RIFT VALLEY UNIVERSITY

GULLELE CAMPUS
Department: MASTERS IN BUSINESS ADMNISTRATION
Division : Weekend
Programme: Post graduate program

year : 1st

Name:
ID.No. :
Course: Financial and Management Accounting
Individual Assignment

Submitted to: Dr Takele Fufa, Ast.professor

Addis Ababa, Ethiopia

March, 2021
Rift Valley University
Post graduate program
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 Financial and Management Accounting
Individual assignment
Questions with answer s
1. Management Accounting Versus Financial Accounting.
Management accounting differs from financial accounting in a number of ways. Indicate whether each
of the following characteristics relates to management accounting (MA) or financial accounting (FA):
1. Publically reported =Financial Accounting
Because financial accounting is focused on creating financial statements to be shared internal and
external stakeholders and the public. Managerial accounting focuses on operational reporting to be
shared within a company
2. Forward looking =Financial management
Because Managerial reports are used internally and look forward.

3. Usually confidential =Financial managment

Because of financial accounting intends to disclose the right information to the stakeholders so that
they can make informed decisions. Whereas the management accounting is confidential and limited to
the management of the company and it is utilized by management in bringing efficiency and
effectiveness in the organization’s working.
4. Complies with accounting standards =Financial Accounting
Because of rules in financial accounting are prescribed by standards such as GAAP or IFRS. There
are legal requirements for companies to follow financial accounting standards.
5. Reports past performance =Financial Accounting
Because of financial accounting focuses on history; reports on the prior quarter or year.
6. Uses physical measures as well as monetary ones for reports =Financial Accounting
7. Focus on business decision making =Financial Management
8. Driven by user needs =financial Accounting
2. The Balanced Scorecard: Stakeholder Values.
In the balanced scorecard approach, stakeholder groups with different perspectives value different
performance goals. Sometimes, however, they may be interested in the same goal. Indicate which
stakeholder groups—financial (F), learning and growth (L), internal business processes (P), and
customers (C) — value the following performance goals:
1. High wages =L
Because of Stakeholders with a learning and growth perspective (employees) value high wages, job
satisfaction, and opportunities to fulfill their potential.
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 2. Safe products. =P
Because of Stakeholders who focus on the business’s internal processes value the safe and cost-
effective production of high-quality products
3. Low-priced products =C
Because of Stakeholders with a customer perspective value high-quality products that are low in cost.
4. Improved return on investment =F
Because of Stakeholders with financial perspective (owners, investors, and creditors) value
improvements in financial measures, such as net income and return on investment.
5. Job security =L
Because Stakeholders with a learning and growth perspective (employees) value high wages, job
satisfaction, and opportunities to fulfill their potential
6. Cost-effective production processes=P
Because Stakeholders who focus on the business’s internal processes value the safe and cost-effective
production of high-quality products.

3. XYZ Co. wants to know if its profitability performance has increased from 2009 to 2010. The
company had net income of $48,000 in 2009 and $50,000 in 2010. Total assets were $480,000 at the
end of 2009, and $560,000 at the end of 2010. Calculate return on assets (ROA) for 2009 and 2010 and
Comment on the results.
Solution
= Return on asset(ROA) = Net income
Average total asset

=Average total asset = total asset for 2009+total asset for 2010/2

=$480,000 +$560,000/2
=$1,040,000/2
=520,000
=======

Return on asset for 2009 = $48,000/$520,000

=$0.09
Return on asset for 2010 = $50,000/$520, 000
=$0.09
Comment
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For 2009, for each dollar invested, XZY Company’s assets generate 0.092 cents of net income and for
2010 ,0.096. These both ratios indicate that the income-generating strength (profit margin) of the
company’s resources became increase from 2009 to 2010 and how efficiently the company is using all
its assets (asset turnover) also increased. Return on assets, then, combines profit margin and asset
turnover: Thus, a company’s management can improve overall profitability by increasing the profit
margin, the asset turnover, or both. Similarly, in evaluating a company’s overall profitability, a
financial statement user must consider how these two ratios interact to produce return on assets.
4. The accountant for ABC Company makes the assumptions or performs the activities in the list that
follows. Tell which of these concepts of Accrual accounting most directly relates to each assumption or
action: (a) periodicity, (b) going concern, (c) matching rule, (d) revenue recognition, (e) deferral, and
(f) accrual.
1. In estimating the life of a building, assumes that the business will last indefinitely. =B

2. Records a sale when the customer is billed. = F

3. Postpones the recognition of a one-year insurance policy as an expense by initially recording the
expenditure as an asset. =E

4. Recognizes the usefulness of financial statements prepared on a monthly basis even though they are
based on estimates. =A

5. Recognizes, by making an adjusting entry, wages expense that has been incurred but not yet
recorded. =F

6. Prepares an income statement that shows the revenues earned and the expenses incurred during the
accounting period.=C

5. On December 1st Mr X began an auto repair shop, Mr X Quality Automotive. The following
information about December’s transactions, accounts, and adjustment data is available.

Transactions
Dec. 1 Mr X contributed $50,000 cash to the business in exchange for capital.

1 Purchased $10,800 of equipment paying cash.

1 Paid $4,500 for a 9-month insurance policy starting on December 1.

9 Paid $18,000 cash to purchase land to be used in operations.

10 Purchased office supplies on account, $3,000.

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19 Borrowed $28,000 from the bank for business use. Mr X signed a note payable to the bank in the
name of the business.

22 Paid $800 for advertising expenses.

26 Paid $1,000 on account.

28 The business received a bill for utilities to be paid in January, $280.
31 Revenues earned during the month included $17,500 cash and $2,700 on account.

31 Paid employees' salaries $3,600 and building rent $700. Record as a compound entry.

31 The business received $1,440 for auto screening services to be performed next month.

31 Mr X withdrew cash of $3,000.

Accounts
Cash; Accounts Receivable; Office Supplies; Prepaid Insurance; Equipment; Accumulated
Depreciation-Equipment; Land; Accounts Payable; Utilities Payable; Interest Payable; Unearned
Revenue; Notes Payable; Mr X, Capital; Mr X, Withdrawals; Service Revenue; Salaries Expense;
Rent Expense; Utilities Expense; Advertising Expense; Supplies Expense; Insurance Expense;
Interest Expense; and Depreciation Expense-Equipment.
Adjustment Data
A. Office Supplies used during the month, 600.
B. Depreciation for the month, $180.
C. One-month insurance has expired.
D. Accrued Interest Expense, $75.

Requirements:
a. Prepare the journal entries and post to the T-accounts.
b. Prepare an unadjusted trial balance.
c. Prepare the adjusting entries and post to the T-accounts.
d. Prepare an adjusted trial balance.
e. Prepare the income statement, the statement of owner's equity, and a classified
balance sheet.
f. Prepare the closing entries and post to the T-accounts.
g. Prepare a post-closing trial balance.
SOLUTION
a. Prepare the journal entries and post to the T-accounts.
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Dec. 1, cash ………………..50,000
X’s capital ………………50,000
(To record x’s owner investment)
Dec. 1 equipment…………………………….10, 800
Cash……………………………10,800
(to record purchase of equipment)
Dec. 1, prepaid insurance………………..4,500
Cash ………………….……4,500
(to record purchase premium insurance)
Dec. 9 Land …………………………….18, 000
Cash ……………………………18,000
(to record cash payment for land )
Dec. 10, office supplies c………………..3,000
Account payable………………3,000
(to record purchase of supply on credit)
Dec. 19 cash …………………………….28, 000
Note payable……………………………28,000
(To record cash borrowed from bank )

Dec. 22, advertising expense………………..800

Cash……………………………800
(to record cash paid for advertising)
Dec. 26 account payable…………………………….1, 000
Cash……….……………………………1,000
(to record cash paid to creditor on account)

Dec. 28, Utility expense………………..280

Utility payable………………280
(to record accrued utility)
Cash ………………………………17,500
Dec.31 Account receivable…………………2, 700
Service revenue Equipment ……………………………….20, 200
(to record service rendered to customer on account and for cash)
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 Dec 31 salary expense ………………….3, 600
Rent expense……………………. 700

Cash ………..………………….4, 300

(to record cash paid for salaries)

