H T
H T
H T
driven. Thus, using a labor related allocation base could distort product costs. Moreover, global
competition has forced management to take a more strategic focus when developing their
The objective of the first case, “Implementing and Monitoring Strategy,” is to challenge
students to develop cost systems based on the strategy of the corporation and its underlying
operations. Students must develop a balanced scorecard that puts H-T’s strategy into action.
The case requires students to be creative in developing a balanced scorecard. Some students
have made their scorecards resemble a stereo system with the receiver, tape deck, CD and
turntable controls, each a separate scorecard perspective. Others have chosen to have their
scorecard resemble the dashboard of a car or the knobs on an oven. The goal is to make students
think out of the box. Students are also required to use the value chain as a link between H-T’s
The second case, “Are Standard and Activity Based Costing Appropriate for H-T?”
suggests that the traditional method of product costing does not reflect the underlying complex
and capital- intensive operations of H- T. Students must develop a standard and activity based
costing system that reflects H-T’s Raleigh division operations. This is challenging because the
students must develop cost-drivers that are balanced scorecard targets and they have to be
conversant about activity-based-costing (ABC). This assignment requires many faculty office
hours. While students can do the ABC computations, they find it difficult to explain ABC.
to use joint costing and service department cost allocation methods to determine the Essonnes
Division’s transfer price. This assignment is difficult because accounting students must look at
3
the human side of the numbers. During the semester, students are assigned short readings about
the French culture and about accountants’ experiences when implementing ABC in France.
Students are usually taught how to calculate joint costing numbers and not about how the
numbers might affect company personnel. Moreover, this case presents students with the multi-
cultural issues of multinational companies. From this case, students get a balanced perspective--
These cases are designed to make students write about the numbers that they produce in
textbook problems. Students find it difficult to explain the numbers. I require an original and
revision of each case. The research assistant (RA) and I grade the original version of the paper
and we decide on the points to be given to each paper. We return both marked-up copies of the
paper to the student. The students are generally given one to two weeks to revise the original
paper. The RA and I grade the rewrites and we assign a second grade. The students are much
better at the revision and usually experience significant grade improvements over the original
paper grade. It’s important to remember that these students are taking their first cost accounting
class and therefore have limited knowledge about accounting. I assign readings and SAP
applications in addition to the textbook assignments to give students the background needed to
complete the case. The teaching notes reveal that the focus is on how well the student can
converse about the concepts presented in the textbook and assigned readings. Students are not
expected to do a great deal of in-dept outside reading as this is an undergraduate, first cost
accounting course.
LEARNING OBJECTIVES
1. To apply and integrate corporate strategy, the value chain and the balanced scorecard to a
multinational computer company. Time-based and customer satisfaction-based goals
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should be included in the balanced scorecard.
2. To demonstrate how managers of each element in the value chain work as a team in
meeting corporate strategy.
4. To allocate joint-costs and service department costs in determining transfer prices for
logic and memory chips.
6. To understand that there are human resource issues associated with implementing cost
systems across a company and cultural issues when divisions are located outside of the
United States. Students often forget that there is a human element to accounting
numbers.
BACKGROUND
originated as a commercial scale, cheese and meat slicing, punch card, tabulating and time
recording conglomerate. The company began with 1,300 employees and with sales in Canada,
D.C., Michigan, New York and Ohio. The company had a difficult time managing its diversified
products in numerous locations. H-T undertook several strategies to overcome its faltering
operations. First, H-T increased sales by implementing healthy sales incentives, grooming its
salesmen in dark suits, promoting company pride and loyalty in its employees and beefing up
customer services. Second, H-T focused on selling tabulating machines, and expanded sales to
Asia, Australia, Europe and South America. These strategies helped H-T overcome its sinking
operations. While other companies were folding during the depression, H-T continued to grow
and began providing employee benefits such as life insurance and paid vacations.
Just- in-time inventory control would not have been useful to H-T during the depression.
