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Term Paper on Use of Management Accounting Tools & Techniques in Tiffany Corporation

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Term Paper on

Use of Management Accounting Tools & Techniques in

Tiffany Corporation

Submitted To

Dr.Yousuf Kamal

Associate Professor

Course No: 4202 (Introduction to Cost & Management Accounting)

Department of AIS

Faculty of Business Studies

University of Dhaka

Submitted By

Group Name – The Tiffany’s

Evening MBA

Department of AIS

Faculty of Business Studies

University of Dhaka

DATE OF SUBMISSION

August 24, 2015

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Group Profile

Group Name – The Tiffany’s

NAME ID

NAUSHEEN AHMED 114-27-036

RUMANA AKTER 114-27-021

MD. ABU BAKER 112-22-069

MAHMUDA PARVIN 113-24-079

NAZMUN NAHAR 113-24-057

MOHAMMAD SAKHAWAT HOSSAIN 113-24-048

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Letter of Transmittal

August 24, 2015

Dr.Yousuf Kamal

Associate Professor

Department of AIS

Faculty of Business Studies

University of Dhaka

Subject: Submission of Term Paper on “Use of Management Accounting Tools & Techniques in

Tiffany Corporation”

Dear Sir

It is our greatest pleasure that, we have got the opportunity to submit the term paper on the topic cited

above as part of our course curriculum. In preparing the term paper, your kind cooperation helped us

doing the task accurately. This project helped us tremendously to understand the implication of

theoretical knowledge in the practical field.

We have undertaken our sincere effort for successful completion of the term paper. However, this

paper may have shortcomings which we hope will be considered cordially. With due respect and

humble submission, we are submitting the report to you for evaluation.

Sincerely Yours Group Name - The Tiffany’s

Evening MBA

Department of AIS

Faculty of Business Studies

University of Dhaka

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Acknowledgement

We would like to pay our gratitude to all of the related books, authors and related Web Sites that

helped us a lot for the completion of this term paper. At first we would like to acknowledge the

Almighty, who helped us every time and was with us and gave us moral support and strength every

moment.

We are especially grateful to our honorable course teacher Dr. Yousuf Kamal, Associate Professor,

Department of AIS, for giving us valuable suggestions and support to prepare this term paper.

Without his advice and support, it would not be possible for us to prepare this report.

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Executive Summary

The accounting literature identifies quite a number of specialized fields of accounting. Among them,

financial accounting is the original field of accounting. Its main purpose is to record transaction details

in monetary terms and prepare financial statements and reports in accordance with GAAP. The other

part of accounting, Management accounting provides necessary information to assist management in

decisions making and management control. Small business owners are faced with countless decisions

every business day. Managerial accounting information provides data-driven input to these decisions,

which can improve decision-making over the long term. Small business managers can leverage this

powerful tool to help make their business more successful by understanding how management

accounting benefits common business decision contexts.

Significant advances in automating routine transaction-related accounting tasks, combined with a strong

corporate emphasis on value creation, have signaled new directions for managerial accounting. This

trend had been building since the 1980s and accelerated in the mid-1990s. The thrust of the changes

have been to make management accountants strategic partners and analysts in management decision

making, rather than simply suppliers of data. Many companies now expect their managerial accounting

staff to assist in developing strategies to enhance shareholder wealth and to participate on cross-

functional teams with managers from operating departments throughout the organization, among other

things. If the old analogy was supplying endless data for management to sift through, the new analogy

has been providing value-added information that is directly to the point and suggests options that

management might not otherwise have considered. Indeed, at some companies the work of management

accountants has increasingly been labeled "finance" rather than "accounting" to suggest a broader set of

skills and expectations.

In this paper, we have applied basic management accounting’s tools and techniques for determining

unit product cost, total overhead cost, total cost, and potential selling price for our new product.

