Question

Case Study Toys-4-Children Ltd (T4C) manufactures and sells children’s toys in Australia. The company currently faces the following core issues and challenges: • T4C aims to introduce a new product – ‘Gold Fish’ – and it needs to develop some preliminary cost estimates. • T4C faces increasing competition from new competitors who are importing children’s toys from China and selling them at low prices in the Australian market. • T4C is struggling with decision making and control over operations in the highly competitive and innovative market environment. Required: 1. Identify and critically discuss the management accounting tools and techniques you would apply to develop cost estimates for the new product. 2. Identify and discuss what you think should be the salient features of T4C’s business strategy to effectively deal with its competitors. 3. What recommendations could be made to T4C to develop efficient decision making and control systems to ensure its sustainability in the highly competitive and innovative market environment?

please take a reference from Horngren's Cost Accounting: A Managerial Emphasis, 3rd Edition

Answer 1

1. Identify and critically discuss the management accounting tools and techniques you would apply to develop cost estimates for the new product.

Ans:

Below are the tools for costing:

1. Batch costing: The cost of a batch of identical products is ascertained and each batch of products is a cost unit for which costs are ascertained.

2. Process costing: Costs are accumulated for each process. To arrive at a cost per unit, the total cost of the process is divided by the number of units produced. The finished product of one process is transferred to the next process.

3. Operating cost: In this method, refinement and more detailed analysis is carried out on the number of the process involved. This process analysis minute costs and ensures greater control over the cost.

Techniques involved are as below:

1. Standard Costing It refers to the preparation of standard costs and applying them to measure the variations from standard costs and analyzing the variations with a view to maintain maximum efficiency in production. What is done in this case is that the costs of each article are determined before-hand under current and anticipated conditions, but sometimes they are determined before-hand under normal or ideal conditions? Then actual costs are compared with the pre-determined costs and deviations known as variances are noted down. Thereafter, the reasons for the variances are ascertained and the necessary steps are taken to prevent their recurrence.

2. Marginal Costing: It refers to the ascertainment of marginal costs by differentiating between fixed costs and variable costs and the effect on profit of the changes in volume or type of output. In this case, only the variable costs are charged to products or operations while fixed costs are charged to profit and loss account of the period in which they arise.

3. Activity-Based Costing: In a business organization, Activity-Based Costing (ABC) is a method of assigning the organization's resource costs through activities to the products and services provided to its customers. It is defined as a technique of cost attribution to cost units on the basis of benefits received from indirect activities, e.g. ordering, setting up, assuring quality. ABC involves identification of costs with each cost-driving activity and making it the basis of apportionment of costs over different products or jobs on the basis of the number of activities required for their completion. It is basically used for apportionment of overhead costs in an organization having products that differ in volume and complexity of production. Under this technique, the overhead costs of the organization are identified with each activity which is acting as a cost driver i.e. the cause for the incurrence of overhead cost. Such cost drivers may be purchase orders issued, quality inspections, maintenance requests, material receipts, inventory movements, the power consumed, machine time, etc. Having identified the overhead costs with each cost center, cost per unit of cost driver can be ascertained. The overhead costs can be assigned to jobs on the basis of a number of activities required for their completion. This is generally used as a tool for understanding product and customer costs and profitability. As such, ABC has predominately been used to support strategic decisions such as pricing, outsourcing and identification and measurement of process improvement initiatives.

ABC principles are used: (i) to focus management attention on the total cost to produce a product or service, and (ii) as the basis for full cost recovery. Support services are particularly suitable for activity-based resourcing because they produce identifiable and measurable units of output. Activity-Based Costing encourages managers to identify which activities are value-added—those that will best accomplish a mission, deliver a service or meet customer demand. It improves operational efficiency and enhances decision-making through better, more meaningful cost information.

4. Direct Costing: The practice of charging all direct costs to operations, processes or products leaving all indirect costs to be written off against profits in the period in which they arise, is termed as direct costing.

