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MANAGERIAL ACCOUNTING FOR DECISION MAKING

AMIS 823 Spring 2008

Course S!!"#us

INSTRUCTOR$ %r"&"s' R( Mu!)'"n*"ni OFFICE +OURS$ M,- 3$30./$30p1 "n*

# "ppoinen

OFFICE$ /32 Fis'er +"!! E.MAIL$ u!)'"n*"ni(3osu(e*u

TELE%+ONE$ 456/7 2/.525 FA9$ 456/7 2:2.2668

COURSE OUTLINE

This course focuses on the strategic nature of management accounting and emphasizes thecritical role that information plays in decision-making, strategy execution, and overallenhancement of a firms value. Primarily taught through case studies, this course will utilizeand build upon the concepts studied in prior anagement !ccounting courses, and allow thestudents an opportunity to see how these concepts fit together. "elected readings fromtextbooks and business periodicals will be used to blend in appropriate theory for newersub#ects that may be the focus of some case studies.

The world of business continues to change dramatically. !s a result, the role of managerialaccounting is very different than it was even a decade ago. Today, managerial accountants serve

as internal business consultants, working side-by-side in cross-functional teams with managersfrom all areas of the organization as they make decisions towards defining and implementingstrategy. To complete their knowledge of managerial accounting, students must understand howmanagers are likely to use and react to information provided by management accounting. $nthe other hand, managers must understand the basis of the financial information provided bymanagement accountants. %e will explore both sides during our discussions.

The course is divided into three ma#or parts. The first part covers fundamental concepts,including activity-based management, and provides an overview of managerial accounting. Thesecond part discusses concepts and methods useful for managerial decision making, such as&'P and differential analysis. (inally, in the third part, we concentrate on planning and

performance evaluation of business segments as they strive to execute the firms strategy. )nthis part, we also discuss measurement and incentives *compensation+ of managers.

!s indicated above, this is a case-based course to illustrate the applications of managerialaccounting concepts in real-life situations. %hile preparing these cases, students should readabout basic concepts on their own, using any of the textbooks mentioned later in this syllabus.owever, ) do intend lecturing on some of the relatively advanced topics *e. g. activity-basedcosting, variance analysis, pricing, target costing and allocations+ at appropriate times duringthe uarter.

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TARGET AUDIENCE

The course is general enough to benefit both !cc and /! students. ! basic knowledge offinancial and managerial accounting should suffice as a pre-reuisite for the course. /oth setsof students will enhance their understanding of anagerial !ccounting topics by seeing howthey are applied to real-life situations. )n addition, /! students will find that the courseintegrates several of the concepts they have learned in their curriculum. !cc students willwelcome the exposure to "trategy, and see how important anagerial !ccounting is towards its*"trategy+ implementation.

RE;UIRED COURSE MATERIALS

. &ourse Packet. !vailable at 0niPrint *&op-1z+.

O%TIONAL MATERIALS FOR REFERENCE

. ilton, 2onald %., anagerial !ccounting3 &reating 'alue in a 4ynamic 1nvironment,"eventh 1dition, c5raw-ill, 6778.

6. orngren, &harles T., 5eorge (oster and "rikant 4atar, &ost !ccounting3 ! anagerial1mphasis, Twelfth 1dition, Prentice-all, 6779.

:. !ny $ther anagerial;&ost !ccounting Text

?

:. &lass Participation.===============...:6?>. (inal 1xam==================....67?

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CASE ANAL=SIS

"tudents will work on the cases in groups of three *preferably+ or four. 1ach group will bereuired to submit written &ase !nalysis *five pages plus 1xhibits+ for each of the followingcases3

. &afes onte /ianco3 /uilding a Profit Plan6. &ompagnie du (roid, ".!.

)n addition, groups will pick four of the remaining cases *except /irch Paper+ that interest themfor a short write-up *6-: pages plus exhibits+.

&ase write-ups should include a discussion of the situation, key issues, and yourinterpretation;recommendations as needed. Please remember that we are covering several topics

and cases in this course, so it is difficult to generalize all the case analysis into a specificformat. %ith your background and knowledge, ) am sure that you will figure out theappropriate write-up for the specific cases that you are analyzing. The uestions shown in thissyllabus are a good baseline for analysis.

