Scovill Inc. / Nutone Housing Group Malia Magers Brian Rosenberg Edward Sabia Shashank Senapaty
Presentation Overview <ul><li>Company Structure </li></ul><ul><li>NuTone’s Products & Pricing </li></ul><ul><li>Current Ac...
Scovill Co. Structure:
Scovill Co. Structure  contd. <ul><li>NuTone’s Contribution to Scovill </li></ul><ul><ul><li>NuTone accounts for 24.5% of ...
NuTone’s Products: <ul><li>Housing Items </li></ul><ul><ul><li>Exhaust Fans </li></ul></ul><ul><ul><li>Intercoms </li></ul...
NuTone’s Pricing: <ul><li>Three Methods Employed: </li></ul><ul><li>1.) Catalogue Pricing </li></ul><ul><ul><ul><li>Set at...
NuTone’s Pricing  contd.   <ul><li>3.) Special-Quote Pricing </li></ul><ul><ul><ul><li>Standard gross profit margin rule p...
Cost Accounting System <ul><li>Direct materials costed at standard costs plus allowance for material overheads </li></ul><...
Cost Accounting System  contd.   <ul><li>Labor standards were set so workers would achieve average efficiency of 300%, not...
Impact of Overstated Standards <ul><li>At year end: Favorable variances minus unfavorable variances credited to CGS as CCA...
Impact  contd.   <ul><li>Size of variance has been growing at an average rate of 38% a year </li></ul><ul><li>Corresponds ...
Impact  contd. <ul><li>Highly skewed cost estimates </li></ul>24.09 0.66 2.74 -8.85 -0.33 3.73 3.40 Door Chime  (Model 15)...
Potential Problems: <ul><li>Competition </li></ul><ul><ul><ul><li>Knowledge of accurate costs necessary to make effective ...
Potential Problems  contd.   <ul><li>Discontinuing Product Lines </li></ul><ul><ul><ul><li>Difficult to estimate the impac...
Potential Problems  contd.   <ul><li>Transfer Prices </li></ul><ul><ul><ul><li>Overlapping product lines within Scovill in...
Potential Problems  contd.   <ul><li>Pricing of ‘Monopoly’ Products </li></ul><ul><ul><ul><li>NuTone’s Food Centers produc...
Potential Problems  contd.   <ul><li>Ignoring Unfavorable Variances </li></ul><ul><ul><ul><li>Unfavorable variances exist ...
Potential Problems  contd.   <ul><li>Favorable Variance Increasing </li></ul><ul><ul><ul><li>Conversion Cost Adjustment in...
Potential Problems  contd.   <ul><li>Poor Professional Practice </li></ul><ul><ul><ul><li>“Rankin took care to review  eac...
A Question to Ponder:  <ul><li>Why might the company resist a change to more realistic standards? </li></ul>
Rankin’s Views: <ul><li>“This system works well for us.  It has worked well for many years.” </li></ul><ul><ul><ul><li>Jus...
Rankin’s Views  contd.   <ul><li>“The higher cost numbers are a crutch.  Even though I know the costs are overstated, when...
Rankin’s Views  contd.   <ul><li>“There are a lot of things that can go wrong at year end, particularly in the inventory a...
Rankin’s Views  contd.   <ul><li>“ It would be a monumental job to change these standards.  Our cost accounting group cons...
Mitigating Problems: <ul><li>Dealing with Initial Fixed Costs </li></ul><ul><ul><ul><li>Scovill can increase NuTone’s budg...
Recommendation: <ul><li>NuTone should immediately switch to more accurate standard accounting system </li></ul><ul><ul><li...
Questions? Thank You For Your Attention!
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Scovill / NuTone Housing Group Inc.

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An analysis of the Scovill / NuTone Housing Group Inc. case sutdy.

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  • Scovill / NuTone Housing Group Inc.

