Professional Documents
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CONTENTS
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ACCT 102 Managerial Accounting Professor Cheng Nam Sang
Academic Term (1/2009-10)
MA
Company Other
Singapore 40 Countries
1.2 TPS
In 2003, MA Company expanded its business to another level- the TPS market. The TPS market
demands for similar products to its normal production lines, which include cash registers, bar-code
scanners and kiosks. The main difference is that the products for TPS do not include the MA label
at the end of the process.
Having implemented this TPS project for the 6th year, sales revenue currently stands at 28.8% of
total factory revenue i.e. 55,463 million USD. Gross profit margin currently stands at about 16%,
accounted as of July 2009. To sustain profitability, development in the project is closely monitored
to ensure optimal customer satisfaction.
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ACCT 102 Managerial Accounting Professor Cheng Nam Sang
Academic Term (1/2009-10)
Also, production processes for TPS would follow existing processes with minimum variation in
the duration and details of processes. Downtime related to changing of line would also be minimal.
After some planning to obtain the relevant costs and limitations involved, MA’s Management
deduced there were no major limiting factors for this project. The only issue, which was within
MA Company’s control, was to set aside machinery and labor time for TPS. Therefore, MA
Company decided to proceed with the TPS project.
ATOS provides IT solutions to its clients from Retail to Infocomm industries, and its orders from
MA Company include cash registers and barcode scanners. Datalogic is a world leader in the
Automatic Data Capture market. Orders include barcode scanners and kiosk. SG is a global
marketing and technology leader in the lottery industry, and they purchase lottery machines. Their
sales stand at 14.8%, 38.2% and 26.8% of total TPS revenue FY08/09, respectively.
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ACCT 102 Managerial Accounting Professor Cheng Nam Sang
Academic Term (1/2009-10)
Datalogic
Looking closer at Datalogic’s figures, it can be observed that the material and labor price variances
are favorable. The significantly high favorable material price variance (MPV) at $102.81 for
Product 1 illustrates the contributive efforts on the part of the production manager in planning the
production schedule wisely so as to avoid rush orders that would incur more costs. The favorable
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ACCT 102 Managerial Accounting Professor Cheng Nam Sang
Academic Term (1/2009-10)
MPV could also be due to the purchasing manager’s effort at sourcing for materials at the lowest
costs possible. Datalogic also has a favorable labor rate variance (LRV) at $17.54 for Product 1,
probably due to well-trained employees who ensure that their work is completed promptly.
However, there is a high unfavorable manufacturing price variance at $633.95 for Product 2. This
is rather difficult for the company to interpret as this could be due to the overhead rate likely to be
a combination of many different cost elements. MA Company needs to re-set its standard
manufacturing price.
SG
SG recorded a favorable MPV and manufacturing price variance. The favorable MPV of $24.07
and $58.15 suggests cost savings from bulk discounts or the availability of suppliers who are able
to supply materials at a lower rate.
However, it can be observed that there is unfavorable LRV. At $47.67 and $75.45, the huge
variances could be attributed to the sudden need for the labor to do overtime to ensure job
completion, this rooting from any possible rush orders, thus highlighting the production manager’s
failure to provide proper production schedules. Another reason could be due to underutilization of
its labor; MA Company could be employing skilled workers to do relatively simple tasks that do
not require those skilled workers.
ATOS
The variance analysis could provide an insight as to why ATOS is a low runner. ATOS recorded
unfavorable material and manufacturing price variances. ATOS could possibly be placing last-
minute orders with MA Company. With such a short notice and insufficient safety stock in the
inventory, MA Company would then have to lose out on bulk discounts while making material
orders to meet ATOS’ demand or even face the issue of lack of materials if the suppliers are
unable to supply the stock in time.
On the other hand, ATOS has a favorable LRV at $6.58 and $4.13, suggesting that the company is
enjoying cost savings from employing workers who are paid at a low rate; owing to the fact that
products demanded (e.g. cash registers) by ATOS have simple designs and processes and require
less skilled labor.
suitable cost driver. As MA Company has thousands of product lines and models, it will be highly
cumbersome for the company to use ABC since it may not be using the same cost driver for all
products. Standard Costing has been put in place for many years. Employees involved in this
costing process would be more fluent with the standard costing method and be more resistant to
changes. As such, standard costing should still be practised as the cost of changing it outweighs the
benefits significantly.
3 Financial Analysis
To successfully evaluate the project’s success, we have conducted some financial analysis on the
Profit & Loss Statement as well as Balance Sheet. To understand how well MA Company has done
to meet its expectations for FY08/09, an Actual versus Budgeted variance comparison has also
been done. Some Profitability ratios are also being analyzed in order to make further conclusions
on how well MA Company is managing its expenses to ensure a healthy cash flow for the project
as well as to evaluate the financial success of the project.
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ACCT 102 Managerial Accounting Professor Cheng Nam Sang
Academic Term (1/2009-10)
As mentioned earlier under the standard costing variances, it is also possible that some customers
place an ad-hoc order at a later stage. Thus, MA Company may not have sufficient inventory on
hand, leading to higher material cost quotations.
