MA Project Report_G7_Group 7

8/7/2019 MA Project Report_G7_Group 7

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ACCT 102: Managerial Accounting

Final Project Report

Prepared for : Professor Cheng Nam Sang

Session : G7 Tuesday 3.30pm-6.45pm

Done by : Lee Wan Yi

Nabyla Bte Abdul Rahman

Mohammad Nazri Bin Sazali

Siti Shahirah Binte Safian

Tan Sze Hao, Eugene


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ACCT 102 Managerial Accounting Professor Cheng Nam Sang

Academic Term (1/2009-10)

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CONTENTS

1. Background of Company and Project 31.1Introduction of Company1.2Third Party Sales (TPS)1.3Pre-Project Planning Phase1.4Background of Customers1.5Flow of Report

2. Cost Variance Analysis 52.1. Justification for Cost Variance Analysis2.2.Cost Variances2.3.Why Standard Costing?

3. Financial Analysis 73.1. Actual versus Budgeted Comparison for P&L Statement3.2.Profitability Ratios

4. Non-financial Key Performance Indicators (KPIs) 114.1.Non-Financial KPIs Used4.2.Downtime Percentage4.3.Delivery Capability and Reliability Percentage4.4.Quality Management Issues4.5.Customer Loyalty4.6.Staff Turnover Rate4.7.Balanced Scorecard

5. Conclusion 146. Appendices 156.1 Company Information (Confidential)

6.2 Tables and figures


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1 Background of Company and Project

1.1Introduction of Company

MA Company, one of the 41 subsidiaries of MA International, is a Global Distribution Centerlocated in Singapore. It is a leading provider of IT solutions and services worldwide, especially in

Retail and Banking industries. It caters to a clientele base of various industries, supplying products

such as ATMs, POS systems, cash registers and bar-code scanners. MA Company aims to reshape

processes, to perform efficiently and provide high quality solutions for its customers through the

use of information technology. For our project, we will be focusing only on MA Companys 3rd

Party Sales (TPS).

Figure 1: Hierarchy of MA Company

1.2 TPS

In 2003, MA Company expanded its business to another level- the TPS market. The TPS market

demands for similar products to its normal production lines, which include cash registers, bar-code

scanners and kiosks. The main difference is that the products for TPS do not include the MA label

at the end of the process.

Having implemented this TPS project for the 6 th year, sales revenue currently stands at 28.8% of

total factory revenue i.e. 55,463 million USD. Gross profit margin currently stands at about 16%,

accounted as of July 2009. To sustain profitability, development in the project is closely monitored

to ensure optimal customer satisfaction.

MACompany

International

MA

Company

Singapore

Other

40 Countries

Subsequent

Markets

3rd

Party

Sales (TPS)

Asia- Pacific

Market

European

Market

Other parts

of the world


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1.3 Pre-Project Planning Phase

Before investing in this project, the degree of material, labor and manufacturing overhead cost

which has to be absorbed by the company were of utmost interest to the company. As material

costs, new equipment (e.g. tooling costs for various product designs) and new machinery would befully absorbed by customers and MA Companys workers were already equipped with the

necessary skills to undertake the TPS project, these concerns were of little significance.

Also, production processes for TPS would follow existing processes with minimum variation in

the duration and details of processes. Downtime related to changing of line would also be minimal.

After some planning to obtain the relevant costs and limitations involved, MAs Management

deduced there were no major limiting factors for this project. The only issue, which was within

MA Companys control, was to set aside machinery and labor time for TPS. Therefore, MA

Company decided to proceed with the TPS project.

1.4 Background of Customers

MAs TPS project caters to clients mainly operating in the electronics and IT industry. Some

clients include Datalogic, Scientific Games (SG), ATOS, Verifone, Siemens, S.A Intellect and

Hypercom. We will be focusing on 3 main clients: ATOS, SG & Datalogic, which are the highest

and lowest runners out of the clients.

ATOS provides IT solutions to its clients from Retail to Infocomm industries, and its orders from

MA Company include cash registers and barcode scanners. Datalogic is a world leader in the

Automatic Data Capture market. Orders include barcode scanners and kiosk. SG is a global

marketing and technology leader in the lottery industry, and they purchase lottery machines. Their

sales stand at 14.8%, 38.2% and 26.8% of total TPS revenue FY08/09, respectively.

