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    Julie Smith David
    Managerial Accounting
    question posted April 26, 2010 by Julie Smith David, last edited May 22, 2012 
    12888 Views, 40 Comments
    Managerial Accounting

    I'm working on Phase 5 of a project, and can't figure out how to go from costing to 5 year projections.

    date needed:
    May 13, 2010


    • Robert E Jensen

      In the Store Point and Click:  Another Example of Technology Replacing Labor
      "Walmart Is Testing A Scan-And-Go iPhone App That Could One Day Replace Cashiers," by Alyson Shontell, Business Insider, September 1, 2012 ---

      In Rogers Arkansas, Walmart recently asked employees and their friends with iPhones to test out a new self scan-and-go app. It's one of a few mobile initiatives Walmart is working on that could one day replace or aid its many cashiers.


      The test was put together by Walmart Labs. The app let employees scan items on their phones but not pay on the devices. Instead the app transferred all scanned items to a self-checkout kiosk.

      But Walmart has said it's working on a mobile payment network with other retailers that could rival current solutions like Google Wallet.

      Walmart spokesman David Tovar tells Reuters the company is "continually testing new and innovative ways to serve customers and enhance the shopping experience in our stores."

      Walmart's US stores spend about $12 millions on cashier wages per second, so an app like this could save the company a lot of money.

    • Robert E Jensen

      Is corporate budgeting is a time waster and a poor measure of performance?
      Do ERP systems help or hinder operating without a budget (not answered in the article below)

      "Freed from the Budget: Many companies see budgeting as a time-consuming exercise of limited value. Some are resorting to a radical fix: getting rid of the budget," by Russ Banham,  CFO.com, September 1, 2012 --- Click Here

      In his book Winning, General Electric’s Jack Welch famously griped: “It sucks the energy, time, fun, and big dreams out of an organization. It hides opportunity and stunts growth. It brings out the most unproductive behaviors in an organization, from sandbagging to settling for mediocrity.”

      “It” is the corporate budgeting process. This much-hated annual exercise in setting targets, doling out resources, and providing incentives for employees is the way nearly all companies run their shops. Even organizations that have adopted monthly or quarterly rolling forecasts as a more agile way of reacting to events still produce a budget, for the most part.

      Now, a few companies are doing what others fantasize about: getting rid of the budget altogether, stomping out the century-old process for good. Their guru is Steve Player, program director at the Beyond Budgeting Round Table, a learning network with more than 50 corporate members. For years, Player has railed against budgeting, which he excoriates as an expensive waste of time. A charismatic consultant and speaker, Player has his converts. Among them is Statoil, the giant Norwegian oil-and-gas company, with $90 billion in 2011 revenue and operations in 36 countries.

      Statoil did away with traditional budgeting in 2005, and decided in 2010 to abolish the calendar year in its management processes whenever possible. “Not only does a budget take too much time, it is a bad yardstick for evaluating performance,” contends Bjarte Bogsnes, Statoil vice president of performance management development.

      He explains that a budget creates the opportunity for “gaming” the system. “Managers are instructed to deliver on an easy-to-achieve target, told what resources they have to get there, and then are incentivized for hitting that number,” Bogsnes says. “It prevents managers from seizing opportunities to create value.”

      Statoil’s radical approach is shared by three other companies profiled below: Elkay Manufacturing, Holt CAT, and Group Health Cooperative. Kenneth Merchant, a professor of accounting at the University of Southern California’s Marshall School of Business, has closely followed the Beyond Budgeting phenomenon, and estimates that at least 100 companies across the globe are on the same path. “A lot fall by the wayside or don’t reach the end destination of no budget at all,” says Merchant, who is also the school’s Deloitte & Touche LLP Chair of Accountancy. “Nevertheless, there is definite value in doing away with the budget,” he adds. “Getting to this point is the problem.”

      Sensible but Unreliable Player doesn’t mince words about his disdain for the “B” word. Budgets, he asserts, can foster unethical behavior and conflicts of interest. “When companies tie incentive compensation to reaching budget goals, they create a huge conflict of interest,” he says. “Managers are incented to submit proposed budgets with low goals. Instead of reaching for outstanding performance, the budget process becomes a game of negotiating the lowest acceptable target, which is often based on assumptions outside the managers’ control.” The process also leads managers to hoard information, says Player, “since no one wants to share information that can be used against them.”

      Budgets are also based on assumptions that are frequently wrong. They cost a ton of money, eat up platefuls of time, are out of date by the time they’re produced, and tend to strip local managers of their accountability, since their plans must be squeezed into the company’s goals, Player says. As a method of cost control, budgets are wanting, since managers tend to spend every cent they’ve been allocated, fearing they won’t get the same allocation the following year.

      “It’s a management process that can kill the organization,” declares Player. “It’s part of the dumb stuff that finance does and should stop doing.”

      Continued in article

      Jensen Comment
      Operating without a budget sounds like a bad idea to me. Generally the budgeting process is where the major decisions are made.

      Bob Jensen's threads on managerial accounting ---

    • Robert E Jensen

      GM sets the Spark off
      "General Motors Raises Its Ante on Electric Cars:  The Detroit automaker will soon debut its first all-electric vehicle, a fast-charging vehicle that also rides well," by Jessica Leber, MIT's Technology Review, November 16, 2012 --- Click Here

      Why It Matters

      Initial sales of electric cars have been sluggish, so the next generation of the vehicles will be crucial for the future of the technology.

