Question

Management Accounting

Overhead Apportionment at Timpson Timpson is a UK-based shoe repair and key cutting company, which today is a very large business. It is the UK's leading retail service provider employing over 3,400 colleagues, with 1,325 owned stores and 110 Snappy Snaps franchises throughout the UK and Ireland. Timpson has been established since 1865 and is family owned and run by John Timpson as Chairman and James Timpson as Chief Executive' (Source: Timpson.co.uk). A number of years ago, when Timpson had approximately 200 stores, the company purchased Shoetech - a smaller rival business with 12 outlets. Timpson issued shares to the owners of Shoetech, and the two principal co-owners of Shoetech were given seats on the Timpson Board of Directors. Drawing on his years of experience as CEO, John Timpson wrote a management text entitled Upside Down Management. Related specifically to the Shoetech transaction, he wrote the following: 'The trouble was due to our management accounts. The contribution from 12 Shoetech branches represented 30% of total Timpson profit. 'We're supporting the whole business' said my new directors. The accounts were misleading: as the Shoetech figures carried no overhead we were not comparing like with like.' Required: (a) Briefly explain what you think John Timpson is trying to say in the extract (presented above) from his book, Upside Down Management. (b) How might area and head office overheads be allocated to the shops? Identify THREE possible allocation bases and comment on each. (c) Discuss the usefulness and possible problems associated with allocating central overheads to operating units (such as the individual outlets in this example).

I'd be grateful if someone could show how to approach this management accounting problem. Thanks in advance.

Answer 1

1	In the given extract, John Thimpsons first states the current fact that Shoetech (a small taken over business with 12 outlets) is contributing around 30% of total profits of Thimpson. But the same is derived without considering or charging any overhead cost to the profits derived by Shoetech. And therefore the profits of 30% is a myth and misleading. And then he further states the whole business of Shoetech is rather supported by Thimpson. And the default is in the preparation of management accounts. Further the profits aren't worth considering as the consistency in charging overheads after charging the direct expenses is not maintained.
2	Three possible basis of head office cost allocation are:
i	Production machine time for a product unit
ii	Direct labor time for a product unit.
iii	Manufacturing floor space each product uses
	All the three methods are self explanatory
3	Usefulness associated with allocating central overheads:
	Department wise profitability can be ascertained
	Helps in analysis of highest and lowest contributing process
	Problems associated with allocating central overheads:
	Can lose sight of total costs incurred
	Computations and percentages obtained can be misleading Further this problem can be majorly solved by allocating overhead expenses to Shoetech and get the profitability factor in a common platform for comparison.