MN3345: STRATEGIC MANAGEMENT ACCOUNTING

Module Guide
Academic year 2022-23
Spring term

COURSE CO-ORDINATOR
Dr Susan O’Leary
McCrea 2-20
E-mail: [email protected]
Feedback drop-in sessions: Fridays 1-3pm
Book here: https://calendly.com/susan-oleary-rhul/30min
COURSE SUMMARY
This course, Strategic Management Accounting (MN3345), aims to integrate knowledge on
accounting, strategy, people, ethics and the internal and external environment of
organisations. It builds on the second year course (Managerial Accounting - MN2405) by
considering management control systems in general and strategic management accounting
practices in particular, drawing on a range of academic and professional literature.
The course is conducted through lectures which introduce key concepts, principles, practices
and literature, while workshops focus on case studies and practical application of techniques
Students are required to take into account the organisational context, including the ethical
context, or the perspectives of individual actors in that context, and relevant academic and
professional literature when anlaysing a case or making recommendations.
Techniques and practices covered will typically be drawn from: benchmarking and
competitor analysis; lifecycle and quality costing; strategic cost management and the value
chain; balanced scorecard; activity based management; pricing decisions and profitability
analysis; management control in organisations including divisionalised organisations;
performance measurement and management, and incentivisation; sustainability, ethics,
governance, and management control; situational influences such as the effect of the
environment or the absence of a profit motive.
The course provides opportunities for students to develop the capacity for the critical
evaluation of arguments and evidence, and the ability to analyse and draw reasoned
conclusions concerning structured and, to a more limited extent, unstructured problems from
a given set of data.
Success in the course will require the student to be able to combine financial and other
numerical data with qualitative information, and to present that information, together with
analysis, argument and commentary, in a form appropriate to the intended audience.

LEARNING OUTCOMES
By the end of the course, students should be able to:

 describe, analyse and critically evaluate contemporary theories and practices of

management control and strategic management accounting

 use a range of management control and strategic management accounting

techniques taking into account the internal and external context of the organisation

 make reasoned recommendations to managers, their advisers or organisational

stakeholders, taking into account the internal and external context of the organisation
and the information provided by the techniques used

 apply theory and empirical evidence to practical examples

 write a structured and critical report, well referenced to relevant sources

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COURSE SCHEDULE

Week
Week Lecture topic Workshop topic
starting
Introduction to the course
1 9-Jan Strategic cost management – Part 1

2 16-Jan Activity Based Management Introduction to the course

3 23-Jan Just-in-Time and Life Cycle Analysis Activity Based Management

4 30-Jan Total Quality Management Just-in-Time and Life Cycle Analysis

5 6-Feb Transfer pricing Total Quality Management

Reading Week – No lectures or workshops

13-Feb
MCQ Test (30%) – 15th February (12 – 1.30pm)

6 20-Feb Divisional performance measures Transfer pricing

7 27-Feb The Balanced Scorecard Divisional performance measures

8 06-Mar Rewards and incentives The Balanced Scorecard

Sustainability and management

9 13-Mar Rewards and incentives
accounting

Preparation for the assignment Sustainability and management

10 20-Mar
accounting

10-May Individual assignment (70%) due – 10th May (12pm)

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PRESCRIBED READINGS
You can use either of the following two textbooks:
 Drury, C. (2019). Management Accounting for
Business, 7th edition, Cengage Learning.
 Drury, C. (2018). Management and Cost
Accounting, 10th edition, Cengage Learning.

Previous or newer editions of either of the above textbooks are also completely
adequate for study purposes. References to other relevant academic papers and
practitioner-oriented articles will be provided within lectures, workshops and on Moodle
throughout the term – these will be useful for the completion of your assignment.

ASSESSMENT TASKS AND FEEDBACK

Formative assessment and feedback

Formative assessment will be provided in workshops when students discuss the work that
they have prepared during the workshop. The workshop tutor will offer verbal guidance.
Suggested answers to some workshop questions will be provided for students to review on
Moodle at the end of each week.
Weekly quizzes are available on Moodle for Weekly quizzes on Moodle for topics 1-4 (those
examinable by the MCQ test) - they will enable you to self assess your understanding of the
topic and monitor your progress
Feedback hours with the course co-ordinator are available to all students on a weekly basis
where they are given practical and useful feedback on their course work and progress within
the course. Students are strongly encouraged to avail of these sessions at regular intervals
throughout the term.

Summative assessment and feedback

There will be two types of summative coursework assessment:
1. A 90-minute MCQ Moodle test (30 multiple choice questions) on topics 1-4
(inclusive)

2. A written individual assignment (2,500 words)

Details of both these tasks will be provided in more detail during lectures and on Moodle.

ASSESSMENT TASK DUE DATE WEIGHTING

15th February
MCQ Moodle Test 30%
(12-1.30pm)

Assignment 10th May (12pm) 70%

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 TOTAL 100%

TEACHING AND LEARNING METHODS

This course will be taught each week as a:

 2 hour face-to-face lecture (as timetabled)
 1 hour workshop (as timetabled).
Please note there are exceptions to this in Week 1 – see above Course Schedule. You are
expected to attend all lectures and workshops.

Lectures
There will be 10 lectures during the term each week. A list of topics and their scheduling can
be found above. Lecture slides will be uploaded to Moodle the week before. Lectures align
with textbook chapters which students are expected to read prior to the scheduled lecture.
During the lecture, key points from the chapters are highlighted and more complex points are
explained in detail. It is suggested that students take detailed notes during the lecture to aid
their study.

Workshops
Workshops are small group meetings where students have the opportunity to test their
knowledge and practice explaining concepts and techniques to each other and the tutor. The
purpose of workshops is to deepen students’ understanding of the studied topics, rather than
passively receiving solutions to questions and exercises.
There will be 9 workshops during the term. They are conducted weekly commencing in the
second week of term. A list of questions, exercises, problems, cases, or activities for each
workshop is given within your workbook. These are selected to cover the main concepts and
issues that are important in each topic. Students are not expected to have completed the
assigned activities before attending the class, although if they do choose to do so, this is a
very effective way of receiving feedback on their work.
Students are expected to actively participate in workshops by answering questions and
contributing to discussions. Students should take this opportunity to clarify areas of difficulty
and seek feedback about their progress in the workshop. Solutions to some workshop
questions will be made available on Moodle at the end of each week. Workshop attendance
will be recorded and monitored.