Because H-T had large inventories on hand, they were able to undertake large government
contracts during the 1930's. H-T had become so large in the computer industry that they were
5
constantly being sued, but unsuccessfully, for antitrust violations. During World War II, H-T
continued to grow through government contracts. H-T used some of its profits to finance
orphans and widows of war casualties. This goodwill act helped to foster employee loyalty and
Technological development escalated beginning in the 1950s. H-T first developed a five-
ton 50- foot by eight-foot calculator. This calculator was replaced with vacuum tubes and later
replaced with a mainframe transistor that was faster and smaller than the vacuum tube. By 1957,
H-T had a spinning disk storage system that could assess and process accounting data on as
many as 50 disks and introduced the FORTRAN computer language. H- T was so large that they
supplied 90% of Europe’s computers, had $80 billion in sales and 270,000 employees. From
1970-80, H-T became the leading manufacturer of mainframe computers, hardware, software,
and services. By the 1980s, H-T was manufacturing floppy disks, bank automatic teller
machines and PCs for small businesses, schools and home use. H-T now has manufacturing
plants located in Raleigh, NC and Essonnes, France. In Raleigh, NC, H-T manufactures low-end
servers and personal computer systems and in Essonnes they manufacture logic and memory
chips. H-T is now vertically integrated and produces, services, and sells products exclusively in
the computer industry. More recently, H-T has experienced a downturn in earnings resulting
Systems Information.
adopters to increase H-T’s share of the computer hardware market. H-T uses a normal
costing system where manufacturing overhead is applied and estimated annually and quarterly
and all other costs are recorded at actual using a stand-alone weighted-average accounting
6
information and inventory system. Stand-alone implies that the cost accounting system is not
integrated with financial accounting, finance or logistics ledgers. They hope to install SAP, an
electronic resource planning system, but that has not happened yet. Because cost accounting is
stand alone, at the end of each quarter considerable accounting effort is spent integrating cost
data with financial accounting and logistics data. Each production location (Raleigh and
Essonnes) is managed separately and within each location there is decentralization of functions.
The cost accountants focus solely on budgeting, recording and analyzing costs. H- T’s
organization chart and its financial statements-- income statement and balance sheet--appear
below.
7
HT Organization Chart
Board of
Directors
High-Tech Corporation
Income Statement
At December 31
(Dollars in millions except per share amounts)
2002 2001
Revenues:
Hardware Sales 36,500 35,700
Services revenues 15,000 12,000
Software sales 13,000 13,000
Maintenance revenues 7,000 7,000
Rentals and financing income 1,600 1,500
Total Revenues 73,100 69,200
Cost of sales:
Hardware Sales 24,000 22,000
Services expenses 12,000 10,000
Software expenses 4,000 4,400
8
Maintenance expenses 3,600 3,600
Rentals and financing expenses 1,600 1,500
Total Cost of Sales 45,200 41,500
Gross Profit 27,900 27,700
9
High-Tech Corporation
Balance Sheet
At December 31
(Dollars in millions except per share amounts)
2002 2001 2002 2001
Assets Liabilities
Current Assets: Current Liabilities:
Cash and cash equivalents 7,680 7,260 Taxes payable 3,000 2,600
Marketable securities 500 450 Short term payables 13,000 11,500
Notes and accounts receivable 16,500 16,400 Accounts payable 5,000 4,500
Sales lease receivables 5,700 6,000 Compensation and benefits 3,000 3,000
Other receivables 900 1,000 Deferred income 3,700 3,500
Inventories 6,000 6,000 Other liabilities 6,600 6,500
Prepaid expenses 3,500 3,200 Total current liabilities 34,300 31,600
Total Current Assets 40,780 40,310
Long term liabilities 10,000 10,000
Property, plant and equipment 41,200 44,000 Other debt 14,000 14,300
Less: Accumulated Depreciation -25,000 -27,000 Deferred income taxes payable 1,600 1,800
Net property, plant and equipment 16,200 17,000 Total liabilities 59,900 57,700
RALEIGH, NC
The product development cycle for low-end servers and personal computer systems is
three months. This means that faster and cheaper computers are developed at least three to four
times a year. The computer industry experiences a 2-3% decline in raw material costs and
selling prices each quarter. Therefore, product costs are changing constantly. While head count
is high at Raleigh, this cost is stable and represents only about 5% of product cost. 70% of
product cost is materials and 25% is manufacturing overhead. Traditionally, for manufacturing
overhead in production, direct labor dollars have been the allocation base. Examples of servers
10
11
Raleigh tries to trace most of its costs directly to the product. Labor and materials are
traced directly to the product through bar codes. Each material input component is bar-coded
and traced directly to the unit to which it is attached. As materials move through assembly,
assemblers indicate which unit of output they are assembling through bar codes. For each
product produced, a diskette includes the serial number assigned to the finished server, the
assembler I.D. number and the identification number of parts used to make the server.
