Managerial Accounting, 12th Edition solutions manual and test bank by Carl S. Warren | James M. Reeve | Jonathan Duchac

Managerial Accounting, 12th Edition solutions manual and test bank by Carl S. Warren | James M. Reeve | Jonathan Duchac 

CHAPTER 27 (FIN MAN); CHAPTER 12 (MAN)
COST MANAGEMENT FOR
DISCUSSION QUESTIONS
JUST-IN-TIME ENVIRONMENT

 

1.
Just-in-time processing is a philosophy that focuses on reducing time, cost, and poor quality
within manufacturing processes. The result of these efforts is a reduction in inventory levels.
2.
Move time and wait time in inventory are examples of non-value-added lead time.
3.
A product-oriented layout can be designed to minimize materials movements and reduce (or
eliminate) setup time. As a result, a product-oriented layout should have a shorter lead time
than a process-oriented layout.
4.
Long setup times lead to large production runs (batch sizes) in order to amortize the cost of
the setup. Large batch sizes result in larger inventories, which in turn lead to long wait times.
Thus, long setup times can lead directly to long lead times.
5.
Pull or “make to order” manufacturing requires the manufacturer to build product only as it is
needed for actual customer orders. As a result, finished goods, work in process, and materials
inventories are minimized. Make to order manufacturing requires a high degree of flexibility
and insignificant setup costs.
6.
Product defects can cause additional costs and unpredictability in the process in the form of
scrap, rework, record keeping, and inspection. In addition, product defects can cause a
process to shut down, because there is very little work in pro

Managerial Accounting, 10th Edition Susan V. Crosson Belverd E. Needles Solutions manual and test bank

Managerial Accounting, 10th Edition Susan V. Crosson Belverd E. Needles Solutions manual and test bank

Chapter 2

Costing Systems: Job Order Costing

Learning Objectives

1. Distinguish between the two basic types of product costing systems, and identify the information that each provides.

2. Explain the cost flow in a manufacturer’s job order costing system.

3. Prepare a job order cost card, and compute a job order’s product or service unit cost.

4. Explain cost allocation, and describe how allocating overhead costs figures into calculating product or service unit cost.

5. Explain why unit cost measurement is important to the management process in producing business results.

Section 1: Concepts

Concepts

• Cost measurement
• Cost recognition
• Matching rule (accrual accounting)

Lecture Outline

I. A product costing system is used to account for an organization’s product costs and to provide timely and accurate unit cost information for pricing, cost planning and control, inventory valuation, and financial statement preparation.

II. Two basic types of product costing systems have been developed:

A. Job order costing systems:

1. Measure and recognize the costs of direct materials, direct labor, and overhead to a specific batch of products or a specific job order.

2. Use job order cost cards.

B. Process costing systems:

1. Are used by companies that produce large amounts of similar products or that have long, continuous production runs of identical products.

2. Use process cost reports.

C. More typical is the operations costing system, which is a hybrid that combines parts of the job order and process costing systems.

Summary

There are two basic types of product costing systems. A job order costing system is used by companies that make unique, custom, or special-order products. Such a system traces the costs of direct materials, direct labor, and overhead to a specific batch of products or to a specific job order. It measures the cost of each complete unit and summarizes the cost of all jobs in a single Work in Process Inventory account that is supported by job order cost cards.

A process costing system is used by companies that produce large amounts of similar products or liquid products or that have long, continuous production runs of identical products. Such a system first traces the costs of direct materials, direct labor, and overhead to processes, departments, or work cells and then assigns the costs to the products manufactured by those processes, departments, or work cells. A process costing system uses several Work in Process Inventory accounts—one for each department, process, or work cell. It assigns costs to products each period using a process cost report.

The typical product costing system, however, combines parts of job order costing and process costing to create a hybrid system known as an operations costing system.

Relevant Examples and Exhibits

· Exhibit 1 Characteristics of Job Order Costing and Process Costing Systems

Teaching Strategy

A good place to begin is by comparing and contrasting job order costing to process costing using Exhibit 1. One approach would be to discuss the exhibit as it pertains to the products or services in Short Exercise 1. Emphasize the key terms of job order, job order cost card, process costing system, process cost report, and operations costing system as you discuss this section.

Section 2: Accounting Applications

Accounting Applications

· Prepare a job order cost card

• Compute a job order’s product or service unit cost

Lecture Outline

I. The basic parts of a job order costing system are the:

A. Cost measurement and recognition procedures.

B. Electronic documents.

C. Accounts that a company uses when it incurs costs for direct materials, direct labor, and overhead.

II. Accounting for materials requires three types of entries.

A. With the purchase of materials, debit Materials Inventory and credit Accounts Payable.

B. With the transfer of direct materials to production, debit Work in Process Inventory and credit Materials Inventory.

C. With the transfer of indirect materials to production, debit Overhead and credit Materials Inventory.

III. Accounting for labor requires two types of entries.

A. For payroll costs incurred for direct labor, debit Work in Process Inventory and credit Payroll Payable.

B. For payroll costs incurred for indirect labor, debit Overhead and credit Payroll Payable.

IV. Accounting for other overhead requires two types of entries.

A. Other overhead includes plant utilities, property taxes, insurance, and depreciation.

B. To record actual overhead costs, debit Overhead and credit Cash or Accumulated Depreciation.

C. To record estimated overhead costs, debit Work in Process Inventory and credit Overhead.

D. The actual (debits) and estimated (credits) overhead costs are compared at the end of the period to determine the accuracy of overhead cost recognition.

V. To record the transfer of completed units, debit Finished Goods Inventory and credit Work in Process Inventory.

VI. When a company uses a perpetual inventory system, two accounting entries are made when products are sold.

A. To record the sold product’s sales price, debit Accounts Receivable (or Cash) and credit Sales.

B. To record the sold product’s associated costs, debit Cost of Goods Sold and credit Finished Goods Inventory.

VII. Each job in production has a job order cost card.

A. Has space for direct materials, direct labor, and overhead costs.

B. Includes the job order number, product specifications, customer name, date of order, projected completion date, and a cost summary.

C. For incomplete jobs, they make up the subsidiary ledger for the Work in Process Inventory account.

D. When a job is completed, the costs are totaled on the job order cost card.

1. Unit cost is computed to value items in inventory.

2. Product Unit Cost = Total Costs for Job ÷ Number of Good Units Produced

VIII. Job order costing systems are also used in service organizations.

A. Job order cost cards track cost-plus contracts.

IX. Overhead costs are allocated in four steps.

A. Step 1: Plan the overhead rate.

1. A predetermined overhead rate is calculated as estimated overhead costs divided by estimated cost driver activity.

B. Step 2: Apply the overhead rate.

1. Costs are assigned by multiplying the actual cost driver activity by the predetermined overhead rate.

C. Step 3: Record actual overhead costs

D. Step 4: Reconcile applied and actual overhead amounts

1. If over- or underapplied amounts are minimal, credit or debit Cost of Goods Sold.

2. If over- or underapplied amounts are material, adjustments should be made to the inventory accounts affected.

X. The traditional approach to applying overhead costs is to use a single plantwide rate.

XI. The more accurate ABC approach to applying overhead costs creates many smaller activity pools and establishes separate rates for each pool.

Summary

In a manufacturer’s job order costing system, the costs of materials are first charged to the Materials Inventory account. The actual overhead costs are debited to the Overhead account. As products are manufactured, the costs of direct materials and direct labor are debited to the Work in Process Inventory account and are recorded on each job’s job order cost card. Overhead costs are applied and debited to the Work in Process Inventory account and credited to the Overhead account using a predetermined overhead rate. They too are recorded on the job order cost card. When products and jobs are completed, their costs are transferred to the Finished Goods Inventory account. Then, when the products are sold and shipped, their costs are transferred to the Cost of Goods Sold account.

All costs of direct materials, direct labor, and overhead for a particular job are accumulated on a job order cost card. When the job has been completed, those costs are totaled. The total is then divided by the number of good units produced to find the product unit cost. The product unit cost is entered on the job order cost card and will be used to value items in inventory.

Many service organizations use a job order costing system to track the costs of labor, materials and supplies, and service overhead to specific customer jobs. Labor is an important cost for service organizations. To cover their costs and earn a profit, service organizations often base jobs on cost-plus contracts, which require the customer to pay all costs incurred plus a predetermined amount (percentage) of profit.

Cost allocation is the process of assigning indirect costs to a specific cost object using an allocation base known as a cost driver. The allocation of overhead costs requires the pooling of overhead costs that are affected by a common activity and the selection of a cost driver whose activity level causes a change in the cost pool. A cost pool is the collection of overhead costs assigned to a cost object. A cost driver is an activity base that causes the cost pool to increase in amount as the volume of activity increases. Allocating overhead is a four-step process that involves planning a rate at which overhead costs will be assigned to products or services, assigning overhead costs at this predetermined overhead rate to products or services during production, recording actual overhead costs as they are incurred, and reconciling the difference between the actual and applied overhead costs. The Cost of Goods Sold or Cost of Sales account is corrected for an amount of over- or underapplied overhead costs assigned to the products or services. In manufacturing companies, if the difference is material, adjustments are made to the Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts. The traditional method applies overhead costs by estimating one predetermined overhead rate and multiplying that rate by the actual cost driver level. When the activity-based costing (ABC) method is used, overhead costs are grouped into a number of cost pools related to specific activities. For each activity pool, cost drivers are identified, and cost driver levels are estimated. Overhead is applied to the product or service by multiplying the various activity rates by their actual cost driver level. The product or service unit cost is computed either by dividing the total product or service cost by the total number of units produced or by determining the cost per unit for each element of the cost and summing those per-unit costs.

Relevant Examples and Exhibits

· Exhibit 2 The Job Order Costing System—Custom Golf Carts, Inc.

· Exhibit 3 Job Order Cost Card for a Manufacturing Company

· Exhibit 4 Job Order Cost Card for a Service Organization

· Exhibit 5 Allocating Overhead Cost: A Four-Step Process

Teaching Strategy

Begin discussing the foundations of job order cost flows by explaining that the basic parts of a job order costing system are the cost measurement and recognition procedures, electronic documents, and accounts that a company uses when it incurs costs for direct materials, direct labor, and overhead. One way to approach the recording of transactions is to use Exhibit 2 and systematically follow the transactions through the T-accounts. Begin with materials and progress to labor, overhead, then completed units and sold units. Reinforce your discussion about the transactions by including Short Exercises 2, 3, and 4 as either class or group activities.

This sets the stage for a discussion of the job order cost card shown in Exhibit 3. Explain that traditionally, job order cost cards were paper, but today, most cards reside electronically in a computer system. In your discussion, emphasize the fact that service organizations as well as manufacturers can use job order cost cards. The difference exists primarily with respect to direct materials. Job order cost cards for service businesses focus on recording costs by activities done for the job. The activity costs may include supplies, labor, and overhead. From a service organization perspective, information on the total cost of a service from job cost cards can be used to determine pricing in cost-plus contracts. Short Exercise 5 provides an excellent classroom activity, for discussion or group work, emphasizing the characteristics of job order cost cards. Short Exercise 6 also reinforces the use of job costing by service firms. Short Exercise 7 provides a good activity to help explain cost-plus contracts.

