Case : 1 Niloufar
Case Summary:
For many years, successful companies have stayed loyal to their winning
strategies. As customers changed behavior and preferences, those successful
companies started facing problems. Their “winning strategies” no longer worked.
The term active inertia is used for companies who are successful and no longer
look for improvements, when they actually should. Companies with active inertia
these days would easily get into problems without knowing where their problems
are arising from. For this reason, businesses should adopt a strategy that is closely
monitoring customers and customers’ behavior in order to know how to plan for
the company’s short-term and long-term future.
As we read in Beyond Budgeting by Jeremy Hope and Robin Fraser, “organizations
need to find a new model that effectively empowers front-line managers to make
fast decisions based on current information.” (Fraser, 252) There are two important
requirements for such model: 1) empowering front-line managers 2) speeding up
decision-making.
Large companies tend to have very tall hierarchical trees. Tall trees mean having
multiple managers making decisions for lower level managers and passing along.
Such system has several deficiencies. One of the biggest problems with such
systems in this day and age is time. It takes a lot of time for the company to make
decisions when decisions need to be made immediately. Moreover, it takes time for
higher managers to receive information from the front-line managers who have
more recent and day-to-day view. Moreover, tall hierarchical structures reduce the
team-work among employees because it has more managers to boss lower levels
around. Therefore, flattening the company structure would reduce the time lag in
the company and also encourages the team-work among employees and different
units. There are multiple factors in every decision companies make, isolating
different units in the company would reduce the chance of having enough
information and perspective when making a decision.
The text introduces the term “devolution” as a mean of helping the company stay
updated with new information and decisions. One interesting feature of devolution
is to organize through market forces. It means acting as the company is a small
economy and different units see one another as internal customers. Moreover,
focus of devolution is giving more attention and decision making power to lowerlevel and front-line managers because they are the ones closest to the customers
and so they have more recent information about customers’ preferences, behavior,
and dislikes. Such transformation would aid the company in making faster and
more accurate decisions.
The text states that devolution takes many years of constant effort to restrain
centralization of power. It might seem too costly to make such change in a
company that has been operated differently for years, but making the effort for
devolution would help the company in the long-run. A good devolution would
bring in workers or employees who share the same value and help defining clear
boundaries. Moreover, it converts one profit center (company as a whole) to
various autonomous profit centers acting as if each division is a single entity
helping other divisions (market forces). Devolution also provides managers with
fast and real-time information, thereby giving the managers enough time to make
decisions according to the latest data. In this day and age, it would be problematic
if there is a long lag between decision and action. A good devolution would also
enable managers to act and make decisions freely, thereby holding the manager
accountable and responsible for result. Devolution also provides information to the
managers that managers wouldn’t see in his/her everyday tasks, information
closely related to customers (front-line).
Beyond Budgeting also defines characteristics of a good manager. A good manager
is one who is able to define targets correctly and come up with strategies that gets
them closer to those targets. Of course, a rigid strategy is no longer feasible. For
this reason, must be able to make adjustments to his/her plans in order to keep the
company on track. Moreover, a good manager should reward employees based on
relative performance.
Relationship of Case to Work Experience:
At the firm I work at, I can clearly see signs of devolution. For instance, I
can see how my manager cares if a new hire is sharing similar values to ours so
that it would be easy to work with him/her and set boundaries. Moreover, the
company has created clear short-term and long-term targets based on market forces
and is subject to change based on changing conditions. We have daily meetings
that discuss latest information about customers and costs. These meetings aid my
manager to be aware of changing factors in his decisions so he could modify and
update his information for upcoming decision-making periods. A company cannot
just set a rigid budget for any period (i.e year) and stay exactly on track. During a
year, so many variables and costs change; companies should keep that in mind.
Therefore, my manager uses recent data on company’s cost and spending (for
example, pas 3 years) in order to predict how much the company needs in the
upcoming period. Of course, he knows that some periods are cyclical and repeat
every year so he could predict more easily the budget for such periods. Through
such efforts, my manager is able to run the company effectively and efficiently and
therefore keep us employed.