1.5 Flow of Report

To analyze the plans and costs of the project, the costing method used by MA Company and

variance analysis of the unit costs will be discussed and evaluated in greater detail.

An actual versus budgeted comparison of the P&L statement is also done to evaluate how well MA

Company has met its expectations. Profitability ratios and non-financial Key Performance

Indicators (KPIs) are used to analyze the success and potential of TPS project in the electronics

industry. Further recommendations are also made upon analyzing these factors.


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2 Cost Variance Analysis

2.1 Justification for Cost Variance AnalysisBy using variance analysis, we would be able to ascertain the accuracy of MA Companys

budgeted figures and identify areas of concern and suggest measures to improve on their

forecasted figures and the organizational health. Since MA Company has just obtained their FY

08/09 actual figures at the end of the financial year, they have yet prepared their variance analysis.

Therefore, we have decided to analyze the details regarding the cost variances and present the

figures to MA Company.

2.2Cost VariancesStandard Costing is used in MA Companys TPS. The costing method allows the company to

calculate the unit cost for a particular product and allows the attainment of timely and accurate

costs information, especially for material cost.

Analysis of the cost variances will be based on 3 customers; Datalogic, SG and ATOS. Generally,

it can be observed for all 3 clients that there is a mixture of favorable and unfavorable price

variances. MA Company has the capacity to handle the unfavorable price variances as most of

these costs are absorbed by its customers.

Client Material Price

Variances

Manufacturing

Price Variances

Labor Price

Variances

Datalogic

Product 1 $(102.81) $1.64 $ (17.54)

Product 2 $(17.74) $633.95 $ (1.99)

Favorable Unfavorable Favorable

Scientific

Games

Product 1 $(24.07) $ (19.35) $47.67

Product 2 $(58.15) $ (6.82) $75.45

Favorable Favorable Unfavorable

ATOSProduct 1 $22.37 $1.10 $ (6.58)Product 2 $23.08 $1.55 $ (4.13)

Unfavorable Unfavorable Favorable

Figure 2: Unit Price Variances for Customers

Datalogic

Looking closer at Datalogics figures, it can be observed that the material and labor price variances

are favorable. The significantly high favorable material price variance (MPV) at $102.81 for

Product 1 illustrates the contributive efforts on the part of the production manager in planning theproduction schedule wisely so as to avoid rush orders that would incur more costs. The favorable


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MPV could also be due to the purchasing managers effort at sourcing for materials at the lowest

costs possible. Datalogic also has a favorable labor rate variance (LRV) at $17.54 for Product 1,

probably due to well-trained employees who ensure that their work is completed promptly.

However, there is a high unfavorable manufacturing price variance at $633.95 for Product 2. Thisis rather difficult for the company to interpret as this could be due to the overhead rate likely to be

a combination of many different cost elements. MA Company needs to re-set its standard

manufacturing price.

SG

SG recorded a favorable MPV and manufacturing price variance. The favorable MPV of $24.07

and $58.15 suggests cost savings from bulk discounts or the availability of suppliers who are able

to supply materials at a lower rate.

However, it can be observed that there is unfavorable LRV. At $47.67 and $75.45, the huge

variances could be attributed to the sudden need for the labor to do overtime to ensure job

completion, this rooting from any possible rush orders, thus highlighting the production managers

failure to provide proper production schedules. Another reason could be due to underutilization of

its labor; MA Company could be employing skilled workers to do relatively simple tasks that do

not require those skilled workers.

ATOS

The variance analysis could provide an insight as to why ATOS is a low runner. ATOS recorded

unfavorable material and manufacturing price variances. ATOS could possibly be placing last-

minute orders with MA Company. With such a short notice and insufficient safety stock in the

inventory, MA Company would then have to lose out on bulk discounts while making material

orders to meet ATOS demand or even face the issue of lack of materials if the suppliers are

unable to supply the stock in time.

On the other hand, ATOS has a favorable LRV at $6.58 and $4.13, suggesting that the company is

enjoying cost savings from employing workers who are paid at a low rate; owing to the fact that

products demanded (e.g. cash registers) by ATOS have simple designs and processes and require

less skilled labor.

