Information for decision making

University Degree Business and Administrative studies

S0803554 EVM204

Task 1

How can management accounting assist in manager’s decision making?

When managing an organisation or business, decision making involves high levels of risk and uncertainty therefore management accounting in itself is the underpinning factor behind a business’s decision making. According to the American Accounting Association, accounting is “the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information” (Collier, 2009 p3). In simpler terms management accounting is an essential factor within any business as it can be utilised to record and summarize an organisations overall performance levels and finances. This allows the manager to set up and implement the correct funding/ processes needed to achieve its maximum success capabilities.

Management accounting identifies and measures the success levels of previous decisions made within the management system, as a result this allows the manager to ascertain and forecast what specific areas will need to be adjusted before the processes are put into practice. There are a number of key tools within management accounting that can aid managers in their decision making, these are known as budgeting and forecast reports, profit and loss sheets and cash flow forecasting. According to Atrill & Mclaney (2007) and Abraham et al, (2008) these allow a manager to firstly predict and make decisions in relation to how they perceive their specific business to perform over the coming months or years. Secondly they highlight the businesses financial positioning and current performance levels within the industry as well as identifying how liquid the business is to ensure cash flow is available for continual trading.

These uses are highlighted further when looking into an adventure leisure organisation such as Go Ape which upon receiving its quarterly financial reports may identify areas where certain departments of the business are failing to meet targets, be it customer satisfaction levels or correct marketing strategies or simply profit margins due to factors such as excessive overheads. There will also be departments that are exceeding targets, these can therefore be identified through the information provided by the management tools as well as accountants enabling the managers to reduce certain costs or implement the correct funding, staffing levels or alternative marketing strategies needed to enhance the businesses profitability and overall success rates to its greatest extent. For this reason it is essential that the information supplied, in order to be constructive, needs to be timely, accurate and relevant.

Task 2

Easy Jet case study:

EasyJet has secured its position as ‘Europe’s leading low cost airline carrier’ since 2002, boasting strong financial stability as well as significant increases in passengers, aircraft and destinations annually not to mention a distinct drop in seat prices to ensure cost advantages over competitors. A cost advantage is gained by having a lower cost base than your competitors in the same market place (Mitchell and Coles, 2003).

EasyJet achieve their greatest cost advantages through two distinct routes these are; market shares and a budget, no frills service. In 2009 EasyJet were awarded the best performing European airline due to unbeatable low cost fares and access to the most convenient airports. It is of no surprise then that their total revenue has increased by 10.5% to £607.5million since 2009 (easyJet 2010 online).

A distinct factor behind easyJet’s success is the implementation of carefully thought out strategies such as the introduction to a new fleet of aircraft, which has drastically reduced maintenance costs as well as majorly cutting down fuel consumption. This becomes more relevant when considering that, the number of Passengers carried in 2010 had increased by 9.1% to 11.0million from the previous year (easyJet 2010, online)

Ryanair have also been highlighted as another leading company, achieving this status by striping back services seen as standard in other airlines for example; British Airways, such as in flight meals, ticket printing, pre-booking for seating, in flight entertainment and First or Business class seating area. According to easyJet (2010) offering the best prices to consumers through carefully planned strategies, maximises their performance and in turn increases potential profitability. This is done through a number of strategies as highlighted above, enabling them to continue to deliver superior performances throughout 2010. As a result easyJet has seen a distinct increase in customer demand allowing them to increase the number of passengers flown by nearly 10% with virtually no yield deterioration. This therefore highlights the companies’ level of sustainability and growth within the market.

According to the Abraham et al (2008) key performance measures are confirmed measurements that mirror the critical success factors of a business, specific to each organisation, due to their constantly changing variables. The financial measures within easyJet could be identified as the operating profit margins, staffing costs and fuel prices. Collier (2009) also defines that “the use of marginal pricing formula and yield management to maximise capacity utilization and revenue” this approach was suggested through the identification that in 2004 only 84% of the average aircraft load factor was achieved as enhancing this would maximise potential revenue dramatically. Non financial performance measures for easyJet or Ryanair could be for example increasing the number of routes available, revenue per passenger, seats sold, market share and the overall passenger load factor.