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TOPIC 1 – INTRODUCTION TO THE COURSE

Learning objectives
After attending the lecture and workshop and completing the reading you should be able to:

 Explain what strategic management accounting is

 Highlight the dual process of strategic planning and strategic implementation, and
how management accounting helps/impacts these processes

 Discuss the history of management accounting and how it has evolved into its
contemporary function as a strategic organisational process.

 Compare the use of strategic management accounting information to that of financial

accounting information.

Essential reading
Chapter 1 & 16 (pp 418-420) - Drury, C. (2019). Management Accounting for Business, 7th
edition.
or
Chapter 1 & 23 (pp 627-628) - Drury, C. (2018). Management and Cost Accounting, 10th
edition.

Suggested reading
Dixon, R. (1998). Accounting for strategic management: A practical application. Long Range
Planning, 31(2), 272-279.
Kober, R., Ng, J., & Paul, B. J. (2007). The interrelationship between management control
mechanisms and strategy. Management Accounting Research, 18(4), 425-452.
Langfield-Smith, K. (2008). Strategic management accounting: How far have we come in 25
years? Accounting, Auditing & Accountability Journal, 21(2), 204-228.
Pitcher, G. S. (2015). Management accounting in support of the strategic management
process. CIMA UK.
Roberts, J. (1990). Strategy and accounting in a UK conglomerate. Accounting,
Organizations and Society, 15(1-2), 107-126.
Skærbæk, P., & Tryggestad, K. (2010). The role of accounting devices in performing
corporate strategy. Accounting, Organizations and Society, 35(1), 108-124.

Workshop

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Information for this workshop will be provided on Moodle and during the workshop.

TOPIC 2 – ACTIVITY BASED MANAGEMENT

Learning objectives
After attending the lecture and workshop and completing the reading you should be able to:

 Understand and explain the eight identified wastes under a Six Sigma project

 Describe the core elements and ethos of a lean production system

 Use the four steps of activity-based management to determine the real cause of
costs, eliminate costs and manage cost, time and other sources of customer value.

 Describe how business process re-engineering can be used to manage costs and
other sources of value

Essential reading
Chapter 15 (pp. 392-397) - Drury, C. (2019). Management Accounting for Business, 7th ed.
or
Chapter 22 (pp. 598-603) - Drury, C. (2018). Management and Cost Accounting, 10th
edition.

Suggested reading
Breiby, M. A., Selvaag, S. K., Øian, H., Duedahl, E., & Lerfald, M. (2022). Managing
sustainable development in recreational and protected areas. The Dovre case, Norway.
Journal of Outdoor Recreation and Tourism, 37, 100461.
Gosselin, M. (1997). The effect of strategy and organizational structure on the adoption and
implementation of activity-based costing. Accounting, Organizations and Society, 22(2), 105-
22.
Langfield-Smith, K. (1997). Management control systems and strategy: A critical review.
Accounting, Organizations & Society, 22(2), 207-232.
Lee, B., H. Pan, G. Ruhago, M. Mizinduko, D. Peter, C. Mann, & S. Forsythe. 2022.
Applying Activity-Based Costing and Management to HIV Services in Tanzania: Improving
Resource Allocation and Efficiency. Washington, DC: Palladium, Health Policy Plus.
Maskell, B. H., & Kennedy, F. A. (2007). Why do we need lean accounting and how does it
work? Journal of Corporate Accounting & Finance, 18(3), 59-73.

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Topic 2 – Lecture

Lecture example 1: Activity based management

PJ Rogers Ltd manufactures timber bookcases in two production processes: cutting and
assembly. The company has adopted an activity-based costing system and has identified
the following activities:

1. Inspect incoming timber.

2. Dispose of substandard timber.
3. Store timber.
4. Move timber to production.
5. Set up circular saw.
6. Operate circular saw.
7. Inspect sawn planks.
8. Recut planks that are too long.
9. Dispose of planks that are too short.
10. Move sawn planks to assembly area.
11. Sand planks.
12. Assemble bookcase.
13. Paint bookcase.
14. Inspect bookcase.
15. Move finished bookcase to shipping.

Required:

1. Explain why the activities ‘Inspect sawn planks’ and ‘Recut planks that are too
long’ can be classified as non-value-added activities.

2. Suggest possible root cause cost drivers for these two activities.

3. Identify the other non-value-added activities at PJ Rogers Ltd.

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Topic 2 – Workshop

Case study 1: Activity based management

Teskor Pty Ltd manufactures paintbrushes at Lonsdale. The management

accountant, Mary Malone, has developed an activity-based costing system
for the company. The activities in the timber handle area are as follows:

Activity Description Cost

Set up saw Saw set up to cut timber into designated lengths £1,300
Operate saw Timber cut into lengths £6,250
Set up lathe Lathe set up to produce a designated handle shape £1,000
Operate lathe Timber lengths shaped into handles £8,600
Inspect handles Handles inspected to identify faults £3,700
Rework handles Faulty handles reworked £2,600
Move handles Handles moved to assembly area £2,500

From the cost assignment module in her ABC system, Malone knows that the activities
‘Inspect handles’ and ‘Rework handles’ are costly. She considers both to be non-value-
added and therefore candidates for elimination.

Required:

1. What percentage of cost could be classified non-value added?

Inspect handles - 3700

Rework handles -2600
Move handles – 2500 = 8,800/25950= 34%

2. Explain why the activities ‘Inspect handles’ and ‘Rework handles’ can be classified
as non-value-added activities.

If it was done good in the first place then u don’t have to inspect and this as well does
not add value to customers.

For some companies’ certain kind of inspection is required so the price can be
minimized.

Move handles: the labor or the lorry moving can cause these costs so the storage area
should be as near the production area to cut costs

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3. Suggest possible root cause cost drivers for these two activities.

Activity cost driver- was basically what would make the cost fluctuate

Root cause driver- Why does the cost exist in the first place.

quality control------ Six sigma

capital investment
replacing and repairing
staff training
better recruitment
Supply chain

4. Suggest possible performance measures for the activity ‘Operate lathe’ which
might help eliminate the activities ‘Inspect handles’ and ‘Rework handles’.

If u want to people to care about something u attach ur performance measures to it.

Eliminate faulty goals

Reducing defects per batch- reduce defects by 50%

5. The above inspection cost reflects inspection of 25 batches of paintbrushes. For

the purposes of this question, assume that this is a value-added cost. Each
inspection typically takes four hours to complete, but, due to various
inefficiencies in the inspection department, the average time increased to five
hours. The non-value-added cost, therefore, would be:

Inspection cost = 3700

25 batches

1 batch = 148

4 hours

£37

25*37= £925

6. Discuss how this process might differ if Business Process Re-Engineering was
used.

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 Activity based management – process of continuous improvement getting rid of
inefficiencies

Business process re-engineering- it does not start with existing systems. They start
something new

That the only question u will get u will not get a case study question.

