Managerial Uses Of Accounting Information 1st Edition Joel. Demski - Solutions

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information arrives before manager acts1S Repeat your analyses in problem 11 above, but now under the assumption the manager privately observes the good or bad news after contracting but before acting.Assume Ralph desires input H in the good news ease and input L in the bad news ease.AppendixLO1
information arrives after manager acts This is a continuation of problem 6 in Chapter 19 (and problem 8 in Chapter 18). The basie story and preferences remain. A high input is desired; the agent experiences an unobservable personal cost; the only contraeting variables are output and a monitor, and
friction free revelation Draw the manager's decision tree for the ease in Table 21.3. Verify the claim in the text that the manager's private communication ean he fully utilized here, and trade takes place without any apparent frietion. Provide an intuitive explanation.AppendixLO1
information management In problems 7 and 8 above you have encountered numerieal examples where private infonnation in the hands of a manager is or is not in the best interests of the organization. Sketch two corresponding institutional settings, one where the organization wants the manager to be
private information with negative value Retum to the example in Table 21.4. First suppose no infonnation is available, eitherpublicly or privately. Determine and interpret an optimal pay-for-perfonnanee arrangement. (Assume the manager can post a large perfonnanee bond.) Second, suppose the good or
vaIuabIe private information Retum, again, to the example in Table 21.1. Suppose no information is available, and the owner desires supply of input H. Determine an optimal pay-forperfonnanee arrangement, and contrast it with the Table 21.2 case where the information is privately obtained by the
communication and input suppIy incentives Retum to the example in Table 21.1. For the first two cases in Table 21.2, draw the manager's decision tree. Then verify that the manager can do no better than accept the offered tenns, supply H in the good environment, and supply L in the bad environment.
ruIes of the game What happens in the trading encounter in the above problem if the subcontractor rather than Ralph makes a take-it-or-Ieave-it offer?AppendixLO1
communication from subcontractor Ralph is trying to finish a rush j ob for a favored customer. The schedule is tight and Ralph can save 8,000 in overtime cost if part of the job is tumed over to aloeal subcontractor. The subcontractor's opportunity cost is either 4,000 or 6,000. The subcontractor
useless participation Return to problem 6 in Chapter 19 and the probability structure in part [d].Verify that if only the manager observes the monitor's report, then the best Ralph can do is commit in the pay-for-performance aITangement to ignore whatever the agent elaims the monitor said. Give an
evaluation dynamics An apparel manufacturer centrally plans production sehedules and treats each manufacturing facility as a cost center. Well-engineered standards are in place for each facility, and the major evaluation measure is cost incurred relative to budgeted cost given the output achieved.
souree documents Ralph's agent delivers confidential and valuable documents among a number of buildings in a metropolitan area. Rapid delivery is essential, and the agent's average delivery time between locations is an important productivity measure.Ralph is also expeeted to maintain detailed
aecruaL aeeounting Aecrual accounting attempts to match accomplishments (e.g., revenue) and effort (e.g., expenses) on a period-by-period basis. Cash basis accounting is le ss consistent in this regard. In balancing short-run and long-run incentives, then, it would seem aecrual accounting has an
If a manager is assigned a single task, we expect high-quality evaluation information to drive out lesser quality evaluation infonnation. For example, a monitor that identified the precise input supplied to the ta sk would render any noisy indicator of input superfluous. Yet when multiple tasks are
Separation of duties is a time-honored control technique. Aecess to the cash register is limited, the inventory clerk does not count the inventory at year' s end, and the warden does not grant paroles. Relate separation of duties to the idea that some combinations of tasks are easier to control
In Chapter21 the tasks of input supp ly and communication were combined, and we stressed the idea a control system should be coextensive with the tasks that are assigned the manager. Here we examine a larger variety of tasks. Does the same idea hold? Carefully discuss.AppendixLO1
ask the manager Retum to problem 11, part [a] aboveo The manager knows the input supplied;suppose Ralph asks the manager to reveal whieh input was supplied. Assume the game is designed so the manager's revelation is received before the output is observed. Find an optimal pay-for-perfonnanee
prior informed manager Ralph wants to hire a highly skilled manager. The venture will succeed (output x2) or fail (output Xl). The diffieulty is the manager might be a high-skill type or a low-skill type. The probabilities are listed below:Notice the high-skill type has a higher probability of
communication in root urility case Ralph' s manager acquires information after acting, but before output is realized.As usual, Ralph, the principal, is risk neutral. The manager has preferences for cash income z and labor input a given by,rz - V(a). Two labor inputs are possible, a = H and a = L.