Dec. 31 Cash ……………………….1440

Unearned revenue …………………….1440

(to recorded cash collect in advance from costumer)

Dec 31 withdrawal …………………..3000

Cash……. …………………….3000

(to record cash paid for personal use)

OR

Date Description Post ref. Debit Credit

Dec Cash 50,000
1 X’s capital 50,000

1 Office Equipment 10,800

Cash 10,,800
(Issued 3 month not receivable)

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 1 prepaid insurance. 4,500

Cash 4,500

9 Land 18000
Cash 18000

10 office supplies 3000

Account payable 3000

19 cash 28000
Note payable 28000

22 advertising expense 800

Cash 800

26 account payable 1,000

Cash 1,000

28 Utility expense 28 0 280

Utility payable
331

Cash 17,500 20,200

Account receivable 2,700
Service Revenue
.3, 600
Salary expense 700
31
Rent expense 4,300

Cash
Unearned revenue 1440
31

1440

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31
withdrawal
Cash 3000 3000

Posting
Cash Account receivable
10,800 (dec.1)
Dec.1)50,000 4,500. (1) Dec 31) 2700
.19)28,000 18,000 (1)
31) 17,500 800 (9) . bal. 2700
31) 1,440 2000 (26)
1000 (26)
4,300 (31
Bal. 54,540 3000 (31)

Office supplies prepaid insurance

Dec. 10) 3000
Dec.1) 4500

Bal. $3000 bal. $4,500

Equipment Land

DEC.1) 10,800 Dec.9) 18000

Bal. 10,800 bal.18,000

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 Account payable utility payable

Dec. 26) 1,000 3000 (dec.10 280 (dec.28)

2000 Bal. 280 Bal.

Note payable unearned revenue X’s capital

28,000 (dec.9) 1440 9dec.31) 15000 (DEC. 1)

28,000 bal. 1440 bal. 150000 Bal.

X’s withdrawal Service revenue salaries expense

Dec.31) 20,200 (Dec.31) Dec.31)3600

Bal. 20000 20,200 bal bal.36000

Rent expense utility expense

Dec. 31) 700 3000 (dec.10

Bal. 7000 bal. 280

Advertising expense

Dec. 22) 1,000 800

Bal. 8000

b. Prepare an unadjusted trial balance

Solution

Mr X Quality Automotive.

Un Adjusted Trial Balance

For the month ended December 31

Debit Credit

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 Cash Br 54540
Accounts Receivable 2700
Office Supplies 3,000
Prepaid Insurance 4500
Office Equipment 10,800
Land 18000

Notes Payable 28000

Accounts Payable 2,000
utility Payable 280
Unearned Service Revenue 1440
Mr.’s capital 500,000
X’s withdraw 3,000
Service Revenue 20,200
Salaries Expense 3600
Advertising Expense 800
Rent Expense 700
utility Expense 280

Total Br 101,920 Br 101,920

C) Prepare the adjusting entries and post to the T-accounts

SOLUTION

Adjusting Entries
In order for revenues to be recorded in the period in which services are performed and for expenses
to be recognized in the period in which they are incurred, companies make adjusting entries. The
use of adjusting entries makes it possible to report on the balance sheet the appropriate assets,
liabilities, and owners’ equity at the statement date. Adjusting entries also make it possible to report
on the income statement the proper revenues and expenses for the period. However, the trial
balance the first pulling together of the transaction data may not contain up-to-date and complete
data. This occurs for the following reasons.
 Some events are not recorded daily because it is not efficient to do so. Examples are the
use of supplies and the earning of wages by employees.
 Some costs are not recorded during the accounting period because these costs expire with
the passage of time rather than as a result of recurring daily transactions. Examples of
such costs are building and equipment depreciation and rent and insurance.
 Some items may be unrecorded. An example is a utility service bill that will not be
received until the next accounting period.
period.
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 Types of Adjusting Entries
Adjusting entries are classified as either deferrals or accruals. Each of these classes has two
subcategories.
I) Deferrals:
Prepaid expenses: Expenses paid in cash before they are used or consumed.
Unearned revenues: Cash received before services are performed.
II) Accruals:
Accrued revenues: Revenues for services performed but not yet received in cash
Accrued expenses: Expenses incurred but not yet paid in cash or recorded.

Mr. X’s adjusting entry at December r 31 as follows.

Dec 31 supplies Expense............................600
600
Office supplies...............................600
supplies 600
(To record supplies consumed)

Dec.. 31 depreciation Expense......................180

Expense 180
Accumulated depreciation ............180
180
(To record depreciation)

For example, on December 1,, Mr. X’s paid Br 4,500 for a for 9 month insurance policy. Coverage
began December 1 current year. For example, on October 4, company’s debited the cost of the
premium to Prepaid Insurance at that time. This account still shows a balance of 4,500 in the
December 31 trial balance.
Insurance expired during December =4500x1/9
= 500
dec 31 insurance expense ………………….Br 500

Prepaid insurance …………………….5000

Mr.’s makes the accrued expense adjusting entry at December r 31 as follows.

Oct. 31 Interest Expense................................75
Expense
Interest Payable...............................75
Payable 75
(To record interest on notes payable)

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supplies expense supplies

Dec. 31) 600 Dec10) 3000 600 (Dec.31)

Bal. 2400

depreciation expense accumulated depreciation

Dec. 31) 180 180 (Dec31)

Insurance expense prepaid insurance

Dec. 31) 500 dec 1)4500 500 (dec.31)

Bal . 4000

Interest expense utility payable

Dec. 31) 75 Dec31) 75

D)Prepare an adjusted trial balance.

SOLUTION

Adjusted Trial Balance

After journalizing and posting all adjusting entries, Mr.’s prepares another trial balance from its
ledger accounts. This trial balance is called an adjusted trial balance.
balance It shows the balance of all
accounts, including those adjusted, at the end of the accounting period. The adjusted trial balance
thus shows the effects of all financial events that occurred during the accounting period

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 Mr X Quality Automotive.

Adjusted Trial Balance

For the month ended December
Debit Credit

Cash Br 54540
Accounts Receivable 2700
Office Supplies 2400
Prepaid Insurance 4000
Office Equipment 10,800
Accumulated Depreciation-Equipment 180
Land 18000

Notes Payable 28000

Accounts Payable 2000
Interest Payable 75
Unearned Service Revenue 1440
Utility Payable 280
Mr.X’s Capital 50,000
Mr.X’s withdraw 3000
Service Revenue 20,200
Salaries Expense 3,600
Supplies Expense 600
Advertising expense 800
Rent Expense 700
Insurance Expense 500
Interest Expense 75
Depreciation Expense 180
utility Expense 280
Total Br 102,175 Br 102,175

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 A)Prepare the income statement, the statement of owner's equity, and a classified
balance sheet.

SOLUTION
Preparing Financial Statements
Mr.X’S a can prepare financial statements directly from the adjusted trial balance.
Mr X Quality Automotive.
Income Statement
For The Month Ended December3
Operation Revenues
Service Revenue ………………………………………………………..Br 20,200
Less: operation Expenses
Salaries expense ………………………Br 700
Advertising expense 800
supplies expense………………......... 600
Rent expense……………………………………3600
Insurance expense…………. 500
Interest expense………….. 75
Depreciation expense…………………………..180
Utility expense……………………............................280
Total expenses……………………………………………………………… (Br 6735)
Net income…………………………………………………………………….Br 13,465

Mr X Quality Automotive
Statement of owner’s equity
For The Month Ended December 31.
Mr.’s capital , December 1………………………………………………………Br 50,000
Add: Net income………………………………………………………………Br 13,465
Less:Mr.’swithdraw…………………………………………………………………(3000)
Increasing owner’s equ…………………………………………………………….10,465
Mr.’s capital , December ………………………………………………………Br 60,465

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 Mr. X’s begins preparation of the income statement from the revenue and expense accounts. It
derives the owner’s equity statement from the capital and with draw accounts and the net income
(or net loss) shown in the income statement. The balance sheet from the asset and liability
accounts, the capital account, and the ending capital balance as reported in the statement of
owner’s equity

Mr X Quality Automotive.
Balance Sheet
For the month ended December 31
Asset
Cash 54,540
Accounts receivable 2,700
supplies 2400
Prepaid insurance 4,000
Office equipment 10,800
Less: Accumulated depreciation- (180) 10,620
Land 18000

