In this document a detailed discussion on the issues faced by Free-Air Skate Pty Ltd shall be made. Providing appropriate recommendations to the management of the company after evaluating the issues is the main objective of this document. In order to provide useful advice to the management of an organiAccountingzation to help the management to conduct the affairs of the organization effectively .
The objective of the report is to discuss the importance of management accountants in today’s complex business environment. The benefits of having management accountants in an organization can be evaluated by comparing the financial performance and position of an organization between periods prior to the engagement of management accountants and periods after the engagement of management accountants.
Despite participating for the first time in the meeting of Free-Air Skate Pty Ltd, it was amply clear from the discussion in the meeting that there was lack of coordination between the different managerial personnel of the company. The company currently has a Human Resource Manager (HRM), a purchase manager, a sales manager and a production manager. The discussion in the meeting made it more than clear that there is serious lack of coordination between these managers of the company. The lack of coordination between these managers are certainly influencing the business operations of the company (Wall, Martin, Kraus and Lind 2015).
An organization operates in a complex business environment and in an uncertain future. In order to manage the resources of an organization efficiently generally the management of an organization uses forecasting statements and budgets. If these budgets and forecasting statements are not practical and appropriate then an organization will struggle to make optimum use of its resources. In case of Free-Air, the company is struggling big time to get their acts together as far as its numbers are concerned. Managers are blaming each other for regular changes in numbers. This is due to the inability of the managers to correctly forecast the expected sales and subsequently required productions & procurements. As a result numbers are changed continuously which is creating huge trouble for the management to conduct the affairs of the company (Andrea and Vagnoni 2015.).
In order to run the business operations of an organization effectively it is important to take correct business decisions. The ability of an organization to take correct business decisions is depending on the ability of the management to correctly forecast the future. A business operates in an uncertain future and it is the ability of the managerial personnel to correctly forecast the future. As already mentioned earlier that lack of ability of different managers to correctly forecast the expected sales, expected production and purchases have created huge trouble for the business to operate the business operations of the company thus, the managers have difficulty to take correct business decisions of the company.
The company seems to lack an effective business strategy. From the discussion in the meeting between different managers it is clear that the company finds it quite difficult to achieve its sales target. As a results the company is failing to meet its sales targets. With the company failing to meet its sales targets all other departments are required to make changes to the numbers continuously. The company needs an effective strategy to achieve its sales target (Panida and Lautour 2018).
Production department, purchase department and human resource department are finding it difficult to utilize the respective resources at their optimum level to achieve the organizational objectives. At present it is clear that the different departments finding it difficult to make optimum utilization of their resources.
The company does not have an effective costing system to correctly ascertain the costs of its products. As a result the management has not access to correct costing information about the products of the company. Without proper cost information it is not possible to take other important decisions such as determination of appropriate pricing of the products of the company (Cooper and Robin 2017). The management of the company is affected negatively due to the inefficient costing system within an organization.
Taking into consideration the issues and problems faced by the company lets provide a detailed discussion on the steps to be taken to resolve the issues faced by the company.
The company needs an efficient costing system in place to ascertain the cost of its products correctly. Determination of cost of products correctly will help the management to correctly price its products in the market. As a result the sales as well as profit of the company both will be positively influenced. Often wrong pricing of products due to wrong costing of products leads to loss of market share. Thus, a company should have an effective costing system in place. Looking at the operations of the company it would be beneficial for the company to have Activity Based Costing (ABC) system in place. It is wrong to assume that ABC system is only useful for large and big corporations (Barrie and Plunkett 2017). Small and medium sized business enterprises are equally benefitted from the use of ABC system. It helps in identifying appropriate cost centres, cost pools and cost drivers to correctly allocate the overhead costs to the products of an organization. Thus, determination of appropriate cost is possible with the use of ABC system within the company. Hence, Free-Air should implement ABC system within the organization correctly ascertain the cost of its products (Kerr, Caratti, Singh, and Zagaria. 2017).
The managers shall hold regular meetings with each other to discuss various aspects of business including any recent changes in business strategy or environment that is expected to impact sales and other elements of business. This will improve communication between different departments of the company as a result the performance of the company will be improved significantly in the future. Coordination between the managers will be improved with regular meetings between them (Terry 2017).
The company has failed to achieve its sales target for number of times. This is primarily due to the inability of the company to come up with an effective marketing and advertisement strategy to market its products. Aggressive marketing strategy including sponsoring different skateboard sporting events in the country will help the company to increase its sales in the future. With aggressive marketing strategy the company will be able to achieve its sales target in the future (Lili-Anne and Ihantola 2015).
The company should have proper agreement with its suppliers to ensure that whenever materials are required the suppliers can send supplies at short notice. The problem of purchase manager should be solved by entering into agreements with suppliers to supply required materials as and when necessary (Martin 2016).
The company should motivate its employees by providing them performance bonus. In case acceptance of new offer the employees will be motivated to provide their best for the company with the objective of earning performance bonus (Tony 2016).
In case the market demand is high and the company lacks required capacity to supply the required demand in the market then it should keep the option of outsourcing open. All efforts should be made to supply the market demand. This will help the company to increase its market share and build a goodwill for itself in the market (David 2016).
