– RESEARCH-BASED ASSIGNMENT
Case Study – Established in 1897, Pimlico is one of the oldest manufacturers of bicycles in the world. Traditionally their products were seen as good quality but not too expensive; their strap line “a bicycle for everyone” just about summed them up. The company use two sales channels, wholesale to the main retailers and directly to the public through their website.
Despite their illustrious heritage Pimlico has been struggling for a number of years. Manufacturers from the Far East and the US have taken significant market share and the company has struggled to break even. The company are not totally sure why, but many industry commentators believe that Pimlico’s products are too bland and too nondescript for the price Pimlico charge. The retailers who buy from Pimlico n are also less than impressed, a recent customer survey highlighted significant quality issues, problems with on time delivery and appalling customer service.
To remedy the situation, the CEO (Chief Executive Officer) has decided to change their strategy. Instead of producing a broad range of cycles they plan to rationalise the product range and concentrate on the following initiatives:
– To develop a range of retro racing bikes to appeal to a younger urban customer with an eye for style and quality. The company feel that they could leverage the company’s heritage and sell at a significant premium.
– Invest in new product development and manufacture high quality and innovative folding bikes. The company have recently employed a number of excellent design engineers and initial designs show great promise.
Unfortunately these changes will result in a number of redundancies particularly in manufacturing as they expect to sell fewer bicycles per year.
The CEO has hired a management consultant to review the change in strategy. They suggest that the move could be very successful but they believe that Pimlico’s management accounting control system is a constraint and may prevent Pimlico from fully leveraging their core competences to achieve success. They believe that the incentives may have unintended consequences and that the control systems lack strategic alignment. The CEO is interested in their ideas and has asked them to review the management accounting control systems and carry out a series of interviews with key members of the management team.
How the management accounting control systems operates – Every January the company’s CEO takes his executive board away to discuss and produce their annual budget. To help the managers prepare, the Chief Accountant sends out the sales forecast and budgeted standard costs for the year along with a set of instructions. Last year the instructions stated:
1. Staff costs are frozen and all new positions must be approved by the chief accountant.
2. The overhead budgets must be no more than 2% above last year’s budget. Except for travel and marketing costs which must be reduced by 12%.
3. Direct material costs are to increase in line with inflation. (currently 1%)
When the budget has been finalised by the accounts team, it is sent to the cost centre managers who are instructed to follow it to the letter (or number).
As part of the month end process the actual and budgeted numbers are compared and any negative variance greater than 5% must be explained by the cost centre manager at the next management meeting. If the variance is greater than 10% the responsible manager must write a full report which explains the variance and detailing how they are going to deal with the causes. If at the end of the financial year the cost centre manager meets their budget, they receive their annual bonus.
After the month end reports have been run, the operations manager, the head of logistics and the purchasing manager meet with the Chief Accountant to analyse the month’s operations. The costs per unit for materials, labour and overhead are compared with standard costs and any variance is discussed. If a negative variance is above 5% the variance is analysed further to understand if it is due to price or efficiency. If a 10% negative variance is reported, a report must be prepared and sent to the chief accountant within 5 working days. Positive operation variances are considered during each manager’s appraisal and can result in significant bonus for the manager.
Interviews – After reviewing the budgeting process the management consultants conducted a number of interviews with key staff;
Mr Drury, who has been the company accountant as long as anyone can remember, places huge value on his management controls. He stated that “I think my management controls are excellent. The month end takes about 4 working days and everything reconciles with the Gaap numbers we report at the end of the year. This means we never get any surprises. The results prove that the system works, we always hit or beat our cost targets and I feel in total control. If the budget is followed, the company runs itself. I see no problem”
Alan Seal the logistics manager sees value in the control systems but has one or two reservations. “The budgets are fair and if you convince the accountants to put a bit slack in they are usually achievable. If things are tight I normally delay some discretionary purchases or delay investments.”
Like Mr Seal, Trevor Weetman, the operations director , has mixed feelings “When I first joined I found the whole process depressing, once a month we were given these huge packs full of numbers and then told to explain the variances at the management meeting. I didn’t even understand the reports, let alone the variances. But I have kind of got used to it now and I can navigate my way through most meetings”
Charlotte Dyson, the marketing director is far less impressed. She said “We are obsessed by the budget and when we beat it we spend the next 12 months slapping each other’s backs. That fine, but in the meantime our competitors have taken more market share. Here is an example, we surveyed a sample of customers who had brought directly from our website last month, it was an embarrassment. All the customers wanted to discuss was late deliveries and poor quality. I raised this at the next board meeting and the Chief Accountant told me that quality was an issue, but the material usage variance was being investigated by production. What’s that got to do with it?”
You are required to:
Produce TWO diagrams (these can be mind maps, rich pictures, posters, influence diagrams or any suitable graphical analysis) which are designed to present the key issues to the management team
– The first should analyse the problems with the management control systems and finance function at Pimlico.
– The second should draw the main points from a relevant article relating to either management control systems, performance measurement, incentives or strategic management accounting. The diagram should briefly acknowledge the article’s context, methodology & limitations. The diagram should focus on the main arguments/points which are relevant to, or may solve the problems you have identified in your first diagram.
The Specification Guidelines for the assignment are as follows:
• The article must be from a refereed academic journal.
• The articles context, methodology and findings should be relevant to the business situation.
• The assignment must be set in the context of management accounting.
• The mind maps/diagrams may be drawn by hand.
• The assignment must be supported by a bibliography which includes both the sources you have cited and the sources which you have consulted in preparing your work.
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