Traditions Ltd

Adapted by Jayne Ducker, Antony Head, (Sheffield Hallam University) and Susan Richardson (University ofBradfordManagement Centre); updated by Martin Quinn

This case study is taken from Ducker, J., Head, A., McDonnell, B., O'Brien, R. and Richardson,S.(1998), A Creative Approach to Management Accounting: Case Studies in ManagementAccountingand Control, Sheffield Hallam University Press, ISBN 086339 7913.

TheCompany

Traditions Limited is a family-owned and managed, traditional department store situated inBreezyfield,a city in the north of England. The Store was established some sixty years ago by the currentowners'father, who passed on the business to his three sons on his death. All three sons are stilldeeplyinvolved in the running of the business, even though they are now in their sixties, and none ofthemhave children to whom to pass on the business. The Store occupies 100,000 square metres of themainshopping district in the city centre. The management team of Traditions Limited pridethemselveson running a store which retains the standards of service and customer relationships usuallyassociatedwith a bygoneera, despite the massive growth in online retailing.

The Store has four retailing departments (Furnishings, Kitchenware, Menswear and Toys) andaRestaurant. Each department is managed by a departmental manager and recently Samanthawasappointed to the post of departmental manager of the Toy Department. She is in her early thirtiesandis studying on a part-time basis at Sheffield Hallam University for a degree in AccountingandManagement Control (she is currently in her finalyear).

Albert is the departmental manager of Menswear and he is also Samantha's great uncle. He used tobea Sergeant in the Police Force and will be celebrating his 65th birthday shortly. Samantha and Albertdonot agree on many issues and often argue. Kitchenware is managed by Joseph and Furnishingsismanaged by Arthur. Joseph and Arthur joined the Store round the same year, beginning theircareers inretailing as junior sales assistants and working their way up to their current management roles.Bothare now in their middle fifties and pride themselves on knowing their regular customers byname.

Claude, who previously worked for Traditions for a number of years as a chef, was promotedto managerof the Restaurant some time ago. Claude achieved some fame a number of years agowhenhe entered and won a potato-sculpting competition. His prize was an all-expenses-paid weekendinParis and he was interviewed by local television. This attracted favourable publicity forTraditionsLimited. However, Claude does have an explosive temper and has been known to 'lash out' at histwoassistants, Tracy and Paul. He sets very high standards for the Restaurant and will throw-awaycookeddishes which do not meet these standards. He spends the majority of his time in the kitchenandintensely dislikes 'paperwork', constantly complaining that it stifles his creativity. The 'FrenchCuisine'menu offered by the restaurant is extensive and creative, but it is generally felt within thecompany

that the prices charged sometimes barely cover the food cost, although this cannot besubstantiatedbecause information is notcollected.

Claude revises menus weekly, ordering food supplies from local suppliers on a daily basis. There isnostock control system in operation in the Restaurant. The kitchen equipment is quite old and hasnotbeen regularly maintained. For example, the dough mixer keeps breaking down and the safetycatch onthe steamer ismissing.

Claude claims that, if he were given additional capital to refurbish and equip the kitchen, he wouldbeable to generate even more business for the Restaurant. In addition, new European Unionregulationsconcerning cook-chill facilities mean that Traditions Limited will soon have to spend aconsiderableamount of money in upgrading the kitchen's food keepingfacilities.

The storage of stock presents problems for Traditions Limited. Merchandise and stock is deliveredtoone store-room for all departments other than the restaurant, where deliveries are made directly tothekitchen area. Deliveries are not checked or counted in any way and items are placed on anyshelveswhich are free. As a result, staff often find it difficult to locate products and thus customers areoften

Purchases forresaleOpeningstockClosingstock

400.0 255.0 263.0

Non-management 75.0 wages

Departmental 21.0 expenses

Colin Drury, Management and Cost Accounting - Traditions Ltd

left waiting for long periods. All staff are allowed into the stock-room and, on oddoccasions,customers have been known to wander in bymistake.

All records of the Store are maintained on manualsystems.

Recent Events

In the past the Store has operated profitably. However, the most recent financial statementsrevealeda small loss for the previous trading period. This came as quite a shock to the owners and iscausinggreatconcern.

Prior to this news, and in a move which seems to have been totally unrelated to it, the familymembersdecided to appoint a Managing Director in order to take some of the workload from theirown shoulders.They appointed Vijay as the Store's first Managing Director and when he takes uphisappointment he will be the first 'non-family' member to be employed in a senior managerial role. Heiswell qualified for the job, having gained valuable retail experience with Sparks and Mention plc,aleading department store chain with a first class management training programme and anexcellentgrowth and profits record. His first post with Sparks and Mention plc was as a graduate trainee andheprogressed to store manager of one of the company's stores in the affluent south east ofEngland.

