19-9 (Continued)
justification for the proposal exists without the need for discounting ($3 million expense
is offset by $4 million savings within one year Æ 33% ROR).The mortgage model
presented is flawed in the $720K annual worth assumption, ludicrous at 25% discount
and totally off the wall with a 30 year amortization. A realistic model would amortize
over 5-10 years at a discount rate in line with APEX opportunity cost of capital. The
An inter-disciplinary team approach must be used to evaluate and install new
technology. All tangible and intangible benefits must be identified and quantified for
measurement. Evaluation of implemented technology must be made at the total system
level using both direct and indirect measures of merit. Those measures must include
intangible benefits such as improved productivity, higher quality, improved market
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Student interest and motivation can be greatly enhanced through the use of
comprehensive cases as a teaching vehicle. This is especially true with mature
audiences that typically like problem oriented learning experiences and hands-on
summarize the lessons learned to help accomplish that learning objective.
Remember that a case is much more than a long textbook problem.
role of accounting in measuring value creation and how managers are influenced
by accounting measures. The learning objectives focus on these ideas rather
than rote accounting details but some details must be learned to understand the
big picture. Cases are an excellent vehicle for accomplishing this. I have had
much success using a short but very rich case in the first class meeting.
In so doing they are shown quite vividly, the difference between cash accounting
and accrual accounting and are led to the need for statements of cash flow as
the third major accounting report.
A class sequence for the first five sessions of the course based upon this
approach is shown on the following page.
Armed with this newly found knowledge of accounting based upon common
sense and a set of standard conventions and accounting principles, students are
required to take on the task of developing the financial scorecard for Chemlite for
the second accounting period. In so doing they are shown quite vividly, the
difference between cash accounting and accrual accounting and are led to the
fuels some excitement over this dry material. The case also includes a good
discussion of the financial planning process and an included short embedded
case, The Case of the Unidentified Industries, requires students to match
companies (automotive, electric utility, grocery chain, aerospace, and importer)
to five sets of financial statistics. This helps drive home the notion that there are
Walk through the example
in Appendix to Chapter One
capitalization,
motivation for
accounting principles,
balance sheet identity,
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denominator.
Understand how
companies differ
Prepare The Case of
the Unidentified
Industries
4 Discuss the Three
Learn how isolation of
Read Solving the
Solicit questions on glossary
items
Provide additional
illustrations for example:
Constructing a personal
balance sheet,
understanding workflow and
inventory accounting,
working capital Discuss
behavioral implications of
financial accounting
measures
Motivate students with
personal examples e.g.
ROE for a mortgaged
house sold at a profit.
Illustrate financial
leverage.
How to Read A
Finanacial Report
step in understanding the importance and value of cash flow statements. Once
this is accomplished, much headway can be made by having students read the
outstanding tutorial article, Solving the Puzzle of the Cash Flow Statement.
(Harvard BH013) This article provides a short description of the format and
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1. Scanning the Big Picture… What are the trends in profitability,
growth and cash flow?
2. Checking the Cash Flow Engine….Does operations provide enough
cash to fund growth and expansion? Or is working capital being
drained?
3. Pinpointing Good News/ Bad News….Are there suspicious
indicators that co-exist with the up Trends?
4. Putting the Puzzle Together….Does the scenario make sense?
To illustrate the process, the article applies the four steps to a recent cash flow
statement for the Colgate Palmolive Company. It then presents and asks the
reader to analyze a fictitious statement with suggested answers provided in the
footnotes. Again this paper does a fine job of developing concepts to be learned
without undue emphasis on obtaining precise answers to the mechanics.
A less friendly but more exact (from a pure accounting perspective) resource is
Understanding the Statement of Cash Flows (9-193-027) It is probably a more
useful reference for instructors than for students as the tutorial meets the
objectives for conveying the essential ideas and is much more readable.
The actual learning takes place when students or student teams prepare to
discuss a case, Statement of Cash Flows: Three Examples (9-193-103) and
engage in a class debrief. This case provides three example cash flow
statements labeled as Alpha, Beta, and Gamma. Their direction is to read and
interpret each and decide whether they would invest in that company. That
sounds rather demanding for a first time reader and it is. To assist the students
in their task, a cash flow analysis form can be provided. Its format roughly
follows the content emphasized in the first three steps of the process and
provides students with the security of having some structure to rely upon. An
important added assist is to advise the students to analyze the companies in
order of Gamma first, then Beta, then Alpha. Each company is reported in a
different format and the line item labeling varies from politely instructive to
mercilessly cryptic. The Gamma Company is, of course, the most gentle of the
three statements. It almost walks the reader through a statement prepared using
the indirect method, the most common format. Beta uses a direct method
development augmented by a reconciliation to verify its consistency with the
income statement. Finally, the Alpha statement appears to have been prepared
for experienced accountants but is workable once the pattern is discerned from
the other statements.
