Financial and non-financial consequences of closing down restaurant department
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Comparison between Traditions Ltd Marginal costing for all departments and without the restaurant department;
Without the restaurant, the store is profitable. The store is capable of making a profit of £9,000. This indicates that the restaurant department is making losses. Even without putting the fixed cost incurred by the business into consideration, the restaurant had made a contribution of £-30,500 in that particular period alone. This is a high level of loss to be incurred by only one department. Among the other three departments, furnishing is the least profitable. This is because; the amount of purchase for resale that ends up being sold is very low. This increases the stock in the store such that closing stock for the furnishing department is very high as compared to the other department. By the end of the period, closing stock is more than the opening stock. This indicates that there were fewer sales made in this department during that particular period.
Financial and non-financial consequences of closing down the restaurant department;
Following the financial position of traditions Ltd analyzed in the previous sector, the restaurant department was making losses. This has prompted the management of the store to consider closing down the restaurant department. Doing so, traditions restaurant is will be faced with various implications, both financial and non financial.
Closing down the restaurant department will lead to reduction in the overall profits realized. This is because; the contribution margin will increase leading to reduction in profits. This is because fixed cost will be shared among three departments. Since fixed costs per period of time do not vary by the amount of units produced, the other three departments will have to incur these costs. This will increase the overall costs leading to reduced profits. As indicated in the calculations of marginal costing statement, when the business is operating four departments, the total contribution margin was £390,500. On closing down the restaurant, the total contribution increased from £390,500 to £421,000. This means that a higher contribution margin is to be shared between remaining departments.
Another financial implication of closing down the restaurant is that the store will be required to retrench workers. The business will have to pay employees in the restaurant department such as Claude. This will have a negative financial effect on the business. Socially, when a business retrenches workers, customers do not like to be associated with it. In this context, Claude is a renowned chef especially after winning the potato-sculpting competition. This made him famous as he created customer loyalty. Many customers visit the store because of him. Closing down the restaurant will reduce customers who also shop in other departments. This will lead to a decline of sales in the other three departments. Reduction of sales will lead to reduction of overall profits in the business (Tennent, 2008).
Another financial effect of closing down the restaurant will lead to low selling of the restaurant assets. As indicated, the restaurant has been having challenges regarding its’ assets such as the dough mixer. Due to poor maintenance of these equipments, they may be valued very poorly. This will limit the store in recovering some of the costs.
Other than financial implications, the store will also face non-financial challenges as a result of closing down the restaurant department. One of the main challenges is bad image of the business which will be brought about by retrenchment of employees. Potential customers dislike businesses which often lay of their employees because terminating employee’s employment suggest that the business is no longer profitable. More so, society does not like business entities that lay off employee because unemployment is viewed as bad. These employees have families and other responsibilities to take care of, without their jobs, they cannot. As such, it is viewed as the fault of the store that these families will suffer. Potential customers will not like to be associated with such businesses (Drury, 2006).
As management accountant, Samantha will be required to prepare, come up and analyze financial information for the store. This will be very difficult since she does not have prior experience in management accounting. More so, the company does not keep well organized information data base. There is no previous history of management information in the company and as such, she has to first of all collect her own management information. This is rather a very tedious. In her role, she will have the responsibility to ensure that the management of the store has to make decisions which are well informed from now going forward so as to guarantee the store’s future profitability, stability as well as its growth.
Samantha will have to come up and maintain management information systems as well as financial policies by liaising with the management to provide a better support service on all aspects of finance. As indicated, Samantha and some of the management colleagues such as Albert often argue. More so, the top management colleagues are old and will not for sure understand fully these financial policies so as to make sound management decision regarding the company.
Her role also includes looking into the future. She is supposes to analyze the performance of the business in the past years and offer advice to the management on how to prevent challenges that the business encounters. Currently, the restaurant department is making losses and as such, it is her responsibility to advice the management whether to close down the restaurant or to put more capital in it so as to make it more profitable as Claude advices. She will be required to make Traditions Ltd adapt to changing environment. The management of the store prides itself on running the store through maintaining the standards of services and customers relationships which is mainly related with a bygone era. This means that the store cannot be able to attract the young middle class people who provide a very significant market. It is her duty to make sure that the store taps in this market so as to increase sales. She should advice the management on adoption new and upcoming trends so that they can be able to make decisions which will inline the store to new trends hence attract more customers.
