Solutions manual management consultancy

MANAGEMENT CONSULTANCY - Solutions Manual

CHAPTER 2
AREAS OF MANAGEMENT ADVISORY SERVICES
– PART I
I.

Questions
1. Refer to page 20, par 3
2. (a) Independent management consulting firms. Examples of these firms
are Accenture Consulting, Ernst & Young Consulting, First
Investment Development, Inc.
(b) Public Accounting firms
(c) Individual practitioners
(d) Internal consulting groups
(e) Research-oriented organizations.
3. Refer to pages 34 to 36
4. Refer to pages 17 and 18
5. (1) Manufacturing
a. Development of standard costing system
b. Application of just-in-time inventory system
(2) Finance and Accounting
a. Improvement of general and cost accounting system
b. Capital investment analysis
(3) Marketing
a. Evaluation and improvement of the distribution system
b. Assessment of the effectiveness of the firm’s marketing strategy
(4) International operations
a. Market research
b. Logistics

2-1


Areas of Management Advisory Services – Part I

Chapter 2

(5) Procurement of materials and supplies
a. Logistics in ordering materials and supplies including choice of
suppliers; quantity and quality decisions, receipt and issuance
procedures, etc.
b. Evaluation of system effectiveness and efficiency
6. Refer to pages 21 to 27
II. Multiple Choice Questions
1.
2.
3.
4.
5.

C
C
A
B
D

2-2


MANAGEMENT CONSULTANCY - Solutions Manual

CHAPTER 3
AREAS OF MANAGEMENT ADVISORY SERVICES
– PART II
I.

Questions
1. Refer to pages 33 and 34
2. Refer to pages 34 to 36
3. Refer to pages 34 to 36
4. Refer to pages 36 and 37
5. Refer to page 38
6. Refer to page 39
7. Refer to page 39 to 44

II. Multiple Choice Questions
1.
2.
3.
4.
5.

B
D
D
B
D

6. D
7. C

8. D

3-1


MANAGEMENT CONSULTANCY - Solutions Manual

CHAPTER 4
PROFESSIONAL ATTRIBUTES OF
MANAGEMENT CONSULTANTS
I.

Questions
1. Refer to page 49, par 1
2. Refer to pages 49 to 65
3. Refer to pages 49 to 65
4. Some of the factors which affect the degree of competence required in a
particular MAS engagement are
1. the nature, difficulty or complexity of the engagement,
2. the significance of the recommendations for which responsibility
will be assumed by the CPA, and
3. the role assumed by the CPA, i.e., as an analyst, advisor or a
researcher.
5. The CPA may acquire competence and proficiency in MS through
1. Education – formal or informal
(e.g., attending courses offered by universities and colleges
or professional or trade associations; reading, self-study)
2. Experience
(e.g., actual
supervision)

performance

under

more

3. Research
4. Consultation with CPAs and other professionals
6. Refer to pages 58 – 59.
7. Refer to pages 50 – 64.
4-1

experienced


Chapter 4

Professional Attributes of Management Consultants

8. Refer to pages 52 – 57.
9. Refer to pages 59 – 61.
10. Refer to pages 64 – 65.
II. Multiple Choice Questions
1.
2.
3.
4.
5.

D
C
A
C
B

6.
7.
8.
9.
10.

B
C
B
A
C

11.
12.
13.
14.
15.

4-2

B
C
D
D

D


MANAGEMENT CONSULTANCY - Solutions Manual

CHAPTER 5
MAS PRACTICE STANDARDS
AND ETHICAL CONSIDERATIONS
I.

Questions
1. “Role” refers to the relationship of the CPA as a consultant to the client
management and personnel. The basic role of the CPA in performing
MAS is to provide advice and technical assistance to the client.
2. Practice standards are necessary in the consulting practice in order to
promote the highest quality of performance of the practitioner.
3. Refer to page 71, par 2
4. Refer to page 71, par(s) 4 and 5
5. Refer to page 72, par 3
6. Refer to page 73, par 1
7. Refer to page 74, par(s) 2 to 4
8. Refer to page 75, par(s) 2 to 6
9. Refer to page 75, par 4

II. Multiple Choice Questions
1.
2.
3.
4.
5.

D
A
C
D
D

6.
7.
8.
9.

