P 1–1: MBA Students

One MBA student was overheard saying to another, “Accounting is baloney. I worked for a genetic
engineering company and we never looked at the accounting numbers and our stock price was always
growing.”

“I agree,” said the other. “I worked in a rust bucket company that managed everything by the numbers
and we never improved our stock price very much.” (Zimmerman, 2020).

Evaluate these comments.

The comments reflect differing perspectives on the relationship between accounting practices and stock
price growth. The first student's assertion that accounting was ignored in a genetic engineering company
might overlook the impact of industry dynamics and investor sentiment on stock prices. The second
student's agreement about a numbers-centric approach not improving stock prices highlights the
potential limitations of solely relying on financial data, while neglecting strategic innovation and market
adaptation.

P 1–2: One Cost System Isn’t Enough

Source: Robert S. Kaplan in “One Cost System Isn’t Enough” (Harvard Business Review. January–
February 1988, pp. 61–66):

No single system can adequately answer the demands made by diverse functions of cost systems.
While companies can use one method to capture all their detailed transactions data, the processing of
this information for diverse purposes and audiences demands separate, customized development.
Companies that try to satisfy all the needs for cost information with a single system have discovered
they can’t perform important managerial functions adequately. Moreover, systems that work well for
one company may fail in a different environment. Each company has to design methods that make
sense for its particular products and processes.

Of course, an argument for expanding the number of cost systems conflicts with a strongly ingrained
financial culture to have only one measurement system for everyone.

Describe the costs and benefits of having a single measurement system. (Zimmerman, 2020).
A single measurement system for cost information offers benefits in terms of simplicity, consistency, and
comparability across different functions and departments within an organization. It can streamline data
collection and training efforts, enhancing resource efficiency. However, this approach may result in a lack
of tailored information for specific functions, limiting accurate decision-making and managerial
functions. Additionally, a uniform system might struggle to adapt to diverse industry needs and
individual company characteristics, potentially leading to inaccurate cost allocation and performance
assessment. Overcoming the challenge of accommodating varied requirements while maintaining a
unified approach poses a key consideration for organizations.

P 1–3: U.S. and Japanese Tax Laws

Tax laws in Japan tie taxable income directly to the financial statements’ reported income. That is, to
compute a Japanese firm’s tax liability, multiply the net income as reported to shareholders by the
appropriate tax rate to derive the firm’s tax liability. In contrast, U.S. firms typically have more
discretion in choosing different accounting procedures for calculating net income for shareholders
(financial reporting) and taxes.

What effect would you expect these institutional differences in tax laws between the United States
and Japan to have on internal accounting and reporting? (Zimmerman, 2020).

The institutional differences in tax laws between the United States and Japan can significantly impact
internal accounting and reporting practices. In Japan, where taxable income is directly tied to reported
financial statements, alignment between financial and tax reporting is likely, fostering transparency and
accuracy. Conversely, the discretionary nature of U.S. accounting for financial reporting and taxes may
lead to divergence between the two, potentially resulting in intricate internal processes to optimize tax
outcomes. These differences shape motivations for financial reporting and tax planning, affecting
internal controls and coordination efforts within firms.

P 1–4: Using Accounting for Planning

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.”

Required:
Are historical costs useless in rapidly changing environments?

Should accounting systems be limited to historical costs? (Zimmerman, 2020).

Historical costs, while an essential aspect of traditional accounting, might indeed have limitations in
rapidly changing environments. The owner of the small software company raises a valid point that in
industries where technology, products, and market conditions evolve rapidly, historical costs might not
provide the most relevant information for decision-making. The emphasis on historical costs might
hinder the ability to respond swiftly to changing circumstances, potentially leading to suboptimal
resource allocation and strategic decisions. In such dynamic settings, a more real-time approach to
financial information, possibly involving managerial accounting techniques and forward-looking
estimates, could better capture the economic realities of the business and aid in navigating the fast-
paced environment.

