QUESTION

 Cost and Management Accounting

Assignment, Semester one 2012

1. General information

As per the course description, this assignment constitutes 30 per cent of the total assessment in

this course and is due in week 10 of the semester.

2. Purpose

This course covers a range of important cost and management accounting topics. The main

purpose of this assignment is to provide students with the opportunity to extend their knowledge, skills, attitudes and values in connection with some of the topics covered during the course.

3. Requirements

This assignment has two parts, as follows:

Part A: BYP Questions (40 marks)

Prepare responses to the following “Broadening Your Perspective” questions which are located at  the end of the relevant chapter of the current (that is, sixth) edition of the textbook:

(a)     BYP2-9 Considering Your Cost and Benefits (p. 92)                      8 marks

(b)     BYP3-7 Considering People, Planet, and Profit (p. 143)                9 marks

Teacher’s hints: (a)   If possible then try to discuss big oil spill in USA and need to discuss like ecological,govt penalty,people jobs .

( B) Research in details.

(c)     BYP6-10 Considering People, Planet, and Profit (p. 289)              9 marks

(Teacher’s hints):Cases like carbon tax in Australia and wind power energy in Australia.Australian govt spend a lot of money on research and development in renewable energy.Some arguments on yes/no then own conclusion.

(d)     BYP8-7 Ethics Case (p. 380) Part (a) 3 marks; (b) 2 marks; (c) 2 marks; (d) 3 marks; (e) 4 marks 14 marks

Part B: Essay (20 marks)

Write an essay on the following topic:

“The challenge with activity-based costing (ABC) is not just to implement

such a system, but rather to ensure that the system is effective and leads to

improved management decision making and organisational performance.”

Identify and discuss the features of an effective ABC system.                            20 marks

(Teacher’s hints: Identify and discuss ABC, what makes an effectice ABC system,what benefits it brings,  what it does for the company etc. Graph/illustration,Give Australian example.)

 Presentation

The assignment is to comply with the University’s General Guide for the Presentation of Academic Work. Students are required to use the APA style of referencing. See comments below regarding  word length.

As a general guide, the assignment should not exceed 3,000 words

• · Demonstrated application of appropriate cost and management accounting knowledge,

skills, values and attitudes.

SOLUTION

1. Part A: Case Studies

1.1 Cost and Benefits Considerations

It is important for small and medium businesses (SME’s) to effectively account for the costs in the business to be able to understand the correct business position. In the current case where a proposal to set up a small business is being considered , all costs should be effectively taken into account to be able to analyse the appropriate business position considering certain number of years into operation.  Thus to account for the costs of the business accurately the Cost Benefit Analysis (CBA) should be considered.

The Cost Benefit Analysis (CBA) estimates and sums up the amount of the money of the potential benefits and costs that accrue to the community and establishing the fact that they are worthwhile. Considering the given case of setting up a small land scape business , the effective costs that have been incurred are a small truck that has been fully paid up , the rest of the costs include the usage of tools for which rent would be payable after 3 years , family helps in the setup of the business. Though some of these costs have not been physically incurred it is important to effectively account for them to understand the long run viability of the business. They should be accounted from the very first year of operation as the business plans to consider them at a later date; therefore they should be accounted for so that the business is able to pay for them effectively after completing certain years of operation.

To understand the long run feasibility of a business or a project a cost benefit analysis is essential. The cost benefit analysis suggests that an investment should be undertaken only if the benefits outperform the costs. The cost benefit model provides for a simple decision making rationale for the company, to undertake rational business decisions. The cost benefit model includes the following methods, Firstly, a certain number of alternatives should be recognised, and after the alternatives are recognised a comparison can be facilitated. In the above case alternative resources can be identified and the comparison can be made with the current resources in use. The cost and the benefits should be adjusted at different times. To adjust the cost and the benefits at different times it is important to recognise the effective costs at the current time period. If the costs of the business are not recognised it would lead to overstatement of the profits which would provide a misleading framework both for the managers of the business as well as the investors of the business. The Cost Benefit Analysis (CBA) varies for each of the businesses because the benefit for one may be a cost for the other. Therefor each business should effectively consider their costs and analyse that accrue to them from the operations.

(Treasury Board of Canada Secretariat, 1998, www.sjsu.edu – accessed on 27/5/2012)

The recognition of the costs is essential to understand the long run viability of a particular business especially a small and medium scale business which often fails because the costs are underestimated and the profits are highly overstated.If the costs of the business are not recognised it would lead to overstatement of the profits which would provide a misleading framework both for the managers of the business as well as the investors of the business.

