NYU Stern School of Business

Undergraduate College

C10.0002.001: PRIN OF MANAGERIAL ACCTG

Spring 2011

Instructor Details

Ferri, Fabrizio

fferri@stern.nyu.edu

212-998-0726

W 5:00pm – 7:00pm and by appointment

10-78 KMC

 

Course Meetings

MW, 9:30am to 10:45am

Tisch T-UC04

 

Course Description and Learning Goals

Managerial accounting includes a broad array of tools necessary to articulate, implement, monitor and refine an organization’s strategy. Managing the modern firm requires a significant amount of financial and non-financial information about the firm’s products, processes, assets, and customers, as well as the external environment.  This information is a key input to operational and strategic decisions: managing product-line portfolios, setting prices, managing customers’ relations, translating the strategy into a series of objectives, measures and targets, monitoring strategy implementation, and so on.

The main objective of this course is for the students to develop a comprehensive framework to think about managerial accounting issues and understand their broader implications for the organization, so as to be able to make more informed (and, thus, “better”) decisions in an uncertain environment. To develop such a framework, students will be required to become familiar with the mechanics of a number of management accounting tools, but ultimately the emphasis will be on obtaining a good grasp of the key conceptual issues. 

 

Teaching Materials

For most topics, I will use cases included in a digital course packet. The required textbook is a custom text based on Managerial Accounting, by Garrison, Noreen, and Brewer, 13thedition, 2009.  Both digital course packet and custom text are available at the NYU Bookstore.

I will often suggest additional readings (available online) to help you in preparing the case.

For some course topics, I will suggest several problems from the text for self-study and self-evaluation. Where necessary, I will also provide lecture notes.

 

Assessment Components

The course grade will be based on class participation, a midterm exam and a final exam, as follows:

 

 

Class participationThe grade for class participation will depend on the quality of your interaction and participation in class discussions.  You are expected to prepare and discuss the case questions and any other assigned reading.

 

Midterm and Final Exam.  Both midterm and final exam will be in-class, closed-book exams.  You may use a double sided sheet of notes (typed or hand written). You must use a pen (NOT a pencil).

 

Grading

At NYU Stern we seek to teach challenging courses that allow students to demonstrate their mastery of the subject matter.  In general, students in undergraduate core courses can expect a grading distribution where: 

Note that while the School uses these ranges as a guide, the actual distribution for this course and your own grade will depend upon how well you actually perform in this course.

 

Re-Grading

The process of assigning grades is intended to be one of unbiased evaluation. Students are encouraged to respect the integrity and authority of the professor’s grading system and are discouraged from pursuing arbitrary challenges to it.

If you believe an inadvertent error has been made in the grading of an individual assignment or in assessing an overall course grade, a request to have the grade re-evaluated may be submitted. You must submit such requests in writing to me within 7 days of receiving the grade, including a brief written statement of why you believe that an error in grading has been made.

 

Professional Responsibilities For This Course

Attendance

 

Participation

In-class contribution is a significant part of your grade and an important part of our shared learning experience. Your active participation helps me to evaluate your overall performance.
You can excel in this area if you come to class on time and contribute to the course by:

 

Assignments

 

Classroom Norms

 

Stern Policies

General Behavior
The School expects that students will conduct themselves with respect and professionalism toward faculty, students, and others present in class and will follow the rules laid down by the instructor for classroom behavior.  Students who fail to do so may be asked to leave the classroom. 

 

Collaboration on Graded Assignments
Students may not work together on graded assignment unless the instructor gives express permission. 

 

Course Evaluations
Course evaluations are important to us and to students who come after you.  Please complete them thoughtfully.

 

Academic Integrity

Integrity is critical to the learning process and to all that we do here at NYU Stern. As members of our community, all students agree to abide by the NYU Stern Student Code of Conduct, which includes a commitment to:

The entire Stern Student Code of Conduct applies to all students enrolled in Stern courses and can be found here:

Undergraduate College: http://www.stern.nyu.edu/uc/codeofconduct
Graduate Programs: http://w4.stern.nyu.edu/studentactivities/involved.cfm?doc_id=102505

To help ensure the integrity of our learning community, prose assignments you submit to Blackboard will be submitted to Turnitin.  Turnitin will compare your submission to a database of prior submissions to Turnitin, current and archived Web pages, periodicals, journals, and publications.  Additionally, your document will become part of the Turnitin database.

