Management Accounting And Financial Performance Of Direct National Deliveries Limited

Recommendations in relation to SME and Ad hoc customers

Discuss About The Journal Higher Education Policy Management.

Management accounting is an important part of business management as financial management. Management accounting can be considered as analysis and distribution of important information in business that can helps in better and effective management of the organization as s single business unit. The importance of business management accounting increases in an organization that is large in size and has different business segments. In such organization the indirect costs can be very high it becomes very difficult to allocate common overheads to separate business departments (Hilton and Platt, 2013). This complexity of allocation of cost can increase and decrease prices and cost analysis of certain products and services offered by an organization. Here effective management accounting can be very beneficial as if conducting in an effective manner it can help in proper cost allocation which results in setting accurate selling prices for its services and products. In this report various aspects of management accounting are discussed with considering operation of Direct National Deliveries Limited. Direct National deliveries Limited are a Courier service providing company that gives its products and services in different parts of British Isles. In addition to local business, they also offer their services in international market with its global courier business. In last few financial years financial performance of the company has not been very sound irrespective of the fact that market share of the company in local market is very high (Weygandt, Kimmel, and Kieso, 2015). They have made huge investment in their transportation channel in lieu of large profits but that strategy of company is working properly. Hence we have been consulted to provide proper direction to the company that can help them to turn around their financial performances in past.

SME- total number of customers in relation to SME is 1900 and the total revenue generated by such customer to the company is 45% of total revenue generated in an accounting period. The bargaining power if these customers are limited as the high discount is only available to large SME’s and not all customers in this segment. It can be evidenced from the given profitability statement that only 5% discount is given on total sales generated by this segment which is lower than half of the discount that is provided to strategic customers. In addition to that services provided to these customers are standards services and there are no specific requirements from this customer for which alternations common services to be provided are to be made (Warren, Reeve, and Duchac, 2015).

Whale Curve for Strategic customers

Hence it can be said that it is a very essential source of income for the company and this segment cannot be ignored it would lose a lot of money for the company. There should not be any alteration in the manner in which management accounting and other activities are done for this segment.

Ad hoc- The number of customer is in this segment is 9000 customers that accounts for around 80% of total customers bur it only contributes 6% to the total revenue made by the company. In theory it can be said that this is not feasible to operate this segment and it should be discontinued. But if profitability of this segment is analysed it can be said that it is most profitable segment for the company. Gross profit margin on this segment is 81% and EBIT margin is 67.4% which is highest among all three segments. This customer also helps in acquiring target market and promotion of the company as more and more people are aware of company due to large number of customers (Maher, Stickney, and Weil, 2012). Hence Company should continue to operate this segment in the same manner as their current operations.   

The cumulative profitability graph represents the profits generated from the strategic customers. This graph shows that only 20% of these customers are profitable. This shows that rest of the customers are incurring losses for the company. The main reason for these losses is that their bargaining power is very high and they are taking huge discounts on their prices. There are various steps that can be taken by the company to manage next 20% of the strategic customer that are incurring losses for the company such as-  

1. Company can discontinue proving services to the top 10 strategic customers that are incurring highest losses. This will help company to get more net profit margin on its overall strategic customer segment (Wild and Shaw, 2012).
2. The company can also decrease the margin of discounts that are given to these customers. Even marginal discounts given to these customers can result in huge loss of money for the company. If these customers agree to the terms of new service then they should continue providing services to these customers otherwise they should discontinue business with them (Dopson and Hayes, 2016).
3. Additional services provided to the customers that are being given a large number of discounts can be discontinued to increase profits from such customers.             

Netta Carter, sales manager for the Strategic customer has proposed to take Parts-R-Us as a new strategic customer. Expected profitability from this customer would be as follows-

In my opinion it would not be profitable for the company to undertake Parts-R-Us as their strategic customer as suggested by Netta carter. The expected profitability statement prepared on the basis of assumptions given by Netta shows that overall profitability from this customer will be very low. Gross profit earned through this customer is positive but when indirect expenses are deducted that it can be seen that there is a loss of 7430 in first year of operation and a profit of 7820 in year two of providing services. On an aggregate basis, company is only earning a profit of 390 pounds which is not financially feasible for customer account of such as large size.                    

