The Understand Company is a family owned business started in 1980. The business specialises in manufacturing metal sunshade stands for both domestic and commercial use. Up until recent times the company has been highly successful, first with their sunshade stands for domestic customers and then branching out to commercial installations for luxury hotels and resorts. The Understand Company sells their product for domestic customers to wholesalers, who then on-sell to retail outlets. Whereas for the commercial installations the Understand Company deals directly with the customer. In an attempt to enter an emerging market, that is the sunshade stands for commercial use, the Understand Company recently introduced made- to-order installations for luxury hotels and resorts. There have been many new sunshade stand manufacturers entering the domestic market over the past ten years. After the Understand Company experienced a recent reduction in sales of domestic sunshade stands, there was a reduction in overall gross profit which led to the company employing a new CEO, John Sticks. John is not a member of the family that started the Understand Company but is a chartered accountant and has knowledge and experience with management accounting and costing in both manufacturing and service organisations.
Prior to the appointment of John as a CEO, a member of family that founded the Understand Company had been acting as CEO and had been responsible for costing and pricing the products the company sells. This family member has hands on knowledge of the production process but no formal accounting qualifications. The founding family were at a loss as to why the company was not as profitable when they knew that they are very experienced at making the domestic product compared with the new entrants to the market.
The new CEO noticed that the company has been recently selling more of the high-end commercial sunshade installations than their competitors and fewer of the sunshade stands for domestic use. This puzzled John as he knew that the Understand Company had many years of experience of making sunshade stands for domestic use and was very efficient at making this product. Whereas the Understand Company was less experienced at making the commercial sunshade stands and was still adjusting their manufacturing process.
The Understand Company used a “Just in Time” ordering and manufacturing process where they tried to minimise inventory of raw materials and stock on hand. The manufacturing process started when orders were received from customers. Manufacturing labour was a fairly small proportion of overall costs as much of the process was highly automated. The process involved cutting of steel with machines, soldering parts and extensive quality control inspections.
John Sticks – the new CEO found that the company was using a cost-plus pricing system adding a 50% mark up to the manufacturing costs of both the commercial and domestic sunshade stands to arrive at the sales price. The costing of the sunshade stands was based on the following information:
| Commercial |
Domestic |
| Units produced and sold |
1,000 |
10,000 |
| Sales Price (Average) |
$27,750 |
$1,500 |
|
Total |
Per unit |
Total |
Per unit |
| Direct Materials |
$6,000,000 |
$6,000 |
$2,000,000 |
$200 |
| Direct Manufacturing Labour |
$2,000,000 |
$2,000 |
$1,500,000 |
$150 |
| Machine Costs |
$2,000,000 |
$2,000 |
$1,000,000 |
$100 |
| Total Direct Costs |
$10,000,000 |
$10,000 |
$4,500,000 |
$450 |
| Manufacturing Overhead Costs |
$8,500,000 |
$8,500 |
$5,500,000 |
$550 |
| Total Cost of Goods Sold |
$18,500,000 |
$18,500 |
$10,000,000 |
$1,000 |
*Manufacturing overhead costs were allocated per machine hour, the commercial units used 1.7 machine hour per unit and the domestic used 6.6 (approx.) minutes per unit.
John began his tenure at the company by closely examining the manufacturing process. The process required for making sunshade stands substantially differed between the domestic and commercial sunshade stands. In addition, sunshade stands for commercial use were manufactured in very small batches to assure uniform quality from one product to the next. On further investigation of the production process, John was able to identify the following activities and their related costs that were used in producing the two different products.
| Units of the Cost Allocation Base |
| Activity |
CostAllocation Base |
Total Activity Costs |
Commercial |
Domestic |
| Soldering |
number of solder points |
$4,000,000 |
15,000 |
40,000 |
| Shipments |
number of shipments |
$1,800,000 |
1,000 |
20 |
| Quality control |
number of inspections |
$2,200,000 |
1,000 |
100 |
| Purchase orders |
number of orders |
$1,400,000 |
1,000 |
50 |
| Machine power |
machine hours |
$3,000,000 |
1,700 |
1,100 |
| Machine setups |
number of setups |
$1,600,000 |
1,000 |
100 |
| Total manufacturing overhead |
$14,000,000 |
|
|
John is trying to find a way to improve the outlook for the company and explain the problem and issues to the family members who have little knowledge of contemporary management accounting techniques.
