EKF113: Case, part A

Title: Management Accounting Challenges in the Operations of Anjo Ltd: A Case Study

- Inspiration from "Anjo Ltd", written by Lin Fitzgerald (case supplied by Routledge) and with the
support of Chat GPI to write the case text.

Introduction

Anjo Ltd, a spin-off from the renowned furniture manufacturer and retailer Chair Ltd, has evolved into
a free-standing company, owned to 70% of Chair Ltd and 30% of different investors, with a distinctive
focus on producing vinyl record storage shelves. Anjo was established to capitalize on the burgeoning
market opportunity presented by high-end vinyl record player manufacturers. These manufacturers
integrated Anjo's products into their offerings, catering to a global customer base with exacting
standards for quality and design. This strategic shift led to Anjo's foray into the business-to-business
sales domain, necessitating a comprehensive re-evaluation of its management accounting practices.

Anjo works under the vision "Empowering Sound and Style: Enriching Lives Through Innovative Vinyl
Record Storage Solutions". The company aims to have market leadership, recognized for exceptional
quality, design, and customization. Operational excellence is key, with a continuous work to
streamline production, logistics, and supply chain operations to ensure efficient order fulfilment,
minimize lead times, and reduce wastage. To achieve market leadership in this high-end market,
quality is of the highest importance.

Market Dynamics and Logistics

Anjo Ltd's operations are divided into two primary market segments: the business-to-business (B2B)
engagement with high-end vinyl record player manufacturers and the traditional consumer-facing
market through Chair Ltd's stores. The Market & Logistics Department (M&LD) is tasked with
managing customer relationships, which vary significantly between the two segments. While Chair
Ltd handles direct consumer marketing, Anjo is responsible for supplying Chair's warehouses based
on orders, creating logistical challenges owing to short lead times and demand fluctuations. This
dynamic environment necessitates maintaining high inventory levels, impacting production and
logistics planning.

Diversified Product Line

Anjo produces two distinct types of vinyl record storage shelves - one crafted from mahogany and a
veneered version. These shelves are modular, allowing end-users to customize their storage solutions
by attaching multiple units together. This versatility aligns with Anjo's aim of delivering value to
customers by enabling them to construct personalized configurations while optimizing production
and inventory management.

High-End Producer Engagement

Anjo's strategic alignment with approximately ten high-end vinyl record player manufacturers
involves active collaboration between the M&LD and these producers. The M&LD's engagement
extends to participation in trade fairs, customer visits, and channelling marketing efforts through the
high-end producers' networks. Despite intense competition, Anjo's reputation in the market has
grown positively. The bespoke requirements of the high-end producers' clientele necessitate Anjo's
ability to accommodate unique dimensions, further highlighting the complexity of its production
process.

Production Department and Process

The production department at Anjo Ltd is a pivotal aspect of its operations. The production process
for the vinyl record storage shelves involves both the mahogany and veneered variants. It
encompasses various stages, from sourcing raw materials, crafting components, assembling the
shelves, and quality control checks. Anjo's ability to cater to unique dimensions for high-end
producers' orders adds a layer of complexity to its production process. No detailed information has
been traced on how large share of sales are customized products, but the production manager think
it is close to 30% of sales to high-end producers. He further thinks the customized products take a
little bit longer to produce, compared to standardized products. The main cost of the specialized
products is however related to production planning, driven by both the lack of opportunity to
produce in advance and the time it takes to enter unique dimensions into the production planning
system. The need for efficient resource allocation, minimizing waste, and maintaining consistent
quality underscores the significance of streamlined management accounting practices.

The structure of the shelfs are made of wooden board, which are assembled by glue in a high-
pressure machine. The shelfs are then “dressed” in either veneer or mahogany.

Conclusion

Anjo Ltd's transformation from a furniture manufacturer's spin-off to a subsidiary targeting the high-
end vinyl record storage market underscores the intricate challenges inherent in its operations. The
dual-market approach, modular product line, and collaboration with high-end producers necessitate
a nuanced approach to management accounting. Striking a balance between cost allocation,
inventory management, customization expenses, and performance measurement is vital for Anjo to
sustain its competitive edge and successfully navigate the evolving landscape of vinyl record storage
solutions.
Organizational Chart for Anjo Ltd

Chief Executive
Officer

Administrative
units

Sales &
Production
Logistics
Deparment
Deparment

Procurement Production Manufacturing

Quality Team
Team Planning Team Team

1. Chief Executive Officer (CEO): Responsible for overall strategic direction and decision-making for
Anjo Ltd.
2. Sales & Logistics Department (S&LD): Head of Sales & Logistics Department with staff oversees
customer relationships, marketing, and logistics. Also develops and improves product designs, features,
and customization options.

• Sales and Marketing Team: Coordinates marketing efforts, customer engagement, and
collaborations with high-end producers.
• Logistics Team: Manages supply chain, warehouse operations, and order fulfilment for Chair Ltd
and high-end producers.
3. Production Department: Head of Production Department: Manages the overall production process and
quality control.

• Procurement Team: Handles supplier relationships and procurement processes.

