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Tuition Note
Session2.4.9 Benchmarking........................................................................................................................... 57
General indicators
Operational issues
-loss of key staff
Financing issues
-profitability problem
-liquidity problem
-gearing problems
Compliance issues
Where:
Key to remember:
Between 1.81 and 2.99 they need further investigation [grey area]
Argenti developed a model, which is intended to predict the likelihood of company failure based on
three connecting areas that indicate likely failure:
defects,
mistakes
symptoms of failure
A Management defects
Accounting defects
3
No costing system: costs and contribution of each product or
service are not known
15
Poor response to change: old-fashioned product or service, obsolete
production facilities, out-of-date marketing methods; old directors
43
High gearing 15
Overtrading 15
45
Creative Accounting 4
12
A 10
B 15
C 0
25
If any score which are more than 25 then it will need immediate action to avoid company insolvency.
Quantitative models:
Advantages:
Quantitative models such as the Altman Z-score use publicly available financial information
about a firm in order to predict whether it is likely to fail within the two-year period.
The advantages of such methods are that they are simple to calculate and provide an objective
measure of failure.
Disadvantages:
However, they only give guidance below the danger level of 18 and there is potential for a
large grey area [1.81-2.99] in which no clear prediction can be made.
Additionally, the prediction of failure of those companies below 18 is only a probabilistic one,
not a guarantee. This means not every company with Z score under 1.8 will go bankruptcy.
These models are open to manipulation through creative accounting which can be a feature of
companies in trouble.
Qualitative models:
Advantages:
The advantage of the method is the ability to use non-financial as well as financial measures
and the judgment of the investigator
Disadvantages:
10
Management accounting is to provide information relating to planning, decision making and controlling.
Planning:
Costs
Budgets
Pricing decision
Decision making
Controlling
Performance measurement
Different ratios
Divisions measurement
Transfer pricing
11
1. Compiling information: collect costs relating to each material, labor, overhead etc. focusing on
internal and external information such as existing financial information/ company resources staff
/government report such as inflation rate, predicted exchange rate, consumer expenditure
etc/industry report.[using different costing systems]
2. Analyzing those costs: making sure costs are accurate (how they come with the costs); favorable or
adverse (variance); etc.
3. Preparing budgets using best estimates, ie, sales budget, cash budget etc.
And management accountant would help senior management in the following management
activities:
Whether to set up company and what further investment that company may try to make
Performance measurement
12
Current position: if you continue to offer ACCA products, you can have $100 return.
Ideal position: shareholders actually want $1,000 of return rather than $100.
But the future forecasts may not be appropriate because its subject to uncertainty.
$ Revenue
Future
project
s
Current
operatio
ns
Years
13
The way we are going to close the gap is to set appropriate/additional strategies, ie, developing new
products which may give us a better return.
A market development strategy aims to find additional markets for existing products.
A diversification strategy aims to reduce the risks of a business or to increase its growth
prospects by entering new industries.
Other strategies:
Efficiency strategies which are designed to increase profits (or throughput) by making
better use of resources in order to reduce costs.
Also it is possible to reduce a planning gap that is measured in terms of profit by divesting
of loss-making business units.
14
Definition of strategy
Pathways that company uses in order to arrive at vision
15
In order to realize the mission, company would usually set lots of objectives to ensure it can meet
with the mission. Objectives are more specific and seek to translate the mission into a series of
mileposts for the organization to follow. So company should firstly identify what are the most
important things for company to succeed (CSF) before setting any specific objectives(KPIs).
Critical success factors are those elements that an organization must perform properly in order to
succeed. These often link with competences. For example, punctuality for train. Customer satisfaction.
We often use balanced scorecard to help us generate into ideas of what CSFs that company should
maintain:
Financial
Non-financial
Customers
Internal
16
(SMARTIE)
Environmentally friendly
3. Portfolio of company
Parental company [step by step teaching sub; allow sub to use parents resources]
Synergy creator
17
Build up
Harvest
Divest
2. BCG matrix
18
Three Steps:
SFA test.
19
We are going to use SWOT analysis to summarize strength, weaknesses, opportunities and threats of
the company.
The resources and competences would stand for the strengths and weaknesses that company has and
this is also referred to as strategic capability defined by Johnson and Scholes.
Resource is something that company has and competence is things the company does.
So we can identify different resources and competences that company has such as following:
Machinery
Money
Materials
Makeup (culture)
Markets (products)
Management information
Management
Methods (processes).
20
Procurement: getting materials for the company not the individual products, like electricity.
Porter suggests that for each cost in the business which is either value adding or non value adding.
Non value-adding: extra benefit < extra cost. Porter suggests than non value-adding activities could
be outsourced.
21
Economic includes the state of the economy, interest rates and tax levels.
Legal includes changes in law making it e.g. harder / more expensive to operate.
New entrants always drive down profit margins (as companies have to spend more on marketing or
lower prices to keep customers). New competitors are only kept out by barriers to entry. These
barriers include: High fixed costs, High capital requirements.
If there is a lot of rivalry in an industry then profit margins will be lower as companies constantly fight
to retain their customers.
