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Instructions:
Seneca Foods As A Regional Producer Essay
Advanced Cost Accounting Questions:
Q1) (ACTIVITY BASED MANAGEMENT)
Seneca Foods is a regional producer of low-priced private-label snack foods. Seneca
contracts with local supermarkets to supply good-tasting packaged snack foods that the
retailers sell at significantly lower prices to price-sensitive consumers. Because
Seneca’s production costs are low, and it spends no money on advertising and
promotion, it can sell its products to retailers at much lower prices than can national-
brand snack food companies, such as Frito-Lay. The low purchase prices often allow
the retailer to mark this product up and earn a gross margin well above what it earns
from brand products, while still keeping and selling price to the consumer well below the
price of the brand products.
Seneca has recently been approached by several large discount food chains who wish
to offer their consumers a high-quality but much lower-priced alternative to the heavily
advertised and high-priced national brands. But each discount retailer wants the recipe
for the snack foods to be customized to its own tastes. Also, each retailer wants its own
name and label on the snack foods it sells. Thus, the retailer, not the manufacturer,
would be providing the branding for the private-label product. In addition, the retail
chains want their own retailer-branded product to offer a full snack product line, just as
the national brands do.
Seneca’s managers are intrigued with the potential for quantum growth by becoming the
prime producer of retailer-brand snack foods to large, national discount chains. As they
contemplated this new opportunity. Dale Williams, the senior marketing manager,
proposed that if Seneca enters this business, it can think of even higher growth
opportunities. Seneca does not have to sell just to the discount chains that have
approached it. Local supermarket chains may also be attracted to the idea of having
their own brand of high quality but lower-priced snack products that could compete with
the national brands, not just be a low-priced alternative for highly price-sensitive
consumers. Perhaps Seneca could launch a marketing effort to regional supermarket
chains around the country for a retail-brand snack food product line. Williams noted,
however, that the local supermarket chains were not as sophisticated as the national
discounters in promoting products under their own brand name. Each supermarket
chain likely would need extensive assistance and support to learn how to advertise,
merchandise, and promote the store-brand products to be competitive with the national-
brand products.
John Thompson, director of logistics for Seneca Foods, noted another issue. The
national-brand producers used their own salespeople to deliver their products directly to
the retailer’s store and even stocked their products on the retailer’s shelves. Seneca, in
contrast, delivered to the retailer’s warehouse or distribution center, leaving the retailer
to move the product to the shelves of its various retail outlets. The national producers
were trying to dissuade the large discount chains from following their proposed private-
label (retailer-brand) strategy by showing them studies that the apparently higher
margins they would earn on the private label would be eaten away by much higher
warehousing, distribution, and stocking costs for these products.
Heather Gerald, the controller of Seneca, was concerned with the new initiatives. She
felt that Seneca’s current success was due to its focus. It currently offered a relatively
narrow range of products aimed at the high-volume snack food segments to
supermarket chains in its local region. Seneca got good terms from its relatively few
supplier because of the high volume of business it did with each of them. Also, the
existing production processes were efficient for the products and product range
currently produced. She feared that customizing products for each discount or
supermarket retailer, plus adding additional products so that they could offer a full
product line, would cause problems with both suppliers and the production process. She
also wondered about the cost of providing new services, such as consulting and
promtoins, to the supermarket chains and of developing some of the new items required
for the proposed full product line strategy. Heather was attracted to the growth
prospects offered by becoming the preferred supplier to major discount and
supermarket chains. But she was not as optimistic as Dale Williams that these retailers
truly believed that selling their own private-label foods would be more profitable than
selling the national brands. Perhaps they were only using Seneca as a negotiating ploy,
threatening to turn to private labels to increase their power in setting terms with the
national manufacturers. Once production geared up, how much volume would these
retailers provide to Seneca? How could Seneca convince the large retailers about the
profitability associated with the new private-label strategy?
Gerald knew that Seneca’s existing cost systems were adequate for their current
strategy. Most expenses were related to materials and machine processing, and these
costs were well assigned to products with the conventional standard costing system.
But the new strategy would seem to involve a lot more spending in areas other than
purchasing materials and running machines. She wished she knew how to provide input
into the strategic deliberations now under way at Seneca, but she didn’t know how to
quantify all the effects of the proposed strategy.
REQUIRED:
a) How can activity-based costing help Heather Gerald assess the attractiveness of the
proposed policy?
b) Assuming that Seneca starts to supply new customers-large discounters and
supermarkets outisde its local region-what ABC systems would be helpful to guide the
profitability of the strategy and assist Seneca managers in making decisions?
*NOTE: Make sure to think about the totality of Seneca’s operations, including its
relationships with both supplier and customers. (i) Discuss how ABC can be used to
manage and controls costs for Seneca's manufacturing operations. The “whale curve”
and some of those concepts can apply to this company. (ii) ABC can be used to
measure profitability: internal to the companyand external by modeling the customer.