The company should use variable costing as it is appropriate costing method considering the nature of company’s business and its operations. Use of absorption costing just because it is easier to price the products of the company is not a correct reason to use an inappropriate costing method (Paolo 2016). Use of variable costing would mean that the management will not have the option to reduce the cost of goods sold by using absorption costing to increase the profit of the organization. Thus, the scope to manipulate the accounts will be not there to the management to influence the financial performance reflected in the income statement of the organization. Hence,, the organization by using variable costing will be able to reflect the correct amount of profit and loss in the books of accounts.
Conclusion:
Considering the discussion in this document it has become quite clear that the management accountants add immense value to an organization and its operations. The benefits are numerous provided the management is ready to provide necessary information and allows the management accountants to discharge their responsibilities properly. In this case listening to the management accountants could solve number problems of Free-Air. The management was about reject the offer of Boardlife of selling 1,000 boards at $200 each however, the calculation by the management accountants showed that despite selling the boards at relatively lower price the company is expected to earn significant contribution from the contract. Thus, the usefulness of management accountants to an organization is immense.
The company has received an offer to sale 1,000 skateboards to Boardlife at a price of $200 per board whereas the normal selling price of per board for other customers is $300. Before deciding whether to accept or reject the offer of Boardlife lets calculate the contribution from the sale of 1,000 boards to Boardlife (Kerr, Caratti, Singh, and Zagaria. 2017).
|
Particulars |
Amount ($) |
Amount ($) |
|
Selling price |
200.00 |
|
|
Direct material |
124.00 |
|
|
Direct labour |
12.00 |
|
|
Variable manufacturing overhead |
30.00 |
|
|
variable administrative overhead |
16.00 |
|
|
Variable cost of per Board for Boardlife |
182.00 |
|
|
Contribution per board |
18.00 |
|
|
Number of boards to be sold under the contract to Boardlife |
1,000.00 |
|
|
Total contribution from the contract of Boardlife |
18,000.00 |
It has been assumed that the existing capacity of the company is enough to produce additional 1,000 boards without any further expenditure on infrastructure changes. Thus, it has been assumed that since the additional 1,000 boards can be produced with the existing capacity there would be increase in fixed costs of the company hence, to determine net contribution from the contract only the variable costs have been considered. It has also been made clear that the commission of $15 on normal sale of each board is not required to be paid for the sale of 1,000 boards to Boardlife (Sean Stein 2017).
Accordingly, taking into consideration that the company is expected to earn a contribution of $18,000 from sale of 1,000 boards despite selling these at $200 per board compare to the normal selling price of $300 each board, the company should go ahead and accept the offer of Boardlife (Petri, Yrjänäinen and Lukka 2014).
Provided there need not any further investment in fixed assets or other infrastructure aspects of the company, Free-Air should accept the offer of Boardlife to sale 1,000 boards at $200 each as the company is expected to earn net contribution of $18,000 from the contract. As the company does not have to worry about additional fixed costs to manufacture additional 1,000 boards of Boardlife hence, despite the selling the boards at $200 to the organization Free-Air would make a significant profit from the contract. Thus, the company should accept the offer of Boardlife to deliver additional 1,000 boards at $200 each.
References:
Booth, Peter. 2018. Management control in a voluntary organization: accounting and accountants in organizational context. Routledge.
Carlsson-Wall, Martin, Kalle Kraus, and Johnny Lind. 2015. “Strategic management accounting in close inter-organisational relationships.” Accounting and Business Research 45, no. 1.
Chiarini, Andrea, and Emidia Vagnoni. 2015. “World-class manufacturing by Fiat. Comparison with Toyota production system from a strategic management, management accounting, operations management and performance measurement dimension.” International Journal of Production Research 53, no. 2.
Chotiyanon, Panida, and Vassili Joannidès de Lautour. 2018. “The Changing Role of the Management Accountants: Becoming a Business Partner.” Springer.
Cooper, Robin. 2018. Target costing and value engineering. Routledge, .
Dale, Barrie G., and James J. Plunkett. 2018 Quality costing. Routledge.
Hill, Terry. 2017. Manufacturing strategy: the strategic management of the manufacturing function. Macmillan International Higher Education.
Höglund, Linda, Mikael Holmgren Caicedo, Maria Mårtensson, and Fredrik Svärdsten. 2016. “Management accounting of control practices: a matter of and for strategy.” In the 9TH INTERNATIONAL EIASM PUBLIC SECTOR CONFERENCE, held in LISBON, PORTUGAL, SEPTEMBER 6-8, 2016.
Kihn, Lili-Anne, and Eeva-Mari Ihantola. 2015. “Approaches to validation and evaluation in qualitative studies of management accounting.” Qualitative Research in Accounting & Management 12, no. 3.
Messner, Martin. 2016. “Does industry matter? How industry context shapes management accounting practice.” Management Accounting Research 31.
Morden, Tony. 2016. Principles of strategic management. Routledge.
Otley, David. 2016. “The contingency theory of management accounting and control: 1980–2014.” Management accounting research 31: 45-62. Available at: https://www.sciencedirect.com/science/article/pii/S1044500516000172 [Accessed on 25 October 2018]
Quattrone, Paolo. 2016. “Management accounting goes digital: Will the move make it wiser?.” Management Accounting Research31.
Smith, Sean Stein. 2017. Strategic Management Accounting: Delivering Value in a Changing Business Environment Through Integrated Reporting. Business Expert Press, 2017. Smith, Sean Stein. Strategic Management Accounting: Delivering Value in a Changing Business Environment Through Integrated Reporting. Business Expert Press.
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