      Charged up: The compact electric Chevrolet Spark is due to hit dealerships in 2013.

      The Chevrolet Spark EV isn’t General Motors’ first pure electric vehicle—that would be the EV1, which was quashed in 2003. But this time around, GM is more serious about these vehicles.

      GM showed off the battery-powered car and let journalists make test drives this week prior to its debut November 28 at the Los Angeles Auto Show. Compact, powerful, and easy to maneuver, the Spark EV looks like a good next step for GM into plug-in vehicles. However, its price has yet to be revealed. That will be crucial, because there has been limited demand for costly electric cars that can’t go long distances without being recharged.

      The Spark joins a list of all-electric cars that includes the Nissan Leaf, the Ford Focus Electric, and Tesla’s Model S. Sales of these plug-in electric vehicles, as well as electric-and-gas models like the Chevy Volt, are important not only for the carmakers, but also to establish markets for advanced battery technologies and battery charging infrastructure.

      By 2017, GM wants to build as many as 500,000 cars a year with electrification technologies, said Mary Barra, senior vice president for global product development. That’s not trivial, considering that today GM sells nine million vehicles annually. In addition to the Spark EV, which will begin with small production runs for limited U.S. and Korean markets, GM plans to make plug-in hybrids like the Chevy Volt and cars with “eAssist technology,” which is a form of hybrid technology. However, Barra says, GM will focus mainly on developing plug-in technologies rather than the traditional gasoline engine hybrids, where Toyota and Ford have made larger investments.

      Even as GM plans to send the Chevy Spark EV to dealerships in the middle of next year, the company is still struggling with the Volt, which, unlike the Spark, has a small gasoline tank to extend its battery range. The Volt has had a slow start since its 2010 debut (see “As GM Volt Sales Increase, That Doesn’t Mean It’s Successful”). GM won’t be close to its goal of selling 60,000 Volts this year. Last month it sold fewer than 3,000.

      But the Spark could help justify GM’s earlier investments. Its electric powertrain, which will be manufactured in Maryland, borrows heavily from the Volt. GM engineers tinkered with the design to achieve more horsepower and faster acceleration. For example, they custom-shaped each square copper wire inside the motor’s coil. Their goal is to broaden the car’s appeal by selling its “fun-to-drive factor.” I found that getting the car from 0 to 45 miles an hour down a short stretch of road required only a pleasantly light touch on the pedal.

      . . .

      In hopes of reducing “range anxiety,” or the worry about running out of charge, GM is making the Spark the first car on the market to use a new North American “fast-charging” standard, approved in October. In special charging stations equipped with the technology, a driver could power 80 percent of the battery in 20 minutes—compared to seven hours for a full charge at home. None of these fast-charging stations are on the road yet, but General Motors expects some will come online by the time the Spark gets into dealerships.

      Jensen Comment
      The Spark may make an excellent commuting alternative for many persons, but for distance travel there are serious drawbacks. The biggest worry is getting stranded where there are no power outlets for miles and miles. Tow trucks of the future may well have emergency charging technology, but it's still a pain waiting a hour or more for a tow truck to bring you some juice. The Volt looks like a better alternative except that the luxury-car price of a Volt, the limited electric power range that drops to less than 30 miles in cold weather, and the poor gas mileage have virtually eliminated the future of Volt production and sales.

      Cost savings are dubious for people who are single and now get by with only one car. The only alternatives are to invest in two cars or use gasoline car rental services when longer trips are planned.

      The bottom line is that, at this point in time, the Spark might be more trouble than it's worth for most car buyers except for commuters who already own multiple cars for their families.

      Possible Cost Accounting Student Projects
      Cost accounting students in teams might be assigned the task of comparing the Spark versus the Volt versus gasoline and diesel automobile alternatives under various lifestyle scenarios. One uncertainty in this equation is how states will adjust licensing fees for electric cars and serious hybrids that no longer contribute toward road maintenance costs with each gallon of gas purchased.

      Another complication is the varying cost of electric power across the 50 states. California, with its new carbon tax, will have very high electric charging rates and gasoline prices. It will be hard to compare the cost of Spark ownership in California with other states like Delaware. And then there are states like Texas where there are miles and miles of open spaces having no towns. It will take a very long time before Texas lines its highways with emergency charging stations. The same can be said for many other states like New Mexico, Arizona, Nevada, Utah, Montana, Alaska, etc.

      Another complication is the varying cost of electric power across the 50 states. California, with its new carbon tax, will have very high electric charging rates and gasoline prices. It will be hard to compare the cost of Spark ownership in California with other states like Delaware. And then there are states like Texas where there are miles and miles of open spaces having no towns. It will take a very long time before Texas lines its highways with emergency charging stations. The same can be said for many other states like New Mexico, Arizona, Nevada, Utah, Montana, Alaska, etc.

    • Robert E Jensen

      "Sky City: China to Build World's Tallest Building, 220 Stories, in 90 Days," by Mike Shedlock, Townhall, November 2012 ---

      Jensen Comment
      Building a building in 90 days? Hummm. Does this count the years of building prefabricated modules that will only take 90 days to assemble?

      This reminds me of the unique Hilton Palacio Del Rio Hotel in San Antonio. It too was assembled in record time in 1968. But assembling merely entailed lifting modularized concrete rooms into place with a crane. The rooms contained all the plumbing fixtures, carpets, curtains, and furniture.

      Hilton Palacio Del Rio Hotel --- http://www3.hilton.com/en/hotels/texas/hilton-palacio-del-rio-SATPDHF/index.html
      Note the pictures.

