H is a large marketing consultancy that provides a range ofservices including developing marketing campaigns, designing webpages, managing media relations and so on. There are approximately300 professional staff working in departments such as advertisingand media relations and 600 support staff in areas such asadministration and information technology (IT). Honey operates froma large office block in the centre of a major city. In common withsimilar agencies, H is successful because it can offer clients anintegrated service for all of their marketing and public relationsneeds. Sometimes those needs are related. For example, advertisingstaff may work alongside public relations staff to ensure that anew product is advertised effectively and that any positive presspublicity, such as the consumers’ favourable reaction at theproduct’s launch, can be maximised. H has a traditional managementaccounting system. Each department has its own detailed managementaccounts, which show financial transactions and chargeable hours.Financial transactions include all revenue from billings invoicedto clients and all costs. Included in the costs are substantialamounts for overheads associated with the running costs of theoffice building and the business as a whole. Chargeable hours aremonitored for each member of staff. The hourly charge-out ratevaries according to the seniority of the staff member and is set sothat all costs are recovered and a healthy profit is charged ontop. Any work undertaken for another department is chargedinternally at the staff member’s full charge-out rate. The mediabuying department of H buys and sells advertising space innewspapers and airtime on radio and television. The departmentsells this space and time to its clients at cost plus a mark-up andalso makes it available at the same price to other departments inH. This means that H can offer to plan and implement a marketingcampaign from the initial design all the way through to thepublication or broadcast of the finished advertisement. H’s boardis concerned that the company’s traditional management accountingsystem is encouraging dysfunctional behaviour and causing disputesbetween managers. The following examples have been debated atrecent board meetings: • The public relations department is payingexternal web designers to design “blogs” on behalf of clientsrather than using the web designers from H’s web design department.The web design business has seasonal peaks and troughs and thereare times when there is spare capacity, but the hourly ratescharged by the web design department are more expensive than thoseavailable from third parties. • The staff coffee shop was closed tocreate additional work space. Since the closure the space has beenempty because none of H’s department heads wish to be charged withthe cost of additional overheads. • Account executives within H arekeen to earn as much profit for themselves from each sale.Consequently, they are dealing directly with major broadcasters andnewspapers and are not using the media buying department. Theseindividual deals are taking away the bargaining power of the mediabuying department. H’s board is keen to consider whether theimplementation of lean manufacturing and lean management accountingtechniques might improve matters. In particular, the followingprinciples have been identified as being relevant to H:
• Honey should be managed through processes or value streamsrather than traditional departmental structures. The board believesthat the two value streams are the sale of professional servicesand the sale of media space.
• The consultancy should maximise the flow of services throughthe value streams while eliminating waste
. • Lean management accounting should provide the value streamleader with performance measurement information to both control andimprove the value stream.
Required - DETAILED ANSWERS!.
(a) (i) Advise Honey’s board on the differences between managingvalue streams and managing departmental profits.
(ii) Recommend, stating reasons, the changes that H should maketo its management accounting systems and policies in order toimprove the management of the value streams. , PLEASENOTE ANSWERS SHOULD BE IN DETAIL
(b) Advise H’s directors on the difficulties that are likely tobe associated with implementing the changes that a move towardslean management accounting will create. Your advice should includerecommendations as to how those difficulties might best be dealtwith. , PLEASE NOTE ANSWERS SHOULD BE IN DETAIL