Estimated profitability from Parts-R-Us

It is very important to track and account website management and corporate sustainability cost separately to each segment of the three segments. The main reason for such division is that these costs are not incurred by these segments equally. For example the usage of website management services by Ad hoc segment is very negligible. Majority of the customers on Ad hoc segment takes services of courier from the company 2 to 3 times in a particular year. Hence it would not be fair on part of the company to charge these high cost of website management to this segment. On the other hand the website management services are used very frequently by other two segments as number of orders given by these segments is very high (DRURY, 2013). Charging lower website management cost to this segment would result in loss for the company.

It would not be financially and operationally feasible for management of the company to charge these costs separately from each of the customers in the strategic segment. There are around 100 customers in this segment and calculation of a number of visits by each of these customers will be very complex and time-consuming. This would also result in additional cost on part of management to conduct such a complex and time-consuming management accounting process (Eldenburg et.al, 2016).

1. Lack of expertise

The main problem that can be seen in the revised CSPA is that ABC costing is a very complex management accounting method and an expert should be consulted by an organization before its implementation. It can be seen that manager has made the profitability statement in no time. Due to which the accuracy of the data presented in the statement cannot be ensured (Dale and Plunkett, 2017).

Solution- Best solution for these problems would be to consult an expert before implementation of ABC costing. A meeting should be conducted first to decide pros and cons of this process on operations of the business.

1. Detailed examination of activities-

Before implementing ABC costing it is important that all the activities of an organization are properly identified and discussed with concerned departments. After such detailed discussion, each cost driver should be selected. For example for an organization of such as huge size, it would be more appropriate to select a single cost driver that is time.

Solution- it would be more appropriate to implement time-driven activity based costing instead of traditional costing method. Traditional costing method has been very effective in case of a small organization in which a number of activities are very low (Christopher, 2016). In a large organization, they have not been very effective as they become very time to consume and increased complexity in management accounting.   

Tracing website management and corporate sustaining costs

Customer accounting measures are the key performance indicators that can be used by an organization to determine the level of satisfaction that a customer is getting in respect to the goods and services provided by such company. There are various factors that can be used, some of which that can be helpful in case of DND are as follows-

Customer support- A separate department that is dedicated to solve the complaints and work on the feedback provided by the customers can be initiated by DND. This would help in giving special consideration to customer satisfaction which is considered as main focus of DND.

Number of new customers- This can also be a effective measure to determine the customer satisfaction as increasing number of customers indicates that company is providing better services as compared to other courier service providers in the market. This metric should be evaluated separately for each of the segment of customers.

Customer referrals- when a new customer is added in the organization then company should ask the manner in which they know about the services of DND. Through this company would be able to identify the number of customers that are referred by existing customers. This will help in evaluating that existing customer are happy with the services provided to them. 

1. Main problem with the quality of management accounting is that there is no specific method that is used by management to allocate their cost to each of their segments. Firstly they were using traditional method and then they used ABC costing method to evaluate extra cost and true profitability of strategic customer segment. They should decide on a particular costing method that would help them to follow a specific technique and comparability of profit will become easy (Goetsch and Davis¸2014). This increases the time spend by management of the company on this which could be used in more productive manner.
2. Company is also not been able to overview the time spend by the infield ground staff and there is a chance that they are committing time theft which could increase the overall cost of business.    
3. One of the biggest concerns regarding quality of services is the constant complaints that are received from customers in respect of delivery of courier. DND has outsourced the service of delivering courier to its customers to sub-contractors. In last few months there have been several complaints in respect of delivery made of these subcontractors (Mok, Sparks, and Kadampully, 2013). If training program is initiated for these subcontractors then it would increase the overall cost of management for the company.