Since the market fixes the price of labor and materials, H-T hopes to increase profit
margins by reducing manufacturing overhead costs. H-T believes that it can reduce costs by
H-T’s strongest competitors reduce throughput time by eliminating the dealer. Their
competitors sell directly to the final or end customer. However, the dealers provide a level of
immediate service to end customers at the end customer’s location that is not provided by its
competitors. Competitors’ customers have to call an 800 number and sometimes wait 30
minutes on the phone before a technician can answer their question. Many customers who have
software installation problems must see a computer specialist at their own cost, or for other
problems they may have to return their equipment to the vendor and wait 2-3 weeks before the
computer is replaced or repaired. Therefore, H-T must weigh the benefits of selling through
dealers to its end customers as opposed to reducing throughput time by eliminating dealers.
Lead-time from dealer order to receipt of goods by the dealer is usually three to four weeks.
Dealers generally hold five-week inventory levels to avoid stock-out costs and to compensate for
12
goods that may be damaged during shipment. If not sold immediately, dealers have unsold
obsolete inventory on hand. In the past H-T has provided rebates to dealers for obsolete
inventory. This way, dealers can offer obsolete inventory at discounted prices to their customers.
H-T is concerned that this policy sends the wrong message to dealers. That is, if dealers don’t
move their inventory fast, the dealer doesn’t lose because H-T will discount the merchandise.
Therefore, dealers are not motivated to buy from H-T in small quantities or to sell their
inventories quickly. H-T wants dealers to more accurately estimate their sales so that they don’t
end up with large quantities of obsolete inve ntory on hand. H-T’s competitors not only reduce
dealer costs by not having dealers, but also reduce costs related to storing outdated inventory at
H-T records procurement parts costs when invoiced. So if they invoice a purchase in
March, they use February costs because March costs are not known at the time of invoicing. At
the end of March, when H-T knows the actual cost of March purchases, they record the under- or
over-applied materials/parts cost as the difference between actual and recorded parts cost.
Variances are investigated at the top end of the organization, outside of the cost accounting
department. Some variance is tolerated/expected due to the rapidly decreasing parts cost in the
computer industry. Similarly, when dealers are billed for computers purchased, they are billed at
the previous month’s price and the invoice price is adjusted the following month to reflect the
actual selling price. That is, H- T does not know the cost of producing the computers and
therefore the selling price of the computers until a month later when their vendors invoice raw
materials. This is when H-T knows the actual cost of parts procurement. Sizing or the
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Upon arrival, parts are debugged for defects. Non-defective items go in the storage bins until a unit
of output is demanded. Once demanded, components needed to complete the order are placed in a
basket. The basket (kit) contains the parts, and a diskette that has the part numbers, order number
and debugger’s identification number (I.D.) recorded on it. Upon leaving the kitting area, the order
is debugged for errors in parts selected to complete the order. The debugger’s I.D. is entered on the
diskette. The assembler, one person, then assembles the server. The assembler must enter their I.D.
on the diskette and verify the parts received. After assembling, the assembler checks the machine
for mechanical failure. Once completed, the machine, its invoice order number and diskette go to
the assembly inspection station. The inspector enters their I.D. on the diskette and inspects the
completed server. The inspector inserts software into the machines to conduct the appropriate tests.
