2011

Decision Making: Accept Or Reject

Fahd Hussain, Fatima Ikram, Sana Abid, Saniya Raza, Urooj Tariq
Company: Gloria Jean s Coffees

ACKNOWLEDGEMENT This research report has been prepared during Spring 2011 at Bahria University, Islamabad in fulfillment of Managerial Accounting [ACC-260] project. It was arguably one of the most thrilling experiences of this semester and we would like to acknowledge all those people who helped us throughout and made this work possible. Thanks to Allah for giving us the skill as well as the will to survive with our head held high throughout the last four months. To our parents and family who have supported us, our salutes! To our teacher, Sir Shahzad Butt, for giving us chance and polishing us manifold. It is undoubtedly through his excellent supervision and knowledge during the whole process that has helped us in coming up with this report.

To Mr. Ismail Tariq, Ms. Rabel Bhurgri, and rest of the people, for giving time and cooperating during the whole process.

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Table of Content Page Number I. Chapter One ± Introduction Problem Statement««««««««««««««««««««««««3 Purpose«««««««««««««««««««..«««««««««.3 II. Chapter Two ± Methodology«««««««««««««««««.««.6 Sample size««««««««««««««««««««««.««««...6 Research Instruments«««««««..«««««««««««.«..«««6 Scope and Limitations««««««««.«««««««««««««..«6 III. Chapter Three ± Analysis & Results Analysis««««««««««««««««««««««««««««.7 IV. Chapter Four ± Decision Problem Question««««««««««««««««««««««««««««8 V. Chapter Five ± Solution Solution««««««««««««««««««««««««««««10 VI. Chapter Six± Annexure Questionnaire««««««««««««««««««««««««««12

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Chapter One Introduction

Problem Statement: Decide and determine whether the project should be accepted or rejected. Purpose y y y To identify and explain all the relevant and irrelevant cost in an accounting problem. Finding any other considerations that can aid in the analysis. Get an insight into the ethical infringement that might occur.

Company Background Gloria Jeans is an Australian coffee shop. Australian owned and locally and internally operated, the Gloria Jean¶s Coffees family stretches far and wide across the world. It is a brew of passion, community and commitment to delivering the highest quality coffee to their guests that unites the Gloria Jeans team in the same Vision ± to be the most loved and respected coffee company in the world. Gloria jeans has almost 7000 stores world wide. It is the second largest coffee chain in the world. Business Model The Gloria Jean's Coffees business model is a franchising system similar to many fast-food chains. Revenue Model Franchise owners have to pay franchise fees and royalties on their sales as well as operating costs.

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Corporate Social Responsibility (CSR) Gloria Jean's Coffees used to sponsor what was a Hillsong-related initiative Mercy Ministries, a pro-life charity. Peter Irvine was executive director of Mercy Ministries . "Gloria Jean's Coffees chose to support Mercy Ministries because there is a need in Australia for a dedicated charity that helps women with these difficult issues," said Peter Irvine, Co-Founder of Gloria Jean's Coffees. In mid-2009, Gloria Jean's Coffees International formed a charity, the GJCI "With Heart" Foundation, to support various international charities, including Compassion and Opportunity International. Criticism Gloria Jean's has recently been under fire in the media for the sugar and fat content of some of their products. Analysis of a regular 'Gloria Jeans Mocha Chiller Coco Loco' revealed it contained 95.5 g of sugar, which is 106 percent of an adult's recommended daily intake. They have also been criticized for failing to provide nutritional information to their customers.

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Chapter Two Methodology Sample Size Our sample size was n=1, we got to pay a visit at their outlet in F-6, Islamabad. We got to speak to the manager of the store, who later called upon their senior to provide us details on the acceptance and rejection. After the exchange of the required information we asked their senior if they have ever encountered any situation where they had to make a decision of accepting and rejecting an order. The response was surprising. He said plenty of times, almost at the end of every month. On further inquiry, he told us that since there are not a lot of renowned coffees shops in the locality of Islamabad, they believe they stand out and this is their competitive advantage. Research Instrument The Research Instrument that we used was an Interview. To be more precise, it was an unstructured interview, since answers to our queries required details. Scope and Limitations Scope y y y This study can help all those who are in dire need of earning a comprehensive knowledge about acceptance and rejections of business proposals. It can also help students to get a grip on carrying out research on accounting problems It can enlighten the concerned about the ethical issues and dilemmas that are encountered by accountants.

Limitations y y This research could have been strengthened if viewpoints of others in Gloria Jeans Coffee house were taken. This study was faced with a time-constraint. Therefore, more time can be spent to find out the nitty-gritty.

