Management Accounting Assignment on 'Jones Compact Cars'.

University Degree Business and Administrative studies

Unit 13- Management Accounting

Assignment - ‘Jones Compact Cars’

I have given the opportunity to investigate and write a full management report on Jones

Compact Cars. The firm requires my expertise in the area of management accounting; I will

use my knowledge to evaluate each course of action needed to run the firm effectively.

Jones Compact Cars is a small family business in rural Southgate. It was established 40

years ago and its star product is the flame red MG. The firm is not functioning efficiently and

there is a lot of room for improvement.

The firm suffers from four major problems, poor marketing, internal co-ordination, personnel

and the lack of production.

I will investigate the above and outline the major problems to a greater degree.

One of the major problems that can be seen is that the firm does not practice good

budgetary control. The sales forecast is set but it is very rarely monitored and costs are

poorly controlled.

The firm believes that if it sells 300 cars at the price of £40 each they will break even.

From using the company information, by analysing and producing a break-even chart I have

found out that

The firm is incorrect in its assumption that it needs to sell 300 cars per year to break even.

The actual amount that has to be sold to break even is 321 cars each month. I have

illustrated this in my break-even chart that clearly shows the number of cars to break even is

321. Break even in appendix.

There are several benefits of the break-even analysis, and I have used it to show how the

firm is performing.

Visual impact, the break-even chart provides a visual means of analysing businesses

financial position at different level of output. Business decisions makers can see at a glance

at the amounts of profit or loss that will make at different sales levels.

Risk assessment, the margin of safety shown on the break even chart provides business

with an assessment of risk. It shows how much sales can fall before a loss is made. The

chart therefore gives an indication of the businesses ability to withstand unfavourable trading

conditions.

Break-even analysis can also be used to consider what would have to the level of

profitability if for instance price or costs were changed.

E.g. if price was being considered and was actually raised by drawing a new total revenue

line on the break even chart, the total amount of profit at each level of sales could easily be

seen. The impact of change in price, fixed costs and variable costs can easily be seen and

plotted.

The limitations of the break-even analysis

The break-even analysis has a number of limitations. In particular it is sometimes criticised

because certain of its assumptions are unrealistic. I have used the chart to find out how the

firm is performing.

Uncertain data, the precise figure of total costs and total revenue are not likely to be

known over the full range of sales. This is relatively true in the long term, e.g. changes in

technology, raw materials costs or market conditions might affect total costs and total

revenue. The process simplistically assumes prices are constant and cannot take these

changes into account.

Fixed and variable cots, the break-even analysis assumes that costs can be divided into

fixed and variable costs. This is not always the case as fuel costs are generally considered

to be semi-variable. They have a fixed standing charge and a variable charge that depends

on how much gas and electricity is used. Another difficulty is that some fixed costs are

stepped or semi fixed, e.g. if a manufacturer raises production, large premises might have to

be obtained this in return will raise costs. Different types of stepped costs such as rent,

administration costs or interest payments on machinery, might have their steps at different

output levels. These factors might make it difficult to construct an accurate break-even

chart.

Unsold production, the break-even analysis assumes that all goods that are produced are

then sold. All businesses hope to sell everything that they have produced this is sometimes

not the case. Some stock might become outdated, unfashionable or damaged and therefor

impossible to sell. If this happens the costs of production will not relate to the number of

goods sold, but to the number of goods produced. Under these circumstances break-even

analysis becomes inaccurate.

Many other factors must be considered such as the accuracy of the data. A firm must be

accurate with its numbers as wrong figures could project sales targets that cannot be

reached. The economy could be in crisis so sales could fall, these factors are not

considered by the break-even analysis.

Some firm sometimes considers break-even analysis to be too simple as x amount has to be

produced and sold to break even but it does not take into account all the above factors such

as unsold stock and the conditions of the market.

On the basis of my calculation I would put forward the following recommendations

to JCCS’s.

The firm must produce an accurate break-even analysis in-order to find out that the firm

must sell 321 cars each month and not 300 per year to break even.

The firm could introduce an effective break even analysis into to management techniques and

then use it to monitor future levels of sales so they can have a ready appreciation of profit

and loss for any given quantity. At present the firm does not have a problem as they re

selling more and margin of safety exists. The business is product oriented and the firm must

realise that marketing needs to be effective and constantly ongoing. In order to maintain and

increase sales. The firm last year set it self a sales target of £500,000 but did not manage to

achieve it. This is because the market is constantly changing and children are becoming less

interested in toys and more into computer games. However there appears to be marketing

emerging, men aged 40-60 with a captivating interest in model cars. The firm must take

advantage of this interest in cars by effective marketing and segmentation in order to attract

these potential sales. As the market is dynamic the firm needs to focus a lot more on its

marketing and the new age who are interested.

