Analysis of Laurie Manufacturing's Management Accounting Report

This report analyzes the management accounting case of Laurie Manufacturing Pty Ltd., a company manufacturing grass collection attachments. The analysis focuses on the company's operational profitability in 2018, revealing operational losses. Two options for improvement are evaluated: reducing variable costs and reducing waste disposal costs. The report examines the impact of each option on profitability, break-even points, and ethical considerations, highlighting the potential environmental repercussions of cost-cutting measures. The findings indicate that while reducing waste disposal costs improves profitability, it raises ethical concerns. The report provides limitations of each scenario and suggests action items for increasing sales or reducing costs responsibly. The report also critiques the management accountant's decision, emphasizing the importance of ethical considerations and the inclusion of environmental costs in decision-making to avoid incorrect estimations and potential long-term financial and non-monetary implications. The report follows APA referencing style.

MANAGEMENT ACCOUNTING

Executive Summary
In this report the case of Laurie Manufacturing Pty Ltd. is being discussed. The company
is engaged in the manufacturing of grass collection attachments which are used in Lawn
Mowers. The operating profitability of the company is analysed for the year 2018 and it
has been identified that the company has incurred an operational loss of $420000. To
overcome the losses two options have been evaluated. As a first option, reduction of
variable cost by 70% is considered by way of purchasing cheap raw material which again
resulted in operational losses of $ 1170000. However, option 2 of reducing the waste
disposal cost of the company and fortunately it turned out to be effective as it resulted in
operational profits of $ 330000. The implementation of option 2 might lead to company
face certain environmental repercussions by ways of excessive costs, penalties and fines
for harming the environment. Therefore, the company must consider such cost prudently.

Analysis
Evaluation of existing Scenario:
Sales 30000*500 $ 15,000,000.00
Less: Variable cost $ 9,750,000.00
Contribution Per Unit $ 5,250,000.00
Less: Fixed Costs $ 5,670,000.00
Operating Loss -$ 9,750,000.00
Breakeven Revenues Total Fixed Cost
Contribution %
5670000
35%
$ 16,200,000.00
Contribution % Contribution
Sales
5250000
15000000
35%

Continued…
Evaluation of Option 1:
Reducing the variable cost by 70%
Sales 30000*500 $ 15,000,000.00
Less: Variable cost
Sales
*70% $ 10,500,000.00
Contribution Per Unit $ 4,500,000.00
Less: Fixed Costs $ 5,670,000.00
EBIT -$ 1,170,000.00
Breakeven Revenues in case of
Option 1 5670000
30%
$ 18,900,000.00
Contribution % 4500000
15000000
30%

Continued…
Evaluation of option 2
Reducing the variable cost by 60%
Sales 30000*500 $ 15,000,000.00
Less: Variable cost
Sales
*60% $ 9,000,000.00
Contribution Per Unit $ 6,000,000.00
Less: Fixed Costs $ 5,670,000.00
EBIT $ 330,000.00
Breakeven Revenues in case of
Option 2 5670000
40%
$ 14,175,000.00
Contribution % 6000000
15000000
40%

Findings
Current Scenario:
In the current scenario company is not generating sufficient amount of sales to achieve break-
even. Hence, it is incurring an operating loss of $9750000. In the present case the breakeven
only be achieved when the company increases its sales (Kaplan & Atkinson, 2015).
Option 1
In the option 1 as well the company will not be able to achieve breakeven from the given sales
meaning thereby the fixed cost will not be recovered with the given revenue generation
(Malina, 2017). Consequently, the company will again have to bear operational losses.
Option 2
Under the second option the company will certainly earn some operation profit as the
breakeven point will be achieved with the given amount of sales (Weetman, 2019). Therefore,
the second option is better than the existing scenario and the option 1 as well.

Limitations& Action Items
Current Scenario:
Limitations: Company is not at the profitability position and hence incurring losses due to
excessive cost.
Actions items: To increase the sales it must consider the different ways of reducing the cost or
enhancing the sales quantum. It will have to make sales of at-least $16200000 to recover all
its cost so that it incurs no losses and at this point of sales it is also true that the company will
not be able to earn any profit.
Option 1:
Limitation:
Cheaper raw material can also cause the quality degradation of the output
Actions items: The company will have to make the sales of at-least $ 18900000 in order to
attain the situation of no profit and no loss.

Continued…
Option 2
Limitations:
It might lead the company to face certain repercussions of reducing the cost that is being
incurred to dispose the plastic waste resulting from the manufacturing cost. The company
might have to face certain environmental liabilities in long term.
Actions: It must try to reduce the cost in such a way that there is no violation of law and
in parallel it must not harm the environment.

Continued..
As the management accountant, Martin has proposed to cut down the disposal costs of
waste plastic material. This decision might let the company improve its operational
profitability in the short term but in it not good from the environmental point of view.
Therefore, the company might have to face certain environmental liabilities in the long
term.
The decision of management accountant is not rational is against the principle of
integrity, objectivity and professional behaviour as suggested by Institute of Management
Accountants. This decision might give rise to the ethical conflicts in the organisation
(Merchant & White, 2017).

Continued…
As per IMA, the management accountant must apply the professional judgement and
provide only those recommendations that could help the company in making right
decisions such as pricing decisions, determination of profitability position etc.
As the management accountant is merely concerned about his own association with the
company and the company’s profitability position the interest of environment is being
ignored.
The management accountant must take into account the environmental interest while
making any decision regarding the company in the current case.

Continued..
 The non-inclusion of environmental costs will certainly lead to incorrect decision
making for Laurie Manufacturing Pty Ltd (Schaltegger & Burritt, 2017).
 The costs will be incorrectly estimated and when in future the potential
environmental liabilities will occur the company will have to face significant down-
fall in its overall profitability position.
 Also, the company might have to face certain non-monetary implications such as
governmental implications etc.

References
Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.
Malina, M. A. (Ed.). (2017). Advances in management accounting. Emerald Group Publishing.
Merchant, K. A., & White, L. F. (2017). Linking the Ethics and Management Control Literatures.
In Advances in Management Accounting (pp. 1-29). Emerald Publishing Limited.
Schaltegger, S., & Burritt, R. (2017). Contemporary environmental accounting: issues, concepts
and practice. Routledge.
Weetman, P. (2019). Financial and management accounting. Pearson UK.