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William Morrison Supermarkets plc. is specialized in food and grocery. In the very beginning, Morrisons was only a Bradford market stall set up in 1899. Gradually it was expanded into shop, supermarket and finally went public in 1967. In 1978, Morrisons took over Whelan Stores in Lancashire, which meant that it began to expand out of Bradford. Later on, fresh food factory, warehouse and distribution center were built. Then Morrisons stores were opened another and yet another across British, becoming a national supermarket group. To praise him for contributing to food retailing, Ken Morrison was awarded a Knighthood on January 2000. In addition, because its sales and profit had increased stably over 35 years, Morrisons entered the FTSE 100 in April 2001. From 2004 to 2005, Morrison acquired Sateway, Rathbones and Kepak Buchan one after another, ranking the fourth among UK's supermarkets. The reason why Morrison is operated so well and keeps a stable growth is that it always tries every means to provide its customers with better service and best goods. For example, in September 2006, Morrisons made fish labeling innovations, on the label telling the customers where the fish came and how they were caught or farmed besides what name each fish is. Morrisons tries to maximize its profits. Meanwhile, it pays more attention to environment friendly, using compostable packaging made from environment friendly materials instead of plastic packaging. Morrisons looks for the local supply source of goods around it in order to make the food fresh and better control the goods quality.
From the above brief to Morrisons, we can see that Morrisons has its own a set of aims and always develops itself towards these aims step by step. As the manager of Morrisons, he should decide how to make full use of resource, activities and staff from Morrisons to achieve these aims. Before making decision, the manager must master plenty of information. He needs to calculate each product's cost and price it. In order to calculate product cost precisely he should adopt activity-based costing system, so he needs to identify many activity cost pool and find proper cost driver for each activity. ABC system enables the manager to understand the relationship between business activities and cost. During pricing, cost is a key to think about, but the manager should also know better about the relationship between cost, volume and profit. As we know, Morrisons processes most of the fresh food though our own manufacturing facilities and sell it in its stores. Every day Morrisons receives many big orders. Because of limited machines, the manager has to make decision to choose the order with richer profits. At this moment, he needs to predict unit contribution margin of each order for making decision, then analyze this decision by sensitivity analysis. In addition, the manager should use standards to management. When there is variance between the standard cost and actual cost of the fresh food, the manager should analyze and solve this issue. In the following part, I will give detailed explanations on how the manager uses some management accounting methods or techniques to manage business of Morrisons and reach its goals.
2. Implementation of Management Accounting Methods in Morrisons
When the manager calculates the cost of fresh beef, he should adopt activity-based costing (ABC) system. Specifically speaking, he needs to allot indirect cost to product respectively in two different stages. At the first stage, indirect cost is allotted into five activity cost pools, including beef procurement, beef acceptance, processing machine, packaging and the administrative personnel. At the second stage, the cost driver of each activity pool is identified. For example, processing machine's cost driver is machine hour. According to machine hour, cost for processing machine is assigned to 3 different product lines of beef, lamb and pork. Similarly, the indirect cost of beef in the other activity cost pools will also be worked out. Plus direct cost of beef, total variable beef cost will be available. Here cost driver means the typical event or activity which incurs cost. ABC method enables the manager to get a more precise beef cost. For pricing, the manager should use cost-volume-profit (CVP) analysis method to deal with (Please see Figure 1 CVP graph). Let's continue to take beef pricing as an instance. Now we have got variable beef cost. On one hand, it is ok as long as beef price is more than its variable cost; on the other hand, there is still a fixed cost. If its price is much higher, its sales volume will be bound to go down. When this volume is lower than break-even point, the expense will be over revenue incurring a loss in Morrisons. Break-even point is sales volume point at which revenue is equal to expense. As long as beef sales volume is more than this point, profits can be made. Therefore, CVP analysis has influenced pricing greatly. Now there are two orders respectively for two kinds of bread. One is called Chesty and the other is called Nusty. Because the machine hour is limited the manager has to make decision to choose one order. It is predicted that Nusty is more than Chesty in unit contribution margin, so it seems advisable to choose Nusty. However, considering the machine hour per unit, Chesty is more than Nusty in contribution margin per machine hour. Finally it is correct to choose Chesty. Because Chesty and Nusty's unit contribution margin is predictable and uncertain, it is necessary to see how sensitive this decision is against uncertain parameter by sensitivity analysis technique. First step is to make contribution margin per machine hour of Chesty same as Nusty and then unit contribution margin of Chesty will drop by a rate. This rate will stand for the sensitive degree of this decision. Morrisons has its own farms and manufacturing facilities, so many fresh food sold in its stores are produced by it, including the delicious sandwich fillers. The manager needs to contrast the standard cost and actual cost by using variance analysis method. For the significant cost variance, the manger must find out the reason to take remedial actions for avoiding the heavy loss. The manager finds the standard cost of sandwich fillers is much more than the actual cost in May. By calculating direct material variance and direct labor variance, he finds a worker tries a new method to make sandwich fillers, both improving efficiency and saving materials. In the end, the worker gets big award money for his innovation. In conclusion, these management accounting methods help the manager a lot with Morrisons business.