There will tend to be higher rivalry (and lower profits) when A Market growth is slow.
Powerful customers prevent companies from putting prices up or implementing other changes.
Customers will be powerful if there is standardization within the industry (making it easier to switch to
another supplier).
22
Suppliers will be powerful if there are high switching costs or there are a limited number of suppliers.
Substitutes
If there are many substitutes for a product then it becomes harder to raise prices.
Direct substitute: where the customer buys the same product from a different manufacturer
Indirect substitute: where the customer buys a product from a different industry to meet the same
need
Monetary substitute: where different industries are competing for the same part of a customers
income.
23
1, Market penetration:
24
2, Market development:
Movement into overseas markets often quoted as good example as the organization will need to build
new competencies when entering international markets.
Approaches:
- Advantages the company gets to know the needs of the final customer
Indirect exporting selling to intermediaries such as retailers who then sell to final consumer.
Overseas production the company manufactures and sells the products in the target country.
25
- Advantages lower risk since local knowledge gained and costs shared
3, Product development:
Company needs to be innovative and strong in the area of R&D and have an established,
reliable marketing database.
Constant innovation allows for the developing sophistication of consumers and customers and
ensures that any product-related competitive advantage is maintained.
Products of the company can be balanced by classifying each products based on their market
share and market growth. So here introduces the model of BCG matrix (Boston consulting
group matrix)
26
This seeks to relate the market share of our SBU in relation to the market share of our largest rival.
This will be expressed as a multiple.
BCG suggests that market share gives a company cost advantages from economies of scale and
learning effects. Thus market share is seen as a strategic asset of sorts.
The dividing line is set at 1 - A figure of 4 suggests that SBU share is four times greater than the
nearest rival. 0.1 suggests that the SBU is 10% of the sector leader.
This is something that can be improved upon by management action and strategy and can be used as
a performance measure.
This represents the growth rate of the market sector concerned. Management often have to react to
this as it is difficult to influence
High growth industries offer a more favorable competitive environment and better long term prospects
than slow-growth industries.
The dividing line is set at 10% though this is often modified to high growth and low growth
1, Cash cows are in the mature or decline stage of the life cycle:
The threat of new competitors is low and the high market share makes the threats from substitutes
and existing competitors low as well.
The product cannot grow any further (since the market is already mature).
The market is growing (introduction or growth stage of the life-cycle) so new competitors will be
attracted into the market
Leave market.
4, Dogs have low market share and low growth. They should be closed unless needed by one of the
other products.
May require investment just to keep product in portfolio, especially if the company is offering a one
stop shop or is using the product as a loss leader.
4, Diversification
This involves taking new products to new markets the riskiest option?
Critics argue that it is madness to take resources away from known markets and products only to
allocate them to businesses that the company essentially knows nothing about. This risk has to be
compensated for by higher reward which may or may not exist.
Brand stretching ability is often seen as being the critical success factor for successful diversification.
The new business and its strategy may well have teething problems with its implementation and this
may damage brand reputation. Thus there is significant risk.
Objectives can no longer be met in known markets possibly due to a change in the external
environment restricting the business in some way.
Possible to brand stretch and benefit from past advertising and promotion in other SBUs;
Diversification promises greater returns and can spread risk by removing the dependency on
one product.
Greater use of distribution systems and corporate resources such as research and development,
market research, finance and HR leading to synergies. Referred to as stretching corporate
parenting capabilities.
28
Growth into similar industries where there is some linkage ie, selling clothes + shoes.
Vertical Integration
Backward secure materials supply, ie, a manufacturing company acquires a company supplying
raw materials.
Horizontal Integration
In order to sell similar products, ie, sell ACCA courses as well as CIMA courses; selling shoes as well
as glasses.
Completely new areas with which the business shares no common ground and so seen as the last of
the growth strategies, ie, selling shoes + selling ACCA courses.
29
After considering all of the potential strategic choices that we are going to choose, the next thing we
can do is to evaluate these choices to see if choices are reasonable.
So we can use a test called SFA test derived by Johnson and Scholes.
*Suitability-fit in to strategy?
Will it meet organizational objectives? Financial & non-financial
30
Job costing
Batch costing
(iii) Just-in-time
Environmental accounting
Lifecycle costing
Standard costing
31
This means to get the right quantity of goods at the right place and at the right time.
1. purchasing
2. production
Order goods from supplier on 1/Jan/2014 and settle the invoice on 6/Jan/2014.
So here matching payables with receivables[in this example, only 1 day to finance inventory]
A: any non-value adding activities should be eliminiated so for example, set up time; inspection time;
move time; queue time; storage time etc.
S:Good relationship with suppliers and suppliers should not be too far away from your courenty.
E:There should be easy products, ie, small products lines like only 5 products within your company
rather than hunders of them.
32
increased flexibility in meeting the customers individual needs (faster response times to
product specification changes) because this is a pull approach[demand approach].
Disadvantges:
There will be an increased reliance on suppliers and hence increase their power.
For company there could be difficulty in finding local suppliers who are capable of meeting the
required component and delivery standards needed in order to run such a system.
