MBA 628 Management Accounting Case Study

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This case was presented in Fall 2009 and revolves around the decentralization of BP America after BP merged with Standard Oil in 1987. In this presentation, the changing role of staff departments is examined in this newly decentralized organization.

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  • Need to mention orally that this is the current situationImplications of new procedures on total corporate cost:-COST CENTER: Current situation:discrepancy of costs, 14M not traceable, corporate had to take it on. then corporate traced it to businesses who incurred the costs, but $1.1M could not be traced so corp is still absorbing
  • PROFIT CENTER: Recommended:total corp costs in long run will decreaseforces businesses to be more responsible in their accounting: how many services do they need, etc., only value-adding services - thus reducing discrepanciesthis is better able to trace back any discrepancies - staff as profit centers are more concerned about their costs so they will play more of a role in tracing discrepancies and less of this responsibility falls on corporate.
  • MBA 628 Management Accounting Case Study

    1. 1. COVER<br />BENETTON DIVERSITY CONSULTINGMark Bundang, TulayCantas, Ron Cohen, AmalKhorchid, RachnaSundaram<br />
    2. 2. AGENDA<br />Situation Overview<br />The Problem<br />Staff Departments: Cost vs Profit Centers<br />Evaluation of Staff Department Performance<br />Impact of BP Minerals Sale<br />New System Impact on Total Costs<br />Recommendation<br />Questions<br />2<br />
    3. 3. SITUATION OVERVIEW<br />3<br />
    4. 4. BP Key Players<br />Sir Peter Walters<br />Chairman<br />Robert Horton / James Ross*<br />CEO<br />David Sourwine<br />Controller, HQ & Treasury<br />Bill Johnson<br />Business Forum Chairman<br />John Bishop<br />Corporate Controller<br />*Took over CEO position in April 1988<br />4<br />
    5. 5. Old Cost Allocation System<br />Corporate costs controlled by CEO benefitting corporation as a whole. Includes planning, control, and executives<br />Business-related costs allocated on …<br /><ul><li>Headcount
    6. 6. Billable hours
    7. 7. Space occupied</li></ul>Business<br />Staff<br />CEO<br />5<br />
    8. 8. New Cost Responsibility StructureFirst Year of Implementation<br />Overall Philosophy of New Structure:<br /><ul><li>Decrease corporate OH by dispersing more costs to users
    9. 9. Businesses’ awareness of the value of staff services</li></ul>Businesses:<br />Freedom of choice when sourcing services<br />Business<br />Staff<br />Profit Center<br />Cost Center<br />CEO<br />Investment Center<br />Staff Departments:<br /><ul><li>Demonstrate value for dollars
    10. 10. Competitive with respect to alternatives
    11. 11. Ensure customer satisfaction</li></ul>6<br />
    12. 12. Business Forum: Overall Goals<br />Introduce the buyer-seller procedure<br />1<br />Take out business-related activities out of stewardship and place them in the businesses<br />2<br />Eliminate activities that the group no longer needs<br />3<br />7<br />
    13. 13. First Year Implementation Results<br />8<br />
    14. 14. New System: Cost Responsibility (after first year of implementation)<br />Business-related stewardship costs<br />(From Corporate to Businesses)<br />$16 million<br />Next Year<br />$?<br />9<br />
    15. 15. Incongruity<br />Businesses<br />Staff<br />Business heads perceive that Staff could offer lower costs.<br />Staff departments uncomfortable with being challenged: prices for services and activities performed<br />Perceive that some businesses “playing games”: unrealistic rates required; exceeding budgeted numbers<br />10<br />
    16. 16. Cost Discrepancy(after first year of implementation)<br />Budgeted costs in disagreement<br />(Between Staff and Businesses)<br />1st cut<br />Further cuts<br />$141 million<br />$11 million<br />$1.1 million<br />Absorbed by the stewardship <br />Budgeted costs<br />Unbilled services in dispute<br />Unbilled services in dispute<br />11<br />
    17. 17. The Problem<br />12<br />
    18. 18. Business Problem<br />Imbalance of Power between Businesses and Staff Departments<br />13<br />
    19. 19. Imbalance of Power<br />Option to source externally<br />Staff<br />Business<br />14<br />