Relationship of Case to Material Covered in Class:
In our past few classes we have discussed how important the role of
budgeting is for a company to run effectively and efficiently. We know that there
are fixed and variable costs in a company’s cost structure. For budgeting, a
company would need to find out how much each of these costs are in order to plan
for the upcoming period. A fixed cost is not really hard to predict. However, a
company would need to make some effort to make accurate predictions of variable
costs. To do so, as discussed in the text, the managers should be supplied with the
latest data and information in order to come up with accurate predictions for
variable costs. If the information provided to managers are not timely and accurate,
the decisions that managers make would also be useless. Moreover, managers
would need authority to make decisions and are responsible for results. A great
example would be Gautam Gupta, ex-CFO of Uber who decided to leave the
company because of great amount of losses the company experienced in the first
quarter of this year.
Conclusion:
In conclusion, I believe that without devolution, companies would run into
major problems sooner or later. There are a lot of companies out there that are still
operated by a centralized power or authority. Such structure wouldn’t allow for
clear and fast transfer of latest data and can delay decision-making. Such delays in
transfer of information could significantly delay budgeting plan and therefore
make the planned budget outdated. Having an outdated budgeting can definitely be
very costly since it would make a company’s projects run into financial problems
during a given year. Moreover, when a company is slow in decision making, it
would fall behind other competitors in every aspect. Moreover, it would run into
problems while making new targets and creating strategies. For all these reasons I
believe that every company, regardless of size, should invest time and resources
for devolution in order to achieve its highest potenti
Case 2 : Mohammed aljohani
Case Summary
In rethinking Activity Based costing case, there is a need for the managers in the
organization to focus on the measures that help in the assigning of the costs to the
products and the customers. The implementation of ABC costing in the large
manufacturing companies is difficult, and this results in the need to focus on the
solutions that guide the implementation of the concept of ABC. The need for the
accuracy of the accounting of the costs helps in the improvement of the
relationships with the clients, and this creates the opportunities for the expansion
and the profitability of the businesses. The opportunities that the organizations face
in the use of the costing methods helps in ensuring that there is focus on the
capacities of the operation of the firms and the estimation of the different drivers in
the cost process.
The rethinking of the ABC method is to ensure that there us accuracy in the
estimating of the capacities of the organization and this involves the practicality of
the allocation of the costs per employee. The activities that the employees engage
and the observation of the time that they spend in the performing of the activities
are important to account for, and this is not possible when using the ABC
method. It implies that in the revised ABC there is the accounting for the demand
of the customers in every transaction and the allocation of the resources to help in
the management of the different activities. In the estimation of the rates if cost
drivers. The new approach allows for the calculation of the different rates in the
assignment of the costs to the customers, and it allows for the application of the
standard costs.
The traditional approach to the allocation of costs is not efficient in the
allocation of the costs to the customers as there is the constant recalculation of
activities in the customers’ service that are performing. The practicality of the
assignment of the costs leads to the need to focus on the expenses and the
utilization of the capacity of the company operation. The need to analyze the usage
of the resources and the reporting given the management of time is important in
helping to focus on the forces that the company should consider in enhancing the
activities of the different departments. Using the new approach, there is the
determination of the performance of the customer service departments and the time
that it takes for the processing of the different requests.
The focus on the circumstances of growth in the organization results in the
analysis of the resources unused compared with the capacity of the company. The
focus on the reduction of the costs and the complete utilization of the capacity of
the organization is essential in helping to update the models that the organization
uses and the estimation of the costs of the different activities. It is important that
there is an observation of the process and the prices that encourage the
management of the resources and the focus on the role of costing in increasing
efficiency of the organization. The programs that are used in the allocation of the
costs enhance the value of the cost of the resources and the enabling of the
permanent shift in the performance of the organization.
Relationship to Work Experience
I used to work at the bank and insurance company and the banks and
insurance companies operate in the same manner, and they continue to utilize the
customer relationship resources in attending to the needs of the customers. There is
the management of the costs and the utilization of the capacities helping to increase
the profitability of the organization and the strengthening of the relations in the
organization. The focus of the banks and the insurance companies is to increase the
profitability of the organization while reducing the costs and this means that the
new approach of the ABC costing enhances the efficiency of the costing activities
and the shift that occurs in the organization in the improvement of the quality
services (Pawłyszyn, 2017).
The time-driven cost activity enhances the identification of the different costs
that the organization incurs and the provision of the signals that might affect the
efficiency of the operation of the organization. It means that there is an analysis of
the costs and the reporting in a manner that helps in focusing on the time that the
company resources use in solving the different customer queries. The analysis of
the reports in the management of the time helps in making decisions in the
company that focuses on the willingness of the streamlining of the processes of the
organization and the enhancement of the practicality of the calculations (Namazi,
2016). In the case, the banks and the insurance are aware of the costs that they are
likely to incur and the management of the efforts of the employees in the
management of the relations with the customers. The enhancement of the processes
helps in saving the company time and the capacity of operation.