Total assets $ 92,260

Liabilities and stockholders’ equity
Liabilities
Notes payable $ 28,000
Accounts payable 2,000
Unearned service revenue 1,440
utility payable 280
Interest payable 75
Total liabilities $ 31,795

Owner’s equity
Mr.’s Capital as of December 31 60,465
Total liabilities and owners’ equity $ 92,260

F. Prepare the closing entries and post to the T-accounts

Solution

Closing Process
The closing process reduces the balance of nominal (temporary) accounts to zero in order to
prepare the accounts for the next period’s transactions. In the closing process Mega transfers all of
the revenue and expense account balances (income statement items) to a clearing or suspense
account called Income Summary. The Income Summary account matches revenues and expenses.
Mr. X’s uses this clearing account only at the end of each accounting period. The account
represents the net income or net loss for the period. It then transfers this amount (the net income or
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net loss) to an owners’ equity account. (For a corporation, the owners’ equity account is retained
earnings; for proprietorships and partnerships, it is a capital account.) Companies post all such
closing entries to the appropriate general ledger accounts.
Closing Entries
In practice, companies generally prepare closing entries only at the end of a company’s annual
accounting period. A couple of cautions about preparing closing entries:
 Avoid unintentionally doubling the revenue and expense balances rather than zeroing
them.
 Do not close withdraw through the Income Summary account. Withdrawals are not
expenses, and they are not a factor in determining net income.

Dec. 31 Service Revenue…………………….20,200

Income summary 20,200

(To close revenue account)

Dec 31 Income summary………………… Br 6735

Salaries expense ………………………Br 700
Advertising expense 800
supplies expense………………......... 600
Rent expense……………………………3600
Insurance expense…………………….500
Interest expense……………………….75
Depreciation expense…………………..180
Utility expense…………………….. .280
(To close expense accounts)
Dec. Income Summary 13,465
Mr. X‘s capital 13,465
(To close net income to capital)

Dec. mr’s X’s capital 3000

Withdraw 3,000
(To close withdrawal s to capital)

G. Prepare a post-closing trial balance

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 solution
Recall that a trial balance is prepared after entering the regular transactions of the period, and that a
second trial balance (the adjusted trial balance) occurs after posting the adjusting entries. A
company may take a third trial balance after posting the closing entries. The trial balance after
closing, called the post-closing trial balance, consists only of asset, liability, and owners’ equity
accounts the real accounts

A post-closing trial balance provides evidence that the company has properly journalized and
posted the closing entries. It also shows that the accounting equation is in balance at the end of the
accounting period. However, like the other trial balances, it does not prove that Pioneer has
recorded all transactions or that the ledger is correct. For example, the post-closing trial balance
will balance if a transaction is not journalized and posted, or if a transaction is journalized and
posted twice.

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 Mr X Quality Automotive.
Post-closing Trial Balance
For the month ended December 31
Debit Credit
Cash Br 54540
Accounts Receivable 2,700
Office Supplies 2,400
Prepaid Insurance 4,000
Office Equipment 10,800
Accumulated Depreciation-Equipment 180
Land 18,000
Notes Payable 28,000
Accounts Payable 2,000
Interest Payable 75
Unearned Service Revenue 1,440
Utility Payable 280
Mr.’s Capital 60,465
Total Br 92,440 Br 92,440

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6. Accounting is traditionally seen as fulfilling three functions: Scorekeeping, Attention-directing
and Problem-solving. Explain.

Answer

The role of management accounting is also described as problem solving, score keeping and
attention directing.

Scorekeeping: Scorekeeping records the results of various actions of the managers and helps in
assessing whether the results expected from the various actions are realized or not This is an
accumulation and classification of data. This aspect of accounting enables both internal and
external parties to evaluate organizational performance. The collection, classification and
reporting of scorekeeping information is the task that dominates day-to-day accounting.
Examples of scorekeeping (scorecard) task include:

 Posting daily cash collections to customers’ accounts.

 Preparing journal entries for depreciation of equipment.

 Processing monthly payroll.

Problem solving: The role of accounting in problem solving is to provide information useful in
evaluating alternatives.

This task of the accountant involves quantification of the likely results of possible courses of
actions and often recommends the best course to follow. Problem solving is commonly
associated with nonrecurring decisions, situations that require special accounting analyses or
reports. Examples of activities performed by an accountant that could be classified as problem-
solving task include:

 Preparing, for production manager, a cost comparison for two computerized

manufacturing control systems.

 Analyzing the cost of several different ways to blend raw materials in the foundry.

Sometimes this classification of accounting information may overlap. A single data may serve to
answer one or more of the questions to be dealt with a good accounting system. For example, the
scorecard and attention-directing data are closely related. The same information may serve as a
scorecard function for a manager and an attention-directing function for the manager’s superior.
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Consider a performance reports in which actual results of decisions and activities are compared
with previously determined plans. By pinpointing where actual results differ from plans, such
performance reports can show managers how they are doing and show the managers’ superiors
where to take action. In addition the actual results help answer scorecard questions of financial
accounting, which is concerned with reporting the results of the organization’s activities to
external parties.

In contrast, problem-solving information may be used in long-range planning and in making

special, nonrecurring decisions, such as whether to make or buy parts, replace equipment, or add
or drop a product. These decisions often require expert advice from specialists such as industrial
engineers, budgetary accountants, and statisticians.

Attention directing: The scorekeeping function in combination with expected results, and
comparative analysis of scores of various companies, divisions and departments, comparative
analysis of present period scores or results with previous periods show opportunities of focusing
attention of managers to improve things

It is the task of reporting and interpreting information that helps managers to focus on operating
problems, imperfections, inefficiencies, and opportunities. This aspect of accounting helps
managers to concentrate on important areas of operations promptly enough for effective action.
Attention directing is commonly associated with current planning and control, and with the
analysis and investigation of recurring routine internal accounting reports. The following
activities fall under attention directing based on the function that the accountant is performing.

 Interpreting why a branch did not meet its sales quota.

 Interpreting variances on a post office supervisor’s performance report.

 Analyzing for the president the impact of net income of a contemplated new product.

7. Why does the Accounting system used for financial statement preparation not always provide
the information that managers need for decision-making purposes?

Answer

Because following reasons financial statements which provided by accounting system does not
always provide information that need managers for decision making

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Accounting system involves in reporting financial information using standard procedures and
rules in a meaningful form of financial statements whereas financial management involves the
assets and resources of the Company and their effective utilization

Accounting system restricts up to reporting and summarizing of financial statement for the
external and internal users whereas financial management is about planning, directing,
monitoring, organizing and controlling of the monetary resources of an organization to achieve
the objective

Accounting system is more about reporting the financial information of a particular individual, or
business entity financial management encompasses everything that involves finances, assets, and
resources. It takes part in financial planning, control, and decision-making.

Reporting financial information to internal users like management and employees for the policy-
making and running day to day operations of the business. Management accounting is forward-
looking and focuses on future activities to achieve business objectives.

8. Identify Managerial accounting techniques that have been developed to meet information
needs in the new business environment like value chain analysis, strategic positioning analysis,
Activity- based management, Activity -based costing.

