Guide to management accounting principles

 Guide to management accounting principles

Assignment Brief

Report content:

A 1000 word report excluding references/bibliography and appendices. You are required to include a word count

on your title page. A formal report structure is required with  appropriate headings and format suitable for presentation at board level. Diagrams used in task 1 and 2 above should be included in the appendices of the report and not included in the word count.

 

Background:

The CFO of P plc has recently been e-mailed a copy of the 2016 published standard PAS 1919 Guide to management accounting principles, the first ever international management accounting standard. In the light of this new standard and recent criticisms from the board that there is a lack of strategic management accounting information available in the organisation, the CFO has asked you to investigate the viability of using Strategy Maps and Balanced Scorecards within P plc.

Required:

Using the PAS 1919:2016 standard, case study notes and relevant management control systems theory, write a report to the group CFO of P plc incorporating;

Q1. A pilot Strategy Map and Balanced Scorecard for the group that would help senior executives achieve the stated group strategic objectives, corporate responsibility aims and strategic developments. (30% marks)

Q2. A pilot Strategy Map and Balanced Scorecard for one of the operating divisions (Plumbing & Heating or Building Materials) that would help all levels of employee achieve divisional objectives that support group strategy, whilst maintaining goal congruence with the executive board and the board of directors. (30% marks)

Q3. Based on the four overarching management accounting principles contained within PAS 1919, critically evaluate the role of Strategy Maps and Balanced Scorecards as effective management tools within the existing organisational structure of P plc. (30% marks)

Q4. Based on your findings in Q3, recommend if the group and each division should use Strategy Maps and/or Balanced Scorecards as part of future management control systems. (10% marks)

Introduction

P plc is based in the UK. It is one of the world’s leading distributors of plumbing, heating and building materials employing over 35,000 people. It operates its own retail outlets, some of which share a common trading name and are organised as separate business units. P plc also sells directly to building and plumbing contractors and merchants through its external direct sales units.

 

P plc was founded in the early 20th Century as a plumbing and buildings materials manufacturing business and enjoyed very rapid growth in the 1970’s and 1980’s. In 1985, P was listed on the UK stock exchange and at this time first ventured into the USA by acquiring a building materials distribution company based in New Jersey. In 1990, P plc acquired a building supplies business in the UK and, later in that decade, made acquisitions of other European based plumbing and heating and building materials distribution companies. In the early years of the 21st Century, P plc sold off all its manufacturing business units and concentrated solely on being a distributor and retailer of plumbing, heating and building materials.

 

Corporate values

P plc is proud of its history and traditions of distributing and retailing good quality products in locations which are convenient to its customers. It has developed a series of core values which are:

 

Trading fairly and honestly;

 

Being responsive to customer needs and market changes and not being satisfied with standing still, but seeking to continuously improve;

 

Employing committed people and providing training opportunities to develop their skills;

Having respect for cultural diversity across all the company’s stakeholders.

Business operations

P plc’s head office is in the UK which also contains its centralised treasury. It has two operating divisions which are:

 

Plumbing and heating Products:

Baths, showers, toilets, sinks, heating systems, general plumbing parts such as water taps, pipes and drainage systems.

Building materials Products:

Concrete building blocks, bricks, tiles, flooring products, roofing materials and wooden roof beams and other timber, as well as upvc products, such as doors and window frames.

 

Each division’s operating arrangements are similar. Each division has two distribution warehouses, one each in Europe and the USA. Each division uses these warehouses to fulfil sales orders placed by its external direct sales units and retail outlets.

 

The external direct sales units sell to building contractors, plumbing contractors and merchants who supply small building and plumbing companies with materials and parts.

 

P plc’s retail outlets sell directly to the public and to the building and plumbing trades. Some of these retail sales outlets were set up or acquired as chains of retail outlets each with a common trading name and these have been retained as separate business units. The retail outlets that have been acquired continue to operate under their own trading names so that P plc can retain the benefit of the goodwill the retail outlets developed. Each has a specific line of business, such as the sale of complete bathrooms and kitchens through chains of showrooms.

 

Business operations (continued)

The plumbing and heating division carries out its retail operations through established chains of showrooms. These showrooms sell products to local tradesmen and also directly to the public. The building materials division’s retail activities are carried out through small-scale retail outlets which are usually located on industrial estates and those that have been acquired retain their local building supply trading names.

Some of the retail outlets were established, or were acquired as chains of retail outlets, operating as business units with a common trading name. The remaining retails outlets are individual business units in their own right comprising a single outlet.

 

Overall, P plc has well over 90,000 suppliers and sells to over 1.2 million customers across the world. Each of the two divisions operates its own large logistics and distribution network. They operate their own fleet of road transport vehicles to distribute products in Europe and the USA and use rail, sea and air networks for distribution to their external direct sales units and retail outlets in other parts of the world.

 

Board of Directors and Executive Board composition

The Board of Directors comprises a Non-executive Chair, a Chief Executive, the five directors covering the functions of Finance, Logistics, Procurement, Marketing and Information Systems, the Managing Directors of the two divisions, the Company Secretary and six non-executive directors.

 

In addition, P plc has an Executive Board comprising the Chief Executive, the five functional executive directors, the Managing Directors of the two divisions and also the Chief Human Resources Officer, who is not a main board member. The Executive Board reports to the Board of Directors.

 

Divisional Management Structure

Each of the two divisions operates with a Divisional Executive Management Team (DEMT), based in the UK. These comprise chief divisional officers for the functions of finance, human resources, information systems, logistics, marketing and procurement. Each DEMT is led by the relevant Divisional Managing Director. In the USA, there is also a Senior Executive Team for each division which comprises chief officers covering the same functions as are represented on the DEMT and chaired by the company’s divisional Vice President (Plumbing and Heating or Building Materials as appropriate) for US sales. The senior executive teams in the USA report to their appropriate DEMT in the UK. An organisational structure chart is presented at Appendix1.