Relationship to Course
Managerial accounting course is important in helping to outline the different
ways that the organization needs to handle the costs in the various departments.
Cost assignment to the different activities is important in managerial accounting as
there is focus on the capacity of the organization and the need to utilize the
resources in the various departments. The relation of the time driven ABC system
is to ensure that there is the calculation of the allocation of the costs to the
customers and the product offered and the efficiency of the method encourages the
safe assignment of the costs and the management of the profitability of the
organization.
The analysis of the cost behavior in the banking and the insurance sectors is
important in helping to analyze the circumstances under which the costs of the
organization change and the variation of the costs given the different activities. It
means that the time-driven ABC system is important in helping to understand the
various efforts of the management in the control of the costs that the management
incurs (Marina Battistella & Antônio Cezar, 2017). There is an analysis of the
patterns of the costs and the break-even points in estimating the point at which the
costs are allocated to the customers. It is important that there is focus on the efforts
of the employees in the control of the costs in the organization as it helps in the
understanding if the efficiency of the customer service departments in the offering
of the services to the customers. It also helps in the acknowledgment of the
challenges that the organization faces in the cost control process.
Summary
The rethinking of the BAC costing system is essential in helping to focus on
the duties that the individuals play and the analysis of the capacities of the
organization. The utilization of the resources is an important aspect in focusing on
the actions of the management and the periods where there is increased the cost to
the company as compared to the allocation of the costs to the customers. The
analysis of the different between the costs and the quantity of the services is
essential as it encourages the contemplation of the actions of the management and
the specification of the allocation of the services to the customers. The role that the
staff plays in enhancing the utilization of the capacity of the company helps in the
monitoring of the actions of the employees and the creation of efficiency in the
management of the needs of the customers.
The time-driven ABC costing system encourages the operating capacity and
the updating of the models that the organization use improvement of the conditions
of the organization. The reflection of the rates of cost-drivers encourages the
analysis of the events based on the mole and the accuracy of the reflection of the
roles of the employees. There is the management of the standards of the
performance of the organization and the time that it takes to complete different
tasks. The accommodation of the costs and the analysis of the figures used in the
offering of the services in the banks and the insurance are effective in the
allocation of the costs as compared to the use of the traditional ABC system. There
is efficiency in determining the areas that the organization needs to improve.
Case3 : MAriana
Summary of the Young Reader Case
The article “The Business of Making Money with Movies” provides chronological
informationabout 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. Piracy still
remains one of the greatest loss of revenue for the box office.
The article suggests various sources of revenue streams by assessing different
models in 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-per-view (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 useof hand held devices and the internet. This leads to the
proliferation of downloaded movieson 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 copy-protection 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 top-line 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.
Case 4 : Peture
Summary of Case
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:
•
•
•
•
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.
Case 5 : Pedro
Case Summary
The article mentioned that many companies have long recognized the importance of cutting cost
in order to become globally competitive. The consequence is that some organizations put more
emphasis on their supply chain activities, with the inclusion of purchasing. Everyone knows that
if you spend a dollar less on purchasing it goes right to the bottom line. It is the Chief Financial
Officer’s and most other senior executives job to understand that if their company could cut the
cost of all goods and services purchased by just 1 percent or 2 percent that it would have a
substantial positive impact or the company’s profit. This is the reason why many, if not most,
companies place a functional leader in place with the usual title of ‘’ Purchasing VP’’. To some
extent most companies consolidate their supplier base by centralizing and aggregating the critical
‘’buys’’ and assign them to their respective strategic purchasing teams and as a result these
companies may feel as though they have addressed the opportunity adequately but according to
this article the job is not fully done.
