Session 3 & 4 - Performance Measurement & Control

Practice question 1

The Widget Company manufactures equipment for metal testing. It also manufactures the electronic chips that go into the manufacture of the testing equipment.

The company has a well-established cost and management accounting system. The cost accounting system records the actual manufacturing costs for the electronic chips and the testing equipment, and also produces standard unit costs for the purposes of budgeting and variance analysis. The management accountant of The Widget Company is pleased with the management information system that is in place within the company, and is particularly proud of the budgetary control reporting system that provides monthly control reports to the board within one week of the end of each month.

The market for metal testing equipment is growing at a reasonable rate, but there are three other competitors in the market. Competition between them is strong and consequently profit margins are fairly low at the moment, although The Widget Company is operating at a profit. The Widget Company's senior management are not sure what any competitor might do next, although they suspect that at least one of them may be in financial difficulty. The Widget Company's sales director is certain that although low prices are one factor in the buying decisions of customers, customers are much more concerned about the quality, reliability and functional features of the equipment that The Widget Company produces.

At a recent board meeting, the board made two important decisions. The first was a decision not to invest in new equipment for manufacturing electronic chips that would significantly reduce the water and energy consumption in the production process. This decision was taken because the discounted cash flow return on investment was considered insufficient.

The second decision was an agreement that costs needed to be reduced to improve profitability. In relation to this, the board decided that employees in the manufacturing units should be empowered more, and should be given some authority to take decisions affecting production operations.

The board also discussed the current lack of sufficient strategic information within The Widget Company. They were aware that the decision not to invest in the new equipment had not taken into consideration the probability of rising water and energy costs in the future, and they felt they needed more information to help them predict the long term prospects for their industry.

Required:

i. Explain the difference between strategic, tactical and operational information, and give examples of each that should be used by a company such as The Widget Company.. (9 marks)

ii. Discuss why it will be important for The Widget Company. to monitor non-financial aspects of performance as well as financial performance.. (5 marks)

iii. Evaluate the compatibility of the current management accounting system in The Widget Company and the information it provides with the objectives of management accounting (7 marks)

iv. Discuss the ways in which the information requirements for a performance management system in The Widget Company would be changed by the delegation of authority to employees working at factory floor level. (4 marks)

(25 marks)