Management accounting report


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Management accounting report

  1. 1. Rennes International School of Business ESC RENNESExecutive 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. 2. TABLE OF CONTENTSIntroduction & Objective IIPart 1. Menatel Presentation 1 1-1 What Is Menatel 1 1-2 Menatel Structure and Organization 1Part 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 6EMBA CairoRennes International School of Business I
  3. 3. INTRODUCTION & OBJECTIVEThe purpose of this report is to write a short analysis of my company’s “Menatel” costcontrol system, focusing on the means used as management tools, such as decision-making over cost allocation, segment development, or workforce motivation. In thisreport I will be focusing on decision-making.EMBA CairoRennes International School of Business II
  4. 4. 1. MENATEL PRESENTATION1-1. WHAT IS MENATELMenatel is a joint stock company under investment low number 8/1997 registered in1998 under number 314030. Menatel is granted a ten years; renewable license, toinstall, operate, and manage a telecommunication network of at least 33,000 publicpayphone. Menatel is determined to achieve this target by the end of 2004. Egyptianshares are 51% and foreign shares are 49%. France Telecom (FCR) “providingMenatel with the know-how technology and management” holds the main foreignshares, which is 44 %. The main Egyptian company with 18% share is the NationalBank Of Egypt (NBE). As a service company Menatel is selling calls per minute,Menatel products are local minutes, national minutes, mobile minutes, andinternational or long-distance minutes.1-2. MENATEL STRUCTURE AND ORGANIZATIONWith a centralized management style Menatel structured into five main divisionsheaded by corresponding Director and five Branches allocated all over Egypt, to formsimple flat functional organizational structure. Technical division activities aremanaging all technical issues related to Menatel payphones (installations,maintenance, and the payphones management system), coordination with allsubcontractors, and managing the Branches. Commercial division activities areadvertising, cards direct and indirect distribution, customer hot line, payphonelocations determination, and sites owner management. Financial and administrativedivision activities are preparing financial statements, business plan, budgets, andpayroll sheets, recruitment, training, and cash and contracts management. Businessdevelopment division activities are handling assignments and projects to improveMenatel performance, and to define and build major business indicators. Logisticdivision activities are managing security, premises, vehicles, transportation, andwarehouse, in addition to manage purchases and custom clearance. For the fivebranches there activities are the same as all Menatel division activities through thematrix and centralize Menatel organization as per the branch assigned area.EMBA CairoRennes International School of Business 1
  5. 5. 2. MENATEL COST SYSTEM2-1. GENERAL POLICYFor internal use Menatel apply contribution approach in building internal coststatement to track fixed and variable cost for making better decisions as thecontribution approach stresses the role of fixed cost in which Menatel is doing a goodjob. Such as, applying the rational- consumption policy on all the financial andadministrative expenses, revise all Menatel contracts with suppliers, contractors ordealers to reduce discounts and to get the best price possible. Menatel’s quality -beingthe secret of its distinctiveness- intact searching for a local efficient suppliers meetingthe quality standard required by Menatel as an alternate to some of the foreignersuppliers of some tools and equipment used in operation. Finally, freezing anyinvestment in new fixed assets and optimize the use of current fixed assets. Alsoreviewing all Menatel resources to achieve optimum utility and productivity.2-2. COST STRUCTUREMenatel cost statement (profit & loss statement) is structured in normal standard formas Menatel cost is classified as follows:2-2-1. REVENUEAll Menatel earnings by selling Local calls, National calls, Mobil calls, andInternational calls, in additional to others revenue.2-2-2. DIRECT COSTAll the costs that have direct relationship to Menatel cost objective (voice callminutes), whether it is variable cost that increase or decrease with the change ofminutes generated for costumers, such as payphone cards cost, and Telecom Egypt’sshare 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, andtechnical assistance.2-2-3. OPERATING PROFIT/ (LOSS)Which is Menatel revenue minus direct cost as in Menatel case the direct cost isconsidered as COGS?2-2-4. INDIRECT COSTAll the cost that has no direct relationship to Menatel cost objective, whether it isvariable, and in Menatel case the percentage of such cost is insignificant relevant tothe indirect fixed cost, or fixed and mainly Menatel consider all the indirect cost asfixed cost, such as salaries and benefits, travel tickets, travel allowance, bonus,transportation exp., technical assistance, office telephone bills, post and courier, bankcharges, advertising, gratitude, … etc.EMBA CairoRennes International School of Business 2
  6. 6. 2-2-5. OTHER EXPENSESSuch as financial expenses, depreciation & amortization, and total provision.2-2-6. CONTRIBUTIONWhich is Menatel revenue minus the summation of direct cost, indirect cost, and otherexpenses?2-2-7. TOTAL FINANCIAL COSTThis includes interest income, exchange differences, and deposit interest whether inLE, or $.2-2-8. NET PROFIT/(LOSS)It is Menatel revenue minus total expenses.2-3. COST FUNCTIONTo choose a reliable cost function the accountant team supported by the technicalteam, both teams, analyze Menatel activities in order to determine the right costdrivers, which are, in Menatel case, local minutes, national minutes, mobile minutes,and international minutes. For simplicity we allocate the cost to each category ofminutes according to each category percentage of the total minutes soled during thecorresponding calculated period or in other word volume percentage. Using theaccountant analysis Menatel accountants look to the accounting system forinformation about cost behavior (fixed or variable), they select a volume-related costdriver and classify each account as a variable or fixed cost. As an example the tablebelow shows costs recorded in jan-2001 in which, a total of 172,000,000 millionminutes 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 VariableCards Supply 2,667,000 2,667,000Network consumption 20,509 20,509Network Power Supply 139,139 139,139TE sharing revenue 3,283,000 3,283,000Mobile Sharing revenue 4,083,000 4,083,000Service Assistance & license fee 81,028 81,028Distribution 1,903,000 1,903,000Vehicles & Transportation 22,235 22,235Total cost of sales 12,198,911 2,165,911 10,033,000EMBA CairoRennes International School of Business 3
  7. 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 CONTROLMenatel policy is to control cost using management by exceptional policy,concentrating on areas that deviate from the plan and ignoring areas that are presumedto be running smoothly. Menatel accounting system records, measures, and classifiesactions in order to produce a monthly performance reports to be used to judgedecisions and the productivity of Menatel divisions and managers. By comparingactual results to budgets, these reports motivate managers to achieve the budgetedobjectives, also spur Menatel to investigate exceptions-items for which actual resultsdiffer significantly from budgeted amounts. The accounting department preparesmonthly a performance reports for each divisions at Menatel. Department heads andtheir superiors use this report to help evaluate how effectively and efficiently thedepartment is operating. Their focus is on variances. The table below shows aperformance 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 20,237,146O&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 2,885,108Network 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 20,692 125,769Network power supply Planned 84,600 84,600 84,600 84,600 84,600 84,600 507,600 Achieved 139,139 145,580 149,244 153,724 162,151 170,609 920,447TE 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 20,662,817Mobile 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 28,504,636EMBA CairoRennes International School of Business 4
  8. 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 81,800 491,000Distribution 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 12,911,356Vehicles & 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 32,244 152,163Personal 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 92,747 531,778Management 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 2,847,260A & 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 1,086,550Transportation 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 40,355Insurance 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 22,319 105,1582-5. DECISION MAKING WITH CVP ANALYSISOne of the obstacles facing the business community in Egypt and of course Menatelas well is the devaluation of the local currency and the increasing demand on theforeign currency. Which caused an unexpected increase in variable cost per unit andunavailability of hard currency?2-5-1. MENATEL NEW TARIFFSMenatel `s revenue relies on the tariff of the calls made by customers using Menatelpublic payphones, the greater portion of this income comes from the local andnational calls, using CVP analysis Menatel choice was to increase the tariff (minuteprice) 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 – fTo decide what to do to obtain the same profitability i.e. P1 = P2 whereP1 = is Menatel profit before variable cost increase.P2 = is Menatel profit after variable cost increase. (Sp-Vc) U – F = (Sp – Vc) U – FKnowing that no change in fixed cost and for the same number of units. (Sp – Vc) ----1 = (Sp – Vc) ---- 2EMBA CairoRennes International School of Business 5
  9. 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 findthat, Sp = 0.12 LE2-5-2. MENATEL NEW 15 LE CARDIn this approach and as a result of the market studies and researches, we found thatMenatel 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 thatthis card consists of 10 LE total revenue and 2.5 LE total variable cost per unit andMenatel sales are 1000 units. This is before the devaluation of the exchange rate, butafter the devaluation the cost per unit raised to 4.5 LE causing a decrease in netincome, contribution margin and the profit as the tables show. Total Per Unit Total Per UnitSales (1000 unit) 10,000 10 10,000 10Less: Variable cost 2,500 2.5 4,500 4.5Contribution margin 7,500 7.5 5,500 5.5Less: Fixed cost 2,500 2500Net Income 5,000 3,000This is mainly why we thought of producing a new face value to the market toincrease the profitability margin, and to fill the gap of the increase of the expenses dueto the devaluation of the exchange rate, the table shows the results. Total Per UnitSales (1000 unit) 15,000 15Less: Variable cost 4,500 4.5Contribution margin 10,500 10.5Less: Fixed cost 2,500Net Income 8,000EMBA CairoRennes International School of Business 6
  10. 10. Simply the variable cost for one pound revenue of the ten-pound face value card is0.25 LE, by introducing the 15 LE face value card to the market Menatel reduce theone pound revenue to 0.16 LE which means that the net income, and the contributionmargin increased even more than the case before devaluation. Still we do not want ourposition in the market to get affected; also we do not want to loose our Black Horsefor nothing. This is why Menatel thoroughly planned the whole operation ofproducing and following up this new face value card before the 10L.E.card call offfrom the market to guaranty the success of the whole operation.EMBA CairoRennes International School of Business 7