The simple question that organizations can answer is: When purchasing, does one have the most
competitive price in the market? The corollary question is: When purchasing, did we ‘’test’’ the
market to determine if we had the most competitive price? The answers to these two questions
would then determine the degree to which the impact that procurement has had on their overall
competitiveness. The scope of opportunity for improvement could be significant as many CFOs
consider purchasing to be just an underperforming unit, in fact the article states that recent
reports by the Aberdeen Group estimated that less than 20 percent of CFOs ‘’view procurement’s
impact on overall competitiveness as very positive.’’ These key points appoint that the Chief
Procurement officer (CPO) could be the CFO’s best friend, by improving in that area and
consequently impact on profitability. In many organizations, the value of the total cost of
purchased goods and services is often larger than the value of any individual business unite, but
the subject of ‘’effective and competitive’’ purchasing does not regularly make the agenda of the
executive team, yet executive committees’ focus and aggressive buy side market testing,
purchasing can become a competitive advantage as the scope of opportunity for purchase-driven
profitability makes a significant incremental contribution to the bottom line and that is highly
considerable for most companies.
Executive focus and attention is very crucial, the CFO can play an essential role in laying the
right framework for the CPO in this scenario. As we know, the key activity areas for
manufacturing companies are to design, buy, produce, sell, and distribute goods so if you were to
accept the proposition that the value of the total cost of purchased goods and services was larger
than any individual business unit, then you would have to ask yourself the following two
questions: How many hours a month does the executive team spend talking about individual
business unit sales and marketing issues, reviewing sales data, market share, key accounts, etc.?
and How much time is spent reviewing the reciprocal data on the purchasing side? Basically, by
looking the respective agendas for the past year or two to determine how many hours were
devoted to strategic purchasing, competitive acquisition of goods and services, purchasing
profitability contribution, and other related practices. According to the article most companies
have the ratio of 5 to 1, or 25 to 1, or maybe the attention devoted to purchasing by the
committee is so small that it isn’t even meaningful at all. Thus, the best way to elevate the buy
side issues to the executive committee level is to have the senior purchasing officer (the CPO) sit
on the highest decision-making body in the company or at least have a regular time slot on the
executive committee meeting agenda to bring out relevant buy side business issues on the table.
This is where the CFO can partner with the CPO in framing these issue clear financial terms.
In order for things to go well there is a need for a strong CPO, counting on an adequate executive
focus, the caliber of the purchasing team, their mental model, and their business practices will
determine the degree of success the organization can reach, in assuring that purchasing makes
the significant contribution to the overall profitability. Typically, to put the right executive in the
place as the CPO it involves taking a high-profile person, with a sales/marketing or a Strategic
Business Unit (SBU) leadership background, and using this individual (with weight and
influence) and put that person in charge of procurement. This individual should also have a
strong, historical track record of success in the line of management, a passion for getting results,
a deep understanding of the business you are in or the industry, senior sales experience, and the
ability to go toe-to-toe with other members or the executive committee. The CPO needs to also
have a capable, performance-oriented purchasing team. This is a team of people who believe
that: Key suppliers must demonstrate inferring commitment to quality, on-time delivery,
reliability, long-term commitment and ethical behavior; all key buys such as raw materials,
inbound and out-bound logistics, and energy, including items such as capital purchases, laptops
and key services such as contract labor, should be centralized, consolidated and managed
strategically; and a team approach on the buy side, involving key people from the relevant
departments and business units is just as important as it is on the selling side. Though all these
components are vital, mindset or attitude alone is not enough. The CPO and the purchasing team
must have the right knowledge and set of skills that will earn the respect of the people
throughout the organization enabling an effective team approach to gather better data on
suppliers’ costs than you have ever had before through tight collaborations with the IT resources.
This is where the management and careful measurement skills come into play, as you would
need to connect the supply chain processes of the supplier to those of the purchaser- and focus on
the elimination of waste and cost in the entire supply chain, therefore eliminating errors and
driving inventory control. And these skills definitely do not come easily.
After feeding you with all this information that may or may not be new to you, you might be
wondering where to start, when adjourning a CPO, how to begin the journey as it could be the
hardest part. The article gave some pointers to consider when in this situation.
1. The CEO and CFO should agree on the value of having a powerful CPO and take action to
put the right person in this specific role.
1. The CEO, CFO and CPO should jointly agree on the incremental contribution to profitability
to be made by the purchasing.
1. The CPO assembles and action-oriented purchasing team and identifies the top priority areas
of focus.
1. The CPO and the purchasing team take the set of actions needed for success and, in
particular implement the ‘’market testing.’’
1. The CFO and CPO should work together to maintain executive attention on the company’s
progress on achieving the targeted incremental contribution (to profitability).
