Harvard Case - Easy Business Company Limited: Cost Analysis on a Small Business Start-up in China (A)
"Easy Business Company Limited: Cost Analysis on a Small Business Start-up in China (A)" Harvard business case study is written by Claude P. Lanfranconi, Peter Yuan. It deals with the challenges in the field of Accounting. The case study is 7 page(s) long and it was first published on : Apr 4, 2000
This case study solution recommends a comprehensive approach to cost analysis and management for Easy Business Company Limited (EBCL) to ensure its long-term profitability and sustainable growth in the competitive Chinese market. We recommend a multi-pronged strategy that includes:
- Implementing a robust cost accounting system: This will enable EBCL to accurately track and analyze costs across all departments and activities.
- Adopting activity-based costing (ABC): This will provide a more accurate view of cost drivers and help EBCL identify areas for cost optimization.
- Developing a comprehensive budgeting process: This will ensure that EBCL has a clear understanding of its financial position and can make informed decisions about resource allocation.
- Implementing a performance measurement system: This will track key performance indicators (KPIs) and provide insights into the effectiveness of cost management initiatives.
2. Background
Easy Business Company Limited (EBCL) is a small business start-up in China specializing in the production and distribution of eco-friendly cleaning products. The company faces several challenges, including:
- High initial investment costs: EBCL requires significant capital for manufacturing equipment, raw materials, and marketing.
- Limited financial resources: As a start-up, EBCL has limited access to capital and relies heavily on internal cash flow.
- Intense competition: The cleaning product market in China is highly competitive, with established players and numerous smaller competitors.
- Lack of cost accounting expertise: EBCL lacks a dedicated cost accounting team and relies on basic accounting procedures.
The case study focuses on the need for EBCL to develop a comprehensive cost analysis system to improve its financial performance and ensure its long-term viability.
3. Analysis of the Case Study
EBCL's current approach to cost management is inadequate for the challenges it faces. The company relies on basic accounting procedures and lacks a clear understanding of its cost structure. This limits its ability to make informed decisions about pricing, resource allocation, and profitability.
Key Issues:
- Lack of Cost Visibility: EBCL's current accounting system does not provide sufficient detail on cost drivers and the true cost of producing and distributing its products.
- Inefficient Cost Allocation: Cost allocation methods are not aligned with the company's activities, leading to inaccurate cost assignments and potentially misleading financial reports.
- Limited Financial Analysis: EBCL lacks the tools and expertise to conduct in-depth financial analysis, hindering its ability to identify areas for cost optimization and improvement.
Framework:
To address these issues, we can apply a framework that combines Cost Accounting and Management Accounting principles:
- Cost Accounting: Focuses on the collection, classification, and analysis of costs associated with production, distribution, and other business activities.
- Management Accounting: Provides information to managers for decision-making, planning, and control.
This framework will guide the implementation of a robust cost accounting system and the development of management accounting tools to improve EBCL's financial performance.
4. Recommendations
1. Implement a Robust Cost Accounting System:
- Establish a dedicated cost accounting team: Hire or train existing staff to manage cost accounting functions.
- Develop a comprehensive cost accounting system: This system should include:
- Detailed cost tracking: Track all direct and indirect costs associated with production, distribution, marketing, and administration.
- Accurate cost allocation: Use activity-based costing (ABC) to allocate costs to specific activities and products.
- Regular cost analysis: Perform periodic cost analysis to identify cost trends, variances, and potential areas for improvement.
2. Adopt Activity-Based Costing (ABC):
- Identify cost drivers: Determine the key activities that drive costs in each department and product line.
- Allocate costs based on activities: Assign costs to specific activities rather than using traditional methods like direct labor hours or machine hours.
- Analyze cost drivers: Identify high-cost activities and explore opportunities for improvement or cost reduction.
3. Develop a Comprehensive Budgeting Process:
- Establish a clear budgeting cycle: Define the timeframe for budget preparation, approval, and monitoring.
- Involve key stakeholders: Engage department heads and managers in the budgeting process to ensure buy-in and accountability.
- Use historical data and industry benchmarks: Base budgets on historical data and industry benchmarks to ensure realistic targets.
- Monitor budget performance: Track actual costs against budgeted amounts and analyze variances to identify areas for improvement.
4. Implement a Performance Measurement System:
- Define key performance indicators (KPIs): Identify relevant KPIs for cost management, such as cost per unit, gross margin, and return on investment (ROI).
- Develop a dashboard for tracking KPIs: Create a visual dashboard to monitor key performance indicators and track progress over time.
- Use performance data for decision-making: Analyze performance data to identify areas of strength and weakness and make informed decisions about resource allocation and cost optimization.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: The recommendations align with EBCL's mission to provide eco-friendly cleaning products while ensuring profitability and sustainability.
- External customers and internal clients: The recommendations will improve EBCL's ability to offer competitive pricing and meet customer expectations.
- Competitors: By implementing a robust cost accounting system and adopting ABC, EBCL can gain a competitive advantage by understanding its true costs and identifying areas for cost optimization.
- Attractiveness ' quantitative measures: The recommendations will improve EBCL's financial performance by reducing costs, increasing profitability, and improving resource allocation.
- Assumptions: The recommendations assume that EBCL has the resources and commitment to implement the necessary changes.
6. Conclusion
By implementing these recommendations, EBCL can significantly improve its cost management capabilities, gain a competitive edge, and ensure its long-term profitability and sustainability in the Chinese market. The comprehensive approach to cost analysis and management will provide EBCL with the necessary insights to make informed decisions and achieve its business objectives.
7. Discussion
Alternatives:
- Continuing with the current cost accounting system: This would be a risky option, as it would limit EBCL's ability to manage costs effectively and compete in the market.
- Outsourcing cost accounting functions: This could be a viable option for EBCL, but it would require careful consideration of costs, expertise, and control.
Risks:
- Resistance to change: EBCL's employees may resist the implementation of new cost accounting procedures and systems.
- Lack of resources: EBCL may not have the necessary resources to implement all of the recommendations.
- Unforeseen challenges: The implementation process may encounter unforeseen challenges that require adjustments and adaptations.
Key Assumptions:
- EBCL is committed to improving its cost management capabilities.
- EBCL has the resources and expertise to implement the recommendations.
- The Chinese market will continue to grow and offer opportunities for EBCL.
8. Next Steps
Timeline:
- Month 1: Form a cost accounting team and begin developing a cost accounting system.
- Month 3: Implement activity-based costing (ABC) and start collecting data.
- Month 6: Develop a comprehensive budgeting process and establish performance measurement metrics.
- Month 9: Begin monitoring and analyzing cost data and performance indicators.
- Month 12: Evaluate the effectiveness of the implemented system and make necessary adjustments.
Key Milestones:
- Completion of the cost accounting system: This will provide EBCL with a clear understanding of its cost structure.
- Implementation of ABC: This will enable EBCL to allocate costs more accurately and identify areas for cost optimization.
- Development of a budgeting process: This will ensure that EBCL has a clear financial plan and can make informed decisions about resource allocation.
- Implementation of a performance measurement system: This will track key performance indicators and provide insights into the effectiveness of cost management initiatives.
By following these steps, EBCL can successfully implement a robust cost management system and achieve its business objectives.
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