1- Case Summary 7.4 The Elements of Supply Chain Management
Supply Chain Management (SCM), is the key functionality to ensure profitability and
performance in a successful company. It unites operational and technical skills from both, inside
and outside the company. It is the overall flow of goods and services, movement and storage of
raw materials, WIP and finished good materials from point of origin, to point of consumption.
For a company to gain a competitive advantage in their target market, they need to ensure the
overall supply chain and value chain are aligned. The primary steps to achieve a strong value
chain are the following six activities, 1. Purchased Supplies 2. Inbound Logistics, 3. Operations,
4. Outbound Logistics, 5. Sales and Marketing, 6. Service and Profit Margin. Supplier
segmentation and management is a key part to allow a thriving cost effective company. In this
case study, Tom Albright and Stan Davis discuss the impact of Supply Chain Management,
Supplier Relations and Operational Functionality on Mercedes- Benz.
In the case study, Tom Albright and Stan Davis took a deep dive into Mercedes- Benz in the
1990’s. In 1993, Mercedes- Benz struggled with product development, cost efficiency, material
purchasing and adapting to the changing market. Mercedes- Benz knew they needed to do
something to become favorable to the marketplace. They came out with the idea of the
Mercedes- Benz M-Class Sports Utility Vehicle. Mercedes-Benz used function or think groups
to come up with concepts and ideas to launch the new M-Class vehicle. They used
representatives from all areas of business to get a vast base of information, which included
business groups such as Marketing, Purchasing and Controlling. Mercedes-Benz also utilized
their vendor force to initial productization to get initial concerns and ideas when creating the
design and production of the new vehicle.
The first topic we will approach is Supplier Relationships. Companies who practice a successful
Supply Chain Management, begin with strategic relationships with a select core supplier force.
Many people believe a success supplier relationship relies on low supplier quotes to achieve
business, which isn’t true. To achieve a successful supplier relationship, the relationship needs to
excel and function on the following key term. Supplier alliances. In a Supplier Reliance, a
company and supplier needs to ensure that both sides of the party are benefiting from the
business. On a buyer side, it is not only cost-efficient pricing, it is operational and logistically
efficient. As stated, low-costing is not always what results in the winning bid, it is the
combination of quality, superior service, smaller frequent deliveries and reliability, which allows
the company to become an allied force. To become an allied supplier, the relationship takes
patience and at times can be very difficult to maneuver. These types of relationships have NonDisclosure agreements and Non-Competes to ensure the information that is provided in
discussions are held and to be used only for the party it is being addressed too.
The four practices to foster Strategic Supplier Relationships are the following, “PowerBalancing, Co-dependency, Target Costing and Personal Ties”. A Power-Balanced relationship
results when the buying company represents a large balance of the supplier’s business. This type
of relationship usually results in the supplier doing as much or more as the buying company
wants to ensure to keep the buyers business. Such extras that the supplier might do is, low
pricing and free shipping on packaging to ensure the order. Co-dependency, is a key strategic
function that allows the buyer to gain sustainable resources from the supplier. This can be, R&D
and overall new project commercialization projects. This results in single-source relationships as
well as strategic relationships with future technological advances on current raw materials or
finished goods. Target Costing, which can be broken down into three different parts. Price-based
targeting, Cost-based targeting, and Value-based targeting. Priced- based target costing is the
negotiating tactic that allows companies to set “targets” to reach to gain the business. Cost- based
target costing is the understanding of the costing and details of the bid. Value-based target
costing is the approach to compare “want” and cost. Mercedes- Benz used target costing on the
implementation of the M-Class Sports Utility vehicle, by utilizing indexes and categorical
information such as, safety, comfort and styling. Finally, Personal Ties. Personal Ties is when a
buyer and supplier join to allow a seamless working relationship.
The second topic we will approach is Supplier Involvement in JIT and TQM. “JIT”, Just-InTime, is essential in Supply Chain Management. Just-In-Time advocates to cut costs by reducing
the amount of goods and materials a company holds in stock and delivers finished good materials
once produced to be sold to the market. This allows a company to benefit in less rework, waste
and warehouse space. Mercedes- Benz designed its manufacturing facility to follow this process
through EDI technology. Once an order is received by EDI transmission, suppliers are notified to
deliver certain key products at a determined time to ensure its spot in the manufacturing process
is up. This allows materials to enter and be used without time lost, as well as no warehouse space
being wasted. “TQM”, Total Quality Management. Total Quality Management is important to
ensure a manufacturing process is working efficiently. This allows a company to ensure all
performance measures for production have no quality issues due to the specifications provided to
the supplier based off the buyer’s acceptable performance measures. These relationships result in
long-term contracts to ensure all quality and performance measures are documented and agreed
upon by both parties.
The last approaches are Outsourcing Logistics Based Supply Chain Management and VMI/SCM
Software. Outsourcing is an effective way to minimize on-site production, reduce internal costs
and utilize outside suppliers for their space and capabilities. Mercedes-Benz outsourced the
product of the M-Class vehicle to suppliers to complete their Finished Good Vehicle, both First
Tier and Second Tier Suppliers. First Tier Suppliers, provide finished modules to Mercedes
directly, Second Tier Suppliers, are the vendors in which First Tier suppliers purchase parts. This
has allowed Mercedes-Benz to lower internal costs, by eliminating manufacturing costs and
warehouse costs, by implementing outsourcing into their model. LCSM, allows the material flow
from supplier to manufacturer or manufacturer to customer seamlessly including transportation,
inventory and information. Hewitt- Packard, uses benchmarking to work with their LCSM
planning, by the following, suppliers, manufacturing, customers. HP, uses on-time performance,
average days or hours late, repair time, greater levels of order variation and safety stock to ensure
a greater LCSM. “VMI,” Vendor-managed inventory business model which the buyer of a
product information to a supplier. The supplier takes full responsibility for maintaining an agreed
inventory of the material, usually at the buyer's consumable location. VMI allows a company to
reduce order to delivery time due to the order being electronically transmitted. This allows the
company to have a competitive advantage due to the decrease in timing.
Relationship to Work Experience
Working in a consumer goods company and having vast experience in purchasing has shown me,
if a company wants to be successful the first thing they need to do is to ensure they have a
Strategic Supply Chain Management. To have a strategic Supply Chain Management, a company
needs to be aligned in best practices and to ensure to have all stakeholders in all departments that
are directly and indirectly involved part of all initial discussions.