 

Recording of Classes

Your class may be recorded for educational purposes

 

Students with Disabilities

If you have a qualified disability and will require academic accommodation of any kind during this course, you must notify me at the beginning of the course and provide a letter from the Moses Center for Students with Disabilities (CSD, 998-4980, www.nyu.edu/csd) verifying your registration and outlining the accommodations they recommend.  If you will need to take an exam at the CSD, you must submit a completed Exam Accommodations Form to them at least one week prior to the scheduled exam time to be guaranteed accommodation.

 

Class Meetings

I believe that an interactive learning environment and a focus on real-world experiences allow for a deeper understanding of managerial accounting issues and result in greater appreciation of their importance in the broader context of complex organizations. Besides, it makes the learning experience more fun! Thus, case discussion will be the basis of most classes.

 

For case discussion to be effective, it is crucial that students will be active participants in class, providing critical analyses of key issues and debating alternative courses of action. In turn, this requires careful preparation of the case and other assigned readings before class.  I will randomly call on students when discussing cases and students should be ready to present their analyses or comment on others' analyses. 

 

I recognize that case discussions can be a challenging learning tool at first. Speaking up in class may be intimidating. Besides, cases often do not have a “right” or “wrong” answer and this may leave students uncomfortable. But the reality is that most interesting managerial problems do not have a clear-cut answer. And that, in most business environments, one’s ability to articulate and communicate her views is critical. Thus, I believe it is important to begin developing these skills while at school.

 

Recognizing these challenges, I will often use a short lecture at the beginning or end of class to put the case in the context of our course. Also, I will assign a set of detailed questions for each case that will guide the student in her preparation. Finally, with the students’ help, I will try to create an atmosphere of mutual respect where students feel encouraged to participate.

In my experience, preparing cases in teams is very productive. Thus, you are encouraged to do so when possible. 

 

Feedback

I encourage you to provide feedback on class topics, content, and cases.  I appreciate any concerns, questions, or opinions regarding the course.  Participants’ feedback is critical to the improvement of the course over time.

 

Calendar at a Glance

Date   

Session

Topic

 Case to prepare

Jan-24

 

Jan-26

1

 

2

Management accounting as management system.

Introduction to cost concepts.

Variable vs fixed costs: using  CVP analysis for decision making:

 

 

 

 

Jan-31

Feb-2

 

 

3

4

Measuring and managing the performance of your products and customers

What is the cost of a product? Allocating indirect costs

Measuring and managing the cost of capacity. 

 

 

SeligramETO

 

Feb-7

Feb-9

5

6

Activity-based costing 

Beyond products: customer profitability

Wilkerson

Kanthal

Feb-14

Feb-16

7

8

Review of ABC, applications, new trends

Midterm Exam  

 

 

 

Feb-21

Feb-23

 

9

10

Measuring and managing firm performance

Budgeting and variance analysis

Target setting and incentives: the EVA solution

 

Musimundo

Vyaderm Pharmaceuticals

 

Feb-28

Mar-02

 

11

12

The link to strategy

Translate the strategy: strategy maps and balanced scorecard

Testing and adapting the strategy

 

Transworld Auto Parts(A)

Store 24

Mar-07

Mar-09

13

14

The levers of control

Final Exam

ATH Microtechnologies(A,B)

 

 

Course Outline

Session 1   Management accounting as management system.

 Monday, January 24

Topics

  • Management accounting as management system: the link to strategy
  • Introduction to cost concepts: variable and fixed costs, direct and indirect costs

Prepare

Read and be ready to discuss article “Mastering the Management System” by Robert Kaplan and David P. Norton, Harvard Business Review; January 2008 (Vol. 86 Issue 1, p.62-77), under Assignments - Session 1 on Blackboard. This will provide us with a framework we will often refer to throughout the course.

As introduction to cost concepts, read Chapter 2, pp.46-51 (cost classifications for predicting cost behavior), pp.36-38 (manufacturing costs) and pp.51-52 (cost classifications for assigning costs to cost objects). The distinction between fixed and variable costs and between direct and indirect costs is key to the topics covered in the next four-five sessions.  

