Moonsnail Strategic Management Accounting - Essay Example

Strategic Management Accounting Case Study: Moonsnail Soapworks Submitted by: XXXXXXXX Number: XXXXXXX of XXXXXXXX XXXXXXXX Subject Code: XXXXXXXX Tutor’s Name: XXXXXX Date of Submission: XX – XX – 2010 Number of Words: XXXX (Excluding Bibliography) Table of Contents Table of Contents 1 1.0 Introduction: 2 2.0 Analysis of the Company: 2 3.0 Financial Analysis of Moon Baby Cream: 5 4.0 Activity Based Costing in Moonsnail: 8 5.0 Balanced Scorecards: 10 6.0 Budgeted Income Statement and Balance Sheet: 11 7.0 Beyond Budgeting vs. Better Budgeting: 13 Bibliography 14 Appendix 17 Appendix 1: SWOT Analysis: 17 Appendix 2: Direct Material Cost for Moon Baby: 18 Appendix 3: Indirect Operating Cost for Moon Baby: 18 Appendix 4: Indirect Operating Cost for Moon Baby: 19 1.0 Introduction: Moonsnail was a simple venture undertaken by Jennifer Ridgway in partnership with her husband Marcus Luttermann. The company was founded in 1995 and was slowly developed to provide a wide range of products. The company deals with various products like soaps, bath products, home aromatherapy and other items like bath oils, massage oils, herbal teas, and also balms and hair treatment products. The company deals with complete natural products and this forms their unique selling point. This paper aims at discussing a few aspects of the strategic planning of the company and provides recommendations to the company to improve their current market position and overall quality of their products. The next section will deal with an internal and external analysis of the company based on which strategic recommendations have been set out. 2.0 Analysis of the Company: Having gained a brief overview of the company and the history of the company, it is also essential to study the internal and external forces that create an impact on the company. Hence to gain a better understanding of the same a SWOT analysis of the company and Porter’s five force analysis of the company has been provided below (also, see Appendix). This helps in the development of the strategic direction and recommendations for the company. 2.1 SWOT Analysis: The first most essential aspect of the company that needs to be understood is the strengths. As understood, the company deals with hand – made products and this helps in ensuring high quality products with least defects. Also the unique selling point of the company is the individualized and unique products that it develops and sells in the crafted shops. The simple processes and modest working environment of the company also permits to ensure that all processes are value based and the customers are not over charged for any of the products unlike the competition. The brand name and image is strong and well recognized across the country. In terms of weaknesses, the company deals with hand – made products which limits the quantity of products that can be developed. Also the lack of machines in the production leads to increased processing time and increased need for human resources to meet market demand. The main markets and sales are from the tourist, which is based on seasonal markets hence leading the company to deal with the seasonal changes. High costs for advertising and marketing expenses. In terms of the opportunities, Moonsnail has a number of opportunities that it can use for its growth and improvements. These include expanding the business to wholesalers and super markets. Also attending different trade shows to introduce themselves to larger wholesalers. The company can concentrate on these to help itself grown and expand and become renowned nationwide. In terms of threats, the company is faced with a high level of threat from competitors, and other larger companies like Body Shop etc which deal with wholesalers and bulk ordering. Also, with the increased numbers of players the threat also increases for the company. Having understood the internal analysis of the company it is essential to learn more about the external environment to help better and more rounded view of the company and better strategic planning. 2.2 Porter’s Five Force Analysis: When the image of an industry is a prime reason of profit for a firm then the second most important factor is the position of that particular firm in that industry. A firm can still generate high returns when its positioned is perfect regardless of the fact that the industry is generating returns that are lower than the average (Francis, 2002). The position of a firm is set by leveraging its strength. Moonsnail has a high level of competitive advantage and as explained by Porter this simply means that the company has a ‘cost advantage’ and ‘differentiation’. Based on this the company can use three possible strategies to improve the business, i.e. Cost leadership, Differentiation (uniqueness) and Focus. Based on the environment and the overall external aspects of the company, it can clearly be noted from the case study that the company faces the following threats. 