MANAGERIAL ACCOUNTING

CASE STUDY REPORT ASSIGNMENT

General Requirements

The due date for submission will be your tutorial in week 10 (starting 7 October, 2013). Submit your assignment to your tutor at the START of the tutorial. No submissions by fax or e-mail will be entertained. A softcopy of the assignment must also be uploaded onto LEO in the assignment drop-box with the name of one member of the group as the file name. Late submission of assignments will result in appropriate penalty. Please refer to the ACU handbook for clarification on penalty for late submission.

Groups of two students each will be formed. All hard copies of assignments must contain ACU assignment cover sheets duly signed by all members declaring that it is an original work. Assignments must be properly printed out on A-4 sized sheets, with appropriate referencing and bibliography. Plagiarism will not be tolerated and will result in no marks being awarded.

Case Background [20 marks - equivalent to 20% overall weighting]

This case study is modified from Case 14.44, p. 680-681 of Langfield-Smith, K, Thorne, H & Hilton, RW 2012, Management accounting, information for creating and managing value, 6th edn, McGraw-Hill, North Ryde.

AWB is an international company which manufactures and sells cosmetic products. Recently AWB underwent restructuring. Under the old structure, it was divided into 9 business units based on countries, e.g. Thailand, Singapore, China etc. Each business unit was headed by a managing director (MD), who is responsible for marketing and manufacturing. Each MD was remunerated based on the monthly business unit profitability. Under the MDs, there were Production Managers and Marketing Managers. They were remunerated according to their personal, department and business unit performance, i.e. a fix sum plus some percent of profit.

To compete in the marketplace and improve organizational performance, AWB engaged in a restructure of its operations. Under the new structure, the 9 business units continued to 2

Exist, but only 6 business units are responsible for the marketing. The remaining 3 units are responsible for manufacturing the products and led by respective Production Managers, who are given full responsibility for manufacturing the products. Each MD of these 3 units is responsible for the marketing and manufacturing. The MDs do not interfere with the Production Manager. The remunerations of MDs are based on the profit of sales and manufacturing. Monthly profit statements are prepared for each business unit. In addition to these reports, a manufacturing report profit and a total company profit statements are prepared. The transfer price for goods transferred between manufacturing and marketing within the same business unit is at standard manufacturing cost. The transfer price for goods transferred between manufacturing and marketing across different business units is at standard cost plus 5 percent.

Some MDs have raised concerns about some of the decisions that have been made since the restructuring, and wonder if the right incentives are in place. Some issues are listed below.

1. Marketing Managers are in the best position to influence the level of slow moving and obsolete inventory, through choosing whether to sell off these products or allow them to be scrapped. In recent months there have been high levels of obsolete inventory. This affects the manufacturing profit statement. There is little incentive for marketing staff to sell off or manage slow or old inventory as they simply purchase goods at standard cost from manufacturing as required.

2. Inventory shipping and transportation is managed by manufacturing staff and the cost of this is charged to the manufacturing profit. However, the cost of these activities is heavily influenced by the deals that the sales forces make with their customers. Sales staff can negotiate three shipping and transportation options. The first option is for the purchaser to pick up the inventory from the warehouse. The second option is for the inventory to be shipped by AWB to a central warehouse of the customer. The third option is for the inventory to be transported to the customer's shops. Each of these options attracts different costs, which are charged to the manufacturing profit.

3. When there is a change in product or raw materials, the business units that include manufacturing areas absorb the manufacturing variances from standard cost (whether favorable or unfavorable). This results in an adjustment to standard cost in subsequent periods and affects the profit of the marketing units. For example, if a favorable purchasing variance results from the activities of the manufacturing department the transfer price will decrease.

4. It is the Production Manger, not the MD of each business unit, who initiates all capital expenditure requests. Capital expenditure decisions affect business unit profits through the timing of cash flows, depreciation on assets and maintenance cost.

Some MDs believe that there may be a problem in the alignment between business unit responsibilities, transfer pricing policy, performance evaluation systems and management remuneration. The profits of some business units are below budget and in the current competitive environment; head office management has raised concern.

You are a member of a management consulting team and have been asked by the AWB to prepare a report outlining any issues that may be working against effective performance measurement and incentive systems in the business units.

In your report of not more than 2000 words, identify clearly any underlying problems and recommend a solution that considers appropriate responsibility centre type, transfer pricing policy, performance evaluation systems and management remuneration package.