      "21-Story Modular Hotel Raised The Roof for Texas World Fair in 1968," modular.org ---

      The Hilton Palacio del Rio Hotel is a milestone, not only for the City of San Antonio, but for the modular construction industry as well. Built by H.B. Zachry Company (now Zachry Construction Corporation) across the street from the site of HemisFair, the Texas World's Exposition of 1968, the 500-room deluxe hotel was designed, completed and occupied in an unprecedented period of 202 working days. This is an achievement of which H.B. Zachry Sr. and each of his workers can well be proud.

      Of the Palacio del Rio's 21 stories, the first four were built of conventional, reinforced concrete for support facilities. At the same time, an elevator and utility core, also of reinforced concrete, were slip formed to a full height of 230 feet. From the fifth floor to the 20th, modules were stacked and connected by welding of steel embedments.

      The 496 rooms were placed by crane in 46 days. The 21st floor, an area which contains a grand ballroom and other required public space, was constructed of light steel and enclosed by an aluminum window hall. The building is served by six elevators (four public and two freight), has a swimming pool on its fifth floor and occupies a half an acre site in downtown San Antonio.

      By giving the room a pre-determined magnetic heading and by "feathering" the vertical propeller, the operator atop the "flying" room controlled the direction of each unit as it was being hoisted to a precise location.

      The hotel's room modules were pre-cast from light-weight structural concrete. Before arriving on the construction site, each room was fully decorated, including color TV, AM/FM radios, beds, carpeting, bottle openers, automatic coffee makers, ash trays, etc. The units are 32 feet 8 inches and 29 feet 8 inches long, 13 feet wide and 9 feet 6 inches high. They weigh 35 tons each and were manufactured at a plant located eight miles from the project site.

      Zachry set up a production line consisting of two rows of eight room-size forms that produced eight complete units daily. The working crews were composed, as an average, of more than 100 men who completed a designated task 496 times.

      Continued in article

      Jensen Comment
      When "building" a high rise where does the start time begin?

      Student Project
      It would be interesting for students in teams to tackle the costing differences between modularization construction versus more conventional construction. For example, modularization probably entails more inventory and inventory financing costs since many of those modules have to sit idle after completion while awaiting the construction and furnishing of the other modules.

      I assume at first blush that at the time the  Hilton Palacio Del Rio Hotel was built, modularization was not cost effective. Otherwise the many hotels built since then would've adopted modularization. Since they did not, I assume that modularization has, until now at least, been too expensive.

    • Robert E Jensen

      "Global Steel Industry Faces Capacity Glut," by John W. Miller, The Wall Street Journal, November 27, 2012 ---

      Jensen Comment
      In the November 2019 issue of TAR (pp. 2181-2182) there's really interesting review of a book by Ron Huefner that deals heavily on accounting for idle capacity. Since TAR book reviews are free to the world, I quote the entire book review by Dennis Campbell (Harvard) below.

      Revenue Management: A Path to Increased Profits, by Ronald J. Huefner (New York, NY: Business Expert Press, 2011, ISBN 13: 978-1-60649-141-6).

      In reading Ronald Huefner's book, I could not help but be reminded of my own experiences in teaching cost accounting and management. Teaching materials and plans in this area inevitably revolve heavily around concepts and techniques for allocating costs and measuring the profitability of products, services, and customers, leaving comparatively little time for the “so what?” questions. Once the measurement is done, how should we use the information to improve profitability?

      Without a systematic framework, this part of the discussion can quickly become a generic exercise in developing a “laundry list” of broad approaches—such as discount pricing for large and predictable orders, preferential pricing for “strategic” customers, and even the wholesale “firing” of customers—with little in the way of prescription for how to choose among these approaches, let alone facilitate their implementation. These approaches are all variants of differential pricing, and Huefner's book reminds us that the field of revenue management provides the appropriate systematic framework for making these choices optimally. In doing so, the book makes a strong case for the need to better integrate cost and revenue management processes within organizations.

      Huefner's target audience is practitioners, and the book seems to be particularly aimed at accounting and financial managers. Perhaps appropriately, given this target audience, the book is written at a relatively high level and focuses on providing a general introduction to revenue management applications and techniques as well as methods for measuring and monitoring their efficacy. The “30,000 foot” view taken in the book, however, presents both strengths and weaknesses. On the one hand, it makes the topic of revenue management in all its various forms accessible at an introductory level. On the other, it allows little in the way of detailed guidance for developing or implementing revenue management practices within organizations.

      It is, of course, difficult to accomplish both tasks in one book. Huefner's focus on the former makes the book most appropriate for financial and accounting managers who need a general introduction to the topic of revenue management. It may also be useful for marketing and operations managers who need a general introduction to cost accounting concepts that can be utilized to evaluate and ensure the profitability of revenue management processes.

      The first two chapters highlight the importance of revenue management as a field and provide a brief historical overview of its origins in airlines, along with its subsequent development and application in a variety of other service industries. Chapter 2 provides a particularly useful overview of industry- and firm-level characteristics that give rise to the demand for revenue management, including the presence of fixed and perishable capacity (e.g., airline seats, hotel rooms), high fixed costs, and uncertain but predictable demand patterns.

