Strategic Administration Of The Operations Accounting Essay


Operations management is an area of management concerned with overseeing, designing, controlling the action of production and redesigning business operations in the production of goods. It involves the responsibility of guaranteeing that business operations are able in terms of using as few resources as needed, and able in agreement of meeting customer requirements. It concerns with managing the process.

Strategic decisions are the decisions that are concerned with whole environment which the firm operates entire resources and the people who from the company and the interface between two. Strategic decisions have major resource propositions for an organization. These decisions are concerned with possessing new resources, organizing others or relocating others.

Decision making is the fundamental skill for any successful execution. But decisions at strategic level are hard to make. They require large amounts of resource and commitments, which may be irreversible. They do involve long term consequences that are hard to predict. And they require considering multiple, often conflicts, strategic objectives, which are difficult to balance, particular in the presence of risk and uncertainty.

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An understanding of the financial concepts will help to do the job better and get ahead. Reduced to its essentials, business finance is about acquiring and allocating resources - how a company goes about financing the assets it need to run the business and how those assets can be put to their highest uses. Finance also an information system. Drawing on the accounting function and its meticulous recording of transaction, finance produces numbers that managers can use to plan and control operations


1.1] A framework for analysing operations management

Analysing operations can be difficult task. Many techniques have been developed to aid this process. What follows is a brief overview of two integrative ways of analysing operations that have become influential in recent years.

1.2]Operations management supports business activities

Operations management can significantly contribute to the success of your business by using your available resources to effectively produce products and services in a way that satisfies customers.

To do this you must be creative, innovative and energetic in improving processes, products and services. The four main advantages an effective operation can provide to business include

reducing the costs of producing products and services and being efficient

increasing revenue by increasing customer satisfaction through good quality and service

reducing the amount of investment that is necessary to produce the required type and quantity of products and services by increasing the effective capacity of the operation

providing the basis for future innovation by building a solid base of operations skills and knowledge within the business

02] Links between strategy and operational performance targets

Operational effectiveness is about having functions in the organisation that work well. These functions are, of course, the organisation's skill sets or 'core competencies' and therefore, as Porter points out, must fit together and work together to implement the strategy. On the other hand, the possible strategies available to an organisation are constrained, at least in the medium term, by the skill sets available to implement them. A motorcycle manufacturer may pursue a strategy to diversify into car manufacture, but is unlikely to be able to, say, enter the ice cream business because the functional skills required are radically different. Strategy may demand capability, but capability in turn constrains strategy.

Operational effectiveness may also create the opportunity for strategy development by inventing new technologies or methods. By creating the strategy /operational effectiveness dichotomy, Porter has paved the way to explore operational effectiveness in its own right as the other major player in organisational success.

"It refers to any number of practices that allow a company to better utilize its inputs by, for example, reducing defects in products or developing better products faster", says Porter.

03] Key Performance Indicators (KPI)

Key Performance Indicators are quantifiable measurements, agreed to beforehand, that reflect the critical success factors of an organization. They will differ depending on the organisation. Key Performance Indicators usually are long-term considerations. The definition of what they are and how they are measured do not change often. The goals for a particular Key Performance Indicator may change as the organization's goals change, or as it gets closer to achieving a goal.An organization that has as one of its goals "to be the most profitable company in our industry" will have Key Performance Indicators that measure profit and related fiscal measures.

04] The concept of the value chain as a means of identifying and creating competitive advantage

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Value chain is the sequential set of primary and support activities that an enterprise performs to turn inputs into value-added outputs for its external customers. As developed by Michael E. Porter, it is a connected series of organizations, resources, and knowledge streams involved in the creation and delivery of value to end customers. The objective of value systems is to position organizations in the supply chain to achieve the highest levels of customer satisfaction and value while effectively exploiting the competencies of all organizations in the supply chain. According to Porter (1985), the value chain disaggregates a firm into its strategically relevant activities. The improved performance of these activities leads to competitive advantage.