If a defect is detected, the inspector flags the assembler and stops that assembler’s operations until
the problem is fixed. Goods cannot move to the next station (i.e., from parts selection, to kitting to
assembly to shipping) until the previous station has quality output. Servers are the high profit
margin products for H-T so they stress quality (< 2% defect rate) in production. The inspector
indicates on the diskette which quality- tests have been conduc ted and removes all testing software
not requested by the customer. Finally, the server is boxed and sent to shipping. A history of the
production and inspection of the machine is kept on diskette and mailed to the central office.
Information from this diskette is used to trace materials and labor costs directly to output. In
production, all overhead is allocated to products using number of parts as the cost driver. A server
could require from twenty to thirty parts, depending on the customer’s specifications. All servers are
packed in identical size boxes and manufacturing time depends on the number of parts tested.
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Shipment of almost all of H-T’s products (servers, PCs and mainframes) is out of Raleigh. In
addition to the production area, Raleigh has 450,000 square feet of warehousing space. Inventory is
in the warehouse for an average of 10-15 days before shipping. H-T uses activity-based-costing
(ABC) to allocate annual warehousing and shipping costs to each product as follows (in millions):
Cost Driver
Hours Hours
Activities Indirect Square Foot Scanning Out- Information
Head Count Floor Space Bound Freight Systems
Receiving (from mfg.) $50 $ 15.5
Shipping parts to
shipping lane $120 $ 12.0
Receiving
Head Count 1,000 500 600 1,200 400
Info. Systems (hrs) 600 120 100 800 60
Shipping parts to
lane
Head Count 800 100 100 800 20
Info. Systems (hrs) 80 10 60 80 15
Storage
Floor Space 1,000 2,000 600 800 400
Info. Systems (hrs) 100 100 100 100 100
Trans-out
Head Count 70 120 50 80 20
Info. Systems (hrs) 20 15 10 20 5
Scanning Hours 10 5 5 10 2
For some parts, transportation-out is the highest cost (servers). For example, servers have
high transportation-out costs because they are heavy. For other products, order filling is the highest
15
cost (desktops). For example, desktops absorb high order filling costs because desktops are
composed of multiple individual parts. The desktops may have 10-15 pieces to a box so it takes
more time to fill a desktop order than a server order, which is composed of one or two parts.
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ESSONNES, FRANCE
In Essonnes, France, H-T manufactures logic and memory chips from a silicon wafer. The
silicon wafers are sliced from a silicon cylinder. The silicon cylinders are $400 each. Each working
day H-T manufactures approximately 1,200 wafers. (An example of a silicon wafer appears below.)
In Essonnes, production takes places 24 hours a day, seven days a week and 52 weeks a year. The
only days off are May 1 because the French law of 1936 requires it and December 25. However,
accounting executives’ working hours are generally 8:30 a.m. to 6:00 p.m., five days a week.
H-T purchases silicon cylinders for $400 each. Approximately 125 wafers can be sliced from
each cylinder. During slicing, there is a loss of 20% of the silicon cylinder. They have quality
assurance contracts with their vendors to assure the quality and on-time delivery of their production
parts (silicon cylinders). After an order is received, H-T slices the silicon cylinders into wafers.
