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Colin Drury, Management and Cost Accounting - Dumbellow Ltd
Dumbellow Ltd
Stan Brignall, Aston Business School
The Board of Dumbellow Ltd are meeting on the 23rd January to discuss the draft budget for 2000/1, some two months before the start of that year. The company produces three industrial valves which are incorporated into equipment used in the Oil and Gas industry. The draft income statement is as follows: Product X £k Sales 100k units at £15 80k units at £25 120k units at £10 Materials Labour Overheads Profit/(Loss) 300 700 225 1225 275 400 800 360 1560 440 1500 2000 1200 480 750 330 1560 (360) 4700 1180 2250 915 4345 355 Product Y £k Product Z £k Total £k
The Board are unhappy with this planned outcome in two respects: they had hoped for a total profit of at least £400k to meet their required 20% return on capital; and they are unhappy about the further deterioration of Product Z, their oldest product, which on current plans would move from being marginally unprofitable this year to highly unprofitable next. Responses to the situation varied. Paul Burns, the recently-appointed Financial Controller who compiled the budget, thought that the best response would be to stop making product Z. He argued, 'Knowing the unsatisfactory results this budget contains, I took the liberty of doing some rough calculations before coming to this meeting. If we drop Z we can eliminate the fixed labour costs associated with it of £90k and sell the machinery specifically associated with it which, being old, is now fully-written off but would probably fetch £5K. There will, however, be redundancy costs which I estimate at £50k.' Arthur Mitchell, the Production manager and oldest member of the management team, was outraged. He said, 'That's typical of you accountants. We've been making Z since the firm started twenty years ago and it still has steady sales. Also, some of the blokes making it have been with the company a long time. You knew what the situation looked like:
Dumbellow Ltd
Stan Brignall, Aston Business School
The Board of Dumbellow Ltd are meeting on the 23rd January to discuss the draft budget for 2000/1, some two months before the start of that year. The company produces three industrial valves which are incorporated into equipment used in the Oil and Gas industry. The draft income statement is as follows: Product X £k Sales 100k units at £15 80k units at £25 120k units at £10 Materials Labour Overheads Profit/(Loss) 300 700 225 1225 275 400 800 360 1560 440 1500 2000 1200 480 750 330 1560 (360) 4700 1180 2250 915 4345 355 Product Y £k Product Z £k Total £k
The Board are unhappy with this planned outcome in two respects: they had hoped for a total profit of at least £400k to meet their required 20% return on capital; and they are unhappy about the further deterioration of Product Z, their oldest product, which on current plans would move from being marginally unprofitable this year to highly unprofitable next. Responses to the situation varied. Paul Burns, the recently-appointed Financial Controller who compiled the budget, thought that the best response would be to stop making product Z. He argued, 'Knowing the unsatisfactory results this budget contains, I took the liberty of doing some rough calculations before coming to this meeting. If we drop Z we can eliminate the fixed labour costs associated with it of £90k and sell the machinery specifically associated with it which, being old, is now fully-written off but would probably fetch £5K. There will, however, be redundancy costs which I estimate at £50k.' Arthur Mitchell, the Production manager and oldest member of the management team, was outraged. He said, 'That's typical of you accountants. We've been making Z since the firm started twenty years ago and it still has steady sales. Also, some of the blokes making it have been with the company a long time. You knew what the situation looked like: