Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading

Change
CHAPTER 1
Cost Management and Strategic Decision Making
Evaluating Opportunities and Leading Change
ANSWERS TO REVIEW QUESTIONS
1.1 Refer to the list of key terms at the end of Chapter 1 and the glossary.
1.2 The primary objective of cost management is to find opportunities for
improvements in costs and customer value and to lead changes to achieve those
opportunities.
1.3 The value chain is a way to describe relations among an organiation!s
operations. The value chain describes how an organiation assigns its resources
to these operations and how one operation affects other operations. "t is
important for managers to understand the value chain because it can be the basis
for competitive advantages and is the starting point for making improvements in
the organiation.
1.# $trategic decision making involves obtaining and using resources to meet an
organiation%s goals by e&ploiting its competitive advantages. Competitive
advantages may be from lower cost operations' higher customer value' and ability
to innovate. (&amples of strategic decisions include a) outsourcing support
services to gain a cost advantage' b) adding product features that customers
value at low cost' and c) focusing resources on development or ac*uisition of
new technology.
1.+ Cost management techni*ues include,
Comparing performance over time and against competitors
-enefit.cost analysis of plans and decision alternatives
/alue.chain analysis of alternative resource arrangements and processes
0earning and educating others about the organiation' its competitors' and
its environment
1easuring the e&pected efficiency of ac*uiring and using resources in
alternative operations
"dentifying opportunities for improving the value and cost of new or
e&isting products and services
0eading organiational change
1easuring actual outcomes of activities' products' and services
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Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
2eveloping measures and methods for motivating and evaluating
personnel
Communicating the results of cost management activities effectively
(&plaining and interpreting differences between actual outcomes and
plans or e&pectations
1.3 Cross.functional teams are composed of individuals who bring diverse technical
and personal attributes. Cross.functional teams provide wide representation of
interests and diversity of perspective. -ecause of this diversity' cross.functional
teams may generate more creative solutions to problems and identify more
innovative opportunities than individuals or less diverse teams.
1.4 -enefit.cost analysis compares e&pected benefits and costs using both
*uantitative and *ualitative information. 0ong.term and short.term impact on
strategic goals should be considered.
1.5 6utsourcing portions of an organiation!s value chain means that payments are
made to others for products or services and other resources that had been used
to perform the outsourced operations have been freed up and may be saved or
used for other operations. Contracts and other assurances 7market forces'
reputation) also have replaced internal control of the outsourced operations.
1.8 (thical standards can guide individuals% behavior when circumstances or others
create pressures to make *uestionable decisions. 9n organiation benefits from
ethical standards by attracting and retaining individuals who share those
standards and by providing a framework and climate for responsible decision
making. $ociety benefits from ethical standards that are followed because trust
and ethical behavior is the least cost prescription for efficient business relations.
1.1: 9 code of ethics is a professional or organiational statement of values and
prescribed behavior. 9n unethical person could perform ade*uately within an
organiation or profession by adhering to a code of ethics. ;owever' a person
with a strong set of ethical standards probably does not need a code of ethics to
control his or her behavior. 9n ethical person can use a code of ethics to bolster
his or her actions against those that might try to improperly influence behavior.
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Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
1.11 The strategic missions of build' hold' harvest' and divest can represent different
stages of an organiation%s lifecycle. The build mission is apparent when new
ideas and products capture the marketplace and growth is rapid 7but perhaps
variable and risky). The hold mission is appropriate when the firm%s ideas and
products have become mainstream and the main task is to fend off imitators. The
harvest mission signals a time to control costs and manage cash flow' probably
to fund the ne&t generation of new ideas and products. The divest mission signals
the end of the lifecycle' at least for current owners and managers' and it is time to
li*uidate assets and fund new operations.
1.12 $trategic advantages derive from uni*ue capabilities' which are difficult to imitate'
to create and deliver products. These uni*ue capabilities can be the results of
creating new knowledge 7e.g.' through R<2)' imitation of others 7e.g.' reverse
engineering and lower cost production)' or by e&perimentation with new
processes' products' or joint ventures with other firms. 1aintaining competitive
advantages is possible by staying ahead of competitors and by protecting
proprietary knowledge and customer relations.
1.13 =uantitative information may be e&pressed in numerical *uantities' such as
number of units' dollars of cost' and so on. =ualitative information describes
attributes' such as color' perceived *uality' taste' and so on.
1.1# >otter!s eight elements of leading change are,
1. "dentify a need for change
2. Create a team to lead and manage the change
3. Create a vision of the change and a strategy for achieving the vision
#. Communicate the vision and strategy for change and have the change
team be a role model
+. (ncourage innovation and remove obstacles to change
3. (nsure that short.term achievements are fre*uent and obvious
4. ?se successes to create opportunities for improvement in the entire
organiation
5. Reinforce a culture of more improvement' better leadership' and more
effective management
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Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
ANSWERS TO CRITICAL ANALYSIS
1.1+ $ome people believe that cost management is just a new label for what cost
accountants have been doing for decades. "t is true that some cost accountants
have been proactive and have recognied how they can best add value to their
organiations. ;owever' many cost accountants have been content to refine
measurements of past costs and have not focused on other needs of their
organiations. Cost management goes well beyond traditional cost accounting
and provides information that is useful for formulating' implementing' and
monitoring strategies and operations.
1.13 6ur increasingly competitive world means that our great ideas and plans of only a
few years ago already may be obsolete. Thus' as 2rucker suggests' we should
challenge those ideas and plans regularly to see if they still meet current market
conditions. "f they do' then we have established an enduring competitive edge. 6n
the other hand' if they do not' we must seek to replace the outmoded ideas and
plans with those that fit better with the world as it is' not as we wish it still would
be. Cost management analysts can use benefit.cost analysis' value.chain analysis
and other techni*ues to measure advantages or disadvantages.