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Whilst economic conditions remain challenging both easyJet and Ryanair are facing tough trading environments. However, easyJet’s strategy to target growth in markets and increase capacity in seats flown has increased by 6.0% since 2009 as a result this will ensure these companies will be well positioned to benefit from the economic recovery.

Task 3

Prepare Brown and greens financial reports

Balance sheet

Income statements

Task 4

Voyager productions case study

Working Capital to sales %

Working Capital -38.5 7.4

Sales x 100 141.1 ...

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Task 3

Prepare Brown and greens financial reports

Balance sheet

Income statements

Task 4

Voyager productions case study

Working Capital to sales %

Working Capital -38.5 7.4

Sales x 100 141.1 x100 138.4 x100

Ans. as % =-27.3%

Ans. as % =5.3%

Interpreting financial reports are an essential factor within the running of any successful organisation as they hold distinct weight within a company’s annual report. According to the Accounting Standards Board (2006) an operating financial review must provide information that enables the shareholders to assess and identify ‘the strategies adopted by the entity and the potential for those strategies to succeed’.

Here are a range of ratio’s that have been calculated from ‘Voyagers production Ltd’s’ financial statements.

Return on investment;

It is clear from the financial report that the return on investment (ROI) remains at a fixed state throughout 2007/2008

Return on capital employed

When identifying shifts in the ratios of return on capital employed (ROCE) it can be seen that it decreases by 2.38% showing an overall improvement from the previous year. This however does not directly link to success as factors such as falling sales levels could have led to decreasing stock purchases.

Operating margin

The operating margin ratio is defined by Collier (2009) as the profitability before non-cash charges. The income statement identifies this margin to have decreased by 0.024% this is due to the fact that the costing of stock has risen at a more preferential rate than that of sales.

Gross margin

The gross margin can be seen to decrease by 0.0208% and therefore shows a lack in growth between the two years and as a result impact on the company’s overall sales performance. The gross margin ratio is highlighted as the difference between the sales and the company’s production costs excluding the projected overheads (Gowthorpe, 2008)

Sales Growth

The sales growth ratio has increased by 1.95% this however does not indicate an overall increase in profit due to the fact that the costs of sales have also increased and therefore leaves an unfavourable ratio.

Working Capital to sales

Gowthorpe (2008) states that the working capital is the difference between the current assets and current liabilities and is therefore a crucial element of cash flow management. The firm’s capital has increased significantly by 150.7% this is because the accounts payable have increased from 22.6 to 66.8 between 2007 and 2008.

Gearing Ratios

Gearing reflects the balance between long-term debt and shareholders’ equity (Collier, 2009), between the two years this percentage can be seen to decrease by 0.419% overall.

Asset turnover

Asset turnover relates to the amount of sales generated for every dollar's worth of assets (Steven et al, 2008). Within Voyagers productions limited it is clear that there is only minimal change between the years and is therefore not of great significance.

Task 5

Service operations in management accounting.

When attempting to identify the key issues that managing accountants face with regards to Service Operations it is important to first understand the fundamentals in operations. Operations is the function within an organisation that produces the goods or services to satisfy the demand from consumers, four main aspects of the operations function are quality, speed, dependability and flexibility- each have cost implications (Slack et al, 2006: Collier, 2009). With regards to the management attributes needed to deliver a service effectively Johnston and Clarke (2008) state that all activities, decisions and responsibilities related to the effective running of a company must be mastered. Perishability, inseparability, heterogeneity, simultaneity, moments of truth and intangibility are all unique characteristics of service industries (Johnston and Clarke, 2008) and as a result service industry operations will fluctuate from other areas, as producing a service differs from producing a product. As a result it could therefore be said that the primary objective of an organisation in this sector should customer satisfaction through good service delivery.