If there is any delay in materials delivery then this will result in stock out and hence company
would lose sales revenue.
Multi skills workers would be needed because we need to best utilise resources within company
and maybe its hard to train those multi skill workers and also there would be costs associated
with them.
33
Basic principles:
1. Getting things right first time,
On the basis that the cost of correcting mistakes is greater than the cost of preventing them from
happening in the first place.
2. Continuous improvement,
Which is the belief that it is always possible to improve, no matter how high quality may be already.
How to apply?
1. in relation to design.
Products and processes should be designed with quality in mind (so that faults are not incorporated
from the outset). For example, COMPANY would need to ensure that specifications for product were
100% correct.
The quality of output depends on the quality of input materials and so TQM would require procedures
for acceptance and inspection of goods inwards and measurement of rejects. Inspection of output
could take place at various key stages of the production process to provide a continual check that the
production process is under control.
3. In relation to sales.
Customer complaints should be monitored in the form of letters of complaint, returned goods, penalty
discounts and so on.
4. In relation to suppliers.
Supplier quality assurance schemes could be established so that suppliers would guarantee the quality
of goods supplied. The onus would then be on the supplier to carry out the necessary quality checks or
face cancellation of the contract.
5. In relation to employees.
34
The information system should be designed to get the required information to the right person at the
right time.
Costs of non-conformance:
Quality costs
Cost of products that do not meet the prescribed quality standards.
1. Costs of internal failure are money spent repairing a product BEFORE a customer
receives a product that has been found to be faulty.
Examples relevant to the business of COMPANY could include the cost of products scrapped
due to inefficiencies in goods inwards procedures, the cost of products lost in process and the
cost of products rejected during any inspection process.
2. Costs of external failure are money spent repairing a product AFTER the customer has
received a faulty product. Examples include meeting warranty costs.
Costs of conformance:
3. Costs of prevention represent the money spent BEFORE products are made to prevent
problems occurring.
Examples include staff training, design and process engineering and machine maintenance.
4. Costs of appraisal are the costs of assessing the level of quality achieved.
This means money spent AFTER products are made to check quality is acceptable.
Examples applicable to COMPANY could be the cost of any goods inwards checks and the
costs of any supplier vetting.
35
How: Link direct and indirect cost (production overhead) to one unit.
AC:
Use OAR X activities (such as machine hours) to calculate overhead for each product.
ABC:
Steps:
Steps1: cost/driver
Advantage:
Disadvantage:
Advantages:
2. is flexible enough to analyze costs by activity providing more useful costing data.
Disadvantages:
1. Cost vs benefit.
4. Focuses on the allocation of cost rather than minimizing the cost incurred
36
Universal Motors wants to establish the cost of its products and find when using different costing
method which will lead to different result and detailed information has been given below:
Direct labor costs $6 per hour and production overheads are absorbed on a machine hour basis if
absorption costing approach is used.
Total production overheads are $654,500 and further analysis shows that the total production
overheads can be divided as follows:
100
Labour Machine
hours hours
The following total activity volumes are associated with each product line for the period as a whole:
Eco 75 12 150
37
1. Compare full costs per unit using absorption costing and activity based costing(show
your calculation in an appendix) (11marks)
(ii)
Full cost/unit
Direct material 20 12 25
Direct labour 3 9 6
0.5hrs X$6/hr
1.5hrs X$6/hr
1hrs X$6/hr
Overhead 42 28 84
1.5hrs X$28/hr
1hr X$28/hr
3hrs X$28/hr
Level of activities
= $654,500
= $28/hr
38
Direct material 20 12 25
Direct labour 3 9 6
0.5hrs X$6/hr
1.5hrs X$6/hr
1hrs X$6/hr
Overhead (W) 95 79 69
W: Steps1: cost/driver
100% $654,500
39
1.5X750
1X1250
3X7,000
Advantages:
2. Is flexible enough to analyze costs by activity providing more useful costing data.
Disadvantages:
1. Cost vs benefit.
4. Focuses on the allocation of cost rather than minimizing the cost incurred
40
Job card:
Direct material X
Direct labour X
Prime cost X
Production overhead X
Total cost X
Markup/margin X
Selling price X
41
Kitty Ltd is a local jobbing company has just completed a one-off job which involved making a
specialist iron frame. The item was given the job number 505.
Note 60 metres of grade B steel were unused and were returned to store.
Hourly rate
Production overheads are absorbed at the rate of $3.00 per direct labour hour in each department.
Note the company uses cost plus pricing of work and adds 40% to the cost of a job to determine price.
The company is very busy and would not normally work overtime on a job of this nature
Required:
42
Q Story Ltd
Story Ltd operates a batch costing system. For a particular order, 8units are produced in a batch.
Production overheads are absorbed at a rate of 12 per direct labour hour and nonproduction
overheads are absorbed at a rate of 30% of total production cost.
Required:
43
Traditionally:
Cost/unit $10
Mark-up 40% $4
Now:
Target price = $8
(20%of price)
Key advantages:
Possible elimination of non value added elements and activities in production process.
Selling price considers what customer might want to pay for the product.