TOPIC 3 – JUST-IN-TIME AND LIFE CYCLE ANALYSIS

Learning objectives
After attending the lecture and workshop and completing the reading you should be able to:

 Outline the main features and steps of a just-in-time philosophy

 Calculate cost-savings arising from JIT

 Analyse life cycle costs and revenues, and understand how to use life cycle
management to reduce costs

Essential reading
Chapter 15 (pp. 385-386 & 397-402) - Drury, C. (2019). Management Accounting for
Business, 7th ed.
or
Chapter 22 (pp. 591-592 & 603-608) - Drury, C. (2018). Management and Cost Accounting,
10th edition.

Suggested reading

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Brakman, S., Garretsen, H., & van Witteloostuijn, A. (2020). The turn from just-in-time to just-in-case
globalization in and after times of COVID-19: An essay on the risk re-appraisal of borders and
buffers. Social Sciences & Humanities Open, 2(1), 100034.

Dunk, A. S. (2012). Assessing the contribution of product life cycle cost analysis, customer
involvement, and cost management to the competitive advantage of firms. Advances in
Management Accounting, 20, 29-45.
Korhonen, J., Honkasalo, A., & Seppälä, J. (2018). Circular economy: the concept and its
limitations. Ecological economics, 143, 37-46.
Larrinaga, C., & Garcia-Torea, N. (2022). An ecological critique of accounting: The circular
economy and COVID-19. Critical Perspectives on Accounting, 82, 102320. Mia, L. (2000).
Just-in-time manufacturing, management accounting systems and profitability. Accounting
and Business Research, 30(2), 137-151.
Power, M., Doherty, B., Pybus, K., & Pickett, K. (2020). How COVID-19 has exposed
inequalities in the UK food system: The case of UK food and poverty. Emerald Open
Research, 2.

Topic 3 – Lecture

Lecture example 1: Just-in-time

Pacific Player Ltd has recently decided to adopt a just-in-time inventory policy to curb its
steadily rising costs and to free up cash for investment. The company borrows capital to fund
any inventory purchases at a rate of 6 per cent per annum. However, the company
anticipates that inventory will decrease from £7 200 000 to £1 200 000. The following data
applies:

 Reduced inventory should produce savings in insurance and property taxes of £54
000 per annum.

 The company will lease 75 per cent of its

existing warehouse to another firm for £80
per square metre per year. The warehouse
has 30 000 square metres.

 Because there is now the need to handle an

increased number of small deliveries from
suppliers, Pacific Player will need to

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 remodel its production and receiving dock at a cost of £1 200 000. These costs will
be spread over 10 years.

 A change in suppliers is expected to result in more expensive raw materials.

However, these materials should give rise to fewer warranty and repair problems
after Pacific Player's finished products are sold, resulting in a net savings of £50 000
per year.

 Two employees who currently earn £120 000 each will be transferred to other
positions in the company, due to the introduction of JIT. A further employee who
earns £150 000 per annum will be made redundant.

 Reduced raw material inventory levels and accompanying stock-outs will cost the
company about £140 000 per year.

Some production managers are skeptical regarding the adoption of the JIT system. One of
them recently commented:

“How can our company even think of doing this? We all remember the problems we
used to find on our audits. How are we going to keep effective control over payments
to suppliers? How can our company save money when we are reducing the size of
orders and increasing the number of orders delivered? What about the risk of
running down the levels of inventory? And how will these changes impact on our
strategic priority of product quality?”

Required:

1. Calculate the annual financial impact on yearly profit of the decision to adopt the
JIT system.

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2. Respond to each of the criticisms made by this production manager. In your
answer, explain the rationale behind improving supplier relationships and the
likely impact of introducing a just-in-time system on the company's strategic
priorities.

Lecture example 2: Life-cycle cost analysis

Pandana Fashions Ltd produces clothes for the ‘young professionals’ market. The design
department is currently working on two potential product lines: After-five Wear and Weekend
Wear. The marketing department is keen to introduce both, but currently the company has
only enough surplus production capacity to introduce one new product line. Both product
lines are estimated to have a life cycle of three years—one year for design and development
and two years on the retail market. The company accountant reviewed the budget estimates
for both of the product lines and estimated their profitability for each year in the retail market
as follows:

After-five Wear Weekend Wear

Sales revenue £700 000 £1 300 000
Cost of goods sold   500 000   900 000
Gross margin £200 000 £ 400 000

The marketing manager, whose performance is evaluated on sales, is keen to introduce the
Weekend Wear and uses the profitability analysis to support this view. However, the
company accountant is concerned about some of the other costs he has uncovered. The

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After-five Wear will be sold in a limited, exclusive market and involve relatively little
promotion and distribution cost. In contrast, the Weekend Wear, a higher volume line, will be
distributed to a large number of retailers and require substantial support costs.

After-five Wear Weekend Wear

Design costs* £40 000 £200 000
Promotion costs† 8 000 80 000
Distribution costs†   12 000   240 000
£60 000 £520 000

* These costs are to be incurred in the year prior to the products' release on the market.
† These costs will be spread equally over the two years in which the products are sold.

Required:

1. Which product line appears the more profitable, using profitability analysis?

2. Prepare a profit statement for each product line for each of the three years of the
life cycle. Which product appears to be the more profitable now? Why?

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Topic 3 – Workshop

Case study 1: Life-cycle cost analysis

Ellipsis Electronics Ltd produces speakers for high-fidelity sound systems. Because of the
rapid rate of technological innovation in the hi-fi market, most of the company's products
have short life cycles. The marketing manager, Jean Wills, believes that new product
introductions are the key to Ellipsis's success. However, the managing director, Joseph
Iacopetta, is concerned that the frequent changes in product lines are eroding the company's
profitability. He believes that many of the new products have such short life cycles that they
never fully recover their costs. He asks the management accountant, Stan Willox, to help
him.

Willox decides to review the profitability of the Easy Ear Speaker System (EESS), which has
just been phased out after only three years on the market. First, Willox prepares an analysis
of the profitability of the EESS:
Year 1 Year 2 Year 3
Sales revenue £75 000 £142 500 £52 500
Less Cost of goods sold:*
Direct materials 15 000 28 500 10 500
Direct labour 7 500 14 250 5 250
Applied manufacturing overhead 11 250 21 375 7 875

*The company uses a JIT system, which means that inventories are minimal and all
manufacturing costs flow directly to cost of goods sold.