When looking at operations from a managing accountant’s perspective they can be seen to provide a range of important financial information to aid managers in deploying correct strategies, three distinct areas are identifying what the cost of spare capacity is and how much is available, What produce/service mix should be produced where there are capacity constraints and what are the overall costs expected for the operational decisions that may be deployed? (Slack et al, 1995)

Another important factor regarding management accounting in service operations is having the ability to understand key performance indicators so that quality information that supports decision making in service operations can be provided. The labour intensity of the sector signifies the importance of performance measures that monitor labour productivity (Guilding, 2002). Budgeting and forecasting are also issues that face these managers as often it is hard to distinguish between avoidable and unavoidable costs specifically with regards to the perishability of many services. Forecasting posses distinct pressure on managers and is an essential skill that is needed to achieve successful operations management, forecasting is set in-place to ensure that sufficient cash is available to meet the level of activity planned by the sales and production budgets as well as turnover of a business (Chapman et al, 2007). This therefore leaves a high degree of pressure on the managing accountant as if the forecasts of the expected cash availability are incorrect, then over time the business may face detrimental impacts to their projected liquidity and may even fall into liquidation such as Woolworths.

Finally with regards to the key issues faced in relation to management accounting information to support decisions in service operations it is clear that they alter from those required in the primary, secondary and quaternary sectors as the use of financial statements are not always readily available.

Task 6

Better Budgeting Vs beyond budgeting

Better Budgeting

Drury (2008) identifies budgeting to be one of the most widely used management accounting techniques around and were established to define the level of activity for both sales and capacity seen within a company. Budgeting has been defined as a “quantitative statement for a defined period of time, which may include planned revenues, assets, liabilities and cash flows” (Chartered Institute for Accountants, 2004: 4) in general a budget provides a focus for the organisation and allows managers to see the company’s financial position within the market.

As stated earlier within this study forecasting is an essential factor in the running of a company and is seen as an intricate tool within ‘better budgeting’. The 21st century has seen a rapidly increasing use of forecasting amongst management accountants ‘due to the fast changing environments seen within the industry’ (CIMA, 2009:4). Heizer et al, (2006) backs this stating that the use of forecasting has played a major role in ensuring budgets are more forward looking and can change and adapt in changing environments.

According to collier (2009) better budgeting is also supported by new technology. This means that the way data is collected and stored in organisations has shifted indicating that the process is sped up and is more accurate. This in turn allows budget holders more time to focus on key aspects or activities that can be developed to enhance the overall success and profitability levels experienced within the company.

Another disadvantage against forward budgeting is the viewpoints of some delegates that believe that ‘Budgets stifle the entrepreneurial, risk-taking culture that, ultimately, can be responsible for value creation.’ (CIMA, 2004: 6) This can ultimately cause detrimental impacts within the company and industry specifically with regards to the ‘economic downturn’ as businesses may then abandon new projects due to all ready allocated resources being promised.

Beyond budgeting

Beyond budgeting has been defined by Dr Peter Bruce as an area where it is needed to look beyond conventional methods of performance measurements and management. According to collier (2009) budgeting as most organisations exercise it should be abolished. As a result an organisation known as the ‘Beyond Budgeting round table’ (BBRT) have developed a more modernised approach to budgeting specifically designed to aid in continuously improving performances in a business environment.

An argument against ‘beyond budgeting’ is that one of its principals is to give teams the freedom and capability to act as they see fit. However by allowing certain individuals the freedom to ‘call budget’- related decisions may result in the businesses objectives set out for the directors to not be fulfilled or that the employees will become un-focussed as they are unable to establish what specifically, they are expected to achieve. (CIMA, 2009)

Finally an advantage of beyond budgeting is its ability to make resources readily available when they are required as opposed to being through annual budget allocations. This therefore ensures the company’s efficiency is maximised and does not waste its revenue due to the business changing its patterns or focus part way through the year.

Overall both these methods of budgeting poses a range of positive and negative factors that can be implemented into the working industry, however due to the wide range of critiques boasting extensive research on each of these methods, it is too difficult to distinguish a clear benefactor between them both.