These pointers are very useful for you to have an understanding on how to integrate a CPO in a
way that would aid to attain better results for your company and be a tool to achieve the best
return from such a move.
Relationship to Future Job
As I intend to be an Entrepreneur I will ideally be a CEO and previous to attaining those heights
of senior executive levels I will have to go through the levels. Entrepreneurship is within the
management branch and the article emphasized a lot on the management skills needed to get the
job done. This article has taught me a lot as far as the explanation of how purchasing not being
just a simple supply chain activity but as being a value-adding market activity that can and
should make significant contributions to a company’s profitability.
When I have my company, I will hope to attain the highest profitability possible and this
information has taught me a new way to help achieving such a thing. Who knows I might be a
CPO before I become a CEO and through this Young Reader Case I am able to know a little bit
more and be informed about what it takes to have a business take advantage of every phase of the
supply chain to maximize profitability. Prior to reading this material I was not familiar with the
term of CPO and what a role they have in the success of a company, it makes a lot of sense
because when it all comes down to successful business depend a lot on the procurement. The
process of finding, agreeing terms and acquiring goods and services whether it be works from
external or internal sources is a part of the game and the competitive bidding process, and when
you want to be a winner in the business industry these are things you must outdo others on.
Relationship to course
The managerial accounting course is very important when it comes to identifying and outlining
the various ways and particular things that a company needs to take into consideration in all
departments, the material covered in the lectures that I associated with this reading was the
decision-making aspect of accounting. In this scenario, it is very key to be able to use the
knowledge of accounting in a company or organization to be able to identify the decisions
necessary to maximize profitability. To make a choice of incorporating a CPO or not is a
measure that requires a high level of accurate decision making for instance. You have to
carefully analyze the company’s situation and see if all components are present in order to attain
a positive result or else it could turn our horrifically. As it was explained in lecture, in order for
decision making to be helpful you must follow the process, identifying the decision problem,
determining the alternatives, evaluate all the costs and benefits of all alternatives, proceed to
make the decision and then review the effects impacted by the decision. I see this highly
correlating with the topic of my case as that for the authors to get to the information of how
useful a CPO can be they had to go through a process before and there is a process of how to
make it happen efficiently and it has a lot to do with decision which end up impacting the
business.
Summary
Decision-making is a very key component when running a successful organization, through this
accounting material I was able to see that making the decision of appointing a Chief Procurement
Officer is a valuable one in order to maximize profits and utilize as a tool to attain competitive
advantage as when a company is slow in decision making it can fall behind its competitors in
almost every aspect. Taking into consideration as well of the need to have a centralized structure
when making the CPO maneuver as well. The main point to take over here is that most
companies see purchasing as a simple supply chain activity when in reality it is a value adding
market activity that can make a huge difference when it comes to contributing towards
profitability, that is the accounting gem.
Case 6 : Avram
Case Summary:
The case, written by Michael C. Jensen, debates that “Corporate budgeting is a joke”,
and he justifies it very well. According to Mr. Jensen, “budgeting”, “consumes a huge
amount of executives’ time, forcing them into endless rounds of dull meetings and tense
negotiations.” And the biggest problem of “budgeting” is that in its current form,
managers are finding ways to beat the system and get around it. For a company, the
expected benefit from a well drafted target plan, is the motivation of employees and
managers to increase sale and revenues, while at the same time the company stays
innovative and efficient. However, the ultimate goal for managers is to increase
compensation and their personal benefits. In a couple of cases presented in the case,
managers use a variety of techniques to “cheat” the system, including, shifting costs to
the future, or placing orders sooner so they can appear on the current financial year.
For example, a manager might have to replace the aging fleet of cars of his department,
but if the year is not going well, and he might not reach his goals, he would probably
choose to push the order of the newer vehicles into the next year, therefore avoiding
showing a huge expense in an already bad year.
The main problem arises from the current way companies compensate. According to
Mr. Jensen, “In a traditional pay-for-performance compensation plan, a manager earns
a hurdle bonus when performance reaches a certain level” and then it starts to increase
until the maximum cap is reached. The problem arises once the cap is hit. At
that point, managers has no reason to push for more, because even if they do, anything
more will not be reflected on their bonus salary!
By “taking a bath” in one year – which means report very low profits or lossesmanagers can expect better result the following. However, there is a common practice
among managers, that if they are going to “take a bath” it might as well be a big one,
since it could also indicate to the higher ups, that they might need to lower targets and
expectations. But this doesn’t always seem to work. The problem with the current
compensation plan is that when you are “rewarding managers for falsifying forecasts
and otherwise distorting critical information, you threaten the integrity of your entire
organization.”
