[SOLVED] Company A is in the chemical industry

Company A is in the chemical industry and a manufacturer of industrial paints. At one of its manufacturing sites (site 1) a new system of costing and management information is being considered to replace a traditional system, which was not meeting fully the current needs of management.
Site 1
One market that is served from site 1 is the drinks-can-coatings market. This market is regarded as very competitive because the customer base is concentrated and the customers' requirements are very exacting. A typical customer would be a packaging company that has a contract to supply painted cans to a soft drink’s manufacturer. The liaison between the can producer and their customer (the soft drinks manufacturer) can be so close that it is common for them to make joint plant location decisions, to integrate their manufacturing systems and to eliminate the transportation of cans. As a consequence of this arrangement, company A's customer has very specific delivery and quality requirements for the paint it receives. The technology of painting cans is very sophisticated, for example, cans are coated with paint at speeds of 1000-1200 cans per minute and at such speeds the fluid properties of the paint become critical. Company A tests its paint at the simulated coating speed before dispatch to the customer. Furthermore, for cans containing a product with an established brand image, customers regularly insist on very close tolerances of colour matching.
The packaging companies have a highly developed purchasing function which places considerable emphasis on 'supply chain management', because it is so important to them. For this type of market, the frequency of orders is low, but the quantities ordered each time are very large. Since the product is mature, there are a number of competitors for this market and competition is usually based on price.
Company A has a number of other customers for its paint products, though these are for much lower volumes and the quality requirements are not so exacting.
At the present time there is a recession in the market, the company is not in trouble but they are operating below capacity. There are no limitations on increasing throughput above the current level. The company is a little concerned about the level and range of finished stock currently held. At times they produce batches which are larger than needed for existing orders and hold the excess in stock in speculative anticipation of future requirements. Over-production is not usually deliberate, orders can be routed to the vat of the most appropriate size but exact measurement is impossible and some 'overs' are inevitable. The accounting system can place a cost on this but the 'value' of these small quantities of a wide range of colours is indeterminate.
In general, the technology of paint production is old and well known. Paints of this type are made in a batch chemical process, whereby solid ingredients are processed and ground, and then dissolved in solvents. Typically, material costs represent 60% to 80% of total costs of manufacture. solvent evaporation is a potential problem, profits could be increased if this loss could be avoided. Other materials, such as expensive dyes, need careful control also to prevent 'in-process' losses.
The ability to attribute other costs to the products manufactured is also important though, particularly when there is a variability about these costs with different batch sizes or the equipment used. For example, one major influence on batch cost variability is the colour matching process. Each addition of the extra dye, or other ingredients, and the subsequent mixing, is costly. A badly matched batch of paint could take three attempts to produce the correct shade and this significantly affects the time of the process and hence the total batch costs.
The company currently produces a detailed overhead expense report but makes no attempt to attribute overheads to products. Controllable overhead costs are identified to cost centres but departmental overheads are not computed and no effort is made to apply overhead costs to products. Marketing decisions are generally made by reference to the material costs of the product and the gap between this and potential selling price is regarded as a contribution to overheads and profit.
In their attempts to make improvements to the costing and management control system the management have encouraged an 'ownership' of the system by all the management team. They have created a costing system design committee which has developed proposals for improving the costing and management information produced in the plant and started to implement these.
Site 2
The management of company A is so pleased with the potential and progress to date on site 1, that it plans to modernize the accounting system on site 2. Site 2 produces a differing variety of paints for other industrial markets. A principle product range is for the marine coatings market, where the company has a technical lead over its competitors.
One of the biggest costs for a large ship, such as an oil tanker, is the fuel it consumes. In the past, ships progressively became less efficient and slower after leaving dry dock, because of the ever- increasing drag as a result of barnacle encrustation on the hulls of the ships, below the water line. Paints were developed, using a special additive, which prevented this encrustation because the paint slowly wore off. The first paints that came on to the market, however, were not considered to be completely ecologically friendly, and so company A developed a new paint, with the same properties, which did not cause damage to sea-life, an important competitive advantage.
The company's marketing team were quick to capitalise on the advantages that the new product offered. The new paint, when compared with traditional paints, allowed ships to stay out of dry dock for longer, increased fuel efficiency and sustained the ships' maximum speed, which results in faster trips and an increase in the ships' possible workload between overhauls.
A problem in serving this market is its fragmentation. Ships' captains often make very quick decisions about repair and overhaul once they have called into port. As a consequence, the sales team has to be in the right place at the right time, and with thousands of ships at sea at any one time this is an expensive task. The marketing staff serving site 2 are located at various strategic ports to gather intelligence and seize selling opportunities as they occur, when ships put into dry dock.
Product quality requirements at this second site are different. Obviously, the technical performance of the paint is an important requirement, but other factors such as colour matching are rarely a worry.
However, delivery speed becomes an important consideration because ships want to minimise the wait in dry dock, and generally they do not place an order until they are in port.
The management of company A are deliberating over the extent to which the system which is in the process of development in site 1 may be replicated in site 2.

Required:

Discuss the main requirements for costing and performance measures in both sites, in particular you should cover the following:
a). Is the product costing system in site 1 adequate for this company? If not, can you suggest specific improvements?
b). What particular characteristics of management success should the system in site 1 emphasise? Suggest performance measures which will highlight these characteristics.
c). To what extent can the costing system and performance measures you suggest above for site 1 be applicable to site 2? As a similar product is being produced should the same issues receive prominence? Discuss your answer.

Question: Company A is in the chemical industry

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