Each group is required to read the case and address the issues raised at the end of the case.
You are expected to conduct research relating to: customer profitability; competitive
advantage/competitive strategy and activity based costing and relate this back to the case
study requirements when preparing your assignment . The assignment should be in
REPORT format and NOT a collection of separate sections each written by individual
students. The report should include: cover page, executive summary, table of contents,
introduction, discussion (with appropriate sub -headings), conclusion, bibliography and
appendices. Please ensure you include summary calculations in the body of the report
and include detailed workings in appendices. Also, it is important that all articles, books
and weblinks used for the assignment are properly referenced throughout the assignment.
Hand written assignments are not acceptable.
Please remember to also include your assignment group number on the group assignment
cover sheet.
The assignment represents 20% of your overall grade for the subject.
DUE DATE: The assignment is due before 3 pm, T hursday 7
th
May, 2015.
Please also note details on submission in the unit outline. Please
submit a copy of the group assignment (WORD document in
either .doc or .doc x format) online through the Turnitin link
provided in the Assignment & Presentations tab in Moodle.
This tab also contains instructions for online submission for
Turnitin. In addition to this please also submit a hardcopy of the
group assignment in the appropriate assignment box for your
seminar time and day for ACF5955. The assignment boxes are
located opposite the reception area on Level 3, Building H.
SPECIFICATIONS: The suggested word limit for the assignment is 2,500 words
(excluding bibliography a nd appendices). Assignments must be
submitted typed (12p font in Times New Roman) and double -spaced, single -sided, on A4 paper. Where appropriate, the
assignment must be adequately referenced, and a bibliography
included. Students should keep a copy of their assignment.
LATE SUBMISSIONS: There is a maximum penalty for late submission of 10% of the
marks allocated to the written report per calendar day late.
Extensions will only be provided to students, who receive
approval from the Chief Examiner prio r to 7
th
May, 201 5.
EQUITY: In order to preserve equity among students, no teaching staff will
provide assistance with assignments. In the event of the need to
communicate additional information about the assignment, this
will be communicated to all students via Moodle.
Semester 1, 2015 1
ACF5955 Management Accounting Assignment
CASE DETAILS
Shorts Galore manufactures unisex sport shorts . The company has been operating
nationally for over fifteen years and every year has been returning a profit , al though
profits ha ve decreased over the previous three years. The company is not the only one
in the clothing industry facing problems. Due to high cost structures a number of other
clothing companies have been forced to cease operations as their cost structures have
made them uncompetitive . The companies that hav e survived have had to find ways of
gaining a competitive advantage. Some have achieved this by outsourcing clothing
production to cheaper overseas locations whilst others have switched to niche markets.
Sh orts Galore is a medium- large sized company with annual sales of just over $ 20.5 MIL
and net assets of approximately $3.75 MIL. For the current year the company generated
a loss of $4 28,750 . Figure 1 shows the summarised pr ofit and loss statement for 2015.
Total costs for sport shorts sold in 2015 in cluded basic manufacturing costs of
$3,705,650 and cu stomising costs of $4,134,500. The CEO Andrea Norton, has become
concerned about the company’s operations due to the company’s unfavourable
financial position. The company has a modern manufacturing facility and is currently
operating at 70 per cent capacity. There are 130 employees and most of these are
machinists who are paid on an hourly basis. Payroll is manually processed in- house, on
a weekly basis, and as such consumes a great deal of resources .
ACF5955 Management Accounting Assignment
Figure 1. Profit & Loss Summary for the Year Ended 2015
Sales $16,311,100
Less: Cost of Goods Sold $7,840,150
Gross Profit $8,470,950
Less: Selling, Distribution & Administration Expenses
Selling and Distribution Expenses $5,515,250
Administration Expenses $3,384,450 $8,899,700
Net Loss -$428,750
Shorts Galore manufactures plain white sport shorts with a design feature (or logo)
which are the basic product l ine for the company. These shorts are produced in small,
medium and large sizes. The normal production cycle for an order of white sport shorts
is five days . In addition to manufacturing the basic sport short s, the company also
manufactures customise d sport short s depending on its customers’ requirements .
There are three processes that can be undertaken to customise a pair of sport shorts
although, not all of these three processes are always needed to customise each pair of
sport shorts . In sequence, these three processes are: dyeing, printing and embroidery.