Moreover, management accounting tools helps us to know the point of sales where our target profit is

zero which is well recognized as break even analysis. Also, management accounting helps conduct

sensitivity analysis for the emerging situations. So, all these things help us in making judgments and

measuring performance. So, Management accounting is fundamental in strategic planning. When a

business is looking to make a strategic decision, for example, whether to develop a new product line,

acquire another business or expand into other countries, the management accounting can assist to take

appropriate decisions.

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Table of Contents

Contents

Page No.

Letter of Transmittal

3

Acknowledgement

4

Executive Summary

5

Introduction & Methodology

7

Overview of The Company

8

Description of the Product & Segmentation Strategy 9-14

Theoretical Overview of Management Accounting Tools & Techniques

15-16

Use of Management Accounting Tools & Techniques in Tiffany Corporation 17-20

Recommendations 21

Conclusion

22

References

23

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Introduction & Methodology

In this chapter, we tried to describe the origin of the report, objective of the report, the methodology,

scope and limitations of the report.

Origin of the Report

The Evening MBA program under the department of Accounting & Information System offers a course

named “Introduction to Cost & Management Accounting” (Course No. 4202) which requires every

group to submit a report on a specific topic determined by the course instructor. The report under the

headline “Use of Management Accounting Tools & Techniques in Tiffany Corporation” has been

prepared towards this purpose.

Objectives of the Study

There are several objectives to conduct the study, which are:

1. To study about the latest management accounting tools and techniques

2. To determine the appropriate price by analyzing the cost drivers and other financial aspects

3. Using of proper management accounting technique to determine the break even sales point

4. To develop deep understanding about how a costing system works in an organization

Methodology

After being instructed by our honorable course teacher of Dr. Yousuf Kamal, we decided to make a

report on the ‘Use of Management Accounting Tools & Techniques in Tiffany Corporation’. At first,

we all the group members selected a new product for our business model and then developed the

costing system for that product. Our plan for making this report was firstly to collect data about

segmentation and analyze them attentively for finding out the necessary information related to our

report and finally to arrange all of those data systematically. For arranging all the data, we have

followed some procedures and steps such as at first we have given an idea of our company. Then we

discussed about the product. Then we decided the possible market segmentation of our product

“SOLAR MOBILE” and then developed the appropriate cost and management techniques for our

company.

Limitations of the Study

The information regarding the competitors is difficult to get.

Delays in getting the necessary materials department to collect information from different sources

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Overview of the company

The Tiffany Corporation is a mobile set manufacturing company.

Description of Business

This business will produce quality cell phone sets and serve them to consumers.

Financing

Initial financing requested is a BDT loan to be off over 5 years. This debt will cover factory equipment,

supplies, leased vans, office space, office equipment, advertising and selling costs.

This report is confidential and is the property of the entrepreneur. It is intended only for use by the

persons to whom it is transmitted, and any reproduction or divulgence of any of its contents without the

prior written consent of the company is prohibited.

Board of Directors

Name Designation Function

Nausheen Ahmed CEO

Managing & Controlling the overall activities of the

organization

Rumana Akter Director Looks after the activities of Marketing Division

Md. Abu Baker Director Looks after the activities of Finance Division

Mahmuda Parvin Director

Looks after the activities of Employee Relation & People

Engagement Division

Nazmun Nahar Director Looks after the Procurement Division

Mohammad Sakhawat

Hossain Director Looks after the Production Division

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Description of the Product

Our Mission

“Our mission is to provide value at an economic cost, progress in diversity, and continue to

contribute to the growth of industrialization in Bangladesh by being the market challenger”

Description of the products

We are going to introduce 3 different models each of which will provide different levels of

utilities to the consumers. Basic qualities of the products are:

1. Solar energy receiving system.

2. High definition signal receiver.

3. Solar charger.

4. Water resistant structure.

Model based facilities are given below:

Serial no. Model code Utilities

1. TR-66

1. Solar energy

receiving system

2. High definition

signal receiver

3. Solar charger

4. Water resistant

structure

2. TR-77

1. Solar energy

receiving system

2. High definition

signal receiver

3. Solar charger

4. Water resistant

structure

5. Internet browsing

facilities

6. High quality solar

module that can

charge the battery

within 20 minutes

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3. TR-88

1. Solar energy

receiving system

2. High definition

signal receiver

3. Solar charger

4. Water resistant

structure

5. Internet browsing

facilities

6. Solar module that

can charge the

battery within 7

minutes

7. Steel body

8. MP3 & MP4 player

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Segmentation Strategy

Marketing Research Information for developing segmentation strategy may necessitate conducting some marketing

research. There may involve:

-

Since these costs are high enough. We gathered information from primary and secondary

sources. What we found, are shown here.

Steps in preparing the segmentation strategy

1) Defining the Business situation

The market of cell phone sets is so vast. And we see that consumers’ choice is changing. As

our business is a new venture, which is just waiting to receive approval from all the related

parties, in fact, now, our business plan is simply a written document. Because, yet, we didn’t

go to production, even if set up the plan. Our plan is, after getting the approval of all the related

parties like: financiers, suppliers, etc, we will launch our venture.

Scope of the market

The demand for changes in the market is ever rising. Therefore, certainly, if we concentrate our

business heavily into something that will provide newer utilities at a less price, then we hope

that we will be able to capture a significant portion of total market share.

2) Defining the target market

At first fixing “Target Market” very much important for our introduction. Defined target

market usually represents one or more segments of the entire market.

The target customer of our product “TR-77” is the young adults, who are adventurous

in nature & like to experience attractive things. Their age range is 22-26.

The target customer of our “TR-66” model is those people who are not interested about

the design of the cell phone but eager to get comprehensive advantage from the use of

his or her cell phone set.

-Buyer of the product

-charging price

-proper distribution channel

-effective promotion strategy

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Our target customer of TR-88 is those people, whose mind setup is determined, and

attitude toward life is clear-cut and have enough money in hand.

When we set up our target market for each and every product, we just took it into our

consideration that every single person’s life style, psychological need, social status, and

instant demand, future expectation of life is different.

3) Considering Strengths and Weaknesses

-For consideration of strengths and weaknesses in the target market we regarded as-

Strengths

Financial support from financiers.

Proper distributional system.

Proper training program for skilled sales team.

One stop solution operation plan.

Competitive pricing strategy.

Strong Corporate Image.

Weakness

Shortage of concentrate

Quality issue

Demand gap

Outdoor campaign is not sufficient enough

Lack of cash may be seen in hard time.

Opportunities

New package in market

New offer

Newly introduced Machine

More export

Strong distributional channel

Given sample to the customer

Threats

Threat of established cell phone company

Different package offer from different company.

5) Defining Marketing Strategy and Action Program

Five important elements of marketing mix are: Product, Price, Distribution, Promotion and Packaging.

Defining marketing strategy means taking decisions which reflect on these marketing mix variables.

There are different marketing strategies which will be discussed later.

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SEGMENTATION

Geographic

Demographic

Segmentation Process

Since our products acceptance to users depends on its utilities & price, we choose to the potential

market geographically & then demographically. It means:

Geographic segmentation

We have divided the whole Bangladesh into 8 major areas according to the environment & sunlight

variation. According to the areas’ nature, we are offering our phone models.

Bogra

Khulna

Barisal Noakhali

Dhaka 1-2-3

Sylhet

Mymensingh

Chittagong

Sales and distribution

For example:

Northern part of Bangladesh gets sunlight in almost all the year & electricity is not at all available in

everyplace of that region. So, we will provide TR-66 for that region.