Self-study Problems

Exercises 2-2, 2-6, 2-7; Problem 2-15.

(text and solutions posted on Blackboard under Assignments - Session 1)

Session Plan

We will spend the first part of the class discussing the role of management accounting (and, thus, the objective of this course) as a set of tools to articulate, implement, monitor and refine an organization’s strategy. For this purpose, we will refer to the assigned reading - “Mastering the Management System” – which will help us appreciate the broader role of management accounting and to put our course in the context of your business education.

Then, we will introduce some key cost concepts that will be used throughout the course: variable and fixed costs, direct and indirect costs.

 

Session 2.  Variable vs fixed costs: using cost-volume-profit analysis for decision-making.

Wednesday, January 26

Topics

  • Variable costs, fixed costs and the profit equation.
  • Contribution margin.
  • The notion of break-even point.
  • Operating Leverage
  • Uses and limitations of cost-volume-profit analysis.

Textbook

Read Chapter 5 (pages 188-200, 210-211). 

Read Chapter 6 (pages 233-258).

Self-study Problems

Exercise 6-11; Problems 6-26, 6-31.

Additional practice problems:

Exercises: 6-12, 6-13, 6-15, 6-16

Problems: 6-19, 6-22

(text and solutions posted on Blackboard under Assignments-Session2)

 

Session Plan

In this session we will examine the use of cost-volume-profit analysis – a set of tools that exploits the relation between cost, prices and volume for decision-making purposes.

We will explore a number of key concepts – contribution margin, break-even point and operating leverage –, identify some formulas that can be used to measure these constructs and review a number of applications.

We will conclude with a discussion of the assumptions underlying CVP analysis and its limitations.   

 

Measuring and managing the performance of your products and customers

Session 3.   What is the cost of a product? Allocating indirect costs

Monday, January 31

Topics

  • Mechanics of two-stage allocations: cost pools and cost drivers.
  • Limits of “traditional” costing systems.
  • Information vs incentives: dual role of costing systems.

Prepare

Read the case study Seligram, Inc.:  Electronic Testing Operations in the digital course packet. Address the following questions:

1.      What is the problem with the existing costing system at ETO?

2.      Calculate the reported costs of the five components described in the case (Exhibit 6) under:

  1. the existing system;
  2. the system proposed by the accounting manager;
  3. the system proposed by the consultant.

3.      Which system is preferable?  Why?

4.      Consider the new machine described at the end of the case. Would you treat the new machine as a separate cost center or as part of the main test room?  Why?  (answer this question qualitatively, ignore the issue of how to quantify the cost of the new machine)

Before reading the case, you may find useful to review the cost concepts in Chapter 2, pp.36-38 and 51-52.

Session Plan

We will devote the session to discussing the Seligram case.

The case gives us an opportunity to appreciate the need for proper cost allocations, understand the mechanics of two-stage allocations and the effect of adding cost pools and changing cost drivers. We will also examine the limits of this type of volume-based cost allocations.

 

Session 4         Measuring and managing the cost of capacity

Wednesday, February 2

Topics

  • Dealing with the cost of capacity in a costing system.

Prepare

Work on the assigned exercise called Youngstown Products (under Assignments-Session 4 in Blackboard).

Read the Microgene case (under Assignments-Session 4 in Blackboard) and address the following questions:

  1. The gross margins of cartridges in the 2009 Revised Budget are dramatically different from the original 2009 Budget. Why?
  2. Can you show how the overhead costs of $26 and $50 are computed? 
  3. Is this costing system providing useful information? If not, how can it be modified?

Go back to the case study Seligram, Inc.:  Electronic Testing Operations in the digital course packet. Address the following question:

  1. Assume we treat the overhead cost associated with the new machine at the end of the case as a separate cost pool (see previous class). How would you go about computing the overhead rate for this cost pool? 

Session Plan

We will spend about one-third of the class on the Youngstown Products exercise.

Then, we will spend about one-third of the class discussing the Microgene case, focusing on the questions above.

Finally, we will spend the remaining time re-examining the problem of the new machine in the Seligram case.

The three settings have in common the problem of how to treat the cost of capacity in the context of a two-stage cost allocation system.

