Scenario of Penguin Sportswear Ltd

Penguin sportswear (Hereafter referred as Penguin) is a medium scale enterprise which manufactures sportswear. It has been registered as a private limited company in 2010. It manufactures and sells its own brand of sportswear under following categories.

• Premium - High end brand for quality conscious customers
• Vantage - Good quality brands with medium price range; and
• Regular - Average quality brand with low price range

The company has 3 branches in main locations of Colombo besides having a head office to control all the activities. The main competitor is Lanka sportswears and they have 5 branches and 3 of them are very close to the existing branches of Penguin.

The Penguin has its manufacturing set up near Biyagama where they produce number of sportswear that they sell under their brand names mentioned above. This manufacturing set up was started in January 2011 with a small manufacturing plant but over the years the production has increased by many folds. There is no proper management accounting system and Mr. Roy Perera is the manufacturing manager who is in charge of the accounting department of the manufacturing unit, who does not have any background of management accounting. He prepares all management accounting reports on MS excel. The reports that have been prepared do not reflect the correct cost of the products manufactured since it varies significantly every month. The variation ranges from 10% to 20%, which is beyond the understanding of the manufacturing manager.

All the shares of Penguin are owned by the family members. In the recent board meeting, the directors decided to recruit a junior management accountant to streamline these calculations and correct the reporting. Assume that you have been selected as the "Junior Management Accountant" on probation basis for Penguin.

In the first meeting held with Mr. Roy Perera, you have been given the information about products and costs relevant to May/ June months of the year 2017..

Following is the income statement of Penguin sportswear, prepared by the company and provided to you for further information.

Penguin sportswear
Income Statement
For the end of First month
		$
Sales (40000 units x $10)		400,000
(Less) Variable Cost of goods sold		(160,000)
Gross Contribution margin		240,000
(Less) Variable Selling & admin expenditure		(60,000)
Net Contribution margin		180,000
(Less) Fixed expenditure
Fixed manufacturing expenditure	150,000
Fixed Selling & Admin Expenditure	40,000	(190,000)
		(10,000)

The loss created a serious problem in the company. Some other relevant data is given below:

• Units produced during the first month: 50,000 units
• Units sold during the first month: 40,000 units

Variable costs:

Direct variable cost

• Direct materials: $2.00 per unit
• Direct labor: $1.60 per unit
• Variable manufacturing overhead: $0.40 per unit

Indirect/Overhead variable costs

• Variable selling and administrative expenses: $1.50 per unit

Other information

• Fixed manufacturing expenditure and Fixed Selling/Admin Expenditure will be applicable in same amounts for the first quarter.
• Budgeted number of production units are expected to be50,000per each month.

Mr. Roy Perera, the manufacturing manager, has asked you to prepare a report explaining the role and function of the management accounting department, covering the management accounting systems operating in the organization as well as the range of techniques used.Being a Junior Management Accountant (on Probation), you need to submit a formal report to the board of directors. Your report should address following findings as supportive information.

Activity 01.

• Explain management accounting, principles of management accounting in context of Penguin Sportswear Ltd.
• Explain different types of management accounting systems in context of Penguin Sportswear Ltd.
• Explain the different methods that can be used for management accounting reporting by Penguin Sportswear with their implications.

Activity 02.

• Prepare company's income statement using marginal and absorption cost techniques, for the second month. Consider 50,000 units were produced & 60,000 units were sold in the second month and there were no closing inventories.
• Use Management reporting techniques to reconcile the first month and second month's net operating income under both the costing approaches by interpreting the data available.

Activity 03.

Assume that the report that you presented in task 1 was much appreciated by the directors and you have been recruited on permanent basis at Penguin as a "Junior Management Accountant". Mr. Aravinda Rodrigo, who is a director at Penguin and who looks after accounting and finance related matters of the organization said that, he is interested to know how different planning tools will help the organizations in achieving its goals and objectives. You need to prepare a report covering the following areas. These areas should be linked to the given scenario of Penguin.

• Explain and analyze important planning tools for budgetary control that you recommend to be used at Penguin. Further explain the advantages and disadvantages to Penguin of applying the said tools.

Activity 04.

Compare any other organization which operates with the similar business activities and explain how organizations are adapting management accounting systems to respond to financial problem. Further analyze and critically evaluate How planning tools for accounting as discussed in above task respond appropriately to solve financial problems in order to lead organizations for a sustainable success.