Answer

Value chain analysis:

Each step in the making of a product or the delivery of a service can be thought of as a link in a
chain that adds value to the product or service. This concept of how a business fulfills its mission
and objectives is known as the value chain. the steps that add value to a product or
service—which range from research and development to customer service—are known as
primary processes. The value chain also includes support services, such as legal services and
management accounting. These services facilitate the primary processes but do not add value to
the final product or service. Their roles are critical, however, to making the primary processes as
efficient and effective as possible

Marketing Distribution Customer

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Service Supply

• Human Resources

• Legal Services

• Information Systems

• Management Accounting

Let’s assume that Good Foods Store has had some success, and Vanna Lang now wants to
determine the feasibility of making and selling her own brand of candy. The primary processes
that will add value to the new candy are as follows: Research and development: developing new
and better products or services. Lang plans to add value by developing a candy that has less
sugar content than similar confections. Design: creating improved and distinctive shapes, labels,
or packages for products. For example, a package that is attractive and that describes the
desirable features of Lang’s new candy will add value to the product. Supply: purchasing
materials for products or services. Lang will want to purchase high-quality sugar, chocolate, and
other ingredients for the candy, as well as high-quality packaging. Production: manufacturing the
product or service. To add value to the new candy, Lang will want to implement efficient
manufacturing and packaging processes. Marketing: communicating information about the
products or services and selling them. Attractive advertisements will facilitate sale of the new
candy to customers and Development Design Production

PRIMARY PROCESSES IN THE VALUE CHAIN

Marketing Distribution Customer Service Supply • Human Resources • Legal Services •

Information Systems • Management Accounting

Distribution: delivering the product or service to the customer. Courteous and efficient service
for in-store customers will add value to the product. Lang may also want to accommodate
Internet customers by providing shipping. Customer service: following up with service after
sales or providing warranty service. For example, Lang may offer free replacement of any candy
that does not satisfy the customer. She could also use questionnaires to measure customer
satisfaction. The support services that provide the infrastructure for the primary processes are as
follows:

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Human resources: hiring and training employees to carry out all the functions of the business.
Lang will need to hire and train personnel to make the new candy.

Legal services: maintaining and monitoring all contracts, agreements, obligations, and other
relationships with outside parties. For example, Lang will want legal advice when applying for a
trademark for the new candy’s name and when signing contracts with suppliers.

Information systems: establishing and maintaining technological means of controlling and

communicating within the organization. Lang will want a computerized accounting system that
keeps not only financial records but customer information as well. Management accounting:
provides essential information in any business.

Advantages of Value Chain Analysis

An advantage of value chain analysis is that it allows a company to focus on its core
competencies. A core competency is the thing that a company does best. It is what gives a
company an advantage over its competitors. For example, Wal-Mart is known for having the
lowest prices; that is its core competency. A common result of value chain analysis is
outsourcing, which can also be of benefit to a business. Outsourcing is the engagement of other
companies to perform a process or service in the value chain that is not among an organization’s
core competencies. For instance, Wal-Mart outsources its inventory management to its vendors,
who monitor and stock Wal-Mart’s stores and warehouses. Managers and Value Chain Analysis
In today’s competitive global business environment, analysis of the value chain is critical to most
companies’ survival. Managers at Wal-Mart and other organizations must provide the highest
value to customers at the lowest cost, and low cost often equates with the speed at which the
primary processes of the value chain are executed. Time to market is very important. Managers
must also make the services that support the primary processes as efficient as possible. These
services are essential and cannot be eliminated, but because they do not add value to the final
product, they must be implemented as economically as possible. Businesses have been making
progress in this area. For example, over the past ten years, the cost of the accounting function in
many companies as a percentage of total revenue has declined from 6 percent to 2 percent.
Technology has played a big role in making

Strategic positioning analysis:

Assessing the strategic position consists of analyzing:

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The environment (competitors, markets, regulations, discoveries etc. Key factors are often
summarized as opportunities and threats. The strategic capability of the organization
(resources, competences). Key factors are often summarized as strengths and weaknesses)

The culture, beliefs and assumptions of the organization The expectation and power of
stakeholders (what do the shareholders want? Will employees co-operate?).

The external environment

Since strategy is concerned with the position a business takes in relation to its environment, an
understanding of the environment's effects on an organization is of central importance to
strategic analysis. The historical and environmental effects on the business must be considered,
as well as the present effects and the expected changes in environmental variables. This is a
major task because the range of environmental variables is so great. Many of those variables
will give rise to opportunities of some sort, and many will exert threats upon the organization

The two main problems that have to be faced are, first, to distil out of this complexity a view of
the main or overall environmental impacts for the purpose of strategic choice; and second, the
fact that the range of variables is likely to be so great that it may not be possible or realistic to
identify and analyses each one.

The resources of the organization

There are internal influences as well as outside influences on the firm and its choice of
strategies. One of the ways of thinking about the strategic capability of an organization is to
consider its strengths and weaknesses (what it is good or not so good at doing, or where it is at a
competitive advantage or disadvantage, for example). Considering the resource areas of a
business such as its physical plant, its management, its financial structure and its products may
identify these strengths and weaknesses

Expectations and influence of stakeholders

A stakeholder can be defined as someone who has an interest in the well-being of the
organization. A typical list of stakeholders for a large company would include shareholders,
employees, managers, customers, locality, suppliers, government and society at large

Strategic planning and management cannot be achieved without regard to stakeholders

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In a profit-making organization, management might have a choice of adopting a high risk/high
return strategy or a low risk/low return strategy. It's important to know which the shareholders
want.

In a not-for-profit organization, such as a hospital, managers need to know what the government
and potential patients want. How much resource should go into heart operations, how much into
hip replacement, etc.

The beliefs and assumptions within an organization

Culture affects the interpretation of the environmental and resource influences; so two groups of
managers, perhaps working in different divisions of an organization, may come to different
conclusions about strategy, although they are faced with similar environmental and resource
implications

Which influence prevails is likely to depend on which group has the greater power, and
understanding this can be of great importance in recognizing why an organization follows, or is
likely to follow, the strategy it does.

A consideration of all relevant features

A consideration of the environment, resources, expectations and objectives within the cultural
and political framework of the organization provides the basis for strategic analysis of that
organization.

However, to understand its strategic position, it is also necessary to examine the extent to which
the direction and implications of the current strategy and objectives that it is following are in
line with, and can cope with, the implications of the strategic analysis.

Key strategic models

A number of models have been developed to help with strategic analysis

SWOT analysis

A SWOT analysis can be used as an analysis tool in its own right or can be used as a summary
sheet on which other results can be placed

Strengths and weaknesses relate to resources and capabilities: what is the organization good at?
What is it poor at? Where resources are in short supply? Where are resources excellent?
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Opportunities and strengths relate to external factors: what will the effect on the organization be
of economic changes? Can the organization make use of new technologies? Are new entrants
likely to enter the market place? Can a powerful customer dictate terms?

External environmental analysis

As well as thinking in terms of opportunities and threats, the following tools can be used to
analyses the external environment:

PEST analysis

A PSET analysis looks at the environment under the heading

Political / legal factors

Economic factors

Social / cultural factors

Technological factors

Porter's five forces mode

Just because a market is growing, it does not necessarily mean that a firm can be profitable in
that market. Porter identified five forces that, collectively, determine the profit potential in an
industry:

Internal analysis

As well as considering strengths and weaknesses, managers can use the following models to
focus their attention.

Porter's value chain

Porter developed the value chain to help identify which activities within the firm were
contributing to a competitive advantage and which were not.

The approach involves breaking down the firm into five 'primary' and four 'support' activities,
and then looking at each to see if they give a cost advantage or quality advantage.

Activity-Based Management:

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Activity-based management (ABM) is an approach to managing an organization that identifies
all major activities or tasks involved in making a product or service, determines the resources
consumed by each of those activities and why the resources are used, and categorizes the
activities as either adding value to a product or service or not adding value.

Activity -based costing:

Activity-based costing (ABC) is the tool used in an ABM environment to assign activity costs to
cost objects. ABC helps managers make better pricing decisions, inventory valuations, and
profitability decisions. A Study Note The customer’s perspective governs whether an activity
adds value to a product or service. To minimize costs, managers continuously seek to improve
processes and activities. To manage the cost of an activity, they can reduce the activity ’s
frequency or eliminate it entirely A lean operation focuses on eliminating waste in an
organization. In other words, business processes should focus on what a customer is willing to
pay for. Lean operations emphasize the elimination of three kinds of waste:

Waste that can be eliminated proactively through good planning and design of the product or
service and the production processes for making it.

Waste that can be eliminated during production by smart production scheduling and consistently
following standardized product and processing plans to ensure quality.

Waste that can be eliminated by management analysis of the actions of workers and machines in
the process of making products and services.

As access to value chain data has improved, managers have refined the issue of how to assign
costs fairly to products or services to determine unit costs. You may recall from an earlier
chapter that traditional methods of allocating overhead costs to products use such cost drivers as
direct labor hours, direct labor costs, or machine hours and one overhead rate. More than 20
years ago, organizations began realizing that these methods did not assign overhead costs to their
product lines accurately and that the resulting inaccuracy in product unit costs was causing poor
pricing decisions and poor control of overhead costs. In their search for more accurate product
costing, many organizations embraced activity-based costing. Activity-Based Costing LO2
Define activity-based costing, and explain how a cost hierarchy and a bill of activities are used.
Activity-based costing (ABC) is a tool of ABM. It is a method of assigning costs that calculates a
more accurate product cost than traditional methods. It does so by categorizing all indirect costs
by activity, tracing the indirect costs to those activities, and assigning those costs to products or
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services using a cost driver related to the cause of the cost. Activity-based costing is an important
tool of activity-based management because it improves the accuracy in allocating activity-driven
costs to cost objects (i.e., products or services). To implement activity-based costing, managers:
1. Identify and classify each activity.

2. Estimate the cost of resources for each activity.

3. Identify a cost driver for each activity and estimate the quantity of each cost driver.

4. Calculate an activity cost rate for each activity.

5. Assign costs to cost objects based on the level of activity required to make the product or
provide the service.

While ABC does increase the accuracy of cost information and gives managers greater control
over the costs they manage, it does have its limitations, including the following: High
measurement costs necessary to collect accurate data from many activities instead of just one
overhead account may make ABC too costly. Some costs are difficult to assign to a specific
activity or cost object since they benefit the business in general (e.g., the president’s salary) and
should not be arbitrarily allocated. ABC allocations may add undue complexity and complication

9. PQR is the accounting intern for, a firm that has many small clients that need monthly accounting
services. Ray has been asked by the partner in charge to analyze the asset section of firms ’s balance sheets
which follow:

2011 2012
Cash $2,500 $3,900
Accounts receivable, net 35,000 40,000
Inventory 85,000 122,000
Other current assets 3,400 4,110
Total current assets 125,900 170,010
Property, plant & equipment, net 180,000 230,000
Other assets 15,000 26,000
Total assets $320,900 $426,010
Required

Prepare a common-size analysis of the assets section of the firm ’s balance sheet for 2011 and 2012.Round
all percentage answers to one decimal place

Solution

Common size Percentage of balance sheet for 2011

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For cash 2011 =$2500/320,900x100

0.779058897 x100

= 0.78%

Accounts receivable, net= 35,000/320,900

= 10.90682456

=0.1090682x100

=10.9%

Inventory =85,000/320,900x100

=0.26488002x100

=26.5%

Other current assets =3400/320,900x100

=0.0105952x100

=1.06%

Property, plant & equipment, net=180,000/426,010x100

=0.560922x100

=56.1%

Other assets= 15000/426,010x100

=0.0467435338x100

=4.67%

For 2012 balance sheet common size percentage

Percentage of cash for 2011=$3,900/426,010x100

0.0091547147 x100

= 0.92%

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Accounts receivable, net= 40,000/426,010

= 10.90682456

=0.0938945095x100

=9.34%

Inventory =122,000/426,010x100

=0.26488002x100

=26.5%

Other current assets =4,110/426,010x100

=0.0096476609x100

=0.96%

Property, plant & equipment, net=230,000/426,010x100

=0.5398934297x100

=53.99%

Other assets= 26,000/426,010x100

=0.0610314312x100

=6.10%

2011 percent 2012 percent

Cash $2,500 0.78% $3,900 0.92%
Accounts receivable, net 35,000 10.9% 40,000 9.38%
Inventory 85,000 26.5% 122,000 28.64%
Other current assets 3,400 1.06% 4,110 0.96%
Total current assets 125,900 39.23% 170,010 39.91%
Property, plant & equipment, net 180,000 56.1% 230,000 53.99%
Other assets 15,000 4.67% 26,000 6.10%
Total assets
$100%
$320,900 $426,010 $100%%

Interpretations of the above common size balance sheet of the PQR Company’s
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  Cash and cash equivalent increase from .078% to 0.92% whereas account
receivable net decrease from 10.9% to 9.38%

 Inventory increase from 26.5$ to 28.64% while other asset decrease from 1.06%
to 0.96%

 Property, plant & equipment, net decrease from 56.1% to 53.99% where as other asset
increase from 4.67% to 6.10%

10. The following information has been taken from the accounting records of ABC Corporation
for last year.

Management wants these data organized in a better format so that financial statements can be
prepared for the year.

Required: 1. Prepare a schedule of cost of goods manufactured.

2. Compute the cost of goods sold
3. Prepare an income statement.

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SOLUTION
1. Prepare a schedule of cost of goods manufactured
ABC CORPORATION
Cost of Goods Manufactured
For the Year Ended December XXX
Direct materials used:
Beginning of direct material inventory Jan.1 Birr 90,000
Add: Purchase of direct material inventory 750,000
Total cost of goods available for use Birr 840,000
Less: Ending of direct material inventory (60,000)
Cost of direct materials used (a) 780,000
Add: Direct manufacturing labor cost r (b) 150,000
Manufacturing overhead costs (c):
Indirect materials and supplies, factory Birr 15,000
Indirect manufacturing labor 300,000
Utilities, factory 36,000
Depreciation, factory 162,000
Insurance , factory 40,,000
Repairs and maintenance, factory 87,000
Total manufacturing over head 553,000

Total manufacturing costs incurred (d) = (a) +(b)+(c) 1,483,000

Add: Beginning work-in-process inventory 180,000
Total manufacturing costs to account for 1,663,000
Less: Ending work-in-process inventory 100,000
Cost of Goods Manufactured 1,563,000

b) Compute the cost of goods sold

Cost of goods sold = Total cost of merchandise available for use- Ending
finished goods inventory
Total cost of merchandise available for use = Beginning of finished goods
inventory + Cost of goods manufactured
= $1,563,000 + 260,000

= 1,823,000
=======
Cost of goods sold =1,823,000 – 210,000
= 1,613000
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 ========
3. Prepare an income statement
ABC Coorporation
Income Statement
For the Year Ended xxxxxx
Sales (gross) 2,500, 000

Less: Cost of goods sold: 1,613000

Beginning of finished goods inventory
$ 260,000
Add: Cost of goods manufactured 1,563,000
Total cost of merchandise available for use 1,823,000
Less :Ending finished goods inventory

Cost of goods sold (b) 1,613000

Gross profit (c) = (a) - (b) 887,000
Less: Operating costs (d):
Selling expenses Birr 140,000
Add:
General and administration expenses 270,000 $ 410,00
Ne income (before tax) (e) = (c) – (d) $ 47,7000
========

11. List any four functions of management. Explain what type of cost management information
is appropriate for each.
The management process implies the four basic functions of: (1) Planning. (2) Organizing (3)
Controlling, and (4) Decision-making.
Management accounting plays a vital role in these managerial functions performed by managers.
(1) Planning:
Planning is formulating short term and long-term plans and actions to achieve a particular end. A
budget is the financial planning showing how resources are to be acquired and used over a
specified time interval.
Management accounting is closely interwoven in planning both because it provides information
for decision-making and because the entire budgeting process is developed around accounting-
related reports. Management accounting helps managers in planning by providing reports which
estimate the effects of alternative actions on an enterprise’s ability to achieve desired goals. For

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example, if a business enterprise determines a target profit for a year, it should also determine
how to reach that target.
For example, what products are to be sold at what prices? The management accountant develops
data that help managers identify the more profitable products. Similarly, the effects of alternative
prices and selling efforts (say, what will profit be if we cut prices by 5% and increase volume by
15%, etc.) can easily be determined by the management accountant. As part of the budgeting
process, management accountants prepare budgeted (forecasted) financial statements, often
called preform statements.
(2) Organizing:
Organizing is a process of establishing an organizational framework and assigning responsibility
to people working in an organization for achieving business goals and objectives. The type of
organizational structure differs from one business enterprise to another. In the organizing
process, departmentalization can be done by setting up divisions, departments, sections,
branches.
Organizing requires clarity about each manager’s responsibility and lines of authority. The
various departments and units are interrelated in a hierarchy, with a formal communication
structure in which information and instructions are passed downwards to lower level
management and upwards to top management level
Management accounting helps managers in organizing by providing reports and necessary
information to regulate and adjust operations and activities in the light of changing conditions.
For example, the reports under management accounting can be prepared on product lines on
which basis managers can decide whether to add or eliminate a product line in the current
product mix. Similarly management accountant can provide sales report, production report to the
respective manager for taking suitable action about the sales and production position.
(3) Controlling:
Control is the process of monitoring, measuring, evaluating and correcting actual results to
ensure that a business enterprise’s goals and plans are achieved. Control is accomplished with the
use of feedback. Feedback is information that can be used to evaluate or correct the steps being
taken to implement a plan. Feedback allows the managers to decide to let the operations and
activity continue as they are, take remedial actions to put some actions back in harmony with the
original plan and goals or do some rearranging and re-planning at midstream.
Management accounting helps in the control function by producing performance reports and
control reports which highlight variances between expected and actual performances. Such

