Finance & Accounting

Use And Purpose Of ABM

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Assessment Type

Case Study

Word Count

2000 words

Subject

Accounting Research

Deadline

4 Days

Assignment Criteria

This assessment task will be testing your individual responses to the questions contained in this document. It will enable you to demonstrate your knowledge and the application of skills relevant to that knowledge, as well as your communication skills. 

Learning objectives 

Learning objective 1: Demonstrate an understanding of applied a research problems in management accounting, and prepare strategies for their solution 

Learning objective 2: Demonstrate an understanding of applied research methods 

Learning objective 3: Collect and analyse accounting research data using applied research methods 

Learning objective 4: Designing applied accounting research methods 

Please use the following guidelines to submit your answers 

Submission Guidelines: 

  1. Your assessment task will be graded only if word processed (i.e., not hand written) and submitted electronically as set out in point 2 below 
  2. Please submit this assessment task electronically through the Study Desk. 
  3. See Assessment Submission Instructions (How to submit your learning/assessment tasks to the study desk) in the Assessment folder of the study desk for course ACC8000 

Requirement 

There are seven (7) questions or criteria on page 4 of this document. All requirements for these seven (7) questions or criteria must be answered with a total word limit of 2,000 words for your answers (excluding the reference list). 

The director has asked you to provide evidence in director's replies 2, 4, and 5 as well as examples in director's reply 2. It is implied that you will use the specified research articles or professional articles as the basis for the evidence or examples in the five specific requirements. Please remember to use the following Harvard guide for a reference when you provide the source of your examples. An item in the reference list would appear as follows: W Alissa, V Capkun, T Jeanjean, N Suca, 2014. An empirical investigation of the impact of audit and auditor characteristics on auditor performance, Accounting, Organizations and Society, Volume 39, Issue 7, October, Pages 495–510. When the same paper is referred to in the body of the text it would be shown as: (Alissa et al. 2014). Please use et al. when there are more than two authors. 

Marking Scheme 

The computer generated and electronically submitted assessment will be marked out of 100 marks. The marks available for each requirement for each of the seven (7) requirements are provided at the end of each requirement. 

The assessment task will have a 30% weighting towards the final grade for the course. That is, an awarded mark of 78 marks for the assessment task will receive 23.4% of the total grade for the course. 

ACC8000 ASSIGNMENT TWO, DUE 23 May, 2015, 11:59pm, 30% 

CASE STUDY DETAILS 

Jones, Alkindi, and Nguyen (JAN) is a small business with $4.5 million annual turnover. It employs about 20 people in its factory, which is located in Adelaide, Australia. The four types of machines produced by JAN are used in the picture framing industry; (1) a guillotine – framing machine, (2) a mitre saw- framing machine, (3) a roller laminating machine, and (4) an underpinning machine. The business manufactures only 22% of parts of the machine in-house and purchases 78% of parts from subcontractors and suppliers. The assembly of all these parts is the main activity of the business. 

You have recently been appointed as the production cost accountant at JAN and from your initial investigations you discover information about JAN activities and costing systems. You have a discussion with the managing director of JAN. Your statements in the discussion and her replies to each statement are as follows: 

Your Statement 1: 'I have found that all activities are performed manually in a traditional manner and indirect (overhead) costs are accumulated into one indirect cost pool and allocated to each product type based on the number of sales for each products as a proportion of total number of sales. The indirect costs allocated to the simple machines (containing fewer parts), with the larger number of sales, are higher than the costs allocated to more complex machines (containing more parts) with a smaller number of sales.' 

Director's Reply 1: 'Yes I know. We chose this approach many years ago because we believed that the machines with higher number of sales are more able to cover a higher proportion of the indirect costs and they probably use more of these costs anyway. However, we have noticed we are not selling as many of the simpler machines as we did previously. Do you think our costs are the reason, if so, why?' 

Your Statement 2: 'I think this is part of the problem and I believe that information provided by an Activity Based Costing (ABC) system may be used to identify how the indirect costs are used by each activity. Marketing is another cost to consider because it is just divided equally between the four types of machines.' 

Director's Reply 2: 'That is interesting, but I have never heard of ABC and I will need more than just your opinion. Can you provide me with some valid evidence that supports your opinion?' 

Your Statement 3: 'Well, before I start working on this ABC evidence to support my opinion, there is something else to consider. In addition to investigating the indirect costs allocation and the marketing costs, I believe we need to conduct activity analysis using an Activity Based Management (ABM) method so that we may able to understand what causes activity costs and activity improvement opportunities, by classifying activities as either value added or non-value added activities.' 

Director's Reply 3: 'What are you talking about value added or non-value added activities? Give me some examples before I consider this extra problem.' 

ACC8000 ASSIGNMENT TWO, DUE 23 May, 2015, 11:59pm, 30% 

Your Statement 4: 'I have conducted some preliminary investigations and I have found that about 20% of activities are non-value added. There are two types of non-value activity costs; production and marketing. The three production non-value added activities (and each activity's percentage of such non-value added costs) are material handling (about 25%), inventory carrying (approximately 55%), and product quality inspections (around 20%), which are approximately 17% of total indirect costs. I also notice that the more complex machines need more parts moved, carried more inventory, and require more inspections (because there are more parts to consider) than the simple machines. The marketing non-value added activities and costs are about 13% of total indirect costs. I believe a review is warranted because these non-value activity costs are about 30% of total indirect costs.' 

