management accounting

CASE Study Assignment BAPCYSA 2021 November QUESTION 1 Background StreetWise operates a chain of high street retail outlets selling clothing and household items. In 2014 this company was heading for a financial loss and was deemed to have lost strategic direction The business formula that had proved successful in the 2000s and early 2010s was no longer proving effective. A new chief executive was appointed to turn the company around. He put into effect a threefold strategy. Firstly he removed levels in the hierarchy, secondly he decentralized the organization and thirdly he focused on the core competencies or skills of the business. These core skills were identified as essentially buying and selling, and from this analysis the philosophy of outsourcing was developed. The argument put forward was that the core activities have to be world class and that the organization must strive to achieve this. You also need world class support, i.e. non-core activities, but this is difficult, if not impossible to achieve in-house. This is because you need to use people who are working in the forefront, or the core, of that industry, and by definition your people are not in the forefront because it is a non- core activity The corporate philosophy and its outsourcing implication was thus evolved in this organization with anything that was not buying and selling becoming a potential candidate for outsourcing For example distribution has been outsourced and has been reduced in size from 250 staff to three; quality control, packaging, and design activities have followed a similar pattern. Security and cleaning are currently in the process of being outsourced. Detail Outsourcing was thus the overall philosophy of the company but they would not do it just for the sake of it, they still needed to be shown that, if a particular activity was outsourced, improvements would result. In relation to IT the feeling of senior management was that IT was performing reasonably well in an operational sense but not really delivering its potential for the business. The IT department are based miles away from the business, off-site and are hard to manage. They had been fully centralized and told by the previous chief executive that they were going to be the hub and key to the smooth running of the company. Arrangements for the setting up of projects with the IT department were fairly informal and projects were tending to overrun budgets. StreetWise decided to explore the possibility of outsourcing all of its IT needs. The process involved the selection of a shortlist of vendors which the company felt to be capable of handling such contract. The company provided a brief to these four who were invited to provide an initial response. The selected vendor. Results Ltd., was the one that was felt to best understand the philosophy and objectives of the company, especially in the area of development. Further detailed negotiations were carried out with Results Ltd. Most of the details of the company's performance requirements in IT had been defined in detail over the 1 CASE Study Assignment BAPCY5A 2021 November past three years, especially the key requirements of their stores and for buying and merchandising The proposal from Results is for a three year initial contract at a fixed price of R250 000 per year. The initial response of the IT department to the possibility of outsourcing was negative. They expressed concern over the recent large investment the company had made in replacing all its computer systems, R100 000 had been spent only last year, they expected this equipment would service the company for another three years. Obviously there was deep concern over job security. Currently the IT department has ten staff earning, on average, R30 000 per year. The vendor had agreed to take on eight of these staff maintaining the terms and conditions they held with StreetWise. Of the remaining two staff one, Charles Smith, was to take early retirement and the other was to be retained within StreetWise, at of R30 000 to assist with management of the contract. A contract manager would have to be appointed by StreetWise - this would be a new appointment, the company did not currently have anyone with those skills in-house - at an estimated salary of R50 000. Additional information provided by the finance director If Charles Smith retired two years early the company would have to pay an extra R20 000 lump sum into the pension scheme. The building housing the IT department was on a three year lease and the company was committed to an annual rental of R10 000 per year for that period. This building could be sublet if IT were outsourced generating R4 000 in the first year, R8 000 in the second and R10 000 in the final year of the lease. . Current forecasts of consumables in the IT department are R5 000, R6 000 and R7 000 over the next three years. The resale value of the IT equipment bought last year is R30 000. Annual overheads for the IT department are R27 000 per year. 60% of the overhead varies with staff numbers, the remaining 40% is a share of central overhead charges. REQUIRED: You have been appointed as a consultant to prepare a report analysing the outsourcing proposal, including both the financial and non-financial effects, and give your recommendations. Your report should include the following: an incremental costing analysis; the effects on reported profits: discussion of other factors that need to be taken into account before a decision is made recommendation; an executive