As a result of the reported loss for the previous trading period, the family members called a meetingofthe Store's employees to discuss the situation. This type of meeting was unprecedented in thehistoryof the Store. Prior to the meeting, a suggestion box was set up and attendees were asked toputforward suggestions for improving the profitability of theStore.

One suggestion for improving the profitability of the Store was the closure of the ToyDepartment,another suggestion was the closure of the Restaurant and a third suggestion was an across theboardprice reduction of 5% in order to stimulate demand. In each case the source of the suggestion wasnot identified.

Unfortunately, when the family members asked for information to assist in evaluatingthesesuggestions, this was hampered by the lack of management information produced withinthecompany. Apparently, the recording systems were geared to maintaining records forgovernmentregulatory bodies, such as Customs and Excise and the Inland Revenue, and to assist thecompanysecretary in the production of the year-end financialstatements.

Since Samantha is studying for an accounting degree, she was asked to tackle the job of seekingoutinformation which might be helpful. The information she produced is set out below. Itidentifiesrevenues and costs incurred during the previous trading period. The family members weresoimpressed with the information she produced that they asked her to consider taking on theadditionalrole of management accountant in thecompany.

Colin Drury, Management and Cost Accounting Traditions Ltd Traditions Ltd Adapted by Jayne Ducker, Antony Head, (Sheffield Hallam University) and Susan Richardson (University of Bradford Management Centre); updated by Martin Quinn This case study is taken from Ducker, J., Head, A., McDonnell, B., O'Brien, R. and Richardson, S. (1998), A Creative Approach to Management Accounting: Case Studies in Management Accounting and Control, Sheffield Hallam University Press, ISBN 086339 791 3. The C0 mpa ny Traditions Limited is a family-owned and managed, traditional department store situated in Breezyeld, a city in the north of England. The Store was established some sixty years ago by the current owners' father, who passed on the business to his three sons on his death. All three sons are still deeply involved in the running of the business, even though they are now in their sixties, and none of them have children to whom to pass on the business. The Store occupies 100,000 square metres of the main shopping district in the city centre. The management team of Traditions Limited pride themselves on running a store which retains the standards of service and customer relationships usually associated with a bygone era, despite the massive growth in online retailing. The Store has four retailing departments (Furnishings, Kitchenware, Menswear and Toys) and a Restaurant. Each department is managed by a departmental manager and recently Samantha was appointed to the post of departmental manager of the Toy Department. She is in her early thirties and is studying on a part-time basis at Shefeld Hallam University for a degree in Accounting and Management Control (she is currently in her nal year). Albert is the departmental manager of Menswear and he is also Samantha's great uncle. He used to be a Sergeant in the Police Force and will be celebrating his 65th birthday shortly. Samantha and Albert do not agree on many issues and often argue. Kitchenware is managed by Joseph and Fumishings is managed by Arthur. Joseph and Arthur joined the Store round the same year, beginning their careers in retailing as junior sales assistants and working their way up to their current management roles. Both are now in their middle fifties and pride themselves on knowing their regular customers by name. Claude, who previously worked for Traditions for a number of years as a chef, was promoted to manager of the Restaurant some time ago. Claude achieved some fame a number of years ago when he entered and won a potato-sculpting competition. His prize was an all-expenses-paid weekend in Paris and he was interviewed by local television. This attracted favourable publicity for Traditions Limited. However, Claude does have an explosive temper and has been known to 'lash out' at his two assistants, Tracy and Paul. He sets very high standards for the Restaurant and will throw-away cooked dishes which do not meet these standards. He spends the majority of his time in the kitchen and intensely dislikes 'paperwork', constantly complaining that it stifles his creativity. The 'French Cuisine' menu offered by the restaurant is extensive and creative, but it is generally felt within the company that the prices charged sometimes barely cover the food cost, although this cannot be substantiated because information is not collected. Claude revises menus weekly, ordering food supplies from local suppliers on a daily basis. There is no stock control system in operation in the Restaurant. The kitchen equipment is quite old and has not been regularly maintained. For example, the dough mixer keeps breaking down and the safety catch on the steamer is missing. Claude claims that, if he were given additional capital to refurbish and equip the kitchen, he would be able to generate even more business for the Restaurant. In addition, new European Union regulations concerning cook-chill facilities mean that Traditions Limited will soon have to spend a considerable amount of money in upgrading the kitchen's food keeping facilities. The storage of stock presents problems for Traditions Limited. Merchandise and stock is delivered to one store-room for all departments other than the restaurant, where deliveries are made directly to the kitchen area. Deliveries are not checked or counted in any way and items are placed on any shelves which