D
C
D
D

III. Cases
5-1


Chapter 5

MAS Practice Standards and Ethical Considerations

Case 1
Nondisclosure is not considered an acceptable alternative because it makes
you an accessory to the fact. Disclosure to the offending party only - with no
action - may result in the destruction of part of the evidence. Probably, the
first step is to report the matter to the chairman of the board. Circumstances,

however, may require that the matter be referred to an external body such as
the Securities and Exchange Commission, Justice Department, Bureau of
Internal Revenue, or the shareholders.
Case 2
The appropriate action depends on the type of company:
1. Privately held company in which the president is the owner:
Discuss the matter with the president who, as owner, can make the
decision.
2. Company with several shareholders in which the president holds a
controlling number of shares: Discuss the matter with the president.
If the president accepts the recommendation and resigns, the
problem is resolved. Otherwise, the matter should be discussed with
the chairman of the board and the board of directors.
3. A large publicly held company: The tendency here is to step over
the president and go directly to the chairman of the board. This is
unwise. You have a responsibility to discuss it first with the
president.
Case 3
The honest and ethical solution is to tell it as it is. The most tactful approach
is to make a full disclosure to the president privately, pointing out the vast
growth of the company and the tremendous changes in technology that have
occurred since he, as controller, installed the system. If he understands the
danger in which he is putting himself with regard to a possible dissident
shareholder, he probably will acquiesce and agree to go forward. If he
doesn’t, and this is a privately held company in which he has control, you
have accomplished your task. In a publicly held company, you may need to
report the problem to the chairman of the board if the impact on the annual
report is serious.
5-2

MAS Practice Standards and Ethical Considerations

Chapter 5

Case 4
Professional ethics requires that you accept only those engagements which
are felt to be beneficial to the client. Clearly, if the results of the study are
favorable, the client will be benefited. There is only a 50 percent chance,
however, that this will result. The question, therefore, is whether a 50
percent chance of benefit is sufficient to pursue the study. Many consultants
would answer yes to this question and accept the engagement because of the
potential profit. The consultant who faced this situation declined the
engagement and suggested that the client should use the money set aside for
the feasibility study to employ an advertising firm to help them sell the
bonds. This decision was justified by what the consultant thought was the
client’s best interest.
Case 5
Ethical conduct requires that you not misrepresent facts and never
subordinate judgment to others. Further, you should not serve a client under
terms or conditions that might impair objectivity, independence, or integrity,
and you should reserve the right to withdraw if conditions develop that
interfere with successful conduct of the assignment.
The consultant who was faced with this situation refused to follow the
direction of the president, and the president refused to pay the consultant’s
fee. The president wanted to use the consultant as a means for firing a vice
president. Ultimately, the fee was settled and no report was issued.
Case 6
Professional ethics require honesty, integrity, and placing the interests of the
client or prospective client ahead of personal interests. The fact that this is

an internal consultant, as opposed to an external consultant, makes no
difference. The internal consultant wrote the report based on the available
facts and was discharged.

Case 7

5-3


Chapter 5

MAS Practice Standards and Ethical Considerations

This is considered an ethical issue because its solution involves the future of
the consultant’s personal doctrine and nonprofessional associations as well
as the effectiveness and integrity of the consultation process in which the
consultant is about to engage. The principles involved in this case are not
uncommon.
Although accepting such engagements would not be in violation of the code
of ethics, acceptance would be ethical only if the consultant’s relationship
with the client firm were completely divorced from the consultant’s personal
doctrine and the client was made aware of the consultant’s values. These
circumstances are not likely, and the consultant would be justified in
declining such an engagement because of a conflict of norms.
Case 8
This arrangement is not acceptable under professional ethics. A consultant
should not pay a fee or commission to obtain a client or franchise a business
practice. The fact that the client came first and the commission came second
in this case makes no difference. The commission is being paid to franchise
a business practice.

The consultant who was faced with this situation accepted the engagement.
After it was completed and he had paid the fee to the public relations agency,
it was discovered that the city manager’s brother owned the public relations
agency. This disclosure was made in conjunction with the city’s audit. The
consultant willingly cooperated with the attorney in prosecution of the case.
The matter was brought to the ethics committee and, while the consultant
was in violation of the ethics code, he was discharged with a reprimand. His
willingness to assist in the prosecution and the fact that he was not
prosecuted in the case were significant in this decision.
Case 9
You are not in a good position from an ethical point of view. Your position
as a director provides you with a significant influence over the direction of
the company. As such, you have a responsibility to do what is best for the
company.
Your responsibility to the consulting firm is to secure
employment to keep your people busy. By being both director and
consultant for the same company, you are in a position that creates a conflict
of interest, which is in violation of the code of professional ethics.
5-4


MAS Practice Standards and Ethical Considerations

Chapter 5

Another problem is your planned conduct in the upcoming board meeting. It
is not honest and ethical for you to remain silent when you have relevant
information on a decision. You have a responsibility to express your
feelings about the proposed engagement even if it means losing the
engagement.