Businesses who want to broaden their Supply Chain Management need to first align their
company by implementing a SCM Software, such as SAP. SAP is a global ERP company that
specializes in integrating business processes, such as accounting, sales, production, and
purchasing. This would be the first step a company needs to achieve before reaching other valueadded processes such as VMI, LMSC, and Supplier Segmentation. SAP would roll up the
information in one place, to ensure the planner would have vast information to move forward to
implement further change. Working with many companies who utilize this system, has allowed
me to understand an overall picture of how a company functions operationally.
Another area, I would focus in on that I can relate to my work experience is Supplier
Segmentation. As a Purchasing Manager for a Consumer Good’s company having a strategic
vendor force has allowed me to get out of Force Majeure issues this year due to Hurricane
Harvey, as well as ensure production is constant.
Relationship to Course
The managerial accounting course covers supply chain management and costing. SCM and
Managerial Accounting work hand and hand. I believe the entire course involves the use of
SCM, in which I will discuss some key areas. In Chapter 1, Plan- Implement-Control Cycle,
shows how a company functions on a management level. This can relate to SCM, due to the fact
in order to have a successful SCM there needs to be a plan in order to attack the goal. In Chapter
2, Flow of Manufacturing Costs in Job Order Costing, goes over raw materials inventory, WIP
inventory, Finished Good Inventory and actions needed in each step, which is part of SCM. Each
cost is recorded in these inventory accounts as assets until the job is sold. Once the job is sold, it
is transferred into COGS, where it is matched up in sales revenue and income statement. In
Chapter 4, Variable Costs are discussed. In SCM, raw materials are part of variable costs, due to
production size and need.
Summary
In conclusion, Supply Chain Management (SCM), is the key functionality to ensure profitability
and performance in a successful company. To ensure a business succeeds a company needs to
ensure their Supply Chain Management is aligned with all stakeholders in their company. Having
a Strategic Supplier Force, allows not only the best prices, it allows the best quality, standards
and delivery times (LCSM). Lastly, not only is it important to have a vast Supply Chain
Management, it is also important to have the completely integrated business. A ERP System
could be costly, but by implementing a software system to allow the integration and
communication to occur allows SCM to shine and provide an overall outlook for a company.
2- Summary of Case 9.3 Creating an Ethical Culture
The case is written by David Gebler and discusses how companies can create an
ethical culture by implementing values-based ethics programs to help employees judge
right from wrong.
Over the years many companies have made the news because they have committed
criminal activities. One of the largest fraud cases in history was committed by
WorldCom managers who are now serving time in prison. There is no doubt that these
companies acted criminally and unethically. However, it is critical to take a closer look at
the people involved to understand how this could happen. After the exposure of the
WorldCom fraud, several executives made public statements such as “Faced with a
decision that required strong moral courage, I took the easy way out….There are no
words to describe my shame.” -Buford Yates, director of general accounting at
WorldCom. Statements such as these come from good people gone bad.
One individual who drew a lot of attention was the the senior manager of the accounting
department, Betty Vinson. Her department booked billions of dollars in false expenses
and ultimately led to Vinson being sentenced to five years in prison and five months in
house arrest. Although Vinson was among the lowest-ranking members in the scandal,
she could likely have stopped the conspiracy had she refused to book the expenses.
Most people involved in the WorldCom fraud did not start out as criminals seeking to
commit fraud. Scott Sullivan, CFO at WorldCom, was a highly respected individual
known for his integrity. This raises the question, how does a person say “no” to a
respectable CFO if asked to do something questionable? Increasing pressure on
managers to constantly meet goals is a leading cause.
Companies need to examine their own culture and if it is promoting or discouraging
ethical behavior. Just having a code of ethics and internal controls is not enough to
protect companies from corporate fraud. Research by The Ethics Resource Center
confirms that although an increase in ethics and compliance programs, observed
misconduct has not changed for the better. Building the right culture is key in order to
reduce the risk of unethical conduct. Measuring the success of an ethical culture is
made by making significant progress in achieving key ethics and compliance program
outcomes. Four key outcomes to the success are:
•
•
•
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Reduced misconduct observed by employees,
reduced pressure to engage in unethical conduct,
increased willingness of employees to report misconduct, and
greater satisfaction with organizational response to reports of misconduct.
The problem with most compliance programs is that they are dictated by executive
management who often measure success by the number of employees completing
ethics training, calls to the hotline, etc. Culture is measured differently. By definition, it
can only be measured by criteria that reflect the individual values of all employees of the
organization. An organization moves toward an ethical culture only if it understands the
full range of values and behaviors needed to meet its ethical goals. Organizations must
understand the pressure employees are under and how they react to those pressures
because it can influence how individuals feel about reporting unethical conduct.
To determine if an organization has the capabilities to create an ethical culture, tools
such as the Culture Risk Assessment model can be utilized. The model provides a
comprehensive framework for measuring cultures by mapping different types of values
in a way that determines specific strengths and weaknesses that can be assessed and
corrected. The Culture Risk Assessment model consists of the following seven levels:
1. Financial Stability - Pursuit of profit and stability
1. Communication - Relationships that support the organization
1. Systems and Processes - Compliance systems and processes
1. Accountability - Responsibility and initiative
1. Alignment - Shared values guide decision making
1. Social Responsibility - Strategic alliances with external stakeholders
1. Sustainability - Resilience to withstand integrity challenges
Levels 1,2, and 3 can be collected into one part called “The Organization’s Basic
Needs”. This part examines if the organization supports an environment where
employees feel physically and emotionally safe to report unethical behavior and to do
the right thing. Level 4 is the second part and can be called “Accountability”. Level 4
focuses on creating an environment that supports employees and managers to take
responsibility and initiative. The third and last part is called “Common Good” and
includes levels 5, 6, and 7. The “Common Good” looks at if the organization supports
values that create a collective sense of belonging where employees feel that they have
a stake in the success of the ethics program. After surveying employees, organizations
tend to be clustered around three or four levels. Once the organization has a better
understanding of its values’ strengths and weaknesses, it can take specific steps to
compensate for deficient values.
What would have happened to WorldCom if the the organization had a deep
understanding of its values and promoted and ethical culture? It is not unlikely that the
outcome would have been much less unethical, if communication, openness, and
transparency were encouraged. When top management displays ethics-related
behavior, other employees are 50 percent less likely to observe misconduct. Perhaps
Betty Wilson would have said how she really felt and effectively crushed the WorldCom
conspiracy that shocked the business world.
