management accounting and financialo accounting
Managerial Finance and Accounting
To line manager Dr. Emad Awadallah
From Ligita Kondrataviciute
Table of contents
1. Introduction 3.
2. Analysis 3 – 7.
2.1 Differences and similarities between management accounting and financial accounting. 3 - 4.
2.2 The main role of the management accountant within the company, scorekeeping and attention directing. 4.
2.3 Main cost classifications and pricing policy 5 - 6.
2.4 Customer satisfaction 7.
3. Conclusion 7.
4. References 8.
In a recently held HADIKA plc. the well known motor car manufacturer, meeting, managers were discussing a current condition of a company. As the company is currently facing a decrease in market share, because of the competition and global financial turmoil, a few decisions were made:
- improvement of motor cars quality;
- improvement of customer service;
- price reduction.
In the first part of the report I am going to explain a few concepts of Managerial Accounting, such as: differences and similarities between management accounting and financial accounting, the main three functions of management accountant within the company, main cost classifications.
In the second part of the report I will explain factors and approaches, which could help HADIKA plc. To increase its market share and satisfy customers.
2.1 Differences and similarities between management accounting and financial accounting.
This is a preview of the whole essay
In this part of the report I am going to discuss what do these two types of accounting have in common and how do they differ.
- Both management accounting and financial accounting often rely on the same financial data.
- The objective of both types of accounting is to provide sufficient information to meet the needs of the various users at the lowest possible cost. (Garrison & Noreen & Brewer 12thed.)
- Type of the users. Management accounting is concerned with the provision of information to people within the organization to help them make better decisions. Financial accounting is concerned with the provision of information to external parties outside the organization.
- Time dimension. Financial accounting is concerned with past financial transactions. In contrast, managerial accounting is concerned with future information as well as with past information.
- Legal requirements. Financial accounting is mandatory. Companies are required to periodically prepare financial statements, by the various outside parties. Managerial accounting, is not mandatory. A company is free to decide a period and number of financial statements.
- Segments of an organization. Financial accounting report describes the whole of the organization. Managerial accounting focuses more on the segments, of a company. For example individual products and activities, sales territories, departments or any other useful category.(C. Drury 1993)
- Generally accepted accounting principles (GAAP). Financial accounting statements prepared for external users must comply with generally accepted accounting principles (GAAP). Financial accounts must be prepared so as to meet the requirements of the Companies Acts and statements of standard accounting practice. In contrast, managers set their own rules, which they find most useful for decision making
( Garrison & Noreen & Brewer 12thed.)
- Report frequency. A detailed set of financial accounts is published annually, less detailed – semi annually. Management accounting reports on various activities are more frequent. May be prepared monthly, weekly, daily. (Atrill & McLaney,2007)
- Relevance of data. Financial accounting reports concentrate on information that can be quantified in monetary terms. Management accounting is more likely to produce reports that contain information of a non-financial nature.
Now as I have discussed the nature of managerial and finance accounting I am going to describe for what management accountant is responsible.
- The main role of the management accountant within the company is contribution to the company’s decisions about strategy, planning and control, by problem solving, scorekeeping and attention directing.
- Problem solving. Comparative analysis for decision making of several alternatives available. Choosing the best alternative in relation to company’s goals.
- Scorekeeping. Accumulating data and reporting results to all levels of management describing the organization condition. Examples of scorekeeping are recording of actual revenues and purchases relative to budgeted amounts.
- Attention directing. Helping managers focus on opportunities and problems. Help them to focus not only on cost reduction opportunities but to pay attention on all possible opportunities, which would add value to the company
2.3 Main cost classifications and pricing policy
In this part I will explain main cost classifications and relate it to HADIKA plc. pricing policy.The kinds of costs that are incurred and the way in which these costs are classified depend on the type of organization
- Direct & Indirect costs
- Product & Period costs
- Variable, Fixed, Semi-Variable &Semi-Fixed
- Relevant & Irrelevant
Direct & Indirect costs
Direct costs - can be directly attributed to a product or product line, to one source of sales revenue, one business unit or operation of the business. For example, the cost of tires on a new automobile.
Indirect costs – cannot be attached to any specific product, unit or activity of sales For example, rent, depreciation of the machines.
Product & Period costs
Product costs – costs associated with goods or services purchased, or produced, for sale to customers.
Period costs – costs treated as expenses in the period in which they are incurred.
Variable, Fixed, Semi-Variable & Semi-Fixed
Variable costs - increase and decrease due to changes in sales or production level. Variable costs fluctuate in proportion with changes in production.
Fixed costs - costs that stay same over a relatively broad range of sales volume or production output.
