Strategic Management Accounting: Adelaide Company Analysis Report

This report provides a strategic management accounting analysis of the Adelaide Company, focusing on its ability to sell mettwurst at a competitive price. It delves into the reasons behind Adelaide's cost advantage, including modern production facilities, ABC costing, and economies of scale. The report calculates the cost per stick of mettwurst under an absorption costing system and contrasts it with activity-based costing, explaining the potential inaccuracies of absorption costing. It identifies and evaluates non-value-added activities within the company's operations, recommending their elimination. The report concludes by assessing whether the company requires business process re-engineering or process improvement to eliminate these non-value-added activities, ultimately suggesting the need for business process re-engineering to achieve long-term strategic goals.

Running head: STRATEGIC MANAGEMENT ACCOUNTING 1
Strategic Management Accounting
Zhaoyu Zhang
S5031528

STRATEGIC MANAGEMENT ACCOUNTING 2
Strategic Management Accounting
Part A
1. Suggest some reasons why the Adelaide Company may be able to sell its
mettwurst at $5.50 over the longer term.
The Adelaide Company might be able to price its mettwurst at $5.5 for a long time
for a number of reasons. First of all, Adelaide has modern and advanced production
facilities, using modern manufacturing processes to reduce its production costs and is
much lower than Hans.
Second, Adelaide may have an ABC cost pricing system that uses high
technology to accurately understand the cost of producing mettwurst and can
effectively control the computational cost. Then it may not be a cost-based pricing
system. He may continue to improve and improve recipes to attract more consumers.
In the end, it may generate a larger annual volume than other companies and achieve
considerable economies of scale.
Additionally, there is a possibility that Adelaide Company may have identified
and eradicated several non-value-added activities from its supply chain that escalated
its overhead costs. Besides, may be able to sell its mettwurst at $5.50 over a long
period because of economies of scale. The company might increase the production of
mettwurst hence realizing significant economies of scale that enables it to achieve
substantial annual volumes. Lastly, Adelaide might avoid using cost-plus pricing
system.
Adelaide uses a more accurate way of determining the manufacturing overhead
expenses because it realizes the relevant relationship between various activity drivers
and the subsequent costs.

STRATEGIC MANAGEMENT ACCOUNTING 3
2. Calculate the cost per stick of mettwurst under the existing absorption costing
system.
First, we compute the cost per unit.
Cost per Unit=Target Selling Price/(1+Mark up)
=$7/1.4
=$5
Thus absorption cost per stick of mettwurst = $7.00 / 1.4 = $5.
3. Hans is convinced that Heidi's activity-based cost for the mettwurst is wrong.
Identify the likely causes of the difference between the absorption cost and the
activity-based cost per unit and explain to Hans why the absorption cost is
likely to be wrong.
Absorption cost systems often exaggerate the cost of high volume products, such
as mettwurst, and underestimate the cost of small batches. In other words, the cost of
mass production is much more efficient than small batch production, both in terms of
raw materials and labor. This is due to the use of quantity-based cost drivers to apply
manufacturing costs, when many manufacturing costs are not driven directly by
production but by other factors, such as the number of batches produced. Hans'
factory-wide rates assume that the management resources consumed by each product
are directly proportional to the amount of direct labor consumed.
In fact, different products may have different management consumption patterns,
which are not necessarily related to the amount of direct labor they need. High-
capacity lines like mettwurst tend to consume less overhead than average factory-
wide overhead rates, while low-volume products tend to consume more. High volume
products require lower than average top supports because they are easy to

STRATEGIC MANAGEMENT ACCOUNTING 4
manufacture and they are produced in relatively large batch sizes. The large size
means that the unit cost of the batch-related activities is relatively low.
Furthermore, fixed manufacturing overhead costs, which are also classified as
indirect manufacturing expenses, do not change with the production level (Averkamp,
2018). Some of these fixed manufacturing costs include rent, depreciation, insurance,
and salaries. In addition to that, manufacturing overheads can be applied using a
number of volume-based cost drivers (Almeida & Cunha, 2017).
4. Review the activities included in the bill of activities and identify any
candidates for elimination as non-value-added activities. For each activity,
explain why you consider it to be non-value-added activities.
Non-value added activities do not improve the value of the product from the
perspective of a customer or the company (Wu & Feng, 2013). Consequently, the
activity can be eliminated without causing any detrimental effects to the customer. It
is important to note some activities cannot be declared as non-value added activities
because there might be a possibility of decreasing the costs of these activities by
improving their efficiency. This includes operating Mincer, and Mixer and Pack meat
into Skin.
Activity The reason why the activity is non-
value added
Inspect Meat If the suppliers give quality assurance to
the customers, then the subsequent
quality inspections will be eradicated
without causing any harm to the
customer. This means that once quality

