Management accounting for business decisions Trailer Construct plc

The Trailer Construct PLC is a small family business which is in the process of expansion into a higher level of operations. The enterprise is involved in the construction and repair of trailers custom made according to the specifications of the client. The demand for construction of new trailers has been consistently rising through the five years to 2011, although demand for repair remained consistent throughout the same period. As a result, the company decided to raise its production level, however its policies and practices remained the same.Trailor Construct’s problem is comprised of a mismatch between its increased scale of operations, and its policies regarding inventory management, cash management, cost tracing and determination, price setting, and its human resources management. The firm is comprised of three divisions, namely Administration, Repair and Construction. The aforementioned policies involved practices undertaken in all three, and therefore are resolved using a systemic approach. This report recommends that the economic order quantity be applied to the inventory management practices of the company, instead of the present long lead time, large inventory storage employed by the company which unnecessarily inflates carrying costs. Production should be enhanced to make better use of expanded capacity and increase production efficiency, to reduce the level of fixed costs distributed to each unit of production. Cash management should be managed better by speeding up collection of receivables. This is to avoid the need to borrow from the bank to bridge cash shortfalls, and thereby eliminate unnecessary interest charges. Finally, employee performance should be improved by motivation through employee engagement. Table of Contents Executive Summary 2 Table of Contents 3 Introduction 4 Repair 4 Construction 5 Administration 6 Inventory management 7 Treatment of employees 8 Conclusion 8 References 10 Introduction The case of the Trailer Construct plc concerns the transformation of a small family business into a larger corporation as a result in the escalation in the scale of operations. This is typical of successful enterprises which attract a greater volume of business than its usual procedures are suited for. The administrative procedures, employee management, and inventory policies should evolve when a company shifts towards a higher scale of operation, because the greater business volumes enable the development of economies of scale, and demand a greater efficiency in these policies and activities. Repair The financial performance of the Repair division shows turnover to be almost unchanged from one year to the next. in comparison, turnover in construction is growing steadily. There is therefore no reason for the procedure that the client can bring in their trailer for repair after only a phone call. However, there is concern that maintaining a large stock or spare parts is unnecessary investment in materials when a lower stock level would do. There may be some merit to stocking up on materials in anticipation of higher prices, but this seldom results in the anticipated savings (unless a sudden significant rise in price or severe shortage takes place) because of the increase in storage and carrying costs that may just offset and even exceed the amount saved by chasing the lower price. The recommendation therefore is that the inventory system should employ the economic order quantity (EOQ) system which is described in the discussion on inventory below. Construction Being the larger of the two divisions, the Construction division shows a steadily rising turnover, indicating that the market is expanding. This presents an opportunity that Trailer Construct should take advantage of. The financial show that although turnover rises, profits remain unchanged for Construction. This may or may not mean that the firm is unduly incurring unnecessary expenses. The company decided to increase capacity by