ACW2391 INTRODUCTION TO MANAGEMENT ACCOUNTING

GROUP ASSIGNMENT

A Consultant’s Report for Colour Petals Ltd

Colour Petals Ltd. is a producer and importer of freshly cut flowers based in the country side village of Tagus. It has
made a name for itself from its gerberas, roses, carnations, and
tulips, although the portfolio includes a range of other products.
Tulips and some special flowers are imported from the
Netherlands. Products are sold at its premises to florists, in the
trade market to wholesalers and retailers, and directly to a large
retail chain. The market for fresh flowers is very competitive,
with significant pressure over prices. There is high seasonality in
supply (e.g. spring and early summer) and demand (e.g. valentine
day, mother’s day, Christmas). When there is a significant
mismatch between those supply and demand, prices can
fluctuate widely, from ‘rock bottom’ prices that do not cover
production costs to ‘sky high’ prices that make very generous
profit margins. In addition to price, the market values highly
product freshness, reliability of supply, speed of delivery, and range products available (including colour variations).

The company owns part of its productive land and part

of it is on a long-term land lease. All production of
flowers is carried out in a series of greenhouses to
Colour Petals built and fully owns. Flower production
facilities (greenhouses) are fitted with temperature and
humidity control equipment that automatically opens
the greenhouses to air circulation when temperature is
too high and heats it up when the temperature is too
low. The company uses its own two tractors to plough
the land and to haul trailers. The trailers carry
fertilizers, seedlings for planting, and occasionally
pesticides to the greenhouses. The plants, seedlings, shrubs, and bulbs planted by Colour Petals are mostly imported
to ensure the highest quality, productivity, and diversity of colour variations. The trailers also carry freshly cut
flowers back from the greenhouses to the processing and packing facility (as well as the green waste that is sent to
a local dump). After processing and packaging, products are kept in one of three refrigeration units to prolong the
life of flowers.

Colour Petals currently employs 70 full-time staff, which represents the double of its size just four years ago. The
company’s manager and founder, Mr. Manuel Smith, is an entrepreneur with twenty years of work experience in
the sector but no training in management. He is directly assisted by his wife, Mrs. Bella Smith, who manages the
sales office and inventories. Like her husband, she has no formal training in management, but she is extremely

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energetic and outstanding in dealing with customers, a true asset to the company. Colour Petals Ltd. has a dedicated
team of three salespersons working in the office at its premises, one accountant, and two distribution employees,
one foremen and one forewoman. The remaining employees work in the production, processing, and packaging of
flowers, making flower production a labour- intensive activity. During peak times of production, part-time
employees are hired on a need basis and on-going staff is paid for overtime work. All of the company’s employees
are paid a fixed salary, plus any extras from overtime work.

The main building where the company operates houses the all administrative staff, the sales office, a product display
area, the processing and packaging facility, and the refrigeration units. Workers are moved to and from the
company’s the main building, as well as between greenhouses, using two fully owned mini-vans. The company also
uses its own fleet of three trucks (with cooling) to distribute products to customers and to take production to the
trade market. The company’s growth has created difficulties to Mr. Smith in ensuring the timely payments to
employees and suppliers. He is also finding a bit overwhelming to have a feel for how the company is doing, now
that the scale of operations has grown to an unprecedented level. At the moment, there is no formal planning in the
company; only rough estimates of revenues and the main cost items are prepared by Mr. Smith in his paper
notebook. The company’s accountant role has been that of dealing with financial accounting matters and ensuring
the company meets is legal tax obligations.

Another issue that the Colour Petals currently face is the management of sales of products in short supply. These
products cannot be sold to the first customer that comes through the door, but rather they need to be meticulously
managed so that the orders from regular customers can be at least partially satisfied. Mrs. Smith noted that the
salespersons, who have been informally assigned to specific customers, frequently lacked an appreciation for this
issue in their eagerness to meet their assigned customer’s requirements. No doubt Colour Petals wanted a proactive
sales team, but the sales push needed to be directed to products in good supply, not for those that can “sell for
themselves”.

The task
You work for a consultancy firm specialized in the provision of management accounting–related services to small
and medium businesses. Your team has been formed to work on a new project that involves the production of a
report outlining the virtues and benefits of embracing certain aspects of management accounting. This report will
be provided to the owners of Colour Petals, Ltd (i.e. Mr. and Mrs. Smith), and it will be presented internally to an
audience of about 20 consultants.

Your report should meet the following requirements:

• to demonstrate that you have conducted in-depth research of conceptual issues you have been assigned
(which effectively means you are required to use many more references than the recommended textbook);
• to conduct research into the sector and base your report, to the extent possible and within reason, on factual
information (note, however, that it is likely that some assumptions will still be required);
• to include an executive summary, an introduction, recommendations and a conclusion,
• to discuss the following issues, as applicable to your group, from both theoretical and a practical point of
view.

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Group Assignment Tasks schedule

Group Due Date Topic
1 Week 7 Chapters 1 and 2: Introduction to Management Accounting and Cost Terms and Concepts

Focus:
¯ The case for the use of management accounting in helping Colour Petals Ltd. its planning, control
and strategic processes;
¯ The value of cost classifications for Colour Petals Ltd. and how this may assist Mr. and Mrs. Smith
in improving their decision-making processes.
2 Week 9 Chapter 3: Determining How Costs Behave

Focus:
¯ Outline the reasons why it is important for Colour Petals Ltd. to engage in cost estimation and
cost prediction.
¯ Expound the choices of methods available in cost estimation and cost prediction and the potential
merits and demerits of each method?

3 Week 10 Chapters 4 and 5: Job costing and process costing systems

Focus:
¯ The case for the use of product costing systems, the potential benefits of their use, and the type
of costing system(s) would be appropriate for Colour Petals Ltd;
¯ Explain the applicability of product costing systems for Colour Petals Ltd.
4 Week 11 Chapter 6 and 7: Allocation of Support Department Costs and Activity based costing

Focus:
¯ The notion of overhead costs, the ways of handling such costs, and the reasons why dealing with
overhead cost may be value adding for Colour Petals Ltd.
¯ How the use of the activity based costing technique may be helpful for Colour Petals Ltd.
5 Week 12 Chapter 9 and 10: Cost-Volume-Profit Analysis and Pricing decisions

Focus:
¯ Explain how can Colour Petals Ltd. apply various pricing strategies to set prices for its products;
¯ Outline to what extend does CVP may influence the product mix decisions at Colour Petals Ltd.