accounting library The accounting library, we have stressed, is weil defended; its integrity is important. In the larger picture, revenue recognition is an important policy instrument.We delay recognition of revenue, and hence income, until the earnings cyele is largely complete.Suppose the manager
hidden inventory A familiar contention when a just-in-time inventory is implemented is the suspicion that the work force hides inventory. Why might inventory be concealed in such a circumstance? How does this relate to our general theme of motivating participation and communication?Similarly, a
Our study of communication and budget participation stresses the theme that a control system must be coextensive with the control problem it is designed to address. If a player is ca1led on to supply input and to communicate, for example, the control system must deal with both input supply and
eost center varianees with allocations This is a eontinuation of problem 6 above. Now assume service department eost is allocated to the other two eost centers. The firm's policy is to base these alloeations on standard variable rates, applied to the aetual quantity of the service department's
eost center varianees Using the data in Tables 20.3 and 20.4, prepare a table displaying price and quantity varianees for eaeh eost eategory in eaeh deparlment. (Variable eosting is used) Do not alloeate any ofthe service department eost to the other departments.Notice that Tables 20.5 and 20.6
eost center varianees Verify the variance ealeulations in Table 20.2. Suppose a raw material shortage was present and the eost center was foreed to use materials of lower quality, but at a lower price. This also resulted in excessive direet labor. Assume 90% of the labor quantity varianee is due to
eost center varianees Ralph manages a generie produetion faeility. For simplicity, there is no overhead, only direet labor and direet material. The LLAs are:direet labor DL = 15(2)q; and direet material DM = 40(1.1)q, where q denotes units of output. The standard price for labor is 15 per hour, and
We often assoeiate responsibility accounting with varianees. What role is played by price and quantity variances in the use of responsibility aeeounting?AppendixLO1
Responsibility accounting focuses on the use of accounting measures in evaluating a manager. Might a manager be held responsible for nonaccounting measures? Give an example. How does the use of nonaccounting measures relate to the notion of responsibility aecounting?AppendixLO1
The idea of responsibility accounting is straightforward: we hold a manager responsible for those aecounting measures that teIl us something about that manager's perfonnance. CarefuIly discuss this idea. What daes it mean to hold the manager responsible for an accounting measure? What daes it me an
local and Jirm-wide bonus determinants A common practice is to define an overaIl bonus pool in terms of how weIl the organization has performed. For example, the pool might be a percentage of accounting income. Adivision manager's share in this pool, in turu, is heavily influenced by how weIl that
cost versus profit center and information content Ralph owns a produetion funetion and seeks the services of a manager. The manager' s input ean be L or H; Ralph desires input H. The manager will oversee a process that will incur a eost that is low or high. Denote the scaled eost possibilities as
summary measure myopia in a profit center Return to problem 9 above and ease [e] where a profit center is used. Suppose instead of eontracting on eost and revenue, the parties eontract on profit itself, or revenue lesseost. Determine an optimal-pay-for-performance arrangement; eontrast it with the
inventory in profit center Ralph manages the manufacture and distribution of a eonsumer product. The investment base is relatively stable, and Ralph is evaluated on the basis of profitability, market share, inventory, and a changing mix of nonfinancial goals that vary with the cir.:umstance. The
The stylized contracting model accommodates the idea that a well-informed player might be induced to communicate what is privately known. This requires we pay attention to incentives; after all, it would be naive to expect the player to freely give away any private-information-based advantage. In
information content of interdepartmental eost allocations Return to Chapter 17, problem 9, where departmental variances were ealeulated.You were asked in part [b] to decide how, orwhether, to alloeate the manufacturing service group costs to the fabrication and assembly departments. Allocate the