    1. 1. Scovill Inc. / Nutone Housing Group Malia Magers Brian Rosenberg Edward Sabia Shashank Senapaty
    2. 2. Presentation Overview <ul><li>Company Structure </li></ul><ul><li>NuTone’s Products & Pricing </li></ul><ul><li>Current Accounting System </li></ul><ul><li>Impact (Examples) </li></ul><ul><li>Potential Problems </li></ul><ul><li>Rankin’s Views </li></ul><ul><li>Mitigating Problems </li></ul><ul><li>Recommendation </li></ul>
    3. 3. Scovill Co. Structure:
    4. 4. Scovill Co. Structure contd. <ul><li>NuTone’s Contribution to Scovill </li></ul><ul><ul><li>NuTone accounts for 24.5% of all Scovill sales </li></ul></ul><ul><ul><li>Largest % of 6 Subdivisions </li></ul></ul><ul><ul><li>Also largest contributor of profits </li></ul></ul><ul><li>Scovill Bonus Structure </li></ul><ul><ul><li>Top level managers awarded yearly bonus only if Scovill meets EPS goal </li></ul></ul><ul><ul><ul><li>Bonus of 50% of base salary </li></ul></ul></ul>
    5. 5. NuTone’s Products: <ul><li>Housing Items </li></ul><ul><ul><li>Exhaust Fans </li></ul></ul><ul><ul><li>Intercoms </li></ul></ul><ul><ul><li>Chimes </li></ul></ul><ul><ul><li>Central Vacuums </li></ul></ul><ul><ul><li>Bath Accessories </li></ul></ul><ul><ul><li>Food Centers </li></ul></ul>
    6. 6. NuTone’s Pricing: <ul><li>Three Methods Employed: </li></ul><ul><li>1.) Catalogue Pricing </li></ul><ul><ul><ul><li>Set at headquarters to yield gross profit margins of between 50% and 60% </li></ul></ul></ul><ul><li>2.) Quantity-Quote Pricing </li></ul><ul><ul><ul><li>List prices set at headquarters, discounts up to 20% based on types of products and quantities buyers commit to </li></ul></ul></ul>
    7. 7. NuTone’s Pricing contd. <ul><li>3.) Special-Quote Pricing </li></ul><ul><ul><ul><li>Standard gross profit margin rule plus shavings dependent on levels of stock on hand, monthly budget requirements, strategic considerations: penetrating new market or using new distributor, etc. </li></ul></ul></ul><ul><ul><ul><li>Comprise 50% of total sales </li></ul></ul></ul><ul><ul><ul><li>“Rankin took care to review each of the special quotes personally. He even called in each day when he was out of town to review them.” </li></ul></ul></ul>
    8. 8. Cost Accounting System <ul><li>Direct materials costed at standard costs plus allowance for material overheads </li></ul><ul><li>Direct labor costs calculated using established time standards and labor rates for each department </li></ul><ul><li>Overhead costs allocated to departments based on “most rational means” available. </li></ul><ul><li>“ Conversion cost adjustment” (CCA) made at end of year </li></ul>
    9. 9. Cost Accounting System contd. <ul><li>Labor standards were set so workers would achieve average efficiency of 300%, not 100% </li></ul><ul><li>Every month: actual labor costs plus overhead are debited, cash or liability accounts are credited </li></ul><ul><li>On selling unit: inventory is credited, CGS is debited by amount calculated according to the standard </li></ul>
    10. 10. Impact of Overstated Standards <ul><li>At year end: Favorable variances minus unfavorable variances credited to CGS as CCA and debited to inventory </li></ul><ul><li>Variance between actual and standard caused understated inventory and overstated CGS </li></ul>
    11. 11. Impact contd. <ul><li>Size of variance has been growing at an average rate of 38% a year </li></ul><ul><li>Corresponds to sales increase </li></ul>
    12. 12. Impact contd. <ul><li>Highly skewed cost estimates </li></ul>24.09 0.66 2.74 -8.85 -0.33 3.73 3.40 Door Chime (Model 15) 83.06 12.11 14.58 48.69 8.74 17.95 26.69 Bathroom Exhaust Fan (Model 40) Profit Margin % Profit Cost Profit Margin % Profit Cost Selling Price $ Products Actual (per unit) Standard (per unit)
    13. 13. Potential Problems: <ul><li>Competition </li></ul><ul><ul><ul><li>Knowledge of accurate costs necessary to make effective pricing decisions and adjustments </li></ul></ul></ul><ul><ul><ul><li>Example: inaccurate representation of profit margin leads to non-optimal pricing decisions </li></ul></ul></ul><ul><ul><ul><ul><li>Model 40 displayed 49% profit margin under the current system, but actual profit margin was 83% </li></ul></ul></ul></ul><ul><ul><ul><li>Market Trends exemplify the need for cost-cutting and understanding core cost sources: </li></ul></ul></ul><ul><ul><ul><ul><li>Builders are using fewer and cheaper add-on products </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Smaller companies are undercutting NuTone’s prices </li></ul></ul></ul></ul>
    14. 14. Potential Problems contd. <ul><li>Discontinuing Product Lines </li></ul><ul><ul><ul><li>Difficult to estimate the impact of inflated labor costs on the profitability of each individual product line because of cost discrepancies </li></ul></ul></ul><ul><ul><ul><li>Example: products that appear to be causing losses are truthfully increasing company profit </li></ul></ul></ul><ul><ul><ul><ul><li>Model 15 displayed -9% profit margin under the current system, but actual profit margin was 24% </li></ul></ul></ul></ul><ul><ul><ul><li>Scovill lost $34.5 million in earnings from discontinued operations in 1981 </li></ul></ul></ul>