3, Customers
Customer requirements for quality, cost, and time are incorporated into product and process
decisions. The value of product features to the customers must be greater than the cost of
providing them.
4, Design
Cost control is emphasized at the design stage so any engineering changes must happen before
production starts.
44
The Better Electricals Group (BEG) which commenced trading during 2002 manufactures a range of
high quality electrical appliances such as kettles, toasters and steam irons for domestic use which it
sells to electrical stores in Voltland.
The directors consider that the existing product range could be extended to include industrial sized
products such as high volume water boilers, high volume toasters and large steam irons for the hotel
and catering industry. They recently commissioned a highly reputable market research organization to
undertake a market analysis which identified a number of significant competitors within the hotel and
catering industry.
At a recent meeting of the board of directors, the marketing director proposed that BEG should make
an application to gain platinum status quality certification in respect of their industrial products from
the Hotel and Catering Institute of Voltland in order to gain a strong competitive position. He then
stressed the need to focus on increasing the effectiveness of all operations from product design to the
provision of after sales services.
An analysis of financial and non-financial data relating to the application for platinum status for each
of the years 2011, 2012 and 2013 is contained in the appendix.
The managing director of BEG recently returned from a seminar, the subject of which was The Use of
Cost Targets. She then requested the management accountant of BEG to prepare a statement of total
costs for the application for platinum status for each of years 2011, 2012 and 2013. She further asked
that the statement detailed manufacturing cost targets and the costs of quality.
The management accountant produced the following statement of manufacturing cost targets and the
costs of quality:
Required:
(a)Explain how the use of cost targets could be of assistance to BEG with regard to their application
for platinum status. Your answer must include commentary on the items contained in the statement of
manufacturing cost targets and the costs of quality prepared by the management accountant.
(8 marks)
45
Both variable costs and fixed costs are expected to increase which may be indicative of an
increase in the level of activity.
Quality costs:
Internal failure costs are money spent repairing a product BEFORE a customer receives a
product that has been found to be faulty. Eg, the cost of products lost in process and the cost
of products rejected during any inspection process.
External failure costs are money spent repairing a product AFTER the customer has received
a faulty product. Examples include warranty costs.
Prevention costs
Prevention costs represent the money spent BEFORE products are made to prevent problems
occurring, Eg, staff training costs.
Appraisal costs
This means money spent AFTER products are made to check quality is acceptable, eg,
inspection costs.
Trend:
Internal failure costs are expected to fall from 21.9% (2,500/ (8,400 + 3,000))of the cost
target to 7.5%(1,200/(12,600+3,400)) from 2011 to 2013.
External failure costs are expected to decline from 27.2% (3,100/(8,400 + 3,000)) of cost
target to 6.1% from 2011 to 2013.
Prevention costs are expected to fall from $42m in 2011 to $132m in 2013.
Appraisal costs are expected to decrease by $100,000 to $07m in 2012 and to remain at that
level during 2013.
Implication:
However in a TQM system, management would aim for zero defects and spend on conformance
costs to reduce total quality costs over time. The emphasis is on getting things right first time
and designing in quality.
BEG is projecting a decrease in all categories of quality cost over the three years which
suggests a TQM approach is being taken.
It would be useful for BEG to obtain some data on costs of quality from the competition in the
hotel and catering industry to get a benchmark for what reasonable costs of quality are since
projections seem a little ambitious.
46
Comment:
2, avoids products having changing product costs during the life of the product.
Q life ltd
Life ltd wants to produce a brand new pad. The following information is available:
R&D: $100,000
Required:
47
Nowadays, business needs to take into account the environmental impact that it has during its
operation of business.
Water consumption
Energy costs
Clean up costs
Taxations
Ethics
Stakeholders needs
Pressure on resources
48
Such as raw material costs and energy costs which should also include the cost of waste
through inefficiency.
These and other conventional costs (such as regulatory fines) are often hidden within
overheads and therefore will not be a high priority for management control unless they are
separately reported.
2, Contingent costs
Such as the cost of cleaning industrial sites when these are decommissioned.
These are often large sums that can have significant impact on the shareholder value
generated by a project. As these costs often occur at the end of the project life, they can be
given low priority by a management that is driven by short-term financial measures (e.g.
annual profit) and make large cash demands that must be planned at the outset of the project.
3, Relational costs
There are relational costs such as the production of environmental information for public
reporting.
This reporting will be used by environmental pressure groups and the regulator and it will
demonstrate to the public at large the importance that PLX attaches to environmental issues.
4, Reputational costs
If the company is failing to address environmental issues and if this is made public then it
would impair companys reputation and hence company would lose sales revenue.
49
The aim of flow cost accounting is to reduce the quantities of material which should be beneficial to
the environment and saving costs for the organizations.
It uses material flows and organizational structures to make material flows more transparent and it
divides the material flows into:
material-these are costs and values of materials involved in the production processes.
c system-these are costs and values of internal handling of materials, eg, personal costs
delivery and disposal-these are costs of material flows leaving the company, eg, transport costs or
waste disposal
There are:
environmentally related costs which can be specifically attributed to an environmental cost center,
eg, sewerage plants.
environmentally driven costs which do not relate to a specific cost center but relate to environmental
drivers, eg, higher staff costs due to more toxic emission during the production process.