The cases will be graded according to the simple system of @check-plus, @check, and @check-minus. The point euivalents will be twelve, ten and eight respectively for the reuired cases.(or the short write-ups, the point euivalents will be six, five and four respectively.

)n general, each member of the group will receive the same grade on a written case analysis.owever, there may be times when one or more members of a group will Afree rideB on the

work of other members. The grades of such free riders will be substantially reduced ifconsistent evidence of free riding is found. To discover free riding, each member of a groupmay submit an individual 5roup "elf-1valuation (orm around the time when the groups paperis submitted. This can be done during class or after class. !n example 5roup "elf-1valuation(orm is included with this syllabus. )f someone does not submit a 5roup "elf-1valuation(orm, the )nstructor will assume that, from this students perspective, at least, no free ridingproblems existed.

CLASS %ARTICI%ATION

&lass participation is one of the best and most reliable ways to demonstrate understanding ofthe ideas and concepts discussed in readings and case materials. %hile my preference is to relyon voluntary participation, ) may call on you at any time to open the case with a summary ofthe key issues, to discuss the reuired readings, or to answer a specific uestion on a case.&onseuently, you will need to prepare carefully before class, and participate actively duringclass.

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%hen preparing the case for class, you should do the appropriate analytical, financial anduantitative analyses to arrive at your conclusions. !t times, it may be appropriate to visuallypresent these uantitative analyses to the class. Preparation of the case with your group ishighly recommended.

It is expected that all groups will work on every case, irrespective of whether you turn in awritten document or not.Towards determining the level of detail that we may need to discussthe case in class, ) will reuire that every group send me an e-mail *feedback+ with some keyinformation that they have derived as part of their analysis. Cou will be notified as to thespecifics of this feedback for each case around a week prior to the submission. This specificfeedback will not have any impact on your grade. owever, it will help you to activelyparticipate during class.

) will take detailed notes on student participation;answers to uestions. These notes will bemade right after class and will form the basis of the @participation grade. !lso, it goes withoutsaying that attendance is essential during the sessions that we have together, and is necessaryfor a high score on the participation component of the final grade. Please let me know if you

are unable to attend any of the classes.

)nput for this participation grade will also come from peer class participation evaluations. !form for this input is attached to this syllabus. $n this form, students will be asked to list up toeight people in the class who, in their opinion, consistently demonstrated excellent classparticipation throughout the uarter. "tudents may not list themselves on this form. (oraccounting purposes, each student will need to sign their form. "tudents who fail to turn in thisform cannot receive the highest class participation grade.

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A>OUT =OUR INSTRUCTOR

%ith over :7 years of experience in industry, r. ulchandani brings extensive knowledge ofthe Areal worldB towards teaching in the /usiness curriculum. Doining 2ockwell )nternationalsoon after obtaining his /!, r. ulchandani had assignments in several functional areas ofthe &ompany, including (inance, !ccounting, aterials;Eogistics and anufacturing. !fterthree years as a 4ivision 5eneral anager, he was named President of the &ommercial 'ehicle"ystems /usiness *F:.G billion in 2evenue+, from which he retired in 4ecember 6777.

4uring his tenure in industry, r. ulchandani actively participated in several global #ointventures, some of which he was instrumental in setting up. )n addition, he has experiencedbeing part of a spin-off into a separate automotive company, which later merged with anothercompany for economic scale.

)n "pring 677, r. ulchandani entered the asters of !ccounting *!cc+ program at The$hio "tate 0niversity, which he completed in Dune 6776. !s a faculty member of the !)"

4epartment since then, r. ulchandani teaches, or has taught, undergraduate financial andmanagerial accounting courses, anagerial !ccounting in the /! core, an /! elective*)mplementing &orporate "trategy+, and the !cc;/! 1lective *!)" 86:+ at the (isher&ollege of /usiness.

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!

onday, arch 6>

Topic3 &ourse )ntroduction

&ase3

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onday, !pril M

Topic3 &omparing Traditional and !ctivity-/ased &osting

&ase3 Dohn 4eere &omponent %orks *!+

2ead3 easure &osts 2ight3 ake the 2ight 4ecisions, 2obin &ooper and 2obert Haplan,arvard /usiness 2eview, "eptember-$ctober K88

%ednesday, !pril K

Topic3 $perating 4ecisions

&ase3 ilton anufacturing &ompany

2ead3

Topic3 2elevant &osts for 4ecision-aking

&ase3 "alem Telephone &ompany

2ead3

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%ednesday, !pril 6:

Topic3 'ariance !nalysis - Eecture

&ase3

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onday, ay 6

Topic3 Transfer Pricing *class to be conducted by Prof. D.2.4ietrich+

&ase3 /irch Paper &ompany

2ead3 Transfer Pricing in the KK7s *and-out+

.

