Colin Drury, Management and Cost Accounting Endeavour Twoplise Ltd

Endeavour Twoplise Ltd.

Jayne Ducker, Antony Head, Brenda McDonnell (Sheffield Hallam University) and Susan Richardson (University of Bradford Management Centre)
This case study is taken from Ducker, J., Head, A., McDonnell, B., O'Brien, R. and Richardson, S. (1998), A Creative Approach to Management Accounting: Case Studies in Management Accounting and Control, Sheffield Hallam University Press, ISBN 086339 791 3. Endeavour Twoplise Limited is a manufacturing company that was established over 50 years ago by the Twoplise family. It has been owned and managed in recent years by Endeavour Twoplise Junior, the son of the founder. Endeavour has no family to inherit the business and so, due to ill health, he has decided to sell it to Brenda Forthright. Brenda has no experience of the company's manufacturing process, but she is a very astute businesswoman. As a prelude to investing in the business, she has carried out extensive research into the environment in which the company trades and into its commercial operations. Her investigations have given her some interesting information. The Product The company produces one product, a metal cog mechanism which is used in ready-mix concrete vehicles to maintain a 'turning' action of the tub whilst the concrete is in transit. This turning action during transit is vital in order to preserve the required consistency of the concrete for tipping directly into customer's prepared locations. The cog mechanism has to meet stringent quality and safety standards and needs regular replacement during the life of a ready-mix concrete vehicle. The tooling of the mechanism requires expensive specialised equipment. The Competitive Environment There are only three major manufacturers of the type of vehicle which uses the company's product, but these vehicles are purchased by a substantially larger number of ready-mix concrete suppliers. Endeavour Twoplise Limited is one of only a few manufacturers in the UK who manufacture the cog mechanism. Sales have been fairly constant over the last 4 years, following a downturn in the recessionary period of the late 1980s/early 1990s. Prior to period, this the product was in great demand during the building boom of the 1980s. The Company's Resources Endeavour Twoplise Limited owns a large plot of land, part of which has been developed to provide well-maintained factory premises and part of which remains undeveloped. The land was bought and developed in 1977 and no revaluation has taken place since that date. The factory is large and provides room for expansion of production within the existing building. Its location is ideal for distribution of products to consumers and for obtaining raw materials. Brenda feels that the site is likely to be worth considerably more that its balance sheet value. The company owns a lorry and a delivery van, both of which are in good condition. Unfortunately, the equipment used in the manufacture of the cog mechanism is old and in need of immediate replacement. Brenda has made extensive enquiries and has established that new equipment would cost 110,000. She would retain the old equipment as a back up, since it has no resale value and there is sufficient factory space to store it. Brenda has a number of business contacts and feels confident that she will have no difficulty in raising the additional funds needed to purchase the new equipment. The company employs four permanent operatives in the factory and hires temporary labour if required. Samuel is the factory supervisor and he also works on the machines. He has been with the company since he left school and is due to retire in two years' time. He tends to be set in his ways and dislikes change. This was shown when Toby, a young operative who joined the company two years ago, tried to initiate changes to the production process which he felt would improve efficiency. Sam was most indignant and threatened to leave if Endeavour made such changes. Since Sam and Endeavour are

Colin Drury, Management and Cost Accounting Endeavour Twoplise Ltd

long-standing friends, Endeavour backed Sam on that occasion and no changes were made. Toby is still working for the company, but this incident has made him rather frustrated. The only other full time employee is Andy Bucket, an accounts assistant, who was employed six months ago, because of Endeavour's deteriorating health, to take some of the workload from his shoulders. The company has an overdraft facility to support its cashflow requirements. Brenda has negotiated a 30,000 overdraft facility to be available to the company when she takes over as owner. The Company's Systems Andy is quite a bright young man and is keen to use his initiative. He has a friend who, until recently, was studying accounting on a day-release basis at the local college and this friend recommended to Andy that it would be helpful if the company set up a budgeting system. During the six months in which Andy has been with the company, he has managed to construct a budget for the period to 30th June, 2000, with advice from his friend and information from Endeavour and the company records. Unfortunately, shortly after the budget was completed, Andy's friend decided to change jobs. He moved out of the area and so Andy no longer has his advice to guide him. Consequently, although the budget has been constructed, nothing has been done with it. The budget identified the levels of production required each month to meet expected demand. The current state of affairs is that production tends to jog along at a steady rate regardless of demand and, in addition, purchases of raw materials tend to be on a 'hit and miss' basis. It is mainly by good luck rather than good management that sufficient raw materials are available. In Endeavour's opinion, if he can see the men working diligently in the factory, he is satisfied that the business is doing okay and so far he has managed to negotiate additional overdraft facilities whenever the company has been short of cash. However, the bank has said that any further borrowing by Endeavour would have to be supported by budgets and monitoring information. The Future Based on her analysis, Brenda is optimistic about the company's prospects. She feels that the long awaited upturn in the construction industry is imminent and that demand for the product will increase considerably in the medium to long term. She has thus agreed to buy the business and take over its management in June 2000. She has already looked carefully at the budget which Andy has produced and is fairly confident that the budgeted balance is a reasonable assessment of the company's assets and liabilities as at 30th June 2000 (see Appendix 1). Brenda has considerable experience of accounting, having worked for a number of years in this field, and has been able to build upon Andy's efforts. Together they have set about the task of gathering information which will be useful in the planning of the final four months' trading up to 31st October 2000. The results of their labours are as follows: Estimated Production Data Estimated selling price per cog mechanism Estimated materials usage per cog mechanism Estimated cost of materials per kilo Estimated production wages and variable overheads per cog mechanism Estimated fixed overheads per month 250 one kilogram 45 65 3000