Therefore, Mr. Jensen is suggesting to slightly change the current compensation model,
and instead of having a budget target and a cap, managers just have a linear line,
where the bonus just increases as the managers increase their outcome. While this
method will not be perfect, and a lot of CEO’s and CFO’s will have a hard time
implementing a change like this, it seems like the proposal is a step in the right
direction, to help improve the faulty and corrupt system that exists.
Relationship of Case to Work Experience:
I work for the family business back home in Cyprus. For a while, the CEO, had a hard
time motivating the sales reps to increase sales, while at the same time decreasing the
costs for the company. Being run by family members, somewhere less interested in
actually bringing new customers in, since they knew, that regardless of how much effort
they put into the company, as long as they reached the minimum target, they would still
earn yearly profits. Therefore, the CEO, chose a very similar model, where sales reps
would get a monthly wage, equivalent to a minimum wage and then, it was a
percentage on their sales. This is a model, similar to a commission system, where a
company like ours, could keep all family members on board, but push them and
motivate them to increase profits.
Relationship of Case to Material Covered in Class:
As we have discussed in class. Companies base decisions on costs and profits.
Therefore, the job of a CEO is to make sure that a company is not spending too much
while at the same time his teams are able to help the company make more money. This
case deals more with variable costs and how managers can manipulate these numbers
to show better results and to reach their targets. It also deals with profits, managers try
to book orders before the end of the year, even though the final product might not be
shipped until a lot later, so they can be able to show higher sales numbers in that
current year.
Conclusion:
It is hard to motivate your managers to push their departments and themselves more,
and it’s extremely hard to find a perfect system that will achieve these results. However,
following a model, that continually tries to get the best out of managers, could achieve
great profits for a company. It seems that whatever a CEO and his team try to do, will
be met with some sort of negative outcome. This doesn’t mean that they should not
try. According to Mr. Jensen “Organizations don’t change overnight”, and we must
always keep in mind that “it has taken many years to weave lying and deceit into the
fabric of our businesses; cleansing the fabric will take time as well.”
Case 7 : Aisha
Case Summary
An analysis of distribution channel profitability is one of the most important factors for a
business. It is vital for all participants in the supply chain to understand the revenue and
cost tradeoffs associated with the various channels through which they deliver product
and services. Distribution costs occur daily for most companies, and thus, evaluating
strategic issues within the distribution system becomes an important task. In order to
evaluate these issues, a company must first formulate potential responses to those
issues, and estimate the impact of improvements on the overall business. In this case
study, Kenneth H. Manning discusses three major approaches to gaining the necessary
data, which is activity-based costing, sales, general, and administrative costs, and
strategic cost management. Of these approaches, Manning posits that the strategic cost
management approach is the ideal approach for determining distribution channel
profitability.
The first and most popular approach we will discuss is activity-based costing, or ABC
concept. Many companies that produce a broad range of products and volumes have
adopted this approach because it provides a more accurate view of a company’s cost
structure than a standard cost approach. ABC concept allows its users to determine the
relative profitability of their distribution channels and customer
groups. The predominant advantage of the ABC approach as opposed to other
approaches is that it costs products more accurately. Overhead costs are allocated to
product lines in a more logically related fashion. This results in improved accuracy over
the typical standard cost approach. However, a significant drawback to the ABC
methodology is that it is not possible to detect if product costs are high due to certain
customer groups or to certain channels. Another disadvantage to this approach is that
the analysis is based on the assumption that all costs are product driven costs, and
therefore, must be traced or allocated to products. Due to these drawbacks, Manning
does not believe that this is the best approach to determining distribution channel
profitability.
The next approach we will discuss is the standard approach to channel profitability. This
is another approach that Manning does not find sufficient. This method is typically used
to develop knowledge of channel profitability by creating two cost pools. The first cost
pool consists of product costs and sales while the second pool consists of general and
administrative costs. This approach is better known as SG&A costs. The product costs
are transferred to the channels based on standard unit costs and the product mix sold
through the channel. The SG&A expenses are allocated to the channels based on
net revenue or sales volume by channel. In order for the approach to yield
profitability, channel or customer group must align the organization. Typically, this
approach comes with many disadvantages as it distorts costs in many situations by not
factoring in the adjustments related to product costs.