The solution here is to resign from the board of directors and become an
advisor to the chairman. You should point out how you feel about the
installation of the sophisticated system at this time. An objective decision
can then be made by the board on all the available facts.

5-5


MANAGEMENT CONSULTANCY - Solutions Manual

CHAPTER 6
ORGANIZATION AND MANAGEMENT
OF THE MAS PRACTICE
I.

Questions
1. The qualifications usually sought in hiring MAS personnel are
1. Adequate academic preparation
An undergraduate degree in business, engineering is usually
required while some graduate studies or master’s degree is
desirable.
2. Practical experience in business, education or government
service is also desirable because MAS engagement demands
logical and disciplined thinking.
3. Ability to work and communicate with client’s personnel and coemployees in the MAS division, inquisitive mind, high
degree of intelligence, pleasing personality, diligence and
aggressiveness are the other personal attributes required of
MAS personnel.
2. Refer to page 112, par 1
3. Refer to page 112, par 1

4. Refer to page 112, par 2
5. Refer to pages 113 to 114
6. Refer to pages 115 to 117
7. Refer to page 117
8. Refer to page 118
9. Refer to pages 118 to 119
6-1


Chapter 6

Organization and Management of the MAS Practice

10. Refer to page 120 to 121
11. Refer to page 122
12. Refer to Appendix A.1
13. Balance Sheet (Appendix A.2), Income and Expense Statement Forecast
(Appendix A.3) and Cash Flow Budget (Appendix A.4)
14. Refer to Appendix A.5
II. Multiple Choice
1.
2.
3.
4.
5.

C
C
B
A

C

6. C
7. D
8. C

6-2


MANAGEMENT CONSULTANCY - Solutions Manual

CHAPTER 7
STAGES OF MANAGEMENT CONSULTING
ENGAGEMENT - PART I
I.

Questions
1. Analytical approach and process refers to the systematic, objective and
rational method of solving business problems.
It involves a
professional-level ability to ascertain pertinent facts and circumstance,
define problem, evaluate the alternative courses of action and present
conclusions and recommendations to solve the problem.
2. Refer to page 127
3. Refer to page 128, par 1
4. Refer to page 130, par 3
5. Refer to page 128
6. Refer to page 129
7. Refer to page 130
8. Refer to page 130

9. Refer to page 132
10. Refer to pages 139 to 143
11. Refer to page 137
12. Refer to page 143 to 144
13. Refer to page 131
14. Refer to page 137
7-1


Stages of Management Consulting Engagement – Part I

Chapter 7

15. Refer to page 139
16. Refer to pages 143 to 144
17. Refer to pages 145 to 147
II. Multiple Choice
1.
2.
3.
4.
5.

D
D
B
D
B

6.

7.
8.
9.
10.

B
D
D
D
C

11.
12.
13.
14.
15.

7-2

D
D
D
D
D

16.
17.
18.
19.
20.

C
D
C
C
A


MANAGEMENT CONSULTANCY - Solutions Manual

CHAPTER 8
STAGES OF MANAGEMENT CONSULTING
ENGAGEMENT - PART II
I.

Questions
1. Refer to page 155
2. Refer to page 156
3. Refer to page 162
4. Refer to page 163 to 165
5. Refer to page 167
6. Refer to page 165
7. Refer to page 165

II. Multiple Choice
1.
2.
3.

B

D
D

8-1


MANAGEMENT CONSULTANCY - Solutions Manual

CHAPTER 9
PROJECT MANAGEMENT AND CONTROL
I.

Questions
1. Refer to page 171
2. Refer to page 171, par 3
3. Refer to pages 172 to 173
4. Refer to page 174
5. Refer to page 178 (a-d)
6. Refer to pages 182 to 184
7. Refer to page 185, par 1
8. Refer to page 185, par 2
9. Refer to page 186
10. Refer to page 187

9-1


MANAGEMENT CONSULTANCY - Solutions Manual

CHAPTER 10

PRESENTATION OF ENGAGEMENT REPORTS
I.

