Management Accounting

Each group is required to  read the case and address the issues raised at the end of the case.
You  are  expected  to  conduct  research relating  to:  customer  profitability;  competitive
advantage/competitive strategy and activity based costing  and  relate this back to the case
study  requirements when  preparing  your assignment .   The  assignment  should  be  in
REPORT  format  and  NOT  a  collection  of  separate  sections  each  written  by  individual
students.  The report should include:  cover page, executive summary, table of contents,
introduction,  discussion  (with  appropriate  sub -headings),  conclusion,  bibliography  and
appendices.    Please  ensure  you  include  summary  calculations  in  the  body  of  the  report
and include detailed workings in appendices.  Also, it is important that all articles, books
and  weblinks used for the assignment are properly referenced throughout the assignment.
Hand written assignments are not acceptable.
Please remember to also  include your  assignment group number on the group assignment
cover sheet.
The assignment represents  20% of your overall grade for the subject.
DUE DATE:  The  assignment  is  due  before  3 pm,  T hursday  7
th
May,  2015.
Please also note details on submission in the unit outline. Please
submit  a  copy of  the  group  assignment  (WORD  document  in
either  .doc  or  .doc x  format) online   through  the  Turnitin  link
provided   in  the  Assignment  &  Presentations  tab  in  Moodle.
This  tab  also  contains  instructions  for  online  submission  for
Turnitin.  In addition to this please also submit a  hardcopy of the
group assignment  in the  appropriate assignment box for your
seminar time and day for ACF5955.   The assignment boxes are
located opposite the reception area on Level 3, Building H.
SPECIFICATIONS:   The  suggested  word  limit  for  the  assignment  is  2,500  words
(excluding bibliography a nd appendices).  Assignments must be
submitted  typed  (12p  font  in  Times  New  Roman)  and  double -spaced,  single -sided,  on  A4  paper.    Where  appropriate,  the
assignment  must  be  adequately  referenced,  and  a  bibliography
included.  Students should keep a copy of  their assignment.
LATE SUBMISSIONS:  There  is  a  maximum  penalty  for  late  submission  of  10%  of  the
marks  allocated  to  the  written  report  per  calendar  day  late.
Extensions  will  only  be  provided  to  students,  who  receive
approval from the Chief Examiner  prio r to 7
th
May, 201 5.
EQUITY:  In order to preserve equity among students, no teaching staff will
provide assistance with assignments.  In the event of the need to
communicate  additional  information  about  the  assignment,  this
will be communicated to all students via Moodle.
Semester 1, 2015    1
ACF5955  Management Accounting    Assignment

CASE DETAILS

Shorts   Galore  manufactures  unisex  sport  shorts .    The  company  has  been  operating
nationally for over fifteen years and every year  has  been returning a profit ,  al though
profits ha ve decreased over the previous  three  years.    The  company is not the only one
in the clothing industry facing problems.  Due  to high cost structures  a   number of other
clothing companies have been forced to cease operations   as their cost structures have
made them  uncompetitive .  The companies that hav e survived have had to find ways of
gaining  a   competitive  advantage.    Some  have  achieved  this  by  outsourcing  clothing
production to cheaper overseas locations whilst others have switched to niche markets.

Sh orts Galore  is a medium- large  sized company with annual sales of  just over   $ 20.5 MIL
and net assets of approximately $3.75 MIL.  For the current year the company generated
a loss of $4 28,750 .   Figure   1 shows the summarised  pr ofit and loss statement for 2015.
Total  costs  for  sport  shorts  sold  in  2015  in cluded  basic  manufacturing  costs  of
$3,705,650 and cu stomising costs of $4,134,500.   The CEO Andrea Norton, has become
concerned  about  the  company’s  operations  due  to  the  company’s  unfavourable
financial position.  The company has a modern manufacturing facility and is currently
operating  at  70  per  cent  capacity.   There  are  130   employees  and  most  of  these  are
machinists who are paid on an hourly basis.  Payroll is manually processed in- house, on
a weekly basis, and as such consumes a great deal of resources .

ACF5955  Management Accounting    Assignment
Figure 1. Profit & Loss Summary for the Year Ended 2015
Sales $16,311,100
Less:  Cost of Goods Sold $7,840,150
Gross Profit $8,470,950
Less: Selling, Distribution & Administration Expenses
Selling and Distribution Expenses $5,515,250
Administration Expenses $3,384,450 $8,899,700
Net Loss  -$428,750