• Production Planning Team: Plans and schedules production based on demand from Chair Ltd
and high-end producers.
• Manufacturing Team: Executes the production process, including crafting, assembly, and quality
checks for mahogany and veneered shelves.
• Quality Team: Ensures products meet quality standards and customer expectations.
4. Administrative unit: Chief Financial Officer (CFO) is the administrative unit manager, with the
responsibility to oversee administrative routines.

• Accounting and Budgeting Team: Manages financial transactions, accounts payable/receivable,

and financial records. Also analyses costs, prepares budgets, and supports cost allocation
decisions.
• Human Resources (HR) Team: Handles recruitment, employee relations, training, and
organizational development.
• IT team: Manages IT infrastructure, software systems, and technological requirements.
Some “need-to-know” about the budget process
Some of the information below, you already find in the excel-sheet.

• The average time for customers to pay is expected to 30 days. (This means that the
balance sheet post of receivables will be = turnover/360 * 30).
• Accounts payable is on average 30 days.
• Sales & Logistics department aims at having three weeks of sales of ”Veneered” and one
week of ”Mahogny” in inventory. Sales is expected to occur during all 52 weeks per year.
(In reality, standardized products of both versions should have three weeks of products in
inventory, but the “Mahogny” version is to a large extent custom made and are delivered
as soon as they are ready, and thereby do not tie capital in inventory. Therefore, the target
for inventory of “Mahogny” is expected to on average be one week).
• Production management has decided to have two weeks of need in storage of all
materials. The factory is kept open 48 weeks per year.
• The administrative budget includes costs of top management, HR, law, accounting, IT
and other administrative functions. It also includes all cost for the office and factory
space that Anjo Ltd occupies.
• The tax rate is 19%.
• Cost of capital: Anjo rents all its buildings (offices and production facilities) from Chair.
As this makes Anjo having less capital tied than comparable companies, Chair demands a
fairly high return on employed capital. For year X, this is set to 20%. Production
department and M&L department budget their capital cost.

Cost allocations
• Procurement costs are allocated based on direct material cost for production
• Production planning team costs are allocated based on number of produced products
• Manufacturing team costs are allocated based on direct cost for labour
• Quality team costs are allocated based on number of produced products
• Joint production department costs are allocated based on product manufacturing costs

Connections between the different budgets

Manufacturing budget gets:

• Number of produced products from S&L
• Cost/unit from Standard Cost sheets

Standard Cost sheets get:

• Overhead rates from Manufacturing department budget

S&L Department Budget gets:

• Sold products from Sales budget
• Cost of product from Standard cost sheets
• Cost of capital (rate) from Manufacturing budget

The results, balance sheet and cash-flow budgets are then almost completely built by
summarizing numbers from the different department budgets and the sales budget.
Practicalities regarding the Excel-file
In the excel-file, the colour of numbers reflects different things:
• Black: Calculated numbers
• Red: Input numbers (that you can change, when doing simulations)
• Blue: Accounting numbers from last year.

Yellow cells, you are supposed to complete with links and mathematical expressions to get
the right numbers.

Each group will find their unique excel-file for Assignment A on their group page in Canvas.
This file can be copied as many times as you want, to test different solutions. However, it is
vital that you always departure from your file and hand in a version of this file, since this is
uniquely marked to prevent cooperation between groups in a way that is not allowed.

The Assignment
Assignment A (10p): Complete the budgeting model (the yellow cells in the excel-sheet)

Assignment B (10p): Use the budgeting model to simulate the different alternatives to handle
challenges Anjo might have. More specific information about what do to do will be
distributed when part A of the case is done.

Twenty minutes of feedback to each group will be offered on Assignment A, to ensure that
the model is correct before Assignment B is performed. A group specific schedule for the 31st
of October will be posted a couple of days in advance.
Suggested work-process

1. The S&L Department is responsible for inventory levels of the finished products.
Thereby, their budget decides on what needs to be produced. Start by deciding the
numbers of products to be produced on this department’s sheet by linking the sold
number of products (sales budget sheet) and calculate the number of products to be
produced.

2. Manufacturing department budget: Calculate the direct costs (cost per products can be
found on standard cost sheets). Be sure to use produced number of products.

3. Calculate the overhead rates. Regarding the “Joint Production department costs”;
either you wait with this until you have the “Product manufacturing cost” per product
on the sheets for the two products, or you collect these costs (in total) from the
manufacturing department sheet.

4. Link the allocation rates to the standard cost sheets for the two products.

5. Finish the S&L Department budget by valuing the production and inventory in money,
by using the standard costs of veneered and mahogny products.

6. Complete the results budget. Be sure to use the produced number of products for
product cost and then adjust for inventory change of finished products (as produced
number of products are used, inventory change of materials will not need to be
adjusted for). Do notice that this organisation has chosen to let cost of capital be
visible in the different teams’ cost. This will be corrected for now, to end up in a more
“normal” results budget, where the interest rate is visible further down and the profit
after financial items can be analysed regarding if the owners’ financial demands are
met or not.

7. Complete the balance sheet budget, but leave the Cash cell until you have done the
Bud. Cash flow sheet.

8. Complete the Bud. Cash flow sheet, and then go back to the balance sheet and link the
increase/decrease in cash.

9. All done!