MANAGERIAL ACCOUNTING

Managerial Accounting and Finance

Managerial Accounting and Finance

Introduction

This report presents my suggestions for improvement of costing and management for your company. The report traces and analyses the various financial and costing problems related to Jarmurph Ltd (JM). In line with the given management, costing and financial scenarios presented to me, I provide some valuable suggestions and advice to will help in managing the problems faced by the company. The focus of the suggestions will be on product pricing and production strategy and the potential for cost reductions. All the analysis, suggestions and advice are presented from point of view of an independent management consultant.

Problem Analysis and Solutions

The primary concern that needs to be analysed here is that relating to fixed and overhead costs. While the FOH allocation was £9 per labor hour in 1988, it is now £190 per labour hour. This increase is even more significant even after accounting for general rise in prices, or inflation. In the opinion of Oliver Billington, JM's chief accountant, most of the overheads cannot be controlled because they have the nature similar to that of fixed costs. In his opinion, new products like 'protective jackets' are not making the money they had wished for. This points us towards poorer sales of this product. If the company is not able to make a reasonable sale of this product, the fixed costs are likely to hit the profit in adverse manners (Hansen & Mowen 2003).

Logically, Billington is right in that he has identified the problem area other than one relating to management accounting. According to Billington, JM needs to cut the products unprofitable products and make room for products that are more profitable. For instance, the company can switch from making a batch of riding hats in the morning to motorcycle shoulder protectors in the afternoon using the same computer-controlled equipment. This will allow no cost increments (Hansen & Mowen 2003). At the same time, the company will be able to make greater revenues because motorcycle shoulder protectors sell for prices higher than that of riding hats.

However, this idea will need to be analysed in terms of costs and benefits associated with shifting to different product range. Moreover, the company needs to see whether there is some cost concern which would uplift profitability of the less profitable products. For instance, there might be costs which the company might control to a significant extent. Higher FOH costs could be replaced by cheaper labor, for example. Currently, the company only has 10% of costs in direct labor; the rest goes to materials, overheads, administrative and selling expense.

The high overheads cost concern put forward by Ellen Stockdale, the production director of Jarmurph Ltd, is also valid. The product 'EventAir' according to Stockdale, costs heavily in overheads given the requirement of many component inputs. The product has not been serving well the profitability or Return on Investment which the company might have estimated (Lucey 2002). May be managers before investing in particular portfolio overestimated the return ...