(www.sjsu.edu – accessed on 27/5/2012)

1.2 Case of the Texas Oil Refinery

The blast in the Texas oil refinery would cause a sharp increase in the social and the environmental costs that accrue to the business. The blast is a result of the insufficient health and safety measures being undertaken by the business and the community’s expectation of the business to be socially responsible The Social Management proposes management tools which improve the performance of the companies by taking in account the expectations of the society. The management has to understand the complexity of the relationship between business and society therefore the business has to engage in active social management techniques. The community which provides the resources to the business expects the business to act in a socially responsible and in an ethical manner.

The business is expected to practice CSR or corporate social responsibility, The CSR concepts defines the integration of the social and the environmental interests with the inserts of the business. Though the CSR and the social cost consideration is a voluntary concept but have become increasingly important in the business.

For the case under consideration of the blast in the oil refinery, the business was expected to act ethically firstly by reducing the air pollution being caused. The business should have effectively taken measures to minimise the pollution levels. The business should also aim at providing social benefits to the employees of the business. Thus the business should provide for the health and safety and other benefits to the employees. These costs are largely social in nature, but the business is expected to take these into account as the community expects the business to act responsibly. The business and the society have to co-exist together, thus to enjoy the confidence of the community it is important for the business to act in a socially responsible manner. Moreover the CSR concept emphasis on the adoption of a high moral conduct for the business and the recognition of all the stakeholders and providing them with equal benefits.

(Fontaine et al, 2006)

1.3 Global Warming and Costs Implication

The impact of global warming on businesses cannot be ignored. As the climate of the earth changes rapidly the importance global warming and renewable resources cannot be ignored. Therefore even if the costs of the renewable resources are higher they have to be developed to stop the damage occurring from global warming. Businesses’ are not isolated from the costs of global warming.  Droughts, floods and Tsunamis have already had a devastating impact on the economies globally. The impact on the climate dependant industries, like agriculture, tourism have been it hard as a result.

(Ackerman et al, 2008)

Therefore the environmental costs have to be taken into account. Many businesses have effectively considered the environment costs and are also practicing it as well. Many Australian companies have taken the concept of global warming and are taking measures to act in a socially responsible manner. For example : Woolworth’s investment into efficiency and low carbon technology Woolworth’s is effectively trying to minimise the impact of global warming , In  2011 Woolworth’s experienced a 10.9% reduction in the carbon emissions. The company is also taking other steps to support the cause of global warming (Annual Report – Woolworth’s 2011- accessed on 27/5/2012).  Thus, as every business uses the environmental resources it is important for them to be socially responsible in their use. In the case of Woolworth’s climate change would huge effect the business as it uses agricultural products and the supplies would also be affected as a result of natural disasters therefore it has to contribute to the society by using some measures to minimise global warming.

Thus, climate change would continue to affect all the international economies, and the global economies, governments as well as the businesses would have to become more socially responsible to minimise the damage that is occurring. Effective practice of carbon minimization measures which are less costly in terms of development of renewable resources. Carbon emission minimization measures may be highly simple but have a huge impact on cost saving for the business as well as the planet. For example, Woolworth’s Australia has taken steps to minimise carbon emission by reducing transportation costs. Reduction in the transportation costs implies greater efficiency for the business as well as minimises carbon emissions which reduce global warming as well increases profitability.

(Annual Report – Woolworth’s 2011- accessed on 27/5/2012)

1.4 Jumbo Airlines

1.4.1 The Stakeholders

The main stakeholders of Jumbo Airlines can be identified as the customers of the Airlines, secondly the management and the investors in the business.

1.4.2 Break Even Point Comparison

The lower breakeven point of Ecocno in comparison to Jumbo Airlines can be attributed to the low cost structure of the airline. As a result of the low costs the airline is able to break even at a lower level, thus being able to generate profits and efficiency for all the stakeholders of the business.

1.4.3 Price Comparison

The main reason for Jumbo Airline being able to charge a higher price for a long period of time can be attributed to the existence of a monopoly like situation.A monopoly is a market condition where there is existence of a single firm dominating the market, with no close competitor of the product produced by the firm. Thus in the case of a monopoly market the firm has the right to determine the price and output being the sole player in the market. The monopoly is said to produce the output that maximises the level of economic profit of the firm the price is set to the level corresponding where the difference between the total cost and total revenue is the maximum (Chauhan , 2010)

1.4.4 Alternatives to Econo

Econo has entered the market with a relatively cost structure and in such a situation the only alternative available to the airline is to follow a low price and low cost model to penetrate into the profits of the monopolist Jumbo Airlines.