Shorts  Galore   manufactures  plain white  sport  shorts  with  a  design  feature  (or  logo)
which  are  the basic product l ine for the company.  These shorts   are produced in small,
medium and large sizes.  The normal production cycle   for an order of white sport shorts
is   five  days .   In  addition  to  manufacturing  the  basic sport  short s,  the  company  also
manufactures  customise d   sport  short s  depending  on  its  customers’  requirements .
There are three processes that can be undertaken to customise a  pair of sport shorts
although, not all of these three processes are always needed to customise each pair of
sport shorts .  In sequence, these three processes are: dyeing, printing and embroidery.
Approximately, sixty three per cent o f  sport shorts  manufactured  are dyed in  a number
of different colours   and this increases the manufacturing cost and  also  increases the
production cycle of an order by approximately three days.    As with the   basic white  sport
shorts, there is a logo,  that is added to eac h  pair of sport shorts .  The logo can either be
embroidered (by machine) or printed on to the shorts .   Eighty – five per cent of   all   the
sport  short s  manufactured  by  the  company have  the l ogo  printed  on  by  a  special
printing  machine.    The  remaining  sport  sho rt s  that  are  manufactured  have  the  logo
embroidered  on   to  them .    The  company  decided  to  trial  the  embroidered  logo  in
response to some customers complaining about the printed logo peeling off the  sport
shorts.

Currently, the company has nine hundred and twenty  customers who pay for the sport
shorts   by credit  card  and they take on average  about sixty days to pay their account.
The customers however differ in terms of the volume and the type of order placed with
Semester 1, 2015    3
ACF5955  Management Accounting    Assignment
the company.  On this basis these ,  customers  have been categorised in one of three
groups:  department  stores, which stock the sport shorts in their sporting goods section;
sporting  clubs,  which  order  the  sport  short s  for  their  members  and  associates  and
individual sports shops.  There are  twenty   customers in the department store category;
two  hundred  customers  in  the  sporting  club  category  and seven  hundred  individual
sporting shops.   Table 1 provides product and customer details for the 2015 financial
year.  A group of Sh orts Galore   sales people sell s  directly to buyers from the department
stores  and sport shops  whereas independent salespeople, paid on a commission only
basis, liaise with the licensing manager from the various sporting clubs.  Advertisements
in catalogues target the sports s hops which place orders with Sh orts Galore   either by
phone or by mailing the order form included in the catalogue.  A major cost across all
customer groups is the co st of providing sample s of  sport shorts  to potential customers.

Table 1.  Product & Customer Details for 2015
Sport Shorts Size
Depatment
Store
Sporting Club Sport Shops Total
Small 355,000 195,000 960,000 1,510,000
Medium 366,000 184,000 105,000 655,000
Large 274,750 169,250 100,000 544,000
Total sport shorts sold 995,750 548,250 1,165,000 2,709,000
Sales Revenue  6,241,613 $          3,450,488 $        6,619,000 $        16,311,100 $
No.of orders received 4,734 11,854 55,101 71,689
No. of deliveries made 4,113 9,873 46,000 59,986
No. of sport shorts dyed 750,000 400,000 550,000 1,700,000
No.of sport shorts printed 697,125 475,125 1,136,750 2,309,000
No.of sport shorts embroided 298,625 73,125 28,250 400,000
Sport Shorts  Sales  by Customer Category

The  manufacturing  costs  for  basic  white  sport  shorts   production  are  accumulated
separately  to  the  manufacturi ng  costs  for  customised  sport  shorts   production.    The
white  sport  shorts   production  process  accumulates  costs  as  direct  materials,  direct
labour or manuf acturing overhead, on a per unit basis. In this process manufacturing
Semester 1, 2015    4
ACF5955  Management Accounting    Assignment
overheads are absorbed on the basis of direct labour costs.  The costs associated with
customising sport shorts  are accumulated separately under the categories of direct costs
(for  dyeing)  and  conversion  costs  (for  printing  or  for  embroidery).    Table s  2   and  3
provide details of  the company’s sport shorts unit   costs and sales prices for 2015.

Table 2. Basic Sport Shorts  –  Cost and Revenue Data for 2015
Basic Sport
Shorts
Average
Selling Price
per unit
Direct
Material cost
per unit
Direct
Labour cost
per unit
Manufacturing
Overhead Cost
per unit
Small $5.45 $0.49 $0.45 $0.30
Medium $6.40 $0.65 $0.50 $0.32
Large $7.15 $0.70 $0.55 $0.35

Table 3. Customised per Unit Data for 2015
Customised
Sport Shorts
Direct Cost per
unit
Conversion Cost
per unit
Dyed $1.40 n/a
Printed n/a $0.50
Embroidered n/a $1.50

In the most recent  e xecutive  m anagement   m eeting, Sh orts  Galore ’s senior management
met to discuss  strategic  planning  issues  for  the  company.    During  the meeting  these
managers agreed that the main strength of Sh orts  Galore   is the quality of the product
whilst  the  main  weakness  in  recent  years  lies  with  customer  service,  especially  in
meeting  scheduled  deliveries.    It  was  also  noted  that  this  was  in  conflict  with  the
company ’s newly proposed  mission statement which stated   that the company’s mission
was  “to  provide  a  reasonable  return  to  shareholders  through  the  provision  of  good
quality products to customers with  excellent customer service and on- time delivery at
the lowest cost” .   This proposed mission statement has  not as yet been ratified by  Sh orts
Galore ’s  Board  of  Directors  and  thus  has  not  b een  implemented.    As  a  result,  the
Semester 1, 2015    5
ACF5955  Management Accounting    Assignment
company’s management accounting and information system has not been modified to
monitor progress towards these critical success factors.

