Arkansas Eggs

Soulikone Sengvongdeuane (Jay)

BSM - 481 Cost Management & Internal Controls

Professor: Dr. Dean Saluti

July 18, 2021

“Scarpe” case

Background:

SISPA (Scarpe Italiane) is an Italian shoe manufacturing company. It focuses on generating manmade shoes via a series of processes ranging from assembling raw materials to converting them into finished footwear. However, this manual technique is cumbersome and time-consuming. The company is chaired by a CEO (Ms. Nadalin). Upon completion of her high learning studies, her father (also the company's president) has directed her to diversify their operations and intrude new geographical locations whereby North America is the target. In America, they anticipate adopting an automated approach to shoe mending whereby machines will be embraced. Thereby, the company's chief accountant, Mr. Hoffman, has had hectic experience in analyzing and reporting whether to embrace the new technology or persist with native. This is subject to the controversial results derived from the financial statements of the two tactics.

The subsidiary in America has revealed various milestones attributable to the complexities accompanying the machine-tailored sneakers. For instance, its setup is demanding due to the acquisition of the plant equipment and methodology of determining the premium prices for the shoes. Consequently, competition from other machine manufacturing shoe companies has been a concern to SISPA. There has been a challenge of assessing the tradeoff between the reduced number of laborers and the corresponding increase in costs inclined to the machine processing. In fact, the company is contemplating to engage in manual production at the initial manufacturing stages and conclude it with machines although it is yet to arrive at a viable solution. An insightful reason seems to be the inability to appropriately allocate overheads more, so the variable costs generated by emerging batches and specialized equipment.

Mr. Hoffman has tried to engage two different approaches to analyze the disparities in overheads but in vain. Overheads are basically expenses incurred in the production process (Sokolov, 2017). The first procedure is the direct labor-oriented process which determines overheads with respect to costs incurred from manpower input to the manufacturing dynamics. Machine hour's criterion is the other mechanism, and it applies the concept of time duration intervals utilized in production. Therefore, the in-house accountant's zeal to establish the better option has of allocating the overhead has been compromised due to the contradicting results from either method.

Ms. Nadalin is frustrated by the companies, and she is opting to withdrawal the operations from North America. Also, during the previous year, the company realized minimal shoe production via the manual approach. This poses a dilemma to the company's CEO which can only be solved by formulating an effective and transparent cost analysis formula that can yield genuine and realistic results. This is initiated by the fact that applying the two approaches blindly will not generate any desirable outcomes instead they will just worsen the case. A clear declaration ought to be drawn on the better method or whether it is advisable to apply them simultaneously. Similarly, it calls for decision formulation regarding forgoing one manufacturing technique at the expense of the other or incorporating their efforts concurrently.

Issue:

Should Scarpe continue selling machine-made shoes, hand-made shoes, both, and under what strategy?

Alternatives:

1. Hand made only

2. Machine-made only

3. Handmade and machine-made production both

4. Change the percentage of the volume of each

5. Strategically adapt target markets for each

6. Develop a new cost accounting system

Alternative 1. Hand made only sub- optimal

Scarpe can opt to engage in handmade shoe production only to reduce the costs that accrue to the machine installations, repairs, and wages rates to the machine operators. Consequently, this can bridge the deficiencies gap attributable to the sudden attention diversion granted to machine-made production as experienced in the previous year. However, this too will be accompanied by its limitations comprising of the hefty expenses in the remuneration of the numerous cobblers and slow manufacturing process.

Alternative 2. Machine-made only sub- optimal

Involvement in automated production as the only viable option will speed up the shoe mending activities and facilitate efficiency. Nevertheless, it will rule out the need to have plenty of labor-intensive workers who impact heavily on the firm's expenses. Unfortunately, such an alternative will possess incremental costs and inconveniences as the drawbacks. For instance, as per the article, Scarpe's CEO is aired astonished by the sudden skyrocketing expenses subjected to machine production adoption. Nevertheless, depending on machines is vulnerable to disruptions like the breakdown of systems due to power blackouts or absenteeism of the machine experts which renders the whole production cycle dormant in such specific scenarios.