Lastly, we will discuss the strategic cost management approach (SCM). The SCM
method recognizes that costs are not driven solely by the products that are
produced, but also by the customers served and the channels through which the
product are offered. Removing the assumption that all costs are related to products
allows the development of a more accurate view of cost consumption. Unlike the ABC
approach, the SCM method gives us additional insight into the reasons for the product
line cost position by creating three different types of cost. The costs created by SCM are
product-related costs, channel-related costs, and customer-related costs. Manning
believes that the SCM is ideal for determining distribution channel profitability.
He discusses a four-step approach for developing accurate channel and customer
costs:
1.
2.
3.
4.
Separate the organizations costs structure into activity costs and non-activity costs.
Identify the cost behavior of all activity and non-activity costs
Trace these costs to the individual products, channels, and customers.
Translatethe product, channel, and customer cost elements into a total cost view for
the business.
Manning asserts that following this methodology will provide any necessary cost view of
the organization.
Overall, the traditional ABC approach is more consistent with the way corporate
planners think about business strategy. However, SCM and other alternative methods
are becoming more popular as companies develop future business plans because it is
important to understand the cost and profitability of serving different channels and
customer groups.
Relationship to Work Experience
Working in a wealth management firm and having prior experience working for a private
equity firm has shown me that many financial firms use ABC costing. While, this is
surprising as the SCM approach is more sound, this approach is popular in the financial
services industry because there is a common goal among the firms. The goal is
the sustained improvement of shareholder value through improved cash flow.
Financial institutions are moving towards the concept where the user pays for the cost
of the services they use, so that all users do not share the bill evenly. To do so they
must have an accurate reflection of the cost of services. These firms typically have high
administrative and fixed overhead costs. In order to implement ABC costing effectively,
they use it in conjunction with Activity-Based Management (“ABM”).
ABM predominantly focuses on the business processes and managing
activities to obtain the organizational objectives. It improves the costing by outlining the
various expenses to activities, and further outlining those activities to services, business
processes, products, customers, and distribution. ABC costing can be considered a
subset of ABM and is crucial for firms to implement both procedures to reach their
goals.
Relationship to Course
The managerial accounting course covers an in-depth analysis of ABC costing. If
we analyze chapter 4 in the textbook, we can see that it discusses ABC costing and
Cost Management. This section will showcase the key points that were discussed in the
chapter and reviewed in the course. We previously learned about Volume-Based Cost
Systems. Volume-Based Cost Systems, in comparison to the ABC method, assigns
indirect overhead costs to products or services using a single allocation base or cost
drive. The cost driver is directly related to the volume of units produced or customers
serviced. Furthermore, in order to assign indirect costs to the individual products or
services, volume-based costing requires that predetermined overhead rate be
calculated. The conclusion of the Volume-Based Cost System is that the cost driver
varies in direct relation to the volume.
Whereas, the goal of Activity-Based Costing is to identify the major activities that place
demands on a company’s resources, and then, assign indirect costs to the products and
services that create those demands. There are two stages in ABC costing. In the first
stage, indirect costs are assigned to activity cost pools. In the second stage, indirect
costs are allocating from the activity cost pools to individual products and
services. Managers can use the data collected from ABC costing to make decisions,
change the way the company operates, and ultimately improve performance by
reducing costs or increasing sales.
In order to implement ABC, sophisticated information systems are required. These
systems can become too costly for the companies, and thus, managers must evaluate
whether the benefits of such a system are worth the cost. We must be aware that ABC
costing is not appropriate for all businesses- particularly for businesses that produce a
single product or similar line of products. A simpler costing system, like the volumebased cost system, would be more suitable for those businesses.
Summary
In conclusion, it is vital for all businesses to implement a method of analyzing
distribution channel profitability. Whether it is using ABC costing, the SCM approach, or
a simpler costing system, such as the standard approach to channel profitability, it is
crucial for a company to ably determine which products and channels are more
profitable than others. The results obtained from the analysis can be shocking and can
have a significant impact on how the business operates. It may force companies to
rethink and reinvent their business strategies. Lastly, not only is it important to have a
distribution channel analysis system, but it is also important to have the correct system.
The system could be costly, but businesses should weigh the pros and cons of
implementing the most efficient method. Ultimately, the correct approach could save
the company.
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