Case
Teaching Notes
Supplementary Resources
Abstract
Textbook questions and cases often ask students to use differential analysis to evaluate one independent cost reduction action. But businesses often have multiple cost reduction alternatives to evaluate simultaneously. Furthermore, companies may consider these options independently or through combinations of alternatives. The case is based on an actual project to evaluate alternative cost reduction actions at a large insurance company. For educational purposes, the scope of the project has been significantly reduced to one function, the accounting department, to provide students with a realistic situation in a manageable format. Students are presented with three alternative cost reduction approaches and must identify the relevant costs and calculate the estimated potential impacts of each alternative. The cost reduction actions evaluated are outsourcing (“offshoring”), greater automation, and an office relocation. Additionally, the students must identify the risks and other nonfinancial considerations associated with the potential cost reduction actions and make a recommendation.
This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.
2024 Sage Publications, Inc. All Rights Reserved
Resources
Figure 1: Operating Earnings ($ in millions)
Figure 2: Operating Expense Ratio for AC Global vs. AC-US
Table 1: Accounting Department Expense Budget Summary | |||||
---|---|---|---|---|---|
Function | Number of Employees | Annual Salaries | Annual Benefits Load | All Other | Total Budgeted Expenses |
Federal tax preparation | 8 | $802,000 | $200,500 | $176,500 | $1,179,000 |
State tax preparation | 12 | 812,000 | 203,000 | 170,000 | 1,185,000 |
Tax management | 2 | 250,000 | 62,500 | 72,500 | 385,000 |
Controller | 2 | 285,000 | 71,250 | 68,750 | 425,000 |
SEC reporting | 7 | 525,000 | 131,250 | 158,750 | 815,000 |
U.S. GAAP reporting | 7 | 575,000 | 143,750 | 126,250 | 845,000 |
Regulatory financial reporting | 6 | 525,000 | 131,250 | 118,750 | 775,000 |
Management reporting | 6 | 455,000 | 113,750 | 106,250 | 675,000 |
Cost accounting | 6 | 385,000 | 96,250 | 98,750 | 580,000 |
General accounting | 10 | 628,000 | 157,000 | 100,000 | 885,000 |
Accounts payable | 10 | 470,000 | 117,500 | 393,750 | 981,250 |
Bank reconciliations | 5 | 215,000 | 53,750 | 61,750 | 330,500 |
Planning and budgeting | 4 | 325,000 | 81,250 | 88,750 | 495,000 |
Financial analysis | 8 | 685,000 | 171,250 | 108,750 | 965,000 |
Totals | 93 | $6,937,000 | $1,734,250 | $1,849,500 | $10,520,750 |
Table 2: Matrix of Potential Accounting Functions for Outsourcing | |||||
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Function | Skill Level Required | Local Knowleged Required | Mgmt. Support/Interaction | Technology Support Required | Compliance Risk |
Tax Department | |||||
Federal tax preparation | Medium | High | Low | Low | High |
State tax preparation | Medium | High | Low | Low | High |
Tax planning | High | High | High | Low | Medium |
Controller’s Department | |||||
SEC reporting | High | High | Medium | Medium | High |
U.S. GAAP reporting | High | High | Medium | Medium | High |
Regulatory reporting | Medium | High | Medium | Medium | High |
Management reporting | Medium | Medium | High | Medium | Low |
Cost accounting | Medium | Low | Medium | Medium | Medium |
General accounting | Medium | Medium | Medium | Medium | Medium |
Accounts payable | Low | Low | Low | Medium | Low |
Bank reconciliations | Low | Low | Low | Low | Low |
Financial Planning and Analysis | |||||
Planning and budgeting | Medium | Medium | High | Medium | Low |
Financial analysis | Medium | Medium | High | Low | Low |
Table 3: 2010 Detailed Expense Budget for Accounts Payable and Bank Reconciliations | ||
---|---|---|
Expense | Accounts Payable | Bank Reconciliations |
Salaries | $470,000 | $215,000 |
Benefits load | 117,500 | 53,750 |
Rent and related | 64,000 | 42,000 |
Supplies | 16,750 | 1,750 |
PCs | 12,000 | 6,000 |
IT support | 11,500 | 6,000 |
Postage | 270,000 | – |
Travel and entertainment | 11,500 | 3,000 |
Corporate expenses | 8,000 | 3,000 |
Total | $981,250 | $330,500 |
Table 4: Summary of Checks Processed per Month | ||||
---|---|---|---|---|
Recurring | Business Partners/Employees (probably electronic) | All Others | Total | |
Checks (monthly) | 8,000 | 17,000 | 25,000 | 50,000 |
Percentage | 16% | 34% | 50% | 100% |
Table 5: Matrix for Evaluating Relocation Prospects | ||||
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Function | Number of Employees | Management Interaction | Interdepartment Interaction | Employee(s) in N.J. |
Tax Department | ||||
Federal tax preparation | 8 | Low | Low | 4 |
State tax preparation | 12 | Low | Low | 9 |
Tax planning and management | 2 | High | Medium | 0 |
Controller’s Department | ||||