%ednesday, ay >

Topic3 "trategy )mplementation and the /alanced "corecard

&ase3 &itibank3 Performance 1valuation

2ead3 The /alanced "corecard-easures that 4rive Performance, 2obert Haplan and 4avid

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%ednesday, ay 68

Topic3 &apital /udgeting 4ecisions

&ase3 The "uper Pro#ect

2ead3 %hy &($s 0se 4ifferent Tools for &apital /udget !nalysis *and-out+

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CASE STUD= ;UESTIONS

Se!igr"1 In)($ E!e)roni) Tesing Oper"ions

. %hat caused the existing system at 1T$ to failJ

6. &alculate the reported cost of the five components listed in 1xhibit 9 using3

a. The existing system.

b. The system proposed by the accounting manager.

c. The system proposed by the consultant.

:. %hich system is preferableJ %hyJ

>. %ould you recommend any changes to the system you preferJ %hyJ

G. %ould you treat the new machine as a separate cost center or as a part of the main test roomJ

>ri*geon In*usries$ Auooi?e Coponen @ F"#ri)"ion %!"n

. The official overhead allocation rate used in the K8M model year strategy study at the!utomotive &omponent and (abrication Plant *!&(+ was >:G? of direct labor cost.&alculate the overhead allocation rate using the K8M model year budget. %hy do you get

different numbersJ

6. &alculate the overhead allocation rate for each of the model years K88 through KK7. !rethe changessince K8M in overhead allocation rates significantJ %hy have these changesoccurredJ

:. &onsider two products in the same product line3

Product 1 Product 2

1xpected "elling Price F96 FG>

"tandard aterial &ost 9 6M"tandard Eabor &ost 9 :

&alculate the expected gross margins as a percentage of selling price on each product basedon the K88 and KK7 model year budgets, assuming selling price remains constant andmaterial;labor costs do not change from standard.

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>. !re the product costs reported by the cost system appropriate for use in the strategicanalysisJ

G. !ssume that the selling prices, volumes, and material costs for the KK model year will notchange for fuel tanks and doors produced by the !&( of /ridgeton )ndustries. !ssume alsothat if manifolds are produced, their selling prices, volume, and material costs will not changeeither.

a. Prepare an estimated model year budget for the !&( in KK

*+ if no additional products are dropped.

*6+ if the manifold product line is dropped.

1xplain any additional assumptions you make in preparing your estimated model yearbudgets.

b. %hat will be the overhead allocation rate under the two scenariosJ

9. %ould you outsource manifolds from the !&( in KKJ %hy, or why notJ %hat moreinformation would you want before reaching a final decisionJ

Desin >r"ss %ro*u)s Co(

. 0se the $verhead &ost !ctivity !nalysis in 1xhibit G and other data on manufacturing coststo estimate product costs for valves, pumps, and flow controllers.

6. &ompare the estimated costs you calculate to existing standard unit costs *1xhibit :+ and therevised unit costs *1xhibit >+. %hat causes the different product costing methods to producesuch different resultsJ

:. %hat are the strategic implications of your analysisJ &ould the production process for flowcontrollers be changed in such a way to allow 4estin /rass Products to reduce the unit cost offlow controllersJ ow would the change in the lot size for flow controller production affectunit costsJ as 4estin /rass Products adopted the most profitable distribution system in theflow controller marketJ %hat actions would you recommend to managers at 4estin /rassProducts &ompanyJ

>. !ssume that the interest in a new basis for cost accounting at 4estin /rass Products remainshigh. )n the following month, uantities produced and sold, activities, and costs were all atstandard. ow much higher or lower would the net incomereported under the activity-transaction-based system be than the net incomethat will be reported under the present, moretraditional systemJ %hyJ

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o'n Deere Coponen -or&s 4A7

. ow did the competitive environment change for the Dohn 4eere &omponent %orks betweenthe KM7s and the K87sJ

6. %hat caused the existing cost system to fail in the K87sJ %hat are the symptoms of costsystem failureJ

:. ow were the limitations of the existing cost system overcome by the !/& systemJ

>. &ompare the cost of Product !7: *see 1xhibit + under the existing cost system and underthe !/& approach.