We recommend that MA Company rectify this material issue by sourcing for local suppliers
instead of just having its overseas suppliers. Even with last-minute orders, local suppliers are still
more able to meet the demands at reasonable prices as compared to the overseas suppliers due to
the cumbersome shipping process. However, MA Company must take into consideration the
quality standards of the materials supplied by the new suppliers by implementing quality standards
in their agreements.
In FY08/09, MA Company incurred a 0.4% wastage cost, which is due to defects in parts
produced, hence causing material wastage. Therefore, MA Company should continue reviewing its
quality standards and improve on the quality of its processes.
From our analysis of the TPS project, we have seen improvements in its overall profitability; Gross
Profit Margin has increased by 0.24%, Net Profit Margin by 0.43%, ROE by 0.86% and ROA by
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ACCT 102 Managerial Accounting Professor Cheng Nam Sang
Academic Term (1/2009-10)
0.24% from 2008 to 2009. The healthy growth of its profitability gives us an indication of MA
Company’s stable financial status.
With an increase in gross profit margin for FY08/09, it shows that MA Company has more
liquidity, and thus more cash flow to spend on Research & Development expenses and investing.
Despite an increase in Net Profit Margin, the percentage is rather low, which suggests that its
marketing or administrative costs may substantially high. MA Company should then look into it
and try to cut unnecessary costs such as Wastage and Entertainment costs.
MA Company reinvests its earnings therefore ROE and ROA are relevant in our analysis.
Shareholders will be glad to know that the return of their investment has become progressively
greater in the past two years. ROA has increased to 0.74%, suggesting that the earnings generated
from invested assets are minimal. In an electronics manufacturing industry, net income is usually
low due to high fixed costs for assets incurred. Therefore, it may be quite acceptable for MA
Company to have a low ROA percentage. However, MA Company should continue to increase its
ROA steadily in the future years.
Datalogic has the highest gross profit margin at 19%, followed by ATOS at 16.53% and Scientific
Games at 14.61%. However, ATOS has the lowest EBITA. This suggests that although Scientific
Games incurred higher material cost which lowered its gross profit margin, it did not incur very
high Selling and Administrative (S&A) expenses unlike ATOS. ATOS has higher S&A expenses
possibly due to the requirement of intensive administrative costs to settle their business
transactions with MA Company. This reflects on MA Company’s inability to keep its earnings
made through business dealings with ATOS at a healthy level. MA Company should look into
these high S&A costs incurred and minimize when possible.
Datalogic and Scientific Games are the two high runners and most profitable TPS customers in
terms of dollars. The nature of products ordered by Datalogic and Scientific Games probably
requires less labour and machine hours for production compared to those of ATOS.
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ACCT 102 Managerial Accounting Professor Cheng Nam Sang
Academic Term (1/2009-10)
Besides that, the frequencies of orders made by Datalogic and Scientific Games per year are higher
too. This is probably due to the good services and quality of products provided by MA Company
for these customers, therefore building up on its customer loyalty. MA Company has notable
mutual understanding with Datalogic and Scientific Games in terms of what they require in their
product orders and process of transaction. These then result in MA Company incurring less S&A
costs to resolve products enquiry, quotations and specification requirement.
Expenses:
Cost of Goods Sold 83.80% 84.03%
Selling & Administrative Expenses 14.21% 14.49%
Total Expenses 98.01% 98.53%
Net Income before Taxes 1.99% 1.47%
Taxes 0.36% 0.27%
Net Income 1.63% 1.21%
The increased profitability of TPS has been further substantiated by our Comparative Common-
size Income Statement analysis of the project. Investors of MA Company would be pleased with
FY08/09’s TPS financial performance with comparison to FY07/08. Total Net Income has
increased significantly by 0.42% from FY07/08 to FY08/09, showing a financial improvement in
the TPS project. Cost of Goods Sold and S&A Expenses consumed smaller percentages of total
sales in 2009. Overall, profits are rising for the TPS project.
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ACCT 102 Managerial Accounting Professor Cheng Nam Sang
Academic Term (1/2009-10)
4.2 Downtime
Components of Downtime percentage include material shortage, rework/retest, changing of line
and part quality issue (part defect) figures. MA Company is able to obtain its monthly downtime
percentage based on its available hours, and sets an achievable downtime target to increase its
production efficiency annually. In comparison to FY07/08, Downtime percentage has generally
decreased from 16% to about 6% in FY08/09 (refer to Appendix 6.2.2), which is a significant
improvement in efficiency.
However, MA Company is facing issues with material shortage and increasing costs. As MA
imports its materials from overseas suppliers, there may be instances when the shipping process of
materials is delayed, causing a bottleneck of the company’s production process, affecting its
productivity.
