Assessment Task 1 - Case Study Analysis Essay.

Description Your answers to the requirements for the four (4) case studies will form the basis of this individual assessment task.

The purpose for this assessment is to assess you on (1) your knowledge and understanding the course content, (2) your application of that knowledge, (3) your critical analysis of information provided in the four (4) case studies.

1. To demonstrate a theoretical knowledge of the role of strategic management accounting in supporting strategy development and the day-to- day operations of a sustainable organisation
2. To apply strategic management accounting tools and techniques to improve the contribution and sustainability of value creating activities
3. To utilise strategic management accounting tools and techniques skills to ensure the role of performance measurement and control systems in value creation is achieved, strategies are implemented and performance monitored and adjusted to improve the success of the strategies.

Ø Please used the electronic submission via link “Submit your assessment task 1 here” provided on the study desk.

Ø To receive marks for this assignment YOU MUST include your name and student number in your assignment file.

Ø You can submit two files, a Word file and an excel file if you wish to provide your calculations

Zhivago Brands Ltd produces no defective machines but it did experience some material quality issues from its suppliers. It wants to reduce direct materials usage per MW machine in 2017. Conversion Costs in each year depend on production capacity defined in terms of MW units that can be produced, not the actual units produced. Selling and customer service costs depend on the number of customers that Zhivago Brands can support, not the actual number of customers it serves. Zhivago Brands has 75 customers in 2016 and 80 customers in 2017.

Required [All requirements must be answered]

1. Identify the business strategy adopted by Zhivago Brands and explain briefly how you reached your decision on the type of business strategy adopted. 2 Marks
2. Calculate the Growth Component analysis of strategic profitability analysis. 6 Marks (Include whether Favourable or Unfavourable for Qs 2 to 5). (Refer to Chapter 15 of the Horngren text).
3. Calculate the Price-Recovery component of strategic profitability analysis. 6 Marks
4. Calculate the productivity component of strategic profitability analysis. 6 Marks
5. Calculate the variance in operating profit for Zhivago Brands Ltd for the 2016 and 2017 accounting years. 4 Marks
6. Provide one measure from any of the above tables for each of the four Balanced Scorecard

“Mike the Bike” Company produces mountain bikes and sells them to its commercial customers, which are 20 retail outlets. Of the 20 retail outlets, 19 commercial customers are small bike shops, which are owned separately and one (1) large retail chain with numerous retail outlet stores.

The retail chain central purchasing buys 60% of the bicycles produced by Mike the Bike Company, which are warehoused centrally and distributed to its outlets at the large retail chain’s expense. The 19 smaller commercial customers purchase bicycles in approximately equal quantities and their orders are about the same size.

Case Study-1

Case Study-1

Requirement-1

It appears that Zhivago Brands follows differentiation business strategy. Differentiation business strategy refers to a business strategy where the firm strives to differentiate itself from the competitors by finding out innovative ways to improve quality and/ or reduce costs. The firm can take differentiation advantages by either providing superior quality or providing product at the cheapest prices. In the case of Zhivago Brands, it has been observed that the firm focuses on quality improvements through innovation with the intention to outperform its competitors. Therefore, it could be inferred that the firm is following differentiation business strategy. Moreover, the firm is also seeking ways to reduce the cost of production which will enable it produce quality product at affordable prices (Grifell-Tatje and Lovell, 2014).

Requirement-2

Revenue effect of growth	(actual units sold 2017- actual units sold 2016)*Selling price 2016
	(63000-60000)*300    =900000			Favorable
Cost effect of growth-variable cost	(Units of input required to produce 2017 output in 2016 - Actual input used to produce 2016 output) * Input price 2016
	Direct material
		(450000/300*315-450000)*13.20 = 297000				Un-Favorable
	Conversion cost
		(375-375)*8000  = 0
	selling and customer-service costs
		(143-150)*10000 = 70000			Favorable
Total growth component
	(900000-297000-0+70000) = 673000				Favorable

Requirement-3

	Revenue effect
		(315-300)*63000 = 945000			Favorable
	Direct material
		(14.03-13.20)* 450000/300*315 =			392175	Un favorable
	Conversion cost
		(8100-8000)*375 = 37500			Un favorable
	selling and customer-service costs
		(9865.35-10000)*143		-19255	Favorable
Total price component
	(945000-392175+19254.90) = 572079.90				Favorable

Requirement-4

	Direct material
		(465000-450000/300*315)*14.03 = 105225				Favorable
	Conversion cost
		(375-375/300*315)*8100 = 151875			Favorable
	selling and customer-service costs
		(143-150/300*315)*9865.38 = 143048.01				Favorable
Total productivity component
	(105225+151875+143048.01) = 400148.01				Favorable

