BUS239- Week 1 Real World Views solution guide to 1.1, 1.3, 2.2 and 2.

1.1

REAL WORLD VIEWS 1.1

Chartered institute of management accountants (CIMA) – activities and skills

Question

1. Provide more detailed illustrations for each of the first four items in the first category of the above
list of how the management accountant can be of assistance in an organization with which you are
familiar.

Outline answer

1. Advise managers about the financial implications of projects

Management accountants aim to provide information to help managers make better decisions by
providing financial information on the profitability and risks to be considered when evaluating
alternative projects. The final decision will be taken by senior managers based on the information
provided and the advice given by the management accountant. The role of the management
accountant tends to be as an information provider rather than a decision-maker, although the
management accountant is likely to have a very significant influence on the decisions made by senior
management.

Explain the financial consequences of business decisions

Besides providing written reports on the financial consequences of the alternatives decisions being
considered the management accountant should also verbally explain and interpret the information
provided to senior managers. In particular, the management accountant acts as an advisor by
providing business support to mangers relating to the financial and the non-financial consequences
of alternatives being considered.

Formulate business strategy

A business strategy relates to the courses of action that must be taken to achieve an organization’s
overall objectives. Management accountants are frequently members of the senior management
team that identify those strategic options that have the greatest potential for achieving the
company’s objectives. In order to make an informed choice regarding the alternative strategies
management accountants generate data relating to alternative strategies. For example, information
may be generated relating to:

• The projected growth rates of the alternatives being considered

• The market share the company is likely to achieve

• The profits for each alterative being considered.

Monitor spending and financial control

To monitor performance, the management accountant provides feedback information in the form of
performance reports relating to activities for which managers are responsible. These performance
reports compare actual
spending with planned spending at regular intervals so that managers can take corrective action to
ensure that future spending/outcomes conform with planned spending/outcomes. Alternatively, the
plans may require modification if the comparisons indicate that the plans are no longer attainable.

1.3

REAL WORLD VIEWS 1.3

Changing product life cycles: Consumer medical devices

Questions

1. Do you think the costs of the electronic components in an iPod/iPad are more or less than those in
a medical device like a blood pressure monitor?

2. Would decreasing the product life cycle of medical devices, or medical devices being more like
consumer electronics pose any risks for manufacturers?

Outline answers

1. The costs of components in a typical consumer electronic device (like an iPod) are likely to be
much less than those of medical devices, as they are likely to be produced in larger volumes and are
subject to less rigorous testing and development.

2. One possible risk could be less time to full test components for fitness of purpose. Another risk
could be the product is not matched to patient needs, as less time may be available for testing/
prototyping. There may also be less time to building adequate fault tolerance, redundancy and user
interfaces. These risks need to be weighed-up against the benefits of a faster time to market and/or
the improved patient benefits.

2.2

REAL WORLD VIEWS 2.2

Cost structures in the airline sector

Questions

1. Do you agree that the variable cost associated with a passenger can be zero? Can this be said for
both low-cost and traditional carriers

2. What options do more traditional carriers have to improve their fixed cost base?

Outline answers

1. The view that the variable cost is zero is most likely not true. However, a view could be formed
that the variable cost is negligible or close to zero. It could be argued that traditional airlines who
offer services such as free meals to passengers incur more variable costs as passenger numbers
increase on a flight.

2. A greater proportion of fixed costs for all airlines is likely to lie in aircraft purchase costs and
aircraft operating costs (such as regular maintenance). Other fixed costs include the typical fixed
costs of any business, such as administration costs. If a more traditional airline wishes to decrease its
fixed cost base without impacting on service, it could for example lease rather than purchase
aircraft. This may imply that some elements of maintenance and/or

re-fitting of aircraft may be suffered by the ultimate owner of the aircraft. Another possible option is
to increase the use of technology. For example, carriers like American Airlines send a bar-coded
boarding pass to smart phones – cutting out check in costs such as staff and printing cost.

2.5

REAL WORLD VIEWS 2.5

Incremental and marginal costs: Marginal costs of downloadable products

Questions

1. Do you agree the marginal cost of downloaded software or music is nil?

2. What marginal costs, if any, might be incurred by the provider of the servers where
software/music is downloaded from?

Outline answers

1. It could be argued that the cost of software support is a marginal cost. This may be the case
particularly in the case of telephone support available with some software products.

2. It could be argued that each download increases the internet bandwidth and server processing
capacity and these are marginal costs that could be passed on to customer (i.e. software developers,
music firms etc). Arguably, these costs might also be construed as marginal for each individual
purchaser too. However, the marginal cost is so small, it is likely to be immaterial and hence ignored.

Chandres Tejura