Director's Reply 4: 'You have my attention but I need more evidence than just these percentages or proportions. I also want to know whether has this type of costing and management system been successfully implemented previously and how it was introduced. I just don't want your comments; I want you to provide me with evidence of how this occurred.' 

Your Statement 5: 'While we are discussing these non-value added activities, I believe I have identified three causes for the need for the high proportion of product quality inspections. 

  1. a lack of commitment to the goals by employees, 
  2. a need for training of employees (and some subcontractors' employees), 
  3. the quality of the parts from our suppliers from overseas. 

I think we need to consider involving our employees in the budgeting process and encourage our subcontractors and suppliers to consider the same participation and training so they have commitment and knowledge so they can identify the costs of these non-value added activities. I also believe JAN should consider a management and performance system called the balanced scorecard so it can consider JAN's value chain stakeholders.' 

Director's Reply 5: 'What! Ask my employees how to run our business? A scorecard, are we going back to school? How am I going to explain this to the board of directors? Like me, none of them are accountants so you need to provide evidence from work already successfully completed and you will need to show how the evidence is valid and relevant to us.'

 ACC8000 ASSIGNMENT TWO, DUE 23 May, 2015, 11:59pm, 30% 

Assessment Task 2 assesses the four learning objectives mentioned on page 1 of this assessment task document and involves the application of skills for topics 1, 2, 3, 4, & 5 to topic 6 

Prepare a brief report (using the provided headings) to the Board of Directors that responds to the points made by the director. Provide a discussion about information, study's validity, and evidence. Use the discussion from these sections to support your conclusions and recommendations. 

  1. Heading 'The use and purpose of ABC': Using the article by Raffish (1991), provide information and evidence to support your Statement 1, Statement 2 and part of Statement 4 and provide what is needed as mentioned in the director's Reply 1, Reply 2 and the ABC part of Reply 4. 15 marks 
  2. Heading 'The use and purpose of ABM': Using the article by Zheng and Gou (2011), provide information and evidence to support your Statement 3 and Statement 4 and provide what is needed as mentioned in the director's Reply 3 and Reply 4. 

15 marks 

  1. Heading 'Commitment to the goals by employees': Using the article by Chong M. Lau and Jerome Caby, (2010), provide information and evidence to support your Statement 5 cause 1 as well as Sholihin, Pike, Mangena, and Li (2011), your budgetary participation statement under your Statement 5. Also provide what is needed as mentioned in the directors Reply 5 related to the director's first and third questions about your budgetary participation statement. 20 marks 
  2. Heading 'Training of employees and some subcontractors' employees)': Using the articles by Wong-On-Wing, Guo, Li, Yang (2007) and any study by Kaplan and Norton involving their 'Strategy Map', provide information and evidence to support your Statement 5 cause 2. Also provide what is needed as mentioned in your director's Reply 5 related to the director's second and third questions about your balanced scorecard implementation statement. 20 marks 
  3. Heading 'The quality of the parts from our suppliers from overseas': Assume JAN's suppliers are based in New Zealand, China, and Malaysia. Using the article by Chong M. Lau and Jerome Caby, (2010) provide information and evidence from that study to make directors aware of possible limitations to the goal mentioned under Statement 5 cause 1 from Sholihin, et al (2011) study. Also, explain why the findings of Lau and Caby (2010) may have implications or limitations on overcoming the cause 3 problem in your Statement

You also may wish to use supplementary e-readings for Topic 6 week 1 from Hofstede's Cultural dimensions; in particular the individualism and power distance. 15 marks 

General format and presentation criteria 

  1. Your report should contain the necessary evidence, be your interpretation of the information and your deductive and inductive reasoning to support your discussion. The information in your conclusions must be derived from your discussion in your analysis (body of the report) and your recommendations must be derived from your conclusions. 10 marks 

7. Providing a professional presentation (e.g., proof-reading and using the appropriate format, referencing and presentation). 5 marks

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Assignment Solution

Introduction

JAN is a company manufacturing four types of machinery. Now it is a settled company earning a reasonable income. However, the company uses traditional methods of costing to allocate its indirect costs to the products manufactured on the basis of the sales. I have recommended the company and the board about the usage of Activity-based costing and Activity-based management to improve the manner in which the costs should be allocated. Such a rational method is necessary for the true and fair reflection and allocation of costs. I have also suggested that training and motivation of the employees by making them a part of the budgetary decision-making would help improve their cooperation and involvement, thereby helping improve the efficiency and effectiveness of the company as a whole.

Use and purpose of ABC

Activity Based Costing is a method and technique so as to manage an organization in an efficient and effective manner. It is one of the exercises which measure the costs incurred for the performance of any activities, resources and the objects in order to generate accurate information which is used for the effective decision-making process. ABC establishes a relationship between overhead costs and activity so that the overhead costs can be more precisely allocate to the product, services or customer segment. (Murti, 2010)

  1. Activity Cost: ABC analysis helps an organization to understand their cost of activities according to industry standards. If it does not match the standards specifies, the management can focus on cost reduction.
  2. Minimum Price: ABC analysis helps and management to determine its minimum price for the product they offer, according to the market demand and the competitor's product in order to face competition and to be in the market. It helps to determine which overhead cost should be the minimum depending on the circumstances under which the product is being sold. (Murti, Strategic Cost Management, 2010)

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