MA515 End Of Trimester Major Case Study Assessment In Replacement Of Final Examination Answer

Answer :

Scenario 1:        (Total = 3 x 5 = 15 Marks)

Western Sydney Steaks (WSS), a national fast-food chain, has experienced a number of problems in the past few years, and management is considering the adoption of a balanced scorecard as part of a turnaround effort. You are one of the renowned Management Accountants in the city. WSS’s CEO has requested you to submit a report highlighting the potential benefits of using balanced scorecard over traditional management accounting tools. You need address the following specific requirements:

Required:

1. Briefly explain the concept of a balanced scorecard. Discuss the general factors that are included in a typical balanced scorecard. (5 marks)

Answer:

Balance score card is the performance measurement toll and framework to implement the strategy of the organization. 

It makes use of financial as well as non-financial performance measures to evaluate the performance of the organization. The balance Score Card measures the performance of the organization from four perspectives as follows:

Financial Perspective: targets at increasing the value of shareholder by increasing the operating profits, sales volumes and lowering the costs.

Customer Perspectives: Targets at increasing the market share of the organization by increasing the customer satisfaction. This is done by addressing the needs of the customers, providing better after sales services, increasing customer focus, etc.

Internal business process Perspective: targets at improving the quality of products and enhancing the productivity of resources. 

Learning and Growth Perspective: targets at increasing the employee satisfaction by aligning the employee and organizational goals and improving the manufacturing process. 

1.  Independent of your answer in requirement 1, assume that WSS is very concerned about customer satisfaction. List four different (and specific) customer satisfaction measures that may be appropriate for the firm (and for other fast-food providers). (5 marks)

Answer:

Customer satisfactions measures appropriate for WSS and other fast –food providers are:

1. Timely service: since the fast food are considered to be quick bites, the service providers should provide the service in a timely manner 
2. Hygienic Food and Place: hygiene of food and place are the first and foremost factors for customer satisfaction in food providers and it is also case with fast food providers
3. Price : Fast food is considered as between the meal foods and hence their price is an important factor for customer satisfaction
4. Courtesy/ communication by staff: since fast food providers have staff interaction with the customers at the front desk. The communication of the staff and curtsey is very important. The staff should be able to communicate with the customers fluently and customize their food accordingly.

3.Independent of requirement 1, assume that WSS wants to return to former levels of profitability. List several financial measures that would allow management to assess success or failure with respect to the following goals: (1) pay creditors on a timely basis, (2) keep shareholders happy, and (3) improve profitability over time at stores that have been open at least one year. (5 marks)

Answer:

Financial Measures that will help the management to assess the success or failure of the following goals are:

1. Pay creditors on a timely basis: creditor’s turnover period – the no of times the creditors are turned over during the year. The higher turnover means short payment cycle and happy creditors. Days credit outstanding: this shows the average no of days the credit is outstanding. The less no of days means faster payment to creditors on timely basis. 
2. Keep shareholders happy: increase in net earnings per share: this will mean that the after savings of the company have increased and so is the shareholders wealth Dividend payout ratio: high dividend payout ratio means the higher current returns to the shareholders and increasing their satisfaction
3. Improve profitability over time at stores that have been open at least one year: Increase in sales volume at the stores: the increase in sales volume will be more revenue and as the fixed cost will remain same it is mean higher profit from the new store.

Inventory Turnover: the increase in inventory turnover ratio will mean that the stock is sold faster at the store.

Operating profits: the operating will measure the profits  at the store after meeting the operating costs. 

Scenario 2:       (Total = 5 x 7 = 35 Marks)

As a cost and management accountant you always advocate about the use of cost volume profit (CVP) analysis and activity based costing in different cost management scenario. That’s why management of the PQR Limited wants you to explain the following issues for their next cost management move for the organisation.

Required:

1. What is a cost driver? What is the cost driver in conventional cost volume profit (CVP) analysis? How is the cost driver measured in conventional CVP analysis?     (7 marks)

Answer:

Cost driver is unit of the activity that leads to incurring of cost and is responsible for incurring the cost. It is the cost driver that triggers in change in cost of the activity.  The cost driver shows the link or the relationship between the activity and the cost of the activity. As the usage of units of cost drivers increases the cost incurred also increases. 

In Conventional Cost volume profit analyses sales volume or the no of units sold is considered as the sole cost driver. The sales of units is considered as the sole factor that results in incurring of cost and revenue.  The sales revenue or sales volume is considered in the linear relationship with the units sold. Also the cost is divided into fixed and variable in reference to the no of units sold. Thus in conventional CVP analysis the variable cost increases only when the number of units sold increases. Thus the total cost is also linear over a given range.

The cost driver is measured in conventional CVP analysis as the number of units of a product sold where there is one product sold. In case there is mix of products, the cost driver is measured keeping the sales mix same.  Thus the standard sales mix of products is considered as one unit and the increase in sale is considered as the increase in these units.  While measuring the cost driver it is also assumed that the beginning and closing inventories are same. 

The conventional CVP analyses the impact of change in sales volume over the cost and profit of the organization.

