Question
Assessment Introduction to the module aims, curriculum and assessment. The aim of this module is to provide an opportunity for students to develop an understanding
Assessment
Introduction to the module aims, curriculum and assessment.
The aim of this module is to provide an opportunity for students to develop an understanding of a range of approaches and accounting techniques for:
a) the reporting and interpretation of business performance;
b) the management of business performance, i.e. planning, control and decision making in business operations.
The module curriculum provides an overview of selected techniques available to aid managers in:
a) Financial Accounting: the reporting and interpretation of business performance and;
b) Management Accounting: the management of business performance, i.e. planning, control and decision making in business operations.
The summative assessment representing 100% of final module grade and comprises an individual case study based assignment of . This assignment will cover both areas of accounting within the curriculum. The requirements of each area (Financial Accounting and Management Accounting) are set out separately below and each carry 50% of the marks.
Marks are expected to be released (subject t to illness and holidays) 20 working days after the hand-in date above.
Note: Please follow normal online assignment hand-in procedures outlined in your student handbook - Section 5. These guidelines include the requirement to declare a word count for the piece.
CRITERIA FOR ASSESSMENT
In accordance with the assignment marking guidelines outlined in your student handbook - Section 5 - marks will be awarded for demonstration of the following learning outcomes:
1. Demonstrate the use of appropriate techniques of measurement and monitoring to identify financial problems and their causes.
2. Demonstrate the use of an appropriate range of analytical tools to evaluate and interpret financial information.
3. Evaluate and discuss accounting statements and models fluently and confidently with both accounting and non-accounting colleagues.
4. Apply and interpret alternative valuation models and conceptual approaches relevant to the identification of cash flows, periodic profits and balance sheet assets and liabilities.
5. Apply and interpret alternative approaches relevant to appraisal of investment expenditure opportunities.
6. Evaluate budgetary information and understand the role of budgeting in supporting the planning and achievement of an organisation's strategic objectives.
It should be noted that presentation style will add to the plausibility of the report.
This is particularly true of referencing style. Unreferenced data or literature severely limits the plausibility of the arguments and analyses presented in a report.
Part A: Financial Accounting Case (50%)
You are to assume you have been recently hired by The Company and have been assigned to a team that reports to the CEO of THE COMPANY (SELECTED BY INSTRUCTOR). The head of your team is the CFO who is concerned with THE COMPANY's current financial performance and comparison against major competitors in the industry. The CFO would like you to provide insights that will help to project future financial performance. The primary question the CFO wants you to answer is:
"will THE COMPANY be financially viable over the next two to three years, and which
steps should be taken to improve its financial stability?"
REQUIRED: You are required to produce a brief report which evaluates THE COMPANY'S financial performance in comparison to another major industry competitor and make recommendations for change.(50 marks)
Note: The report should be based on a justified set of measures and analytic techniques introduced in the module. In developing a specific recommendations, you should ensure you outline a supporting rationale, as to whether the assigned company's recent financial performance is of sufficient financial strength, will THE COMPANY be financially sustainable over the next two to three years, and which steps should be taken to improve its financial stability?
Structure for Financial Accounting report
oFront sheet(including name and student number, word count).
o, including the given title in full.
oIntroduction
oMain body with appropriate headings
oConclusion
oNumbered appendices
Presentation
Your work should be word processed in accordance with the following:
- Font style, , font size 12
- 1.5 line spacing
- The page orientation should be 'portrait'
- Margins on both sides of the page should be no less than 2.5 cm
- Pages should be numbered
- Your name and student number should be included on every page
Part B: Management Accounting Case (50%)
All questions below are compulsory. You must answer all three questions in this part of the assessment.
Farnsworth's Fine Furniture Ltd
Introduction
Farnsworth's Fine Furniture (FFF) is located in Hastings, East Sussex, and is a small producer of high quality reproduction bedroom furniture.Turnover last year was in the region of 2.4 million, and as has been the case for most of the past 25 years, the business was acceptably profitable.FFF is registered as a private limited company and is owned by Fred Farnsworth, a qualified cabinet maker who started his trade immediately after leaving school.He has no formal training in management, but has gained a wealth of practical experience over the past quarter of a century.
