1)

A consulting company that provides software and services relating to business intelligence and analytics has a library of customer success stories on its website at http://www.sas.com/success/indexByTopic.html#1000.1001.0000. Select and read one of the success stories relating to Activity-Based Management. Summarize the success story, and relate the ideas of the article to what you have learned this week in this course.

2)

The State of Rhode Island publishes its budget and the supporting information at www.budget.state.ri.us/index.htm. Access the budget and answer the following:

· What are the duties of the budget office? (Hint: Use the Primer link.)

· What are the six governmental functions listed in the budget?

· What are the major sources of Rhode Island's revenues?

· What is the accounting basis used in the preparation of the budget? (Hint: Use the Primer link and scroll down until you see the Budget Basis section.)

· The budget mentions four categories of program performance measures. List them, and briefly describe how they are used in Rhode Island. (Hint: Use the Primer link and scroll down until you see the Program Performance Measures section.)

· What did you learn from reviewing the most recent budget of the State of Rhode Island?

What do you think the biggest challenges are when it comes to preparing their budget?

Summary of notes from readings “activity based costing”

Traditional cost accounting methods suffer from several defects that can result in distorted costs for decision-making purposes. All manufacturing costs—even those that are not caused by any specific product—are allocated to products. Nonmanufacturing costs that are caused by products are not assigned to products. And finally, traditional methods tend to place too much reliance on unit-level allocation bases such as direct labor and machine-hours. This results in overcosting high-volume products and undercosting low-volume products and can lead to mistakes when making decisions.

Activity-based costing estimates the costs of the resources consumed by cost objects such as products and customers. The activity-based costing approach assumes that cost objects generate activities that in turn consume costly resources. Activities form the link between costs and cost objects. Activity-based costing is concerned with overhead—both manufacturing overhead and selling and administrative overhead. The accounting for direct labor and direct materials is usually the same under traditional and ABC costing methods.

To build an ABC system, companies typically choose a small set of activities that summarize much of the work performed in overhead departments. Associated with each activity is an activity cost pool. To the extent possible, overhead costs are directly traced to these activity cost pools. The remaining overhead costs are allocated to the activity cost pools in the first-stage allocation. Interviews with managers often form the basis for these allocations.

An activity rate is computed for each cost pool by dividing the costs assigned to the cost pool by the measure of activity for the cost pool. Activity rates provide useful information to managers concerning the costs of performing overhead activities. A particularly high cost for an activity may trigger efforts to improve the way the activity is carried out in the organization.

In the second-stage allocation, activity rates are used to apply costs to cost objects such as products and customers. The costs computed under activity-based costing are often quite different from the costs generated by a company's traditional cost accounting system. While the ABC system is almost certainly more accurate, managers should nevertheless exercise caution before making decisions based on the ABC data. Some of the costs may not be avoidable and hence would not be relevant.

Summary from readings “profit planning”

Product Safety

Obviously, a major ethical obligation of any organization is to produce a quality product or service. Just as obviously, nothing will put a company out of business faster than offering a product that is dangerous, poorly produced, or of inferior quality.

Competition in the marketplace generally helps ensure that goods and services will be of a quality that is acceptable to consumers. However, sometimes a company becomes the victim of external sabotage (like Johnson & Johnson), and sometimes a company makes a foolhardy decision, and the result is a product that is not safe. Let’s look at these classic cases.

COMPANY: Johnson & Johnson

INDUSTRY: Pharmaceuticals

SITUATION

In September 1982, seven people in the Chicago area were killed when they

ingested Tylenol, a painkiller produced by McNeil Labs, a division of Johnson

& Johnson. The Tylenol in question was found to have been laced with

cyanide, and it was not known for several weeks whether the contamination

was the result of internal or external sabotage. A thorough investigation later proved that the poisonings were the result of external sabotage, although the culprit has never been found.

HOW THE COMPANY HANDLED IT

First, the company pulled all Tylenol from shelves in the Chicago area. That

was quickly followed by a nationwide recall of all Tylenol—31 million bottles

with a retail value of over $100 million. Johnson & Johnson sent Mailgram

messages explaining the situation and the recall to over 500,000

doctors, hospitals, and distributors of Tylenol. It also established a toll-free

crisis phone line so that consumers could ask questions about the product. In addition, its CEO, James Burke, and other executives were accessible to the press and were interviewed by a variety of media.

