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STRATEGIC MANAGEMENT ACCOUNTING – P30263

Section A 80% of total examination marks

Answer two of the following three questions

Question 1

MiT is Europe’s largest manufacturer of bicycles, their headquarters are in Southern Germany but their production facilities are in Eastern Europe.  The company has a reputation for good quality but are not seen as being particularly innovative. MiT believe that their success is due to one core competence, they are very good at process management and consequently have very low costs.

However, over the last few years, new competitors have emerged and they have seen a decline in market share. Initially MiT responded by aggressively cutting costs to protect margins, but revenues have continued to decline and profit margins have been squeezed. At a recent meeting the CEO said “our products are outdated and our plans for organic growth are simply not working.” He then explained that he was considering the purchase of a number of smaller bicycle manufacturers, the first of which is EBike Ltd.

Ebike Ltd have only been trading for four years, they manufacture and distribute folding electronic bicycles from their small site in South London. The CEO of MiT is tremendously excited about the idea of purchasing Ebike. At the same meeting he told the team that “Their products are very innovative, very stylish and most importantly, hugely popular with the style conscious 20 to 30 year old urban market. Over the last 3 years Ebike have seen revenues grow by an average over 25% per annum”

The information below shows Ebike’s performance for the last two financial years.

Notes

§ The directors of Ebike believe that they will sell 20,000 units in the financial year ending November 2020

§ MiT have asked for more detailed information but were told that Ebike don’t have very sophisticated processes and that information just isn’t available

§ The directors at Ebike believe that they will need to continue to make a significant investment in battery technology over the foreseeable future

§ Ebike sell all of their products directly to the consumer via it’s website. Over 50% of Ebike’s  customers are in growing international markets

§ Depreciation accounts for approximately 20% of Ebike’s fixed costs

§ Approximately 85% of MiT’s sales are to the large European retailers.

§ The industry average inventory as percentage of revenue is 20%

Required:

a) Using the data available,  forecast operating profit and  EBITDA for the year ending 2020. List any assumptions you have made to produce your forecast [8 marks]

b) Write a report to the board of MiT which critically evaluates the decision to purchase Ebike. (Show any further calculations in the body of your report.) [32 marks]

Total 40 Marks

Question 2

Ransid Inc. supply and maintain computer systems for large organisations. Three years ago they launched a new service solely designed for regional healthcare providers based in the UK. Ransid supply and install the equipment and for an annual fee they offer a full support package. If the customer has a fault, they phone the Ransid call centre who try to solve the problem remotely, if they can’t solve the problem, the call centre sends an engineer to the customer’s site.

The company have managed to secure three large contracts, but Ransid are concerned as the service is not producing the returns they expected. They have responded to this, by taking the following actions at the beginning of 2019

Action 1 - They introduced a performance measurement system where the manager of the call centre is measured and rewarded on the cost per call taken (total call centre cost per month/number of calls in the month)

Action 2 - They reduced staff numbers in the finance team, by reorganising the accounts receivables team. This saved £50,500 in 2019.

Action 3 –  All new engineers were paid a  lower basic salary but now receive a payment for each customer visit. Overall costs for these engineers are almost the same, but they believe that these new recruits are far more productive

As the new management accountant you believe that it may be useful to analyse customer profitability using ABC principles. You have collated the following information relating to their key activities and the three customers in the financial year ending December 2019:-

Notes:

i. Remedial engineer visits are when an engineer is required to return a second time to solve the same fault

ii. The South West contract started in January 2019. It has a clause which allows Ransid to cancel the contract with six months notice

iii. They have calculated their cost of capital at 10% per annum

iv. In the year ending December 2018 they received 10,436 calls and made 1,896 engineer visits

v. On average it took 34 days for customers to pay their invoices in 2018

vi. All the engineers who work on the South West contract are new employees and are paid a bonus and a lower basic salary  (see action 3 above)

Required:

a) Using activity based costing principles calculate the profit/loss each of the three contracts generate. [12 marks]

b) Explain why Ransid may be advised to continue with the South West contract even if it is failing to make a profit [9 marks)

c) Critically evaluate the three actions Ransid took at the beginning of 2019 to improve profitability [10 marks]

d)  Explain what a cost of quality report is and how a cost of quality report may help the managers at Ransid  improve performance [9 marks]

Total 40 Marks

Question 3

BiFold Ltd sell windows and doors for commercial premises. All production has been outsourced but they design the products themselves. The company are thought to be a bit expensive but they have a reputation for excellence in design.

Just over a year ago BiFold appointed Cindy Lightfoot as their new chief executive. Cindy felt that the company could be far more profitable and set about implementing a new strategy with a primary aim of delivering genuine shareholder value. Cindy summarised her strategic objectives in a new mission statement which declares

“We will provide industry beating returns to shareholders by exploiting economies of scale to be the lowest cost provider. We will also be the best, we will continue to design highly innovative products”

To help achieve their objectives, Cindy implemented the following three changes in January 2019.

1. They outsourced much of the outbound logistics to a specialist contractor who charged £65 per delivery

2. The company renegotiated the sales staff contracts by cutting salaries and replacing this with an increase on the commission in sales revenue.

3. Cindy has capped the annual pay rise to 1% and banned any new recruits unless sanctioned by her

(See below for a summary of the company’s performance over the past year)

Required:

a) Using the limited data provided, calculate three KPI’s which may help Bifold realise their mission statement [7 marks]

b) Prepare a report which;

i) compares the company’s performance against the objectives stated in their mission statement

ii) critically evaluates the three changes implemented in January 2019

Include any further calculations in the body of your report  [33 marks]

Total 40 Marks 

Section B 20% of total examination mark

Answer one of the following two questions

Question 4

a) Identify a company who follow a strategy of differentiation and suggest and fully justify a performance measure from each of the four balance scorecard perspectives which would help that organisation meet its strategic goals (11 marks)

b) Using relevant examples discuss the validity of the following statement “cost control is a threshold competence rather than a core competence” (6 marks)

c) It is believed that if a competence is to be a core rather than threshold it requires organisational support. Explain what this means for the design of performance measurement systems. (3 marks) 

Total 20 marks

Question 5

Larry Chance founded APM Software Ltd in 1997. The company design innovative software solutions for large corporations. They have been hugely successful and Larry believes that this is largely due to his leadership. His approach could be summarised in an interview he gave in 2014, when he said “I set the direction, my accountant sets the budget to meet my targets and if one of my managers beats the target I reward them. If they fail they are not the people for us”. However the last two years have been rather difficult, customers require more value, competitors have introduced new more innovative products and APM have found it particularly difficult to attract and retain talented staff.

a) Using Porters five forces theory and the information above briefly explain why APM are finding the competitive environment more challenging [5 marks]

b) Referring to relevant theory (perhaps self-determination theory)  critically evaluate Larry’s approach to management control [9 marks]

c) Malmi and Brown explain that organisational culture is or can be within the control of managers and therefore it can be used to regulate employee behaviour. Using two examples explain how APM could use cultural controls to improve business performance [6 marks]

Total 20 marks