Three sisters, Kathy, Linda and Valerie Montgomery started out with what looks like a hobby, without knowing it would develop into a legitimate business of today. These three sisters had adopted an unconventional approach to the growth of their business start-up, by buying materials at a bargained price and producing them into shirts. This approach produced enough revenue growth (on a small scale) but depended largely on loans to finance their business; but with the increase in the firm’s employee and bad economy, they were faced with series of financial problems which resulted into changing their approach to business, by re-organizing the method being used to carry out the business. The company was divided into three functional areas of purchasing, productivity, and sales and administration. Additionally, they adopted budgeting systems and accounting records to monitor and control the business. Background
By the time Artisan shirt craft started selling their products, the combined decision on how they worded their shirts and the appealing quality of the product paved way for the sisters. Few years later, their product gained wide recognition. After five years, the company was organized into three distinct responsibility divisions based on the talents at which each sister had competitive advantage over one another. Kathy handled price determination, Linda oversaw the painting, while Valerie was in charge of the sales and administrative aspect of the business. Record and Control.
At the earlier stage of the business, there was no unit to handle the financial part of the business. The accounting system is crucial to the success of a company, it includes budget, data on the cost of each product, current inventory, and periodic financial report. These components of the accounting record are used for decision making and control. Shirtcraft was virtually devoid of financial control. Growth and Economy
Demand for shirtcraft continued to grow, by the end of 2009, the firm had over 75 employees. However the firm kept no accounting records, no budget for productions, and used the bargaining method of purchasing. As a result of this the firm found it difficult to obtain loans from banks to finance their business. The increase in employee will bring about principal agency cost problems. This tenets of economics is that individual set in their self-interest to maximize their utility, to the detriment of the principal interest. Some of these agency problems are free rider, horizon problems, employee theft, and empire building. All these problems will lead to reduction of firm value, caused when agents pursue their own interests to the detriment of the principal. The Way Forward.
Foe Shirtcraft to continue in business, and not vacillate as a result of excessive inventory holding cost for over purchased materials and loss of sales due to under purchasing, the company needs to establish a good organizational structure control, which would make the company more stable and also gain back the confidence of their bankers.
Budgeted Annual and Monthly Financial Statement Cost for Purchasing Department.
| Sept.($)| Oct.($)| Nov.($)| Dec.($)| Jan.($)| Feb.($)| Mar.($)| Apr.$| May.($)| Jun.($)| Jul.($)| Aug.($)| Annual Total($)| Direct Material Cost. ($19200x7)| 134,400| 134,400| 134,400| 134,400| 100,800| 100,800| 100,800| 100,800| 100,800| 100,800| 100,800| 100,800| 1,344,000| Salaries and Overhead| 15,000| 15,000| 15,000| 15,000| 11,250| 11,250| 11,250| 11,250| 11,250| 11,250| 11,250| 11,250| 150,000| Total| 149,400| 149,400| 149,400| 149,400| 112,050| 112,050| 112,050| 112,050| 112,050| 112,050| 112,050| 112,050| 1,494,000|
Budgeted Annual and Monthly Financial Statement Cost for Production Department
| Sep.($)| Oct.($)| Nov.($)| Dec.($)| Jan.($)| Feb.($)| Mar.($)| Apr.($)| May.($)| Jun.($)|...