Review the fact that the costs of direct materials and direct labor can be easily traced to a product or service, but overhead costs are indirect costs that must be collected and allocated in some manner, since their physical flow and cost incurrence do not always match. Students may not fully appreciate the importance or understand the need for allocation of overhead. Therefore, you might consider a discussion about why financial statements require the reconciliation of overhead costs. In other words, explain that financial statements report actual cost information. As a result, estimated overhead costs applied during the accounting period must be adjusted to reflect actual overhead costs. This discussion provides the foundation for cost allocation, cost drivers, cost objects, and cost pools which then logically lead to calculating predetermined overhead rates. At this point, consider using Short Exercises 9 and 10 as class or group activities to help solidify the discussion about the overhead rate and how overhead is allocated to production.

With this knowledge, students are now ready for a discussion regarding the comparison of applied overhead costs to actual overhead costs. Remind them that if the overhead costs applied to production during the period are less than the actual overhead costs, the difference represents underapplied overhead costs. Likewise, if the overhead costs applied to production during the period are greater than the actual overhead costs, the difference in the amounts represents overapplied overhead costs. If these amounts are immaterial, they are adjusted through Cost of Goods Sold. If, instead, the differences are material for the products produced, adjustments are made to the accounts affected—that is, the Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts. Exhibit 5 provides an excellent illustration regarding the four-step process of allocating overhead cost. Consider reinforcing the concept of overapplied and underapplied overhead costs by incorporating Short Exercise 8 and/or Problem 4 as a class activity.

Section 3: Business Applications

Business Applications

• Planning
• Performing
• Evaluating
• Communicating

Lecture Outline

I. Managers depend on relevant and reliable information about product unit costs to manage their organizations.

A. Unit cost knowledge is used for planning:

1. To help set reasonable prices.

2. To help estimate the cost of products or services.

B. Timely cost knowledge is used in day-to-day performing:

1. To manage activity volume.

2. To ensuring quality.

3. To negotiate a selling price.

C. Actual results and targets are used when evaluating:

1. To watch for changes in cost.

2. To watch for changes in quality.

D. Managers use unit costs when communicating to internal and external users:

1. Inventory balances on the balance sheet

2. Cost of goods sold/sales on the income statement.

E. Job order costing supports the management process as summarized in Exhibit 6.

Summary

When managers plan, information about unit cost helps them develop budgets, establish prices, set sales goals, plan production volumes, estimate product or service unit costs, and determine human resource needs. Daily, managers use cost information to make decisions about controlling costs, managing the company’s volume of activity, ensuring quality, and negotiating prices. When managers evaluate results, they analyze actual and targeted information to evaluate performance and make any necessary adjustments to their planning and decision-making strategies. When managers communicate with stakeholders, they use unit costs to determine inventory balances and the cost of goods or services sold for the financial statements. They also use internal reports that compare the organization’s measures of actual and targeted unit costs to determine whether the cost goals for products or services are being achieved. Reports may also contain nonfinancial measures of performance.

Relevant Examples and Exhibits

· Exhibit 6 Job Order Costing and the Management Process

Teaching Strategy

To link the concept of job order costing with the management process, refer to Exhibit 6. Section 3 of the TriLevel Problem provides a good illustration and learning tool for this concept. Additionally, consider using Short Exercise 11 as a good capstone exercise to summarize discussion for this chapter.

Student Engagement Tactics

If you are primarily presenting this material in a lecture setting, keep in mind that there are several ways to maintain student attention.

1. Make connections between the chapter material and current events or actual company examples; for example, you might choose a high profile criminal court case in the news and discuss how the attorney in a large criminal law practice would ordinarily keep separate records of the costs of advising and defending each of his/her clients.
2. Begin each class with something that is familiar and important to students; in this chapter, for example, choose the most recent movie that is popular with the students. Using movie studios as the example, discuss how a job order costing system might work to accumulate costs for accounting and billing purposes on this movie.
3. End each class by summarizing the main points. You might want to pick three or five main points for every chapter of this text. One good way would be to follow the three sections of the text to determine the three main points.

Management, 12th Edition solutions manual and test bank by Robert Kreitner | Carlene Cassidy

Management, 12th Edition solutions manual and test bank by Robert Kreitner | Carlene Cassidy 

CHAPTER 2

The Evolution of Management Thought

CHAPTER OBJECTIVES

· Identify two key assumptions supporting the universal process approach and briefly describe Henri Fayol’s contribution.

· Discuss Frederick W. Taylor’s approach to improving the practice of industrial management.

· Identify at least four key quality improvement ideas from W. Edwards Deming and the other quality advocates.

· Describe the general aim of the human relations movement and explain the circumstances in which it arose.

· Explain the significance of applying open-system thinking to management.

· Explain the practical significance of adopting a contingency perspective.

· Describe what “management by best seller” involves and explain what managers can do to avoid it.

OPENING cASE

What are Zildjian’s Secrets to Success?

Craigie Zildjian is head of The Zildjian Company, the world’s largest cymbal maker and the oldest continuously family-run business in the U.S. (founded in 1623 in Turkey, now located in Norwell, MA). Her perspective on their recipe for success:

· Guided by core values:

o Continuous quality improvement

o Innovation

o Craftsmanship

o Customer collaboration

o Empowering employees

o Avoiding complacency

o Reinvesting in the company

· Risky R&D (research and development) also help Zildjian maintain a competitive edge with 65% of the world cymbal market. Introducing the first titanium-coated cymbal and expanding their plant are two examples of how they are taking risks and betting on the future.

· Careful listening is part of the corporate strategy. This includes bringing in artists (musicians) to meet with the R&D manager and marketing staff. An excellent example of how Zildjian collaborates with their customers.

Ask students to compare much younger companies they are familiar with (they are likely to mention Apple or Google) with the nearly 400 year old Zildjian Company. What are the similarities and differences? What can these young companies learn from the history and success of such an old company?

LECTURE OUTLINE

Historians and managers alike believe that one needs to know where management has been if one is to understand where it is going.

Various approaches in the evolution of management thought are discussed relative to the lessons each can teach today’s managers.

I. THE PRACTICE AND STUDY OF MANAGEMENT

The systematic study of management is relatively new, essentially a product of the twentieth century. The actual practice of management has been around for thousands of years.

· The pyramids of Egypt stand as tangible evidence of the ancient world’s ability to manage.

· Those ancient managers faced many of the same general problems managers face today such as planning, staffing, managing resources, keeping records, monitoring progress and taking corrective action when needed.

A. Information Overload

· In early cultures, management was learned by word of mouth and by trial and error.

· There was no systematically recorded body of management knowledge.

· Thanks to modern print and electronic media there is a wealth of information on management available for students of management.

· So much information exists today that it is difficult or impossible to keep abreast of it all.

B. An Interdisciplinary Field

Scholars from many fields—including psychology, sociology, cultural anthropology, mathematics, philosophy, statistics, political science, economics, logistics, computer science, ergonomics, history, and various fields of engineering—have, at one time or another, been interested in management.

· Administrators in the areas of business, government, religious organizations, health care, and education have also contributed.

· Each group has offered its own perspective, with new questions and assumptions, new research techniques, different technical jargon, and new conceptual frameworks.

C. No Universally Accepted Theory of Management

· There is no single theory of management that is universally accepted today.

· This chapter covers five approaches to management, which provide the main headings for the chapter.

II. THE UNIVERSAL PROCESS APPROACH

The universal process approach is the oldest and one of the most popular approaches to management thought. It is also called the universalist or functional approach. Early writers emphasized the specialization of labor, the chain of command, and authority.

There are two main assumptions:

· Although the purpose of organizations may vary, a core management process remains the same across all organizations.

· This process can be reduced to a set of separate functions and related principles.

A. Henri Fayol’s Universal Management Process

Henri Fayol published his classic book, Administration Industrielle et Générale, in 1916. It was not translated into English until 1949. Fayol’s work had a permanent impact on twentieth-century management thinking.

Fayol divided the manager’s job into five functions (as mentioned in Ch. 1):

(1) Planning

(2) Organizing

(3) Command

(4) Coordination

(5) Control

His 14 universal principles of management (listed and explained in Table 2.1 in the text) were intended to show managers how to carry out their functional duties. These principles are

(1) Division of work

(2) Authority

(3) Discipline

(4) Unity of command

(5) Unity of direction

(6) Subordination of individual interests to the general interest

(7) Remuneration

(8) Centralization

(9) Scalar chain

(10) Order

(11) Equity

(12) Stability and tenure of personnel

(13) Initiative

(14) Esprit de corps

These functions and principles have withstood the test of time because of their widespread applicability.

B. Lessons from the Universal Process Approach

· The complex management process can be separated into interdependent areas of responsibility, or functions.

· Management is a continuous process beginning with planning and ending with controlling.

· There is a concern that this rigid approach may make management seem more rational and orderly than it really is.

· The functional approach is useful because it specifies what managers should do.

III. THE OPERATIONAL APPROACH

The term operational approach is a convenient description of the production-oriented area of management dedicated to improving efficiency and cutting waste.

It has also been called scientific management, management science, operations research, production management, and operations management.

Its underlying purpose is “to make person-machine systems work as efficiently as possible.”

A. Frederick W. Taylor’s Scientific Management

· Taylor was born in 1856 and was a self-made man.

· As a factory manager, Taylor was appalled at the industry’s unsystematic practices.

· In his pursuit to find a better way he sought what he termed a “mental revolution” in the practice of industrial management.

· Scientific management is the development of performance standards on the basis of systematic observation and experimentation.

· Experiment was Taylor’s trademark.

Taylor focused on four areas:

· Standardization

· Time and task study

· Systematic selection and training

· Pay incentives

B. Taylor’s Followers

Frank and Lillian Gilbreth were inspired by Taylor to turn motion study into an exact science.

· Using motion pictures, they studied and streamlined work motions, paving the way for work simplification by cataloguing 17 different hand motions (called therbligs)

· They are best known today as the parents in the humorous book and movie Cheaper by the Dozen, which 2 of their 12 children wrote about living in a household where scientific management was applied.

Henry L. Gantt refined production control and cost control techniques.

· Variations of Gantt’s work-scheduling charts are still used today. (See Chapter 6.)

· Gantt also emphasized the importance of the human factor and urged management to concentrate on service rather than profits.

C. The Quality Advocates

Today’s managers recognize the strategic importance of quality. In the 1980s, Americans began to realize that quality was the reason for Japan’s dominance in world markets. As a result, the following quality advocates began to be listened to:

· Walter A. Shewhart introduced statistical quality control in 1931.

· Kaoru Ishikawa was a professor at the University of Tokyo who advocated quality before World War II.

o He founded JUSE (the Union of Japanese Scientists and Engineers).

o He focused on prevention and introduced the idea of both internal and external customers.

o He introduced fishbone diagrams, which are still used as a problem-solving tool. (See Chapter 8.)

· W. Edwards Deming introduced concepts such as employee participation and continuous improvement in Japan. His 1986 book, Out of the Crisis, became a bible for Deming disciples. (See Chapter 16 for more.)

