JOHNSON COMPANY: INVENTORY AND
PRODUCTION MANAGEMENT
As a hired specialist responsible for the
improvement of the company’s functioning,
several recommendations should be given
regarding the inventory reduction. There are
multiple ways in which this task can be
accomplished. Their choice depends on the
peculiarities of the company’s functioning, its
supply chain, and the way it works (Bragg,
2018). If to speak about Johnson Company, the
elimination of obsolete inventory, along with
improved forecast accuracy, can be considered a
reasonable approach (Bragg, 2018).
At the moment, the organization’s warehouse is
full of outdated DVD players. They tie up
working capital and decrease development
speed (Bragg, 2018). In such a way, Johnson
Company should sell these devices at a reduced
price. It may have a negative impact on short-
term profits; however, in a long-term
perspective, it will help to overcome the crisis
and align the efficient functioning of the
company by providing sources for the
development of a new line.
Another factor under discussion is the adherence
to a JIT system. It can be described as a just-in-
time inventory system in a management strategy
that presupposes the enhanced alignment of all
raw-materials orders from suppliers in
accordance with the current production
schedules (Silver, Pyke, & Thomas, 2016). The
given method as opposed to the just-in-case
strategy in which producers prefer to hold large
inventories to cover the marketing demand.
Johnson Company previously utilized this very
strategy; however, now it is an appropriate time
to switch to a new model. Several reasons
support this decision. First of all, the warehouse
is full as there are obsolete DVD players and no
place for new products. Second, the time and
costs of delivery of new devices will be reduced.
For this reason, the company can be
recommended to switch to the JIT model.
However, the choice of the method to work with
the inventory demands reconsideration of
relations with suppliers. Previously, the
company ordered many devices to fill the
warehouse and ensure that customers’ demand
will be satisfied. The given approach will not
work in the new environment. The firm should
engage in continuous cooperation with its
suppliers to inform them about the need for a
particular product and ensure its on-time
delivery (Silver et al., 2016). In such a way,
these sorts of relations should be improved to
guarantee that the efficient scheme will be
created and all actors will benefit from their
close cooperation.
One more problem arising because of the
reconsideration of the company’s functioning is
the risks associated with the elimination of
safety stock. Thus, if there is no buffer to protect
the company against shortages arising because
of uncertainties in demand, Johnson Company
can lose clients dissatisfied with the lack of
needed products or delays in their delivery. To
minimize these risks, the company should
devote much attention to the continuous increase
in the quality of forecasting to avoid shortage
and, at the same time, enhanced cooperation
with suppliers that provide needed products to
the organization (Bragg, 2018). Better
collaboration means reduced response and
delivery time. For this reason, it can be
considered an effective solution to the problem.
Finally, there is the problem of choice between
recycling, remanufacturing, and refurbishing.
The first one is the process of converting waste
materials into new objects that can be used
(Silver et al., 2016). Refurbishing is the
renovation of obsolete things to make them work
or look better (Silver et al., 2016). Finally,
remanufacturing is the rebuilding of a certain
product to the specification of the initial product
with the help of reused, repaired, or completely
new parts (Silver et al., 2016). Regarding the
current focus of the company, recycling can be
used as there is no need to repair DVDs or make
them look better. The company should eliminate
old products by using effective recycling
techniques to create a background for its further
evolution.
References
Bragg, S. (2018). Inventory management (3rd
ed.). Centennial, CO: AccountingTools, Inc.
Silver, E., Pyke, D., & Thomas, D.
(2016). Inventory and production management
in supply chains (4th ed.). Boca Raton, FL: CRC
Press.
CENTRAL WORLD PRODUCTS PLC.
MANAGEMENT PROPOSAL
Introduction
Business trends in the corporate world are
always changing. Some of the factors that
impact on firms include economic decline,
change in consumer preferences, and level of
competition. To keep up with the changes in the
business environment and maintain a
competitive advantage, it is important for
companies to regularly make fundamental and
strategic appraisals of their operations (Smart,
Awan & Baxter 2013).
In this paper, the author will provide a proposal
for the management of Central World (WC)
Products Plc. (HK). The suggestions will focus
on costing systems, profitability analysis, and
strategic assessment. The cost accounting
system framework will be used to estimate the
price of different products for profitability
evaluation, inventory appraisal, and expenditure
control. Profit analysis will be carried out by
looking at the four levels of proceeds margins.
The four include gross, operating, pre-tax, and
net profit levels. The strategic assessment will
be used to provide the management of Central
World with analysis and guidance on the best
alternatives available to help the company to
start trading again.
