Kit Valley Towels Case Study

Faculty of Business and Law
Department of AEF

ACADEMIC YEAR 2015/16

ASSESSMENT BRIEF

Module Code: UMACRQ-15-M
Module Title: Performance Measurement and Management
Submission Deadline: 18 November 2015
Assessment Component
Assessment Weighting: 30% of total module mark

Assessment Instructions

Kit Valley Towels Case Study (Details on blackboard).

The management of KVT has hired your consulting firm to prepare a report to be given to the Board of Directors.
Your report should:
• Explain the potential advantages that ABC offers firms in the costing of their products. (Indicative mark 15%)
• Briefly describe how an activity based product costing system can be extended from unit product costs to focus on various other cost objectives. (Indicative mark 15%)
• Determine the profitability of each customer group (large, medium and small) and average profitability of each customer within each group. (This should be supported by printouts from a spreadsheet completed on a template obtainable in the ‘blackboard’ assessments folder) (Indicative mark 15%)
• Identify strategic issues that may arise from the results of the profitability analysis and other avenues that may be worth exploring further. These avenues may include both the consideration of the validity of implicit assumptions and also opportunities that may be worth pursuing. (Indicative mark 35%)

Marking Criteria 
• You are encouraged to explicitly structure your report, but marks will based on the report as a whole rather than on the basis of subdivisions. A proper, careful format and structure with good clarity of expression will be expected. (Up to 20% of the mark will relate to clarity of expression, structure and credibility).
• The case study approach is intended to allow considerable latitude in the content of reports. In common with real life situations there is deliberately some degree of ambiguity (e.g. as to whether all costs have been assigned, or assigned correctly) and there is no unique correct answer. For instance some of the costs need to be assigned in whatever way seems most appropriate to you on the basis of the information provided.
• Students will be rewarded for sound analysis, practicality of suggestions, imaginative lateral thought, sensible recognition of constraints and likely consequences, and a convincing, coherent argument.
• Although you may want to verbally discuss with classmates ‘in broad terms’ the approach you plan to adopt, you should not show your answer to others on the course. You should certainly not collaborate.
Format

All work should be word processed in 12 point font Times New Roman or Arial and double spaced 

Please use the following file format(s)…Word and Excel

Please ensure that you provide the following details on the first page of your coursework:
• Student Number
• Module Name and Number
• Word Count (excluding tables)
Word Limit

The word limit for this coursework is 2,500
Word count includes everything in the main body of the text including headings.
• Any references, and footnotes are not included in the word count.
• There is no direct penalty for exceeding the word count but the marker WILL stop reading once the word limit has been reached and nothing further will be taken into account in the allocation of marks.
You can view the UWE word count policy here: http://www1.uwe.ac.uk/aboutus/policies

Referencing:

Where appropriate there may be reference to the literature but this should be limited.
Please ensure you adhere to the principles of good academic practice and ensure you use the UWE Harvard system to reference your work. Failure to properly reference your work to original source material can be grounds for the assessment offence of plagiarism and may result in failure of the assessment or have more serious implications. 

For further guidance on correct referencing go to:
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Instructions for submission 

You must submit your assignment before the stated deadline by electronic submission through Blackboard. Notification that the electronic submission portal is open for your assignment is displayed (usually two weeks before the submission date) in the Coursework tab in myUWE, the Coursework tab in Blackboard and via an announcement in the Blackboard course. 

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Late submission in the 24 hours following the deadline will be accepted but the assignment mark will be capped at 40%. Submissions after 24 hours will not be accepted. For full guidance on online submission through Blackboard, see:

http://info.uwe.ac.uk/online/Blackboard/students/guides/assignments/default.asp

Submissions of coursework by any other method (including a paper copy, on disc, by email or by fax) are NOT permissible for this module unless specifically agreed in advance of the submission date.

