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Case & Problem Materials in Management Accounting - Second edition by Tony Brabazon and Tony O'Dea 138 pages; quality trade paperback (softcover); catalogue #04-0259; ISBN 1-4120-2431-5; US$21.99, C$28.99, EUR17.99, £11.99 This book is suitable for intermediate and advanced management accounting courses at either undergraduate or postgraduate levels.
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About the Book
This book aims to enhance the ability of students to apply and critically evaluate modern management accounting concepts, by positioning them as the decision-maker in a diverse series of case scenarios. The second edition of this book has been expanded to include a total of 53 cases split into four sections. The first three sections are relatively short 'concise' cases and problems, and the last section is comprised of 'integrative' cases which cover a wide range of management accounting concepts. The text covers traditional topics from cost accounting, decision-making and performance measurement, as well as newer developments in managerial accounting including activity-based management, just-in-time, cost-of-quality analysis, target-costing, product design evaluation, service-system design evaluation and compensation-system design.
This book is suitable for intermediate and advanced management accounting courses at either undergraduate or postgraduate levels. All of the cases and problems in this book have been extensively field-tested by the authors, in particular on MBA courses they have team-taught.
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About the Author
Tony Brabazon currently lectures Management Accounting and Management Control Systems on a number of postgraduate programmes. Research interests include mathematical decision models, evolutionary computation, the application of computational intelligence to the business domain, the utility of complexity metaphors in business, and compensation system design. He has published widely in these fields.
Tony O'Dea lectures principally in the areas of Management Accounting and Management Control Systems. Tony O'Dea's research interests include the behavioural impact of management accounting systems, emerging cost management practices, and corporate performance management systems. His publications cover the application of management accounting in multinational companies, and studies of user and preparer perceptions of the utility of management accounting.
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Excerpts
PREFACE
The inspiration for this book is to offer an alternative to existing case and problem materials for management accounting students. In our experience, these either take a narrow 'technical' computational approach, or alternatively at the other extreme are too detailed, making it difficult for students to relate the information in the case to fundamental management accounting concepts. We feel there is a need for a series of case study and problem material which allows students to extend their understanding of fundamental management accounting concepts, without enmeshing these concepts in unnecessary detail thereby hindering the learning process. This book is suitable for intermediate and advanced management accounting courses at either undergraduate or postgraduate levels. It is also suitable for those preparing for professional accounting exams. All of the cases and problems in this book have been extensively field-tested by the authors, in particular on MBA courses we have teamtaught.
We acknowledge our debt to our past students who helped mould the cases into their current form.
The second edition of this book has been expanded to include a total of 53 cases split into four sections. The first three sections are relatively short 'concise' cases and problems suitable for in-class use, and comprise of a mix of quantitative and qualitative elements. The last section is comprised of 'integrative' cases which cover a wide range of management accounting concepts. The four sections of the text are organised as follows. Section A covers cost accounting, both traditional and activitybased approaches. Particular emphasis is placed on the decision-usefulness of costing information. Just-in-time and cost-of-quality reports also feature in this section. Section B covers the role of management accounting in assisting the decision-making process. Specific topics covered are cost-behaviour, break-even analysis, the
combination of activity-based-costing and break-even analysis, relevant costing, and production-planning under conditions of scarce resources. Several cases are included which illustrate target-costing, and product / service system design evaluation. Section C addresses the role of management accounting in performance measurement. Topics include the preparation of budgets under conditions of uncertainty, activity-based budgeting, standard costing, learning effects in budgeting, the evaluation of decentralised organisations using ROI, RI and EVA, transfer-pricing and ethical issues in performance evaluation. Several cases are included on compensation-system design. The final five cases in Section D integrate concepts from across the spectrum of management accounting and represent a comprehensive test of students' understanding of management accounting principles.
Sparkly Inc. operates a chain of retail jewellery stores. Over the past twenty years since Sparkly was founded, it has grown from a single store in Fort Worth, to a chain of 140 stores across the state of Texas. The company has been consistently profitable, and profits have increased in line with revenue growth. About ten years ago the company obtained a public listing on the Pacific Stock Exchange in San Francisco, and has seen a substantial increase in the value of its share price since its initial listing.
The chain has an established reputation for low-cost jewellery, and is firmly targeted at the budget-conscious purchaser. The trading philosophy of the chain's CEO (Dan Ranchero) is to 'go for volume, with lo-lo prices'. To ensure that prices can be kept as low as possible, Sparkly Inc. locates in low-rent locations, and tries to keep staff costs to a minimum. Each shop has a full-time manager, and a small number of core, full-time staff. During busy periods (holidays and Christmas), staff numbers are supplemented by hiring temporary staff as required. Limited training is provided to staff, as the selling point of the chain is low prices rather than high-quality service.