overhead LLAs In problem 12 of Chapter 9 you examined an activity based costing procedure in which overhead categories were allocated to products based on a diverse set of independent variables (direet labor, direet material, setups, inventory transactions, and eomplexity). Now suppose each product
current cost Ralph manages a consumer products outlet. Inventory is important. Customers will not return if the outlet is out of stock; and inventory carrying costs are far from trivial. Changing prices are also an issue.At present the historieal eost of the outlet's inventory is 2,036,000 (based
customer satisfaction Ralph owns a group of auto dealerships, eaeh a franchised sales and repair fadlity for a partieular national brand. Ralph uses sales, inventory, and profitability measures of a specific dealership to evaluate the performance of that dealership's management team. Another
return on investment Ralph manages a regional home products store. A variety ofhardware, lumber, and small appliance items are stocked and sold to the general public. A smaller portion of the business deals with commercial customers. The store is but one of many such outlets owned and operated by a
extenuating circumstances Ralph manages an in-house engineering team that provides consulting serviees for a variety of product design, manufacturing, and application probiems. The unit requesting this service usually reaches an agreement with Ralph on the estimated hours required to deal with the
inventory in profit center This is a eontinuation of problem 11 above. Suppose standard full eosting is used, based on a normal volume of 25,000 units. Determine the profit in Ralph's profit center; and factor the difference between aetual and budgeted profit into as many variances as you can
evaluation practices Suppose you, as manager, have just been moved to a new location. One of your initial tasks is a quick study of how the individuals whom you will now supervise have been evaluated. You are particularly interested in how the items in the accounting library are used for this
cost center varianees with allocations Amend your table in problem 7 above for the ease where the firm allocates actual variable serviee eost to the eonsuming departments. For this exercise assume there was no price variance associated with the service department's "fixed" eost.Why might the firm
insuranee arrangements A large bank evaluates commerciallending officers in terms of the profitability and quality of their loa n portfolios. When a loan is consummated, the loan officer"borrows" the principal from center at an intemally posted rate. The intemal rate depends on the maturity of
sourcing dispute17 Ralph' s Firm is a targe, decentralized organization. Each major product group is manufactured and marketed by a separate division. Various coordination and financing serviees are provided by central management. The divisions are free to trade among themselves as opportunities
product costs and transfer prices Retum to problem 14 above. Now suppose the accounting system uses standard, full costing to transfer the product from Upstream to Downstream. The full cost datum used to record the transfer is based on the noted LLA and a normal volume of 10,000 units. Regress ca
product costs and transfer prices We now find Ralph exploring accounting questions in a vertically integrated organization. The firm has two divisions, Upstream and Downstream. Upstream manufactures a single product. The sole customer for this product is Downstream.In tum, Downstream uses this
informative division profit measures in presenee of other information Transfer pricing allocates the gains from trade between the trading divisions in the sense the accounting profit associated with the trade is alloeated to the divisions.In this way the division ineome measures are made more
informative division profit measures Retum to the setting of Table 23.3. Reeonstruct the table for the cases where the probability that a transfer occurs is (i) .2 and (ii) .8. Contrast your findings with those in the table.AppendixLO1
transfer priees and responsibility aeeounting Retum to the setting of Table 23.3. When T = 0, the optimal pay-forpedormance arrangement bases the division A manager's evaluation on the ineome of both divisions. Carefully explain, linking this phenomenon to responsibility accounting.Continuing,
revelation ineentives Verify the claim in footnote 9. What happens here if the managers are evaluated on the basis of firm-wide rather than division profit?AppendixLO1
internai eost of funds and rationint8 Ralph manages a decentralized firm where division managers have significant authority to make production and investment decisions. All capital expenditures must be approved by center. Divisions must submit detaile d capital budgets prior to approval by center.
