LO 1 Demonstrate an understanding of management accounting systems Case Study

LO 1 Demonstrate an understanding of management accounting systems
Case Study 1 – Zoom Video Conferencing Co. – A ‘Game Changer’
The teleconferencing company Zoom has seen a massive increase in profits and has doubled its annual sales forecast, driven by a surge in users as more people work from home and connect with friends online during the coronavirus crisis.
The once-obscure Zoom Video Communications, rapidly emerged as the latest Silicon Valley gold mine, as its financial results depicts an astronomical growth turning it into a stock market icon.
Zoom’s boom has come despite privacy & security problems that enabled outsiders to make uninvited and sometimes crude appearances during other people’s video conferences.
Financial Performance of Zoom Inc at a Glance.-
Zoom Video Communications (NASDAQ:ZM) has been one of the biggest winners of pandemic-driven social distancing. Over the last 12 months, the share price has surged 220%, and the stock currently trades at 39 times sales and 154 times earnings.
This may have some investors asking themselves: is Zoom overvalued?
Fourth Quarter Fiscal Year 2020 Financial Highlights:
• Revenue: Total revenue for the quarter was $188.3 million, up 78% year-over-year.
• Income from Operations and Operating Margin: GAAP income from operations for the quarter was $10.6 million, compared to GAAP income from operations of $5.5 million in the fourth quarter of fiscal year 2019. After adjusting for stock-based compensation expense and related payroll taxes, non-GAAP income from operations for the fourth quarter was $38.4 million, up from $9.8 million in the fourth quarter of fiscal year 2019. For the fourth quarter, GAAP operating margin was 5.6% and non-GAAP operating margin was 20.4%.
• Net Income and Net Income Per Share: GAAP net income attributable to common stockholders for the quarter was $15.3 million, or $0.05 per share, compared to GAAP net income attributable to common stockholders of $1.2 million, or $0.01 per share in the fourth quarter of fiscal year 2019.
Some Issues that are worrisome
The biggest issue with Zoom is its valuation. It currently trades at over 320 times forward earnings and about 45 times this year′s revenue estimate. Those ″cult stock″ valuations are too high relative to Zoom′s growth, and could deflate if its growth decelerates, or if it loses users to rival platforms, or it stumbles over new security and privacy issues.
Zoom′s second major issue is trust. It falsely claimed that the platform offered end-to-end encryption, which it wasn’t true as some of its own employees could still access the video streams., while quietly revising its ″daily active user″ count to ″daily active participants,″ since the former metric actually counted the same user’s multiple times. Those missteps raised troubling questions about the way Zoom markets itself to consumers and investors.
Zoom′s security flaws — which include routing streams through Chinese servers, failing to block attacks on video conferences, and phishing scams – that have already tarnished its brand. Several countries — including the U.S., Germany, Australia, and Taiwan — have all asked their government agencies to stop using Zoom. Big companies like Google and Space X have also ordered their employees to stop using Zoom.
Fast forward to 2025, Zoom′s user growth could decelerate once the pandemic is conquered or if people go back to work or if bigger rivals continue to expand their competing platforms, then Wall Street′s expected projections of 34% revenue growth on a consistent basis could prove just too high given that the stock could crumble under the weight of its hefty valuations in the years ahead.
Excerpts from source: CSI Market, techrepublic.com, The Venture Capitalist, Yahoo Finance)
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Based on the above case study, students are required to critically evaluate how management accounting systems and management accounting reporting are integrated within Zoom Communications Company future business plans, when responding to the following questions: –
Evaluate the concept of ‘management accounting’ and give the essential requirements of different types of ‘management accounting’ systems, as well as different methods used for ‘management accounting reporting’ while examining the evolving landscape of higher Revenues, mind numbing Operating Profits(EBIDTA) being reported by video teleconferencing platforms, amidst the Covid-19 pandemic. With all the major players offering “freemiums or additional time” to individuals, corporates, educational institutions and celebrities critically evaluate the benefits of ‘management accounting systems’ and ‘management accounting reporting’, by assessing how these systems if integrated within the Zoom Video Conferencing Company’s organizational processes can lead to improved operational efficiencies.
(Answers will be graded for application within the company’s context)
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LO 2 – Apply a range of management accounting techniques.
Case Study 2 – Graphics Systems Limited
It was discovered that Graphics Systems Limited uses Standard Costing and Absorption Technique in its costing activities. It was also found out that the company was fulfilling its objectives since there the profits of the firm were increasing, sales were increasing, customers had increased and due to the fact that brand loyalty had been achieved. It was lastly found out that there is a strong significant relationship between Costing Techniques and the firm’s effectiveness since there was increased revenue, increased profitability, increased customer base, proper inventory management and improved corporate responsibility.
It was concluded that Graphics Systems Limited uses Standard Costing and Absorption Technique in its costing activities and therefore there was increased revenue, increased profitability, increased customer base, proper inventory management and improved corporate responsibility which validated a strong significant relationship between Costing Techniques and the firm’s effectiveness.
It is recommended that Graphics Systems Limited should try out some more costing techniques such as direct costing and Marginal Costing. The researcher recommended that firms should manage company resources through the use of costing activities because it can help to bring about accountability and transparency through increased corporate responsibility. This can help to improve on the effectiveness of Graphics Systems Limited and other related organizations world over. Studies recommended that Graphics Systems Limited should increase on number of staff with relevant knowledge on costing activities since it was seen that the nature of costing determines the firm’s performance.