Before submitting your work, please ensure the following:
• That you have proof read you work thoroughly to ensure your work is presented appropriately 
• That you have addressed all the required elements of the assessment
• That you have referenced in accordance with the guidance provided
• That you have addressed each of the marking criterion
• That the submission is in the correct format
Feedback 
Students will normally receive marks and feedback on their submission within 20 working days of the submission deadline (not including any public holidays or university closure days). Any delay in returning students’ work will be communicated by the module leader via Blackboard. 
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Further Guidance 

Guidance on study skills: http://www1.uwe.ac.uk/students/studysupport/studyskills.aspx
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Extenuating Circumstances 

If you are experiencing difficulties in completing a piece of assessment on time due to unexpected circumstances (for example illness, accident, bereavement), you should seek advice from a Student Support Adviser at the earliest opportunity.
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Appointments with a student adviser can be made via an Information Point or online at:
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The Student Support Adviser will advise as to whether you should submit an application for ‘Extenuating Circumstances (ECs)’, how to do so and what evidence is required to support the application. 

Further details on ECs can be found here:
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Kit Valley Towels

First Stage Allocation: Allocate S&A Costs to S&A Activities

First: S&A Costs Total 
Despatch Sales Marketing Other Assigned Source
Administration – Table 4A
Selling – Table 4A
£0 £0 £0 £0 £0 

Percentage of… 
Second: S&A Despatch Sales Marketing Other 
ACTIVITIES
Enter P.O. Table 4A
Commissions ”
Despatch ”
Invoicing ”
Sales Calls ”
Check Credit ”
Samples,… ”
Sp Handling ”
Distribution ”
Marketing, Cust ”
Advertising ”
Marketing ”
Administrative ”
Licences,fees ”
TOTAL 0 0 0 0 ”

Third: Allocate Costs to Activities
Despatch Sales Marketing Other Total
ACTIVITIES
Enter P.O. – – – – – 
Commissions – – – – – 
Despatch – – – – – 
Invoicing – – – – – 
Sales Calls – – – – – 
Check Credit – – – – – 
Samples,… – – – – – 
Sp Handling – – – – – 
Distribution – – – – – 
Marketing, Cust – – – – – 
Advertising – – – – – 
Marketing – – – – – 
Administrative – – – – – 
Licenses,fees – – – – – 
TOTAL £0 £0 £0 £0 £0 

Second Stage Allocation: AllocateS&A Activites to Custmer Type (Large, Med, Small)
First: Obtain Cost Driver %
Customer Type…….
COST DRIVER Large Medium Small Total
Units – Table 1
Units embroidered – ”
Units dyed – ”
Orders – ”
Despatches – ”
Invoices – ”
%>60days – ”
Revenues £0 ”
Customers – ”

Cost Driver Percentage of Total for each Customer Type
Units #DIV/0! #DIV/0! #DIV/0! #DIV/0! From above
Orders #DIV/0! #DIV/0! #DIV/0! #DIV/0! From above
Despatches #DIV/0! #DIV/0! #DIV/0! #DIV/0! From above
Invoices #DIV/0! #DIV/0! #DIV/0! #DIV/0! From above
%>60days #DIV/0! #DIV/0! #DIV/0! #DIV/0! From above
Revenues #DIV/0! #DIV/0! #DIV/0! #DIV/0! From above
Customers #DIV/0! #DIV/0! #DIV/0! #DIV/0! From above

Second: Allocate Activity Costs to Customer Type Alloc. Base
ACTIVITIES Total Cost Large Medium Small (Table 4B)
Enter P.O. – #DIV/0! #DIV/0! #DIV/0! orders
Commissions – direct
Despatch – #DIV/0! #DIV/0! #DIV/0! despatches
Invoicing – #DIV/0! #DIV/0! #DIV/0! invoices
Sales Calls – direct
Check Credit – #DIV/0! #DIV/0! #DIV/0! %>60days
Samples,… – #DIV/0! #DIV/0! #DIV/0! revenues
Sp Handling – – – estimate
Distribution – #DIV/0! #DIV/0! #DIV/0! revenues
Marketing, Cust – #DIV/0! #DIV/0! #DIV/0! revenues
Advertising – – – estimate
Marketing – #DIV/0! #DIV/0! #DIV/0! units
Administrative – #DIV/0! #DIV/0! #DIV/0! units
Licenses,fees – direct
TOTAL – #DIV/0! #DIV/0! #DIV/0! AA

