Li & Fung: Comprehensive Financial Analysis and Cost Allocation Report

This report provides a detailed analysis of Li & Fung's cost allocation challenges within its supply chain management operations. It identifies issues such as inefficient cost classification and the impact of these problems on the company's profitability. The report suggests recommendations including improved cost management, the implementation of standard costing, transfer arbitration strategies, and the adoption of market-based transfer pricing. An action plan is outlined to address these issues, detailing steps for market research, implementation of new costing methods, and monitoring of financial performance. The report emphasizes the importance of financial resource allocation to enhance efficiency and overall profitability within the competitive supply chain environment. The analysis focuses on improving financial performance by reducing costs and increasing revenue.

FINANCE AND
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
ANALYSIS AND JUSTIFICATION..............................................................................................2
ACTION PLAN...............................................................................................................................4
PROFESSIONAL, ETHICAL ISSUES...........................................................................................6
STRENGTH AND WEAKNESS OF THE REPORT.....................................................................6
REFERENCES................................................................................................................................8

INTRODUCTION
Finance and accounting both are one of the highly required and important concepts of
every company which supports to it in order to manage financial resources. Along with this, the
company able to make different kinds of financial decisions which support to entity in terms of
raising its business performance. At the present study, the role which is played by the suggestion
provider is like researcher who give advices to the company by considering the market research
in proper and adequate manner. In the accounting system there are basic concepts included
which are like management and financials. Further, such approaches are useful for make the
internal and external business decisions up to the higher extent (Hoyle and Doupnik, T., 2015).
At the current study, the Li and Fung company is selected which is operating in supply chain
management industry in Hong Kong country. Main products which are provided and offered by
the company are like apparel, household goods, furnishing, health and beauty items, toys for
children etc. Moreover, the firm has its presence in this particular industry from last 111 years
ago as it was established in the year 1906. Along with this, the Li and Fung entity provides
various services like, design and development of the products, vendor distribution, raw materials
etc. When talking about the market presence then, it operates in the 40 countries where it has
more than 250 offices. Number of suppliers who provide the raw materials in order to
manufacture products are like 15000 along with the 8000 consumers. Other than trading
business, the Li and Fung organisation operates under the logistics as well as where it has the
wide network.
The present provided article is on the basis of management accounting system and most
of business in their process which is like cost accounting. Basic need of the cost accounting in an
organisation is to segregate and classify several numbers of costs in proper ways. On the basis of
that effectual kind of decisions are to be made by the company which is supportive to enhance its
profitability. Under the accounting technique of cost, the current article talking about allocation
of costs in different kinds of organisational functions as well as external party (Fourie and et.al,
2015). In the present study, there is mainly focus on the transfer prices of products and services
which is determined between two parties for exchanging the goods. By the price of transferring
the company can generate incentives also which is discussed in the current mentioned article.
Moreover, decision rules for such kind of prices are to be reinforced by measuring performance
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as well as reward systems and methods. When there are more than three or multiple parties are
available in the pricing negotiation then auction process is to be taken into account for settlement
of the prices. With the help of auction procedure the company able to tale better decisions and
get the fair amount of selling (Fields, 2016). There are capital and operating costs are playing
very major role in the entity which are considered at the present article and study. In the current
report main focus is on identifying areas where company can focus to improve its efficiency
which are reflected by the article. Action plan that will be followed to implemented relevant
changes will also be described in the report. In this way, entire research work will be carried out.
ANALYSIS AND JUSTIFICATION
Each and every business entity concerns towards the profitability while operating in the
specific industry and country. Level as well as condition of the profit and income of the firm
depends on the costs and revenue which is incurred at the workplace. On the basis of proper cost
allocation, the management able to meet with the objectives and aims regarding to the profit
maximisation and other financials. By considering the article of cost allocation problem, the
suggestion and recommendations along with the justification are given as below:
 In the firm cost plays very significant role and it is a sensitive element of the overall
process. Li and Fung were facing cost allocation problem in their business and cost were
not classified in different categories in proper manner which was creating problem for the
firm. Costs were not assigned to the relevant cost objects in the business. Due to which
costing of product was done in wrong manner. In order to solve this problem article is
reviewed and solution is identified. To the company Li and Fung it can be suggested
being a researcher that, it needs to manage the costing aspects in highly appropriate ways.
