TOPICS IN MANAGEMENT ACCOUNTING
AMIS 4310
Topics/Case Descriptions
Measuring Product Costs
Case: Seligram, Inc.: Electronic Testing Operations
Case Description: Explores the obsolescence of a cost system when technology changes. In
particular, it asks students to increase the number of cost centers and allocation bases. The firm
moves from a one-center, direct labor-hour system to a three-center, direct labor-hour and
machine-hour systems. In addition, the case demonstrates how cost systems can induce subtle
and not so subtle shifts in the strategy of the firm. In particular, we see how certain businesses
are made to look inappropriately attractive or unattractive.
Cost Behavior, Capacity Analysis and the Downward Demand Spiral
Case: Bridgeton Industries: Automotive Component & Fabrication Plant
Case Description: Bridgeton Industries was experiencing reduced sales. To become more
competitive it introduced a classification procedure for products based upon their productivity
and other factors. Products were classified into three groups: world class, potentially world class,
and non-world class. The firm outsources the non-world class products. This outsourcing causes
the costs on the remaining products to increase because some fixed costs associated with the
outsourced products did not go away. These residual costs caused more products to become nonworld class and hence candidates for outsourcing. The firm has entered the death spiral.
Activity-Based Costing
Case: Destin Brass Products Co.
Case Description: A specialized manufacturer of brass valves, pumps, and flow controllers is
troubled by competitive pricing in pumps and higher than expected margins for flow controllers.
Managers’ are increasingly questioning whether they know the true manufacturing costs of its
products, and suspect that cost accounting and cost allocations to products may be to blame. Two
volume-based systems are described and illustrated. The case requires students to develop
activity-based costs for comparison and then decide which system is most useful to company
managers.
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Pricing Decisions
Case: Dakota Office Products
Case Description: The senior management team of Dakota, an office products distributor, is
concerned about the company's first loss in history. Dakota's customers are increasingly
demanding more specialized services, such as desktop delivery. Also, whereas some customers
have switched to electronic ordering, others continue to place their orders manually. Pricing is
based on a fixed markup of the cost of the purchased item. The managers feel that the fixed
markup may not be compensating them for the higher costs of manual order processing and
desktop delivery. The financial manager initiates an effort to estimate the costs of handling the
different types of orders so that she can estimate the profitability of individual customers based
on their actual order pattern. The case provides students with an opportunity to build a simple
activity based cost model in a nonmanufacturing (distribution) setting, assess the implications
from having a more accurate cost model, and recommend actions to enhance the company's
profitability.
Break-Even Analysis
Case: Caribbean Internet Café
Case Description: An entrepreneur is hoping to open Caribbean Internet Café in Kingston,
Jamaica. He has gathered data on all the relevant costs: equipment, rent, labor, etc. He has also
found a partner in the local telephone company, Jamaica Telecommunications Limited (JTL).
JTL has provided equity and a long-term loan at favorable interest rates. He is now faced with
the task of analyzing fixed, variable and start-up costs; contribution margin; and the concept of
break-even to guide his decision.
Business Decisions
Case: Salem Telephone Company
Case Description: An independent regulated telephone company has established a computer
services subsidiary that has not lived up to expectations. Managers must determine whether it is
profitable or not and consider changes in pricing or promotion that might improve profitability.
The teaching purpose is to introduce concepts of relevant costs, contribution, and breakeven
analysis.
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Operating Decisions
Case: Superior Manufacturing Company
Case Description: A professional manager is hired by a small manufacturing company after the
president discovers that he has made poor decisions. One product appears to be unprofitable,
whereas the product sold in highest volume is under competitive price pressure. A crude cost
accounting system fails to reveal appropriate actions to correct problems. The case uses
information on cost behavior, relevance of allocated costs, contribution margin and variances to
explain the nature of cost accounting.
Profit Planning and Budgeting
Case: Cafes Monte Bianco: Building a Profit Plan
Case Description: The case presents the profit plan as a tool to quantify strategic alternatives.
Using projected revenue and cost schedules, students are required to build a profit plan
(including an income statement and balance sheet) for a closely-held coffee manufacturer in
Italy. Students must estimate cash flow and ROE and use this analysis to evaluate the
attractiveness of a new strategy.
Profit and Cost Center Performance Evaluation
Case: Compagnie du Froid, S.A.
Case Description: The owner of an ice cream company must evaluate the performance of three
regional businesses. To do the analysis, students must flex the budget by seasonal temperature;
calculate revenue, volume, price, and efficiency variances; analyze the effects of transfer prices;
and calculate return-on-investment. In addition, the owner considers how to set strategic
boundaries and how to compensate his managers.
Production Volume Variance
Case: Polysar Limited
Case Description: Canada’s largest chemical company produces and markets butyl rubber in two
divisions, each treated as a profit center. The new plant in the North American Division operates
below capacity resulting in a significant volume variance and an operating loss. The European
Division is at capacity and is profitable. The actions of the European Division affect the capacity
utilization of the North American Division. The case provides a strong understanding of the
relationship between capacity utilization and the absorption of fixed costs, and illustrates why the
volume variance was developed. It also reinforces student abilities to use budgets, pre-set
standards and ex-post income statements to evaluate performance.
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Capital Budgeting
Case: The Super Project
Case Description: The manager of financial analysis at General Foods Corporation questions the
company’s capital budgeting system in evaluating a proposal to introduce a major new product.
The manager believes that several costs that are omitted from the analysis should be included in
assessing the attractiveness of the proposed investment. The case provides opportunities to
specify correctly the relevant cash flows using key assumptions, and to assess the usefulness of
various techniques used to measure the attractiveness of the project.
Executive Compensation
Case: Vyaderm Pharmaceuticals
Case Description: In 1999, the new CEO of Vyaderm Pharmaceuticals introduces an Economic
Value Added (EVA) program to focus the company on long-term shareholder value. The EVA
program consists of three elements: EVA centers (business units), EVA drivers (operational
practices that improve EVA results), and an EVA-based incentive program for bonus-eligible
managers. Over the next two years, the implementation of the program runs into several
stumbling blocks, including resistance from regional managers, who push for ‘‘line of sight’’
EVA drivers; the difficulty of managing a large number of EVA centers; and unexpected bonus
adjustments.
The decision point focuses on a business unit where the sudden exit of a competitor produces an
unexpected one-time ‘‘windfall’’ in earnings. The assignment requires students to calculate the
current year bonus payouts for this business unit (when the bonus will be unexpectedly high) and
subsequent years (when the bonus will be unexpectedly low). Vyaderm’s top executives must
decide whether to adjust EVA results and payouts associated with this “windfall”.
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