Managerial Control Systems - Assignment Example

Identify and explain in your own words the three phases of the case study and their associated objectives (6 marks, up to page). The first phase of the case study involves describing the present management accounting system, and the manner by which the firm’s effects on the environment are treated and reported. It is common for traditional accounting systems to group operating costs indiscriminately together as overhead, without classifying the cost according to its nature or purpose, e.g. so as to determine environmental impact or organizational unit accountability in the case of EMA. The second phase is the identification of opportunities for revenues and costs that the existing system fails to report, and the specification of what changes must be adopted in the system in order to better highlight the opportunities, to make the business more profitable yet more environmentally sustainable. It requires establishing control by assigning responsibility centres and sub-centres, the drivers relevant in their cost assignment, and the setting up of records to duly report activities and allocation of corresponding costs. It also involves proper communication and consistency in applying these measures. The final phase is the trial and documentation of changes to discover how the changes will affect the results from those achieved under the current system. This trial and assessment seeks to determine whether the changes introduced leads to improved management decision-making. Included in the assessment is an evaluation of management tools introduced, how they enhance the relevance of the information delivered to managers, and the potential and opportunities created in enhancing the type, quality and accuracy of managers’ decisions that impact on the environment and the firm’s future profits. 2. Identify and explain the Blackbaud school accounting and reporting system that is in operation at MLC, in particular the reporting and capital expenditure functions (4 marks, ? page) The Blackbaud school accounting and reporting system is primarily a school management software catering to staff in all school office (Blackbaud website, 2012), and is limited in its outputs as far as management accounting is concerned. In its reporting capability, it generates the standard summary accounting information (chart of accounts, trial balance, the general ledger, and the income statement and balance sheet). There is no categorization or distinction among costs, all being reported together as overhead. These outputs are used to manually generate the pertinent spreadsheet leading to the more detailed income and expenditure statement and cash flow forecast, which have greater detail to support management decisions. Capital expenditures are distinguished as to capital works and capital replacements. Acquisition price form the sole criterion for deciding among projects, without taking into account the forecasted revenues/ benefits accruing therefrom. There is no system for monitoring costs after acquisition of either capital works or replacement; in the case of the latter, replacements depend upon user requests and not upon any systematic capital budgeting method. 3. Identify the environmental impacts associated with MLC’s operations and explain how the costs associated with the environmental impacts are treated and flow through MLC’s accounting system (6 marks, 1 page) According to the case study, there are four environmental impacts of MLC’s operations. These are energy usage, paper usage, water usage and waste management. Each of the costs associated with these impacts are coded directly into the firm’s expenses accounts. Expenses that go into energy, paper and water usage are assigned to the broad category of “administration and general” overhead expenses, while costs incurred for waste management are recorded under “caretaking and cleaning” overhead expenses. The costs are loosely allocated between “tuition” and “boarding”; the criterion for doing so is not specifically provided for, and is generally left to the arbitrary decision of the analyst. Energy usage is classified under Light and power; paper usage is included, among other costs of reproduction presumably, under Photocopying expenses; and water usage en toto is summed up under Rates – Council/Water. All three of these expenses are categorized under Administration and General Overheads, although it is clear that they are partially due to the principal activity of the school (i.e., “tuition”), while the remainder is attributable to an activity in support of the school’s principal activity (i.e., “boarding”). As for waste management, the entirety is included in the account “waste” which is reported under the heading “Caretaking and Cleaning”. It is reported as an overhead without distinction as to the unit or activity that incurred the waste management expense. It is evident that in any case – whether administrative and general overhead, or caretaking and cleaning overhead – there is no segregation or allocation of expenses on the basis of its generation, or the unit leader responsible for it, or the product or activity for which it is incurred. Thus despite derivation of the percentage of MLC’s total expenditure, the information this gives is devoid of relevance to decising which of the costs may be reduced, or which activities or products may be foregone. 