      Chapters 3–6 focus on the integration of revenue management with various cost measurement and analysis techniques, ranging from contribution margin and capacity analysis to opportunity costs and the theory of constraints. Huefner provides a strong case in this section for the role of cost systems in ensuring the success of revenue management efforts. In drawing a much-needed link between cost and revenue management techniques, this is perhaps the strongest portion of the book. However, given the target audience of finance and accounting managers who are likely to understand cost accounting concepts comparatively well, these chapters tilt too heavily toward cost measurement rather than revenue management. This is most notable in Chapter 5, where Huefner provides a very good, and relatively detailed, overview of the CAM-I capacity model, but devotes less than a paragraph to applying the model in revenue management decisions.

      Despite this, Huefner should certainly be given some credit for drawing the link between capacity cost analysis and revenue management. Detailed models of an organization's cost structure should allow managers to proactively assess, for any given level of revenue-generating activity, the appropriate level of capacity required in various types of resources (personnel, office space, hardware, and other indirect support resources). In this vein, his work in Chapter 5 appropriately articulates a view similar to that of Cooper and Kaplan's (1999) “fundamental equation of activity-based costing,” which goes something like the following:

      Cost of Resources Supplied = Cost of Revenues Used + Cost of Unused Capacity

      The left-hand side of this equation captures the cost of resources committed during a particular accounting period, while the right-hand side simply partitions this cost into the costs of resources utilized in productive and non-productive activities. As Cooper and Kaplan point out, cost systems like activity-based costing are focused on the right-hand side of this equation—modeling the costs of resources used and, by extension, providing transparency into where unused capacity exists in the organization. With information from such cost systems in hand, managers need to decide whether to reduce unused capacity by reducing the cost of resources supplied (cost management) or by reallocating that capacity to productive revenue-generating use (revenue management).

      Chapters 7–9 focus on the “bread and butter” issue of revenue management—differential pricing. These chapters provide a broad overview of different approaches to segregated pricing (e.g., by customer, location, distribution channel, or product) and more specific techniques such as discounting, bundling, and markdowns. While these chapters are useful in providing a review of different pricing approaches that fall under the broad umbrella of revenue management, the weakness of the “30,000 foot” approach is apparent here, as no guidance or framework is offered for choosing which approaches work best and under what circumstances.

      Chapters 10–12 point to potentially important roles for accounting and finance professionals to play in measuring and monitoring the efficacy of revenue management efforts within organizations. These chapters highlight the importance of considering the effects of current revenue management efforts on future customer behavior and profitability. The price discrimination at the heart of many revenue management techniques carries potential risks for organizations in the form of customer perceptions of unfairness, eroded trust, and reduced loyalty (Chapter 10). Revenue management decisions, in the form of price discounting, bundling, and other techniques also need not necessarily result in more profitable customers (Chapter 11).

      Huefner begins to address the issue of how to measure all of these effects in Chapter 12, where he advocates a detailed analysis of different revenue sources. Overall, these chapters do a good job in highlighting the importance of these issues, but the ideas could be pushed further—particularly with regard to what type of management reports and reporting processes would be necessary to monitor, evaluate, and manage the risks and benefits of revenue management efforts over time.

      In sum, the book serves as a good introduction to revenue management concepts for finance or accounting professionals who are unfamiliar with this field. More importantly, it provides a call to arms for better integration of revenue and cost management systems and points to an important and relatively unexplored role for these professionals in monitoring, evaluating, and managing ongoing revenue management efforts within organizations.

      Cooper, R., and Kaplan. R. S. 1999. The Design of Cost Management Systems: Text and Cases. Second edition. Upper Saddle River, NJ: Prentice Hall. Reporting Business Risks: Meeting Expectations (London, U.K.:

      ICAEW Financial Reporting Faculty, 2011, ISBN 978-0-85760-291-6, pp. v, 79). Downloadable at http://www.icaew.com .

      Dennis Campbell
      Associate Professor of Business Administration
      Harvard University

      Jensen Comment
      There is an error in the hard copy version of this book review in that the ICAEW reference included in the electronic version was omitted from the hard copy version on Page 2182

      There's an error in the electronic version of this book review in that the reviewer (Dennis Campbell) is erroneously omitted and credit for the review is  Timothy B. Bell in the electronic version. The correct credit to Dennis Campbell is given in the hard copy version on Page 2182.

      Timothy Bell is actually the reviewer of another book pp. 2183-2185.

      Bob Jensen's threads on managerial accounting are at


    • Robert E Jensen

      Question From Freakonomics:
      Must there be a disconnect between introductory microeconomics and the business world?

      "Putting Microeconomics to Work," by Steven D. Levitt, Freakonomics, November 27, 2012 ---

      I’ve long been puzzled by the almost complete disconnect between real-world businesses and academic economics.  After I graduated from college, I went to work as a management consultantAlmost nothing I learned as an economics major proved helpful to me in that job.  Then, when I went back to get a Ph.D., I thought what I had learned in consulting would help me in economics.  I was wrong about that as well!

      Ever since, I’ve felt that both business and economics would benefit from a greater connection.  Why don’t businesses set prices the way economics textbooks say they should?  Why are randomized experiments so rare in business?  Why do economists write down models of how businesses behave without spending time watching how decisions are actually made at businesses? The list goes on and on.

      It’s taken a while, but the business/economics connections are finally starting to happen with greater regularity.  John List and I wrote an academic piece about field experiments in businesses a few years back that focused on how partnering with businesses could help academics with their research.

      The benefits are also going the other way.  The Economist has a nice article about how microeconomists are adding value to businesses.  (I’m sure the economists mentioned in the article are delighted to be included; I’m almost as sure they will hate the cartoon likenesses that accompany it!)