Proposed Cost System, Profitability Analysis,
and Strategic Appraisal
Profitability and Sales Outlets
Differences between strategic and traditional
management accounting
Management accounting is the process of
preparing executive accounts and reports. The
reports provide companies with accurate and
timely information required to make both long
term and short term decisions. The information
can be statistical, financial, or non-financial.
Gilkar (2007) is of the opinion that the process
is crucial to the implementation of the best
organizational strategies. Compared to financial
accounting, management entails the creation of
monthly reports for the internal stakeholders of
a company.
The stakeholders include department managers
and chief executive officers. The reports
presented to provide information on the sales
revenue generated, raw material and inventory,
variance analysis, as well as the available cash.
Other data shown include states of accounts
payable and accounts receivable, trend charts,
and the number of orders in hand (Gilkar 2007).
According to Bhimani et al. (2015), there are
two forms of management accounting. The two
are traditional and strategic accounting. The two
differ from each other in a number of ways.
Traditional management accounting involves
the evaluation of business performance based on
long-established systems and standards. The
practice is beneficial to companies that offer a
narrow range of goods or services. In addition,
the approach is used by businesses that do not
require custom designs. Warren, Reeve, and
Duchac (2011) observe that traditional
management accounting focuses on cost
reporting and utilization of fixed assets. Some of
the primary concerns associated with the
practice include ineffective and imprecise
performance measurement of organizations
carrying out activities in non-conventional
means.
On its part, strategic management accounting
focuses on merging organizational goals with
other relevant business information. The aim is
to provide an appropriate model to help
company managers to make suitable business
decisions (Warren, Reeve & Duchac 2011). The
approach also analyses external information on
the impact of resources, costs, market share,
prices, and cash flow (Horngren, Harrison &
Oliver 2008). The evaluation helps managers to
determine the best tactical response to given
business situations.
Other differences between traditional and
strategic management accounting systems are in
terms of reporting units, the approach used in
cost and profitability analyses, performance
appraisal, and ownership. On the basis of the
strategy used in cost and performance appraisal,
for example, traditional management accounting
uses ex-post control. It achieves this through
product costing systems, monthly departmental
budgets, and period based manufacturing
expenditure. In addition, performance appraisal
is conducted on a monthly basis. On its part,
strategic management accounting uses the ex-
ante control-based methodology and life-long
outlays to analyze cost (Bhimani et al. 2015). In
addition, performance evaluation is carried out
on the basis of three or six-monthly multi-
dimensional reviews.
Expected profitability: Computations
The calculations used to show the expected
profitability of the different types of Central
World’s sales outlets for the coming year will be
based on activity-based costing (ABC). The
reason for using this methodology is that ABC
provides companies with important information
on cost drivers and activities carried out by the
Profits in departmental stores and own shops
Item
Department stores
Own shop
Total
Revenue
$ 50,000
$1,000,000
1050000
Cost of sales
$ 10,000
$150,000
160,000
Contribution
$ 40,000
$850,000
890000
business. In addition, the approach provides
vital information on the relationship between
clients, markets, costs, and products.
Profitability analysis of CW’s outlets and
shops
The table below shows calculations aimed at
determining the outlets that make the most
profits for CW:
Table 1: Profitability of outlets.
CW has a known overhead cost of $200,000.
The cost needs to be allocated to all the outlets
to get a complete view of the profitability.
The table below shows the calculations for
apportioned overheads:
Table 2: Apportioned overheads.
The calculations show that there is a need to
allocate overhead costs more fairly to determine
the correct expected profits. To ensure proper
Apportioned overheads
Item
Department stores
Own Shop
Total
Revenue
$ 50,000
$1,000,000
1050000
Costs of sales
$ 10,000
$150,000
160,000
Contribution
$ 40,000
$850,000
890000
Overheads
$200,000
$ 80,000
$ 120,000
200,000
Profit / Loss
-$40,000
$730,000
770,000
allocation, CW should determine what makes
some outlets costly to deal with compared to
others. Some of the factors could be the way the
personnel working in these outlets interact with
customers and the expenses used in order
systems. Such expenses include post, telephone,
and internet. For example, if it takes half as
many posts, internet, and telephone expected to
make orders in department stores outlets, the
focus should be on determining how to reduce
the costs. In addition, if customers in CW’s
shops place more orders compared to those from
departmental store outlets, their own shops
should get the largest share of the cost of
processing orders.