In addition to these manufacturing costs, Willox is able to isolate the following costs
associated with the EESS:

Year 0 Year 1 Year 2 Year 3

Research and development £17 000
Product design 10 000
Process design 15 000 £ 5 000 £3 000
Tooling costs 20 000
Marketing costs 8 000 12 000 6 000 £8 000
Warranty claims 10 000 4 000 1 000
After-sales service 3 000 5 500 2 000

Required:

1. Assess the profitability of the EESS in years 1, 2 and 3 including only the
manufacturing costs.

Year 1 – 75000- 15000-7500-11250= 41250

Year 2 – 142500-28500-14250-21375= 78375

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 Year 3 – 52500-10500-5250-7875= 28875
For all 3 years profitability = 148500

2. Assess the profitability of the EESS based on its life cycle costs.

3. Given this information, what action should Ellipsis take when considering future
products?

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4. Discuss the advantages and disadvantages of developing life cycle budgets for
proposed new products.

The longer the lifecycle the difficult it to predict costs an=s there are many factors affecting
the wars inflation supply demand , logistics natural disaster

TOPIC 4 – TOTAL QUALITY MANAGEMENT

Learning objectives
After attending the lecture and workshop and completing the reading you should be able to:

 Explain the meaning of ‘quality’ and describe the different approaches that can be
used to manage quality.

 Describe the four types of quality costs, and prepare and interpret cost of quality
reports. Discuss how quality can be managed through total quality management
(TQM)

Essential reading
Chapter 15 (pp. 402-406) - Drury, C. (2019). Management Accounting for Business, 7th ed.
or
Chapter 22(pp. 608-612) - Drury, C. (2018). Management and Cost Accounting, 10th edition.

Suggested reading
Chenhall, R. H. (1997). Reliance on manufacturing performance measures, total quality
management and organizational performance. Management Accounting Research, 8(2),
187-206.
Hoque, Z., & Alam, M. (1999). TQM adoption, institutionalism and changes in management
accounting systems: A case study. Accounting and Business Research, 29(3), 199-210.
Ittner, C. D., & Larcker, D. F. (1997). Quality strategy, strategic control systems, and
organizational performance. Accounting, Organizations and Society, 22(3-4), 293-314.

Topic 4 – Lecture

Lecture example 1: Cost of quality

The following costs were incurred by Valley Fabrications Ltd to maintain the quality of its
products during April:

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  Operating an X-ray machine to detect faulty welds, £5400.
 Repairs to faulty products returned by customers, £6000.
 Cost of re-welding faulty joints discovered during processing, £3800.
 Cost of sending machine operators to a three-week quality training program, £5800.
 Cost of recalling faulty products, £10 000.
 Legal fees related to product recall, £1800.
 Product inspection in finished goods warehouse, £3400.
 Cost to confirm a supplier's quality accreditation, £600.
 Cost of faulty goods that were scrapped, £8400.

Required:

1. Prepare a cost of quality report

2. Comment on the relative proportions of each of the four categories of quality

costs.

3. Do you think that Valley Fabrications has identified all of its external failure costs?

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Topic 4 – Workshop

Case study 1: Cost of quality

Landers Ltd is a major UK bicycle

manufacturer. Over the last decade,
bicycle manufacturers from Taiwan and
Korea have been able to price their bikes
below those of the Landers products, but
the company has retained its market share
due to the poor quality of the imported
bikes. Recently, however, the quality of
the imported bikes has improved, and
Landers has had to cut prices to maintain
market share. The managing director,
John Landers, is concerned about the
viability of the business at these lower
prices and asks the accountant, Eloise Martin, to investigate the problem.

Martin's initial investigation indicates that the lower prices cannot be sustained in the longer
term, as they do not cover the costs of manufacture, let alone contribute to the company's
selling and administrative costs. She looks for possible cost reductions. The company has
always had a reputation for high quality, but Martin feels that there are substantial costs
incurred in attaining this level of quality. She knows that there are extensive quality
inspection checks throughout the production process and that many employees spend part
of their time reworking defective parts. She has also noticed the buckets full of scrapped
parts and components spread throughout the factory. These costs are not recorded
separately in the existing accounting system.

The company is divided into three departments: Manufacturing, Marketing and

Administration. Each month, the finance team checks a report which compares actual costs
for the departments with budgeted costs. The budgeted costs are based on the costs for the
previous year, adjusted for any major changes planned for the coming year.

Over the next six months Martin identifies the following costs of quality:

 Cost of replacement bikes provided under warranty, £7500. external

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  Cost of bikes returned by customers and scrapped, £7500. external

 Sales commissions on faulty bikes returned by customers, £750. external

 Contribution margin forgone on bikes returned by customers, £1500. external

 Rework on defective wheels, £12 000. internal

 Quality inspection in the goods receiving area, £22 500. Appraisal

 Quality inspections during processing, £34 500. Appraisal

 Laboratory testing of bikes and components to identify faults, £19 500. Appraisal

 Contribution margin forgone on lost future bike sales, £7500. external

 Engineering costs to correct production line quality problems, £22 500. Prevention or
internal

 Lost contribution on machine downtime during correction of production line quality

problems, £37 500. internal

 Operating an X-ray machine to detect faulty welds, £22 500. appraisal

 Cost of repairs under warranty, £1500. external

 Cost of rewelding faulty joints discovered during processing, £28 500. internal

 Cost of quality training programs, £4500. prevention

 Inspection of bikes put into finished goods warehouse, £24 000. appraisal

 Cost of faulty components that are scrapped, £6000. internal

 Cost of faulty bikes that are scrapped after finished goods inspection, £15 000.
internal

During this period, total manufacturing costs were £900 000.

Required:

1. Prepare a cost of quality report.

Internal cost
121500/275250 = 44.2%

external costs
26250/275250 = 9.53%

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Appraisal costs
123000/275250 = 44.68%

Prevention costs

4500/275250 = 1.63%

Total quality costs = 275250

Total manufacturing costs = 900000

2. Use the information in this report to suggest ways in which the company could
reduce its cost of quality.

Increase prevention costs, low prevention costs u needs to spend more money on
prevention as prevention is better than cure.

Reduce appraisal costs

High appraisal cist sis seen in that internal costs which is allowing them to reduce their
eternal costs

Prevention

Training
Repairing and maintaining
Improving machinery and [production prices
Ensuring ur are buying quality products supplier inspection

3. When John Landers receives the cost of quality report, he is amazed and says,
‘Eloise, you're the accountant. Why didn't you tell me before that our quality costs
were this high?’ Explain to Landers why Martin was unable, because of the
existing accounting system, to tell him much about the cost of quality.