 

Financial structure

There are 500 million GBP 0.10 shares in issue. The ownership of the company is split in the following proportions:

 

Financial institutions: 90%
Individual investors: 9.5%
Board members and employees: 0.5%

 

The share price has ranged between GBP 9 and GBP 6 over the last year. The dividend in the last financial year was GBP 0.25 per share and represented an increase of 20% over the previous year. The Chairman commented on this improved dividend stating that the Board had strong confidence that the company would continue to grow.

 

Chairman’s statement on P plc’s strategic objectives

P plc’s Chairman has declared three strategic objectives for the company which all combine with the aim of improving shareholder value. These three strategic objectives of P plc are:

 

  1. To be the market leader in the regions of the world in which it operates;
  2. To deleverage the company by disposing of business units or individual retail outlets which do not contribute sufficiently to the aim of P plc becoming market leader or are failing to meet minimum performance targets;
  3. To continuously strive to improve its products and customer services.

 

The business acquisition strategy employed by P plc has led to high levels of goodwill. In some cases, newly acquired businesses have underperformed and not met profit expectations. Some impairment of goodwill has been necessary in respect of certain business units. Those which have seriously underperformed have been disposed of. The net value of goodwill, after impairment, is shown in the company’s statement of financial position in Appendix 2.

 

Comparative performance and assets employed by the divisions

The divisions measure performance at external direct sales unit and individual retail outlet level. Where retail outlets are organised into business units under a common trading name, then the performance of the retail units are consolidated enabling performance to be measured at the business unit level. The performance of the divisions for the financial year 2015 and the assets they employed as at 31 December 2015 are as follows:

 

Performance:                                                                 Plumbing and heating                    Building materials

GBP million                                         GBP million

Revenue                                                                           7,040                                                     6,837

Operating profit                                                               234                                                         213

 

Assets employed:                                                         Plumbing and heating                    Building materials

GBP million                                         GBP million

Non-current assets:

Intangible assets:                                                             781                                                        967

Property, plant and equipment                                 597                                                        729

Trade and other receivables                                        65                                                          70

Current assets:

Inventories                                                                         930                                                         854

Trade and other receivables                                  1,075                                                     1,052

Non-current assets employed by P plc at its head office were GBP 40 million at book value.

  

Source of products

P plc prides itself on operating an efficient supply chain and developing strong relationships with a wide range of suppliers across the world which offer quality products. It grants preferred supplier status to most of its suppliers and enters into long-term supply contracts. All P plc’s external direct sales units and retail outlets are supplied from its warehouses in Europe or the USA. This means that some of its products which are sourced from Asia and Africa are shipped to the company’s warehouses in Europe and the USA. External direct sales units and retail outlets in Asia and Africa then receive shipments from the company’s warehouses. This means that some products, which P plc sources from suppliers located in Asia and Africa, cross the world, are stored in warehouses and then cross the world again to be delivered to their destinations in Asia and Africa.

Corporate Responsibility Aims

P plc aims to provide excellent customer service across its two divisions. This excellence in customer service is underpinned by its:

 

  • provision of high levels of staff training and development, with strong concentration on safety management;
  • adherence to the highest ethical standards both internally and with respect to supplier relationships;
  • concern to cause the least environmental damage possible within its operations in terms of emissions, waste management and recycling activities by employing environmental performance management methods;
  • promotion of product integrity through selling only safe and reliable products which are of the required standard of quality and partnering with key suppliers.

 

 

Strategic developments

P plc aims to increase its market share by making repeat sales through its external direct sales units and retail outlets to existing customers and attracting new customers away from competitors. It places customer service as its key critical success factor. The Board is constantly seeking improvements in the company’s logistics particularly in sourcing products and their delivery to its external direct sales units and retail outlets wherever they are in the world. It is actively considering acquiring logistic resources in parts of the world where it does not own warehousing and distribution facilities at present and also pursuing the concept of virtual warehousing by which its external direct sales units and retail outlets will still place their orders with P plc but will obtain their supplies directly from the manufacturer. Other areas of strategic development concern reviewing the life expectancy of its products so as to give greater value for money to final customers and benchmarking its performance in different countries in order to improve operating efficiency.

 

 

 

Extracts from P plc’s statement of profit and loss and statement of financial position

 

Statement of profit or loss for the year ended 31 December 2015
GBP million
Revenue 13,877
Cost of sales 10,128
Gross profit   3,749
Operating costs   3,302
Operating profit      447
Net Finance costs        68
Profit before tax      379
Tax      116
PROFIT FOR THE YEAR      263
Statement of financial position as at 31 December 2015

 

GBP million
ASSETS
Non-current assets
Intangible assets: goodwill (net) 1,748
Property, plant and equipment 1,366
Trade and other receivables    135
Total non-current assets 3,249
Current assets
Inventories 1,784
Trade and other receivables 2,127
Cash and cash equivalents    418
Total current assets 4,329
Total assets 7,578
EQUITY AND LIABILITIES
Equity
Share capital (GBP 0.1 shares)      50
Share premium      25
Retained earnings 3,396
Total equity 3,471
Non-current liabilities
Bank loans 1,000
Current liabilities
Trade and other payables 2,905
Bank loans and overdrafts    202
Total current liabilities 3,107
Total liabilities 4,107
Total equity and liabilities 7,578

 

 

P plc ORGANISATION STRUCTURE

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