The current management of the company is not efficient and thus improvement is needed for the procedures in the main business areas in the organisation.
The company should use ABC system to assign the overheads and a cost-plus pricing to set prices. As the competition increasing, a medium-price policy approach is appropriate for pricing to maintain the company’s existing market share. The company could prepare cash budget to forecast the cash flow and ageing schedule of debtors to overview the outstanding debtors. The company should adopt personnel controls and behavioural controls mechanism for employee management. To improve the inventory policy, the company should adopt a JIT system to reduce cost of holding stocks and achieve a 100% on-time delivery.
1. Introduction
Trailer Consturct plc is a construction trailers business, it has grown and expanded of the last five years but it was still operating on small scale. This report is assessing the management of the company. The current problems faced by the company will be pointed out and provide with some suggestions for improvement as well as the difficulties attached along to those suggestions.
2. Main body
2.1 The administration department
2.1.1 Cost tracing, Cost allocation
Since the company construct trailers according to customer’s specified order, the company should adopt the job costing approach. Job costing is an order-specific approach to use when each job is unique to perform the customer’s specifications (Vergauwe,S. and Wallace,P., 2013).
For job costing, direct costs can be specifically identified with particular cost objects by using cost tracing and indirect costs can be assigned to cost objects by using cost allocations (Vergauwe,S. and Wallace,P., 2013). Drury,C. (2009) states that cost assignment involves the application of appropriate data processing procedures that identify and record those resources that used by cost objects.
Currently, the company is using a manual data processing system, which is time consuming. Since the company has grown up, there are more data need to be collected, so manual system is no longer suitable to be used. Hence, computer data processing system should be introduced into the company. For example, the company can use barcode scanning for the parts, which the workers have used and spreadsheets to perform those complicated accounting tasks. Computer system is much more efficient than the manual system. Besides costly, human error, such as prone to typing may also arise by using computer programs.
As stated by Drury,C. (2009) activity-based costing (ABC) system assigns indirect costs to each major activity and using different types of cost drivers, which included non-volume-based drivers. Using non-volume-based drivers to assign non-volume-related indirect cost can minimize the cost of errors. So, the company is recommended to use the ABC system to assign overheads to cost objects. However, ABC system is expensive to operate. Besides, ABC system does not give the right cost, because estimation is involved (Vergauwe,S. and Wallace,P., 2013).
2.1.2 Pricing
At present, the company is setting the selling price based on historical information, which is not really accurate because it does not really reflect the cost.
ABC system is useful for pricing, which gives more accurate picture of actual cost. The company should operate a cost-plus pricing. According to Drury,C. (2009), cost-plus pricing is an approach to determine the selling price by calculating the product costs and adding the desired profit margin in order to make a profit. Moreover, the increasing of steel prices and competition so raising prices seems difficult. Cost-plus pricing is able to help to predict the competitor’s price range by assuming that all firms in the same industry have similar cost structure (Drury,C., 2009). So the company will not over-price and loss its potential customers. However, cost plus pricing is not guarantee that total sales revenue will be more than total costs.
The company could adopt a medium-price policy approach for pricing. A medium price would ensure that the company’s existing market share for the product is maintained. A medium price may also be necessary as competitors come along with new strategies.
2.1.3 Cash flow management
Since the company experience cash shortage, it should prepare a cash budget. According to Drury,C. (2009), the objectives of preparing cash budget are to ensure that there is sufficient cash at all times to meet the operations level and to identify the cash shortage in advance, so that the company is able to take action to ensure the bank loans will be available. Since there is uncertainty and risk of cash flow, cash budget may cause distortion. Moreover, cash budget can be simply manipulated by the managers to show that they have good performance.
The main reason for the company facing cash shortage is the company does not have an overview of the outstanding debtors and take no action when the debtors do not pay on time. The company can prepare an ageing schedule of debtors to overview the outstanding debtors. For example, the employee can send a letter to the debtors to remind them to pay their debt. However, the schedule does not really reflect to the real life because not everybody is going to pay on time. The company can charge interest on late payment or offer discount for prompt payment to control the debtors levels.
2.2 Employee management
Since the company has difficulties attracting skilled and motivated staff, it can adopt personnel controls mechanism to cope with the problem. For example, the company can recruit a new batch of staff and sign employment contracts with them. Then, distribute them into different specified job areas and provide them with some specified training courses to ensure that they know how to perform their task and achieve company’s target. Since the new staffs are assumed with zero technical knowledge, the training courses may take time to complete. So the employee’s issue can’t be improved in the short term.
Furthermore, the company can use behavioural controls mechanism to stop the employees of having too much freedom in executing their job. The company can find right people among the current workers to replace the previous heads of department due to a high cost of replacing. By using this mechanism, the new heads of department watch the workers and ensure that the work done has achieved company’s target. By replacing the previous heads of department may demotivate the current workers and they may worry about getting fired and thus decline in morale.
Currently, the company is paying the employees based on monthly basis with a fixed salary. The company can consider giving the employees year-end bonus based on the company’s overall performance to motivate them. The year-end bonus may demotivate some of the employees who more care about the recognition from the senior management instead of only giving money as a prize.
2.3 The inventory policy
The current inventory policy is not efficient and thus increases the cost of the company. A just-in-time (JIT) system is a pull manufacturing system, which can achieve several goals, such as ‘eliminate waste’, ‘no queuing or storage times’, ‘zero production breakdowns’ and ‘100% on time delivery’ (Vergauwe,S. and Wallace,P., 2013). Implementing JIT will hold the minimum stock levels which may reduce the storage space and save the cost. Since a 100% on-time delivery can be achieved by JIT, so the company has improved for their delivery services which would able to let the company to be different from the competition. Hence, the company should adopt JIT system. Adoption of JIT is expensive and takes longer time, so the costs may not cut initially.
2.4 The other issues
2.4.1 The financial performance
By analysing the financial performance of the company, there are some problems can be identified. Firstly, there shows the profit margin ratios for construction decreased from 2006-2011. This indicates that the company has spent a large amount of money on COGS or overhead. The company can use the ABC system as suggested to reduce cost.
Furthermore, there also shows a decrease of repair’s total assets from 2007-2011. The repair department is relatively small compared with the construction section. To be different from competition, the company can expand the repair department by investing new fixed assets or introducing latest technologies in order to provide a better repair service and gain reputation.
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