summary. [36] CASE Study Assignment BAPCYSA 2021 November QUESTION 1 Background StreetWise operates a chain of high street retail outlets selling clothing and household items. In 2014 this company was heading for a financial loss and was deemed to have lost strategic direction The business formula that had proved successful in the 2000s and early 2010s was no longer proving effective. A new chief executive was appointed to turn the company around. He put into effect a threefold strategy. Firstly he removed levels in the hierarchy, secondly he decentralized the organization and thirdly he focused on the core competencies or skills of the business. These core skills were identified as essentially buying and selling, and from this analysis the philosophy of outsourcing was developed. The argument put forward was that the core activities have to be world class and that the organization must strive to achieve this. You also need world class support, i.e. non-core activities, but this is difficult, if not impossible to achieve in-house. This is because you need to use people who are working in the forefront, or the core, of that industry, and by definition your people are not in the forefront because it is a non- core activity The corporate philosophy and its outsourcing implication was thus evolved in this organization with anything that was not buying and selling becoming a potential candidate for outsourcing For example distribution has been outsourced and has been reduced in size from 250 staff to three; quality control, packaging, and design activities have followed a similar pattern. Security and cleaning are currently in the process of being outsourced. Detail Outsourcing was thus the overall philosophy of the company but they would not do it just for the sake of it, they still needed to be shown that, if a particular activity was outsourced, improvements would result. In relation to IT the feeling of senior management was that IT was performing reasonably well in an operational sense but not really delivering its potential for the business. The IT department are based miles away from the business, off-site and are hard to manage. They had been fully centralized and told by the previous chief executive that they were going to be the hub and key to the smooth running of the company. Arrangements for the setting up of projects with the IT department were fairly informal and projects were tending to overrun budgets. StreetWise decided to explore the possibility of outsourcing all of its IT needs. The process involved the selection of a shortlist of vendors which the company felt to be capable of handling such contract. The company provided a brief to these four who were invited to provide an initial response. The selected vendor. Results Ltd., was the one that was felt to best understand the philosophy and objectives of the company, especially in the area of development. Further detailed negotiations were carried out with Results Ltd. Most of the details of the company's performance requirements in IT had been defined in detail over the 1 CASE Study Assignment BAPCY5A 2021 November past three years, especially the key requirements of their stores and for buying and merchandising The proposal from Results is for a three year initial contract at a fixed price of R250 000 per year. The initial response of the IT department to the possibility of outsourcing was negative. They expressed concern over the recent large investment the company had made in replacing all its computer systems, R100 000 had been spent only last year, they expected this equipment would service the company for another three years. Obviously there was deep concern over job security. Currently the IT department has ten staff earning, on average, R30 000 per year. The vendor had agreed to take on eight of these staff maintaining the terms and conditions they held with StreetWise. Of the remaining two staff one, Charles Smith, was to take early retirement and the other was to be retained within StreetWise, at of R30 000 to assist with management of the contract. A contract manager would have to be appointed by StreetWise - this would be a new appointment, the company did not currently have anyone with those skills in-house - at an estimated salary of R50 000. Additional information provided by the finance director If Charles Smith retired two years early the company would have to pay an extra R20 000 lump sum into the pension scheme. The building housing the IT department was on a three year lease and the company was committed to an annual rental of R10 000 per year for that period. This building could be sublet if IT were outsourced generating R4 000 in the first year, R8 000 in the second and R10 000 in the final year of the lease. . Current forecasts of consumables in the IT department are R5 000, R6 000 and R7 000 over the next three years. The resale value of the IT equipment bought last year is R30 000. Annual overheads for the IT department are R27 000 per year. 60% of the overhead varies with staff numbers, the remaining 40% is a share of central overhead charges. REQUIRED: You have been appointed as a consultant to prepare a report analysing the outsourcing proposal, including both the financial and non-financial effects, and give your recommendations. Your report should include the following: an incremental costing analysis; the effects on reported profits: discussion of other factors that need to be taken into account before a decision is made recommendation; an executive summary. [36]