Calculation of total activity cost
The next step of calculating the expected
profitability of the different types of sales outlets
for the coming year will involve determining the
total activity cost by each task. The duties
carried out by CW to effectively serve the clients
include making sales calls, processing orders,
picking and packing, shipping, and making
credit control calls.
The table below shows total cost by activity:
Table 3: Total cost by activity.
Activity
Total Activity Cost
Make sales calls
5850
Process Orders
1,500
Pick and pack
17,800
Ship
2500
Make credit control calls
1500
Total
29150
The company has a total of 15 stores and shops.
As a result, the total activity cost by task for the
firm is 29150 × 15 = $437250. After getting the
cost of each activity performed by CW, the cost
of each product and client contribution can be
calculated using the second principle of activity-
based costing. There are two different types of
outlets for CW. As a result, activity costs should
be split evenly between all the shops. The
measure to be used will be activity drivers.
The final step will entail calculating the
expected profitability of the outlets by
combining the total activity costs with
contribution expenses from table 1. The table
below shows the expected profits and loss by
outlet:
Table 4: Expected profits and loss by outlet.
Department Store
Own Shops
Revenue
$ 50,000
$1,000,000
Cost of sales
$ 10,000
$150,000
Contribution
$ 40,000
$850,000
Cost to serve
25,000
200,000
Expected Profit/loss
15,000
650,000
Comments on the results and figures obtained
A number of findings were made from the
calculations of the expected annual earnings in
relation to the profitability of CW. In terms of
profit margins, for example, the computations
show that CW’s total earnings will be $665,000.
In addition, the calculations show that CW’s
own shops will generate more profits at the end
of the coming financial year compared to the
departmental stores. In terms of cost allocation,
CW’s own shops will require more expenses for
processing orders and making deliveries. The
reason is that the shops receive more customer
orders.
Importance of the Profitability Analysis
Usefulness and limitation of the profitability
analysis
Profitability analysis
Profitability analysis allows business managers
to predict the success of a proposal or optimize
the gains of an ongoing project (Gilkar 2007). In
addition, the evaluation is used to anticipate
potential sales and profits specific to given
aspects of the business. Such items include
geographic regions, customer preferences, and
product types (Bhimani et al. 2015).
The information generated through profitability
analysis will help Central World (CW) in a
number of ways. For example, it will help the
management to increase the annual revenues of
the organization by attracting more clients.
Profitability analysis enables companies to set
prices for various products. Amending prices
and making them affordable will prompt more
clients to seek the firm’s goods and services
(Drury 2007). As a result, the sales department
will focus on retaining customers who have
reasonable demands and value and who are
willing to pay for the company’s products.
The profit analysis will also help CW to
determine the most and least profitable products.
The company provides clients with high-quality
gifts and household products. The products
generate varying amounts of revenue for the
company annually. Through profit analysis, CW
will be able to determine that products that are
in high demand in the market (McLaney & Atrill
2012). Such items can generate huge profits for
the company if sold well. In addition, CW will
be in a position to determine the products to be
sold and to be bought in large quantities.
The information generated by the profitability
analysis will help CW to optimize its responses
to changing customer needs. The preferences
and wants of the consumers are constantly
evolving (Warren, Reeve & Duchac 2011). As a
result, it is important for companies to keep track
of the changes. Failure to meet the new demands
and preferences lead to loss of competitive
advantage and reduced revenues. One of the
factors associated with the change in needs
includes the technological advancement of a
current product. Another importance of the
profitability analysis information to CW is that
it will help the company to evolve its mix of
products and maximize its medium and long
term earnings
Limitations of profitability analysis
Some of the probable limitations of the
profitability analysis include timing, risk, and
value problems. The timing concern is brought
about by the fact that CW may sacrifice some of
its current earnings while anticipating future
revenues. The case is evident when a company
wishes to introduce a new product that requires
high start-up expenditure in the market.
Profitability analysis entails calculating Return
on Common Equity (ROE). Smart, Awan, and
Baxter (2013) note that ROE captures the profits
of one year only. As a result, the analysis may
fail to provide full information on the effects of
long-term decision making.
Another probable limitation of the profitability
analysis is the failure to state the risks taken by
CW to generate its total ROE. The reason is that,
at times, the approach focuses on profits without
putting into account risks. As a result, the
process can generate inaccurate information on
expected financial performance (Drury & Tayles
2006).