Relationship to Work Experience
Until just recently I was working for a small real estate development company. In recent
years, this company has undergone massive structural changes to adjust to the
industry. Prior to the financial crisis in 2007-2008, the company employed approximately
one hundred people across multiple departments, operated in several states, and
provided a variety of services related to the real estate industry. However, the financial
crisis forced the owner to downsize and layoff the most of the employees. Now the
company employs seven people only.
In my experience the company has been struggling to find its culture. Now, I am not
saying that the company or its employees are acting unethically, but the lack of an
established ethical culture can cause problems for the sustainability of the company.
The company does have an employee handbook, code of conduct, and the usual
corporate guidelines and protocols. However, these efforts have not promoted
openness and transparency among employees. For some reason the company is still
being run in the same manner as it was before downsizing. The biggest problem is the
lack of communication - and it starts with the CEO. My opinion is that the extremely high
employee turnover these past couple of years is a direct result of not knowing or
promoting an ethical company culture.
Relationship to Class Material
Ethical behavior is critical in every aspect of a business. Every person in an
organization should feel comfortable to judge right from wrong, honest from dishonest,
and fair from unfair. It is all managers’ responsibility to encourage ethical behavior and
the best way to do so is by leading by example. As mentioned in the case, one leading
cause for white-collar fraud is pressure to meet performance goals. Budgeting is
beneficial for an organization as is looks to the future and addresses potential problems
that a manager may face. Budgeting is also used to evaluate performance and motivate
and reward employees. However, without an ethical culture in the organization, there is
the potential risk that managers will play “budget games” for personal benefit. For
example, a manager who has already met the monthly sales goal could try and defer
sales to reach next month’s sales goal easier.
Summary
Creating ethical cultures in business is more important than ever before. Major fraud
scandals have shocked the business world and revealed that good people can go bad if
companies ignore how the environment influences behavior. The “good old” code of
conduct does no longer suffice on its own. Although federal legislations such as the
Sarbanes-Oxley Act of 2002, make it easier for people to judge right from wrong,
company management must understand that it is the company's values that create
ethical cultures. To learn what the company’s values are, tools such as the Culture Risk
Assessment model can be utilized. Upon reviewing the results, management can work
on improving areas where the company is doing poorly. One of the most effective
methods to encourage communication, openness, and transparency is for managers to
lead by example in creating an ethical work environment.
3- Summary: Continuous Budgeting at the HON Company
Continuous budgeting can be defined as the action of updating a company’s budget
quarterly throughout the year, with each updated budget encompassing the following
three quarters. In many cases they can be ideal for a company, for they have more
control over their net profit and sales by being able to adjust accordingly throughout the
year. These budgets should start being made six weeks prior to the start of the new
quarter.
At HON Industries, one of the largest makers of mid-prices office furniture, they utilize
continuous quarterly budgeting throughout their company. HON Industries is composed
of nine smaller operating companies, the largest being the HON company, and they
produces office furniture ranging from desks and chairs, to storage units and
workstations. In this case study, it is discussed what steps the HON Company goes
through each quarter to update their budget.
The first step in preparing the budget is to develop the sales budget. The sales budget
starts with two teams: the sales team, and the marking team. The sales team must pool
together their information on previous sales and upcoming demand, while the marketing
team must compile a budget based on product types and distribution. These budgets
will normally differ, but after analyzing both budgets and some needed compromise,
both teams should come to an agreement on their singular sales budget. This step
should take about two weeks.
The second step is to convert the sales budget into a plant production and shipping
schedule. The sales budget should have a list of projected sales, and the plants need to
prepare for what is being sold. To continue, the shipping schedule then needs to be put
in place to make sure that these sales can be completely executed and shipped to the
customers. This step should take one week to complete.
Step three is to prepare the cost/expense budgets for the production and distribution,
along with sales and general administration. Now that the schedule is in place for the
projected sales, it’s now time to calculate what the cost will be to manufacture these
products. It must be factored in the cost of materials to make these products, and if
there is any change from previous quarters. There will be multiple budgets from all of
the departments: research and development, SG&A, customer service, production, and
distribution. It should also take one week to complete this step.
In step four it is time to consolidate all of these budgets into one master budget. The
company’s accounting group will look over the budget and check for any major errors.
The budget also has to comply with the company’s strategic plan. It should take one
week to complete this part.
The final step is to prepare the budget to be presented to the parent company, in this
case HON Industries. The company must put together numerous financial statements,
such as budgeted return on assets employed, major tooling expenditures, an analysis of
prices to net sales, and more. These statements, along with the budget, are then send
to the parent company. This should take top executives about a week to create. If the
parent company approves, then business can continue as usual. If the parent company
comes back with concerns, the top executives then have another week to update the
budget where needed.
By budgeting continuously, this allows for the HON Company to update their budget due
to seasonal effects. This allows them to adjust for a predicted decrease in sales, or an
impromptu influx in sales due to a large order. Furthermore, continuous budgeting
involves all aspects of the company so that way every department has the opportunity
to bring their concerns and needs to the table. In the end, this gives them more control
over their sales and inventory, along with net profit.
Relation to Work Experience:
Continuous budgeting is almost always done at companies, but maybe not to the full
extent that it is truly required. I work at a small independent record label, and most of
our work is outsources to other companies. We have partners that press our vinyl
records, create our CD’s, make the artwork for albums, help with digital marketing, and
distribute our records both physically and digitally. We typically work on a timeline that
extends 6 months to a year in the future, focusing mostly in the upcoming 3-4 months.
Because we rely on so many outside sources for our company to function, we have to
be flexible to ensure that our artist’s music will be able to be released.
We also have to be ready to adjust our schedule if something else comes up. We have
numerous artists who have moved on to larger labels, but we still hold the rights to their
early catalog. We are responsible for producing the physical records for those albums.
Since the artists are no longer on our label, we do not know when their next record is
coming out (for the most part). Once we get word that they have a new project to come
out, we then have to switch our physical production schedule around to make sure that
we have plenty of their back catalog on hand. So that way if their new record is a hit,
we will have enough stock to cover future purchases from new fans.
This can be even more straining because of the limited amount of vinyl pressing plants
there are available for us to use. We may have to push a future record back to make
room for the production of another artist’s record. If we feel that we will have more sales
from the production of a back catalog record than we would of a new record, we will
more than likely push the new record back.
Another way we have to continuously update our budget is for the intake of a new artist.
We are constantly on the search for new artists, but we don’t have a strict schedule in
which we abide to – we will only sign an artist if we see prominent potential in them.
This being said, if we do find an artist, we have to be able to adjust our budget for the
influx in expenses we will accrue. These expenses will range from paying for studio
time, music video directors, tour support, and of course, paying for the production of
records upfront. We must have a large enough budget for production costs to cover for
a new artist/record.