+i!on M"nuB")uring Cop"n

. )f the company had dropped Product 7: as of Danuary , KK, what effect would that actionhave had on the FG8,777 profit for the first six months of KKJ

6. )n Danuary KK6, should the company reduce the price of product 7 from FK.> to F8.9>J

:. %hat is iltons most profitable productJ

>. %hat appears to have caused the return to profitable operations in the first six months ofKKJ

S"!e Te!ep'one Cop"n

. A2evenue hoursB represent the key activity that drives costs at "alem 4ata "ervices. %hichexpenses in 1xhibit 6 are variable with respect to revenue hoursJ %hich expenses are fixedwith respect to revenue hoursJ

6. (or each expense that is variable with respect to revenue hours, calculate the cost perrevenue hour.

:. &reate a contribution margin income statement for "alem 4ata "ervices. !ssume that inter-company usage is 67G hours. !ssume commercial usage is at the arch level.

>. !ssuming the intracompany demand for service will average 67G hours per month, whatlevel of commercial revenue hoursof computer use would be necessary to break even eachmonth. "ince the intracompany demand is known to be 67G hours, the contribution fromthese sales is assured to cover a portion of the fixed costs. Thus, to determine the level ofcommercial revenue hours reuired to break even, the contribution from commercial salesonly needs to cover the fixed costs remaining after subtracting the fixed costs alreadycovered by the contribution from intracompany sales.

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G. 1stimate the effect on income of each of the options (lores has suggested if %u estimatesthem as follows3

)ncreasing the price to commercial customers to F,777 per hour *this would reduce

external demand by :7?+.

2educing the price to commercial customers to F977 per hour *this would increase

external demand by :7?+.

)ncreased promotion would increase revenue hours by up to :7?. %u is unsure how

much promotion this would take. *ow much could be spent and still leave "alem 4ata"ervices with no reported loss each month if commercial hours were increased :7?J+.

9. /ased on your analysis above, is "alem 4ata "ervices really a problem to "alem Telephone

&ompanyJ %hat should (lores do about "alem 4ata "ervicesJ

M. &an you suggest changes in the accounting system that would result in more usefulinformation for (lores and %uJ

C"ri##e"n Inerne C"B

. %hat managerial issues should 4avid 5rant consider before starting the &aribbean )nternet&afNJ

6. 4efine the fixed, variable and start-up costs in this case.

:. %hat will be the costs for the very first customerJ

>. %hat is the contribution margin per customerJ

G. ow many customer visits will &)& need in order for the cafN to break-even in the first yearJ

9. ow many customer visits will &)& need in order for the cafN to break-even in year twoJ

M. "hould 5rant proceed with the ventureJ

C"Bes Mone >i"n)o$ >ui!*ing " %roBi %!"n

. 0se a profit plan model to evaluate the attractiveness of switching all production to privatebrand coffee. 1stimate key accounting variables relating to profitability and cash flow forthis alternative.

6. /ased on your analysis, what recommendations would you make to 5iacomo "alvettiJ

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:. %hat assumptions did you make to complete your analysisJ ow critical are theseassumptions to your conclusionsJ

>. Prepare a list of additional assumptions that you would ask for to improve the uality of youranalysis.

G. !nalyze the profitability of a mixed strategy where the company would sell 5rade A!Bcoffee with an advertising level of M? and the rest of the production would be devoted toprivate brand coffee.

Cop"gnie *u Froi*1 S( A(

. ow would you explain the difference between the )talian regions expected and actualprofitJ

a+ %hat was the impact of the change in sales volumeJ

b+ %hat was the impact of the change in the prices charged for ice-cream and specialtiesJ

c+ %hat was the impact of the changes in the cost of raw materials, labor, and fixed costsJ

d+ ow much of the changes in the cost of raw material and labor are due to changes in theprices of the raw materials and wages of labor, and how much are due to manufacturingefficienciesJ

6. ow would you evaluate the performance of the manager of the )talian 2egionJ

:. ow would you evaluate the performance of the (rench and "panish managersJ ow wouldyou account for the ice-cream transfer from (rance to "painJ