17
After slicing the cylinder into wafers, these wafers are cleaned and chemically coated during joint
processing. Also, in joint processing, H-T incurs monthly property plant and equipment-depreciation
expense, taxes, patent amortization, and other factory overhead costs of $120,000. H- T’s salaried
engineers in the joint processing department earn a total annual payroll of $2,070,000 a year. The
joint processing of the wafer results in two distinct products, memory chips and logic chips. Quality
control is very important in processing the wafer, even the air is filtered and controlled and the
equipment used to make the chips is monitored closely by engineers for quality of production. It
takes 250 steps of processing and 150 quality control steps to produce a finished wafer. Rooms full
of tools and expensive high tech equipment are used in the production area. Manufacturing includes
using an ultraviolet light to project the memory chip images onto the wafer. During the testing
phase, each wafer is tested and visually inspected. Materials cost beyond joint processing is
utilities, maintenance and quality assurance. End-of- line includes dicing the wafer and picking the
good memory and logic chips from the wafer. Each chip is charged to H-T’s internal customers at
From each wafer H-T can usually get a total of 100 logic chips and 400 memory chips
of which 5% of the good output is loss. The loss is detected at the end of production. To minimize
costs, H-T is currently focusing on increasing the yield from each cylinder and wafer. Some waste is
expected because square chips are being manufactured on a round wafer. Production cost and time
After end-of-line, the chips go to production control where they are distributed to their internal
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customers at a transfer price of 10% above total production cost.
H-T spends considerable effort in developing and implementing its budget. H-T prepares
five-year strategic plans from which flow yearly budgets and quarterly budgets. The annual budgets
begin with actual data that is negotiated with production managers to produce annual and quarterly
budgets. Budgeting involves a cross-functional team to insure optimal corporate goal congruence
(as opposed to unit- focused goals that may be suboptimal to the corporation as a whole). Upper
management has weekly technical meetings with production regarding yield, lead-time, and quality
of shipped output. Each quarter (3 months), H-T compares actual with monthly budgets. Usage of
Information Quality
Suppliers Systems Utilities Maintenance Assurance
(Computer (Square (labor hours (# people on
hours) kilometers) used) production line)
The budgeted charge-out rate for information systems is $10,000/hour, for utilities is $20,000/square
kilometer, for maintenance is $80/labor hour and for quality assurance is $52,000/person.
Information systems include the salaries of personnel, accounting and budgeting costs and
costs associated with the mainframe central processing unit. Utilities include building repairs,
19
electricity, water, fuel, property taxes, and building depreciation. Maintenance involves servicing
the machinery used in production and computers and mainframe systems used throughout H-T.
Quality assurance represents those personnel who measure quality and who conduct surveys on
supplier, employee and customer satisfaction. Full absorption costing is used to determine product
costs. For the French definition of full absorption costing, see Bescos and Mendoza (1995).
H-T wants to assign costs so that managers maximize the quality of output and reduce the
percentage of spoiled chips from each cylinder and wafer (yield). Currently H-T uses a traditional
normal costing system and allocates all processing costs to the good chips only. H-T also wants a
To monitor quality, H-T continuously queries its suppliers, employees and customers.
Employee satisfaction is important because they believe the more satisfied the employee, the more
likely the employee will seek to achieve quality output efficiently. In France, the employees are
very concerned about job stability as a result of the downsizing that has taken place. H-T has
reduced the number of buildings occupied by 60%, the number of employees by 40% and has
increased production 100% over the past five years as a result of increased technology in its
production facilities. Thus, employees are working harder to achieve corporate goals in a
competitive environment. Customer surveys include questions about on-time delivery. H-T strives
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IMPLEMENTING AND MONITORING STRATEGY
H-T is in the process of designing a balanced scorecard for the company overall and a Tableau de
bord for its plant in Raleigh NC. Management’s overall corporate goal is to get multi-year
cooperative agreements with SAP adopters to increase H-T’s share of the computer hardware
market.
1. Develop a value chain for H-T Corporation and for its operations in Raleigh. Your value
chain models should be illustrated similar to your textbook. Explain functions in the value
chain with examples. For instance, define in your own words, research and development
costs (R&D) and indicate what projects might be undertaken in R&D. Just because you have
the R&D element in the corporate value chain does not imply that you have a R&D element
in the Raleigh value chain. Therefore, the corporate value chain may look different or
similar to Raleigh’s value chain. You must explain why the chains are similar or dissimilar
between the corporate office and the Raleigh plant site.