2.3 Why Standard Costing?

MA Company does not adopt the Activity Based Costing (ABC), Job Order or Process Costing as

these costing systems are tedious to implement. ABC system requires the company to determine a


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suitable cost driver. As MA Company has thousands of product lines and models, it will be highly

cumbersome for the company to use ABC since it may not be using the same cost driver for all

products. Standard Costing has been put in place for many years. Employees involved in this

costing process would be more fluent with the standard costing method and be more resistant tochanges. As such, standard costing should still be practised as the cost of changing it outweighs the

benefits significantly.

3 Financial Analysis

To successfully evaluate the projects success, we have conducted some financial analysis on the

Profit & Loss Statement as well as Balance Sheet. To understand how well MA Company has done

to meet its expectations for FY08/09, an Actual versus Budgeted variance comparison has also

been done. Some Profitability ratios are also being analyzed in order to make further conclusions

on how well MA Company is managing its expenses to ensure a healthy cash flow for the project

as well as to evaluate the financial success of the project.

3.1 Actual versus Budgeted Comparison for P&L Statement

3.1.1 Revenue Variances

P & L (FY08/09)

(values in thousands)

Budget

(USD)

% on Sales Actual

(USD)

% on

sales

Sales Revenue 40,003 55,463

Material cost 31,681 79.20% 46,220 83.30%

Inward Freight - 0.0% 40 0.10 %

Wastage 158 0.40% 216 0.40%

Material Incl Freight & Wastage 31,389 46,476

Material Content % (Material +

Freight + Wastage/ Sales Revenue)

79.60% 83.80%

Gross Profit Margin 8,163 20.40% 8,987 16.20%

Figure 3: Budget Variances

With reference to Figure 3, the actual sales revenue is 0.27% higher than expected revenue, which

is generally a good indication. However, it may be due to the actual production volume being

higher than the forecasted volume, therefore generating higher sales. Also, higher production

volume may have led to an unfavourable variance of 4.1% for material costs.

(The complete P&L Statement can be found in Appendix 6.2.1)


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As mentioned earlier under the standard costing variances, it is also possible that some customers

place an ad-hoc order at a later stage. Thus, MA Company may not have sufficient inventory on

hand, leading to higher material cost quotations.

We recommend that MA Company rectify this material issue by sourcing for local suppliers

instead of just having its overseas suppliers. Even with last-minute orders, local suppliers are still

more able to meet the demands at reasonable prices as compared to the overseas suppliers due to

the cumbersome shipping process. However, MA Company must take into consideration the

quality standards of the materials supplied by the new suppliers by implementing quality standards

in their agreements.

In FY08/09, MA Company incurred a 0.4% wastage cost, which is due to defects in partsproduced, hence causing material wastage. Therefore, MA Company should continue reviewing its

quality standards and improve on the quality of its processes.

3.1.2 Expense Variances

FY08/09 (values in thousands) Budget % on Sales Actual % on sales

Outward Freight 1,083 2.70% 198 0.40%

Figure 4: Outward Freight Variances

Figure 4 shows thata significant reduction in outward freight expenses, which is due to new

agreements made between the customers and MA Company to reduce freight costs incurred by

MA Company. MA Company should continue its initiative so as to entirely eliminate the outward

freight so as to increase its profit margins.

3.2 Profitability Analysis

3.2.1 Profitability Ratios

Figure 5: Profitability Ratio Variance

From our analysis of the TPS project, we have seen improvements in its overall profitability; Gross

Profit Margin has increased by 0.24%, Net Profit Margin by 0.43%, ROE by 0.86% and ROA by

Profitability Ratios FY08/09 FY07/08 Percentage Increase from

FY07/08 to FY08/09

Gross Profit Margin 16.20% 15.97% 0.24%

Net Profit Margin 1.63% 1.21% 0.43%

Return on Equity 2.75% 1.89% 0.86%

Return on Assets 0.74% 0.50% 0.24%


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0.24% from 2008 to 2009. The healthy growth of its profitability gives us an indication of MA

Companys stable financial status.

With an increase in gross profit margin for FY08/09, it shows that MA Company has more

liquidity, and thus more cash flow to spend on Research & Development expenses and investing.

