Managerial Accounting Case Summary

ACG 6305: SECOND SET OF CASE ANALYSIS AND ARTICLE SUMMARIES

Case Analysis: “JEA: On the Road to Cost Transparency”

1. Analyze and discuss how TS customers should use the green, yellow, and red cost structure for planning, control, and cost management.

Answer: The green costs are variable or mixed and can be reduced directly by the director-level decisions, such as trying to reduce the number of cell phones or PDAs in a department. Next, the yellow costs are discretionary fixed and can be reduced by vice president level decisions, such as trying to reduce the unused features in a software application. And last, the red costs are structurally fixed and can be reduced only by executive level decisions, such as trying to reduce the cost of a network. The TS internal customers could use the report as a template for future project-related action.

1. Analyze and discuss how the cost transparency initiative can be implemented by a new computer program that is understandable to and accepted by all internal users.

Answer: The cost transparency initiative is to create a database program and pull the Excel line items into this database. And users are “forced” to update their budgets at the beginning of each year. With that way, internal users cannot ignore or delay the process of inputting cost allocation and the fact that the report would be updated yearly helps solve JEA’s cost transparency issues.

1. How can JEA motivate the managers, directors, and/or VPs to change their spending behavior using PBC information?

Answer: JEA can motivate managers, directors, and VPs spending behavior by scheduling meetings with department’s leaders. Wanyonyi knew it would been a challenge in changing their ways to the new PBC. But she believes that JEA would grow as an organization as long as all her peers on the executive committee integrate the PBC results into their respective balanced scorecards.

1. Explain the importance of having an executive champion to set the “tone at the top” for implementing strategic cost initiatives such as PBC.

Answer: Because the last PBC initiative failed, it is now hard to get the commitment and trust from internal customers. Having an executive champion is a signal to show all company’s employees that this initiative is going to work and everyone including them are taking this project seriously.

1. Explain how to integrate the PBC system with JEA’s Six Sigma quality improvement initiative and the balanced scorecard executive performance measurement system.

Answer: To integrate the PBC system with JEA’s Six Sigma and the balanced scorecard, each VP and/or officer has to know how to identify whether the potential cost savings are in the green, yellow, and red area from Process-Based Costing Report. The number of dollars saved through cost transparency would become as part of their balanced scorecard next year. And this process would repeat annually and create a continuous improvement.

1. I do not have accounting major, so I do not really know how management accountants solve real-life business issues. This article is interesting to me as the first article dictating the practical case study. I am impressed (and proud) by the way the professors at UNF solved this case. From the Process-Based Costing Report to the ways to engage all internal users’ attention, they are helpful to me in a way of expanding my practical knowledge in accounting.

First article: “Strategic Cost Structure Choice in the Transportation Industry and its Implication for Organizational Development and Growth in the People’s Republic of China”

1. The trucking part of the transportation sector is a smart choice to study on the risk-return implications of different cost structures as they have a wide range in choosing their ratio of fixed and variable costs. Also, trucking in China significantly matters when it carries 90% of the domestic goods in the country.
2. Two hypothetical Chinese companies stated has the same operating revenues (OR) and operating income (OI) but the variable and fixed costs are reversed in each company. From their calculation, we can conclude that in a growing trucking market, the operating leverage from a high fixed/low variable cost structure will generate higher OI than a high variable/low fixed one. In contrast, if trucking market is highly volatile, a high variable/low fixed cost structure is less risky and will generate higher OI.
3. China does not have a well-structured trucking market where most truck providers are small-sized. The small trucking companies is inclined to own old and inefficient trucks and therefore, transportation costs are way higher (three times) than those of developed countries. In order to cut cost, trucking companies often load their trucks by 50% and even higher at times above the legal load limit. This leads to the suffering of not only the trucks themselves but the road also. This may be the culprit of common truck accidents in China.
4. There are some suggested advantages of deploying a high variable/low fixed cost structure in Chinese trucking industry. First, in the long run, profit in these companies is likely to be similar to a higher profit model (a high fixed/low variable). Second, long-term viability is improved because of lower risk than the high fixed/low variable trucking companies. Third, the flexible ability in the long run is higher due to the lower committed fixed costs. Fourth, as there is a lower fixed cost commitment, there are more Chinese people penetrating and taking the market shares. Last, as there are less fixed costs (less long-term variable costs), it means there is a less need for using complicated strategic cost management with too many cost objects.
5. The disadvantages when applying a high variable/low fixed cost structure are also mentioned in the article. The advantage of operating leverage accelerating at least short-term profit growth in a growing economy is reduced. Moreover, the standardization and efficiency of trucking assets may be lower and the truck purchase costs may be relatively higher than trucking companies that buy their own trucks and trailers.
6. If I am a small business truck owner and I want to start my business in China, I think this article is a useful guide for me to consider the trade-off between two choices. Balancing my business cost structure and having a comprehensive knowledge of the market that I want to jump in definitely help reduce the risk of bankruptcy or inefficiency.

Second article: “Discovering Mutual Supplier and Distributor Enhanced Profitability through Industry Supply-Chain Collaboration”

1. A major contact lens manufacturing company (CLMC) financed an independent ABC study of their two wholesale distributors of their products as CLMC doubted that the wholesalers’ traditional costing systems may not effective to reflect the real costs and profitability of their products. Due to its significant volume over other competitors’ products, traditional costing system is likely to over-cost CLMC’s high-volume product lines, and under-cost the low-volume specialty and standard products of its competitors.
2. Due to the economic environment and product life cycle, the sellers have a lower pricing power as they go towards the end of the cycle. To keep generating profits, companies need to seek for better ways of reducing their costs. And joint efforts from multiple companies in the same supply chain can significantly increase cost efficiencies. This collaboration needs trusts and clear agreements beforehand between participants as they may hide their information due to the competition. We can solve this problem by hiding independent consultant to conduct ABC analysis, clearly stating the information-sharing parameters or deliverables of the study or having a mutual agreement between parties in advance.
3. For a successful intercorporate ABC analysis, the authors suggested that the most powerful company in the supply channel should sponsor the study. There are several reasons for this belief. First, the dominant participant has the “deepest pocket”, and the cost of this study may be a small number in its income statement. Second, the larger party expects to have a larger benefit from the study outcomes. Third, it is likely to be easier for the largest participant to conduct this study as it may have more sophisticated costing system and qualified accountants within its company. Last, the authors believe that the sponsor will receive lots of benefits when having this study such as: having a depth view into the rest of the supply chain and getting a bird’s-eye view of its own advantages and disadvantages over its competitors.
4. The recipients of an interorganizational cost study are likely secondary organizations within the supply chain, so they may have less refined cost management and transparency systems. By participating, each recipient would learn more about its internal cost structure and how to improve it. Moreover, recipients would have a better understanding of the profitability of each product and can identify ways to save more costs and enhance their bottom lines.
5. The ABC case study results indicated that CLMC’s products were more profitable than they believed. With careful design and proper implementation, intercorporate cooperation can be achieved between competitors and each participant can obtain more benefits than costs from this study.
6. One of the drawbacks of traditional costing system is that it over-costs the high-volume products and under-costs the low-volume one. That problem of traditional costing approach founded from this real-world case study is consistent with what we learned in class. My concern is that how we can make sure that all the information given by participants are correct. They may agree that they will provide some accurate information for the intercorporate analysis but do we need to have independent individuals (like consultants) to examine the accuracy of given information before we use them to analyze?

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