3. Develop a Tableau de bord for H-T’s operations in Raleigh. The Tableau de bord should be
consistent with the corporate balanced scorecard goals. You should contrast the difference of
Kaplan’s Balanced Scorecard as you illustrated in number two above with the tableau de
bord for Raleigh.
4. Prior to the summary of your paper, you should recommend whether H-T should use the
balanced scorecard only or the tableau de bord for Raleigh as well as the balanced scorecard
for corporate headquarters.
Your paper should include at least two references in addition to the textbook. This manuscript will
be graded based on the following criteria.
Clarity (20%)
Creativity or critical thinking (15%)
Grammar (25%)
Cost-accounting terminology (25%)
Documentation (15%)
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ARE STANDARD AND ACTIVITY BASED COSTING APPROPRIATE FOR H-T?
Raleigh, NC
H-T is contemplating using activity based costing (ABC). Answer the following questions about the
Raleigh, North Carolina location.
1. Would you recommend that H-T consider using activity-based-costing throughout the
Raleigh plant site? That is, H-T is currently using ABC in the warehousing area only.
2. What costing system is H-T using in the production area: actual, normal or standard? What
costing system would you recommend that H-T use and why?
3. Develop a model (see Horngren, Foster and Datar (2000), exhibit 5-3, page 146) for H- T to
use if it considers adopting ABC at the Raleigh plant’s production department. Your model
should include identification of activities and cost drivers for which standards should be
developed. To defend the cost drivers used, relate them to the tableau de bord and corporate
strategy targets that you developed in the assignment, “Implementing and Monitoring
Strategy.”
Your paper should include at least two references in addition to the textbook. This manuscript will
be graded based on the following criteria.
Clarity (20%)
Creativity or critical thinking (15%)
Grammar (25%)
Cost-accounting terminology (25%)
Documentation (15%)
22
ALLOCATING COSTS IN A MULTICULTURAL COMPANY
Essonnes, France
1. Recommend a method that H-T should use in allocating its joint production costs. Explain
how this method would be useful in monitoring company strategy
2. Use your recommended joint cost allocation method to allocate joint production costs.
Provide an illustration of the computations used to allocate joint production costs.
3. What method did you use to allocate service department costs to the production departments?
Explain why you recommend your selected service department cost allocation method.
4. How much will H-T charge its internal customers (transfer price) for:
a. Memory chips.
b. Logic chips.
5. H-T is hesitant about implementing standard costing because the manufacturing system is
very complicated and because many products share the same manufacturing machines and/or
assembly production lines. Assuming that H-T uses normal costing 1 and is considering ABC
and standard costing, 2 explain personnel issues. You will probably need to read about the
French culture before answering this question. French culture sources should be cited and
included in your references.
Your paper should include at least two references in addition to the textbook. This manuscript will
be graded based on the following criteria.
Clarity (20%)
Creativity or critical thinking (15%)
Grammar (25%)
Cost-accounting terminology (25%)
Documentation (15%)
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REFERENCES
Bescos, P., and C. Mendoza. 1995. ABC in France. Management Accounting (April): 33-41.
Epstein, M.J., and J Manzoni. 1997. The Balanced Scorecard and Tableau de Bord: Translating
strategy into action. Management Accounting (August): 28-36.
Kaplan, R.S., and D. P. Norton. 1992. The Balanced Scorecard—Measures that drive performance.
Harvard Business Review (January-February): 71-79.
Horngren, C.T., G. Foster, and S.M. Datar. 2000. Cost Accounting A Managerial Emphasis. Upper
Saddle River, NJ; Prentice Hall.
1
Normal costing requires allocating direct costs using actual inputs at actual rates/costs and allocating indirect costs
using actual inputs at budgeted/standard rates.
2
Standard costing requires allocating direct costs using standard inputs at standard rates/costs and allocating indirect
costs using standard inputs at budgeted/standard rates.
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