It is her duty to identify departments that need reduction in operational and production costs. Most importantly she should be able to establish better and effective strategies so as to control spending. This will involve reducing the spending habits of some department and increasing others. Each department is headed by a family member and in reference to their relationships; some of the managers of departments such as Albert will not be willing to reduce their spending habits to increase other departments. Since is a family owned business, sibling rivalry will be unavoidable bringing about more challenges and disagreements among decision makers.
Management Information System (MIS) for Traditions Ltd;
Management information system (MIS) is vital in its role as an agent of sharing information within a business. There are various factors to consider while implementing a management information system at Traditions Ltd (Graham, 2005) (Clarke, 2010).
These factors include;
- The level of knowledge of the users. Traditions Ltd is a family owned store. The managers of the store are above fifty years of age and most of them have little or no knowledge of what management information system is. These managers also do not have siblings to act on their behalf. They are required to access the MIS and effectively use it on daily basis. As such, the management information system that can be effective in the store should be easy to use for the management and simple to understand (Khosrowpour, 1997).
- The security of the system. A secure MIS should be implemented in the store. Since the store is family owned, there may be conflicting interest within the family. A management system should be in such a way that it is transparent and each member with access should be able to view what others are doing (Galletta & Zhang, 2006).
Stock control systems;
Stock taking is a process that requires the making a list of stock with their location and value. A stock control system must be able to show make orders, track stock levels as well as issue stock. The systems should contain information on the value, location, description, reorder levels, quantities, supplies and information on previous stock history (Office, 2009).
Inventory turnover is a ratio that describes how many times a business inventory is sold and replaced over a period of time. To calculate the inventory turnover days, the days in the period are divided by the inventory turnover formula. Inventory turnover ratio is a key measure for determining the efficiency of the business in management of company inventory as well as making sales from it (Wanjialin, 2004).
It can be calculated as;
Inventory turnover =cost of goods sold/ average inventory. Or
Day sales Inventory is simply the inverse of the inventory turnover ratio multiplied by 365. i.e.
Days Inventory= (Average Inventory/Cost of good) *365
Budgetary planning and control system;
Budgetary planning is the process by which a budget is prepared in an organization. A budget is a plan which is expressed quantitatively for a specific period of time. It can include various items such as assets, liabilities, planned sales output and revenues, amount of resources, cash flows and costs and expenses. As a management accountant at Traditions Ltd, budgetary planning is vital in the operations of the store. This is a process that will involve identifying objectives, looking for alternatives and collecting information about them and choosing the best alternative that suits the store. The final step is to implement the chosen alternatives to achieve the set objectives. In planning the budget, one needs to make sure that the plans are properly quantified, financed and be able to control resource allocation and performance (Plumptre, 1988) (Bogsnes, 2009).
The main functions of the management accountant involve forecasting. This is where I am supposed to lay down objective to be achieved at the end of a specific period. Come up with a plan on how these forecasted objectives are going to be realized. Communicate this plan to all members of the departments in details so that they can follow the plan comprehensively. Coordinate various departments by keeping an eye on what is happening within the operation of the store. Select a team of managers and supervisors who are going to monitor every day activities in the store and make reports. Come up with authorization protocol where every employee should be able to follow. To boost morale and encourage employees, motivate employees either through giving rewards for best performers or promotions. Evaluate on regular basis the performance of the store to know whether the store is in line in realizing of the set objective (Radev & Allen, 2006).
Some of the behavioural problems one might encounter as a management accountant are the unwillingness of some management colleagues as well as other employees in the implementation of the plan. Since this is a family business, and each department is headed by a family member, some of them may be unwilling to cooperate especially when it comes to financing. This might result in mistrust, leaving behind some aspects of the plan which will lead to under realization of the objective. Budgets are time consuming and tiresome. As such, a management accountant should be ready to work long hours without pay so as to meet deadlines (Lacey, 2013).
The best way to gain budget control in the businesses is through the analysis of variance. There are two types of variance analysis. One is the fixed analysis which does not change with the level of activities within the business. The other one is the flexed analysis which is prepared in such a way that it can be altered to indicate the actual activity involved. A flexed variance analysis will suit Traditions Ltd. This is because; the management accountant should be able to monitor each and every activity that is taking place in the store.
Actual profits= budgeted profits+ favourable variances – adverse variances.
For budgetary control to be effective, serious attitudes should be emphasized. There should be clear boundaries between managerial duties and other duties undertaken by employees. Budget targets which are challenging should be identified and more emphasis put on them. Routines for data collection, analysis and reporting should be established. Reports should be aimed at respective managers and reporting periods should be fairly short. Time variance reports should be prepared and where they are adverse, action should be taken to get back to favourable (Business : The Ultimate Resource, 2003).
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