This report is meant to explain the importance of management accounting and its relevance to a business. It takes a look at the performance of s at the performance of the company of choice is NEXT and this report would assist in the management of the company in achieving long term and short term objectives.
Next is one of UK's leading retailers based in Enderby, Leicester that offers trendy and high quality clothing and accessories for men, women and children and, also offers a very wide range of home products ranging from kitchen appliances, furniture to home entertainment electronics.
The company has been in existence since 1981 and opened 70 NEXT stores for women's clothing in the UK. I983, 52 NEXT stores were opened for men's apparel. The parent company was called J. Hepworth & Son, and in 1986 changed its name to Next.
Next has since grown into a global brand with more 55,000 strong workforce of over 35,000 in full time employment worldwide. Next is listed on the London Stock Exchange under the parent company, Next Group PLC. The company recorded revenue of £3.4 billion for the financial year ending 2010 and a pre-tax profit of £ 0.5 billion. (next.com, 2011) Next has also been appointed as the Official Clothing and Home Appliances Supplier to the London 2012 Olympic Games.
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Next retails clothes, shoes and accessories for men, women and children. It also sells branded electronics and home wares.
Next has three major distribution channels for its products which include;
Next Retail: which comprises of more than 500 stores in the UK ,
Next Directory which is its online offering and,
Next International which comprises of more than 180 stores in Europe, Asia and North America.
Besides retailing, Next is into other businesses that include;
Next Sourcing: this sources for Next products,
Lipsy which designs and sells younger women's clothing wholesale and retail
Ventura: a transport and logistics company providing customer services to clients for outsourcing purposes
Next is in a very competitive business and thus has a very large base of competitors worldwide. These include, Debenhams plc, Esprit Holdings Limited, Gap, Inc., The H & M Hennes & Mauritz AB, House of Fraser Group Plc., John Lewis Partnership Plc., Marks and Spencer Group Plc and Zara France
REVIEW OF MANAGEMENT ACCOUNTING
"Management accounting is the application of the principles of accounting and financial management to create, protect, preserve and increase value for the stake- holders of for - profit and not - for - profit enterprises in the public and private sectors", (CIMA, 2005)
USES OF MANAGEMENT ACCOUNTING
Used for making decision
To ensure that an entity's asset is secured.
Increasing resources usage
Communicating internally with shareholders and employer
Controlling and planning activities
Management Accounting is basically related to gathering of data both from external sources and internal sources processing, analysing, communicating, and interpreting the result of the information for using within the company in other to allow the management plan, control operation and in making decisions.
Management Account Key Techniques
Cost - volume - profit analysis
Net Present Value
Activity based costing
Internal rate of return
The key techniques of management accounting
The management accounting techniques recommended for next are:
Cost-volume-analysis which is also known as Break-Even analysis is an application of managerial costing which shows the relationship between profit, cost and volume for decision making and short term planning (Lucey, 1996). The assumptions of cost-volume-analysis are:
There is no stock level.
Cost can be decided on into fixed and variable elements.
In other words, it is the categorization of production cost into fixed and variable in other to determine the level of sales volume at whether a firm makes profit or loss.
Always on Time
Marked to Standard
Activity-based-costing (ABC) measures the cost and performances of the activities involved in manufacturing a product, the product, the resources and the consumers of the product for decision making within the organisation. Activity-based-management (ABM) uses the information taken from ABC to ensure effort improvement and decision making for an efficient operation in an entity.
However, relevant cost management must provide relevant cost information, irrelevant activities that do not contribute to the value of customers and the organisation, accurate cost information of products and services in segmented market and cost driver information. Activity-based-management is necessary for management improvement decision making.
ADVANTAGES OF JUST-IN-TIME
Lower investment because of implementation of zero or no inventory.
Elimination of work flow issues and bottlenecks improves an entity performance.
Due to reduction in stock helps in the satisfaction of market niches.
Savings are acquired from the reduction in inventory.
DISADVANTAGES OF JUST-IN-TIME
Just-in-time increases complexity within work cells
The tool requires no defect at all in the production of a product the first time.
A change of factory layout is required.
Requires involvement of full workers.3
This is a management tool used for strategic planning and management. It is used to monitor a company's performance with respect to long term goals and also enhances both internal and external communication in the company. Next management needs to monitor the performance of its subsidiaries, stores and online offerings. They also need to be aware of the performance of new range of products and old products too. Knowing which product lines to discontinue since the company has a large marketing mix.
This is the summary and estimation of future expenditure and a mechanism of ways this expenditure. For instance, since Next deals with clothing, the price of cotton can indeed affect the business. It is necessary to make provision for the variance in the price of this commodity.
This length of time required to recover an investment by a company. Understanding and calculating the payback period of an investment is crucial to an organisation. It assists management in making decisions in terms of budgeting and long term plans which could save the company money, time and effort.
Since there would be an expected growth in the number of Next stores in the UK, Next would have to consider investing in new trucks for transportation of goods to warehouses and onward transfer to stores nationwide.
Cost of new truck: £5,000,000
Life: 8 years
Benefit: improve the transportation of products across regions in the UK instead of building new warehouses which may be time consuming and involve hiring new hand and increased recurrent expenses and increase profit by £1,500,000£ per year
Cost of capital is 5%
The new trucks would be sold for £1,000,000 at the end of eight years
£1,000,000 is expected to be recovered in the 4th year and so the payback period for this 4 years.
Accounting rate of return
The increased annual income related to the new trucks will be £500,000
(£5,000,000 - £500,000 of depreciation).
Depreciation =(£5,000,000- £1,000,000 ) /8
\= £4,000,000/8 = £500,000
The average income will equal the annual income since the annual income is equal each year.
The average investment is £2,000,000 = (£5,000,000 - £1,000,000)/2
The accounting rate of return for the investment in the new trucks is computed as:
£2,000,000 / £5,000,000 = 40%
Net present value
The organisation's cost of capital is 5%
The incremental cash flows in each period of the project's life.
£5,000,000 outflow immediately
£1,500,000 inflow at the end of each year for eight years
£1,000,000 inflow from salvage at the end of eight years
For a eight-year annuity of £1,500,000, PV = £
For the £1,500,000 salvage in five years, PV = £
The PV of the cash inflows is £
Because the investment of £ takes place at time zero, the PV of the total outflows is £( )
The NPV of this investment project is £
Internal rate of return
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By trial and error, or the use of a financial calculator or spreadsheet software, we find that the IRR in our example is 16.14% > 10% cost of capital,
The present value of the cash inflows was £ and the present value of the cash outflows was £.
Therefore, the profitability index for that project was
STRENGTHS & WEAKNESSES
The techniques used in this report are very much relevant to Next Plc as a business and can also be used in other areas and subsidiaries of the company. It is can be quite helpful in analysing and evaluating both long term and short term objectives. For instance, Its online offering , Next Retail and it's logistics subsidiary, Ventura can be examined using this report
One weakness is that it does not predict future state of the company giving the current economic climate and the effect of the increase in VAT by the government or the effect the UK economy would have on it since majority of the company's income comes the United Kingdom. That cannot be currently determined. It also cannot predict the impact Next's major competitors would have against Next, financially.