Relation to Course Material:
In the past few weeks we have been focusing on budgeting in class. Managers must be
able to predict the future cost of running the business, ranging from fixed costs like rent
and utilizes, to variable costs like material costs and commissions. By utilizing a
continuous budget, companies are able to have the most ideal control over their money
during the year. If a company was to run on a yearly budget, then if something
happened in May that throws off the whole budget, they will be unable to adjust to fix
the problem. By using a continuous quarterly budget, the company will be able to adjust
accordingly and fix the problem before the fiscal year ends. Quarterly budgeting also
allows for adjustments for temporary changes, such as an increase in prices of raw
materials, or a decrease in sales.
Summary:
The Young Reader case study explores the ideal of continuous budgeting in a very strict
and ridged format, which I would assume works ideally in large businesses and
corporations. As someone who works for a small business, I see how continuous
budgeting works on a smaller, less ridged scale. Quarterly budgeting allows for a
company to stay up to date on their expenses and projected sales, so that way they can
end the year with their ideal net profit. It also gives companies the ability to be flexible
with their yearly plans, and adjust as they go along. While all companies and
businesses should use a budget, I believe that no matter the size they should be
implementing a continuous quarterly budget.
4- Distinguishing Between Direct and Indirect Cost Is Crucial for Internet
Companies
Case Summary
In the article, the author explains the accurate way of allocating costs to Internet-based
companies. For a company, cost management is very important because it facilitates
in determining the profitability. It is very important for Internet-based companies to
differentiate between the direct and indirect cost. However, numerous people
have disagreed to this by saying that it is no longer a valid way of looking at costs for a
company in an E-commerce environment with intangible assets. The author's goal is to
persuade that to assess the profitability analysis, product-line decisions and pricing
decisions are still significantly affected by the way costs are classified.
Direct cost is easily traceable whereas an indirect cost needs an allocation scheme to
be traced. A central element of cost management is the proper allocation of its costs to
various products and services. Therefore the way costs are allocated plays an important
role in influencing the profitability of individual good or service.
Cost is being measured as a function of cost objective. In the traditional view, products
and services in the departments serve as a key cost objective. The cost of materials
and labor are easily traced therefore making them perfect examples of direct costs.
Contrary to that the depreciating machinery, utilities, and insurance are considered
as indirect costs. As products are the cost objects in manufacturing companies,
service is a cost object in service industries.
Tangible products are rational choices for the primary
cost objectives in most manufacturing firms. Whereas services are rational choices for
primary cost objectives in other firms. There will be an increase in the significance of
intangible assets. For example, in the banking industries direct and indirect cost are
directly related to the particular service such as processing a loan.
There is a remarkable change in the E-commerce companies over the past 5 years and
it changed in a way companies interact with their suppliers as well as customers. Many
companies generate revenues via the internet and we refer these companies as
Internet-based companies. Despite the fact that the basic nature of doing business has
changed for a large section of our market, the primary character of cost management
has not changed. Profitability analysis, product line decisions and pricing decisions are
still affected by the way, the costs are being classified as direct and indirect.
Due to the growth of the internet, there are changes in many aspects of commerce. A
number of firms are now emerging for the concept of sales over the internet. In
this scenario, it is really important to understand the impact of these changes on
corporate cost management system. In E-commerce transaction with customers are
handled electronically. It gives innovative ways to interact with the customer. Ecommerce companies should view customers as well as products services as the key
cost objectives.
Most internet based firms can be classified into four types of business models: Business
to Business, Business to Customer, Business to Government and Customer to
Customer. B2B (business to business) and B2C (business to customers) trade where
companies sell their products and services online either to other firms or directly
to the customer. Thus all the costs are a significant part of the online
business. Another type of business is customers to customers (for example E
bay) which creates revenue through the commission. The B2G business directly
deals with the government. Among athe four business models the B2B creates the
most
revenue.
Low switching cost and low cost of information have created the situation in which
companies continuously adjust/change prices and try to attract and track other future
customers. User-friendly, secure and hassle-free experience should be there for
customers in order to retain them. Companies that are going to be competitive should
devote their time on resources to attract customers through advertising
on the internet or traditional media.
For Internet-based firm direct cost is the cost of the product a customer
buys, the manufacturing cost of products are intermediate cost objective. It may be even
possible to trace software related cost to specific customers in an Ecommerce environment and thereby treating directly in terms of the customer. The
cost that cannot be directly traced for example computer hardware is treated
as an indirect cost in the internet-based firm.
Effective customer profitability, pricing decision, and marketing decision will be achieved
if customers are treated as cost objective. Focusing needs and desirability
of the customer is fundamental objective for the internet-based firm and they need to
adopt customer focus. The Internet-based firm should also consider other cost
objectives in differentiating between direct and indirect cost.
Relationship of Case to Work Experience
Back in my country, my father is an industrialist and I gained my work experience
from his guidance. I was an administrative manager and I personally feel that
distinguishing between direct and indirect cost is essential. In our engineering based
industry of powder coating, we buy electromagnetic powder from the supplier. The
electromagnetic powder can be treated as a direct cost to my company and indirect
costs could be utilities and rent. Our main cost objective was to trace down direct and
indirect cost and proper allocation of the cost because it helps us to
gain profitability. The nature of the firm is B2B, so to satisfy the other firm
requirements we need to continuously maintain the quality standards to remain in the
business. Quality inspection is also considered as a direct cost.
Relation of case to Material Covered
In chapter 1 we studied about direct and indirect cost. We also solved an example
of differentiation in direct and indirect cost. We went through the example of California
Pizza Kitchen, which talks about a manager trying to determine the cost of serving a
specific customer. Cost object, are costs such as rent and supervision is considered as
an indirect cost and if the manager is to determine the cost of
operating a specific restaurant, then the cost of rent and utilities will be considered
as a direct cost. The same thing applies to the internet-based companies. If they
consider the customer as a cost objective, then to attract more customers they need to
make more advertisement through the internet and the advertising cost will be
considered as a direct cost. Manufacturing cost will be considered
as an intermediate cost to internet-based companies.
Summary
In the current economy, it is important to imply the information we know in the field of
management accounting. Direct and indirect costs are one kind of implication. This
implication of managerial accounting will help to identify the cost objective and
distinguish between the direct and indirect cost which in return would help to
gain profitability. In today’s world, most of the companies are earning online. The
attention to the customer is the primary focus for any company selling its product online.