The company started in small, cheap and not very comfortable premises, with Fred and fellow-tradesman John Baker making up the entire workforce.Despite a few difficult early years the business grew steadily, and about ten years ago Fred was able to move to a new industrial park on the outskirts of Hastings.Here he has a large workshop, a fair-sized storage area, a staff room and a couple of offices for administrative staff.He also has a showroom in one of Hastings' newest and most impressive shopping centres, situated in the heart of the city.
Over the years Fred has reduced his product range to just three pieces of bedroom furniture - a wardrobe, a chest of drawers, and a dressing table.These are sold either as separate items or as a complete three-piece bedroom suite.The furniture is hand-made to a very high standard, and is an authentic reproduction of the Chippendale style introduced by English cabinetmaker Thomas Chippendale in the mid-18th century.The exquisitely designed Chippendale furniture became the most famous name in the history of English furniture, at a time when such craftsmanship was at its peak.
Production and Delivery Methods
Fred still uses the same methods of production employed by Chippendale and his cabinetmakers more than 250 years ago.The wood is sawed and planed by hand, is assembled using hand-made nails, and is still decorated with the original hand-carved designs and patterns made famous by its originator.This requires a high degree of skill in all stages of the production process.Although Fred spends most of his time managing the business, he still keeps a watchful eye on activities and will even help out at times when the men are over-stretched.
The furniture is made from high quality seasoned mahogany which is imported from South America by the Sussex Timber Company.Although Fred could buy mahogany more cheaply from other suppliers, he has dealt with the Sussex Timber Company for many years and has confidence in the quality of their products and in their service.The grain and colour of the wood used is extremely important and, because the fronts of the furniture must match in grain and colour for each piece or suite of furniture, high levels of off-cuts and waste are inevitable.
The gleaming finish to the furniture is produced by way of skilful hand-polishing, using a unique polish named "CarnauBee" which consists mainly of carnauba wax, beeswax and turpentine.Carnauba wax, known as the "queen of waxes", is extracted from the leaves of the palm copernicia prunifera, a plant which is native to and grown only in certain north-eastern states of Brazil.FFF obtains all of its polish from Waxworks Limited, a Liverpool-based company that imports the carnauba wax from Brazil and makes up the polish exclusively for FFF according to a special formula.Mahogany and CarnauBee are the two main materials used in the manufacture of FFF's products.
Twenty-four people are now employed full time in FFF's production process.Twenty of these are highly skilled cabinetmakers, while the other four are young apprentices.All the cabinetmakers have been with the company for a good number of years, and are supervised by John Baker, Fred's first employee who is now the production manager.John is a bit set in his ways, but according to Fred, "He does a damned fine job and he is a superb craftsman."
It is essential that the finished furniture arrives at the customer in perfect condition.Fred is proud of the fact that the company receives very few complaints of furniture damaged in transit.FFF sub-contracts this part of the business to a well-established delivery company in Hastings, who have always provided a reliable, high-class service to customers.Not only is the furniture carefully protected in transit, it is placed in position in the customers' homes.If the customer is not completely satisfied the furniture is immediately returned to the factory.FFF pay a premium price for this service, but it has proved to be of benefit to both the company and the customer, since problems can be resolved very quickly.
Although product costs are high due to the highly skilled, labour-intensive nature of the production process, the high raw material costs and the specialised delivery service, Fred has found that the company's products attract the type of customer who is willing to pay a premium price.
Recent History
During the past year FFF has invested 200,000 in the refurbishment of the offices and showroom and in the extension of the workshop and storage area, so as to meet the increasing demand for the company's products. This was funded by a five-year loan from the company's bank.Fred believes that the increase in demand is due mainly to the showing of a prime-time television documentary on the rejuvenation of Hastings, which gave quite a bit of airtime to Farnsworth's Fine Furniture. To capitalise on the free publicity, Fred used the documentary as the basis of his own national advertising campaign.However, the resulting increase in 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.