2.3 Recommended Strategy: Based on the study and the current position of the markets, the company should base the strategies on the focus strategy. Ridgway attempts to achieve differentiation in its product line because there are only two competitors who sell similar kind of products as Moonsnail. When a company uses Focus Strategy they have more loyal customers and because of this more entrants are not encouraged to compete directly (Fraser, 2007). Since the company focuses on only a narrow segment of the market therefore the sales of the company is not as large. But they can charge higher prices because of only few competitive products available in the market (Wagner and Hansen, 2004). The strategy used by Ridgway is the Focus Strategy which is focusing on a fine or narrow part of the market and within which the company tries to gain an advantage either with low costs or differentiation. As the product line of Moonsnail is more than the other two competing firms therefore it has competitive advantage because of its differentiation. The main recommended strategy for the company is to develop and use the various opportunities available and to enter into the wholesale markets as well. This will give the company a wider range of customers and will permit a chance for higher sales and overall revenues. 3.0 Financial Analysis of Moon Baby Cream: It is essential to analyze whether the launch of baby cream, namely, Moon Baby will be financially beneficial to Moonsnail. Based on the information gathered, it is estimated that about 1,000 jars of the product will be sold in the first year of operations. Revenue from the retail sales channel is computed based on the unit selling price of $9.95. The direct material costs for the production of 1,000 jars are computed and presented in Appendix 2. About 10% ($650) of the direct labor costs ($6,076 in 1999) is allotted to the production of Moon Baby. Packaging costs (jars and labels), the plate cost and the advertising expenses are also included based on the information gathered. The total indirect labor costs and the portion that is to be allocated to the Moon Baby cream are presented in Appendix 3. The indirect operating expenses are allocated based on the labor hours (which are about 10%). The projected income from the baby cream is presented below: Projected Income from Moon Baby Revenue   Number of jars 1000 Unit Price $ 9.95 Total Sales $ 9,950.00 Expenses   Direct Material $ 361.98 Direct Labor $ 650.00 Packaging Costs $ 351.77 Total Manufacturing Expenses $ 1,363.75 Other Expenses   Plates $ 115.00 Advertising $ 1,000.00 Total Expenses $ 2,478.75 Income from Moon Baby $ 7,471.25 Allocated Indirect Expenses $ 1,544.10 Net Income from Moon Baby $ 5,927.15 It is evident that the launch of baby cream results in an estimated profit of $5,927.15 in the first year of operations. As the sales volume is expected to grow by 20% from year 2 onwards, it is clear that the product will be more profitable from the second year of operations. Hence it is advisable for Moonsnail to go ahead with the launch of the new product. 3.1 Marginal Costing vs. Full Costing: It is evident from the above section, that full costing approach has been used to estimate the profitability of the launch of the new product, Moon Baby cream. All the costs and expenses are included in the analysis, as they are all relevant and specific to the launch of Moon Baby. The increase in the indirect operating expenses is also included as they are incurred only due to the new cream. The analysis was based on the assumption that the cream will be sold at the retail price at the Moonsnail outlets and the estimate was 1,000 jars. As the company is fully responsible for these costs, the product is relatively new and is to be launched, and no other third party is involved, full costing approach is more appropriate to be adopted. When considering expansion activities and other distribution channels or bulk sale to third parties, it is essential to take the marginal costing approach. In this approach, the costs of producing one more additional unit of the product is considered (which are the variable costs incurred to produce one more unit). As the company has all the infrastructure and the production facilities in place, the profitability of taking a new contract to produce the same product needs to be examined based on the marginal costs involved. In order to decide about the wholesale option available to Moonsnail, marginal costing approach is adopted. It is estimated that in the first year, Moonsnail will get 20 whole sale accounts and each account will sell 30 bottles per month. Hence Moonsnail will be able to sell a total of 720 bottles (20 accounts*30*12) in the first year. The additional shipping costs incurred in the year will amount to $ 2,400 (20 accounts*$10 per shipping*12 months). It is assumed that the indirect operating expenses are not affected by the additional production of 720 units. The contribution from the wholesale channel is computed as shown below: Marginal Costing for Wholesale of moon Baby Number of Units 720 Total Sales $ 4,320.00 Direct Material $ 260.63 Direct Labor $ 468.00 Packaging Costs $ 253.27 Additional Shipping Costs $ 2,400.00 Total Marginal Costs $ 3,381.90 Contribution $ 938.10 Hence it is evident that the wholesale of Moon Baby yields a profit of $ 938.10 in the first year. Hence it is recommended that Moonsnail goes ahead with the option of getting wholesale accounts in addition to the retail channel. 4.0 Activity Based Costing in Moonsnail: Activity Based Costing is one of the few modern accounting systems and is one which has proved to be very beneficial over the years. The method of ABC is a relatively newer accounting system and this segregates the expenses and the overheads based on the functions. This is then followed by allocation of the costs among each individual item based on the volume of activity. Here in this system the activities and the overheads are traced to a particular product and the costs are not spread across all the product lines of services (Kaplan & Anderson, 2007). The use of ABC costing allows the company to accurately assign the costs for all the activities of each of the product or service. 