>. %hat problems is Dacues Trumen facingJ

G. %hat would you recommend to himJ

%o!s"r Liie*

. Prepare a presentation for the Polysar /oard of directors to review the performance of the

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:. %hat changes, if any, would you recommend be made in the management accountingperformance system to improve the reporting and evaluation of the 2ubber 5roupperformanceJ

K"n'"! 4A7

. %hat was the Hanthal president, 2idderstrale, attempting to accomplish with the !ccountanagement "ystemJ !re these sensible goalsJ

6. %hy did 2idderstrale feel that the previous cost system was inadeuate for the new strategyJ%hy could there be hidden profit and hidden loss customers with the previous cost systemJ%hat causes a customer to be a Ahidden lossB customerJ

:. ow does the new Hanthal K7 !ccount anagement "ystem workJ %hat new features doesit offerJ %hat are its limitations that may limit its effectivenessJ

>. &onsider a product line whose products generate a G7? gross margin *after subtracting

volume-related manufacturing and administrative expenses from prices+. The cost forhandling an individual customer order is "1H MG7, and the extra cost to handle a productionorder for a non-stocked item is "1H 6,6G7.

a+ &ompare the net operating profits of two orders, both for "1H 6,777. $ne order is for astocked item and the other is for a non-stocked item.

b+ &ompare the operating profits and profit margins of two customers, ! and /. /othcustomers purchased "1H 97,777 worth of goods during the year. !s sales came fromthree orders, for three different non-stocked items. /s sales came from 68 orders, of which9 were for stocked items and 66 for non-stocked items.

G. %hat should 2idderstrale do about the two large unprofitable customers revealed by theaccount management systemJ

>ir)' %"per Cop"n

. /irch Papers president *not named in the case+ is concerned that using divisional profits forperformance evaluation is not maximizing the overall profit of the firm. %rite a to 6 pagememo explaining the strengths and weaknesses of this method of evaluation.

6. 2ecommend policies that /irch Paper could adopt to improve corporate profits when transferpricing issues arise. Dustify your recommendations using *analyzing+ the bids received by r.Henton.

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Cii#"n&$ %erBor"n)e E?"!u"ion

. %hy has &itibank introduced a performance scorecardJ

6. &omplete the performance evaluation form *1xhibit + for Dames c5aran.

:. %hat would you say to c5aran in his performance review meetingJ

>. %ould you roll this performance scorecard to other regions at &itibankJ %hat changes, ifany, would you make to itJ

Nor*sro$ Dissenion in 'e R"n&s 4A7

. %hat is the cause of the problems described in the caseJ ow serious are these problemsJ

6. !re . ow would you change management systems at

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T'e Super %roe)

. %hat are the relevant cash flows for 5eneral foods to use in evaluating the "uper Pro#ectJ )nparticular, how should management deal with issues such asI

a+ Test marketing expensesJ

b+ $verhead expensesJ

c+ 1rosion of Dell-$ contribution marginJ

d+ !llocation of charges for the use of excess agglomerator capacityJ

6. ow attractive is the investment as measured by various capital budgeting techniues *i.e.accounting rate of return, payback period, internal rate of return, net present value+J owuseful are each of these measures of investment attractivenessJ

:. ow attractive is the "uper pro#ect in strategic and competitive termsJ %hat potential risksand benefits does 5eneral (oods incur by either accepting or re#ecting the pro#ectJ

>. "hould 5eneral (oods proceed with the "uper pro#ectJ %hy, or why notJ

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Group Se!B.E?"!u"ion For

Cou have 77 group participation points to allocate to members of your group. )f you believethat each member of your group participated eually in this group pro#ect, then you shouldassign each member of the group the same number of points. )f one or more members of thegroup did not contribute eually, you should assign fewer points to them and more points tomembers of the group who contributed more to this pro#ect. )n any case, the total number ofpoints you allocate to members of your group must sum to 77. PE1!"1 P2)

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%eer C!"ss %"ri)ip"ion E?"!u"ion For

Cour name3

*Print+

Please list up to eight people in the course who, in your opinion, demonstrated consistentexcellent class participation throughout the uarter. 4o not list your own name. Please signyour name at the bottom of this form.

!s a reminder, excellent class participation is defined as3 a student consistently attends class,consistently and appropriately contributes to case discussions, and occasionally contributesunusually insightful comments in these discussions. Please print legiblyQ

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9.

M.

8.

"ign here

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