      For what it’s worth, I’m trying to do my part to improve philanthropy and business through a little firm called The Greatest GoodBut, damn, it turns out to be a lot harder to make things happen in the real world than it is in the ivory tower!

      Jensen Comment
      We could use more of this in managerial accounting, especially in such areas as CVP Analysis and ABC Costing.

      Bob Jensen's threads on managerial accounting ---


    • Robert E Jensen

      CGMA Portfolio of Tools for Accountants and Analysts ---
       Includes ethics tools and learning cases.

    • Robert E Jensen

      From the CFO Journal's Morning Ledger on June 6, 2013

      Companies turn to 3-D printing to cut costs
      Thanks to cheaper equipment and better technology, 3-D printing is moving into the mainstream of business faster than many people realize,
      CIO Journal’s Clint Boulton reports. GE‘s Aviation unit prints fuel injectors and other components within the combustion system of a jet engine. GE is also experimenting with 3-D printing to produce a medical device, the ultrasound probe. Researchers at GE say that 3-D printing could help cut the costs of manufacturing certain parts of the probe by 30%.

      Jensen Comment

      This technology seems to be betting for an accounting research case study in cost accounting.

      Bob Jensen's Helpers for Case Writers ---

    • Robert E Jensen

      I hope Jim K will comment on how "research in business schools is becoming increasingly distanced from the reality of business"
      "In 2008 Hopwood commented on a number of issues," by Jim Martin, MAAW Blog, June 26, 2013 ---

      The first issue below is related to the one addressed by Bennis and O'Toole. According to Hopwood, research in business schools is becoming increasingly distanced from the reality of business. The worlds of practice and research have become ever more separated. More and more accounting and finance researchers know less and less about accounting and finance practice. Other professions such as medicine have avoided this problem so it is not an inevitable development.

      Another issue has to do with the status of management accounting. Hopwood tells us that the term management accountant is no longer popular and virtually no one in the U.S. refers to themselves as a management accountant. The body of knowledge formally associated with the term is now linked to a variety of other concepts and job titles. In addition, management accounting is no longer an attractive subject to students in business schools. This is in spite of the fact that many students will be working in positions where a knowledge of management control and systems design issues will be needed. Unfortunately, the present positioning and image of management accounting does not make this known.

      Continued in article

      Avoiding applied research for practitioners and failure to attract practitioner interest in academic research journals ---
      "Why business ignores the business schools," by Michael Skapinker
      Some ideas for applied research ---

      Essays on the (mostly sad) State of Accounting Scholarship ---

      Sue Haka, former AAA President, commenced a thread on the AAA Commons entitled
      "Saving Management Accounting in the Academy,"
      --- http://commons.aaahq.org/posts/98949b972d
      A succession of comments followed.

      The latest comment (from James Gong) may be of special interest to some of you.
      Ken Merchant is a former faculty member from Harvard University who form many years now has been on the faculty at the University of Southern California.

      Here are my two cents. First, on the teaching side, the management accounting textbooks fail to cover new topics or issues. For instance, few textbooks cover real options based capital budgeting, product life cycle management, risk management, and revenue driver analysis. While other disciplines invade management accounting, we need to invade their domains too. About five or six years ago, Ken Merchant had written a few critical comments on Garrison/Noreen textbook for its lack of breadth. Ken's comments are still valid. Second, on the research and publication side, management accounting researchers have disadvantage in getting data and publishing papers compared with financial peers. Again, Ken Merchant has an excellent discussion on this topic at an AAA annual conference.

      Bob Jensen's threads on what went wrong in the Accounting Academy
      How did academic accounting research become a pseudo science?
      http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong ---

    • Robert E Jensen

      Teaching Case
      From The Wall Street Journal Accounting Weekly Review on August 9, 2013

      CBS-Time Warner Cable Dispute Shows an Industry Unaware of Reality
      by: Martin Peers
      Aug 07, 2013
      Click here to view the full article on WSJ.com

      TOPICS: Cost Management, Revenue Recognition

      SUMMARY: The article describes a current dispute "..that has become commonplace in pay TV, centering on how much more money Time Warner Cable should pay to carry CBS on its cable lineup....[A]t the core of it, the companies are squabbling over their share of pay-TV's spoils-money that, if the newspaper and music industries are any guide, could disappear much faster than anyone expects." The related video clearly describes the fees being disputed by Jason Bellini in #TheShortAnswer.

      CLASSROOM APPLICATION: The article may be used to discuss revenue-related contracts and cost control with a focus on change, including decline, and innovation.

      1. (Introductory) For what service does Time Warner Cable pay CBS?

      2. (Introductory) What is the nature of the current dispute between the two companies? (Hint: The related article and video both help in answering this question.)

      3. (Introductory) How have these contracts in dispute impacted costs at cable operators?

      4. (Introductory) Access the related video "The Short Answer: Why Time Warner Cable and CBS are at War." List all alternatives available to viewers for watching their favorite television shows.

      5. (Advanced) How have changes in this sector of the entertainment industry impacted the way each party views the value of this contract between the cable operator and network television stations? How are these changes comparable to the newspaper and music industries?

      6. (Advanced) What do you think might happen to the primary sources of revenue to television network stations given the changes describe in this and the related article?

