Management Control

Management Control
PROCHIM B: Detergix Division

Team 5
Sejong YOO (B00702551)

Wee Ling Veronica Teo (B00702525)
Wujing Wang (B00673819)
Yilin YAN (B00672904)
Shuyi ZHAO (B00639474)
Danning YANG (B00653887)
Contents
Introduction
Current Accounting Method - Transfer payment
New Accounting Method - Byproduct
Recommendation and Discussion
Introduction
Prochim Group
Leading manufacturer of base products in mineral and organic chemicals
6,000 employees
12 plants in France
Represents 5% of total turnover of the French chemical industry
LILLE
NORMANDIE
Grenoble plant :
The largest plant of Prochim in France
Manufactures base products (chlorine, soda) and their by-products
PARIS
GRAND EST
STRASBOURG
LE-DE-FRANCE
BRETAGNE
RENNES
PAYS
DE LA LOIRE
NANTES
ORLANS
CENTRE-VAL
DE LOIRE
Certain products occupied important positions not only in France, but also
in other European countries
HAUTS-DEFRANCE
ROUEN
NOUVELLE-AQUITAINE
DIJON
BOURGOGNEFRANCHE-COMT
LYON
AUVERGNE-RHNEALPES
BORDEAUX
OCCITANIE
TOULOUSE
PROVENCE-ALPESCTE DAZUR
MARSEILLE
CORSICA
AJACCIO
The DETERGIX S.A. Unit

Separate from the Grenoble
Plant, set up in 1988
Producing detergent from

phenol and sell it to washing
powder manufacturers
Independent unit in terms of

facilities, workforce, and
management
Capital structure
Prochim Group controls 70%
and 3 main customers (washing
powder producers) controls
10% each
Production and Accounting method

Physical Unit method
This method allocates to each joint product the same proportion of joint costs as the
underlying proportion of units.
With current accounting method, the NNP has too small margin compared to detergent.
Work and Progress
Catalytic Reaction & Distillation
80%
Raw Material
20%
Final Detergent Product

Split-off Point
Final NNP Product
Products and cost price

Detergent (main product):
80% of the production
Fast-expanding market
Stable market price: 140 / ton in 2003
NNP (by-product)
20% of the production
Restricted market
Fluctuate market price: 40(External), DETERGIX Price: 80 (Internal)
Due to the unit pice of NNP, it is sold only in internally.
The internal demand for NNP is low, so the inventories of NNP increase rapidly.
Current Accounting
Physical Unit method:
Allocate to each joint

product the same
proportion of joint costs as
the underlying proportion
of units.
Detergixs gross margin was

3 times higher than that for
2002.
Current Accounting
Conflict among different parties

Mr. Patron, The Manager
Mr. Fabri
Head of Manufacturing
At current rate, all 4 containers will be used

for NNP by the end of the year.
Only have small containers left to keep

stocks of detergent for sales.
Buy another storage container (70K,
depreciated in 10 yrs, recovered within 1
year.
Mr. Souprod
(Head of Sales of by-products)
Mr. Detere
Head of Detergent Sales
Detergent margin would drop from 41%

to 28%. He get judged on his margin.
Detergent market is competitive and it

cannot be sold to other group plants at
higher prices.
Cant sell NNP on the market as long as

it is at 75/ton.
Change the cost of NNP since most of it
results from the assignment of shared
manufacturing costs.
The plant was built to make detergent
not NNP
Value NNP costs at 0.
Mr. Conta
The Factorys Accountant
All those changes wont make any

difference to the end result
We need more active, sales rather than

accounts based, way of reducing NNP
What are the problems of

current accounting?
The problems of current method

Treat NNP as a joint product
NNP is produced because Detergent is produced.

Not all costs are directly related to physical quantities.
Accountability & Controllability Principles

NNP product manager does not have the control over NNP production because the
production of NNP is dependent on the production of detergent.
The NNP sale manager should not be responsible for the low sales and growth margin of
the NNP
Performance measured by individual departments Gross Margin
Performance of the manager responsible for sales of detergent and the manager responsible for
sales of NNP are measured ONLY by their Gross Margin
The conflicting interests between NNP and Detergent departments because they only care about
their own Gross Margin
Corporate level not optimal for other buying centers of group (NNP)
Current Accounting with 1

extra Container
New accounting method

Accounting for byproduct
By-products are of less significance than the main products.
Relevant factors that influence by-product valuation and accounting include

The need for separate
profit calculation for sales
incentives or for control.
The use of the by-product

as alternative to main
products
02
01
04
03
The uncertainty of byproduct value at the time

of production
The use of the by product

in other production.
Recommented by-product accounting method

90
Raw material
Shared variable cost
Shared fixed cost

2nd manufacturing process
10
3
75
20
20
20
50
45
28
Shared fixed cost

2nd manufacturing process
10
68
35
28
25
23
100
Raw material
Shared variable cost
24
24
Detergent
NNP
CURRENT
3
30
20
Detergent
NNP
NEW
Scenario 1:
Sell the excess NNP at market price and without extra container
Scenario 2:
Keep the NNP in stock and purchase an extra container based on 2003
Discussion
What is the difference on cost accounting between

treating NNP as a by-product and as a joint product?
Which scenario do you recommend to the company?
Can you think of any other scenario?
How is NNP department treated in the case study and is it

fair treatment?
Optimum Strategy for Detergix

Comparison of CF
Scenario 1: Sell the excess NNP at market price : Additional Gross Margin -33,740
Scenario 2: Keep the NNP in stock and purchase an extra container : Additional Gross
Margin 16,226
Purchase an extra container and sell the excess NNP at market price
What other calculation?

