Reference no: EM131419160

Advanced Management Accounting Assessment

Learning Outcomes:

• Use and evaluate management accounting techniques and information in organisational situations, especially to provide product and customer costing and profitability information and to budget
• Contribute to organisational strategy and problem solving, decision making and innovation, especially dealing with change, uncertainty and complexity
• Produce performance measurement information for organizational control
• Communicate management accounting information and be aware of behavioural implications
• Contribute to development of organisational quality and staff resources

Question 1: Product and Customer Costing and Profitability

KFC has successfully operated its lunch boxes service in Mumbai city when they outsource the distribution to the Dabbawalas. Office workers placed their order via smart phone and pay online. The electronic order will be sent the nearest outlet where the food will be prepared and packed. The Dabbawalas team will collect from the outlet and send to the customers. The Head quarter of KFC from Los Angeles city has set an incentive for its outlets worldwide to embark on lunch boxes project. They initiated a Dabbawalas competition worldwide. Online lunch website is open at 10 am and closed at 2 pm. Customers' order within the radius of 1 km of the KFC outlet is accepted by the website. They are offered 10 choices of menu. The HQ is rewarding outlets based on one criterion: speed (minutes) of delivery per every meter travelled. The standard was set based on study done on Mumbai operations. The completion is going to be recorded as reality shows as well. Huge monetary rewards is going to be handout if they have met the standard:

	From the start of the project:
Speed	Month 1	Month 2	Month3	Ave 3 months
< 10 minutes	0%	5%	5%	3%
11 - 15	40%	60%	80%	60%
16 - 20	50%	30%	15%	32%
>20	10%	5%	0%	5%
Total orders	100%	100%	100%	100%

The KFC country teams in Bangkok and Jakarta cities are keen to join the challenge. They have selected three outlets i n their city. They study their food preparation processes. When orders appear on the computer screen in the kitchen, Staff A prepare the lunch box cording to the menu, (30 box per minute), Staff B put in cooked food into the box (20 boxes per minutes) Staff C check and seal the box and hand it over to Dabbawalas man who turn came in to collect every 5 minutes. (25 boxes per trip)

As an intern of the management consultant team hired to study the fairness of the competition, you are required:

Given different situation in these two cities, you are required to complete the following questions. Detailed discussion for each question is required.

1. Draw a diagram to identify the throughput of the operations and explain the meaning of throughput account.

2. Identify the bottlenecks here and suggest how they might over come to meet the demand?

3. Explain what is six-sigma and how can they help to improve the quality of service for KFC.

4. Give your advice to the KFC management team on other criteria to be used to ensure the service quality being reflected better.

Question 2: Organisational Strategy And Problem Solving, Decision Making and Innovation

Global Education runs hundreds of three types (Primary, Secondary and Vocational) of schools in Australasia and Asia regions. Their mission is to profit from changing landscape of global education. In the mist of changing environment, fierce competition and possible financial difficulties, a recent board meetings of directors, require additional financial information about individual type of school in order to strategize for the overall profitability improvement.

Michelle Mullen, the financial controller, has been asked to provide additional data that would assist the board in its investigation. Mullen believes that profit statements, prepared along both product lines and geographic areas, would provide the directors with the required insight into operations. Mullen had several discussions with the division managers (primary, secondary and vocational) for each school type and complied the following information from these meetings:

	Type of school			Total
	Primary	Secondary	Vocational
Enrolment (EFTS)	80,000	90,000	80,000	250,000
Average course fee/EFTS ($)	16,000	40,000	30,000
Average variable teaching cost/ EFTS($)	8,000	1,900	1,600
Average variable marketing expense /EFTS($)	400	500	450
Fixed overhead, excluding depreciation($)				5,000,000
Depreciation of school facilities (building & equipment) ($)				4,000,000
Administrative and selling expense($)				1,160,000

The allocation of overhead has always been an unresolved issue. The division managers concluded that Mullen should allocate fixed overhead to both product lines and geographic areas on the basis of the ratio of the variable costs expended to total variable costs.

Each of the division managers agreed that a reasonable basis for the allocation of depreciation on school facilities would be the ratio of EFTS per school type (or geographical areas) to the total number of EFTS.

There was little agreement on the allocation of administrative and marketing expenses. So, Mullen decided to allocate only those expenses that were traceable directly to an area. For example, teaching staff salaries would be allocated to geographical areas. Mullen used the following data for this allocation:

Teaching staff salaries ($)		Marketing staff salaries ($)
Primary	1,200,000	New Zealand	600,000
Secondary	1,400,000	Australia	1,000,000
Vocational	800,000	Singapore	2,500,000

The division managers were able to provide reliable sales percentages for their product lines by geographical areas:

	Percentage of EFTS
	New Zealand	Australia	Singapore
Primary	40%	10%	50%
Secondary	40%	40%	20%
Vocational	20%	20%	60%

Required:

1. Base on the above data, prepare profit statements by [1] school-type and [2] geographical areas.

2. Discuss strategies the company should adopt in order to ensure profitability and financial sustainability.

Question 3: Produce Performance Measurement Information For Organizational Control

Zeal International has its head office in Auckland, operates throughout New Zealand and Australia as well as parts of Asia. There are three main divisions:

• Brewing Division - this is the oldest division, and it operates major breweries in Dunedin and Brisbane.
• Newspaper Division - owns leading tabloid newspapers in several cities
• Cable Television Division - operates cable television services in Asia and Australia. This is a high -risk, growing market

Each division is headed by a managing director who has been given a high level of decision-making authority. Each managing director effectively runs his or her division as a stand-alone business within the general policy guidelines provided by the board of directors in the head office. Each managing director agrees to achieve a series of targets: return of investment (ROI), market share and sales growth. These targets are developed each year as part of the annual budget-setting process. Intense lobbying takes place between each managing director and the board of directors to determine the most suitable targets.