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Geographic/

Demographic

Area with

almost

continuous

electric supply

Area with

moderate

electric supply

Area without

electric supply

High income TR-88 TR-88 TR-77

Moderate

income TR-77 TR-66 TR-66

Low income TR-66 TR-66 TR-66

Similarly we will segment our market to improve our market share. Products will reach the consumers

from our hands through the following way:

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Theoretical Overview of Management Accounting Tools &

Techniques

For fulfilling the purpose of management accounting there are already many techniques and tools

prevail in the market which are as follows:

Cost Volume Profit (CVP) Analysis

CVP analysis examines the behavior of total revenue, total costs and profit as changes occur in the

output level, selling price and variable costs per unit or fixed costs. Cost volume profit analysis is a

powerful tool that helps manager understands the relationships among cost, volume, and profit. CVP

analysis focuses on how profits are affected by the following five factors – selling price, sales volume,

unit variable costs, total fixed cost and mix of product sold.

Theory of Constraints (TOC)

In 1985, Goldratt published The Goal, a novel about manufacturing. Goldratt devised a set of nine rules

that summarize his principles of optimized production. In order to have the philosophy of The Goal

cover more than just manufacturing operations, Goldratt’s emphasis on bottlenecks led him to codify

his approach to problem solving into a structured process he called the Theory of Constraints.

Six Sigma

Six Sigma can be defined as a specific methodology to develop and implement quality improvements

in an organization’s critical processes by rigorously measuring and identifying variations from customer

specifications in those processes and adjusting them or creating entirely new processes to keep

variations at an acceptable level. Specifically, Six Sigma seeks to focus an organization on – defining

customer/user requirements, aligning processes to meet those requirements, using metrics to minimize

variations in processes and rapidly and permanently improving processes.

Job Order Costing (JOC)

Job Order Costing, generally, it is the allocation of all time, material and expenses to an individual

project or job. Specifically, JOC is normally software based and provides for budgeting, forecasting,

collecting and reporting on the expenditure and revenue associated with specific projects or jobs. A job-

order costing systems is used in situations where many different products are produced each period.

Job-order costing is also used extensively in service industries. Hospital, law firms, accounting firms,

movie studios, advertising agencies and repair shops, for example, all use a variation of job-order

costing to accumulate cost for accounting and billing purposes.

Process Costing

Process costing is a method of cost and management accounting applied to production carried out by a

series of chemical or operational stages or processes. Its characteristics are that costs are accumulated

for the whole production process and that average unit costs of production are computed at each stage.

A process costing system is used in situations where the company produces may units of a single

product for long periods.

Absorption Costing

Absorption costing is the method under which all manufacturing costs, both variable and fixed, are

treated as product costs with non-manufacturing costs, e.g. selling and administrative expenses, being

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treated as period costs. Absorption costing treats all manufacturing cost as product coasts, regardless of

whether they are variable or fixed. The cost of a unit of product under the absorption costing method

consists of direct materials, direct labor, and both variable and fixed manufacturing overhead.

Variable Costing

Under variable costing, only those manufacturing cost that varies with output are treated as product

costs. This would usually include direct materials, direct materials and the variable proportion of

manufacturing overhead. Fixed manufacturing overhead is not treated as a product cost under this

method. Rather, fixed manufacturing overhead is treated as a period cost and like selling and

administrative expenses, it is expensed in its entirety each period.

Standard Costing

Standard costing is an accounting system designed to properly allocate costs of direct labor, indirect

labor, materials, overhead, and selling / general / administrative accounts on a unit basis for the purpose

of accurately costing products and the subsequent control of those costs in managing the production,

marketing, purchasing, and administrative functions of the business.

High Low Method

This is mainly a statistical tools also used in management accounting to find out the relation between

fixed cost and variable cost. That means this method used in management accounting to determine the

cost equation of the company. Under this method per unit variable cost is the difference of cost of

higher activity and cost of lower activity divided by the difference of higher and lower activity.

Least Squares Regression Methods

This method is also like the high low method, used to find out the relation between fixed cost and

variable cost. But, unlike the high low method, uses all of the data to separate a mixed cost into its’

fixed and variable components by fitting a regression line that minimizes the sum of the squared errors.

