Write a Report about Management Accounting in JAN

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  • Use and purpose of Activity based costing
  • The use and purpose of ABM

 

SKU: Fin830432

This assessment task will be testing your individual responses to the questions contained in this document. It will enable you to demonstrate your knowledge and the application of skills relevant to that knowledge, as well as your communication skills.

Learning objectives

Learning objective 1: Demonstrate an understanding of applied a research problems in management accounting, and prepare strategies for their solution

Learning objective 2: Demonstrate an understanding of applied research methods

Learning objective 3: Collect and analyse accounting research data using applied research methods

Learning objective 4: Designing applied accounting research methods

 

CASE STUDY DETAILS

Jones, Alkindi, and Nguyen (JAN) is a small business with $4.5 million annual turnover. It employs about 20 people in its factory, which is located in Adelaide, Australia. The four types of machines produced by JAN are used in the picture framing industry; (1) a guillotine – framing machine, (2) a mitre saw- framing machine, (3) a roller laminating machine, and (4) an underpinning machine. The business manufactures only 22% of parts of the machine in-house and purchases 78% of parts from subcontractors and suppliers. The assembly of all these parts is the main activity of the business.

You have recently been appointed as the production cost accountant at JAN and from your initial investigations you discover information about JAN activities and costing systems. You have a discussion with the managing director of JAN. Your statements in the discussion and her replies to each statement are as follows:

Your Statement 1: “I have found that all activities are performed manually in a traditional manner and indirect (overhead) costs are accumulated into one indirect cost pool and allocated to each product type based on the number of sales for each products as a proportion of total number of sales. The indirect costs allocated to the simple machines (containing fewer parts), with the larger number of sales, are higher than the costs allocated to more complex machines (containing more parts) with a smaller number of sales.”

Director’s Reply 1: “Yes I know. We chose this approach many years ago because we believed that the machines with higher number of sales are more able to cover a higher proportion of the indirect costs and they probably use more of these costs anyway. However, we have noticed we are not selling as many of the simpler machines as we did previously. Do you think our costs are the reason, if so, why?”

Your Statement 2: “I think this is part of the problem and I believe that information provided by an Activity Based Costing (ABC) system may be used to identify how the indirect costs are used by each activity. Marketing is another cost to consider because it is just divided equally between the four types of machines.”

Director’s Reply 2: “That is interesting, but I have never heard of ABC and I will need more than just your opinion. Can you provide me with some valid evidence that supports your opinion?”

Your Statement 3: “Well, before I start working on this ABC evidence to support my opinion, there is something else to consider. In addition to investigating the indirect costs allocation and the marketing costs, I believe we need to conduct activity analysis using an Activity Based Management (ABM) method so that we may able to understand what causes activity costs and activity improvement opportunities, by classifying activities as either value added or non-value added activities.”

Director’s Reply 3: “What are you talking about value added or non-value added activities? Give me some examples before I consider this extra problem.”

Your Statement 4: “I have conducted some preliminary investigations and I have found that about 20% of activities are non-value added. There are two types of non-value activity costs; production and marketing. The three production non-value added activities (and each activity’s percentage of such non-value added costs) are material handling (about 25%), inventory carrying (approximately 55%), and product quality inspections (around 20%), which are approximately 17% of total indirect costs. I also notice that the more complex machines need more parts moved, carried more inventory, and require more inspections (because there are more parts to consider) than the simple machines. The marketing non-value added activities and costs are about 13% of total indirect costs. I believe a review is warranted because these non-value activity costs are about 30% of total indirect costs.”

Director’s Reply 4: “You have my attention but I need more evidence than just these percentages or proportions. I also want to know whether has this type of costing and management system been successfully implemented previously and how it was introduced. I just don’t want your comments; I want you to provide me with evidence of how this occurred.”

Your Statement 5: “While we are discussing these non-value added activities, I believe I have identified three causes for the need for the high proportion of product quality inspections.

1. a lack of commitment to the goals by employees,
2. a need for training of employees (and some subcontractors’ employees),
3. the quality of the parts from our suppliers from overseas.

I think we need to consider involving our employees in the budgeting process and encourage our subcontractors and suppliers to consider the same participation and training so they have commitment and knowledge so they can identify the costs of these non-value added activities. I also believe JAN should consider a management and performance system called the balanced scorecard so it can consider JAN’s value chain stakeholders.”
Director’s Reply 5: “What! Ask my employees how to run our business? A scorecard, are we going back to school? How am I going to explain this to the board of directors? Like me, none of them are accountants so you need to provide evidence from work already successfully completed and you will need to show how the evidence is valid and relevant to us.”