Also to overcome the above the firm could introduce constant monitoring of sales and its

customers.

I have also analysed the variances as it states JCC does not practice good budgetary

control and very rarely monitors them. Costs are appearing to be poorly controlled and all

this has a major affect on the way a business performs.

I have produced the following variance analysis.

Budgeted Actual Variance

£000 £000 £000

Sales 480 432 48 ADV

Special orders 10 0 10 ADV

Total sales 490 432 58 ADV

Materials 192 200 8 ADV

Direct labour 96 105 9 ADV

Power 4.8 4 0.8 FAV

Fixed production costs 50 48 2 FAV

Marketing 10 5 5 ADV

352.8 362 FAV

Planned profit 137.2 70 67.2 ADV

Benefits of the variance analysis/ standard costing

There are several benefits of the variance analysis; the variance analysis compares actual

costs against budget. If actual performance is better than standard there is said to be a

favourable costs variance.

E.g.

If standard labour cost is £36 but actually works out to be £32 there’s a favourable

difference of £4. This means that the costs are lower than expected. However if actual

performance is worse than standard this is said to be an adverse or unfavourable variance.

Variances are a method of control and can show if the firm is running efficiently. Variances

can also be a motivating factor for the staff as if an adverse exists staff must work hard to

change the adverse into a favourable in the future.

Variance analysis is also classed as a method of appraisal as staff can easily know if they

have done well when the variance is favourable. Staff can monitor their progress and assess

how well they are performing.

Variance analysis helps and is a tool of,

*Planning function

*Control function

*Motivating function

The variance analysis can be used on any expenditure of the business. There are a number

of advantages of using this techniques. By calculating variances a firm such as JCC can

identify areas of weakness and inefficient practice. If a variance appears to be too high than

it can be investigated using an approach called management by exception. This can allow

tolerance in the control system. Some firms only investigate variances if they are more than

5 to 10% different from the standard .

Disadvantages of the variance analysis/ standard costing

It can be difficult sometimes to forecast as obtaining the numbers can be difficulty and costly.

Variance analysis can also de motivate staff as it could restrict permanent improvements as

the worker might achieve goal and not do more. Variances could also restrict the idea of

continuous improvement as just meeting targets and not doing more could de motivate staff

and company performance. In some cases to carry out standard costing it can require a

business to gather large amount of information. The process can be time consuming and in

some cases expensive. Most firms use standards costing as an ongoing process so the costs

are ongoing. There are some unforeseen consequences with standard costing. A member

of staff in order to achieve a favourable variance might purchase cheap poorer quality

materials. This would bring the costs down but it could effect sales as product made with

poor material. This could damage the reputation of the firm and losses as low sales.

The variances have occurred due to many factors such as the decline in sales, material costs,

labour costs and even the marketing of the product.

The variances have occurred as the market is in decline and the firm is only aiming its

product at the older segment and not at the younger age as they are more interested in

computer games. The product is not targeted at the new market but only for those in there

40 - 60s.

Another cause that I believe has resulted in the poor variances is the special order being lost

probably due to the firm not meeting production deadlines so as a result the variance has

occurred.

I believe is the main reason why the variances have occurred and this is because of the

machinery is said to be old and not reliable and also the variance targets could be set too

high or even too ...

This is a preview of the whole essay

computer games. The product is not targeted at the new market but only for those in there

40 - 60s.

Another cause that I believe has resulted in the poor variances is the special order being lost

probably due to the firm not meeting production deadlines so as a result the variance has

occurred.

I believe is the main reason why the variances have occurred and this is because of the

machinery is said to be old and not reliable and also the variance targets could be set too

high or even too low so this must be investigated to a further extent.

The material variance resulted in an adverse this is probably due to the price of the

material, the price of the materials could have increased so firm should of searched out for a

new cheaper supplier. The budgeted amount was 490 whilst the actual amount was 342 so

there was an adverse of 58. More material was used than predicted this I think was

probably due to a lot of wastage or even workers making mistakes and wasting materials.

Another reason for this variance could be the theft of the material. I think the firm did not

take advantage of bulk buying so major discounts were lost and could have resulted in the

adverse variance.

The material costs could also have been budgeted too low and the firm did not realise the

increase in prices, wastage so this could have also hindered the variance.

