Exam 1: Cost Management and Strategic Decision Making Evaluating Opportunities and Leading Change

The ethical standard of confidentiality would prohibit Management Accountants from testifying in Court against their employers.

Cost Management teams often find that employees are sources of valuable information and suggestions in cost management review.

Companies in the United States are required by law to follow the code of ethics developed by the Institute of Management Accountants (IMA).

Companies that outsource support services do not understand the concepts underlying the value chain.

The outside supplier has quoted a price of $90 per unit for supplying this component. The following is a conversation that took place among the manufacturing manager (Dana Rice), buyer (Emily Scanlon) and Sam Weiss. Weiss: I think that we should continue to manufacture internally because we can save $1.90 per unit on this component. Rice: According to your report, we would save $1.90 per unit, but I do not agree with those numbers. Weiss: What do you mean? I have followed the same costing guidelines this company has used for years. I have even cross-checked my numbers with historical data and know for sure that the overhead rates which I have used are correct. Rice: I am sure you have done your job thoroughly, but I think that our costing system is archaic. This component is complex and difficult to manufacture. I believe that our overhead allocation method does not accurately capture the production difficulties and the additional resources that are devoted to the manufacture of this component. For example, a significant portion of our quality problems are due to this component. We spend close to a third of our quality inspection time on just this component alone, but that is not reflected. These quality problems cause delays in getting this component to the assembly department, and that causes a delay in getting the final product to the customers. Many of our customers are expecting just-in-time deliveries, and they get upset when we're late. Scanlon: I know that the supplier that has approached us has a strong reputation for quality. Therefore, we can rest assured that we will have negligible quality problems. Rice: Sam, your report does not consider this additional benefit from buying outside. I would appreciate if you can rework your numbers to better reflect the true costs associated with manufacturing this component internally. Required: (a) Assume the role of Sam Weiss. What are the different elements of costs that are likely to be associated with the manufacture of the component? Does the current costing system capture these costs? (b) Recommend improvements in the costing system. (c) How can Weiss quantify "qualitative" benefits such as quality and on-time delivery? Thompson Metal Corporation (TMC) supplies various types of machine tools to manufacturing companies. TMC has always paid a lot of attention to the quality of its products. Recently, an outside supplier has approached TMC to supply an important and intricate component of one of its more advanced tools that TMC has been manufacturing in-house. Sam Weiss, a junior accountant at TMC, has collected the following information regarding this proposal. The cost of manufacturing one unit of this component internally are as follows:

In a presentation to the investment community, Sam Palmisano, CEO of IBM Corporation, stated: "We intend to continue to take share, as we have in the past two or three years, in our core businesses." Palmisano contended that the category of business-process transformation services, such as customer support, human resources, and other administrative overhead, represents an untapped market of $500 billion dollars if businesses outsourced these functions to companies like IBM. IBM's expressed goal is to capture 10% of this new market. Palmisano also cited new business opportunities in information technology. The company's new chief financial officer, John Loughridge, stated that IBM's goal was to achieve high-single digit annual percentage gains in sales and greater than 10% yearly increases in earnings per share. (Source: Barron's: May 24, 2004) Required: (a) Does the strategy described by IBM's management fall into the build, hold, harvest or divest category of strategic missions? Explain your answer with specific examples related to the general characteristics of that category of strategic mission. (b) Identify the types of risks and rewards normally encountered by a company with the strategic mission described by IBM's management.

Management should emphasize long term success over short term achievements in creating a successful culture for organizational change.

Quantitative information is expressed only in dollars.

The extended value chain:

Use the following to answer questions: In the Management's Discussion and Analysis section of its 2005 annual report, the CEO of McDonald's Corporation discussed the strategic direction and financial performance of the company by referring to the comprehensive revitalization plan initiated by the company in 2003: "in 2003, the Company initiated a comprehensive revitalization plan focused on maximizing customer satisfaction and strengthening our financial position. We redefined our strategy to emphasize growth through adding more customers to existing restaurants and aligned the System around our customer- focused Plan to Win. We streamlined processes such as new product development and restaurant operations, improved our training programs, and implemented performance measures, including a restaurant review and measurement process, to enable and motivate franchisees and restaurant employees to serve customers better." Among the improvements cited were: (1) Improving the taste of many of the core offerings (2) Streamlining processes such as new product development and restaurant operations (3) Implemented performance measures to enable and motivate franchises to service customers better (4) Achieved high levels of customer awareness worldwide During 2005, McDonald's comparable sales increased 3.9%, earnings per share increased from $1.79 to $2.04, cash from operations increased $433 million to $4.3 billion and the company repurchased $1.2billion in common stock. (McDonald's 2005 Annual Report) -Which of the improvements cited by McDonald's is an example of the extended value chain?

Which of the following is not a piece of qualitative information in a decision?

Maria Kadison, Controller at Robbins Corporation, became aware that Robbins is in talks with Hallion Company for a friendly merger. Maria discloses this information to her immediate family. No member of Maria's family purchases either Robbins' or Hallion's stock before the merger. Which of the following is True?

Holinger quoted a price of $66.60 for each engine transferred to the SBAD. John Hargreaves, the manager of SBAD, was furious to note that the ED was "trying to make money off a sister division."He argued that the price must include only the cost of materials, as all other costs will be incurred irrespective of whether or not SBAD places the order for 20,000 engines. Matt Hall, the production manager of ED, pointed out that the special equipment will be purchased only for fulfilling this internal order. Moreover, he argued that inspection must also be done just like on all other engines; therefore, the inspection costs must also be included. Labor is paid a flat monthly salary. Other manufacturing costs include both variable and fixed components (in roughly equal proportion). Required: (a) Given that excess capacity exists, what is the minimum price that the ED must charge to the SBAD? (b) What are the pros and cons of internal sourcing? Cleary Yard Equipment Corporation manufactures lawn mowers and snow blowers. It also manufactures engines that are used by the Lawn Mower Assembly Division (LMAD). The Engine Division (ED) also sells about 40% of its output to the outside market (these are multipurpose engines). Its annual capacity is 150,000 units and annual output 135,000 units. All engines sold internally to the LMAD are priced at cost plus 20% markup. In January 2007, the Snow Blower Assembly Division (SBAD) approached the ED to 'buy' 20,000 engines. Diane Holinger, the controller of ED, computed the costs of manufacturing these engines as follows:

The Value Chain is a set of linked operations or processes that begins in the manufacturing process of a company.

In September, 2006, Paul Otellini, CEO of Intel Inc., a computer chipmaker, announced the company's plan to eliminate 10,000 jobs, approximately 10% of the company's worldwide workforce of 100,000 employees. Many of the job cuts would be in the marketing area, as company studies concluded that the company's ratio of marketing personnel to salespeople was higher than that of competitors. This move follows the layoff of 1,000 managers in July, 2006. The strategic moves were in response to Intel's lost market share to rival Advanced Micro Devices in recent years and 57% drop in net income and 13% drop in revenues from the previous fiscal year. (News.Com. September 5, 2006) Required: (a) Describe the quantitative aspects of Intel's decision. (b) Describe the quantitative aspects of Intel''s decision. (c) What step in Intel's value chain is impacted by this decision?