CHAPTER 1: COST MANAGEMENT AND STRATEGY
EXERCISES
1-24 Strategy; Real Estate Services (15 min)
This exercise can be used to provide a good perspective for the
students to see the role of cost management in solving business
issues, and in placing the management accountant in more of a
leadership role in the firm. It also provides an early motivation for the
cost behavior issues to be discussed later in chapter 3 and chapter 8.
The management accountant has a hunch that the company is
about to take on a potentially damaging strategic initiative. This is a
great opportunity to begin to play more of a strategic role in the
company. The first step should be to obtain the relevant information
about projected revenues and costs and do a careful analysis of the
likely profitability of developing the new, smaller customers.
Here’s how the case might be used in a class discussion. First,
ask the class to identify the types of costs likely to be incurred by this
company in providing its service. The answers are likely to include
labor costs and materials for cleaning and maintenance, in addition to
costs for maintaining the firm’s office. As these examples are given,
put them on the chalkboard and collect 6 or 8 of them. Then, ask
how each of these costs might differ between large and small
customers. For example, the cost of cleaning labor and materials will
likely be somewhat proportional to the square feet of space each
customer occupies, so that cost projections based on current
customer experience is likely to be useful in estimating the
costs/profits of the smaller customers. However, security costs are
likely to not vary greatly based on the size of the customer. How
,does this affect the pricing and the potential profitability of the smaller
customers? Similarly, how will the office-related costs of managing
the customer account differ between large and small customers –
probably not much at all. Overall, the fact that some costs will not be
proportional to customer size (as measured by square feet of office
space) means the smaller customers will be more costly, per unit of
floor space, than the larger customers. This should be taken into
account in pricing the smaller jobs and in projecting profits from the
smaller customers.
, 1-24 (continued-1)
An important issue this case brings out is the need for the
management accountant to take a proactive role in business decision
making. The discussion here should focus on what steps the
accountant should take to become a more integral part of business
decision making. A number of possible answers are likely to be
proposed.
1-26 Risk Management, Enterprise Sustainability, and Lean Accounting (40 min)
1. There are two IMA Statements on Management Accounting (SMA) on
Enterprise Risk Management. “Enterprise Risk Management:
Frameworks, Elements and Integration” (2006), and “Enterprise Risk
Management: Tools and Techniques for Effective Implementation”
(2007).
The definition in the text notes that enterprise risk management is a
framework and process that firms use to managing the risks that
could negatively or positively affect the company’s competitiveness
and success. Risk is considered broadly, to include (1) hazards
such as fire or flood, (2) financial risks due to foreign currency
fluctuations, commodity price fluctuations, and changes in interest
rates, (3) operating risk related to customers, products, or employees,
and (4) strategic risk related to top management decisions about the
firm’s strategy and implementation thereof.
2. There are three SMAs on enterprise sustainability. “Implementing
Corporate Environmental Strategies” (1995), “Tools and Techniques
of Environmental Accounting for Business Decisions” (1996), and
“The Evolution of Accountability – Sustainability Reporting for
, Accountants” (2008). The definition in the text notes that enterprise
sustainability means the balancing of the company’s short and long
term goals in all three dimensions of performance – social,
environmental, and financial.
3. There are two SMAs on lean accounting. “Lean Enterprise
Fundamentals” (2006), and “Accounting for the Lean Enterprise:
Major Changes in the Accounting Paradigm” (2006). The definition in
the text notes that lean accounting uses value streams to measure
the financial benefits of a firm’s progress in implementing lean
manufacturing.
1-28 Balanced Scorecard (15 min)
1. The balanced scorecard can help a firm by explicitly drawing
managers’ attention to critical success factors in four key areas:
customer satisfaction, financial performance, internal business
processes, and innovation and learning (human resources). The
balanced scorecard helps managers to focus on the strategically
important, critical success factors, and to take a long-term perspective
to the firm’s performance. In effect, it helps managers to focus on the
broad set of critical factors that the firm must attend to in order to
compete successfully.