The labour variance also showed an adverse, as the budgeted was 96 whilst the actual

came to 105 meaning an adverse of 9. This is another adverse in the firm’s variance analysis

and is caused by the ageing workforce I feel. Most of workers are in their later age and

could suffer form illnesses. The main reason I feel the variances have occurred is due to the

old machinery the firm owns as it could have broken down and valuable man-hours had

been lost whilst the machinery was being fixed. Labour time management and training could

also have occurred the variances as the workers could be poorly trained and could not carry

lout the tasks in the required times.

The power variance is shown to be a favourable in the analysis as budgeted was 4.8 and

actual was 4 so a favourable of 0.8.

This is a positive variance but it is only achieved as the firm has only produced fewer goods

as machinery kept on breaking down. The variance could also have been set too low so

even as this is a positive variance it musty still be investigated as why it has occurred as a

positive. The fixed production cost variance is a favourable by 2. The budgeted amount

was 50 whilst the actual came to 48. This has occurred probably due to good management

or even a reduction in fixed costs. If a firm keeps its fixed costs too low they might be

emitting vital functions of the business that could reduce the firms efficiency and in return

could suffer high costs to the business in the loss of productive efficiency and sales by

keeping fixed costs deliberately low.

On the bases of my variance analysis I will recommend the following suggestions to

the firm so the variances could be minimised.

In order to minimise the variances the firm must recognise its operations.

The sales variance was relatively high so the firm needs to concentrate and improve the

marketing effect. The firms could take such actions as an increase in its advertising

campaign, so it is increasing the knowledge of its product.

To improve the variance the firm could target a new segment the younger generation with

newer model cars and benefits. By effective marketing research and approach the firm

should target new customers who would want these benefits. The firm main aim should be

effective marketing especially at the newly identified 40 to 60 year olds. Ongoing marketing

will increase potential sales thus higher profits can be achieved.

The firm is selling nostalgia so variances could be achieved through effective management

and by improving standard costs and the overall efficiency of the business. The firm must

ensure that the budget costs are equal to actual costs and this can by done effective market

research and planning that will result in a efficient firm.

All extensive favourable variances that have occurred I feel must be investigated as they

could have been set too low and the firm did not budget effectively. The firms number one

aim should be to enforce accurate budgets and team working, training and also investment

into new machinery and the results will show up in profits.

Cellular production could also be used to create job deepening and widening as a result the

average work day will became more interesting and worker will work more effectively and

also less absentees. By training workers and working effectively the firm would benefit from

correct budgets and profit.

Bulk buying and extensive market research is vital to successful and must be fully met.

I will now construct a sales forecast for the next year.

Jan Feb March April May June

Low low increase

10000 10000 15000 18000 20000 30000

July Aug September October November

Decline high

20000 25000 25000 51000 80000

Dec Total 388800 for year predicted are.

High

84800

I came to the above sales forecast conclusions that I have created y referring to the

appendix 2 in case study that I had. By using the sales variance I have predicted that that

sales will fall. The sales forecast above are my predictions but I have also taken into

account the declining market, as children are less interested in toys and more in computer

games. So I have decided to have a 10% decline in the sales predictions.

I have taken 10% of the original sales prediction of 432000 from last year. The new total I

have come to is 388800. A 10% decline.

Later on sales that I have predicted should increase as the firm has identified the new market

of 40to 60 years olds who are interested in model cars and also the exporting form Taiwan

could help the increase of sales. Ensuring that the above recommendations made by me are

taken into account. Of effective marketing and management, the control of budget, thus the

sales should increase. I must reiterate that marketing should be an ongoing process so the

consumers can be informed of what is new and available. The highest sales will be made at

Christmas due to the festive season. This is the time of the year where JCC needs to get its

marketing policy precise as most firms take advantage of the holiday season and launch

many products. At the beginning of the year the sales are very low but gradually they will

increase this would be due to the firm employing effective marketing and attracting a new

segment.

Based on the figures presented in appendix 1 I will calculate the monthly profit using

marginal costing.

Sales 1000 per month

selling price £40 each unit

(1000x40) sales £40000

Direct labour cost per unit £8.00

Factory power 0.40 unit

materials £16 unit

Total £24.40 x 1000= £24400

Contribution 40000

take away - 24000

15600 15600

Less fixed costs per month 5000

Profit 10600

Now I will use the figures in appendix 1again to find out the monthly profit using absorption

costing.

Variable cost £24.40

fixed cost £5000 £5 fixed cost per unit

1000

Total absorption cost per unit is £29.40

Sales are £40000

Less absorbed cost £29400

Profit per month £10600

JCC believed that purchasing motors from Taiwan will result in a saving of £2 per motor or

£2000 per month. Ken is keen to press ahead with the idea and now I will analyse the

figures and find out if this move is appropriate and if it will result in a saving.

