PLEASE help write an Accounting "Business Memo" based off this case study of Impcorp Foods I put down below. HERES THE QUESTIONS TO ANSWER FROM THE ARTICLE BELOW:

1) a summary, containing the firms corporate goal and strategy, key business issues from anaylsis, and recommendation

2) introduction, writing a brief description of the business context and overview of contents

3) Product cost anaylsis

4) Weakness of Existing Cost system

5) Conclusion and Recommendations

6) Appendix for any additional easy to follow calculations of best case and worst case scenarios and supporting tables

Impcorp Foods

Hoang Nguyen Aulcorp Food Marketers and Distributors Inc.

INTRODUCTION

You were recently hired as the finance manager of Impcorp. Your position was created because the management accounting work was overwhelming Sergio Villani, the chief executive officer (CEO), and the other staff members. Sergio needed someone other than himself to oversee that area. He further believed that improvements were needed in the management accounting and inventory areas, but he was unclear where to begin and what to do to prepare for the continuing growth of suppliers, products, and retailers. Specifically, as profitability of suppliers, products, and retailers are currently difficult if not impossible to calculate, he asked for your suggestions for pursuing profitable growth. He also said Impcorp might need to replace its accounting software system with one with more functionality. You are to identify changes needed in the management accounting area to improve the profitability of Impcorp.

BACKGROUND

Impcorp Foods was established in Canada as a private, family-owned firm seven years ago. At that time, Sergio leveraged his more than 20 years of progressive food sales experience with a leading retailer into his own business. Sergio, his wife Lise, and one other employee, Maria Randle, were the first three employees. He was responsible for sourcing products and generating sales while Maria and Lise

Gary Spraakman York University

handled office administration work, including accounting and logistics. Internal control and operating procedures were retained in the minds of these three employees, which was not uncommon with start-up firms.

The business started with importing Italian cakes, followed by expansion into sauces, rice products, and various other product categories. The demand to which Impcorp was responding came from customers of major North American retailers, who wanted authentic, premium quality Mediterranean food at reasonable prices. The suppliers came from various regions in Italy, many of whom manufactured products for the Italian market but had no presence in the North American market. Impcorp gave them access to the North American market through ordering products in large volumes in return for price discounts. In the first year, Impcorp had two major Canadian retail chains as customers and three products from suppliers, for total sales of $600,000. Now, after seven years, the sales have exceeded $10 million.

A crucial component of the business is the logistic linkage between suppliers in Italy and retail chains in North America. The products are shipped from Italy directly to North American retailers or, if shipments to the retailers need to wait, to public warehouses. Impcorp pays the suppliers and receives payment from the retailers. Presently, there are seven Italian suppliers and six major retail customers. The latter are evenly split between major Canadian and American retail chains.

ISSN 1940-204X

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Impcorps sales growth comes mainly from newly developed products through joint efforts with Italian suppliers for customers of retail chains in Canada and the United States. Prices are kept competitive by maintaining close supplier relationships and by volume sales to retail chains. Costs are further minimized with appropriate IT investments. As high product quality is demanded by the retail chains, Impcorp ensures meeting this criterion by working with only tier 1 suppliers.

DUTIES OF THE NEW FINANCE MANAGER

Your first task is to familiarize yourself with the companys organizational structure, accounting system, and logistics. In recent years, Impcorp added three Italian suppliers and two retailers. You have also noticed that Impcorp successfully developed many new products with Italian suppliers and will be adding another American retail chain next year. The number of products increased from 35 to 84 over the past two years. You quickly understand why staff had become overwhelmed. The organizational chart is shown below.

Sergio Villani

CEO

Operations

Product Development

Emily Chu

Finance Manager

Adriana Vitelli

Sr. Development Manager

Accounting

Supply Chain/ Logistics

Danielle Baxter

Project Account Manager

Tasha Killin

Operations/Logistics

Natalie Rogers

Locistics Coordinator

Lisa Villani

Product Developer

Annette DeMarco

Accounting Coordinator

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MANAGEMENT ACCOUNTING PRACTICES

Impcorp prospers by selling products to retail chains at prices that exceed the costs of supplier payments, retailer discounts and rebates, shipping and warehouse costs, and all associated staff and other costs. Profitability is calculated only in total, not separately by each supplier, product, or retailer. You learn more about the existing system. You start with the operating statement, which is in Table 1 below. This and all other financial statements are prepared in Canadian dollars at the firms office in Canada.

business documents such as sales orders and invoices can flow directly from a senders computer to a receivers computer without human intervention. Impcorp currently does not have EDI integrated into the accounting system; consequently, accounting staff must make entries with both the EDI software and the accounting software, thereby doubling their work and increasing the chance of errors. In addition, the existing system does not automatically record foreign exchange gains or losses. Of the foreign exchange loss recorded in Exhibit 1, $42,424 is unrealized and the remaining $46,021 is for realized losses on accounts receivable, accounts payable, and bank accounts. Manual adjustments are needed for foreign currency accounts; these are time-consuming and error-prone.

