The application of management accounting principles in the bread industry : a case study
Abstract
A loaf of bread is a consumable product and is consumed by millions of people on a daily basis around the World. Bread constitutes the staple diet of millions of South Africans. The bread industry in South Africa has undergone a total transformation since deregulation of the
industry on 1 March 1991. The deregulation lead to a considerable amount of new entrants to the market which increased competition immensely. Another impact deregulation had was
that the distribution channel of bread changed from cafes and medium-sized shops to large chain stores, supermarkets, spaza shops and hawkers. In the past a distributor only had limited distribution stops, but the distribution stops have increased significantly due to the
changing distribution channel. This. combined with rising fuel prices, increased delivery cost significantly. A bread factory, the object of this case study, has experienced similar increases in their distribution costs. The bread factory has numerous delivery routes and as a way to monitor these distribution costs, the bread factory calculates a delivery route contribution margin to
determine whether a deliver) route is viable or not. This calculation deducts the costs to service the delivery route from the income generated by the route. The production costs of bread therefore directly affect the profitability of a delivery route margin. The main ingredient of bread, namely flour, is purchased from a miller than forms part of the group that
the bread factory belongs to. The transfer price at which this flour is purchased, impacts the production cost of bread directly. The general objective of this research was to determine whether general management accounting principles were applied in the bread factory with specific reference to the financial viability of the delivery routes. The study consisted of a literature study and an empirical survey. Semi-structured interviews, using a questionnaire, were conducted with senior management of the bread factory. The results of the interviews and an examination and
analysis of the financial data for Bread Factory A were used to assess the current calculation of the delivery route segment margin and to develop a model for future calculation of an accurate delivery route segment margin. Certain strategic documents of Bread Factory A
were analysed to determine whether their strategy enabled Bread Factory A to gain a
competitive advantage. Quotations were obtained from independent external suppliers for the supply of flour and compared with the current transfer price paid to the group supplier of flour to determine whether the transfer price was market-related. The results showed that certain production costs were not allocated as part of cost of sales and
therefore affected the calculation of the profitability of delivery routes. The delivery route calculation was not a calculation of the contribution margin of the delivery route. Furthermore, based on the quotations obtained, the transfer price at which flour is purchased
from the miller is higher than the market price. Based on the results of this study, it is recommended that the bread factory uses a delivery route segment margin calculation to determine the profitability of a delivery route. A model is provided by the researcher. Furthermore. it is recommended that the holding company of the bread factory and the miller
should involve both parties in the setting of the transfer price of flour. Negotiations should take place between these three parties to ensure that a more market-related transfer price is set.