ABC is a manufacturer of almost hundred different automotive components that are sold in both large and small quantities on a just-in-time (JIT) basis to the major vehicle assemblers. Business is highly competitive and price sensitive. The company is listed on the stock exchange, but ABC’s share performance has not matched that of its main competitors.
ABC’s management accounting system uses a manufacturing resource planning (MRP II) system to control production scheduling, inventory movements and inventory control, and labour and machine utilisation. The accounting department carries out a detailed annual budgeting exercise, determines standard costs for labour and materials, and allocates production overhead on the basis of machine utilisation. Strict accounting controls over labour and material costs are managed by the detailed recording of operator and machine timesheets and raw material movements, and by calculating and investigating all significant variances.
While the information from the MRP II system is useful to management, there is an absence of integrated data about customer requirements and suppliers. Some information is contained within spreadsheets and databases held by the Sales and Purchasing departments respectively. One result of this lack of integration is that inventories are higher than they should be in a JIT environment.
The managers of ABC (representing functional areas of sales, production, purchasing, finance and administration) believe that, while costs are strictly controlled, the cost of the accounting department is excessive and significant savings need to be made, even at the expense of data accuracy. Managers believe that there may not be optimum use of the production capacity to generate profits and cash flow and improve shareholder value. ABC’s management wants to carry out sensitivity and other analyses of strategic alternatives, but this is difficult when the existing management accounting system is focused on control rather than on decision support.
i) Outline the different types of information system available to manufacturing firms like ABC.
ii) Recommend with reasons the information system that would be appropriate to ABC’s needs.
2. Given the business environment that ABC faces, and the desire of management to reduce the cost of accounting:
i) Discuss the relevance of the current management accounting system; and
ii) Recommend how the system should be improved.