sourcing Ralph is Chief Procurement Officer for a large metropolitan area in the North East. This is a political appointment. Ralph is presently working on a water purification project. The quality of the area's water supply has declined, and Ralph must provide additional purification facilities.
The dynamic theme of decision and performance control emphasizes simultaneous use of the accounting library for deeision making and performance evaluation purposes. Here the basie library building bloeks of aggregation, LLAs, and alloeation enter. This suggests a managed tension, a tension between
accounting governance Accounting, we have argued, provides a financial library; its comparative advantage is integrity. The accounting Iibrary is consciously designed to be difficult to manipulate. This means, among other things, it wiIl have Iess than aggressive recognition rules and be sIow to
internai governanee The typieal fast food empire uses an array of finaneial and nonfinaneial measures to evaluate the manager at eaeh location. (Reeall problem 15 in Chapter 19.) Improvement goals are established for eaeh location, goals that reflect circumstanees and opportunities at that
factors ofproduction Ralph's firm is expanding. It tentatively plans to add a sales force. The sales force will require the usual trappings of an autornobile, personal computer, state-ofthe-art communication equipment, and so on. Since no preeedents have been set, the firm has an open mind on the
labor market conditions We usually have diffieulty writing long term contraets. Suppose a manager is known to the labor market and has a reputation (good or bad). The employer eannot write an iron-clad long-term contraet, and instead the parties periodically renegotiate, with knowledge of the
an old friend Retum to the setting of problem 8 in Chapter 18, where the following probability stmeture was assumed:Reeall the best pay-for-performance arrangement used II = 8,934.62 and 12 = 15,972.54.a] Draw the manager's decision tree, using the noted pay-for-performance arrangement. Determine
renegotiation equilibrium Verify the renegotiation game in Table 24.2 results in use of the status quo contraet when output is informative and use of the low powered eontraet when it is not informativeo AppendixLO1
renegotiation and status quo Retum to the originaI story setting in Table 24.1. Carefully describe the role played by the initial pay-for-performance arrangement. It will, in equilibrium, be replaeed by aguaranteed payment of 8,000. Why not simply begin with an arrangement that ealls for payment of
Accounting govemance is visible (and contentious) in the world of financial reporting, as evideneed by F ASB and GASB aetivities. Yet accounting govemanee is important inside an organization and hardly independent of the attendant extemal reporting environment. Carefully discuss this
private eost information Retum to problems 7 and 8 above. Now explicitly assume that eaeh division manager knows its respective eost strueture, though is less informed about the other' seost strueture. Center is less informed. The eoordination procedure ealls for the two managers to negotiate a
internal supply and demand schedules Return to problem 7. Suppose division A ean manufacture any quantity it desires and will be eredited with an internai revenue of T per unit manufactured.Conversely, division B can process and sell any quantity it desires and will be charged an internal price of
discouraging end ofyear games A software development finn is funded by a venture capital group and a large pension fund. These investors dosel y monitor the finn and expect it to meet its sales and ineome projeetions.Nearing the end of a reeent year, it has beeome apparent the announeed ineome goal
encouraging profitable investment15 Ralph's firm is always looking for new, innovative products. A manager in Ralph' s firm every now and then discovers a new product. Any such discovery is privately known, and it is up to the manager to reveal to Ralph the new product idea.Any new product will
multiple tasks and delayed evaluation The manager of a facility that manufactures autornobile components is evaluated on the basis of output (relative to an output budget) and cost (relative to a cost budget). Product quality is also important, and it is weU recognized short-run performance
aggregation Retum to problem 9 aboveo 80th tasks are present as above, but now only the total output is observable. This implies low output from task one and high output from task two cannot be distinguished from high output from one and low output from two. How much would Ralph now pay to observe