1.4.5 Price Competition

With the entry of Econo a possible price competition has been introduced, the market has changed from a monopolist to an oligopolistic market. Thus the price wars are a natural phenomenon of the change in the market structure.The price wars affect the cost-effectiveness of the firm; In an oligopoly the price wars may have a damaging impact on the firms as it creates deflationary pressures on the business. Profit pressures may lead to the practice of such a strategy, there is pressure on the management to ensure the sustainability of the business as well as ensure profitability. Thus these strategies may be adopted as a result. The stakeholders in this case the customers are likely to benefit out of the low costs of ticket prices to some extent but the deflationary pressure on business which may occur due to the price wars may affect the investors of the business as well as the investor. Thus, a balance and effective stakeholder management strategy has to be adopted.

(www.succezz.com – accessed on 27/5/2012)

2. Part B: Activity Based Costing System

2.1 Definition of Activity Based Costing (ABC) System

The Activity Based Costing (ABC) system was developed by Cooper and Kaplan of Harvard Business School in 1988.The system was developed to account for the product costing in the manufacturing process. The Activity based Costing system identifies the production process as a set of activities that are required to manufacture a particular product. All the costs are thus, considered and are grouped together which a particular activity during the manufacturing process. In the ABC structure the departments in the organization serve as the cost centre for the process. The aim of the ABC system is to effectively trace the costs that accrue in the particular production process as well as account for all the costs that are fixed as well as variable. The ABC method has to focus on the variability of the costs with respect to operation and the consumption of resources in the organization.

(Goektuerk, 2005Toit, 2008 and maaw.info – accessed on 27/5/2012)

The ABC system is the best procedure to account for the overhead costs in the manufacturing process. If the relationship of the overhead costs cannot be determined then the ABC system offers no value at all, hence is 0. In order to understand and identify the costs in the ABC system it is important understand the products that use a particular activity. Thus the cost drivers have to be identified. The cost drivers define why a particular cost is incurred and undertaken in the process. Let us understand the cost drivers with the help of example: Suppose there are 10 machine set ups being undertaken by an organization, the number of the machine set ups will determine the costs of the process. Thus the costs to produce the product will also account for the machine set up costs that have been incurred to manufacture the product. (Toit, 2008)

The main difference between the traditional cost accounting procedure and the ABC method can be identified as the following

1. Firstly, in the traditional costing system it is assumed that each of the product consumes resources like energy, labour etc. whereas in the ABC system, cost is accounted for each activity which consumes the resources unlike the ABC system where each product consumes the resources available. Therefore the ABC system can be said as the cost of all the activities that are undertaken to produce a particular product.

2. Secondly, The traditional costing measures account for the unit measures of costs of resources, such as the unit cost of direct labour and other resources. These unit level costs are directly proportional to the number of units of the product produced. The ABC system utilises the cost drivers that can be defined at unit – level, batch level. For example:Let us understand the cost drivers with the help of example: Suppose there are 10 machine set ups being undertaken by an organization, the number of the machine set ups will determine the costs of the process. Thus the costs to produce the product will also account for the machine set up costs that have been incurred to manufacture the product. In this case the cost drivers are the setup – hours that have been utilised to set up the 10 machines for the manufacturing process.

(Bras et al, 1995)

The ABC procedure offers certain advantages to the businesses that have been identified below.

2.2 Advantages of the ABC System

2.2.1 Breakdown of Manufacturing Costs

The ABC costing system accrues certain advantages to the business. It allows the business to identify key manufacturing activities and account for them effectively and in a realistic manner.  The main advantage of the ABC system it allows the factor to break down the manufacturing process into different activities and identify the costs associated with each of the activities. The effective recognition of the costs allows the corporation to identify the high cost areas and hence apply cost control measures to introduce greater efficiency and ensure profitability of the business.  The managers are easily able to identify the reason for the increase in the costs and thus effectively apply the cost control measures.

2.2.3 Identification of Cost Behaviour

The ABC system helps in the identification of the cost behaviour. It enables the understanding to explain the rising costs associated with the business. It enables the management to understand the increase in the cost for an additional unit of the cost produced, or additional costs if an extra batch is produced. Therefore the management has complete clarity on the manufacturing process and thus , is able to take effective and informed decisions to control costs as well as whether to incur the costs keeping the long run goals and objectives of the firm in mind. The ABC process enables a better understanding of costs to the management, thus enable them to take better product pricing decisions or changes in the product or the reduction or increase in the batch being produced. Thus, the decision making is the key to achieve the growth and profit objectives of each organization.

(Toit, 2008)

The ABC system requires an extra effort for the mangers and the accountants which is accrued to the business in the terms of the advantages that accrue to the firm in the form of advantages. The ABC system most certainly accrues advantages to the business; it also offers certain limitations that cannot be ignored have been discussed below.