In order to allocate the environmentally driven costs to cost centers its important to find adequate
costs drivers such as volumes of water and toxicity of emissions.
50
It considers costs and revenue throughout the life of a product from initial design stage to the end of
its life to be removed from market.
This allows an early focus which can help decision making such as pricing and the design of the
product taking into account of future environmental costs such as cleanup costs.
Refinery Co is a large oil refinery business in Kayland. Kayland is a developing country with a large
and growing oil exploration and production business which supplies PLX with crude oil. Currently, the
refinery has the capacity to process 200,000 barrels of crude oil per day and makes profits of $146m
per year. It employs about 2,000 staff and contractors. The staff are paid $60,000 each per year on
average (about twice the national average in Kayland).
The government of Kayland has been focused on delivering rapid economic growth over the last 15
years. However, there are increasing signs that the environment is paying a large price for this growth
with public health suffering. There is now a growing environmental pressure group, Green Kayland
(GK), which is organizing protests against the companies that they see as being the major polluters.
Kaylands government wishes to react to the concerns of the public and the pressure groups. It has
requested that companies involved in heavy industry contribute to a general improvement in the
treatment of the environment in Kayland.
As a major participant in the oil industry with ties to the nationalized oil exploration company (Kayex),
PLX believes it will be strategically important to be at the forefront of the environmental developments.
It is working with other companies in the oil industry to improve environmental reporting since there
is a belief that this will lead to improved public perception and economic efficiency of the industry. PLX
has had a fairly good compliance record in Kayland with only two major fines being levied in the last
eight years for safety breaches and river pollution ($1m each).
The existing information systems within PLX focus on financial performance. They support financial
reporting obligations and allow monitoring of key performance metrics such as earnings per share and
operating margins. Recent publications on environmental accounting have suggested there are a
number of techniques (such as input/ output analysis, activity-based costing (ABC) and a lifecycle
view) that may be relevant in implementing improvements to these systems.
PLX is considering a major capital expenditure program to enhance capacity, safety and efficiency at
the refinery. This will involve demolishing certain older sections of the refinery and building on newly
acquired land adjacent to the site. Overall, the refinery will increase its land area by 20%.
Part of the refinery extension will also manufacture a new plastic, Kayplas. Kayplas is expected to
have a limited market life of five years when it will be replaced by Kayplas2. The refinery accounting
team have forecast the following data associated with this product and calculated PLXs traditional
performance measure of product profit for the new product:
51
Production costs
13.8 15.1 16.6 18.3 18.5
Marketing costs 5.0 4.0 3.0 3.0 2.0
Development costs 5.6 3.0 0.0 0.0 0.0
Product profit 0.6 5.4 10.5 11.9 13.1
Subsequently, the following environmental costs have been identified from PLXs general overheads as
associated with Kayplas production.
Additionally, other costs associated with closing down and recycling the equipment in Kayplas
production are estimated at $18m in 2016.
The board wishes to consider how it can contribute to the oil industrys performance in environmental
accounting, how it can implement the changes that this might require and how these changes can
benefit the company.
Required:
(a) Discuss and illustrate four different cost categories that would aid transparency in environmental
reporting both internally and externally at PLX. (6 marks)
(b) Explain and evaluate how the three management accounting techniques mentioned can assist in
managing the environmental and strategic performance of PLX. (9 marks)
(c) Assess the impact of implementing an input/output analysis on the information systems used in
PLX.
(3 marks)
(d) Evaluate the costing approach used for Kayplass performance compared to a lifecycle costing
approach, performing appropriate calculations.
(7 marks)
(25marks)
52
(a)
Conventional costs
Such as raw material costs and energy costs which should also include the cost of waste
through inefficiency.
These and other conventional costs (such as regulatory fines) are often hidden within
overheads and therefore will not be a high priority for management control unless they are
separately reported.
Contingent costs
Such as the cost of cleaning industrial sites when these are decommissioned.
These are often large sums that can have significant impact on the shareholder value
generated by a project. As these costs often occur at the end of the project life, they can be
given low priority by a management that is driven by short-term financial measures (e.g.
annual profit) and make large cash demands that must be planned at the outset of the project.
Relational costs
There are relational costs such as the production of environmental information for public
reporting.
This reporting will be used by environmental pressure groups and the regulator and it will
demonstrate to the public at large the importance that PLX attaches to environmental issues.
Reputational costs
If the company is failing to address environmental issues and if this is made public then it
would impair companys reputation and hence company would lose sales revenue.
53
Lifecycle costing
It considers costs and revenue throughout the life of a product from initial design stage to the
end of its life to be removed from market.
This allows an early focus which can help decision making such as pricing and the design of the
product taking into account of future environmental costs such as cleanup costs.
There are:
1, environmentally related costs which can be specifically attributed to an environmental cost center,
eg, sewerage plants.
2, environmentally driven costs which do not relate to a specific cost center but relate to
environmental drivers, eg, higher staff costs due to more toxic emission during the production process.