The existing accounting system has limited storage capacity. For example, it does not maintain historical records of the selling prices and purchase costs for future reference. Off-line records are time-consuming and error-prone. At the same time the existing accounting system seems not to be used to its full potential. In addressing Sergios desire to know the profitability by suppliers, products, and retailers, you find that sales and cost of goods sold are coded or placed into a limited number of accounts. Although available, Impcorp is not currently using a sufficient number of accounts to enable profitability to be calculated by additional suppliers, products, and/or retailers. The problem is even more serious. The accounting system only generates the periodic corporate-level income statements and balance sheets. All other reports, such as cash flow projections, are manually generated if produced, and they often require days of administrative work to be produced.

In examining some of the recorded period expenses, you note that Impcorp offers its retailers rebates for certain products. For example, retailers may receive a 2% reduction in price for a particular sauce. This rebate is to fund the retailers advertising program and to increase sales volume. Also, in order to provide incentives for quick payments of accounts receivables, retailers are provided with cash discounts if they pay within a specified period.

To be compliant with food industry standards, Impcorps logistics systems must be able to trace lot numbers (which are unique numbers that manufacturers assign to their products) and identify product expiry dates. Although the existing accounting system can handle individual inventory items, it cannot handle lot numbers. The lot tracking system makes traceability easier when a recall or safety issue arises and the entire batch must be returned to the manufacturer. In addition, packing slips (documents which lists the items to be shipped and identifies the receiver) must be manually

Table 1 Operating Statement, Most Recent Year

Revenue Cost of goods sold (penalties from retailers $15,000) Gross margin

Expenses: Employee administrative salaries Employee benefits Information technology, computer repairs Telecommunications Unsaleable product, damaged, expired, shortage Facilities, rent, amortization Automobile including amortization Foreign exchange (gains) losses, realized and unrealized Customer discounts/rebates and commissions Transportation of inventory Insurance for inventory Storage costs for inventory Interest and bank charges Consulting fees Advertising, entertainment Total

Net income

$10,635,119 7,872,775 $ 2,762,344

$ 673,475 30,162 33,860 23,874 53,170 31,609 62,500 88,445 160,658 801,523 15,184 45,700 15,910 22,511 62,520 $ 2,121,101

$ 641,243

The operating statement suggests to you that cost of goods sold is likely understated, as only the purchase costs paid to the suppliers are captured. You discover that financial statement accuracy has been a source of irritation within the company. The existing accounting system software requires extensive time for many post-closing entries, as depreciation and intercompany transactions can only be done manually. This tends to increase errors. The retail chains require electronic data interchange (EDI) capability whereby

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created because of the systems shortcomings. Moreover, the warehouse management system automatically adjusts inventory for sales activities, but it is not possible to simultaneously record the receipt of inventory at multiple warehouse locations. As a result, accurate warehouse inventory records are not feasible despite the use of Excel to supplement the accounting system.

Retailers issue their purchase orders to Impcorp. These orders are recognized as sales by Impcorp, which then issues purchase orders to suppliers to acquire the products demanded by the retailers. These purchase orders cannot be linked with the retailers corresponding orders. Other than manually, it is difficult to determine whether retailers orders were filled and whether inventory replenishments were accomplished. Furthermore, there is limited reporting capacity to determine the total available inventory, products on order, products on hand, and as noted, products applied to sales orders.

A SOFTWARE OPPORTUNITY

Sergio has been considering replacing the existing accounting software with a well known alternative. He insisted on an objective assessment of the two systems, which he obtained in the following report from another, but independent, consultant. (Before finalizing her report, the independent consultant was briefed by you on specific shortcomings of the existing system.)

