MANAGEMENT ACCOUNTING

Management Accounting

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MANAGEMENT ACCOUNTING

PART ONE: SITUATION/PROBLEM

I would be smart as to define meaning for you. We each find meaning in every personal experience that may seem difficult to describe, sensitive as they may be. But I can refer you to those broad time-tested parameters in management in which the meaning has been found through the centuries, and without which the night of meaningless closes in, sooner or later.

Meshack Business Conferences is a company skilled in the organization of and running of the conferences and seminar in Australia. It usually runs five to six events annually and is currently planning a two-day conference to take place at the university Parkville Hotel, Melbourne, in July 2018. The conference will be titled Information Technology in the 21st Century and will present twelve speakers of international repute, five from Australia, three from Western Europe, and two each from the UK and US (Hutaibat, 2011). The booking of the venue has incurred the payment of a non-refundable deposit of $1500. The conference organizer, Terry George, estimates the following costs and revenues to be applicable.

Costs

i. A daily delegate rate of $20 per head on each day of the conference, to cover tea/coffee and use of all hotel facilities.

ii. Meals charged at a standard rate​-breakfast$10, lunch$15, dinner$25.

iii. Overnight rate for double room of $45

iv. Stationery and conference papers costing $8 per delegate pack.

v. Conference speakers are to be paid a combination of fee plus expenses and will be offered and overnight accommodation at the company's expenses.

vi. An advertising budget of $1200 has been agreed for June.

vii. The marketing thrust will be via mailshot. An initial print run of 4000 brochures has been agreed for distribution by post. Envelopes and covering letters can be reckoned to make the total cost of the mail out 44 per addressee. Printing cost can be calculated at $450 set up plus 15p per brochure. Confirmation letters will be sent to those delegates making firm bookings by post at a further cost of $40p per addressee.

viii. Administration cost and the cost of word processing mailing list are estimated to amount to $6000.

Revenues

Pilot testing discloses that delegates will be prepared to pay a conference fee of around $600, the rate to include overnight accommodation between the days of the conference and inclusive of all meals between lunch on day one and lunch on day two. Any delegate requiring overnight accommodation before day one will be billed separately (Hill et al., 2014). The venue can accommodate a maximum of 145 delegates in theatre style or 85 delegates’ seminar style, over each of the two days of the conference. Terry is actively seeking other means of raising additional conference related revenue.

It is likely that the survival of the whole company might be endangered by this one event. Early cancellation would cut short the hemorrhage of funds, but at what cost to the company's reputation? If we wish to continue to be regarded as conference professionals, we may have to bear the loss of this one event, making it critical that such losses are minimized (Hitt et al., 2012). This is the only real problem facing us.

PART TWO: BACKGROUND INFORMATION

An initial analysis shows that the case is short, but with an abundance of cost information. Data allowing the conduct of break-even analysis is readily available. More detailed scrutiny to the first paragraph reveals more than just numbers. The conference under consideration is apparently not a one-off event; Meshack Business Conferences (MBC) is apparently in this business in the long run. Therefore, this single event cannot be considered in isolation (Zimmerman & Yahya-Zadeh, 2011). More detailed attention to the numerical content reveals a plethora of assumptions, so that unique outcomes will not be feasible, and sensitivity in some areas notably about exchange rates.

A third reading raises issues related to the short and long-term goals of the company and the potential impact of decision making on alternative strategies. Sketching out the relationships reveals that a fixed or variable cost division does not work particularly well and neither does a sunk/discretionary cost division. The focus is explicitly on relevant costs and the conference activity, and its timing reveals a possible avenue of analysis (Richard et al., 2009). Therefore, the key issues of the case appear to be:

· a company with goals of survival and long-term profitability;

· a single event, Information Technology in the Twenty-first Century', which may or may not contribute to the company profitability;

· the strategic importance of this event to the long-term viability of the company;

· The financial impact of the success or failure of this event.

The company would wish or like this event to contribute to the profitability and will take pains and sacrifices to ensure that it does so. But its long-term reputation may be more important, so that strategic decisions may be necessary to cope with loss-making contingencies.

A SWOT analysis is probably not appropriate to this case because very little information is provided on the group, its staffing or its alternative products’. The calculations are the simplest staring point because they will provide some of our unknowns regarding this particular event. However, we must remain fully aware that the financials, whatever message they give, may be peripheral to the strategic actions eventually undertaken. A simple break-even analysis requires that we create the relationship between cost and revenues (Ramljak & Rogošić, 2012). Our first assumption requires the formulation of linear relationships: so that ultimately we can get the break-even of the number of delegates.

