Reference no: EM132486716

Topic - The role of accounting information in management decision making

Learning objectives - At the end of this topic you should be able to

- Understand the scope of management accounting and what drives the work of management accountants;

- Discuss and critique the historical development of management accounting

- Know and evaluate the purposes of product costing;

- Apply the terminology associated with concepts of cost, and what cost elements constitute product cost;

- Analyse the general ledger flows of manufacturing costs, and be able to construct a manufacturing statement both manually and using a spreadsheet;

- Describe the value chain framework and its applications in management accounting.

Questions -

Q1. Explain the value chain and list ways that value chain analysis benefits organisations.

Q2. Why do managers need to measure, monitor, and motivate performance?

Q3. Identify two key influences on the nature of a management accounting system.

Q4. You are about to start a coffee shop business. Identify the likely key costs and classify each as a fixed or variable.

Q5. Why might some have trouble classifying costs as fixed or variable?

Exercises -

1. Value-added and non-value-added activities

Some activities add value to an organisation, while others do not.

Required - Determine whether each of the following activities is likely to be value-added or non-value-added and explain your choice.

(a) Inspection activities

(b) Moving materials to work stations

(c) Manufacturing extra inventory to keep employees busy

(d) Packing to fill a customer order

(e) Product design initiatives

2. Internal and external reports

Classify the following reports as internal or external.

(a) Operating budget

(b) Credit reports

(c) Financial statements

(d) Capital budget

(e) Tax returns

(f) Analysis of product mix

3. Types of manager decisions

Suppose that the following are activities conducted by Microsoft Corporation.

A. Comparing the timeliness of development steps of a new release of Windows with the timeline that was laid out to guide development.

B. Developing a timeline for the release of new Windows and Microsoft Office products over the next year.

C. Debugging the next version of Windows.

D. Providing technical support to customers who are having problems with Microsoft Office.

E. Estimating cash expenditures for the next year.

F. Comparing budgeted costs to actual costs and discussing major differences with department managers.

G. Deciding whether to construct a new building on the Microsoft site.

Required - Identify whether each activity is most likely part of:

(a) organisational strategies

(b) operating plans

(c) actual operations

(d) measuring, monitoring, and motivating.

For each item, explain why.

Problems -

1. Structural cost drivers

(a) With reference to Marino Designs in Self-study problem 2, demonstrate the meaning of the structural cost drivers: scope, technology and experience.

(b) Classify Marino Designs' likely strategy as low cost or product differentiation. Explain.

2. Relevant information

Suppose you are responsible for ordering a replacement for your office photocopy machine. Part of your job is to decide whether to buy it or lease it.

Required -

(a) Describe something that could be considered relevant information in this decision and explain why it is relevant.

(b) Describe something that could be considered irrelevant information in this decision and explain why it is irrelevant.

(c) Explain why it was important to distinguish between relevant and irrelevant information in this problem.

3. Uncertainties, degree of uncertainty

Community Children's Hospital can invest in one of two different projects. The first project is to purchase and operate a hotel that is located two blocks from the hospital. The CEO of the hospital has no experience operating a hotel, but the hospital does provide rooms for in-patients, and so she is familiar with cleaning requirements and managing housekeeping staff. However, the hospital does little advertising and does not have a large public relations staff. In addition, the hospital and hotel are located in a part of town that is deteriorating.

The other investment opportunity is to replace the heart monitors in the neonatal intensive care unit (critical care for newborns and infants). The new monitors would provide a range of functions, including monitoring the body temperature and blood pressure of infants, as well as monitoring heart functions. Each monitor can be used for up to four infants with information about each infant forwarded to one computer that is monitored by a special technician. The current monitors are bedside monitors that need to be read every 10 minutes by nursing staff.

Required -

(a) Prepare a list of uncertainties that the CEO faces if she buys the hotel.

(b) Prepare a list of uncertainties the CEO faces if she replaces the heart monitors.

