University of Warwick
Warwick MBA by Distance Learning
Management Accounting IB806P 2020-2021 #2
Length: 3000 words
Deadline: 13th September 2021 before 10:00:00 (UK time) Submission: Electronic Submission on http://my.wbs.ac.uk/
You work as a consultant in the firm of Bartholomew and Associates. As part of your current workload you are aiding and advising a client on a number of issues.
Client – Spa Spares Ltd
Spa Spares Ltd is a UK company which manufactures a range of spare parts and accessories for use in spas and hot tubs. Its main market is the UK but it has over a number of years built up a good clientele across Europe.
The company operates via two divisions which take responsibility for different types of spare parts. The electronic division take responsibility for pumps, motors and filters, whilst the accessory division takes responsibility for design and manufacture of peripheral items such as cushions, pillows and cup holders which are sold to retailers for onward sale to the end customer.
The company has grown and developed over time following its vision to be the leading supplier of spa spares and accessories in the UK with a focus on the quality of the products and punctuality of delivery for customers.
The company has experienced good financial growth with profits from both divisions increasing year on year. Both divisional managers have been able to achieve a bonus each year, since return on investment (ROI) is the main performance measure being used in the organisation to evaluate the performance of the divisions and they are able to achieve an ROI in excess of the target set by head office.
Some recent events though have worried the Chief Executive Officer Liam Parker (CEO) and you have been called to a meeting to discuss them with him.
Liam begins by showing you the financial summaries from the two divisions from the last period (See appendix one) showing both divisions achieving a return on investment over the target of 10%.
When you enquire about the composition of the asset bases of each division, he reveals he is surprised that the electronic division has chosen not to invest in new filter processing machines. He has recently been reading about new machines being integrated into rival manufacturers businesses. The machines it is claimed, increase throughput time and reduce defects in the process.
In addition, a recent customer feedback survey has revealed higher numbers of returns from customers of filters and a drop in the on-time delivery score across the electronic division. There is also a higher than usual maintenance cost in the period (in the electronic division) which has been explained by charges for non-routine maintenance call outs.
In the accessory division whilst the asset base is not so old sales are starting to plateau and there have been few new innovative accessories being added to the range.
Whilst Liam can see that both divisions are achieving the target set he wonders whether the financial measure being used is appropriate. He also wonders whether each division should be evaluated on wider measures of performance.
You are also called to a meeting at the accessory division where you are met by the divisional manager Sadia Shah.
In discussion with Sadia she reveals that the accessories market is becoming more competitive. There are new entrants to the market particularly from Asia who seem to have very competitive prices. Sadia appreciates that her division needs to bring new innovations to the market but is unsure how to do so and continue to achieve the financial targets.
Sadia does have a new product (a multi-functional light called the Lumilight) which she can introduce to the market. She is concerned that as a result of the increased competition, it will be more difficult to sustain the high forecast demand for the Lumilight. This is due to the company’s current absorption costing system with a full cost approach to pricing products. She shows you the data in appendix two to demonstrate her problem.
“As you can see based on the projection the cost of the unit will be £25 and when we add the profit margin to this we would have to charge at least £31.25 per Lumulight. Our market research suggests that customers would be willing to pay £28 for the product. On this basis there is no way I can bring the product to the market.”
Required: Part One
Produce a report for Liam Parker which covers the following key areas:
1. Evaluates the current method of appraising performance utilising the additional information supplied in appendix one to demonstrate its usefulness to the organisation in terms of goal congruence. (15%)
2. Puts forward a case for a more multi-dimensional approach to performance measurement and management which could be adopted by the business, within this you should ensure you consider the rationale for the change, the potential issues that might be faced, sample measures that could be included and empirical evidence to support your recommendation (35%)
Required: Part Two
Produce a report for Sadia Shah which covers the following key areas:
1. Explains the problems of relying on absorption costing methods in the current business environment. (10%)
2. Evaluates the potential benefit to the accessory division of employing a target costing approach. (30%)
10% of marks will be allocated to the academic writing of the reports and use of literature.
Extract from management accounts for the year ended 31 December 2020
Electronic Divisions proposed investment: The machines required would cost £3,000,000 and would generate additional controllable contribution of £240,000.
The current cost of capital for the company is 8%
Product costing projections for the Lumilight
In addition, other costs of production overhead, marketing and distribution are £10 per unit based on the projected sales figures of 400,000 units.
The company has a current requirement to achieve a profit margin of 20%
Procedures relating to submitted work
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