Controller | 2 | High | High | 1 |
SEC reporting | 7 | Medium | Low | 5 |
U.S. GAAP reporting | 7 | Medium | Low | 5 |
Regulatory financial reporting | 6 | Medium | Low | 4 |
Management reporting | 6 | Medium | High | 4 |
Cost accounting | 6 | Medium | Low | 5 |
General accounting | 10 | Medium | Low | 9 |
Accounts payable | 10 | Low | Medium | 7 |
Bank reconciliations | 5 | Low | Low | 3 |
Financial Planning and Analysis | ||||
Planning and budgeting | 4 | Medium | High | 2 |
Financial analysis | 8 | High | High | 6 |
93 | 64 |
Table 6: Summary Employee Information for Severance Calculations | |||||||
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Actual Costs | |||||||
Number of Employees | Weeks of Eligible Severance | Total Annual Salaries | Benefits Load | Health | 401(k) | Payroll Taxes | |
Tax Department: | |||||||
Department head and assistant | 2 | 32 | $250,000 | $62,500 | $17,200 | $12,500 | $19,125 |
Federal Tax | |||||||
N.J. residents | 4 | 76 | 445,000 | 111,250 | 32,200 | 22,250 | 34,043 |
Non-N.J. residents | 4 | 66 | 357,000 | 89,250 | 27,200 | 17,850 | 27,311 |
Total | 8 | 142 | 802,000 | 200,500 | 59,400 | 40,100 | 61,354 |
State Taxes | |||||||
N.J. residents | 9 | 140 | 627,000 | 156,750 | 76,600 | 31,350 | 47,966 |
Non-N.J. residents | 3 | 52 | 185,000 | 46,250 | 20,000 | 9,250 | 14,153 |
Total | 12 | 192 | 812,000 | 203,000 | 96,600 | 40,600 | 62,119 |
Controller’s Department: | |||||||
Department head and assistant | 2 | 28 | 285,000 | 71,250 | 15,000 | 14,250 | 21,803 |
SEC Reporting | |||||||
N.J. residents | 5 | 96 | 379,000 | 94,750 | 34,400 | 18,950 | 28,994 |
Non-N.J. residents | 2 | 36 | 146,000 | 36,500 | 17,200 | 7,300 | 11,169 |
Total | 7 | 132 | 525,000 | 131,250 | 51,600 | 26,250 | 40,163 |
U.S. GAAP Reporting | |||||||
N.J. residents | 5 | 74 | 413,500 | 103,375 | 37,200 | 20,675 | 31,633 |
Non-N.J. residents | 2 | 30 | 161,500 | 40,375 | 12,200 | 8,075 | 12,355 |
Total | 7 | 104 | 575,000 | 143,750 | 49,400 | 28,750 | 43,988 |
Regulatory Reporting | |||||||
N.J. residents | 4 | 52 | 351,000 | 87,750 | 27,200 | 17,550 | 26,852 |
Non-N.J. residents | 2 | 30 | 174,000 | 43,500 | 17,200 | 8,700 | 13,311 |
Total | 6 | 82 | 525,000 | 131,250 | 44,400 | 26,250 | 40,163 |
Management Reporting | |||||||
N.J. residents | 4 | 52 | 303,000 | 75,750 | 27,200 | 15,150 | 23,180 |
Non-N.J. residents | 2 | 30 | 152,000 | 38,000 | 17,200 | 7,600 | 11,628 |
Total | 6 | 82 | 455,000 | 113,750 | 44,400 | 22,750 | 34,808 |
Cost Accounting | |||||||
N.J. residents | 5 | 70 | 322,000 | 80,500 | 34,400 | 16,100 | 24,633 |
Non-N.J. residents | 1 | 12 | 63,000 | 15,750 | 10,000 | 3,150 | 4,820 |
Total | 6 | 82 | 385,000 | 96,250 | 44,400 | 19,250 | 29,453 |
General Accounting | |||||||
N.J. residents | 9 | 128 | 559,000 | 139,750 | 69,400 | 27,950 | 42,764 |
Non-N.J. residents | 1 | 18 | 69,000 | 17,250 | 7,200 | 3,450 | 5,279 |
Total | 10 | 146 | 628,000 | 157,000 | 76,600 | 31,400 | 48,042 |
Accounts Payable |
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N.J. residents | 7 | 106 | 333,000 | 83,250 | 46,600 | 16,650 | 25,475 |
Non-N.J. residents | 3 | 60 | 137,000 | 34,250 | 25,000 | 6,850 | 10,481 |
Total a | 10 | 166 | 470,000 | 117,500 | 71,600 | 23,500 | 35,956 |
Bank Reconciliation |
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N.J. residents | 3 | 42 | 137,000 | 34,250 | 30,000 | 6,850 | 10,481 |
Non-N.J. residents | 2 | 24 | 78,000 | 19,500 | 12,200 | 3,900 | 5,967 |
Total a | 5 | 66 | 215,000 | 53,750 | 42,200 | 10,750 | 16,448 |
Financial Reporting & Analysis Department: | |||||||
Budgeting | |||||||
N.J. residents | 2 | 28 | 177,000 | 44,250 | 12,200 | 8,850 | 13,541 |
Non-N.J. residents | 2 | 26 | 148,000 | 37,000 | 15,000 | 7,400 | 11,322 |
Total | 4 | 54 | 325,000 | 81,250 | 27,200 | 16,250 | 24,863 |
Financial Analysis | |||||||
N.J. residents | 6 | 72 | 526,000 | 131,500 | 39,400 | 26,300 | 40,239 |
Non-N.J. residents | 2 | 30 | 159,000 | 39,750 | 17,200 | 7,950 | 12,164 |
Total | 8 | 102 | 685,000 | 171,250 | 56,600 | 34,250 | 52,403 |
a The severance and continuing benefits for the accounts payable manager total $29,073, and the severance and continuing benefits for the most experienced staff member in bank reconciliations is $19,714.
Note: When calculating severance using the total salaries, you must first find the average weekly salary (salaries/number of employees/52 weeks) and multiply by the number of weeks of severance. Follow a similar process for health benefits. For 401(k) and payroll taxes, you may either follow the same process or apply the rate.
Table 7: Supplemental Information on Relevant Expenses |
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This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.
2024 Sage Publications, Inc. All Rights Reserved