Schultz Seating Ltd is the UK based company; it produces and distributes the soft furnishings. There are many issues due to which the company is facing different challenges. Those problems include the costing methods, financial performance, production decision and number of sales. It has been identified that the company has been in loss from the past five years and it has been supported by the parent company under which it works. The management has decided to restructure the costing system and other accounting systems in order to make the company profitable in the next six months. Therefore, in this report different analysis has been done which outline the issues and possible solutions to those issues which can make help the company to become profitable.
In this report, different suggestions are made the company for their costing method as well as investment in the projects. It has been suggested to the company that they should outsource the sofa production line which will be the benefits to the company; in addition, there is low risk. Also, it has been advised based on the capital investment appraisals that the company should invest in the second project which starts working immediately as there is already a lack of funds therefore only one project can be selected. However, when it comes to the costing method choice, it the beyond budgeting approach is the best for the company as it allows the stakeholders to use the appropriate measure over the period of time to enhance the performance of the company.
This report aims to evaluate the Schultz Seating Ltd and its costing method. Based on the costing methods researcher will suggest the best strategies which can increase the revenue of the company in addition also the financial performance of the company can be improved. However, the company is not making the profitt from the past few years, being a new employee to the company it has been evaluated that what are the problems with the company and how these issues can be resolved.
There are the different budgeting models which the businesses and organisations use to forecast their budget and control the costs. In the Schultz Seating Ltd, there has been poor financial performance for many years. It has been identified that the company has the budgeting issues. In order to modify the budgeting model company, need to follow the different model that is beyond budgeting model. In addition, the traditional budgeting is not a good choice as it lacks the various things which limit the managers and organisations to enhance the performance of the company. Beyond budgeting is the leadership philosophy or an approach of budgeting that can be used instead of the traditional budgeting (Rickards, 2006).
Beyond budgeting is the flexible budgeting and there is no fixed budget of the year as it requires the evaluation of the resources of the quarterly or monthly basis. It focuses on the timely allocation of resources rather than the fix allocation of resources. It always focuses on future goals and performance and less likely to consider the past performance of the company. However, this is the tool that allows the operation managers to control the cost about the external environment (Abernethy, et al., 2001).
There are the different benefits which Schultz Seating Ltd can get after implementing the beyond budgeting such as the performance of the company may increase. In addition, the company will allocate the resources on the basis of demand rather than the fixed cost for the year without any justification. It also helps in eliminating the behaviours by making the team-based rewards. There are also specific challenges which company can face with beyond budgeting such as implementation process etc.
When it comes to the break-even analysis, it is the amount or the number that is the target of any company or business which they have to achieve in order to recover all the costs they have incurred. In the production of Sofa at Schultz Seating Ltd, there are different costs which the business has to consider. Basically, there are the three different costs which the business has to pay in both options, first is the variable costs; it is the expense which occurs on per unit. In document three, the break-even estimation has been mentioned. It can be seen in the cost statement that there is the direct material cost per sofa and direct labour cost per sofa, these types costs are the variable costs that will incur on the basis of units produced (Sangster, 1993).
On the other hand, there are other fixed manufacturing and administrative costs which will occur on any value without considering the units produced or sold. As these are the costs that business will have to pay for the manufacturing. These are the stepped fixed costs because that s the use of resources without considering the number of units produced. Thus, these cannot be changed. Apart from that, some mixed costs include the direct, indirect, variable and fixed costs. Operating gearing is the relationship between sales and operating profit. Based on the break-even analysis, outsourcing is the best option for Schultz Seating Ltd as it has a higher margin of safety which reduces the risk for the business.
Operating profit is also known as the net income, and it is the revenue that is recognised in the period when accountants report to the management. It is the remainder after deducting the expenses from the sales. That amount is obtained using the accrual basis of accounting in this system expenses are indicated with the indication of the revenues. When any sale occurs, the revenues are recorded along with its costs. In this system also, the accruals and prepaid expenses are indicated with the different entries so that these can be recognised in the reporting period. Also, when it comes to the sales, it is normally recorded when sales occur not when the customer pays for it, in this accounting system that sales that are doe on credit is recorded with the different entry and also affects the operating profit (Silver, and Peterson, 1985).
However, the net cash flow is the net change in the cash over the reporting period. It is the cash amount that business generates or loss in the business year or accounting period. The accountants who manage the accounts of a business record this amount at the end of reporting period. It is the amount that is obtained using the cash amount at the start of the year and cash amount at the end of the year, it is the change or difference between the cash available in the business from beginning to the ending of the reporting period. Therefore, this amount is not affected by the accrual basis of accounting. Consequently, the amount of net cash flow and the amount of net profit is different. There are the four factors or accounts that cause the difference between the net cash flow and operating income those are Expense Accruals, Prepaid expenses, deferred revenues, and sales on credit (Junming, 2005).
It can be seen from the information extracted that the net cash flows remained negative in the given six months. Although there is a profit in the income statement, the cash remains short. The primary reason behind these scenarios which can be determined in the report is sales on credit. There are more credit sales than cash sales. Which make the changes in the revenues of business but does not affect the cash flow, therefore, cash inflow is not recorded. That is the reason for negative cash flow and positive return (Welsch, Hilton, and Gordon, 1988).
Overhead costs are those costs that are not directly related to the production of the units, in addition, there are the two essential methods when it comes to the apportionment of overhead. There are certain reasons for which the apportionment base can be used for the calculation the total costs. There are the two different methods which company can use to apply apportionment base. The first method is the primary distribution of overhead, in this system, the allocation of the indirect cost is calculated on the logical or rational basis. It is also known as the departmentalisation of the indirect costs. However, when the distribution of the indirect costs is done the difference between the product and services department can be ignored (Gunasekaran, Williams, and McGaughey, 2005).
Another reason can be the secondary distribution, in this system, the total cost of the service departments are allocated to the production departments. The logic behind this system is that a product never passes the service department, but the service departments are made up to support the product manufacturing. Therefore, it is essential to distribute its costs. The company has the alternative options for the distribution of them. Therefore, it may choose the apportionment base system for the costs.
Those costs that are related to the manufacturing of the products are distributed along with the indirect costs such as employment department costs, maintenance costs; purchase department costs, storekeeping and all other costs are added into the total costs. In both types, some differences can help the decision makers aware about the procedures, and therefore each class has its own benefits. It can be said that it is an excellent choice to use this method in the original as well as the proposed method.
According to the view of sales director, the proposed method is superior due to low overhead payable, but when one looks at the statement clearly the maintenance and administration charges on the proposed plans are higher than the actual methods. Therefore, it cannot be said that this method is superior to the prior method as when it comes to the total overhead costs that are the same as in the actual method. In order to increase the revenue and lower the costs, the company will have to focus on the other alternative strategies rather than the proposed costing methods (Stevenson, 2005).
In the current costing method and proposed costing method, the almost overhead costs are the same therefore changing the technique is not a good choice as the company will have to bear the same costs. However, the changing costing method without any additional benefit is not a wise decision. If there are the chances that allow the company to reduce the maintenance and administration costs in the proposed method that will surely enhance the revenue as the overhead costs will be decreased, and the revenue per sale will increase and overall the performance of the company will increase (Lefley, 1994).
As from the capital investment appraisals it is has been clearly mentioned that there are the two options available to the company in which it can invest the funds and as per the budget available, only one option can be chosen for now. In the one option, Stitch king company will have the advantage of making the process faster as the stitching process will be stronger as the machine will stitch the mattress and other material automatically and there will be no need of the manual method. In addition, this will also reduce the lack of human capital and decrease the variable cost that can add value to the overall performance of the company. However, this method is workable after some time as the company currently does not have the product line on which this project offer the benefit (Ashford, Dyson, and Hodges, 1988).
Although this method provides benefit in terms of increased speed and automation, when it comes to the Gluegenie, this project offers the benefit of increased quality. The production process will also be improved along with that the making of frames and beds will also be easy with the help of this project. Even, this project will start working immediately. This project also seems beneficial to the company as the improved quality and production process will enhance the products of the company. The higher quality will allow the company to charge higher prices and provide the quality products that will also improve the performance of the Schultz Seating Ltd. whereas this project also seems affordable and feasible as this also has the benefit of the improvement in the production process (Hawkins, and Pearce, 1971).
Currently, there are the conflicts between each method, the pros of each way are useful, and also the company requires these whereas the company has the low resources therefore only one project can be initiated at the time. Consequently, it has been the concern that which project should be started for now which can improve the costing method and also provide the benefit to the company.
Based on the risk and return, there is a higher risk in the stitch king as it will be used later and a company does not have the additional capital which can be paid for this project. When it comes to the profit, there is a higher profit in the second option as from the figure of NPV it can be said that it provides the more benefit. In addition, this project will also start working immediately after the investment is made. Although the payback period in the first project is less but it will be applicable when project starts working. As the funds are in shortage and both projects cannot be accepted currently therefore only that project which starts working now will be beneficial. Gluegenie is the best recommendation as the company will get the higher revenue, as well as the advantages, will begin on an immediate basis (Merchant, 1985).
Abernethy, M.A., Lillis, A.M., Brownell, P. and Carter, P., 2001. Product diversity and costing system design choice: field study evidence. Management Accounting Research, 12(3), pp.261-279.
Ashford, R.W., Dyson, R.G. and Hodges, S.D., 1988. The capital-investment appraisal of new technology: problems, misconceptions and research directions. Journal of the Operational Research Society, 39(7), pp.637-642.
Gunasekaran, A., Williams, H.J. and McGaughey, R.E., 2005. Performance measurement and costing system in new enterprise. Technovation, 25(5), pp.523-533.
Hawkins, C.J. and Pearce, D.W., 1971. Capital investment appraisal (pp. 11-25). London: Macmillan.
Junming, Y., 2005. The Evolution of Cost Control Strategy: A Viewpoint Based on Life-Cycle Costing [J]. Accounting Research, 3, p.008.
Lefley, F., 1994. Capital investment appraisal of advanced manufacturing technology. THE INTERNATIONAL JOURNAL OF PRODUCTION RESEARCH, 32(12), pp.2751-2776.
Merchant, K.A., 1985. Budgeting and the propensity to create budgetary slack. Accounting, Organizations and Society, 10(2), pp.201-210.
Rickards, R.C., 2006. Beyond budgeting: boon or boondoggle. Investment Management and Financial Innovations, 3(2), pp.62-76.
Sangster, A., 1993. Capital investment appraisal techniques: a survey of current usage. Journal of Business Finance & Accounting, 20(3), pp.307-332.
Silver, E.A. and Peterson, R., 1985. Decision systems for inventory management and production planning. John Wiley & Sons Inc.
Stevenson, W.J., 2005. Operations management. McGraw-hill.
Welsch, G.A., Hilton, R.W. and Gordon, P.N., 1988. Budgeting: profit planning and control. London: Prentice-Hall.