Despite an increase in Net Profit Margin, the percentage is rather low, which suggests that its

marketing or administrative costs may substantially high. MA Company should then look into it

and try to cut unnecessary costs such as Wastage and Entertainment costs.

MA Company reinvests its earnings therefore ROE and ROA are relevant in our analysis.

Shareholders will be glad to know that the return of their investment has become progressively

greater in the past two years. ROA has increased to 0.74%, suggesting that the earnings generated

from invested assets are minimal. In an electronics manufacturing industry, net income is usually

low due to high fixed costs for assets incurred. Therefore, it may be quite acceptable for MA

Company to have a low ROA percentage. However, MA Company should continue to increase its

ROA steadily in the future years.

3.2.2 Gross Profit Margin by customer

(values in thousands) Datalogic Scientific Games ATOS

Gross Profit Margin 19.00% 14.61% 16.53%

EBITA (USD) 741,867 713,318 18,331

Figure 6: Analysis of Customer earnings

Datalogic has the highest gross profit margin at 19%, followed by ATOS at 16.53% and Scientific

Games at 14.61%. However, ATOS has the lowest EBITA. This suggests that although Scientific

Games incurred higher material cost which lowered its gross profit margin, it did not incur very

high Selling and Administrative (S&A) expenses unlike ATOS. ATOS has higher S&A expenses

possibly due to the requirement of intensive administrative costs to settle their business

transactions with MA Company. This reflects on MA Companys inability to keep its earnings

made through business dealings with ATOS at a healthy level. MA Company should look into

these high S&A costs incurred and minimize when possible.

Datalogic and Scientific Games are the two high runners and most profitable TPS customers in

terms of dollars. The nature of products ordered by Datalogic and Scientific Games probably

requires less labour and machine hours for production compared to those of ATOS.


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Besides that, the frequencies of orders made by Datalogic and Scientific Games per year are higher

too. This is probably due to the good services and quality of products provided by MA Company

for these customers, therefore building up on its customer loyalty. MA Company has notable

mutual understanding with Datalogic and Scientific Games in terms of what they require in theirproduct orders and process of transaction. These then result in MA Company incurring less S&A

costs to resolve products enquiry, quotations and specification requirement.

3.2.3 Comparative Common-Size Income Statement

Figure 7: Comparative Income Statement

The increased profitability of TPS has been further substantiated by our Comparative Common-

size Income Statement analysis of the project. Investors of MA Company would be pleased with

FY08/09s TPS financial performance with comparison to FY07/08. Total Net Income has

increased significantly by 0.42% from FY07/08 to FY08/09, showing a financial improvement in

the TPS project. Cost of Goods Sold and S&A Expenses consumed smaller percentages of total

sales in 2009. Overall, profits are rising for the TPS project.

Comparative Common-Size Income Statement

Years Ended Jul 31 , FY08/09 and FY07/08

FY08/09 FY07/08Net Sales 100.00% 100.00%

Expenses:

Cost of Goods Sold 83.80% 84.03%

Selling & Administrative Expenses 14.21% 14.49%

Total Expenses 98.01% 98.53%

Net Income before Taxes 1.99% 1.47%

Taxes 0.36% 0.27%

Net Income 1.63% 1.21%


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4 Non-Financial Key Performance Indicators (KPIs)

4.1 Non-Financial KPIs Used

Non-financial KPIs used to evaluate the success of the TPS project include Downtime Percentage,

Delivery Capability and Reliability (DC&R), Customer Complaints for Defects, Customer

Retention Rate, Quality Requirements and Staff Turnover rate. In order to monitor its progress,

MA Company has included monthly downtime, DC&R as well as quality reports reviewed by

management level to ensure the entire business process runs smoothly and any problems would be

identified and then rectified.

4.2 Downtime

Components of Downtime percentage include material shortage, rework/retest, changing of line

and part quality issue (part defect) figures. MA Company is able to obtain its monthly downtime

percentage based on its available hours, and sets an achievable downtime target to increase its

production efficiency annually. In comparison to FY07/08, Downtime percentage has generally

decreased from 16% to about 6% in FY08/09 (refer to Appendix 6.2.2), which is a significant

improvement in efficiency.

