ACCA – F5 - SECTION C

Q.260:

(A) One of the main reasons why BS cars is becoming expensive to operate is the amount of data
which has been and is being accumulated. For an EIS, there is requirements of large amounts of
information to be easily accessible – the data should be on-line and as up-to-date as possible.
This has disc storage implications which increase over time as the volume of information
increases.
The larger the database the more processing power is required to run the basic straightforward
operations, another increased expense maybe a requirement to invest in a new hardware as the
existing one is proving to be inadequate.
Excess data then that is required costs more.
Information requirements of the executives using EIS change over time and it costs to change
the way in which the system was setup originally. The maintenance and support costs also
increase over time partly due to the original design and partly due to information requirements.
Use of inefficient hardware increase the time it takes to extract the information which in turns
increases the network costs. The line rental increases.
If information is being input into the system by staff, then staffing cost also increases or the cost
of another agency hired to do the work.

(B) Management’s decision to concentrate on internally-produced information will have serious

implications.

Market Information

Competitor information is a must have thing for companies. Internally-produced information

provides a restricting image to the company. Management needs to know the worth of their
product in relation to those of competitors in terms of quality, design etc.

Customer Information

Loss of customer information will have a damaging effect on the company. Any organization
needs to know about its market, both existing and potential, to survive and grow. it is short-
sightedness to assume that the market share a company has will remain forever in this ever-
changing market.

The industry

Industry-specific information is lost. Societies established for particular industries provide useful
information and comparisons about all manufacturers in that industry.

The effect on company’s information system

 The system is only providing information that is relevant at an operational level and is not
suitable for making decisions about the whole organization.
The effect on company’s products

Unaware of technological innovations. Products will lag behind the rest of industry. Danger of
‘reinventing the wheel’. Market opportunities would be forgone. Product pricing is defective
without external information.

The board’s decision appears to be misguided which in the longer term, may effects the
organization’s profitability and market share.

Q.261:

Unitary to divisionalised structure

 Each division will now require its own accounts.

 Financial as well as non-financial performance measurement.
 Internal and external income will have to be identified.
 External market information is required for the performance of the manager to be distinguished
from the performance of the business unit.

Central direction to empowerment

 Separate the transmission of the strategic and operational information as strategic information
will not be required by the empowered leaders but the data concerned with the day to day
management of the business.
 New reporting formats that are understandable to the team leaders. More detailed information
at more frequent intervals than that was required was previously.
 New control systems will be required to meet the needs of the newly empowered team leaders
and the senior management. Standardization must be ensured.

The shift to outsourcing

 New information systems will be needed to facilitate access to external providers of services
 Authorization/approval systems need to be developed.
 Monitoring systems will be needed.
 Financial appraisal systems may need to be installed

Expansion in part time and temporary employees

 Traditional personnel systems need to adapt to the new situation.

 2 to 3 times greater number of employees. Can the existing system cope? Is there sufficient
storage and memory capacity?
 Maybe necessary to simplify systems to new staffing situation.
 Customers adopting JIT systems

 Previously a small/simple stock system would be sufficient. The advent of JIT puts the onus on
the company to replenish stocks immediately. Need for responsive inventory system.

Long print runs to high value low volume

 More complex, individualistic and diverse requirement. Modification of established ordering and
printing systems.
 High value permits lowers margin of errors and deficiencies in quality standards. This may entail
close monitoring and low tolerance systems being installed.

Q.262:

(A) There are different types of decision-making at different levels. Decisions can be classified as
structured, semi structured, and unstructured. Unstructured decisions are those in which the
decision maker must provide judgment, evaluation, and insights into the problem definition.
Structured decisions, by contrast, are repetitive and routine, and decision makers can follow a
definite procedure for handling them to be efficient. Semi structured decisions are those in
which only part of the problem has a clear-cut answer provided by an accepted procedure. In
general, structured decisions are more prevalent at lower organizational levels, and
unstructured decision making is more common at higher levels. The decisions made by rees
investments are going to classed as semi structured or unstructured.