1.14 The other 8:@ of department store customers may have good reasons why they
shop elsewhere. "f so' this means that you are not meeting their needs. $tores
that meet or e&ceed customers! needs will attract more customers' eventually
capturing a larger market share. "f the store is to remain competitive and grow' it
should find out what it could be doing to attract some of its non.customers. 9n
ideal team to research this issue would include people from purchasing' sales'
marketing' and accounting 7or finance). These individuals should be capable and
allowed to challenge e&isting store policies and practices. $ales and marketing
personnel should understand 7or learn) what the store and its competitors are
doing to attract and retain customers. The accounting 7or finance) person should
seek to measure the costs and the benefits of attracting new customers. "t is
possible to Aover.satisfyA customers by giving them so many incentives to shop
that the store actually loses money.
1.15 Bursuit 2ata might have a competitive advantage in new product development if
any or all of the e&pected benefits cannot be imitated by competitors. Can Bursuit
deliver uni*ue products more reliably than competitors to support e&pected sales
growthC Can Bursuit complete the product development more *uickly' with fewer
defects than competitorsC Can Bursuit control its development' production' and
service costs so that benefits of increased sales are not eliminated by higher
costsC (&hibit 1.+ demonstrates that failing any of these activities can eliminate
competitive advantages.
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Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
1.18 The overriding concern is the tradeoff of the importance of ta& reporting to the
goals of the organiation and the cost of providing this service. 2eciding whether
to outsource ta& services re*uires careful benefit.cost analysis. The benefits of
outsourcing must outweigh the costs. Dou should identify the types of costs and
benefits of either retaining or outsourcing ta& services. Eote that you could
alternatively classify costs of outsourcing as benefits of retaining' and vice.versa.
For consistency' you just need to keep the same perspective 7outsourcing or
retaining) throughout the analysis. For e&ample' possible costs of outsourcing
include costs of retraining or terminating current ta& employees. 9voiding these
costs alternatively could be counted as benefits of retaining ta& services
internally. Bossible benefits of outsourcing could be lower out.of.pocket costs
and access to better ta& e&pertise. To the e&tent possible' you should *uantify
these costs and benefits. Comparing *uantified costs and benefits is part of the
analysis' but a complete analysis also compares *ualitative costs and benefits. "f'
for e&ample' ta& reporting involves sensitive information about the company%s
sources of competitive advantage' the company may decide to keep the service
inside. ;owever' if the information is not critically important and the cost of
maintaining the ta& reporting capability is high' the company may consider
outsourcing ta& reporting to an organiation that specialies in ta& work G as long
as the *uality of the service can be assured. Hhether the *ualitative information
outweigh the *uantified information is a judgment that you may have to make.
Bersons interested in ta& careers probably should anticipate that most
outsourced ta& work will be done by professional accounting or law firms. Hhile
both types of firms employ paraprofessionals' most career opportunities are
available to persons with law degrees andIor who have earned a CB9. "f
outsourcing of ta& services grows' there will be fewer career opportunities for
non.degree or uncertified ta& preparers.
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Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
1.2: 9n absurd outcome of the directive to minimie costs might be that no
department does any work and avoids ac*uiring or using any resources. That'
however' ignores the opportunity costs of lost outputs. $ince opportunity costs
almost never show up on accounting reports' it is easy for managers to ignore or
be unaware of them. 9 less e&treme but possibly damaging outcome could be for
each department to minimie the costs of its assigned work' but ignore its
impacts on other departments. "f all the processes of an organiation are
balanced 7that is' all can produce just the right amounts of output when needed)'
then minimiing the cost of each process will minimie overall costs. 1ost
organiations are not perfectly balanced' however' and minimiing the costs of
each process may impair the ability of another process to meet its objectives.
Thus' one process may produce too much output' leading to waste. 9nother
process may produce too little output' leading to missed opportunities for other
processes that depend on the former process output. ?ne&pected or changed
demands from internal and e&ternal customers may re*uire changes in schedules
and outputs in many parts of the company. To not meet those changes could
result in significant opportunity costs for the company as a whole. Thus'
encouraging managers to focus only on their process7es) may be a myopic
management policy. Companies also need to encourage cooperation among
departments.
1.21 This was an unfortunate outcome for Jeneral 1otors% employees' stockholders'
and customers. The hoped.for cost savings from automating some manufacturing
processes did not materialie because the company apparently automated an
infle&ible' inefficient process. Thus' the company replaced humans with more
e&pensive robots but did not take advantage of the fle&ibility that automated
manufacturing offers. Though J1 could make cars more *uickly' there was
insufficient demand for the kinds of cars J1 was prepared to make to justify the
increase in capacity and cost. 9s a result' J1%s total costs increased' but sales
did not increase sufficiently to cover the increased costs. To learn how to benefit
from automated manufacturing' Jeneral 1otors later formed a joint venture with
Toyota and then started the separate $aturn 2ivision.
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Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
1.22 "nternet shopping may be a serious threat to traditional shopping malls and
department stores because of improved "nternet security' convenience' and
access to the widest possible range of products. "n many developed economies'
the majority of adults work outside of the home and 7a) do not need a break from
household routines and 7b) do not have the time to shop leisurely at the mall. This
change in shopping patterns has serious implications for traditional' physical
stores. For e&ample' 9maon.com has established a strong' virtual presence in
the book and music markets. -arnes < Eoble' which had based its retail strategy
on large physical stores with large' on.site inventories' also has established a
strong "nternet outlet to compete with Amazon.com. Kust as it is no longer
necessary for some banks to have a physical presence 7e.g.' 1-E9 "nternational'
"nc.)' some department stores may find it unnecessary to have a costly retail
building and staff. Careful consideration of the costs and benefits of alternative
retail outlets may indicate that a virtual' on.line catalog is cheaper and reaches
more customers than shopping mall outlets 7e.g.' 2ell Computing' www.dell.com#.
$ince many customers may want to touch or feel the merchandise before buying'
some combination of physical and virtual stores may be optimal. "t seems safe to
predict continuing and growing developments in electronic commerce.