· Joseph M. Juran also had a strong influence on Japanese managers.

o The Juran Institute helped strongly establish the concept of the internal customer.

o Teamwork, partnerships with suppliers, problem solving, and brainstorming are all Juran trademarks.

o Juran also introduced Pareto analysis, a technique for separating major problems from minor ones (his 80/20 rule is further discussed in Chapter 6 under the heading of “Priorities”).

· Armand V. Feigenbaum developed the concept of total quality control while a doctoral student at MIT.

o His 1951 book focused on quality improvement throughout an organization.

o He felt that the customer is the one who ultimately determines quality.

· Philip B. Crosby wrote the 1979 best-seller Quality Is Free, which promoted the concept of zero defects, or doing it right the first time.

D. Lessons from the Operational Approach

· Scientific management was a revolutionary approach, producing dramatic results in the context of the haphazard industrial practices at the time.

· It created a much-needed emphasis on promoting production efficiency and combating waste.

· Even though Taylor’s work is often considered “dehumanizing” today, Taylor actually improved working conditions by reducing fatigue and redesigning machines to fit people.

· Operations management tends to be broader in scope and application than scientific management. Operations management is defined as developing tools and procedures to efficiently transform raw materials, technology, and human talent into useful goods and services.

IV. THE BEHAVIORAL APPROACH

This approach recognizes the importance of people in management and reflects the belief that successful management depends on the ability to understand and work with a variety of people.

A. The Human Relations Movement

The human relations movement was a concerted effort among theorists and practitioners to make managers more sensitive to employee needs. It was supported by three very different historical influences.

(1) The Threat of Unionization: The movement was a union-avoidance tactic, with the idea that satisfied employees would be less likely to join unions.

(2) The Hawthorne Studies: Practical behavioral research studies such as these made management aware of the psychological and sociological dynamics of the workplace. One outcome – researchers determined that productivity was much less affected by changes in work conditions than by the attitudes of the workers themselves.

(3) The Philosophy of Industrial Humanism: A convincing rationale for treating employees better and recognition that people were important to productivity. There were three primary proponents:

· Elton Mayo focused on emotional factors. He encouraged work that fostered personal and subjective satisfaction.

· Mary Parker Follett encouraged managers to motivate performance rather than demand it. She recognized that employees are a complex collection of emotions, beliefts, attitudes and habits. Cooperation, a spirit of unity, and self-control were keys to productivity.

· Douglas McGregor created the Theory X/Y philosophy, with Theory X as the traditional assumptions (which he characterized as pessimistic, stifling and outdated) and Theory Y stating that employees are energetic and creative if given the opportunity.

B. Organizational Behavior

1. Organizational behavior is a modern approach to management that attempts to determine the causes of human work behavior and translates the results into effective management techniques.

2. This is an interdisciplinary approach with psychology predominating.

C. Lessons from the Behavioral Approach

· Primarily, the behavioral approach makes it clear to present and future managers that people are the key to productivity.

· Negatively, traditional human relations doctrine has been criticized as vague and simplistic. Supportive supervision and good human relations does not guarantee higher morale and productivity.

V. THE SYSTEMS APPROACH

A system is a collection of parts operating interdependently to achieve a common purpose.

This approach requires a completely different style of thinking. The traditionalists said that the whole can be explained in terms of its parts. Systems theorists assume that the whole is greater than the sum of its parts. The difference is traditional analytic thinking (outside-in) versus synthetic thinking (inside-out). Systems theorists propound synthetic thinking because management is not practiced in a vacuum. Many organizational and environmental variables affect each other.

A. Chester I. Barnard’s Early Systems Perspective

· Barnard wrote the classic The Functions of the Executive in 1938.

· In it, he characterized all organizations as cooperative systems.

· “A cooperative system is a complex of physical, biological, personal, and social components which are in a specific systematic relationship by reason of the cooperation of two or more persons for at least one definite end.”

· Barnard felt that an organization did not exist if three principal elements—willingness to serve, common purpose, and communication—were not present and working interdependently (see Figure 2.4).

B. General Systems Theory

General systems theory is an interdisciplinary area of study based on the assumption that everything is part of a larger, interdependent arrangement. Ludwig von Bertalanffy, a biologist, was the founder of general systems theory.

1. Levels of Systems

· Identifying hierarchies of systems, ranging from very specific to very general, has helped make general systems theory more concrete.

· See the seven-level scheme of living systems in Figure 2.5.

2. Closed versus Open Systems

· A closed system is a self-sufficient entity.

· An open system depends on the surrounding environment for survival.

· Systems can be categorized as open or closed by evaluating the amount of interaction they have with the outside environment.

· Organizations are, by their very nature, open systems.

C. New Directions in Systems Thinking

· Organizational Learning and Knowledge Management

Organizational learning portrays the organization as a living and thinking open system.

· Like the human mind, organizations rely on feedback to adjust to changing environmental conditions, and they learn from experience.

· Organizations engage in complex mental processes such as anticipating, perceiving, envisioning, problem solving, and remembering.

· When organizational learning becomes a strategic initiative to identify and fully exploit valuable ideas from both inside and outside the organization, a knowledge management program exists. More is said about knowledge management and how it relates to decision making in Chapter 8.

· Chaos Theory and Complex Adaptive Systems

· Chaos theory was developed in the 1960s and 1970s by mathematicians Edward Lorenz and James Yorke.

· The challenge for those in the emerging field known as complex adaptive systems theory is the notion that every complex system has rules that govern the seemingly random patterns and that those rules can be discovered in a seemingly chaotic system.

· With this theory, managers are challenged to be more flexible and adaptive than in the past.

· Chaos theory and complex adaptive systems theory are launching pads for new and better management models, not final answers.

· Lessons from the Systems Approach

· Managers have a greater appreciation for the importance of seeing the whole picture.

· The systems approach also works to integrate various management theories.

· Critics say the systems approach is short on verifiable facts and practical advice.

VI. THE CONTINGENCY APPROACH

The contingency approach is an effort to determine, through research, which managerial practices and techniques are appropriate in specific situations.

· Different situations require different managerial responses.

· This approach is particularly appropriate in intercultural situations.

· In real-life management, the success of any given technique is dictated by the situation.

A. Contingency Characteristics

Contingency thinking is viewed as a workable compromise between the systems approach and a purely situational perspective. (Figure 2.6 illustrates this.)

The contingency approach is

(1) An open-system perspective

(2) A practical research orientation

(3) A multivariate approach

· Bivariate analysis looks for simple one-to-one causal relationships.

· Multivariate analysis is a research technique used to determine how a combination of variables interacts to cause a particular outcome.

B. Lessons from the Contingency Approach

· The contingency approach is a helpful addition to management thought because it emphasizes situational appropriateness.

· Contingency thinking is a practical extension of the systems approach.

· Critics say contingency theory creates the impression that the organization is a captive of its environment, making attempts to manage it useless.

· The contingency approach is not yet fully developed. Its final impact remains to be seen.

VII. THE ERA OF MANAGEMENT BY BEST SELLER: PROCEED WITH CAUTION

Over the last 25 years or so, the field of management moved from the classroom into the mainstream. Peter Drucker launched this trend, becoming the first management guru who appealed to both academics and practicing managers.

In 1982, the popularization of management shifted into high gear when Thomas J. Peters and Robert H. Waterman, Jr. published In Search of Excellence.

Others followed (see Table 2.4), and the popular appeal of management grew.

Certain academics worried that the instant gurus and their best sellers would encourage shoddy research and simplistic thinking.

A. What’s Wrong with Management by Best Seller?

Top managers will apply concepts learned in a book to an organization with no diagnosis or assessment to determine the real organizational problems. This is not the fault of the management books, which typically contain some really good ideas. Rather, it is the hurried and haphazard application of those ideas that causes the problems.

B. How to Avoid the Quick-Fix Mentality

In a follow-up study of the “excellent” companies outlined in Peters and Waterman’s In Search of Excellence, companies that satisfied all of the excellence criteria turned out to be no more effective than a random sample of Fortune 1000 companies.

To avoid the quick-fix mentality, managers should

1. Remain current with literature in the field, particularly with journals that translate research into practice.

2. Ensure that concepts applied are based on science or, at least, some form of rigorous documentation, rather than purely on advocacy.

3. Be willing to examine and implement new concepts, but first do so using pilot tests with small units.

4. Be skeptical when solutions are offered; analyze them thoroughly.

5. Constantly anticipate the effects of current actions and events on future results.

C. Putting What You Have Learned to Work

To put this historical overview into proper perspective, this chapter provides a useful conceptual framework for students but generally does not carry over to the practice of management. Managers are pragmatists; they use whatever works, generally a “mixed bag” approach.

END OF CHAPTER FEATURES

· Terms to Understand – encourage students to make use of the flashcards available on the student website. Also, suggest they visit the Manager’s Toolkit section on the website for tips and suggestions for aspiring managers.

· Action Learning Exercise – Open Systems Thinking and Recycling Encourage students to keep a log for 24 hours recording all tangible items they buy or consume, include in the report what they did with packaging, waste and leftovers. Then have students respond to the questions for consideration at the end, and discuss the results in class.

· Ethics Exercise – Do The Right Thing, Putting the Recent Recession into Historical Perspective. After reading John Gerzema’s observations have students respond to the questions that follow. A few possible responses they are likely to offer are included.

What are the ethical implications of the following interpretations?

1. Managers will need to be mindful of the new reality – money has become less important to people. From an ethical perspective we hope this is good news. Although we may see less bad behavior that is motivated by money and instead is replaced by a quality of life incentive. Changes in motivation do not automatically eliminate ethical concerns. Therefore, managers will need to learn what does motivate their employees as they strive to increase employee loyalty and productivity while still fostering an ethical workplace. The American Dream that was driven by material possessions has taken a bit of turn to also include happiness that is derived from activities and relationships.

2. Historical blip or new reality? Have we learned from the past? A walk down memory lane will remind us of “old-fashioned” values – family, faith and community. These have come and gone often times as unemployment rates and prosperity hit peaks and valleys. Students’ opinions will vary on whether or not this new reality is here to stay.

3. Younger employees are less motivated by money and more interested in balancing their work and personal lives. In an effort to find the keys to motivating this new generation, managers should begin by simply asking each employee. As we learned from Mary Parker Follett, employees are a complex collection of emotions, beliefs, attitudes and habits. From an ethical perspective it simply makes good sense to treat each person as a unique individual with emotional needs rather than a number or machine. Each person has a unique set of needs, wants and values so a manager cannot assume that each of their team members is motivated by the same opportunities or rewards. Lead by seeking input and inviting feedback. Ask them “what’s working?” and “what’s not?”.

· Managers-In-Action Video Case Study – Mitchell Gold + Bob Williams

Gold & Williams Industry Trendsetter

Length: 8 minutes and 15 seconds

Topics:

Quality, Employees, Eco-friendly manufacturing\Recycling, Employee Benefits, Customer Expectations, Diversity, Work environment, Recruitment, Retention, Health & Wellness, and Innovation.

Company Background

Source: Mitchell Gold + Bob Williams company website January 4, 2011
http://www.mgbwhome.com/

Whether you're raising a baby or a business, there are more than enough rules on how to do it. The furniture industry is no exception. Right from the start, Mitchell Gold knew he had to break some of those rules to satisfy their customers. And it paid off big time.

