management accounting

There are 5 questions on the case study but i just need the writer to answer question 3 (i) about:

Design a customer profitability system based on ACTIVITY BASED COSTING (ABC) for Short Galore. Include the activity cost driver rates; the customer related activity costs and indicate the profitability of each of the three customer groups.

ACF5955 Management Accounting Assignment

MONASH UNIVERSITY

DEPARTMENT OF ACCOUNTING

ACF5955 MANAGEMENT ACCOUNTING

ASSIGNMENT – SEMESTER 1 2015

NB: This document is to be read in conjunction with the instructions on the assignment

contained in the unit outline.

REQUIRED:

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 3pm, Thursday 7th 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 .docx 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 and appendices). Assignments must be

submitted typed (12p font in Times New Roman) and doublespaced,

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 prior to 7th May, 2015.

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.

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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, although

profits have 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 have 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.

Shorts Galore is a medium-large sized company with annual sales of just over $20.5MIL

and net assets of approximately $3.75MIL. For the current year the company generated

a loss of $428,750. Figure 1 shows the summarised profit and loss statement for 2015.

Total costs for sport shorts sold in 2015 included basic manufacturing costs of

$3,705,650 and customising 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.

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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 line 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 shorts, the company also

manufactures customised sport shorts 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 of 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 each 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 shorts manufactured by the company have the logo printed on by a special

printing machine. The remaining sport shorts 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

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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 shorts 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 Shorts Galore sales people sells 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 shops which place orders with Shorts Galore either by

phone or by mailing the order form included in the catalogue. A major cost across all

customer groups is the cost of providing samples 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 manufacturing costs for customised sport shorts production. The

white sport shorts production process accumulates costs as direct materials, direct

labour or manufacturing overhead, on a per unit basis. In this process manufacturing

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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). Tables 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 executive management meeting, Shorts Galore’s senior management

met to discuss strategic planning issues for the company. During the meeting these

managers agreed that the main strength of Shorts 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 Shorts

Galore’s Board of Directors and thus has not been implemented. As a result, the

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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, Shorts 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)

information 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

for 2015. 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

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ACF5955 Management Accounting Assignment

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 Shorts 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.

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ACF5955 Management Accounting Assignment

REQUIREMENTS (90 marks)

The senior managers at Shorts 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 Shorts Galore senior management a

recommendation of the best strategy you believe that Shorts 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 Shorts Galore could adopt

in order to be competitive and why this is the best one. Your discussion 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 Shorts Galore as the one recommended.

2. Shorts Galore’s management team have agreed that the company needs to

become more customer focused and have asked your project team to research this

further with respect to customer profitability analysis. Discuss in detail how

customer profitability analysis 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.

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ACF5955 Management Accounting Assignment

3. (i) Design a customer profitability system based on Activity Based Costing (ABC) for

Shorts 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 (in addition to those listed in Table 5), that may be used for selling,

distribution and administration costs.

4. Discuss in detail your customer profitability results for Shorts 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 Shorts Galore, identify and discuss in detail five strategic issues that may

arise for the company.

Semester 1, 2015 9