Semi – Variable costs - a cost composed of a mixture of fixed and variable components. Costs are fixed for a set level of production or consumption, becoming variable after the level is exceeded.
Semi-Fixed - refers to expenditure which remains fixed within a particular level of productive activity, which is referred to as the range. If the level exceeds this range, then additional costs will be incurred.
Relevant & Irrelevant
Relevant costs - future costs that could be incurred, depending on the strategic course taken by a specific business. For example, if HADIKA plc. wants to increase production, and the cost of tires goes up - these costs need to be taken into consideration.
Irrelevant costs - costs that should be disregarded when deciding on a future course of action. Whereas relevant costs are future costs, irrelevant costs are those costs that were incurred in the past. For example, rent of the manufacture premises.
Concerning HADIKA plc. Pricing policy, for the company to be able to compete and attract more customers prices of the cars should be lowered. First thing to consider is lowering possible costs of the car produced. Because of the global turmoil, people are no longer willing to pay huge sums of money for the cars. As a result, HADIKA plc. should consider changing car models, from expensive sports car to cheaper family car. This would help to decrease costs of a car production. Money could be saved on many components of a car:
- Engine. There would be no need to fit a powerful turbo – engine.
- Car safety. Sports car needs to have a lot of functional safety features such as: Electronic Stability Systems, Anti-Lock Brake System or ABS, Effective Traction Handling, which could be avoided.
- Suspension. No need for expensive sport – suspension.
- HADIKA plc. should scrap minor comforts as part of a drive, as it was done by German car brand- Wolkswagen. VW-brand Golf and Passat cars were made with fixed instead of adjustable head-rests, pen-holders were no longer provided in glove boxes and tyre valves were protected with cheaper caps. ()
Factory costs are very sensitive to variety of production. So by reducing car models variety – by half, for example, raises productivity by 30%, cuts costs 17%, and substantially lowers the break-even point. Cutting the product line in half again boosts productivity by 75%, slashes costs 30%, and diminishes the break-even point to below 50%. ()
One more solution to help save on costs is to cut the labour. As HADIKA plc. heavily invested in automated processes there is no need to employ as many staff. So the number of workers could be reduced.Not only price of the product should be reduced, in order to compete, but company must become more customer driven and make customer satisfaction an important priority. In the last part of the report I am going to analyze factors that have an influence on customer satisfaction.
4. Customer satisfaction
Excellence in customer service requires that the supplier do what he promised, do it well, and do it the same every time. The product should speak for itself. If something additional is needed to please the customer, it should be part of the original product package and, more importantly, it should be delivered to all customers on a consistent basis () In order to satisfy customers HADIKA plc. must concentrate on key success factors that directly affect them. These factors are cost efficiency, quality, time and innovation.
Cost efficiency provides an organization with a strong competitive advantage, because customers will buy products with the lowest price. HADIKA plc. should set as lower prices on its cars as possible, it would help to attract and satisfy customers.
Customers must always get a high quality products & services. HADIKA plc. should focus on main TQM concepts. TQM is the outgrowth of a long line of developments seeking to evaluate and improve the quality of manufactured goods. The idea behind TQM is that much can be achieved by innovation, but competitive advantage is largely affected by continuous process improvement. Continuous improvement is an ongoing effort to improve products, services or processes. The way in which companies implement continuous improvement is called “Benchmarking”. It’s a studying the business practices of other companies for purpose of comparison.( R. Reid & R. Sanders, 2007).
One more concept of TQM that should be followed by Hadika plc. employee empowerment. By empowering employees and giving them relevant information they will be able to respond faster to customers and improve quality of service.
Time is very important factor in satisfying customers. Fast, on – time delivery, response to customer requests help company to beat the competition. Because of that Hadika plc. should provide their customers a 100% fast services.
Innovation is one more factor that can attract or distract customers. Company, to be successful from time to time must innovate new products and services, be capable to adopt the changing customer requirements.
In this report I have analyzed main concepts of managerial accounting and searched for possible ways for HADIKA plc. to increase its market share, and attract more customers. I compared our company with other companies, listed possible ways for the company to compete in today’s market. The main things to be considered and analyzed are: reduction of prices, which could be achieved by cutting all possible manufacturing costs, customer satisfaction, which could be examined and improved using main TQM concepts, and key success factors.
Peter Atrill & Eddie McLAney 2007, Management Accounting for decision makers 5th edition, Prentice Hall.
Colin Drury 1993, Costing an introduction 3rd edition, Chapman & Hall.
R. Garrison & E. Noreen & P. Brewer, Managerial Accounting 12th edition, Mc GRAW HILL
R. Reid & R. Sanders 2007, Operations Management: an integrated approach 3rd edition, John Wiley & Sons, Inc