Lower the cost when associated with specific business, then it helps in order to raise
overall profitability and liquidity situation in the industry of supply chain management.
When looking at the current financial position then it can be assessed that Li and Fung
entity not able to generate revenue in increasing trend from the last five years (Horton
and Serafeim, 2012). Along with this, when visualising to the net profit situation then
also it can be found that, respective value fluctuates every year from the FY 2012 to
2016. The justification behind giving recommendation of cost managing is that, it able to
reduce cost of goods sold as well as other expenses. When different number of
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expenditures will be reduce within business then it will be helpful for Li and Fung in
terms of enhancing the net income.
 Standard costing is the tool in which company set out the level of expenses at the current
or previous era for the future financial year. It is highly necessary to manage such kind of
costing within business which helps to meet with the objectives and goals of financials.
In this, the Li and Fung will be able to determine that how much amount of expenses
needs to be there. Earlier Le and Fung were not able to do same. In business there was no
control system and due to this reason across all departments it was difficult task to
determine earlier that how much must be spend on performance of specific task. By
considering this strategy of standard costing, the company set out benchmarks and always
ready to meet with them properly. When benchmarks and standards will be settled down
then it will be able to meet with the goals (Ahmed and Duellman, 2013). For example:
with the help of standard costing, the Li and Fung make benchmark that in next year
operating cost should not increase from 5800 GBP. When it follows these criteria and
manage expenses accordingly then able to reduce total cost of production. Further, it will
be highly profitable for the Li and Fung entity in terms of cost reduction improving
income ratio as compare to last accounting period.
 In addition to this, being the researcher it can be suggested to the Li and Fung business
enterprise that, it needs to adopt and implement transfer arbitration strategy within
workplace. It will be supportive for the cited company in order to generate opportunities
for generating more profit (Anandarajan and Srinivasan, 2012). Presently the Li and Fung
not able to earn better and effectual kind of the amount in terms of income. Due to which
the arbitration strategy is suggested being a researcher to the chosen company. This kind
of specific technique will provide opportunity to the firm in order to purchase products
from one supplier and sale to customers after comparing as well as analysing various
suppliers. In this, the raw material provider, who allow goods at lower cost as compare to
others, that will be selected by the firm. After that, materials will be sold in the market
which is supportive for the company to generate opportunity cost (Gippel and Zhu,
2015). Hence, it can be recommended to the management of Li and Fung entity that, it
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must implement and execute the transfer arbitration within working environment and
purchasing process.
 Apart from this, the Li and Fung business should looks upon the transfer pricing aspect as
it plays effective role in the company. The price under which goods and services are
exchanged from parent company to the subsidiary or external party to internal then it
identified as transfer pricing. In this kind of price level, sometimes the negotiation
process takes place in the company and sometimes not. At this stage or aspect, there are
different number of techniques are addressed which are like market, negotiated, adjusted
market, contribution, cost plus etc (Knechel and Sharma, 2012). It can be advised to Li
and Fung company that it should adopt market pricing. The reason is that, it supports to
create and generate the highest amount of profit within industry and supportive for cited
firm in terms of meeting with goals (HOW TRANSFER PRICING TECHNIQUES
IMPROVE PROFITABILITY, 2014). At the time of settling transfer price the Li and Fung
entity requires to adopt cost plus strategy also along with the market. With the help of
this, internal and external both kind of situations will be discussed and considering. If it
will ignore one aspect then cannot set out the proper transfer price of its products and
services. Further, chances of arising problems with cost and profit can be increase which
is negative aspect for the supply chain management enterprise (Dyreng and Williams,
2012).
 At the time of market and company research it can be found that, the entity facing
problems with the revenue and sales due to costing aspect of the marketing and selling. In
the current era, there are list of companies operate in supply chain management which
lead to create competition. For this, the Li and Fung company highly requires to manage
and allocate the financial resources to selling and distribution as well as marketing
function. Further, if it allots higher finance and fund to the cited organisational function
and not give positive response then it will create cost burden on the Li and Fung entity
(Zhaoguo and Bhargava, 2013). As a result, the management not able to earn profit and
condition will be incur same as last periods which is like cost increasing. Hence, it can be
said that, the company should use proper and effective cost allocation system which will
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be supportive for reducing selling costs and generating more profit at the end of financial
year.