(c) Which scenario appears to have a greater degree of uncertainty? Why?

4. Relevant information; recommendation

Frank owns a caravan and loves to visit national parks with his family. However, the family only takes two one-week trips in the caravan each year. Frank's wife would rather stay in motels than the caravan. She presented him with the following itemisation of the cost per trip, hoping that he will sell the caravan and use motels instead.

Required -

(a) What are the relevant costs for deciding whether the family should go on one more camping trip this year?

(b) What are the relevant costs for deciding whether Frank should sell the caravan? Assume the family will take the same vacations but stay in motels if the caravan is sold.

(c) What factors other than costs might influence the decision to sell the caravan? List as many as you can.

(d) Consider your own preferences for this problem. Do you expect Frank's preferences to be the same as yours? How can you control for your biases and consider this problem from Frank's point of view?

(e) Frank asks you to help him decide what to do. Do you think he should sell the caravan? Why?

5. Cost drivers; value chain; strategy; organisational structure

Australian fashion designer Sean Ashby commenced his men's swimwear and clothing business aussieBum in 2001. A keen swimmer and surfer, he was unable to find a good pair of men's cossies and used his life savings of $20 000 to make a series of prototypes, buy materials and commence manufacturing in Australia. Despite rejection from local retailers who did not see the potential for aussieBum to compete with international brands, Ashby has proven critics wrong. He had no choice but to take his business online, with instant exposure to the international market. It now takes thousands of orders a day.

Since the company's inception, Ashby says that aussieBum has 'taken on its own little cult revolution', with celebrities such as Ewan McGregor, Billy Connolly and David Beckham fans of the aussieBum brand. Even Kylie Minogue's male dancers wore aussieBum cossies in the film clip for her song 'Slow'. The marketing thrust behind Ashby's aussieBum is to live the dream - 'the dream to be independent and present our gear in a way that gets noticed. We don't apologise for pushing the boundaries . . . We have a saying at aussieBum - If you doubt yourself, wear something else'.

The company doubled in size every year in its first five years and continued to grow by 20 per cent every quarter. By 2005, aussieBum earned more than $5 million in sales and carried no debt. The aussieBum brand now takes pride of place in stores such as Selfridges in the UK; Brown Thomas in Ireland; La Maison Stores in Canada; Alpha Male in Melrose Drive, Los Angeles; KaDeWa in Germany; as well as others in Spain, The Netherlands, Sweden, Poland and Russia. As well as direct department store sales, aussieBum's internet retail orders are booming, with aussieBum being distributed to more than 70 countries. It now has over 200 000 consumers ordering direct via its custom built e-commerce site.

Most of the raw materials are sourced from Italy and China. By manufacturing in Australia, aussieBum hopes to promote Australia's culture and relaxed lifestyle as well as eliminate restrictions that might come with outsourcing production to other countries. Moreover, producing locally (through independent manufacturers) provides flexibility and a reduced timeframe in getting new products to market. With a heavy emphasis on innovative product design, aussieBum pays close attention to the design phase of the product process.

Two recent examples of aussieBum's flexibility and innovative approach to product development and marketing are worthy of note. First, it was able to capitalise on the consumer backlash against competitor Bonds when that company transferred more of its manufacturing offshore. Ashby estimates that aussieBum's sales grew by at least 40 per cent as a result. Second, aussieBum was able to achieve continued growth during the global financial crisis. The company continues to avoid debt and own all its assets outright.

Required -

(a) With reference to the information provided, distinguish between structural and executional cost drivers.

(b) Illustrate and describe the industry and organisational value chain in which aussieBum operates.

(c) Classify aussieBum's likely strategy as low cost or product differentiation. Explain.

(d) Classify aussieBum's organisational structure as centralised or decentralised. Explain.

(e) With reference to disruptive innovation, do you consider aussieBum to be a disruptor to the traditional garment industry value chain? Discuss why or why not.