QUESTION

Part 1

For part 1 prefer please  this book Drury, C. (2008). Management and cost accounting (7th Ed). South Western, London:  Cengage Learning.

Objective of this assignment

The objective is to place the student in the position of a management accounting role within a business and to address the requirements of the CEO. This is achieved through the use of information available from the public domain, combined with fictitious information, which reflects the information that would be available to a management accountant. Key parts of the assignment require demonstration of analysis of the information from the annual report and fictitious information, summarizing and communicating this analysis to a specific audience. Some questions are open-ended to allow a variety of aspects to be investigated from the annual report and additional fictitious information. This analysis is also to be supported by academic literature to draw a link between academic studies and the practice of business. Completion of this assignment will give all students a strong insight into the requirements and skill set of a management accountant.

Background

Fletcher Building Limited (FBU) has been a highly successful company over the last eight years. The company listed on the New Zealand Stock Exchange (NZX) in 2001, and for shareholders that had invested in the company in 2001, the company has delivered a 19% compounded annual growth rate. The company is now one of the largest on the NZX by capitalisation. The company has six main divisions; Building Products, Crane, Distribution, Infrastructure, Laminates & Panels, and Steel. It operates mainly in New Zealand (47% of sales) and Australia (39% of Sales), and other markets include North America, Asia and Europe. The Crane Division was the latest acquisition with FBU acquiring 100% ownership of the company in May 2011.

The results of FBU for 2011 showed Net Earnings after tax were NZ $283 million. However, 2011 had been a challenging year. Earnings before interest and taxes (EBIT) declined from 2010, and cash flows also declined.

Fictitious scenario

The Chief Executive Officer (CEO) of FBU, Jonathan Ling, is concerned that 2012 will be even more challenging. The CEO knows the importance of cost control, especially during difficult trading periods. As a consequence, he has employed a consulting team EMAL (Experts in Management Accounting Limited) to provide an independent review of costs and recommendations in a report. Although you are relatively new to the firm, you have had a good background of accounting education including the topic of management accounting that has given you the confidence about undertaking this task.

Additional information:

Some segment analysis by division

n.b. The Administration expenses for Steel Products Division include the full charge of 6 Factory Accountants (average annual salary of $100,000 each) plus 10 Administration staff (average annual salary of $50,000 each). All these staff are also responsible for the Infrastructure Division.

Building Division Product Costs of three products

Three products from the Building Division generate 25% of the Building Division revenue. The cost detail of these products are listed in the following table.

The current costing system used across all divisions of the company is a traditional based standard costing system which applies an indirect overheard cost at the manufacturing level based on direct manufacturing costs for each product. A standard mark up is then applied to each product cost to reflect the company Selling, General and Administration Expenses (S G & A). This can vary between divisions and between departments within each division. Bill Roest, the FBU CFO has indicated to EMAL that the costs for the three main products should meet the competitors selling price and earn a mark up for a profit contribution of 20% on total costs.

Requirements:

The only information you have is available through the public domain and the additional information provided for this assignment (this is fictitious information used only for the creation of this assignment). Therefore you are to limit your research, review and analysis and any report and recommendations to the information obtained through the public domain. Do not contact FBU or any persons associated with the company about this assignment.

1. Access and read the Fletcher Building Annual Report 2011 (from the link provided). Also review the presentation made to investors in March 2012 from this link

http://www.fletcherbuilding.com/investor/financial-information

1. Write a report to the CEO that addresses the following issues:

a)     Identify, evaluate and provide justifications of cost categories as defined in the financial statements and fictitious scenario that have the potential for cost reductions or the need for strong cost control.

b)     Discuss how the role of the management accountant team for FBU can deliver better results for the company. Following the discussion, complete a 10 point action plan for the management accounting team from FBU to address.

c)     Identify and discuss risks that the company needs to consider for 2012 that should be discussed at Board level.

1. Identify and summarise academic or research articles that support your evaluation for the Question 2a) above (a minimum of two articles).

Maximum report length 10 pages of A4 (using Arial font 11) including tables, graphs or diagrams.