Break Even Analysis

The break-even point for a product is the point where total revenue received equals the total costs

associated with the sale of the product (TR = TC). A breakeven point is typically calculated in order for

businesses to determine if it would be profitable to sell a proposed product, as opposed to attempting to

modify an existing product instead so it can be made lucrative. Break even analysis can also be used to

analyze the potential profitability of an expenditure in a sales-based business.

Operating Leverage

The operating leverage is a measure of how revenue growth translates into growth in operating income.

It is a measure of leverage, and of how risky (volatile) a company's operating income is. Normally it is

calculated as contribution margin or CM (sales revenue less variable cost) divided by net operating

income or NOI.

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Use of Management Accounting Tools & Techniques in

Tiffany Corporation

Main cost of producing Solar Mobile

Manufacturing Cost

Non-Manufacturing Cost

Manufacturing cost comprises of direct material, direct labor and manufacturing overhead which are as

follows for Tiffany Corporation:

Cost Type Details

Manufacturing Cost

Direct Material Cost of the main raw materials like solar panel,

solder iron, heat gun, heat shrink tubing, wire

stripper etc.

Direct Labor Salary and wages of assembly line workers

Manufacturing Overhead Salary of the factory manager, heat & light,

property taxes, depreciation, insurance of

manufacturing facilities

Non-Manufacturing Cost

Selling Cost Cost of Advertising, sales commission,

depreciation of sales facilities etc.

Administrative Cost Executive compensation, insurance, depreciation

of office equipment etc.

Cost Behavior

The main cost identified above can be separated into variable, fixed and mixed category

Cost Type Details

Variable Cost Direct material, direct labor, packing material

costs

Fixed Cost Executive salaries, utilities, insurance,

depreciation, advertising.

Mixed Cost Sales salaries and commissions, clerical

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Determination of Product Cost

Cost Driver: Batch wise labor hour of the three main department

Way of Cost Drivers' Data Capturing: Labor log books to total labor hours

The labor hour activities in Tiffany Corporation are as follows:

The Labor Hour Activities

Code

Product

Name

Batch

Size

Batch

No

Wiring &

Tubing

Dept.

Assembling

Dept.

Finishing

Dept.

Hour

Hour

Hour

061037

TR-66

3990

DB9017

4

3

2

061038 TR-77 1670 DB9018

4

3

2

061039 TR-88 877 DB9019

4

3

2

Production cost per unit under Job Order Costing System

During the production period, overhead absorbed for the batch of production at the rate of Tk. 25000,

30,000 and 20,000 per Labor hour for wiring & tubing department, assembling department and

finishing department respectively.

Determination of Total Overhead

Departments

(1)

OH rate

(2)

Tk.

No. of

working

days

(3)

No. of working hours

per day

(4)

Total OH

(2x3x4)

(5)

Tk.

Wiring & Tubing 25,000 26 4 2,600,000

Assembling 30,000 26 3 2,340,000

Finishing 20,000 26 2 1,040,000

Total 5,980,000

Determination of Unit Production Cost Type of Cost TR-66 (Tk.)

Tk/

TR-77 (Tk.) TR-88 (Tk.)

Raw material

1,629 4,012 7,982

Packing material 376 898 1,710

Factory overhead

1,498 3,580 6,818

Product cost per unit

3,503 8,490 16,510

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Determination of Potential Selling Price

While determining the potential selling price, Tiffany Corporation sets 7% profit margin on total cost.

The details are shown in the following table:

Determination of Potential Selling Price Type of Cost TR-66 (Tk.)

Tk/

TR-77 (Tk.) TR-88 (Tk.)