1.23 Continually putting out daily fires is not conducive to strategic planning. This can
be a sign of understaffing or a failure of the C(6 to delegate tasks to others.
$ometimes managers of small companies 7large ones' too) micromanage all
aspects of the business either because no one is available or competent to
perform them or because the C(6 is unwilling to share power and decision
making with others. The cost of micromanaging can be an elimination of strategic
planning' which guides the organiation through the future. Dou might suggest
that the C(6 delegate many of the routine tasks he or she performs to a
competent assistant. "f none e&ists' then the C(6 needs to train or hire someone.
Then the C(6 needs to block out time for strategic planning' either alone or with a
small group of key employees. The C(6 also might consider hiring a consultant
to facilitate the planning effort' but cost might be a concern.
1.2# 1any routine' number.crunching accounting tasks have been automated.
9lthough understanding how the numbers are LcrunchedM is important 7and we
will crunch numbers in this te&t)' it is important to understand why certain facts
and figures are measured and reported and whether they are the right information
to support important decisions. "f one learns only how to crunch numbers and not
why' one is limited in how much one can help an organiation improve.
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Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
SOLUTIONS TO EXERCISES
1.2+ 71+ min) Cost.management techni*ues
1atches of cost management techni*ues and management decisions are,
Cost management techni*ue 1anagement decision
a. 0earning about how operations work NNgN The design of incentive bonuses of up
to 12@ of salary by (lectricity
Corporation 7(CEO) for middle
managers based on meeting difficult
profit goals
b. 6rganiing resources into efficient
activities and operations
NNfN The use of seminars called LHhat if "
owned the businessCM by Television
Corporation 7T/EO) to introduce staff
to issues of competition
c. 1easuring actual and e&pected costs
of activities' products' and services
NNbN (CEO%s decision to restructure into
four major operating divisions,
Broduction' 1arketing' Bower
Transmission' and Construction
d. "dentifying profitable products'
services' customers' and distribution
NNaN The decision by Coal Corporation
7CoalCorp) to evaluate every job
currently performed by employees to
determine which jobs were essential
to the goal of profitability
e. "dentifying opportunities for
improvements in the value of
products and services
NNcN T/EO%s new focus on estimating the
costs of television programming and
production
f. Communicating effectively NNdN The decision by Bublic Horks
Corporation%s 7H6R>$) to sell its
poorly performing Broperty and
Computing $ervices divisions
g. 1otivating and evaluating personnel NNeN T/EO%s analysis of T/3%s programming
and advertising practices' its new
commercial rival
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Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
1.23 71+ min) Teamwork
1atches of types of teams and operations or decisions are,
Type of team 6peration or decision
a. "ndividual 7no team) NNdN Hord processing center of a large
university where most of the work is
preparation of e&ams' copying
articles' and preparation of
promotional materials
b. $mall' Ldoubles tennisM team where
members have special skills that
complement each other% strengths
and weaknesses
NNbN 2evelopment of a new business
curriculum to meet specific
educational needs
c. 0arge' LsoccerM team where all team
members have assignments but work
closely together
NNbN 2esign of advertising campaign to
counter a rival%s new product
announcement
d. 0arge' LswimmingM team where team
members have individual
responsibilities' often do not interact'
but share in team outcomes
NNbN 2evelopment of a new video game for
Blay $tation
NNb or cN Hriting a new' cost management
te&tbook
Nb or cN Completion of a comple& project
with a short' rigid deadline
NNaN Completion of an application to
graduate school
NNcN Competition in a collegiate' intramural
volleyball league
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Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
1.24 72: min) $trategic decision making
There are many solutions to this e&ercise' but here is one possibility,
$trategic 1ission Types of 2ecisions "nformation Eeeded
1. -uild Compete on *uality or priceC
Full or limited range of productsC
Customers% needs and
e&pectations for price' *uality'
and products
Competitors% strategy
2. ;old CapacityC 0ocation7s)C Costs and benefits of alternative
capacities' beverages offered
3. ;arvest Replace or keep old e*uipmentC
Eumber and types of employeesC
Cash and or credit card salesC
Replacement and operating costs
$ales per employee
Competitors% sales practices
#. 2ivest TimingC
6ther opportunitiesC
Hilling buyers' highest sales price
Timing' investment costs
1.25 72: min) "nternal controls
a. The separation of dutiesPsandwich making versus sale recordingIcash receiving
Pprovides an internal control. Hithout this control' the sandwich maker could
sell sandwiches at a discount to friends or give them away or pocket some of the
cash from the sale. 9s it stands' overriding this control would re*uire collusion
on the part of both people involved in the transaction.
b. Companies use a variety of control methods. Hhether these are better is
*uestionable. $ome methods include a camera that records all production and
sale activities' a pseudo.customer who is actually a spy for management to
observe what goes on 7this approach is used in bars' for e&ample)' and making
sure that the number of sandwiches sold based on a count of the bread used is
commensurate with the cash receipts and record of sales.
c. 9s noted in a' the two employees could collude 7i.e.' work together to override the
control).
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Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
1.28 73: min Q document search) $trategic decisions
There are many ways to analye these two companies' one way is to contrast Coca.
Cola%s and Bepsico%s value chains 7taken from Forms 1:.> from the $(C%s (2J9R
database).
/alue chain element Coca.Cola Bepsico
R<2 Eumerous patents' copyrights'
trade secrets' proprietary
technology' and trademarks
(mphasis on trademarks' owns
or licenses patents
2esign 9ll in.house 7C)
Focus on beverages
$ome outsourced 7i.e.' licensed
from others)
Focus on beverages and snack
foods 7Frito.0ay)
$upply ?ses materials specialists to
secure commodities on open
market. 9lso long.term supply
relationships with -railian
producer of orange juice
concentrate
?ses materials specialists to
secure commodities on open
market
Broduction Broduce and sell beverage
concentrates' syrups and
finished beverages
Broduce and sell finished
beverages and beverage
concentrates
1anufactures snack foods in
own plants
1arketing Compete on pricing' advertising
and sales promotion programs'
product innovation' increased
efficiency in production
techni*ues' the introduction of
new packaging' new vending and
dispensing e*uipment and brand
and trademark development and
protection.
