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Discussion over divisional performance of Cakes Co (ROI and RI)

Discuss about the Fuzzy Analytic Network Process.

The report evaluates about a manufacturing company, Cakes Co. The Cost performance of the company has been evaluated on the basis of the internal changes and the operations of the company. This is a manufacturing company which manufactures the kitchen aid mixers. In the report, various internal issues of the business has been discussed and it has been evaluated that what changes must be done by the management of the company to improve the profitability level of the company.

In the case, overall performance of Cakes Co, divisional performance of cakes co, pricing methods of cakes co, cost price and market price evaluation, non financial information about the company etc. has been studied. It also concentrates on the various studied and articles about the scorecard and the other related factors. The evaluations on the all related factors of the company are done to measure the performance of the company. On the basis of the report, it has been measured that an organization should evaluate and measure all the internal evaluation, practical measurement and must know about the theory knowledge before reaching over a conclusion. On the basis of the study, it has been recommended to the CakesCo to use the balance scorecard for managing the performance of the company as well as market cost plus pricing should be adopted by the company.

The Cakes Co’s evaluation study has been conducted on the basis of the case statistics and current profitability level of the company. The evaluation study express that the total production units, cost of each product, fixed cost, variable cost etc of the company are the crucial part which plays the important role in measuring the overall performance of the company (Brealey, Myers and Marcus, 2007).

On the basis of the below table, it has been recognized that the total revenue of the company from production and sales are $ 301 and the maintenance department of the company generates $ 5 million. It leads that the total net profit of the company is $ 306 million which is quite better.

Production and sales

Maintenance

Total

$ million

$ million

$ million

Revenue

 $      880

 $        17

 $      897

Operating cost

 $      494

 $        11

 $      505

Operating profit

 $      386

 $          6

 $      392

Apportioned head office cost

 $        85

 $          1

 $        86

Profit before tax

 $      301

 $          5

 $      306


(Zimmerman and Yahya-Zadeh, 2011)

Further, the evaluation on the further maintaining process of the company also explains that the organization should consider on the machinery while manufacturing it so that no defects could risen in the machinery in next 3 years and after that the company could charge the money from the clients. Overall performance of the company is better and company is making good profits.

Evaluation on current transfer pricing methods

Further, the evaluation of the CakesCo has been done on the basis of the divisional performance. The overall performance of the company explains that the company is maintaining the operations at a better level. The overall profits of the company are quite higher. But on the other hand, the case explains that earlier company used to measure the performance on the ROI system. The ROI evaluation process of the company explains that the total profit of the company is $ 186.12 million. The profit from production and sales department of the company is $ 184.54 and the profit from maintenance department is $ 1.58 million.

Calculation of residual income

Production and sales

Maintenance

Total

$ million

$ million

$ million

Capital employed

 $ 1,294.00

 $    38.00

 $ 1,332.00

Multiply by: Cost of capital

9%

9%

9%

 $    116.46

 $      3.42

 $    119.88

Less: Profit before tax

 $    301.00

 $      5.00

 $    306.00

 $    184.54

 $      1.58

 $    186.12


(Horngren, 2009)

However, the management of Cakes Co has decided to change the relative measurement to identify the performance of the company. It explains that the total profit of the company is 23% of total invested capital (Drury, 2013). The profit from production and sales department of the company is 23.3% and the profit from maintenance department is 13.2% of overall investment of the company.

Calculation of return on investment

Production and sales

Maintenance

Total

$ million

$ million

$ million

Capital employed

 $ 1,294.00

 $    38.00

 $ 1,332.00

EBIT

 $    301.00

 $      5.00

 $    306.00

Return on investment

23.3%

13.2%

23.0%

 
On the basis of the study, it has been found that the both measurement are explaining about the better performance of the company. However, ROI is better measurement option as it explains about the profitability level on the basis of the total invested income of the company (Davies and Crawford, 2011).

The production and sales department of the company is offering the products to the maintenance department of the company on the basis of the cost only. No profits are added by the company on those products as well as the company is not offering on the market price. It is leading to the accounts and the production cost and overall cost of the company at misleading place (Horngren et al, 2010). An organization is always required to chose a transfer pricing policy in such a way that if ever the individual performance of a department is calculated than the actual position of the department could be calculated on the basis of the current pricing strategy, the products worth of $ 10 million (cost price) is provided by the production department to the maintained department and due to it, the profitability position of production department has been lower and maintenance department has been enhanced.

