ABP Post Graduate Diploma In Business Management

ABP Post Graduate Diploma In Business Management

1.0 Introduction

This report identifies and critically evaluates the costing techniques used by Morrison and the role of such costing techniques in setting prices. The report will also analyse the last three years of the financial statements of the company to evaluate its performance and recommend possible ways to improve the financial performance of the company. Lastly, the report will cover a flexible budget for the actual production of 48,300 units in a small hypothetical electronics company called Safety First Limited, calculate the variances between the flexed budget for 48,300 units and the actual costs for 48,300 units, write an email to the Finance Director Mr. Mike Kenny, evaluating the budget out turns and reasons for these variations and then offer recommendations on how the company’s cost control activities could be improved.

2.0 Company Profile

Morrison Supermarkets PLC is the fourth largest retail chain in the United Kingdom, headquartered in Bradford, West Yorkshire. The company forms part of the FTSE 100 Index of companies with a market share of around 12 percent after Tesco (31 percent), Asda (17 percent), and Sainsbury’s (16 percent). The company started as an egg butter outlet back in 1899 but today it has over 450 outlets across the UK. Its current market share was however, boosted in 2004 when it acquired Safeway (Carollo, 2012). Today the company sells thousands of brands under the “own brand” banner. Some of these own brands include M Savers for all range of low-cost products, M Kitchen for all range of kitchen products, NuMe for all range of health products, and VM Morrison for all range of high-end products (Morrison, 2012).

Over the last three years, the company has however experienced a 0.2 percent drop in market share while the other three largest retail chains expected Tesco have experienced a growth of almost the same margin. This was a time when the market grew by about 4.5 percent, with smaller retail chains such as Waitrose registering huge gains perhaps due to the increasing perception that high-end retail chains are for high-end customers while low-end retail chains are for low-end customers who form the greatest portion of the UK grocers (Carollo, 2012). Again this could be because low-end retail chains tend to open up stores near neighbourhoods unlike high-end retail chains which target customers with cars.

The company registered one of the strongest financial performances in recent years in the 2011/12 financial year – a 7 percent growth in sales (£17.7billion), 8 percent growth in EBIT (£947 million), and a Net debt of £1,471million. This shows the company has been utilizing sound costing techniques especially in creating high returns on equity and reduction of unnecessary costs (Morrison, 2012). Morrison was selected to be the case study for this report because of its ability to achieve huge profits (as shown above) in a highly competitive and unpredictable industry where small players are slowly winning the hearts of the consumers.

3.0 Costing Techniques Employed by Morrison

Morrison utilises the activity-based costing technique. The company utilises this costing technique because it is flexible and allows managers to reduce redundancy by eliminating costly processes in favour of efficient and cheaper ones. Activity-based costing is in line with the company mission to create value for its customers and employees (Morrison, 2012). Though complex, the technique can be broken down into two broad steps. The first step entails the identification of cost drivers (activities) involved during the production of a commodity. The second step entails the assigning of costs (indirect and direct) to each specific activity. A combination of these two steps gives a manager an opportunity to set a reasonable and responsive commodity price while factoring in past, current and future cost indicators (Kaplan & Anderson, 2007).

For instance, when calculating the costs of say, pork, a manager should allocate all direct and indirect costs incurred in acquiring the product in two different pools/stages. The first pool will comprise of distinct sections (the number will be determined by the activities involved) such as procurement, acceptance, processing, delivering, packaging, as well as shelving. The second pool should include the actual cost drivers for each of the specified activities. Such costs should be calculated based on past, prevailing, and future indicators such as the average costs of labour for slicing and packaging pork into one kilogramme packages or even the average costs of transporting pork from the farm to the store. Here, the manager can decide to split the costs into major categories, say, direct and indirect costs. The bottom line is that the cost of every activity (cost drivers) should be clearly established and noted for costing (Baker, 1998).

3.1 Role of the Activity-based Costing Technique

The activity-based costing technique helps Morrison to keep its costs of selling at manageable levels. According to Sibun and Hall (2008), retail chains employ activity-based costing technique when entering into contracts with supplies of critical supplies such as groceries. In fact, when it comes to choosing suppliers, the retail chains try as much as possible to get the lowest bargain so as to keep the cost of selling at relatively low levels compared to their competitors. As it will be demonstrated in the financial analysis section below, Morrison has succeeded in keeping its profitability at low and stable levels because the activity-based costing technique makes it easy to predict costs and therefore make the necessary plans for less costly alternatives.

The activity-based costing also helps Morrison to make future strategic plans. Recent industry statistics show a decrease in consumer purchasing power yet the costs of manufacturing has escalated. This has made it hard for prices of critical household commodities to remain low. To mitigate this adverse scenario, retail chains always look for the best deal so as to keep their shelf prices at relatively low levels. An activity-based costing enables retail chains to approach each product line independently as determined by the cost of producing it (Baker, 1998). At Morrison, for example, the activity-based costing helps the company to distinguish between commodities for both high-end and low-end – M Savers versus VM Morrison.

By using an activity-based costing technique, Morrison gets an opportunity to set responsive prices for its products as well as to constantly review its product prices in order to make align with the prevailing economic standards. This is in line with the company mission to be a unique grocer that delivers to its customer’s fresh, high quality, accessible, and affordable groceries.  Specifically, the company believes its futuristic strategy is based on its clear view of the future of the retail industry (Morrison, 2012). Arguably, such clear view of the industry cannot be achieved without getting a clear glimpse of the trends of key cost drivers.

2.0 Analysis of Financial Performance of the Company in the Last Three Years

2.1 Profitability

Profitability

2012

2011

2010

Morrison

GP

6.9%

7.0%

6.9%

NP

3.9%

3.8%

3.9%

ROCE

9.7%

9.7 %

9.4%

ROE

12.8%

11.7%

12.1%

Tesco

GP

6.1%

6.4%

6.1%

NP

4.4%

4.4%

4.1%

ROCE

13.3%

12.9%

12.1%

ROE

15.81%

16.07%

15.91%

Morrison has a “healthy” GP that beats the industry leader, Tesco for the three years but it has a smaller NP than Tesco for the same period of time as the table above shows. Even so, Tesco seems to enjoy strong and stable profitability than Morrison given, its GP has the smallest change for the three years. This is an indicator that Morrison costing techniques are not as efficient as Tesco’s.

Again, Morrison does not perform well in managing costs of sourcing capital given its low NP during the three years – Tesco score well on this front too. Since Morrison has low ROCE and ROE ratios than Tesco it can also be argued that the company does not fare well in investing its capital – its investing activities yield more expenses perhaps because it is in a period of laying down a strong foundation for competing with Tesco, Asda, and Sainsbury’s.

2.2 Liquidity Ratio

Liquidity

2012

2011

2010

Morrison

Current Ratio