In 1989 when the economy was unstable, he and his partner, Bob Williams, naively created The Mitchell Gold Co. Since then, despite tough economic times and upheaval in the furniture industry, sales have reached in excess of $100 million. The combination of Gold's years of marketing experience with Williams' talents as art director set the course for Mitchell Gold and changed the furniture industry.

One of their earliest ideas, "Relaxed Design," was based on trends they saw in the apparel industry. Designing furniture Bob Williams would want in his own home - comfortable, classic, affordable - he dressed his pieces in relaxed slipcovers of pre-washed fabrics like denim, khaki and velvet. He also addressed the need for a less-intimidating shopping experience by limiting choices to avoid confusing consumers. Along the way, Williams has received numerous awards, including Design 100 awards from Metropolitan Home magazine. And today, the line, which started with dining chairs, offers both slipcovered and tailored upholstery (including down-blend cushions, premium goose-down-blend and comfortable sleepers), leather, sectionals, beds, ottomans, recliners and yes.. dining chairs.

Mitchell Gold + Bob Williams has won accolades from the media, as well as its consumers. Following are some innovations on the company's journey to success:

Customer Service. "Our emphasis is on taking care of a small and highly select number of customers extremely well," says Gold. "And on training each store's salespeople so that consumers feel safe and satisfied buying from them." To do that, explains Gold, "we added a special group called TAPs (The Answer People), who travel the country doing no selling, but only sharing knowledge of our products."
Retail Partners. The company is a leading home-furnishings brand, carried in such national chains as Pottery Barn, Restoration Hardware, Williams Sonoma Home, and Bloomingdale’s, as well as in more than 60 independent retailers nationwide. In addition, there is a growing chain of Mitchell Gold + Bob Williams Signature Stores that carries exclusively their products, in cities ranging from New York to D.C., Miami, Houston, Portland OR, and L.A.
Commercial Ventures. Mitchell Gold + Bob Williams furniture is so popular that hip hotel chains such as the W Hotels or Rande Gerber's Whiskey Bars want to treat their guests to Mitchell Gold + Bob Williams.
Brand Building. "People want to know who makes the furniture they're spending their lives on and want to buy a brand associated with the lifestyle they want to live", says Gold. The right ads, the right publications and subtle "co-branding" with retailers have helped Gold do that.
Hot Stuff. It's not just advertising that makes people remember a brand, says Gold. It's the right advertising. Designed to "make a statement" and grab consumers' attention by pushing the envelope in style, content and theme, Mitchell Gold's advertising campaigns are always unexpected and a strong departure from typical advertisements in the industry. Besides, who said furniture ads can't be as provocative as apparel or cosmetics?
Instant Antiques. Leather European club chairs that look as if they'd been in the family for years and go so well with flea market finds - but are proportioned just right for today.
Factory Power. Where does 18 years of incredible growth lead? A big factory. In 1998 Mitchell Gold built a 267,000 sq-ft., state-of-the-art factory, bringing total manufacturing and warehouse space to 400,000 sq. ft. The new facility has a health-conscious café, employee gym and indoor walking track, and even its own on-site daycare center for its over 700+ employees (lulu's child enrichment center link) - the first one of its kind in the residential furniture industry.
Community Advocacy. Mitchell Gold + Bob Williams are honored to support grass-roots and national not-for-profits who champion for those less fortunate and individuals living with life-challenging illnesses. The company is proud to support groups such as the Human Rights Campaign, Empire State Pride Agenda, DIFFA (Design Industries Foundation for AIDS), Friends In Deed, ALFA (AIDS Leadership Foothills-area Alliance), Juvenile Diabetes Research Foundation, Ovarian Cancer Research Fund and the Leukemia Society.

On the Mitchell Gold + Bob Williams website there is a link (http://mgbwhome.com/whoweare.asp) to “Who We Are” which leads to the list below which is great for class discussion on company values and becoming a people-centered organization. This also appears in the background on a wall during the video.

Mitchell Gold + Bob Williams

Synopsis of Video

Company Founders Mitchell Gold and Bob Williams discuss their unique approach in the furniture industry when they started their company. They clearly demonstrate how successful companies can produce quality products while also providing a great place to work. Employees share their perspective, which makes it easy to understand why Mitchell Gold + Bob Williams has grown from 23 employees to more than 700.

For more information about Mitchell Gold + Bob Williams visit their website: http://www.mgbwhome.com/

Previewing Questions

1. Describe quality management ideas and practices suggested by quality advocates Deming, Ishikawa, Juran, and Feigenbaum (discussed in this chapter in the Quality Advocates section)?

Kaoru Ishikawa who advocated quality by focusing on prevention. He also introduced the idea of both internal and external customers, and fishbone diagrams as a problem-solving tool.

W. Edwards Deming introduced concepts such as employee participation and continuous improvement.

Joseph M. Juran helped strongly establish the concept of the internal customer. Teamwork, partnerships with suppliers, problem solving, and brainstorming are all Juran trademarks. He also introduced Pareto analysis, a technique for separating major problems from minor ones ( 80/20 rule)

Armand V. Feigenbaum developed the concept of total quality control focused on quality improvement throughout an organization. He felt that the customer is the one who ultimately determines quality.

2. What responsibility should a company have to their employees’ quality of life and working conditions? Provide specific examples to support your answer.

Personal opinion question, however, based on the Ethics Exercise at the end of the chapter, evidence would suggest managers should pay attention to quality of life and working conditions. Examples will vary – consider using REI or Google as examples. They provide excellent employee benefits and outstanding working conditions that foster creativity, empowerment, loyalty, productivity, and long-term success.

3. How can business owners and managers get employees to produce their best work?
Taking the time to learn about each employee and what motivates them will help managers to provide the appropriate level of challenge and independence and to structure meaningful rewards.

Postviewing Questions

4. For each of the quality advocates referenced in question one, identify a quality idea\perspective and discuss a corresponding practice in place today at Gold + Williams.

Kaoru Ishikawa the idea of both internal and external customers is demonstrated when the owners discuss not only their commitment to being driven by the external customer as it relates to design but also focused on listening to their employees. This example also illustrates W. Edwards Deming’s concept of employee participation and Joseph M. Juran’s internal customer and teamwork. Armand V. Feigenbaum felt that the customer is the one who ultimately determines quality. Gold + Williams redefined how the furniture industry did business after listening to customers. The results were more affordable, flexible products delivered faster.

5. How does the work environment at Gold + Williams impact quality and success? Gold + Williams have created a corporate culture centered around people with the belief that if people are having fun and enjoy their job they will produce their best work. Air conditioning, good lighting and a place where everyone is welcome and valued contribute to a higher sense of ownership, employee engagement and success.

6. From an employee recruitment and retention perspective, what benefits, policies, and management practices provide Gold + Williams with a competitive advantage? Explain why.

Air conditioning, good lighting and good coffee were some of the items mentioned that brought people to the company. Policies and practices that are inclusive, where people are accepted regardless of their sexual orientation is another example. Their annual health fair with free physicals is yet another benefit where management has sent a strong message through their actions that people in the company are important. The owners also set an example by being friendly and personable with employees and leading by example in the community. Creating an environment where the emphasis is on teamwork: “Each person’s success is everyone’s success” contributes to a positive work environment. All of these things combine to create a company where employees feel valued and are therefore loyal and committed to doing their best work.

7. One of the five overarching changes mentioned in chapter 1 was environmentalism and sustainability. Discuss how Gold + Williams is responding to this change and adapting its manufacturing practices?
From day one, Gold + Williams has had a commitment to the environment. They changed the perspective to consumer/retail driven which leads to faster shipping and ideally, less waste.

CLOSING CASE: Six generations have fine tuned guitar maker

1. Division of Work: Specialization of labor includes a group of employees who make just the guitar strings.

Unity of command: No more absentee managers off fixing other factories.

Unity of direction: A commitment from every employee to try to make the perfect guitar.

Remuneration: Since 1986 employees have received about $15 million in profit sharing.

Initiative: Shifting from a traditional hierarchical structure to a more team oriented environment where employees were more involved.

Esprit de corps: Successfully producing 85,000 guitars in a team oriented environment where everyone is striving to make the perfect guitar and is rewarded with profit sharing for the effort implies there is a good bit of esprit de corps.

2. She would be very positive about it. Shifting from a top-down management structure to a more team oriented approach is certainly aligned with Follett’s focus on people. Everything Martin does is about valuing a motivated workforce and creating an environment where workers can shine.

3. Martin is definitely a Theory Y manager. His pride in the company and his belief in his employees’ ability to make the perfect guitar is evident.

4. An open system. They rely on customers for their business, they hired people from different industries with expertise in quality and they seek learning opportunities from outside, nontraditional experiences such as Outward Bound.

5. The 7 Habits of Highly Effective People: Powerful Lessons in Personal Change. Because all employees of any company should have the concepts in this book as part of their toolkit.

Reengineering the Corporation: A Manifesto for Business Revolution. Staying competitive in any industry involves using the all the productivity tools available for manufacturing and design.

INSTRUCTIONAL TIPS

1. In order to help support your students on research projects assigned in this class, this chapter in the manual provides a list of periodicals that are good resources for articles on management and related topics. You are welcome to copy this list and share it with your students when giving research assignments.

2. A brief class discussion of the impact of one’s personal background on one’s present and future perspective and direction can help highlight the value of using a historical perspective as a basis for understanding.

3. An interesting and enjoyable class exercise that helps personalize the material in Chapter 2 is to assign individuals or groups the roles of Henri Fayol, F. W. Taylor, Mary Parker Follett, Chester I. Barnard, W. Edwards Deming, and Thomas J. Peters. Then ask each expert to debate and discuss how he or she would handle various contemporary management situations (e.g., global competition, employee alcohol/drug abuse, diversity issues, the changing character and nature of the workforce, and motivation of younger employees who value leisure more than work).

4. A debate or other structured class discussion session about the relative merits of each of the major approaches to management is a good way to compare and contrast the various perspectives. It quickly becomes apparent that there is no single best approach and that each perspective contributes something of value to our knowledge of management.

5. There is a saying that “those who do not study history are condemned to repeat it.” Ask students which of the various approaches to management they think they could use when they become managers. What ideas do they think would no longer be effective in today’s workplace?

6. To add energy to the discussion of chaos theory and complex adaptive systems theory, bring a number of small soft balls or toys to class and start the students tossing them around the classroom. You’ll see the energy level of the class shoot up as students toss the items around. (You can add arbitrary rules such as “Toss objects to a different person each time.” You can also vary the size of the balls and toys. For example, add a beach ball to the collection being tossed around.) Slowly add additional balls and toys, one at a time, until the “system” collapses under the sheer number of flying things. Discuss the fine line between a complex system and total chaos, using this example. (Caution: To ensure the safety of this exercise, use only soft balls and toys, and allow only underhand throwing.)