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reports serve as a basis for taking necessary corrective action to control operations. The use of
performance and control reports follows the principle of management by exception. In case of
significant differences between budgeted and actual results, a manager will usually investigate to
determine what is going wrong and possibly, which subordinates or units might need help.
(4) Decision-making:
Decision-making is a process of choosing among competing alternatives. Decision- objectives.
Similarly in organizing, managers need to decide on an organization structure and on specific
actions to be taken on day-to-day operations. In control function managers have to decide
whether variances are worth investigating. Making is inherent in each of three management
functions described above, namely, planning, organizing and controlling. A manager cannot plan
without making decisions and has to choose among competing objectives and methods to carry
out the chosen
12. Changes in the business environment have altered the nature of competition
and the types of techniques managers use to succeed in their businesses. These
changes include (1) an increase in global competition; (2) lean manufacturing; (3)
advances in information technologies, the Internet, and enterprise resource
management; (4) a greater focus on the customer; (5) new forms of management
organization; and (6) changes in the social, political, and cultural environment of
business. Management accountants have responded to the above six changes in the
contemporary business environment with 13 methods that are useful in
implementing strategy in these dynamic times. The first six methods focus directly
on strategy implementation—the balanced scorecard/strategy map, value chain,
activity-based costing, business intelligence, target costing, and life-cycle costing.
The next seven methods focus on strategy implementation through a focus on
process improvement—benchmarking, business process improvement, total quality
management, lean accounting, the theory of constraints, enterprise sustainability,
and enterprise risk management. Describe each briefly.
Answers
An increase in global competition:
Increasing global competition is changing the environment facing most companies today. As
trade barriers fall and transaction costs decline, new global competitors are entering previously
36 | P a g e
more isolated domestic markets. In response to this intensified competitive pressure, local
companies are pushed to enhance performance by innovating and adopting process and product
improvements. This domestic sector dynamic leads to higher productivity, which, in turn, can
create sustainable competitive advantages for companies, as well as being the most important
driver of job creation and per-capita income growth for the economy. Our new study goes further
than previous research by focusing on how increasing global competition leads to productivity
growth, using the US automotive manufacturing sector as a case example. More specifically, we
have focused on the production of new vehicles in the US, including parts assembly. We have
chosen this example because of the globally competitive nature of the automotive market and the
size of the US in this market over our period of analysis. As we shall see, some of the non-US
original equipment manufacturers (OEMs) had clear productivity advantages which enabled
them to create significant competitive pressure in the US market. In this report, we look at how
the Big Three US OEMs responded to the changed competitive environment, how they overcame
barriers to compete, or failed to do so, and how their introduction of process and product
innovations drove productivity growth
Lean manufacturing
Lean manufacturing is a methodology that focuses on minimizing waste within
manufacturing systems while simultaneously maximizing productivity. Waste is
seen as anything that customers do not believe adds value and is not willing to pay
for. Some of the benefits of lean manufacturing can include reduced lead times,
reduced operating costs and improved product quality.
Lean manufacturing, also known as lean production, or lean, is a practice that
organizations from numerous fields can enable. Some well-known companies that
use lean include Toyota, Intel, John Deere and Nike. The approach is based on the
Toyota Production System and is still used by that company, as well as myriad
others. Companies that use enterprise resource planning (ERP) can also benefit
from using a lean production system.
Advances in information technologies, The Internet, And Enterprise
Resource Management;

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With more innovation in technology, new businesses are created. With more business,
technology comes to the rescue by making things easier. The two exist in something of a
symbiotic relationship that ensures they will always coexist.

Business has been around since prehistoric times. It may have begun with nothing more than
barter trade, if the history books are to be believed, but it has since morphed into something far
more complex, and none of that would have been possible without technology. The major
industries of the world would collapse, if the existence and use of information technology were
to be snatched suddenly from businesses. That's because most business transactions and
operations cannot be conducted in the 21st century without technology.

Great customer focus

Customer Focus is an aligned organization-wide approach to customer satisfaction and service,
leading to customer loyalty and advocacy. The result is sustainable profitability.
Please watch this video which discusses customer focus and briefly describes our Customer-
Focused Leadership Workshop or continue reading the article below.
In a Customer Focused organization, Leadership, Processes and People are customer-aligned.
This requires that:
 Every action is shaped by a relentless commitment to meeting and exceeding customer
expectations regarding product and service quality.
 Customer touch points and supporting internal processes are constantly evaluated and
improved to meet or exceed those expectations.
 Every employee understands what he/she must do in order to maintain and add value to
every relationship with both the paying customer and those within the organization that
rely on them for the work they do.
While Customer Focus and service excellence is everyone ’s responsibility, this is particularly
true for anyone who manages and supervises others. That ’s why we believe that …                     .
New forms of management organization
New forms of organizations are geared to make organizations more receptive, adaptive
and generative -- always focused on meeting the needs of stakeholders. New forms of
management organizations often exhibit the following characteristics:

1. Strong employee involvement - input to the system starts from those closest to
the outcome preferred by the system, from those most in-the-know about whether the

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organization is achieving its preferred outcomes with its stakeholders or not. This way,
the organization stays highly attuned and adaptive to the needs of stakeholders.

2. Organic in nature - less rules and regulations, sometimes no clear boundaries and
always-changing forms

3. Authority based on capability - ensures the organization remains a means to an

end and not an end in itself

4. Alliances -takes advantage of economies of scale, e.g., collaborations, networks,

strategic alliances/mergers, etc.

5. Teams -shares activities to take advantage of economies of scale at the lowest

levels of activities and ensures full involvement of employees at the lowest levels

6. Flatter, decentralized organizations - less middle management, resulting in top

management exchanging more feedback with those providing products and services;
also results in less overhead costs

Bench making
The balanced scorecard enables a company to determine whether it is making continuous
improvement in its operations. But to ensure its success, a company must also compare its
performance with that of similar companies in the same industry. Benchmarking is a technique
for determining a company’s competitive advantage by comparing its performance with that of
its closest competitors. Benchmarks are measures of the best practices in an industry
The Balanced Scorecard
The Balanced Scorecard If an organization is to achieve its mission and objectives, it must
identify the areas in which it needs to excel and establish measures of performance in these
critical areas. As we have indicated, effective performance measurement requires an approach
that uses both financial and nonfinancial measures that are tied to a company’s mission and
objectives. One such approach that has gained wide acceptance is the balanced scorecard. The
balanced scorecard is a framework that links the perspectives of an organization’s four
stakeholder groups to the organization’s mission, objectives, resources, and performance
measures. The four stakeholder groups are as follows: Stakeholders with a financial perspective
(owners, investors, and creditors) value improvements in financial measures, such as net income
and return on investment. Stakeholders with a learning and growth perspective (employees)

39 | P a g e
value high wages, job satisfaction, and opportunities to fulfill their potential. Stakeholders who
focus on the business’s internal processes value the safe and cost-effective production of high-
quality products. Stakeholders with a customer perspective value high-quality products that are
low in cost. Although their perspectives differ, these stakeholder groups may be interested in the
same measurable performance goals. For example, holders of both the customer and internal
business processes perspectives are interested in performance that results in high-quality
products.
Theory of Constraints
Theory of Constraints According to the theory of constraints (TOC), limiting factors, or
bottlenecks, occur during the production of any product or service, but once managers identify
such a constraint, they can focus their attention and resources on it and achieve significant
improvements. TOC thus helps managers set priorities for how they spend their time and
resources. In identifying constraints, managers rely on the information that management
accounting provides. EXAMPLE. Suppose Vanna Lang wants to increase sales of store-roasted
coffees. After reviewing management accounting reports, she concludes that the limited
production capacity of her equipment—a roaster that can roast only 100 pounds of coffee beans
per hour—limits the sales of the store’s coffee. To overcome this constraint, she can rent or
purchase a second roaster. The increase in production will enable her to increase coffee sales.
Business process improvement,
JIT, TQM, ABM, and TOC all make a contribution to continuous improvement, as war on
wasted time, wasted resources, and wasted space. All employees are encouraged to look for ways
of improving processes and saving time. Total quality management focuses on improving the
quality of the product or service and the work environment. It pursues continuous improvement
by reducing the number of defective products and the time needed to complete a task or provide
a service. Activity-based management seeks continuous improvement by emphasizing the
ongoing reduction or elimination of nonvalue-adding activities. The theory of constraints helps
managers focus resources on efforts that will produce the most effective improvements. Each of
these management tools can be used individually, or parts of them can be combined to create a
new operating environment. They are applicable in service businesses, such as banking, as well
as in manufacturing and retail businesses. By focusing attention on continuous improvement and
fine-tuning of operations, they contribute to the same results in any organization: a reduction in
product or service costs and delivery time, an improvement in the quality of the product or
service, and an increase in customer satisfaction.