4.1 Advantages and Disadvantages: A study by Philip Beaulieu has highlighted that the main reasons that ABC costing method has not caught up with all companies is firstly because it does not meet the needs of all firms and is not an appropriate accounting method for the firms. For example if a company has just one or two products to offer then the method is not appropriate. Other limitations of this method includes, that the method brings out the wastes that are involved in the processes which most managers would prefer are not found by the top level management (Beaulieu & Lakra, 2002). Also, this method is very time consuming and in a number of cases the adoption of this is unsuccessful as the implementation can be an issue. Activity based costing is relatively complex as compared to the traditional accounting methods because it requires detailed analysis, time, experienced and highly skilled accountant. In the case of Moonsnail, this will prove to be more beneficial than disadvantageous as it helps in pricing based for each product rather than the overall costs. This will allow better pricing for all products and will ensure that no products end up taking the cost of others and thereby making the prices very high. Each product is priced based on the activities involved and hence this permits a better chance for more value based pricing. According to Delaney & Whittington (2009), activity based costing is an accounting tool for business and process improvement. It is possible to identify wastes and activities that do not add value to the Moonsnail and the products because it mirrors the way the work is done. It is also possible to identify whether Moonsnail marketing and distribution channels are adding value. Hence in conclusion the benefits of ABC do outweigh the negative aspects in the case of Moonsnail. Use of this method will be very effective for the company and will ensure better pricing strategies. 5.0 Balanced Scorecards: According to Tyagi and Gupta (2008), balanced scorecard is a management system that guides managers to set, track and achieve important strategic goals and objectives in their companies. The goals and objective are set, implemented and monitored through the four legs of a balanced scorecard. According to Hannabarger et al (2007), the balance scorecard assist business and non-business organization to perform better during the fast changing business environment. There are four determinants of organizational success which are finances, internal business processes, customers, and learning and growth. Therefore, the management should consider all the above four determinants and manage them appropriately to make the organization sustainable. 5.1 Advantages and Disadvantages: Considering the case of Moonsnail, it is essential to note that the use of a balance scorecard here will help provide a complete view of the employees and the organizational performance as well. It also will assist in detailing the success factors and the performance indicators and allows a better reviewing of the company to gain a clear idea on the capabilities and performance. Using the balance scorecard also permits a better focus on the key areas that are needed for creating a breakthrough. Also, this method allows the company to integrate and direct the performance and also permits better ways to guide the efforts of all levels of employees within the organization. Together with this analysis, there is a much better chance for overall improved performance as there are clear metrics, objectives and targets that can be set down to ensure that all levels of employees are working towards an unified goal. Balance scorecard provides a bigger picture for the company. According to Hoag & Cooper (2006), balance scorecard informs the management that there are four factors that help the organization perform better. It also enables the organization to make better decisions about its operations. Better decisions are made when the company’s management considers various factors before they arrive at their decision. It encourages the management to remain focused and informed on key issues that affect their business. As a result, they are empowered to make useful decision in the organization. However, it has various weaknesses. In the case of Moonsnail, the company faces major weakness as the company is based out of internal analysis that has been conducted. According to Hoag & Cooper (2006), the balance scorecard does not take into consideration the other factors that largely influence the performing of the organization. They include macroeconomic environment, regulatory factors, brand image and even the competitors. The balance scorecard is a first generation scorecard. First generation scorecards fail to include other key metrics that help to measure performance. 6.0 Budgeted Income Statement and Balance Sheet: The budgeted income statement for the year 2000 is prepared based on the estimates made by Ridgway. These estimates are presented along with the actual income statement from 1999 and the percentage changes in the values in Appendix 4. 