Categorization of cost of quality can be done four major types that are-

1. Prevention costs- Costs that are incurred as a result of expenses done for preventing a failure in quality of product and services.
2. Appraisal costs- cost incurred to improve the quality of product and service.
3. Internal failure costs- Costs that are done on final products to check if the product or service is defective or not.
4. External failure costs- a cost that is incurred after the product and service are shipped to the customer (Lari and Asllani¸ 2013).

80% of the total quality cost incurred by the company is related to the internal and external failure. These both are the costs that incur after the product or service is ready to be delivered to be delivered to the customer (Sallis¸2014). That shows that there are not enough preventive measures to stop and limit the failures on par with the management of the company. These costs can be reduced by increasing the preventive measures and ultimately increasing the overall preventive and appraisal cost. In aggregate also these costs are very high and there is a requirement to put a limit on these costs to increase the profitability of the company (Yim, 2014). These costs put an extra burden on the financial performance of the company as these costs are not related to any type of income generated by the company.

Yes, the implementation of Total quality management would be very effective in the company. TQM is a continuous management technique that is used by management of an organization to decrease the errors and defects in business processes so that failure cost can be decreased. These are a requirement to implement TQM in the company as failure cost of the company is very high (Ross, 2017).     

Potential key weaknesses of revised CSPA

Shareholders of the company are using return on capital employed as their key performance indicator and they have set a standard ROCE that company should achieve 16% per annum. Following are some of the limitations of current performance measurement model is as follows-

1. Heavy investment- Company recently has done heavy investment in the company that has suddenly increased the capital employed by the company. The amount of profit cannot be increased with such swiftness, hence it is impossible to achieve ROCE set be shareholders with such short period of time (Dikolli, Hofmann and Pfeiffer¸2013).
2. Standalone KPI- Shareholders of the company are focused on a single KPI whereas it is advised to use more than one Key performance indicators to check financial viability of a business. Hence shareholders can use return on equity along with ROCE.
3. Impractical target- the target ROCE set by shareholders of the company is not achieved at the current point of time (Jayaraman et.al, 2017). CEO of DND is had clearly stated that currently the ROCE of 18% is a “Pipe Dream” and currently they are securing ROCE of 12%.

One of the most commonly used methods of performance measurement in the current business environment is Balanced Scorecard method. The balanced scorecard can be defined as a performance metric that is used by an organization to improve their business processes and ultimately improving the quality of financial products and services. This also acts as performance measurement tool that identifies mistakes in the business process and helps in giving feedback to departments.   

Four legs that are used in this performance measurement model are as follows-

1. Competitive advantage- Here management should check whether the company has some factors in their business that can give them a competitive advantage over other companies in the market.
2. Business process- Here management should check whether the business processes used by management of the company results in profits for the company or not (Kaplan, 2012).
3. Customer perspective- here customer feedbacks are collected by an organization to evaluate whether they are getting customer satisfaction or not.
4. Financial data- At last the financial performance of a company is evaluated with the help of financial data published in financial statements (Taylor and Baines, 2012).      

Therefore DND can use this method to evaluate their true financial and operational performance instead of using ROCE.

1. Cash flow Forecasting- It is important for an organization to assess that they have sufficient cash on a daily basis to manage its day to day expense.
2. Gross profit margin- Only increase in profit is not enough as management should evaluate the profit made from such revenue after deducing direct expenditures.
3. Funnel drop off rate- It is the rate at which the customer abandon the services of the company after using such services (Parmenter, 2015).
4. Revenue growth rate- The rate at which the revenue is increasing over a set period of time is also an important indicator to shows whether the sales are actually growing or not.
5. A number of customers- It would not be an ideal situation where the revenue of the company increases but there is a downfall in a number of customers. Hence a number of customers are an essential KPI.
6. A number of complaints- Number of complaints represent the level of customer satisfaction which is man objective of the company(Van Der Aalst, La Rosa and Santoro, 2016).
7. Inventory turnover- It shows a number of times the whole stock of the company is sold in the market which can indicate demand for product and services in the market.
8. Relative market share- This represents the proportion of total industry that is acquired by a particular company.

