Reference no: EM132925271

Super Sensors Ltd. (SSL) is a small but rapidly growing hi-tech firm that produce sensors to monitor tyre pressures. SSL currently has 30 directly-employed staff. The firm initially produced equipment suited for heavy engineering vehicles, but since its creation 3 years ago, has expanded to seven products, variously suited to engineering, construction and logistics vehicles run by firms with large fleets. Some are more complex and need to be very robust, while others require less process stages. They had hoped such rapid expansion would have already started to bring financial gains, but they are not making as much profit as they had hoped to be at this stage in their journey, and they have asked you, a junior finance manager recently hired from a rival firm, to take a look at their finances.

From an initial look, you are concerned that SSL are not charging the correct amount for each product. In particular, you are concerned that the costs associated with creating each product are not reflected in the sales price, with only the direct costs being associated with each product, and the indirect costs not apparently being covered. The current approach that they are using is traditional Absorption Costing but you believe it is not sophisticated enough for the variety of indirect costs that they incur and that there may be better approaches.

Part of the reason that the problem has gone undetected is likely because SSL has grown so quickly. As such, it does not have a formal hierarchical structure. At the moment, all staff apart from the manufacturing staff (of which there are nine) still report directly into the founder. The founder still likes to sign off on most decisions, and to be given oversight of problems, even if they are relatively small. For example, just yesterday, you had to ask him to sign a cheque for £62.37 to pay the office cleaner. As such, the founder is so busy that it is hard to get his attention and staff are complaining that it's hard to get things done and make change happen. The marketing department are particularly frustrated, because they have spent weeks trying to get the sign off on a new social media promotion strategy but cannot get the attention of the founder.

Thus, there are two distinct problems: costing problems, and structural problems. On their own, each would be bad enough. Together, they are creating significant issues for the survival of SSL and you believe that something needs to be done.

1) Explain the problems with SSL's current costing approach and propose an alternative costing approach that may help to improve their understanding of the costs associated with bringing each product to market.

2) Explain why structural change may be needed at SSL and propose an alternative structure, justifying your choice.

3) Identify one significant challenge that the changes you are proposing may bring. Recommend actions that SSL could take to reduce this challenge.