ACCT 5000 Intermediate Management Accounting

Semester 2 2015

ACCT 5000 Intermediate Management Accounting Portfolio Case Study

Background: Emerald Entertainment Group
Emerald Entertainment Group (EEG) was founded in Perth in 1998. The company started as a result
of a diversification of investments from its parent company in Singapore. EEGs initial investment
portfolio consisted of entertainment venues such as clubs and restaurants. Johnny Wong, the
marketing department manager of EEGs parent company in Singapore was sent to Perth to manage
and grow business operations of EEG. Although Johnny had extensive experience in marketing and
business expansion, he had no prior experience in accounting and cost control. EEG thus engaged
the services of an accounts officer, Vanessa Costello, to assist with keeping accounting records.
Vanessas job scope consisted of basic data entry such as recording of revenues and expenses (eg,
supplier invoices and other company expenditures) onto a basic spreadsheet. No internal
management reports were generated and these figures were provided to an external accountant
who then prepared financial reports to ensure compliance with regulatory reporting standards.
Pricing of products and other investment decisions were largely based on Johnnys intuition and
understanding of the market. Due to favourable economic conditions brought about by the mining
boom, the company experienced significant business growth. Its revenues tripled from an initial $2
million a year to $6 million and money was readily available. Johnny was viewed favourably by the
management in Singapore due to his performance and was thus given much autonomy in managing
EEG. As such, Johnny invested excess cash into several other unrelated businesses. By the end of
2013, the company had business interests in shopping centres, agricultural farms, markets,
restaurants, cafes, clubs and a real estate agency.
However, the state of economy rapidly deteriorated in 2014 due to a significant slowdown in the
resources sector. This had a considerable impact on revenues of EEG and the company started
experiencing financial difficulties, such as the inability to meet supplier payments on time. In 2015,
due to financial constraints, EEG wanted to consolidate and determine the financial viability of its
various businesses. However, Johnny was unsure of how this can be done as he did not have
sufficient information to assess the performance of each business.
Johnny thus decided to employ William Brown, a chartered accountant to assist with sprucing up the
accounting records and overall management process. Specifically, William was tasked to determine
management accounting information required to assist Johnny in assessing the viability of the
various business interests of EEG.
Required:
Assume you are William Brown, and that you had identified several issues that need to be raised
with the management of EEG.
You are required to submit two (2) reports to management of EEG to address the various issues
identified. In your submission, you will be expected to use examples that are specific to this business
to present and argue your points. You should not just provide a textbook summary of the theory and
principles.

ACCT 5000 Intermediate Management Accounting

Semester 2 2015

Please read the Guidelines available on Blackboard prior to writing up your reports. There are
strict requirements as regards formatting and layout).

For Report One (Issues 1 and 2) (10 marks):

Issue 1:
The accounting records managed by Vanessa Costello were rather basic and not always complete.
These records mainly consisted of costs of raw materials. As such, the company had no clear idea of
what it cost to produce most of the items sold in their various businesses beyond the purchase cost
of raw materials. As the growth of EEG happened during the mining boom, there was always money
in the bank to meet commitments and finance new projects. Johnny has always believed that his
investment decisions were sound since the financial reports (as prepared by the external
accountant) typically showed EEG generating positive net income. Besides, he was far too busy to
bother with what it cost to produce an item or provide a service, so long as it was doing well (as
indicated by money in the bank).
In your submission to Johnny Wong and the management of EEG,
1. Discuss the current no product-costing policy, and present and argument in support of
undertaking an appropriate product costing system (note that you are not required to
detail a specific product-costing system)
2. Also, explain why financial accounting reports may not be a suitable replacement for
managerial accounting information and reports per se. Remember to provide example
specific to EEG.

Issue 2:
Recognising the diversity of activities that existed within EEG, you believe that the implementation
of Activity-Based Costing will assist in improving costing accuracy of products and services.
In your submission:
1. Explain the major differences between the traditional costing approach and the ActivityBased Costing (ABC) approach, (you are not required to explain the detail steps in
implementing ABC), and
2. Briefly explain some of the general signs that might exist in the various business of EEG that
might warrant a need to consider moving to an ABC approach. (Bear in mind that an ABC
approach primarily affects the way overhead costs are allocated)

ACCT 5000 Intermediate Management Accounting

Semester 2 2015

For Report Two (Issues 3 and 4) (10 marks):

Issue 3:
Johnny Wong made most business decisions regarding new ventures and new products and services
based primarily on his intuition and business instincts. Although Johnny did consider costs, this
was generally not a big factor in his decisions. You are concerned that this approach to decision
making coupled with an insufficient level of understanding of the relationship between business
activities and the cost of these activities (cost behaviour) will ultimately result in financial ruin.
Include in your submission:
1. A discussion on the benefits to EEG arising from a thorough understanding of how costs
behave; and
2. Explain briefly some methods of deriving a cost function, as well as explain the difficulties
that may be faced in gathering information to carry it out.

Issue 4:
In trying to encourage Johnny Wong to make informed decisions, and for the company to become
proactive in the pricing of products and services, you are keen to introduce Cost-Volume-Profit
analysis to be able to predict the effects that changes in volume, costs and prices have on profits.
In your submission:
1. Include an explanation of the analysis techniques to achieve this, particularly in the light of
such a diverse range of products and services sold by EEG, and
2. Explain the difficulties that may arise from the assumptions necessarily made in undertaking
such an analysis.

NOTE:
Report 1 covers Issues 1 and 2
Report 2 covers Issues 3 and 4
Due dates are as detailed in the Program Calendar of the Unit Outline.