2. The Balanced Scorecard: Some example factors that might be
included in JIC’s Balanced Scorecard are as follows:
EXERCISES
1-24 Strategy; Real Estate Services (15 min)
This exercise can be used to provide a good perspective for the
students to see the role of cost management in solving business
issues, and in placing the management accountant in more of a
leadership role in the firm. It also provides an early motivation for the
cost behavior issues to be discussed later in chapter 3 and chapter 8.
The management accountant has a hunch that the company is
about to take on a potentially damaging strategic initiative. This is a
great opportunity to begin to play more of a strategic role in the
company. The first step should be to obtain the relevant information
about projected revenues and costs and do a careful analysis of the
likely profitability of developing the new, smaller customers.
Here’s how the case might be used in a class discussion. First,
ask the class to identify the types of costs likely to be incurred by this
company in providing its service. The answers are likely to include
labor costs and materials for cleaning and maintenance, in addition to
costs for maintaining the firm’s office. As these examples are given,
put them on the chalkboard and collect 6 or 8 of them. Then, ask
how each of these costs might differ between large and small
customers. For example, the cost of cleaning labor and materials will
likely be somewhat proportional to the square feet of space each
customer occupies, so that cost projections based on current
customer experience is likely to be useful in estimating the
costs/profits of the smaller customers. However, security costs are
likely to not vary greatly based on the size of the customer. How
,does this affect the pricing and the potential profitability of the smaller
customers? Similarly, how will the office-related costs of managing
the customer account differ between large and small customers –
probably not much at all. Overall, the fact that some costs will not be
proportional to customer size (as measured by square feet of office
space) means the smaller customers will be more costly, per unit of
floor space, than the larger customers. This should be taken into
account in pricing the smaller jobs and in projecting profits from the
smaller customers.
, 1-24 (continued-1)
An important issue this case brings out is the need for the
management accountant to take a proactive role in business decision
making. The discussion here should focus on what steps the
accountant should take to become a more integral part of business
decision making. A number of possible answers are likely to be
proposed.
1-26 Risk Management, Enterprise Sustainability, and Lean Accounting (40 min)
1. There are two IMA Statements on Management Accounting (SMA) on
Enterprise Risk Management. “Enterprise Risk Management:
Frameworks, Elements and Integration” (2006), and “Enterprise Risk
Management: Tools and Techniques for Effective Implementation”
(2007).
The definition in the text notes that enterprise risk management is a
framework and process that firms use to managing the risks that
could negatively or positively affect the company’s competitiveness
and success. Risk is considered broadly, to include (1) hazards
such as fire or flood, (2) financial risks due to foreign currency
fluctuations, commodity price fluctuations, and changes in interest
rates, (3) operating risk related to customers, products, or employees,
and (4) strategic risk related to top management decisions about the
firm’s strategy and implementation thereof.
2. There are three SMAs on enterprise sustainability. “Implementing
Corporate Environmental Strategies” (1995), “Tools and Techniques
of Environmental Accounting for Business Decisions” (1996), and
“The Evolution of Accountability – Sustainability Reporting for
, Accountants” (2008). The definition in the text notes that enterprise
sustainability means the balancing of the company’s short and long
term goals in all three dimensions of performance – social,
environmental, and financial.
3. There are two SMAs on lean accounting. “Lean Enterprise
Fundamentals” (2006), and “Accounting for the Lean Enterprise:
Major Changes in the Accounting Paradigm” (2006). The definition in
the text notes that lean accounting uses value streams to measure
the financial benefits of a firm’s progress in implementing lean
manufacturing.
1-28 Balanced Scorecard (15 min)
1. The balanced scorecard can help a firm by explicitly drawing
managers’ attention to critical success factors in four key areas:
customer satisfaction, financial performance, internal business
processes, and innovation and learning (human resources). The
balanced scorecard helps managers to focus on the strategically
important, critical success factors, and to take a long-term perspective
to the firm’s performance. In effect, it helps managers to focus on the
broad set of critical factors that the firm must attend to in order to
compete successfully.
2. The Balanced Scorecard: Some example factors that might be
included in JIC’s Balanced Scorecard are as follows:
