Q1. As a lead in a successful consulting firm, you are about to vis...

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Q1. As a lead in a successful consulting firm, you are about to visit with a COO (chief operating officer) of a high profile service firm. The COO has asked you to help fine-tune the recently installed ABC system. The controller set up the ABC system by allocating overhead on the basis of four drivers: general square footage, service area utilities, marketing area copier costs and property tax assessment. The COO would like a critique of the current system, as well as any other potential benefits that could be achieved with an ABC system. FIRST, provide the COO a careful explanation of how ABC works. THEN, provide feedback on the existing ABC system. FINALLY, explain how ABC can help a company move from a stage 1 cost management system to a stage 3 or 4 cost management system.

Q2. As the lead in a successful consulting firm, you are faced with a challenge from one of your clients. Your client suggests that transfer pricing is an effective tool to avoid paying exorbitant income taxes, but there is little benefit to using transfer pricing as a management tool. Also, this client has taken a considerable number of economics courses, and believes that the transfer price should be based on the marginal cost. FIRST, explain how a system of transfer pricing works, and the available options for setting a transfer cost. NEXT, discuss whether marginal cost is an appropriate transfer price. FINALLY, explain to the client why transfer pricing can be an effective management tool.

Q3. As the lead in a successful consulting firm, you are faced with a challenge from one of your clients named Mike Jensen. Mike suggests that your suggested implementation of a standard costing is useless, since the actual costs are what get reported on the financial statements. Given that Mike Jensen an important client (and likely to win a major award in the future), FIRST explain to Mike how a standard costing system works. NEXT, explain to Mike why you understand his concerns about using budgeted figures in standard costing. FINALLY, explain how standard costing can help manage his strategic business units.

Q4. During lunch, you are having a brief discussion with a class visitor, Strategic Cost Management. This class visitor is a former CPA, and has spent significant time on Wall Street in the investment market. The class visitor says to you: “That Rodgers guy is pretty funny, but I don’t believe in this whole ‘Balanced Scorecard’ thing he was yelling about… It seems to me if the firm is earning a comfortable ROI, everything else will take care of itself.” FIRST, describe to the visitor how the Balanced Scorecard works. NEXT, discuss with the visitor any potential limitations of ROI analysis. FINALLY, provide some justification for the implementation of the Balanced Scorecard across any firm.

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QUESTION 1:
How does ABC work?
Activity-based costing or ABC system can be literally taken for one to initially understand its essence. Hence, it is a manner of costing methodology wherein activities are taken into consideration. These activities, with respect to ABC, are cost drivers or the reasons for the incurrence of costs to be allocated. With respect to costs, it is important to emphasize the scope of ABC – manufacturing overhead costs. Thus, this system is concerned with the allocation of overhead costs to be able to come up with accurate product costs.
Feedback on the existing ABC system
As a service firm, the existing ABC system may be evaluated in terms of how relationships between overhead costs (specifically administrative expenses) and chosen activity drivers are drawn. For instance, square footage, service area utilities, and property tax assessment, in my opinion, may not be very useful or relevant cost drivers of administrative expenses. These activities have a more likely dominant fixed component to them. To illustrate, square footage remains the same regardless of the level of overhead costs; a period where service-related but indirect costs are high cannot be justified by or attributed to a constant square footage. The same logic may be applied with service area utilities and property tax assessment. The increase in levels of business activities – specifically providing services to customers – may not demonstrate a corresponding increase in utilities expense or property taxes paid. As for marketing area copies costs, this information as a cost driver may have to be further analyzed to determine a significant relationship with any type or kind of overhead cost.
The bottom line is, a correct choice of cost drivers is more likely made when change in frequency or quantity of such cost drivers has a linear or significant relationship in the...

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