Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed


Examples of dysfunctional decisions managers may make to increase reported operating profit are a



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7.7
Examples of dysfunctional decisions managers may make to increase reported operating profit are
a
Plant managers may switch production to those orders that absorb the highest amount of manufacturing overhead, irrespective of the demand by customers.
b
Plant managers may accept a particular order to increase production even though another plant in the same company is better suited to handle that order.
c
Plant managers may defer maintenance beyond the current period to free more time for production.
7.8
Approaches used to reduce the negative aspects associated with using absorption costing include
a
Changing the accounting system.
• Adopting either variable or throughput costing, both of which reduce the incentives of managers to buildup stock.
• Adopting a stock-holding charge for managers who tie up funds in stock.
b
Extending the time period used to evaluate performance. By evaluating performance over a longer time period (say, three to five years, the incentive to take short-run actions that reduce long-term profit is lessened.
c
Including non-financial as well as financial variables in the measures used to evaluate performance.
7.9
The theoretical capacity and practical capacity denominator-level concepts emphasise what a plant can supply. The normal utilisation and master-budget utilisation concepts emphasise what customers demand for products produced by a plant.
7.10
Normal utilisation is the denominator-level concept based on the level of capacity utilisation that satisfies average customer demand over a period (say, two or three years, which includes seasonal, cyclical or other trend factors. Where managers do not have a high level of confidence in forecasting two to three years in the future, they may prefer master-budget utilisation (which is based on only one year ahead) as the denominator level.


Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012

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