At present motors are made in house at variable cost per unit of £6 and a fixed overhead

charged at each unit of £2.50. However Ken believes by dealing with the Taiwanese a

motor for £6.50 each so a saving of £2 per motor or 2000 per month in fixed costs.

In house (UK)

Cost £6.00

F/C per unit £2.50

£8.50

(100 x £2.50 = £2000) fixed costs

Taiwan

£6.50

£2.50

£9.00

£8.50 UK

A saving of £2 in Taiwan

It appears that at very first by buying from Taiwan would result in a saving of £2 as the

product is costing only £6.50 to obtain. But where in the UK it is costing £8.50 but in fact

the direct cost is only £6 and the remaining cost which is £2.50 is the fixed cost and that will

still remain as certain improvements might be needed on the products or a new production

process might be carried out. In fact the fixed cost remains and does not disappear even

when the firm buys from Taiwan. Purchases from Taiwan will effectively be £9 and the fixed

costs will remain a burden.

In addition there will also be some non-accounting costs that will have to be considered.

There are many various problems when a firm buys from a foreign country and some of

these are.

*JCC has no longer control over the production and the quality of the Taiwanese motors, as

they might not meet British standards above all customers liking.

*There could also be problems with the continuation of supply as the firm is buying from

Taiwan that is half way around the world. There could be seniors where the firm is unable

to meet consumer demand as supply is delayed. There could be further distribution

problems as the exchange rate might rise and firm finding it to expense to trade.

*The customers might not be happy with the quality they are receiving and losses could be

paid as the cars are suppose to be British but they are being produced in a foreign country

by a foreign firm. So the cars are not British but Taiwanese.

*Possible redundancies if the firm were to but from Taiwan, as production would be closed

down and the manpower would not be needed so possible payments to workers might have

to be given. This would have a major effect on the business as the firm was always involved

in the community and by making its workers redundant reputation could be lost. There will

also be many accounting costs when the production is closed down.

*Possible conflict with the Taiwanese as they could later on increase the price and JCC will

than have to abide with them as they probably have closed down their own production and

sold the machinery. JCC will have to accept whatever price if the Taiwanese were to

increase it as JCC would no longer have its own production and it will be in the mercy of the

Taiwanese.

Ken has informs that he has been approached by the local MG owners club to produce a

job lot of special edition Deluxe model MG’s to celebrate their 40th anniversary. They

require 50 cars, all in ruby red and are waiting a quotation. I will help Ken to prepare a

quote, as he is somewhat confused, as the cars will be made at two different centres.

Centre A - assembly, and Centre B customised spraying.

Below I have prepared the quote using the figures presented in appendix 3.

Job cards:

Centre A

Direct labour 36hrs

Direct labour rate £4.80 = 168

Direct materials from store:

4 x £8.35= 33.40

10 x £4.20= 42.00

1 x £16= 16.00

Total = £91.40

Fixed overheads: absorption rate £3.50 per direct labour hour

£3.50 x 35 = £122.50

£168

£91.40

£122.50

£318.90 for Centre A

Centre B

Direct labour hours 8

direct labour rate £6.50 = £52.00

Direct materials from stores:

5 x £4.60= £23.00

Fixed overheads: absorption rate £8.95 per machine hour, 18 machining hours

operated.

£8.95 x 8hrs = £161.10

£52.00

£23.00

£161.10

£236.10 total for Centre B

Invoice

Centre A £381.90

Centre B £236.10

Total £618.00

15% mark up profit + £92.70

Price £710.70

Vat 17.5% + £124.37

Total cost £835.07

Above I have produced a job card and the invoice price. I have come to the conclusion

that the following price should be charge to the MG Owners Club. I have calculated the

costs for centre A and B and also taken the 15% mark up profit that brought the total to

£710.70. Than I calculated the VAT of 17.5% to the total so the final price came to

£835.07.

I have noticed that it has been some years since JCC made an investment in capital

equipment. The machinery is slightly archaic. The machinery is said to break down on

various occasions and the production manager refuses to be held responsible for poor

productivity.

Ken believes that investing in new machinery will benefit the business as faster production

less downtime, less waste and lower maintenance costs. However there are some barriers

to this as the workforce will have to be trained on how to use the machinery and also

redundancies as the machinery will carry out most of the jobs. The machinery will only be a

benefit to the company if it is run twenty-four hours a day. Mr Jones is apprehensive about

the changes and the effects it will on the firm and the workers even the local community, as

MR Jones is a well-respected man. His workforce and the community enjoy a positive

relationship and his loyal workforce trusts him. Mr Jones is worried about any

consequences of the changes.