Additional Discussion/Essay Questions

1. What was Henri Fayol’s contribution to the evolution of management thought?

2. How did F. W. Taylor go about improving job performance through scientific management?

3. What circumstances gave rise to the human relations movement?

4. What is an open system, and why is it useful to view organizations as open systems?

5. As this chapter shows, the basis for the quality movement actually started in the 1930s. Why do you think it took so long to catch on in the United States?

6. How would you react if a new boss gave you a book to read and told you that the organization was going to change dramatically to reflect the book’s ideas?

Discussion Starter:

Historical perspective and context; Management history; Today’s students

Although management theory and practice have been researched and analyzed for hundreds of years, it is often difficult to convince today’s aspiring managers that learning about the history of management is worth their time. Today’s college students have grown up with the internet, social media and smart phones. How can they possibly learn from managers who never had access to these modern day communication tools?

For Discussion:

1. What impact has technology had on contemporary managers?

2. What aspects of management remain the same?

3. What useful lessons have you learned from the “school of hard knocks” (e.g., your own historical context)?

4. What lessons can be learned from managers who came before us? And why is it important (or unnecessary) to put modern management practices into historical context?

BONUS VIDEOS

BIZFLIX VIDEO CASES FROM THE TEXTBOOK WEBSITE

Discussion Questions and Guide

Chapter 2Video Case: Casino

Video Case Synopsis

Martin Scorcese’s film is a lengthy, complex, and beautifully photographed study of Las Vegas gambling casinos and their organized crime connections during the 1970s. According to VideoHound’s Golden Movie Retriever, it completes his trilogy that includes Mean Streets (1973) and Goodfellas (1990). Ambition, greed, drugs, and sex destroy the mob’s gambling empire. The film includes strong performances by Robert De Niro, Joe Pesci, and Sharon Stone. The violence and the expletive-filled dialogue give Casino its R rating.

This scene is part of “The Truth about Las Vegas” sequence that appears early in the film. It follows the scenes of the casino deceiving the Japanese gambler.

The scene starts with a close-up of Sam “Ace” Rothstein (Robert De Niro) standing between his two casino executives (Richard Amalfitano and Richard F. Strafella). In a voice-over narration he says, “In Vegas, everybody’s gotta watch everybody else.” The scene ends after Rothstein describes the former cheaters who monitor the gambling floor with binoculars.

Chapter 2—The Evolution of Management Thought

TRUE/FALSE

1. Founded in 1623, the Zildjian Company attributes its success to good management principles and an appreciation for the company legacy that keeps everyone focused on preserving the business for the long haul.

ANS: T PTS: 1 DIF: Moderate REF: p. 35

OBJ: LO: 2-1 NAT: BUSPROG: Analytic STA: DISC: Strategy

KEY: Bloom's: Knowledge

2. The Zildjian Company has an estimated 65% of the world cymbal market. They attribute this success to sticking with one product and never making changes.

ANS: F PTS: 1 DIF: Moderate REF: p. 35

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Knowledge

3. When studying management, history and historical perspective do not matter because management is a new, forward-looking field.

ANS: F PTS: 1 DIF: Moderate REF: p. 36

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Environmental Influence KEY: Bloom's: Comprehension

4. We gain a better understanding of the present by taking a historical perspective.

ANS: T PTS: 1 DIF: Moderate REF: p. 36

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Environmental Influence KEY: Bloom's: Comprehension

5. Women and men from around the globe have been contributors to management theory and practice.

ANS: T PTS: 1 DIF: Moderate REF: p. 37

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Environmental Influence KEY: Bloom's: Knowledge

6. Business management courses were not taught in the U.S. until the end of World War II.

ANS: F PTS: 1 DIF: Moderate REF: p. 37

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Environmental Influence KEY: Bloom's: Knowledge

7. In early cultures, management was something one learned by word of mouth and trial and error, rather than something one studied.

ANS: T PTS: 1 DIF: Moderate REF: pp. 37-38

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Environmental Influence KEY: Bloom's: Knowledge

8. Management has been practiced for thousands of years.

ANS: T PTS: 1 DIF: Moderate REF: p. 37

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Environmental Influence KEY: Bloom's: Knowledge

9. The field of management is presently experiencing information overload.

ANS: T PTS: 1 DIF: Moderate REF: p. 38

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Environmental Influence KEY: Bloom's: Knowledge

10. The interdisciplinary nature of management is a principal cause of the information explosion in management theory.

ANS: T PTS: 1 DIF: Moderate REF: p. 38

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Environmental Influence KEY: Bloom's: Comprehension

11. The only universally accepted theory of management is the systems approach.

ANS: F PTS: 1 DIF: Easy REF: p. 38

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

12. The universal process approach is the oldest, and one of the most popular, approaches to management.

ANS: T PTS: 1 DIF: Moderate REF: p. 39

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

13. According to the universalist or functional approach to management, administration of public and private organizations requires different processes.

ANS: F PTS: 1 DIF: Moderate REF: p. 39

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

14. Chain of command refers to who is ultimately responsible for getting things done.

ANS: F PTS: 1 DIF: Easy REF: p. 39

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Knowledge

15. According to Henri Fayol, a manager’s job can be divided into the following five areas of responsibility: planning, organizing, leading, motivating, and controlling.

ANS: F PTS: 1 DIF: Moderate REF: p. 40

OBJ: LO: 2-1 NAT: BUSPROG: Analytic STA: DISC: Strategy

KEY: Bloom's: Comprehension

16. According to Henri Fayol’s unity of command principle, each employee should receive orders from only one superior..

ANS: T PTS: 1 DIF: Easy REF: p. 40

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Knowledge

17. According to Fayol's centralization principle, the right to give orders must be centralized and the responsibility decentralized.

ANS: F PTS: 1 DIF: Moderate REF: p. 40

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

18. Subordinates should observe the formal chain of command unless expressly authorized by their respective superiors to communicate with each other. Fayol called this the scalar chain.

ANS: T PTS: 1 DIF: Moderate REF: p. 40

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Knowledge

19. There is virtually no evidence of Henry Fayol's universal process approach in today's management literature.

ANS: F PTS: 1 DIF: Easy REF: p. 39 | p. 41

OBJ: LO: 2-1 NAT: BUSPROG: Operations Management

STA: DISC: Comprehension KEY: Bloom's: Comprehension

20. The operational approach to management focuses on improving efficiency and quality.

ANS: T PTS: 1 DIF: Moderate REF: p. 41

OBJ: LO: 2-2 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

21. Frederick Taylor's scientific management movement involved standardization, time and task study, systematic selection and training, and pay incentives.

ANS: T PTS: 1 DIF: Easy REF: p. 41

OBJ: LO: 2-2 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

22. As an advocate of employee rights, Frederick Taylor believed in letting workers determine their own way of doing tasks.

ANS: F PTS: 1 DIF: Moderate REF: p. 41 | p. 43

OBJ: LO: 2-2 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

23. According to scientific management, workers produced more when paid by the hour.

ANS: F PTS: 1 DIF: Moderate REF: pp. 42-43

OBJ: LO: 2-2 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

24. Henry L. Gantt humanized Frederick Taylor's differential piece-rate plan by combining a guaranteed day rate (minimum wage) with an above-standard bonus.

ANS: T PTS: 1 DIF: Moderate REF: p. 44

OBJ: LO: 2-2 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

25. Frank and Lillian Gilbreth were dedicated to finding the one best way to do every job.

ANS: T PTS: 1 DIF: Moderate REF: p. 44

OBJ: LO: 2-2 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

26. A Pareto analysis can be used to separate major problems from minor ones by determining the 20 percent of possible causes leading to 80 percent of all problems.

ANS: T PTS: 1 DIF: Easy REF: p. 45

OBJ: LO: 2-2 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Knowledge

27. According to Armand V. Feigenbaum, quality is determined by the customer.

ANS: T PTS: 1 DIF: Moderate REF: p. 45

OBJ: LO: 2-3 NAT: BUSPROG: Analytic STA: DISC: Creation of Value

KEY: Bloom's: Comprehension

28. The concept of a fishbone diagram, or doing it right the first time, was promoted by Philip B. Crosby.

ANS: F PTS: 1 DIF: Moderate REF: p. 45

OBJ: LO: 2-3 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

29. Whereas scientific management is limited largely to hand labor and machine shops, operations management specialists apply their expertise to all types of production and service operations.

ANS: T PTS: 1 DIF: Moderate REF: pp. 45-46

OBJ: LO: 2-3 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

30. Frederick Taylor and the early scientific management proponents have been praised for viewing workers as complex beings, not mindless machines who work just for money.

ANS: F PTS: 1 DIF: Easy REF: pp. 45-46

OBJ: LO: 2-4 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

31. Advocates of the behavioral approach to management argue that profits must be the central focus of organized activity, since without profits the organization cannot exist.

ANS: F PTS: 1 DIF: Moderate REF: p. 46

OBJ: LO: 2-4 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

32. The legal formation of labor unions was an important historical influence behind the human relations movement.

ANS: T PTS: 1 DIF: Moderate REF: pp. 46-47

OBJ: LO: 2-4 NAT: BUSPROG: Analytic

STA: DISC: Environmental Influence KEY: Bloom's: Comprehension

33. The idea that "satisfied employees would be less inclined to join unions" was proposed by early human relations theory after the Wagner Act was passed.

ANS: T PTS: 1 DIF: Moderate REF: p. 47

OBJ: LO: 2-4 NAT: BUSPROG: Analytic

STA: DISC: Legal Responsibilities KEY: Bloom's: Comprehension

34. Frederick Taylor's scientific management studies began in 1924 in a Western Electric plant near Chicago.

ANS: F PTS: 1 DIF: Moderate REF: p. 47

OBJ: LO: 2-4 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Knowledge

35. The performance of a select group of employees in the Hawthorne studies tended to improve, no matter how the physical surroundings were manipulated.

ANS: T PTS: 1 DIF: Moderate REF: p. 47

OBJ: LO: 2-4 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

36. The Hawthorne studies concluded that productivity was affected less by changes in work conditions than by the attitudes of the workers.

ANS: T PTS: 1 DIF: Moderate REF: p. 47

OBJ: LO: 2-4 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

37. Mary Parker Follett viewed organizations as technical systems.

ANS: F PTS: 1 DIF: Moderate REF: p. 48

OBJ: LO: 2-4 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

38. Douglas McGregor's Theory Y assumes people are energetic and creative individuals capable of achieving great things if given the opportunity.

ANS: T PTS: 1 DIF: Easy REF: p. 48

OBJ: LO: 2-4 NAT: BUSPROG: Analytic STA: DISC: Individual Dynamics

KEY: Bloom's: Knowledge

39. Douglas McGregor's Theory Y assumes that most will only do as their told and that employees prefer to be directed.

ANS: F PTS: 1 DIF: Moderate REF: p. 48

OBJ: LO: 2-4 NAT: BUSPROG: Analytic STA: DISC: Individual Dynamics

KEY: Bloom's: Knowledge

40. The idea that most people dislike work, and will avoid it when they can, is a Theory Y assumption, according to McGregor.

ANS: F PTS: 1 DIF: Moderate REF: p. 49

OBJ: LO: 2-4 NAT: BUSPROG: Analytic STA: DISC: Individual Dynamics

KEY: Bloom's: Knowledge

41. The behavioral approach to management makes it clear to present and future managers that people are the key to productivity.