Marking guide:

Question 2

Report format and presentation                                                                                  10 marks

Identification, evaluation and justification of cost categories for reductions                30 marks

This includes any relevant calculations

Discussing on the role of management accountant delivering better results  20 marks

10 point action plan                                                                                                     10 marks

Identification and discussion of risks for the Board                                                     10 marks

Total Question 2                                                                                                         80 marks

Question 3

Identification of academic articles                                                                               8 marks

Summarising of academic articles                                                                               12 marks

SOLUTION

1. Part 1: Case of Fletcher Building Ltd.

1.1 Cost Reductions

Fletcher building Limited has been an extremely successful organization over the past years. The company has not only initiated a good financial performance for itself it has also created value for its investors by registering a growth rate on 19% over the years. The company has a market capitalization of $3349 million and is the largest market capitalization on the New Zealand stock exchange. The organization has been performing considerably well evident from its past 4 year’s performance, because of large scale efficiency and productive strategies adopted by the management.

Figure 1: Net Profit Fletcher Building (Annual Report Fletcher Building 2011- accessed on 18/4/2011)

The creation of high net profit margins can be attributed to the efficiency of the organization. It should be noted that the in 2009 the firm experienced a sharp dip in the net earnings owning to the merger done by the firm in 2009 and its impact on the earnings in clearly evident. The performance of the firm is attributed to the growth in the revenues of the firm.

Figure 2: Revenue Fletcher Building (Annual Report Fletcher Building 2011- accessed on 18/4/2011)

Despite the increase in the revenues of the firm 2011 has been a challenging year for the organization owning to the current global business environment accompanied with interest rate and exchange rate fluctuations. The CFO has identified that 2012 would also be a challenging year for the organization for this purpose COST CONTROL has been identified as a strategic tool to counter the circumstances.

Some of the areas where ‘COST CONTROL’ may be the most effective tool to achieve organizational efficiency are

1. Reduction in the Cost of Goods sold

The Cost of Goods sold may be defined that as the direct costs that accrue to a firm to sell the product. These include direct costs like labour costs, transportation costs. The business operations have indicated a significant increase in the cost of goods sold of the building materials as well as the Steel division of Fletcher Ltd. Which do not permit Fletcher to achieve a high sales efficiency owning to the high direct expenses.

Figure 3: COGS Fletcher Building (Annual Report Fletcher Building 2011- accessed on 18/4/2011)

There is a significant increase in the COGS particularly over the last fiscal i.e. 2011 and the trend would continue if strategies to reduce costs are not adopted.

2. Reduction in Administrative Expenses

Another key area identified by the business is the gradual increase in the administrative expenses of the firm .The firm needs to account for these expenses and adopt strategies to reduce such expenses. The company has a load of excess employees and has to practice layoffs in order to achieve administrative efficiency.

Figure 4: Administrative Expenses Fletcher Building (Annual Report Fletcher Building 2011- accessed on 18/4/2011)

Thus the management has to identify the importance of COST CONTROL adopt the effective strategy to achieve efficiency. COST CONTROL can be identified as an effective strategy particularly owning to the global business scenario. The global economy is still recovering from the crash in 2008. Therefore it is important for companies to identify and prioritise key areas and practice cost control to maintain organizational efficiency. Cost-reduction programs should have the perfect inventiveness and structure to encourage organizational cooperation. Senior management must play a key role in cost reduction programs, helping to overcome the fear and concerns lower-level management. Moreover it is essential for the management to maintain control over the organization while adopting such a strategy (Hoeppner, 2009).

It is important for the organization to formulate a strict budget, allocate the organizational resources effectively. After achieving effective resource allocations the organization should aim to achieve budgetary targets formulated to control costs. A budget is particularly important in this case as the organization has to achieve cost control and it can only be done if the budget is formulated correctly and is effectively implemented(Browncll, 1980).

1.2 10 Point Action Plan

To achieve organizational efficiency and effective COST CONTROL, the following 10 point action plan is suggested.

1. Formulation of a budget

Firstly to achieve effective Cost Control a formulation of a budget is essential. A budget would enable effective allocation of organizational resources identifying the key profitability areas and high cost area. A Budget would enable effective implementation of the cost control measures being initiated.

2. Reduction in the Direct Costs

One of the areas that have been identified as problematic for the organization is the high cost of goods sold. The organization has been experiencing a gradual increase in these costs. Therefore efforts have to be directed towards the minimization of these direct costs. Either by acquiring materials from cheaper resources or introducing supplies chain efficiency.

