business report

CASE REPORT

Management Accounting Page 1

FreeAir Skate Pty Ltd is a company that was set up by John Eustace in the past

year. John is an engineer by trade, whose interest in skateboarding led to him

starting up the company. The company prides itself on producing innovative and

stylish skateboards. The company’s production bases are in Malaga and Port

Kennedy, Western Australia, with its retail store in Innaloo. The head office is in

Malaga. Products are normally started in the Malaga facility, before being moved

82km to the Port Kennedy facility for finishing and packaging. They are then shipped

to the retail store in Innaloo, which is 69km away. FreeAir Skate currently produces

three lines of skateboards: SnowSkate, SurfSkate and DirtSkate. Each of the lines

were developed to specifically address what John felt was missing in the market, ie a

skateboard to mimic the feeling of snowboarding, surfing and off-roading

respectively.

To produce the skateboards, all of the boards are produced at the Malaga site.

Pieces of wood (veneer) are glued together and compressed by machines. They are

then moulded and shaped by a hydraulic press. They are then left to set before

laminate is applied to the boards using an industrial laminator. At this point, graphics

are also incorporated onto the board.

Once this is completed, the boards are shipped to the Port Kennedy facility, where

the trucks (a component usually made of metal that holds the wheels to the board)

and the wheels are fitted. The trucks and wheels are produced by a machine

designed by John, so as to replicate the feeling of snowboarding, surfing and off-

roading for the respective boards. None of the trucks or wheels are sold individually.

The fitting of the trucks and wheels to the board are done mainly by hand. The

finished boards are then packaged and shipped to the retail store in Innaloo for sale.

Along with two other new graduates (Freddy Tai and Chloe Lewandoska), you have

just been hired by John as graduate accountants. On the first day of work, John said

to all of you: “Look, we are a pretty small operation here. I am not sure if I really need

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a management accountant going forward. I guess I need you to balance the

accounts and prepare the year end reports, but apart from that, I do not see how we

have enough work to warrant me keeping all of you on full-time. Tell me what it is

that you management accountants typically do when it’s not year-end or month end,

because I can’t really see management accountants adding value to FreeAir.”

Not an entirely good start to your first job, but you now have to convince John that

management accountants are necessary in an organisation and show that you can

add value to FreeAir.

“I am about to have a meeting with my managers, so why don’t you all come along

and we’ll see what you can contribute,” John said.

At the meeting you were introduced to Lena Gooding (Human Resources Manager);

Alistair Chan (Purchasing Manager); Thusara Sivalingam (Sales Manager) and Tom

Yarran (Production Manager).

“Before we begin,” John started. “I would like to acknowledge our new accountants

who will be sitting in on this meeting. There are several issues we need to discuss

and having fresh ears and eyes may be good for us. Why don’t you start with your

issue, Alistair?”

Alistair: “I have told you all before, you guys need to stop messing around with

the numbers. I do not know how much material is needed and when it

is needed if you keep changing the numbers.”

Tom: “Like I said, we produce what is required by Thusara and his team. You

can’t blame me for the changes as Thusara keeps changing his

numbers!”

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Thusara: “It’s not like I want to change the numbers. The market is constantly

changing so we need to adjust the numbers accordingly. Furthermore,

we have to keep the numbers realistic for my sales people, otherwise,

they would not be motivated to achieve them.”

John: “Hang on, Thusara. I prepared the budget and these are based on the

information you provided for me at the beginning of the year. It’s not

like it will change so drastically that we have to change the numbers all

the time."

Tom: “Which is what I keep saying!”

Thusara: “Look, I am only trying to make sure that our targets are met and that

our sales team is happy, so that they will keep selling for us. If I have to

adjust the numbers, it’s because I am being told that the numbers are

not achievable. I know I gave you some numbers at the beginning of

the year, but it’s not like I have a crystal ball. I am only trying to predict

based on last year’s numbers. How else would I be able to give you

numbers? Do you want me to pluck them out of the air?”

John: “Alright, relax, Thusara. I understand that you are providing me with

numbers based on experience. However, there may be other factors

that you should consider. No, don’t shake your head at me. Our new

accountants here can hopefully provide us with some insights on what

we need to consider when forecasting next year’s numbers. Hopefully

that will solve your problem Alistair.”

