Balance Sheet and Cost Reduction of Sidcup Furnishings - Coursework Example

Management Accounting work Sidcup Furnishing LTD a) An analysis of and comments on the information contained in the extracts from the profit and loss for the years 2002 to 2005. From the extract of the balance sheet sales have declined from the year 2003 to 2005 and this could be as a result of increased competition, on the other hand overhead factory costs have not declined and this has caused the factory to experience a decline in profits. The decline in profits is a result of the decline in sales volume; therefore the company should adopt a strategy that will increase the volume of sales so that the company can increase its profits. This can be done through charging lower prices to its customers and this can be achieved through effective cost reduction strategies that will reduce the cost of production. From the indexes given the cost of labour has increased over the years while the price of their products also tends to increase over the years, therefore the increase in the cost of labour has led to an increase in prices. The cost of direct materials has increased over the years meaning that this could have caused the increase in the cost of production for a unit. On the other hand retail prices have increased over the years as indicated by the retail price index. The company however still experiences profits despite competition and therefore the management should work to maintain high and also achieve more profits in the competitive environment. b) An indication of the possible areas of weaknesses in the material, labour and overhead costing and control practices and procedures used in the factory of the company. In addition, you should comment on any other areas you consider to be significant. Job order costing is used where each job is unique and requires special attention, therefore this is the best method to be used by Sidcup limited because each order is different in production, the problem faced by this company is that the determination of cost of labour used and materials used, the method used is inappropriate. In the determination of cost of materials used in the production process the company should determine the cost of materials through one of the following methods: First in first out- this means that materials used costs will be determined through the cost of those that came in first. Last in last out- this means that costs of materials used will be determined by the cost of those that came in last. Average method- this means that the cost of materials used will be determined by an averaged cost of the materials. Specific identification this means that materials cost will be determined by the specific cost of those used in production. Sidcup estimates material costs using the cost from the previous year which is very wrong because their costs may increase or decrease during the year, therefore the company should adopt one of the material cost estimation methods. (Pizzey A (1989)) Direct labour cost estimation is also not appropriate, the cost of labour used is that determined at the beginning of the year using the previous year expenses. The company should adopt direct labour cost estimation methods which will use labour hours and cost per hour to determine labour costs. The company has no budget for any year, the company therefore should budget prepare sales budgets, production budgets, direct material usage budgets and direct material budgets in order to aid in planning and coordination of activities in the organisation. According to the components of the costs of production given below, the cost of labour is higher than any other cost; therefore they use a labour intensive method of production. The cost of production can be brought down through the adoption of a capital intensive means of production where the machines do a lot of the work. Machines will also increase their production capacity and this will lead to economies of scale where the total overheads will be distributed to a large number of units produced. % Direct materials 35 Direct labour 45 Factory overhead 20 Total factory cost 100 The company has a factory manager and supervisors whose work is to recruit workers, this is one task assigned to two individuals and the company should reduce costs by reducing the amount of permanent workers which will in turn reduce administration cost which are indirect costs. The supervisor in this company can buy supplies directly from the supplier, this should not be the case and the store department is the one that should be responsible for purchases to enable accountability of cost of goods purchased. The company has inappropriate control measure that will ensure that it works in the right manner; the absence of control measure brings inefficiency in an organisation which will result to under production and therefore lesser profits. The company should not quote any amount to a customer before all costs are considered, the problem of understating the price of goods shows that the companies estimation department is inefficient. The addition of a 25% on the cost to cover factory overheads and an addition 40% to cover other overheads and profits is inappropriate, this is because the value added on these goods is too high and results to high prices on this goods. The company has three service departments and each is headed by a supervisor, the maintenance and the store department seem to be doing the same job and therefore the company should do away with the maintenance department, this will ensure that there are no extra costs indirect costs. The high wages and salaries associated with overtime jobs also will add to the cost of production, a good produced during the weekend or at night will have too high costs of production, workers will also want to work over time due to the high wages and may delay work to achieve the wages. c) Your recommendations to eliminate the weaknesses identified in (b) above. Regardless of the method used to estimate the cost of production the cost assigned to a unit should include direct labour, direct raw materials and overhead or indirect cost. This company should adopt a cost estimation method for each job through estimating the time of labour used. Therefore hourly rates of labour should be determined in order to allocate specific amounts of costs to these orders. Direct materials used should be determined through any of the four estimation methods mentioned above, this will ensure that proper accounting for costs incurred is maintained. The best method to adopt here is the specific identification method where the specific cost of direct materials used is determined. The company should try and replace labour with machines and use capital intensive methods of production, this will reduce the cost of production and also help realise economies of scale that will lead to lower prices of their goods. Budgets should be prepared at the beginning of each year to determine the costs and prices of its products. budgets will aid in planning, coordinating various activities, act as a means of communicating organisational goals, act as a motivating tool and they act as a tool of control where actual events and activities are compared with the budget and therefore any deviations are investigated and proper actions taken to improve the situation. The company should adopt an organisation structure that has well defined roles and duties to avoid assigning two people the same job, every employee has to have specific roles and duties that are relevant in the production process and avoid wastage. The company should adopt appropriate control measure in its production process where every person will be answerable to the person above him in the bureaucratic form of organisation. There should be a hierarchical form of structure in the organisation where positions are arranged from high to low in terms of authority. Only a small amount of value added to the goods should be considered so that the price quoted to the customer is not too high, a 25% and 40% increase on cost of the goods is too high and this percentage should be reduced to achieve lower prices for the goods so that the consumers will stop complaining of high prices quoted. The company should also restructure its departments, the production departments are okay but the services departments should be restructured. There is no need to have a maintained department and in its place they should account for depreciation of their premises in its place, this will ensure that extra costs are not incurred and proper maintenance of their assets. The company should also reduce the amount paid during overtime; it can also reject overtime jobs because they add to the high cost of production. The company should therefore maximise on the official working hours rather than rely on overtime. d) Your comments on and recommendations to the current procedure adopted by the estimating department to prepare quotations for customers' enquiries. When an order is received the cost estimating department should issue a job card that will indicate the processes required for the completion of that order. This card should then be issued to the production department that will determine the cost of the product through the consideration of the processes required and the cost of labour and materials required. When the direct costs are determined the cost estimation department should estimate the indirect costs that will be incurred and add this to the direct cost, finally the costs associated with production will be added to the required or percentage profit and this will finally give us the price of the unit to be produced. In case of an order from a customer each department should add its costs to the quotation, each department should also add a certain fixed amount of profit to the cost of producing a certain good so as to avoid overstating or understating the price of a good. in this case the estimation department will not be necessary and therefore no extra costs will be incurred. Sidcup competitors may be using capital intensive means of production where machines do a lot of the work and therefore their cost of production may be lower, this leads to increased competitive prices and therefore Sidcup limited should adopt capital intensive means of production. The company should also prepare budgets at the beginning of each year; the budgets will include sales budget, direct material usage budgets, direct labour budget and also purchase of materials budget. These budgets will enable the company to plan, coordinating and communication of its goals and objectives. Therefore the company should not issue any quotation to the customer before proper estimation of the cost of production is done, this will help avoid understating or overstating of the price to the customer. 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