Question: This is an extract from Ducker, H.,
This is an extract from Ducker, H., Head, A., McDonnell, B., O’Brien, R. and Richardson, S. (1998), A Creative Approach to Management Accounting: Case Studies in Management Accounting and Control, Sheffield Hallam University Press, ISBN 0 86339 791 3. Introduction High Street Reproduction Furniture is a small, but rather exclusive, producer of reproduction bedroom furniture. Turnover last year was just over £1 million and the business continues to provide a steady profit margin. It is a private limited company owned by John Carpenter and his wife Eleanor and it has been trading for 25 years. John, who is a fully qualified cabinet maker, started in the trade immediately after leaving school. He has little formal training in management, but has much hands-on experience gained from running his business. Past and recent history of the company The company originally operated from small, cold and draughty premises in the back streets of Sheffield and in the early years its only employee was Fred. Because of the cold working conditions, John always wore a ‘flat’ cap (a woven cap with a peak, traditionally worn by the men of Yorkshire) whilst he worked alongside Fred, a habit that seems to have stuck and has become somewhat of a trademark for John. According to John, ‘In those days I had to think on my feet and we tended to exist from one job to the next, on a wing and a prayer you might say?’ As a consequence of this, whenever John has a major problem at work which needs resolving, he tends to put his cap on to help him think things through. The employees always know the ‘chips are down’ when they see John walking about in his cap. The business grew steadily in the early years and about ten years ago John was able to move from the original site to a high street location in Sheffield, which provides a small showroom area, a workshop, staff room and storage. However, the product range has remained fairly constant and consists of three pieces of bedroom furniture, namely, a wardrobe, a chest of drawers and a dressing table. These are sold directly to customers either as separate items or as a bedroom suite. The furniture is hand-made to a very high standard, authentically reproducing the Baxendale style which was popular in the late nineteenth century. This requires a high degree of skill in the construction and finishing stages of the production process. Although most of John’s time these days is spent in managing the business, he still keeps a watchful eye on activities and likes to help out if the men are over-stretched. The furniture is made from mahogany supplied by Sheffield Timber Company, which imports high quality seasoned timber from South America. Although John could buy mahogany more cheaply elsewhere, he has dealt with this company for a long time and has confidence that the quality will be consistently good. The grain and colour of the wood is extremely important and, because the fronts of the furniture must match in grain and colour for each piece or suite of furniture, the company expects to have a high level of off-cuts and waste. The unique finish to the furniture is produced through a highly-skilled hand-waxing process, using beeswax mixed to a special recipe created especially for High Street Reproduction Furniture by Charlesworth Specialist Waxes, who make and supply this recipe exclusively to the company. Mahogany and beeswax are the two main materials used to make the finished products. Twelve people are now employed full time in the production process: ten are highly skilled cabinet makers and two are young apprentices. All the cabinet makers have been with the company for a long time and Fred is now the workshop supervisor. Fred is a bit set in his ways but, according to John, ‘He does a damned good job and he is a very good craftsman.’ Careful delivery of the furniture to the customer is very important and John is proud of the fact that the company receives very few complaints of furniture damaged in transit. The company sub-contracts this part of its activities to a well-established company in the city of Sheffield. This company has always been reliable and has provided a high-class service to customers carefully protecting the furniture in transit, setting the piece in its position for the customer and asking them to check it over. If the customer is not satisfied with the furniture, then it is returned to the workshop immediately. Of course, High Street Reproduction Furniture pay a premium price for this service, but it has proved of benefit to both the company and the customer, since problems can be resolved immediately. The specialised nature of the production process and the specialised delivery service results in high product costs. However, John has found that the company’s products attract the type of customer who is willing to pay a premium price. In the past year the company has invested £100 000 in the refurbishment of the offices and showroom and in the extension of the workshop and storage area to meet increasing demand for the company’s products. This was funded by a five-year loan from the company’s bank. John believes that the increase in demand is mainly due to the showing of a television documentary of Sheffield which featured High Street Reproduction Furniture. The company appeared in a very favourable light as part of the new face of Sheffield emerging from the aftermath of the shrinking steel industry and the programme