Question

You have recently been appointed as the senior management accountant in a large listed company, Apple plc. Apple plc produces a wide variety of differently products (candy bars, chews and other sweets) in batches using various combinations of highly automated processes. These processes include mixing, cooking and packaging. Some, but not all, of the processes are common to all products. The company is organised into three divisions and each division is responsible for a particular product. Each division is treated as a profit centre and has its own manager. The company currently uses traditional accounting systems for all its operations.

You have examined the management accounting practices of Apple plc and have had discussions with the board of directors and managers of the company. In doing so you have identified the following key areas which need to be addressed:

1. There is little understanding of the role and nature of management accounting amongst the directors and managers and you feel that this limits their ability to make sound strategic decisions for enhancing the company’s performance.

2. It appears that the existing performance evaluation system is causing serious dissatisfaction amongst the managers of the different divisions. The performance of the divisions is evaluated using a profit margin and managers are paid a bonus only if their division attains a minimum required profit margin, which is currently set at 25%. The bonus plan currently in force is designed in such a way that a divisional manager is awarded a flat bonus of £100,000 for achieving the minimum required profit margin. Additional bonus is paid to those managers whose divisions achieve higher profit margin than the 25% minimum profit margin. This additional bonus is awarded on the basis of the percentage points above the minimum profit margin such that for each 1% that actual profit margin exceeds the minimum 25%; the manager is awarded 2.5% of the flat bonus.

3. The company currently allocates common costs to the products using the absorption costing system. Given the performance evaluation system, there are also serious concerns from some divisional managers about the amount of costs being charged to their products. They argue that the allocation system penalises their products, leading to their production costs being too high and making it difficult for them to set competitive selling prices for their products. This is leading to growing rivalry and tension between divisional managers and is affecting the operations of the company.

You are required to produce a report to the board of directors addressing the above three issues. Your report should clearly discuss the strategic and operational decisions that businesses have to make and how strategic management accounting can enhance those decisions.

The report should include a critical evaluation, using appropriate literature sources, of the techniques/concepts or systems that are currently used by the company and those you are proposing, outlining their merits and limitations. You may incorporate logical assumptions with regard to the company and use numerical examples to illustrate the techniques that you propose to adopt. Use of insights from case study materials you have come across from your readings and/or from course material is encouraged.

 

Summary

The question belongs to Finance and it discusses about writing a report on the performance evaluation system in force in a company and recommending changes to the system.

Total Word Count 2492

Download Full Solution

---