Compete on price' *uality'
variety' customer service
2istribution Finished beverages'
concentrates and syrups sold to
authoried distributors andIor
bottlers
$elected investments and long.
term relations with strong
bottlers G strategic alliances on
every continent
Finished beverages'
concentrates and syrups sold to
authoried distributors andIor
bottlers
Frito.0ay delivers directly from
factories to store shelves
Customer service Eot disclosed Eot disclosed
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Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
1.3: 72: min) -enefit.cost analysis
This analysis contains both *uantitative and *ualitative information. -oth are important
to choosing among the alternatives.
a. 9lternatives for $upply of
2isk 2rive Components
Cost per year
7?$ R
thousands)
6ther costs and benefits
Continue current supply and
assembly operations G
detect and replace faulty
components.
R2'331
Costs, Foregone cost savingsS missed
opportunities to use resources
elsewhereS missed opportunities to
improve processesS resources
wasted on defective products
-enefits, 9void costs of changes <
disrupting current operationsS costs
are known but costs of other
alternatives are estimates
Thoroughly inspect incoming
components before they are
assembled.
R1'4:5
Costs, Changes in procedures'
training < hiring inspectorsS
returning faulty components
-enefits, (arly detection of faulty
components prevents wasteful
losses of other resourcesS less costly
than current practice
2evelop close relationships with
a few' selected suppliers
that will guarantee the
performance of all
components.
R1'354
Costs, (stablishing and monitoring
contract performance' loss of control
of incoming *ualityS possibly higher
material costs and costs of change
-enefits, (liminate faulty components
before using themS least costlyS
refocus resources on other tasks
b. 9nalying current operations and adjusting for e&pected changes may be used to
develop *uantified internal cost estimates. -ids by possible outsourced suppliers
might provide estimates of outsourced costs.
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Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
c. The recommendation depends on how much supplier behavior can be controlled
by contracts. "f guarantees of *uality and on.time delivery can be enforced' then the
lowest cost option may be to outsource *uality inspections to selected suppliers.
1.31 73: min Q article search) Cost.management support
Bossibilities abound. ;ere is a solution based on an article describing the scary but real
possibility of outsourcing white.collar jobs 7including accounting and finance) to foreign
countries
$trategic decision making $earch for ways to control growth of support service
costs while maintaining *uality
2o competitors have a cost advantage by LoffshoringM
white collar jobsC
$trategic problem 9lthough most organiations would prefer to keep
support services' such as customer care and financial
services' domestic' competitive pressures are causing
many to relocate support services in foreign countries at
lower overall costs. -ut how does one assure *uality and
face possible political backlashC
9reas of operations e&amined 9ll areas of support services
$ources of information $urveys of practice show growing off.shoring' significant
cost savings' and no loss of service *uality.
Has strategic decision making
a successC
9pparently' yes' because more companies are off.
shoring. For e&ample' J( Capital has offshored all of its
loan application processing to "ndia. He should e&pect
that all routine support activities can be off.shored. The
article does not address possible political backlash
inspired by angry white.collar workers.
The article 7and others) suggests that this is an
unavoidable trend' which forces us to consider how we
7educators and students) can add value to organiations
that is not available offshore. He suggest that focusing
on uni*ue' inimitable support of strategic decision
making is a key survival activity. This is the focus of most
of this te&t.
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Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
1.32 71+ min) /alue chain analysis
1atching value.chain elements and operations follows,
/alue chain element 6peration or decision
a. Research and development NNgN 2ell Computer%s replies to customers% *uestions
via email
b. 2esign NNcN (lectronic ordering link between Container
"ndustries' "nc. and a division of 2uBont Corp.
that supplies the raw plastic pellets
c. $upply NNaN Burchase of 1c2ata Corp. by 3.$*uared' "nc. to
ac*uire its data communications technology
d. Broduction NNfN Bick up of $torageTek Corp.%s packaged disk
drives by ?nited Barcel $ervice for delivery to
customers
e. 1arketing b or e 2evelopment of animation for DahooT%s home
pages
f. 2istribution NNdN RC9%s outsourcing of the assembly of its
portable C2 players to a company in 1e&ico
g. Customer service NNeN ?pdating Canterbury Eew Oealand%s electronic
"nternet catalogue of sport and casual clothing
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Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
$60?T"6E$ T6 BR6-0(1$
1.33 73: min) -enefit.cost analysis
a. (&pected benefits of the decision total R241'::: 7U R121'::: Q 8:'::: Q 3:':::) while
e&pected costs total R182'::: 7U R13:'::: Q 2:'::: Q 12':::)' with a net benefit of
R48':::. =ualitative factors to consider include service *uality 7timeliness' accuracy)'
impacts on e&isting customers' contacts with e&isting customers' and impacts on
current and future employees.
b. (VC(0 $60?T"6E$ 9R( F6?E2 "E (VC(0 $60?T"6E$ F"0(
-enefits of outsourcing accounts
receivable
(&pected
amount
9ctual
amount /ariance =ualitative "nformation
1. Bersonnel cost
savingsWWWWWWWW R121'::: R52'::: 7R38':::)
2. Facilities cost
savingsWWWWWWWW. 8:'::: 1::'::: R1:':::
3. $upport cost
savingsWWWWWWWW.. 3:'::: 4:'::: R1:':::
#. =uality of
serviceWWWWWWWWWW.. .. .. .. Fewer billing complaints
Total *uantifiable
benefitsWWWWWWW.. R241'::: R2+2'::
:
7R18':::)
Costs of outsourcing
(&pected
amount
9ctual
amount /ariance =ualitative "nformation
1. Contracted
serviceWWWWWWWWWW R13:'::: R13:'::
:
R:
2. Training
costsWWWWWWWWWWWW. 2:'::: 3:'::: R1:':::
2. Contract
administrationWWWWWWWW. 12'::: 13'::: R1':::
3. 0oss of direct contact with
customersW .. .. .. 0ower sales growth
#. 9dverse effects of personnel
reductions .. .. .. "ncreased personnel turnover
Total *uantifiable
costsWWWWWWWWW. 182'::: 2:3'::: R11':::
Eet *uantifiable annual
benefits................... R48'::: R#8'::: 7R3:':::)
c. 9lthough *uantitative benefits were lower than e&pected' they are still positive.
