This cost function will help Menatel to predict the total cost for any level of activity and to make better decisions. 2-4. COST CONTROL To control costs Menatel apply the following: - Rational consumption policy for all expenses. - Review all contracts with suppliers to reduce discounts and get best prices. - Freeze investments in new fixed assets and optimize use of current assets. - Review all resources to achieve optimum productivity. - Standard costing system to set standards and monitor variances from standards. - Budgeting to set targets and monitor performance against budget. - Variance analysis to identify reasons for variances and take corrective actions.

1. Rennes International School of Business
ESC RENNES
Executive Master of Business Administration
EMBA
COHORT 1 (2003 - 2004)
Management Accounting
Conducted by:
Dr. Barbara Majumdar
Management Accounting
By
Magdy A. Sattar
August, 2003
Cairo, Egypt

2. TABLE OF CONTENTS
Introduction & Objective II
Part 1. Menatel Presentation 1
1-1 What Is Menatel 1
1-2 Menatel Structure and Organization 1
Part 2. Menatel Cost System 2
2-1 General Policy 2
2-2 Cost Structure 2
2-5-1 Revenue 2
2-5-2 Direct Cost 2
2-5-3 Operating Profit 2
2-5-4 Indirect Cost 2
2-5-5 Other Expenses 3
2-5-6 Contribution 3
2-5-7 Total Financial Cost 3
2-5-8 Net Profit 3
2-3 Cost Function 3
2-4 Cost Control 4
2-5 Decision Making with CVP Analysis 5
2-5-1 Menatel New Tariff 5
2-5-2 Menatel New 15 LE. Card 6
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3. INTRODUCTION & OBJECTIVE
The purpose of this report is to write a short analysis of my company’s “Menatel” cost
control system, focusing on the means used as management tools, such as decision-
making over cost allocation, segment development, or workforce motivation. In this
report I will be focusing on decision-making.
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4. 1. MENATEL PRESENTATION
1-1. WHAT IS MENATEL
Menatel is a joint stock company under investment low number 8/1997 registered in
1998 under number 314030. Menatel is granted a ten years; renewable license, to
install, operate, and manage a telecommunication network of at least 33,000 public
payphone. Menatel is determined to achieve this target by the end of 2004. Egyptian
shares are 51% and foreign shares are 49%. France Telecom (FCR) “providing
Menatel with the know-how technology and management” holds the main foreign
shares, which is 44 %. The main Egyptian company with 18% share is the National
Bank Of Egypt (NBE). As a service company Menatel is selling calls per minute,
Menatel products are local minutes, national minutes, mobile minutes, and
international or long-distance minutes.
1-2. MENATEL STRUCTURE AND ORGANIZATION
With a centralized management style Menatel structured into five main divisions
headed by corresponding Director and five Branches allocated all over Egypt, to form
simple flat functional organizational structure. Technical division activities are
managing all technical issues related to Menatel payphones (installations,
maintenance, and the payphones management system), coordination with all
subcontractors, and managing the Branches. Commercial division activities are
advertising, cards direct and indirect distribution, customer hot line, payphone
locations determination, and sites owner management. Financial and administrative
division activities are preparing financial statements, business plan, budgets, and
payroll sheets, recruitment, training, and cash and contracts management. Business
development division activities are handling assignments and projects to improve
Menatel performance, and to define and build major business indicators. Logistic
division activities are managing security, premises, vehicles, transportation, and
warehouse, in addition to manage purchases and custom clearance. For the five
branches there activities are the same as all Menatel division activities through the
matrix and centralize Menatel organization as per the branch assigned area.
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5. 2. MENATEL COST SYSTEM
2-1. GENERAL POLICY
For internal use Menatel apply contribution approach in building internal cost
statement to track fixed and variable cost for making better decisions as the
contribution approach stresses the role of fixed cost in which Menatel is doing a good
job. Such as, applying the rational- consumption policy on all the financial and
administrative expenses, revise all Menatel contracts with suppliers, contractors or
dealers to reduce discounts and to get the best price possible. Menatel’s quality -being
the secret of its distinctiveness- intact searching for a local efficient suppliers meeting
the quality standard required by Menatel as an alternate to some of the foreigner
suppliers of some tools and equipment used in operation. Finally, freezing any
investment in new fixed assets and optimize the use of current fixed assets. Also
reviewing all Menatel resources to achieve optimum utility and productivity.
2-2. COST STRUCTURE
Menatel cost statement (profit & loss statement) is structured in normal standard form
as Menatel cost is classified as follows:
2-2-1. REVENUE
All Menatel earnings by selling Local calls, National calls, Mobil calls, and
International calls, in additional to others revenue.
2-2-2. DIRECT COST
All the costs that have direct relationship to Menatel cost objective (voice call
minutes), whether it is variable cost that increase or decrease with the change of
minutes generated for costumers, such as payphone cards cost, and Telecom Egypt’s
share of revenue, or fixed cost that is not effected by any changes in those minutes,
such as, maintenance, spare parts, modem invoices, licenses fees, usage fees, and
technical assistance.
