NAME: BHUWAN GHIMIRE
SENECA ID: 139677173
SUBJECT: COST ACCOUNTING, IAF 530
Binson’s Country Markets (Case Analysis)
The purpose of this report is to deal with the issues seen in case of Binson’s country Markets. First, there is the requirement for establishing new management accounting system to ensure profitability of departments and stores with return on sales and return on Investment. Secondly, an experienced management staff should be hired to assist in adequate staffing during busy and nonplus times based on net present value methodology and recommendation as to whether or not to construct new loading docks.
After reviewing the operations at Binson’s Country Markets the following issues can be observed:
1. A poor management accounting system not helpful for the profitability of departments and stores with return on sales and return on investment;
2. Inexperienced General Management; and
3. Inefficiency of shipping and receiving.
ANALYSIS ; SOLUTION
Analysis: Binson’s Country Market currently prepares only one income statement after the year end for both the stores. It makes it difficult to track the profitability of each department in each store, other than the sales by each department, which are captured by the cash registers. For the future well-being of the stores, non-financial measures are also necessary to ensure profitability. Better customer satisfaction and brand power can attract customers to the stores repeatedly.
Solution: In order to overcome this issue, the company can implement an Activity Based Costing (ABC) system. With an ABC system, all costs and activities associated to each product and service can be identified, which will be helpful in determining the real profitability of each item, service or category. All products have to be analyzed and the total cost should be calculated based on the related cost drivers.
Activity and process based analysis will lead to efficient improvement and cost cutting opportunities. When each department’s activities are examined from a process approach, it can be helpful in determining the departments that are profitable. The departments can be breakdown in the following manner: – Bakery, fresh breads – Bulk foods, groceries – Dairy, frozen foods – Deli meats, cheese, olive bar, salad bar, prepared foods, delivery, e-mail sales – Meat, poultry, fish – Produce (fruits and vegetables), flowers For each department, the cost drivers we can use under an ABC system are:
I. Attending customer complaints
II. Coordinating with other areas
III. Deal with returns and exchanges
IV. elementary management
V. Temperature control
VI. Cleaning the area
VII. Customer serving
VIII. Dealing with suppliers Supervision
Training Once sales is determined for each department and their cost drivers based on the activities involved in providing services and products in each department. As we do a detailed analysis, we can start questioning if each activity adds value or not. For example, we can question if the cost is high, we can determine the root cause and remedy the problem.
1. Value and process analysis will bring all these questions to light and draw management attention to finding the answers. In terms of the financial statements, the company can prepare the consolidated financial statements for each store and prepare internal records to determine profitability for each department each store.
2. Inexperienced Management Team: The current management team does not have enough experience to deal with staffing issues. The current scheduling system in place leads to either excess or inadequate staffing. Although there are two long-time employees that are hardworking and dedicated, they have no supervisory experience. Proper scheduling of staff is not being conducted. No current written policy and procedure manual exists for the staff to follow. In addition, rules governing staff are non-existent. As a result, there has been mismanagement in the staff scheduling, which ultimately results in work inefficiency, inadequacy and overtime cost due to excess staffing and improper customer service. The which would cover the code of conduct for employees.
A proper work allocation system can be implemented so that proper duties are assigned to staff. The policies and procedures can be applied to have employees trained in more than one department of the stores to make scheduling of staff easier. The professional general manager for each store should be hired who will deal with major staffing issues, such as work schedules. There is also need to hire assistant managers, preferably with experience, that can lead multiple departments as outlined above in the management accounting system proposal.
Existing store employees will be considered for the assistant management positions as they can provide the best advice to the new general managers from their experience.
3. Inefficiency of Shipping and Receiving Area: The installation of the new loading docks is said to increase sales by $100,000 and save $50,000 in labor costs every year. This has some cost factors in relation to the financing of the system. To determine its viability, a Net Present Value (NPV) calculation needs to be performed. Overall, this calculation takes into account the after tax present value of all cash inflows and outflows using a discount rate.
Once all amounts are added, if the results are negative then the proposal should be rejected as It would be putting out more money than the loading docks are actually worth. However, when a decision is being made using the NPV calculation, one should always consider that future factors can change, which unfortunately cannot be seen at the present. In this case, these factors can be over estimating increase in sales and savings in labor costs. Installing the new loading docks at the stores will speed up unloading and thereby get the goods on the shelves more quickly.
With the installation of the new loading docks, the company can improve efficiency, which in turn will also improve overall sales for the company. Activity Based costing system is the best tool to ascertain where to reduce costs while increasing profitability and to improve the management of the company. To do so, we need to continue to use the services of the professional accountant to prepare consolidated financial statements and in addition prepare financial statements for each store.
A bookkeeper should be used to prepare the internal records which will segregate the sales and costs associated with each department. The professional accountant should use this to prepare the biblically available financial statements. The company should hire professional managers to efficiently create a staff scheduling system so that costs and staffing can be adequately managed. To adequately manage this, assistant managers should be hired to lead the staff and departments. In regards to installing new loading docks, the company should definitely invest in the installation as it provides a positive cash flows.