Monoclean Ltd Case 14.42 Langfield-Smith, Thorne, Smith and Hilton Review of Cha
ID: 365337 • Letter: M
Question
Monoclean Ltd
Case 14.42 Langfield-Smith, Thorne, Smith and Hilton
Review of Chapters 12, 13 and 14: responsibility accounting, transfer pricing: reward systems: manufacturer
Monoclean Ltd is a multinational company that manufactures and markets household cleaners in a batch process-manufacturing environment, and activity-based costing (ABC) is used to allocate overhead to production. Recently Monoclean has undergone a major structural reorganisation to assist it to complete more effectively in the Asia-Pacific region.
In the old structure, the Asia-Pacific region was divided into 12 business units, along geographical lines. Each business unit had a managing director (MD) who was responsible for manufacturing as well as marketing and selling operations of the business unit’s products. Each MD was evaluated and remunerated on the business unit profitability, which was as reported in a monthly business unit profit statement. Managers within each business unit were evaluated and renumerated according to their personal, department and business unit performance.
About a year ago, the number of manufacturing plants in the Asia-Pacific region were reduced from 12 to five. The 12 business units continued to exist, except that seven were now responsible only for the marketing and selling of products. Only five business units continued to include manufacturing plants, which were now responsible for supplying all of the business units in the Asia-Pacific region. Each business unit with a manufacturing plant has a manufacturing manager. While the MDs of those business units have ultimate responsibility for the marketing and sales operations and all other aspects of the business unit, in practice the MD does not interfere with the manufacturing manager, who is given full responsibility for manufacturing in the business unit. The MD is principally evaluated and remunerated on the profit generated from marketing and sales activities. Marketing profit reflects actual sales revenues less standard manufacturing costs and actual sales and marketing costs. The manufacturing manager is evaluated on the profit from manufacturing. Manufacturing profit consists of sales revenue less actual manufacturing costs. There is also a manufacturing director for the region who has ultimate responsibility for all the manufacturing managers.
With the new company structure, monthly profit statements are prepared for each business unit. In addition to these reports, a manufacturing profit statement is prepared for the region and a total-company profit statement is prepared. The transfer price for goods transferred between manufacturing and marketing areas within the same business is at standard manufacturing cost.
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The transfer price for goods transferred between manufacturing and marketing, not within the same business unit, is at standard costs plus 5 per cent.
Some business unit managers have raised concerns about some of the decisions that have been made since the restructure and wonder if the right incentives are in place. Some specific examples and issues follow:
Marketing and sales managers are in the best position to influence the level of slow moving and obsolete inventory, through choosing whether to sell off these products ore to allow them to be scrapped. In recent months there have been high levels of obsolete inventory. This affects the manufacturing profit statement. There is little incentive for marketing staff to sell off or manage slow or old inventory, as they simply purchase goods at standard cost from manufacturing as it is required.
Inventory shipping and transportation is managed by manufacturing staff and the cost of this is charged to the manufacturing profit. However, the cost of these activities is heavily influenced by the deals that the sales force makes with their customers. Sales staff can negotiate three shipping and transportation options: the purchaser can pick up the inventory from Monoclean’s warehouse, the inventory can be shipped by Monoclean to a central warehouse of the customer, or Monoclean can transport the inventory to the customers’ supermarkets. Each of these options attracts different costs, which are treated as a component of the manufacturing profit.
When there is a change in product or raw material sourcing, the business units that include manufacturing areas absorb the manufacturing variances from standard cost (favourable or unfavourable). This results in an adjustment to standard costs in subsequent periods and affects the profit of the marketing units. For example, if a favourable purchasing variance results from the activities of the manufacturing business unit, the transfer price will decrease.
Another issue of concern is the role of the business unit MD in the capital expenditure approval process. If the manufacturing director, not the MD of each business unit, who initiates all capital expenditure requests. Capital expenditure decisions affect business unit profits through the timing of cash flows, depreciation on assets, maintenance cost and so on.
Some business managers believe that there may be a problem in the alignment between business unit responsibility, transfer pricing policy, performance evaluation systems and management remuneration. The profits of some business units are below budget and, in current competitive environment, head office management is concerned.
Require
You as part of a management consulting team have been asked by the regional finance director of Monoclean Ltd to prepare a report outlining any issues that may be working against effective performance measurement and incentive systems in the business units. In your report, identify clearly any underlying problems and recommend a solution that considers appropriate responsibility centre type, transfer pricing policy, performance evaluation system and management remuneration package.
Explanation / Answer
In an organization, there are various rules and regulations which are followed to sustain the business for a longer period. But sometimes it is seen that the process or the path that is following by the company to undertake the business may not correct. If it is seen in Monoclean Ltd there are certain issues with the performance measurements and incentives scheme. The performance benefits for the employees are not good. The employee who works for this company may not be provided with proper performance appraisals. It is the responsibility of the organization to understand about their employees need. As the workforce of the company is depending on the employees so they need to provide with all sorts of need and requirements so that they can be motivated in work and they can also give a boost in their job to do best.
The company goal is depending on the employees who are required to be supported by the managers to do the best and make the creativity in the organizational works. To work efficiently they must be given incentives for their achievement in the company’s work. It is the most important aspects of the organization to deal with the employees. If the proper facilities are not provided to them then there must be a lag in the production of the company as the employees will not get the boost to work in the organization and the outcome will be comparatively lower than if it is available with all facilities to them.
Another important issue is the transfer pricing policy; it is the point where a company gets to know about the profit or loss. If the good and services are transferred to the parent company then the cost of the product manufacturing is comparatively lower and the company gets more opportunity to earn a profit. But in another way, if the product is transferred to any other company the transferring cost is more which an organization needs to focus on its strategies, as the tax rate of transferring the products is quite more in the case for others.