You as part of a management consulting team have been asked by the regional finance
director of Monoclean Ltd to prepare a report outlining any issues that may be working
against effective performance measurement and incentive systems in the business units. In
your report, identify clearly any underlying problems and recommend a solution that
considers appropriate responsibility centre type, transfer pricing policy, performance
evaluation system and management remuneration package.
Page 1 of 6 BACC216 Management Accounting 2 Semester 2, 2017 Assignment 2 – Case Study – Group Submission Due: 11.55 pm, Sunday, 29 October 2017 Maximum of two students per group The Assignment must be completed in REPORT format. Monoclean Ltd Case 14.42 Langfield-Smith, Thorne, Smith and Hilton Review of Chapters 12, 13 and 14: responsibility accounting, transfer pricing: reward systems: manufacturer Monoclean Ltd is a multinational company that manufactures and markets household cleaners in a batch process-manufacturing environment, and activity-based costing (ABC) is used to allocate overhead to production. Recently Monoclean has undergone a major structural reorganisation to assist it to complete more effectively in the Asia-Pacific region. In the old structure, the Asia-Pacific region was divided into 12 business units, along geographical lines. Each business unit had a managing director (MD) who was responsible for manufacturing as well as marketing and selling operations of the business unit’s products. Each MD was evaluated and remunerated on the business unit profitability, which was as reported in a monthly business unit profit statement. Managers within each business unit were evaluated and renumerated according to their personal, department and business unit performance. About a year ago, the number of manufacturing plants in the Asia-Pacific region were reduced from 12 to five. The 12 business units continued to exist, except that seven were now responsible only for the marketing and selling of products. Only five business units continued to include manufacturing plants, which were now responsible for supplying all of the business units in the Asia-Pacific region. Each business unit with a manufacturing plant has a manufacturing manager. While the MDs of those business units have ultimate responsibility for the marketing and sales operations and all other aspects of the business unit, in practice the MD does not interfere with the manufacturing manager, who is given full responsibility for manufacturing in the business unit. The MD is principally evaluated and remunerated on the profit generated from marketing and sales activities. Marketing profit reflects actual sales revenues less standard manufacturing costs and actual sales and marketing costs. The manufacturing manager is evaluated on the profit from manufacturing. Manufacturing profit consists of sales revenue less actual manufacturing costs. There is also a manufacturing director for the region who has ultimate responsibility for all the manufacturing managers. With the new company structure, monthly profit statements are prepared for each business unit. In addition to these reports, a manufacturing profit statement is prepared for the region and a total-company profit statement is prepared. The transfer price for goods transferred between manufacturing and marketing areas within the same business is at standard manufacturing cost. Page 2 of 6 The transfer price for goods transferred between manufacturing and marketing, not within the same business unit, is at standard costs plus 5 per cent. Some business unit managers have raised concerns about some of the decisions that have been made since the restructure and wonder if the right incentives are in place. Some specific examples and issues follow: • Marketing and sales managers are in the best position to influence the level of slow moving and obsolete inventory, through choosing whether to sell off these products ore to allow them to be scrapped. In recent months there have been high levels of obsolete inventory. This affects the manufacturing profit statement. There is little incentive for marketing staff to sell off or manage slow or old inventory, as they simply purchase goods at standard cost from manufacturing as it is required. • Inventory shipping and transportation is managed by manufacturing staff and the cost of this is charged to the manufacturing profit. However, the cost of these activities is heavily influenced by the deals that the sales force makes with their customers. Sales staff can negotiate three shipping and transportation options: the purchaser can pick up the inventory from Monoclean’s warehouse, the inventory can be shipped by Monoclean to a central warehouse of the customer, or Monoclean can transport the inventory to the customers’ supermarkets. Each of these options attracts different costs, which are treated as a component of the manufacturing profit. • When there is a change in product or raw material sourcing, the business units that include manufacturing areas absorb the manufacturing variances from standard cost (favourable or unfavourable). This results in an adjustment to standard costs in subsequent periods and affects the profit of the marketing units. For example, if a favourable purchasing variance results from the activities of the manufacturing business unit, the transfer price will decrease. • Another issue of concern is the role of the business unit MD in