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Chapter Three Analysis and Results After our visit to Gloria, we found out that in the business world, something which is more important than carrying out the business is the budget and resources. The manager made it very obvious to us that cost, sales and profit should be of utmost importance to a business holder. When we further inquired, we came to know that it is important to know what cost is relevant to the business and what is not. Pertinence of a cost plays a vital role in a decision problem. He further elaborated how every decision requires different values and data. So significance of relevant and irrelevant costs cannot be undermined. We also had an encounter with their accountant, who is a graduate from Muhammad Ali Jinnah University. His encounter made things more clear, since he was familiar with the accounting terms that we were referring to. The data that was given to us by the accountant was very informational. The accountant referred to two main clauses as cardinal. y Bearing on the future The problem at hand was made clear with this first principal of decision making. The accountant told us that all those costs that have occurred in the past are irrelevant to a decision since they are orthodox and will not be catered in the present situation. Different under competing alternatives It is also important to see that the information which is being considered as relevant must differ among other alternatives. If they do not, they violate the principle and hence the tag of relevancy associated with them stays no longer.

y

Furthermore, the manager pointed out how costs should be dealt with. He made us familiar with the term ³sunk cost´ through various helpful examples. He said that it is important to ignore the costs that have already occurred, which is a sunk cost since it violates the first clause of decision making, not bearing on the future. He mentioned in clear terms to first identify the sunk cost and not include the Sunk cost in our decisions no matter what.

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Decision Problem Question Gloria Jeans makes coffees for extreme wild coffee lovers. Its manufacturing plant has the capacity to make 9000 cups of coffee each month. Current monthly production is 6500 cups of coffee. The company normally charges Rs. 165 per cup of coffee. Variable cost and fixed costs for the current activity level of 75 percent of capacity are as follows: Variable costs: Manufacturing: Direct labor ««««««««««««««««««Rs. 275,000 Direct material ««««««««««««««««.. Marketing ««««««««««««««««««.. 162,500 87,500_

Total variable costs ««««««««««««««. Rs. 525,000 Fixed costs: Manufacturing ««««««««««««««««..Rs. Marketing ««««««««««««««««««... Total fixed cost ««««««««««««««««.. 175,000 75,000 250,000

Total costs ««««««««««««««««««.Rs. 775,000 Variable cost per unit «««««««««««««.. Fixed cost per unit ««««««««««««««... Average unit cost «««««««««««««««« Rs.100 «50 Rs.150

Gloria Jeans has received a special order for 1200 cups of coffee at Rs.90 per cup of coffee from LMKR (oil and gas company). For this order, no variable marketing costs will be incurred. Ismail Tariq, a management accountant with Gloria Jeans, has been assigned the task of analyzing this order and recommending whether the company should accept or reject it.

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Required:

1: What are the costs that will be relevant to Ismail Tariq¶s analysis of the special order being considered by Gloria Jeans. 2: Determine if Gloria¶s should accept the special order. Compute both the new average unit cost and the incremental unit cost for the special order and then explain your answer. 3: Discuss any other considerations that Ismail could include in his analyses of the special order. 4: what steps could Ismail Tariq take to resolve the ethical conflict arising out of Rabel¶s insistence that the company avoid competitive bidding?

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Chapter five Solution Part no. 1 ‡ The relevant cost in the analysis of special order by Gloria Jeans are those expected future costs which are applicable to a particular decision ‡ This means the cost that will differ between the alternatives of accepting or rejecting the order, will be considered as a relevant cost. ‡ Since the order is being directly received by Gloria Jeans, so variable marketing cost is irrelevant, because the additional marketing costs will not be incurred under this order. ‡ ‡ Only the variable cost of direct labor and direct material are relevant The fixed cost is not relevant because no additional capital investments are needed to full fill this special order. ‡ Also the firm is operating 35% below the full capacity and will be certainly able to cater to this order. Part no. 3 Other considerations that Ismail Tariq should include in his analysis of the special order that has come up are y It is possible that problems can arise with other customers that would eventually pressure Gloria Jeans for similar treatment. y The future customer potential of the Landmark Resources (LMKR) can generate additional revenue Part no. 4 y Ismail Tariq can take various steps to resolve the ethical conflict that might be arising out of Rabel¶s insistence that the company avoid competitive bidding. These steps could be: y He should resort to the company¶s established policies regarding these situations.

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y

It might be possible, that such policies are non-existent, or if the conflict does not get resolved, in such case, it is advisable that Ismail talks with his immediate manager¶s supervisor.

y

It is also possible that the manager¶s supervisor might be involved in this gimmick, so it is advisable for Ismail to step further and get to speak to the higher authorities which might include the board of directors.

y

Also Ismail can clarify this situation by consulting an advisor, who can advise him on the possible courses of actions that he can take.

y

Ismail can also do a popular phenomenon of bringing the issue into limelight, he can resort to external whistle blowing and catch an eye of media and other affiliations.

y

The last option could be none other than putting a resign and submitting an informative memorandum to the board of directors.

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Chapter Six Annexure Questionnaire

I.

Have you ever encountered a situation where you had to accept or reject a bulk order?

II.

What steps did you take to accept that order?

III.

What factors need to be considered while making an accounting decision?

IV.

How important is it to look upon at the relevancy of a cost?

V.

Are there any ethical quandaries that should be catered in making a decision?

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