In order to allocate the environmentally driven costs to cost centers its important to find adequate
costs drivers such as volumes of water and toxicity of emissions
Input/output analysis:
Input/output analysis (sometimes called mass balance) considers the physical quantities input
into a business process and compares these with the output quantities with the difference
being identified as either stored or wasted in the process.
These physical quantities can be translated into monetary quantities at the end of the tracking
process.
The aim of flow cost accounting is to reduce the quantities of material which should be
beneficial to the environment and saving costs for the organzations.
It uses material flows and organizational structures to make material flows more transparent
and it divides the material flows into:
1, material-these are costs and values of materials involved in the production processes.
2, system-these are costs and values of internal handling of materials, eg, personal costs.
3, delivery and disposal-these are costs of material flows leaving the company, eg, transport
costs or waste disposal.
54
However, cost/benefit analysis will need to be undertaken for each of the systems.
This will be difficult, as benefit estimates will prove vague given the unknown nature of the
possible improvements that may accrue from using the techniques.
ABC and input/output analysis will require significant increases in the information that the
management accounting systems collect and so incur increased costs
(c)
Input/output analysis will require the information systems to collect not just monetary but also
physical measurements of the materials being processed through the refinery.
This may require additional records and costly changes to companys existing database
structures.
Systems will have to be put in place to monitor physical volumes of raw materials, waste and
recycled material within the refinerys processes.
(d)
Traditional costing:
This ignores capital costs, environmental costs and the cost of decommissioning.
Revenue 149.4
Lifecycle costing:
A lifecycle analysis aims to capture the costs over the whole lifecycle of the product:
Revenue 149.4
Decommissioning costs 18
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When the environmental costs are all included, the forecast profit margin on the Kayplas
project is reduced from 27.8% to 6.8%, which makes it a much less attractive investment.
If the actual costs of decommissioning in five years time are higher than the forecast for
example, due to changes in environmental legislation in the next five years - then the profit
margin will be reduced even further.
Lifecycle costing makes the post-production costs such as decommissioning costs visible at the
start of the project and in the design stage of the product and this should help PLX to minimize
those.
Eg, they could investigate whether they could design any of the equipment to be used to
produce Kayplas in such a way that it could also be used to produce Kayplas2.
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Benchmarking is the process of identifying best practice in relation to both products (including) and
the processes by which those products are created and delivered. The search for best practice can
take place both inside a particular industry, and also in other industries.
Benchmarking is the establishment, through data gathering, of targets and comparators, through
whose use relative levels of performance can be identified.
Process:
1, Decide the areas to benchmark. I.e. improve efficiency.
The performance drivers have been provided and the indicators are based on the activity per driver.
This step would normally be more complex in a private sector situation as commercial secrecy would
hinder the sharing of information.
5, Compare performances
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Functional benchmarking
This is where a function of the business is compared to a similar function of another business.
Businesses consider their position in relation to performance of the best in the sector.
Competitors are unlikely to provide willingly any information for comparison so this type of
analysis is often undertaken through trade associations or third parties to protect
confidentiality.
Internal benchmarking
This involves comparing businesses or operations from within the same organisation (eg
business units in different countries).
Strategic benchmarking
It involves considering high level aspects such as core competencies and developing new
products.
Again, the above can only be done if the company has adopted appropriate performance
measures.
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Advantages:
Disadvantages:
Implying that there is a single best way to do things which must be copied by all.
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1. Profitability
Asset Turnover.
2. Liquidity
Current ratio.
Acid ratio.
Inventory days.
Receivables days.
Payables days.
3. Gearing
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Ganymede University (GU) is one of the three largest universities in Teeland, which has eight
universities in total. All of the universities are in the public sector. GU obtains the vast majority of its
revenue through government contracts for academic research and payments per head for teaching
students. The economy of Teeland has been in recession in the last year and this has caused the
government to cut funding for all the universities in the country.
In order to try to improve efficiency, the chancellor of the university, who leads its executive board,
has asked the head administrator to undertake an exercise to benchmark GUs administration
departments against the other two large universities in the country, AU and BU. The government
education ministry has supported this initiative and has required all three universities to cooperate by
supplying information.
The following information has been collected regarding administrative costs for the most recent
academic year:
The key drivers of costs and revenues have been assumed to be research contract values supported,
student numbers and total staff numbers. The head administrator wants you to complete the
benchmarking and make some preliminary comment on your results.
Required:
(a) Assess the progress of the benchmarking exercise to date, explaining the actions that have been
undertaken and those that are still required. (8 marks)
(9 marks)
(17 marks)
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(a)
GU is trying to improve efficiency and is benchmarking all of its administration operations relating to teaching and
research.
The performance drivers have been provided and the indicators are based on the activity per driver. The drivers might
be improved by distinguishing between teaching staff and administrative staff.
The government selected the three largest universities for benchmarking which excludes five other smaller universities.
The basic data has been gathered as required by government. This step would normally be more complex in a private
sector situation as commercial secrecy would hinder the sharing of information.
