Management Accounting
Your Report With your analysis complete, you are ready to present
your findings. For better organization, you decide to
divide everything into three sections: product costing, spe-
cial orders, and performance evaluation.
Students will include the following in their case study:
1. Prepare a draft memorandum for Smith to present to
her colleagues and management that gives recommenda-
tions for changes and discusses their benefits for the
company as a whole.
2. Prepare a draft of an executive summary of the entire
memorandum (Parts 1-3).
Part 1: Product Costing
1. Develop a glossary of terms and definitions to be used
by Smith in her presentation and discussions to ensure
consistency and mutual understanding of terms. In addi-
tion to definitions, provide a brief description of the
applicability of terms to Fine Foods. The glossary should
include, but not be limited to:
◆ Cost object
◆ Cost driver
◆ Product vs. period
◆ Fixed vs. variable
◆ Direct vs. indirect
◆ Incremental and common
◆ Relevant vs. irrelevant
◆ Controllable vs. Noncontrollable
◆ Dual allocation (sometimes called departmental)
◆ Volume allocation
◆ Activity-based allocation
Table 2: Contribution Margins and Operating Profit
Gross sales
(Standard discounts)
(Activity discounts)
(Special discount activities for customers)
Net sales
(Variable manufacturing cost)
(Fixed manufacturing cost)
(Freight out)
CONTRIBUTION MARGIN 1
(Media)
(Sales promotion)
CONTRIBUTION MARGIN 2
(Marketing and sales)
CONTRIBUTION MARGIN 3
(Top management)
(Business administration)
(Information system)
(Human resources)
(Supply chain)
(Production)
(External logistics for finished goods)
(Markup – Manufacture expenditures)
(Other fixed costs)
CONTRIBUTION MARGIN 4
(Structural costs)
(Total depreciation)
OPERATING PROFIT
2. Write a draft of a memorandum that Smith can present
to her colleagues and management to support her case. The
memo should include, but not be limited to, an analysis of
current product costing approaches used at Fine Foods,
Inc., changes she should recommend, and the extent to
which the recommended changes would resolve her concerns.
Part 2: Special Orders
Write a draft of a memorandum that Smith can present
to her colleagues and higher management that focuses on
what Fine Foods calls special orders. The memo should
include, but not be limited to:
◆ A description of the accounting and other consider-
ations that should be considered with respect to special
orders.
◆ A brief definition of the terms “by products” and
“joint products” and the extent to which these items
apply to special orders at Fine Foods, if at all.
◆ Identification of all the benefits that Fine Foods
receives special orders.
◆ An analysis of the way Fine Foods, Inc. handles its
special orders and any recommended changes
Part 3: Performance Evaluation
1. Develop a glossary of terms and definitions to be used
by Smith in her presentation and discussions to ensure
consistency and mutual understanding of terms. In addi-
tion to definitions, provide a brief description of the
applicability of terms to Fine Foods. The glossary should
include, but not be limited to:
◆ Types of responsibility centers:
• cost centers
• revenue centers
• profit centers
• investment centers
◆ Computation methods of monetary amounts to
evaluate performance:
• contribution margin
• operating profit
• return on investment
• residual income and similar value-added
approaches, such as EVA™
◆ Agency costs
2. Prepare a draft of a memorandum for Smith to pre-
sent to her colleagues and management that includes, but
isn’t limited to:
◆ What roles do performance-evaluation and reward
systems play in organizations? Discuss individual vs.
team-based performance evaluation in this context. Are
these roles relevant for all types of organizations and
employees? To what extent, if any, do these roles apply to
Fine Foods?
◆ Discuss basic concepts of performance evaluation,
particularly results control. Discuss issues of financial vs.
nonfinancial performance in this context.
◆ What types of responsibility centers are the SMUs in
Fine Foods? Are these appropriate types of responsibility
centers for Fine Foods? Why or why not?
◆ Identify potential agency costs that might occur
within Fine Foods. Discuss performance measurement
(monitoring) and incentive systems as mechanisms to
decrease agency costs at Fine Foods. Identify and discuss
any recommendations to implement a reward system.
Analyze the extent to which your recommendations
would solve the issues that concern Smith and would
decrease agency costs.
◆ Analyze the performance evaluation approaches at
Fine Foods. Identify and discuss any changes you might
recommend. Analyze the extent to which these changes
would resolve the issues raised by Smith.