4. Explain the limitations of the existing accounting system with regard to cost savings and how costs can be reclassified to improve decision making (4 marks, ? page) Managers are required to make decisions among different products, processes or activities, as to which ones are to proceed and which to be terminated, depending on cost savings that may be realized. The purpose is to more efficiently allocate the available resources in the firm, in order to achieve the optimum level of profit. In the case study, the existing accounting system does not distinguish costs as to their incidence or the particular activity, product or resource centre that had generated such cost. Instead, they are mingled in a single account, making it impossible to match or compare among the different cost drivers in order for the manager to arrive at a well-informed decision. Deciding on the basis of revenues alone will be insufficient basis if the goal of the decision-maker is to maximize profit; it is necessary to determine the appropriate cost involved in the activity, in order to determine profit. 5. How can Activity Based costing be beneficial to MLC? (4 marks, ? page) Activity Based costing (ABC) aims at the absorption of overheads in firms producing various products. Several activities go into the production of a product, and each of these activities consumes a certain amount of resources (Pearce, Atkinson & Mourato, 2006, p. 41). The overhead cost is identified and assigned to a particular cost centre, which in turn resolves the costs and assigns them to each product, job or process in that cost centre, depending on the number of activities involved (Rajasekaran & Lalitha, 2011, p. 271). In the case of MLC, the capital expenditures are lumped together indiscriminately as overhead costs, rendering them unusable for costing analysis per product or activity. ABC dismantles overhead costs and assigns them per activity, therefore facilitating cost analysis per product or service, and enabling decision-making on their continued production. 6. Explain how costs associated with environmental impacts within MLC can be allocated and what are the limitations associated with the cost drivers identified in the study? (6 marks, 1 page) There are different bases per type of environmental impact, for the determination of the cost drivers. For light and power, this would be the total floor are occupied out of the total school area, as well as the efficiency and sustainability of the particular energy source used (if differentiated), to determine energy usage. For photocopying, the driver would be the number of photocopies made per department over total copies, to determine paper usage. For water usage, the driver is the Water Corporation’s prescribed domestic water usage percentages. Finally, for waste, the issue considered is the direct allocation in those cases when waste services may be allocated by proportion of square meter floor space over total area. The cost drivers specified for each environmental impact are useful for the estimation of proportions allocated for each activity/product/centre. However, they are also subject to limitations. For instance, in energy usage, the cost driver assumes equal energy consumption throughout the school. However, there are in truth some areas with greater energy usage (e.g., audio-visual facilities with air conditioning, electronic video capabilities, and special lighting) and those with less (e.g., outdoor sports quadrangle). For paper usage, there are different uses for paper other than photocopying, as well as types of paper used, and other variables. Water usage is allocated according to a schedule presumed applicable for all schools, but the presumption is disputable. Finally, as with energy, different waste is actually generated in different rates and entails different expenses, although the cost driver specified presumes a uniform distribution according to floor space. These considerations make the allocation of environmental impact limited in its accuracy and precision, and must be adjusted where necessary, though not arbitrarily. 7. Identify and explain the benefits to the responsibility centres within AMP from maintaining records on both energy and water usage (6 marks, 1 page) The allocation of costs to responsibility centres, particularly on energy and water usage, may at first glance appear to be an exercise in assignment of blame for wastefulness rather than assignment of costs. However, there are benefits to the allocation of costs according to usage. It apprises unit managers of useful information dealing with the efficiency of their operations, alerting them to aspects of their processes which may be streamlined so as to reduce energy and water use. Aside from cost savings, other benefits accrue to the unit because of the distribution of costs among resource centres. The case study enumerates how reducing consumption in energy also reduces the wear and tear on equipment and cuts down on maintenance service costs; sparing use of printing equipment (that is, to only the jobs that are necessary) reduces wastage of consumables such as toners and printer ink; and more judicious use of electronic and electrical equipment extends service life because of more frequent cooling periods and less overheating. Likewise, identifying costs of water usage to the responsibility centres and sub-centres enables the manager to study those practices that appear most wasteful, and devise methods to reduce water usage. More efficiently designed bathroom and lavatory fixtures, such as automatic shut-off faucets and the use of dual flush toilets, may be resorted to if observations prove this a source of inefficient water use. In those functions where water is more frequently used (e.g. chemical laboratories, gymnasium showers), special attention may be given to training students as to their proper, less wasteful use. Where bore water is used, particular emphasis should be given the likely effect of such use on the environment, possibly due to the release of harmful minerals and gases from underground sources. It is evident that such information enables managers to “maintain or alter patterns of organizational activities” to the benefit of the organization (Simon, 2000, p. 5). 