ANS: T PTS: 1 DIF: Easy REF: p. 49

OBJ: LO: 2-4 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

42. Systems theorists studied management by taking things apart.

ANS: F PTS: 1 DIF: Moderate REF: p. 50

OBJ: LO: 2-5 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

43. According to Chester Barnard's early systems model, the principal elements in an organization are willingness to serve, common purpose, and communication.

ANS: T PTS: 1 DIF: Moderate REF: p. 50

OBJ: LO: 2-5 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

44. Chester Barnard's systems perspective has encouraged management and organization theorists to study organizations as complex and dynamic wholes instead of piece by piece.

ANS: T PTS: 1 DIF: Moderate REF: p. 51

OBJ: LO: 2-5 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

45. Everything belongs to only one system 3/4 the solar system, according to general systems theory.

ANS: F PTS: 1 DIF: Easy REF: p. 51

OBJ: LO: 2-5 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

46. Given that a battery-powered digital watch runs without help from the outside environment, it could be described as a relatively closed system, after the battery is in place.

ANS: T PTS: 1 DIF: Challenging REF: p. 51

OBJ: LO: 2-5 NAT: BUSPROG: Reflective Thinking

STA: DISC: Operations Management KEY: Bloom's: Application

47. Organizational learning advocates say organizations can learn from experience, just as people do.

ANS: T PTS: 1 DIF: Moderate REF: p. 52

OBJ: LO: 2-5 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

48. A commonality between chaos theory and organizational learning is the concept that systems are influenced by feedback.

ANS: T PTS: 1 DIF: Moderate REF: p. 52

OBJ: LO: 2-5 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

49. Complex adaptive systems cannot be changed.

ANS: F PTS: 1 DIF: Easy REF: p. 52

OBJ: LO: 2-6 NAT: BUSPROG: Analytic

STA: DISC: Environmental Influence KEY: Bloom's: Comprehension

50. The most significant contribution of contingency theory has been the identification of the one best way to manage.

ANS: F PTS: 1 DIF: Moderate REF: p. 54

OBJ: LO: 2-6 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

51. According to the contingency approach, different situations require different managerial responses.

ANS: T PTS: 1 DIF: Easy REF: p. 54

OBJ: LO: 2-6 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Knowledge

52. The contingency approach to management amounts to a purely situational view.

ANS: F PTS: 1 DIF: Moderate REF: p. 54

OBJ: LO: 2-6 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

53. The three characteristics of the contingency approach are a multivariate approach, an open-system perspective, and a practical research orientation.

ANS: T PTS: 1 DIF: Moderate REF: pp. 54-55

OBJ: LO: 2-6 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

54. Closed-system thinking is fundamental to the contingency view.

ANS: F PTS: 1 DIF: Moderate REF: p. 55

OBJ: LO: 2-6 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

55. Bivariate analysis is a research technique used to determine how a combination of variables interacts to cause a particular outcome.

ANS: F PTS: 1 DIF: Moderate REF: p. 55

OBJ: LO: 2-6 NAT: BUSPROG: Analytic

STA: DISC: Environmental Influence KEY: Bloom's: Knowledge

56. The contingency approach is strictly theoretical 3/4 not research-oriented.

ANS: F PTS: 1 DIF: Moderate REF: pp. 54-55

OBJ: LO: 2-6 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

57. Practical and relevant multivariate analyses are what contingency management theorists strive to carry out.

ANS: T PTS: 1 DIF: Moderate REF: p. 55

OBJ: LO: 2-6 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

58. Management theory probably will not evolve beyond the contingency approach.

ANS: F PTS: 1 DIF: Moderate REF: p. 55

OBJ: LO: 2-6 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

59. The contingency approach is a helpful addition to management thought because it emphasizes situational appropriateness.

ANS: T PTS: 1 DIF: Moderate REF: pp. 54-55

OBJ: LO: 2-6 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

60. In order to avoid the quick-fix mentality, which makes management by best-seller so tempting, managers should ensure that recommendations are based on science or, at least, on some form of rigorous documentation, rather than purely on advocacy.

ANS: T PTS: 1 DIF: Moderate REF: p. 58

OBJ: LO: 2-7 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

MULTIPLE CHOICE

61. The Zildjian Company’s key to success is

a.	their secret strategy
b.	good management practices
c.	avoiding risky R&D (research and development)
d.	buying their competitors
e.	their location

ANS: B PTS: 1 DIF: Moderate REF: pp. 35-36

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Knowledge

62. The Zildjian Company has achieved long-term success in part, because they are guided by their core values. Which of the following is NOT one of their core values?

a.	innovation
b.	craftsmanship
c.	avoiding risk taking
d.	empowering employees
e.	customer collaboration

ANS: C PTS: 1 DIF: Moderate REF: p. 35

OBJ: LO: 2-1 NAT: BUSPROG: Analytic STA: DISC: Strategy

KEY: Bloom's: Analysis

63. Where did the pioneering contributors to management theory and practice come from?

a.	Around the globe
b.	The United States
c.	The Western Hemisphere
d.	The Third World countries
e.	The Eastern Hemisphere

ANS: A PTS: 1 DIF: Moderate REF: p. 37

OBJ: LO: 2-1 NAT: BUSPROG: Diversity

STA: DISC: Environmental Influence KEY: Bloom's: Comprehension

64. As an area of academic study, management is essentially a product of

a.	the sixteenth century.
b.	the British system.
c.	the twentieth century.
d.	trial and errors.
e.	corporate America.

ANS: C PTS: 1 DIF: Moderate REF: p. 37

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Environmental Influence KEY: Bloom's: Comprehension

65. Which of these best describes the body of management knowledge today?

a.	Japan-dominated
b.	Disappearing
c.	Experiencing information overload
d.	Severely limited
e.	Unified

ANS: C PTS: 1 DIF: Moderate REF: p. 38

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Environmental Influence KEY: Bloom's: Evaluation

66. Steve Wozniak, cofounder of Apple sets the record straight on many factual errors written about him including that he dropped out of college (he didn’t). His story reminds managers that they should

a.	research only online using sites such as Wikipedia
b.	always trust data that has been published in books
c.	validate the real story by going to the person who is the subject of the article
d.	always trust data that has been published in journals
e.	validate the real story by going to the person writing the article or publication

ANS: C PTS: 1 DIF: Challenging REF: p. 38

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Environmental Influence KEY: Bloom's: Comprehension

67. The field of management can be described as

a.	interdisciplinary
b.	applied social science
c.	little more than common sense
d.	highly scientific
e.	seriously out of date

ANS: A PTS: 1 DIF: Easy REF: p. 38

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

68. Which of the following is not one of the approaches to management discussed in the text?

a.	The systems approach
b.	The contingency approach
c.	The universal process approach
d.	The multinational approach
e.	The behavioral approach

ANS: D PTS: 1 DIF: Easy REF: p. 39

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Analysis

69. Which approach is the oldest, and one of the most popular, approaches to management thought?

a.	Contingency
b.	Universal process
c.	Operational
d.	Systems theory
e.	Behavioral

ANS: B PTS: 1 DIF: Easy REF: p. 39

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

70. The functional approach to management is also known as the

a.	systems approach.
b.	behavioral approach.
c.	excellence approach.
d.	operational approach.
e.	universal process approach.

ANS: E PTS: 1 DIF: Moderate REF: p. 39

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Knowledge

71. The universal process approach assumes that

a.	managing in public and private organizations is basically the same.
b.	small organizations are hardest to manage.
c.	management is not practiced in small organizations.
d.	managing in public and private organizations is completely different.
e.	it is more difficult to manage public organizations.

ANS: A PTS: 1 DIF: Easy REF: p. 39

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Comprehension

72. Henry Fayol’s 14 Universal Principles of Management includes ___________, the principle that specialization of labor is necessary for organizational success.

a.	discipline
b.	authority
c.	the chain of command
d.	the division of work
e.	the unity of direction

ANS: D PTS: 1 DIF: Moderate REF: p. 40

OBJ: LO: 2-1 NAT: BUSPROG: Analytic

STA: DISC: Operations Management KEY: Bloom's: Knowledge

Macroeconomics: A Contemporary Approach, 10th Edition solutions manual and test bank by William A. McEachern

Macroeconomics: A Contemporary Approach, 10th Edition solutions manual and test bank by William A. McEachern 

Chapter 2

ECONOMIC TOOLS AND eCONOMIC sYSTEMS

INTRODUCTION

This chapter emphasizes key ideas in economic analysis, such as opportunity cost, the production possibilities frontier, absolute and comparative advantage, the division of labor and the gains from specialization, and how economic systems answer the three economic questions of what, how, and for whom. All these ideas address the economic problem of how to allocate scarce resources among unlimited wants. The use of graphs was introduced in the Appendix to Chapter 1. In this chapter, graphs are integrated into the discussion.

CHAPTER OUTLINE

I. Choice and Opportunity Cost (Slide 3)

A. Opportunity Cost: The value of the best alternative that is forgone. Because of scarcity, whenever people make a choice, another opportunity is forgone.

· CaseStudy): The Opportunity Cost of College (Slide 4)

B. Opportunity Cost Is Subjective (Slide 5): Only the individual making the choice can identify the most attractive alternative. Calculating opportunity cost requires time, information, and the assumption that people rationally choose the most valued alternative.

C. Sunk Cost and Choice (Slide 6)

· Sunk cost: A cost that has already been incurred and cannot be recovered.

· Economic decision makers should ignore sunk costs and consider only those costs that are affected by the choice.

II. Comparative Advantage, Specialization, and Exchange

A. The Law of Comparative Advantage (Slide 7): The individual, firm, region or country with the lower opportunity cost of producing a particular output should specialize in producing that output.

B. Absolute advantage versus Comparative advantage: (Slide 8)

· Absolute advantage: The ability to produce a product with fewer resources than other producers require.

· Comparative advantage: The ability to produce a product at a lower opportunity cost than other producers face. Resources are allocated most efficiently when production and trade conform to the law of comparative advantage.

· Absolute advantage focuses on who uses the fewest resources and Comparative advantage focuses on what else those resources could produce.

C. Specialization and Exchange (Slide 9)

· Barter: A system of exchange in which products are traded directly for other products.

· Money: A medium of exchange in economies with extensive specialization

D. Division of Labor and Gains from Specialization (Slides 11-12)

· Specialization of labor

· Takes advantage of individual preferences and natural abilities

· Allows workers to develop more experience at a task

· Reduces the need to shift between tasks

· Permits the introduction of labor-saving machinery

· May be tedious and injury prone due to repetitive motion

III. The Economy’s Production Possibilities

A. Efficiency and the Production Possibilities Frontier (Slides 13-15)

1. The production possibilities frontier (PPF) is a simple model designed to depict the production capabilities of an economy given current resources. The PPF assumes the following:

· Output is limited to two broad classes of products: consumer goods and capital goods.

· Production takes place over a given time period.

· The economy’s resources are fixed in quantity and quality over this period.

· The available technology does not change during the period.

· The “rules of the game” are also assumed fixed.

B. Inefficient and unattainable production: The PPF identifies possible combinations of the two types of goods that can be produced when all available resources are employed efficiently. Resources are employed efficiently when there is no change that could increase the production of one good without decreasing the production of the other good.

