A recently incorporated power company, set up after the privatization of the electricity and coal industries, owns the following assets.
An electricity generating station, capable of being fuelled either by coal or by oil.
Three coal mines, located some 10 to 20 miles from the generating station, connected to a coal preparation plant. A coal preparation plant, which takes the coal from the three mines and cleans it into a form suitable for use in the generating plant. As a by-product, a quantity of high quality coal is produced which can be sold on the industrial market. The plant has a rail link to the generating station.
The electricity generated is distributed via power lines owned by a separate company, which has an obligation to provide the distribution service on pre-set terms. The market for electricity is highly competitive with demand varying both by the time of day (in the short-term) and by season of the year (in the medium-term).
The power company is in the process of developing a management accounting system which will be used to provide information to assist in setting electricity tariffs for customers and to hold managers within the company accountable for their performance. Initially there are five main operating units, with a manager responsible for each, namely the generating station, the three coal mines and the coal preparation plant.
(a) Outline, using pro-forma (i.e. without figures) reports where necessary, the accounting statements you would recommend as a basis for the evaluation of the performance of each of the unit managers.
(b) Discuss the key measurement issues that need to be resolved in designing such a responsibility accounting system.
(c) Explain how the information required for tariff-setting purposes might differ from that used for performance evaluation.