Reference no: EM132515039

Point 1: Henganofi Corporation was a company that grew from humble beginnings. Its original shareholders consisted of a collection of village cooperatives in the Eastern Highlands of Papua New Guinea. Their main source of income was from growing coffee on their small plots of land. Coffee prices were very high in the 70's and 80's, which led this company to expand their business interests significantly to include the following: poultry farming, coffee processing, coffee exporting, a printing press, bulk fuel distributorship, fuel service stations, a mechanical workshop, paper packaging manufacturing, and plantation management services.

Point 2: The Managing Director Pieter Knol originally came from Europe as a volunteer with the village cooperatives, and was integral to the growth of the business entity from cooperatives to a corporation. "Accounting records" consisted of a multi-column cashbook and a "journal" containing narratives of non-cash transactions. Money in the bank account was interpreted as a good state of financial 'health' , and during tougher times, low-interest government-backed loans were easily accessible via the many development banks that were set up to encourage local businesses during that era.

Point 3: Zeke Anthony, a chartered accountant has been employed by Henganofi Corporation to spruce up the accounting records and overall management process, and after a prolonged analysis and study of the various business interests of the company, Zeke decided to engage the assistance of a former colleague Rob Barlow, to help with this task.

Required:

In your role as Zeke Anthony, you have flagged the following two issues of concern that you intend to bring to the attention of Pieter Knol, and the Board of Directors.

Issue 1:

The financial records have previously been managed by Pieter Knol who does not have an accounting background, and as such were rather basic and not always complete. The company has no clear idea of what it cost to produce most of the items sold in their various businesses beyond the purchase cost of raw materials. As the growth happened in the 'good' times, there was always money in the bank to meet most commitments and finance new projects. Pieter have always been of the opinion that "what has worked, will continue to work, and if something is not broken, why fix it?" Besides, he was already far too busy with new and exciting 'projects' to bother with 'what it cost' to produce an item or provide a service, so long as it was doing well (indicated by money in the bank). He also felt that the same financial reports that were prepared for external users (e.g. shareholders and banks) should be "more than sufficient" to run the business, since they are already paying so much money for their preparation, and audit.

In your submission to Pieter Knol and the Board of Directors:

Question (a) Explain why it is critical for the business to know clearly what it costs to make a product or provide a service in a systematic and properly recorded way. Demonstrate the benefits to management, of having such information in a timely manner. (Do not describe a specific product-costing system)

Question (b) It is often alleged that financial statements produced for external users do not adequately cater to the needs of the management of a company (internal users) who must have relevant and timely information for taking effective decisions and actions in the day-to-day running of a business.

Provide convincing reasons why management accounting information can better meet that need (your responses should be based on the specific characteristics of management accounting information)

Issue 2:

Since the business was started, Pieter Knol based his decisions about potential investments solely on one criteria: what interested the major shareholders and his own personal preferences.

Zeke and Rob have strong reasons to believe that such a criteria for committing valuable and scarce resources, together with a lack of understanding of the true relationship between business activity levels and how much impact levels of activities have on cost (cost behaviour) will eventually lead to the financial downfall of Henganofi Corporation.

In your report to Pieter Knol:

Question (a) Clearly demonstrate the benefits that will be gained from understanding cost behavior, and briefly explain two (2) often-used approaches to obtain a cost formula.

Question (b) Describe in general, some of the common problems faced in the process of collecting information for analysis.

You should use examples from the business at hand (or similar types of businesses). The report is to help the managing Director run the business more successfully.