BUSINESS REPORT ON ELECTRONIC CIRCUIT BOARD PLC Introduction Electronic Board Plc is an organization established by an electrical engineer, John Watsons in the early 1970s as a sole proprietorship venture. The main business of the company is the production of electronic circuit boards. The company later on through dint of hard-work, developed into a public limited liability company. It maintained remarkable business success which climaxed in 1990, when it recorded an appreciable sales margin of ? 26 million and a profit after tax of ? 1. m, using staff strength of 200 employees. The good business records of this company truncated in 1992, when it started experiencing heavy dwindling fortunes by recording abysmal drop in total sales turnover of ? 21. 5m and a colossal total loss of ? 1. 7m. This report assesses the internal and external causative agents of the decline in the success of the electronic board plc, using the SWOT analysis method and critically evaluates the ways through which management accounting and control can contribute to the successful management of the company.
INTERNAL ENVIRONMENTAL FACTORS The organizational structure of the company is heavily lopsided around Directors who have no management accounting regard and skill required to achieve the profit maximization objectives of the company. In the Board of Directors structure, no management accountant was appointed to advise the company on the cost implications of their expenditures. There was no budget guidelines to expenditures incurred. The up-coming financial advice proffered by the lone qualified accountant appointed only in 1990 was disregarded.
A case in point was the statement attributed to one Senior Manager, berating the accounting profession, saying that accountants were not professional electronic engineers: “they know nothing about the industry and the decisions we have to take”. They also have no idea of proper cost of production per unit. In addition to this is an internal bottle-neck, (a major hold-up in the production circle), which they suffered due to the multi-staged and highly automated nature of the process of producing the circuit boards. The company’s heavy inventory system ties down their operating cost.
One accounting personnel is grossly insufficient for a company that has 200 personnel and a sales turnover of ? 26m record. Lack of good budgeting approach to the business activities of the company is unprofessional as it gives room for unguided and unprofitable spending. Another weak operational circumstance of the electronic board plc is that scrap or damage rate of output goods is as high as 25% of production out-put. This represents 1:4 out of every finished good proving faulty. All that are highlighted above constitute the internal weaknesses of the company. It has managerial weakness which contributed heavily to its abysmal performance.
EXTERNAL THREATENING FACTORS Every business regardless of its internal control system make-up has inalienable relationship with people making up its external environment. An organization’s external environment includes customers, market environment, competitors and others. In the case of Electronic Board plc, her market environment is highly competitive as the customers had access to alternative goods. There were so many competitors spreading across UK and Far-East who produce and sell other alternative high quality goods which made the demand for the goods of Electronic Board Plc to be highly responsive to change in price.
The stiff competitive environment and the recessionary scenario the business was operating in, jointly accounted for the drastic downturn of sales figure of ? 21. 5m and a whooping loss of ? 1. 7m recorded in 1991. AREAS OF STRENGTH AND OPPORTUNITIES Notwithstanding the above stated pitfalls, the company’s obvious internal strengths include: (1)The company has a management team that is desirous of improving the fortunes of the company to a better level through embracing positive change. (2)The management has a corporate desire to remain at the forefront of production technology.
This is shown by the fact that their decisions support financing the procurement of modern technology that can improve the firm’s production quality. (3)The availability of a management accountant in their employ can be utilized as an opportunity to remedy losses due to misguided capital expenditures. (4)The company already has a name in the electronic board making industry. These four points of strengths and opportunities, if effectively guided by management accounting system, will improve the returns to capital invested. MANAGEMENT ACCOUNTING: A PANACEA FOR
THE RESCUE OF THE ELECTRONIC BOARD PLC According to Will S, Ray H, & Eric E. N. (2009), management accounting is a branch of accounting that is concerned with providing information to managers who direct and control the firm’s operations. Management directing function seeks to effectively use both the human and raw material wealth of a firm to achieve organizational set objectives on routine basis. Controlling function is the art of tele-guarding the activities of the organization to consistently fall in line with set objectives.
Management accounting achieves this function through effective budgeting. EFFECTIVE BUDGETING SYSTEM Budget is a comprehensive business plan for procuring and appropriating a firm’s financial resources over a specified time period. One of the identified problems of the Electronic Board Plc is that the line managers dismissed with a wave of hand, budget plans submitted to it by the Accountant. Instead of doing that, the Management should have optimized the benefits of the organization by using the budgetary system suggested by accountant to achieve the following: 1)define business goals and objectives as a benchmark for measuring effective performance; (2)means of providing prudent utilization of scarce economic wealth (finances) in procurement of technological equipment; (3)providing a road-map that pulls all the organizational personnel moving together towards the same goal of making maximum profit while spending less; and (4)overcome or meaningfully reduce the 65% bottleneck recorded in the entire cost structure owing to direct material. JUST IN TIME (JIT) INVENTORY SYSTEM AND THROUGHPUT ACCOUNTING (TA)
Since it is reported that the Electronic Board Plc’s operational circumstance is multi-staged and suffers bottleneck with respect to direct materials and has three well defined ordering methods, her problems can be solved through Just-In-Time inventory system and Throughput Accounting (TA) approach. Just-In-Time (JIT) inventory technique is a management accounting practice which seeks to reduce business operational cost caused by large inventory holding. It achieves this by ordering them directly from their suppliers when required, instead of having to hold too much stock, Frank, W and Alan, S (2008).