3. Conversion of Sales into actual

Another factor that has been identified with the businesses low efficiency is the low rate of conversion into cash. The firm should work effectively to reduce receivable period, this would generate cash and pump it in the organizational enabling it to generate additional cash flows.

4. Reduction in Administrative Expenses

High administrative expenses have already been identified as cause for lower efficiency for the firm; therefore to achieve efficiency it is important to reduce the increasing administrative expenses. The firm needs to account for these expenses and adopt strategies to reduce such expenses. The company has a load of excess employees and has to practice layoffs in order to achieve administrative efficiency.

5. Recovering from the Acquisitions

In December 2010, Fletcher announced the acquisition of Crane limited; though the acquisition was announced in December Fletcher has acquired the 97% stake in the corporation by March 2011. This has created a cash strain on the business. Thus the organization should not undertake any other acquisition instead focus on generating efficiency from the acquired firm.

6. Reduction in the Selling Price and Selling at par with Competition

Thus it is evident that Fletcher is selling their products at a price way higher than the competition. This may be a cause for diversion of sales from Fletcher to the competitors, thus the firm should effectively revise their prices to bring them in line with the competition to achieve revenue growth. The CFO has already advised a 20% reduction in the mark up to make the prices competitive.

7. Increasing Market share

Fletcher’s market share of The Build 3 product is considerably less, the share of the product is 10%. Thus there is a certain avenue for growth in the product. The firm should focus on providing a high quality product and penetrating the market with it. The same applies for Build 1 and Build 2 products Fletches have the capacity to penetrate the market with their high quality products.

8. Compliance with the Global Business Environment

As the global economy is still recovering from the Financial Crisis of 2008 the situation is far from over. Fletcher is a global corporation and therefore is affected by the changes in the global environment. Fletcher should review the global economic environment as well before key policy decision making.

9. Minimization of Risks

Since the firm is under a cash strain currently it is vital that the firm adopts strategies and business practices which lead to risk minimization. Risk minimization can be applied to all aspects of business including manufacturing as well as financing activities. Risk Minimization is an effective measure for Cost control.

10. Prudent Decision Making

Before adopting any strategy the firm should effectively test the technique, and plan appropriately before undertaking the policy decision. The management should be actively involved in the decision making process to maximise profits to increase organizational efficiency.

1.3 Identification of Risks

Cost-reduction programs should have the perfect inventiveness and structure to encourage organizational cooperation. Senior management must play a key role in cost reduction programs, helping to overcome the fear and concerns lower-level management. Moreover it is essential for the management to maintain control over the organization while adopting such a strategy. The management also has to identify the certain risks associated with the adoption of the Cost Control Strategy and to achieve high profitability in 2012.

Firstly, it is important that the Stakeholders are content with the adoption of the policy. For instance the proposed layoffs and reduction in administration should not cause the employee groups to be demotivated. This would adversely affect organizational efficiency.

Secondly, it is also important to consider the global business environment and the potential strain it causes on the business. The business has to adopt risk minimization strategies to operate in the stringent liquidity environment.

Thirdly, while aiming to reduce the direct costs an important factor is the labour costs and the stakeholder group of labour associated with it. It is important to ensure that the labourers are satisfied and motivated to work in the organization. Other measures to reduce direct costs should also be considered.

Thus these are some of the key risks that have been identified and should be discussed at the board level. The board then should adopt prudent decision making to minimise these risks and achieve maximum organizational efficiency and profitability.

2. Summary

The articles that have been considered which justify the Cost Control Strategy are “Cost Reduction More Important Than Ever” by Hoeppner et al, 2009 and PARTICIPATION IN BUDGETING, LOCUS OF CONTROL AND ORGANIZATIONAL EFFECTIVENESS – A FIELD EXTENSION by Peter Brownell 1980.

The article “Cost Reduction More Important than Ever” emphasises the importance of cost control and justifies that it is more important than ever in the current business scenario. Cost-reduction programs should have the perfect inventiveness and structure to encourage organizational cooperation. Senior management must play a key role in cost reduction programs, helping to overcome the fear and concerns lower-level management. Moreover it is essential for the management to maintain control over the organization while adopting such a strategy. The paper also emphasises the importance of individual cost reduction managers and the strategies they propose. It is also vital to account for stakeholder groups before adopting any strategy (Hoeppner, 2011).