Ken has seen two machines on the market and he is reluctant to buy one of them. The two

machines are RCC Silver costing £35000 and the RCC Gold at a cost of £45000. It is

likely that the gold will last approximately 3 years longer than the silver. Ken has some ideas

of additional revenues and expenses if a new machine is purchased.

I will analyse the information and find out if the machinery is really worth buying and if so out

of the two. I will be carrying out an investment appraisal analysis for the two machines.

I will use the pay back method, ARR and NPV method for this.

ARR

RCC Silver RCC Gold

Cost £35000 £45000

years

1 2000 3000

2 3000 4000

3 5000 6000

4 8000 8000

5 8000 8000

6 8000 10000

7 5000 6000

/ 0 5000

/ 0 4000

/ 0 3000

Total 39000 57000

Profit 4000 12000

Profit per year 571 1200

ARR 1.6% 2.7%

RCC silver worked out by adding total inflow which equals 39000 than minus investment of

35000 equalling 4000. Divide the 4000by the number of years in use that is 7 and that

equals 571 profit a year.

Pay back method

RCC Silver RCC Gold

year year

0 35000 0 45000

1 2000 1 3000

2 3000 2 4000

3 5000 3 6000

4 8000 4 8000

5 8000 5 8000

6 8000 6 10000

7 5000 7 6000

/ 0 8 5000

/ 0 9 4000

/ 0 10 3000

Pay back occurs after 6.2 years 7 years

The pay back method states that pay back for silver is 6.2 years whilst for the gold is 7

years.

I will now calculate the net present value of the investment in to the machinery. The

calculations will show the time value of money and if the figures are positive that is a good

indication towards the project. When producing the discounted cash flow I will take the five

percent discount factor into account.

NPV (net present value) discounted cash flow

(DF= DISCOUNT FACTOR/ DCF= DISCOUNT CASH FLOW)

RCC Silver RCC Gold

Year Silver D/F DCF Year Gold D/F DCF

net return 5% net return 5%

1 2000 .952 1904 1 3000 .952 2856

2 3000 .907 2721 2 4000 .907 3628

3 5000 .864 4320 3 6000 .864 5184

4 8000 .823 6584 4 8000 .823 6584

5 8000 .784 6272 5 8000 .784 6272

6 8000 .746 5968 6 10000 .746 7460

7 5000 .711 3555 7 6000 .711 4266

/ * * * 8 5000 .677 3385

/ * * * 9 4000 .645 2580

/ * * * 10 3000 .614 1842

TPV 31324 44057

NPV 3676 ** 943

I will now evaluate the benefits and limitations of each of the investment appraisal methods

used above.

The pay back method of investment appraisal involves calculating pay back period. This is

the amount of time it takes a business to recover the initial cost of an investment.

The method is relatively simple to apply there are several advantages of the pay back

method. The method is appropriate when technology changes rapidly, such as in computing

new more efficient designs and software. So the method helps to value if purchasing the

new technology is appropriate.

JCC needs to invest in the right machinery as they are having some financial problems. All

investments projects are risky to some degree, the shorter the pay back period the less risk

involved. This method is quick and uncompleted and helps to make quick decisions over

choice of what machinery to buy. By using this method I was able to find out how long it

would take to make the money back that I would invest into the machinery.

The disadvantages of this method are that it ignores all revenues after pay back. The overall

profitability of investment projects are ignored, this is because the speed of repayment is the

sole purpose. Another thing it does not consider is the time value of money, the timing of the

cash flows within the pay back period are ignored.

There are several advantages of the ARR method this method is slightly less difficult than

the pay back method. The profitability of an investment project is clearly identified rather

than simply the cash flow. This method helps to make relatively easy comparisons between

different types of investments projects. The method can be used to compare the return on a

particular project with the return on capital employed within a business as a whole. This

method shows profitability that pay back does not show. It shows the profitability but

profitability must not be confused for the final profit. It shows how well the firm’s assets are

being used.

The disadvantages of the method are that it does not take in to account the timing of cash

flows. This might cause JCC problems as business could suffer from poor irregular cash

flow. The ARR method does not take in to account of how long the investment will last, nor

how long it will take for income to cover the initial outlay.

So this method is much harder to calculate than the pay back and also problems can arise

with averaging because it does not show whether a project is more or less profitable in its

early or later stages. The method ignores the time value of money, if that money is worth

more now than in future. It uses profit figures that include no cash items such as

depreciation and provision for bad debts. This can distort the calculation depending on how

depreciation and other provisions are calculated.

I will also indicate the benefits of the NPV net present value process and its limitations.

The NPV method of investment appraisal considers the costs and benefits of an investment.