Class discussion begins with a class debrief of each company in the order
suggested. After each company’s situation is recorded students are asked
whether they would invest in the company and a big picture is developed as the
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pieces of the puzzle are put together. After the student vote is recorded, the real
identity of the company is identified. The students are amazed to see that their
observations quite readily square with the real circumstances once they learn the
company identity.
At this point I have been able to challenge my classes to analyze (as a team)
financial statements of some companies. In using real financial statements, they
will encounter lots of jargon and new terms so I furnish a copy of the Glossary of
Selected Accounting Terms which is included at the end of this section of the
engineers can learn the mechanics of any system they encounter. We begin with
an examination of the origins of cost accounting.
Why Cost Accounting?
If students understand how costing systems arose to solve specific information
needs, they are much better equipped to deal with the compromises inherent in
any system and less apt to misuse the information. It helps for students to
understand that cost systems are frequently driven by the need to value
inventory of in-process and finished items and that they have been adapted for
use in product costing and cost control. The distinction among these three
purposes of cost accounting is key to the instructional strategy presented. That
strategy relies on establishing the connection between the budgeting process
and the development of standard costs firmly in the minds of students.
Connecting Budgets and Standard Costs
Budget arithmetic is not particularly challenging to engineers and when
presented in the abstract generates boredom for students and instructors alike.
A better way is to use an example which has enough real world complexity to
illustrate issues concretely yet is not overwhelming to the point that the object
lessons are lost in the shuffle. Fortunately, such an example is available in the
Meyers Tap sequence of cases (9-185-111), a four part series that can be used
to illustrate the process and establish interest quickly. The materials available
include:
Mayers Tap (A) (9-185-024)
Mayers Tap (B) (9-185-025)
Mayers Tap (C) (9-185-026)
Mayers Tap (D) (9-185-027)
Mayers Tap Video Tape
Mayers Tap Computer Model
Mayers Tap (A) reviews the company scenario and discusses a current dilemma
where the company is winning orders it expected to lose and losing on bids that it
believed it had pared to the bone. The company operates two plants, each with
different process characteristics and a total of thirty one different machine
groups. The system is described for an abbreviated set of eleven different
products, enough to convey some of real life complexity without generating an
overwhelming multi-product data base. Routings and materials lists are provided
for each of the items. The overall process flow for representative products in
each plant are provided.
Mayers Tap (B) provides a proposed operating budget for the ensuing year as
well as a complete list and definition of overhead accounts. It requires students
to develop overhead allocation based on direct labor hours and other bases
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using the budgetary data available. This data is already loaded into the computer
model allowing the students to focus on results rather than computation. One
class exercise involves creating a separate overhead rate for each plant whereby
students discover that Mayers’ pricing difficulties are a result of their current use
of a flat overhead rate for the entire company. Another requires the use of the
computer model as students decide on a way to model each overhead category
as fixed or variable and then choose a basis for allocating or assigning a portion
of the overhead budget to a specific product. Students realize that the process is
based upon some fairly arbitrary judgments despite the fact that it often delivers
cost numbers to 4 significant decimal places.
Mayers Tap (C) requires students to use one of the allocation schemes to
analyze profitability by product using one, two and thirty one cost centers. Again
the computer model facilitates the analysis. Again students see that the
granularity employed in developing the system affects results. Here they
compare their judgments made on one or two cost center system with those they
might have made using a 31 cost-center system. Further they discover that
making product cancellation decisions using standard costs can result in reduced
profitability when allocated fixed costs are not actually reduced as volume
declines.
Mayers Tap (D) motivates students to work through the implications of multiple
cost centers from an administrative perspective. It is more valuable for
accountants than for engineers.
Exploiting the Connection
The following learning objectives can be accomplished using the Meyers Tap
series
Understanding the bill of material and its use in developing unit material
costs
Understanding the product routing document and its use in establishing
unit labor costs
The concept of a budget volume as the activity level basis for allocation of
overhead cost
Use of direct labor hours as a basis for allocation of overhead costs to
individual products.
Fixed and variable cost concepts.
The availability and use of two-stage allocations to obtain greater
precision in cost allocation.
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The errors caused by use of simple single cost center systems.
Marginal cost and misuse of allocated fixed costs in profitability analysis.
The concept of profit contribution and its relation to direct costing.
The Meyers Tap exercises provide an excellent vehicle to allow students to
discover problems inherent in traditional cost systems as used by many
companies. Subsequent articles and cases can be used to reaffirm or test
understanding of the concepts outlined above.
Suggestions are:
Is One Cost System Enough? (88106 ) is a reprint of a clearly written
