Flowers Finesse (“FF”) Co. is a producer and importer of freshly cut flowers based in the country side village of Tagus. Among its wide range of flower products, Flower s Finesse has made a name for its gerberas, roses, carnations, and tulips. Tulips and Hyacinths are imported from the Netherlands. Products are sold at its premises to florists, in the trade market to wholesalers and retailers, and directly to a large retail chain. The market for fresh flowers is very competitive, with significant pressure over prices. There is high seasonality in supply (e.g. spring and early summer) and demand (e.g. valentine day, mother’s day, Christmas). When there is a significant mismatch between the supply and demand, prices can fluctuate widely, from ‘rock bottom’ prices that do not cover production costs to ‘sky high’ prices that make very generous profit margins. In addition to price, the market values product freshness, reliability of supply, speed of delivery, and the range of products available (including colour variations). The company owns part of its productive land and the rest is on a long-term land lease. All production of flowers is carried out in a series of greenhouses built and owned by Flowers Finesse. Flower production facilities (greenhouses) are fitted with temperature and humidity control equipment that automatically opens the greenhouses to air circulation when temperature is too high and heats it up when the temperature is too low. The company owns and uses its two tractors to plough the land and to haul trailers. The trailers carry fertilizers, seedlings for planting, and occasionally pesticides to the greenhouses. The plants, seedlings, shrubs, and bulbs planted by Flowers Finesse are mostly imported to ensure the highest quality, productivity, and diversity of colour variations. The trailers also carry freshly cut flowers from the greenhouses to the processing and packing facility (as well as the green waste that is sent to a local dump). After processing and packaging, flower products are kept in one of three refrigeration units to prolong their life. Page 2 of 3 Flowers Finesse currently employs 70 full-time staff, which represents a doubling of its size in just four years. The company’s manager and founder, Mr. Edward Long, is an entrepreneur with twenty years of work experience in the sector but no training in management. He is directly assisted by his wife, Mrs. Winry Long, who manages the sales office and inventories. Like her husband, she has no formal training in management, but she is extremely energetic and outstanding in dealing with customers. Flowers Finesse has a dedicated team of three salespersons, one accountant, two distribution employees and two forepersons. The remaining employees work in the production greenhouses and in the processing and packaging of the flowers. The flower production process is a labor-intensive activity. During peak periods of production, casual employees are hired on a need basis. All of the company’s full-time employees are paid a fixed salary, plus any extras from overtime work. The main building houses the administrative staff, the sales office, a product display area, the processing and packaging facility, and the refrigeration units. Workers are moved to and from the main building and the various greenhouses, using two fully owned mini-vans. The company also has its own fleet of three trucks (with cooling) to distribute products to customers and deliver the products to the trade market. The company’s growth has created various difficulties for Mr. Long, one of the issues is in relation to ensuring timely payments to employees and suppliers. He is also finding it difficult to have a firm grasp of how well the company is operating; this is due to the growth in operations over the last four years. At the moment, there are no formal planning process in the company; only rough estimates of revenues and the main cost items are prepared by Mr. Long in his paper notebook. The role of the company accountant has been that of dealing with financial accounting matters and ensuring that the company meets its legal tax obligations. Another problem that Flowers Finesse is currently facing relates to the management of sales in respect of short supply products. These products cannot be sold to the first customer that comes through the door, but needs to be meticulously managed to ensure that orders from regular customers can be at least partially satisfied. Mrs. Long noted that the salespersons, who have been informally assigned to specific customers, frequently lacked an appreciation for this issue in their eagerness to meet their assigned customer’s requirements. While Flowers Finesse wants a proactive sales team, the sales push needs to be directed to products in good supply, not for products that can “sell for themselves”. Page 3 of 3
Required: 1. Identify and explain the value of the various cost classifications. Illustrate using examples of how three different bases of cost classifications may assist Mr. and Mrs. Long in improving their decision-making processes in Flowers Finesse Co.
2. Conduct some research into costing techniques that Flowers Finesse Co. might find useful. Based on this research and using the detail in the case, choose a specific technique (or set of techniques) that you believe would be most suitable. Describe specifically how your chosen technique(s) could be used by providing tangible examples of how they would operate within Flowers Finesse Co. It should be clear from these examples how Flowers Finesse would be able to determine a product cost for their products. (Please note: you are not required to actually calculate any costs here, just outline how costing could be done differently. Therefore, you may wish to provide a table or diagram outlining the operation of your proposed costing technique(s).
3. Please briefly describe why you consider your chosen technique(s) to be superior to other techniques. Using the detail in the case, describe how your chosen method of calculating product cost will be beneficial and relevant for Flowers Finesse Co. specifically.
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