cost accounting

ACCT 5000 Intermediate Management Accounting Semester 2 2015

ACCT 5000 Intermediate Management Accounting Portfolio Case Study

Background: Emerald Entertainment Group

Emerald Entertainment Group (EEG) was founded in Perth in 1998. The company started as a result of a diversification of investments from its parent company in Singapore. EEG’s initial investment portfolio consisted of entertainment venues such as clubs and restaurants. Johnny Wong, the marketing department manager of EEG’s parent company in Singapore was sent to Perth to manage and grow business operations of EEG. Although Johnny had extensive experience in marketing and business expansion, he had no prior experience in accounting and cost control. EEG thus engaged the services of an accounts officer, Vanessa Costello, to assist with keeping “accounting records”. Vanessa’s job scope consisted of basic data entry such as recording of revenues and expenses (eg, supplier invoices and other company expenditures) onto a basic spreadsheet. No internal management reports were generated and these figures were provided to an external accountant who then prepared financial reports to ensure compliance with regulatory reporting standards.

Pricing of products and other investment decisions were largely based on Johnny’s intuition and understanding of the market. Due to favourable economic conditions brought about by the mining boom, the company experienced significant business growth. Its revenues tripled from an initial $2 million a year to $6 million and money was readily available. Johnny was viewed favourably by the management in Singapore due to his performance and was thus given much autonomy in managing EEG. As such, Johnny invested excess cash into several other unrelated businesses. By the end of 2013, the company had business interests in shopping centres, agricultural farms, markets, restaurants, cafes, clubs and a real estate agency.

However, the state of economy rapidly deteriorated in 2014 due to a significant slowdown in the resources sector. This had a considerable impact on revenues of EEG and the company started experiencing financial difficulties, such as the inability to meet supplier payments on time. In 2015, due to financial constraints, EEG wanted to consolidate and determine the financial viability of its various businesses. However, Johnny was unsure of how this can be done as he did not have sufficient information to assess the performance of each business.

Johnny thus decided to employ William Brown, a chartered accountant to assist with sprucing up the accounting records and overall management process. Specifically, William was tasked to determine management accounting information required to assist Johnny in assessing the viability of the various business interests of EEG.

Required:

Assume you are William Brown, and that you had identified several issues that need to be raised with the management of EEG.

You are required to submit two (2) reports to management of EEG to address the various issues identified. In your submission, you will be expected to use examples that are specific to this business to present and argue your points. You should not just provide a textbook summary of the theory and principles.

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Please read the Guidelines available on Blackboard prior to writing up your reports. There are strict requirements as regards formatting and layout).

For Report One (Issues 1 and 2) (10 marks):

Issue 1:

The “accounting records” managed by Vanessa Costello were rather basic and not always complete. These records mainly consisted of costs of raw materials. As such, the company had no clear idea of what it cost to produce most of the items sold in their various businesses beyond the purchase cost of raw materials. As the growth of EEG happened during the mining boom, there was always money in the bank to meet commitments and finance new projects. Johnny has always believed that his investment decisions were sound since the financial reports (as prepared by the external accountant) typically showed EEG generating positive net income. Besides, he was far too busy to bother with ‘what it cost’ to produce an item or provide a service, so long as it was doing well (as indicated by money in the bank).

In your submission to Johnny Wong and the management of EEG,

1. Discuss the current no product-costing policy, and present and argument in support of undertaking an appropriate product costing system (note that you are not required to detail a specific product-costing system)

2. Also, explain why financial accounting reports may not be a suitable replacement for managerial accounting information and reports per se. Remember to provide example specific to EEG.

Issue 2:

Recognising the diversity of activities that existed within EEG, you believe that the implementation of Activity-Based Costing will assist in improving costing accuracy of products and services.

In your submission:

1. Explain the major differences between the traditional costing approach and the Activity-Based Costing (ABC) approach, (you are not required to explain the detail steps in implementing ABC), and

2. Briefly explain some of the general signs that might exist in the various business of EEG that might warrant a need to consider moving to an ABC approach. (Bear in mind that an ABC approach primarily affects the way overhead costs are allocated)

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For Report Two (Issues 3 and 4) (10 marks):

Issue 3:

Johnny Wong made most business decisions regarding new ventures and new products and services based primarily on his intuition and business “instincts”. Although Johnny did consider costs, this was generally not a big factor in his decisions. You are concerned that this approach to decision making coupled with an insufficient level of understanding of the relationship between business activities and the cost of these activities (cost behaviour) will ultimately result in financial ruin.

Include in your submission:

1. A discussion on the benefits to EEG arising from a thorough understanding of how costs behave; and

2. Explain briefly some methods of deriving a cost function, as well as explain the difficulties that may be faced in gathering information to carry it out.

Issue 4:

In trying to encourage Johnny Wong to make informed decisions, and for the company to become proactive in the pricing of products and services, you are keen to introduce Cost-Volume-Profit analysis to be able to predict the effects that changes in volume, costs and prices have on profits.

In your submission:

1. Include an explanation of the analysis techniques to achieve this, particularly in the light of such a diverse range of products and services sold by EEG, and

2. Explain the difficulties that may arise from the assumptions necessarily made in undertaking such an analysis.

NOTE:

Report 1 covers Issues 1 and 2

Report 2 covers Issues 3 and 4

Due dates are as detailed in the Program Calendar of the Unit Outline.

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cost accounting

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