?nknown is whether the outsourcing contract is responsible for lower sales growth and
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Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
increased personnel turnover. This looks like a close call' and deserving of more
investigation.
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Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
1.3# 73+ min) -enefit.cost analysis.
7Eote, Costs in tables are rounded to two decimals' but solutions use e&act decimals.
Transactions in column 2 are rounded up.)
a. Eumber of transactions
9 - C 2
a. Eumber of
transactions' C9$
9ccounting
6peration
C9$ cost per
year
C9$ cost per
transaction
C9$ number of
transactions per
year
7rounded up)
9ccounting operation 72 U -IC)
9ccounts receivable R +:'::: R 12.:: #'134
Jeneral ledger 23'::: 4.:: 3'253
9ccounts payable 3+'::: 8.:: 3'558
Bayroll 2:'::: 3.:: 3'33#
Credit < collections 8'::: 11.:: 518
b. 6ther companies in the same industry may have lower average costs for several
reasons. 6ne reason may be that other companies have more efficient accounting
operations and personnel 7e.g.' re*uire less data entry or manual processing) and'
therefore' use fewer resources to accomplish the same level of work. This can
happen if resources necessary to process transactions 7e.g.' personnel) are hired
at fully.employed costs 7e.g.' salaries) but are not fully used. 9nother reason may
be that C9$ operates its accounting functions at a lower volume of transactions
than other companies but has comparable spending 7e.g.' employee salaries) for
the types of accounting transactions G the same level of cost divided by fewer
transactions yields a higher average cost than the association average.
c. There are two types of cost savings possible G out.of.pocket savings of resources
that are not needed and freed.up resources that can be used elsewhere G and they
may not be the same amounts. -ecause we do not know how C9$ obtains and
pays for accounting resources' this solution assumes that computed savings are
out.of.pocket savings.
1-1$
Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
9 - C 2 (
9ccounting 6peration
C9$ Eumber of
Transactions
9ssociation cost
per transaction
Cost $aving per
Transaction
C9$ Cost
$avings per Dear
7rounded) 7( U
-&2)
9ccounting 6peration
9ccounts receivable #'134 R 5.:: R #.:: R 13'335
Jeneral ledger 3'253 #.:: 3.:: 8'5+5
9ccounts payable 3'558 +.:: #.:: 1+'++3
Bayroll 3'33# 2.+: 3.+: 11'338
Credit < collections 518 3.:: +.:: #':8+
d. Competitor%s cost advantage,
9 - C 2
$2C
9ccounting 6peration
$2C Eumber of
Transactions
7same as C9$)
$2C Cost 9dvantage per
Transaction
XC9$ Cost G 7:.5: &
9ssociation Cost)Y
$2C Cost
9dvantage per
Dear 72 U - & C)
7rounded)
9ccounts receivable #'134 R+.3: R 23'33+
Jeneral ledger 3'253 3.5: 12'#54
9ccounts payable 3'558 +.:: 18'##+
Bayroll 3'33# #.:: 13'333
Credit < collections 518 3.2: +':45
Total cost advantage R 43'351
"t is important to know the amount of cost advantage because this represents
resources that the competitor does not have to use on accounting procedures.
This reduced resource use can be a cost saving or it can be applied to more
productive uses. "n either case' the competitor can be more profitable.
e. Companies in competitive industries seek to generate the most return from their
resources. "f a company has a cost disadvantage in any of its operations that is
not offset by greater benefits' the company will steadily lose ground to
competitors. Thus' companies compare 7or benchmark) their operations against
competitors%. "t may be possible to gain an advantage over competitors if a
company can achieve performance comparable to the best practices in the world'
which may be practiced by companies not in the same industry.
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Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
1.3+ 73: min) -enefit.cost analysis, 6utsourcing.
a. "f 2inosaur 6il outsources its ta& planning and ta& return preparation operations'
it could save at least the following amounts,
Dinosaur Ta& 6peration Cost per year
Ta& planning R1'2::':::
Ta& return preparation 2':::':::
Total savings R3'2::':::
2inosaur could save more than this amount if some portion of the information
systems cost 7personnel' hardware' and software) also could be eliminated by
outsourcing ta& operations. Therefore' 2inosaur should be inclined to pay
anything less than R3'2::'::: for ta& services' or more' depending on how much
additional information systems cost could be saved by outsourcing.
b. 2inosaur must be concerned about the *uality of the ta& services as well as the
price paid 7now and in the future). The e&ternal service provider must be
thoroughly familiar with the ta& regulations in each of the areas where the
company must report. =uality of service is especially important for ta& planning
since these services must be timely and in tune with company goals and
competitive pressures.
c. The first.year cost of the package of outsourced services is R#. + million 7R3 Q R1.+
million)' and thereafter is only R3 million. 9dditional e&pected annual savings of
R3::'::: would add to cost savings for five years' as shown below,
Dear 6utsourced $ervice
Costs
Cost $avings of
6utsourcing Ta& and
"nformation $ystem
"mprovements
7R3'2::'::: Q R3::':::)
Eet $avings
1 R 7#'+::':::) R 3'+::'::: R 71':::':::)
2 73':::':::) 3'+::'::: +::':::
3 73':::':::) 3'+::'::: +::':::
# 73':::':::) 3'+::'::: +::':::
+ 73':::':::) 3'+::'::: +::':::
Total R 1':::':::
This appears to be a favorable outsourcing arrangement 7given concerns in part
b). 7Eote, the EB/ at 1: percent U R+31'4+4)
1-1&
Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
1.33 72: min) (thical issue.