While historical costs might have limitations in rapidly changing environments, it's important to note that
accounting systems serve broader purposes beyond just generating historical costs. Accounting systems
provide a structured framework for recording and organizing financial information, ensuring compliance
with regulations, and facilitating communication between various stakeholders. In many cases, historical
costs still serve as a baseline for evaluating performance, assessing profitability, and making comparisons
over time. However, recognizing the limitations, businesses operating in rapidly changing environments
might benefit from incorporating additional tools and techniques, such as real-time data analytics and
forward-looking projections, to complement the traditional accounting approach and make more
informed decisions that align with the pace of change in their industry.

P 1–5: Budgeting

Salespeople at a particular firm forecast what they expect to sell next period. Their supervisors then
review the forecasts and make revisions. These forecasts are used to set production and purchasing
plans. In addition, salespeople receive a fixed bonus of 20 percent of their salary if they meet or
exceed their forecasts.

Discuss the incentives of the salespeople to forecast next-period sales accurately. Discuss the trade-off
between using the budget for decision making versus using it as a control device. (Zimmerman,
2020).

Salespeople have strong incentives to forecast next-period sales accurately due to the direct link
between their forecasts and their compensation. The fixed bonus of 20 percent of their salary for
meeting or exceeding forecasts creates a financial motivation to provide realistic estimates. Accurate
forecasts enhance the likelihood of achieving or surpassing sales targets, leading to higher bonuses and
overall compensation. However, this incentive structure could potentially lead to overly conservative
forecasts to ensure meeting targets and securing bonuses, which might not fully capture the true sales
potential and might negatively impact production and purchasing plans.

Using forecasts as a basis for production and purchasing decisions provides a practical approach for
resource allocation and planning. It aligns the company's operations with expected future demand,
enabling efficient inventory management and cost control. However, the trade-off arises when the
budget becomes primarily a control device. If salespeople perceive that their forecasts are used mainly
to monitor their performance and not to guide production and purchasing decisions, they might be less
motivated to provide accurate forecasts. This can result in less reliable data for decision-making, as
salespeople could either inflate or deflate forecasts to manipulate their bonus potential, potentially
undermining the effectiveness of the budget as both a decision-making tool and a control mechanism.

P 1–6: All Things Tennis

All Things Tennis (ATT), a French company, manufactures a variety of tennis gear, such as racket covers,
tennis bags, and embroidered towels. ATT sells all its products exclusively in Europe through
independent distributors. ATT’s most popular line is a series of racket covers with various animal
pictures on the cover.

ATT is currently making 500 animal racket covers a week at an average per unit cost of 3.50 €, which
includes both variable costs and allocated fixed costs. The variable cost of each racket cover is 1.10 €.
ATT sells the racket covers to distributors for 4.25 €. A distributor in Canada, Toronto Sports, wants to
purchase 100 racket covers per week from ATT and sell them in Canada. Toronto offers to pay ATT 2 €
per racket cover. ATT has enough capacity to produce the additional 100 racket covers and estimates
that if it accepts Toronto’s offer, the per unit cost of all 600 racket covers will be 3.10 €. Assume the
cost data provided (3.50 € and 3.10 €) are accurate estimates of ATT’s costs of producing the racket
covers. Further assume that ATT’s variable cost per racket cover does not vary with the number of
racket covers manufactured.

Required:

Given the data in the problem, what is ATT’s weekly fixed cost of producing the animal racket covers?

To maximize firm value, should ATT accept Toronto’s offer? Explain why or why not.
Besides the data provided in the problem, what other factors should ATT consider before making a
decision to accept Toronto’s offer? (Zimmerman, 2020).

ATT's Weekly Fixed Cost: ATT's weekly fixed cost can be calculated by subtracting the variable cost per
unit from the total cost per unit: Fixed Cost = Total Cost per Unit - Variable Cost per Unit = 3.50 € - 1.10 €
= 2.40 €.