Requirement-5

	2016	2017
Units sold	300	315
Selling price	60000	63000
Total revenue	18000000	19845000
Less: costs
Direct materials	5940000	6523950
conversion costs	3000000	3037500
selling and customer-service costs	1500000	1410750
Total cost	10440000	10972200
Operating profit	7560000	8872800
Variance	1312800	Favorable

Requirement-6

The four perspectives of balance score card for Zhivago Brands along with their relative measures are given below:

Perspective	Measure	2016	2017
Financial	Profit margin	42%	45%
Customer	Increase in new customers	56	21
Innovation and learning	Number of times faulty materials returned to suppliers	9	2
Internal processes	Late delivered ratio to total units sold	2.00%	0.63%

The financial perspective refers to the measurement of business performance from the financial view points. For this purpose, profit margin ratio has been taken as the measure of performance. In the year 2016, the firm earned 42% profit margin which increased to 45% in the year 2017. This shows that the financial performance of the firm has improved in the current year.

In order to measure the business performance from the customer’s perspective, the increase in new customers has been taken as the performance measure. It could be observed that the firm added 56 new customers to its kitty in the year 2016; however, it could add only 21 new customers in the year 2017. This shows that the performance from the customer’s view point has not been good in the current year (Valmohammadi and Ahmadi, 2015).

Further, innovation and learning perspective has been analyzed with reference to number of times faulty material returned to the supplier. In the year 2016, 9 times faulty material was returned to the suppliers which decreased significantly in the year 2017 to 2. The decrease in the number of faulty material returns shows that the firm is improving in terms of innovation and learning.

Internal processes perspective has been measured with reference to late delivery ratio to total deliveries made. In the year 2016, the ratio was 2% and it decreased to 0.63% in the year 2017 showing improvement in the internal processes (Valmohammadi and Ahmadi, 2015).

Case Study-2

Requirement-1

	Large Retailer Chain	Smaller Retailers
Manufacturing costs	10,800,000.00	7,200,000.00
Order filling costs allocated	484,800.00	323,200.00
Sales force costs allocated	240,000.00	160,000.00
Total	11,524,800.00	7,683,200.00
Units sold	27,000.00	18,000.00
Cost per bicycle	426.84	426.84

Manufacturing costs	18,000,000.00
Cost driver (units sold)	45000
Cost per driver	400.00
Order filling costs allocated	808,000.00
Cost driver (Orders placed)	1,212.00
Cost per driver	666.67
Sales force costs allocated	400,000.00
Cost driver (Number of sales calls )	300.00
Cost per driver	1,333.33

	Large Retailer Chain	Smaller Retailers
Manufacturing costs	10,800,000.00	7,200,000.00
	(27000*400)	(18000*400)
Order filling costs allocated	8,000.00	800,000.00
	(12*666.67)	(1200*666.67)
Sales force costs allocated	8,000.00	392,000.00
	(6*1333.33)	(294*1333.33)
Total	10,816,000.00	8,392,000.00
Units sold	27,000.00	18,000.00
Cost per bicycle	400.59	466.22

Requirement-3

The cost per bike when computed using single cost driver i.e. units, arrives at $426.84 and $426.84 for large retailer chain and smaller retailers respectively. Thus, the cost per bike is same for both the customer groups. However, when the computation is revised taking ABM cost allocation methodology, the cost per bike gets changed. Under ABM methodology, the cost per bike for large retailer chain works out to be $400.59 and that for smaller retailer chain it works out to be $466.22. Thus, it could be observe that under ABM cost allocation bike made for large retailer chain get cheaper while the bikes made for smaller retailer chain get expensive. The cost allocation under ABM is done applying different cost drivers for different types of costs. The use of different cost drivers removes the biasness and helps in allocating fair portion of the costs to the products or services (Schutzer, Arthur and Anscher, 2016).

Requirement-4

Currently, the competitor is selling bikes for large retailer chain at $469.53 (426.84*110%). If the competitor offers 8% discount on the current selling price, the revised price would be $431.97. So, to be competitive in the market, Mike the Bike would need to bring the prices down from $469.53 to somewhere equal to the competitor’s prices i.e. $431.97.

One can observe that when ABM cost allocation is applied, the cost per bike for large retailer chain falls to $400.59. Applying 10% mark up, Mike the Bike can offer it at $440.65. Thus, it can reduce the price from $469.53 to $440.65 and give a tough fight to the competitor.

Case Study 3

Requirement-1

The profit of Rotor Electrics is $98 and that of Green Acres is $790. The consolidated profit of SSHA Holdings Ltd is $888. This is the case where Rotor Electrics sells its products to external customers instead of transferring the same to Green Acres.

