Management Accounting Issue: Escalation of Raw Materials and Freight Costs

This article discusses the management accounting issue of the escalation of raw materials and freight costs in Deere & Co, a large tractor manufacturer. It explores the impact of increased costs on profits and suggests management accounting techniques to tackle the issue.

Management Accounting
Issue 2
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MEMORANDUM
TO: Board of Directors
FROM: Manager
DATE: 16th May 2019
SUBJECT: Management accounting issue relating to the escalation of raw materials and freight
costs
Link of the article-
Badkar. 2018 Deere earnings miss as raw material, and freight costs bite [Online] Available
Through: < https://www.ft.com/content/7f70bd14-a180-11e8-85da-eeb7a9ce36e4 >.
Introduction
Management accounting is one of the important aspects of the modern-day business so
that it may be able to strengthen internal operations in a better manner. In this aspect, cost
accounting or management is a major accounting issue which needs to be tackled by the
company. This is evident from the fact that when costs increase unnecessarily, profits dip down
severely. The article provides clarity regarding the increase in raw material and freight costs of
Deere & Co, which is a large tractor manufacturer headquartered in the US (Badkar. 2018).
Costs are increased up to 77 % in the last three months in comparison to 75.2 % in the
last second quarter, which is of concerned issue of management of the company. Sales incentives
given for construction equipment have also added to increment in expenditures, Samuel Allen,
Chief executive of the business, said. Memorandum will provide better insights to cover
maximum production at minimum costs by incorporating appropriate management accounting
tool for desirable results.
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SWOT Analysis in consideration of management accounting issue
Strengths
 Market leader in heavy equipment and
engineering sector with a diverse
product portfolio.
 High asset leverage
 An excellent financial position with
increased net income.
Weaknesses
 Limited brand awareness on a global
scale.
 IT communication and network
infrastructure are escalating costs than
benefits.
 Inefficiency of management in reducing
procurement and supply chain
management costs.
Opportunities
 Capable enough to enter into the fresh
and potential market.
 Current policy of expansion in Asia,
East and Europe.
 I am collaborating with international
firms for reducing competition.
Threats
 Workforce issues relating to high
demand in salaries
 Economic unrest of developing nations
and government regulations.
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The SWOT analysis has been made with reference to Deere & Co, which is facing cost
issue and management is unable to reduce the same for earning higher profits in the best manner
possible. Replacement demand for heavy agricultural equipment had been lifting sales despite
large trade fears. The prices are escalated and cutting costs is another way, the firm is initiating
for tackling raw material and freight cost pressures in an effective manner. Rising transportation
costs are also obstructing company to sell goods to customers in handling business operations
with ease.
Net income increased to $910.3 m with a share of $2.78 per share in comparison to
$641.8 m and $1.97 per share in last year quarter. It can be further analysed that profits and per
share dividend have maximised despite higher costs in recent times. This shows that the demand
for agricultural equipment’s and heavy machinery is on the rise. However, solutions to the
reduction in costs of supply chain and transportation along with raw material costs are to be
tackled.
Considering management accounting techniques for tackling the issue
Implementing lean production-
It is one of the important technique through which Deere & Co can easily reduce the
costs quite effectually. The studies have shown that companies engaged in engineering sector can
reduce material waste up to 64 % by implementing lean production. The lean construction
further increases worker accountability, and higher quality of the finished product is achieved.
Renegotiating contracts annually-
The number of production of heavy equipment and machinery will determine costs
accordingly. It can be assessed that Deere & Co should review contracts as multiple contracts
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handled on a yearly basis results in a reduction of costs of producing items. Annual bidding with
suppliers and negotiating on the deals with customers would definitely result in an economical
way for the company to attain higher production at reduced costs.
Initiating standard costing system-
It is regarded as predetermined costs, which help in measuring actual performance in the
best manner possible. The standard costing would be then matched with actual costing incurred.
This will help in identifying deviations, and as a result, necessary corrective action could be
implemented for improving upon the costing parameter.
Budgetary control-
The budgetary action and estimating future financial needs are to be arranged by Deere &
Co in according to orderly basis. The financial performance of the company can be controlled in
an appropriate manner. This means that through budgetary control techniques, the business
would be able to attain desired operations at minimum costs.
Just-in-Time delivery-
It is another management accounting tool which helps in reducing wastage of inventory
in production. Ordering inventory when it is actually required at the time of production will help
in ascertaining due demand for production. Hence, managing inventory will reduce the cost of
production for Deere & Co quite effectually.
Logistics cost-
Keeping per order cost of logistics will help the company in keeping customers in a
happy mode resulting in lowly product cost. On the other hand, maintaining customer
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satisfaction, the higher spread of orders can be made, resulting in higher production at lower
costs and thus, transportation costs may be reduced for offering goods at normal prices.
Suggestions to Board of Directors
Hereby it can be suggested to the Board of Directors of Deer & Co that management should
opt in for Just-In-time delivery system and multiple contracts on a yearly basis. Renegotiating
with these suggestions, it can easily resolve management accounting issue currently being faced
by the firm. Moreover, lean production and standard costing system would add to the benefits of
a company as it would be able to attain the desired amount of inventory for production purpose.
Raw material and freight costs would be resolved by ordering a large spread of per unit of items
so that higher scale of production may be done. It can be further suggested to the Board of
Directors that budgetary control techniques will help in measuring actual performance for
meeting financial concerns.
Thus, by taking into account all the suggestions, management of Deere & Co will be able
to resolve the management accounting issue of increased raw material and freight costs currently
being faced by it. Hence, costs may be reduced, and more profits could be earned by the
organisation quite comfortably.
Thanking You.
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REFERENCES
Books and Journals
Frenzel, M. and et al., 2017. Raw material ‘criticality’—sense or nonsense?. Journal of Physics
D: Applied Physics, 50(12), p.123002.
Haug, R., 2018. The practical handbook of compost engineering. Routledge, New York.
Hitomi, K., 2017. Manufacturing systems engineering: A unified approach to manufacturing
technology, production management and industrial economics. Routledge, New York.
Schmuch, R. and et al., 2018. Performance and cost of materials for lithium-based rechargeable
automotive batteries. Nature Energy, 3(4), p.267.
Wallace, D., 2017. Environmental policy and industrial innovation: Strategies in Europe, the
USA and Japan. Routledge, New York.
Online
Badkar. M., 2018 Deere earnings miss as raw material, and freight costs bite [Online] Available
Through: < https://www.ft.com/content/7f70bd14-a180-11e8-85da-eeb7a9ce36e4 >. [Accessed
on 16th May 2019].
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