Accepting Toronto's Offer: ATT should not accept Toronto's offer. While the offer price of 2 € exceeds the
variable cost of 1.10 €, it does not cover the fixed costs of 2.40 € per unit. Accepting the offer would
result in a loss of 0.30 € per unit (2 € - 2.40 €), leading to reduced profitability and potentially negative
impact on firm value.

Additional Factors to Consider: Besides the provided data, ATT should consider factors such as:

Opportunity Cost: ATT should assess whether producing racket covers for Toronto would impact its
ability to meet existing demand from European distributors.

Market Expansion: Entering the Canadian market might open up growth opportunities, potentially
increasing firm value in the long run.

Relationships with Distributors: Accepting Toronto's offer at a lower price could strain relationships with
existing European distributors if they perceive a disparity in pricing.

Long-Term Strategy: ATT should evaluate how accepting the offer aligns with its overall business strategy,
considering factors like branding, customer perception, and potential impact on future pricing
negotiations.

Potential Future Demand: Assessing the potential demand growth in Canada and the long-term viability
of the Canadian market is crucial before committing to a decision.

Cost Fluctuations: Consideration of potential changes in variable and fixed costs over time should also be
factored into the decision.
In conclusion, while the offered price might cover variable costs, ATT needs to consider various strategic
and financial factors before deciding whether to accept Toronto's offer to ensure it maximizes its firm
value.

P 1–7: Parkview Hospital

Parkview Hospital, a regional hospital, serves a population of 400,000 people. The next closest
hospital is 50 miles away. Parkview’s accounting system is adequate for patient billing. The system
reports revenues generated per department but does not break down revenues by unit within
departments. For example, Parkview knows patient revenue for the entire psychiatric department but
does not know revenues in the child and adolescent unit, the chemical dependence unit, or the
neuropsychiatric unit.

Parkview receives its revenues from three principal sources: the federal government (Medicare), the
state government (Medicaid), and private insurance companies (Blue Cross–Blue Shield). Until
recently, the private insurance companies continued to pay Parkview’s increasing costs and passed
these on to the firms through higher premiums for their employees’ health insurance.

Last year Trans Insurance (TI) entered the market and began offering lower-cost health insurance to
local firms. TI cut benefits offered and told Parkview that it would pay only a fixed dollar amount per
patient. A typical firm could cut its health insurance premium 20 percent by switching page 20 to TI. TI
was successful at taking 45 percent of the Blue Cross–Blue Shield customers. Firms that switched to TI
faced stiff competition and sought to cut their health care costs.

Parkview management estimated that its revenues would fall 6 percent, or $3.2 million, next year
because of TI’s lower reimbursements. Struggling with how to cope with lower revenues, Parkview
began the complex process of deciding what programs to cut, how to shift the delivery of services
from inpatient to outpatient clinics, and what programs to open to offset the revenue loss (e.g., open
an outpatient depression clinic). Management can forecast some of the costs of the proposed changes,
but many of its costs and revenues (such as the cost of the admissions office) have never been tracked
to the individual clinical unit.

Required:

Was Parkview’s accounting system adequate 10 years ago?

Is Parkview’s accounting system adequate today?

10 Years Ago: Parkview's accounting system was likely adequate at that time for patient billing and
overall financial management. The lack of detailed revenue breakdown by individual clinical units might
not have been a significant issue if revenue sources were stable and reimbursement mechanisms were
straightforward.

Today: Parkview's accounting system is no longer fully adequate due to changes in the healthcare
landscape. The system's inability to track revenues and costs at the individual clinical unit level hampers
the hospital's ability to assess profitability, make informed decisions about program changes, and
respond effectively to shifts in reimbursement models and competitive pressures.

Changes Needed: Parkview should consider the following changes in its accounting system:

Cost Allocation: Implement a more refined cost allocation method to track costs at the individual clinical
unit level. This would provide accurate insights into the profitability of each unit and help in making
informed decisions about resource allocation.

Revenue Tracking: Enhance the system to track revenues at a granular level, including revenues from
different payer sources (Medicare, Medicaid, private insurance), enabling better analysis of revenue
sources and the effects of changes in reimbursement rates.

