Brantwood Joinery Ltd: what management accounting is actually for
Brantwood Joinery Ltd makes bespoke staircases and fitted furniture. It has 28 employees, turnover of £2.4m and issues around 45 quotations each month. The new finance director, recruited from an audit firm, has proposed that the monthly management accounts should follow the statutory accounts format and be issued six weeks after the month end, so that 'the two sets of figures agree'. The sales director instead wants a weekly report showing contribution by customer. The production manager wants the £9,000 monthly factory rent spread over jobs on direct labour hours (currently about 2,000 per month) and intends to quote future work at the resulting full cost per job hour. Weekly contribution reporting is estimated to take a part-qualified accountant four hours a week, 48 weeks a year, at £24 per hour.
1. Which of the three requests best serves the purpose of management accounting information at Brantwood? Justify your answer by reference to relevance, timeliness and cost-benefit.
Read the worked answer
Purpose test. Management accounting exists to inform internal decisions and control. Its tests are relevance and timeliness, not agreement with the statutory figures.
- Six-week statutory-format accounts fail on timeliness and relevance for decisions. They are stewardship information for the bank and HMRC; by the time they are issued the quoting, staffing and purchasing decisions have already been made.
- Rent apportioned over jobs is arithmetic that does not change any decision: the rent is £9,000 whether a particular staircase is quoted or not. It is allocate-and-apportion information, not decision information.
- Weekly contribution by customer is relevant (it reflects revenue and costs that change with the decision), timely (it can be acted on while jobs are still being quoted), and directly supports pricing, credit and capacity decisions.
Cost-benefit. Four hours a week × 48 weeks × £24 = £4,608 a year. With 45 quotations a month at an average contribution per job of around £3,000, avoiding a single mispriced or misdirected job pays for the report several times over. The sales director's request is the best fit, provided the report is kept short and is not allowed to grow into a six-page pack.
2. Advise the production manager on quoting at a full cost based on the absorbed rent. Support your answer with the hourly rate and two quantified risks.
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Rate: £9,000 ÷ 2,000 direct labour hours = £4.50 per direct labour hour.
Risk 1 – the rate moves with volume, not with cost. If hours fall to 1,600 the rate becomes £5.63; if they rise to 2,500 it becomes £3.60. The rent is unchanged in every case, yet quotes would rise or fall. Brantwood would lose work in quiet months and under-price in busy ones, which is the opposite of what a costing system should do.
Risk 2 – the base is arbitrary. A labour-heavy job carries more rent than a machine-heavy one of identical floor space, so customers cross-subsidise each other. In competitive tenders the full cost can exceed the price a competitor charges, so profitable work is declined.
Advice. Full cost is a sensible long-run guide because all costs must eventually be covered. But the floor price for a one-off job when there is spare capacity is the incremental (variable) cost, because taking the job adds contribution and no extra rent. Use full cost as a target, not as a veto.
3. The finance director objects to the weekly report on cost grounds. Set out the cost-benefit judgement you would present, and state one condition you would attach to the report.
Read the worked answer
Cost: 4 hours × 48 weeks × £24 = £4,608 per year.
Benefit: the decision value, not the report itself. With 45 quotes a month, a single wrongly priced job at £3,000 of lost contribution more than offsets the annual cost. The report also supports credit control (which customers absorb effort) and capacity decisions (which products are worth chasing), so the benefit is likely to be several times the cost.
Judgement: proceed, because the cost is small, certain and recurring, while the loss avoided is larger and would otherwise be invisible. If the accountant's time is genuinely constrained, the same information could be produced monthly at £1,152 and would still be timely.
Condition: the report must be a one-page exception report - contribution by customer, variance from quote, and flagging of customers below target contribution - with a clear owner and a defined decision it supports. A report nobody acts on has a cost and no benefit, which is precisely the failure of the six-week accounts.