Summary
Case Study#1
Summary
Problems facing by Strategic Marketing Unit Two (SMU2) of Fine Food:
Unfairly allocated costing system
Unreliable performance evaluation standard leads to undervaluation of SMU2 and negative motivational effect on employees.
Key Findings:
Fine Foods allocates some period costs (including sales and marketing costs, media and sales promotion costs, and freight out cost) based on weight of product sold. SMU2 thus seems less profitable because the main product of SMU2 is Product MP and its special orders, which are relatively dense and bulky. This allocation method makes SMU2 seems less profitable.
Fine Foods evaluate the performance of SMUs based on operating profit, which includes several uncontrollable cost elements in the calculation. Hence, operating profit cannot reflect the true performance of each SMU.
Recommendations:
Allocate indirect costs based on number of unit sold instead of weight of product sold
Use CM1 and CM2 as the primary evaluation for the SMUs instead of operating profit.
Introduction:
Background
Fine Food Inc. is a branded, high-quality food provider. It has a big market and loyal customers, including supermarkets, convenience shops, restaurants, large food service groups, caterers, and etc. Fine Food Inc. is owned by Great Plains Capital. However, it has completely freedom and control over management, product selection, and performance evaluation. Therefore, external reporting is not mandatory, and internal reporting is not regulated by any financial accounting standards. Any external reporting will be done by Great Plains Capital on a group basis. Fine Food Inc. is organized in three units called Strategic Marketing Units (SMUs). Each unit serves a segment of market. SMU1 serves supermarkets and similar outlet. SMU2 serves institutional customers who order in large volume and bulk quantities. SMU3 serves Fine Food in other countries, and governmental organizations. SMU2 and Special Orders
SMU2, which will be
Summary
Problems facing by Strategic Marketing Unit Two (SMU2) of Fine Food:
Unfairly allocated costing system
Unreliable performance evaluation standard leads to undervaluation of SMU2 and negative motivational effect on employees.
Key Findings:
Fine Foods allocates some period costs (including sales and marketing costs, media and sales promotion costs, and freight out cost) based on weight of product sold. SMU2 thus seems less profitable because the main product of SMU2 is Product MP and its special orders, which are relatively dense and bulky. This allocation method makes SMU2 seems less profitable.
Fine Foods evaluate the performance of SMUs based on operating profit, which includes several uncontrollable cost elements in the calculation. Hence, operating profit cannot reflect the true performance of each SMU.
Recommendations:
Allocate indirect costs based on number of unit sold instead of weight of product sold
Use CM1 and CM2 as the primary evaluation for the SMUs instead of operating profit.
Introduction:
Background
Fine Food Inc. is a branded, high-quality food provider. It has a big market and loyal customers, including supermarkets, convenience shops, restaurants, large food service groups, caterers, and etc. Fine Food Inc. is owned by Great Plains Capital. However, it has completely freedom and control over management, product selection, and performance evaluation. Therefore, external reporting is not mandatory, and internal reporting is not regulated by any financial accounting standards. Any external reporting will be done by Great Plains Capital on a group basis. Fine Food Inc. is organized in three units called Strategic Marketing Units (SMUs). Each unit serves a segment of market. SMU1 serves supermarkets and similar outlet. SMU2 serves institutional customers who order in large volume and bulk quantities. SMU3 serves Fine Food in other countries, and governmental organizations. SMU2 and Special Orders
SMU2, which will be