However, MA Company is facing issues with material shortage and increasing costs. As MA

imports its materials from overseas suppliers, there may be instances when the shipping process of

materials is delayed, causing a bottleneck of the companys production process, affecting its

productivity.

Downtime Target

FY 07/08

Average

FY07/08

Exceeded

Downtime

FY 07/08

Target

FY

08/09

Average

FY08/09

Exceeded

Downtime

FY08/09

Material

Shortage 1,100 2,584 1,484 1,000 1,192 192

Rework/Retest

1,100 478 (622) 1,000 265 (735)Changing of

line 620 212 (408) 500 196 (304)

Part Defects600 381 (219) 400 590 190

Downtime % 8.5% 7.3% - 7.0% 5.1% -

Figure 8: Analysis of Non-Financial KPI

MA Companys heavy reliance on its material suppliers causes it to be very susceptible to external

shocks in the supply market. If there were to be a diminished material supply, MA Company

would be unable to meet their customer demands on time.


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One way to minimize this problem is to utilize the spare factory capacity that can be used for

material storage. MA Company can then make more bulk purchases in advance which lower its

unit costs as well as the possibility of material shortage to meet the following months production

demand. In other words, instead of a make-to-order environment, MA Company should purchasemore materials in advance.

4.3 Delivery Capability and Reliability (DC&R)

Customer Delivery Capability and Reliability

S.A Intellect 100%

ATOS Worldline SA 86.5%

Datalogic Scanning 99.9%Verifone Singapore 100%

Scientific Games Racing, LLC 100%

Figure 9: DC&R for Customers

With the majority of DC&R within 95-100% for its major customers (Datalogic, Scientific

Games), MA Company is rather successful in delivering their goods without delays or quantitative

and qualitative errors, therefore resulting in a higher customer satisfaction and retention rate.

As ATOS makes frequent last-minute customer orders, MA Company has insufficient time for

production, therefore delaying its delivery. If so, MA Company should suggest ATOS to submit its

orders beforehand, and take into consideration the time needed for MA Company to meet its

demand.

4.4 Quality Management issues

MA relies on an active management system that complies with the requirements of ISO 9001.

Quality techniques such as QFD, FMEA, Six Sigma and PDCA are used to reduce defects and

ensure they meet the design and quality requirements of the customers. These methods will help to

reduce the wastage costs on defects. MA also has a target Defective Parts per Million (DPPM) of

4500 for customer complaints resulting from its 3rd party business, and its average actual DPPM

has improved from 4550 to 4230 in FY 08/09, suggesting higher customer satisfaction for its high-

quality products.


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4.5 Customer Loyalty

MA Company has a 100% customer retention rate and clinches 1 to 2 new deals yearly.

Currently, MA Company does not have a Business Development Team. It may be beneficial for

the company to have a small but strong team of employees trained in branding and marketing of itsproducts to potential clients. This investment may yield rewards to MA Company in time to come.

4.6 Staff Turnover rate

The staff turnover rate in MA Company has exceeded the targeted rate for FY07/08 and FY08/09.

MA Company should review the costs relating to such high turnover, which include recruitment

and training costs, and weigh the turnover costs and costs incurred to increase employee benefits

and welfare.

By organizing events, it may increase bonding amongst employees and the management and

hence, increase employee loyalty. Employee surveys should be conducted by the HR Department

annually so that in such a big company, issues regarding employees at the end of the hierarchy can

be escalated to management level and improvements can be made to retain its workers.

4.7 Balanced Scorecard

In view of our recommendations, we have designed a simple balanced scorecard for MA Company

so as to monitor the improvements in the companys performance in the areas as shown below.

Perspective Performance Measure Method of Measurement Target

(At 100%)

Customer

Number of CustomerComplaints

No. of complaintsreported by customer service

4200

Percentage of customersretained from previous year

Review Customer Database

100%

Number of new customers 2 to 4

Internal

Business

Process

Wastage Rejected or Failed units xmaterial per unit

0.10%

Material Downtime Production time delay due tomaterial shortage

2.00%

Units Produced perDirect Labour Hour (DLH)

Total units produced TotalDLH

-

Learning and

Growth

Employee turnover Provided by HR Department 4%

Suggestions per employee From Employee Surveyconducted by HR Department

-

Financial Gross Profit Margin - 17.50%

Figure 10: Balance Scorecard


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Currently, from the list of performance measures above, MA Company only uses Number of

Customer Complaints,Wastage and Material Downtime for their TPS Balanced Scorecard.