was given prime-time national coverage. In order to capitalise upon this free publicity, John also launched a national advertising campaign, using the documentary as a marketing ploy. However, the increased demand is putting pressure on the workforce and the lead time (the time between the customer ordering the furniture and the expected delivery date) is increasing. Iris has been responsible for the paperwork ever since John started the business. Initially she worked part time whilst her children were young but has worked full time for the last five years. She has had the help of Cecil, who is a qualified accountant, for the last twelve months. Cecil spends two days each month on the company premises, assisting with costings and accounts. Although, according to John, ‘Iris has always done a great job of sorting us out’, John feels that the company is getting too busy for her to cope. He has asked Cecil’s advice and Cecil has suggested that it is probably time to employ a full-time management accountant, even though this will mean a reduction in his own services for the company. Two months ago John took Cecil’s advice and contacted Sheffield Hallam University to advertise the post on the undergraduate careers board. He felt that the post would suit a new graduate and that he could offer a fair salary whilst not placing too large a burden on the company’s overheads. A number of students expressed an interest and John interviewed three of these. He selected Mary, who is due to start with the company as soon as her final exams are completed. Last week Mary arrived at High Street Reproduction Furniture and settled in nicely. Wisely, John involved Iris in the selection process and the two seem to be getting on well together. John received a profit statement from Cecil for the previous six months’ trading which itemised the performance of the company’s three products. This is attached as Exhibit 1. John was appalled to see that the dressing tables had made a loss. He has called a meeting for next week with Mary, Iris and Fred to discuss the situation. It could not be before then, as John had important appointments for the rest of the week. First, he had to visit the beeswax suppliers who are located in the Scottish Highlands, in order to renegotiate a contract for beeswax for the coming year; second, Sheffield Timber had telephoned and asked for an urgent meeting. John warned Mary, Iris and Fred that at next week’s meeting he also wishes to discuss another matter with them. This concerns a potential new venture for the company. Much to his amazement, knowledge of the company has reached the American market through the screening of the television programme. One particular company has approached John with an enquiry for fifty chests for export to America. High Street Reproduction Furniture has never supplied bulk orders before and this customer is only willing to pay 70 per cent of the normal selling price. He has briefly discussed the problems with Mary who, being keen and enthusiastic in her first job, wishes to anticipate John’s information needs before the meeting takes place. She has been working overtime (after Iris has left for the day) to produce the information which is attached in Exhibit 2. She hopes to impress John at the meeting by being well prepared, but has only managed to obtain the raw data by the date of the meeting. EXHIBIT 1 Cecils Profit Statement for the last six months’ trading 
EXHIBIT 2 Mary’s Initial Information Gathering Profit statement: Numbers of each product sold in the period covered by the statement: Wardrobes …………………………………………………………. 200 Dressing tables …………………………………………………………. 160 Chests of drawers …………………………………………………………. 200 Selling and distribution costs includes delivery costs to the customer Amount paid to delivery contractor for last six months …………… £19 600 Average delivery cost per product ……………………………………………… £35 each Dressing tables: Six months ago John made the decision to buy in the mirror section of the dressing tables from a local firm at a cost of £200 each. Mary has found the original estimate of the cost if the company were to continue making the mirror section in house, which was used for comparison with the sub-contract price. This is shown below: (£) Direct materials …………………………………………………………. 120 Direct labour ……………………………………………………………….. 40 Variable overheads …………………………………………………………. 20 Fixed overhead ………………………………………………………………… 40 Total …………………………………………………………………………….. 220 In order to ensure that the timber used to frame the mirror section matched the main body of the dressing table, it was agreed that the supplying firm would buy their timber from the same supplier, i.e. Sheffield Timber Company. The mirror sections were delivered to High Street Reproduction Furniture in an unfinished state and were hand-waxed by the company’s own craftsmen. Control over the quality of the mirror sections has been problematic. The American Enquiry Mary has obtained the following information: Delivery charges (50 chests to the dockside) …………………………………… 3 vans @ £300 each Average lead time: for the last six months …………………………………………………………. 12 weeks for the six months prior to that ……………………………………………… 8 weeks Average overtime: last week ………………………………………………………………… 6 hours per man for the last six months 1 …………………………………… hour per man per week Stocks of mahogan ……………………………………………… 3250 square metres Average usage of mahogany per product: Wardrobes …………………………………………………………….. 