What are the customer's interests, which section of the site are most customers visiting,
what are their key areas while picking up the product etc, are some issues
where companies need to invest their money in, in order to increase the
online sale. Thus, such costs can’t be ignored and contribute in one of the major costs.
Apart from this, slashing prices to compete with the competitors and making festive
sales also contribute to its cost. Thus, in a nutshell, apart from focusing on their direct
costs, these costs should also be treated as a direct cost to the online business
and they must be taken care of accordingly.
5- Case #8.4- “The Business of Making Money with Movies” by S. Mark
Young, James J. Gong, and Wim A. Van der Stede.
Summary of the Young Reader Case
The article “The Business of Making Money with Movies” provides chronological
information about how the movie industry has adapted to new technological changes
over the past decades, while continually changing its revenue generating models and
boosting its revenue streams along the way. Making a movie involves six stages:
development, pre-production, production, post-production, marketing and distribution,
and exhibition.
In the early 70s, the main source of revenues for studios came from theatrical release,
international sales and network television until the innovation of the first home video
system. This system provided new opportunities for studios to generate more
revenues. Today the viewing options for consumers and the revenue streams for
studios have increased significantly through the adoption of new technologies.
Notwithstanding, theatrical release still remains the most important factor of success in
the movie industry.
The opening box office performance is also a critical indictor of a film’s success.
According to boxofficemojo.com, the overall box office performance was $10.6 billion in
2009. This was the first time ever the domestic box office exceeded $10 billion. This
was due to the following critical factors affecting the theatre-going experience. Firstly,
the studios were under enormous pressure to create blockbusters movies but overtime
the percentage of people who actually go to a movie theater declined due to the
variety of entertainment options such as video games, music, movies, television and
user generated content on social network sites available both online and mobile
devices. Today people prefer to watch movies in locations other than a theater because
of high movies tickets, boring commercial, rude behavior of other audience and dirty
theaters. Secondly, the large increase in ticket prices affected box office revenue.
Today movie ticket price average cost ranges from $11 on a weekday to $13 on
weekends compared to the prices of past years. As a result of this many people wait to
see a film on DVD or on pay-per-view in the comfort of their own homes. Thirdly, movie
piracy especially the illegal downloads from the internet affected revenue. Piracystill
remains one of the greatest loss of revenue for the box office.
The article suggests various sources of revenue streams by assessing different
modelsin the entertainment industry. The main goal of the entertainment industry is to
develop content that can be distributed through as many channels as possible in other
to generate revenue. Outside theater releases, the major sources of revenue in the
movie industry comes from home video, network, satellite and cable television,
international distribution, internet and mobile devices.
Over the years, the development of home video has been a great source of revenue in
the film industry. Major studios earned more revenue in the domestic home video
market through sales and rentals than they did from theatrical release. These sources of
revenue of home video were achieved through television viewing, video/DVD, pay-perview (PPV), premium pay channels such as HBO, Showtime and Starz, network and
cable TV, and syndicated TV.
The international box office accounts for less than half of the major studios total income
from theatrical markets over the years. The international market for U.S. films continues
to grow rapidly. According to the article, the largest foreign consumers of films are those
from the U.K., Japan, Germany, France, Spain, and Australia/New Zealand.
These international markets generated $18 billion in revenue to the U.S. studios. Also,
television licensing is highly profitable overseas. The overseas nontheatrical market
grew over the years making the home video market a large source of overseas revenue
for Hollywood studios than the overseas theatrical market. It is predicted that by 2011
overseas revenue from U.S. movies will increase to $41.6 billion.
The article suggests that technological innovation in the coming years will lead to the
most significant revenue yet to come. We can see evidence of this today from the
ubiquitous use of hand held devices and the internet. This leads to the proliferation of
downloaded movies on smart phones. The film industry is trying to determine a new
revenue-generating model to exploit the Internet as a new revenue source but their
greatest concern is copyright. There lies this fear that once a movie is released online
they lose control over its distribution. As such the studios are working to build a copyprotection technology to maintain control over online content. Today, consumers
already can download films directly to their hand held devices such as Ipads, and other
mobile devices. Movie downloads potentially offer a significant source of revenue for the
studios if they can put in place the right business model. Although hard to predict, it is
estimated that over the next couple of years, internet movie downloads in the U.S. will
generate $1.3 billion in revenue.
In summary, we can see how the movie industry has adapted to recent technology in a
bid to increase revenue streams. Firms and industries generate revenue by developing,
selling and reselling the same content using different platforms in different
markets.Motion pictures are just one of the information industries in which value is
created through knowledge and intellectual property. The article is of the opinion that
understanding and managing lifecycle costs and revenues can help create value to
exploit these intellectual property.
Relationship of the case to my work experience
I currently work at Realogy (real estate and relocation services). At Realogy, we are
deeply committed to embedding innovation and technology throughout our business
practices. This is most evident in the services and solutions we provide to our affiliated
agents and brokers.
Each year, Realogy hand selects a group of companies to present their emerging
technology products to an invitation-only audience of Realogy executives and
franchisees where ideas are shared and connections are made.
In 2016, Realogy announced the formation of ZapLabs as the company’s innovation
and technology hub. ZapLabs focuses on accelerating change within the real estate
industry. Zap keeps real estate sales agents and consumers connected throughout the
transaction journey. It helps homebuyers and sellers connect with a real estate expert
who is prepared to meet their needs, every step of the way. It also helps our affiliated
real estate sales agents and brokers stay in sync with their customers, grow their
businesses, and thrive in today’s real estate industry. This contributed to the $5.81
billion in revenue earned by realogy in 2016.
Over the past years, real estate and its business models have already been
substantially influenced by online market developments. New technologies such as the
internet and its infrastructure have introduced disruptive competition to the traditional
regional/local market by changing conventional supply-and-demand patterns.
Technology has made it easy to forget face to face meetings.
Today, virtually everything is done online. You can view real estate listings online at the
comfort of your house and also have access to the sales agents through one on one
chat or phone call.
Relationship of the case to material covered in class
Managerial accounting gives us more insight into a company by looking at different line
items in various financial statement. The Income statement is a very important report
because it contains the line item called revenue/sales which is the lifeblood of every
surviving company.
The income statement contains revenue earned and expenses incurred by a
company during a reporting period. It also shows how economic resources are used to
generate earnings. The income statement is used by management within the company
but also by investors and creditors outside the company to evaluate profitability,
performance and risk assessment.