The results of the comparison should lead to identification of areas for improvement. If GU is not demonstrating leading
performance then it should send staff to the top performer to identify their best practice processes and devise projects to
implement these at GU.
Management should perform a post-project review in order to identify if the improvement has achieved or exceeded its
goals and consider lessons that have been learned from the project.
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Contract management 78 87 97
Research
GU has the lowest costs relative to the value of the research contracts supported, and it has also
earned the highest value contracts.
This may suggest that GU continues to maintain its good practice in cost controls.
AU spends significantly more per student on its teaching facilities and student support than the other
two universities but with fewer students.
The lower student numbers at AU may also reflect that it only wants to accommodate a smaller
number of students and therefore sets harder entry requirements than the other two.
So we can compare factors such as student drop out rates, pass rates, and students success rates in
gaining employment after they graduate.
Costs of BU is higher than the other two and it is with the highest amount of students and hence it
may suggest that students are interested in teachers support services.
Human Resources
BUs human resource costs per staff member are 22% higher than the other two universities although
its with more staff than GU and it may suggest that GU is more efficient.
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GU spends more (around 11%) on IT management than BU. However, this may be due to the subjects
being taught.
E.g. if GU offers more science and technology-based subjects this is likely to mean it will need greater
computing resources than if it offers more arts subjects.
Further investigation:
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Direct material(3kg/unitX$4kg) 12
Direct labor(2hrs/unitX$6/hr) 12
Variable overhead(2hrs/unitX$4/hr) 8
Fixed overhead(2hrs/unitX$8/hr) 16
Standard cost 48
1, ideal standard:
2, attainable standard:
Improves on current standard but still allows for small inefficiency in the process, e.g. want to improve
last years result and admit this is not perfect due to some factors.
3, current standard:
Standard an organisation is currently achieving. It does not provide inspiration for improvement but it
does provide a benchmark against which to measure day-to-day activity.
This is a standard (e.g. cost/unit) that was set some time ago and has not been updated. It allows a
company to measure its progress over time.
But in the real life that the standard cost would be always different from the actual cost.
And we need to investigate reasons why there would be difference between the two (variance analysis)
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Variance analysis
Material Sales
variance variance
Labour Fixed
variance Variable overhead
overhead variance
variance
1, FAVOURABLE VARIANCES occur when actual results are better than expected, producing higher
than expected profits.
2, ADVERSE VARIANCES occur when actual results are worse than expected, producing lower than
expected profits.
Cost variance:
1, Materials:
Actual:
Output 1,400units
Required:
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2, Labor
Actual:
Output 1,400units
Required:
Efficiency Rate
Idle time?
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Actual:
Output 1,400units
Required:
Possible reasons:
Efficiency Expenditure
Budget Actual
Required:
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Machine Machine
breakdown? breakdown?
5, Revenue Variance:
Q Tony
Output:
Budgeted 1,000units
Actual 1,400units
Required:
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E.g. if the standardized purchase price for the material is $50/kg and the actual is $60/kg then it may
suggest management has spent more to purchase the raw material then it should be of $10/kg. But if
Im going to give you further information that theres an inflation in the prices of 10% which means
10%X$50/kg=$5.kg is not controllable by the management and this is the planning variance. Theres
only $5/kg which is controllable by the management then this is operational variance.
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Usage
Price
Q POPO
POPO involves in selling bottles and it incurred the following information when making a bottle.
Standards:
Actual:
Output: 12,500units
Costs: $195,500
Required:
Calculate the basic usage and price variance suggesting whether production and purchase
manager have done a good job.
Calculate the planning and operational variance if further investigation has suggested that due
to the poor harvest that POPO used poorer quality of material and increases the usage to
3.1kg/unit and due to inflation that purchase cost has increased to $5.15/kg.
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Yield variance is saying a change in the material mix will have an impact on the output valued a
standard costs.
SQSP
Yield variance
AQ(SM)SP
Mix variance
AQSP
Price variance
AQAP
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% $
A 70 20
B 20 30
C 10 50
In May, 855 tonnes of wine were produced and inputs were as follows:
$ $
A 660 21 13,860
B 210 32 6,720
C 130 47 6,110
1,000 26,690
Required:
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= AS SCM BS SCM
When a company has two or more products (products mix) we might need to analyze which product
we can sell more and which product we can sell less.
AS SCM
AS(SM) SCM
BS SCM
Q KITTY
Standards (budget):
Sales
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units Standard
price
Sales
Required:
1, market size: the wider economic growth which leads to more demand in the goods and this is not
controllable by the management which is a planning variance.
2, market share: the profit we retained in the market so this is controllable and this is determined by
management action.
AS SCM
BS SCM
Q MZ ltd
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Required:
SH SR
Efficiency
AHW SR
Idle time
AHP SR
rate
AH AR
SH SRW
Efficiency
AHW SRW
Idle time
AHP SRP
rate
AH ARP
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Standard:
Actual results:
Output: 1,200units
(i) Calculate the labour efficiency variance, labour idle time variance and labour rate variance.
(ii) Calculate the labour efficiency variance, labour idle time variance and labour rate variance if we
expect to lose 20% of labour hours due to idle time.
