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Costs for Decision Making: An Instructional Case of Relevant Costs and Differential Analysis of Cost Reduction Alternatives

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CASE QUESTIONS Provide responses, displaying all work, to the following questions: 1. General Questions: a. What costs are relevant to each of the three alternatives: offshoring, relocating functions, and automating functions? b. What are some of the nonfinancial considerations associated with each of these alternatives? 2. Offshoring Analysis: a. Based on George’s assumptions that all of the remaining supervisor’s costs are split 65% to accounts payable and 35% to bank reconciliation, and all incremental ongoing technology costs and postage IMA EDUCATIONAL CASE JOURNAL 4 VOL. 9, NO. 3, ART. 3, SEPTEMBER 2016 costs are charged to accounts payable, calculate the annual savings per function through offshoring. b. What would the impact be on AC-US’s costs for the next three years if the two accounting functions are performed in India instead of in the U.S.? (Be sure to include severance in the one-time costs, using information from Table 6 and assume zero inflation). 3. Electronic Processing: a. Using the information that Charleston gathered on electronic payment processing, determine the potential staff reduction and calculate the potential annual cost savings from electronic processing of 50% of the accounts payable checks. b. If AC-US outsources bank reconciliations and/ or accounts payable, what would be the maximum combined savings of electronic payments and outsourcing over the next three years, including the one-time costs? (Be sure to include severance costs, using information from Table 6, in the one-time costs). 4. Relocation: a. Using the information that Falkirk gathered on potential real estate savings through relocation, estimate the annual cost savings available through relocating some or all of the accounting functions to New Jersey. b. What are the impacts on AC-US’s costs over the next three years, including the one-time costs? (Be sure to include severance costs, using information from Table 6, in the one-time costs). 5. Recommendation: Based on your analysis, recommend a course of action for AC-US. Remember Thomas’s goal of 10% reduction in the expenses for the accounting function. Your alternatives include retaining operations as they are, adopting electronic payments for accounts payable, relocating accounting functions, and/or offshoring functions. You may recommend a combination of any of the alternative cost savings approaches

Answer 1

a.) Relevant cost for offshoring would be the managerial supervisor cost, the exchange rates, benifits, the aditional labour cost, and the additional technology cost, the cost for a personal computer , supplies, travel, severance and all other expences and the $0.65 per payment for processing accounts payble and $200 per bank recencolition.
Relevent costs for electronic payments would be the bank charges for an average of $0.125 per electronic payment, postage expense, personal computer(PC) cost, IT support and the severance cost for laid of employees.

b.) For offshoring: skill levers, local knowledge( of the US internal revenue code) eg. compliance risk, technological support, and the need for direc management oversight- which may be difficlt due to distance and differences in time zones.
For electronic payments: Reducing processing time, labour forces reduction/ employee morale, and poential and current business partners whom are good candidiates for elecrtonic payments.
For recolaction: management and interdepartmental interaction, employee moral and the number of N.J resident employees in each function.