Teaching-Learning Activity #1

Name:

Discussion Questions:
1. Give four examples of firms you think would be significant users of cost management
information and explain why.

Service Entities:
● A Pneumatic Vulcanizing Shop: which needs cost management to determine whether it
should repair or replace a machine
● FICCO Cooperative: to keep costs low by using activity analysis to identify key
operations and to find those that add little or no value.
● Driving Academy: to analyze and choose between different compensation plans for its
instructors; and to determine whether it should acquire new cars
Merchandising:
● Lots for Less: to keep costs low by streamlining restocking and sales
Manufacturing
● Payo Manufacturing Corporation: to keep costs low by improving manufacturing
performance and by using target costing and other management techniques
● Lola Abon’s Durian Candy: to assess the profitability of its different products using
cost management
Governmental and not-for-profit organizations
● Department of Education: to keep costs low in order to provide the best possible service
given available funds.

2. Give three examples of firms you think would not be significant users of cost management
information and explain why.

● Google: here the focus is on forming strategic alliances with other software developers,
innovation and competition.
● Hermès or any other luxury goods company: a high fashion firm competes on
innovation and product leadership; the development and communication of attractive
new ideas is the key to competitive success rather than cost management
● LA Lakers Basketball Team: dependent primarily on the development of fan support,
good coaching and player acquisition.
3. What is meant by the term cost management? Who in the typical firm or organization is
responsible for cost management?

● Cost management information is the information the manager needs to effectively

manage the entity’s financial information about cost and revenues, as well as relevant
non-financial information about productivity, quality and other key success factors for
the firm.
● Typically, cost management is the responsibility of the Chief Financial Officer (CFO)
who often delegates much of this responsibility to the Controller.

4. List the four functions of management. Explain what type of cost management information
is appropriate for each.

● Strategic Management – information is needed by management to make sound strategic

decisions regarding choice of products, manufacturing methods, marketing techniques
and channels, and other long-term issues.
● Planning and Decision Making – information is needed to support recurring decisions
regarding replacement of equipment, managing cash flow, budgeting raw materials
purchases, scheduling production and pricing.
● Management and Operational Control – information is needed to provide a fair and
effective basis for identifying inefficient operations and to reward and support the most
effective managers.
● Preparation of Financial Statements – information is needed to provide accurate
accounting for inventory and other issues, in compliance with reporting requirements,
for the preparation of financial reports and for use in the three other management
functions.

5. Which is the most important function of management, and why?

Of the four functions, strategic management is the most important because it most directly
relates to the overall success of the firm. In strategic management, top managers determine
how the firm is to compete and what specific goals it must set and achieve to be successful.
The determination of these strategies and goals drives all other activities in the firm.

6. Identify the different types of business firms and other organizations that use cost
management information and explain how the information is used.

● Merchandising firms purchase goods for resale. Merchandisers use cost management
information to control stocking, distribution and customer service.
● Manufacturing firms use raw materials, labor, manufacturing facilities and equipment
to produce products. These firms use cost management information to control
 production costs.
● Service firms provide a service to customers that offer convenience, freedom, safety or
comfort. Service firms use cost management information to identify profitable services
and to control costs incurred in providing services.
● Governmental and not-for-profit organizations provide services without generating
revenue. They incur costs from the budgetary appropriation by the government or
philanthropic organizations. These organizations use cost management information to
determine and control the costs of the services they provide.

7. Name a firm or organization you know of that you are reasonably sure uses strategic cost
management and explain why it does so.

MayBank (page 24)

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8. The opening paragraph of an accounting textbook says, "Managers need accounting

information and need to know how to use it." Critically evaluate this statement.

● The word “need” has a negative connotation.

● It implies an unlimited level of demand for information.
● Actually, managers apply a cost-benefit criterion to information and will only want
accounting information if its benefits exceed its costs.
● Accounting information helps improve decision making and controlling behavior in
organizations.
● Generally, accounting information is very prevalent which implies that its benefits
 exceed its costs.
● As such, successful managers would want to learn how to use accounting information
in these organizations.
● If a manager perceives that the cost of generating the accounting information would
exceed the benefits, they will not use it. Thus, they do not need to know how to use it
because they do not need it.

9. The owner of a small software company felt his accounting system was useless. He stated,
"Accounting systems only generate historical costs. Historical costs are useless in my business
because everything changes so rapidly."
a. Are historical costs useless in rapidly changing environments?
b. Should accounting systems be limited to historical costs?

a. Though historical costs are of limited use in making planning decisions in a rapidly
changing environment, it is still useful for control purposes, as they provide
information about the activities of managers and can be used as performance measures
to evaluate managers.
b. Though historical costs are not generally appropriate for planning purposes, additional
measures are costly to make. Thus, an accounting system should include additional
measures if the benefits of improved decision making are greater than the costs of the
additional information.

10. A finance professor and a marketing professor were recently comparing notes on their
perceptions of corporations. The finance professor claimed the goal of a corporation should be
to maximize the value to the shareholders. The marketing professor claimed that the goal of a
corporation should be to satisfy customers. What are the similarities and differences in these
two goals?

Similarity - Maximize shareholder wealth

Difference - Goal

● Finance textbooks focus on financing decisions and not on the use of assets and dealing
with customers.
● Marketing’s goal of satisfying customers recognizes that customers are the source of
revenues for the organization, and therefore the means through which shareholder value
is increased.
● Customer satisfaction is only valuable insofar as it creates shareholder wealth.
● The further goal of marketing is to ensure that customer satisfaction is maximized
without compromising the organization’s profitability.

11. How do management accountants support strategic decisions?

Management accountants contribute to strategic decisions by providing information about the
sources of competitive advantage and by helping managers identify and build a company’s
resources and capabilities.

12. Define the term strategic cost management.

Strategic cost management is the process of understanding and managing, to the organization’s
advantage, the cost relationships among the activities in an organization’s value chain.

13. What is meant by a business strategy?

A strategy is a game plan that enables a company to attract customers by distinguishing itself
from competitors. The focal point of a company’s strategy should be its target customers.

14. What information does cost accounting provide?

Information related to the acquisition or consumption of an organization’s resources is

provided to both internal and external users.

15. How do cost accountants support strategic decisions?

- By providing information about the sources of competitive advantage

- By helping managers identify and build a company’s resources and capabilities.