Let’s take various instances here: C= a+bq

R =pq

Where; C = Total Costs; R = Total Revenue

a = fixed costs (particularly up-front conference related costs)

b = variable costs per unit (related to q, the number of delegates)

p = price to delegates, assumed to be fixed and, therefore, initially eliminating the prospect of discounting. Broken-even occurs where R = C

i.e. pq =a +bq

where q = a

p – q

Broken-even output q is equivalent to the average fixed cost and the total revenue. To allocate cost appropriately, realistic assumptions need to be made, but there is no single right answer.

Figure 1.0: Break-even Output

Some areas of uncertainty exist which require a sensitivity analysis to determine their impact:

· how do we treat the nonrefundable deposits? It may constitute an up-front booking cost or a deposit which is lost only in the event of cancellation (Freeman, 2010). In the later instances it may be used to offset other conference related costs, and not constitute additional expense, should the conference go ahead;

· the meals combination is assumed to constitute two lunches, but only one breakfast and one evening meal;

· double rooms are provided, but it is unrealistic that we can assign two strangers to share one room;

· speakers fee and travel costs and some assumptions about the exchange rate pertaining;

· Speakers’ travel costs require assumptions regarding the likelihood of having meet first class/business/economy modes of travel.

Given that the venue can only accommodate 85 delegates, in seminar style, then, for instance, 60 break-even is extremely high, severely limiting the potential profitability of the event. Theatre style, increasing accommodation to 145 possible delegates, therefore appears a must. A detailed sensitivity analysis reveals that this solution is relatively robust to the uncertainties preempted above, except in one instance (Cuganesan et al., 2012). The necessity of paying first class airfares for pivotal conference speakers could cause a blow-out in travel-related expenses. Costing based on economy-rate fares is probably unrealistic but academics. MBC might expect to pay first class fares for several and business class for the remainder of the speakers, seven in all flying to the venue. The conference-related fixed cost might easily double thus increase the break-even figure.

This conference is, of course, looking a little risky. Up-front expenses, with no matching revenues, will put pressure on the overdraft facility. With realistic assumptions, we cannot make a profit with a seminar style presentation (Bhimani, 2009). Even with a theatre-style format, we need well over one hundred delegates to make it a viable proposition. This is a distinct possibility that we will not manage to attract delegates in this numbers at a fixed fee $600. Other contingencies have to be examined, one of which is the cancellation.

If we have already incurred the upfront pre-conference expenses, then we can forget about those. They are sunk cost which cannot be recovered. Of more concern is our ability to recover those costs incurred in the actual running of the event, and if possible to make a contribution which alleviates the sunk cost burden. Either way, the event will result in a hefty loss, but it might be smaller than it otherwise might have been (Cadez & Guilding, 2012). To justify continuing the run the conference at all, on financial grounds, we must cove the fixed cost element of speaker expenses and travel. So that ultimately we can justify the noncancellation of the event on financial grounds.

PART THREE: PROVISION OF A FOLLOW UP

Some aspects and issues exist to tackle the issues itemized above:

· Raise the number of paying delegates. Some flexibility in the fixed price structure might be possible. The two days of the conference might be marketed separately, as might the separate sessions. Discounts might be offered for early payment and the first and the subsequent delegates from the same organization (Blocher et al., 2010). Price discrimination might be practiced in favor of the local delegates approached at the last minute.

· Increase the number of non paying delegates. The reputation of the company will depend on the ambiance of the conference venue and the feel of the event. If there are very few paying delegates, then the conference room must no look empty; a return to a seminar style, with tables, chairs, and static flower display will reduce the extent of the spare space (David, 2011). The number of people attending may only be increased by providing free places. It may even be necessary to pay for the free spaces by providing lunch and afternoon tea. This strategy might backfire if the newcomers are differentiated from the paying delegates and do not conceal the circumstances of their presence.