      Reviewed By: Judy Beckman, University of Rhode Island

      Future of Cable Might Not Include TV
      by Shalini Ramachandran and Martin Peers
      Aug 05, 2013
      Page: B1


      "CBS-Time Warner Cable Dispute Shows an Industry Unaware of Reality," by Martin Peers, The Wall Street Journal, August 7, 2013 ---

      If anyone in the media world should pay attention to the Washington Post's WPO -0.64% sale, it's Time Warner Cable Inc. TWC +0.78% CEO Glenn Britt and CBS Corp. CBS -0.13% chief Les Moonves.

      It was a mere coincidence that news of the Post sale broke right after Mr. Britt had sent his latest missive to Mr. Moonves in a months-long squabble over money. But the timing highlighted the essence of what another cable executive, Jim Dolan of Cablevision Systems Corp., CVC +0.10% was quoted saying Monday: The pay-TV industry is in a bubble. And it remains perilously out of touch.

      The dispute is one that has become commonplace in pay TV, centering on how much more money Time Warner Cable should pay to carry CBS on its cable lineup. CBS says it wants to be "paid fairly" for its programming, while Time Warner Cable says it is trying to protect its customers. But at the core of it, the companies are squabbling over their share of pay-TV's spoils—money that, if the newspaper and music industries are any guide, could disappear much faster than anyone expects.

      As Dish Network Corp. Chairman Charlie Ergen said on Tuesday, "all the content revenue in the industry is probably at risk," adding that "I don't think the industry quite understands how the Internet works."

      The Washington Post's $250 million sale perfectly captures how digital technology has sucked most of the value out of newspapers as advertisers defect to the Web.

      Newspaper print ads fell 55% between 2007 and 2012, according to the Newspaper Association of America.

      It isn't only the Post suffering. The Boston Globe was sold for $70 million Saturday, a fire sale for New York Times Co., which paid $1.1 billion for it 20 years ago. That's what is called value destruction.

      Other sectors of media haven't fared much better. In music, thanks to both piracy and the digital dismantling of the album system, album sales fell 54% between 2000 and 2012, according to Nielsen SoundScan. There are now just three major music companies, when six existed in the mid-1990s.

      Newsweek has its third owner in three years.

      Some other companies are responding to the digital transition. On Madison Avenue, Publicis Groupe SA's proposed merger with Omnicom Group Inc. is an attempt to get ahead of the curve, joining forces to better compete with Silicon Valley ad giants.

      In television though, it isn't about the future. It's about protecting the past. The players are seeking to squeeze more money from the existing ecosystem—an ecosystem in which U.S. households pay an average of $84 a month, according to SNL Kagan, for hundreds of channels they don't watch.

      Cable networks' share of those fees is expected to amount to $44 billion this year, SNL Kagan says. That is separate to the $24 billion in advertising that flowed to cable networks last year, estimates Kantar Media.

      These huge flows of cash have fueled profits of big entertainment companies in recent years. Time Warner Inc., 21st Century Fox (the now-separate former entertainment side of News Corp, which owns The Wall Street Journal), Walt Disney Co. and Viacom Inc. each derive the majority of their profits from cable networks. Broadcasters, long out of that loop, are making up for lost time by seeking bigger cash fees, which explains CBS's current battle with Time Warner Cable.

      But as Messrs. Dolan and Ergen have acknowledged, these arrangements aren't sustainable. Younger people watch what they want online, making the idea of cable TV less appealing. The percentage of people age 13 to 33 subscribing to pay TV fell to 76% this June from 85% in June 2010, a new study by research firm GfK found.

      "Cord cutting used to be an urban myth. It isn't any more," said cable analyst Craig Moffett in a report Tuesday.

      Yet the entertainment companies seem blissfully unaware. Yes, most make their cable programming available online, but only to TV subscribers who remember passwords, itself a turnoff. Some shows are separately licensed to online outlets, like Amazon.com Inc., Hulu or Netflix Inc., but not every outlet has all seasons.

      Continued in article

      Bob Jensen's threads on managerial Accounting ---


    • Robert E Jensen

      Teaching Case:  Managerial Accounting Courses Should Focus on Long-Term and Short-Term Impacts of Poor Quality on Costs and Revenues
      From The Wall Street Journal Accounting Weekly Review on December 20, 2013

      Lululemon Woes Persist
      by: Ben Fox Rubin and Andrew Dowell
      Dec 13, 2013
      Click here to view the full article on WSJ.com

      TOPICS: Cost Management, Managerial Accounting, Quality Costs

      SUMMARY: "Lululemon Athletica Inc. said hits to its reputation and continuing quality problems hurt sales of its yoga gear in November, contributing to a weak outlook that sent the company's stock sliding on Thursday."

      CLASSROOM APPLICATION: The article introduces the managerial topic of cost of quality issues with a product likely of interest to at least the female students in the class.

      1. (Introductory) What events have led to Lululemon facing declining foot traffic in its stores? For further background, you may refer also to the related article.

      2. (Advanced) Define cost of quality and name four types of quality costs.

      3. (Advanced) Which types of cost of quality is Lululemon now experiencing? Name all that you can find from the article and support your answer.

      Reviewed By: Judy Beckman, University of Rhode Island

      Lululemon Pants Back in Stores After Recall
      by Suzanne Kapner
      Jun 03, 2013
      Page: B2

      "Lululemon Woes Persist," by Ben Fox Rubin and Andrew Dowell, The Wall Street Journal, December 13, 2013 ---

      Lululemon Athletica Inc. LULU -0.56% said hits to its reputation and continuing quality problems hurt sales of its yoga gear in November, contributing to a weak outlook that sent the company's stock sliding on Thursday.

