Managerial Accounting in Sport Inc Company - Case Study Example

Table of Contents Managerial Accounting 2 Activity based accounting 3 Job Costing system 7 Behavioural Expectations for Sports Inc. 8 Analysis of Cooling Ltd 9 Market share variances 10 Sales mix Variances: 11 Selling price variances 12 Revenue Variances 12 Report on Cooling Ltd's performance in 2006 13 References 15 Rostocki, Narcyz.Introduction to Activity Based Costing (ABC) Internet ABC Online Presentation: http://www.pitt.edu/~roztocki/abc/abctutor/ 18 Managerial Accounting Managerial accounting is a way in which to keep financial records in any company with the idea to make assessments as to where improvements can be made in the performance of that company using cost based analysis. This is achieved by allocating costs, especially indirect costs, specifically to all the parts of the service or product. The specificity of the allocation of costs allows one to assess the true costs in the company and then to determine how to make adjustments in those fields for future improvement. These costs consist of overhead with an emphasis on an the formerly neglected role of indirect overhead, the cost of production, the variable costs of labour and fixed costs. Traditional financial accounting, does not specify where the costs are and what are all of the hidden costs of production. Managerial accounting, on the other hand, using the methods of activity based costing allows one to track costs of overhead to specific areas, so a true assessment of cost can be achieved. Managerial accounting is used by companies to assess their past performance. In this way managerial accounting provides an essential tool to the efficient functioning of any company. Sport Inc. may be a small company, but it is growing. It has many costs that offer many points of study to further improve performance. Sports Inc.holds up to 300 events per year at up to 140 venues. Each event receives up to 8000 people, with the largest ranging up to 16,000 people. There are many services offered such a ticket sales, marketing, parking, transportation and security. All these services involve staffing requirements, with wages to be paid. All these services have specific overheads allocated to them when managerial accounting principles are applied to evaluate the overall cost. In this way one can trace what the particular costs are of each service, and how this relates to the income that is produced by these services and in this way one can better asses areas of strength and weakness. This insures that accurate adjustments can be made in those areas where there is less profit due to increased costs. With good records of what are the problems, ways can be found to improve these areas. Traditional accounting methods where financial accounting method do not allocate indirect overhead costs to specific areas do not offer an accurate assessment of where the costs lie, and therefore is not possible to make accurate improvements, which is the underlying principle of managerial accounting. Activity based accounting Activity based accounting would provide an enormous boon to sports Inc. This method of accounting would allocate specific overhead costs to all the different services sports Inc. provides. Lewis summarizes the role of activity based costing well, “The purpose of activity-based costing (ABC) systems is to focus on the causes behind indirect costs. It is primarily a system of allocation. Activities rather than traditional departments are emphasized in order to isolate the cost drivers, which are the factors most likely to cause or contribute to the occurrence of costs. ABC systems are designed to be complementary with the technological changes in the factories due to enhanced global competition”. (Lewis, 1993, p. 12) Bamber and Hughes further elaborate this description to underline the managerial function of ABC: “ABC provides more accurate cost information that managers can use in making important business decisions. Activity-based management (ABM) refers to using ABC information to make decisions that increase profits while satisfying customer needs. Managers use ABC information in making pricing and product or customer mix decisions, in identifying opportunities to cut costs, and in routine planning and control.” (Bamber & Hughes Ii, 2001, p. 381) Sports Inc. is a heavily service based company therefore the focus should be on these services. With each service, it is important to allocate an overhead cost. For ticket sales, the overhead costs could involve labour of the employees selling tickets, the material with which the printing is done, the cost of the design of the tickets, the rental of the venue where the tickets will be sold. All these separate overhead costs would be quantified, and allocated to ticket sales. For marketing, there will be different costs allocated to different types of marketing done on behalf of the Company such as advertising by print media, by Internet media, by radio media or by TV. Using different media entails that they will have different costs associated with them and different benefits which would have to be factored into the cost. For example, TV advertising in prime time hours would reach a large audience, but the associated costs would be much higher than say, radio advertising. The relative cost benefit analysis of these different types of marketing ploys would have to be reviewed There would be the cost of the people hired to design the various marketing procedures. More experienced and savvy marketers would involve higher costs, but the marketing programs would be commensurately improved. The cost benefit of the relative skills of the marketers would have to be assessed in this way. As Hughes adds the role of ABC in marketing is of an especially high priority, “ABC customer cost data can help BNB's managers develop more effective marketing strategies by more appropriately pricing their services and assessing the profitability of different mixes of customers and/or services. (Bamber & Hughes Ii, 2001, p. 381) The security and parking and transportation for Sports Inc. were outsourced to separate companies. Allocating overhead costs to these different services would offer a quantitative variable of their cost which would involve wages, rental space, the number of people employed. Allocating overhead allocation costs here would allow comparisons so as to compare them to other bids from companies in a competitive market. All of this would be done so one could get the idea of the numbers of people required, with neither over staffing or under staffing: arriving at the ideal number to cover each venue would minimize cost and maximize effectiveness. A number of steps would have to be employed to institute an activity based costing method to sports Inc. There are five steps involved in establishing an activity-based costing system into a business according to Narcyz Rostocki. The first step is to find out what are the activities to which you or you will be applying your costing system. In the case of sports Inc. it will entail determining the labour and the services of the various divisions that are going to make the sport's sporting events that are put on. Step two will be calculating the cost associated with the various aspects of putting on the many events that sports Inc. is involved with over the course of a year. This will involve tracing the costs associated with the labour for the services involved and the cost associated with marketing events. Questions such as the cost benefit ratio of the excellence of marketing teams versus the degree of difference that this will make in revenue using higher quality and more expensive personnel. Step three is determining the cost drivers of each of the elements. This was alluded to briefly in the previous example in terms of the relative cost benefits of one product versus another or one type of service versus another and what are the advantages and disadvantages of using better our lesser quality. Also there is the question of determining how many tickets will potentially be sold, the cost of printing out those tickets, how many man-hours should be allocated in terms of security and parking services; these are all important questions in cost driver analysis. The fourth step involves collecting accurate data on all the elements previously mentioned so that accurate assessments can be made on the cost effectiveness so that improvements can be made at a later date based on these relative costs. Therefore having a detailed analysis of the costs is the fifth and final step in implementing an activity-based costing system to an organization such as sports Inc. Job Costing system Presently sports Inc. uses a job costing system. This type of system is useful for predominately service based businesses. As Lewis outlines, “ Job-order costing systems are used by companies whose products or batches of products are treated as individual jobs. Aircraft manufacturers and parts suppliers for large manufacturing companies, such as tool and die shops, are examples of the users of this system.” (Lewis, 1993, p. 11) A job costing system is especially useful when the various jobs within the organization vary significantly so that cost can be clearly allocated to them. With sports Inc. being a service company there is a wide gulf that separates a specialized marketing position from that of security personnel but all in all it is generally retail sales based and the distinctions between most jobs are not as clear as they could be. In job order costing attempts are made to break up the overall work of the system into distinct categories and occupations. Allocating job costs in this company is probably made on the basis of assessmenent of labour hours. This system certainly makes sense for the retail positions such as food vendors and security personnel or ticketing personnel; however, distinctions need to be made for the skill positions such as the high-level marketing and administration of the whole system. A job costing system for sports Inc. using activity-based costing would work very well for sports Inc. Behavioural Expectations for Sports Inc. Sports Inc. will rely a great deal on marketing to create a demand for the events that it puts on. Understanding the factors that effect the public's behavioural changes will need to be factored into any accounting system which attempts to create a budget for future events. Understanding the relative disposable income of the audience to which a particular event that is put on will play a role in making projections especially in downturns in the economy . Maslow's Hierarchy of needs theory suggests that the basic survival needs have to comfortably attained for populations to then turn their attention to other interests of, say entertainment. The needs are as follows, 1. The physiological needs: food, shelter, warmth, and other bodily wants.2. The safety needs: security and protection.3. The need for love and belongingness: desire to both give and receive love and friendship.4. The need for esteem: self-respect and the respect of others.5. The self-actualization need: "What a man can be, he must be." (Riahi-Belkaoui, 1992, p. 106) Value/Expectancy theory expands on Maslow's ideas and attempts to quantify the behavioural turns of the public: “ the basic tenet of the value/expectancy theory is that an individual chooses personal behavior on the basis of: (1) expectations that such behavior will result in a specific outcome, and (2) the sum of the valences--that is, personal utilities or rewards, derived from the outcome.” (Riahi-Belkaoui, 1992, p. 107) This is one such approach that a company has to consider as one of the cost-drivers for many events, drivers that have as much to do with the economic climate at the time of the event as well as the the demographic to which it caters to. Analysis of Cooling Ltd Budget for June 2006 Actual for 2006 Selling price per unit $ Unit Volume Sales Mix % Revenue $ 000 Selling Price per unit $ Unit Volume Sales