ACTION PLAN
Sequenc
e of
activities
Activity Action taken at
each activity
Start time Completion
time
Entity that will
be responsible
1 Market
Research
Market research
is collection of
data which data
can be collected
through:
One on One
interview: This
is done by
focusing on one
group but
collecting
information
from one
individual at a
time.
Individual’s
point of view
help company in
determining
what changes
they need to
make according
to changing
market trends.
1 August 2017 20 August 2017 Marketing
manager
5

Phone surveys:
When there are
high number of
consumers,
researchers
should follow
phone survey
technique, This
helps in
collection of
reliable data.
Emailing
questionnaire
and many more.
2 Determine
the goals
After evaluating
market,
researchers
should focus on
setting goals of
production like
what, when, how
and at what
price should be
beneficial for
increasing
company’s
turnover. For
instance, if the
market demand
for some
1September
2017
2September
2017
Marketing
executive
6

specific
commodity is
high and at same
time if the
company
launches the
product at less
price than it will
automatically
will increase
company’s
profitability
(Brief and
Peasnell, 2013).
3 Frame
objective
on the
basis of
goals
In this step,
company will set
targets and
should make
sure the proper
availability of
funds for each
operations in
order to
accomplish
goals on time.
3September
2017
4September
2017
Marketing
executive
4 Create a
plan or
schedule
Planning is
thinking before
acting, manager
should plan
every activity in
5September
2017
10September
2017
Marketing
manager
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order to avoid
wastage of time
and to establish
smooth
functioning of
every activities
and departments.
5 Implement
Suggestion
In execution
step, manager
need to
implement the
changes which
were discovered
after market
research with the
ongoing
production
process.
11September
2017
20September
2017
Operation
manager
6 Monitorin
g
Professional of
the company
should monitor
each and every
production
operation to
ensure proper
allocation and
optimum
utilization of
resources.
Monitoring
21September
2017
21November
2017
Production
manager
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helps in
evaluating
employee’s
performance and
making them
work efficiently
(Gitman and
Flanagan, 2015).
7 Review
and
evaluation
At last when the
production is
done and the
goods and
services are
launched in
market,
researcher again
need to collect
feedback and
evaluate if the
company have
been successful
in meeting its
buyers needs
and wants.
21December201
7
23December201
7
Production
manager
PROFESSIONAL, ETHICAL ISSUES
Being a researcher, his/her role is to collect, interpret, analyse and store the data or
information properly or in particular format. There are various ethical issues if the researcher
will not play is part properly, these issues are as follows:
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Collection of data: Primary role of the researcher is to gather information from internal
as well as external environment. All the decision and strategies are made on the basis of
information or data which is collected (Loughran and McDonald, 2016). For conducting the
research, sampling is done from the total population. If the researcher is bias while selecting the
samples, the research will move to wrong track and decision will not be accurate.
Analyse of data: As the data is collected properly, the next step is to analyse and
evaluate of information. If it is not done then future prediction will not be accurate and the
efforts made on collection of data will be totally wasted. For example: research is made to find
out customer behaviour related to specific product, questionnaire is made by the researcher and
the information is gathered properly (Avazzadehfath and Raiashekar, 2012). At the time of
evaluating the data, different techniques are adopted such as ANNOVA, T-test, data mining etc.
If the researcher will not implement these techniques then data which is collected will not
analyse adequately and find out the demand of the people and relevant data to make effective
decision.
Storing and misuse of data: After completion of the project, data should be stored
properly and securely for minimum seven years. Security measures should be taken by the
researcher so that data could not be stolen (Lee and Choi, 2013). If the information goes in the
hand of unauthorised person then the strategies and problem solving approaches of the
organisation will be leaked and which will decrease the market share of the company and they
will lose competitive edge over the market.