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These costs are not accounted separately

TOPIC 5 – TRANSFER PRICING

Learning objectives
After attending the lecture and workshop, and completing the reading you should be able to:
• Understand why organisations use transfer pricing
• Explain the various methods that can be used to determine a transfer price and
discuss the advantages and disadvantages of each
• Explain the general rule that can be used to set transfer prices

• Determine appropriate transfer prices under a variety of scenarios

Essential reading
Chapter 13 - Drury, C. (2019). Management Accounting for Business, 7th edition.
or

23
Chapter 20 - Drury, C. (2018). Management and Cost Accounting, 10th edition.

Suggested reading
Göx, R. F. (2000). Strategic transfer pricing, absorption costing, and observability.
Management Accounting Research, 11(3), 327-348.
Sikka, P., & Willmott, H. (2010). The dark side of transfer pricing: Its role in tax avoidance
and wealth retentiveness. Critical Perspectives on Accounting, 21(4), 342-356.

Topic 5 – Lecture

Lecture example 1: Transfer pricing

Pacific Telecommunications has two divisions

and operates out of Liverpool. The Express
Division manufactures and transfers a range of
computer circuit boards to the Harris Division,
which uses those circuits to produce
telecommunication equipment for the European
market. The Express Division is operating at full
capacity. One circuit board that it transfers to the
Harris Division - Circuit A569 - has standard variable costs of £32, which are currently used
as a transfer price. However, A569 can be sold in the external market to other companies in
the computer industry for £40.
To produce its final product, the Harris Division incurs additional variable manufacturing and
selling costs of £65 and sells the final product to the external market for £120. The Harris
Division has just been contacted by a Malaysian-based company that is offering a product
similar to Circuit A569 at the very competitive price of £28. The manager of the Harris
Division is very keen to take up this offer.
Required:

1.1. Calculate the transfer price for Circuit A569, using the general transfer pricing
rule, assuming that the Express Division has no spare capacity.

2.2. Recalculate the transfer price assuming the Express Division has spare capacity
but no external market.

24
 3. Explain the likely transfer price if the company policy for transfer pricing is
variable cost plus 20 per cent.

4. Is it in the best interests of the company as a whole if the manager of the Harris
Division purchases its circuits from the Malaysian company rather than from the
Express Division?

Topic 5 – Workshop

Case study 1: Transfer pricing

Electro Ltd has two divisions: Assembly and Electrical. The Assembly Division transfers
partially completed components to the Electrical Division at a predetermined transfer price.
The Assembly Division's standard variable production cost per unit is £510. This division has
spare capacity, however, company policy dictates that it must sell as many units to Electrical
as external demand dictates. Beyond this, it can sell components to outside buyers at £570
per unit.

The Electrical Division incurs variable costs of £150 in addition to the transfer price for the
Assembly Division's components. It also currently has spare production capacity.

Required:

1. Determine a transfer price using the general rule, explaining your reasoning.

25
2. What transfer pricing policy would you recommend if there was no outside market
for the transferred component, and the Assembly Division had spare capacity?
Explain your reasoning.

3. The Electrical Division has received a special order for its product at a price of
£697.50. Assume the company uses cost-plus transfer pricing at a 10% mark-up.
a) Is the Electrical Division manager likely to want to accept or reject the special
offer? Basing your answer on calculations, explain why.

b) Is this decision in the best interests of Electro Ltd as a whole? Basing your
answer on calculations, explain why.

4. Rather than using cost plus transfer pricing (as in part 3), explain how a
negotiation between the Assembly and Electrical divisions could be used to set a
transfer price. Assuming the Electrical division wishes to accept the special order

26
 of £697.50 and there is no external market for Assembly’s components, what
range of transfer prices would be acceptable to both divisions?

4. How would the transfer price change if the Assembly Division had no spare
capacity and could sell all its units to an external buyer? Given your answer to
part 4, would this pose a problem for Electro in setting transfer prices?

READING WEEK

No lectures or workshops
MCQ Moodle test on February 15th (12.30-1.30pm). Afterwards have a good rest!

27
My MN3345 plan for Reading Week:

Date Task

Monday 13th February

Tuesday 14th February

Wednesday 15th February MCQ Moodle test (12-1.30pm)

Thursday 16th February

Friday 17th February

TOPIC 6 – DIVISIONAL PERFORMANCE MEASURES

Learning objectives
After attending the lecture and workshop and completing the reading you should be able to:
• Explain the concept of decentralisation, and its costs and benefits

28
 • Explain why it is preferable to distinguish between managerial and economic
performance
• Explain the factors that should be considered in designing financial performance
measures for evaluating divisional managers and divisional performance
• Calculate, use and assess return on investment (ROI) and residual income (RI) for
performance evaluation and management
• Understand the use of Social Return on Investment (SROI) and its limitations

Essential reading
Chapter 12 - Drury, C. (2019). Management Accounting for Business, 7th edition.
or
Chapter 19 - Drury, C. (2018). Management and Cost Accounting, 10th edition.

Suggested reading
Gibbon, J., & Dey, C. (2011). Developments in social impact measurement in the third
sector: scaling up or dumbing down?. Social and Environmental Accountability Journal,
31(1), 63-72.
Giraud, F., Langevin, P., & Mendoza, C. (2008). Justice as a rationale for the controllability
principle: A study of managers’ opinions. Management Accounting Research, 19(1), 32-44.
Govindarajan, V., & Gupta, A. K. (1985). Linking control systems to business unit strategy:
Impact on performance. Accounting, Organizations and Society, 10(1), 51-66.
Lin, Z. J., & Yu, Z. (2002). Responsibility cost control system in China: A case of
management accounting application. Management Accounting Research, 13(4), 447-467.

Topic 6 - Lecture

Lecture example 1: Return on investment (ROI) & residual income (RI)

Investment centre A Investment centre B

Profit £32 MIL £48 MIL
Invested Capital £400 MIL £800 MIL

29
 Sales Revenue £600 MIL £900 MIL

Required:

1. Calculate return on investment (ROI) for investment centres A and B highlighting

return on sales and investment turnover for both divisions.

2. Calculate return on investment (ROI) for investment centres A and B using a more
simplified formula.

3. Now assume the manager of Investment Centre B is considering a new project

which involves some modifications to a (capital) asset which will cost £100MIL.
These modifications will save the company £4.5MIL next year. The investment is
expected to a earn a return of more than 8% over its entire life which is greater
than the 4% minimum return the company expects from investments of this
nature. Therefore, from the company’s viewpoint the project is desirable. How
does the project affect the ROI which the manager of Investment Centre B is
responsible for?