multiple tasks Ralph owns a produetion function. Output can be either Xl or ~, with Xl The manager' s input ean be one of two quantities, L or H. Ralph is risk neutral. The probabilities are:Ralph wants supply of input H in all that follows.The manager is risk averse imd incurs an unobservable,
aggregation Table 22.2 deals with a case where two tasks are assigned a manager, input to each task must be supplied immediately and only aggregate output is observed.a] Determine optimal pay -for-performance arrangements for the three cases under the assumption the output from each task is
interaeting control problems Retum to the setting of Table 22.1 and concentrate on the first task. If this is the only task assigned to the manager, how much would the organization pay to be able to observe the manager's input? Conversely, if two of the type one tasks are assigned to the same
interacting eontrol problems Retum to the setting of Table 22.2, and concentrate on the first case where two of the type one tasks are assigned to a single manager.a] Drawthe manager's decision tree and verify the managercan do no betterthan accept the contract terms and supply input H to both
relative performance evaluation Ralph is at it again. Output from the produetion proeess owned by Ralph ean be Xl or X2• The manager's input ean be L or H. Ralph is risk neutral. The probabilities are:Ralph wants supply of input H.The manager is risk averse, and is described by the usual personal
interactive controls Whistle blower type arrangements are designed to eneourage revelation of substandard performance. The most simple example is where an employee is legally protected when disclosing fraud. Ralph also knows these games. Suppo~ an absentee owner wants to hire Ralph to supp ly some
two-sided contrai problem Ralph wants to hire a manager. The manager's output ean be either Xl or xz.The manager' s input ean be L or H. Ralph is risk neutrai. The probabilities are:Ralph wants supply of input H in all that follows.The manager is modeled in the usual way, with utility for wealth w
classical analysis Ralph's firm eonsists of divisions A and B. The output of division A is transferred to division B, where it is processed further and then sold. No eosts are ineurred at center. The division's eost struetures are as foUows:CA(qJ = 200 + 450!JA - lOql + (l/6)qÄ; and Cs(CIs) = 300
trade of output for [ungible currency Return to problem 5 ahove. Nowassume division A is unable to accommodate division B, and B must, as aresult, go to an outside source. This souree is paid the amount P. Everything else remains as before.aJ Assume the opportunity is taken. Determine the
trade of output for accounting cu"ency United Management has a divisionalized structure. Various divisions enjoy considerable autonomy. Central management provides oversight, finaneial management, and strategic planning. Cash is eentrally managed.Division B has encountered an opportunity to provide
control difficulties in classkal approach In Chapter 18 we used the managerial input model to stress the point that a serious control problem can only be present if we have uneertainty, risk aversion, and varying personal cost in that mode!. The dassical approach to interdivision coordination
We used the managerial input model to highlight the importanee of allocating the gains to interdivision trade between the two divisions. In that setting, how do the managers learn of possible gains to trade and what role is played by the allocation of any gains to trade?AppendixLO1
Transfer pricing uses priees and quantities to record trade between divisions.In general terms this is often thought of as using a priee mechanism to guide such trade. To what extent is this analogy correct? Discuss the similarities and differenees when trade passes (i) between two divisions in the
The chapter stresses the the me that interdivision coordination amounts to regulating trade between divisions. Explain why regulating trade between divisions might be an issue and what role transfer prieing plays in the exercise.AppendixLO1
reversed roles Repeat problem 17 above for the case where the manager rather than Ralph privately observes and then communicates the monitor's report. Why does it matter who privately observes the performance evaluation information?AppendixLO1