· Efficient production: getting the most from available resources, indicated by points along the production possibilities frontier. (See Exhibit 2)

· Inefficient production: points inside the PPF (See Exhibit 2)

· Unattainable production: points outside the PPF (See Exhibit 2)

C. Shape of the Production Possibilities Frontier (Slide 18):

· The PPF derives its bowed-out (concave) shape from the law of increasing opportunity cost.

· Opportunity cost increases as the economy produces more of one good and less of the other because resources in the economy are not all perfectly adaptable to the production of both types of goods.

· If all resources were perfectly adaptable to alternative uses, the PPF would be a straight line, reflecting a constant opportunity cost along the PPF.

D. What Can Shift the Production Possibilities Frontier?(Slide 19-22):

· Economic Growth: is reflected by an outward shift of the PPF.

· Changes in resource availability: people working longer hours, war

· Capital stock: more capital goods produced during this period shifts the PPF outward the next period

· Technology: discoveries that employ resources more efficiently

· Rules of the Game: improvements in the formal and informal institutions that support the economy shift the PPF outward.

· CaseStudy(20-23): Rules of the Game and Economic Development

E. What We Learn from the PPF (Slides 23-25):

· It illustrates the concepts of efficiency, scarcity, opportunity cost, economic growth, and the need for choice.

· It does not tell us which combination to choose. How society goes about choosing depends on the nature of the economic system.

IV. Economic Systems (Slides 26-31)

A. Three Questions Every Economic System Must Answer: (Slides 26-27)

1. What goods and services are to be produced?

2. How are goods and services to be produced?

3. For whom are goods and services to be produced?

B. Pure Capitalism: Individual decision making through markets includes:

1. Private ownership of all resources.

2. Market prices generated in free markets guide resources to their most productive use.

3. Goods and services are channeled to consumers who value them the most.

· Adam Smith and the “invisible hand”

4. Flaws of a pure market system:

· No central authority protects property rights, enforces contracts, or ensures that rules of the game are followed.

· People with no resources to sell could starve.

· Some producers may try to monopolize markets by eliminating the competition.

· Production or consumption of some goods involves damaging byproducts (i.e., pollution).

· Private firms have no incentive to produce public goods.

5. Because of these limitations, government has been given some role in most market economies.

C. Pure Command System: Resources are directed and production is coordinated not by market forces but by the “command” or central plan, of government.

1. In theory, property is owned communally; central plans spell out answers

to what, for whom, and how much; and individual choices are incorporated into central plans (communism).

2. Flaws of a pure command system:

· Running an economy is so complicated that some resources are used inefficiently.

· Because no one person in particular owns resources, each person has less incentive to employ them in their highest-valued use, so some resources are wasted.

· Central plans may reflect more the preferences of central planners than those of society.

· Because government is responsible for all production, the variety of products tends to be more limited than in a capitalist economy.

· Each individual has less personal freedom in making economic choices.

D. Mixed and Transitional Economies (Slide 37)

· No country exemplifies either type of economic system in its pure form.

· The United States represents a mixed system, with government directly accounting for about one third of all economic activity. In addition, government regulates the private sector in a variety of ways (e.g., antitrust, workplace safety, environmental quality, and zoning activities).

E Economies Based on Custom or Religion: Molded largely by custom or

religion¾for example, the caste system in India or charging interest under

Islamic law.

CONCLUSION

This text focuses on the mixed market system, which blends private choice, guided by the price system in competitive markets, with public choice, guided by democracy in political markets.

CHAPTER SUMMARY

Resources are scarce, but human wants are unlimited. Because you cannot satisfy all your wants, you must choose, and whenever you choose, you must forgo some option. Choice involves an opportunity cost. The opportunity cost of the selected option is the value of the best alternative forgone.

The law of comparative advantage says that the individual, firm, region, or country with the lowest opportunity cost of producing a particular good should specialize in that good. Specialization according to the law of comparative advantage promotes the most efficient use of resources.

The specialization of labor increases efficiency by (a) taking advantage of individual preferences and natural abilities, (b) allowing each worker to develop expertise and experience at a particular task, (c) reducing the need to shift between different tasks, and (d) allowing for the introduction of more specialized machines and large-scale production techniques.

The production possibilities frontier, or PPF, shows the productive capabilities of an economy when all resources are used efficiently. The frontier’s bowed-out shape reflects the law of increasing opportunity cost, which arises because some resources are not perfectly adaptable to the production of different goods. Over time, the frontier can shift in or out as a result of changes in the availability of resources, in technology, or in the rules of the game. The frontier demonstrates several economic concepts, including efficiency, scarcity, opportunity cost, the law of increasing opportunity cost, economic growth, and the need for choice.

All economic systems, regardless of their decision-making processes, must answer three basic questions: What is to be produced? How is it to be produced? And for whom is it to be produced? Economies answer the questions differently, depending on who owns the resources and how economic activity is coordinated. Economies can be directed by market forces, by the central plans of government, or, in most cases, by a mix of the two.

TEACHING POINTS

1. This chapter contains several fundamental concepts that should be fully discussed because they are used throughout the text to discuss economic choice in a variety of settings. When discussing opportunity cost and choice, be sure to distinguish between those costs that are associated with marginal decision making and those that are not (i.e., sunk costs). Also, many students will not immediately recognize that non-monetary costs are components of opportunity costs so it helps to emphasize this point.

2. Comparative advantage is a second important concept emphasized in this chapter. For additional examples of comparative advantage, consider the classic example in which an attorney can type and file faster and more accurately than a secretary. Because of comparative advantage, it will usually pay the lawyer to hire a secretary rather than to do the typing and filing because the opportunity cost is lower. Another example would be for Hawaii to specialize in pineapple growing and then trade with Idaho for potatoes. This chapter makes the point that opportunity cost is a relative concept, based on relative rather than absolute resource requirements in the production of goods. Because comparative advantage implies the specialization of resource use, trade becomes important in allocating goods to consumers. Students often note that self-reliance is an admirable concept. The discussion of comparative advantage shows that specialization and exchange lead to a more efficient allocation of resources.

3. When drawing the production possibilities frontier, partition the horizontal axis into equal segments, and then show the ever-increasing amounts of the alternative good that must be sacrificed to obtain more of the good in question. You thereby illustrate the law of increasing opportunity costs. Students often confuse increasing total and increasing marginal opportunity costs. You should emphasize, through your construction, that it is incremental costs that are increasing. Draw your curve large with plenty of bow in it. Numerical examples are helpful to some students.

4. Sometimes people claim that the PPF is bowed out because of the law of diminishing returns. Diminishing returns, of course, assumes an increase in one type of resource, holding other resources constant. This is not the case along the PPF, because all resources tend to be reallocated between goods with movement along the PPF. You could incorporate the law of diminishing returns into your discussion by fixing capital between the sectors and then shifting only labor resources. The text’s approach, however, is to assume that resources are not homogeneous; some are specific to the production of a particular good. The result is increasing opportunity costs and a bowed-out PPF.

5. Once the PPF is understood in terms of its construction and shape, it is important to emphasize the concepts that it illustrates. Scarcity is reflected by the fact that some output combinations are not feasible. The infinite number of output combinations that are feasible illustrates choice. Efficiency is illustrated when production occurs along the PPF, and the shape of the PPF illustrates the law of increasing opportunity costs. Furthermore, if resources are different, then the required specialization of resource usage implies that some form of trading occurs in order for each resource owner to consume all (both) goods.

6. A discussion of shifts in the production possibilities frontier leads naturally to a consideration of the sources of economic growth. Technological advance shifts the PPF. Such advances take time and require society to save, just as with the accumulation of physical capital. Emphasize that the PPF need not always shift out in a balanced way. Technological advance is often specific to an industry. Improvements in the rules of the game and in the education and health of the population may also lead to an outward shift in the PPF.

7. This chapter closes by considering how different economic systems answer the three economic questions. You may wish to discuss how numerous political systems have shifted toward more market-based economies over the past century to emphasize the capitalist approach. The chapter contains a fairly short reference to Adam Smith and his notion of the “invisible hand.” You may want to discuss this important concept in more detail.

ANSWERS TO END-OF-CHAPTER QUESTIONS AND EXERCISES

Answers to Questions for Review

1. (Opportunity Costs) Discuss the ways in which the following conditions might affect the opportunity cost of going to a movie tonight:

a. You have a final exam tomorrow.

b. School will be out for one month starting tomorrow.

c. The same movie will be on TV next week.

d. The Superbowl is on TV.

a. This greatly increases the opportunity cost. Your opportunity cost includes the ticket price plus the value of the loss of study time and loss of sleep that may have a negative effect on your final exam grade tomorrow.

b. This significantly lowers the opportunity cost. Your opportunity cost includes the ticket price plus the value of any other activity you might have engaged in tonight instead, such as, staying home and watching TV.

c. This leaves the opportunity cost unchanged, but the movie becomes a less attractive alternative.

d. This may increase or decrease the opportunity cost, depending on whether or not you are a football fan.

2. (Opportunity Costs) Determine whether each of the following statements is true or false, or uncertain. Explain your answers:

a. The opportunity cost of an activity is the total value of all the alternatives passed up.

b. Opportunity cost is an objective measure of cost.

c. When making choices, people carefully gather all available information about the costs and benefits of alternative choices.

d. A decision maker seldom knows the actual value of a forgone alternative and therefore must make decisions based on expected values.

a. FALSE. The opportunity cost is the value of only the single best alternative forgone.

b. FALSE. Opportunity cost is a subjective measure of cost. Only the individual can estimate the expected benefits and costs to himself or herself.

c. FALSE. Information is gathered only as long as the expected benefits from information gathering exceed the expected costs. Acquiring information about alternatives is costly and time consuming. Individuals usually make their choices based on limited and incorrect information because that was what was available given their time and cost constraints.

d. TRUE. For example, you can guess that you will enjoy a movie and then find it too violent for your tastes.

3. (Comparative Advantage) “You should never buy precooked frozen foods because the price you pay includes the labor costs of preparing the food.” Is this conclusion always valid, or can it be invalidated by the law of comparative advantage?

This statement conflicts with the idea of comparative advantage. If your opportunity cost of preparing food is higher than the cost of buying prepared food, the law of comparative advantage would direct you to buy the product with the lowest opportunity cost. There will be some people with very high time costs (e.g., surgeons), who will make the decision not to cook. The fact that prepared foods have become popular indicates that they are fulfilling a need. This need arises from the increasing opportunity cost of preparing one’s own food. The increasing opportunity cost is caused by the fact that the value of time to the professional person is rising faster than the cost of precooked frozen food.

4. (Specialization and Exchange) Explain how the specialization of labor can lead to increased productivity.

People are assigned various tasks according to their individual skills, that is, their comparative advantages. Also, people become better at a task the more they practice it; no time is lost in moving from one task to another. Specialization allows a more efficient organization of the production process and the introduction of more efficient production methods. With specialization, it is possible for a group of people to produce much more than the group could if each person produced the entire product herself or himself.

5. (Production Possibilities) Under what conditions is it possible to increase production of one good without decreasing production of another good?