2-2-3. OPERATING PROFIT/ (LOSS)
Which is Menatel revenue minus direct cost as in Menatel case the direct cost is
considered as COGS?
2-2-4. INDIRECT COST
All the cost that has no direct relationship to Menatel cost objective, whether it is
variable, and in Menatel case the percentage of such cost is insignificant relevant to
the indirect fixed cost, or fixed and mainly Menatel consider all the indirect cost as
fixed cost, such as salaries and benefits, travel tickets, travel allowance, bonus,
transportation exp., technical assistance, office telephone bills, post and courier, bank
charges, advertising, gratitude, … etc.
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6. 2-2-5. OTHER EXPENSES
Such as financial expenses, depreciation & amortization, and total provision.
2-2-6. CONTRIBUTION
Which is Menatel revenue minus the summation of direct cost, indirect cost, and other
expenses?
2-2-7. TOTAL FINANCIAL COST
This includes interest income, exchange differences, and deposit interest whether in
LE, or $.
2-2-8. NET PROFIT/(LOSS)
It is Menatel revenue minus total expenses.
2-3. COST FUNCTION
To choose a reliable cost function the accountant team supported by the technical
team, both teams, analyze Menatel activities in order to determine the right cost
drivers, which are, in Menatel case, local minutes, national minutes, mobile minutes,
and international minutes. For simplicity we allocate the cost to each category of
minutes according to each category percentage of the total minutes soled during the
corresponding calculated period or in other word volume percentage. Using the
accountant analysis Menatel accountants look to the accounting system for
information about cost behavior (fixed or variable), they select a volume-related cost
driver and classify each account as a variable or fixed cost. As an example the table
below shows costs recorded in jan-2001 in which, a total of 172,000,000 million
minutes achieved.
Local minutes were 94,610,000 million. 55 %
National minutes were 34,569,000 million. 20 %
Mobile minutes were 41,275,000 million. 24 %
International minutes were 1,546,000 million. 1%
Monthly cost Jan.2001 Fixed Variable
Cards Supply 2,667,000 2,667,000
Network consumption 20,509 20,509
Network Power Supply 139,139 139,139
TE sharing revenue 3,283,000 3,283,000
Mobile Sharing revenue 4,083,000 4,083,000
Service Assistance & license fee 81,028 81,028
Distribution 1,903,000 1,903,000
Vehicles & Transportation 22,235 22,235
Total cost of sales 12,198,911 2,165,911 10,033,000
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7. Fixed cost per month = 2,165,911 LE.
Variable cost per minutes = 10,033,000/172,000,000
=0.06 LE per minutes.
Variable cost per local minutes = 0.55*0.06 = 0.033 LE.
Variable cost per national minutes = 0.20*0.06 =0.012 LE.
Variable cost per mobile minutes = 0.24*0.06 =0.014 LE.
Variable cost per international = 0.1*0.06 =0.006 LE.
The algebraic mixed-cost function for each minute’s category will be as follows:
Y = 2,165,911 + (0.06*number of total minutes).
Y = 2,165,911 + (0.033*number of local minutes).
Y = 2,165,911 + (0.012*number of national minutes).
Y = 2,165,911 + (0.014*number of mobile minutes).
Y = 2,165,911 + (0.006*number of international minutes).
2-4. COST CONTROL
Menatel policy is to control cost using management by exceptional policy,
concentrating on areas that deviate from the plan and ignoring areas that are presumed
to be running smoothly. Menatel accounting system records, measures, and classifies
actions in order to produce a monthly performance reports to be used to judge
decisions and the productivity of Menatel divisions and managers. By comparing
actual results to budgets, these reports motivate managers to achieve the budgeted
objectives, also spur Menatel to investigate exceptions-items for which actual results
differ significantly from budgeted amounts. The accounting department prepares
monthly a performance reports for each divisions at Menatel. Department heads and
their superiors use this report to help evaluate how effectively and efficiently the
department is operating. Their focus is on variances. The table below shows a
performance report for the year 2001 (only the first and second quarter) as example.
Menatel Budget 2001 follow up Jan.01 Feb.01 March.01 April.01 May.01 Jun.01 Accum.