The young reader’s case primarily focuses on how revenue is being generated by
adapting to technological changes. Revenue is generated by the effective use of assets
in the company. Under the accrual basis of accounting, revenue is usually recognized
when you transfer the risk of ownership of goods and services to the customer. Under
the cash basis of accounting, revenue is recognized when cash is received from the
customer following its receipt of goods and services. Revenue also known as topline is the starting line item in the income statement. This has a very significant function
because revenues drive every other line item in an income statement. A variety of
expenses related to the cost of goods sold and selling, general and administrative
expenses are then subtracted from revenue to arrive at the earnings of a business.
The book, in different chapters, references the income statement. In chapter 5, under
the contribution margin approach the book mentions a new type of income statement
called the contribution margin income statement. This is based on cost behavior, or
whether cost is variable or fixed. The contribution margin represents the amount of profit
remaining after only variable costs have been deducted from sales revenue. The
contribution margin income statement is not used for external reporting rather it
provides a tool for managers to use for “what-if” analysis or to analyze what will happen
to profit if something changes.
Furthermore, chapter 13 discusses about managerial responsibility in regards to how
revenue is being generated. The manager of a revenue center is responsible for
generating revenue. Also, companies often give revenue center managers sales targets
and then evaluate or reward them based on whether they meet those targets.
Summary
The way businesses are being transacted within the real estate industry is rapidly
evolving based on new technology being invented and refined. The advent of the
internet along with cellular and mobile technology being available almost everywhere
means that people are no longer tied to their offices. Listing sites have become more
technologically advanced that people can send and receive information listings 24/7. By
using technology, brokers and agents have become more proactive in anticipating
client’s needs. They are able to this by staying on top of industry trends.
I believe that in the future, we’ll see more interactive sites which would enable
prospective home buyers make instant listing payments online. This will free up time for
real estate agents to focus more on emerging customers’ needs as this is primed to be
the pivotal revenue-generating activity for the real estate industry going forward.
6- Measuring the Strategic Readiness of Intangible Assets
Case Summary:
The value of intangible assets should be regarded as just as important as the value of
tangible assets. It is common for companies to measure their accounts receivable,
accounts payable, and capital in an effort to gauge their financial standing. What most
do not consider is the importance of measuring the intangible assets that also contribute
to their overall success and promise of longevity. These variables present themselves in
the form of human capital, information capital, and organizational capital, all of which
indirectly effect financial performance. This makes it all the more important for
manager’s to consider, as these influences are complexly imbedded in company
culture, the skills and talent of employees, and employee’s ability to share
knowledge. Measuring these various variables is incredibly significant in the manager’s
ability to manage the company’s competitive position with greater ease and accuracy.
Measuring the strategic readiness of intangible assets contributes to the company’s
Total Quality Management and Six Sigma efforts. That is, it assists companies in
achieving the satisfaction and loyalty of both consumers and employees. It offers insight
into the most effective way to properly train and motivate employees to pursue
corporate goals and initiatives. It also provides a more in depth perception of how
closely aligned the company’s assets are to the corporate strategy. It is only when these
assets are a direct reflection of the company strategy that the company will benefit from
value added. These assets are divided by, as mentioned, categories which include
human capital, information capital, and organization capital. Human capital is comprised
of, “…the skills, talent, and knowledge that a company’s employees possess”.
Information capital includes, “… the company’s databases, information systems,
networks, and technology infrastructure”. Lastly, organizational capital is comprised of,
“… the company’s culture, its leadership, how aligned its people are with its strategic
goals, and employees’ ability to share knowledge”. It is integral that managers assess
each of these categories, without neglecting any individual one, in order to obtain a
holistic perspective of the strategic readiness of all intangible assets.
The tools used to assess this include employee surveys, Strategy Maps, and Readiness
Reports for each individual category. While employee surveys offer insight to develop
the maps and reports necessary to assess intangible asset readiness, the Strategy
Map, specifically, analyzes the relationship between four interrelated perspectives which
include the financial, customer, learning and growth, and internal process perspectives.
The Readiness Reports for each individual category are specialized, accordingly, and
compare actual measures to company expectations and standards. For example, the
Human Capital Readiness Report assesses strategic processes, strategic job families,
and competency profiles of the company. In contrast, the Information Capital Readiness
Report assesses strategic processes, strategic job families, transformational
applications, analytical applications, transactional applications, and the technology
infrastructure of the company. Lastly, the Organization Capital Report analyzes the
culture, leadership, alignment, and teamwork attributes of the company. Considering
each category, with proper evaluation of the individual variables which influence them,
managers will be able to better understand the value of their intangible assets and
where they should allocate more of their efforts for improvement. For example, the
Organization Capital Readiness Report might provide insight about how the company
should allocate more attention towards improving organizational behavior and policies.
In summation, this data helps to measure the alignment of intangible assets as
compared to the company’s strategy, which helps to secure a sustainable competitive
advantage that is equally as valuable as an impressive balance sheet or income
statement.
Relationship of Case to Work Experience:
In regards to personal work experience, I have seen recent efforts, focused on the same
initiatives as those presented in the case, as a Product Development Intern at Movado
Group Inc. More specifically, I have seen funds and resources allocated towards all of
the variables which help to ensure the strategic readiness of intangible assets including
human capital, information capital, and organization capital. In regards to human capital,
the department that I am involved in has specifically identified 4 strategic job families
which include Product Development Coordinators, Product Development Managers,
Product Development Directors, and Designers. The role and responsibilities of each of
these positions vary but our department relies heavily on the cohesive participation of
each of these individuals to guarantee the success of this business function. Generally,
their competency profile requires them to have general knowledge of operations
management and innovation. There is, of course, more emphasis on certain
competency areas as it pertains to the responsibilities of specific positions. For
example, Designers are required to have a little less knowledge of operations
management as compared to Product Development Coordinators who communicate
with suppliers and manufacturers, overseas, to test products and inquire about
minimum order quantities and pricing. Designers, in contrast, are required, by the nature
of the job, to have more knowledge about innovation. Their greatest asset is their
creative abilities which are not as necessary for Product Development Coordinators.
Additionally, Movado Group Inc. (MGI) also utilizes quarterly 360-degree feedback
surveys to assess the performance of supervisors, peers, and subordinates. This is an
integral component of analyzing the strength and weaknesses of the human capital
component of the department and overall company.
In regards to information capital readiness, MGI has placed great importance on the
initiatives related to this area. For example, there is an entire team of IT technicians who
are continuously auditing the processes and software programs used by the company.