 

Session 5   Activity-based costing 

Monday, February 7

Topics

  • Activity-based costing.
  • Differences from and advantages over “traditional” costing systems.
  • Translating activity-based costing into improved profitability.

Prepare

Read Chapter 8, pages 307-331, 333-334.

Read the case Wilkerson in digital course packet and answer the following questions:

  1. Using a two-stage cost-allocation diagram, describe Wilkerson’ existing cost system.
  2. Using a two-stage cost-allocation diagram, describe theactivity-based cost (ABC) model.
  3. Using the ABC model and the information in the case, provide your best estimate of the cost and profitability of Wilkerson’s three product lines. How do they differ from the existing cost system? What causes these differences?
  4. Based on the results of your activity-based cost model, what actions could Wilkerson’s management team consider to improve the company’s profitability?

 

Self-study Problems

Exercises 8-1, 8-7, 8-15; and the review problem on pages 334-336. 

Additional practice problems from Chapter 8:

             8-5, 8-9, 8-10, 8-13, 8-14, 8-16, 8-17.

 (text and solutions posted on Blackboard under Assignments-Section 5)

Session Plan

We will discuss the Wilkerson case as an example of activity-based costing (ABC) and activity-based management (ABM).  We will examine the advantages of ABC over traditional systems and discuss its implementation challenges.

 

Sessions 6   Beyond Products: Customer Profitability

Wednesday, February 9

Topics

  • Use of ABC to measure customer profitability
  • Using customer profitability for decision-making

Read

Read the case Kanthal in digital course packet. Address the following questions:

  1. Using a two-stage cost allocation diagram, describe Kanthal’s old cost system. Why did Ridderstrale feel it was inadequate for the new strategy?
  2. Describe the new system (use a diagram) – the Kanthal 90 Account Management System. What new features does it offer? Hint: use Exhibit 5. There are essentially two cost drivers, one volume-related and one order-related, for two pools (manufacturing costs and SG&A costs).
  3. Consider a product line whose products generate a 50% margin (after subtracting from prices the cost of volume-related manufacturing and SG&A expenses). Assume that the cost for handling an individual customer order is SEK 750 and the extra cost to handle a production order for a non-stocked item is SEK 2,250.
    1. Compare the operating profits of two orders, both for SEK 2,000. One order is for a stocked item and the other is for a non-stocked item. What does the comparison tell us about the profitability of small orders?
    2. Compare the operating profits and profit margins of two customers A and B. Both customers purchased SEK 160,000 worth of goods during the year. A’s sales came from 3 orders for 3 different non-stocked items. B’s sales came from 28 orders, of which 6 were stocked items and 22 for non-stocked items. What does the comparison tell us?
  4. What should Ridderstrale do about the two large unprofitable customers revealed by the account management system?

Session Plan

Often some overhead costs are incurred to serve customers and satisfy their requirements. This is particularly true for non-manufacturing costs, such as the costs often lumped in financial reports as “sales, general and administrative” costs (SG&A). When firms are managed around customers’ needs, the costing system should be modified accordingly. Kanthal is an example of a company that dramatically changed its operations after designing its cost systems around its customers and developing proper measures of customer profitability.

 

Session 7.  Review of ABC, applications and new trends

Monday, February 14

Topics

  • Review session and discussion of current trends

Read

 

Read article “When and why to measure cost lessaccurately to improve decision making” by K. Merchant and M.D. Shields,Accounting Horizons 1993, vol. 7(2), pp.76-81. Posted on Blackboard, Assignments – Session 7

Session Plan

In sessions 3-6 we have covered quite a lot of material. In this session, we will pause and try to connect the dots.

In the first part of the session, we will briefly review the costing systems analyzed and clarify any pending issue.

In the second part of the session, to conclude the costing module of the course, we will briefly discuss the assigned Accounting Horizons article, which challenges the notion that greater accuracy in measuring costs is always desirable. This will remind us that every managerial accounting technique needs to be placed in the context of the broader organization’s goals.

Finally, we will discuss a recent development in activity-based costing called “time-driven” ABC.