Dan Ranchero is a strong believer in the motivational power of incentive payments. A relatively small basic salary is paid to managers and full-time staff, and this salary is the same across all stores. The bulk of compensation paid to employees (both managers and staff) is in the form of sales commission. Managers get an annual bonus (paid three months after the end of the financial year, once the books have been audited) of 1% of the gross sales (defined as sales before the cost of any sales commissions are deducted) of their shop. Sales staff in each shop receive 1% commission on the gross sales that they personally generate. A sophisticated paperbased system keeps track of the sales of each member of the sales staff to facilitate the calculation of bonuses. Managers also get 1% sales commission on any sales they make themselves. These commissions are paid one month in arrears to allow time for processing of the sales dockets each month.
In past years, shop managers received share options in Sparkly Inc., but this scheme was abandoned by Dan Ranchero when he became CEO four years ago. Dan decided to drop the scheme, as he believed that managers' compensation should be based on their individual performance, not on group performance. In Dan's pithy rhetoric, staff 'should only eat what they kill'. Although there was some resentment amongst shop managers when the share option scheme was abandoned, this lessened with the general downturn in the stock-market (and share prices) in 2004 and 2005.
Dan has become concerned about the operation of the compensation system over the past year. The rate of sales growth at the chain has reduced substantially. At first Dan thought that this was because of a slight dip in the economy, but despite an economic upturn in recent months, sales have remained static. The personnel office has noted that the rate of manager and staff turnover at some of the newer, and at some of the smaller stores, has increased. Dan has also noticed that experienced managers have been refusing transfers from established stores to new stores. This is of particular concern because the strategic plan of Sparkly Inc. anticipates a major drive to open a large number of 'out-of-state' stores in the coming years, in order to maintain the
growth of the chain. It was intended that experienced managers would be transferred within the chain to manage many of these stores during their initial 'start-up' period. Dan thinks that the current design of the compensation system, particularly the annual bonus, could be partly responsible for the personnel problems.
Although many alternative compensation systems could be implemented, Dan does not want to introduce a new system which would inflate the wage bill. After a topmanagement meeting to discuss alternative compensation systems for shop managers Sinead Crachtit, the CFO of Sparkly Inc., has agreed to 'run the numbers' on a number of alternative schemes. Sinead had argued at the meeting that an annual bonus scheme based on ROI (return on investment) would be preferable to the current annual bonus scheme based on sales revenue, as ROI automatically adjusts for the size of the shop. Larger shops naturally generate more sales revenue but require more investment to support their operations. Everyone agreed at the meeting that whatever new bonus scheme was introduced, the 1% sales commission to both managers and staff would not be altered.
The CFO's Scheme
Having examined the financial statements for the company for last year, Sinead calculated that the average ROI for the entire chain was 12%. Sinead thinks that the current annual bonus system should be scrapped, and be replaced with a system which only pays an annual bonus to shop managers who exceed the average ROI for the chain in a given financial year. For example, if the average ROI for the chain during a financial year was 12%, only managers whose shop generated an ROI of more than 12% in that year would receive any annual bonus.
Sinead thinks that the compensation system should not be too complex, and that the 'profit' and 'net asset' figures used to calculate the ROI for each shop should be the same as those used in producing the monthly management accounts. In these accounts, shop profit is defined as gross profit per shop, less direct costs of the outlet such as shop manager and staff wages (including sales commissions), shop rent, and a share of head office costs split equally between the shops. The net assets of each shop are defined as the Net Book Value of fixed assets used by the shop, plus the net current assets of each shop. All cash is maintained in a bank account controlled by head-office, and is not included in calculating the net assets of individual shops.
Having thought about how the annual bonus should be calculated, the next question was how much bonus should be paid to each manager. Clearly it did not seem appropriate to pay the same bonus to a manager who produced an ROI of 20% and to a manager who generated a return of 40%. After some thought, Sinead decided to propose payment of an annual bonus of 50% of basic salary to managers who exceeded average ROI for the chain, with the bonus rising to 100% of basic salary for managers who exceeded average ROI of the chain by more than 10%.
Before suggesting the new compensation scheme at the next management meeting, Sinead decided to calculate the annual bonus which would be paid under the existing compensation scheme, and compare this with the bonus under her proposed scheme. To do this, Sinead took the results of one of the shops from last year's (year end) management accounts. Selecting a shop at random, Sinead picked an outlet which had been in operation for 12 years, and which was trading successfully.
Catalogue Information