Participation in Budgeting, Locus  of  Control and  Organizational Effectiveness – A FIELD EXTENSION by Peter Brownell 1980.though an old writing but extremely relevant in the current business scenario. The paper emphasise the importance of budgeting and the budgetary control on the achievement of organizational efficiency. The article lays importance on the budgetary practice as the key management function .It also emphasise the importance of effective resource allocation in the budget process to achieve organizational targets. It also emphasises that budgeting leads to management exercising control on the organizational by setting targets to be achieved in a specified period of time.

Thus both the articles emphasise the Cost Control strategy and its importance in the current business scenario.

3. Part 2: Corporate Social Responsibility and Adoption of CSR

3.1 Corporate Social Responsibility

Corporate social responsibility (CSR) is a term increasingly gaining importance both domestically and internationally. With the increase in globalization the global companies are increasingly adopting the concept of corporate social responsibility. The universal definition of corporate social responsibility defines the concept as the compliance of transparent business activities based on ethics, compliance and legal framework, respect for people, communities, and the environment. The global corporations have to concentrate on activities other than making profits and have to assume responsibility for their activities and their impact on the environment.  A business has a large number of people associated with it; these interest groups are called stakeholders. Stakeholders of the business are customers, employees, business partners, investors, suppliers and vendors, the government and the community.

(Baird et al, 2002)

The concept of CSR has been articulated in many ways and different authors have provided different rationales for the adoption of the concept. The philosophy is based on operating business in a healthy market, economy and communities. The key drivers behind the concept of CSR are:

1. Enlightenment

It involves the creation of a cohesive environment where the business operates ethically creating a sustainable business environment. With the creation of such a business environment the markets and society is able to function well together.

2. Social Infrastructure

Contribution of the business to the social investment and the building of social infrastructure is a concept increasingly gaining importance.

3. Transparency and Trust

There is growing expectation that corporations will be more open, more accountable and report publicly on their performance in social and environmental fields.

4. Increased public expectations of business

There is a growing expectation among the public that a business in socially responsible to provide a large number of jobs and contribute to the economy by taxes as well as creation of employment.

(ASOCIO Policy Paper, 2004)

Increasingly stakeholders expect the companies to act in a socially and environmentally responsible manner in conducting business activities. CSR is also referred to as “Corporate citizenship” which implies that the company should be should be a good neighbour within the business environment. Increasingly companies are realizing that in order to stay productive, competitive in a rapidly changing business scenario, they have to become socially responsible. The business expects to gain long run sustainability by taking care of stakeholder interests.

3.2 Adoption of CSR

Realising the importance of the concept of CSR corporations in New Zealand have increasingly adopted CSR as a part of business policy. Though research has proven that New Zealand has been slow in the adoption of CSR concept but with the concept gaining wide scale acceptability corporations in New Zealand have increasingly adopted the concept of CSR (Frame et al, 2003).

According to a survey one of the most highly rated corporations on the social responsibility index is Warehouse (New Zealand). The company has been given a rating of AA according to the research study conducted. Warehouse is New Zealand’s one of the largest retailers known for their wide range of products offered ranging from clothes, grocery, sporting gear to high technology items. Founded in 1982 with 89 stores all over New Zealand it remains a New Zealand owned and operated company employing practically 9,000 people. The corporation is a highly profitable organization with a profit of about $76.0 million on sales of $1.67 billion for the year 2011. The corporation has adopted an extensive CSR program to protect the interests of all stakeholder groups.

(3dethics.e-contentmanagement.com and www.thewarehouse.co.nz- accessed on 18/04/2012).

Warehouse has a clear commitment to the green cause and has effectively recognised their social responsibility in their annual sustainability report 2011. According to the management the core purpose of the business is to be responsible to their stakeholders “Make a difference to people’s lives by making the desirable affordable and supporting New Zealand’s communities and environment” has been the mission statement of Warehouse. Some of the CSR initiatives undertaken by the corporation are, the Warehouse charitable trust has been established to support team members and community members to help those affected by natural disasters. The trust has established a fund of $500,000 to help those affected.  The company also undertook an extensively funded program in September 2010 to help those affected by the massive earthquake. The Warehouse Group donated $500,000 to the New Zealand Red Cross following the Canterbury Earthquake. The massive green program launched by the organization has also been attributed with great success, the organization has experienced 75% reduction in bag volumes from 2009-2011.

