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Strategy and Management Accounting Strategy specifies how an organization matches its own capabilities with the opportunities

s in the marketplace to accomplish its objectives Strategic Cost Management focuses specifically on the cost dimension within a firms overall strategy Management accounting helps answer important questions such as: Who are our most important customers, and how do we deliver value to them? What substitute products exist in the marketplace, and how do they differ from our own? What is our critical capability? Will we have enough cash to support our strategy or will we need to seek additional sources? Management Accounting and Value Creating value is an important part of planning and implementing strategy Value is the usefulness a customer gains from a companys product or service Value Chain is the sequence of business functions in which customer usefulness is added to products or services The Value-Chain consists of: R&D : Generating and experimenting with ideas related to new products, services and processes. Design : Detailed planning and engineering of products, services and processes. Production : Acquiring, coordinating and assembling resources to produce a product or deliver a service. M a r k e t i n g : Promoting and selling products or services to customers or prospective customers. D i s t r i b u t i o n : Delivering products or services to customers. Customer Service : Providing after- sale support to customers.

Managers in Different parts of the Value Chain

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Exercise 1-18 Hamburger fast food restaurant, incurs the following costs: A. Cost of oil for the deep fryer (L.E. 5000). B. Wages of the counter help who give customers the food they order (L.E. 8000). C. Cost of the costume for the king on the Burger King Television commercials (L.E. 2500). D. Cost of children's toys given away free with kids meals (L.E. 7500). E. Cost of posters indicang the special two cheeseburgers for $2 (L.E.5000). F. Cost of frozen onion rings and French fries (L.E.15000). G. Salaries of food specialists who create new sandwiches for the restaurant chain (L.E.10000). H. Cost of to-go bags requested by customers who could not finish their meals (L.E.2000). Required: Classify each of the cost items (A-H) as one of the business functions of the value chain. Classification of cost items Item A B C D E F G H Cost of oil for the deep fryer. Wages of the counter help who give customers the food. Cost of the costume for the king on the Burger King Television commercials. Cost of children's toys given away free with kids meals. Cost of posters indicating the special two cheeseburgers for $2. Cost of frozen onion rings and French fries. Salaries of food specialists who create new sandwiches for the restaurant chain. Cost of to-go bags requested by customers who could not finish their meals. : : : : : : Classification : Production Distribution Marketing Marketing Marketing Production Design of products Customer service

Exercise 1.16 Compaq Computers incurs the following costs: A. Electricity cost for the plant assembling the Presario computer line of products (L.E. 10000). B. Transportation costs for shipping the Presario line of products to retail chain (L.E. 5000). C. Payment to David Kelley Designer for design of the Armada Notebook (L.E. 20000). D. Salary of computer scienst working on the next generaon of minicomputers (L.E. 50000). E. Cost of Compaq employees visit to a major customer to demonstrate Compaqs ability to interconnect with other computers (L.E. 15000). F. Purchases of competors products for tesng against potenal Compaq products (L.E. 40000). G. Payment to television network for running Compaq adversements (L.E. 25000). H. Costs of Cables purchased from outside to be used with Compaq printers (L.E. 5000). Required: Classify each of the cost items (A-H) as one of the business functions of the value chain.

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Classification of cost items Item A B C D E


Electricity cost for the plant assembling the Presario computer line of products

Classification : Production

Transportation costs for shipping the Presario line of products to retail chain : Distribution Payment to David Kelley Designer for design of the Armada Notebook : Design of products Salary of computer scientist working on the next generation of minicomputers : Research&Development Cost of Compaq employees visit to a major customer to demonstrate Compaqs Customer Service or : ability to interconnect with other computers Marketing F Purchases of competitors products for testing against potential Compaq products : Design of products G Payment to television network for running Compaq advertisements : Marketing H Costs of Cables purchased from outside to be used with Compaq printers Production A Supply Chain Implementation The term supply chain describes the flow of goods, services and information from the initial sources of materials and services to the delivery of products to consumers, regardless of whether those activities occur in the same organization or in other organizations. Therefore, enhancing supply chain may lead to implement strategy, cut costs, and create value.