Another limitation of the profitability analysis is
the misinterpretation of information and future
business trends. The issue is linked to the value
problem. Profitability evaluation that focuses on
ROE analyses return on investment using the
information in book value and not market worth
(Bhimani et al. 2015). Due to the differences
between the two components, a high rate of
equity may not lead to increased revenue on
investment for stakeholders and the entire
company.
Other important information about the
company
Additional information about CW is needed to
make an informed judgment about the
fundamental and strategic appraisal of the
business. The factors to be taken into
consideration include liquidity, efficiency,
profitability, and leverage ratios.
Liquidity costs
Liquidity cost calculation is an approach used to
measure the amount of monetary and easily
converted assets that are needed to cover debts
and provide a broader picture of the business and
its financial situation (McLaney & Atrill 2012).
If CW fails to realize enough sales, it may be
unable to meet its financial commitments.
Liquidity costs can avert this problem through
current and quick fraction calculations.
By analyzing CW’s current costs, one is able to
determine whether or not the company is
capable of generating enough revenue to meet its
short term financial obligations. On its part, the
quick costs will measure CW’s ability to access
money on a timely basis to support the
immediate demands aimed at making the
company more profitable. The computation of a
quick ratio involves dividing the current assets
with the liabilities (Gilkar 2007). Based on the
trends in the industry within which CW is
operating, a ratio of 1.0 or higher will be a sign
that the firm is in a good position to meet its
demands, make huge profits, and maintain a
competitive advantage. As a result, CW must
work to ensure that its cash is not underutilized.
To avoid underutilization, the company can
invest more in other projects.
Efficiency Levels
Efficiency is calculated over a 3 or 5 year period.
The computation is used to forecast the
performance of specific areas of the business,
such as operational results. Drury (2007) notes
that the approach uses inventory turnover
calculations. The analysis of efficiency ratios
will provide information on how long it will take
for the company’s products to be sold and
replaced in the coming financial year.
The calculation will entail dividing total
purchases with the average stock at a given time.
Assessing inventory turnover has a number of
benefits for a business. In CW’s case, for
example, information on supply turnover will
help the company to increase its profits each
time goods are sold at the right prices and
replaced on time. In addition, management will
be able to improve the company’s buying
practices and stock management. Information on
turnover can also help in making informed
decisions by determining the inventory
networking capital ratio.
The average collection period provides
important information about CW and its sales.
The data will be needed to make informed
choices. The evaluation of collection duration
provides companies with the average number of
days that clients take to pay for their products
(Horngren, Harrison & Oliver 2008). The period
will be determined by dividing receivables with
total sales and multiplying the result by 365.
Customers
Information on the types of customers in all the
sales outlets will help in making informed
decisions about the fundamental and strategic
appraisal of CW. Smart, Awan, and Baxter
(2013) note that all customers are not equal.
Some clients generate positive net margins
compared to others. In addition, some customers
are high maintenance. As a result, they are not
profitable for the company in any way.
Information on clients will help the management
make informed choices by focusing on a new
customer base and getting rid of those costing
the business money. Eliminating such clients
will help CW to focus on more profitable
customers in its sales outlets. It will also help the
company to address the gross margin concerns.
Conclusion
Profitability analysis is important for every
organization. The reason is that the evaluation
helps companies to identify those business areas
that are performing well while finding solutions
for those that are failing. The analysis carried out
on CW will help the company to develop the
appropriate strategies to improve its
profitability. It will also make it possible for
managers to make informed choices, which are
required for the company to continue trading.
References
Bhimani, A, Horngren, C, Datar, S & Rajan, M
2015, Management and cost accounting, 6th
edn, Pearson Education Limited, Hoboken.
Drury, C & Tayles, M 2006, ‘Profitability
analysis in UK organisations: an exploratory
study’, The British Accounting Review, vol. 38,
pp. 405-425.
Drury, C 2007, Management and cost
accounting, 7th edn, Cengage Learning,
London.
Gilkar, N 2008, Profitability analysis: an
exploratory study, Atlantic Publishers &
Distributors (P) Ltd., New Delhi.
Horngren, C, Harrison, W & Oliver, M
2008, Accounting, 8th edn, Prentice Hall, Upper
Saddle River, NJ.
McLaney, E & Atrill, P 2012, Accounting: an
introduction, 6th edn, Pearson, Harlow,
England.
Smart, M, Awan, N & Baxter, R
2013, Principles of accounting, 5th edn,
Pearson New Zealand, New Zealand.
Warren, C, Reeve, J & Duchac, J
2011, Accounting, 24th edn, South-
Western/Cengage Learning, Sydney.