    15. 15. Potential Problems contd. <ul><li>Transfer Prices </li></ul><ul><ul><ul><li>Overlapping product lines within Scovill indicate that NuTone could be distributing products across divisions </li></ul></ul></ul><ul><ul><ul><li>A standardized accounting system would benefit divisions purchasing transfer products from NuTone – More realistic contribution margins and unit costs </li></ul></ul></ul><ul><ul><ul><li>Remember that Scovill would be unaffected by lower transfer prices, as the overall company is unaffected by losses to one division that equally raise profits in alternate divisions </li></ul></ul></ul>
    16. 16. Potential Problems contd. <ul><li>Pricing of ‘Monopoly’ Products </li></ul><ul><ul><ul><li>NuTone’s Food Centers product line represents 95% of the total market share </li></ul></ul></ul><ul><ul><ul><li>Need accurate cost data to derive product prices that will allow NuTone to maintain a monopoly on this market – barrier to entry </li></ul></ul></ul>
    17. 17. Potential Problems contd. <ul><li>Ignoring Unfavorable Variances </li></ul><ul><ul><ul><li>Unfavorable variances exist at year end, but are being overlooked because of compensation from larger favorable variances </li></ul></ul></ul><ul><ul><ul><li>Examples: losses due to scrap (which was not tracked well during the year), misreporting (such as over-reporting of labor hours), & differences across plants </li></ul></ul></ul><ul><ul><ul><li>Scovill is not alerted to issues that require attention - Fixing such problems would likely lead to increased profits </li></ul></ul></ul>
    18. 18. Potential Problems contd. <ul><li>Favorable Variance Increasing </li></ul><ul><ul><ul><li>Conversion Cost Adjustment increases were caused by NuTone’s sales growth </li></ul></ul></ul><ul><ul><ul><li>Distortions are getting larger and larger - The further these discrepancies increase, the more difficult it is to estimate actual costs </li></ul></ul></ul><ul><ul><ul><li>“Headquarters personnel could easily see the favorable variances that were building up, but they couldn’t estimate accurately how much would be left after the unfavorable variances were subtracted at year end.” </li></ul></ul></ul>
    19. 19. Potential Problems contd. <ul><li>Poor Professional Practice </li></ul><ul><ul><ul><li>“Rankin took care to review each of the special quotes personally. He even called in each day when he was out of town to review them.” </li></ul></ul></ul><ul><ul><ul><li>Important sector of a large corporation should not be run entirely by one man, or by a decision process that is not clearly defined </li></ul></ul></ul><ul><ul><ul><li>Need a contingency plan or a standardized system that allows multiple team members to make similar decisions based on the data provided </li></ul></ul></ul>
    20. 20. A Question to Ponder: <ul><li>Why might the company resist a change to more realistic standards? </li></ul>
    21. 21. Rankin’s Views: <ul><li>“This system works well for us. It has worked well for many years.” </li></ul><ul><ul><ul><li>Just because it works doesn’t mean we can’t improve upon it. We need to strive for excellence. </li></ul></ul></ul>
    22. 22. Rankin’s Views contd. <ul><li>“The higher cost numbers are a crutch. Even though I know the costs are overstated, when I do my pricing calculations, I unconsciously believe those figures are the real costs.” </li></ul><ul><ul><ul><li>Satisfying your own psyche is not sufficient for appropriate business practices. </li></ul></ul></ul><ul><ul><ul><li>Not every salesperson may believe this as well </li></ul></ul></ul>
    23. 23. Rankin’s Views contd. <ul><li>“There are a lot of things that can go wrong at year end, particularly in the inventory areas, and I don’t want any of those unpleasant surprises that can occur at year end.” </li></ul><ul><ul><ul><li>If you were to focus on the existence of the problems causing year end surprises and methods for mitigating them, profits could be further increased. </li></ul></ul></ul>
    24. 24. Rankin’s Views contd. <ul><li>“ It would be a monumental job to change these standards. Our cost accounting group consists of only six people. The whole job would take years to complete.” </li></ul><ul><ul><ul><li>Scovill could temporarily assist NuTone with accounting help to make transition smoother. </li></ul></ul></ul><ul><ul><ul><li>Initial costs will be compensated for with future profits. </li></ul></ul></ul>
    25. 25. Mitigating Problems: <ul><li>Dealing with Initial Fixed Costs </li></ul><ul><ul><ul><li>Scovill can increase NuTone’s budget to aid with excess costs associated with the change </li></ul></ul></ul><ul><ul><ul><li>Scovill can lower profit expectations temporarily to allow for the transition </li></ul></ul></ul><ul><li>Problem with Forcing a Change </li></ul><ul><ul><ul><li>Rankin and his colleagues will also be excited to see that their profits can further increase </li></ul></ul></ul>
    26. 26. Recommendation: <ul><li>NuTone should immediately switch to more accurate standard accounting system </li></ul><ul><ul><li>Most notably the Labor Standard </li></ul></ul><ul><li>Raise profit margin expectations for pricing to account for change </li></ul><ul><li>Scovill should temporarily lower year end profit expectations to account for initial fixed costs associated with the change. </li></ul>
    27. 27. Questions? Thank You For Your Attention!
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