When Fred started the business he employed Betty Baker, John's wife, as bookkeeper and administrative assistant.To begin with Betty worked just two days a week, but this became a full-time position as production and sales increased.For the past two years Betty has had the help of Arnold Smith, a qualified accountant, who spends two days each month on the company premises.Arnold has advised Fred that the business is getting too busy for Betty, and that it is time that he employed a qualified, full-time accountant (even though this would mean that Arnold's services would no longer be required).
Two Months Ago
On Arnold's recommendation Fred advertised for a newly-qualified accountant.Along with a number of other candidates you applied for the post, and were thrilled to make the short list of three.Your interview went well, but even so you were pleasantly surprised when Fred telephoned and asked you to join the company.Despite his rather quaint, old-fashioned manner, you were impressed by Fred's experience, his quick mind, and his willingness to bring the company's accounting systems into the 21st century.
Last Week
You started your job with FFF, and have already settled in nicely.Everyone has made you very welcome, and there is a nice relaxed working atmosphere.You are amazed at how basic the accounting and reporting systems are, and believe that you will be able to make a name for yourself by introducing a number of improvements.
It appears that your opportunity to impress may come sooner than expected; Fred has just received a profit statement from Arnold for the last six months (see Exhibit 1 below) which sets out the profitability of each of the company's three products.
Fred was horrified to see that Dressing Tables had made a loss, the first time in years that any of the products had failed to produce a profit.Fred has called a meeting for next week with John, Betty and you in order to discuss the situation.
Fred would have preferred to meet sooner, but has a number of important commitments this week.He has firstly to visit Waxworks in Liverpool, where he must renegotiate the contract for CarnauBee polish for the coming year.He has also been called to an urgent meeting with Sussex Timbers.
Fred has also advised you, John and Betty that he wishes to discuss another matter at next week's meeting.It concerns a potential new venture for the company.Much to Fred's amazement, the screening of the Hastings documentary has created an awareness of FFF in the United States.An American company has approached Fred with an enquiry for fifty chests of drawers, for export to America.However, because of the size of the order, the American customer is only prepared to pay 70% of the normal selling price.
In preparation for the meeting you gather as much information as you can.This is set out in Exhibit 2.
EXHIBIT 1
Profit Statement of FFF for the last six months' trading (All figures in 000's)
Wardrobes
Dressing Tables
Chests of Drawers
Total
Sales revenue
680
400
600
1,680
Direct materials
200
192
180
572
Direct labour
126
96
106
328
Variable manufacturing overheads
34
32
30
96
Allocated fixed manufacturing overheads
120
140
136
396
Total manufacturing costs
480
460
452
1,392
Gross Profit (Loss)
200
(60)
148
288
Admin, Sales & Distribution costs
160
Net Profit (EBIT)
128
EXHIBIT 2
Your Initial Information Gathering
Profit Statement
Numbers of each product sold in the period covered by the statement:
Wardrobes400
Dressing Tables320
Chests of Drawers400
Admin, Sales and Distribution costs includes delivery costs to the customer
Amount paid to the delivery contractor for the last six months39,200
Average delivery cost per product35 each
Dressing Tables - Mirror Sections:
Six months ago Fred made the decision to buy in the mirror sections of the dressing tables from a local firm at a cost of 200 each.This was based on the estimated cost of FFF continuing to make the mirror sections in-house, as set out below:
Dressing Tables - Mirror Sections: Continued
Direct materials120
Direct labour40
Variable man. o/heads20
Fixed man. o/heads40
Total220
In order to ensure that the timber used to frame the mirror section matches the main body of the dressing table, it was agreed that the local firm supplying the mirror sections would also buy their timber from The Sussex Timber Company.The mirror sections are delivered to FFF in a partially finished state, and are then hand-waxed by FFF's own craftsmen.Control over the quality of the mirror sections has been problematic.