Before the poisoning, Tylenol had captured over a third of the painkiller

market, so Johnson & Johnson decided to rebuild the brand and its franchise.

That wasn’t going to be easy, since consumer fear ran high immediately after the poisoning. In one survey conducted a month after the incident, 87 percent of the respondents understood that Johnson & Johnson was not to blame for the Tylenol deaths, yet 61 percent declared they would be unlikely to buy Tylenol in the future. So even though most consumers knew the poisonings were not the fault of Johnson & Johnson, most of them wouldn’t buy the product again. Johnson & Johnson tackled this problem head-on by offering coupons to entice consumers back to Tylenol and, ultimately, by redesigning Tylenol’s packaging to be tamper resistant.

RESULTS

Johnson & Johnson’s reaction to the Tylenol poisoning has been hailed as the

benchmark for how organizations should react to a crisis. As we’ve mentioned in other chapters, the firm’s reaction to the Tylenol crisis proved that its famous Credo, in which it outlines its responsibilities to its consumers, employees, community, and stockholders, wasn’t hollow. It was that concern for the customer—its primary stakeholder—that drove its response to the crisis. By being accessible to the press, which is yet another important stakeholder in a crisis, Johnson & Johnson’s executives displayed concern for the consumer by refusing to dodge responsibility or blame any other party for their difficulties.

The results of the crisis were far reaching. The tamper-resistant packaging

pioneered by Johnson & Johnson after the crisis has become commonplace in a wide variety of products, from food to pharmaceuticals. Two decades after the crisis, Johnson & Johnson’s reputation as a quality producer of pharmaceuticals and as a company that cares about its customers is still strong. Its former chairman, James Burke, is renowned for his concern about ethical issues and became a sought-after speaker on a wide variety of topics related to ethics. Also, by the mid-1980s, Tylenol had regained almost all of its market share.

COMMENTS

The background of former Johnson & Johnson CEO James Burke was probably critical to the company’s behavior during the Tylenol crisis. Burke was a marketing man who knew and understood the importance of public perception and the value of timely, accurate communication. Not many executives are comfortable with open communication, and their natural reticence can be enormously harmful to their organizations when a crisis strikes.39 Burke was open with the public, but he was also extremely open with the press and created a relationship of trust with them. It came in handy when, several weeks into the investigation, a small amount of cyanide was found in a company plant. It was also learned that it could in no way have been involved in the Tylenol contamination. The press was told and asked not to reveal the information, and they didn’t! We know about this only because the story was relayed by Lawrence Foster, then head of company communications, in a talk with our students. Burke also took the long-term view, believing that a recall would be costly in the short term but would help rebuild brand loyalty and trust in the long term.

UPDATE

While Johnson & Johnson has long been admired for its handling of the Tylenol crisis, in recent years it has stumbled. For example, J&J’s LifeScan

division pleaded guilty to criminal charges in 2000 and paid $60 million in

fines for selling defective glucose-monitoring devices to diabetics and for

later submitting false information about the problem to federal regulators.

Lawyers who filed the class-action suit against LifeScan estimated that at

least three diabetics had died because of the faulty readings they obtained

from LifeScan’s SureStep monitoring device. LifeScan, in court documents,

admitted that it had not adequately described the product’s defects to the

Food and Drug Administration (FDA), failed to disclose the problem to

patients, and then failed to notify the FDA once problems began to occur. It’s difficult to reconcile this image of Johnson & Johnson with the Tylenol one. The chairman of Johnson & Johnson, Ralph S. Larsen, wrote in a statement, ‘‘Mistakes and misjudgments were made. We fully acknowledge those errors and sincerely apologize for them. We are committed to learning from this experience.’’40 More recently, the company has been criticized for not launching a recall earlier of many of its over-the-counter medications that had a moldy odor that made consumers ill.41 Also, as this book goes to press, Johnson & Johnson has been accused of paying kickbacks to a large nursing home chain to use its antipsychotic medications on elderly patients. Yet, it is important to note that in an annual survey of reputation among U.S. companies conducted in 2009, the Johnson & Johnson brand ranked number one in reputation for the tenth consecutive year. And our former students who have worked for the company continue to rate it a highly ethical company that is guided by its Credo.