Customer Profitability Analysis

First: Get Revenues by Customer Group
Unit Sales Large Medium Small
Regular – Table 1
Mid-size – ”
Hand – ”
Special – ”
Total – – – – 

Revenue Price Large Medium Small
Regular – – – – Table 2
Mid-size – – – – ”
Hand – – – – ”
Special – – – – ”
Total £0 £0 £0 £0 BB

Unit ManufacturingCost
Regular – – – – Table 2
Mid-size – – – – ”
Hand – – – – ”
Special – – – – ”
Total £0 £0 £0 £0 CC

Customizing Unit Cost
Inking – – – – 
Embroidery – – – – 
Dyeing – – – – 
£0 £0 £0 £0 DD

Total Cost
Mfg Cost £0 £0 £0 £0 CC above
Customizing £0 £0 £0 £0 DD above
S&A #DIV/0! #DIV/0! #DIV/0! #DIV/0! AA above
Total Cost #DIV/0! #DIV/0! #DIV/0! #DIV/0! EE

Customer Profits #DIV/0! #DIV/0! #DIV/0! #DIV/0! BB-EE
per Customer #DIV/0! #DIV/0! #DIV/0! #DIV/0!

Performance Measurement and Management
Coursework assignment 2015/16

Case: Kit Valley Towels

Background: Kit Valley Towels (KVT) produces and sells towels for the British ‘sport towel’ market. They’re called sports towels because they have the promotion of a sport, an event or a logo printed on them, and their most popular use is for distribution in connection with major sporting events like the Olympics, Six Nations Rugby tournament, F.A. Cup, British Open Golf Tournament, and Wimbledon. Towels with University, County Cricket team logos, and promotions for commercial products like soft drinks, beer, fast food chains, etc, are also big sellers.
The firm designs, weaves, prints, and embroiders towels. All towels are woven ‘in-house’ and the costs of towel production are tracked separately from the costs of customizing towels. 75% of their orders include logo design, while the balance are ‘print only’ and require the payment of a license fee for the logo used. About 15% of their orders include embroidery. Towels are made in three sizes: regular (45cm x 75cm), hand (30 x 50), and mid-range (37.5 x 60). The normal production cycle for an order of white towels is three days. If a customer wants a coloured towel, the basic white towel made by KVT is sent to a dyeing firm, which extends the production cycle of an order by three days. Also, customers occasionally order towels in sizes other than the three standard sizes. These towels are called ‘special’.
The firm now produces a ‘medium’ quality towel. They have had some difficulty with the ‘staying power’ of the material printed on these towels, which is attributed to the towel quality, the ink, and the printing process. Customers complain that the ink lays on the surface and cracks and peels off. KVT recently made a breakthrough in developing an ink that soaks into the towel, won’t wash out, and is non-toxic. A big advantage of this ink is that it avoids EU environmental disposal requirements since it can be washed down the drain. Due to the characteristics of their new ink, KVT is considering upgrading the quality of the basic towel since it will ‘take’ the ink better, both the towel and the ink will last longer, and the product will sell at a higher price. If they take this step, they will evaluate expanding their marketing and sales areas with the objective of ‘going Europe-wide’.

Customers: Except for a few national chains, KVT’s sales are predominantly in the South of Britain. The company sells its products to 986 different customers. These customers differ primarily in the volume of their purchases, so management classifies each customer into one of three categories: large (8), medium (154), and small (824). Large customers are primarily national chains, small customers are single store operations (including ‘Pro Shops’ at golf courses), and medium-sized customers are small chains, large single stores, or licensing agents for professional sports teams and manufacturers of consumer products. Figure 1 gives the product and customer size statistics for 2015.

