In this assignment, three issues are discussed. Recommendations are given and explained in line with the literature. The following content is organized into three parts, first part about the role of management accounting information. Secondly is the performance measurement. The third is accounting costing system. Finally, a brief conclusion is provided.
1. Role of management accounting information in strategic and operational decision
The reasons for the company to adopt the innovative accounting system are explicit. The changing and integrating of the external business environment has resulted in intensive competition in all level of the business, including the market, manufacture, research and design and so on. To be successful, the company need to improve its performance and build its competitive advantage from time to time. Not only has the company to satisfy the customers, but also to focus performance of intangible assets and its strategy. Consequently, financial and non-financial information are required for the company, when making decision or strategies. As Bhimani et al.(2008) state that the traditional accounting system is shifting to a more business- and support-oriented focus. It is proved that the strategic accounting methods, including product life cycle, are more beneficial over the traditional ones, such as the absorption costing. In this aspect, the directors and managers should realize the importance of the management accounting information in the new context.
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As defined by the CIMA (cited by Mangena, 2010a), Management Accounting (MA) penetrate through the whole improvement process of the financial and non-financial information system to support the planning, evaluation and controlling within the organization. The financial reporting and cost accounting are only parts of the management accounting's role, which used by the Apple plc. Concluded by the Mangena (2010a), there are four roles for management accounting, which are strategic management, planning and decision making, management control and financial reporting.
Initially, a key role of the MA is to connect financial considerations with operation and strategies of the company (Bhimani et al., 2008). When formulating strategies, the managers need various accounting information to evaluate strategic alternatives. This kind of decisions, including investment appraisal, choice of product and new product development etc., provides the direction and competitive strategy. For example, as the Apple plc. has several products, which share the manufacturing facilities. How does the company manage the capacity issue encountered? Which product is emphasized in the short-run? Hereby, the contribution margins analysis by the management accounting can provide insight into this problem. It can be assumed that the contribution margin for Chew and Candy Bar are as follows:
At the first glance, it is probably to choose to produce Candy bar in advance, considering the 37.5% contribution margin per unit. However, when take the constraints factors into account, the result is different.
We can find that the Chew can provide more than ?27000 contribution to the company. Without using this information, the company may choose its profitable product mix in a wrong way and fail to maximize its operating profit.
Secondly, through budgeting, Cash flow management and so on, the MA can assist the manager to make the short-term and long-term planning more effective and efficiently. Cost accounting and pricing are crucial decision involved. Apple plc. may be caught in a dilemma whether to abort a new product because even its cost is higher than the customer expectation, not to mention the price. In the course of target costing, the management accounting can manage the cost starting from customer price expectation information, then calculate the cost for new product and finally, through trade-offs to meet the target cost, which is more feasible to market the product . Furthermore, value chain and customer profitability analysis can be applied to make the process more smooth and successful.
Thirdly, due to the decentralisation, the traditional control and reward system is challenged. New developments are in place to deal with the suboptimal or conflicts among different responsibility centres. To evaluate the actual performance, the MA can employ benchmarking to compare the variance, Economic Value Added, Residual Income and so on. Besides, non-financial information is also taken into consideration, such as the customer complaints and Staff turnover ratio, with the regard of Balanced Scorecard. Finally, the basic purpose of the management accounting information is to issue the external financial report. This could do with information about sales, stock and other asset ().
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2. Performance Measurement system
Performance measurement system (PMS) is part of the management control system. There are two types of the performance measures (PM), which are financial and non-financial measures. Effective PMSs should concern linkage with the organization's strategies, correspondence with structure and decision-making process and motivation for employees. The important of principle of PM is controllability. The ultimate goal of the performance measurement should be improve the performance of the companies or divisions, or individuals.
In this case, Apple plc. has adopted a single historical financial measures - profit margin. Although the benefits of the financial measures are observed, such as comparable, reliable, comprehensible and goal congruence, there are several problems encountered in this system in the context of decentralisation.
First and foremost, comparing to the new measures, like Balanced Scorecard, the financial measures ignore intangibles and do not reveal the economic income completely. Secondly, they are historical and short-term indicators, which is lagging and do not reflect the future performance. Furthermore, only relying on the financial measurement will lead to suboptimisation or incorrect performance information. specifically, some scholars (e.g. Pettit, 2000) argue that the profit margin ignores the capital and its cost and may result in misallocation of resources. For example, the manager is likely to make the equipment replacement decision because of the high-margin return, regardless of the cost of the investment. If coupled to incentive compensation, this will cause the moral hazard among the managers.
Fourthly, the company do not consider the controllability for the manager's performance and the organisational decision making process. The absorption costing induces the inaccurate cost assigning, which then affect the accurate performance of the managers. This cost decision is not controlled by the manager themselves. Finally, it is obvious that, the financial incentive is major motivation, which Frey B. (cied by Neely, 2007) argue that the intrinsic and extrinsic motivation are essential. Bhimani et al. (2008) also state that incentives should consider the trade-off with risk and the intensity.
To improve the PMS, Apple plc. should bear the objectives of the PM in mind. Mangena (2010 c) propose that to conquer the problems of traditional financial measures, company might employ the innovative financial techniques to improve the accounting profit measures and reduce pressure for short-term profit and the non-financial measures. Moreover, Ittner and Larcker (2000, cited by Bhimani et al., 2008) add that non-financial measurement can complement the financial measures, because it is long-term oriented, refection on economic income, and transparent performance evaluation. There are various techniques to illustrate the need of Apple plc., for instance, The Balanced Scorecard (BSC), Economic Value Added (EVA), Quality Management, Activity-based Costing and Management and so on. As a result, The Balanced Scorecard (BSC) is the most appropriate. The BSC consist the financial measurement and non- financial measures, such as customer, internal process, and learning and growth perspectives (Kaplan and Norton, 1996, 200, 2004, cited by Bhimani et al., 2008). Horngren et al. (2008) state that the performance measurement is directly link to organization goal and strategies through BSC.