10 square metres Dressing tables (excluding mirror) ……………………………. 4 square metres Mirror section …………………………………………………………… 1 square metre Chests of drawers …………………………………………………….. 5 square metres The meeting It is obvious to everyone (except Mary) that John is worried. He makes a strange sight in his cleanly cut business suit and his flat cap! Mary is puzzled but she dares not to comment. The first item on the agenda is the loss-making situation of the dressing tables. John comments, ‘I am appalled to find that the dressing tables are making a loss of £30 000. I can’t understand it as it has never happened before. It looks as though we shall have to stop making them and concentrate on the other products, unless any of you can offer an alternative solution’. Iris says that, given Cecil’s figures, she has to agree with John about the dressing tables. Fred comments that he hasn’t had time to look at the figures as he has been ‘snowed under’ with work. Mary decides to keep her data to herself at this stage and offers to go away and ‘work on some numbers’. The second item is the potential new venture. John passes copies of the American enquiry to all those present. ‘I intimated to you all last week that we might discuss this today. Do you have any views on whether we should accept it or not?’ Iris and Fred have discussed this item before the meeting. Fred tells John that the order is totally impossible, given that the workshop is getting very overstretched, and Iris agrees with him, adding, ‘How on earth do they expect us to make a profit at only 70 per cent of the normal selling price?’ Mary interrupts at this stage, having gained a little more confidence, and suggests to John that the enquiry might be worth looking into. She promises to provide further information by the end of the week. John decides that they should meet again on Friday, when Mary will have more information for them and hopefully Fred will have had time to give the issues greater consideration. As they leave the meeting, Fred comments to Iris, ‘There’s something else worrying him besides what he’s telling us. I wonder what it can be?’ Question 1. Mary has decided to restate Cecil’s original profit statement by using the additional information she has collected and by employing a marginal costing approach. Required: (a). Prepare a new profit statement for Mary which clearly identifies both the contribution made by each product over the last six months and the overall profit. (b). Prepare a profit statement which shows the potential situation if John stops production of the dressing tables and demand for the other products remains the same as that of the past six months. Assume that supplies of mahogany are unlimited. (c). What other issues should John consider before making the decision to stop producing dressing tables? (d). Prepare a statement which identifies the contribution which the dressing tables would have made in the last six months, had the mirror section not been sub-contracted out. Suggest other issues which might affect John’s decision to make the mirror sections in house once again. Question 2. Utilising theoretical models and illustrating your answer with reference to the case study materials, discuss the decision situation regarding the American enquiry. Your discussion should also be supported by financial information which Mary would be likely to produce. Question 3. Mary has suggested to John that the company would benefit from a management information system to aid him in planning and controlling the activities of the business and to assist in organisational decision making. Join is not sure what Mary means. Required: (a). Illustrate the types of planning and controlling activities that are likely to take place at High Street Reproduction Furniture Ltd. (b). Describe the types of information which might be useful. (c). Suggest the likely sources of this information. Question 4. At the urgent meeting last week, the Sheffield Timber Company informed John that supplies of mahogany from South America were in jeopardy. There had been a serious forest fire and much of the seasoned stock ready for export at the premises of the South American exporter had been wiped out. Sheffield Timber envisaged that there would be no more supplies of the type used by High Street Reproduction Furniture for the next six months. After that date, it seems that supplies can be restored to normal. Required: (a). Provide a production schedule which would maximise profits on the stocks of mahogany held by High Street Reproduction Furniture Ltd and identify the forecast profit figure based on this production schedule. You should assume that forecast demand from the normal customer base will be 10 per cent higher than the last six months’ figures and that the decision on the American enquiry is still unresolved. You should also assume that the mirror section of the dressing table will have to be produced by High Street Reproduction Furniture, since the current supplier does not hold any stock of the mahogany. (b). Identify other issues which John would need to take account of, if this production schedule is undertaken. (c). Compare the predicted profit in (a) above with the profit which John might have expected in the second half of the year, if the predicted demand for all three products had been met, the American contract had not been taken on and the mirror section of the dressing table had been produced by High Street Reproduction Furniture Ltd. Comment on your findings.