Approximately, sixty three per cent o f sport shorts manufactured are dyed in a number
of different colours and this increases the manufacturing cost and also increases the
production cycle of an order by approximately three days. As with the basic white sport
shorts, there is a logo, that is added to eac h pair of sport shorts . The logo can either be
embroidered (by machine) or printed on to the shorts . Eighty – five per cent of all the
sport short s manufactured by the company have the l ogo printed on by a special
printing machine. The remaining sport sho rt s that are manufactured have the logo
embroidered on to them . The company decided to trial the embroidered logo in
response to some customers complaining about the printed logo peeling off the sport
shorts.
Currently, the company has nine hundred and twenty customers who pay for the sport
shorts by credit card and they take on average about sixty days to pay their account.
The customers however differ in terms of the volume and the type of order placed with
Semester 1, 2015 3
ACF5955 Management Accounting Assignment
the company. On this basis these , customers have been categorised in one of three
groups: department stores, which stock the sport shorts in their sporting goods section;
sporting clubs, which order the sport short s for their members and associates and
individual sports shops. There are twenty customers in the department store category;
two hundred customers in the sporting club category and seven hundred individual
sporting shops. Table 1 provides product and customer details for the 2015 financial
year. A group of Sh orts Galore sales people sell s directly to buyers from the department
stores and sport shops whereas independent salespeople, paid on a commission only
basis, liaise with the licensing manager from the various sporting clubs. Advertisements
in catalogues target the sports s hops which place orders with Sh orts Galore either by
phone or by mailing the order form included in the catalogue. A major cost across all
customer groups is the co st of providing sample s of sport shorts to potential customers.
Table 1. Product & Customer Details for 2015
Sport Shorts Size
Depatment
Store
Sporting Club Sport Shops Total
Small 355,000 195,000 960,000 1,510,000
Medium 366,000 184,000 105,000 655,000
Large 274,750 169,250 100,000 544,000
Total sport shorts sold 995,750 548,250 1,165,000 2,709,000
Sales Revenue 6,241,613 $ 3,450,488 $ 6,619,000 $ 16,311,100 $
No.of orders received 4,734 11,854 55,101 71,689
No. of deliveries made 4,113 9,873 46,000 59,986
No. of sport shorts dyed 750,000 400,000 550,000 1,700,000
No.of sport shorts printed 697,125 475,125 1,136,750 2,309,000
No.of sport shorts embroided 298,625 73,125 28,250 400,000
Sport Shorts Sales by Customer Category
The manufacturing costs for basic white sport shorts production are accumulated
separately to the manufacturi ng costs for customised sport shorts production. The
white sport shorts production process accumulates costs as direct materials, direct
labour or manuf acturing overhead, on a per unit basis. In this process manufacturing
Semester 1, 2015 4
ACF5955 Management Accounting Assignment
overheads are absorbed on the basis of direct labour costs. The costs associated with
customising sport shorts are accumulated separately under the categories of direct costs
(for dyeing) and conversion costs (for printing or for embroidery). Table s 2 and 3
provide details of the company’s sport shorts unit costs and sales prices for 2015.
Table 2. Basic Sport Shorts – Cost and Revenue Data for 2015
Basic Sport
Shorts
Average
Selling Price
per unit
Direct
Material cost
per unit
Direct
Labour cost
per unit
Manufacturing
Overhead Cost
per unit
Small $5.45 $0.49 $0.45 $0.30
Medium $6.40 $0.65 $0.50 $0.32
Large $7.15 $0.70 $0.55 $0.35
Table 3. Customised per Unit Data for 2015
Customised
Sport Shorts
Direct Cost per
unit
Conversion Cost
per unit
Dyed $1.40 n/a
Printed n/a $0.50
Embroidered n/a $1.50
In the most recent e xecutive m anagement m eeting, Sh orts Galore ’s senior management
met to discuss strategic planning issues for the company. During the meeting these
managers agreed that the main strength of Sh orts Galore is the quality of the product
whilst the main weakness in recent years lies with customer service, especially in
meeting scheduled deliveries. It was also noted that this was in conflict with the
company ’s newly proposed mission statement which stated that the company’s mission
was “to provide a reasonable return to shareholders through the provision of good
quality products to customers with excellent customer service and on- time delivery at
the lowest cost” . This proposed mission statement has not as yet been ratified by Sh orts
Galore ’s Board of Directors and thus has not b een implemented. As a result, the
Semester 1, 2015 5
ACF5955 Management Accounting Assignment
company’s management accounting and information system has not been modified to
monitor progress towards these critical success factors.
