Management Accounting

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Question:

This assignment consists of two case study scenarios.

Case Study 1

You have recently taken a 12-month leave of absence from your job in Australia and have accepted an AusAid sponsored position as the financial controller of the African Nasal Hospital (ANH) group.

The ANH group was established in 1965 by Sir John Packard and his wife, Lady Julia Packard, with the purpose of providing aid to people suffering from severe nasal issues. While initially this aid was provided from one location, today there are 20 hospitals throughout Africa.

Purpose

The Packards started ANH in response to a heartfelt need. While this issue was resolved in America as far back as 1890, today more than 300,000 people in Africa suffer from severe nasal issues due to limited access to medical treatment. Based on available resources, ANH is able to treat approximately 25,000 patients per annum.

Funding

As patients receive free treatment at ANH, all funding for the organisation is based on donations received from overseas organisations, as well as through aid programs run by developed nations such as Australia and New Zealand.

Patient Treatment

The two main causes of nasal issues are a lack of access to medical treatment, and poor education. Patients suffering from severe nasal issues normally undergo a small surgical procedure (with an 85% success rate), and then spend 14 days as an in-patient at the hospital. Below provides a typical in-patient treatment program.

Task:

ANH has recently been approached by a major US-based charity which has proposed to fund ANH $1,125 for each patient treated at Abuja Hospital (one of ANH’s largest hospitals).

Assuming that ANH accepts this proposal, You will need to:

  • Calculate the break-even number of patients for Abuja Hospital, assuming that no other funding will be received.
  • To address the requirement, follow the steps below:
  1. classify costs into variable and fixed
  2. calculate the variable costs per patient,
  1. calculate the contribution per patient
  2. calculate the fixed costs (to the nearest dollar)
  3. calculate the break-even number of patients for Abuja Hospital
  4. calculate the current hospital capacity
  • Comment on the break-even point compared to the hospital’s capacity.

Case Study 2

Jet Santiago is the management accountant for the Pizza Gourmet chain of restaurants.

Pizza Gourmet is a successful pizza business focused on providing authentic, quality

Italian Pizza.

It is a popular brand that enjoys a strong reputation for quality food and the restaurants are known for their authentic Italian ambience.

Pizza Gourmet restaurants are popular dining venues and can command a premium price for their pizzas. Service is either dine-in or take-away (pick-up and home delivery).

The following factors are relevant to Pizza Gourmet.

  1. Business model

The original Pizza Gourmet restaurant is still proprietor-owned, plus there are 150 franchise outlets. The business was expanded to include franchisees in July 2000 and further expansion is planned.

  1. Quality control systems

In order to maintain quality and ensure the brand promise is delivered, strong control is maintained over franchisees. Key ingredients are received into a central hub and premixed to the Pizza Gourmet recipe, then transported to restaurants for final processing. An integrated stock control system is used, with all stock levels being centrally monitored and all orders for ingredients originating only from Head Office.

  1. Staff recruitment and training

Staff recruitment and training is controlled from Head Office. Pizza Gourmet manages its staff in line with its slogan, ‘Treat your staff the way you would your best customer’. The business uses an internally developed e-recruiting system to source staff and has achieved significant cost savings this way. A centrally controlled enterprise resource planning (ERP) system is used to administer all financial and operational aspects of the business.

  1. The changing economic situation

Pizza Gourmet’s business is operating well and has consistently earned high returns over the past five years. However, with tight economic conditions many consumers are moving from fine dining to mid-range restaurants, which means that competition in the sector is increasing. Management is assessing options to maintain Pizza Gourmet’s competitive advantage.

Task:

Jet has been asked to prepare an analysis using Porter’s value chain to assist management in assessing Pizza Gourmet’s competitive advantage.

Specifically, she has been asked to:

  1. Prepare a value chain analysis for Pizza Gourmet and categorise each activity according to Porter’s value chain. (Classify these per the activity types/value chain element provided)

Use the following Activity types/Value chain element for your analysis: Primary activities:

Inbound logistics Operations Outbound logistics Marketing and sales After-sales services

Support activities: Administrative infrastructure HR management Technology development Procurement

  1. Assess whether each activity provided is a key element of Pizza Gourmet’s competitive advantage. (Assess whether each activity is a key element by indicating “Yes”or “No”
  2. Evaluate which activities Pizza Gourmet could outsource to achieve cost reduction. (Indicate whether each activity could be outsourced by indicating “Yes”or “No”and providing a brief explanation)

Answer:

Case Study 1

Calculation of breakeven number of patients for Abuja Hospital

Segregation of fixed and variable cost

Variable costFixed cost
Meal costCost paid to doctor, nurses  and admin staff
Medical suppliesLinen cost
Surgical equipment 
Cost paid to Anaesthetists 

 Calculation Of Variable Cost Per Patient

ParticularsAmount
Meal cost$225.00
Medical supplies$250.00
Surgical equipment$100.00
Cost paid to Anaesthetists$ 22.50
Total variable cost$597.50
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Contribution Per Patient

=Revenue on each patient – Variable co

=$1125-597.5

=$527.5

Fixed Cost

ParticularsAmount
Administration assistants $46,800.00
Doctors $156,000.00
Linen cost $65,000.00
Nurses $163,800.00
20% of salary cost $73,324.50
Total fixed cost $504924.50

Break Even Number Of Patients

=Fixed cost/ contribution per patient

=$504924.5/527.5

=957 patients

Annual bed capacity

= (365/14 days need to treat patient)*50 beds

1304 patients

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Comment Of Breakeven Point In Comparison To Hospital Capacity

By considering present case situation, it can be noticed that breakeven is attainable of 74% of margin of sales which shows that current cost structure will assist in attaining sufficient profit margin that can use for the welfare of patients by providing them better medical services.