July Estimated sales of cog mechanisms Estimated production of cog mechanisms 110 100

Aug 115 120

Sept 110 110

Oct 80 70

Colin Drury, Management and Cost Accounting Endeavour Twoplise Ltd

Estimated purchases of raw materials (kilos)

100

110

100

60

Purchase of New Equipment Brenda has decided that the new equipment will be delivered in July and paid for in August. She has made arrangements for the company to issue 10% debentures to the value of 130,000 to be repaid in the year 2007. Interest on the debentures will be paid by two six-monthly instalments, in arrears. 130,000 will be credited to the company's bank account on 1st August 2000. Depreciation July to October Buildings Machinery Vehicles 333 15,200 (includes depreciation on new equipment) 5,400

Credit terms All sales are on credit and two months' credit is allowed. All purchases of raw materials are on credit and are paid for one month following purchase. Wages, variable and fixed overheads are paid in the month in which they are incurred.

Proposed Dividend Since Brenda will make a considerable investment in purchasing the business, she intends to propose a dividend of 5% in October 2000.

APPENDIX 1
Budgeted Balance Sheet of Endeavour Twoplise Limited as at 30th June 2000 Cost Fixed Assets Land & buildings Machinery & equipment Motor vehicles 120,000 50,000 52,000 222,000 Current Assets Stock of raw materials (100 kilos) Stock of finished goods (110 cogs) Debtors (May: 5,900, June: 13,100) 4,500 12,100 19,000 35,600 Creditors (amounts due within one year) Trade creditors for raw materials Bank overdraft 3,900 17,250 20,000 44,000 16,000 80,000 100,000 6,000 36,000 142,000 Depreciation to date NBV

Colin Drury, Management and Cost Accounting Endeavour Twoplise Ltd

21,150 14,450 156,450 Capital and Reserves: Ordinary share capital (1 shares) Retained profits 100,000 56,450 156,450

Note: finished goods stocks are valued at marginal cost for budget purposes Question 1 a) From the information which Brenda and Andy have provided, calculate the closing stock of raw materials and finished goods and present the raw materials budget and the finished goods budget for each month from July 2000 to October 2000 inclusive. Your answers should be expressed in either kilograms or cogs, as appropriate. b) Calculate and present the sales revenue budget and production cost budget for each month from July 2000 to October 2000 inclusive, and identify the budgeted closing debtors, budgeted closing creditors and budgeted closing stock values at 30th June 2000. c) Prepare and present the cash budget for each month from July to October 2000 inclusive. Question 2 Brenda has decided that now the budget has been constructed, she can use it for monitoring and controlling purposes. However, she needs to explain to Andy how this can be done so that he can undertake the necessary tasks involved. Write a memo to Andy from Brenda which: a) explains how Brenda intends to use the budget to monitor and control the company's activities and identifies the tasks which Brenda might require Andy to undertake in implementing the process; b) explains how she might use a responsibility accounting approach and identifies some of the problems that she might encounter in doing so. Question 3 It is now October 2000 and Brenda, who has become more confident at planning ahead for the business, has produced a budget for the next twelve months' trading to October 2001. This highlights a period of 35 per cent spare capacity from November 2000 to January 2001 inclusive. She has established that for an extra investment of 35,000, she could buy equipment which is more flexible than the newly purchased plant, in that it can be used to produce cog mechanisms of a slightly different design, in addition to the current cog mechanism. These slightly different cog mechanisms are suitable for use in automated waste collection vehicles. Identify the types of information which Brenda would need to consider in making a decision to purchase the additional equipment, the likely sources of information and any other factors which you feel she should consider. Question 4 From the information provided by Brenda and Andy, prepare a budgeted trading and profit and loss account for the four months to 31st October 2000 and a budgeted balance sheet as at 31st October 2000. Ignore taxation.