QUESTION
AFW2020: Cost information for decision making
Semester one 2012
Assignment questions
Total marks: 50
Weighting: 20%
Due date: 4 May 2012 by 5 pm
Preparation for the assignment questions should commence on the very first day the
semester begins. Take copies of the papers recommended plus other references that
may interest you and read them over several times to familiarise with the contents,
style of writing and the standard of the materials contained therein. Note that most
of the reference readings are from journals ranked as A* and A. Do not wait for
activity-based costing to be covered in lecture 8 and then commence work on this
question. It will be too late.
Duly acknowledge all sources used and provide one list of references for all the
questions. You may use an essay format to answer the questions below. See Q
Manual for an essay format and how to write a literature review. Word limit for the
whole assignment is 2500 including references.
Question 1
Select a website of either a profit or a not for profit organisation that contains its vision,
mission, objectives/goals and strategies, and answer the following questions:
A: Provide the name and a brief background of the organisation you have chosen. State
clearly the organisation’s vision, mission, objectives/goals and strategies (maximum 100
words).
B: Explain whether the above statements correspond with the definitions provided in
your text book. If not, explain why? (maximum 200 words).
C: What types of management accounting information could be collected to help the
responsibility centre managers of your chosen organisation to make better decisions.
Explain. (maximum 500 words).
D: Look at a recent annual report of this organisation. Do you consider the information
contained therein as suitable for management decisions. Explain your answer. (maximum
400 words).
(2 + 5 + 10 + 8 = 25 marks)
Question 2
Many research findings have demonstrated that in spite of the popularity of activity-based
costing (ABC), its diffusion process in organisations has not been as intense as it may
have been expected. This is in essence the ‘ABC paradox’.
A: Provide a brief review of the literature on ABC. (maximum 600 words)
B: Identify and explain the reasons for the ABC paradox. (maximum 600 words)
(12 + 13 = 25 marks)
Selected References but not limited to:
Chenhall, R. H. and K. M. Langfield-Smith (1998) Adoption and benefits of
management accounting practices: an Australian study, Management Accounting
Research, 8, 1 – 20.
Gosselin, M. (1997) The effect of strategy and organisational structure on the
adoption and implementation of activity-based costing, Accounting, organisations and
Society, 22, 105 – 122.
Gosselin, M. (2007) A review of activity-based costing: technique, implementation
and consequences, in Chapman, C., A. G. Hopwood and M.D. Shields (eds.)
Handbook of Management Accounting Research, Elsevier Ltd. Oxford, 641 – 671.
Innes, J., F. Mitchell and D. Sinclair (2000) Activity-based costing in the UK’s
largest companies: a comparison of 1994 and 1999 survey results, Management
Accounting Research, 11, 349 – 362.
Jones, C. T. and D. Dugdale (2002) The ABC bandwagon and the juggernaut of
modernity, Accounting, Organisations and
Society, 27, 121 – 163.
SOLUTION
British Insurance
- About the company
Brit Insurance is an general insurance company having international presence. It is reinsurance group that specializes in commercial insurance. The company is privately owned formed by two players of the market, Apollo Management and CVC Capital Partners.
Brit Insurance was founded in 1995 as Benfield & Rea Investment Trust. After various acquisition of Stewart Syndicates Limited and Wren PLC in 1996 and 1999 respectively it was relisted as Brit Insurance Holdings PLC. Currently the company is incorporated in Netherlands.
Mission and Vision
As mentioned on the website of the company the vision and mission statement are given as to be a leading international general insurance and reinsurance group. To achieve this mission it is believed that the services are to be delivered through size and diversity.(Gosselin,1997) It is also emphasized to be the choice for the growth for the customers at all times through innovation and being the forefront for bringing about the change in the market.
The vision and mission statements are one of the most important aspects when considering the future outlook of the company and the direction in which it is moving. The mission statement however is completely different from the vision statement which at time seems to be similar. A mission statement gives in brief the basic ideology of the company and describes its fundamental purpose of existence in a market, which may be related to a particular segment or may have geographical importance. Mission statement thus represents
- Capabilities of Organization
- Target Customer
- Activities of the organization
- Business Makeup of the organization
The mission statement thus on the whole represents the public image of the company and reflects how and what it aims to achieve.
The Vision statement in a way is to have a view of the future scenario of the company and how it will operate. Vision statement is of utmost importance as it provides and acts like a guiding statement for the whole organization for achieving the desirable results for the organization. However it may not be the picture of the future of the company but also an inspiration and the basis for the strategic planning of the company. A vision statement is applicable on the entire company and also for each individual department. Vision statement provides a direction for the company on how to achieve the desired results.
