Harvard Case - Hung Fook Tong: Accounting for Discounts and Incentive Schemes
"Hung Fook Tong: Accounting for Discounts and Incentive Schemes" Harvard business case study is written by Xu Li, Gianne Wong. It deals with the challenges in the field of Accounting. The case study is 10 page(s) long and it was first published on : Dec 12, 2019
At Fern Fort University, we recommend Hung Fook Tong (HFT) implement a comprehensive accounting system to manage discounts and incentive schemes effectively. This system should integrate activity-based costing (ABC) to accurately allocate costs, cost accounting to track expenses and profitability, and a robust budgeting process to control spending and ensure financial stability. This approach will provide HFT with greater transparency, control, and insight into the financial impact of its various discount and incentive programs, ultimately leading to improved profitability and sustainable growth.
2. Background
Hung Fook Tong, a leading Chinese medicine retailer in Hong Kong, faces challenges in accurately accounting for discounts and incentive schemes offered to customers and employees. The company's current accounting system struggles to capture the true costs associated with these programs, leading to potential profit erosion and inaccurate financial reporting. The case study highlights the need for a more sophisticated accounting system that can effectively track and analyze the financial implications of these programs.
The main protagonists in this case study are:
- Mr. Wong, the company's finance director, who is concerned about the lack of transparency in the accounting system.
- Mr. Chan, the sales manager, who advocates for maintaining the current system due to its simplicity and perceived effectiveness.
- The Board of Directors, who ultimately need to make informed decisions regarding the company's financial performance and future growth.
3. Analysis of the Case Study
This case study presents a classic dilemma faced by many companies: balancing the need for operational efficiency with the need for accurate financial reporting. HFT's current system, while simple, fails to capture the true costs associated with discounts and incentive schemes. This leads to several issues:
- Inaccurate Profitability Measurement: The company's reported profits may be artificially inflated as the true cost of discounts and incentives is not fully reflected.
- Limited Decision-Making Insight: Without accurate cost data, management cannot make informed decisions regarding pricing, product mix, and incentive program effectiveness.
- Potential for Fraud and Abuse: The lack of transparency can create opportunities for fraud and abuse, particularly within the incentive programs.
To address these issues, HFT needs to adopt a more sophisticated approach to accounting for discounts and incentives. This involves implementing a combination of cost accounting, activity-based costing, and budgeting techniques.
Cost Accounting: HFT should implement a robust cost accounting system that tracks the costs associated with each discount and incentive program. This includes:
- Direct Costs: Costs directly related to the program, such as product discounts, employee bonuses, and advertising expenses.
- Indirect Costs: Costs indirectly related to the program, such as administrative overhead, sales commissions, and customer service costs.
Activity-Based Costing: ABC provides a more accurate allocation of costs by identifying the specific activities involved in each discount and incentive program. This allows HFT to understand the true cost drivers of these programs and make informed decisions about their effectiveness.
Budgeting: HFT should develop a comprehensive budgeting process that incorporates the costs associated with discounts and incentives. This will allow the company to:
- Forecast Costs: Accurately predict the financial impact of the programs.
- Control Spending: Monitor actual costs against budget and take corrective action as needed.
- Improve Financial Planning: Develop more accurate financial forecasts and make informed decisions about future investments.
4. Recommendations
HFT should implement the following recommendations:
- Implement an Activity-Based Costing System: This will provide a more accurate allocation of costs associated with discounts and incentive schemes.
- Develop a Robust Cost Accounting System: This system should track all direct and indirect costs associated with each program.
- Establish a Comprehensive Budgeting Process: This process should incorporate the costs of discounts and incentives and be used to forecast, control, and monitor spending.
- Train Employees on the New Accounting System: Ensure all relevant personnel understand the new system and its implications for their work.
- Regularly Review and Update the System: The system should be reviewed periodically to ensure its accuracy and effectiveness.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The recommendations align with HFT's mission to provide high-quality Chinese medicine products and services at competitive prices. By accurately accounting for discounts and incentives, HFT can ensure that these programs are aligned with its overall financial goals.
- External Customers and Internal Clients: The recommendations will benefit both external customers and internal clients. Customers will benefit from transparent pricing and clear understanding of the value they receive. Internal clients, such as sales and marketing departments, will benefit from improved data and insights to optimize their performance.
- Competitors: Implementing a sophisticated accounting system will allow HFT to better understand the cost structure of its competitors and develop more effective pricing and marketing strategies.
- Attractiveness ' Quantitative Measures: The recommendations are expected to improve HFT's profitability by reducing unnecessary costs and improving the effectiveness of discount and incentive programs. This can be measured through improved profit margins, increased sales, and reduced operating expenses.
6. Conclusion
Implementing a comprehensive accounting system that integrates activity-based costing, cost accounting, and budgeting will provide HFT with greater transparency, control, and insight into the financial impact of its discount and incentive programs. This will lead to improved profitability, more informed decision-making, and a more sustainable business model.
7. Discussion
Alternative approaches to managing discounts and incentives include:
- Maintaining the current system: This option offers simplicity but lacks accuracy and transparency.
- Outsourcing accounting functions: This option can provide expertise but may be costly and may not address the underlying issues within the company.
The risks associated with the recommended approach include:
- Implementation costs: Implementing a new accounting system can be expensive and time-consuming.
- Resistance to change: Employees may resist the new system, particularly those who are accustomed to the current approach.
- Data accuracy: Ensuring accurate data input and maintenance is crucial for the effectiveness of the new system.
The key assumptions underlying the recommendations include:
- Management commitment: Successful implementation requires strong commitment from management to drive change and ensure employee buy-in.
- Resource availability: Adequate resources, including financial and human capital, are needed to implement and maintain the new system.
- Data integrity: The accuracy and reliability of data collected are critical for the effectiveness of the system.
8. Next Steps
HFT should take the following steps to implement the recommendations:
- Form a project team: Assemble a team of key stakeholders to oversee the implementation process.
- Define project scope and objectives: Clearly define the goals and deliverables of the project.
- Develop a detailed implementation plan: Outline the steps, timelines, and resources needed for implementation.
- Pilot test the new system: Implement the system in a pilot phase to identify and address any issues before full rollout.
- Train employees on the new system: Provide comprehensive training to ensure all relevant personnel understand the new system and its implications.
- Monitor and evaluate performance: Regularly monitor the performance of the new system and make adjustments as needed.
By taking these steps, HFT can successfully implement a new accounting system that will provide greater transparency, control, and insight into the financial impact of its discount and incentive programs, ultimately leading to improved profitability and sustainable growth.
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Case Description
The case explores how Hung Fook Tong Group Holdings Limited (1446.HK) a Hong Kong company engaged in the production and sales of a variety of herbal and non-herbal products under its Hung Fook Tong (鴻福堂) brand, accounts for its various membership programmes and promotional packages. Founded in 1986 by Mr. Wong Jing Fat, the Company has grown from a single herbal tea shop into a chain of 115 retail stores. The case is set in the first quarter of 2019 before the release of 2018 annual results. Students take on the role of Colin Lo, the Financial Controller of the Company. Mr. Lo is preparing for the upcoming board meeting. He expects a detailed discussion on the impact of changes in accounting policies, in particular, HKFRS 15 Revenue from Contracts with Customers.
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