Managerial Accounting at GEK Technologies, Fishermens Co-Op, Parko Department Store - Case Study Example

Managerial Accounting Table of Contents Case GEK Technologies: Competitive strategy and SWOT analysis 3 Case 2: Fishermen’s Co-op 5 Case 3: Anderson Customized Security 9 Case 4: Parko Department Store: Balance Score Card 10 Reference List 13 Case 1: GEK Technologies: Competitive strategy and SWOT analysis A. Having studied the case study thoroughly, it can be said that GEK’s competitive strategy is growth oriented. They laid emphasis on producing prestigious audio products thereby setting a high benchmark for performance, reliability and service. The company kept their product line updated according to the development of new technologies. Initially, they started off with producing high quality record players which attracted customers belonging to a certain age group but gradually they shifted into producing technologically advanced products such as CD players, MP3 players and USB turntable. This helped the company to reach a wider customer base, rather only a younger one. This indicates that their primary strategy was to achieve a higher level of customer satisfaction. In addition to that, GEK’s leaders followed a team or sound style of leadership strategy which was concerned with both the production and employees (Zeidan 2009, 82-85). This was evident from the fact that highly skilled and experienced employees were paid sufficiently well. B. Strength: The development of the USB turntable has proven to be a huge strength for GEK technologies. With the rising demand for new style of products which demonstrated portability, USB turntable was a perfect introduction. This is evident from the sharper than expected increase in sales for the USB Turntable over the last few years. Another strength associated with GEK technologies comes from the product Record player as the manufacturing of this product requires high level of craftsmanship. In 2012, the employees of GEK technologies working on the record player division were older, more experienced and very loyal. These workers displayed the highest level of craftsmanship in the company as well as in the entire industry. This was evident from the fact that record players represented a relatively high proportion of total sales in certain places. Weaknesses: GEK’s weakness can be identified in the CD player and MP3 player division where the sales growth became stagnant after 2010. This also shows that the development of USB turntable was mistimed as it halted the sales of CD players and MP3 players whose sales rate were significantly higher than any other product divisions. Opportunities: GEK’s opportunities can be witnessed in the USB turntable production division as it is shows a sharper than expected increase. The investment in this division is prospective. This is aided with the consistent increase in the sales rate and rising demand of new style of products which are portable, which in turn would help the division to generate significant wealth for the companies. Moreover, USB turntable as a product can be viewed as a ground work for further development of other products. Apart from that, another opportunity can be noticed in the record player division. Since the sales rate of this division is decreasing rapidly and the technology is becoming obsolete, the company can choose to shut it down and use the excess proceeds, generated from selling the assets, to either invest in another prospective project or distribute the excess cash as dividends to the shareholders. Threat: Having studied the report of GEK, record player and USB turntable division poses a certain degree of threat to the company. Record player which is an obsolete technology has accrued obsolete assets and inventories worth $287,000. Moreover, the company might incur losses as there was a sharp decline in sales in this division and high cost of production was associated with it. The USB turntable division is another threat to the company because a sharper than expected increase in sales for the USB turntable had resulted in delays in production and a backlog of orders. This resulted in the company’s incapability to meet customer demands. Case 2: Fishermen’s Co-op A. Given: Financial performance of three fleets of Fishermen’s Co-op: Southern Australian Operating Profit before tax = $3,600,000 Total Assets = $35,000,000 Current Liabilities = $8,000,000 Company income tax rate is 30 %. According to Phillips (2001, 10), Return on investment can be calculated using the following formula: ROI = Net Income/Investment Capital (1) In accordance with the data available we have to calculate the net income and the investment capital. The net income can be calculated by subtracting the corporate tax payable by the company from the operating profit before taxes. Corporate tax payable = Operating Profit before tax × Company income tax rate Putting the