a. Baul is aware of an illegal' possibly very serious violation of proper business
practice. 9rguably' he has many overlapping ethical responsibilities G as an
employee' professional' citien' and ethical being. 9s an employee of the
corporation' he is paid by stockholders to safeguard their interests' and illegal
dumping could have serious impacts on their wealth. "llegal dumping also could
adversely affect the jobs of his fellow employees. "f Baul is a member of a
profession' such as the 9"CB9 or "19' he is responsible for protecting the
corporation%s legitimate objectives and his profession%s reputation. 9s a citien of
the region' it is *uite likely that he and his fellow citiens will have to pay the
costs to remedy damage caused by the illegal dumping. 9s an ethical being' he
may feel responsibility to safeguard the (arth' its creatures' and future
generations.
b. Baul is in an awkward and potentially dangerous situation. Though he has ethical
responsibilities' it is a fact that Lwhistle.blowersM often suffer serious
repercussions for fulfilling those responsibilities. 6ne possibility is to resign
immediately and leave the area. This will strike most as an irresponsible' cowardly
approach. ;e should seek advice from a trusted friend or counselor 7possibly an
attorney) in order to consider and document all of his options carefully and to
protect himself and his family.
Baul might get guidance from the "19%s $tandards of (thical Conduct' which
describe professional obligations to organiations' the profession' and himself.
;e should then consult with the controller' his superior. "f the controller does not
take appropriate action' Baul should go to the ne&t highest level of management'
and continue until someone does take action. 9t this point' he should not release
the information to the media or to the board of directors because this dumping
may be the action of a few rogue employees. ?nfairly and perhaps erroneously
e&posing the company to the media may cause harm to the company and to
himself. ;e should contact the -oard of 2irectors only after e&hausting his
access to internal management.
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Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
1.34 (thical issuePfraud
This situation is based on an actual case where a manager and an accountant conspired to
overstate sales and profits. Hhy would they do thisC Berhaps the manager%s compensation
depended on sales or profits. Berhaps they wanted the company%s financial performance to
look better. "n any case' these were criminal fraudulent activities.
"n the actual case' the fraudulent activities were discovered by people who worked in the
accounting department who discovered the invoices and shipping documents tucked away
in the desk drawer of the accountant who colluded to commit the fraud. The LfriendM was
among those charged with the fraud because she knew about it and was suspected to be
involved. $he was eventually cleared of wrongdoing' but not until after several years of
defending herself against the charges. $he lost her job' and she lost a lot of time. "f she
were faced with similar circumstances again' she says she would immediately inform the
head of the accounting department' and at least two other people in the organiation who
were higher than her boss. ;er initial contact would not be to accuse the alleged
perpetrators of committing fraud' but would in*uire as to the propriety of their actions in
view of the company%s accounting and sales policies. "n this way' she would avoid accusing
someone of misbehavior before she had proof that what they did was wrong. "f her in*uiries
were ignored' she would begin looking for a new job.
1.35 72: min) -enefit.Cost 9nalysis, "nternal 6rders
a. Costs and benefits of internal sourcing include,
Bossible Costs of "nternal $ourcing =uantifiable G Des or EoC
$etting internal pricing policies
and refereeing disputes
Des and Eo, can measure time spent on these
activities' but may not be able to measure the
opportunity cost of lost management time
$upporting inefficient operations
with artificially high internal prices
Des' if there are market prices to compare
internal prices. "f 9ndover%s cost of R12.44 per
unit is competitive' then this cost may be an
appropriate basis for internal sales.
Bossible -enefits of "nternal $ourcing =uantifiable G Des or EoC
1-21
Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
?se of e&cess capacity Des and Eo, can measure costs of unused
capacity' but may not be able to measure
opportunity costs of resources tied up in
chronically e&cess capacity. 9ndover has
unused capacity of 4'::: units. "f this persists'
the company may consider reducing capacity. "f
this is a short.term condition' using capacity for
internal sales is a good use of capacity.
Cost savings Des' if internal operations are efficient' internal
sourcing can save the profit that otherwise is
given to suppliers. "f 9ndover is committed to
its level of labor and other manufacturing costs'
the only cost to the company is for materials.
Baying anything more than that to a supplier is a
waste of resources. "nternal sales in e&cess of
material cost just redistributes profit between
divisions.
Brotection of proprietary
knowledge
Eo' but losses of proprietary knowledge may
devastate the company
b. 9ny policy stated as Lcost plus 2+ percentM is asking for trouble' because LcostM
is undefined. "f market prices are available' the company probably should use
these for internal sales' with a policy of sourcing internally at the market price.
?sing cost.based internal prices may be necessary but creates complications of
determining the price that best motivates managers to benefit themselves and the
company as a whole.
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Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
1.38 72+ min) -enefit.cost analysisPadd a product line.
Coffee $hop
6nly
Costs and
-enefits of
9dding "ce
Cream
Combined
(ffects of Coffee
and "ce Cream
6perations
$ales revenue
R ++'::: R 3:'::: R 5+':::
Costs

Food
13'::: 1+'::: 31':::
0abor
12'::: 3'3:: 1+'3::
?tilities
3'::: 8:: 3'8::
Rent
3'::: 1'+:: 4'+::
6ther costs
3'::: 4+: 3'4+:
1anager!s salary
2:'::: . 2:':::
Total costs
3:'::: 21'4+: 51'4+:
6perating profit 7loss)
R 7+':::) R 5'2+: R 3'2+:
The addition of the ice cream shop has a R5'2+: favorable impact on e&pected profits. "f
9roma is comfortable about the estimated impacts' the company perhaps should
e&pand. 9dding ice cream may attract new customers who also buy coffee
productsS though some customers who would have bought a specialty coffee
drink may now purchase ice cream instead. These effects may offset. 9t any rate'
adding the ice cream shop appears to result in overall profitable operations.