Case Study 2: Value Chain Analysis For Pizza Gourmet

In accordance with the value chain analysis model by Porters activities of business is mainly bifurcated into two broad categories i.e. primary and secondary activities

Primary activitiesSupport activities
Inbound logistics· Cooking and mixing of core ingredients within restaurants.· Developing new products.· Receiving key ingredients into a central hub. Administrative infrastructure· Developing strategy· Maintaining restaurant facilities· Performing finance functions· Performing reporting functions
Operations· Preparing and cooking pizzas.· Taking customer orders· Serving pizzas at customer tablesHR management· Recruiting staff, including e-recruitment· Providing training programs for staff and franchisees.
Outbound logistics· Delivering pizza to customer’s residence· Storing key ingredients in central hub· Transferring ingredients to restaurants Technology development· Developing advanced tracking system· Developing website and potential mobile applications 
Marketing and sales· Creating brochures· Providing nutritional information of food to customers.· Running TV, newspaper and radio campaigns.Procurement· Negotiating access to premises for company and franchise restaurants· Negotiating supply arrangements with ingredient suppliers· Negotiating supply arrangements with packaging suppliers
Service and support· Taking customer orders· Replenishing store supplies 

In accordance with the above categorization, it can be said that primary activities are delivering and preparing products for consumers. Thus activities related to it is considered to be part of inbound logistics, operations and outbound logistics. Marketing and sales activity assist in reaching a large audience for the promotion of products of Pizza Gourmet. Other primary activities are related to service and support in which taking orders from customers and replenishing store supplies is involved. These are basic activities but essential as without this management of business will be significantly affected. Support activities are related to planning and reporting in order to provide back-end support to business. With the support activities, Pizza Gourmet will be able to make better product and service strategies as per their previous experience and market trends. Further, HR management assists them in recruiting qualified staff and enhancing their skills and capabilities through training and development activities. Through Technology development they can create software and website for smooth operations of the business and with procurement, negotiation can be done for better cost management.

Assessment Of Each Activity For Key Element Of Pizza Gourmet To Address Whether It Is Competitive Advantage Or Not

Value chain elementActivityActivity providing competitive advantage or notJustification
Inbound logisticsCooking and mixing of core ingredients within restaurantsYesThis activity will have a direct influence on customer satisfaction and their perception to visit again.
Marketing and salesCreating brochuresYesThis activity will attract potential customers to Pizza Gourmet.
Outbound logisticsDelivering pizza to customer’s residenceYesThis will enhance the convenience of customers which will make an increase in sales of business.
Technology developmentDeveloping advanced tracking systemYesIt will make improvement in overall management efficacy and reduction in management cost.
Marketing and salesDeveloping and setting up new restaurantsYesThis activity will make an increase in market share and its reach to customers.
Inbound logisticsDeveloping new productsYesTo promote innovation and provide better options to customers.
Administrative infrastructureDeveloping strategyYesThis will provide growth and effective management to business.
Administrative infrastructureMaintaining restaurant facilitiesNoThis is a basic activity which will not make any value addition however it is essential to develop better aura.
ProcurementNegotiating access to premises for company and franchise restaurantsYesFor cost management.
ProcurementNegotiating supply arrangements with ingredient suppliersYesFor cost management.
ProcurementNegotiating supply arrangements with packaging suppliersYesFor cost management.
Administrative infrastructurePerforming finance functionsYesTo make optimum use of available funds to enhance profits.
Administrative infrastructurePerforming reporting functionsYesFor recording business activities this task is essential as it will assist in future planning and making improvement in business.
OperationsPreparing and cooking pizzasYesThis activity will have a direct influence on customer satisfaction and their perception to visit again.
Marketing and salesProviding nutritional information of food to customersYesWith this, a business can assure they are delivering healthy and tasty product (Finkler, 2016).
HR managementProviding training programs for staff and franchiseesYesIt will strengthen human resource to attain competitive advantage.
Inbound logisticsReceiving key ingredients into central hubYesTo ensure that all ingredients are available with business.
HR managementRecruiting staff, including e-recruitmentYesQualified staff will be required to strengthen human resources for business (Légaré and Witteman, 2013).
Service and supportReplenishing store suppliesNoThis is a basic activity for business it will not make any value addition.
Marketing and salesRunning TV, newspaper and radio campaignsYesWith this business will be able to reach a large number of audience.
OperationsServing pizzas at customer tablesNoThis is basic activity for business it will not make any value addition.
Outbound logisticsStoring key ingredients in central hubYesTo ensure that all ingredients are available with business (DRURY, 2016).
OperationsTaking customer ordersYesBetter assistance to customers will make an increase in their satisfaction level.
Outbound logisticsTransferring ingredients to restaurantsYesTo ensure that all ingredients are available with restaurants in a timely manner.