Each managing director receives an annual cash bonus based on achieving the target divisional ROI. The company defines ROI as operating profit, before interest and taxes, divided by divisional assets (measured at original cost less accumulated depreciation). Senior managers are each eligible for a cash bonus of $60,000 if they reach their divisional ROI target. If performance is above target, share options are awarded at the rate of 10,000 shares for every additional point over target. Thus, if the ROI target is 13 per cent and the division achieves 15 per cent, the manager would be awarded 20,000 share options. These options are at the prevailing market price on the last day of the financial year, and must be taken up within two years of the award. During the past year, the market price of the company's shares increased from $4 to $6. If the ROI target is not reached, there are no bonuses or share options, and the managing director has to provide convincing reasons for the poor performance. As a consequence of the performance measurement and reward system, the managing directors are highly motivated to achieve-and exceed-their ROI targets.

Jay Williamson has just been appointed as the new management accountant in the head office, charged with redesigning the performance measurement system. As his first task, he has obtained the financial data for the last year and the latest forecast for the current year, for each division, in thousands of dollars, as follows:

	Operating profit		Sales revenue		Divisional assets		Target ROI %
	Last year	Current year	Last year	Current year	Last year	Current year	Last year	Current year
Newspaper	440	539	2,588	2,600	4,400	4,900	10	10
Brewing	950	1,100	4,750	4,500	5,000	6,471	18	16
Cable	200	350	1,800	850	6,660	7,000	2	3

Hamish Smith, the managing director of the Brewing Division, is concerned that his market share, and hence his ROI, is likely to suffer next year, as his main competitor has recently purchased new brewing technology. While his own brewing equipment is only 10 years old, it is unable to produce the new variety of beers that customers are demanding, and maintenance and operating costs are increasing.

Smith is considering a proposal to invest $10 million in new equipment. They will probably increase next year's operating profit for his division by $1 million. Smith has analysed the future cash flows of this proposal, and the new acquisition will easily satisfy the minimum required rate of return of 10 per cent for all new investments that is set for the Zeal Group. Without this acquisition, Smith expects his divisional profit ROI to drop to 14 per cent next year.

Required:

1. Calculate the ROI for each division for last year and the current year, as well as the two component of ROI: profit margin and return on assets. Comment on the relative performance of the three divisions

2. Calculate the bonus that each managing director would earn in the two years.

3. Explain why Hamish Smith is reluctant to invest in the new brewing equipment. Provide calculation to back up your answer.

4. Jay Williamson is considering expanding the divisional targets to include a range of non-financial measures. He is interested in developing a scorecard for each division. For each of the three divisions:

a. Formulate objectives for each of the four perspectives: financial, customer, internal business process and learning and growth

b. Construct a strategy map to demonstrate the relationships between objectives for each perspective

c. Suggest lag and lead indicators for these perspectives

Question 4: Motivating Human Behaviour And Organisational Control

Swift Engine Limited is a large and successful manufacturer of engines. The company consists of two divisions: the Automotive Engine Division and the Outboard Motor Division. Swift Engine has recently acquired a company which will become a third division. The new Couch Division is a small manufacturer of lawnmower motors. It has been owned and managed by the one person for 40 years. The prior owner treated all employees as part of family. The company was noted for the lack of a "them and us" attitude between employees and management, and there was free and open communication between all staff. Unfortunately, Couch is not a strong performer; the lawnmower market is in decline and profits have slipped.

Swift Engine is known for its modern management systems and would like all managers at Couch to participate in the performance related pay system that is used in the other two divisions. The profit-sharing plan applies to senior divisional managers only. It is based on placing 10 per cent of Swift Engine's profit before interest and income tax into a pool, which is then shared by the senior divisional mangers in direct proportion to their base salaries. The senior managers in the two original divisions received bonuses of 11 per cent and 12 per cent of their salaries for the last two years before the acquisition of Couch.

The profit results for the first financial year following the acquisition of Couch division. Are as follows:

	Outboard $	Automotive $	Couch $
Sales revenue	31,600,000	42,000,000	9,500,000
Cost of goods sold	10,000,000	24,000,000	4,500,000
Gross margin	21,600,000	18,000,000	5,000,000
Administrative costs	11,800,000	7,400,000	3,600,000
Marketing and selling costs	7,400,000	6,200,000	1,200,000
Total costs	19,200,000	13,600,000	4,800,000
Profit before interest and taxes	2,400,000	4,400,000	200,000

Senior management salaries included in the above costs, and divisional assets at the year shown as follows:

	Outboard $	Automotive $	Couch $
Senior management salaries	4,000,000	2,800,000	1,400,000
Divisional assets	8,000,000	8,000,000	1,600,000

Prior to the acquisition by Swift Engine, all Couch employees, including the senior managers who participated in a gain sharing program. Under this program, the financial impact of improvement in labour productivity and delivery performance were quantified each quarter, and 50 per cent of this amount was accumulated in a pool. At the end of each year, each employee received an equal share of the pool. The scheme was discontinued when Swift Engine purchased Couch.

Required:

1. Which division has the best performance in the first year after acquisition?

2. Determine the bonus pool available for that year, calculate the percentage bonus that each senior manager would receive.

3. Discuss the behavioural problems that may arise among the senior managers of the Outboard and Automotive divisions as a result of the bonus.

4. Discuss the behavioural problems that may arise within the Couch division from the changes in the performance-related pay system.

5. Suggest some changes that could be made to improve Swift Engine's performance-related pay system and alleviate some of the problems identified in requirement 3 and 4.