Questions
1. Refer to page 191
2. Refer to pages 191 to 192
3. Refer to page 192
4. Refer to page 192
5. Refer to pages 193 to 194
6. Refer to page 194
7. Refer to page 197, last paragraph
8. Refer to page 199
9. Refer to page 201
10. Refer to page 202

10-1


MANAGEMENT CONSULTANCY - Solutions Manual

CHAPTER 11
MANAGING THE QUALITY OF
CONSULTING ENGAGEMENT
I.

Questions
1. Refer to page 206
2. Refer to pages 206 to 209
3. Refer to page 207, par 1
4. Refer to page 207, par 3

5. Refer to page 207, last paragraph
6. Refer to page 208, par 3
7. Refer to page 209
8. Refer to page 210, last paragraph
9. Refer to pages 216 to 217
10. Refer to page 218

11-1


MANAGEMENT CONSULTANCY - Solutions Manual

CHAPTER 12
MANAGEMENT OF THE CLIENT RELATIONSHIP
I.

Questions
1. Refer to pages 222 to 223
2. Refer to page 221, par 3
3. Refer to page 222, par 3
4. Refer to page 222, last paragraph
5. Refer to page 223, par 2
6. Refer to page 223, par 3
7. Refer to page 224, par 2
8. Refer to page 224, pars 4 & 5
9. Refer to page 231 – Abandoning Clients Gracefully
10. Refer to page 231, par 2

II. Multiple Choice
1.

2.
3.
4.

C
D
D
C

12-1


MANAGEMENT CONSULTANCY - Solutions Manual

CHAPTER 13
MANAGEMENT OF PEOPLE RELATIONSHIPS
I.

Questions
1. Refer to page 237
2. Refer to page 237
3. Refer to page 238
4. Refer to page 240, par 2
5. Refer to page 243
6. Refer to page 244, par 3
7. Refer to pages 244 to 245
8. Refer to pages 247 to 248
9. Refer to pages 249 to 250
10. Refer to pages 250 to 251
11. Refer to pages 252 to 253

12. Refer to pages 253 to 254

13-1


MANAGEMENT CONSULTANCY - Solutions Manual

CHAPTER 14
FINANCIAL FORECASTING
I.

Questions
1. The pro-forma financial statements and cash budget enable the firm to
determine its future level of asset needs and the associated financing that
will be required. Furthermore, one can track actual events against the
projections. Bankers and other lenders also use these financial
statements as a guide in credit decisions.
2. The collections and purchase schedules measure the speed at which
receivables are collected and purchases are paid. To the extent
collections do not cover purchasing costs and other financial
requirements, the firm must look to borrowing to cover the deficit.
3. Rapid growth in sales and profits is often associated with rapid growth
in asset commitment. A P100,000 increase in sales may occasion a
P50,000 increase in assets, with perhaps only P10,000 of the new
financing coming from profits. It is very seldom that incremental profits
from sales expansion can meet new financing needs.
4. The percent-of-sales forecast is only as goods as the functional
relationship of assets and liabilities to sales. To the extent that past
relationships accurately depict the future, the percent-of-sales method
will give values that reasonably represent the values derived through the

pro-forma statements and the cash budget.

II. Multiple Choice
1.
2.
3.
4.
5.

C
A
C
A
A

6.
7.
8.
9.
10.

B
A
C
B
A

11.
12.
13.

14.
15.

14-1

D
C
B
C
A

16.
17.
18.
19.

B
A
A
D


Chapter 14

Financial Forecasting

III. Problems
PROBLEM 1 (ETC ELECTRONICS COMPANY)
Cash Receipts Schedule

+

+

+

Sales
Cash Sales (10%)
Credit Sales
(90%)
Collections
(month after sale)
20%
Collections
(second month
after sale) 80%

April
P320,000
32,000
288,000

May
P300,000
30,000
270,000

June
P275,000
27,500

247,500

July
P275,000
27,500
247,500

Aug.
P290,000
29,000
261,000

Sept.
P330,000
33,000
297,000

57,600

54,000

49,500

49,500

52,200

230,400

216,000

198,000

198,000

P311,900

P293,000

P276,500

P238,200

Total Cash
Receipts

Cash Payments Schedule
Purchases
Payments (month after
purchase - 40%)
Payments (second
month after purchase 60%)
Labor Expense (10% of
sales)
Overhead
Interest Payments
Cash Dividend
Taxes
Capital Outlay
Total Cash Payments

April
P130,000

May
P120,000

June
P120,000

July
P180,000

Aug.
P200,000

Sept.
P170,000

52,000

48,000

48,000

72,000

80,000

78,000

72,000

72,000

108,000

27,500
12,000
30,000
50,000
25,000

27,500
12,000

29,000
12,000

33,000
12,000
30,000

P270,500

P159,500

P185,000

25,000

300,000
P588,000

Cash Budget
Cash Receipts .....................................
Cash Payments ...................................
Net Cash Flow .....................................
Beginning Cash Balance .....................
Cumulative Cash Balance ...................
Monthly Borrowing or (Repayment)......
Cumulative Loan Balance ....................
Marketable Securities Purchased ........
(Sold)
Cumulative Marketable Securities .......

