Analysing how to implement improved techniques at Apple plc


The aim of this report is to discuss the current techniques being employed at Apple plc. and to implement improved techniques. What and how these techniques can be implemented are questions which are answered in this report. It starts with the simple explanation of management accounting and its role. It then goes on to describe the current techniques being employed at Apple Plc. and what new techniques can be employed to improve the overall performance.

2.0 Management Accounting

Management accounting deals with processing of accounts information for the use of managers or staff in general, within an organization. This information in return helps the managers to make strategic decisions in order to improve their management and control functions. Horngren et al. (1993) describes management accounting as a process of identifying, measuring, accumulating, analysing, preparing and communicating information that helps managers to fulfil organisational objective.

3.0 Role of Management Accounting

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Role of management accounting consists of the following things:

Planning and Decision making


Financial reporting

Strategic Management

3.1 Planning and Decision Making

Planning is a key feature of any business. It is a primary function of the managers who decide in advance about the different aspects of business such as capital expenditure, sales or production plan. A decision is then made in light of the information provided to the managers. This decision has the potential of making or breaking a business.

3.2 Controlling

Information provided to the managers, leads to better planning and decision making which eventually facilitates their control functions within an organization. Controlling leads to reduction in uncertainty, helping towards better forecasting of profits and performance of the firm in general.

3.3 Financial Reporting

Financial reporting is highly useful for external sources such as shareholders, investors, creditors, etc. subject to disclosure agreements .T.D. Fry(1994) states that linking financial reporting with management accounting encourages managers to emphasize on financial performance.

3.4 Strategic Management

Management accounting promotes a strategic way of management. In this way management accounting equips the managers to think out of the box and set some objectives and benchmarks about their production, costing or product lifecycle.

4.0 Modern Management Accounting Techniques

There are various modern management accounting techniques currently used in the businesses around the world. These techniques help managers to achieve their objectives and moreover to fully implement management accounting in it's true sense. Some of the widely used techniques are activity based costing (ABC), target costing, customer profitability, Balance scorecard and many more. Some of these techniques are mentioned below.

4.1 Target Costing:

Target costing as mentioned by A. Lockamy and W.I. Smith (2000), is a process for ensuring that a product launched with specified functionality, quality and sales price can be produced at a life-cycle cost that generates a satisfactory level of profitability. This was first introduced by Toyota in 1965 (Tanaka,1993). It emphasizes to control the cost of the product keeping in mind the market. M.L. Gagne and R. Discanza (1995) describe it as a tool for manufacturing and marketing departments in companies to respond to market demands and competitive forces rather than merely focus on internal performance, no doing so would put an added strain on the selling department to operate within the market.

A target cost of a product can be achieved by subtracting the desired profit a company wishes to earn on a product from its established selling price. An allowable cost is derived by the company for a product through this method which is described by the equation below (A. Lockamy and W.I. Smith, 2000):

Allowable product cost = Sales Price - Profit Margin

Implementation of Target Costing is done through functional cost analysis (M.L. Gagne and R. Discanza, 1995). Functional cost analysis is a group exercise which brings together employees from different departments and requires them to make contribution towards the cost reduction process of the product. This helps the company to identify extra costs incurred on the product and gives the company a competitive edge in the market. Figure.1 below summarizes the target costing process.

4.2 Customer Profitability:

Customer profitability analysis is a process of allocating revenues and costs to customer segments or individual customer accounts (E.M.V. Raaij, 2005). Implementation of customer profitability analysis can be divided into two major steps:

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Step 1: It starts with identifying a list of current customers from the database. In order to implement CPA, an up to date database is required so that costs can be allocated only to active customers.

Step 2: This process deals with designing the customer profitability model which will determine the cost drivers of activities a firm performs. Cost drivers can be identified by the following formula (E.M.V. Raaij, 2005):

The next equation calculates customer profitability by taking into account the number of cost driver units consumed by a customer subtracted from that customers sales revenue.

Calculating customer profitability is a very delicate process which takes into account every activity like sales trips made by the sales team to a customer and etc. It often allocates a fixed cost for each activity and then calculates the overall cost associated to a particular customer. Figure.2 below distinguishes between two customers with same sales revenue but with different costs, hence making serving customer A profitable rather than serving customer B.

4.3 Value Chain:

Value chain analysis is a method for decomposing the firm into strategically important activities and understanding their impact on cost behavior and differentiation (M. Hergert & D. Morris, 1989). This works on the basic principle of competitive advantage. According to Porter (1985), competitive advantage can be achieved by low cost, differentiation and focus. Products are mended to meet the requirements of a customer, hence achieving differentiation and charging premium. In order to do this a product is passed through a chain comprising of design, production, marketing, delivery and service and gains value at every step. When this value exceeds cost a profit is generated (M. Hergert & D. Morris, 1989). Figure 3 below outlines some activities that the firm tries to generate value in.

M. Hergert & D. Morris (1989) goes on to explain that by differentiating products a firm gains a special market place. However a firm should know which of its activities generate value and what is the cost of these activities. This creates a problem as deriving a cost is a difficult task but equally difficult is to know what customers are willing to pay for the firm's activities.

4.4 Just-In-Time:

It is a method widely used in management accounting which places major emphasis on inventory control with the prime goal of achieving zero inventory (D. Hutchins, 1999). It functions on the principles of Lean manufacturing which dictate total waste elimination.

A. Harrison (1992) describes the kinds of waste that can be eliminated as follows:

Over Production: It happens when more is produced than needed, completely ignoring the principles of demand and supply.

Waiting Time: It is the idle time incurred in manufacturing when machine or labor hours are not fully utilized.

Transport: Efficient means of transport are necessary as the raw materials are delivered when they are needed in just-in-time approach.