(B) Decision support systems are software solutions designed to support managers making semi-
structured or unstructured decisions. Such systems are best suited to situations were part of the
problem is well understood, and hence can be automated, but part is not well understood and
the manger will have to use judgement to come to a final decision.
Decision support systems will usually consist of:
 Large database of information
 Problem exploration facilities (what-if and sensitivity analysis)
 Goal seeking or optimization functions
 Graphic tools
 In-built statistical, simulation and financial functions
A DSS could be useful for rees investments because investment decisions are mostly semi-
structured or unstructured. Hence a significant part can be understood by analysis of data.
However, Mark Rees will still be reliant upon his analysts correctly interpreting the information
and making appropriate judgements. The DSS is likely to be successful if the current investment
problems are caused by poor analysis of data rather than poor judgement or worsening
economic climate.
 (C) An expert system is the software model of the knowledge. Facts and reasoning of an
acknowledged human expert. The expert system software usually represents knowledge as a set
of inter-connected rules. Rules derived from discussions with experts as well as observing and
recording their decision-making behavior. Expert systems are a specialized form of a DSS.
An expert system consists of:
 A knowledge base of rules and facts.
 An inference engine
 A knowledge acquisition facility
 A knowledge presentation and explanation function

In Rees investments it would be possible to use expert system based on the knowledge and
expertise of Mark Rees. In this way, less accomplished analysts could use his expertise to help
them make their own investment decisions.

This maybe particularly attractive to mark rees because:

 The company was successful when he used this approach
 Standardization would be achieved

However, it has to be hoped that his approach is still valid in the changed economic
environment and that the past success was due to his expertise and not the favorable economic
climate prevailing at that time.

Q.263:

(A)

(i) The following types of information systems are available to manufacturing firms like
CDE:

A Transaction processing system (TPS) serves the operational level of the organization. Records
all daily transactions.

A Management information system (MIS) takes the bulk data from the TPS and develops it into
something useful to the management to support decision making. MIS is usually computer
based, making use of spreadsheets where “what if” analysis can be carried out.

An Enterprise resource planning (ERP) is a sophisticated MIS which covers the whole range of
the organization’s activities. ‘seamless integration of all the information flowing though the
organization’. A data warehouse is maintained of inputs from the TPS & MIS systems.

A Strategic enterprise management (SEM) system assists management in making high-level

strategic decisions. Tools such as Activity Based Management (ABM) and balance scorecard are
applied.
An Executive information system (EIS) or Executive support system (ESS) gives management
access to both internal and external data. Data can be used to assess the operations of the
organization and to scan general business conditions. Data for EIS is online and is updated in real
time to ensure integrity.

(ii) CDE is a substantially sized company, listed on the stock exchange, and operating in a
highly competitive and fast-moving business. It currently uses MRP II system to control
production scheduling and labour and machine utilization. This is satisfactory as far as
controlling day to day activities of the business but there is absence of information
being presented to managers for strategic and decision support purposes
I recommend that CDE moves towards an EIS system. This will enable managers to
integrate the data from the current MRP II systems with the known data about the
customers and suppliers. The managers will be able to see the view of the whole
business and will be able to drill down if they wish to see more detail on the contents of
any particular figure.
(B)

(i) The current management accounting system provides:

 A detailed annual budgeting exercise
 Standard costing for labour and material
 Production overhead recovery on the basis of machine hours

Labour and material costs are analysed timesheets.

CDE carries out traditional old-fashioned management accounting.
Annual budget is drawn up at the beginning of each year.
Overhead allocation on the basis of machine hours is arbitrary.
Standard costing is used which is appropriate in a mass production scenario. It is much
less appropriate in a JIT environment.

In conclusion, the current management accounting system in not altogether relevant to

the JIT environment such as at CDE.

(ii) The management accounting system should be improved by:

 Introduction of rolling budgets
 Replacement of current standard system with a “lean” management accounting
system focused on eliminating waste rather than building up inventories to
reduce unit production cost.
 Moving to ABC method of absorbing overheads rather than on the basis of
machine hours worked. This enables accurate costing and pricing decisions to
be undertaken.