    20. 20. Leveling the Playing Field<br />Option to source externally<br />Leverage of some kind<br />Business<br />Staff<br />15<br />
    21. 21. Evaluating the Staff Departments <br />16<br />
    22. 22. Staff Departments Controls<br />Labor variances<br /><ul><li>Based mainly on efficiency rather than rate</li></ul>Overhead variances<br /><ul><li>Both on efficiency and rate</li></ul>As a Cost Center<br />17<br />
    23. 23. Evaluation of Staff Departments<br />As a Profit Center<br />Labor variances<br /><ul><li>Both on efficiency and rate</li></ul>Overhead variances<br /><ul><li>Both on efficiency and rate</li></ul>Sales Variances<br /><ul><li>Markup to internal & external clients</li></ul>Gross Profit or Contribution Margin<br /><ul><li>Co-ordination of Costs and Revenues</li></ul>18<br />
    24. 24. Impact of Change on Staff DepartmentsSale of BP Minerals<br />19<br />
    25. 25. Impact of Sale of BP Minerals<br />Decrease in internal service demand<br />Remaining businesses must now increase their own demand<br />Could result in staff reduction<br />As a Cost Center<br />20<br />
    26. 26. Impact of Sale of BP Minerals<br />Staff departments can solicit external demand to compensate for loss of internal activity<br />New external revenue could be higher than that generated from BP Minerals<br />As a Profit Center<br />21<br />
    27. 27. New System Implications on Total Corporate Cost<br />22<br />
    28. 28. Implications on Total Corporate Cost<br />As a Cost Center<br />New procedure Intention: <br />Disperse corporate overhead to Businesses<br /><ul><li>Non-value adding services are recognized & eliminated </li></ul>What actually happened: <br />Corporate costs successfully dispersed $16M<br />However, unbilled services of $1.1M were still taken on<br />23<br />
    29. 29. Implications on Total Corporate Cost<br />As a Profit Centers <br />Staff more concerned with cost traceability<br />Forces businesses to be more responsible for costs<br />Hence, further reduction in corporate costs<br />24<br />
    30. 30. Recommendation<br />25<br />
    31. 31. Recommendation<br />BP America’s corporate staff departments should be designated as <br />Profit Centersand allowed to solicitbusiness externally.<br />26<br />
    32. 32. Recommendation<br />Option to source externally<br />Option to solicit external business<br />Business<br />Staff<br />27<br />
    33. 33. Benefits of Recommendation<br /><ul><li>Level playing field for both business & staff
    34. 34. Increases businesses’ accountability & responsibility
    35. 35. Better cost traceability & control
    36. 36. Corporate can focus on overall strategic planning</li></ul>28<br />
    37. 37. Potential Risks<br />Lack of cooperationIncreased competition between staff and business departments at the expense of teamwork. <br />Threat of over-soliciting external business<br /> Interdependencies ignored; decisions based on self-interest rather than overall interest. <br />More items to control as a profit center than as a cost center.<br />Learning curve for generating sales on the part of staff.<br />29<br />
    38. 38. QUESTIONS?<br />30<br />
    39. 39. Appendix<br />31<br />
    40. 40. Timeline<br /><ul><li>Decentralization.
    41. 41. Migration to new cost structure
    42. 42. John Bishop and David Sourwine discussion for the upcoming year.
    43. 43. Sale of BP Minerals
    44. 44. Creation of Business forum (Bob Horton)</li></ul>(Bill Johnson)<br />1987 <br />BP America is created through total merger of BP and Standard Oil.<br />April 1989<br />Next Business Forum meeting<br />1988<br />James Ross approves of the Business Forum Process<br />32<br />
    45. 45. Business Forum Meeting<br />Staff Departments<br />Role and mission<br />Input expected from businesses<br />Expected staff headcount and budgeted costs<br />Review of services, billing procedures, and expected annual charges<br />33<br />
    46. 46. Key Players<br />Sir Peter Walters, Chairman, BP<br />BP America<br />Robert Horton, CEO (until early 1988)<br />James Ross, CEO (beginning April 1988)<br />John Bishop, Corporate Controller<br />David Sourwine, Controller, HQ & Treasury<br />Bill Johnson, Business Forum Chairman<br />34<br />
    47. 47. Leveling the Playing Field<br />Option to source externally<br />Leverage of some kind<br />Business<br />Staff<br />35<br />

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