eash [low budget Retum to problem 12, Chapter 14, where a linear program was used to loeate an optimal production schedule. To avoid overwhelming detail, now assume the data relate to a quarter; so the optimal plan calls for production of ql = 50 (and lb =0) in each of the next three months. Also
A central theme of competitive analysis is equilibrium behavior. What does it mean for your strategy to be mutually consistent, in the sense of equilibrium behavior, with that of your competitor?AppendixLO1
Might a marketing organization, where most of the costs are period costs, find these varianee procedures useful? Explain. How might the proeedures differ from those discussed in the text?AppendixLO1
Redraw Figure 17.1 for the case where the aecounting library uses standard, variable costing.AppendixLO1
priee and quantity effeets Ralph purchases prefabricated containers, assembles them and sells them to local merchants. Assembly errors occur on oceasion, and the affected containermust be scrapped. Ralph figures this happens 5% of the time. The prefabricated containers cost 100 per unit. The
price, quantity, and volume effeets An organization has an overhead LLA of OV = 100,000 + 25DLH, where DLH denotes direet labor hours. It is also able to identify the underlying costs and separately aggregate those associated with the LLA's intercept (orthe "fixed" eost)in one account and those
varianees under variable and full eosting This is a continuation of the saga in Ralph's Job, problem 7 in Chapter 7 and problem 9 in Chapter 6. Suppose the average wage rate for direct labor tumed out to be 20 per hour, and direct material tume d out to cost 12.5 per unit. Calculate all
exogenous events and variances Retum to the setting of Ralph' s Job aboveo Suppose all of Ralph' s employees are covered by a health plan. The health services are provided by a local provider, and cost Ralph 3,500 per employee covered per year. Where are these emp~oyee benefit eosts likely to be
varianees for individual products Retum to the setting of Table 17.6, where variable eosting is used in our main illustration. Prepare a eompanion table that breaks the various varianees down by job, to the extent possible (given the information in the example) and to the extent you feel
departmental variances This is a eontinuation of Ralph's LP, problem 12 in Chapter 14. Ralph has implemented the production and sale s plan determined in the original problem.Events did not quite tum out, though. Budgets are based on the LlAs noted in the original problem. Sales and produetion of
recognition rules, varianees and produet eosts Ralph produees two products, eode named X and Y. The eost structure is estimated by the following LlAs:direct material dollars DM = 40X + 60Y;direet labor hours DLH = 2X + lY;mrect labor dollars overhead OL = 150LH; and OV = 200,000 + 20M + O.SOL.459
varianees with muLtipLe independent variabLes Ralph's Fancy Costing Company (RFCC) produees a variety of fabricated products to customer order. Product costing and budgeting at RFCC are based on the following LLAs:direct labor: DL$ = 35DLH (where DLH denotes direct labor hours);direct material: DM$
rules of the game Our discussion of eompetitive response focused on several well-defined eneounters where the "rules of the game" were well-specified and understood. A larger question addresses the "rules of the game." Retum to the haggling example in the text where the buyer had a value of V = 4,
nonfinaneial measures A common practice in the fast food industry is to evaluate a store manager on the basis of profitability and a set of nonfinancial measures. These supplementary measures relate to such things as the outlet's deanliness, the quality of its product and service, and so on. (A
profit varianees This is a continuation of Ralph's LP, problem 9 above. Using the originaI production plan (of ql = 150 and ~ = 0) and the actual results noted above, provide a detailed varianee analysis that breaks down the differenee between planned and actual profit. Be eertain to indude all the
variances based on planning model This is a eontinuation of Ralph's LP, most reeently problem 13 above. Ralph deeides, upon further refleetion, two signifieant errors were made in speeifying the originaI LLAs. The first produet's selling price should have been 610 per unit(instead of 6(0); and the
Suppose an organization uses standard costs. Discuss the relationship between the decomposition procedures developed in the text and the overaIl "plug" in the standard eosting system that is dosed to cost of goods sold.AppendixLO1

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