The move to an EIS system should enable a more holistic view of decision taking by
management concentrating on adding value and satisfying customers rather than on the
pursuit of the accounting-based cost control.
Q.264:

a.
Explanation of system types

A Transaction processing system (TPS) serves the operational level of the organization.
Records all daily transactions. Information produced is mainly operational and tactical
and has no strategic value.

An Enterprise resource planning (ERP) is a sophisticated MIS which covers the whole
range of the organization’s activities. ‘seamless integration of all the information flowing
though the organization’. A data warehouse is maintained of inputs from the TPS & MIS
systems. Prepares specially designed reports. Both tactical and strategic.

Benefits of ERP system

Can provide performance data for multi-functional activities. Can be valuable for
activity-based costing, balance scorecard performance analysis and supply chain
management.
Provide better quality strategic information

Benefits of EIS system

Provide information to senior executives. Real time business scanning. Monitoring

performance of the organization. One-off file interrogations. Easy to use.

b.
Budgetary allocations

Budgeting in the past have been made using inefficient system. It has been to allow a 5%
to 10% increase in the budget allocation each year to allow for inflation and system
upgrades. This approach to budgeting inevitably builds ‘slack’ into the budget and
encourages wasteful spending.
System is weak because it assumes that the it is less satisfactory. It needs continuous
upgrades each year. A cost benefit analysis should be carried out.
An AB budgeting or zero-based budgeting approach should be used as it would prove to
be more effective.

Evaluation of Benefits

Difficult to measure quantitatively. Improvements in management information should

be considered (more information, more up to date information, more accurate
information and so on). Rough estimates of potential benefits can be made for example
on terms of revenue, cost savings or profits.
Q.275:

(A)
1) Waste Disposal Costs
Landfill taxes, disposal of raw materials and chemicals not used in the
production process. Fines for compliance failures such as pollution.
Use ‘mass balance approach’ to measure how much material is wasted in the
production process. Cost of packing is considered. How much packing a product
uses and what % of that packing is recyclable?
2) Water consumption costs
Pay for water twice; first to buy it and the second time to dispose it. Look into
the production process to see how much water is used and where savings can
be made.
3) Energy Consumption Costs
Switching production to night shifts when electricity is cheaper. Elimination of
wasteful practices and inefficiencies.
4) Transport and travel cost
EMA can help identify savings in terms of business travel and transport of
goods. Replacement of current vehicles with more fuel-efficient ones.

(B) EMA focuses on cost of energy and water. Uses standard costing to identify, analyze,
manage and hopefully reduce environmental costs in such a way that it benefits both the
organization and the environment.
EMA techniques could include the following:
 Input/Outflow Analysis
Records inputs and balances this with outflows on the basis that what goes in must
come out. If 100kg is input and only 80kg of materials have been produced then the
difference of 20kg must be accounted for in some way. For example, 10% of it has been
sold as scrap and 10% of it is a waste. By accounting for output in this way, both in
physical terms and at the end of the process in monetary terms too, businesses are
forced to focus on environmental costs.
 Flow Cost Accounting
Not only uses material flows but also the organisational structure. Makes material flows
transparent by looking at their physical quantity, their costs and their values. It divides
material flows into three categories: material, system & delivery and disposal. The
values and costs of each of these flows are the calculated. Aim to reduced the quantity
of materials as well as to influence a positive effect on the environment. It has a positive
effect on the business’ total costs as well.
 Activity-Based Costing
ABC allocates internal costs to cost centres on the basis of cost drivers that drive those
activities. In EMA context, it distinguishes between environment-related costs which can
be attributed to joint cost centres and environment-driven costs which tend to be
hidden in general overheads.
 Lifecycle Costing
Within the context of EMA, lifecycle costing is a technique that requires full
environmental consequences and therefore costs arising from the production of a
product to be taken account across its whole life cycle literally “from cradle to grave”.