Joseph Wako, an electrical engineer, established Electronic BoardsLtd(EBL)

in the early 1990s. From small beginnings, the company earned a reputation for the quality and 

reliability of its products, and grew rapidly and consistently until, by 2015, it employed over 

200 people and had achieved a turnover of Ugx456 million and a profit after tax of Ugx64.1 

million. In addition to Joseph Wako, the managing director, the board consists of a production 

director, aresearch director, and a marketing director.

Market circumstances:Thecompany produces customized batches of electronic circuit 

boards for approximately 15 major customers in the defense, computer, electrical goods, and 

automotive industries. The market is highly competitive in respect to both price and quality. 

The market price has fallen steadily in recent years. In addition to several other independent 

firms from both Uganda and Kenya, many of their larger customers have in-house facilities for 

the production of circuit boards. These latter firms deliberately subcontract a portion of their 

circuit board requirements for strategic reasons. In a recession, they can cease or reduce their 

subcontracting and bring the work in-house, thus stabilizing their own employment levels.

Operational circumstances:The production process for circuit boards is complex,multi

stage, and highly automated. Production flows continuously through the various processes, and 

any hold-up quickly affects the flow of work at all production stages. Experience has shown 

that a proportion of the final output contains faults and has to be scrapped. These scrap levels 

typically vary between 10% and 25% of good output; a considerable learning effect is apparent, 

and the yield on repeat orders is usually significantly improved. At present, faulty products are 

identified only upon completion, although action has been instigated (in the form of an 

investigative working party) to achieve earlier identification of faults. Orders are obtained in 

three ways:(a)written tender for large contracts (approximately 40% of business)

(b)telephone quotation for small orders (approximately 20% of business): a price is normally 

quoted to the caller during the call,(c)repeat orders (approximately 40% of business).

Prices are calculated by estimating the direct material cost of an order and adding on an 

allowance for all other costs and profit. This allowance is based on the previous year’s direct material cost to sales margin. In recent years, the cost structure of the firm’s output has been 

as follows:

Cost structure of current boards

Direct materials:65%

Direct labor 5%

Production overheads: 20%

Non-production overheads: 10%

Direct materials are by far the major cost component, and this importance is reflected in the 

high levels of material stock held by the company.

Financial information:It is generally accepted by the senior members of management that 

the development of a management accounting system has been neglected. This has been 

attributed mainly to the dismissive attitude of line management toward accountants. 

Encapsulating this view was the comment of one senior manager: ‘They are "bean counters" 

who know nothing about the electronics industry, the problems we face, or the decisions we 

have to take’. The consistent success of the company in the absence of any management 

accounting system has reinforced this type of attitude among managers and directors in the 

company. No qualified accountants have been appointed to the board, and until 2014, only one 

qualified accountant was employed by the company. His prime responsibility was the 

preparation of statutory financial accounting statements for shareholders.

In addition, however, since 2012, a halfyearly company profit and loss account and statement 

of financial position have been prepared for the board. No product costing system has been in 

operation.For financial statement preparation, work in progress is simply valued at an estimate 

of its direct material content cost, and finished goods stock is valued at a discounted selling 

price (using the previous year’s gross profit percentage). However, some managers have 

complained about their lack of knowledge of unit production costs and about their inability to 

pinpoint which contracts or types of work have been profitable for the company.

Budgets are no longer prepared. Attempts were made to produce annual budgets in 2010 and 

2011, but the firm’s accountant experienced great difficulty in obtaining reliable estimates from 

line management. His lack of authority within the firm and the absence of a finance director to 

provide support rendered his requests for information ineffective. Consequently, acceptance of 

the budgets that he prepared was not forthcoming. They were quickly viewed as unrealistic by 

management and, after a few months, ignored.

Capital budgeting decisions have been based on the need for the firm to remain at the forefront 

of production technology. If new equipment became available that would improve the firm’s 

product quality, it was usually purchased, and then funds were ‘found’to finance it. This had 

often led to the company having unexpected overdrafts, high bank charges, and high interest 

expenses.

Recession:In 2015, the firm experienced its first recession. Market share fell, sales dropped to 

Ugx21.5 million, a loss of Ugx1.7 million was made, and the company’s liquidity suffered 

considerably. The market decline was expected to continue in 2016, and the managing director 

of Electronic Boards Ltd. sought ways of alleviating the effects of the recession on the 

company’s financial performance. He found, however, that the lack of management accounting 

information hampered him in pinpointing problem areas and in identifying costreduction 

possibilities. Consequently, he approached a firm of management consultants to provide a 

blueprint for the development of a management accounting system over the next two years.

Required:Prepare a blueprint for the Chairmanoftheboard of EBLoutlining the main factors 

thatshouldbeconsideredwhenestablishing a meaningfulmanagement accounting function.