MANEGERIAL ACCOUNTING

PROF. BALA

Kailash Tadkase

PGXPM 7 Term I

ASSIGNMENT

Background:

The company in this case is assumed to be a multiproduct company of good

standing and market leader in its sphere of activity. However in recent times
the company is faced with intense competition from local as well as some
imported cheap products and its products are no more competitive. This has
caused alarming reduction in its profits and market share. Consequently this
has resulted in overall low morale, lack of motivation on part of Management
and caused attrition.

The Management of the company has taken cognizance of the situation and
has formed a cross functional team of internal consultants to go over the
current situation fix the current problems and suggest strategic measures
which can be implemented to reverse the situation.

The Report outlines the current situation, the possible causes and strategic
recommendation to improve the situation.

1. Current scenario:

There are following broad problem scenarios related to:

A] Market :
Market competition has increased and the some of the fast moving products
have slowed down resulting in increased inventories. Incorrect cost analysis
and or lack of information on costs has resulted in wrong focus on least
profitable customers while the high profitable customers are straying away
and defecting.

B] Production :

There is no coordination in production and customer demand. While there is

a pressure on production with adhoc demands from sales but we also notice
there is piling up of unsold inventories.

C] Profit:

The company’s profitability is affected to a great extent. There is an increase

in production and support cost to maintain multiple product lines. This
results in increase in indirect costs. On the other hand the company is unable
to pass on the increased cost to the customers because of intense
competition. It ability spend money on a) demand generation and b) on
innovation of new products two key activities to ensure retention of its
market share is getting affected for lack of funds.

D] Motivation: Management / Sales- Customer relationship:

There is lack of coordination between sales and production for inventory

availability. The Sales is de-motivated as they are not able to offer discounts
to their customers. For want of correct inventories there seems to a shift of
focus on least profitable customers and the more profitable customers are
moving away.

2. Analysis of problem & Strategic Recommendation for

Implementation:

We find that the above four problems to be inter related:

We can classify the problems broadly in to following:

i) Lack of planning and control ( sales and production)

ii) Lack of CRM initiative and customer centricity

iii) Lack of correct costing method and Innovation

 iv) Lack of inter linked scoring system and incetivisation for process
improvement and employee motivation / retention.

The following report addresses each of the above problem and also the
strategic recommendation and implementation steps:

i) Implement effective planning and Control Mechanism:

We have seen that there is no clear, structured and controlled mechanism

for sales demand forecast. The lack of integrated planning and control
mechanism has resulted in inventory pile up of certain products, while on
the other hand there are adhoc requirements and pressures for sales to
cater to demand of certain other products. This has resulted in lopsided
capacity planning and utilization. It has also resulted in shifting of
customers due to lack of availability of required products in the market to
meet its actual demand.

Hence there is an immediate need to implement a measurable and

integrated planning and control method which will integrate efficiently the
sales demand forecast and production planning and capacity utilization. It
should be simple and should be able to integrate the concerned
department’s objectives. It should be able to link the Top floor to the shop
floor as it has been observed many times that many Visions and growth
strategies fail for lack of alignment with the grass root or the shop floor or
Sales.

ii) Implement CRM initiative to bring in customer centricity:

It is evident that there is no CRM analytics system in place to provide data

on low value / profit and high profit customers. Consequently the
company and sales in particular is blank on where to focus and hence
does not pay attention to the high profit yielding customers and
resultantly lose them.

Hence, a customer analytics and relationship management system needs to

be implemented. The CRM system should be able to provide diced and
sectional view of customer information to the relevant user. The
Management with the help of this system should be able to take a overall
market view so as to take - 1.) product rationalization or a 2) product
positioning decisions. Most importantly the Sales organization will be able to
have a value based customer view so as to provide differential service levels
and retain high profit customers.
iii) Implement cost effective management:

This is the most important element which will address most of the problems
of the company.

With a highly competitive market scenario its imperative for the company to
hold its price line which can be achieved only by controlling and reducing
costs and thus increasing its profitability.

