A study of management accounting within McDonalds Corporations
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Published: Mon, 5 Dec 2016
McDonalds is the one of the largest food service retailer in the world, operating in 117 countries and serving more than 60 million people, it was owned more than 32,000 restaurants globally. Mc Donald operates its business in any of the three types Franchisee, Affiliate or as a Corporation.
Company was founded by Richard and Morris Mc Donald as a single restaurant in California in 1940 initially and soon adopted the technique of fast food concept by the end of 1948 and soon expanded their product range and started making many food items and by the year 1958 they opened 34 restaurants and surprisingly it was opened 67 new restaurants in one year 1959 and made it as the total 101 restaurants.
Soon the company started the phenomenon of advertisement and expanded its business rapidly by investing more and more on advertisements, in 1960’s and 1970’s. By the end of 1970 company started 1000 restaurants and also started social service concept by starting Home away from Home for homeless children
In the beginning of 1980’s company faced tough competition from its competitors Burger King and Wendy’s and started aggressive marketing campaigns and then it is known as burger war at that time. However it continued to improve its business despite of tough competition. Mc Donald took 33 years to start 10,000 Restaurants and later it took 8 years to reach 20,000 restaurants mark. And by the end of 1997 the volume of Restaurants had reached to 23,000 and continued to open 2000 restaurants each year.
In the early 2000 it started to create a new image to the company to overcome the drawbacks and owes faced by the company in 1990’s.
The Business Model of McDonald’s:
Mc Donald’s earns revenues in many ways like as an investor, as a franchiser of restaurants, and as an Operator of Restaurants. Only 15% of its profit comes directly from its own operations and rest of the money comes from the franchisees, rent, marketing costs on sales and many like that. The franchisee fees and other revenues are differ based on the locations and countries and it had various packages that are different from its competitors
Products of Mc Donald’s:
The following are the products that are changing over times and the present food items sold at Mc Donald’s mentioned below
Deserts and Breakfasts
Mc Donald’s currently operating more than 110 countries and serving to the millions of people and facing hug competition from its competitors like Starbucks Corporation, Wendy’s, Taco Bell, KFC restaurants, and Burger King. The main policies of Mc Donald’s are Quality Value and Cleanliness and they concentrate more on the Safety of the food and they knew well that their reputation mainly based on the Safety measures they take to ensure the customers the hygienic quality
Review of Management Accounting:
Management Accounting is “the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities”
Chartered Institute of Management Accountancy (CIMA)
Management Accounting refers to only recording the financial results of the managers and act basically as a Historic Score keeper role. Apart from that it tries to evaluate the values and results of certain periods and why they took place. At a minor level it also tries to forecast the outcomes of the future implementations and their effects for long time. But unfortunately no one can predict the future certainly thus its role is limited to analysing the past data and possibly giving the reasons why they occurred.
The role of Management Accounting:
To Identify Current Business Position: through analysing the past accounting data Management Accounting tries to identify the current position of various areas of business and their performance.
To know the potential new resources: Management Accounting tires to identify whether there any resources available for the business and evaluate its profitability.
Identifying the Internally available Resources: The Management Accounting tries to tries to identify the available resources if any and the possibility of using them
Finding Available Business Alternatives: it further tries to find out the available alternatives for the current business and asses the profitability to reduce the risk of investment
Dealing with Current external environment: managing Management Accounting is not only with accounting data available, it should understand why the business has failed if failed and why it made profit if it is so.
Anticipated Future Changes in environment: The Management Accounting tries to anticipate the future though no one can anticipate it correctly, it tries to reduce the risk for the future.
Key Management Accounting Concepts:
Management Accounting techniques and its applications will vary from one company to other and must suits to its needs. The following are the few of the key accounting techniques to be followed by the company
Every country has their own accounting standards to be followed, UK is under the influence of Accounting Standard Board (ASB), has issued a series of standards of statements of Standard Accounting Practice (SSAP).
The Consistency: The interpretation and presentation of likely things should be treated consistently within each accounting period and from one accounting period to the next. To meet the requirements of each individual decision maker Management accounting need to be prepare the reports according to their requirements and delete the un necessary data . it is fallacy that all internal accounts and reports should be consolidated for the sake of neatness to give overall total.
The going concern: Measuring the balance sheet details like inward and outward details of the company and accessing their future value and making the future inwards assessment of the company.
Accruals/Matching: to build the logical relationship between the costs incurred in the current financial statement and future value of it. That is making the expected value of the investment for the future. This is achieved by deducting the total costs from the sales revenue produced as the resource is used rather than when it is purchased.
Prudence: it states the future revenue and hence the profit.
Key Techniques of Accounting Management:
Determining the Economic Order Quantity
Stock Valuation and pricing
Discounted Cash flow(DCF)
Internal Rate of Return(IRR)
Weighted Average cost of Capital
Profit and Contribution centres
Cost or expense centre
Recommended Techniques to the company:
Stock Valuation: in cost analysis stock valuation is one of the important concept, as Mc Donald is a food retail based business, the inward food and its consumption is very high and will be done on regular basis, this can be done carefully to avoid the excessive costs. This can be done either by the following methods
LIFO method, FIFO method, Average cost, Replacement Cost method
EOQ: Economic Order Quantity is important to determine especially when the costs involved in the material is high or when they need some special storage capacities like frozen conditions. To know the EOQ value for a good we can use the following formula
Q = d for period*Cost per order/Holding cost per unit
CVP analysis: The CVP analysis is used to measure the profit in terms of the utilizations and usage of the stock to make the long term planning if needed to focus on the variable costs. This can be calculated in the following manner
Profit = Revenue – Expenses
Profit = Revenue – (Fixed Costs+ Variable Costs)
Thus the business will begin to make profit beyond the level of activity where revenue equal expenses, known as breakeven point
As the Mc Donald has operations in various countries it need to be analyze the performance of each country and area wise to identify its range of profits and needed planning for the future.
IRR: When comparing the profitability of two similar projects and their profitability we need to calculate the IRR called as Internal Rate of Return. This can be achieved by accessing NPV and if the NPV is Zero then the cash flows is equal to the present cash out flows. This is known as the Internal rate of Return or Internal Yield of the project.
Capital budgeting: Maximization of the long term value of a business is the main objective of Capital Investment Budgeting (CIB). To plan the investments on the various projects held by the company it needs the proper way to distribute between the projects held by the company as the resources held by the company are limited. This can be illustrated by the following simplified example
Project [email protected]% Ranking on NVP
A £ 10m 1
B £5m 2
C £4m 3
D £3m 4
The PI of the each project will be 20%, 25%, 22.2%, and 25% respectively. The budgeting for these projects can be done based on their PI value and then the investment of the company will be profitable. This can be done by using IRR method to allocate the funds to each project that are available with the company
Weighted Average Cost of Capital: The cost of capital is the rate of return the company has to pay to the various investors of funds in the company. The sources in general are equity and debt. This can be calculated by applying the following applications
The cost of Debt
Cost of Equity
Weighted Average Cost of Capital (WACC): The WACC represents the minimum overall return which is needed if the business is to be able to satisfy the expectations of its sources of capital say as Equity holders and the debtors of the company.
The strengths and Weaknesses of the Analysis:
The report is based purely on the accounting reports of the particular period and as it is based on numbers purely. The external factors like social and other cannot be considered some times.
To better implementation of the results the managers must be consider the other factors also.
The period of accounts considered in the report is very less as it is for the short period and for fast assessment, so that many influencing factors in the past may not be considered in the report
The real time values are far more different and complex in nature and so it can be consider the more values and more in depth analysis.
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