      The company has long enjoyed a loyal following that enabled it to command premium prices for its clothing.

      But it suffered a string of self-inflicted wounds this year, including the recall of popular yoga pants in March, the surprise resignation of its CEO in June and comments in November by its chairman, who appeared to say new quality problems were the fault of overweight customers.

      Lululemon Chief Financial Officer John Currie said on a conference call with analysts that all of those issues likely contributed to an unexpected drop in store traffic in November.

      "Any time there's negative PR for a company, there's an impact on the business," Mr. Currie said.

      That slowdown, along with quality-control problems that led monitors at the company's distribution centers to reject some product and left stores with inadequate supplies of some gear, prompted the company to lower its outlook for the rest of the year. Shares closed down 12% at $60.39 on Thursday.

      The weak outlook overshadowed growth in the company's third quarter.

      For the quarter ended Nov. 3, the Vancouver-based company reported a profit of $66.1 million, up from $57.3 million. Revenue grew 20% to $379.9 million.

      The company's gross margin slipped to 53.9% from 55.4% as product costs jumped 24%.

      Investors focused on the company's outlook for the holiday quarter.

      Continued in article

      See the topic Quality Cost and Models in MAAW at

      Bob Jensen's threads on managerial accounting ---


    • Robert E Jensen

      $4,878 Room and Board Charge for One Night in the Hospital:  Those meals must've been fantastic
      "This $55,000 Bill Is The Perfect Example Of Our Broken Hospital System," by Lauren F. Friedman, Business Insider, December 30, 2013 ---
      See a copy of the bill itself (note how the charge for aspirin is now hidden)

      Jensen Comment
      Cost Accounting Student Assignment:  Backflush the line items on this bill to identify possible components and justify the charges
      Hint:  Don't forget hospital bad debts and executive salaries and subtle kickbacks to doctors.
      For example, it's common for physicians in the Emergency Room to recommend at least one night at $10,000 in ICU when a $4,878 room for one night would probably suffice.

      Bob Jensen's health care messaging updates --- http://www.trinity.edu/rjensen/Health.htm

    • Robert E Jensen

      Quiz time:
      How well do you know the world of management accounting? Uncertainty about the global economy lingers, and projections for growth are tepid. Issues such as risk management, recruitment and retention of talent, and regulatory red tape remain on the minds of finance professionals. Test your knowledge of the events and trends in management accounting in 2013 with this 13-question quiz from CGMA Magazine ---

      "The CGMA Magazine quiz: 13 questions about management accounting in 2013," by Neil Amato, CGA Magazine, January ---

      Jensen Comment
      I think better questions could be posed about such topics as the future of activities-based costing, capacity accounting, behavioral issues, CAM-I, Chinese Management Accounting, COSO Implementation, electronic commerce, health care managerial accounting, lean accounting, system security, etc.

    • Robert E Jensen

      "Factory Jobs Are Gone. Get Over It," by Charles Kenny, Bloomberg Businessweek, January 23, 2014 ---

      In the runup to this year’s State of the Union address, President Obama has been busy trying to fulfill pledges from last year’s. He went to Raleigh, N.C., to announce it would become a high-tech manufacturing hub to ensure that the U.S. attracts “the good, high-tech manufacturing jobs that a growing middle class requires.”

      The president is one of many politicians of both parties as well as pundits who think manufacturing deserves special treatment. But this factory obsession is based on flawed economics. As the Brookings Institute economist Justin Wolfers asked recently, “What’s with the political fetish for manufacturing? Are factories really so awesome?”

      Not really—at least not for the U.S. in 2014. Any attempt to draw lessons from the 1950s, when many a high school-educated (white, male) person got a job in a factory and joined the middle class, doesn’t account for the changes in the U.S. and global economy since the middle of the last century. While it’s smart to focus on creating more stable, remunerative jobs, few of them are likely to come from manufacturing.

      In 1953 manufacturing accounted for 28 percent of U.S. gross domestic product, according to the U.S. Bureau of Economic Analysis. By 1980 that had dropped to 20 percent, and it reached 12 percent in 2012. Over that time, U.S. GDP increased from $2.6 trillion to $15.5 trillion, which means that absolute manufacturing output more than tripled in 60 years. Those goods were produced by fewer people. According to the Bureau of Labor Statistics, the number of employees in manufacturing was 16 million in 1953 (about a third of total nonfarm employment), 19 million in 1980 (about a fifth of nonfarm employment), and 12 million in 2012 (about a tenth of nonfarm employment).

      Service industries—hotels, hospitals, media, and accounting—have taken up the slack. Even much of the value generated by U.S. manufacturing involves service work—about a third of the total. More than half of all people still employed in the U.S. manufacturing sector work in such services as management, technical support, and sales.

      Over the past 30 years, manufacturers have spent more on labor-saving machinery and hired fewer but more skilled workers to run it. From 1980 to 2012 across the whole economy, output per hour worked increased 85 percent. In manufacturing output per hour climbed 189 percent. The proportion of manufacturing workers with some college education has increased from one-fifth to one-half since 1969.

      Across richer countries, growth has been accompanied by a decline in the number of manufacturing jobs and the rise of service jobs. Some of the richer countries, such as France, that have seen the slowest decline in manufacturing’s share of employment have actually suffered some of the most sluggish growth. In the U.S., Eric Fisher of the Federal Reserve Bank of Cleveland suggests that those states where the shift from manufacturing employment has been the most rapid are those where wages have climbed the fastest.