It also takes into account the effect that interest rates and time have on the investment

decision. The main benefit of the method is that it considers the time value of money and

when calculating the NPV investment all the costs and benefits are given at their present

value. The following formula is used to calculate the present value of future cash.

Present value of cash flow in year N= actual cash flow in year N

R= rate of interest (1+R) N

N= the year of the cash flow, the number of years into the future.

Formula to work out NPV discount factor

1.05= 0.952

1.05 2=0.907

The method is excellent for analysing projects and comparing alternative investment projects

and they can be easily compared. The method takes into account the interest rates and the

timing of future cash flows.

I worked out the NPV by subtracting total present value of investment. The product with

the highest NPV is the RCC Silver but I feel neither of the machines are a intelligent

investment.

The disadvantages of this method are that it can be very difficult to understand and analyse.

The method is complex to calculate without a computer or discount tables.

The future rate if interest is mostly to vary and is unpredictable so could affect firm. Also it

is normal to calculate discount factor to 3 or 4 decimal points. But it must be understood

that precision to 4 decimal points on estimated cash flows can add to unnecessary

complications. Future predictions are also difficult to forecast as the market is dynamic but

this method is widely used when projects are in consideration. The method does not

provide an accurate means of comparison if the initial outlay on projects is different.

E.g. of NPV

NPV 50000 on a 5,000,000 investment would generally be considered not as good as a

NPV of 40000 on a 200,000 investment, even though the NPV is higher.

The method is time consuming if not fully understood and hard to calculate.

After taking into account all the qualitative factors and by producing the appraisal.

Below are my recommendations to JCC if it is to buy the machinery.

After analysing the results I have come to the conclusion that it would not be a worthwhile

buying the machines. I have come to the following decision due to many factors. The main

factor is that the net present value is shown as a negative for both of the machines. The

machines will not be a worthwhile investment. The accounting rate of return for the two

machines are too low, simply there is not much that can be achieved by, buying the

machines.

Rate of return for Silver is 1.6% whilst for the Gold is 2.7% that is relatively low and not a

worthwhile investment. Also the pay back method clearly shows that it would take too long

for the machinery to be paid back. The Silver would roughly take 6.2 years to pay back

whilst the Gold would take 7 years, these periods are too long and JCC cannot afford to

investment into the machinery as the market is also in decline.

Since the appraisal method did not prove positive I still feel it would not be a good

investment for JCC.

In order to make the most out of the machinery it is said that the machinery would have

been run 24hours a day. From looking at all the data of JCC it is clearly not a good idea as

the market is in decline and sales are low so the machines running 24 hours a day would be

totally unnecessary as there is no demand to warrant the running especially 24hours a day.

The sales variance analysis indicates that the sales have decreased, costs have risen due to

poor management control so buying the machinery would be totally inappropriate as costs

would rise especially when machinery would have to be run 25hours a day.

JCC has not got a good a very understanding of the current market and most of the data

they posses is not very accurate. So the appraisal could have been produced using

inaccurate figures. The data is not very reliable so it would not be in the interest of JCC to

purchase the machinery. The machinery would prove to be a negative investment.

There are also problems with training the workforce if new machinery purchased. The firm

would suffer from training costs and productivity would be disturbed as workers being

trained. Some redundancies might have to take place as the machinery normally replaces

manpower. Redundancy payments will have to be made and this could also have an affect

on the reputation of JCC. JCC is described to be a part of the community so by making

workers redundant would give a bad impression of the firm. The good reputation it has in

the community would be lost. Major shift changes would be needed due to the fact the

machinery must be run 24hours day, reorganising in the firm. High wage costs as running

continuously and could cause conflict as workers having to work night shifts. Socialisation

of the workers would be effected as time changes.

The machinery could also be too loud and disturb the local community and cause bad

relationships, therefore causing bad reputation. This could cause the sales to fall.

The company could benefit from investing the money into a bank or a building society and

can earn interest from there.

As all the methods have proven that the investment into the machinery would not be a idea

for the business. I feel the money could be invested into the improvement of the original

machinery as the records show the current machinery is slightly archaic and often breaks

down that results in poor productivity overall the machinery is unreliable. A lot of

manpower is wasted whilst Norma is fixing the machinery.

The firm could find a contractor and negotiate a deal and get the current machinery restored

fully so productivity at the highest level can resume. Also the reputation of the firm would not

be effected. The firm would benefit from not investing in the machinery I have come to this

conclusion by analysing the appraisals and the appropriate information given. I feel my

conclusion is valid and the machinery is not worth buying.

If JCC were to do ahead and invest in the new machinery to increase production the

following consequences would occur to the following people,

*The employees would be effected if machinery bought as the new technology might take

their jobs and produce. So job insecurity for the workers as new technology can produce.

