The following cases were used in a graduate level managerial accounting course. These are “real life” situations I had to deal with over the course of my career. This “mini-cases” are best used in threaded discussions. If you want to know how each situation was eventually resolved, please email me. Please note: instructors only!
Case 1: The Military
You are the CFO of a defense contractor helping the Navy build warships. You notice the bathrooms for the ships are tremendously costly, beyond all reason.
What are the reasons why this could be the case? In your answer, consider such things as: (a) relatively recent changes in policy towards gender by the Navy; (b) government accounting practices; (c) sunk costs; and (d) other managerial accounting principles, if any.
Case 2: The University
The University has a graduate school of business. The Vice-President of Finance of the University says he will not allow a class to run unless it has six students. Only three students sign up for the class. The VP of Finance states the professor can run the class at half pay. The school is not near its capacity.
Evaluate this using the principles of management and cost accounting.
Case 3: The Construction Company
A construction company specializes in pouring foundations for housing units. It also has a division performing masonry work. In the last several years masonry work has become unprofitable because of a recession. The head of the masonry unit says:
1. We need to bid low for jobs in order to keep a cadre of skilled masons. When the recession ends, we will not have the capability of getting back into doing skilled masonry work if we don’t have a viable group of masons. If necessary, we should accept modest losses on the job and not cover direct costs.
2. We should be evaluated as a service unit. We do work for the construction company clients keeping other construction companies out of our market area.
Evaluate the masonry managers claims. Is the masonry department a service department? Should the company continue to keep a masonry unit if it is not turning a profit?
Case 4: The Bank
The Bank you work at has a product profitability system. The head of the Trust Department says:
1. The Trust department brings in large amounts of deposits the commercial lending department can then loan out at a huge profit. We should get earnings credits for that.
2. Why do I have to absorb some of the corporate overhead? The Trust Department has very little to do with the rest of the bank.
Evaluate the Trust Department Managers comments. How will this impact the product profitability system? If you do want to give the Trust Department earnings credit how will that affect the Commercial Loan Departments profitability, if any? Is the Trust Department correct about the overhead allocation?
Case 5: The Toy Company
A toy company in business for seventy years has consistent sales of $20 million per annum. It has recently secured a contract with a television network allowing the toy company to create a board game from a phenomenally successful show. The toy company estimates sales will be $50 million in the first year, $20 million in the second year, and $10 million in the third year.
Discuss some of the considerations the toy company should take into account when costing and pricing the new product.
Case 6: The Natural Products Company
The company is in the dietary supplements industry. Unlike many of its unethical competitors the company does not simply grind up roots, leaves and berries and put the material in a capsule. The company does a scientific study and determines what the effective chemical ingredient is within the plant. For instance, the active ingredient in kava is kavalactones. The company determines what an effective dose of kavalactones is and manufactures it accordingly.
The problem is costing the product. There are multiple ways to extract kavalactones. Roots have about ten times the amount of kavalactones than bark chips or leaves. Due to competitive pressure, the growers insist on marketing the bark chips and leaves with the roots.
How would you determine the standard cost of the kava product? The Science Department says the standard cost should be based on kavalactones and not the amount of product. The Manufacturing Department says there should be no standard cost since the yield is so variable. The Sales Department says how can we price this? Evaluate.
Case 7: Customer Profitability System
You are the Controller of a medium size manufacturing company. The CFO comes to you one day and says: I bet our customers follow the 80/20 rule of profitability. I think we need a customer profitability system.
Describe what information the customer profitability system should capture.
Case 8: A Baseball Team
A major league baseball team signs a star to a five year contract. In the middle of the second year, the player’s performance begins to degrade very quickly. Each team can only carry 25 players on its active roster, and 40 players in total (including minor league players) Major league baseball has a trading deadline. After that date it becomes extremely difficult to trade players to another team. The trade deadline is now rapidly approaching.
The general manager gathers his advisors and asks what to do about the star. The first advisor says: ” We pay the star so much we have to keep playing him. How else will we get a return on our salary?” The second advisor says: “This contract is a sunk cost. We should cut this player (i.e. release him from the roster, but not the contract) as soon as we can. We will have to eat his salary but we can at least have one more player on the active roster who will help win a championship.” The third advisor wants to keep the star on the roster a little longer to see if the Star can break out of his batting slump. This will potentially increase the star’s trade value and allow the team to recoup some of the salary it has paid. Evaluate the advice of each of the three advisors, using managerial accounting principles.
Case 9: The Military
The Navy will sometimes cancel the construction of a warship midway through its construction if the Navy decides it does not need the warship any more. Large warships can take years and billions of dollars to build. Sometimes the Navy will scrap a warship as it nears construction. Pundits claim this is a waste as the ship was so close to finish. Evaluate the actions of the Navy and the statement of the pundits, both in terms of the initial and the annual costs of operating a warship. Use managerial accounting principles in your discussion.
Case 10: The IRS Mileage Rate
The Internal Revenue Service state it calculates the allowable reimbursement rate for business travel using fixed and variable costs. It also says only variable costs are considered when calculating the rate for medical related travel. Finally, the rate for charitable purpose travel is fixed by statute. Evaluate this policy from economic, social and managerial accounting perspectives. What costs do you think are the most important when calculating the reimbursement rates?
Mark Koscinski CPA D.Litt. 