June
P311,900
270,500
41,400
20,000
61,400
--11,400
11,400

14-2

July
P293,000
159,500
133,500

50,000
183,500
--133,500
-144,900

August
P276,500
185,000
91,500
50,000
141,500
--91,500
-236,400

September
P283,200
588,000
(304,800)
50,000
(254,800)
*28,400
28,400
(236,400)


Financial Forecasting
Ending Cash Balance ..........................
* Cumulative Marketable Sec. (Aug.)
Cumulative Cash Balance (Sept.)
Required (ending) Cash Balance

Monthly Borrowing

50,000

50,000

Chapter 14

50,000

10,000

P236,400
- 254,800
- 10,000
- P28,400

PROBLEM 2 (ODETTE ELECTRONICS)

Required New Funds

=

S =

(10%) (P100 mil.)

S =

P10,000,000

RNF (millions) =

A
S (S) 

85
100 (P10,000,000) 

L
S

(S)  PS2 (1  D)

25
100 (P10,000,000)  .07

(P110,000,000) (1  .40)
= .85(P10,000,000)  .25(P10,000,000)  .07(P110,000,000) (.60)

RNF

=

P8,500,000  P2,500,000  P4,620,000

=

P1,380,000

PROBLEM 3 (TESS’ SHOPS, INC.)

a) Required New Funds
S =
RNF

=

A
S

(S) 

L
S

(S)  PS2 (1  D)

15% x P300,000,000 = P45,000,000
240
120
=
300 (P45,000,000)  300 (P45,000,000)  .08
(P345,000,000) (1  .25)

14-3


Chapter 14

Financial Forecasting

= .80(P45,000,000)  .40(P45,000,000)  .08
(P345,000,000) (.75)

RNF

=

P36,000,000  P18,000,000  P20,700,000

=

(P2,700,000)

A negative figure for required new funds indicates that an excess of
funds (P2.7 mil.) is available for new investment. No external funds are
needed.

b) RNF

=

P36,000,000  P18,000,000  .095(P345,000,000)
x (1  .5)

=

P36,000,000  P18,000,000  P16,387,500

=

P1,612,500 external funds required

The net profit margin increased slightly, from 8% to 9.5%, which
decreases the need for external funding. The dividend payout ratio
increased tremendously, however, from 25% to 50%, necessitating more
external financing.
The effect of the dividend policy change
overpowered the effect of the net profit margin change.

14-4


MANAGEMENT CONSULTANCY - Solutions Manual

CHAPTER 16
MANAGEMENT OF CURRENT ASSETS
I.

Questions
1. Cash and marketable securities are generally used to meet the transaction
needs of the firm and for contingency purposes. Because the funds must
be available when needed, the primary concern should be with safety
and liquidity rather than the maximum profits.
2. Float exists because of the delay time in check processing. Electronic
funds transfer, or the electronic movement of funds between computer
terminals, would eliminate the need for checks and thus eliminate float.
3. A firm could operate with a negative balance on the corporate books
knowing float will carry them through at the bank. Checks written on

the corporate books may not clear until many days later at the bank. For
this reason, a negative account balance on the corporate books of
P100,000 may still represent a positive balance at the bank.
4. By slowing down disbursements or the processing of checks against the
corporate account, the firm is able to increase float and also to provide a
source of short-term financing.
5. The average collection period, the ratio of bad debts to credit sales and
the aging of accounts receivable.
6. The EOQ or economic order point tells us at what size order point we
will minimize the overall inventory costs to the firm, with specific
attention to inventory ordering costs and inventory carrying costs. It
does not directly tell us the average size of inventory on hand and we
must determine this as a separate calculation. It is generally assumed,
however, that inventory will be used up at a constant rate over time,
going from the order size to zero and then back again. Thus, average
inventory is half the order size.

16-1