This case focuses on the design of a management control system in a company where ‘control by observation’ is no longer deemed appropriate and where management by objectives is being implemented. It engages in a discussion of decentralization and responsibility accounting issues.

Company background

Cresta Plating Company Ltd was purchased in 1990 by a group of companies to carry out the plating works of its many subsidiary companies. Cresta is one company within a division of the main group, the division being concerned predominantly with metal finishing in the widest sense. The company is located in the London area and this was a significant factor in the decision to purchase, since the majority of the companies in the group were also situated in the south east of England.

Apart from plating work for companies within the division and within the group generally, the company carries out a substantial amount of plating for companies outside the group. The proportions of work for group companies and non-group companies have recently been equal.

The company had its origins in the early 1970s and from tin-shed beginnings it expanded by the time of the purchase in 1990 to a reasonable size and had gained a sound technical reputation. All the remnants of private family business management have now disappeared.

However, despite the efforts of the parent company and a number of recent executive appointments which have been group-inspired, the ‘group image’ is not well established.

Production and progress

The company is in the electro-plating jobbing industry and this presents problems not met in a plating shop in a factory handling work that is produced in that factory alone. This is an important factor, for it results in the company having limited knowledge of the orders that are coming into the factory premises. Production planning and control is extremely difficult, especially when linked to the quick delivery so vital to secure orders. The company aims at a 48-hour turnaround from the receipt of an order to its despatch.

Since 1990 the company has grown rapidly and now employs about 350 people at two factories in London, one in Newcastle and another in Sheffield, the last two factories being recent acquisitions of family businesses which, although technically sound, have not been satisfactory in the financial sense.

At Cresta, both barrel plating and vat plating are used. Most of the vats are hand-operated in order to achieve a flexibility necessary to cope with the different mixes of products. On the barrel-plating side, there are two large automatic plants to cope with the steady flow of work from group companies. There are also a few hand-operated barrels. The company handles a wide variety of work, ranging from small orders of a few kilograms weight, to huge orders where the total weight of the products involved could be as much as one tonne. A wide variety of finishes is catered for, such as zinc, cadmium, tin, chromium, nickel, copper, precious metals such as gold and silver and also plastics.

The company has been profitable for a number of years and the continuation of this trend can be seen in recent results. This success has been partly due to the fact that the company has an assured market within the group. Intra-group pricing is a touchy matter within the company and Cresta is under constant pressure to reduce transfer prices which, by the strength of its top management, it seems to withstand successfully.

Accounting methods

   The accounting department has a staff of 12 who cover the duties of financial accounting, cost accounting and wages for all the factories. There are, however, two clerical workers on routine accounting and wages matters, both at Newcastle and Sheffield. Until a few months ago, the only costing work being done was the recalculation of cost rates for the purpose of estimating for price fixing. This recalculation was undertaken annually and was on an absorption costing basis. Overhead costs are categorised as fixed or variable on a basis specified by head office and this analysis is a requirement of the trading statement prepared and submitted to head office.

The appointment was made in 2009 of a new man to the post of company secretary/chief accountant. He has proved to be quite an innovator and one of the first tasks he undertook was to review the financial and cost accounting procedures. At one of the early board meetings he attended it was stressed that better financial controls were needed. This attitude was supported by the argument that, as the company was continuing to expand, control by observation became increasingly difficult. The new man formed the impression that a certain amount of lip-service was being paid to the idea of management accounting and information services.

He found that monthly and quarterly interim trading statements were being prepared, but he was disappointed that these were only total trading statements for the company. He proceeded to give immediate thought to the departmentalisation of the figures. One of the factors which weighed heavily with him was the fact that during his four weeks ‘acclimatisation’ at head office, he had been introduced to a management by objectives programme which was in the process of being launched throughout the group. Two points that particularly impressed him about this programme were:

1. The overall financial objective, which was to be built into the programme, namely a return on capital employed of 20 per cent before tax.

2. The desire to set objectives and key tasks for individual managers and executives.

This second point matched comments which had been made at the Cresta board meeting that production managers needed measures which they did not have at the moment........

Question

Matters were brought to a head when the group management accountant called a meeting of executives at head office to consider a wide variety of matters, which included the profit center reporting at Cresta. The managing director and the accountant were invited to this meeting.

As the accountant, you have been asked to prepare a short review of the management accounting system in use at Cresta. This should review the main problems with the present system, as you see them, and any possibilities which you see for improvement.