4. Calculate residual income (RI) for investment centre B with and without the
additional investment (from Part 3). The imputed interest rate is 4% (based on the
minimum required rate of return).

Topic 6 – Workshop

Case study 1: Divisional performance measures

Zap is a retailer that specialises in electrical goods. It is one division amongst 10 in a large
retail company, Tahoma. The following data relates to the most recent year of operations:

30
 Profit £ 6 000 000
Sales revenue 75 000 000
Invested capital 30 000 000
Grant Lawson has just been appointed as the new financial controller of Tahoma. During his
first week on the job, Lawson receives a visit from the managing director, who says:
I'm so glad you have arrived. As you will notice, we use return on investment and
residual income as divisional performance measures. But now you are here, we can put
in place our new profit-sharing plan. I want all employees across the divisions to share
in the rewards of our good financial performance. Starting next quarter, 5 per cent of the
company's quarterly profit will go into a pool, and at the end of the financial year, this
will be distributed to employees in proportion to their base pay. This will really give our
employees increased motivation to strive harder!

Required:
1. What type of responsibility centre is Zap? Explain why. What are the other three
types of responsibility centres? Explain the differences between them and
suggest what type of financial performance measure is suitable for the evaluation
of each.

2. Calculate Zap's profit margin, asset turnover and return on investment.

31
3. Use the two component ratios of ROI to demonstrate 2 ways in which the manager
of Zap could increase ROI to 25%. Provide calculations to support your answer.
Assume sales revenue (both in terms of sales price and sales figures) cannot
change. Discuss the strategic implications of your answer.

4. Assume that the retail company has a minimum required rate of return of 11 per
cent, and calculate the residual income for Zap.

5. Outline two advantages and two disadvantages of the type of incentive scheme
that has been suggested by the managing director.

Advantages:

Disadvantages:

TOPIC 7 – THE BALANCED SCORECARD

Learning objectives
After attending the lecture and workshop and completing the reading you should be able to:

32
 • Explain the limitations of financial performance measures within strategic
management and discuss the role of non-financial performance measures
• Explain the main frameworks that can link performance measurement to strategic
management
• Design a balanced scorecard and strategy map to meet an organisation’s strategic
objectives
• Describe how the balanced scorecard can be adapted to include sustainability
outcomes and drivers.

Essential reading
Chapter 14 - Drury, C. (2019). Management Accounting for Business, 7th edition.
or
Chapter 21 - Drury, C. (2018). Management and Cost Accounting, 10th edition.
Chapter 17 (pp 775-777) - Langfield-Smith, K., Thorne, H., Smith, D., & Hilton, R. (2015).
Management Accounting: Information for Creating and Managing Value (7th edition). North
Ryde, NSW: McGraw-Hill Education.

Suggested reading
Chenhall, R. H. (2005). Integrative strategic performance measurement systems, strategic
alignment of manufacturing, learning and strategic outcomes: An exploratory study.
Accounting, Organizations and Society, 30(5), 395-422.
Cooper, S., & Pearce, G. (2011). Climate change performance measurement, control and
accountability in English local authority areas. Accounting, Auditing & Accountability Journal,
24(8), 1097-1118.
Hoque, Z. (2003). Total quality management and the balanced scorecard approach: A critical
analysis of their potential relationships and directions for research. Critical Perspectives on
Accounting, 14(5), 553-566.
Kaplan, R. S., & Norton, D. P. (2004). Focusing your Organization on Strategy - With the
Balanced Scorecard. Cambridge, MA: Harvard Business School Publishing.
Macnab, A. J., Carr, C., & Mitchell, F. (2010). Garden designs to improve the line of sight:
Implementation of the balanced scorecard and an alternative costing system at the Royal
Botanic Garden Edinburgh. Research executive summary series, 6(7), CIMA UK.
Otley, D. (1999). Performance management: A framework for management control systems
research. Management accounting research, 10(4), 363-382.

Topic 7 – Lecture

Lecture example 1: Balanced scorecard

LetsMove is a transportation company in
Cornwall. Its main customer, MineralUK, is a

33
mining company which employs LetsMove to transport slate mineral deposits to a nearby
manufacturing facility.
Profits for the last three years have been substantially less than were expected by the
managing director, Karen Albright. Karen was convinced that the company needed to adopt
a revenue growth strategy to improve profits and to prevent LetsMove from going out of
business. She believed in order to grow the company, orders could be expanded to non-
mining customers in the area. She initiated a comprehensive marketing campaign in order to
attract new customers. After one year, the following review of company performance showed
continued disappointing results:

2017 2018

Number of deliveries 610 502

Market Share 44% 39%
Profit £873,865 £699,432
Annual Costs £310,659 £450,982

Frustrated by these results, Karen hired a local consultant to examine the company’s
operations and to help build a viable strategy for revenue growth. After a careful review, the
consultant made the following observations:
 Fuel prices have increased dramatically within the last year.
 Best practice within the transportation industry (especially in relation to the
transportation of minerals) is to equip vehicles with specialised cargo securement
equipment. The majority of LetsMove trucks do not use such equipment.
 The shipping manager at MineralUK has recently written a letter of complaint
regarding the damage done to mineral loads during transportation and the
considerable delays with delivering these loads to the manufacturing facilities.
 Staff members (truck drivers) often find themselves in dangerous positions where
mineral loads become unstable. Unsure of appropriate safety procedures the drivers
often injure themselves whilst attempting to secure the loads. As a result employing
and retaining staff is problematic and costly, and many drivers have successfully
claimed compensation from LetsMove.

Required:

1. Assess how LetsMove currently measures performance, outlining any

adverse effects it may have on the company’s strategy of revenue growth.
Explain why a strategically oriented performance measurement system would
be more beneficial.