Overall,  the  management  team  agreed  that  the  company  needed  to  become  more
customer focused and this would help in improving company profit.  In bid to ensure the
company returns a profit in the next twelve month period, Sh orts  Galore ’s management
team decided that the profitability of its customers in the three customer categories
need to be determined and analysed, as at present this is not possible.  Some managers
believe that some of the customers generate high profits whilst other customers are
“loss” customers.  These managers have agreed that using Activity Based Costing (ABC)
in formation  would  facilitate  this  analysis.    As  a  starting  point  for  ABC  analysis  they
recently  obtained  additional  data  on  selling  and  distribution,  and  administration
expenses along with cost pools and cost drivers for various customer related activities
f or 201 5 .  These are detailed in Tables 4 and 5.

Table 4.  The Assignment of Selling, Distribution & Administration Costs
to Customer Related Activities
Customer Related Activities
Selling & Distribution
Administration
Accounts Maintenance 0% 70%
Marketing & Advertising 10% 0%
Sales Commission 5% 0%
Sales Visits 15% 0%
Delivery Activities 50% 10%
Tracking Misplaced or Lost Items 20% 20%
Percentage Distribution

Table 5.  Customer Related Activities & Assumed Activity Cost Drivers
Customer Related Activities Assumed Activity Cost Driver
Accounts Maintenance No. of orders received
Marketing & Advertising Management Estimate *
Sales Commission Direct allocation to Sporting Club customers only
Sales Visits
75% allocation to Department Store customers, 25% allocation to
Sport Shop  customers
Delivery Activities No. of deliveries made
Tracking Misplaced or Lost Items No. of sport shorts sold
* Management decided this allocation is:  20% to Sporting Club customers & 80% to Sport Shop customers

During the executive management meeting the Marketing  &  Sales Manager, Stan White,
pointed out that  Sh orts Galore   can only reduce its   prices if it can  cut costs.  He went on
to  suggest  that  the  company  can  reduce  its  quality  inspection  costs  by  reducing
inspections, which will improve on- time delivery rates.  This  issue  was  to be included in
the agenda for discussion at the next meeting .

REQUIREMENTS   (9 0 marks)
The  senior  managers  at S h orts  Galore   have  approached  your project team  and have
asked for advice on the current situation and the future direction of the company.  You
are expected conduct research and analysis to prepare a report for the next executive
management meeting which addresses the requirements below:
1.   Your  project  team  is  required  to  present  to  S horts  Galore   senior  management  a
recommendation of the best strategy you believe  that  Sh orts Galore   should adopt in
order  to  be  competitive.    In  order  to  achieve  this,  your  team  should  conduct
research into the fundamental ways in which companies can achieve a sustainable
competitive advantage.  Specifically your team is required to:
(i) Discuss in detail at least three of these strategies, and  for each one, identify and
discuss in detail  at least two Australian or US ,  publicly listed  companies that have
succeeded in using the particular strategy, the reason why the strategy was chosen
and  implemented  by  the  company,  and  how  this  has  been  effective  for  each
company.
(ii) Using your research from Requirement 1, present the senior management team
with a recommendation of the best strategy you believe Sh orts Galore   could adopt
in  order  to  be  competitive   and  why this  is  the best  one.    Your  discussio n should
include and justify what you believe to be the critical success factors in achieving this
strategy.  Explain also why the other two strategies, as identified by your research
above , may not be as  effective for Sh orts Galore as the one recommended.
2.      S horts  Galore’s  management  team  have  agreed  that  the  company  needs  to
become more customer focused and have asked y our project team to research this
further  with  respect  to  customer  profitability  analysis.    Discuss  in  detail   how
customer  profitability analysi s  can  be  used  by  companies  in  increasing  customer
focus.  You should also identify and discuss in detail  two  Australian or US ,  publicly
listed  companies  which  have  implemented  customer  profitability  analysis
highlighting  how  these  companies  have  used  this  approach to  become  more
customer focused  and  discuss what the overall outcome has been for each company.
Semester 1, 2015    8
ACF5955  Management Accounting    Assignment
3.   (i)   Design a customer profitability system based on Activity Based Costing (ABC)  for
S h orts Galore .  Include   the activity cost driver rates; the   customer related activity
costs and indicate  the profitability of each of the three customer groups.
(ii)  List and briefly justify four other potential cost pools and drivers from the case
those  (i n  addition  to  those  listed  in  Table  5),  that  may  be  used  f or  selling,
distribution and administration costs.
4.   Discuss  in  detail  your  customer  profitability  results  for S horts  Galore   with  an
emphasis on analysing the customer related activity costs.
5.   Based  on  your  project  team’s  research  and  also  on  your  customer profitability
analysis for  S h orts Galore, identify and discuss in detail five   strategic issues that may
arise for the company.