8. How could MLC develop additional records for identifying, allocating and managing the costs associated with waste and how should the associated financial benefits be accounted for? (7 marks, 1 page) A number of suggestions are forwarded by the case study for the development of additional records in the case of waste management, to aid in the allocation and management of costs. First is the recording of labor time per activity, in the nature of a time-motion study or a simple recording of completion times. This is to determine how much time workers spend on waste management activities; the allocation of labor cost to waste management may be held proportional to the time spent on these activities to total labor time. Purchases made for waste management purposes, such as containers and handling equipment, and the training cost needed for handlers to properly use such equipment, must be allocated to waste management. Furthermore, the additional costs associated with waste management that are not included in the initial cost should likewise be allocated to the appropriate unit. Associated costs may be allocated on the basis of these drivers; however, associated benefits should likewise be distributed, depending upon the relative performance of the unit in comparison with other units. Any cost savings that may be particularly attributed to specific responsibility centres (it is understood that there are those which will be difficult, if not impossible, to allocate reasonably). The advantage of allocating cost savings benefits to the responsibility centres is that the savings or benefits allocations act as an initiative to support the waste management program more enthusiastically. 9. Explain how a life cycle costing system (LCC) could be implemented within MLC and what would the environmental impact issues that would need to be considered and costed within the LCC exercise? (7 marks, 1 page) Before an appropriate life cycle may be identified, it is important that the purpose of the analysis be specified. The reason for which the analysis is undertaken determines the proper life cycle to be considered, and from thence, the identification of the appropriate cost base (Emblemsvag, 2003, p. 22). The life cycle follows the product, not just within the company but even until its use and consumption. There are four acknowledged product life cycles, for instance, which include marketing, production, customer, and society (Smith, 2007, p. 380). In its commonly acknowledged sense, Life Cycle Costing (LCC) is taken to yield the Life cycle replacement costs that forms part of the WLC or Whole Life Cycle cost (Boussabaine & Kirkham, 2004, p. 8). Whole Life Cycle costing assessment takes into account the attributes of the contructed facility, its reusability, sustainability, maintainability and obsolescence, including the capital, maintenance, operational, finance, residual and disposal costs, both economic and non-economic (Boussabaine & Kirkham, 2004, p. 9). On the other hand, Activity-based Life Cycle Costing (LCC), on the other hand, is a process-oriented method (Emblemsvag, 2003, p. 23), the life cycle of which is easier to identify. Adopting an activity-based LCC, the environmental impact issues that need to be considered and costed are those that affect specific activities, and therefore the life cycle is more clearly demarcated. Despite this certainty, there are many issues decided subjectively in LCC, such as the estimated direct and indirect costs in the future, the estimated frequency of maintenance and severity of repair needs, the future developments in technology and the likelihood of obsolescence, as well as other costs the natures of which are speculative at best. References Blackbaud 2012 K12 School Management Solutions. Accessed 1 June 2012 from https://www.blackbaud.com/independent-schools/ Boussabaine, A & Kirkham, R 2004 Whole Life-Cycle Costing: Risk and Risk Responses Emblemsvag, J 2003 Life-cycle Costing: Using Activity-Based Costing and Monte Carlo Methods to Manage Future Costs and Risks. John Wiley & Sons, Inc., Hoboken, NJ Pearce, D; Atkinson, G; & Mourato, S 2006 Cost Benefit Analysis and the Environment: Recent Developments. OECD (Organization for Economic Co-operaiton and Development) Rajasekaran, V & Lalitha R 2011 Cost Accounting. Dorling Kindersley (India) Pvt. Ltd, licensee of Pearson Education, New Delhi Simons, R 2000 Performance Measurement and Control Systems for Implementing Strategy: Text and Cases, Prentice Hall, USA Smith, J A 2007 Handbook of Management Accounting, 4th edition. CIMA Publishing, an imprint of Elsevier, Burlington, MA Read More