Supply Chain for XYZ Company

Key Success Factors The dimensions of performance that customers expect, and that are key to the success of a company include: 1. Cost and efficiency 2. Quality 3. Time 4. Innovation

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Exercise 1-19 A survey on the ways organizations are changing their management accounting systems reported the following: a. Company 5 prepares a value chain income statement for each of its product line. b. Company 4 now presents in a single report all costs related to achieving high quality levels in its product. c. Company 3 now presents in its performance reports esmates of the manufacturing costs of its two most important competitors, in addition to its own manufacturing costs. d. Company 2 Contracts with its suppliers to frequently deliver small quantities of materials directly to the production floor. e. Company 1 now reports the percentage of mes it fail to meet delivery dates that it has promised to customers. Required: Link each of these changes to value- chain, supply- chain analysis or to the key success factors that are important to management. Company Company 5 Company 4 Company 3 Change Prepares a value chain income statement for each of its product line Presents in a single report all costs related to achieving high quality levels in its product. now presents in its performance reports estimates of the manufacturing costs of its two most important competitors, in addition to its own manufacturing costs Contracts with its suppliers to frequently deliver small quantities of materials the percentage of times it fail to meet delivery dates that it has promised to customers is reported Link to Value chain (KSF) Quality and Cost (KSF) Cost

Company 2 Company 1

Supply Chain (KSF) Time

Management Accounting Guidelines Cost Benefit approach is commonly used: benefits generally must exceed costs as a basic decision rule. Behavioral and Technical Considerations people are involved in decisions, not just dollars and cents. Different definitions of cost may be used for different applications.

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A Five-Step Decision Making Process 1. Identify the problem and uncertainties Subject of the exercise represents the problem 2. Obtain information Manager can get the information through

Phone calls

Observation

Interviews

Questionnaire (Survey)

3. Make predictions about the future Manager estimates, Managers predict, revenues or costs are budgeted (things related to the future) 4. Make decisions by choosing between alternatives Manager or owner decide to implement the decision 5. Implement the decision, evaluate performance, and learn. a. Implement: Start to produce. b. Evaluate performance: compare actual results with budget c. Learn: feadback after evaluating the performance Exercise 1-21 Bellvue Plastics makes molded plastic parts that it sells to original equipment manufacturers. Typical products include automotive door handlers, air conditioner outer cases, and filters used in dehumidifiers. The mangers at Bellvue have recently offered a line of rubber molded dog toys. They take the following actions with regard to this decision. a. Bellvue gives out several promotional dog toys at local pet stores and request customers responses by means of survey. b. Bellvue sales mangers estimate they will sell more automotive door handles if the interest rate remaining low. c. Bellvue mangers discuss the possibility of introducing a new product. d. Bellvue mangers compare actual costs of marking dog toys with their budgeted costs. e. Costs for making dog toys are budgeted. f. Bellvue decides to make dog toys. g. The purchasing manager calls a supplier to check the price of rubber.
Required: Classify each action (a-g below) as a step in the five- step decision making process.

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Action A B C D E F G

Classification

Bellvue gives out several promotional dog toys at local pet stores : Obtain information and request customers responses by means of survey. Bellvue sales mangers estimate they will sell more automotive door Make predictions about the : handles if the interest rate remaining low. future Bellvue mangers discuss the possibility of introducing a new Identify the problem and : product. uncertainties Bellvue mangers compare actual costs of marking dog toys with Implement the decision, evaluate : their budgeted costs. performance, and learn Costs for making dog toys are budgeted. Bellvue decides to make dog toys. : : Make predictions about the future Make decisions by choosing among alternatives

The purchasing manager calls a supplier to check the price of : Obtain information rubber. Planning and Control Systems Planning selects goals, predicts results, decides how to attain goals, and communicates this to the organization Budget the most important planning tool Control takes actions that implement the planning decision, decides how to evaluate performance, and provides feedback to the organization

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