Transcribed Image Text:
Wardrobes Dressing tables Chests Total (£000) (£000) (£000) Sales revenue 340 200 300 840 Direct materials 100 96 90 286 Direct labour 63 48 53 164 Variable workshop overheads Apportioned fixed workshop overheads Total manufacturing costs Gross profit (loss) Selling & distribution costs Net profit 17 16 15 48 60 240 70 230 (30) 68 198 226 696 100 74 144 80 64
> Do Duncan’s test for paired comparisons for the data of Exercise 13.6 on page 519. Discuss the results. Exercise 13.6: A study measured the sorption (either absorption or adsorption) rates of three different types of organic chemical s
> The printout in Figure 13.5 on page 532 gives information on Duncan’s test, using PROC GLM in SAS, for the aggregate data in Example 13.1. Give conclusions regarding paired comparisons using Duncan’s test results. Fig
> The following table (from A. Hald, Statistical Theory with Engineering Applications, John Wiley & Sons, New York, 1952) gives tensile strengths (in deviations from 340) for wires taken from nine cables to be used for a high-voltage network. Each cabl
> A random variable X follows an exponential distribution with mean 1/β. Assume the prior distribution of β is another exponential distribution with mean 2.5. Determine the Bayes estimate of β under the absolute-error loss function.
> The data in the following table represent the number of hours of relief provided by five different brands of headache tablets administered to 25 subjects experiencing fevers of 38â—¦C or more. Perform the analysis of variance and test t
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> Use Tukey’s test, with a 0.05 level of significance, to analyze the means of the five different brands of headache tablets in Exercise 13.2 on page 518. Exercise 13.2:
> The study Loss of Nitrogen Through Sweat by Preadolescent Boys Consuming Three Levels of Dietary Protein was conducted by the Department of Human Nutrition and Foods at Virginia Tech to determine perspiration nitrogen loss at various dietary protein leve
> The purpose of the study The Incorporation of a Chelating Agent into a Flame Retardant Finish of a Cotton Flannelette and the Evaluation of Selected Fabric Properties conducted at Virginia Tech was to evaluate the use of a chelating agent as part of the
> Consider the data of Review Exercise 13.45 on page 555. Make significance tests on the following contrasts: (a) B versus A, C, and D; (b) C versus A and D; (c) A versus D. Exercise 13.45: Four laboratories are being used to perform chemical analysis. Sa
> Use Bartlett’s test at the 0.05 level of significance to test for homogeneity of variances in Exercise 13.6 on page 519. Exercise 13.6: A study measured the sorption (either absorption or adsorption) rates of three different types of o
> A random variable X follows a negative binomial distribution with parameters k = 5 and p [i.e.,b ∗ (x; 5, p)]. Furthermore, we know that p follows a uniform distribution on the interval (0, 1). Find the Bayes estimate of p under the squared-error loss fu
> Use Cochran’s test at the 0.01 level of significance to test for homogeneity of variances in Exercise 13.4 on page 519. Exercise 13.4: Immobilization of free-ranging white-tailed deer by drugs allows researchers the opportunity to clos
> Six different machines are being considered for use in manufacturing rubber seals. The machines are being compared with respect to tensile strength of the product. A random sample of four seals from each machine is used to determine whether the mean tens
> (a) Fit a multiple regression equation of the form μY |x = β0 + β1x + β2x2 to the data of Example 11.8 on page 420. (b) Estimate the yield of the chemical reaction for a temperature of 225 ◦ C.