Costing techniques are methods for ascertaining cost control and decision-making purposes, (CIMA, 2009). They can be applied to make-or-buy decisions, negotiation, price appraisal and assessing purchasing performance. They include; Marginal Costing; a technique of costing in which allocation of expenditure to production is restricted to those expenses which arise as a result of production, e.g., materials, labor, direct expenses and variable overheads. Fixed overheads are excluded in cases where production varies because it may give misleading results. The technique is useful in manufacturing industries with varying levels of output. Direct Costing; the practice of charging all direct costs to operations, processes or products and leaving all indirect costs to be written off against profits in the period in which they arise is termed as direct costing. The technique differs from marginal costing because some fixed costs can be considered as direct costs in appropriate circumstances. Absorption or Full Costing; the practice of charging all costs both variable and fixed to operations, products or processes is termed as absorption costing.
Focus on:
Prepare an income statement that depicts the changes in profit values & individual cost lines for company in case by calculating costs applying absorption costing and marginal costing scenarios. Do you believe that costing plays an important role in managing sales & eventual profitability, if so, use a range of accurate management accounting techniques in producing appropriate financial statements? Produce a range of financial reports that interpret data accurately for a range of business activities in the organization by recommending effective costing techniques are used at Graphics Systems Ltd? Critically evaluate the relationship between costing techniques and the effectiveness of graphics systems limited?
Use the scenario below for calculations:
Selling price per unit 10.00
Direct (variable) materials per unit 3.00
Direct (variable) labour per unit 3.00
Fixed manufacturing cost per period 300,000
Non-manufacturing costs per period 100,000
The company makes one product. Budgeted activity is for 150,000 items to be made each period. There were no opening inventories at the start of Period 1, and all production is finished within each period.
Assume actual manufacturing fixed costs are € 300,000 for each period.
Here is a schedule of production and sales for each period 1-6 inclusive.
The company makes one product. Budgeted activity is for 150,000 items to be
made each period. There were no opening inventories at the start of Period 1,
and all production is finished within each period.
Assume actual manufacturing fixed costs are £300,000 for each period
The company makes one product. Budgeted activity is for 150,000 items to be
made each period. There were no opening inventories at the start of Period 1,
and all production is finished within each period.
Assume actual manufacturing fixed costs are £300,000 for each period
Period 1 2 3 4 5 6
Sales (000) 150 120 180 150 140 160
Production (000) 150 150 150 150 170 140
(Answers will be graded for application within the company’s context)
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LO3 Explain the use of planning tools used in management accounting.
LO4 Compare ways in which organizations could use management accounting to respond to financial problems.
Case Study 3 – Hertz Gone Off Road Forever.
Hertz Global Holdings Inc., the car-rental company founded with a dozen Ford Model Ts over a century ago, filed for bankruptcy after sweeping travel restrictions and the global economic collapse destroyed demand for its vehicles.
Hertz, originally known as Rent-a-Car Inc., was founded in Chicago in 1918. It was operating 12,400 locations worldwide as of February.
The Chapter 11 filing in Delaware allows Hertz to keep operating while it devises a plan to pay creditors and turn around the business. The second-largest U.S car-rental-car company does not need debtor-in-possession financing for now, according to a person familiar with the matter, because it has more than $1 billion cash on hand. Hertz’s court petition listed about $25.8 billion in assets and $24.4 billion of debts, and its biggest creditors include IBM Corp. and Lyft Inc.
“With the severity of the Covid-19 impact on our business, and the uncertainty of when travel and the economy will rebound, we need to take further steps to weather a potentially prolonged recovery,” Paul Stone, Hertz’s Chief Executive Officer
After the coronavirus pandemic decimated revenue, the car renter sought relief from lenders and a bailout from the U.S. Treasury Department. But while it managed to negotiate a short-term reprieve from creditors, it wasn’t able to work out longer-term agreements.
While all travel-related companies have been hurt by the pandemic, a big part of what’s weighed on Hertz is its strategy of owning or leasing a large portion of its fleet outright instead of acquiring them through buyback agreements with manufacturers. Hertz typically responds to falling demand by selling cars from its fleet but has been hit especially hard by the drop in prices at used-car auction rates as well.
Hertz said it has enough cash for now to support its operations, which include Hertz, Dollar, Thrifty, Firefly, Hertz Car Sales, and Donlen. But it might need to raise more, perhaps through added borrowings while the bankruptcy process moves forward
″Hertz may have little choice but to scale down its operations and sell assets to pay down its significant secured debt,″ Joseph Acosta, a partner in the bankruptcy practice at the law firm Dorsey & Whitney, said in an email. ″Hopefully, the restructuring expenses will not bury the company in the process.″
The company began laying off workers to preserve cash in March as emergency measures to contain the virus halted business and leisure travel. Hertz disclosed on April 29 that it had missed substantial lease payments related to its rental cars.
Source – @2020 Bloomberg L.P & Gulf Business News
Given the above scenario, you will now prepare a ‘formal report’ while evaluating how financial accounting tools would appropriately help resolving problems in leading organizations to attain organizational success, while analyzing the below points. You are required to research and discuss the concepts critically.
• Evaluate the merits and demerits of different types of planning tools while analyzing their application in preparing budgets and forecasts so that adequate steps could have been taken to avoid the bankruptcy situation at Hertz. Compare and analyze how by adopting effective management accounting systems, company can now respond to financial issues leading to attainment of sustainable success.
• Discuss and analyze the shortcoming in the present management accounting practice leading to the failure of the travel company.
• Evaluate and recommend how planning tools for accounting respond appropriately to solving financial problems which can help Hertz to regain operational continuity & sustainable success. (Please research and respond appropriately).
(Answers will be graded for application within the company’s context)
Note: Your research should be referenced using the Harvard referencing, system. Please also provide a bibliography using the Harvard referencing system. The recommended word limit is 7000-8000 words.

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