Calcalation of P&L Statement for 2004
Sensitivity Analysis
Why : Ensure the Sustainability of the business
Uncertainty about market price of the product

To identify and assess the risks involved
To monitor the risk carefully during the operating
Sensitivity Indicator
The percentage change of project outcome (e.g. Gross Margin) in response to the
percentage change in a variable.
SI = (dGM / GM) / (d Variable / Variable)
Interpretation of SI
-when SI>1, Gross margin is sensitive to the variable
-when SI<1, Gross margin is insensitive to the variable.
-when SI=1, Gross margin is neutral to the variable.
Sensitivity analysis
BASE LINE
920,000
ITEM
Base Case for NNP
EXCESS
PRICE MARGIN
NNP GM
40
44%
40,414
TOTAL
GM
SI
933,557
830,000
740,000
650,000
Case 1-1: Price increase (20%)
48
53.3%
58,814
951,957
10%
Case 1-2. Price decrease (10%)
36
37.7%
31,214
924,357
10%
32
29.9%
22,014
915,157
10%
560,000
905,957
10%
24
6.5%
3,614
896,757
10%
Base Case for Detergent
140
39.7%
933557
168
49.7%
1,130,557
106%
126
33.0%
802,224
141%
708,414
158%
567,700

98
84
13.8%
-0.5%
426,986
145,557
896,757
Case1
Case2
Case3
Case4
Case5
200,000
12,814
638,057
905,957
290,000
19.9%
24.6%
915,157
380,000
28
112
924,357
470,000
951,957
1,130,557
BASE LINE
989,843
181%
211%
849,128
1,130,557
802,224
426,986
638,057
426,986
286,271
145,557
145,557
Case1
Case2
Case3
Case4
Case5
Do you think this is sustainable?
Long-term prediction
No, because internal Plants refuse to buy at 80 because they buy it at 40.
Assuming sell every NNP at 40 EURO internally and externally
ITEM
PRICE
MARGIN
TOTAL GS
SI
BASE LINE for Only Excess

920,000
Base Case for Only Excess
40
43.9%
BASE LINE for All NNP
933557
830,000
Base Case for All NNP
40
43.9%
853,557
48
53.3%
869,631
9%
36
37.7%
842,841
13%
32
29.9%
829,446
740,000
14%
650,000
560,000
869,631
842,841
829,446
812,224
789,262
Case2
Case3
Case4
Case5
470,000
380,000
28
19.9%
812,224
16%
290,000
24
6.5%
789,262
19%
200,000
Case1
Solution for the low demand of NNP

Export to the
foreign market
Promotion of NNP to
more Proclaim group
plants and oil & chemical
industries.
Alternative use
for NNP
Thank you

Management Control

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PROCHIM B: Detergix Division

Sejong YOO (B00702551)

Leading manufacturer of base products in mineral and organic chemicals

The largest plant of Prochim in France

Manufactures base products (chlorine, soda) and their by-products

The DETERGIX S.A. Unit

Producing detergent from

Independent unit in terms of

Production and Accounting method

Final Detergent Product

Products and cost price

80% of the production

20% of the production

Due to the unit pice of NNP, it is sold only in internally.

Allocate to each joint

Detergixs gross margin was

Conflict among different parties

At current rate, all 4 containers will be used

Only have small containers left to keep

Detergent margin would drop from 41%

Detergent market is competitive and it

Cant sell NNP on the market as long as

All those changes wont make any

We need more active, sales rather than

What are the problems of

The problems of current method

NNP is produced because Detergent is produced.

Accountability & Controllability Principles

Current Accounting with 1

New accounting method

By-products are of less significance than the main products.

Relevant factors that influence by-product valuation and accounting include

The use of the by-product

The uncertainty of byproduct value at the time

The use of the by product

Recommented by-product accounting method

Shared fixed cost

Shared fixed cost

What is the difference on cost accounting between

Which scenario do you recommend to the company?

Can you think of any other scenario?

How is NNP department treated in the case study and is it

Optimum Strategy for Detergix

What other calculation?

Uncertainty about market price of the product

To monitor the risk carefully during the operating

Case 1-1: Price increase (20%)

Case 1-2. Price decrease (10%)

Case 1-3. Price decrease (20%)

Case 1-5. Price decrease (40%)

Base Case for Detergent

Case 2-1: Price increase (20%)

Case 2-2. Price decrease (10%)

Case 2-4. Price decrease (30%)

Case 1-4. Price decrease (30%)

Case 3-3. Price decrease (20%)

Do you think this is sustainable?

Assuming sell every NNP at 40 EURO internally and externally

BASE LINE for Only Excess

Base Case for Only Excess

BASE LINE for All NNP

Base Case for All NNP