We are aware that the company follows the cost based methodology for
pricing. The costing methodology which is being used is the traditional cost
allocation method in which indirect cost is allocated to the cost of the
product on predetermined basis. But because of increase in percentage of
indirect cost this method has become inaccurate, as the indirect costs are
not caused equally by all products.

Current system may not:

• Identify the true total product cost because of unnecessary allocation

and complexity

• Identify and report cost of quality

• Provide cost and performance information to support strategic goals

• Measure or reward desired performance

• Focus on cost prevention of potential non value added costs.

• Identify and isolate non value added activities

Since this system is not able to identify the actual indirect cost to the
product it results into some of the product “Under- costed” and some “over-
coste”. This may result in some products incorrectly priced and as a result
lose their competitive edge.

Hence there is a strong need to have an Activity Based Costing

( ABC) and a Activity Based Management approach:

ABC is the costing model that identifies activities in an organization and

assigns the cost of each of these activity resources to all products and
services according to actual consumption by each. It assigns more indirect
cost into direct costs

TYPICAL BENEFITS OF ACTIVITY-BASED COSTING:

• Identify the most profitable customers, products and channels.
• Identify the least profitable customers, products and channels.
• Determine the true contributors to- and detractors from- financial
performance.
• Accurately predict costs, profits and resources requirements
associated with changes in production volumes, organizational
structure and costs of resources.
• Easily identify the root causes of poor financial performance.
• Track costs of activities and work processes.
• Equip managers with cost intelligence to stimulate
improvements.
• Facilitate a better Marketing Mix
• Enhance the bargaining power with the customer.
• Achieve better Positioning of products
With the costing now based on activities, the cost of serving a customer can
be ascertained individually. Deducting the product cost and the cost to serve
each customer, one can arrive at customer's profitability. This method of
dealing separately with the customer costs and the product costs, enables
the identification of the profitability of each customer and Positioning the
products and services accordingly.
CONTINUOUS IMPROVEMENT
The implementation of ABC can make the employees understand the various
costs involved. This will then enable them to analyze the cost, and to identify
the activities that add value and those that do not add value. Finally,
based on this, improvements can be implemented and the benefits can be
realized. This is a continuous improvement process in terms of analyzing the
cost, to reduce or eliminate the non value added activities and to
achieve an overall efficiency ( source: 12 Manage)

The following diagram shows the positive impact of an effective cost

information system: Source: presentation on Cost management by
Prof. Bala – Kellogs School of Management
This therefore leads to the need for implementing an Activity Based
Management (ABM) methodology.

Activity-based management (ABM) is a method of identifying and

evaluating activities that a business performs using activity-based costing to
carry out a value chain analysis or a re-engineering initiative to improve
strategic and operational decisions in an organization. Activity-based costing
establishes relationships between overhead costs and activities so that
overhead costs can be more precisely allocated to products, services, or
customer segments. Activity-based management focuses on managing
activities to reduce costs and improve customer value. This has to be an
ongoing activity.

iv) Implement Balance Score Card:

This is a strategic management tool. It will help us to evaluate the

performance on the following:

• Financial – How do we look to shareholders

 Measures-Sales Growth, Percent profitability, Operating

margin, EVA

• Customer- How do our customers see us?

  Measures- Complaint response time, order fill rate,
errorless delivery, warranty claims

• Internal- At what must we excel?

 Measure- product defects, cycle time, labour productivity

product cost, sales forecast accuracy

• Innovation & learning- How can we improce and create value?

 Measures- New ideas implemented, percent of sales from

new products, number of patents

There is need for these measures to be linked to an incentive. For example,

we need to tie sales forecast accuracy to the Sales in the organization. The
evaluation and feed back system will do wonders for overall motivation of

Summary & Conclusion

The implementation of the above is expected to

• Effectively determine the actual product costs

• Help take cost reduction decisions, thereby improving profitability

and competiveness

• Rationalize activities (particularly non-value added activities)

• Rationalize product lines, help focus on product innovation.

• Help implementing more transparent and structured sales incentive

schemes to boost Sales morale

• Help in better planning, forecasting and control, thereby regaining

Senior Executive Morale

• Improve CRM and help retaining profitable customer even in a

competitive market.

• The performance measurement tool will help create motivation and

retention