 Evaluation Of Activities For Outsourcing In Order To Make Reduction In Costs

Value chain elementActivityActivity viable for outsourcing or notJustification
Inbound logisticsCooking and mixing of core ingredients within restaurantsNoThis is the major operation of Pizza Gourmet and done to be on an immediate basis so it cannot be outsourced.
Marketing and salesCreating brochuresYesWriters and designers can be hired for preparing attractive brochures at minimum charges.
Outbound logisticsDelivering pizza to customer’s residenceNoIt is because; delivery has to be done as per customer order which will have significant variation  thus outsourcing will not cost beneficial (DRURY, 2016).
Technology developmentDeveloping advanced tracking systemYesHiring expert in this task will assist in developing better software through which effective management can be done to make a reduction in operational costs (Finkler, 2016).
Marketing and salesDeveloping and setting up new restaurantsNoThis is management planning task which cannot outsource it is to be done by top management of the restaurant.
Inbound logisticsDeveloping new productsNoProducts have to be developed as per the experience of the Pizza Gourmet. Thus it will be done hotel staff as per changing taste and preference of customers.
Administrative infrastructureDeveloping strategyNoThe strategy has to be developed by management for increasing efficiency of business. Thus it cannot be outsourced.
Administrative infrastructureMaintaining restaurant facilitiesNoIt is to be done in-house as it is to be done on a daily basis and can be easily managed by daily staff.
ProcurementNegotiating access to premises for company and franchise restaurantsNoThis will be the major asset for business thus this task is to be done by management it cannot be outsourced.
ProcurementNegotiating supply arrangements with ingredient suppliersYesIngredients negotiation can be outsourced to suppliers for cost cutting and to take good discounts.
ProcurementNegotiating supply arrangements with packaging suppliersYesPackaging negotiation can be outsourced to suppliers for cost cutting and to take good discounts (Légaré and Witteman, 2013).
Administrative infrastructurePerforming finance functionsNoThis information is confidential for business so it cannot be outsourced.
Administrative infrastructurePerforming reporting functionsNoIt is to be done in-house as it is to be done on a daily basis and can be easily managed by daily staff.
OperationsPreparing and cooking pizzasNoIt is to be done in-house as it is to be done on a daily basis and can be easily managed by daily staff (Monczka and et. al. 2015).
Marketing and salesProviding nutritional information of food to customersYesFor this nutritionist can be hired on a session basis to save cost.
HR managementProviding training programs for staff and franchiseesYesFor this experts can be hired on a session basis to save cost (Simatupang Piboonrungroj and Williams, 2017).
Inbound logisticsReceiving key ingredients into central hubNoThis information is confidential for business so it cannot be outsourced.
HR managementRecruiting staff, including e-recruitmentYesRecruiting agencies can be hired to get good employees with minimum cost (McIvor, 2016).
Service and supportReplenishing store suppliesNoIt is to be done in-house as it is to be done on a daily basis and can be easily managed by daily staff.
Marketing and salesRunning TV, newspaper and radio campaignsYesAdvertising agencies can be hired for effective campaigns of the product.  
OperationsServing pizzas at customer tablesNoIt is to be done in-house as it is to be done on a daily basis and can be easily managed by daily staff.
Outbound  logisticsStoring key ingredients in central hubNoIt is to be done in-house as it is to be done on a daily basis and can be easily managed by daily staff.
OperationsTaking customer ordersNoIt is to be done in-house as it is to be done on a daily basis and can be easily managed by daily staff (Schniederjans, Schniederjans and Schniederjans, 2015).
Outbound logisticsTransferring ingredients to restaurantsNoIt is to be done in-house as it is to be done on a daily basis and can be easily managed by daily staff.

References

DRURY, C.M., 2013. Management and cost accounting. Springer.

Finkler, S.A., Smith, D.L., Calabrese, T.D. and Purtell, R.M., 2016. Financial management for public, health, and not-for-profit organizations. CQ Press.

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Légaré, F. and Witteman, H.O., 2013. Shared decision making: examining key elements and barriers to adoption into routine clinical practice. Health Affairs, 32(2), pp.276-284.

McIvor, R., 2016. An analysis of the application of process improvement techniques in business process outsourcing. International Journal of Quality & Reliability Management, 33(3), pp.321-343.

Monczka, R.M., Handfield, R.B., Giunipero, L.C. and Patterson, J.L., 2015. Purchasing and supply chain management. Cengage Learning.

Schniederjans, M.J., Schniederjans, A.M. and Schniederjans, D.G., 2015. Outsourcing and insourcing in an international context. Routledge.

Simatupang, T.M., Piboonrungroj, P. and Williams, S.J., 2017. The emergence of value chain thinking. International Journal of Value Chain Management, 8(1), pp.40-57.

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