Task 7

With regards to the data supplied above, it is clear that option 3 is the most suitable proposal to use. This is due to the fact that A: The fixed costs between option 3 and the current situation has not differed and B: There has only been a minimal increase in the variable costs of only 0.75, this therefore highlights that the selling price of £12.55 can be achieved which is an increase of £3.05 . As a result this creates a break-even point per unit of 26027.4, this is substantially less than that the current situation as well as options 1 and 2. As a direct result of this the margin for safety as a percentage and in number of units sold works out overall to be of a more advantageous degree. Finally the total costs of option 3 works out to be £48,000 cheaper than that of its closest competitor which succumbs to £31,500 better than the total cost in the current situation.

Task 8

Activity Based Costing (ABC)

Activity based costing (ABC) is defined as a more accurate method of allocating overheads to products or services. According to Baker (1998) the basic concept of ABC is that activities consume resources to produce an output. ABC is a decision making tool that allows, in comparison to the traditional overhead absorption, organisations to clarify the actual cost linked with each product and service produced (Hicks, 2002)

Collier identifies ‘ABC’ to be a three stage process that;

Trace costs for business processes to cost pools
Identify cost drivers for each cost pool
Determine the number of activities for each cost driver.

(Collier, 2009:235)

A distinct advantage of using an ‘ABC’ method is that it can minimise potential distortions on product costs that might occur from arbitrary allocation of overhead costs. In simpler terms this means that overheads could therefore be allocated at the same time they are being consumed (Collier, 2009).

This type of method is also useful for service based organisations as many have identified that traditional manufacturing based costing methods are often not suitable with regards to the nature of the service sector (Weetman, 2006). This therefore highlights how ‘ABC’ strategies differ from that of more traditional costing methods as the methods are based specifically around activities. Financial and non financial information are also used which according to Baker (1998) are of key value to managers attempting to deliver high levels of quality within service sector as not all operations can be linked to financial data.

In general Activity-based learning enables organisations to expand business performance through increased competence and reduction of costs, it identifies the key activities performed in all stages of delivering the entire service to the customer.

Bradtke (2007) states that ‘ABC’ has been designed to cope with deficiencies of traditional costing systems and is widely acknowledged by managing accountants to be of distinct value with regards to the running and success of a business. It is specifically useful due to its ability to achieve precise accuracy and transparency of product calculation and overall allows organisations to determine the actual costs associated with each product and service. This method of costing is a proven asset within the service sector and is seen to over-shadow more traditional methods of costing. This is due to the fact that the unique characteristics of the service industry, such as heterogeneity, means that the process involves instinctive and varied reactions.

Task 9

Annotated Bibliography

Topic A: How can strategic management accounting aid managers in the decision making process?

Collier, P (2009) ‘Accounting For Managers: Information For Decision Making’ Chichester: Wiley. UK

This source is directly useful when attempting to look into and identify the key characteristics of management accounting specifically with regards to the decision making skills involved with management

Chartered Institute Of Management Accountants (2004) ‘Better Budgeting’ London: CIMA [online] http://www.cimaglobal.com/cps/rde/xbcr/live/betterbudgeting_techrpt_2004.pdf [accessed 01/01/10]

This report identifies the most up to date strategies used in today’s business environment. It shows how management accounting can aid mangers decision making, specifically in budgeting.

Drury, C (2008). Management and Cost Accounting. London: Cengage Learning EMEA. p 570.

This reference highlights the key importance of cost effective management and identifies the importance that manager’s decisions have on the overall success of a business.

Atrill, P. and Mclaney, E. (2006) Management Accounting for Decision Makers, fifth Edn. Prentice-Hall publications. New York

With regards to the academic resource above Atrill et al, identifies the importance of acquiring the attributes to effectively plan, control and supply information to managers so that they can implement strategies within an organisation. Overall it gives a structured and comparative argument of the importance of decision making in management accounting.

Lucey, T (2003). Management Accounting. Fifth Edn. Business & Economics. UK

When looking into the usefulness of this book it again identified a range of traits similar to the previous sources highlighted above. However in comparison it could be said that many of the areas went into far greater detail when looking at managers decision making.