· Seeking other sources of revenue. Some alternatives exist including; sponsorship of the event in whole or parts. Sponsorship of meals and cocktail parties by firms wishing to advertise their name will be relatively easy to come by and will at least reduce the costs to MBC of meals. Major sponsors, with the acknowledgment of the literature and with an opportunity to speak to delegates at opening or plenary sessions, should also be sought from among members of the hardware and software industry (Ma & Tayles, 2009). Selling space in thoroughfares to book publishers and computer companies to provide sales opportunity for them with the interested delegates. Prime selling space adjacent to tea/ coffee areas would command premium fees. Selling collected conference proceedings immediately after the event in the form of books/or videos. A higher price, though significantly discounted from the conference fee, might be charged from the outset to those unable to attend as delegates (Nixon & Burns, 2012). The computer and IT industries and financial institutions might then be targeted for the sales of collected proceedings.

· Reducing costs. This may be very difficult because quality must not be sacrificed in return for a few cents. Most delegates remember the venue, food, drink, and contacts from a conference and not the content of the presentation. It is important that we do not skimp on the quality of meals for instance (Cinquini & Tenucci, 2010). It is better to try to reduce long-term cost of costs by coming to some single venue agreement with the host for future events.

· Alternative accounting procedures. It very doubtful whether all of the fixed costs are specific to this conference. It could be that at least part of some expenditures like advertising, administration et cetera, are attributed to other events or the company as a whole. Part of these could, arguably, be treated as depreciable assets rather than being expensed directly and attributed to this particular conference activity (Tayles, 2011).

Finally going concern assumption relative to MBC incorporates a commitment to running to running this conference once it has been promoted. Any financial losses incurred must be borne in the course of furthering the reputation of the company. The suggestion above which involve increasing revenue, increasing the number of delegates and seeking new sources for both should be explored. Great care should be taken in cost cutting, and accounting procedural manipulation attempted only if it is essential that the financial outcome of this particular conference looks better. For the company as a whole, it may present wasted efforts. Otherwise, the representation of the findings for this case is relatively straightforward (Ward, 2012). There is a single overall thrust so that problems of integration are not apparent, and the recommendations are clear. Perhaps, major difficulties may arise in the presentation; some compromise must be reached between clarity of exposition and the detailed content of the costing calculations. . A detailed sensitivity analysis reveals that this solution is relatively robust to the uncertainties preempted above. But the company's' long-term reputation may be more important, so that strategic decisions may be necessary to cope with loss-making contingencies. The reputation must be enhanced at all cost.

References

Bhimani, A. (2009). Risk management, corporate governance and management accounting: Emerging interdependencies.

Blocher, E. J., Stout, D. E., & Cokins, G. (2010). Cost management: A strategic emphasis. Includes index.

Cadez, S., & Guilding, C. (2012). Strategy, strategic management accounting, and performance: a configurational analysis. Industrial Management & Data Systems, 112(3), 484-501.

Cinquini, L., & Tenucci, A. (2010). Strategic management accounting and business strategy: a loose coupling?. Journal of Accounting & organizational change, 6(2), 228-259.

Cuganesan, S., Dunford, R., & Palmer, I. (2012). Strategic management accounting and strategy practices within a public sector agency. Management Accounting Research, 23(4), 245-260.

David, F. R. (2011). Strategic management: Concepts and cases. Peaeson/Prentice Hall.

Freeman, R. E. (2010). Strategic management: A stakeholder approach. Cambridge university press.

Hill, C. W., Jones, G. R., & Schilling, M. A. (2014). Strategic management: theory: an integrated approach. Cengage Learning.

Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2012). Strategic management cases: competitiveness and globalization. Cengage Learning.

Hutaibat, K. A. (2011). Value chain for strategic management accounting in higher education. International Journal of Business and Management, 6(11), 206.

Ma, Y., & Tayles, M. (2009). On the emergence of strategic management accounting: an institutional perspective. Accounting and Business Research, 39(5), 473-495.

Nixon, B., & Burns, J. (2012). Strategic management accounting.

Nixon, B., & Burns, J. (2012). The paradox of strategic management accounting. Management Accounting Research, 23(4), 229-244.

Ramljak, B., & Rogošić, A. (2012). Strategic management accounting practices in Croatia. Journal of international management studies, 7(2), 93-100.

Richard, P. J., Devinney, T. M., Yip, G. S., & Johnson, G. (2009). Measuring organizational performance: Towards methodological best practice. Journal of management, 35(3), 718-804.

Tayles, M. (2011). Strategic management accounting. In Review of Management Accounting Research (pp. 22-52). Palgrave Macmillan, London.

Ward, K. (2012). Strategic management accounting. Routledge.

Zimmerman, J. L., & Yahya-Zadeh, M. (2011). Accounting for decision making and control. Issues in Accounting Education, 26(1), 258-259.

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