34
2 Design a strategic performance measurement system that includes the
following:
a) A strategy map

b) A balanced scorecard with both lead and lag indicators

35
Topic 7 – Workshop
Case study 1: The balanced scorecard
AllStar Appliances manufactures small home appliances. It operates in an extremely
competitive market and of late, has been struggling to survive. At the start of 2017, Tom
Anderson was hired to take over the kitchen appliances division which had been suffering
some substantial losses over the previous year.
After some investigation, Tom soon realised that the products had a serious problem with
quality, due to the high number of returns and customer complaints. In order to turn around

36
the fortunes of the division, Tom decided that it needed to pursue a high-quality strategy that
substantially reduced the number of defective products produced. He hoped that this would
lead to revenue growth.
After meeting with line managers in the division he observed that many of them were payed
bonuses based on the following performance measures:

Employee Performance Measure

Production Workers Throughput rate*

Production Managers Throughput rate* and cost reduction
Sales Managers Number of sales per quarter
*The number of units completed within a specific period of time

Tom subsequently made the following decisions to be put in place immediately:

 Investment in employee training to help workers to detect quality problems as they occur.
 Increased feedback from customers about the quality of products through customer
feedback surveys.
 Re-design of products and production processes by the research and development
department.
 Implement a Balanced Scorecard to ensure quality improvements are achieved and
translate into financial outcomes.

Required:
1. Assess how AllStar currently measures and rewards performance.

2. Explain why Tom feels the Balanced Scorecard would increase the likelihood that
his high-quality strategy would actually produce improved financial outcomes.

37
3. Design a strategic performance measurement system that includes the following:

a) A strategy map

b) A balanced scorecard with both lead and lag indicators

38
TOPIC 8 – REWARDS AND INCENTIVES

Learning objectives
After attending the lecture and workshop, and completing the readings you should be able
to:
• Discuss the advantages, disadvantages and challenges of the balanced scorecard
• Explain how reward systems can be designed and used to enhance goal congruence
• Recognise the difference between intrinsic and extrinsic sources of motivation

39
 • Describe the differences between Herzberg's two-factor theory and the expectancy
theory of motivation.
• Identify the different forms of performance-related pay systems used in
organisations.
• Outline the advantages and disadvantages associated with group versus individual
rewards.
• Recognise the importance of the frequency and timing of the payment of incentive
payments to enhance motivation and performance.

Essential reading
Chapter 12 (Sections 13.8-13.13) - Langfield-Smith, K., Thorne, H., Smith, D., & Hilton, R.
(2015). Management Accounting: Information for Creating and Managing Value (7th edition).
North Ryde, NSW: McGraw-Hill Education.

Chapter 14 - Drury, C. (2019). Management Accounting for Business, 7th edition.

or
Chapter 21 - Drury, C. (2018). Management and Cost Accounting, 10th edition.

Suggested reading
Banker, R. D., Potter, G., & Srinivasan, D. (2000). An empirical investigation of an incentive
plan that includes nonfinancial performance measures. The Accounting Review, 75(1), 65-
92.
Fisher, C., & Downes, B. (2006) Performance management and metric manipulation in the
public sector. Research executive summary series, 5(3), CIMA UK.
Ittner, C. D., & Larcker, D. F. (2003). Coming up short on nonfinancial performance
measurement. Harvard Business Review, 81(11), 88-95.
Ittner, C. D., Larcker, D. F., & Rajan, M. V. (1997). The choice of performance measures in
annual bonus contracts. Accounting Review, 72(2), 231-255.
Norreklit, H. (2000). The balance on the balanced scorecard: A critical analysis of some of its
assumptions. Management accounting research, 11(1), 65-88.
Norreklit, H., Jacobsen, M., & Mitchell, F. (2008). Pitfalls in using the balanced scorecard.
Journal of Corporate Accounting & Finance, 19(6), 65-68.
Topic 8 – Lecture

Lecture example 1: Performance-related pay

ABC Tubes Ltd manufactures aluminium cylinders that are used

in a variety of products, such as scuba diving equipment and fire
extinguishers. The company has just introduced a performance-
related pay system in their smallest manufacturing plant.

40
Employees will receive bonuses, based on their work team exceeding team performance
targets. At this stage only three of the four work teams will participate in the scheme. If this
system works well, it will be introduced into all of the company's plants.

There are four teams in the plant, and each team has been given monthly performance
targets for cycle time, material usage and production output. Two of the work teams are
organised sequentially, that is, the output of Team A becomes the input for Team B. Teams
C and D both manufacture their product independently of the other teams; however, teams C
and D do share some equipment with Team B. Team D is not participating in the new
performance-related pay scheme, as this team has just introduced some new production
technology, which would make it difficult to achieve any performance targets at this stage. A
bonus pool of £10 000 is set aside each quarter to be shared among the members of the
three participating teams if they each achieve their targets.

The employees are excited by the new scheme. They can only gain by such a system.
However, at the end of the second month, tempers start to fray. Frank Smart, a member of
Team B, takes his complaints to the production manager, Amos Bennett:

Frank: This new system is just not working. Team A is sabotaging our performance.
How can we meet our performance targets when Team A gives us faulty product to
process? They have skimped on material, so it takes us much longer to complete our
part of the manufacturing process. This is made worse when the purchasing
department orders our material far too late, so we have to wait around for deliveries.
And someone has been leaving the calibrator machine in such a mess, so we waste
valuable time resetting the gauges before we can use it. I am sure it is a member of
Team C. The system is not fair. The other two teams are making their targets and we
are not—and it is not our fault! Also, Jack Scratt, a member of our team, is clearly not
working to capacity—and his rewards will be the same as ours!

Bennett was not sympathetic. He has just had to deal with a delegation from Team D, who
are upset because they cannot share in the performance bonuses.

Bennett: Calm down, Frank. I am sure that you are exaggerating. These problems
will iron themselves out over the next few months. It is up to each team to manage its
performance. Go away and deal with these problems.

Required:

1. Explain five features of the performance-related pay system that are causing
problems.

41
2. Are the three performance measures appropriate for assessing performance and
awarding bonuses? Explain your answer.

3. Suggest four changes that could be made to improve the current system.
Additionally, consider other forms of incentive schemes that may be suitable for
the company.

Topic 8 – Workshop

Case study 1: Performance-related pay

Salt Water Ltd is a large and successful manufacturer
of engines. The company consists of two divisions: the
Automotive Engine Division and the Outboard Motor
Division. Salt Water has recently acquired a company
which will become a third division. The new Couch
Division is a small manufacturer of lawnmower motors.

42
It has been owned and managed by the one person for 40 years. The prior owner treated all
employees as part of his family. The company was noted for the lack of a ‘them and us’
attitude between employees and management, and there was free and open communication
between all staff. Unfortunately, Couch is not a strong performer; the lawnmower market is in
decline and profits have slipped.

Salt Water is known for its modern management systems and would like all managers at
Couch to participate in the performance-related pay system that is used in the other two
divisions. The profit-sharing plan after the acquisition of Couch will apply to senior divisional
managers only. It is based on placing 10 per cent of Salt Water's profits before interest and
income tax into a pool, which is then shared on an equal basis by the senior divisional
managers as a percentage of their total combined salaries. The senior managers in the two
original divisions received bonuses of 11 per cent and 12 per cent of their salaries for the
last two years before the acquisition of Couch.