Alistair: “Okay, let’s see what we can get from their report before the next

meeting.”

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Thusara: “There is something else we need to look at. Boardlife wants to get

some boards from us, but I am not sure it’s such a great deal. They are

asking for a discount based on the quantity they want. Even though it’s

a large amount, the price they are offering is too low! I do not think we

can go ahead with it. I have the details here (Appendix A).”

Alistair: “That will mean we need more materials if we accept the offer. You

have to tell me quick as ordering in smaller amounts would mean I

have to pay a premium for it.”

Lena: “It will also mean more staff-hours will be required if it is a large order.

Tom, do you have any capacity to produce them?”

Tom: “I will need to have a look first. We do have some capacity now, but

that does not mean that every offer that comes in, we can produce.”

John: “Look, Boardlife is a huge merchandiser. It would be good for us if we

can get our boards to them. It would mean greater exposure for us.

Since we now have accountants, and three of them to boot, Thusara,

why don’t you let them have the details and they can include their

analysis and recommendation in their reports and we can discuss this

at the next meeting.”

Thusara: “Sounds good. At least I don’t have to do all these extra analysis, which

is not my job anyway.”

John: “Alright, that’s enough. Tom, you have something for us?”

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Tom: “Yeah, there’s these new system everyone seems to be talking about,

ABC, or activity something or other. It’s supposed to be a better system

for costing, but I think we need to investigate more first before using it.”

Lena: “Yes, I have heard of it too, but I am not sure that would be useful for

us. After all, we are not a large company and I heard that ABC is

typically used by large corporations.”

Tom: “Do you always need to disagree with me? I am not saying we should

use it, but I think we should be open to using it if it is good for us.”

John: “Alright, cut it out you two. Our new accountants can analyse this ABC

or whatever and help us determine if we should use it or not. If it is

useful for us, I see no reason why we should not adopt it. But if as

Lena say, only large corporations use it, then there must be a reason

why smaller firms like us don’t. We need to know more.”

Lena: “Just one other thing, since we are on the subject of costing. Have you

decided on whether we should use variable or absorption costing?”

Thusara: “I still think we should use absorption. Makes it whole lot easier for me

to price the boards!”

Tom: “But variable is more useful for planning! Fixed costs are fixed anyway,

so why even bother with it?”

John: “OK, stop this now. Let’s get our new experts to explain them both to

us all and then we can make a decision. Can you guys include this in

your report as well?”

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Tom: “One other thing, John. Look, our expenses are very high and it looks

like we are not going to meet our targets this year. I am thinking that

the routine maintenance that is done on our machines by Meng

Solutions, you know the maintenance that is due next month? How

about we postpone that to next year. That way, we can keep our

expenses down.”

Thusara: “I have the same situation here……well, not really the same. But it

looks like we are not going to hit our sales target as well. We have one

month left, so how about increasing the bonuses for our sales people if

they hit their targets?”

John: “I am not sure that these are actually legal or not. Could you guys also

analyse these two issues in your report?”

John: “And if there is nothing else, we’ll see you all at next month’s meeting.”

REQUIRED:

Prepare a report (no more than 10-pages) for John Eustace that addresses all the

issues in the above exchanges.

Attach an email brief of your report to John by the due date.

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Appendix A

(Note: Appendix A information is to be used only for analysing the

special offer from Boardlife)

Boardlife has offered to buy 1,000 units of SurfSkate for $200 each. The normal

selling price is $300.

The cost data for each SurfSkate follows:

$

Direct material (board, trucks and wheels) $ 124

Direct labour @ $24/hour $ 12

Variable manufacturing overhead @ $120/machine hr $ 30

Fixed manufacturing overhead @ $160/machine hr $ 40

Variable administrative expenses (allocated per board) $ 16

Fixed administrative expenses (allocated per board) $ 20

Variable selling cost (commissions @ $15/board) $ 15

Fixed selling cost (allocated per board) $ 16

Total costs $ 273

For this special offer, no commissions will be payable as it is a direct offer to FreeAir

Skate from Boardlife.

There are no capacity constraints on any of the machinery that is used by FreeAir

Skate to produce the boards, nor are there any labour constraints