Hull University / HKU
SPACE 2016/17
BSc Accounting.
Module 26144 Advanced
Management Accounting
Individual
Assignment
Assignment title: Costing
Systems, Profitability Analysis and Strategic Appraisal,
Consider yourself to be a consultant employed to advise the management
of a local company, Central World (CW) Products plc (HK), about costing systems
and profitability analysis and their strategic assessment. This involves calculation, interpretation and
critique of their sales outlet information.
Central World (CW) Products plc (HK) purchases a range of good quality
gift and household products from around the world; it then sells these products
through retail outlets or “mail order”.
The company receives “mail orders” by post, telephone and through the internet. Retail outlets are either small displays
within department stores or CW Products plc’s own small shops.
The company started to set up its own shops after a recession in the late
1990s and regards them as the flagship for its business; sales revenue has
gradually built up over the last 15 years.
The company’s outlets have increased and it now has counters in 5
department stores and 10 shops. As its reputation has grown further sales have
been made by mail order, customers originally using the postal system, but more
recently the telephone and internet.
The company has made good profits over the last few years but recently
trading has been difficult. As a
consequence, the management team has decided that a fundamental and strategic reappraisal
of the business is now necessary if the company is to continue trading.
The following forecast information for the coming year has been
prepared:
|
|
Department
store
Outlets
|
Own Shops
|
Mail Order
|
||
|
Post
|
Telephone
|
Internet
|
|||
|
Sales revenue per outlet
Sales revenue per order
Mark-up on purchase cost
Number of outlets
Percentage of “mail orders”
|
$50,000
30%
5
|
$1,000,000
40%
10
|
$150
40%
30%
|
$300
40%
60%
|
$100
40%
10%
|
The total number of orders through the whole “mail order” business for
the company in the coming year is expected to be 100,000 orders.
Meanwhile the budgeting process for the coming year is proceeding. CW Products plc uses an activity-based
costing (ABC) system and the following estimated (unit and batch-related) cost
information for the coming year is also available:
Retail outlet costs:
|
|
|
|
Number each
year for each:
|
|
|
Activity
|
Cost driver
|
Rate per cost
driver
|
Department
store
|
Own shop
|
|
Telephone queries and requests to CW
Sales visits to shops and stores by CW sales staff
Shop orders
Packaging
Delivery to shops
|
Calls
Visits
Orders
Deliveries
Deliveries
|
$
15
250
20
100
150
|
40
2
25
28
28
|
350
4
150
150
150
|
Staffing, rental and service costs for each of CW Products plc’s own
shops amounts to, on average, $200,000 per shop per year.
Mail order costs:
|
|
|
Rate per cost
driver
|
||
|
Activity
|
Cost driver
|
Post
|
Telephone
|
Internet
|
|
Processing “mail orders”
Dealing with “mail order” queries
|
Orders
Orders
|
$
5
4
|
$
6
4
|
$
3
1
|
|
|
|
Number of packages per order
|
||
|
Packaging and deliveries for “mail orders” - cost per package $10
|
Packages
|
2
|
2
|
1
|
The maintenance of an Internet sales link is estimated to cost $80,000
for the coming year.
Additionally, the company has fixed (product and facility related)
costs of Warehousing which serves the mail order business and replenishes the
shops and store outlets. Information
technology costs (in addition to the internet-sales link mentioned above) which
support all sites. There are central
administration costs dealing with procurement of products and the overall
senior management salaries and office costs and the human resource function
which deals with training and recruitment for all outlets. The expected costs for
the coming year are shown below:
|
|
$
|
|
Warehouse
IT
Administration
Personnel
|
1,750,000
850,000
1,450,000
300,000
4,350,000
|
continued
Required:
Prepare a Report for the management which:
(a)
(i) Briefly
contrasts Strategic and Traditional Management Accounting.
10 marks
(ii) Contains calculations, in good form, that
will show the expected profitability of the different types of sales outlets
for the coming year and the total profitability of the company.
30 marks
(iii) Includes comments on the results of the
figures you have prepared.
10 marks
(b)
(i) Discusses how useful the profitability analysis
is, any limitations it may have and thus, overall how helpful the information
you have prepared above is for the company’s fundamental and strategic reappraisal
of its business.
20 marks
(iii) Indicates what other information about the
company, and its sales outlets, may be needed in order to make a more informed
judgment about the fundamental and strategic appraisal of the business.
30 marks
Guidance. The numerical data and the small case study
provided above form the basis for you to make applied comments and
interpretations, stating any assumptions.
A split of marks is indicated; note a large proportion of the marks are
NOT reserved just for correct calculations.
It is important that your understanding of the calculations, their
implications and their limitations comes through in your answer, not only of
the accounting but the business implications.
There is no single correct
answer, your opinion and understanding should be displayed in addition to
selected references to the literature on the topic. One academic paper of mine
related to profitability analysis is available on the SOUL and eBridge website
to give you some slight assistance.
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