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Kaizen costing applies functional analysis in the design phase to create a target cost for each
production function.
These are totalled to give a product target cost which, after the first year of production, is used as the
baseline for further on-going reductions. These reductions in turn reduce the baseline cost and so on
as the production process improves
The management attitude to employees is different in the standard costing system and Kaizen costing
system, as in continuous improvement systems they are the source of the improvement solutions
while in standard costing systems with its analysis of variances of labour rates and efficiencies, the
employees are often seen as the source of problems.
In the Kaizen system, the employees often work in teams and are empowered to make changes to
production that would have to be cleared through a management hierarchy in a more static standard
costing system. Changing the costing system would be likely to represent a major cultural change at
Tench with its history of bureaucratic control.
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The company has a strong position within Essland, which has a population of 200 million and forms
the majority of Tenchs market. However, the company has also traditionally achieved a good market
share in six neighbouring countries due to historic links and shared culture between them and Essland.
All of these markets are experiencing growing car ownership as political and market reforms lead to
greater wealth in a large proportion of the population. Additionally, the new government in Essland is
deregulating markets and opening the country to imports of foreign vehicles.
Tenchs management recognizes that it needs to make fundamental changes to its production
approach in order to combat increased competition from foreign manufacturers. Tenchs cars are now
being seen as ugly, pollutive and with poor safety features in comparison to the foreign competition.
Management plans to address this by improving the quality of its cars through the use of quality
management techniques. It plans to improve financial performance through the use of Kaizen costing
and just-in-time purchasing and production. Tenchs existing performance reporting system uses
standard costing and budgetary variance analysis in order to monitor and control production activities.
The Chief Financial Officer (CFO) of Tench has commented that he is confused by the terminology
associated with quality management and needs a clearer understanding of the different costs
associated with quality management. The CFO also wants to know the impact of including quality costs
and using the Kaizen costing approach on the traditional standard costing approach at Tench.
Required:
(a) Discuss the impact of collection and use of quality costs on the current costing systems at Tench.
(6marks)
(b) Discuss and evaluate the impact of the Kaizen costing approach on the costing systems and
employee management at Tench. (8 marks)
(c) Briefly evaluate the effect of moving to just-in-time purchasing and production, noting the impact
on performance measures at Tench. (6 marks)
(20 marks)
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The costs of quality will probably be hidden in overheads in the standard costing system at Tench.
The existing system will need to be modified to separate these costs.
Quality costs:
Internal failure costs are money spent repairing a product BEFORE a customer receives a
product that has been found to be faulty. Eg,the cost of products lost in process and the
cost of products rejected during any inspection process.
External failure costs are money spent repairing a product AFTER the customer has
received a faulty product. Examples include warranty costs.
Prevention costs
Prevention costs represent the money spent BEFORE products are made to prevent
problems occurring, E.g. staff training costs.
Appraisal costs
This means money spent AFTER products are made to check quality is acceptable, eg, inspection
costs.
The identification and collection of these costs will help Tench to raise the quality of its products
in order to compete more effectively with the new imports.
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Kaizen costing
The Kaizen costing process focuses on producing constant, small, incremental cost
reductions throughout the production process during the products life.
These are totalled to give a product target cost which, after the first year of production, is
used as the baseline for further on-going reductions.
These reductions in turn reduce the baseline cost and so on as the production process
improves.
Change
For standard costs which are fixed over the relevant period but as process is continually
improving and hence standard costs have much less value.
And hence Kaizen costing can respond more easily to a dynamic business environment.
Control VS Reduction
Standard costing is used to control costs while Kaizen costing focuses on cost reduction.
In the Kaizen system, the employees often work in teams and encouraged to make
changes to production in order to make it more efficient.
And hence the change in the costing system would require a change in the corporate
culture, ie, from workers are getting command to workers are actively looking for problems.
It would allow company to address quickly the changing nature of Tenchs competitive
environment.
It will increase staff motivation because staff are involved in making decisions of how to
improve company efficiency.
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JIT
This means to get the right quantity of goods at the right place and at the right time.
Key elements:
Order goods from supplier on 1/Jan/2014 and settle the invoice on 6/Jan/2014.
So here matching payables with receivables[in this example, only 1 day to finance inventory]
A: any non-value adding activities should be eliminiated so for example, set up time; inspection
time; move time; queue time; storage time etc.
S:Good relationship with suppliers and suppliers should not be too far away from your courenty.
E:There should be easy products, ie, small products lines like only 5 products within your
company rather than hunders of them.
Impact on Tench:
Advantages:
increased flexibility in meeting the customers individual needs (faster response times to
product specification changes) because this is a pull approach[demand approach].
Disadvantges:
There will be an increased reliance on suppliers and hence increase their power.
For company there could be difficulty in finding local suppliers who are capable of meeting
the required component and delivery standards needed in order to run such a system.
If there is any delay in materials delivery then this will result in stock out and hence
company would lose sales revenue.
Multi skills workers would be needed because we need to best utilise resources within
company and maybe its hard to train those multi skill workers and also there would be
costs associated with them.
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