Downtime Target Average Exceeded Target Average Exceeded
FY 07/08 FY07/08 Downtime FY FY08/09 Downtime
FY 07/08 08/09 FY08/09
Material
Shortage 1,100 2,584 1,484 1,000 1,192 192
Rework/Retest
1,100 478 (622) 1,000 265 (735)
Changing of
line 620 212 (408) 500 196 (304)
Part Defects
600 381 (219) 400 590 190
Downtime % 8.5% 7.3% - 7.0% 5.1% -
Figure 8: Analysis of Non-Financial KPI
MA Company’s heavy reliance on its material suppliers causes it to be very susceptible to external
shocks in the supply market. If there were to be a diminished material supply, MA Company
would be unable to meet their customer demands on time.
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ACCT 102 Managerial Accounting Professor Cheng Nam Sang
Academic Term (1/2009-10)
One way to minimize this problem is to utilize the spare factory capacity that can be used for
material storage. MA Company can then make more bulk purchases in advance which lower its
unit costs as well as the possibility of material shortage to meet the following month’s production
demand. In other words, instead of a ‘make-to-order’ environment, MA Company should purchase
more materials in advance.
With the majority of DC&R within 95-100% for its major customers (Datalogic, Scientific
Games), MA Company is rather successful in delivering their goods without delays or quantitative
and qualitative errors, therefore resulting in a higher customer satisfaction and retention rate.
As ATOS makes frequent last-minute customer orders, MA Company has insufficient time for
production, therefore delaying its delivery. If so, MA Company should suggest ATOS to submit its
orders beforehand, and take into consideration the time needed for MA Company to meet its
demand.
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ACCT 102 Managerial Accounting Professor Cheng Nam Sang
Academic Term (1/2009-10)
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ACCT 102 Managerial Accounting Professor Cheng Nam Sang
Academic Term (1/2009-10)
Currently, from the list of performance measures above, MA Company only uses ‘Number of
Customer Complaints’, ‘Wastage’ and ‘Material Downtime’ for their TPS Balanced Scorecard.
However, upon discussing with MA Company regarding these performance indicators we deem
useful, this suggested Balanced Scorecard has been accepted and reasonable targets have been set
as the company’s short-term goal for TPS. This Balanced Scorecard serves as a monitoring tool for
the areas that we have discussed in our report which are crucial to further improve on the TPS
Project.
5 Conclusion
MA Company International has been building up on its branding since its first start-up in Germany
to over 100 countries. Currently, MA Company possesses a strong and diversified network for
sourcing of clients as well as reliable and considerably cheap suppliers, therefore aiding them in
further expansion of the TPS market. It also acknowledges the importance of maintaining good
relations with current clients by providing quality products and services for a higher level of
customer satisfaction. Unless there are higher material costs incurred from last-minute orders, MA
Company has been keeping its costs incurred and absorbed by TPS production minimal, hence
generally achieving higher profit margins. Besides that, it monitors and reviews its business
process from time to time. Therefore, its efficiency rate over the 2 years of assessment has
increased. This TPS project can then be considered a successful initiative.
Moreover, it also has opportunities to expand its business further to meet the demand for Lottery
Machines for the upcoming Integrated Resort in Singapore. New retail outlets also require simple
products like barcode scanners and cash registers which are generally provided by MA Company.
Besides this, with its newly clinched deal for the SMRT gantries for the Circle Line in Singapore,
MA Company has strong potential to continue expanding its market share.
To remain competitive, instead of just slashing prices, MA Company must exercise product
differentiation by focusing on its quality and uniqueness of the interior and exterior designs of
products as well as its services and continue sourcing for cheaper suppliers and labor so as to
circumvent cost increases.
With its strong foothold in the electronics manufacturing industry, as long as the recommendations
suggested are practiced by MA Company and its business process is closely monitored, MA
Company will be able to stay at a competitive edge and remain successful in its TPS project.
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ACCT 102 Managerial Accounting Professor Cheng Nam Sang
Academic Term (1/2009-10)
6 Appendices
Expenses:
Staff Cost 3,901 9.80% 4,625 8.30%
Outward Freight 1,083 2.70% 198 0.40%
Admin Cost - 986 1.80%
Floor Area 437 1.10% 297 0.50%
Utilities 426 1.10% 273 0.50%
MIS (Management Information System) 411 1.00% 346 0.60%
Training, Medical, Subs (Other Personnel Cost) 221 0.60% 109 0.20%
Supplies 175 0.40% 261 0.50%
Interest on Inventory 166 0.40% 350 0.60%
Depreciation & Gain/Loss on Disposal 156 0.40% 115 0.20%
Subcontract & Rework 77 0.20% 16 0.00%
Maintenance 71 0.20% 72 0.10%
Travel and ENT 43 0.10% 26 0.00%
Interest on FA 14 0.00% 7 0.00%
Packing - 0% 54 0.10%
Rest & Admin - 0% 28 0.10%
Exchange (Gain) / Loss - 159 0.30%
Total Expenses 7180 17.90% 7,882 14.20%
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ACCT 102 Managerial Accounting Professor Cheng Nam Sang
Academic Term (1/2009-10)
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