1. In activity–based costing, costs are classified into unit level, batch level, product level and facility level. How are these categories typically handled in CVP analysis, where there are only two categories available: fixed or variable?     (7 marks)

Answer:

If the cost is classified into two categories only being fixed and variable, they are handled in CVP analysis as follows:

The batch, product level and facility level costs are non-volume related activity costs. These cost changes with the changes in the no of batches in which the units are produced, or change in the type of products or the change in the facility used to manufacture the costs. Thus these three types of cost do not change in the change in the number of units of produced.  This is considered as the fixed cost. 

Thus the total fixed cost includes the batch level cost, product level cost and the facility level costs. 

The variable cost is the unit level cost as it changes with the no of units sold. 

Therefore in CVP analysis the Breakeven point  is calculated as:

BE point (in units) = (Total batch, product and facility level costs)/ (Selling price – unit level costs)

And the profit  = sales revenue  - ( unit level costs + batch level cost + product level cost + facility level cost).

1. In an environment where activity–based costing is necessary and appropriate, is the relevance of conventional CVP analysis enhanced or diminished? Explain.     (7 marks)

Answer:

The relevance of conventional CVP analysis is diminished in the environment of activity-based costing because the traditional approach assumes only one cost driver being the sales volume. It assumes that the variable cost changes only in the change in the sales of no of units and the costs that do not change with respect to the no of units sold are fixed costs. 

However, the activity based costing approach explains that some costs changes to cost drivers other than the no of units sold (volume). For example the batch costs varies with the no of batches set up rather than the no of units produced. Thus the batch cost which is considered as fixed in conventional CVP analysis is not fixed and varies with the change in the no of batches even though the total no of units produced may be same.

The conventional CVP analyses does not provide adequate information on the cost of the products and hence the relationship of the profit with the volume is not correct. This affects the quality of decisions made by the management. 

The new activity based CVP analysis provides better information as it uses multiple cost drivers for analysis.

1. Explain the additional limiting assumption of using CVP analysis under activity–based costing.  

     (7 marks)

Answer:

The limiting assumptions of using CVP analysis under the activity based costing are:

The assumption that the sales mix remains the same is a limitation under the activity based costing. The CVP analysis assumes that all the products will volume will change in the same proportion as the original proportion. However, the activity change in any one product will change the costing of the one product only in sales mix. This will result in incorrect information about the profit of individual product. Also there might be change in volume of sales any one product at a different rate than others. This will not be accounted for properly in CVP analysis. 

The CVP analysis is a tool useful for short term only. As in long term all the costs tend to vary even for the same volume.  The fixed and variable classification of cost is based upon the behavior of cost over a short period of time. The change in rent, insurance, price of material, salaries and wages in long term result in all cost to vary. Thus CVP analysis under activity –based costing is a short term tactical tool.

The identification of the correct cost driver and the cost pool is very important in activity based costing. The same limitation applies to usage of activity based costing approach in CVP analysis.  There are some costs which are affected by more than one cost driver, it becomes very difficult to categorize these costs and measure the change on change in cost driver. 

1. PQR Limited makes major household appliances such as refrigerators, stoves and dishwashers. Sales are heavily dependent upon the number of housing starts and the level of disposable income. Next year the number of housing starts in Victoria is expected to be the same as this year; however, about two-thirds of these starts will be for rental units compared to a historical average of one-third. The remaining housing starts will be for single-family homes and up market units. PQR generally makes two levels of each product: the economy model (fully functional, but with few special features) and the prestige model (with the most popular special features). PQR Limited assumes a product mix of 40 per cent economy and 60 per cent prestige. Describe how the change in the percentage of rental units in housing starts could create a problem with the stable product mix assumption.    (7 marks)

Answer:

 To depict the problem that will be created by the assumption of the stable product mix assumption let us assume that the number of housing starts in Victoria  in this year are 300.

Thus the same number of housing starts will be there in next year, = 300

Current year starts for rental units = 1/3 = 300/3 = 100

Current year:

Current year starts for rental units = 1/3 = 300/3 = 100

Current year starts for single family up market unit = 200

PQR assumed product mix = 40% economy and 60 % prestige

Rental starts     up-market units    Total

Economy Model                40%*100 = 40       40% *200 = 80120

Prestige Model       60% *100 = 60      60% * 200 = 120   180

Total 100200   300

Next year:

Starts for rental units = 2/3*300 = 200 units

PQR assumed product mix = 40% economy and 60 % prestige

Rental starts     up-market units    Total

Economy Model                40%*200 = 80       40% *100 = 40120

Prestige Model       60% *200 = 120     60% * 100 = 60    180

Total 200100   300

According to PQR out of 200 rental starts 80 should be economy model and 120 prestige based upon the standard mix, the next year. However, the sales are also dependent upon the disposable income of the people. It is not necessary that the disposable income of the rental start will also increase by the same ratio as the increase in product mix. The standard mix requires that the rental starts prestige model demand will also become double in next year. It is possible that PQR end up making more appliances for prestige model than the actual demand in the market.

Using Technology for Assessment