6.1 Analysis of Assumptions and Suggestions to Improve: Ridgway has estimated her retail sales to increase by 50 %. This can be attributed to the growing market conditions and as Ridgway has been in the industry for quite some time now, these projections about the retail sales can be considered reliable. However, the estimate can be made more accurate by estimating the demand based on historical sales and considering other factors including estimated tourist activities and other seasonal effects. The wholesale revenue is estimated to reduce by 17 % and can be considered reliable as Ridgway is well aware of the changing circumstances in the market and the wholesale clients reducing the purchase of her products due to low demand in the year 1999. The mail order revenues are however estimated to increase by 50 %. This is not an accurate estimate as mail order customers are not consistent with their frequency of orders and may easily switch to easily available local products (as most of the mail order catalogues are sent out of the country). Ridgway needs to keep the mail order sales to be in the same level as the previous year, unless she plans on buying marketing lists from companies and sending the catalogue to a wider selection of potential customers. The cost of sales is kept at the same rate as that of the previous year. It is essential to include the effect of inflation on these costs as well, as suppliers can increase their prices. Advertising costs are reasonable, as $ 1,000 will be spent on the new product Moon Baby. However, the other operating costs need to be increased based on inflation and other factors, such as the production volume and number of outlets. The current estimate of these indirect operating costs are not accurate. Moreover, the salaries should be increased at an appropriate rate rather than just ‘doubling’ the rate. It is essential to consider the number of new employees that need to be hired and increase the expenses on salaries accordingly. A number of other factors such as, the economic growth rate in the markets, the tourist activities and the seasonal effects on sales are to be included in the projected income statement to make it more accurate. 7.0 Beyond Budgeting vs. Better Budgeting: The term beyond budgeting refers to management of organizations where innovation is an essential aspect of the business. As defined by BBRT, 2010, “Beyond Budgeting is about rethinking how we manage organizations in a post-industrial world where innovative management models represent the only sustainable competitive advantage. It is also about releasing people from the burdens of stifling bureaucracy and suffocating control systems, trusting them with information and giving them time to think, reflect, share, learn and improve. Above all it is about learning how to change from many leaders who have built and managed ‘beyond budgeting’ organizations” (BBRT, 2010). Better Budgeting on the other hand is more based on the efficient controlling processes and also focuses on speedier planning and improved operational planning processes. The main aim here is to ensure better processes when compared to the one – off annual budgeting action. In the case of Moonsnail using the concept of Beyond Budgeting will prove to be very effective and can be used applied to ensure that the company is in sync with the various competitions as well is financially sound to be able to sustain the competitive advantage. 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Appendix Appendix 1: SWOT Analysis: Strengths Strong Brand Name and Brand Image Hand Made Products Low Cost of Production Low Overheads Wide Market Range Weaknesses Markets and Sales mainly from tourist Highly time consuming processes Limited production facilities High costs of marketing and advertising Seasonal Markets Opportunities Large Wholesale markets Trade Shows Joint Ventures Threats Large Competitors Increased market players Economies of Scale Appendix 2: Direct Material Cost for Moon Baby: Direct Material Costs Material Quantity / 30 Jars   Quantity / 1000 Jars   Amount Calendula Grape seed Oil 266 g 8866.67 g $ 95.32 Chamomile Extract 10 ml 333.33 ml $ 48.38 Rosehip Seed Oil 50 g 1666.67 g $ 111.00 Vitamin E 2 g 66.67 g $ 7.03 Aloe Vera gel 250 ml 8333.33 ml $ 72.75 Distilled Water 250 ml 8333.33 ml $ 4.17 Coconut Oil 126 g 4200.00 g $ 11.07 Beeswax 32 g 1066.67 g $ 12.27 Total Direct Materials Cost $ 361.98 Appendix 3: Indirect Operating Cost for Moon Baby: Indirect Operating Expenses Insurance $ 811.00 Utilities $ 5,136.00 Machine Repairs $ 812.00 Travel Expenses $ 3,387.00 Shipping $ 1,542.00 Office $ 661.00 Fees $ 197.00 Bank $ 1,603.00 Telephone $ 1,292.00 Total Indirect Expenses $ 15,441.00 Apportioned for Moon Baby $ 1,544.10 Appendix 4: Indirect Operating Cost for Moon Baby: Budgeted Income Statement 2000   2000 1999 % Change Sales           Retail $ 71,213   $ 47,475   50% Wholesale $ 17,642   $ 21,256   -17% Mail order $ 2,895   $ 1,930   50% Consignment $ 9,492   $ 9,492   0% Misc $ 422   $ 422   0% Total Sales   $ 101,664   $ 80,575 26% CGS           Retail $ 10,989   $ 7,326   50% Wholesale $ 5,276   $ 6,357   -17% Mail order $ 447   $ 298   50% Consignment $ 1,464   $ 1,464   0% Misc $ 65   $ 65   0%     $ 18,241   $ 15,510 18% Expenses           Advertising $ 2,500   $ 1,111   125% Insurance $ 811   $ 811   0% Shipping $ 1,542   $ 1,542   0% Machinery $ 812   $ 812   0% Office $ 661   $ 661   0% Travel $ 3,387   $ 3,387   0% Rental $ 7,741   $ 7,741   0% Utilities $ 5,393   $ 5,136   5% Salaries $ 12,152   $ 6,076   100% Bank $ 1,603   $ 1,603   0% Fees $ 197   $ 243   -19% Telephone $ 1,292   $ 1,292   0%     $ 38,091   $ 30,415 25% Gross Profit $ 45,332   $ 34,650 31% Read More