Cards Supply Planned 2,433,972 2,461,104 2,724,244 2,747,863 2,878,716 3,210,796 16,456,695
Achieved 2,667,037 2,655,714 3,349,314 3,688,533 3,903,480 3,973,068 20,237,146
O&M utilities & supplies Planned 293,163 293,163 293,163 293,163 293,163 293,163 1,758,978
Achieved 377,652 401,349 561,809 601,053 420,025 523,220 2,885,108
Network consumption Planned 32,250 32,250 32,250 32,250 32,250 32,250 193,500
Achieved 20,509 19,682 22,471 19,584 22,830 20,692 125,769
Network power supply Planned 84,600 84,600 84,600 84,600 84,600 84,600 507,600
Achieved 139,139 145,580 149,244 153,724 162,151 170,609 920,447
TE sharing revenue Planned 2,808,523 2,841,402 3,149,145 3,176,534 3,325,128 3,714,837 20,015,969
Achieved 3,282,889 2,865,595 3,672,980 3,621,238 3,690,734 3,530,041 20,662,817
Mobile Sharing revenue Planned 3,220,457 3,260,571 3,613,714 3,645,143 3,815,657 4,262,857 21,818,399
Achieved 4,083,397 3,858,544 4,771,018 5,230,284 5,714,180 4,847,213 28,504,636
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8. Service Assistance & license fee Planned 68,000 68,000 68,000 68,000 68,000 68,000 204,000
Achieved 81,028 81,900 81,700 82,872 81,700 81,800 491,000
Distribution Planned 1,496,397 1,513,050 1,674,900 1,689,488 1,770,518 1,979,250 9,123,603
Achieved 1,903,397 1,730,493 2,119,844 2,201,239 2,454,287 2,501,696 12,911,356
Vehicles & Transportation Planned 34,200 34,200 34,200 34,200 34,200 34,200 205,200
Achieved 22,235 23,252 20,999 20,942 32,491 32,244 152,163
Personal costs Planned 132,110 132,110 132,110 132,110 132,110 132,110 792,660
Achieved 88,020 86,064 87,432 88,159 89,316 92,747 531,778
Management fee Planned 372,115 376,507 417,285 420,915 440,604 492,244 2,519,670
Achieved 510,799 315,283 644,399 262,128 579,051 535,600 2,847,260
A & G Expenses Planned 180,586 183,225 190,077 193,327 199,837 208,646 1,155,698
Achieved 115,130 174,848 212,565 182,296 240,296 161,415 1,086,550
Transportation Planned 9,000 9,000 9,000 9,000 9,000 9,000 54,000
Achieved 5,851 6,119 5,526 5,511 8,550 8,798 40,355
Insurance Planned 25,000 25,000 25,000 25,000 25,000 25,000 150,000
Achieved 15,748 16,370 17,173 16,137 17,441 22,319 105,158
2-5. DECISION MAKING WITH CVP ANALYSIS
One of the obstacles facing the business community in Egypt and of course Menatel
as well is the devaluation of the local currency and the increasing demand on the
foreign currency. Which caused an unexpected increase in variable cost per unit and
unavailability of hard currency?
2-5-1. MENATEL NEW TARIFFS
Menatel `s revenue relies on the tariff of the calls made by customers using Menatel
public payphones, the greater portion of this income comes from the local and
national calls, using CVP analysis Menatel choice was to increase the tariff (minute
price) for these calls to approximately 20% to obtain the same level of profitability.
The general formula that combines profit, sales price, variable cost/unit, fixed cost,
and number of units soled is:
P = (sp – vc) u – f
To decide what to do to obtain the same profitability i.e. P1 = P2 where
P1 = is Menatel profit before variable cost increase.
P2 = is Menatel profit after variable cost increase.
(Sp-Vc) U – F = (Sp – Vc) U – F
Knowing that no change in fixed cost and for the same number of units.
(Sp – Vc) ----1 = (Sp – Vc) ---- 2
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9. Knowing that Vc----2 = 1.02 Vc
Sp----1 = 0.1 LE
Vc = 1.3 LE
0.1 – 1.3 = Sp – (1.02 * 1.3)
Solving the equation to determine the new tariff or the new local minute price we find
that,
Sp = 0.12 LE
2-5-2. MENATEL NEW 15 LE CARD
In this approach and as a result of the market studies and researches, we found that
Menatel 10L.E. Card is our Black horse in the market, (88 % of Menatel sales).
By a simple calculation of its cost against its profitability to Menatel, assuming that
this card consists of 10 LE total revenue and 2.5 LE total variable cost per unit and
Menatel sales are 1000 units. This is before the devaluation of the exchange rate, but
after the devaluation the cost per unit raised to 4.5 LE causing a decrease in net
income, contribution margin and the profit as the tables show.
Total Per Unit Total Per Unit
Sales (1000 unit) 10,000 10 10,000 10
Less: Variable cost 2,500 2.5 4,500 4.5
Contribution margin 7,500 7.5 5,500 5.5
Less: Fixed cost 2,500 2500
Net Income 5,000 3,000
This is mainly why we thought of producing a new face value to the market to
increase the profitability margin, and to fill the gap of the increase of the expenses due
to the devaluation of the exchange rate, the table shows the results.
Total Per Unit
Sales (1000 unit) 15,000 15
Less: Variable cost 4,500 4.5
Contribution margin 10,500 10.5
Less: Fixed cost 2,500
Net Income 8,000
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10. Simply the variable cost for one pound revenue of the ten-pound face value card is
0.25 LE, by introducing the 15 LE face value card to the market Menatel reduce the
one pound revenue to 0.16 LE which means that the net income, and the contribution
margin increased even more than the case before devaluation. Still we do not want our
position in the market to get affected; also we do not want to loose our Black Horse
for nothing. This is why Menatel thoroughly planned the whole operation of
producing and following up this new face value card before the 10L.E.card call off
from the market to guaranty the success of the whole operation.
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