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
1-23
Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
1.#: 73: min) -enefit.cost analysisPadd a project
a. and b.

"ncome
$tatement
Eew contract
changes
2ollar impact
of new
contract
"ncome with
new contract
$ales revenue R 1'+::'::: R 2::'::: R 2::'::: R 1'4::':::
Costs
0abor 4::'::: 14+'::: 14+'::: 54+':::
(*uipment lease 1:#'::: 12@ 12'#5: 113'#5:
Rent 12:'::: . . 12:':::
$upplies 3:'::: 1+@ 8'::: 38':::
6fficers! salaries #::'::: . . #::':::
6ther costs +:'::: 1+@ 4'+:: +4'+::
Total costs 1'#3#'::: 2:3'85: 1'334'85:
6perating profit 7loss) R 33'::: R 73'85:) R 32':2:
Technically' the new contract reduces profit of the company by R3'85:. -y itself'
this one.year contract appears not to be worth the effort of hiring and training
new' part.time consultants.
c. 6ther considerations include 71) whether this will enable the company to get into
a new' profitable line of business' 72) what other opportunities the company has
for e&pansion' 73) whether the contract will provide for more revenues in the
future' and 7#) what obligations the company makes to its employees. "n short' the
company should consider both short and long run costs and benefits of its
decisions.
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
1-2
Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
SOLUTIONS TO CASES
1.#1 7#: min) 9nalye strategic decision
a. The following spreadsheet computes customer profitability. "f the lower portion of
the spreadsheet 7rows 5 G 14) contains only formulas' you can test the sensitivity
of the profit estimates to changes in the parameters 7rows 2 G 4).
9 - C
1 9nnual 9verage 2ata 0arge
Customer
$mall
customer
2 Eumber of orders per year 2::: 2::
3 $ales value of supplies per order in dollars R1'::: R3::
# Cost of supplies to Corporate (&press as a
percent of sales
5:@ 4+@
+ Brocessing cost per order R2+ R2+
3 2elivery cost per order as a percent of
sales
5@ 5@
4 Cost to create and maintain "nternet access
per customer per year
R3'::: R3':::
5 9nnual Customer profitability
8 Revenues 7-2Z-3' C2ZC3) R2':::'::: R12:':::
1: Cost of supplies 7-#Z-8' C#ZC8) 1'3::'::: 8:':::
11 Jross margin 7-8.-1:' C8.C1:) #::'::: 3:':::
12 6perating costs
13 6rdering costs 7-2Z-+' C2ZC+) +:'::: +':::
1# 2elivery costs 7-3Z-8' C3ZC8) 13:'::: 8'3::
1+ "nternet access costs 7-4' C4) 3'::: 3':::
13 Total operating costs
7$?17-13,-1+)' $?17C13,C1+)
213'::: 14'3::
14 Customer profit 7-11.-13' C11.C13) R154'::: R12'#::
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
1-2!
Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
9ssuming that Corporate (&press has constrained order processing capacity' simply
displacing one large customer to serve ten small customers would have an adverse
impact on profits because Corporate (&press would lose R154'::: profit while gaining
only 1: & R12'#:: U R12#'::: profit. ?nless Corporate (&press feels that these
companies will grow to be more profitable than its current average customer' this can be
an unwise tradeoff. "n fact' Corporate (&press has decided to restrict its services to
larger companies because it believes smaller companies are unprofitable to serve.
b. 6n average' each small customer would have to increase its profitability from
R12'#:: to R15'4:: by increasing the value of its orders' by paying a premium for
services' by demanding less costly service' or a combination of these actions. 6n
the face of it' these might be likely' and if Corporate (&press can identify
promising new customers' it may be able to design an LintroductoryM level of
service to attract customers that can LgrowM into more profitable service.
c. "t might be worthwhile for Corporate (&press to consider a pilot program with a
few' selected companies in order to design and test a new level of service. 9
limited pilot test will allow the company to investigate and e&periment with the
costs and benefits of serving small companies without the risk of a full.scale
implementation that may be very difficult to change or reverse.
1.#2 73: min) 9nalye support services in the value chain
a. Bossible Costs of
6utsourcing,
0oss of sensitivity to company uni*ueness' culture and
values
0oss of trust' loyalty' and free flow of information
between internal auditors and management
"nternal strife and tension during and after change
Reduced scope and integration of financial audit
activities that might run afoul of $arbanes.6&ley
Bossible -enefits of
6utsourcing,
Reduced costs of services' travel' and training
9ccess to improved e&pertise on foreign operations and
information technology
1-2"
Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
b. The CF6 is responding to serious profit pressures and a concern that the company is
not receiving full value for its internal auditing e&penditures. "n fact' the CF6 might
feel that the company has too much internal auditing activity and could do well with
less. The CF6 also might be concerned that the internal auditing department is so
entrenched that it is controlled by no one G the last comment by the director of
internal audit may signal "9%s sense of invulnerability. This situation probably is
affected by the $arbanes.6&ley act' which places a strong emphasis on maintaining
and documenting strong internal controls. The CF6 must insure proper conformance
with L$6VM re*uirements.
The 2"9 is concerned both about the level and *uality of "9 service the company needs
and will get under the alternative sourcing methods. The 2"9 has only known internal
sourcing and cannot imagine that an e&ternal provider could provide comparable
services. "t seems that the 2"9 is responsible for building a strong "9 department and
is proud of its contributions. The 2"9 probably also feels personally threatened and
protective of the current "9 staff.
c. The last comment of the 2"9' who threatens to use "9%s direct access to the board of
directors to influence the outsourcing outcome and the CF6%s standing with the
board' is an obvious threat' which unfortunately will not improve the climate or the
communication between "9 and the CF6. "t%s a desperate' probably ill advised
comment that could backfire if the board supports its top management team. The audit
committee of the board of directors should be notified.
d. 6ne possible compromise is to develop a co.sourcing arrangement with an e&ternal
provider of "9 services. This arrangement could use the internal department for most
"9 activities but use the e&ternal provider for specialied activities that the company
feels are either too e&pensive to maintain internally or that the e&ternal provider can
provide better. This may be a permanent solution or it could be an interim step
between the current situation and complete outsourcing' depending on how the co.
sourcing arrangement succeeds.