 

Session 8.   In-Class Midterm Exam

Wednesday, February 16

 

Measuring and Managing Firm Performance

Session 9.   Budgeting and Variance Analysis

Monday, February 21

Topics

  • Variance analysis
  • The role of budgets as control mechanism
  • Target setting

Prepare

Read the case Musimundo in digital course packet. Answer the following questions:

1. Musimundo operates in a very uncertain environment. What role does the budgeting process serve in such environment?

2. As shown on page 14, in the first six months of 2004 Musimundo has reported a favorablevariance of AR $449,000 in Gross Margin Before Variable Costs. That is, the actual Gross Margin Before Variable Costs (AR $ 12,080,000) was higher the the budgeted amount (AR $ 11,631,000).

[Note: the Gross Margin Before Variable Costs reported on p.14 is the difference between Revenues and COGS reported on p.13).

How much of this AR $449,000 variance is due to the variance in revenues versus the variance in COGS? How much of the variance in revenues is due to variance in price versus variance in quantities sold? And how much of the variance in price is really due to a variance in the price of the various products (“pure price variance”) as opposed to a variance in the product mix?  The Variance Analysis Template File (posted online under Assignments-Session 9) will help you answer these questions (the file also presents all the relevant information in one place.).

3. What is your assessment of the sales and profit performance of the music product line (CDs and cassettes)? Again, try to decompose the variance in the Gross Margin using the Variance Analysis Template File.

4. Should the board approve Nalda’s request to change the budget targets for the year? If so, how would you change them?

 

Session 10.  Target setting and incentives: the EVA solution

Wednesday, February 23

Topics

  • Choosing the “right” performance measure
  • Designing an incentive plan
  • Target setting
  • Organizational design issues

Prepare

Read the case Vyaderm Pharmaceuticals in digital course packet

Answer the following questions:

1. Why has Maurice Vedrine decided to introduce EVA as the financial performance measure?

2. Do you agree with the way targets are set?

3. What should Vedrine do about the bonus for the Dermatology Division? As part of your analysis, please do the calculations requested by Vedrine at the end of page 8 of the case. To get started, use the computations posted online under Assignment – Session 10

Session Plan

In this session we will examine the implementation of an “EVA” (Economic Value Added) management system - the attempt to introduce a single, comprehensive performance measure and design an incentive plan closely tied to this measure. We will do so by looking at a real case, Vyaderm Pharmaceuticals.

The case will give us the opportunity to explore a number of questions: what are the properties of the ideal performance measure? Is the metric that best measures performance also the one that best motivates employee to perform? What are the challenges in designing and calibrating an incentive plan? What are the implications in terms of organizational design?  What are the risks and limitations of an EVA-type system?  

 

The Link to Strategy

Session 11.  Translate the strategy: strategy maps and balanced scorecards.

Monday, February 28

Topics

 

 

  • Strategy maps and balanced scorecard as tools to translate strategy into specific objectives, targets, measure and initiatives.
  • Limits of financial performance measures and benefits of non-financial performance measures

Prepare

 

Read article: “Transforming the Balanced Scorecard from Performance Measurement to Strategic Management: Part I” R.S. Kaplan and D.P. Norton, Accounting Horizons, March 2001 (under Assignment-Session 11  on Blackboard).

Read article “Having Trouble with Your Strategy? Then Map It” by Robert Kaplan and David P. Norton, Harvard Business Review; Sept-Oct2000 (under Assignment-Session 11  on Blackboard).

Read the case Transworld AutoParts (A) in digital course packet. Answer the following questions (be prepared to provide specific suggestions for the last question):

  1. Why did Transworld Auto Parts decide to develop a strategy map and a balanced scorecard (BSC)?
  2. How well do the strategy map and BSC of the two divisions reflect the divisions’ strategies?
  3. How helpful are the strategy map and BSC of the two divisions in assessing the divisions’ performance?
  4. What changes would you propose to the strategy maps and BSC of the two divisions?

Session Plan

On the first day of the course, we introduced the “closed-loop” management system linking strategy and operations (review the exhibit on p.3 of the HBR article “Mastering the Management System”). 

In this session, we will examine “Stage 2” of the loop - that is, translating the strategy into a series of specific strategic objectives and initiatives and developing appropriate measures and targets.