It is a “technique whereby the primary goal is to maximize throughput while simultaneously maintaining or decreasing inventory and operating costs” CIMA (2005). Throughput Accounting works in (JIT) business condition and is goal maximizing management accounting system that seeks to reduce bottlenecks or limiting factors without increasing cost. Since the cause of losses recorded by the Electronic Board Plc include holding too much stock and high level of scraps in finished goods, the application of JIT and TPA will help reduce cost and increase profit margin.
The Management Accountant can operationalbize this by matching production with demand quantity; and by reducing inventory level which ties down cash, through using the available reliable suppliers when occasion demands that. INVENTORY ANALYSIS Inventory analysis is used to calculate inventory holding as an average of cost of goods sold. Inventory holding period ratio according to Melville (2011:366) measures the average number of days which elapse between acquiring an item of inventory and then selling or using the inventory.
This is calculated in days as follows: Average inventory x 365 / Cost of Sales. “Efficient firms don’t tie up more capital than they need in raw materials and finished goods” Brealey, A, Myers S. C and Allen F (2011:741). Those firms stock only relatively little quantity of stock of finished goods and raw materials and turn them over quickly. Since it is established that the Electronic Board Plc maintains large inventory which ties down capital, the management accountants should apply inventory holding ratio analysis.
This will help analyze the appropriate number of days and quantity of stock to be held by the firm to meet up with customers demand without unnecessarily storing too much inventory which will tie down capital by occupying expensive warehouse and eventually damage due to long storage. APPOINTMENT OF A MANAGENT ACCOUNTANT AS MEMBER OF THE BOARD OF DIRECTOR The implementation of all the above stated management accounting strategies capable of salvaging the Electronic Board Plc cannot be possible, if a professional Management Accountant, who occupies the post of a Finance Director, is not appointed in the Board of Directors of the company.
His appointment will help sustain the views of the professional accountants of the firm during Board of Directors meetings where decisions concerning the business are taken. The Finance Director will also act as an effective communication link between the line management and the accountants of the firm especially when they need to obtain information from the top officers to plan their budgets. The presence of the Finance Director will assure the implementation of the contents of the budgets as a guiding corporate tool.
He will also make the management to see the need for employing more capable professional accountants who can undertake cost-volume-profit (CVP) analysis and advice management on the cost implications of taking unexpected overdrafts with high interest charges from the bank. This team of professional management accountants will from time to time up-date the books of account of the company. RECOMMENDATION Considering the dwindling business fortunes being experienced by the Electronic Board Plc. f late, vis-a-vis the identified solutions to the problems through management accounting application, the following steps are recommended: 1)There should be the appointment of a Finance Director who shall have a say and represent the management accounting interest in the Management Board. 2)More professional accountants should be employed to take up the challenging task of keeping up-to-date accounting records as well as preparing effective yearly budget and control instruments for the company. ) There should be regular inventory holding analysis to determine the appropriate level of inventory to hold at any point in time. This will help to avoid wastages due to long holding of stock which ties up the firm’s capital. 4)Just-In-Time (JIT) and throughput accounting approach should be put in place by the management accountant. REFERENCES Brealey, A, Myers S. C and Allen F (2011). Principles of Corporate Finance. McGraw-Hill, Irwin. CIMA (2005) Operating and Financial Annual Review demonstrates success. http://www. cimaglobal. com:80/annualreview2005retrieved October 23, 2011.
Frank, W and Alan, S (2008). Business Accounting 1. Prentice Hall, Pearson Education Limited, Edinburgh Gate, Harlow Essex CM20 2JE, England Hill, T. & R. Westbrook (1997). “SWOT Analysis: It’s Time for a Product Recall”. Long Range Planning 30 (1): 46–52. Melville, A. (2011). International Financial Reporting, A Practical Guide 3rd Edition. , Prentice Hall Pearson Education Limited, Edinburgh Gate, Harlow Essex CM20 2JE, England Will S, Ray H, & Eric E. N. (2009). Management Accounting 3rd edition. , McGraw-Hill, Higher Education, Bershire, SL6 2QL, England.