Managerial Accounting Case - Lipton Essay

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MBA 520: Managerial Accounting

Performance Measurement at Lipton:
Evaluation and Recommendations

Nick Arens
Chris Lance
Ryan Moore
Rob Sloan

We at ALMS Consulting Co. have been hired to analyze the way product lines and product managers are being evaluated at the Thomas J. Lipton, Incorporated (“Lipton” or the “Company”) entity. We will review the performance metrics utilized at the corporate level of Lipton, explain the current methodology utilized to evaluate the individual product lines, and then detail the benefits and potential downfalls of the methodology proposed by Don Logan. Finally, we will provide our own recommendations and opinions as to how
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Historic cost depreciation is being used which leads to skewed numbers that misrepresent how well a product line will continue to operate in the future due to understated replacement value of fixed assets.
Also, the cost of working capital is not being included; as a result, Trading Profit is not indicating the amount of cash and other current assets being tied up in each particular product line. We think that the opportunity cost of utilizing (tying-up) working capital is not reflected on each individual product lines’ final results, enabling product managers to utilize potentially excessive levels of working capital without poorly affecting their Trading Profit.
Finally, Mr. Logan concluded that there are expenses that are not being allocated at all or are being allocated improperly:
There is a corporate unallocated Other Income and Deductions (“OI&D”) account that includes charges that pertain to the different product lines.
The allocation of the New Product Development costs is also questionable. Even though these costs are being utilized to create new products, the established products are bearing the costs based on their profits.
Manufacturing overhead is based on planned and not actual production.
Don Logan felt that all of these factors played a role in not presenting a true measure of how each product line and each product manager was doing within Lipton. We tend to agree that the current process is not accurately reflecting how
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