Production Costs Per Pcs

3,503 8,490 16,510

Fixed Costs 1,224 1,224 1,224

Profit (7%)

330 680 1,241

Selling Price

5,057 10,394 18,975

Break Even Analysis

Tiffany Corporation currently sells 8,000 pcs of TR-66, 6500 pcs of TR-77 and 5000 pcs of TR-88. We

also determined our break-even point so that we will be able to know the point where our target profit is

zero. Details are in the following table:

Determination of Break-Even Unit Sales Type of Cost TR-66 (Tk.)

Tk/

TR-77 (Tk.) TR-88 (Tk.)

Fixed Costs (a) 8,000,000 8,000,000 8,000,000

Target Profit (b)

0 0 0

Unit CM (c) 1,554 1,904 2,465

BE Unit Sales (a)/(c)

5,148 4,202 3,245

Scenario Analysis

As our organization deals with electronic and electrical things, the increase or decrease in the price of

these accessories is a common phenomenon. However, as a new concern, we have to grab attention of

the customers for which we may need to increase our monthly advertising budget. So, both of the

situations may affect net operation income of the company to some extent. We can conduct a scenario

analysis for Tiffany Corporation in the following aspect:

Scenario Impact

5% increase in the price of electronics and

electrical accessories

How will Net Operating Income be affected? 2% increase in the price of electronics and

electrical accessories & Increase of yearly

advertising budget by Tk. 1,000,000

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Scenario-1: 5% increase in the price of electronics and electrical accessories

Particulars Present (Tk.) 5% increase in cost (Tk.)

Tk/

Sales 202,892,000 202,892,000

Variable Expense

165,759,000 174,046,950

Contribution Margin 37,133,000 28,845,050

Fixed Expense 8,000,000 8,000,000

Net Operating Income

29,133,000 20,845,050

If price of electronic and electrical items is increased by 5% then NOI is reduced by Tk. 8,287,950.

Scenario-2: 2% increase in the price of electronics and electrical accessories & Increase of yearly

advertising budget by Tk. 1,000,000

Particulars Present (Tk.) Increase in Adv. cost (Tk.)

Tk/

Sales 202,892,000 202,892,000

Variable Expense

165,759,000 169,074,180

Contribution Margin 37,133,000 33,817,820

Fixed Expense 8,000,000 9,000,000

Net Operating Income

29,133,000 24,817,820

If price of electronics and electrical accessories is increased by 2% and yearly advertising budget is

increased by tk. 1,000,000 then NOI is reduced by tk. 4,315,180

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Recommendations

The solar mobile is designed with a view to decrease the battery charging time, making it capable of

charging more than one battery at a time and getting the desired current from the PV panel. Our

software is able to eliminate costs. Though it will be a new product in the market, our cost effective and

user friendly feature of this phone will easily grab the attention of the customers. However, after

passing the introduction stage, we will focus on adding more features for our phone to target the

premium customers. Also, we will increase our profit margin. After reaching the saturation stage, we

will follow differentiation strategy to cope up with competition since new comers may enter into the

market and make it more competitive.

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Conclusion

Management accounting or managerial accounting is concerned with the provisions and use of

accounting information to managers within organizations, to provide them with the basis to make

informed business decisions that will allow them to be better equipped in their management and control

functions. As management accounting has no statutory bindings like financial accounting a manager

can select any techniques and tools he / she likes. Sometimes this selection depends on situation and

sometimes on organization’s strategy. But choosing the right strategy for the organization is a key

factor. We have applied some of the management accounting tools and techniques for our new product

which enables us to fix the right price for the product and make appropriate decision for present and

future growth. Management Accounting is one of the most important area for any kind of organization.

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References

Books

Managerial Accounting by Garrison/Noreen/Brewer

Websites

1. http://www.cgma.org/Resources/Tools/essential

2. http://www.slideshare.net/stroke/cost-management-accounting-techniques

3. http://accounting-simplified.com/management/introduction/functions.html

4. http://www.smccd.net/accounts/nurre/online/chtr3.htm

5. http://www.accountingtools.com/job-costing