5. Absorption Costing: The practice of charging all costs both variable and fixed to operation, process or products or process is termed as absorption costing.

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2 .Identify and discuss what you think should be the salient features of T4C’s business strategy to effectively deal with its competitors.

Ans:

1. When a new product is introduced in the market: The new product may be sold at a very low price
to make it popular but it should not be below the marginal cost. This is done with the expectation that sales will increase with the passage of time and the cost of production will come down as a result of the increase in sales.

2. Environment-friendly materials are to be used to ensure much care for the kids as well as nature. Since the Chinese products are mainly made of plastic containing arsenic at a high level which could result in brain damage and other human genetic disorders. Therefore the product quality is very important. This will give an upper hand among the other competitors which sell cheap plastic toys.

3. Make the product attractive with animated features that will be engaging to look and play with. This will always amaze the kid's mind and it turns out to be more informative to the kids. Since the product is a goldfish - It can be run in water as well to be operated over the land. It should use the fins and tails to swim and make it more enjoyable instead of dead fish. This will be more engaging for the kids.

4. Toys should be well designed using modern CAD drawings for better looks and performance and durability.

5. It should not have sharp edges to avoid harming the kids while they are course of action.

6. There can also be a provision for the kids to change the colours of the toy if needed by arranging additional sketch sets.

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3. What recommendations could be made to T4C to develop efficient decision making and control systems to ensure its sustainability in the highly competitive and innovative market environment?

1. Market research needs to be continuously monitored to understand the performance of the product of the competitors and the negatives of the products that the competitor's manufacture must be identified and those needs to be rectified eventually by continuous improvement process.

2. Boost the marketing strategy: Before the big guys grab your slice of the pie, make a concerted effort to make a splash in your local market. Increase your activity on social media by creating a community of goldfish toys.

3. Counterfeiting of toys should be strictly checked and definitely there should be better visible identification marks of the company's product which would be hard for the locally made counterfeit products.

3. Use the structure-conduct performance (SCP) model. This model makes a distinction between characteristics related to market structure, characteristics related to the conduct of market participants and the performance of the market as a whole.
The SCP model states that within a framework of certain basic conditions, the structure of a market
determines the conduct of its participants (buyers and sellers); which in turn influences its
performance. A schematic overview is presented below.

4. The structure of the market consists of, inter alia, the number and size distribution of firms in
relation to the size of the market, the degree of horizontal and vertical integration, and the presence
or absence of barriers to entry faced by new firms. Conduct refers to the behavior of firms, for
example, service policies, research, and development activities and strategic actions. Performance
is commonly measured in terms of productive and allocative efficiency. In addition, innovation and
quality of the goods provided can be considered as performance indicators.

5. Basic conditions Basic conditions refer to characteristics that are often exogenous to the market (e.g. infrastructure or legal and policy environment) but may also be endogenous (e.g. available technology, product durability or purchase methods). Basic conditions can be subdivided in ‘demand conditions’ and ‘supply conditions’. Basic condition indicators include consumer demand, production, elasticity of demand, technology, substitutes, raw materials, seasonality, rate of growth, product durability, location, lumpiness of orders, scale of economies, method of purchase, scope economies.

6. Market structure The structure of a market is defined by the size and number of (potential) sellers (and buyers); i.e. by the level of concentration of market share. The market structure as such is mainly determined by the extent to which entry barriers are present. Structure indicators include number of buyers and sellers, barriers to entry of new firms, product differentiation, vertical integration and diversification.

7. Conduct The conduct of market participants is generally interpreted as being focussed on maximising profits. In the most general form, profit maximisation entails pricing strategies, product strategies, etc. Conduct indicators include advertising, research and development, pricing behaviour, plant investment, legal tactics, product choice, collusion, mergers and contracts.

8. Performance Performance is commonly measured in terms of productive efficiency and profits. In addition, innovation and quality can be considered as performance indicators.