One recent development was the implementation of SAP. There was a year-long effort
where the IT and Human Resources department collaborated in an effort to ease the
transition of employees from the antiquated systems, that were previously used, to the
more advanced and modern SAP system. Additionally, there are analytic applications in
place which grant Product Development Coordinators the ability to share information
and knowledge. Specifically, these applications detail the matrixes of every season
watch collections for every brand including the projected cost of production, actual
costs, projected retail price, actual retail price, and SKU numbers. In addition to the SAP
system, there is also a private database, which is available to all employees,
that includes photos and important details of the various raw materials that are kept in
our raw materials studio. The combination of these two applications supports the
company’s initiative focused on information capital readiness. Moreover, the security
precautions, training, and awareness e-mails that are available to every employee, by
the IT department, also help to support the security function of information capital.
Perhaps the strongest of all of MGI’s intangible assets is their organizational capital.
The company culture is almost palpable and is strongly infused in their everyday
activities. The history of the business, founded on innovation and entrepreneurship, is
strongly communicated in their vision and mission statements. In fact, the company
details their vision and mission statements, and company culture in their “Casita”. This
is a diagram, which resembles a small house, hence the name “Casita” which translates
to “small house” in Spanish. There are two versions of this Casita. One of which focuses
on corporate goals and one of which focuses on value chain goals. Both versions begin
by detailing the mission and vision statement of the coming year followed by corporate
themes, priorities, and ending with the overall Mandate Priorities.
It is obvious that there is an alignment, within the company, of their departmental goals
and incentives as is evident by the continuous teamwork that can be witnessed within
each department. The private library database is often visited by individuals from every
department. Specifically, in relation to the department where I am located, Designers,
Product Development Coordinators, Product Development Managers, and Product
Development Directors, alike, refer to the content listed there in order to share
materials. For example, if a brand discovers a cheaper supplier, who is able to
manufacture a complex movement that is cheaper than previous suppliers, this
information is automatically available to all of the licensed brands within the company.
Product Development Directors are continuously encouraging the coordinators and
Designers to consider risks and work with an entrepreneurship mindset. This
knowledge management system is, perhaps, the most used tool in my department as it
provides the integral information that coordinators and Designers need to operate more
efficiently and effectively. In the past, Directors, Designers, and Coordinators would
withhold information from other licensed brands because they were prideful of their
discoveries and innovations and did not understand the benefit of sharing information.
With the implementation of this system, teamwork has strengthened, ever since. The
integration of training programs, executive talks, company intranets, and bulletin boards
help to foster this collaboration among employees and the Casita, most definitely, helps
to reinforce it. As the case suggests, “No asset has greater potential for an organization
than the collective knowledge possessed by all its employees”.
GRAPHIC OMITTED (CANVAS DOES NOT SUPPORT IT)
Relationship of the Case to Class Materials:
The strategic readiness of intangible assets relates well to the topics discussed in
Chapter 10, Decentralized Performance Evaluation. More specifically, the concept of
fostering teamwork and open communication as components of organization capital
readiness aligns well with the notion of decentralization. Decentralization refers to
forwarding decision making down to lower-level managers. An advantage
of decentralization is that it recognizes that lower-level managers may have more
knowledge about their area of responsibility and can make quicker and more informed
decisions. This is exactly what the implementation of information systems is intended to
create. With the access of this knowledge, available to all employees, lower-level
managers are able to gain the insight necessary to make these informed decisions. As
mentioned in class, this also helps to foster the development of managerial expertise.
With strong human capital, information capital, and organization capital, decentralization
will help to make managers confident in lower-level management’s ability to make good
decisions. This relieves them of focusing on day-to-day details and, instead, allows
them to focus more on strategic issues. The Balanced Scorecard presented in class
also aligns with the company’s efforts to ensure the strategic readiness of intangible
assets as it measures the value creation through the financial, customer, internal
business processes, and learning and growth perspectives, as mentioned earlier. These
components can also be seen in the Casita that was developed by the Product
Development department of the company where I am currently employed.
These measurements also help in developing a statement of cash flows, specifically in
regards to the indirect method, as managers must account for intangible assets. This
also applies to the development of cash flow statements from investing activities where
managers must also account for intangible assets. This begins to introduce the material
learned in Chapter 12, Statement of Cash Flows. In this case, intangible assets have an
influence on whether or not the company’s performance will result in a positive or
negative cash flow. As mentioned in class, it is more favorable, generally speaking,
when there are negative cash flows in the investing activities section. Companies must
be cautious, however, when there is a positive total cash flow in the investing activities
section. Of course this is a general assumption. Managers must still consider other
methods of measuring cash flows to confidently determine the status of the company’s
performance.
Overall Summary:
In summation, the strategic readiness of intangible assets is just as integral to the
success and longevity of a business as is an impressive income statement or balance
sheet. In fact, I would argue that there should be greater emphasis placed on this
assessment method because it measures the variables of success that have been
previously considered immeasurable. Although a company could not survive without the
support of finances and accounting efforts, it would also fail to survive without the
strength of its intangible assets. Specifically, it would fail to survive without human,
information, and organization capital. The purpose of measuring the readiness of these
assets is to gauge whether or not they are accurately aligned with the company’s
strategy. In order to effectively deliver a strategy, companies must ensure that their
information systems, networks, technology infrastructure, company culture,
leadership, skills, talent, and knowledge of employees all support the same vision.
It is important that companies consider utilizing employee surveys, Strategy Maps, and
Readiness Reports of every category in order to gain a true understanding of the
readiness of their intangible assets. I appreciate that companies are allocating more
time in understanding the influence that these assets can have on company
performance as it is very easy to overlook. These methods of assessing intangible
assets are also considerably useful as they incorporate the opinions of employees. Most
of all, however, the results can assist managers in better implementing Total Quality
Management and Six Sigma efforts. It is important that managers recognize the value of
strong financial statements as well as the value that well aligned intangible assets
provide. After all, the infrastructure, people, and company culture are the foundation of a
business. A strong balance sheet only serves to support it.
7- Case: The Business of Making Movies
Case summary
Motion pictures continue to play an essential role in the ever-changing entertainment
industry. In this case, the authors discussed the processes involved with favorable
distribution and marketing of a film on accounting. By analyzing production, marketing
cost and revenue data on more than 2,000 movies, the article explored the key factors
that contributed to a box-office success. In the motion picture industry, before a film gets
into theatres and seen by audiences, there are three key stages in the value chain for
theatrical motion pictures—production, distribution, and exhibition. Young et al. also
focused on these three sections and examined the impact of each part on the box
office.