1.#3 7#+ min) Cost.management support of strategy
a. -oeing%s value chain includes all the common elements' but it also outsources some
of its production and distribution activities. (&hibit 1.2 in the te&t could be used as
shown below to reflect -oeing%s many activities 7ignoring the small amount of
outsourcing).
1-2$
Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
b. The most obviously affected elements would be supply' production' marketing'
distribution' and customer service. "t is also likely that support services' especially
accounting' legal services' and information systems would be affected' too' as the
company strives to reprogram its production and satisfy its customers. "t is possible
that the company would divert resources from research and development and design
to meet the current crisis' but that might affect future profitability adversely.
c. "t seems incredible' but -oeing apparently did not thoroughly investigate the impacts
of doubling production on all of its value chain elements. "f' for e&ample' the
company did not plan properly for increased supply of raw materials' parts' and
assemblies' its normal suppliers could not meet -oeing%s needs. -oeing would be
forced to find other' perhaps more costly suppliers who might agree to e&pedite
orders' but would charge premium prices. 0ikewise' if the company did not plan its
production scheduling properly' it is likely that demands on some resources would
e&ceed capacity' leading to congestion' e&pediting' and loss of smooth throughput.
(very value.chain element could e&perience similar effects.
1-2%
Research
and
Develop-
en!
Des"#n S$ppl%
&rod$c-
!"on
'ar(e!"n#
D"s!r"-
)$!"on
C$s!oer
Serv"ce
Val$e o*
&rod$c!s
and
Serv"ces
+$an
Reso$rces
&r"ar% &rocesses
&h%s"cal
Reso$rces
De*"ne Scale and Scope o* Opera!"ons
S$ppor! Serv"ces,
Acco$n!"n#
+$an Reso$rces
Le#al Serv"ces
In*ora!"on S%s!es
Teleco$n"ca!""ons
-oe"n# A"rcra*!
Copan%.s Val$e
Cha"n
Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
d. "t is easy 7and unfair) to use hindsight to solve -oeing%s problem' but it does seem
obvious that if management had placed a figure of their value chain before them and
asked' L;ow will each element be affected by a doubling of productionCM and L;ow
can we prepare for this change in outputCM many problems would have been
anticipated and avoided. 6ne classroom application might be to assign small groups
to each element of the value chain and ask them to make a list of their activities that
might be affected by doubling output in a short period of time. Then ask how impacts
in one element may affect other elements.

1.## 72: min) Cost.management support and ethics of strategic decisions
a.
$trategic decision.making element Cost management support
2rop other products BrofitabilityIbenefit.cost analysis
Focus resources "dentify future profitabilityIcost benefit
?nderstand strengths and weaknesses Competitor analysis
?nderstand customers% needs -enchmarking' communication
?nderstand partners% needs Communication with partners
Bredict future of feasible technology Combine strengths' competitor analysis
with needs and company%s technical
knowledge
Teamwork Cross.functional teams
0eadership Follow the 5 steps of implementing change
"dentify alternative decisions and
outcomes
-enefit.cost analysis
b.Clearly' future estimated revenue and cost streams from alternative products are
important to strategic decisions. These estimates include costs of services and
processes that are internal to 2atacom and those that may be outsourced. 2atacom will
decide on its value chain in part based on these *uantitative data. 2atacom also will
consider effects of these decisions on its market reputation' its sources of competitive
advantage' and its ability to attract and retain the people necessary to meet its strategic
goals. These *ualitative data eventually will result in *uantitative outcomes' but these
effects are *uite difficult to estimate.
1-2&
Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and Leading
Change
d. 6rganiations like 2atacom can use tools of value.chain analysis and benefit.cost
analysis to estimate the profit impacts of outsourcing or retaining certain
processes.
1.#+ 73: min) Responsibility for unethical action
Charles impressed our 1-9 students because his career
was similar to the one that they e&pectedPup to the commission of the
fraud. Charles% boss received a jail sentence of several years and a large fine.
Charles did several months in jail' plus a year of home confinement plus a fine that wiped out
his savings and retirement accounts. (ven more' he has found it difficult to get work in any
field. (mployers shy away from prospective employees who answer [yes% to the [have you ever
been convicted of a felony% *uestion.
a. Eo. 6ne can sympathie with him for being in a bad job' but that is no justification for what
he did.
b. 9ccording to Charles' he should have talked to someone early in the game' such as his wife
and the former CF6. 9lso' he should have had sufficient savings to *uit his job when his
boss began demanding that he find ways to manipulate the records. Charles thought he was
trapped. ;e did not want to give up his high paying job' especially to look for work in
another city. "f he had saved enough resources' he could have walked from the job and
taken a job in a different line of work or moved to another city. (ither choice would have a
better outcome than doing jail time' losing what savings and retirement funds that he did
have and losing the prospects of employment because he was a convicted felon.
c. 2uring a period in which Charles% boss was hospitalied for heart problems' Charles had to
make a financial presentation to the board of directors. 2uring the presentation' he
confessed to the financial fraud. The board called in corporate counsel 7who turned out to
be of no help to Charles). The $(C was notified by somebody. 7He could not tell who
contacted the $(C based on our review of documents and interview with Charles.) Charles
mistakenly believed that he would not get in trouble with the authorities because he was just
following his boss%s orders. Charles told us that the federal prosecutor assigned to the case
said that he always liked to catch at least two fish' so the prosecutor went after both Charles
and his boss. -oth Charles and his boss went to jail and was fined enough to wipe out his
pension. Charles is now out of jail and reports that he has a lot of trouble getting a job. "t
seems that potential employers shy away from people who answer LyesM to the *uestion
L;ave you ever been convicted of a felonyCM
1-30