2.3 Disadvantages of the ABC

2.3.1 Highlighting Unprofitable Product Lines

The ABC system on occasions may highlight unprofitable product lines as well as the products. The management may then effectively have to take firm decisions to stop the manufacture of the products that may leave many persons jobless. This may go against the social objectives of the business. Therefore the employees of the corporation may feel constantly pressured as the organization uses the ABC system. The management thus, would have to effectively maintain a balance and transfer the human resources to the production of the profitable product line instead of cutting jobs. The ABC accounting system clearly allows the firm to become more competitive,

2.3.2 Detailed Data

The ABC system is a complex mechanism to access the costs associated with the manufacturing process. Therefore it is important for the accounting system to provide complete details of the costs and the other information required to estimate the costs correctly and accurately. The firm is effectively required to have its ledgers or the other accounting resources to record all the transactions. This may prove to be a tedious task for the managers as if accurate information is not available the costing process would not produce correct results. This would lead to misleading the management and may also result in incorrect decision making.

(Toit , 2008)

2.4 Example of an Industry using ABC Accounting: The Australian Wine Industry

The Australian Wine Industry has effectively recognised the need for the sophisticated methods of accounting to survive long term in the industry. The stakeholders in the industry have effectively advocated for the initiatives that would help the participants in the industry to develop a sustainable business strategy in the industry. The ABC system enables a clear definition of the activities in the wine industry and effectively accounts for the costs at each level. It also helps in the recognition of the activities which are high cost and hence helps in the prioritization of the resources, which enables the effective use of the given resources to the SME wine industries.

Some member participant’s objectives may however not seem to be rationally profitable, the Wine Federation has effectively recognised that the following of effective management costing techniques like the ABC would enable in the recognition of the rational goals of such industry participants. The assumption is made sophisticated management accounting techniques are not only desirable but are necessity for the business. The industry is expected to follow the guidelines given to the small and medium enterprises which effectively endorse the view of the using sophisticated management techniques.

Thus, the Australian wine industry effectively uses the ABC system to estimate costs and attain the long run profitability in the business. Following the sophisticated management techniques helps in the effective cost recognition which enables the management to make informed decisions to attain the long run goals of the business.

(Reddaway et all , 2011)

3. References

• example, choices which have been made. For, and improvements in transportation. “AN INTRODUCTION TO COST BENEFIT ANALYSIS.” Powering Silicon Valley | San Jose State University. N.p., n.d. Web. 27 May 2012. <http://www.sjsu.edu/faculty/watkins/cba.
• Treasury Board , Canada Secretariat. “BENEFIT-COST ANALYSIS GUIDE Treasury Board of Canada Secretariat Ottawa.” Treasury Board of Canada Secretariat 1.1 (1998): 1-93. Print.
• Ackerman , Frank , and Elizabeth Straton. “What We’ll Pay if Global Warming Continues Unchecked.” The Cost of Climate Change 1.1 (2008): 1-42. Print.
• Fontaine, Charles, AHaarman, and S Schmid. “The Stakeholder Theory.” Edlays education 1.1 (2006): 1-33. Print
• Annual Report 2011.” www.woolworthltd.au. Version 1-165. N.p., n.d. Web. 27 May. 2012. <http://media.corporate-ir.net/media_files/IROL/14/144044/WWL
• Chauhan, S. P. S.. Microeconomics: an advanced treatise. Eastern economy ed. New Delhi: PHI Learning, 2009. Print.
• “Business Ethics: Ethical Dilemma Reason 2 – Profit Pressures.” Succezz.com is an Education and Learning Site. N.p., n.d. Web. 27 May 2012. <http://www.succezz.com/Articles/business-ethics-dilemma-reason2.html>.
• Goektuerk, Hakan. Activity-Based Costing (ABC) – advantages and disadvantages How ABC can be applied to institutions of higher education. München: GRIN Verlag GmbH, 2007. Print.
• Du Toit , Elda. Fresh Perspectives:Cost and Management Accounting. Cape Town , South Africa: Pearson, 2007. Print.
• Bras, Bert , and Jan Emblemsvåg. “THE USE OF ACTIVITY-BASED COSTING, UNCERTAINTY, AND DISASSEMBLY ACTION CHARTS IN DEMANUFACTURE COST ASSESSMENTS.” ASME Advances in Design Automation Conference, Boston, Massachusetts, Sept 1.1 (1995): 1-9. Print.
• Reddaway, Melanie , Steve Goodman, and Chris Graves. “The role of accounting information in the management of winery SMEs: a review of the broader existing literature and its implications for Australia’s wine industry.” 6th AWBR International Conference 1.1 (2011): 1-13. Print.

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