Firstly, marketing is universally considered to be the key factor that leads to box-office
success. A movie's marketing budget was found as high as 50% of its total production
cost for blockbuster films, which mostly comes from advertising on television, print,
radio, and outdoor billboards. The related attempts to generate a buzz for the movie
before release account for the remaining part of the budget. Viral marketing via social
network, email, and other electronic media campaigns to promote new films is also a
critical sector of marketing. Licensing is especially vital for the marketing of movies in
theatres take for example the McDonald's and Walt Disney Company licensing
relationship which lasted over 10 years and was extremely profitable for both parties.
Secondly, distribution is the indispensable process of getting the film viewed by an
audience. This is usually the task of a professional film distributor, who could be an
independent company or a subsidiary of a major studio. Distributors play a role as a
negotiator between the film-production company and the exhibitors, and has a set of
tasks and responsibilities. They need to arrange industry screenings to make the
exhibitor believe they will get financial profit and contracts with exhibitors on the split of
the house nut for each party. They also determine the time and the number of theatres
to ensure the profit the film can make during its theatrical run and ensure the transfer to
the theatre by the opening day. They also control the contracted theatres having a
certain number of seats, show times, etc. In addition, the MPAA movie rating sometimes
is involved in the distribution process. And, interestingly, the research has shown
different ratings have various revenue potential. For example, an R-rating movie is likely
to make a 12% less revenue than a film with a lower rating.
Thirdly, the exhibition of a film has always been seen as the retail branch of the film
industry. Exhibitors regularly have a contract with a distributor, which includes the profitsharing terms and length of time the movie will be in the theatre. There is a lot of deals
between distributors and exhibitors, which depend s on the perceived revenue potential,
the relative bargaining power of the parties, the length of running days, the time of film
opening, and other factors. One type of their deals is both distributor and exhibitor take
a fixed percentage during the film's theatrical run, another is taking a sliding-scale
percentage of gross box-office receipts and other variables. In real life, it seems that
distributor could get larger revenue as the time goes on. Because distributors can
change the two types of payments and take the larger percentage of ticket revenue after
the exhibitor has taken out the house nut. At the same time, the exhibitor can get the
profits in concession in theaters, which account for around 46% of profits and about
20% of revenues. That means the exhibitor depend highly on concessions in theatre, as
we see, the price of popcorn and soft drinks in a theatre is relatively higher than the
outsider. By showing the number of screens and theatres of the top-five chains, the
authors proposed that the two most stressful issues for exhibitors are installing digital
technology instalment and providing a better movie-viewing experience for the
audience. Although digital cinema helps to save an amount of money on film print and
has an advantage of efficiency, it is a huge number for the conversion. Another thing
costs the exhibitor a lot is the owning and maintenance fee for digital technology.
However, the exhibitor has to cover the cost without split with the studios and survives
under the depression in motion industry due to the poor movie-watching environment.
Besides, theatrical release and box-office performance on opening weekend has been
paid attention by the producer and the distributor, while most revenues about 80% of
the total revenues come from other forms of distribution, such as DVD, TV.
Taking all the above information into consideration, the author conducted an empirical
study by collecting production, marketing and revenue data from 2,023 films to explore
the major factors influence the success of a release. This study finally found that star
power has a significant positive effect on production cost, and hi-tech motion movies
and sequels have higher production costs than other films. Then the types of
distributors also have an impact on the production costs and the independent distributor
have lower production costs than those distributed by the major studio. What's more,
the results indicate that production costs, quality of a movie, ratings of motion pictures
and release seasons are the determinants of marketing costs and the movie features,
including star power, hi-tech genre, distributor, also make an impact on the volume of
marketing costs. Production costs and marketing costs are found to have a positive
effect on the box-office revenue. From the result of regressions, they got a conclusion
that marketing costs have a stronger impact on film's revenue compared to production
cost. The results also indicate that the star-laden, hi-tech, sequels and major studio
finance lead to a higher production cost.
Relationship of case to work experience
Although I have no experience in the motion picture industry, this case study gives me a
new perspective on assessing the return of marketing investment and production cost.
This case reminds me of my previous work experience in a small software startup
company called Lawei Technology Co.Ltd. It's a young company, and it faces a
question that it needs to grow its brand to make money but has zero money. In the early
stage, it allocated most of the capital on equipment, facilities and staff salaries and left
limited money for marketing activities. So it grew slowly and failed to come to light in the
competitive software industry. After getting more investment from the government and
individuals, it began to do more marketing to change the situation.
In my opinion, for most of young companies, it is a hard determination of the cost on
marketing and makes good use of it to get more return. What I learnt from this case is
that marketing costs can have a stronger positive effect on film's revenue compared to
production cost. So it is recommended that companies should allocate a certain
percentage of their gross revenue on marketing, especially for a startup. It may help to
create buzz and market share as well as build industry connections.
Relationship of Case to Material Covered:
Costing systems help companies determine the cost of a product or service related to
the revenue it generates. The accounting for business nanagers course introduces two
costing system: Volume-Based Cost System and Activity-Based Costing. The VolumeBased Cost System assigns manufacturing overhead based on the volume of a cost
driver, whereas Activity-Based Costing(ABC) allocates indirect costs to products on the
activities they require. Compared to volume-based cost system, Activity-based costing
provides a more full and accurate view of product cost, it seems to be beneficial for
companies by providing greater accuracy, lowering costs and increasing profitability.
Activity-Based Costing (ABC) is commonly used in manufacturing as a method of
assigning indirect costs to products on the activities they require. It also can be applied
in service industries, because service companies usually do not use cost driver
techniques in their cost measurements and allocation procedures, but can allocate cost
by various functions or activities.
In this case, we can see the different effects of the costs of production and marketing
have on the revenue, and the marketing costs have a stronger positive impact on the
box-office revenue. So it is suggested to apply Activity-Based Costing system on cost
accounting. In practice, it means that we can allocate cost of movie based on activities
that cause the costs to vary, such as production, marketing, and distribution of films.
And applying this costing system would help in evaluating past performance on boxoffice and cost management and make cost predictions of future engagements more
meaningful. What's more, ABC costing requires organizations to focus on and
understand the relationships between costs and activity, so it helps find ways to
manage or reduce costs to improve their profitability.
Summary:
This case shows the business process of selling movies and provides key success
factors for a box-office success. It seems to have great implication for accounting
practices and regulations in the motion picture industry. According to the result of the
study, from a matching-principle perspective, organizations in movie industry are
suggested to pay more attention to marketing and make bigger investment in marketing
than production of movies. It also reveals the importance of understanding the
relationship between cost and activity and allocating the cost based on activities. So
Activity-Based Costing would be a good choice for service companies to manage their
costs.
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