Figure 1 KVT
Product and Customer Size Statistics
Sales in units by customer account size
Large Medium Small Total

Towel: Regular 27,250 16,600 10,550 54,400
Mid-Size 36,640 18,552 10,308 65,500
Hand 35,880 19,966 95,954 151,800
Special 480 3,426 594 4,500

Number of units sold 100,250 58,544 117,406 276,200

Number of units embroidered 5,959 6,490 29,394 41,843
Number of units dyed 20,536 9,935 12,328 42,799
Number of orders received 133 845 5,130 6,108
Number of despatches made 147 923 5,431 6,501
Number of invoices sent 112 754 4,737 5,603
Accounts with balance > 60 days 1 11 122 134

KVT has a different approach to customers in each of its three categories. A small group of in-house sales people sell directly to buyers in the large customer category. Independent manufacturer representatives, on commission, call on the licence holder, or the manager of a store in the medium-customer category. Ads placed in regional and national magazines and newspapers target customers primarily in the small-customer segment, who phone or post in their orders. KVT does not give discounts.

Manufacturing: KVT has a modern weaving and printing plant in Chard, Somerset. Upgrading the facilities over recent years was accompanied by the introduction of an activity-based costing system (ABC) to determine product costs. The cost accounting system is fairly sophisticated, and management has confidence in the accuracy of the manufacturing cost figures for each product line. Figure 2 shows the firm’s standard unit costs for various items.

Figure 2 KVT
Product Information

Quantity Sales Material Labour Manufacturing
Price Overhead

Line 1: Production
Regular 54,400 £3.60 £0.60 £0.37 £0.22
Mid-Size 65,500 3.20 0.50 0.33 0.20
Hand 151,800 2.55 0.39 0.31 0.19
Special 4,500 4.00 0.67 0.48 0.29

Quantity Cost Material Labour Manufacturing
Overhead

Line 2: Customizing
Inking (based
on passes) 552,400 – £0.0030 £0.0045 £0.0742
Dying 42,799 £0.11 – – 0.0000
Embroidery 41,843 – 0.0026 0.1750 1.0994
Other 85 – 0.0032 0.0015 0.0000

Direct labour wage rate = £9.00 per hour
For the inking of two-colour logos each towel goes through two passes.

Company management is committed to adopting advanced manufacturing techniques such as benchmarking and just-in-time (JIT). The corporate culture necessary for the success of such techniques is evolving, and worker empowerment is already a major programme. In addition, workers are allowed several hours away from regular work assignments each week for training programmes, or to confer on budgets, work improvements, and applying the ABC system.

Performance: The Profit Statement (reflecting actual sales and actual costs) in Figure 3 shows the company is profitable. However, management has become concerned about the profitability of the customers in its three customer categories – large, medium, and small. Different customers demand different levels of support, and management has no basis for identifying customers that generate high profits, or to drop those that do not generate enough revenues to cover the expenses to support them. Under the previous accounting system, it wasn’t possible to determine the costs of supporting individual customers.
With the introduction of ABC, it may now be possible to determine customer profitability. Figure 4 (a) shows how the administrative and selling costs are assigned and re-assigned between various functions within the selling and marketing areas, and to sub-activities in the selling and marketing areas. Figure 4 (b) provides a list of selling and marketing activities and the activity base to use in assigning costs to each.

Figure 3 KVT
Profit Statement
For the Year Ended 2015
Quantity
Sold Sales
Sales
Regular 54,400 £195,840
Mid-size 65,500 209,600
Hand 151,800 387,090
Special 4,500 18,000
£810,530

Less: Cost of Goods Manufactured
Towels 30.0% £243,549
Customizing 20.1% 163,121
Other Factory Overhead 2.1% 17,000 £423,670
Gross Profit 47.8% £386,860

Less: Selling & Administrative
General Administration 21.0% £170,000
Selling Expenses 19.1% 155,000
325,000
Profit Before Taxes £61,860