Production and sales

Maintenance

Total

$ million

$ million

$ million

Revenue from market sales

 $         870

 $         27

 $         897

Revenue from transferring

 $           10

 $       -10

Operating cost

 $         494

 $         11

 $         505

Operating profit

 $         386

 $           6

 $         392

Apportioned head office cost

 $           85

 $           1

 $           86

Profit before tax

 $         301

 $           5

 $         306


(Kinney, Raiborn and Poznanski, 2011)

The above evaluation on the transferring price evaluation explains that the current performance of the company is not at all good and it is required for the company to make little change into the performance to make it better. The transferring of the products of the company could be recorded by the company on the basis of the market price of the company. The case explains that if the company outsource the services into the market than the prices would be $ 200 per piece. Thus, it has been measured that the market price of the product is $ 200. On the basis of it, the total transferring price of the production and sales department should be $ 79,20,000.

Calculation on market cost

Total sales unit for repair

39600

Market cost

200

Total cost

7920000

Evaluation on proposed methods of market price


The market cost of the service products of the company is quite lower than the production cost and due to it, the overall profitability of both the company is also affected.

Calculation of profit on the basis of the marketing cost

Production and sales

Maintenance

Total

$ million

$ million

$ million

Revenue from market sales

 $      870

 $        27

 $      897

Revenue from transferring

 $          8

 $         -8

 $         -  

Operating cost

 $      494

 $        11

 $      505

Operating profit

 $      384

 $          8

 $      392

Apportioned head office cost

 $        85

 $          1

 $        86

Profit before tax

 $      299

 $          7

 $      306


(Deegan, 2013)

It explains that this transferring price must not be accepted by the company as no company would sell the products in loss.

The above evaluation on the market transferring price evaluation explains that the pricing strategy must not be accepted by the company as it would affect the production department profitability at negative level. The transferring of the products of the company could be recorded by the company on the basis of the cost plus pricing strategy of the company. The case explains that the profitability % of the company is around 34%. Thus, it has been measured that if the products would be sold on the cost plus strategy of the company than on the basis of it, the total transferring price of the production and sales department should be $ 1,30,00,000 (Bhimani and Horngren, 2008).

Calculation on cost plus

 (amt in $ million)

Total cost of transferring  product

10

Profitability %

30.4%

Total cost

13.4


The cost plus of the service products of the company is higher than the production cost and due to it, the overall profitability of both the company is also affected.

Calculation of profit on the basis of the cost plus cost

Production and sales

Maintenance

Total

$ million

$ million

$ million

Revenue from market sales

 $      870

 $        27

 $      897

Revenue from transferring

 $   13.40

 $   13.40

 $         -  

Operating cost

 $      494

 $        11

 $      505

Operating profit

 $      389

 $        29

 $      419

Apportioned head office cost

 $        85

 $          1

 $        86

Profit before tax

 $      304

 $        28

 $      333


It explains that this transferring price must be accepted by the company as it would improve the total profitability of production and sales department of the company.

The non financial information of an organization is as much important for the position and the performance of the company as much as the financial information of an organization is. The main non financial and external data of an organization could be the total life of the organization, market base of the company, quality of the products etc. (Epstein et al, 2011)All these factors are the main measurements to identify the overall position and performance of the company.

On the basis of the study, it has been found that the Cakes Co is operating its business in the market from last 10 years and in these years, the market base of the company has been improved as well as the sales and the position of the company has also been improved. Further, the case explains that in this time period, the company has succeeded to manage a good number of loyal customers.

The company always try to make some innovative products for the clients so that the cooking process could be easier for them along with it, company always offers a quality product to the clients. It could be evaluated on the basis of the total repairing items of the company. In a yea, only 9% of the customers of the company have demanded for some maintenance (Garrison et al, 2010).

The warranty strategy of the company is also impressive and it has aided into the overall performance of the company. On the basis of the non financial information evaluation of the study, it has been measured that the overall performance of the company is quite better and it would offer better results to the company.

Balance scorecard is a measurement of overall performance of an organization. It is a proper process of strategic planning and management evaluation which is used by the companies to identify the performance of the company, communicate the goals of the company, prioritize the services, products and the projects of the company etc. (Niven, 2011).  Chavan (2009) explains that the balanced scorecard connects the various dots in a huge picture of an organization among the mission, core values, vision, objectives, key performance indicators etc of the company to identify the overall performance of the company.

