Analysis of Management Accounting of Shell Company - Case Study Example

Case Analysis inserts his/her Introduction The decision by Shell Company to assess the commitment of management is a radical step that aims to identify cost drivers; carryout the analysis of tasks and amount spent by each of its department, and assess the value addition properties of each segment. Such steps are essential in a case analysis process because it helps in scrutinizing the areas that cost the company unnecessary expenditures. Radical measures that are evidence-based could assist in justifying steps and recommendations that aims to bring change and help the institution make profits. A). Calculation of UOC (unit operating cost per barrel for SG) Operating costs @ 120,000 barrels per day Office of the president 5886720 Business management 15197000 Community relations 4204800 Human resource management 1191360 Production management 112828800 Exploration management 280320 Health, safety, and environment 1051200 Total 140640200 b). Whether barrel of oil is the cost driver for all the activities within RDS Although there are several departments in RDS, which justifies that the activities are diverse, the main cost driver is a barrel of oil. Each of these departments performs a specific task that relates to supporting the main goal of enhancing oil exploration and manufacturing activities. Oil is the main item for the company. Therefore, it is the main item considered as the cost driver for RDS. c). Explanation on why RDS chooses to monitor cost per barrel Monitoring of cost per barrel is a major indicator on the prospects of gaining profit or making loss. The parameter is a direct indicator on whether the company is taking right measures in their cost management. Given that cost per barrel depends on demand supply and other market shocks among other uncertainty this parameter gives a general outlook on the market behaviour and therefore essential for its efforts in managing costs. Besides, assessment of cost per barrel helps RDS examine their operating cost against other players in similar market segment. 2. Computing the cost of activities in the provide IT and Telecommunication services Table 1: showing activity costing Cost Pools Install, operate support hardware and software Provide SAP support Provide telecommunication services Other processes in business management 980 632 3388 3212 Cost Drivers 49 32 576 2960 Cost Driver Rate (980/49) = 20 (632/32) = 19.75 (3388/576) = 5.88 (3212/2960)= 1.09 Per hour to directly Install, operate support hardware software hours Per hour to Provide SAP support Per provide telecommunication services Cost Per other processes in business management Table 2: Showing contribution from every segment Contribution overhead (expenses): Install, operate support hardware and software @ 20 2016 4320 Provide SAP support @ £ 19.75 822 (16234.5) provide telecommunication services @ 5.88 3287 19315.8 Cost Per other processes in business management @ 1.09 9072 9888.48 31523.98 Items included in the calculations provide telecommunication services Cost Per other processes in business management Install, operate support hardware and software Justification for the selected items Provision of SAP support is an activity or the initiative of the parent company and, therefore, was not considered for calculations. Other parameters provide important accounting information for the analysis. 3. Performance measures that helps in evaluating whether the activities are being performed well There are several methods that assist in evaluating whether departments or products within a company are meeting the targets. Traditional costing method and the activity-based costing are the common approaches for products. However, is a department makes some sales or gets some income from their involvement in the business it is possible to determine their performance as well. These measures assess the market changes, uncertainties that may occur and their possible influence. However, comparison with other companies competing in the same market segment may give a better picture that could assist the company in evaluating whether selected activities are optimal. 4. Calculation of UOC per barrel for each process in the Business management department Calculation of UOC (unit operating cost per barrel for each process in the business management department UOC for install, operate support hardware and software UOC for provide SAP support UOC for provide telecommunication services UOC for other processes in business management b). Whether barrel of oil is the cost driver for all the activities within RDS These analyses depicts that the barrel cost of oil is not the cost driver for all the activities within RDS. The analysis shows that the unit cost of operating per barrel was 1169.67, which was about 200% more than the market value. Although there is inadequate information on the business diversification in RDS, there is likelihood that there could be other activities that contributes to the output of RDS. However, if RDS entirely depends on oil exploration then the company should consider their expenses from the entire departments within the company. 5. How to use the activity analysis and the activity cost data that were developed to improve operation and better manage cost Using this model in improving operation has many advantages. According to Caplan, (2006) activity analysis and information from the activity cost helps in monitoring and tracking of all the cost that the company incurs. Tracking of such costs is essential in the identification of trends and the possibility of deviating from the standards guiding the company financial operation. Besides, the model assist in the measurement of the latest activities in the market, it also helps in the establishment of cost of management and recommend appropriate measures to reduce over-expenditure. The model could also assist in the assessment of customer profitability. Most companies have challenges in the selection of overhead components that aids organisations in identifying the prospects of identifying profitable ventures and customers because they lack appropriate activity costing data. Such information is appropriate in helping companies turn to options that gives more output in terms of profit. In brief the model is useful when the company intend to make decisions related to these items Allocation of overhead costs Determination of production cost for the plant Determination of appropriate pricing for the product Decisions on merging, product development Reference Caplan, D. (2006). Management Accounting Concepts and Techniques. New York: University of Albany. Read More