Possible redundancies might be considered by JCC that will effect their reputation in the

community as making people redundant. The employees that JCC might consider to retain

will need training on the new machinery. This process will incur costs on the business. So

effective use of the machinery will take time, as employees still need to normalise their selves

to the new equipment. Production will be slow at the start.

Another major effect on the business will be that the working hours for workers will have to

be increased as the machinery will have to run 24hours a day. This would cause the wage

costs to rise and also major shift changes so reorganising will be needed. Some workers

will have to work night shifts and whole days that would be restricting the sociable hours.

The machinery would not benefit the firm or the loyal workers of JCC as it will raise costs

for the firm and also cause bad reputation in the community as loyal workers being made

redundant. As a result sales could fall.

*The local community would also be affected, as the redundancies will have to be made.

This is because most workers are local so the community would be affected and the local

economy.

The machinery would also cause noise pollution, as it would be run 24hours day. The

increased emissions from the machinery as of the 24-hour operation would effect the

community by disturbing the peace of the town and also the constant movement of materials

and goods could also cause traffic. Therefore increased pollution and nuisance for the

community.

*The environment and the tranquillity of the town would be disturbed as the noise from the

machines the increased usage of power from JCC will all effect the community and the

environment. So there could be complaints from the local residents to the council about

JCC and the firm could face fines for the noise and disturbing. Therefore giving the

respected family run business a bad image in the community.

*The firm’s ethics by buying the motors directly from Taiwan more cheaply could mean the

firm is exploiting the workers in South Asia. The suppliers could be using child labour to

produce the motors and if found out JCC would lose its reputation that it posses. Also

exporting from Taiwan might not be appreciated by the consumers as the cars are suppose

to be British but why are they made in Taiwan so sales could be lost and the product could

be of a poor quality. Mr Jones is very reluctant on image and wants to keep the community

and his loyal workers happy. Therefore increased profitability is not essential, customer

satisfaction is more important.

The social consequences could be minimised if the firm is willing to reorganise its

operations.

Flexible working hour arrangements could be negotiated with the workers. The firm could

also offer special redundancy payments to those who are willing to leave therefore causing

less conflict in the work place. The firm could offer alternative work for those being made

redundant so reputation would not be lost.

To reduce the noise pollution the deliveries to the business could be at certain times.

E.g. only between 6am to 8am or so. This will result in less traffic in the town and noise

pollution.

To make the machinery energy efficient economical programmes could be introduced such

as, how to reduce wastage and electricity usage. The firm could consider investing and

researching in cleaner fuels so less pollution will be produced resulting in a cleaner

environment. In order to reduce the noise from the machinery the firm could invest into

soundproof walls but this will incur heavy costs. But the local community will remain happy

and no complaints will be received. To improve the efficiency of the business the firm

should conduct market research in the town to find out what the consumers want.

Since there would be noise pollution from the machinery what the firm could do is put

something back in the community just to say thanks. The firm could sponsor the football

team or even special events involving sports cars so a fun day for the children. The firm

could also sponsor a school playground. This will probably increase sales in the near future

and children might be attracted to the cars.

To resolve the problems with the Taiwanese of worker exploitation the firm could suggest a

Fair Trade policy where the workers are given rights at the work place and their wages

reviewed so efficient money is being made by them to live on.

By using the above suggestions the community and the environment would be affected to a

lesser extent if not at all and the firms reputation would remain.

To: Mr Jones Ref: Executive Summary

From: Usman Mahmood Date: 01-06-2003

Terms of reference

I have produced full management report on Jones Compact Cars that had been asked for

by Ken. By using my expertise in the area of management accounting, I have evaluated

what cause of action is needed.

Jones Compact Cars is a small family business in rural Southgate. It was established 40

years ago and its star product is the flame red MG. I believe Jones a Compact car in rural

Southgate has accomplished very much since it was established 40 years ago.

Findings

The firm lacks in four major areas. Poor marketing, inter co-ordination, personnel and lack

of production. Below I have investigated the four problems in greater degree.

The current machinery keeps breaking down, the firm has lost special order, poor marketing

and budgeting.

On of the major problems that can be seen is that the firm does not practice good budgetary

control. The sales forecast is set but it is very rarely monitored and costs are poorly

controlled. The firm is incorrect in its assumption that it needs to sell 300 cars per year to

break even. The firm must produce an accurate break-even analysis in-order to find out that

the firm must sell 321 cars each month and not 300 per year to break even.

In order to increase sales. The firm last year set it self a sales target of £500,000 but did not

manage to achieve it. The sales variances suggest that the business is not spending its money

properly. The firm must locate suitable suppliers and order the correct goods at the suitable

prices. The firm needs to cost accordingly as budgets are very rarely monitored. Costs are

poorly managed and this effects the firm greatly.

