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ACCT 5000 Intermediate Management Accounting Portfolio Case Study

Background: Phoenix Enterprises Group

Phoenix Enterprises Group (PEG) was founded in Perth in 1999. The company started as a result of a diversification of investments from its parent company in Singapore. PEG’s initial investment portfolio consisted of entertainment venues such as clubs and restaurants. Francis Sik, the marketing department manager of PEG’s parent company in Singapore was sent to Perth to manage and grow business operations of PEG. Although Francis had extensive experience in marketing and business expansion, he had no prior experience in accounting and cost control. PEG thus engaged the services of an accounts officer, Jessica Boulter, to assist with keeping “accounting records”. Jessica’s job scope consisted of basic data entry such as recording of revenues and expenses (e.g. supplier invoices and other company expenditures) onto a basic spreadsheet. No internal management reports were generated and these figures were provided to an external accountant who then prepared financial reports to ensure compliance with regulatory reporting standards.

Pricing of products and other investment decisions were largely based on Francis’ intuition and understanding of the market. Due to favourable economic conditions brought about by the mining boom, the company experienced significant business growth. Its revenues tripled from an initial $2 million a year to $6 million and money was readily available. Francis was viewed favourably by the management in Singapore due to his performance and was thus given much autonomy in managing PEG. As such, Francis invested excess cash into several other unrelated businesses. By the end of 2013, the company had business interests in shopping centres, agricultural farms, markets, restaurants, cafes, clubs and a real estate agency.

However, the state of the economy rapidly deteriorated in 2014 due to a significant slowdown in the resources sector. This had a considerable impact on revenues of PEG and the company started experiencing financial difficulties, such as the inability to meet supplier payments on time. In 2015, due to financial constraints, PEG wanted to consolidate and determine the financial viability of its various businesses. However, Francis was unsure of how this can be done as he did not have sufficient information to assess the performance of each business.

Francis thus decided to employ Bonnie Williamson, a chartered accountant to assist with sprucing up the accounting records and overall management process. Specifically, Bonnie was tasked to determine management accounting information required to assist Francis in assessing the viability of the various business interests of PEG.

Required:

Assume you are Bonnie Williamson, and that you had identified several issues that need to be raised with the management of PEG.

You are required to submit the reports to management of PEG to address the various issues identified. In your submission, you will be expected to use examples that are specific to this business to present and argue your points. You should not just provide a textbook summary of the theory and principles.

Please read the Guidelines available on Blackboard prior to writing up your reports. There are strict requirements as regards formatting and layout).

For Report One (Issues 1 and 2) (10 marks):

Issue 1:

The “accounting records” managed by Jessica Boulter were rather basic and not always complete. These records mainly consisted of costs of raw materials. As such, the company had no clear idea of what it cost to produce most of the items sold in their various businesses beyond the purchase cost of raw materials. As the growth of PEG happened during the mining boom, there was always money in the bank to meet commitments and finance new projects. Francis has always believed that his investment decisions were sound since the financial reports (as prepared by the external accountant) typically showed PEG generating positive net income. Besides, he was far too busy to bother with ‘what it cost’ to produce an item or provide a service, so long as it was doing well (as indicated by money in the bank).

In your submission to Francis Sik and the management of PEG,

1. Discuss the current no product-costing policy, and present an argument in support of undertaking an appropriate product costing system (note that you are not required to detail a specific product-costing system but need to provide practical benefits of knowing the cost to produce/deliver a product/service)

1. Also, explain why financial accounting reports prepared for external users may not be a suitable replacement for managerial accounting information and reports per se. Remember to provide examples specific to PEG.

Issue 2:

Recognising the diversity of activities that exists within PEG, you believe that the implementation of Activity-Based Costing will assist in improving costing accuracy of products and services.

In your submission:

1. Explain the major differences between the traditional costing approach and the Activity-Based Costing (ABC) approach to overhead cost allocation, (you are not required to explain the detail steps in implementing ABC), and

1. Briefly explain some of the general signs that may exist within the various businesses of PEG that may warrant a need to consider moving to an ABC approach to allocating overhead costs.