Initially, to implement the BSC, Apple plc. need to formulate its strategies and indentify the key performance indicators (KPIs) (Assiri et al., 2006). An example of the BSC implementation in a food manufacturer is given below.
Figure 3 Balanced Scorecard for a Food Company
After finding the indicators, the company can set up the target appropriately. In this case, it is important to find out how the BSC link to the performance measurement. Another example (Figure 2) has shown the method is to compare the actual achievement with preset targets.
In the other hand, for Apple plc., there is main barrier to measure the performance, especially for the financial perspective, that is the absorption costing. To deal with this, Activity-based Costing (ABC) can be applied. Although the ABC could make the cost allocation reasonably and the manager responsible, it cannot isolate solve the previous problem, neither the BSC.
Figure 4 An Example of BSC for Performance Measurement (source from Leung et al., 2006)
However, the new developments have limitation as well. Ittner and Larcker (2000, cited byBhimani et al., 2008) claim that the more complex PMS is costly and time consuming. Comparing to profit margin, BSC requires numerous information and the implementation involving experiment and improvements from time to time. Assiri et al.(2006) has examined the factors when implementing BSC. Training is second important factor among the nineteen, which is requiring huge investment. Apart from that, the validity of the information is doubtable. In addition, Mangena (2010) convince that BSC has lacked to integrate the PM to performance management, and difficulty of KPI identification. Furthermore, Bhimani et al. (2008: p.211)indicate other two proposals in this context. They are changing the performance evaluation period and cautious budgeting and build excess stock to reduce management freedom. To conclude, if the company want to apply the BSC and other systems, it is better to outsource the service or do the training first, as we indicate in the first question.
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3. Costing system
The usage of the absorption costing is problematic in Apple plc. This kind of system does not emphasize on the fix cost or overhead, because absorption costing based on the direct-labor production and is not suitable for the contemporary environment, which is using automated technology and huge investment in fix assets(Proctor, 2002). Therefore, the overhead absorption depends on volume and neglects the non-volume related activities. This arbitrary nature results in the inaccurate product costs and misleading the decision making. As Kaplan and Cooper (1998, cited by Proctor, 2002)'s research indicate the high-volume and low-complexity products are overcosted while the low-volume and high complexity ones are undercosted. Overall, the absorption costing is not adequate in the context of high overhead, multiple products and multiple shared processes (Mangena, 2010b).
Hence, new costing methods should be taken into consideration, such as the activity-based accounting, marginal costing, relevant cost and variable cost. Here, ABC is proposed, since the ABC information can aid the decision making in different way (Bhimani et al., 2008). The ABC is concerning four key aspects (Mangena, 2010b). The first is support cost is nothing to do with the volume. Secondly, support costs will respond to the complexity. Thirdly, the activities cause costs and finally, products or services consume activities. The traditional costing system is improved by the ABC trough the calculation and apportion by activities.
To start with, the comparison between the traditional costing and ABC is best evidence to affirm the rational of the ABC for Apple plc (see Figure3) There are two point emphasized in the figure. For one thing, it is the different cost pooling, which ABC based activity analysis provide the flexibility to gather the superior cost information. For another thing, the ABC adopts multiple cost drivers to avoid the insufficient and one-sided information, while the absorption costing primarily depends on volume. These all manifest the ABC is a profitability measure which can provide the accurate product cost for control and decision making.
The Mangena (2010b) argue that there are four kinds of situation that can be benefited from the ABC. The first is that the overheads play an important role in the total cost. Secondly, the volume is not a cost driver, due to the new technologies and short life cycle. Third is the company has multiple products, especially sharing the manufacturing facilities. Lastly, the demands of the resources are varying. These guidelines are in line with its competitive advantage towards traditional costing systems. However, Innes and Mitchell (1995) argue that the benefit for the implementing the ABC trades off by the cost of design, which we will discuss the limitation later.
Figure 3 Comparison between Traditional costing and ABC(Mangena, 2010b)
ABC can be furthermore used to form the Activity-based Management (ABM). It is involves the cost and profit management by means of ABC information, which will benefit company more than expected. For example, the ABC may suggest that price for Chew can reduce, because it is high-volume and low-complexity product and in the other hand, raise the price for Candy Bar. Another example is for design and development. Activity analysis enable the Apple plc. reviews how design process affect the activities and costs and can work with its customer to evaluate the new product alternatives.
Hereby, we can find that the ABC is appropriate for the Apple plc, either because the development from the traditional costing system, or because the benefit that it provides ABC information. However, some limitation are raised (e.g Mangena, 2010b, Gunasekaran et al., 1999). One of them is the complexity ABC itself is main barrier for companies to implement. Due to this, the activity-based cost rate should keep informed regularly. It needs to take a serious consideration when using the ABC information, such as cost drivers, for decision making. Finally, many managers complaint the benefit of the ABC is offset by the cost when espousing the detailed ABC system. Nevertheless, information technology help to reduce the risk and cost faced.
In this report, three main issues have been discussed by the literature support. The four kinds of role for management accounting is reveal and explain how they function with the management process. Secondly, Balanced Scorecard is come up to replace the traditional financial measurement, although some limitations, time consuming and costly, are significant, it is worth to applied the basic BSC to refine its Pm. Finally, accounting costing system is reviewed and recommendation is to shift to ABC system, which is more flexible and accurate. Overall, the recommendations here are basic assumed in the context of the Apple plc. and are lack of practical examination.