3. Benefits of Management Accounting Methods to Morrisons
Compared with traditional costing method which makes the product cost overrated, ABC method enables the manager to calculate the product cost more precisely, so the goods price in Morrisons are more competitive. Moreover, ABC method is good for assessing business performance of every activity. Based on the performance, the manager will think about which non-value-added activities are and how to reduce or eliminate these non-value-added costs. This may explain why most of Morrisons food and raw materials come from the area around each store. It saves transportation cost and time, as well as storage cost. It is unnecessary to order food and materials, because the supplier is nearby. CVP analysis assists the manager in discovering the break-even point which lets him know the current sales volume is making profits or taking losses, and what the sales volume will be and how the product is priced for the purpose of making its desired profits, as well as how the profits change with the sales volume. To reach this desired sales volume, the manager must make decisions and planning. For example, the manager may try to increase sales volume by sales promotion, such as giving discount or buying one and getting another free. The relationship between cost, volume and profit help the manager to analyze and make a decision on opening another Morrisons store, farm, and manufacturing factory, or replacing old machines or adding new machines. Sensitivity analysis is able to help the manager to decide which parameters are the most important to make correct decisions. For example, by using sensitivity analysis in the relationship between cost, volume and profit of fresh food, the manger will know about which influences the break-even point and desired profits the most among unit price, unit variable cost, fixed cost and sales volume. Then the manager will make decisions and planning according to the information. In addition, sensitivity analysis can also assist the manager in analyze if it is necessary to change the made decision when the prediction on vital parameter is proved to be wrong, thus helping the manager to avoid making blind change as soon as he sees the prediction on vital parameter is proved to be wrong. Variance analysis will bring two kinds of result. One is advantageous variance and the other is disadvantageous variance. Advantageous variance from direct labour will show the employee may create a more efficient method of work. The manager will praise this employee for his innovation by some way, such as award money, which will encourage all employees in Morrisons to improve efficiency. Meanwhile, the manager can know more about this efficient method of work by investigation and see if it is feasible to implement this new method to other processing departments of Morrisons. Disadvantageous variance from direct material makes the manager understand the cost change of materials so as to control cost and budget precisely for the future, while disadvantageous variance from direct labor will give the manager a hint to investigate the reason and take actions in time preventing the issue from enlarging.
4. Limitations of Management Accounting Methods
Although management accounting methods can bring many benefits to Morrions, they have some limitations. ABC method makes costing complex and increase costing work. Morrions will have to employ more accounting people. This no doubt will increase the operating cost of Morrions. After the management in Morrions measures the benefits brought and increased cost by ABC method, they will make a decision to adopt ABC method or not. Furthermore, cost drivers are keys to ABC method, but they may be difficult to identify and easy to change, which will affect the accuracy of related data. It is difficult to precisely assign how much cost to which activity and how much cost in each activity to which product. This will influence the accuracy of product cost. In CVP analysis, it is not quite accurate to divide total cost, especially variable cost. In the real economic activities, as the production and sales volume is over some range, fixed cost will have a ladder change while variable cost will be affected by business size and productivity changing in curve line. In a longer time, it is impossible that the material price keep the same. Therefore, it is impossible that the relationship between total cost and sales revenue is always linear. In addition, the factors affecting cost and revenue are not only production and sales volume, but also productivity and market conditions. Finally, no matter how well Morrions make the prediction and planning, the actual production and sales volume is rarely the same as the prediction and planning. When analyzing how sensitive unit price is against the desired profits by using sensitivity analysis, there is an assumption that the others factors are not unchangeable. In fact, the change of one factor often causes the change of other factors. For example, the manager wants to achieve the profit aim by raising the unit price of pork, but if pork price is raised pork sales volume will no doubt go down so that the profit aim can still not be reached. Moreover, sensitivity analysis is able to help the manager make correct decision, but sometimes it is unexpected. Let's take the mentioned Chesty and Nusty bread as an example. By sensitivity analysis Chesty should have more unit contribution margin, but it has still a slight chance that the actual unit contribution margin of Nusty is more than Chesty. Variance analysis will take much time. The manager is so busy that he has no time to investigate every reason for variance between actual cost and standard cost. However, he must investigate the reason for significant variance between actual cost and standard cost. How will the manager judge which variance he should investigate and which variance he should ignore? This question is hard to answer. Generally, the manager often judge to investigate some variance reason or not by his guesswork, premonition and institution. As we know, guesswork, premonition and institution are uncertain and often make a mistake, so that some variance reason he takes plenty of time to investigate may be meaningfulness while another variance reason he does not investigate is indeed useful.
In conclusion, just like a coin with two sides, management accounting methods are advantageous, but they have their own limitations.