To do so, we will discuss the case of Transworld Auto Parts, a manufacturer of original and after-market parts for automobile producers which develops a strategy map and a balanced scorecard for its luxury and economy divisions. The case gives us the opportunity to explore a number of key questions: why do we need non-financial performance measures? How to choose the relevant performance measures in the balanced scorecards? In what sense is balanced? What are the linkages about the four perspectives?

In preparing the case, you will find useful to first read the article “Transforming the Balance Scorecard from Performance Measurement to Strategic Management: Part I” and the HBR article “Having Trouble with Your Strategy? Then Map It”

I also recommend you re-read pp.6-7 (par. Stage 2) of the HBR article “Mastering the Management System”.

 

Session 12.      Testing and adapting the strategy

Wednesday, March 2

Topics

  • Using the performance measurement system to test and adapt the strategy
  • Non-financial performance measures and Balanced Scorecard.

Prepare

Read article: “Transforming the Balanced Scorecard from Performance Measurement to Strategic Management: Part II” R.S. Kaplan and D.P. Norton, Accounting Horizons, June 2001 (under Assignment-Session 12  on Blackboard).

Read the case Store24 in digital course packet.

Answer the following questions (be prepared to provide specific suggestions for the last question):

  1. If you want to use the BSC to test the effectiveness of the “Ban Boredom” strategy, what other variables would you include in the analysis?
  2. Is the “Ban Boredom” strategy associated with better future financial performance? 
  3. What would you recommend to Bob Gordon? i) Drop “Ban Boredom” and focus only on “ ‘Cause You Just Can’t Wait”; ii) continue to implement “Ban Boredom”; iii) implement one strategy in some stores and the other in some other stores. Be ready to explain your choice.

Session Plan

On the first day of the course, we introduced the “closed-loop” management system linking strategy and operations (review the exhibit on p.3 of the HBR article “Mastering the Management System”). 

In this session we will examine “Stage 5” of the loop - that is, testing and adapting the strategy. To do so, we will discuss the case of Store24, a New England convenience store chain which is trying to assess whether its strategy is working and how to adjust it. The case highlights the challenge of distinguishing a bad strategy (Stage 1 in the loop) from a bad implementation of a good strategy (Stage 2) and presents ways in which performance measurements system can be used to answer these questions (Stage 5). It will also offer un another opportunity to examine the use of non-financial performance measures and balanced scorecards, which we already discussed in the Transworld Auto Parts case.

In preparing the case, you will find useful to first read the article “Transforming the Balance Scorecard from Performance Measurement to Strategic Management: Part II”, which is a continuation of the Part I article assigned as a reading in the previous class.  I also recommend you re-read pp.14-16 (par. Stage 5) of the HBR article “Mastering the Management System”.

 

Session 13.  The levers of control

Monday, March 7

Topics

  • Beyond incentives: balancing the tension between profit, growth and control
  • The four levers of control: belief systems, boundary systems, diagnostic systems and interactive systems

Prepare

Read article “Control in an Age of Empowerment” by Simons, R. Harvard Business Review March 1995

Read the case ATH Microtechnologies (A) and (B) in digital course packet. There are some questions at the end of each case. Just skim through them. Focus instead on understanding the pros and cons of the "earnout" structure described in the case.

Session Plan

We will discuss the case ATH Microtechnologies – a disguised name for a real start-up company in the medical devices industry. The case details the evolution of a company since its founding as it faces a number of control problems. In doing so, it highlights the challenges and importance of adopting the appropriate control systems in a high-growth, dynamic environment.

The lessons of the case extend beyond this company to virtually every organization and the economy as whole, as highlighted by the recent financial crisis.

In preparing the case, you will find useful to refer to the framework of the ‘levers of control’ developed by Robert Simons at the Harvard Business School (see article “Control in an Age of Empowerment”). Most control systems we have analyzed throughout the course appear to fall under the heading of “diagnostics” systems. The ‘levers of control’ framework adds two key dimensions. First, it highlights the importance of how control systems are used (e.g. “interactive” versus “diagnostic”). Second, it reminds us of the importance of softer control systems which determine (or reflect) the culture of an organization (“belief” and “boundary” systems.)

We will then conclude with a few final thoughts about the course.

 

Session 14   In-Class Final Exam 

Wednesday, March 9

 

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