are free. As a result, staff often nd it difcult to locate products and thus customers are often Colin Drury, Management and Cost Accountingr Traditions Ltd left waiting for long periods. All staff are allowed into the stock-room and. on odd occasions. customers have been known to wander in by mistake. All records ofthe Store are maintained on manual systems. Recent Events In the past the Store has operated protably. However. the most recent financial statements revealed a small loss for the previous trading period. This came as quite a shock to the owners and is causing great concern. Prior to this news. and in a move which seems to have been totally unrelated to it. the family members decided to appoint a Managing Director in order to take some of the workload from their own shoulders. They appointed Vijay as the Store's rst Managing Director and when he takes up his appointment he will be the rst 'non-family' member to be employed in a senior managerial role. He is well qualied for the job. having gained valuable retail experience with Sparks and Mention plc. a leading department store chain with a first class management training programme and an excellent growth and profits record. His first post with Sparks and Mention pic was as a graduate trainee and he progressed to store manager of one of the compaan stores in the affluent south east of England. As a result of the reported loss for the previous trading period, the family members called a meeting of the Store's employees to discuss the situation. This type of meeting was unprecedented in the history of the Store. Prior to the meeting. a suggestion box was set up and attendees were asked to put forward suggesons for improving the protability of the store. One suggestion for improving the profitability of the Store was the closure of the Toy Department. another suggestion was the closure of the Restaurant and a third suggestion was an across the board price reduction of 5% in order to stimulate demand. In each case the source of the suggestion was not identied. Unfortunately. when the family members asked for information to assist in evaluating these suggestions, this was hampered by the lack of management information produced within the company. Apparently. the recording systems were geared to maintaining records for govemment regulatory bodies. such as Customs and Excise and the Inland Revenue, and to assist the company secretary in the production of the yearend nancial statements. Since Samantha is studying for an accounting degree. she was asked to tackle the job of seeking out information which might be helpful. The information she produced is set out below. It identifies revenues and costs incurred during the previous trading period. The family members were so impressed with the information she produced that they asked her to consider taking on the additional role of management accountant in the company. Departments Furnishing Kitchenware Restaurant Menswear 000 000 000 000 Sales 5600 980.0 410.0 430.0 Purchases for resale 400.0 680.0 325.0 229.0 Opening stock 255.0 63.0 255 210 Closing stock 263.0 53.0 25.0 25,5 Nonmanagement 75.0 45.0 101.0 65.0 wages Departmental 21.0 10.0 16.5 5.0 expenses Sales promotion costs 14.0 2.0 nil 10 Per cent of oor space 20 20 15 35 occupied by department Toys 000 680.0 560.0 1910 229.5 95.0 20.0 20.0 10 can. entry. Mmgcnem and Cost Accounting , Traditions Ltd Samantha has looked into the behaviour of these costs at different sales levels. Purchases of goods for resale in all departments varied proportionally with the level of sales. Additionaly. due to the stafng policy of the company (see note on stafng policy below). so did the wages of non- management staff. Departmental expenses (for instance. wrapping paper for goods purchased. cleaning of staff uniforms) were also considered to vary with the level of sales. and there seemed to be a direct correlation between sales promotion costs in the departments and the increase in sales. Other costs totalling 412,000 (not included in the above schedule) were considered not to change with sales levels and some of these costs could not be directly related to individual departmenw. Note on Staffing Policy The company staffs all the Departments by using a core of full time staff to cover a minimum demand level and a flexible workforce of part time staff to work as and when required, with no guaranteed minimum or maximum number of hours for part-time staff. Question 1. 0n the assumption that the costs for this trading period will not change signicantly from those of the previous period, prepare marginal costing statements to show contributions for each department and contribution and prot for the Store overall on the basis of: a) all departments remaining in operation; b) the closure of the Restaurant Department Question 2. Discuss briey the financial and ncmnancial consequences of closing the Restaurant Department. Question 3. a) Identify the problems which Samantha would need to address in her new role as Management Accountant of Traditions Limited. b) Explain the main factors which will influence the design and implementation of a Management Infonrtation System for Traditions Ltd. Question 4 How would you. as Samantha. approach the setting up of a budgetary planning and control system for the Store and what behavioural problems do you think you might encounter? Departments Furnishing Kitchenware* Restaurant Menswear Toys FOOD FOOD FOOD FOOD FOOD Sales 560. 0 980. 0 410. 0 430. 01 680. 0 Purchases for resale* 400. 0 680. 0 325.0 229. 0 560. 0 Opening stock 255. 0 63.0 25.5 27.0 197. 0 Closing stock 263.0 53.0 25. 0 25.5 229.5 Non - management 75.0 45.0 101. 0 65. 0 95. 0 wages Departmental 21. 0 10.0 16.5 5. 0 20. 0 expenses Sales promotion costs 14. 0 2.0 nil 1. 0 20.0 Per cent of floor space 20 20 15 35 10 occupied by department