However, upon discussing with MA Company regarding these performance indicators we deemuseful, this suggested Balanced Scorecard has been accepted and reasonable targets have been set

as the companys short-term goal for TPS. This Balanced Scorecard serves as a monitoring tool for

the areas that we have discussed in our report which are crucial to further improve on the TPS

Project.

5 Conclusion

MA Company International has been building up on its branding since its first start-up in Germany

to over 100 countries. Currently, MA Company possesses a strong and diversified network for

sourcing of clients as well as reliable and considerably cheap suppliers, therefore aiding them in

further expansion of the TPS market. It also acknowledges the importance of maintaining good

relations with current clients by providing quality products and services for a higher level of

customer satisfaction. Unless there are higher material costs incurred from last-minute orders, MA

Company has been keeping its costs incurred and absorbed by TPS production minimal, hence

generally achieving higher profit margins. Besides that, it monitors and reviews its business

process from time to time. Therefore, its efficiency rate over the 2 years of assessment has

increased. This TPS project can then be considered a successful initiative.

Moreover, it also has opportunities to expand its business further to meet the demand for Lottery

Machines for the upcoming Integrated Resort in Singapore. New retail outlets also require simple

products like barcode scanners and cash registers which are generally provided by MA Company.

Besides this, with its newly clinched deal for the SMRT gantries for the Circle Line in Singapore,

MA Company has strong potential to continue expanding its market share.

To remain competitive, instead of just slashing prices, MA Company must exercise product

differentiation by focusing on its quality and uniqueness of the interior and exterior designs of

products as well as its services and continue sourcing for cheaper suppliers and labor so as to

circumvent cost increases.

With its strong foothold in the electronics manufacturing industry, as long as the recommendations

suggested are practiced by MA Company and its business process is closely monitored, MACompany will be able to stay at a competitive edge and remain successful in its TPS project.


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6 Appendices

6.1 Company Information (Confidential)

Company Name: Wincor Nixdorf Pte Ltd

6.2. Tables and Figures

6.2.1 P&L Statement

FY08/09 Budget % on Sales Actual % on sales

Sales Revenue 40,003 55,463

Material cost 31,681 79.20% 46,220 83.30%

Inward Freight - 0.0% 40 0.10 %

Wastage 158 0.40% 216 0.40%

Material Including Freight & Wastage 31,389 46,476

Material Content % (Material + Freight +Wastage/ sales @ invoice price)

79.60% 83.80%

Gross Profit/Sales Profit 8,163 20.40% 8,987 16.20%

Expenses:

Staff Cost 3,901 9.80% 4,625 8.30%

Outward Freight 1,083 2.70% 198 0.40%

Admin Cost - 986 1.80%

Floor Area 437 1.10% 297 0.50%Utilities 426 1.10% 273 0.50%

MIS (Management Information System) 411 1.00% 346 0.60%

Training, Medical, Subs (Other Personnel Cost) 221 0.60% 109 0.20%

Supplies 175 0.40% 261 0.50%

Interest on Inventory 166 0.40% 350 0.60%

Depreciation & Gain/Loss on Disposal 156 0.40% 115 0.20%

Subcontract & Rework 77 0.20% 16 0.00%

Maintenance 71 0.20% 72 0.10%

Travel and ENT 43 0.10% 26 0.00%

Interest on FA 14 0.00% 7 0.00%

Packing - 0% 54 0.10%

Rest & Admin - 0% 28 0.10%

Exchange (Gain) / Loss - 159 0.30%

Total Expenses 7180 17.90% 7,882 14.20%

Total EBITA (incl. of imputed Interest) 983 2.50% 1,105 2.00%

Less Imputed interest 180 0.40% 357 0.60%

Total EBITA (excluding imputed Interest) 1,163 2.90% 1,462 2.60%

Total EBITA (excl Imputed Interest) / Sales % 2.90% 2.60%


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6.2.2 Actual versus Target Downtime Percentage

MA Project Report_G7_Group 7

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