Question

The Company - Traditions Ltd

Recent Events

In the past the Store has operated profitably. However, the most recent financial statements revealed a small loss for the previous trading period. This came as quite a shock to the owners and is causing great concern.

Prior to this news, and in a move which seems to have been totally unrelated to it, the family members decided to appoint a Managing Director in order to take some of the workload from their own shoulders. They appointed Vijay as the Store's first Managing Director and when he takes up his appointment he will be the first 'non-family' member to be employed in a senior managerial role. He is well qualified for the job, having gained valuable retail experience with Sparks and Mention plc, a leading department store chain with a first class management training programme and an excellent growth and profits record. His first post with Sparks and Mention plc was as a graduate trainee and he progressed to store manager of one of the company's stores in the affluent South East of England.

As a result of the reported loss for the previous trading period, the family members called a meeting of the Store's employees to discuss the situation. This type of meeting was unprecedented in the history of the Store. Prior to the meeting, a suggestion box was set up and attendees were asked to put forward suggestions for improving the profitability of the Store.

One suggestion for improving the profitability of the Store was the closure of the Toy Department, another suggestion was the closure of the Restaurant and a third suggestion was an across the board price reduction of 5% in order to stimulate demand. In each case the source of the suggestion was not identified.

Unfortunately, when the family members asked for information to assist in evaluating these suggestions, this was hampered by the lack of management information produced within the company. Apparently, the recording systems were geared to maintaining records for government regulatory bodies, such as Customs and Excise and the Inland Revenue, and to assist the company secretary in the production of the year-end financial statements.

Since Samantha is studying for an accounting degree, she was asked to tackle the job of seeking out information which might be helpful. The information she produced is set out below. It identifies revenues and costs incurred during the previous trading period.

Departments Furnishing Kitchenware Restaurant Menswear Toys ($ 000) ($ 000) ($ 000) ($ 000) ($ 000) Sales 560.0 980.0 410.0 430.0 680.0 Purchases for resale 400.0 680.0 325.0 229.0 560.0 Opening stock 255.0 63.0 25.5 27.0 197.0 Closing stock 263.0 53.0 25.0 25.5 229.5 Non-management 75.0 45.0 101.0 65.0 95.0 wages Departmental 21.0 10.0 16.5 5.0 20.0 expenses Sales promotion costs 14.0 2.0 nil 1.0 20.0 Per cent of floor space 20 20 15 35 10 occupied by department

The family members were so impressed with the information she produced that they asked her to consider taking on the additional role of management accountant in the company.

Samantha has looked into the behaviour of these costs at different sales levels. Purchases of goods for resale in all departments varied proportionally with the level of sales. Additionally, due to the staffing policy of the company (see note on staffing policy below), so did the wages of non-management staff. Departmental expenses (for instance, wrapping paper for goods purchased, cleaning of staff uniforms) were also considered to vary with the level of sales, and there seemed to be a direct correlation between sales promotion costs in the departments and the increase in sales. Other costs totaling $412,000 (not included in the above schedule) were considered not to change with sales levels and some of these costs could not be directly related to individual departments.

Note on Staffing Policy

The company staffs all the Departments by using a core of full time staff to cover a minimum demand level and a flexible workforce of part time staff to work as and when required, with no guaranteed minimum or maximum number of hours for part-time staff.

Required:

a)         On the assumption that the costs for this trading period will not change significantly from those of the previous period, prepare marginal costing statements to show contributions for each department and contribution and profit for the Store overall on the basis of:

      i)          all departments remaining in operation;

      ii)         the closure of the Restaurant Department

b)         Discuss briefly the financial and non-financial consequences of closing the Restaurant Department.

c)         Identify the problems which Samantha would need to address in her new role as                          Management Accountant of Traditions Limited.

d)         How would you, as Samantha, approach the setting up of a budgetary planning and control system for the Store and what behavioural problems do you think you might encounter.

Answer 1