STRATEGIC MANAGEMENT ACCOUNTING 5
assurance has been guaranteed, then
incoming inspections are unnecessary,
hence non-value added.
Disposal of substandard meat This is a non-value added activity
because quality product assurance
automatically does away with the
possibility of having substandard meat.
Move to mincing room There will be no need of moving to
mincing room if the layout of the plant
was furnished, and automotive material
used in handling the activity.
Additionally, there will be no harm to the
customer.
Load Mincer There will be no detrimental effect to the
customer if the process included
automatic loading was enabled, or the
capacity of the Mincer was expanded.
Unload Mincer Similarly, there will be no adverse effect
to the customer if automatic loading was
enabled, or the capacity of the Mincer
was increased.
Move to mixing room Suppose the layout of the plant was
improved and automotive material used
in handling this process could be
eradicated with adverse effect to the

STRATEGIC MANAGEMENT ACCOUNTING 6
customer, hence the activity unnecessary.
Load mixer There will be no detrimental effect to the
customer if the process included
automatic loading was enabled, or the
capacity of the Mixer was expanded
Unload Mixer Similarly, there will be no detrimental
effect to the customer if the process
included automatic loading was enabled,
or the capacity of the Mixer was
expanded
Move to Packing Room There will be no adverse effect to the
customer if the process included
automatic loading was enabled, or the
capacity of the Mixer was expanded
Move to Smokehouse There will be no harmful effect to the
customer if the process included
automatic loading was enabled, or the
capacity of the Mixer was expanded
Move to truck There will be no detrimental effect to the
customer if the process included
automatic loading was enabled, or the
capacity of the Mixer was expanded
5. Does Schmidtke’s need business process re-engineering or process
improvement to eliminate its non-value-added activities? Explain

STRATEGIC MANAGEMENT ACCOUNTING 7
Seemingly, Schmidtke’s has been running as a family business over the years.
Throughout this period, the business has been operated using traditional business
activities, and most probably obsolete machinery. For the business to come up with
long-term strategies, and sustain its business operations in the long run, Schmidtke
must keep with the competition. Accordingly, the firm must come up with modern
approaches and acquire new equipment (The Economist, 2009).
Business Process Improvement (BPI) is a slow and continuous refinement of a
firm's business processes and policies. In the process, subtle adjustments are made to
the current procedures to cut down operating costs and improve efficiency. Business
Process Re-energizing (BPR) is a thorough business recreation to realize substantial
improvement in vital areas of business operation such as quality, costs, and delivery
(Finance Management, 2018).
In conclusion, Schmidtke needs business process re-energizing to eliminate its
non-value-added activities. BPR will spread the costs incurred over a more extended
period, and achieve relevant changes needed to give them a competitive edge in the
market (Saunders, 2017).

STRATEGIC MANAGEMENT ACCOUNTING 8
References
Almeida, A., & Cunha, J. (2017). The implementation of an Activity-Based Costing
(ABC) system in a manufacturing company. Retrieved from Science Direct:
The implementation of an Activity-Based Costing (ABC) system in a
manufacturing company
Averkamp, H. (2018). Introduction to Activity Based Costing. Retrieved from
Accounting Coach: https://www.accountingcoach.com/activity-based-
costing/explanation
Business process re-engineering. (2009, February 16). Retrieved from The
Economist: https://www.economist.com/news/2009/02/16/business-process-
re-engineering
Objectives Of Business Process Reengineering. (2018, June 5). Retrieved from
Finance Management: https://efinancemanagement.com/corporate-
restructuring/business-process-reengineering
Saunders, J. (2017, August 23). Getting Started With Business Process
Reengineering. Retrieved from Open Source Workflow & BPM Blog:
https://www.processmaker.com/blog/bpm/business-process-re-engineering/
business-process-reengineering-get-started/
Wu, P., & Feng, Y. (2013, February 12). Identification of non-value adding activities
in precast concrete production to achieve low-carbon production. Retrieved
from Graphic Products: https://www.graphicproducts.com/articles/value-
added-vs-non-value-added-activities/