The firm is selling nostalgia so positive variances could be achieved through effective

management and by improving standard costs and the overall efficiency of the business. The

firm must ensure that the budget costs are equal to actual costs and this can be done

effective market research and planning that will result in a efficient firm.

The firm must keep a very close eye on its costs. If the firm purchased motors from Taiwan

it will not reduce the fixed costs of £2 per motor or £2000 a month. The fixed cost remains

and do not disappear even if the firm buys from Taiwan. Purchases from Taiwan will

effectively be £9 and the fixed costs will remain a burden. There could be various problems

when buying from a foreign country. Could results in redundancies and poor reputation for

the firm. Unemployment in the town of Southgate would rise. The customers might not be

happy with the quality they are receiving and losses could be imminent.

The business is product oriented and does not take into account what the market is asking

for. The firm must realise that marketing needs to be effective and constantly ongoing. The

firm should target the right customers the older generation and not the kids as they are more

interested in computer games at present. The firm needs good effective marketing in order

to identify customer so the firm needs to become market oriented. The firm needs to

understand that the market is dynamic and continuous marketing is needed. So the firm

must allocate extra funds towards the marketing and promotion, as this will increase sales.

By effective marketing research and approach the firm should target new customers who

would want these benefits. The firm’s main aim should be effective marketing especially at

the newly identified 40 to 60 year olds who are interested in model cars. Ongoing

marketing will increase potential sales thus higher profits can be achieved.

The production of the cars is not effective as the machinery is slightly archaic. But the

business must not buy the new machinery, as it is not needed. The accounting rate of return

is poor and also the pay back method indicates that it would not be an effective investment.

The firm would be wasting money by buying new machinery; instead it must improve current

machinery. By fixing current machinery there would be less conflicts as to making people

redundant and also the consequences would be avoided with the community regarding to

noise and pollution. Job security will remain for the workers and the reputation of the firm

will not be effected.

The two machines on the market are RCC Silver costing £35000 and the RCC Gold at a

cost of £45000 and they are not a suitable investment for the firm.

The company could benefit from investing the money into a bank or a building society and

can earn interest from there.

Suggestions

Although the business is lately going through a rough time as the market is in decline with the

kids more interested in computer games rather than in model cars. The firm should conduct

research and also target the newly identified 40-60-year olds market that is very interested

in classic cars. By an effective marketing approach I believe the firm can overcome this

drought. One of the most important aspects for JCC is marketing and the firm must ensure

correct approaches are taken to identify customer. The customer must always be informed

what JCC is launching and also JCC must carry out research to find new trends in future.

The firm see if the demand exists and produce accordingly to that demand. To be

successful market research needs to be done constantly and the firm in future must persuade

the customers and influence them to buy the products. The business must diversify in order

to increase sales and expand to make more profit.

The finance is also very important and JCC must ensure that the correct methods are used

to monitor company performance and costs are lowered. Financial targets need to be set

accordingly and must taken into account the current interest rates and the current situation of

the economy.

The firm in future could export from European countries that follow set standards such as

minimum wage and worker rights. The product could also be of the highest quality since

exporting from Europe. Or JCC could launch its products in foreign countries to increase

sales and could establish it self for being the number one MG model maker. The firm could

introduce new models of cars and new techniques that could attract the younger generation

so further sales could be made. The machinery must be fixed this could be done by a

special contractor, training in the workforce to motivate the workers and create a family

atmosphere at the work place. The firm could employ new younger workers and train them

on the job to reduce costs so future workers are catered for.

JCC is in a very competitive environment I feel it must reorganise its marketing to take full

advantage. In future it could also consider launching other products such as model planes.

I believe the future car model market will intensify with more and more competition will

exists. JCC must establish customer loyalty now before the market becomes to competitive

and customers have a choice of sellers to buy from. I believe the competition will increase

with more firms introducing themselves in this market.

Future economic trends must be recognised and the firm must take full advantage of low

interest rates as loans can be obtained and money used to invest into the company. I believe

the firm must take full advantage of bulk buying and reduce wastage in order to increase

profits.

I feel a new younger approach is needed so young Jones is the right person to do this. The

future for JCC Compact Cars will only be good by excellent marketing, internal co-

ordination, excellent personnel and good quality production.

If the above four are met accordingly JCC will be the number one for model cars.

I feel research and marketing are the most important aspects for JCC by identifying the

customer and the needs the business would be in a stronger position.

Usman Mahmood

Management Accounting Assignment on 'Jones Compact Cars'.

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