The report specified that the existing system has basic accounting functionalities for general ledger, receivables, payables, banking, and payroll, e.g.:

Real time transaction posting;

Built-in customized standard financial reports for certain

accounts, such as accounts receivable and accounts payable. Users can also modify reports in terms of their layouts and, to an extent, their contents;

Users can drill down on transactions for more detailed information;

Users can track cash receipts and disbursements for accounts receivable and accounts payable;

The system has the capability to create journal entries, reverse entries, and recurring entries;

Limited types of built-in financial reports for decision- making purposes; and

Simple and easy-to-use interface that requires only minimal training to understand module functionalities. The new software has the following additional functionalities:

Handles multicurrency operations and can automatically update currency exchange rates for foreign currency balances;

Handles both the original foreign currency amount and the translated local currency, with the exchange rate at the time of posting the transaction. When amounts are settled for transactions, such as the payment of an invoice, the local and foreign accounts are separately handled. The remaining local currency is booked as either foreign exchange loss or gain;

Takes into account multiple warehouses at the same time and tracks inventory individually or in combined lots;

Manages expiration dates according to customer requirements;

Tracks specific lots as to where those products are shipped or sold;

Purchases of the same item can be made from the same supplier at multiple prices;

Shipments from suppliers can be tracked to multiple warehouses and inventory on hand can be shown in total and by each warehouse;

Packing lists can be created automatically; Built-in EDI functionality automates purchase orders and

sales orders; Built-in financial reports can be extensively customized; Outstanding purchase orders can be matched against

their respective sales orders for more effective inventory

planning and control; and Budgets can be created and later compared to the

actual results.

FURTHER ASSESSMENT

Through further questioning of the two consultants, you realize that the existing system has a basic server, which implies that there is no backup. If the system crashes, all information would be lost and Impcorp would be in serious trouble. In contrast, the new system has a redundant server to reduce the risk of information loss and to speed up processing. The existing system slows tremendously when going from three to four users. This does not happen with the proposed new system because of its higher capacity server.

There are other advantages. The locking feature of the existing system is a disadvantage, as it requires that all users log off before any changes can be made. The proposed system does not have that shortcoming.

The existing system is out-of-the-box software without industry-specific features. In contrast, the proposed system is specifically tailored to the packaged food wholesale operations where Impcorp competes. The consultant or supplier for the

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proposed system deals only with companies in this part of the food industry. Therefore, the modules and upgraded features are highly functional for Impcorps business.

The proposed new system has fewer restrictions on reports, and there are more reports than there are with the existing systeme.g., reports on suppliers, products, and retailers, and cash flow statements. Furthermore, financial data can be viewed and analyzed on a real-time basis. The existing system does not have this feature; users cannot change records in real time.

The strengths of the proposed software for the food industry are: lot tracking, multiple warehouses functionality, and tracking of effective pricing dates. These are important because of customer concerns over food safety, utilization of more than one warehouse to store goods, and constant price changes due to dynamic market conditions.

The functionality of the new system appears impressive. Nevertheless, its profitable deployment must be ensured. As all staff will be affected if the new system is adopted, you decide to speak to all of them in order to gather their thoughts and reactions on replacing the existing system. After talking with them, you sense positive reactions from some employees but reluctance from others. With those insights you reach the conclusion that most employees are not confident that they have the knowledge and skills necessary for the proposed system, which is actually an enterprise resource planning (ERP) system implementation, and that they will need intense training if the implementation is to be successful. Otherwise, the implementation of a new ERP system on top of the regular workload will be unbearable for the staff.

COSTS AND BENEFITS

The consultant has quoted the cost of the new software at $100,000. There would also be a hardware upgrade required for $12,000, an annual licensing/operating cost of $13,000, which is $11,000 more than the existing system. You estimate that training in terms of outside help, replacement staff, and staff time to cost $17,000 of which $10,000 is for initial training and $7,000 for additional post-implementation training.

It is estimated that a one-year time frame is required for staff to become sufficiently familiar with the system to do their jobs. Training is to start one month after the software set-up and continue for two months after implementation. There are 100 hours allocated for training over the first year. In conjunction with the independent consultant, Sergio estimates that inventory which is at a steady level during the year will be reduced by 10% due to the better information. (Impcorp has an inventory turn of 20 times.) With the improved

information, reduction in penalties from retailers due to late shipments and cost of expired items are estimated to represent an annual saving of 10%. There is also an estimated 10% saving in employee administration salaries from a reduction in manual entries, duplication, and quicker transaction processing. Cash flow should also improve, particularly because of the reduction in inventory as noted, which would decrease the interest and bank charges cost by 15%.

REQUIRED:

You have completed the assessment of your responsibilities as the new finance manager at Impcorp. Report to Sergio on what Impcorp needs to do to improve its management accounting practices, and how to proceed with those improvements. Be sure to calculate the costs and benefits of your recommendations.

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