values according to the formula: Corporate tax payable = $3,600,000 × 30 % = $1,080,000. Net Income = Operating Profit before tax - Corporate tax payable Putting the values according to the formula: Net Income = $3,600,000 - $1,080,000 = $2,520,000. Investment capital is calculated using the following formula: Investment Capital = Total assets – Current Liabilities Putting the values according to the formula: Investment Capital = $35,000,000 - $8,000,000 = $27,000,000. Thus using equation (1) we can calculate the return on investment of the Southern Australian fleet of Fishermen’s Co-op. Return on Investment (ROI) (in percentage) = ($2,520,000/$27,000,000) × 100 = 9.33%. According to Grant (2003, 23) and Savarese (2000, 9), in order to calculate Economic Value Added, we first have to calculate the capital charge. The formula to calculate the capital charge is: Capital charge = Capital employed × Cost of capital Given: Cost of Capital = 8%; Capital employed = $27,000,000 (calculated previously as investment capital) Therefore, Capital charge = $27,000,000 × 8% = $2,160,000. Economic value added (EVA) = Net Operating profit after tax - Capital charge (1.1) Net operating profit after tax (NOPAT) calculated previously as net income = $2,520,000. Therefore, putting the values according to equation 1.1 we obtain: Economic Value Added (EVA) = $2,520,000 - $2,160,000 = $360,000. Northern Australian Operating Profit before tax = $800,000 Total assets = $4,000,000 Current liabilities = $2,000,000 Company income tax rate is 30 %. Corporate tax payable = $800,000 × 30% = $240,000. Net Income = $800,000 - $240,000 = $560,000. Investment Capital = $4,000,000 - $2,000,000 = $2,000,000. Return on Investment (ROI) (in percentage) = ($560,000/$2,000,000) × 100 = 28%. Given: Cost of Capital = 8%; Capital employed = $2,000,000 Therefore, Capital charge = $2,000,000 × 8% = $160,000. Net operating profit after tax (NOPAT) calculated previously as net income = $560,000. Economic Value Added (EVA) = $560,000 - $160,000 = $360,000. Fishing Operating profit before tax = $300,000 Total assets = $8,400,000 Current liabilities = $800,000 Company income tax rate is 30 %. Corporate tax payable = $300,000 × 30% = $90,000. Net Income = $300,000 - $90,000 = $210,000. Investment Capital = $8,400,000 - $800,000 = $7,600,000. Return on Investment (ROI) (in percentage) = ($210,000 /$7,600,000) × 100 = 2.76%. Given: Cost of Capital = 8%; Capital employed = $7,600,000 Therefore, Capital charge = $7,600,000 × 8% = $608,000. Net operating profit after tax (NOPAT) calculated previously as net income = $210,000. Economic Value Added (EVA) = $210,000 - $608,000 = - $398,000. As evident from the table given above, the Northern Australian fleet of Fishermen’s Co-op has generated the highest EVA and ROI followed by Southern Australian and Fishing division. The positive EVA for Northern Australian and Southern Australian fleet suggests that there have been favourable investment opportunities for Fishermen’s Co-op. The positive EVA value indicates that the organization is providing greater return to its shareholders than required thereby generating value for the company (ACCA 2011). On the other hand, the fishing division’s negative EVA value depicts a loss of value of the investment. Although it has generated a positive ROI of 2.76%, the economic value of production has depreciated. The organization should gather the assets by closing the division down since the return generated is less than the cost of capital. The proceeds should be invested in other divisions where the opportunity for investment looks prospective. As an alternative, the company can also return the excess proceeds as dividends to the shareholders (ACCA 2011). Investors should be apprised about the fact that an increasing ROI is not necessarily favourable for shareholders. Thus, ROI cannot be set as a benchmark. EVA, on the other hand, is more practical and understandable accounting variable as it incorporates all the necessary data from the income statement and transforms it into simple EVA figures. With the help of these figures, the benchmark can also be explained to non-financial employees. On the other hand, ROI being a traditional accounting measure is associated with many drawbacks. The figures incorporated in ROI can be easily manipulated by modifying the accounting policies or using different judgments. ROI variables may influence managers to take decisions that generate short term profits, which may harm the business in the long term. In addition to that, using ROI as a performance evaluation parameter may lead to incongruity in goals among divisional managers (ACCA 2011). However, research scholar Phillips (2003, 10) suggested that ROI is a user friendly evaluation parameter. B. In order to be able to do an in-depth analysis of a division’s ROI and EVA, more accounting variables can be incorporated. The accounting