1. High discount rates-

One of the most important factors that are putting financial pressure on the company is high discounts provided to customers in strategic segmentation. There are 100 customers in this segments that contribute more than 50% revenue to the company. Even a small percentage of discount provided to these customers results in a huge loss of money for the company. The company has to find a method to restrict the percentage of discounts provided to this customer.  The amount of loss can be estimated by the fact that EBIT margin on these customers is only4% which is very low as compared to average margin earned by the company.

1. Quality of outsources services

Main business objective and the reason for the success of DND is the quality of services provided by them to its customers. DND has outsourced its delivery services to a sub-contractor and company is receiving many complaints in respect of delivery. DND should take strict action in this matter to improve the quality of services provided by the sub-contractor. There are two options available with the company i.e. providing training to this delivery person or giving the contract to ISO certified contractor. The second option will be more feasible from a financial perspective.

Conclusion 

It can be said that there are various deficiencies in management accounting of the company that has resulted in the poor financial performance of the company. First and foremost the company should implement Time driven activity based costing so that accurate costs can be assigned to its product and services. The focus should be given to Strategic customer segment and requisite changes should be done as net profit margin earned from these customers is very low and they are the main reason for the poor financial performance of the company.  

References 

Christopher, M., 2016. Logistics & supply chain management. Pearson UK.

Dale, B.G. and Plunkett, J.J., 2017. Quality costing. Routledge.

Dikolli, S.S., Hofmann, C. and Pfeiffer, T., 2013. Relative performance evaluation and peer-performance summarization errors. Review of Accounting Studies, 18(1), pp.34-65.

Dopson, L.R. and Hayes, D.K., 2016. Managerial accounting for the hospitality industry. Wiley Global Education.

DRURY, C.M., 2013. Management and cost accounting. Springer.

Eldenburg, L.G., Wolcott, S.K., Chen, L.H. and Cook, G., 2016. Cost management: Measuring, monitoring, and motivating performance. Wiley Global Education.

Goetsch, D.L. and Davis, S.B., 2014. Quality management for organizational excellence. Upper Saddle River, NJ: pearson.

Hilton, R.W. and Platt, D.E., 2013. Managerial accounting: creating value in a dynamic business environment. McGraw-Hill Education.

Jayaraman, S., Milbourn, T.T., Peters, F.S. and Seo, H., 2017. Product market peers and relative performance evaluation.

Kaplan, R.S., 2012. The balanced scorecard: comments on balanced scorecard commentaries. Journal of Accounting & Organizational Change, 8(4), pp.539-545.

Lari, A. and Asllani, A., 2013. Quality cost management support system: an effective tool for organisational performance improvement. Total Quality Management & Business Excellence, 24(3-4), pp.432-451.

Maher, M.W., Stickney, C.P. and Weil, R.L., 2012. Managerial accounting: An introduction to concepts, methods and uses. Cengage Learning.

Mok, C., Sparks, B. and Kadampully, J., 2013. Service quality management in hospitality, tourism, and leisure. Routledge.

Parmenter, D., 2015. Key performance indicators: developing, implementing, and using winning KPIs. John Wiley & Sons.

Ross, J.E., 2017. Total quality management: Text, cases, and readings. Routledge.

Sallis, E., 2014. Total quality management in education. Routledge.

Taylor, J. and Baines, C., 2012. Performance management in UK universities: implementing the Balanced Scorecard. Journal of Higher Education Policy and Management, 34(2), pp.111-124.

Van Der Aalst, W.M., La Rosa, M. and Santoro, F.M., 2016. Business process management.

Warren, C.S., Reeve, J.M. and Duchac, J., 2015. Managerial accounting. Nelson Education.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.

Wild, J.J. and Shaw, K.W., 2012. Managerial accounting. McGraw-Hill/Irwin.

Yim, A., 2014. Failure risk and quality cost management in single versus multiple sourcing decision. Decision Sciences, 45(2), pp.341-354.

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