> The following is a set of coded experimental data on the compressive strength of a particular alloy at various values of the concentration of some additive: (a) Estimate the quadratic regression equation μY |x = β0 + Î&s
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> This case study is taken from Ducker, J., Head, A., McDonnell, B., O'Brien, R. and Richardson, S. (1998), A Creative Approach to Management Accounting: Case Studies in Management Accounting and Control, Sheffield Hallam University Press, ISBN 086339 791
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> This case study is taken from Ducker, J., Head, A., McDonnell, B., O'Brien, R. and Richardson, S. (1998), A Creative Approach to Management Accounting: Case Studies in Management Accounting and Control, Sheffield Hallam University Press, ISBN 086339 791
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> This case study is taken from Ducker, J., Head, A., McDonnell, B., O'Brien, R. and Richardson, S. (1998), A Creative Approach to Management Accounting: Case Studies in Management Accounting and Control, Sheffield Hallam University Press, ISBN 086339 791
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> The following information relates to three possible capital expenditure projects. Because of capital rationing only one project can be accepted: The company estimates its cost of capital is 18 per cent. Calculate: (a). The payback period for each proje
> Short flower Ltd currently publish, print and distribute a range of catalogues and instruction manuals. The management has now decided to discontinue printing and distribution and concentrate solely on publishing. Long plant Ltd will print and distribute
> Cassidy Computers plc sells one of its products, a plug-in card for personal computer systems, in both the UK and Ruritania. The relationship between price and demand is different in the two markets, and can be represented as follows: Home market: Price
> Butterfield Ltd manufactures a single brand of dog food called ‘Lots O Grissle’ (LOG). Sales have stabilized for several years at a level of £20 million per annum at current prices. This level is not expected to change in the foreseeable future (except a
> Safety or buffer stocks are held for many reasons. For example, road authorities might want to hold sufficient stock of grit salt in case of bad weather, or firms might build stock of key materials if a price rise is impending. In recent times climate c
> The Boeing 737 jet is the world’s most popular and reliable commercial airliner. The company has manufactured over 8000 jets in the 737 family. In 2005, the 737-900ER was launched, which can carry more passengers over a further range than any previous mo
> Modern day aircraft are complex pieces of engineering, increasingly using more technology, composite materials and more efficient engines. Aircraft engines are in particular improving not only in fuel efficiency, but also in range, thus contributing to l
> South African energy and chemicals company Sasol, like many companies dealing with large-scale projects, needs to prepare cost estimates. Sasol specialize in high value liquid fuels, chemicals and low-carbon electricity. In 2014, the company decided to i
> In the March 2012 edition of CIMA’s Financial Management journal, Christian Doherty asks what will management accountants ten years on be grappling with? This question has been posed before (see, for example, Scapings et al., 2003) and technology is a fa
> According to a US Congressional enquiry, this accident apparently partly resulted from local decisions within the oil multinational BP and its contractors to save relatively immaterial costs by cutting corners in oil exploration safety measures (National
> As one of the pioneers in the low-cost airline market, easyJet’s business model includes some core values: ● Safety – Our number one value, sitting at the core of everything we do. ● Pioneering – We challenge to find new ways to make travel easy and affo
> Insteel Industries decided to implement ABM at the Andrews, South Carolina, plant. The ABM team analysed operations and identified 12 business processes involving a total of 146 activities. The ABM study revealed that the 20 most expensive activities acc
> Taylor, Woods and Cheng Ge Fang (2014) reported on how one UK company moved its target costing system away from profit targets and focused it on product-level economic value added (EVA(TM)) targets. The company, which used the pseudonym Electronics for c
> Management accounting combines accounting, finance and management with the leading-edge techniques needed to drive successful businesses. Chartered management accountants: ● Advise managers about the financial implications of projects. ● Explain the fina
> Following events of September 2001, airport security screening in the US and globally increased dramatically. As we all know, this led to increasing queues at airports which while inconvenient, are paramount to the safety and security of passengers. Sin
> As a result of the recent financial troubles at Tesco its shares declined to an 11-year low in 2014. Terry Smith, chief executive of investment house Fundsmith, stated in an article published in The Financial Times that investors had long ignored warning
> An article by Chen et al. (2015) published in Strategic Finance described how Zhongyuan Special Steel Co. (ZYSCO), a typical Chinese state-owned company, introduced a new strategic management system that would integrate its value creation strategy into e
> Southwest Airlines set ‘operating efficiency’ as its strategic theme. The four perspectives embodied in the balanced scorecard were linked together by a series of relatively simple questions and answers: Financial: Wha