figures which should be incorporated in the divisional accounting data includes revenues, operating expenses, interest expenses, return on common equity, profit margin, and cash flows. Incorporating these variables in the accounting data would help the researcher to determine the accurate net income and thereafter effective comparison can be done between the ROI and EVA. Case 3: Anderson Customized Security A. “The concept of transfer pricing is that, within a manufacturing company, one department, on transferring its output to another department, should regard this transfer as a sale and that there should be a definite policy on the setting of the selling price (Gallway 2007, 18).” The prices set clearly indicates a positive impact towards the attitude of Reading Company as it would be able to accrue additional profits by selling the products at the negotiated price which it would not make otherwise. In addition to that, the price set will also provide an incentive to the buying division to purchase from the supply division (Ghosh 2000, 661-682). B. Yes, negotiation of a price between Millwall and Reading is a satisfactory method to solve the transfer price problem because prices have a significant impact on the budgeting system of an organization. And proper negotiation will help the divisions to come up with sound transfer pricing strategy and operational decisions which will significantly contribute towards enhancing the performance of the company. (James 2006, 5-39). C. Yes, the corporate management should get involved in this transfer pricing controversy as transfer pricing decisions are completely aligned with the appropriate factors of strategy and structure of an organization. This strategy and structure are formulated by the management itself. By setting a stable transfer price, the corporate management can cut down on the repeated transfer costs thereby increasing value for the company. Case 4: Parko Department Store: Balance Score Card A balanced scorecard is an efficient tool for strategic planning and management system used extensively by government, businesses and industries as well as by non profit organizations all over the world in order to coordinate the business activities with the strategy and vision of an organization. This is done in order to bring upon improvement in internal and external communications in an organization as well as to keep track of its performance so as to keep it in sync with the strategic goals (Balance Scorecard Institute 2013). (Source: Researcher’s creation) (Source: Researcher’s creation) Internal business Perspective All Business Operations perspectives are for the corporation as a whole GOAL (Huselid and Becker 2000) KPI Target Initiative or ACTION Employees Establishing ongoing assessment of targeted employees Courtesy shown by junior staff members to senior staff members, Percentage of employees who have attended the city’s cultural diversity workshop. Build and manage an efficient workforce in order to contribute towards value maximization Thorough assessment of targeted employees and mould them according to the operational needs (Source: Researcher’s creation) Reference List ACCA. “Economic value added versus profit-based measures of performance.” Accessed October 19, 2013. http://www.chinaacc.com/upload/html/2013/06/27/lixingcun14326f7 3085b4210 a91a6832541ce6a8.pdf Balance Scorecard Institute. “Balanced Scorecard Basics.” Accessed 19 October, 2013. http://www.balancedscorecard.org/bscresources/aboutthebalancedscorecard/tabid/55/default.aspx Gallway, Albert. “Transfer pricing – choice.” Management Decision 28 (2007): 18-21. Ghosh, Dipankar. “Complementary arrangements of organizational factors and outcomes of negotiated transfer price.” Accounting, Organizations and Society 25 (2000): 661-682. Grant, James L. Foundations of Economic Value Added. New Jersey: John Wiley & Sons, 2003. Huselid, Mark. A., and Brian Becker. “Strategy Map: Competency skill attainment focus.” Accessed 19 October, 2013. http://www.markhuselid.com/pdfs/hr/4-ExampleStrategyMap.pdf Huselid, Mark A. “HR Architecture Drives Strategy Execution.” Accessed: 19 October, 2013. http://www.markhuselid.com/pdfs/workforce/8HRArchitectureDrivesStrategyExecution.pdf James, Wendy. “A processual view of institutional change of the budget process within an Australian government-owned electricity corporation.” International Journal of Public Sector Management 19 (2006): 5-39. Phillips, Patricia P. Measuring return on investment. USA: ASTD press, 2001. Phillips, Jack J. Return on Investment in Training and Performance Improvement Programs. Burlington: Routledge, 2003. Savarese, Craig. Economic Value Added: The Practitioners Guide to a Measurement and Management Framework. NSW: Allen & Unwin, 2000. Zeidan, Hania. “The Blake Mouton Managerial Grid Identifying five different leadership styles.” The Certified Accountant 39 (2009): 82-85. Read More