(iii) Finally, use ABC to manage the company’s relationship with suppliers.
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Q2) (COST-BASED DECISION MAKING)
COST COMMITMENT
Using published sources, identify the process of cost commitment during various
phases of some product’s life cycle. Try to find several examples so that you can
contrast the rate of cost commitment for different products.
*Note: Provide a minimum of two examples and document the process of cost
commitment
during various phases of these products' life cycles. In particular, indicate what
percentage of the costs will be committed at the design stage.
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Q3) (FORMAL MODELS IN BUDGETING AND INCENTIVE CONTRACTS)
THE REVELATION PRINCIPLE IN BUDGET SETTING
Kentville Orchards grows and sells a wide variety of fruits. Norm Wilson, the vice-
president-controller of Kentville Orchards, is responsible for all aspects of budgeting and
forecasting in the firm. Norm has becoming both disillusioned and dissatisfied with the
traditional approach that Kentville Orchards has taken to budgeting. Norm summarized
his concerns as follows:
“The traditional approach, where we set budget objectives and then evaluate
performance relative to those objectives, is not working well. First, the budget is
focusing attention on the wrong things. The managers are interested in making short-
run profit as large as possible and are not doing things to improve long-run profitability.
Second, I do not think that the model of evaluating performance based on profits has
the scope to evaluate the jobs that the managers are doing. Their jobs are much more
complicated than a simple profit measure implies, and we need a more accurate picture
of how well they are doing. Finally, the existing system is motivating the managers to
build slack into both their standards and performance targets so that they can make
budget and earn bonuses. As a result, our forecasting system is unable to predict either
sales levels or input usage accurately.”
Norm went on to indicate that he was considering recommending to the senior
management committee at Kentville Orchards that the current budgeting system be
replaced with a new system using participative budggeting techniques. Specifically, the
new system would require that the objectives for each management job in the
organization be defined relative to the organization’s strategic goals by negotiations
between the job’s incumbent and incumbent’s supervisor. From these general
objectives, specific performance objectives would be set for each job each year through
negotiations between the incumbent and the incumbent’s supervisor. The objectives
would be multidimensional and would include performance objectives for all attributes of
the job that are considered important.
The annual evaluation would reflect two dimensions of performance appraisal. First, the
incumbent would be evaluated for innovation in developing ways of carrying out
assigned responsibilities. Second, the incumbent’s performance would be evaluated
relative to the targets that were negotiated with the supervisor. Norm summarized his
feelings as follows:
“The only thing that is holding me back is that I do not think that the proposed changes
go far enough. The proposed system deals with the problem of inadequate performance
measurement but still provides managers with the incentives to understate their
potential, since their performance will be evaluated relative to the targets that each
manager negotiates with his supervisor. Moreover, the planned system, like the old
system, still has the aspect of checking up on people rather than relying on them to do
their jobs. Perhaps we should go even further and implement the proposed system but
evaluate managers only on their ability to be innovative in undertaking the tasks that
they have been assigned. If they are not evaluated relative to the targets that they set
jointly with their supervisors, they will be motivated not to understate their potential. The
bottom line is that I think that we should get rid of the concept of standards altogether,
irrespective of who sets the standards. As a result of eliminating the concept of
standards, the budget will serve to communicate and coordinate rather than be a threat
and a means of checking up on the managers.”
Seneca Foods As A Regional Producer Essay
Seneca Foods As A Regional Producer Essay
RUBRIC |
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Excellent Quality 95-100%
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Introduction
45-41 points The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned. |
Literature Support 91-84 points The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned. |
Methodology 58-53 points Content is well-organized with headings for each slide and bulleted lists to group related material as needed. Use of font, color, graphics, effects, etc. to enhance readability and presentation content is excellent. Length requirements of 10 slides/pages or less is met. |
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Average Score 50-85% |
40-38 points More depth/detail for the background and significance is needed, or the research detail is not clear. No search history information is provided. |
83-76 points Review of relevant theoretical literature is evident, but there is little integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are included. Summary of information presented is included. Conclusion may not contain a biblical integration. |
52-49 points Content is somewhat organized, but no structure is apparent. The use of font, color, graphics, effects, etc. is occasionally detracting to the presentation content. Length requirements may not be met. |
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Poor Quality 0-45% |
37-1 points The background and/or significance are missing. No search history information is provided. |
75-1 points Review of relevant theoretical literature is evident, but there is no integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are not included in the summary of information presented. Conclusion does not contain a biblical integration. |
48-1 points There is no clear or logical organizational structure. No logical sequence is apparent. The use of font, color, graphics, effects etc. is often detracting to the presentation content. Length requirements may not be met |
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