The profit results for the first financial year following the acquisition of the Couch Division,
are as follows:

Outboard Automotive Couch

Sales revenue £31 600 000 £42 000 000 £9 500 000
Cost of goods sold  10 000 000  24 000 000  4 500 000
Gross margin £21 600 000 £18 000 000 £5 000 000
Administrative costs 11 800 000 7 400 000 3 600 000
Marketing and selling costs  7 400 000  6 200 000  1 200 000
Total costs £19 200 000 £13 600 000 £4 800 000
Profit before interest and taxes £ 2 400 000 £ 4 400 000 £ 200 000

Senior management salaries included in the above costs, and divisional assets at the end of
that year, are as follows:

Outboard Automotive Couch

Senior management salaries £4 000 000 £2 800 000 £1 400 000
Divisional assets  8 000 000  8 000 000  1 600 000

Prior to the acquisition by Salt Water, all Couch employees, including the senior managers,
participated in a gainsharing program. Under this program, the financial impact of
improvements in labour productivity and delivery performance were quantified each quarter,
and 50 per cent of this amount was accumulated in a pool. At the end of each year, each
employee received an equal share of the pool. The scheme was discontinued when Salt
Water purchased Couch.

Required:

1. Which division has the best performance in the first year after the acquisition?
(Hint: Use ROI calculations)

43
2. Determine the bonus pool available for that year, and calculate the percentage
bonus that each senior manager would receive.

3. Discuss the behavioural problems that could arise among the senior managers of
the Outboard and Automotive divisions as a result of the bonuses.

They wouldn’t be happy bcoz now they are going to receive less bonus in percentage
compared to last years since the couch division don’t not produce anywhere near as
much profits as the other divisions.

Demotivating for senior managers as now they have to share their profits with the low
performing division

Expectancy theory

4. Discuss the behavioural problems that may arise within the Couch Division from
the changes in the performance-related pay system.

44
5. Suggest some changes that could be made to improve Salt Water's performance-
related pay system and alleviate some of the problems identified in requirements 3
and 4.

Keep the reward system same as before

Change it to division based

Assignment
performance mamagement after acquisition to write essay on google scholar

TOPIC 9 – SUSTAINABILITY AND MANAGEMENT ACCOUNTING

Learning objectives

45
After attending the lecture and workshop and completing the reading you should be able to:

 Explain the meaning of corporate sustainability and why it is of increasing interest to

organisations and their stakeholders

 Outline the implications for management accounting of increased sustainability

reporting

 Explain the challenges to be met in recognising and measuring economic,

environmental and social impacts

 Integrate environmental costs in the analysis of costs for decision making

Essential reading
Chapter 16 (pp 420-427) - Drury, C. (2019). Management Accounting for Business, 7th ed.
or
Chapter 23 (pp 628-633) - Drury, C. (2018). Management and Cost Accounting, 10th ed.

Chapter 17 (pp 752-768) - Langfield-Smith, K., Thorne, H., Smith, D., & Hilton, R. (2015).
Management Accounting: Information for Creating and Managing Value (7th edition). North
Ryde, NSW: McGraw-Hill Education.

Suggested reading
Adams, C. A., & McNicholas, P. (2007). Making a difference: Sustainability reporting,
accountability and organisational change. Accounting, Auditing & Accountability Journal,
20(3), 382-402.
Epstein, M. J. (1996). Improving environmental management with full environmental cost
accounting. Environmental Quality Management, 6(1), 11-22.
Jasch, C. (2003). The use of Environmental Management Accounting (EMA) for identifying
environmental costs. Journal of Cleaner production, 11(6), 667-676.
Milne, M. J., & Grubnic, S. (2011). Climate change accounting research: keeping it
interesting and different. Accounting, Auditing & Accountability Journal, 24(8), 948-977.
Schaltegger, S., & Burritt, R. L. (2006). Corporate sustainability accounting: a nightmare or a
dream coming true?. Business Strategy and the Environment, 15(5), 293-295.

Topic 9 – Lecture

Case study 1: Rockhampton Sofa Company

46
Rockhampton Sofa Company is thinking of setting up a plant in Chengdu, China. Operating
data for Rockhampton and Chengdu are as follows:

Rockhampton Chengdu
Material per sofa £103 £79
Labour time per sofa 30 minutes 90 minutes
Labour cost per hour £24.00 £1.10
Waste per sofa 15 kgs 35 kgs
Working weeks per annum per employee 40 49
Fixed manufacturing cost (£) 100,000 per annum 50,000 per annum
Delivery time 7 days 27 days

If the Chengdu plant is opened, the Rockhampton plant will be closed. If the Rockhampton
plant is closed the employees will almost certainly be unemployed. There is consternation in
the local community about the closure, especially among older employees. The plant
appears to have few airborne pollutants and does not contaminate waterways and sewers.

Required:
1. Rank the alternatives using only financial data.

2. Rank the alternatives using only environmental and social impact data.

47
3. Identify any impacts that this decision may have on the broader economy.

4. Write a recommendation to the board outlining the issues it should consider when
making this decision.

Topic 9 – Workshop

48
 Case study 1: Egham Council
Egham Council is looking at buying two new minibuses for transporting senior citizens to
Staines and other areas. A bus is expected to travel 250,000 kms per annum, and will last 3
years, with zero disposal value. There are three types of buses that look attractive: a
conventional petrol engine that can be converted to LPG, a petrol-electric (battery) model,
and a diesel bus. The operating information for each bus follows:

Petrol/LPG Petrol-Electric Diesel

CO2 emissions 290 gms per km 15 gms per km 250 gms per km
Purchase price £175,000 £590,000 £292,500
Maintenance costs per km £0.46 £0.56 £0.89
Petrol: 35 litres per 100 kms
Fuel consumption 10 litres per 100 kms 15 litres per 100 kms
LPG: 15 litres per 100 kms
Fuel price £1.05 petrol/£0.45 LPG £1.05* £1.10
Life of the engine 400,000 kms 450,000 kms 1,000,000 kms
Cost of replacement engine £14,000 £19,000 £35,000

* Cost of petrol. Assume that fuel costs for electric power are insignificant

Required:
1. Consider which of the three buses is the more attractive option on financial
grounds.

2. Now using only the environmental data, assess which option is the most
attractive. Does this differ from your answer to Q1?

49
3. Write a recommendation to Egham council outlining which bus it should
purchase.

50