the capital expenditure approval process. If the manufacturing director, not the MD of each business unit, who initiates all capital expenditure requests. Capital expenditure decisions affect business unit profits through the timing of cash flows, depreciation on assets, maintenance cost and so on. Some business managers believe that there may be a problem in the alignment between business unit responsibility, transfer pricing policy, performance evaluation systems and management remuneration. The profits of some business units are below budget and, in current competitive environment, head office management is concerned. Required: You as part of a management consulting team have been asked by the regional finance director of Monoclean Ltd to prepare a report outlining any issues that may be working against effective performance measurement and incentive systems in the business units. In your report, identify clearly any underlying problems and recommend a solution that considers appropriate responsibility centre type, transfer pricing policy, performance evaluation system and management remuneration package. Information detailing the report format required for this assignment follow: Page 3 of 6 BACC2146 Management Accounting 2 Semester 2, 2017 Report Writing • The report should not be longer than 1,000 words • The report should be 1.5 spaced and in a readable format (Times New Roman 12 point is expected). • Page numbered, if using appendices these also require page numbering. • Black font • Must include your name and student number of each of your group members (maximum of two students per group). • The report should be in the following format: 1. Cover page – include the report title, authors’ names and student numbers, and the date. 2. Table of Contents – detailing by page number the location of the sections of the report. 3. Executive summary – a brief description of the problem including the background which has led to the need to solve the problem, key issues, alternatives considered (if necessary) and the analysis undertaken and the results/recommendations reported. (This section will not be included in the word count for your assignment). These first three sections should only occupy a few pages and only take a few minutes to read. The content of these first three sections should give a clear indication to the reader of the scope/context of the problem and the results/recommendations. 4. Introduction – background, clear specification of the problem and clear and concise identification of the issues. 5. Analysis – identification and analysis of the problem together with any assumptions made, limitations identified and any areas requiring investigation should be included in the analysis section. Subheadings may assist with the organisation of the analysis section. 6. Conclusion – recommendations, limitations and further investigation are discussed in the conclusion. No new material should be introduced in this section. 7. Appendices – supplements the information contained in the main body of the report (Analysis Section). It is a method of providing adequate detail for the reader who is interested in more detailed information without breaking the main strand of the argument of the report (Appendices must follow the flow of the main report, they should not be a jumbled mess placed at the back of the report to provide further detailed evidence etc., appendices should follow the same logical sequence that you follow in the main body of your report). Appendices should be clearly labelled and page numbered (e.g., Appendix 1, page 1 of 4). Appendices should be clearly identified in the main body of the report when referred to. Appendices should be referred to in the Table of Contents. 8. References Referencing of material (text books, journal articles, professional publications, media articles, web sites etc.) consulted and used in the preparation of your report must be included in the references section. The APA (American Psychology Association) referencing is required for your report. It is the method that is used Page 4 of 6 by the accounting discipline in their academic journals, text books etc. For further information regarding APA referencing is available at the following address: http://libguides.melbournepolytechnic.edu.au/referencingfundamentals/FormattingAPA • Headings – clearly label different sections/topics in your report with appropriately worded headings (i.e., “Transfer Pricing”, “Incentives”). Remember to only include information/discussion of the topic under the heading. When you move onto another topic, you require a new heading. • Spelling – use spell checkers and grammar checkers and read through your completed work to check for spelling and grammar mistakes that are not always picked up by computer programs such as from and form. • Language – the language of a report is clear and concise. Formal English is required, colloquial English is not appropriate for report writing. For MPA901 Ethics and Governance, it is preferred that you use terms such as “it is recommended” “this report recommends” rather than “I recommend” or “we recommend” Expressions listed below that are colloquial English usually have a concise English word or a business/accounting terminology that is appropriate for report writing: Examples: “look into” alternative “investigate” “big fall” alternative “50 percent reduction” “pay fast” alternative “cash is received within five working days” A thesaurus either