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Total quality management
Total quality management (TQM) requires that all parts of a business focus on quality. TQM ’s
goal is the improved quality of products or services and the work environment. Workers are
empowered to make operating decisions that improve quality in both areas. All employees are
tasked to spot possible causes of poor quality, use resources efficiently and effectively to
improve quality, and reduce the time needed to complete a task or provide a service. TQM, like
the JIT operating philosophy, focuses on improving product or service quality by identifying and
reducing or eliminating the causes of waste. Like JIT, TQM results in reduced waste of
materials, higher-quality goods, and lower production costs in manufacturing environments. To
determine the impact of poor quality on profits, TQM managers use accounting information
about the costs of quality. The costs of quality include both the costs of achieving quality (such
as training costs and inspection costs) and the costs of poor quality (such as the costs of rework
and of handling customer complaints). Managers use information about the costs of quality
Business intelligence
Business intelligence (BI) combines business analytics, data mining, data visualization, data
tools and infrastructure, and best practices to help organizations to make more data-driven
decisions. In practice, you know you’ve got modern business intelligence when you have a
comprehensive view of your organization’s data and use that data to drive change, eliminate
inefficiencies, and quickly adapt to market or supply changes.
It’s important to note that this is a very modern definition of BI—and BI has had a strangled
history as a buzzword. Traditional Business Intelligence, capital letters and all, originally
emerged in the 1960s as a system of sharing information across organizations. It further
developed in the 1980s alongside computer models for decision-making and turning data into
insights before becoming specific offering from BI teams with IT-reliant service solutions.
Modern BI solutions prioritize flexible self-service analysis, governed data on trusted platforms,
empowered business users, and speed to insight.

Target costing

Target costing is very much a marketing approach to costing. The Chartered Institute of
Marketing defines marketing as: ‘The management process responsible for identifying,
anticipating and satisfying customer requirements profitably. ‘In marketing, customers rule, and
marketing departments attempt to find answers to the following questions: Are customers

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homogeneous or can we identify different segments within the market? What features does
each market segment want in the product?
What price are customers willing to pay?
To what competitor products or services are customers comparing ours?
How will we advertise and distribute our products? (There are costs associated with those
activities too)
Marketing says that there is no point in management, engineers and accountants sitting in
darkened rooms dreaming up products, putting them into production, adding on, say 50% for
mark-up then hoping those products sell. At best this is corporate arrogance; at worst it is
corporate suicide.
Note that marketing is not a passive approach, and management cannot simply rely on
customers volunteering their ideas. Management should anticipate customer requirements,
perhaps by developing prototypes and using other market research techniques. Therefore
really important information relating to a new product is:
Of course, there will probably be a range of products and prices, but the company cannot
dictate to the market, customers or competitors. There are powerful constraints on the product
and its price and the company has to make the required product, sell it at an acceptable and
competitive price and, at the same time, make a profit. If the profit is going to be adequate, the
costs have to be sufficiently low. Therefore, instead of starting with the cost and working to the
selling price by adding on the expected margin, target costing will start with the selling price of
a particular product and work back to the cost by removing the profit element. This means that
the company has to find ways of not exceeding that cost.

Life cycle costing

As mentioned above, target costing places great emphasis on controlling costs by good product
design and production is planning, but those up-front activities also cause costs. There might be
other costs incurred after a product is sold such as warranty costs and plant decommissioning.
When seeking to make a profit on a product it is essential that the total revenue arising from the
product exceeds total costs, whether these costs are incurred before, during or after the product is

42 | P a g e
produced. This is the concept of life cycle costing, and it is important to realize that target costs
can be driven down by attacking any of the costs that relate to any part of a product’s life. The
cost phases of a product can be identified as:
Enterprise sustainability
Sustainability does not have to come at a cost. A well-designed sustainability program can help
companies increase profits by generating savings, driving growth, and reducing risk.

Creating a sustainable enterprise involves transforming the entire value chain from the supply of
materials to product design, operations, sales and marketing, and end-of-life management. We
help clients uncover opportunities and risks, set priorities, and launch coherent implementation
programs.

To support the building of sustainable enterprises, we have developed a diagnostic tool that
identifies opportunities to promote growth through new products, new markets, and the
composition of the business portfolio; improve return on capital through green sales and
marketing, sustainable value chains, and sustainable operations; and manage risk, whether
regulatory, reputational, or operational.

Enterprise risk management

Enterprise risk management (ERM) is the process of assessing risks to identify both threats to a
company’s financial well-being and opportunities in the market. The goal of an ERM program is
to understand an organization's tolerance for risk, categorize it, and quantify it.

When companies look at enterprise risk, the traditional approach is to look at financial risks,
regulatory risks and operational risks. What happens if the exchange rate drops and the interest
rate rises, if new drugs don't get FDA approval, or if your main warehouse burns down?

To make the calculation, you take the potential impact of an event and multiply it by the odds of
that event happening. For low-impact events, even a high probability of occurrence won't affect
the company's total risk exposure by much, while for high-impact events, even a low probability
of occurrence is potentially devastating.

Risks posed by the cyber security threat landscape are increasingly part of the ERM equation,
and that poses a challenge for CISOs and other senior security professionals. Quantifying the
business impact of a cyber security event is a very difficult, if not impossible task, and
quantifying the likelihood of such an event is even harder.

13. Why does an emphasis on accounting limit an understanding of the broader

importance of management control? What contribution can non-financial
performance management make to our understanding of management control
within organizations?
Answer

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What contribution can non-financial performance management make to our
understanding of management control within organization .so what about the
benefits? What are the tangible reasons for using MCSs? The benefits of
implementing the framework focus largely on different ways operational efficiency
is enhanced and improved.
First, implementation of an MCS can reduce risks. The organization will remove
non-conformity by ensuring the actual performance and results relate to the main
objectives of the organization. The organization doesn’t just set goals and then
pursue them blindly, but has systems in place to ensure the processes are moving
the organization towards the objectives.