      Developing countries have taken over much of the low-skilled, low-capital production once done in the U.S.: Consider the garment industry or tire manufacturing. Such low-tech work is even more mind-numbing and poorly paid than it was when the work was done in the U.S. through the 1970s. Many of the workers killed in the recent Rana Plaza garment factory collapse in Bangladesh earned just $3 a day. Some politicians have regretted the loss of similar jobs in the U.S. The question is: Do we want such jobs here now?

      Shutting the borders to low-cost imports in the hope of reviving low-skilled manufacturing employment at home would likely kill jobs, not save them. When Obama in 2009 slapped tariffs on Chinese tire imports that had flooded the U.S. market, he temporarily preserved 1,200 jobs in the tire industry as supplies tightened and U.S. tiremakers helped make up the difference. But the impact on the U.S. labor force as a whole was negative. Gary Hufbauer of the Peterson Institute estimates that the cost to U.S. consumers was more than $1 billion. As tires got more expensive, tire buyers had less money to spend on other goods. The effect of that drop in demand on retail employment was a loss of 3,731 jobs, three times the number preserved in the tire industry.

      Champions of reindustrialization often cite the cluster effect as a reason to back manufacturing. If a company builds a factory, then other factories will pop up in the same place to benefit from the industry knowledge and experienced workforce found there. If that theory were strongly supported by the facts, that might be a reason for governments to subsidize early investors in building the first plant somewhere. But work by economists Glenn Ellison of Massachusetts Institute of Technology and Ed Glaeser of Harvard suggests that while “slight concentration is widespread” among industries, “extreme concentration” is the exception. High levels of concentration aren’t a particularly common or unique feature of high-tech manufacturers (although high-tech service industries cluster in Silicon Valley). In manufacturing, the two economists suggest clustering is most evident in fur, wines, hosiery, oil and gas, carpets and rugs, sawmills, and costume jewelry.

      Continued in article

      Jensen Comment
      In the meantime cost and managerial courses and textbooks should be making the shift to accompany changing labor patters such as accounting for complicated indirect costs and services such as medical services, food services, and online selling.

      Bob Jensen's threads on managerial and cost accounting ---

      Management and Accounting Web (MAAW) --- http://maaw.info/

    • Robert E Jensen

      Jensen Comment
      We generally teach good things about the cost advantages of economies of scale. Perhaps we should had illustrations of some of the downers of economies of scale.

      "Why the Promise of Cheap Fuel from Super Bugs Fell Short:  The sell-off of synthetic biology pioneer LS9 goes to show that making biofuels from genetically engineered microbes is harder than though has yet to deliver economically, by Martin LaMonica, MIT's Technology Review, February 5, 2014 ---

      . . .

      “Many of the claims being made in connection with biofuels in 2006 and 2007 were way too optimistic,” says MIT biotechnology and chemical engineering professor Gregory Stephanopoulos.

      The trouble, says James Collins, professor of biomedical engineering at Boston University, is that while the science behind these companies was promising, “in most cases, they were university lab demonstrations that weren’t ready for industrialization.”

      In addition to the challenge of designing effective organisms, synthetic-biofuel companies struggle with the high capital cost of getting into business. Because fuels are low-margin commodities, biofuel companies need to produce at large volumes to make a profit. Commercial plants can cost on the order of hundreds of millions of dollars. Some advanced biofuel companies have been able to secure the money for large-scale plants by going public, but now many investors have soured on biofuels. “People want to see things validated a little further along and take more technology risk off the table early. There’s little willingness for investors to pay for proofs of concept,” Berry says.

      Jay Keasling, cofounder of LS9 and the CEO of the Department of Energy’s Joint BioEnergy Institute acknowledges that synthetic-biology companies have moved more slowly than many investors had hoped. He also cautions against expecting bioenergy to undercut petroleum fuels on price any time soon. Making cost-competitive fuels with genetically engineered microbes will require advances in both science and engineering, he says. “We’re never going to have biofuels compete with $20-a-barrel oil—period,” he says. “I’m hoping we have biofuels that compete with $100-a-barrel oil.”

      In theory, hydrocarbons that can power planes and diesel engines are more valuable than ethanol, which has to be blended. But the yield of converting sugars to hydrocarbons is lower than the yield for ethanol because of the basic chemistry, Keasling says, so the economics depend more heavily on the price of sugar. “[Getting] the yields up to make them economically viable is very hard to do,” he says.

      Keasling says new techniques are needed to speed up the process of engineering fuel-producing organisms. If engineers could isolate desired genetic traits quickly and predict how a combination of metabolic pathway changes would affect a microörganism, then designing cells would be much faster, he says. “We need to be as good at engineering biology as we are at engineering microelectronics,” he says. Optimizing crops for energy production and new techniques for making cheaper sugars could also help bring down the cost.

      After cofounding LS9, Berry cofounded another biotech company called Joule that seeks to decouple fuel production from the price of sugar. It has engineered strains of photosynthetic microörganisms to produce fuels using sunlight, carbon dioxide, and nutrients, rather than from sugar (seeAudi Backs a Biofuel Startup” and “Demo Plant Targets Ultra-High Ethanol Production”).

      Given the challenges that have beset synthetic biology companies so far, some new companies are deciding from the outset not to make biofuels. Indeed, the first company to be spun out of Keasling’s Joint BioEnergy Institute—Lygos, based in Albany, California—has decided to make a few high-value chemicals, rather than fuel.