An economy can produce more of one good without sacrificing production of another good if it is operating inside its PPF. The economy is inside the PPF when some resources are idle or when they are allocated inefficiently. Therefore, production can increase by using more of the idle resources or by allocating resources more efficiently.

6. (Production Possibilities) Under what conditions would an economy be operating inside its PPF? On its PPF? Outside its PPF?

The economy is inside its PPF if some resources are idle (unemployed) or if resources are allocated inefficiently. An economy is producing on its PPF if all resources are employed efficiently. An economy cannot operate outside of its PPF. Points outside the PPF represent unattainable combinations, given the resources, rules of the game, and the technology available.

7. (Shifting Production Possibilities) In response to an influx of undocumented workers, Congress made it a federal offense to hire them. How do you think this measure affected the U.S. production possibilities frontier? Do you think all industries were affected equally?

Such a law should cause the PPF to shift inward, because fewer resources would be available to the United States economy. The more labor-intensive industries, such as agriculture and services, would be hurt the most, especially those requiring unskilled labor.

8. (Production Possibilities) “If society decides to use its resources efficiently (that is, to produce on its production possibilities frontier), then future generations will be worse off because they will not be able to use these resources.” If this assertion is true, full employment of resources may not be a good thing. Comment on the validity of this assertion.

The answer to this question depends on how the resources are used. If resources are used to produce consumer non-durables and if little capital is produced, then future generations will be worse off. If society’s resources are used to produce capital goods and research, then economic growth in the future will be faster, making future generations better off. The key to this question is the realization that most of society’s productive resources are reproducible and that full employment can promote growth.

9. (Economic Questions) What basic economic questions must be answered in a barter economy? In a primitive economy? In a capitalist economy? In a command economy?

All of the listed types of economies face the same three basic questions: what goods and services to produce, how to produce those goods and services, and for whom the goods and services should be produced.

10. (Economic Systems) What are the major differences between a pure capitalist system and a pure command system? Is the United States closer to a pure capitalist system or to a pure command system?

Laws about resource ownership and the extent to which the government attempts to coordinate economic activity vary among economic systems from the most free (the capitalist system) to the most regimented (command system). A pure capitalist system is characterized by private ownership of all resources and coordination of all economic activity based on prices generated in free markets. A pure command economy is characterized as government control of both resources and production. The United States represents a mixed system with government accounting for about one third of all economic activity. In addition, government regulates the private economy in a number of ways (e.g., laws affecting antitrust, workplace safety, zoning, and illegal activities.)

Answers to Problems and Exercises

11. (CaseStudy: The Opportunity Cost of College) During the Vietnam War period, colleges and universities were overflowing with students. Was this bumper crop of students caused by a greater expected return on a college education or by a change in the opportunity cost of attending college? Explain.

During the Vietnam War period, the armed forces were populated with male draftees. A male college student, however, received a deferment for the period during which he was a full-time student. Therefore, the opportunity cost of entering college, at least for the vast majority of young males, no longer included the civilian salary that one could have earned. For females, on the other hand, the opportunity cost may well have increased because of the labor shortage created by the draft and the increase in college attendance among males.

12. (Sunk Cost and Choices) Suppose you go to a restaurant and buy an expensive meal. Halfway through, despite feeling full, you decide to clean your plate. After all, you think, you paid for the meal, so you are going to eat all of it. What’s wrong with this thinking?

This question highlights the importance of ignoring sunk costs in marginal decision making. Once you have purchased the meal, you cannot get your money back whether or not you finish the meal. There is no benefit to overeating.

13. (Opportunity Cost) You can either spend spring break working at home for $100 per day for five days or go to Florida for the week. If you stay home, your expenses will total about $120. If you go to Florida, the airfare, hotel, food and miscellaneous expenses will total about $1,000. What’s your opportunity cost of going to Florida?

The opportunity cost is the total cost of going to Florida and includes dollar costs incurred as well as the forgone opportunity of working. Assuming you would work for five days if you stayed home, the cost of going to Florida would total $1,380: the $1,000 cost of going to Florida plus the net value of what you could have earned $380 ($500 in earnings less expenses of $120) if you stayed home.

14. (Comparative and Absolute Advantage) You have the following information concerning the production of wheat and cloth in the United States and the United Kingdom:

Labor Hours Required to Produce One Unit

United Kingdom United States

Wheat 2 1

Cloth 6 5

a. What is the opportunity cost of producing a unit of wheat in the United Kingdom? In the United States?

b. Which country has an absolute advantage in producing wheat? In producing cloth?

c. Which country has a comparative advantage in producing wheat? In producing cloth?

e. Which country should specialize in producing wheat? In producing cloth?

a. In the United Kingdom, the opportunity cost of one unit of wheat is 1/3 unit of cloth (producing one unit of wheat takes 2 hours, the time that would allow you to produce only 1/3 of a unit of cloth, in the United States, the opportunity cost of one unit of wheat is 1/5 unit of cloth (producing one unit of wheat takes 1 hour, the time that would allow you to produce only 1/5 unit of cloth).

b. The United States has an absolute advantage in both goods; it is able to produce both products in less time than the United Kingdom requires.

c. The United States has a comparative advantage in wheat because it has the lowest opportunity cost of producing (one fifth cloth versus one third cloth for the United Kingdom), while the United Kingdom has the comparative advantage in cloth. (The opportunity cost of cloth in the United States is 5 wheat. The opportunity cost of cloth in the United Kingdom is 3 wheat.)

d. The United States should specialize in wheat, and the United Kingdom should specialize in cloth. The country with the lower opportunity cost of producing a good should specialize in producing that output.

15. (Specialization) Provide some examples of specialized markets or retail outlets. What makes the Web so conducive to specialization?

Students’ answers will vary according to their experiences. One specialized market is that for military weapons. The stock exchange provides a specialized market for buying and selling company shares, and there are specialized markets for selling government bonds and foreign currencies. Specialized retail outlets could include movie theaters specializing in “art” films, wine shops, cheese shops, language schools, and so forth. Media such as the Web allow firms in specialized markets to advertise their products at relatively low cost, and also permit customers to conduct interactive online searches for relatively specialized goods and services.

16. (Shape of the PPF) Suppose a production possibilities frontier includes the following data points:

Data Point Cars Washing Machines

A 0 1,000

B 100 600

C 200 0

a. Graph the PPF, assuming that it has no curved segments.

b. What is the cost of producing an additional car when 50 cars are being produced?

c. What is the cost of producing an additional car when 150 cars are being produced?

d. What is the cost of producing an additional washing machine when 50 cars are being produced? When 150 cars are being produced?

e. What do your answers tell you about opportunity costs?

a. The PPF drawn above is composed of two straight-line segments, AB and BC.

b. The cost of a car when 50 cars are produced is 4 washing machines. In the segment BC, as you move from 0 to 100 cars, you must give up 1,000 − 600 = 400 washing machines. Thus, each additional car costs 400 /100 = 4 washing machines along segment BC of this PPF.

c. The cost of a car when 150 cars are produced is 6 washing machines. In the segment AB of this PPF, as you move from 100 to 200 cars, you must forgo 600 washing machines. Thus, each additional car costs 600 /100 = 6 washing machines along segment AB of this PPF. The 150th car costs you 6 washing machines.

The cost of a washing machine when 50 cars are produced is one quarter of a car. In the segment BC, as you move from 600 to 1,000 washing machines, you must forgo 100 cars. [(100/(1,000−600))] = ¼, the slope of segment BC of the PPF. Note: The PPF would indicate that when 50 cars are produced, 800 washing machines can be produced.

d. The cost of an additional washing machine when 150 cars are produced is one sixth of a car. In the segment AB, as you move from 0 to 600 washing machines, you must forego 100 cars. (100/600) = 1/6, the slope of segment AB of the PPF. Note: The PPF indicates that when 150 cars are produced, only 300 washing machines are produced. Also note that the answers to this question are the inverse of the answers to questions (b) and (c).

e. As you increase the production level of either good, its (opportunity) cost per unit eventually increases. When you go from 50 cars produced to 150 cars produced, the cost in terms of washing machines forgone rises from 4 washing machines to 6 washing machines. When you go from 300 washing machines produced to 800 washing machines produced, the opportunity cost in terms of cars forgone rises from 1/6 of a car to 1/4 of a car.

17. (Production Possibilities) Suppose an economy uses two resources (labor and capital) to produce two goods (wheat and cloth). Capital is relatively more useful in producing cloth, and labor is relatively more useful in producing wheat. If the supply of capital falls by 10 percent and the supply of labor increases by 10 percent, how will the PPF for wheat and cloth change?

The PPF will shift inward along the axis measuring cloth production and outward along the axis measuring wheat production. This is represented by a shift from CD to AB on the following graph:

18. (Production Possibilities) There’s no reason why a production possibilities frontier could not be used to represent the situation facing an individual. Imagine your own PPF. Right now—today—you have certain resources—your time, your skills, perhaps some capital. And you can produce various outputs. Suppose you can produce combinations of two outputs, call them studying and partying.

a. Draw your PPF for studying and partying. Be sure to label the axes of the diagram appropriately. Label the points where the PPF intersects the axes, as well as several other points along the frontier.

b. Explain what it would mean for you to move upward and to the left along your personal PPF. What kinds of adjustments would you have to make in your life to make such a movement along the frontier?

c. Under what circumstances would your personal PPF shift outward? Do you think the shift would be a “parallel” one? Why, or why not?

a.

b. Moving upward and to the left along the PPF could be represented by a move from point C to point B. You would be giving up some partying to engage in more studying. You would have to focus your schedule so that you would frequent places where there were inducements to study rather than to party. The library, a quiet spot in the cafeteria, or a café playing classical music and offering quiet solitude would be your quest for at least a few more hours of the week.

c. The PPF drawn assumes that you have a fixed amount of time skills as well as some capital. Your time available can’t change; there are only 24 hours in a day. However, your study skills could be enhanced by training or by acquiring a new computer. This increase in skills and capital in the production of studying would shift the PPF outward along the vertical axis, indicating that with the same time constraint, you are able to accomplish more studying. A parallel shift in the PPF could occur if that new computer also allowed you greater satisfaction partying on the internet. In this imagined example, the computer, the capital good, would enable you to do more of both in the same time.

19. (Shifting Production Possibilities) Determine whether each of the following would cause the economy’s PPF to shift inward, outward, or not at all:

a. An increase in average length of annual vacations

b. An increase in immigration

c. A decrease in the average retirement age

d. The migration of skilled workers to other countries

Items a, c, and d all decrease the amount of labor available; thus, the PPF would shift inward. Item b increases the available labor, and thus the PPF would shift outward.

20. (Economic Systems) The United States is best described as having a mixed economy. What are some elements of command in the U.S. economy? What are some elements of tradition?

The government represents an element of command in the U.S. economy. Government accounts for about one third of all economic activity. In addition, government regulates the private economy in a number of areas including antitrust, workplace safety, zoning, food safety, illegal activities, and so on. Elements of tradition or custom would include our style of dress, our choice of occupation similar to that of our parents, and our fierce adherence to the English system of measurement rather than the metric system used by the rest of the world.