Prepare a brief report (using the provided headings) to the Board of Directors that responds to the points made by the director. Provide a discussion about information, study’s validity, and evidence. Use the discussion from these sections to support your conclusions and recommendations.

1. Heading “The use and purpose of ABC”: Using the article by Raffish (1991), provide information and evidence to support your Statement 1, Statement 2 and part of Statement 4 and provide what is needed as mentioned in the director’s Reply 1, Reply 2 and the ABC part of Reply 4.
2. Heading “The use and purpose of ABM”: Using the article by Zheng and Gou (2011), provide information and evidence to support your Statement 3 and Statement 4 and provide what is needed as mentioned in the director’s Reply 3 and Reply 4.

 

3. Heading “Commitment to the goals by employees”: Using the article by Chong M. Lau and Jerome Caby, (2010), provide information and evidence to support your Statement 5 cause 1 as well as Sholihin, Pike, Mangena, and Li (2011), your budgetary participation statement under your Statement 5. Also provide what is needed as mentioned in the directors Reply 5 related to the director’s first and third questions about your budgetary participation statement.
4. Heading “Training of employees and some subcontractors’ employees)”: Using the articles by Wong-On-Wing, Guo, Li, Yang (2007) and any study by Kaplan and Norton involving their “Strategy Map”, provide information and evidence to support your Statement 5 cause 2. Also provide what is needed as mentioned in your director’s Reply 5 related to the director’s second and third questions about your balanced scorecard implementation statement.

 

5. Heading “The quality of the parts from our suppliers from overseas”: Assume JAN’s suppliers are based in New Zealand, China, and Malaysia. Using the article by Chong M. Lau and Jerome Caby, (2010) provide information and evidence from that study to make directors aware of possible limitations to the goal mentioned under Statement 5 cause 1 from Sholihin, et al (2011) study. Also, explain why the findings of Lau and Caby (2010) may have implications or limitations on overcoming the cause 3 problem in your Statement 5. You also may wish to use supplementary e-readings for Topic 6 week 1 from Hofstede’s Cultural dimensions; in particular the individualism and power distance.

General format and presentation criteria

6. Your report should contain the necessary evidence, be your interpretation of the information and your deductive and inductive reasoning to support your discussion. The information in your conclusions must be derived from your discussion in your analysis (body of the report) and your recommendations must be derived from your conclusions.

7. Providing a professional presentation (e.g., proof-reading and using the appropriate format, referencing and presentation).

 

A Brief Explanation about how ABM can be used for cost reduction.

Activity-based management (ABM) is a system-wide, integrated approach that focuses management’s attention on activities with the objective of improving customer value and achieving profit by providing this customer value. The Process-value analyses are the operational processes of activity-based management and contain (1) a driver analysis, (2) an activity analysis, and (3) performance measurement. Driver analysis have a focus on cost reduction and identify what causes activity costs. An activity analysis identifies which activities are undertaken. It determines how many people perform the activities, identifies the time and resources required to perform the activities, and gives an assessment of the value of the activities to the organisation. This value assessment includes a recommendation to maintain the activities that add value and to reduce or eliminate non-value added activities. Performance measurements are related to activities to monitor progress towards achieving the recommendations.
Activities necessary to remain in business or add value from the customers’ perspective are called value-added activities. All other activities are considered unnecessary and are referred to as non-value-added activities. Reordering parts, expediting production, and reworking because of defective parts are all examples of non-value-added activities. Other examples include warranty work, handling customer complaints, and reporting defects. Non-value-added activities can exist anywhere in an organisation.
The following activities are often cited as wasteful and unnecessary in manufacturing organisation’s operations:
Scheduling activities means the time and resources used to determine when different products have access to processes (or when and how many setups must be done) and how much will be produced.
Moving activities means the time and resources used to move raw materials, work in process, and finished goods from one department to another.
Waiting time means the time wasted in the next process waiting for raw materials to be delivered or work in process completed by the previous process.
Inspecting activities means the time and resources spent to ensure that the product meets specifications.
Storing activity means the time and resources used to hold a good or raw material in inventory.

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