Advanced: Recommendations for improvements to a performance report and a review of the management control system Your firm has been consulted by the managing director of Inzone pic, which owns a chain of retail stores. Each store has departments selling furniture, tableware and kitchenware. Departmental man¬ agers are responsible to a store manager, who is in turn responsible to head office (HO).

All goods for sale are ordered centrally and stores sell at prices fixed by HO. Store managers (aided by departmental managers) order stocks from HO and stores are charged interest based on month-end stock levels. HO appoints all permanent staff and sets all pay levels. Store managers can engage or dismiss temporary workers, and are responsible for store running expenses.

The introduction to Inzone pic’s management accounting manual states:

‘Budgeting starts three months before the budget year, with product sales projections which are developed by HO buyers in consulta¬ tion with each store’s departmental managers. Expense budgets, adjusted for expected infla¬ tion, are then prepared by HO for each store. Inzone pic’s accounting year is divided into 13 four-weekly control periods, and the budgeted sales and expenses are assigned to periods with due regard to seasonal factors. The budgets are completed one month before the year begins on 1st January.

‘All HO expenses are recharged to stores in order to give the clearest indication of the “bottom line” profit of each store. These HO costs are mainly buying expenses, which are recharged to stores according to their square footage.

‘Store reports comparing actual results with budgets are on the desks of HO and store management one week after the end of each control period. Significant variations in perfor¬ mance are then investigated, and appropriate action taken.’

Ms Lewis is manager of an Inzone pic store. She is eligible for a bonus equal to 5% of the amount by which her store’s ‘bottom-line’ profit exceeds the year’s budget. However, Ms Lewis sees no chance of a bonus this year, because major roadworks near the store are disrupting trade. Her store report for the four weeks ending 21 June is as follows:

Requirements:

(a) Make recommendations for the improvement of Inzone pic’s store report, briefly justifying each recommendation. (11 marks)

(b) Prepare a report for the managing director of Inzone pic reviewing the company’s responsi¬ bility delegation, identifying the major strengths and weaknesses of Inzone pic’s management control system, and recommend¬ ing any changes you consider appropriate.

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Actual Budget () () Sales 98 850 110000 Costs: Cost of goods (including stock losses) 63 100 70 200 Wages and salaries 5300 5500 Rent 11000 11000 Depreciation of store fittings 500 500 Distribution costs 4220 4 500 Other store running expenses 1970 2000 Interest charge on stocks 3410 3500 Store's share of HO costs 2050 2000 Store profit 7300 10800 98 850 110 000 Stocks held at end of period 341 000 350 000 Store fittings at written 58000 58000 down value