Data Analysis: Invest in data analytics capabilities to forecast the impact of various changes on revenues
and costs, allowing for better decision-making and strategic planning.

Budgeting: Develop more detailed budgets for each clinical unit to align spending with anticipated
revenues, enabling efficient allocation of resources and effective management of costs.

Performance Evaluation: Implement performance metrics for each clinical unit to assess their
effectiveness, efficiency, and contribution to the hospital's overall financial health.

Incorporating these changes would equip Parkview Hospital with the necessary information to navigate
challenges, respond to market dynamics, and make well-informed decisions in a rapidly evolving
healthcare environment.
P 1–8: Montana Pen Company

Montana Pen Company manufactures a full line of premium writing instruments. It has 12 different
styles, and within each style, it offers ballpoint pens, fountain pens, mechanical pencils, and a roller
ball pen. Most models also come in three finishes—gold, silver, and black matte. Montana Pen’s
Bangkok, Thailand, plant manufactures four of the styles. The plant is currently producing the gold clip
for the top of one of its pen styles, no. 872. Current production is 1,200 gold no. 872 pens each month
at an average cost of 185 baht per gold clip. (One U.S. dollar currently buys 32 baht.) A Chinese
manufacturer has offered to produce the same gold clip for 136 baht. This manufacturer will sell
Montana Pen 400 clips per month. If it accepts the Chinese offer and cuts the production of the clips
from 1,200 to 800, Montana Pen estimates that the cost of each clip it continues to produce will rise
from 185 baht to 212.5 baht per gold clip.

Required:

Should Montana Pen outsource 400 gold clips for pen style no. 872 to the Chinese firm? Provide a
written justification of your answer.

Given your answer in part (a), what additional information would you seek before deciding to
outsource 400 gold clips per month to the Chinese firm? (Zimmerman, 2020).

Should Montana Pen Outsource: Montana Pen should outsource 400 gold clips for pen style no. 872 to
the Chinese firm. The decision should be based on a cost comparison, considering the total cost of
producing 400 clips in-house versus outsourcing to the Chinese manufacturer. The cost per gold clip from
the Chinese manufacturer is 136 baht, which translates to $4.25 (136 baht / 32 baht per dollar).
Comparing this cost with the increased in-house cost of 212.5 baht per clip ($6.64), outsourcing to China
would result in significant cost savings. Thus, Montana Pen should take advantage of the lower cost
offered by the Chinese manufacturer for a portion of its production.

Additional Information Needed: Before deciding to outsource 400 gold clips per month to the Chinese
firm, Montana Pen should consider the following additional information:

Quality Assurance: Assess the quality of the gold clips produced by the Chinese manufacturer to ensure
they meet Montana Pen's standards and specifications.
Supply Reliability: Evaluate the Chinese manufacturer's ability to consistently supply the required
quantity of gold clips on time to avoid disruptions in production.

Transportation and Logistics: Analyze the transportation and logistics costs associated with importing the
clips from China to Thailand, considering factors like shipping time and potential customs duties.

Contract Terms: Review the terms of the contract with the Chinese manufacturer, including pricing
stability, minimum order requirements, and any penalties for changes or cancellations.

Long-Term Impact: Consider the long-term implications of outsourcing, including the potential effects on
in-house production capabilities, workforce, and relationships with suppliers and customers.

Exchange Rate Stability: Assess the stability of the exchange rate between the Thai baht and the U.S.
dollar, as fluctuations can impact the cost-effectiveness of outsourcing.

Strategic Considerations: Evaluate how outsourcing aligns with Montana Pen's overall business strategy,
goals, and competitive positioning within the market.

Gathering this additional information would provide a comprehensive view of the outsourcing decision's
potential benefits and risks, allowing Montana Pen to make an informed choice.

References:

Zimmerman, J. (2020). Accounting for Decision Making and Control (10th ed.).
[VitalSource Bookshelf]. https://online.vitalsource.com/#/books/9781259731419/