Thus the vision and mission statement of Brit Insurance can be analyzed based on the above discussion. The vision statement of Brit as mentioned lay stress on being the leader in the market by providing services which provide growth to the customers by applying innovative techniques and innovative products. This will help the company in becoming the leader in the industry in international market which is the mission statement of the company.
As studied vision statement which is the guideline for the employees and members of the organization to achieve the mission statement can be closely related in case of Brit Insurance. The vision statement of the company is providing with the basis for the members to come up with innovative and world class products and to continuously strive for achieving the growth for the costumers and thus the company. This will ensure that the company gains international credibility and develop competency in the market which will then be the core competency for the company.
The management accounting information for any organization includes preparation and analysis of financial ratios, preparation and forecasting of budget, performing variance analysis and cost accounting. These are all essential parts for the management accounting information that utilize all the data related to accounts and reports that are made available in order to assist in the forecasting for the future cash flows for the company.
The website of Brit Insurance provides qualitative and quantitative information in relation to the performance of the company. For the qualitative information the company briefs about the products and the gains from the product and in the investor section complete information on the corporate governance is provided. The corporate governance is also provided on the website which provides an insight into various fundamentals of the company and also the reviews of the audit and risk committee on the financial and internal reporting process and the financial statements of the company. This is done in order to ensure that risk management and internal and external audit processes of the company is up to the requirement of the company as laid down earlier.
All the important information of the company related to the strategy and the corporate governance of the company is included in the annual report of the company. The strategy of the complete group has been divided into sub sections that have been given as vision of the company and Long Term Goals of the company. The long term goals of the company include sustainable business, Multi Channel Distribution, Service excellence, operational effectiveness, financial strength and diversity and spread of reach. As per the information available under the strategy section it can be said that the company is having the holistic view but more information can be gathered and implemented in order to develop strategy. For example Multi Channel Distribution lay emphasis on developing close link with the customers of the company by developing more closer relationships and the distribution channels. But the annual report does not provide more information on how many distribution channels are currently operating and the associated costs.
The Strategy objectives have also been laid with the complete analysis on the progress against the key objectives and the performance indicators. This includes the parameters that have been considered as the key objective based on the strategy that has been discussed above. Thus complete analysis is done for the key parameters that were considered during the previous year.
The company also publishes the business review statement wherein the analysis of the global market has been done along with the calculations highlighting the major ratios. This section also includes the performance of each strategic business unit of the company. This section discusses the performance of the various SBUs like Claims UK and Reinsurance. The analysis for SBU is done by highlighting the main achievements further supported by the ratio analysis.
The Risk Management activities of the company have been illustrated clearly and thus ensure that the company is having best practices in the industry to safeguard the interest of the shareholders as well as the customers.
Thus such information has been very critical and helpful not only in analyzing the current growth as well as the planning that is required to be done keeping in view the interest of the shareholders by making estimates of the budget and the cash flow for the company.
The annual report of the company has been very informative, both in quantitative as well as qualitative manner. The annual report of the company provides the complete detail of the financial status of the company by providing the complete details of the income statement and the balance sheet of the company along with the notes which is the statutory requirement.
Also the financial analysis clearly shows not only the income statement but also the cash flow and more importantly the change in the equity of the company is shown.
Based on the information in the annual report it has been made easy the analysis of the expected growth or other parameters with that what is achieved. Secondly the information provided in the annual report is very clear and provides the analysis for most of the associated ratios. For example expense ratio and retention ratio comparison done for the annual and quarterly basis.
Also the websites also provide the half yearly report which can accessed and analyzed for the management report to be prepared and revise the targets or operations of the company accordingly. Thus all in all the annual report can be used as the basis for the management accounting information and make analysis for the company so as to achieve the desired results.
Activity based costing
A good amount of study has been done and published on the effectiveness and success of activity based costing. Most of them of all have suggested that the activity based costing has not been that successful in being implemented by the companies practically (Gosselin, 1997; Öker & Adigüzel, 2010b). Theoretically it has been studied and analyzed that activity based costing can be beneficial for a company and can bear good results however it has failed in the practical implementation. It has also been argued that small and medium enterprises are the ones that have shown difficulty in implementing Activity based costing. The reasons that have been cited are firstly the difficulty associated with the implementation of activity based costing and secondly the difficulty in having the data available required for the model. The small and medium enterprises are have issues concerned to them. (Velmurugan, 2010)These enterprises show the potential and need for a system in place as they are big enough for owners to take interest but at the same time prove to be too costly for them in making the resources and efficient system in place for gathering data required for efficient implementation of the activity based costing system.