Overall, the management team agreed that the company needed to become more
customer focused and this would help in improving company profit. In bid to ensure the
company returns a profit in the next twelve month period, Sh orts Galore ’s management
team decided that the profitability of its customers in the three customer categories
need to be determined and analysed, as at present this is not possible. Some managers
believe that some of the customers generate high profits whilst other customers are
“loss” customers. These managers have agreed that using Activity Based Costing (ABC)
in formation would facilitate this analysis. As a starting point for ABC analysis they
recently obtained additional data on selling and distribution, and administration
expenses along with cost pools and cost drivers for various customer related activities
f or 201 5 . These are detailed in Tables 4 and 5.
Table 4. The Assignment of Selling, Distribution & Administration Costs
to Customer Related Activities
Customer Related Activities
Selling & Distribution
Administration
Accounts Maintenance 0% 70%
Marketing & Advertising 10% 0%
Sales Commission 5% 0%
Sales Visits 15% 0%
Delivery Activities 50% 10%
Tracking Misplaced or Lost Items 20% 20%
Percentage Distribution
Table 5. Customer Related Activities & Assumed Activity Cost Drivers
Customer Related Activities Assumed Activity Cost Driver
Accounts Maintenance No. of orders received
Marketing & Advertising Management Estimate *
Sales Commission Direct allocation to Sporting Club customers only
Sales Visits
75% allocation to Department Store customers, 25% allocation to
Sport Shop customers
Delivery Activities No. of deliveries made
Tracking Misplaced or Lost Items No. of sport shorts sold
* Management decided this allocation is: 20% to Sporting Club customers & 80% to Sport Shop customers
During the executive management meeting the Marketing & Sales Manager, Stan White,
pointed out that Sh orts Galore can only reduce its prices if it can cut costs. He went on
to suggest that the company can reduce its quality inspection costs by reducing
inspections, which will improve on- time delivery rates. This issue was to be included in
the agenda for discussion at the next meeting .
REQUIREMENTS (9 0 marks)
The senior managers at S h orts Galore have approached your project team and have
asked for advice on the current situation and the future direction of the company. You
are expected conduct research and analysis to prepare a report for the next executive
management meeting which addresses the requirements below:
1. Your project team is required to present to S horts Galore senior management a
recommendation of the best strategy you believe that Sh orts Galore should adopt in
order to be competitive. In order to achieve this, your team should conduct
research into the fundamental ways in which companies can achieve a sustainable
competitive advantage. Specifically your team is required to:
(i) Discuss in detail at least three of these strategies, and for each one, identify and
discuss in detail at least two Australian or US , publicly listed companies that have
succeeded in using the particular strategy, the reason why the strategy was chosen
and implemented by the company, and how this has been effective for each
company.
(ii) Using your research from Requirement 1, present the senior management team
with a recommendation of the best strategy you believe Sh orts Galore could adopt
in order to be competitive and why this is the best one. Your discussio n should
include and justify what you believe to be the critical success factors in achieving this
strategy. Explain also why the other two strategies, as identified by your research
above , may not be as effective for Sh orts Galore as the one recommended.
2. S horts Galore’s management team have agreed that the company needs to
become more customer focused and have asked y our project team to research this
further with respect to customer profitability analysis. Discuss in detail how
customer profitability analysi s can be used by companies in increasing customer
focus. You should also identify and discuss in detail two Australian or US , publicly
listed companies which have implemented customer profitability analysis
highlighting how these companies have used this approach to become more
customer focused and discuss what the overall outcome has been for each company.
Semester 1, 2015 8
ACF5955 Management Accounting Assignment
3. (i) Design a customer profitability system based on Activity Based Costing (ABC) for
S h orts Galore . Include the activity cost driver rates; the customer related activity
costs and indicate the profitability of each of the three customer groups.
(ii) List and briefly justify four other potential cost pools and drivers from the case
those (i n addition to those listed in Table 5), that may be used f or selling,
distribution and administration costs.
4. Discuss in detail your customer profitability results for S horts Galore with an
emphasis on analysing the customer related activity costs.
5. Based on your project team’s research and also on your customer profitability
analysis for S h orts Galore, identify and discuss in detail five strategic issues that may
arise for the company.