It is evident from the extensive measures adopted by Warehouse that it is to the cause of the society and environment. Its commitment to provide sound corporate governance would ensure transparency and accountability in the system. The aim of the organization is to sustain business in a socially responsible manner.

(Warehouse-11th Community and Environment Report- accessed on 18/04/2012)

Another New Zealand with a clear CSR policy is Telecom Corporation of New Zealand formulated in 1987. The corporation boasts of the largest consumer market share in the New Zealand. The company is also has been given a rating of A+ by a survey on the social responsibility index. Thus, it is evident that the corporation has maintained a balance between financial performance and the protection of shareholder interests. The company has ensured appropriate legal compliance with NZSX Best Practice Code, Corporate Governance in New Zealand. The corporation has effectively identified the areas where the change was required and adopting appropriate policies to ensure the legal compliance. Telecom has ensured the promotion of ethical behaviour to carry out business activities evident from the fact the company has effective policies for code of ethics as well as whistle blowing is an example of the high ethical standards set by the corporation.

The company is also promoting gender equality as part of their CSR; the company has taken part in the Global Women (Women in Leadership) Programme – where Telecom is a foundation partner. The company also runs a charitable foundation called the Telecom foundation has been formulated to help children, charities and different stakeholder groups. The Foundation runs extensive programs in philanthropy to help all sections of society.

(Telecom.co.nz and Annual Report Telecom 2011 – accessed on 18/04/2012)

As some of the largest corporations have effectively adopted the concept of CSR it is an example for the smaller corporations to adopt the concept as well. Moreover as the issues of environment and global warming have been gaining momentum it is expected from the businesses to act in a socially responsible manner.

4. References

• “Fletcher Building : 2011 Annual Report : Investor information.” Fletcher Building : Home. N.p., n.d. Web. 18 Apr. 2012. <http://www.fletcherbuilding.com/reports/11/financial/Investor-information>.
• Hoeppner, Donald . “Cost Reduction More Important Than Ever.” Winning approaches for cost and Resource Productivity 2.1 (2011): 1-5. Print.
• Brownell, Peter. “PARTICIPATION IN BUDGETING, LOCUS OF CONTROL AND ORGANIZATIONAL EFFECTIVENESS – A FIELD EXTENSION.” WORKING PAPER ALFRED P. SLOAN SCHOOL OF MANAGEMENT 1169.80 (1980): 1-45. Print.
• Braid, Victoria , David Wofford, and Christina Kramer. “WHAT IS CORPORATE SOCIAL RESPONSIBILITY?.” 21ST CENTURY CORPORATE SOCIAL RESPONSIBILITY: ADVANCING FAMILY PLANNING AND REPRODUCTIVE HEALTH 1.1 (2002): 1-10. Print.
• Paper, Policy . “CORPORATE SOCIAL RESPONSIBILITY.” ASOCIO Policy Paper, 2004 1.1 (2004): 1-6. Print.
• Frame, Bob, Richard Gordon, and Ian Whitehouse. “Corporate Responsibility in New Zealand – A Case Study.” Landcare Research 1.1 (2003): 1-18. Print.
• “11th Community and Environment Report..” www.thewarehouse.co.nz. N.p., n.d. Web. 18 Apr. 2012. <http://www.thewarehouse.co.nz/is-bin/intershop.static/WFS/TWL-Site/TWL-B2C/en_NZ/content/Society%20and%20Environment/Reports/the-warehouse-2011-community-environment-report.pdf>.
• “About Telecom: Telecom.” Telecom New Zealand. N.p., n.d. Web. 18 Apr. 2012. <http://www.telecom.co.nz/content/0,8748,200633-1548,00.html>.
• Napoli, David, Alma Whitely, and Kathrine S. Johansen. “Top 120 Australian and New Zealand Companies – Corporate Social Responsibility Index – 3D Ethics: Implementing Workplace Values.” 3D Ethics: Implementing Workplace Values. N.p., n.d. Web. 18 Apr. 2012. <http://3dethics.e-contentmanagement.com/inside/appendI>

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