STRENGTH AND WEAKNESS OF THE REPORT
Strength of the project:
Li and fung which have sustainable competitive edge in supply chain management, while
maintaining the supply chain, huge cost incur which is related to distribution, storage and
procurement of goods and services. The organization basically focus on cost accounting which
keep record of all the cost inured in the company which is used to improve the management in
terms of cost. It is the biggest strength for the company where they get competitive edge over
their rivals. In the current report an action plan is prepared under which in constructive way
approach is described that will be followed in order to identify solution of the problem. Entities
that will be responsible for the performance of the stages specified in the action plan is also
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determined. It can be said that action plan will act as guideline for readers in respect to way in
which cost allocation problem can be solved by them in their business. Cost accounting helps the
venture to measure and improve their efficiency due proper use of raw material, capital and
machinery and stabilize the company when fluctuation in prices occurs. It also helps to find the
activities which is profitable and non-profitable for the firm and guide to reduce the cost and
increase the profit. If the organization want to do proper planning of any project, effective
management of the cost helps them to find relevant data about the decision. [
Weakness of the project:
The current study considers only cost allocation system which is part of the cost
accounting and supports to Li and Fung firm to take internal business decisions. Further, very
basic weakness of the present analysis is that, it ignores each and every aspect of the external
environment by which the firm cannot analyse market conditions and its business performance in
the supply chain management industry of Hong Kong. Along with this, other than allocation
approach it not considers any of the cost accounting elements like process and batch costing as
these are important for it. It operates in different products where job costing system is the highly
required system to analyse cost of different goods which rely under the each batch like toys,
apparels, beauty products etc. Along with this, the current report not covering the inventory or
cost factor which is significant to manage at the workplace of Li and Fung organisation due to
operating under the industry of supply chain management.
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REFERENCES
Journals and Books
Ahmed, A. S. and Duellman, S., 2013. Managerial overconfidence and accounting conservatism.
Journal of Accounting Research. 51(1). pp. 1-30.
Anandarajan, M., Anandarajan, A. and Srinivasan, C. A. eds., 2012. Business intelligence
techniques: a perspective from accounting and finance. Springer Science & Business
Media.
Avazzadehfath, F. and Raiashekar, H., 2012. Decision-making based on human resource
accounting information and its evaluation method. Asian Journal of Finance &
Accounting. 3(1).
Brief, R. P. and Peasnell, K. V. eds., 2013. Clean surplus: A link between accounting and
finance. Routledge.
Dyreng, S. D., Mayew, W. J. and Williams, C. D., 2012. Religious social norms and corporate
financial reporting. Journal of Business Finance & Accounting. 39(7‐8). pp. 845-875.
Fields, E., 2016. The essentials of finance and accounting for nonfinancial managers.
AMACOM Div American Mgmt Assn.
Fourie, M. L. and et.al., 2015. Municipal finance and accounting. Van Schaik Publishers.
Gippel, J., Smith, T. and Zhu, Y., 2015. Endogeneity in Accounting and Finance Research:
Natural Experiments as a State‐of‐the‐Art Solution. Abacus. 51(2). pp. 143-168.
Gitman, L. J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Horton, J., Millo, Y. and Serafeim, G., 2012. Resources or power? Implications of social
networks on compensation and firm performance. Journal of Business Finance &
Accounting. 39(3‐4). pp. 399-426.
Hoyle, J. B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.
Knechel, W. R., Sharma, D. S. and Sharma, V. D., 2012. Non‐audit services and knowledge
spillovers: Evidence from New Zealand. Journal of Business Finance & Accounting. 39(1‐
2). pp. 60-81.
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Lee, S. and Choi, W. S., 2013. A multi-industry bankruptcy prediction model using back-
propagation neural network and multivariate discriminant analysis. Expert Systems with
Applications. 40(8). pp. 2941-2946.
Loughran, T. and McDonald, B., 2016. Textual analysis in accounting and finance: A survey.
Journal of Accounting Research. 54(4). pp. 1187-1230.
Zhaoguo, Z., 2012. Comparison and Choice of Accounting Conservatism Measurement Method
——Empirical Research on Relevance and Reliability [J]. Accounting Research. 2. pp.
008.
Online
HOW TRANSFER PRICING TECHNIQUES IMPROVE PROFITABILITY, 2014. [Online].
Available through: <https://accounting-financial-tax.com/2012/10/how-transfer-pricing-
techniques-improve-profitability/> [Accessed on 8th July 2017].
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