The American Enquiry (And other useful information)
You have obtained the following additional information to enable you to suitable analysis and provide meaningful advice to Fred:
Delivery charges (50 chests packed for delivery to the USA)3 containers at 300 each
Average lead time:
For the last six months12 weeks
For the six months prior to that8 weeks
Average overtime:
Last week6 hours per man
For the last six months1 hour per man per week
Stocks of mahogany on hand at present6,500 square metres
Average usage of mahogany per product:
Wardrobes10 square metres
Dressing tables (excluding mirror)4 square metres
Mirror section1 square metre
Chests of drawers5 square metres
The Meeting
After welcoming everyone Fred moves quickly to the first item on the agenda, the loss-making dressing tables."I don't understand this at all," Fred says."It has never happened before, but at first glance I would say that we might have to stop making them and concentrate on the other products.Has anyone got any comments?"
Betty is quick to agree with Fred; based on the figures, the dressing tables might have to go.John Baker looks harassed, and says that he has simply not had time to look at the figures, as he has been 'snowed under' with work.You are sure that a variable costing analysis will show the figures in a different light, but at this stage you simply tell Fred that you are working on some numbers, and will let him have them by first thing tomorrow.
Fred thanks you and moves on to the second item on the agenda, the American enquiry."I have to admit, things seem to be happening too fast right now," Fred says."Has anyone got any views on whether we should accept this order or not?"
John is quick to voice his opinion."Fred, with the best will in the world we can't manage this right now.We're beyond stretched in the factory - the boys will walk out if I put any more pressure on them."
Betty chips in to remind Fred that the price is ridiculous anyway."How can we be expected to make a profit at just 70% of the normal selling price?" she asks.
You don't want to embarrass Betty so you simply tell Fred that you have a few ideas, which you will present in writing tomorrow morning together with the analysis of the dressing table loss situation.
The meeting breaks up shortly afterwards, but as they leave the room you hear John say to Betty:"There's something else bothering Fred.I wonder what it can be?"
Question 1
(a) new profit statement for Fred, using a variable costing approach (Also known as marginal costing, or the contribution margin approach).You should identify the contribution made by each product over the last six months, as well as the overall net profit for the company.(6 marks)
(b)Calculate the company net profit for the last six months if Fred had stopped production of the dressing tables six months ago, and demand for the other two products had remained the same.(You may assume that supplies of mahogany are unlimited).Show all of your workings clearly.(3 marks)
(c)Name at least six relevant qualitative issues that Fred should consider before stopping production of the dressing tables.(Qualitative issues are those that are likely to have a financial impact on the organisation, but which cannot be exactly quantified at this stage).(6 marks)
(d)Calculate how much contribution the dressing tables would have made in the past six months if the mirror section had not been contracted out.You should show your workings clearly.(2 marks)
(e)Mention three important qualitative issues which Fred should consider when deciding whether to make the mirror sections in house, or to continue buying them from the outside supplier.(3 marks)
Question 2
memo to Fred, setting out in detail the implications of the American enquiry, with particular regard to:
(a)The potential profitability of the current enquiry.(You must provide calculations and any other schedules you feel are necessary to support your figures).(8 marks)
(b)Other short and long term issues to be considered before accepting the order.(8 marks)
Question 3
At the urgent meeting last week, the Sussex Timber Company informed Fred that supplies of mahogany from South America were in jeopardy.There had been a serious forest fire at the premises of the South American exporter and much of the seasoned timber ready for export had been wiped out.Sussex Timber envisages that there will be no more supplies of the mahogany used by FFF for the next six months.After that date, it appears that supplies should be restored to normal.
(a)Draw up a production schedule which would maximise profits if the available stocks of mahogany held by FFF were used up.You should also calculate the forecast profit figure based on this production schedule.
Note: You should assume that forecast demand from the normal customer base will be 10% higher than the last six months' figures and that the decision on the American enquiry has not yet been made.You should also assume that the mirror section of the dressing table will be manufactured by FFF as the current supplier does not have any stocks of mahogany on hand.
(10 marks)
(b)Identify at least four other significant issues that Fred should consider if the above-mentioned production schedule is put in place.
(4 marks)
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