Advanced: Design of a management control system Maxcafe Ltd sold its own brand of coffee through¬ out the UK. Sales policies, purchasing and the direction of the company was handled from head office in London. The company operated three roasting plants in Glasgow, Hull and Bristol. Each plant had profit and loss responsibility and the plant manager was paid a bonus on the basis of a percentage on gross margin. Monthly operating statements were prepared for each plant by head office and the following statement is a monthly report for the Glasgow plant:

Each month the plant manager was given a production schedule for the current month and a tentative schedule for the next month. Credit collection and payment was done by Head Office. The procurement of special coffee for roasting operations was also handled by the purchasing department at Head Office. The objective of the purchasing department was to ensure that any one of forty grades of special coffee was available for the roasting plants.
Based on estimated sales budgets, purchase commitments were made that would provide for delivery in 3 to 15 months from the date that contracts for purchases were made. While it was possible to purchase from local brokers for immediate delivery, such purchases were more costly than purchases made for delivery in the country of origin and hence these ‘spot’ purchases were kept to a minimum. A most important factor was the market ‘know-how’ of the purchasing department, who must judge whether the market trend was up or down and make commitments accordingly.
The result was that the purchasing department was buying a range of coffees for advance delivery at special dates. At the time of actual delivery, the sales of the company’s coffee might not be going as anticipated when the purchase commitment was made. The difference between actual deliveries and current requirements was handled through either ‘spot’ sales of surplus special grades or ‘spot’ purchases when actual sales demand of the completed coffee brands was greater than the estimated sales.
In accounting for coffee purchases a separate record was maintained for each purchase contract. This record was charged with coffee purchased and import and transport expenses, with the result that a net cost per bag was developed for each purchase. The established policy was to treat each contract on an individual basis. When special coffee was deliv¬ ered to a plant, a charge was made for the cost represented by the contracts which covered that particular delivery of coffee, with no element of profit or loss. When special coffee was sold to outsiders, the sales were likewise costed on a specific contract basis with a resulting profit or loss on these transactions.
For the past several years there has been some dissatisfaction on the part of plant managers with the method of computing gross margins subject to bonuses. This had finally led to a request from the managing director to the accountant to study the whole method of reporting on results of plant operations and the purchasing operation.
Required:

(a) An explanation to the managing director indi¬ cating any weaknesses of the current control system, and

(b) an explanation of what changes you consider should be made in the present reporting and control system.

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Operating statement Glasgow plant April Net sales Less: Cost of sales Special coffee - at contract cost Roasting and grinding: Labour Fuel Manufacturing expenses () 1489 240 747320 76440 49 560 67240 193 240