when they are being measured, and they react to the measurements..
Answer: TRUE
Diff: 2
Terms: measurements
Objective: 5
3) Information is never neutral; just the act of measuring and reporting information affects the
individuals involved.
Answer: TRUE
Diff: 2
Objective: 5

4) The act of simply measuring and reporting information on certain processes:

A) focuses the attention of employees on those processes that are being measured.
B) diverts the employee's attention to other activities that are not being measured.
C) disproves the saying "What gets measured gets managed."
D) has no effect on employee behavior.
Answer: A
Diff: 2
Objective: 5
5) Which statement below is FALSE?

A) "What gets measured gets managed."
B) People react to measurements.
C) Employees spend more attention on those variables that are not getting measured.
D) "If I can't measure it, I can't manage it."
Answer: C
Diff: 2
Objective: 5
6) When a change is introduced, employees tend to:

A) embrace the change.
B) be indifferent to the change.
C) exhibit no change in behavior.
D) resist the change.
Answer: D
Diff: 1
Objective: 5
7) The introduction of a new management accounting system is MOST likely to motivate

UNWANTED employee behavior when it is used for:
A) evaluation.
B) planning.
C) decision making.
D) coordinating individual efforts.
Answer: A
Diff: 2
Objective: 5

8) Management accountants are MOST likely to feel outside pressure to influence the numbers
favorably when the information is used for:
A) budgeting.
B) compensation and promotions.
C) continuous improvement.
D) product costing.
Answer: B
Diff: 2
Objective: 5
AACSB: Ethical reasoning
9) Fostering a culture of high ethical standards includes all of the following EXCEPT:
A) following the good example set by senior management.
B) communicating to employees a belief system that inspires and promotes commitment to the
organization's core values.
C) following the general examples set by front-line employees.
D) communicating to all employees a boundary system that states what actions will not be
tolerated.
Answer: C
Diff: 2
Objective: 5
10) The Institute of Management Accountants (IMA):

A) is a professional organization of management accountants.
B) is a professional organization of financial accountants.
C) issues standards for management accounting.
D) a professional organization of management accountants that issues standards for management
accounting.
Answer: D
Diff: 2
Terms: Institute of Management Accountants
Objective: 5

11) Discuss the potential behavior implications of performance evaluation.

Answer: As measurements are made on operations and, especially, on individuals and groups,
the behavior of the individuals and groups are affecte.D
People react to the measurements being made. They will focus on those variables or the behavior
being measured and spend less attention on variables and behavior that are not measured.
Managers and employees may take unexpected and undesirable actions to influence the score on
performance measure. For example, managers may skip discretionary expenses in order to
increase their bonus.
Diff: 3
Terms: performance evaluation
Objective: 5

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Management Accounting, 6e (Atkinson et al.)

2) Management accounting information is primarily oriented to external stakeholders, such as

5) Management accounting information is sometimes predictive and forward looking.

developed, and how the content is to be presented.

8) Management accounting measures can provide advance warnings of problems.

9) Information about customer satisfaction is an example of financial information.

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12) Management accounting:

13) Which of the following descriptors refer to management accounting information?

14) Which of the following would be considered management accounting information?

A) tabulated results of customer satisfaction surveys.

16) Management accounting reports might include information about:

18) Which of the following is NOT a function of a management accounting system?

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19) Financial accounting:

21) Historically, management accounting innovations have been developed by:

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23) Financial accounting information:

25) Management accounting information is BEST described as:

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27) What is the purpose of management accounting?

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3) Management accounting innovations are usually developed by academics.

5) Which of the following companies is a service company?

6) Historically, service companies have:

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7) The Hawthorne study revealed that:

8) _______ helped develop the Plan-Do-Check-Act (PDCA) cycle.

9) Describe the steps in the PDCA cycle.

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5) Management accounting can provide information on customer satisfaction.

6) Planning activities include all of the following EXCEPT:

7) The most important factor in successful organizations is:

8) A key element of any organization's strategy is identifying:

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3) Operating profit is an example of nonfinancial information.

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MOST useful to:

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Chemical Retail Paint Industrial

19) What is the return on investment for the Chemical Division?

20) Which division is more profitable based on ROI?

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24) Is financial accounting or management accounting more useful to an operations manager?

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25) Give two examples of financial information and nonfinancial information.

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4) The act of simply measuring and reporting information on certain processes:

5) Which statement below is FALSE?

6) When a change is introduced, employees tend to:

7) The introduction of a new management accounting system is MOST likely to motivate

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10) The Institute of Management Accountants (IMA):

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11) Discuss the potential behavior implications of performance evaluation.