Question: You have recently been appointed to lead the management accounting department of W Ltd, which is a small engineering company engaged in the manufacture of precision parts. The market in which the company sells its products is small and W Ltd faces severe competition. Due to the production facilities available, the company is able to undertake only small-scale engineering work. Large-scale engineering jobs are turned away as the company does not possess the manufacturing facilities to undertake them. At best, it can act only as agent for another contractor to do the work. The board of W Ltd is aware that the volume of work which is being turned away is increasing. This is particularly frustrating as the company is unable to utilise its capacity to the fullest extent all the time. W Ltd has achieved a steady increase in profit over the last few years. Nevertheless, the board of the company believes that it could increase profitability still further by expanding and thus being able to carry out the larger scale work which is currently being turned away.
Budgetary control and standard costing information has, for many years, been provided as the sole output of the management accounting department. The previous management accountant prided himself on the punctuality and comprehensiveness of the reports produced. Each job is priced by adding a percentage to its total cost calculated in accordance with the company's standard costing procedures. The annual cost budget is split into monthly parts and flexed to take account of a particular period's actual production. Monthly cost variances, comprising those for direct materials, direct labour, variable and fixed production overheads, are produced and provided to the relevant manager. In addition, sales price and volume variances are produced by the management accounting department each period. The company does not have a marketing department, although new customers are obtained from advertising within professional engineering journals and by attendance at trade shows. At one such recent trade show, the managing director was introduced to the concept of benchmarking. He believes that there may be advantages in W Ltd undertaking benchmarking.