The main advantage of the balance scorecard is that it becomes easier for the management of the company to evaluate all the internal values, marketing perspective financial perspective, operational perspective etc of the company to measure the overall performance of the company (Kaplan, Norton and Rugelsjoen, 2010). However, it has been stated by Yüksel and Da?deviren, (2010) that balanced scorecard is an accounting tool which only measures the performance of the company. It does not suggest any changes to the company for the betterment.

The balanced scorecard only focuses on the main elements of the business. All other elements are ignored by the company to manage and evaluate the process of the company. The Kaplan (2009) further added into the study that the overall performance of balanced scorecard in an organization is quite beneficial for the company and the management of the company. As it becomes it easier for the management to make better decisions about the changes into the organization.

The evaluation on the balanced scorecard explains that unlike all the other tools, it also has some strength and weakness which should be focused by the companies while adopting the balanced scorecard technique in the business. The study explains that the balanced scorecard is a good choice for an organization to measure the financial and non financial activities of an organization and measure the overall performance of the company. However, the literature analysis study explains that this technique also has some cons which must be studied and focused by the managers of the company before adopting the process so that it becomes bit easier for them to manage the performance and measure the overall performance of the company.

If the balance scorecard process is evaluated on the Cakes Co than it could be easily evaluated that which process and the strategies of the company are quite better and which are required to be improve for the better position of the company. The overall study explains that this technique must be used by the companies to evaluate and manage the overall performance and position of the company so that the Cakes co’s position could b improved more and the company could achieve the goals and the objectives effectively and efficiently.

On the basis of the overall study on the performance, transferring prices, non financial information and the balanced scorecard of the company, it has been found that the overall performance of the company is quite good but few changes into the operations and the techniques of the company would make the performance better such as, the organization should adopt the RI approach too measure the overall performance. It would help the company to measure the total generated profit on the basis of the capital.

In addition, if the cost plus approach would be accepted by the company than the performance of the production and sales department of the company would be better and it would also helpful for the company to measure the individual performance of the department. In addition, the study on the non financial performance of the company explains about competitive strength of the company and lastly, it is recommended to the company to adopt the balanced scorecard approach to manage and evaluate the strategies of the company.

References:

Bhimani, A. and Horngren, C.T., 2008. Management and cost accounting (Vol. 1). Pearson Education.

Brealey, R., Myers, S.C. and Marcus, A.J., 2007. FundamentalsofCorporate Finance. Mc Graw Hill, New York.

Chavan, M., 2009. The balanced scorecard: a new challenge. Journal of management development, 28(5), pp.393-406.

Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.

Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.

DRURY, C.M., 2013. Management and cost accounting. Springer.

Epstein, P.R., Buonocore, J.J., Eckerle, K., Hendryx, M., Stout Iii, B.M., Heinberg, R., Clapp, R.W., May, B., Reinhart, N.L., Ahern, M.M. and Doshi, S.K., 2011. Full cost accounting for the life cycle of coal. Annals of the New York Academy of Sciences, 1219(1), pp.73-98.

Garrison, R.H., Noreen, E.W., Brewer, P.C. and McGowan, A., 2010. Managerial accounting. Issues in Accounting Education, 25(4), pp.792-793.

Horngren, C.T., 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education India.

Horngren, C.T., Foster, G., Datar, S.M., Rajan, M., Ittner, C. and Baldwin, A.A., 2010. Cost accounting: A managerial emphasis. Issues in Accounting Education, 25(4), pp.789-790.

Kaplan, R.S., 2009. Conceptual foundations of the balanced scorecard. Handbooks of management accounting research, 3, pp.1253-1269.

Kaplan, R.S., Norton, D.P. and Rugelsjoen, B., 2010. Managing alliances with the balanced scorecard. Harvard business review, 88(1), pp.114-120.

Kinney, M.R., Raiborn, C.A. and Poznanski, P.J., 2011. Cost accounting: Foundations and Niven, P.R., 2011. Balanced scorecard: Step-by-step for government and nonprofit agencies. John Wiley & Sons.. Issues in Accounting Education, 26(1), pp.257-258.

Niven, P.R., 2011. Balanced scorecard: Step-by-step for government and nonprofit agencies. John Wiley & Sons.

Yüksel, ?. and Da?deviren, M., 2010. Using the fuzzy analytic network process (ANP) for Balanced Scorecard (BSC): A case study for a manufacturing firm. Expert Systems with Applications, 37(2), pp.1270-1278.

Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and control. Issues in Accounting Education, 26(1), pp.258-259.

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