Alternative 3 . Handmade and machine-made production both- optimal

A contra-production of handmade and machine-made shoes will enhance better evaluation of possible tradeoffs between them. That is, costs saved from a unit production factor can be utilized to boost the processing of the other. Suppose machines replace a massive number of manual laborers; then the costs saved should be utilized to acquire more raw materials to facilitate vast production in the manmade sector to bridge the niche experienced in the previous year. At the same juncture, if some of the laborers are laid off contingent on the automation, then their respective salary costs ought to be filtered into machine installation, repair, maintenance, and operations.

Alternative 4. Change the percentage of the volume of each- optimal

This optimal alternative has the advantage of simultaneously reducing the costs attributable to handmade and machine-made production as laborers will be reduced whereas few machines and operators will be required respectively. However, this is not the long-term strategy of the firm as it aspires to expand and boost its volume and that is why a branch has been established in North America.

Alternative 5. Strategically adapt target markets for each- optimal

Strategizing the target markets of the shoe production techniques will aid the company in the identification of the tastes and preferences of their prospective customers hence apprehending the laws of supply and demand as triggered by the different approaches. Planning for the intended markets for each kind of criteria will eradicate the disparities arising from the machine automation bias. Likewise, the company will achieve some degree of control over the competition posed by machine shoe processing firms in America as will master how to maneuver accordingly by diversifying techniques to respective markets if need be.

Alternative 6. Develop a new cost accounting system- optimal

The lack of prime criteria for such costing is the ultimate driver for the controversies generated and so do the challenges manifested by the irrelevant overheads that are captured in the manufacturing overheads although they ought to be their own genre of overheads (Gersil,2018). For instance, arriving at figure $320000(machine hour manufacturing overheads) is a result of double counting. The firm can therefore generate a new system that will oversee the proper absorption of costs into their relevant categorizations and avoid such confusions.

Recommendations:

This article recommends:

· Familiarizing with newly adopted cost accounting systems by abandoning initially contradicting techniques.

· Striking a balance between the volumes of machine made and handmade shoes.

· Conducting comprehensive market research to identify prospective customers.

· Endorsement of the absorption costing fundamentals and training on ascertaining expenses as per categorizations.

item	Machine-made	Hand-made	Explanation
Direct Labor	$5,000	$35,000	from Hoffman’s analysis
Direct Materials	$7,000	$18,000	from Hoffman’s analysis
Machine Depreciation	$25,000	$5,000	from Hoffman’s analysis
Subtotal	$37,000	$58,000	Direct Labor + Direct Materials + Machine Depreciation
Overhead
Machine Maintenance	$40,000	$10,000	$50 x Machine Hours for each type of shoe($50x800) ($50x200)
Machine Setup	$14,375	$10,625	$2,875 x batches for each type of shoe($2875x5) ($2875x35)
Materials Handling	$23,500	$211,500	$11,750 x shipments for each type of shoe ($11,750 x 2) ($11,750 x 18)
Overhead Total	$77,875	$322,125	Machine Maint. + Machine Setup + Handling
Cost of Goods Manufactured	$114,875	$380,125	Subtotal + Overhead Total ($37,000+$77,875) ($58,000+ $322,125)
Cost Per Pair of Shoes	$285.19	$380.13	Cost of Goods Manuf/Number of Pairs ($114,875/400pairs) ($380,125/1000pairs)
Selling Price	$300	$500	taken from Hoffman’s analysis
Profit Margin	$12.81	$119.70	Selling Price – Cost ($300-285.19)
Profit Margin percentage	4.27%	23.98%	Profit Margin/ Selling Price ($12.81/300) ($119.70/

References

Gersil, A., & Kayal, C. (2018). A Comparative Analysis of Normal Costing Method with Full Costing and Variable Costing in Internal Reporting. International journal of management, 7(3).

Sokolov, A. Y., & Sungatullina, L. B. (2017). Management accounting of production overheads by groups of equipment. Asian Social Science, 11(11), 379.