Mix Revene $ 000 Standard 1000 15,000 75 15,000 850 14,700 61.25 12,495 Heavy Duty 2,500 3,500 17.5 8,750 2,100 7000 29.17 14,700 Superior 3,100 1,500 7.5 4,650 2,900 2,300 9.58 4,370 Total 20,000 100 28,400 24000 100 31,565 The Budget was prepared based on a market share of 33% and total sales in the market of 60,000 units. The company expected to sell 20,000 units of the total market of 60,000 units. Actual number of units sold in June were 70,000. Market size = 70,000. Of this share, this company sold 24000. Therefore the company had 24000/ 70,000 = 34.3 % actual market share. Actual results – Budget = Variance 34. % - 33 % = 1.3 % . Therefore there is a positive variance of market share of 1.3. Market share variances The Market share variances have to be calculated relative to their own markets . Also, each of the cooling packs are different products, that is the standard, the heavy duty and the superior so that variable costs are not offered in this example since it offers multiples of different products that cannot be compared in a scalar dimension. Market shares of each cooling pack = sales mix proportion x market share % Budgeted Standard pack market share = 0.75 x 33 = 24.75 % Actual Standard pack market share =0.6125 x 34.3 = 21 % Variance = Actual – budget = -3.75 %. Therefore there is a loss of market share for the standard pack by 3.75 % Budgeted Heavy Duty pack market share = .175 x 33 = 5.775 % Actual Heavy duty pack market share = .2917 x 34.3 = 10.00 % Variance = 4.225 % . Therefore variance is positive 4.225 % for the heavy duty pack. Budgeted superior pack market share = .075 x 33 = 2.475 Actual superior pack market share = ..0958 x 34.3 = 3.29 variance = .815 % . Therefore the market share is positive 0.815 % for the superior pack. Sales mix Variances: Sales mix variance for standard pack = actual – budgeted. = 61.25 % - 75 % '' '' = - 13.75 %. Therefore there is a negative 13.75 % sales mix variance for the standard pack Sales mix variance for heavy duty pack = 29.17 – 17.5 = 11.67. Therefore the sales mix variance for the heavy duty pack is 11.67 % increase. Sales mix variance for superior pack = 9.58 – 7.5 = 2.08 . Therefore there was a 2.08 % increase in the superior pack. Selling price variances Standard selling price variance = $ 850 - $ 1000 = $ 150 ( decrease) Heavy duty selling price variance =$ 2100 – 2500 = $ 400 ( decrease) Superior selling price variance = 2900 – 3100 = $ 200 ( decrease) Revenue Variances Standard revenue variance = 12495 – 15000 = $ 2505 ( decrease) Heavy duty revenue variance = 14700 – 8750 = $ 5950 ( increase) Superior revenue variance = 4370 – 4650 = $280 ( decrease) Report on Cooling Ltd's performance in 2006 Cooling. Ltd. makes cooling packs for trucks. It's three types of cooling packs are the standard, the heavy-duty and the superior. Cool Ltd. made a budget for June of 2006. Not factored into this budget was the fact that one of its main competitors Fan Pack went bankrupt in May of 2006. Fan Pack was bought by Cool Solutions a rival business which drastically lowered their prices in order to increase their market penetration. In response to this cooling Ltd. also lowered its prices even though it had a quality advantage in its heavy duty and superior cooling packs Prior to the pricing war with cool solutions cooling Ltd. have had a 33% market share. The actual budget for June 2006 showed an increased market share of 34.3% with an increase of 1.3%. This became becomes more significant considering that the market size increased from 60,000 units to 70,000 units so that market share increase is on a larger base than the previous market share. A number of new facts are revealed through an analysis of the various variances. There was a 3.75 % market share decrease for the standard cooling packs. The standard cooling pack also saw a loss in other variances relative to the projected budget: There was a decrease of 13.75 % in the sales mix variance; there was $ 150 decrease in selling price variance; there was a $ 2505 decrease in revenue variance. The standard pack did not fare very well. This was implicit in original product description of the excellence of the heavy duty and superior packs and it appears that the standard pack suffered in comparison. The heavy duty pack saw a positive 4.225 % increase in market share variance, a 11.67 % increase in sales mix variance,a decrease in selling price variance of $ 400 and a $ 5950 increase in revenue. The heavy pack was the most successful of the packs. The superior pack did not fare as well. It saw a 0.815 % increase in market share variance, a 2.08 % increase in sales mix variance, a $ 200 decrease in selling price variance and $ 280 decrease in revenue variance. All of the packs saw a decrease in their prices as was to be expected in the pricing war with Cooling solutions. Out of this battle for market penetration the clear winner was the heavy duty pack which increased its revenues by increased demand and greater market penetration. In future budgets a greater volume of heavy duty packs should be sold to consolidate this advantage and use this to leverage the other packs at first to see if the brand can spread from the quality of the heavy pack. References Bamber, L. S., & Hughes Ii, K. E. (2001). Activity-Based Costing in the Service Sector: The Buckeye National Bank. Issues in Accounting Education, 16(3), 381. Retrieved August 26, 2006, from Questia database: http://www.questia.com/PM.qst?a=o&d=5000867981 Bhimani, A. (Ed.). (2003). 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Retrieved August 26, 2006, from Questia database: http://www.questia.com/PM.qst?a=o&d=5000868008 Rostocki, Narcyz.Introduction to Activity Based Costing (ABC) Internet ABC Online Presentation: http://www.pitt.edu/~roztocki/abc/abctutor/ Shakespeare, T., & Gallop-Goodman, G. (2000, February). Making Sense of Money Matters. Black Enterprise, 30, 190. Retrieved August 26, 2006, from Questia database: http://www.questia.com/PM.qst?a=o&d=5001137338 Read More