Since you are aware of the effectiveness of your systems, you can notice problems
quicker. You reduce risk as you notice problems before they turn into a disaster.
Consider you are aiming to boost sales to increase the organization ’s bottom line.
Due to having a Management Control System in place, you’ll be alerted if the cost
of production goes up and the targets become harder to obtain.
In even simpler turns, imagine you are driving down the road. Now if your car just
stops suddenly because it ran out of fuel, you are in trouble and you didn ’t have a
warning system in place. On the other hand, if you have a system in place
monitoring your fuel levels, you can have an alarm notify you when you are
running low on fuel. This allows you to take corrective action (find a gas station),
before you are stuck on the side of the road.
The framework also improves your organization’s ability to plan future actions.
The information flows faster under the MCS system, as each part of the
organization’s process is being monitored and analyzed. The enhanced
information flow makes it easier to plan and organize future processes and ensure
objectives are set properly.
Without the kind of information MSC provides, you would find long-term planning
difficult, as you wouldn’t have the right facts or the control to guarantee you are
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aware of the current situation and on top of future predictions. In the car example,
knowing how much fuel you have in each moment and the distance you need to
travel will make it easier to plan when you need to stop to refuel.
Organizational efficiency also improves in the form of better facilitation of co-
ordination. For any business to succeed, a good communication between the
management and other parts of the business is the key. With MSC in place, the
workers, their tasks and objectives are aligned with the management’s tasks and
objectives.
The control systems in place create a middleman between the management and the
employees and feeds information to both directions. As you, the manager, become
more aware that sales numbers are increasing due to a specific result, you can use
the information to tweak and perfect the system further. On the other hand, this
also improves employee motivation and gives them feedback on the things they are
doing right.
MSC naturally provides benefits in a pure managerial point of view. The first is
how managerial problems are much easier to notice. Each organization will face
problems related to the other managerial functions of planning, staffing and
organizing, but with a proper control system in place, the impact of these can be
limited. You gain more information, you receive early notifications when the
management is not working to its standard, and you are able to remedy the
situation before it gets worse.
Furthermore, supervision becomes much easier under the systematic control
system, since the deviations are easier to spot. The data and information you
receive as a manager will make it easier to notice the issues, instead of having to
monitor each employee constantly. Supervision is smoother and more focused on
spotting the actual problems and deviations in the system.

Finally, MCS supports organizational decentralization, without the loss of control.

The system creates an environment of knowledge and understanding of the
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objectives. A key part of the framework is the proper communication of the goals
and policies in place to subordinates. Since the subordinates and lower level
managers are on top of the current situation and are fully aware of the
expectations, they can have more confidence in doing the right things.
14. XYZ company’s projected profit for the coming year is as follows;
Total per unit
Sales………………. ……… $ 200,000 $ 20
Less Variable exp…………$120,000 $ 12
Contribution margin………$ 80,000 $8
Less: Fixed costs…………..$ 64,000
Operating margin………….$ 0

Based on the above data, Determine;

1. The breakeven point in units
2. The breakeven point in dollars
3. The contribution margin ratio
Solution
1) Break even quantity (BEQ) = Fixed cost
(Price in unit-Variable cost per unit)
This formula gives the BEP in number of units
= 64,000
(20 -12)
=64,000
8
=8000 unit
=====

2) The breakeven point in dollars = TR at BEP = F

1-vp
This gives BEP in terms of sales birr
BEP sales = F
P-Vc
P
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 Or

= 64,000
(20 -12)
20

= 64000
8
20

= $64,000x20
8

= $1280,000
8

= $160,000
=============
OR

BEP in dollar = BEP.Q ×P

= 8000 unit x$20

=$160,000

==========

3. The contribution margin ratio

The contribution margin ratio = CM ration= CM per unit

P
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 Cm per unit =sales price –variable cost

= sp-vc

= $20 -$12

= $8

CM ratio = cm per unit

100

=8/100

=8%

=====

15. PQS Corporation manufactures and sells a seasonal product that has peak
sales in the third quarter. The following information concerns operations for
Year 2—the coming year—and for the first two quarters of Year 3:

a. The company’s single product sells for $8 per unit. Budgeted sales in units
for the next six quarters are as follows (all sales are on credit):

b. Sales are collected in the following pattern: 75% in the quarter the sales are
made, and the remaining 25% in the following quarter. On January 1, Year 2,
the company’s balance sheet showed $65,000 in accounts receivable, all of
which will be collected in the first quarter of the year. Bad debts are negligible
and can be ignored.

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c. The company desires an ending finished goods inventory at the end of each
quarter equal to 30% of the budgeted unit sales for the next quarter. On
December 31, Year 1, the company had 12,000 units on hand.

d. Five pounds of raw materials are required to complete one unit of product.
The company requires ending raw materials inventory at the end of each
quarter equal to 10% of the following quarter ’s production needs. On December
31, Year 1, the company had 23,000 pounds of raw materials on hand.

e. The raw material costs $0.80 per pound. Raw material purchases are paid
for in the following pattern: 60% paid in the quarter the purchases are made,
and the remaining 40% paid in the following quarter. On January 1, Year 2,
the company’s balance sheet showed $81,500 in accounts payable for raw
material purchases, all of which will be paid for in the first quarter of the year.

Required: Prepare the following budgets and schedules for the year, showing
both quarterly and total figures:

1. A sales budget and a schedule of expected cash collections.

2. A production budget.

3. A direct materials budget and a schedule of expected cash payments for

purchases of material.

SOLUTION

1. A sales budget and a schedule of expected cash collections

Solution

A) Sales budget

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 Quarter

1 2 3 4
Expected sales in 40,000 60, 000 100, 000 50, 000
units
Selling price per x $ 8 x$8 x $8 x $8
unit
Total sales $320,000 $480,000 $800,000 $400,000
b) Schedule of expected Cash Collections

Quarter
1 2 3 4 Total
25% of the previous $650,000 $80,000 $120,000 $200,000 $1,050,000
quarter sales
75%ofthe current 240, 000 360,000 $600,000 $300,000 1,500,000
quarter sales
Total collections $890, 000 $440,000 $720,000 $500,000 2550, 000
3. A production budget

After the sales budget has been prepared, the production requirements for the
forth-coming budget period can be determined and organized in the form of a
production budget. Sufficient goods will have to be available to meet sales
and provide for the desired ending inventory. A portion of these goods will
already exist in the form of a beginning inventory. The remainder will have
to be produced. Therefore, production needs can be determined as follows:

Budgeted sales in units ………………………………………… xxxx

Add desired ending inventory……………….…………………. xxxx

Total needs……………………………………………………… xxxx

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 Less beginning inventory……………………………………….. xxxx

Required production……………………………………………. .xxxx

The schedule given below shows the production budget for PQS Corporation.
Note that the desired level of the ending inventory influences production
requirements for a quarter. Inventories should be carefully planned.
Excessive inventories tie up funds and create storage problems. Insufficient
inventories can lead to lost sales or crash production efforts in the following
period

A production budget

Quarter Total
1 2 3 4
Expected sales(units) 40, 000 60, 000 100, 000 50, 000 250, 000
Add: Desired Ending Inventory 18, 000 30, 000 15, 000 21, 000 21, 000
Total needs 58, 000 90, 000 115, 000 61, 000 229, 000
Lees: Beginning Inventory 12, 000 18, 000 30, 000 15, 000 12, 000
Units to be produced 46, 000 72,000 85, 000 46, 000 217, 000

4. A direct materials budget and a schedule of expected cash payments for

purchases of material.

a)A Direct Materials Budget

Solution

Returning to PQS Corporation budget data, after the production requirements have been
computed, a direct materials budget can be prepared. The direct materials budget details the
raw materials that must be purchased to fulfill the production budget and to provide for
adequate inventories. The required purchases of raw materials are computed as follows:
Raw materials needed to meet the production schedule…………………………….xxxx
Add desired ending inventory of raw materials……………….……………………..xxxx
Total raw materials needs…………………………………………………… .xxxx
Less beginning inventory of raw materials………………………….………… xxxx

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 Raw materials to be purchased………………………………………………………. .xxxx

Quarter Total
1 2 3 4
Production needs(pounds) 230, 000 360, 000 425, 000 230, 000 1, 245, 000
Add: Desired ending inventory 36, 000 42, 500 23, 500 36, 500 36, 500
Total needs 266, 000 402,500 448, 500 266, 500 1, 483, 500
Less: Beginning inventory 23, 000 36, 000 42, 500 23, 500 23, 000
Raw materials to be purchased(pounds) 243, 000 366, 500 406, 000 243, 000 1, 258,500

Raw Materials to be purchased (Dollar)

1 2 3 4 Total
Raw materials to be 243, 000 366, 500 406, 000 243, 000 1, 258,500
purchased
Raw materials cost per X$.0.80 X$.0.80 X$.0.80 X$.0.80 x X$.0.80
pound
Total $194, 400 $293, 200 $324,800 $194,400 $1,006,800

B ) Schedule of Expected Cash Disbursements (for Materials Purchase)

Quarter Total
1 2 3 4
40% of the previous $81,500 $77,760 $117,280 $.129,920 $.289,460
quarter
60% of the current 116,640 175,920 194,880 116,640 604,080
quarter
Total cash disbursement $.189,140 $.253,680 $312,160 $.246,560 $.893,540

END!
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