Taxes, @ 30.0% 18,558
Net Profit, after Taxes £43,302

Balance Sheet At Year End, 2015
Cash £8,000
Accounts receivable 14,200
Stocks 26,000
Equipment (net) 174,000
Buildings (net) 245,900
£468,100
Accounts payable £28,000
Loans 115,100
£143,100

Shareholder’s Equity £240,000
Retained Earnings 85,000
£325,000
£468,100

Figure 4 KVT
(a) Costs Distributed Between Functions
<-<-<-<-<-Directly Assigned To: – >->->
Total
Total Despatch Sales Mktg Other Assigned
Administration £170,000 £17,000 £37,400 £20,400 £56,100 £130,900
Selling 155,000 15,500 117,800 9,300 12,400 155,000
32,500 155,200 29,700 68,500 285,900
Re-assign to customer-related activities
Despatch Sales Mktg Other
Entering purchase orders 55.0% 10.0%
Commissions 10.0%
Despatch activities 65.0% 15.0%
Invoicing 20.0%
Cost to make sales calls 30.0% 10.0%
Checking credit 10.0%
Samples, Catalogue info 5.0% 10.0%
Special handling charges 5.0% 5.0%
Distribution management 10.0% 10.0%
Marketing by customer type 5.0%
Advertising/Promotion 30.0%
Marketing 15.0% 50.0% 5.0%
Administrative office support 20.0%
Licenses, Fees 5.0%
100.0% 100.0% 100.0% 100.0%

(b) Basis for Distributing Costs of Functions

<–<–<– Item –>–>–> <–<–<– Base –>–>–>
Discounts Direct
Commissions Direct
Entering purchase orders Number of orders
Despatch activities Number of despatches
Invoicing Number of invoices
Cost to make sales calls Direct
Checking credit Percent accounts >60 Days
Samples, Catalogue Info Sales £
Special handling charges Management estimate (1)
Distribution management Sales £
Marketing, By customer type Sales £
Advertising/Promotion Management estimate (2)
Marketing Number of units sold (3)
Administrative office support Number of units sold (3)
Licenses, Fees Direct

(1) 20% to medium-sized customers; 80% to small-sized customers.
(2) 25% to medium-sized customers; 75% to small-sized customers.
(3) Excluding specials.

Requirements: The management of KVT has hired your consulting firm to prepare a report (of no longer than 2,500 words) to be given to the Board of Directors.
Your report should:
• Explain the potential advantages that ABC offers firms in the costing of their products. (Indicative 15%)
• Briefly describe how an activity based product costing system can be extended from unit product costs to focus on various other cost objectives. (Indicative 15%)
• Determine the profitability of each customer group (large, medium and small) and average profitability of each customer within each group. (This should be supported by printouts from a spreadsheet completed on a template obtainable in the ‘blackboard’ assessments folder) (Indicative 15%)
• Identify strategic issues that may arise from the results of the profitability analysis and other avenues that may be worth exploring further. These avenues may include both the consideration of the validity of implicit assumptions and also opportunities that may be worth pursuing. (Indicative 35%)

Notes: 
• You are encouraged to structure your report, but marks will based on the report as a whole rather than on the basis of subdivisions. A proper, careful format and structure with good clarity of expression will be expected. (Up to 20% of the mark will relate to clarity of expression, structure and credibility).
• The case study approach is intended to allow considerable latitude in the content of reports. In common with real life situations there is deliberately some degree of ambiguity (e.g. as to whether all costs have been assigned, or assigned correctly) and there is no unique correct answer. For instance some of the costs need to be assigned in whatever way seems most appropriate to you on the basis of the information provided.
• Students will be rewarded for sound analysis, practicality of suggestions, imaginative lateral thought, sensible recognition of constraints and likely consequences, and a convincing, coherent argument.
• Where appropriate there may be reference to the literature but this should be limited.
• Given the nature of this coursework assignment I strongly recommend that, although you may want to verbally discuss with classmates ‘in broad terms’ the approach you plan to adopt, you should not show your answer to others on the course. You should certainly not collaborate.
• The deadline for submission is 2pm on Wednesday 18th November 2015.

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