Topic B Bibliography - What are the arguments for and against the use of a balanced scorecard as a performance measurement tool?

Spitzer, D, R (2007) ‘Transforming Performance Measurement: Rethinking the Way We Measure and Drive Organizational Success’ USA: AMACOM

This reference highlights the positives of using balanced scorecards and explains that transforming performance measurement helps organisations maximize the value of their performance measurement approaches.

Nirven, P, R, (2006) ‘Balanced Scorecard Step By Step: Maximising Performance and Maintaining Results’ 2nd Ed, New York :John Wiley and Sons Ltd

This book offers an extensive positive view for the use of a balanced scorecard as a performance measuring tool and explains how it enhances the process to maintain the results.

Olve, N and Sjöstrand, A (2006) ‘Balanced Scorecard’ 2nd Ed, Mankato: Capstone Publishing

This book gives an overview and explains the use of a balanced scorecard. It includes the basics of management accounting that are useful to understand when using a balanced score card and other key performance indicators.

Norrekelt, H (2000) ‘: The balance on the balanced scorecard a critical analysis of some of its assumptions’, UK: Academic Press ()

This journal is useful in offering information on this topic as it not only gives a positive view for the use of a balanced scorecard, but offers critique also.

Nirven, P, R (2003) ‘Balanced Scorecard Step-By-Step For Government and Non Profit Agencies’ New York :John Wiley and Sons

This reference offers an explicit view on the use of a balanced scorecard for government and non profit organisations which offer points both positively and negatively.

References

Abraham, A. Glynn, J. Murphy, M. Wilkinson, B (2008). Accounting for managers. Fourth Edn. Cengage. London
Atrill, P and McLaney, E (2007). ‘Management Accounting For Decision Makers’. fifth Ed, Pearson Education Ltd: Essex
Accounting standards board (2009). Reporting statements: operating and finance review. London: ASB.
Baker, J (1998) ‘Activity-Based Costing and Activity-Based Management for Health Care’ Maryland: Aspen Publishers
Bradtke, D (2007). Activity-Based-Costing (online). Available at . (Accessed 20/04/2010)
Collier, P. M (2009). Accounting for Managers - interpreting accounting information for decision-making. Third Edn. Wiley and sons Ltd. USA.
Chartered Institute Of Management Accountants (2004) ‘Better Budgeting’ (online) available from http://www.cimaglobal.com/cps/rde/xbcr/live/betterbudgeting_techrpt_2004.pdf [accessed 23/04/10]
Chapman, C. Hopwood, A. Shields, M (2007) Handbook of management accounting research. Second Edn. Business and economics. UK
Drury, C (2008). Management and Cost Accounting. Seventh Edn. Cengage Learning. London.
EasyJet (2009) ‘Introduction to EasyJet: Turning Europe Orange’ (online) Available at http://corporate.easyjet.com/en/investors/video/introduction-to-easyJet.aspx (Accessed 20/04/10)

Gowthorpe, C (2008). Management Accounting. Cengage learning. London.
Guiling, C (2002) ‘Financial Management for Hospitality Decision Makers’ Elsevier Science and Technology Books. Amsterdam.
Heizer, J. and Render, B. (2006). Principles of Operations Management. Business economics. USA
Hicks, D (2002) Activity-based costing: making it work for small and mid sized companies. Second Edn. WCM Ltd. UK
Johnston, R. Clarke, G (2008) service operations management: Improving service delivery. Third Edn. Business & Economics. UK
Mitchell, D. Coles, C (2003). The ultimate competitive advantage: secrets of continually developing a more profitable business model. Berrett-Koeher publishers, Inc. California.
Steven, R. Westerfield, R. Jordan, B (2008). Fundamentals of corporate finance. Eighth Edn. Harvard Business School. USA
Slack, N. Chambers, S. Johnston, R. Betts, A (2006). Operations and process management principles and practice for strategic impact Pearson Education Ltd. Essex:
Weetman, P (2006) ‘Management Accounting: An Introduction’ 3rd Ed, UK: Pearson Education/Financial Times Press