Requirements: Your case study write-up should include the first five sections listed below
- Background
In this section you are to provide a brief overview of the important background information relating to the company. This information presented in the Background section should be relevant to your discussion of the company’s problem and issues that you are to identify in Section 2.
Ideally, you should briefly describe the company’s core business, products, processes, costing systems, pricing as well as strategy, environment and/or other significant aspects that you see as relevant in this case.
Note: You should only include what is pertinent to the problem and issues in the case and avoid reproducing the original text of the case.
2. Problem & Issues
In this section you are to identify and briefly discuss:
a). The problem the company is facing at the time of the case,
b). The issues that may have led to the problem the company is facing
c). The rationale that links the problem and issues you have identified – explain how the issues you have identified lead to the company’s problem?
Note: A problem is something that the organization must overcome to be sustainable and is reasonably well understood – even if its solution is not. Example: consecutive periods of reported loss.
An issue is more specific to the company’s situation and has led to the problem. It also requires attention but needs to be investigated and better understood (which you will attempt to do in Sections 3 & 4) before specific solutions are considered.
3. Theoretical Analysis
This section requires your analysis of the qualitative aspect of the underlying cause(s) of the problems and issues that you have identified in Section 2. Your analysis should be supported by the relevant theory and concepts covered in ACCT2102.
4. Calculations & Interpretations – Quantitative Analysis
This section requires you to undertake quantitative analysis on the case. You are to perform calculations (may be presented in the Appendix) that are relevant to the problem and issues that you identified in Section 2. In addition, you will interpret the results of your analysis. Your interpretation of your calculations should further the discussion on the problem and issue/s and should be supported by the relevant theory and concepts covered in ACCT2102.
Round all dollar calculations to nearest cents.
5. Recommendations
In this final section, you are to present your recommendations to the company’s management to address the underlying causes of the problem and issues the company is facing. Your recommendations should be informed by your analysis in Sections 3 & 4.
6. Appendix (optional)
You may present your calculations in the Appendix and refer to them in the body of your case. You are allowed two additional pages for the Appendix. Any material over this limit will not be read or marked. The interpretation of your calculations is to be presented in Section 4. Interpretation presented in the Appendix will not be read or marked.
- Be aware of the assessment marking criteria – read through document “ACCT2102 Case Study Marking Rubric”.
- Your case study should be cohesive, readable, well-presented and free from spelling or grammatical
- Presentation requirements: your case write-up should follow the sectional structure outlined above with 1.5 line spacing, 12 point Arial font, default margin and the use of section headings.
- Word limit 1,200 words (max. 3 pages, 1.5 line spacing, 12 point Arial font, normal margins). This word limit does not include any tables, graphs etc., that support your analysis and recommendations, all tables, graphs etc are to be presented in the Appendix which is limited to 2 pages only. Any material in addition to these requirements will not be read.
- Be succinct and make sure you have fulfilled the Each student should submit a single word of their case study with their name and student number in the top right hand header of each page.
- This is an individual assessment. You are required to submit your work via the Turn it in link in the “Case Study” folder under the Assessment tab on the Blackboard site by the due date. Submitting your case after the due date will attract late submission penalties as per Section 5.3 of the ECP.
Other information:
- To apply for an extension for this assessment, refer to “Extension for Case Study Submission” under the Course Help tab on the Blackboard site or refer to Section 6.1 of the ECP.
- Be aware of the University’s policy on academic integrity and plagiarism as outlined in Section 6.1 of the ECP.
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