	Rotor Electrics	Green Acres
Selling Price per unit	220	2100
Less: Production Cost per unit	100	1100
Less: Selling Expenses (10% sales commission)	22	210
Profit per unit	98	790
Units sold (assumed)	1	1
SSHA Holdings Ltd	888

Requirement-2

The profit of Rotor Electrics is $278 and that of Green Acres is $610. The consolidated profit of SSHA Holdings Ltd is $888. This is the case where Rotor Electrics does not sell its products to external customers but transfers the same to Green Acres at transfer price of $400.

	Rotor Electrics	Green Acres
Selling Price/ transfer price per unit	400	2100
Less: Production Cost per unit	100	1280
		(1100-220+400)
Less: Selling Expenses (10% sales commission)	22	210
Profit per unit	278	610
Units sold (assumed)	1	1
SSHA Holdings Ltd	888

Requirement-3

1. The performance of the division is the parameter of assessing the performance of the manager of that division. So, the changes in costs, revenues, and profits of the division would surely affect the bonus and promotions of the manager concerned. In the current case of SSHA Holdings, the transfer price has been set at $400 while the product is available in the market at $225. So, the manager of Rotor Electrics which is the transferring division would happily accept the transfer price but the manager of receiving division i.e. Green Acres would not accept (Kozlova et al., 2016).    

Due to this transfer pricing decision, the profit margin ratio of Rotor Electrics would increase to 69.50% from 44.55% while the profit margin ratio of Green Acres would decrease to 29.04% from 37.62%.

2. In case the transfer price is set at $400, the managing direct would need to think of changing the performance measurement basis for the two divisions. If the managing director intends to keep the performance measurement base same, it will meet the requirements of goal congruence. Due to high transfer price, Green Acres may take decision to buy the product from outside market which may affect the overall profits of the company negatively. So, the transfer price of $400 is not goal congruent price.
3. The managing director is recommended to either change the performance measurement basis for both the divisions or change the transfer pricing to make it goal congruent. As the product being transferred is available in the outside market at $225 so the transfer price could be set near to $225 (Kozlova et al., 2016).

Case Study-4

1. Yes, Adam Dolittle is wrong. The performance related pay must be linked to the performance of the individual or the team. The individual members of the team are being given equal amount of bonus on team achieving the targets which is wrong. The bonus should be shared based on the contribution of each individual in the team’s performance. Further, the scheme is also ineffective in regards to the methodology adopted for assessment of team’s performance. The scheme is clearly biased for team-B Faisal (Ahammad et al., 2015).
2. The performance measures suggested in the scheme are not appropriate. The performance measures should be designed keeping in view the peculiarities of processes and activities of all the teams.
3. Apart from these three measures, productions of defectives should also be included as the performance measures so the teams could be discouraged from producing faulty products. In case team A produces defectives, there must be penalty on it and at the same team B should be compensated for delays due to defective material being received from team A.
4. Plan for development of new strategies is given below:

Level of management	Strategy	Performance measure
Enterprise strategy level	Increasing focus on the quality and quality of production through lucrative incentive plans	Production output ratio Defective production ratio
Corporate strategy level	Formulating policy for incentives for different teams with the objective to enhance their performance	Team’s output vs resource
Business strategy level	Implementing the incentive scheme and monitoring the targets on a daily basis	Daily targets vs achievement
Functional strategy level	Communicating the team’s targets and breaking the team’s targets into individual’s targets	Individual target vs achievement

References

Faisal Ahammad, M., Mook Lee, S., Malul, M. and Shoham, A., 2015. Behavioral ambidexterity: The impact of incentive schemes on productivity, motivation, and performance of employees in commercial banks. Human Resource Management, 54(S1), pp.s45-s62.

Grifell-Tatjé, E. and Lovell, C.A.K., 2014. Productivity, price recovery, capacity constraints and their financial consequences. Journal of Productivity Analysis, 41(1), pp.3-17.

Kozlova, T., Zambrzhitckaia, E., Ivanova, N., Dolgopolov, O. and Makovchuk, I., 2016. Management aspect of transfer pricing for operating companies within iron and steel holding corporations. Indian Journal of Science and Technology, 9(14).

Schutzer, M.E., Arthur, D.W. and Anscher, M.S., 2016. Time-driven activity-based costing: a comparative cost analysis of whole-breast radiotherapy versus balloon-based brachytherapy in the management of early-stage breast cancer. Journal of oncology practice, 12(5), pp.e584-e593.

Valmohammadi, C. and Ahmadi, M., 2015. The impact of knowledge management practices on organizational performance: A balanced scorecard approach. Journal of Enterprise Information Management, 28(1), pp.131-159.