Process: Processes which can be design or maintenance can generate a lot of waste which does not help towards reducing waste.

Inventory: The main thing which comprises JIT is inventory control. It makes the company more responsive towards market trends and reduces its storage costs. It also frees cash for the company which can be better used, in investing other projects.

Motion: The workforce might be in motion but they may not be doing their respective tasks. This can result in time wastage and low efficiency.

Defective Goods: Cost of defective goods can be huge. At times this cost cannot be measured in certain circumstances when a company looses its market reputation as it happened with Toyota recently.

5.0 Costing Techniques at Apple Plc.

Current practices at Apple Plc. have been vague in nature and are costing the firm a great deal of problem.

5.1 Current Practices: Absorption Costing

It is a process by which not only fixed costs and variable costs but also overheads are included. This is a method of arriving at a full cost of production for the purpose of inventory valuation. M Abdel-Kader (2006) mentions that, the problem with absorption costing is how to allocate overheads to the respective functions of the firm and how to define space usage? And goes on to question the credibility of absorption costing for decision making purpose.

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Absorption costing can be implemented using a three step process. The first step uses the basis of area occupied by every cost center to allocate overheads. In the second step overheads are apportioned on the basis of service center to production cost center. In the last step all these costs are absorbed in the cost of the product.

In our company the basic problem with using absorption costing is that, costing of the product does not take into account that different divisions of a company are separate profit generating centers and not a single center. Hence the costing has to be done separately. It combines every cost to a product rather than costing on the basis of activity performed. To counter this problem a more favorable costing system should be introduced. I would propose Activity Based Costing.

5.2 Proposition: Activity Based Costing (ABC)

As the name implies, it recognizes that activities cause cost (J. C. Lere, 2000). Some activities are performed to manufacture a product. These activities are known as unit-level activities. It assigns a certain amount of cost to every activity and hence costing is done by taking into account the number of times an activity is performed. These costs behave like variable costs as they change according to the number of units produced. J. C. Lere (2000) goes on to describe more activities, such as batch activities which are assigned a cost on the basis of the number of batches produced rather than on the number of units produced within a batch. This gives a definite cost which reduces the variation in costing a product. The third kind of activity which is discussed by J. C. Lere (2000) is product-level activity. This, once performed benefits all units of a particular product. Quality control or testing the product before it goes out in the market is an example of product-level activity.

There are three main processes or activities as described below which are performed in Apple Plc.:




Not all products use the above processes. Hence we can divide these activities into separate entities and assign them certain cost on the basis of their usage.

We can assume for our sake that packaging is done by every division of the company but not cooking and mixing.

The second step would be to assign what kind of activities are these processes. We can say that as not all divisions are using mixing and cooking hence they can be allotted the status of unit-level activities. Each division would be charged according to the number of units it uses these processes for. While on the other hand we can assign packaging as a batch-level activity. Division would be charged on the basis of their respective number of batches which goes through this activity. This model simplifies the system of costing the product. Divisions pay for the activity they use and are not charged with the whole cost and its overheads.

Turney's (2008) research endorses that ABC can provide important insight into the profitability of the business as it:

Eliminates the product cost subsidies inherent in cost accounting;

Reveals the source of loss that is responsible for the decline in profitability;

Acts as a catalyst for decisions affecting profitability.

6.0 Performance Evaluation System at Apple Plc:

6.1 Current Practice: Bonus Based System

The current performance evaluation system which has caused dissatisfaction among the managers is not robust. It emphasizes managers to improve sales and at times force sales while cutting costs. This puts an added pressure on the managers while ignores the workforce which is an important part of a firm. This can cause a serious problem for the company as forcing sales and cutting costs to achieve the desired profit margin can lead to low quality products and may even cause redundancies. Low quality products will destroy the image of the company and its customer base while redundancies can have a negative impact on the workforce and there might possibly be a clash between the managers and the union. Hence in light of the problems faced by the company I would propose Balanced Scorecard system.

6.2 Proposition: Balanced Scorecard (BSC)

Balanced scorecard is a system of performance evaluation first developed by Kaplan and Norton in 1992. According to Kaplan and Norton (1992), BSC is a diverse set of performance measures, spanning financial performance, customer relations, internal business processes and the organizations learning and growth activities. Lipe and Salterio (2000) in their study say that each business unit in a firm develops its own BSC which reflects its own performance, hence in doing so every business unit places a target to achieve according to its own functionality. BSC is implemented in a four step procedure which is described by Lipe and Salterio (2000):

Clarifying and translating the vision and strategy

Communicating and linking

Planning and target setting

Strategic feedback and learning

Vision and strategy come at the very top of every management, if mission statements are vague than the management cannot translate them into their work and develop a strategy. Although every unit in a firm will develop its own BSC but there should be no lack of communication between different units. This guarantees the smooth flow of processes between and within a unit. In the remaining steps of implementation Lipe and Salterio (2000) mention that the managers develop their own targets and plan out things accordingly while keep on receiving feedback on the performance of the firm and the business unit which they are responsible for in relation to their scorecard measure.

This can be implemented in Apple Plc. in every division. BSC would be especially helpful as it deals with different units according to their respective functions. While divisional managers can set their own targets, company hierarchy can judge these managers on the basis if divisional managers can achieve their targets or not. If they do achieve their targets than they can be paid bonus which should be a definite amount rather than linked to the profit margin. Bringing this change in performance evaluation system would compel the managers to pay attention to the division's financial measure but also to concentrate on things such as customer relations and organization's learning and growth activities, hence taking into account everything. This would also improve the communication between managers and understanding of management accounting.

Due to these reasons Balanced Scorecard would be highly beneficial for the company and I would strongly recommend this as a replacement of the current system which is purely based on financial performance and fails to take into account other factors.