Activity based costing concept was developed by Cooper and Kaplan in 1988. The activity based costing is characterized by use of both the resources that are used in the process and the activities that are performed along with the indirect costs that is included in the cost object. Therefore it is expected that the solution to the indirect costs will also be provided by Activity based costing.
The interest in this area reduced in the by the early years of its formulation due to the difficulty that the managers faced in the implementation. This has been the scenario till date wherein a lot of text been in place but not much happening as far as activity based costing is concerned.
B.
The issue with the implementation is the complexity of the model that has made the corporate skeptical as the confidence in arranging the data and the confidence that the model use it accurately and correctly is also questioned. It also to track the activities in an organization that involves a lot of processes that are closely related and there is difficulty in tracking there dependency on each other. The collection of data is time consuming, costly and requires a bit of experience in collection.
Also periodic updating is required as the processes in an organization keeps on changing and thus the associated costs of the activities for a certain process will also vary. Thu in order to fully utilize the advantages of activity based costing it has to be updated periodically which adds to the time consuming and cost intensive characteristic.
The other challenges of the activity based costing involve the attitude of the management. Since it is periodic and time consuming it is not being accepted by the managers and face resistance for its implementation. Also in situations which is more common in small and medium enterprises is the more concern for the financing than the cost accounting thus this also is not supported by the management. However the activity based costing also require complete knowledge about the company and the related activities without which the implementation will not be complete and thus desired results will not be delivered and will result in inconsistency.
The activity based costing also will not give results with same efficiency for all organizations and will differ for organizations based on the technicality of the business that the company is involved in and the various other factors like production process, type of product, nature of industry etc. Also the cost associated with the risk of the management cannot be considered in Activity based costing. (Alaswami,2010)
Thus it can be said that the basis for activity based costing has been very influential and thus a huge amount of study has been done in this respect. However the practical implementation shows that there are a lot of complexities associated with it and thus has faced a lot of criticism especially by small and medium enterprise which range from time consuming to costly and also to managerial issues in implementing. This has been shown in the survey conducted by John Innes, Falconer Mitchell and Donald Sinclair in the UKs companies, according to which the companies that have been implementing activity based costing in the period of 1994 to 1999 has seen significant changes in the implementation of it. It is also inferred from the survey that the large companies are implementing and thus supporting activity based costing more. Also the proportion of companies that are implementing activity based costing has come down and thus shows the acceptability of the system. The results of the survey also show that the activity based costing has lost its popularity and thus has faced much criticism.
Thus this has been the most suitable type of costing where in the processes are simple and there is no need for extensive research required to do the research. However a different but similar approach has been developed which is Time Driven Activity Based Costing which
References:
Gosselin, M. (1997). The effect of strategy and organizational structure on the adoption and implementation of activity-based costing. Accounting, Organizations and Society, 22(2), 105-122.doi:DOI: 10.1016/S0361-3682(96)00031-1
Gosselin, M. (2006). A review of activity-based costing: Technique, implementation, and consequences. In Christopher S. Chapman,Anthony G.Hopwood and Michael D.Shields (Ed.),
Handbooks of management accounting research (pp. 641-671) Elsevier. doi:DOI: 10.1016/S1751-3243(06)02008-6
Kaplan, R. S., & Cooper, R. (1998). Cost and effect : Using integrated cost systems to drive profitability and performance. Boston, Mass: Boston, Mass. : Harvard Business School
Velmurugan, M. (2010). The success and failure of activity-based costing systems. Journal of Performance Management, 23(2), 3.
Innes, J., F. Mitchell and D. Sinclair (2000) Activity-based costing in the UK’s largest companies: a comparison of 1994 and 1999 survey results, Management Accounting Research, 11, 349 – 362.
Feras Alsamawi. (2010). Activity Based Performance Management – state-of-the-art and not time driven. Available: http://pure.au.dk/portal/files/13868/ABPM_Feras_Alsamawi.pdf. Last accessed 01st May 2012.
Henrik Fladkjær, Erling Jensen. (2011). The ABC-paradox: Is Time Driven ABC Relevant forSmall and Medium Sized Enterprises (SME)?. Department of Business and Management, Aalborg University
KG60
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