01] Models for strategic information systems planning and the contribution

Information system are very important to business's success, it is clearly necessary to have an information system strategy and to align it with the overarching corporate strategy. To achieve this, business use a number of available models which support strategic information system planning, including the financial optimisation and simulation models and sensitivity analysis.

Financial models these build a representation of a financial situation

Optimisation models select the best solution from the alternatives available

Simulation models these attempt to predict the effects of a decision

Sensitivity analysis this will test the effects of changing key variables on a plan

02] Information-based services contribute to business functions

In rational decision-making, information relevant to the issues that have to be decided plays a crucial role in each phase of these processes; executives have to acknowledge the facts in order to be able to consider an issue. The main reason for the use of information is a reduction of uncertainty needed to obtain the answer to an issue at hand. Decision making is the process of identifying, selecting, and implementing alternatives. The right information, in the right form, at the right time is needed to make correct decisions. For example, based on information about customers, competitors, and production capabilities, a manager may decide to alert top executives that a strategic decision needs to be made. Top executives would use the information received to identify alternatives for consideration. Each alternative would then be evaluated based on feasibility, cost, time to implement, consistency with corporate strategy, and other criteria.

03] Justification for the need to monitor the business environment

Information is essential at these stages of decision-making.

Intelligence- Information raises awareness that a problem /opportunity exists

Design- Information helps to identify alternative solutions

Choice- Information guides selection of the best option

Implementation- Information assists implementation and is the basis for review

Information technologies are important tools in the decision-making process. Ex-databases, internet and intranets. Each technology plays a role in supporting decision making. They have increasingly made access to, sharing and manipulating information a routine part of decision making. They have also facilitated the use of quantitative techniques to make decision making more effective.

04] Reliability of quantitative techniques in strategic decision-making

Decision making is crucial for survival of business. Businesses have to make decision considering the limited amount of information. Since, the complexity of business environment makes the process of decision-making difficult; the decision-maker cannot rely entirely upon his observation, experience or evaluation to make a decision. Decisions have to be based upon data which show relationship, indicate trends, and show rates of change in various relevant variables.

While widely used quantitative forecasting models not guarantee. Their impact is dependent on a number of factors, including the quality of support from information system and the ability of managers to use information appropriately. Research suggests that methods such as time series are very effective over short periods. For long-term forecasting, casual models tend to be more reliable.

05] Decision-making models and the strategic models which the organisation could follow.

The essence of management is making decisions. Managers are constantly required to evaluate alternatives and make decisions regarding a wide range of matters. Just as there are different managerial styles, there are different decision-making styles. Decision making involves uncertainty and risk, and decision makers have varying degrees of risk aversion. Decision making also involves qualitative and quantitative analyses and some decision makers prefer one form of analysis over the other. Decision making can be affected not only by rational judgment, but also by nonrational factors such as the personality of the decision maker, peer pressure, the organizational situation, and others.

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Strategic decisions models are those that affect the direction of the firm. These major decisions concern areas such as new products and markets, acquisitions and mergers, subsidiaries and affiliates, joint ventures and strategic alliances, and other matters. Strategic decision making is usually conducted by the firm's top management, led by the CEO or president of the company.


01] Cash budget and advise the Institute as to what they should do in the light of this budget.
















































Capital Expenditure






Total Payments






Net Cash flows






Opening Cash Balance






Closing Cash Balance












02] Describe cost-volume-profit analysis formula and explain the limitations and assumptions of such.

The Cost Volume Profit Analysis of a company displays how the changes in cost and volume affect a company's profit. A CVP analysis consists of five basic components that include: volume or level of activity, unit selling price, variable cost per unit, total fixed cost, and sales mix. A Cost-Volume-Profit Analysis also consists of the CVP income statement, break-even analysis, margin of safety, target net income, changes in business environment, and the CVP income statement revisited. These components are vital to determining the success of a company through profit margins

Another important aspect of a Cost-Volume-Profit Analysis is the contribution margin. The contribution margin is the revenue remaining after deducting variable costs. If the unit selling price increases, the contribution margin per unit will decrease provided the unit variable costs remain the same and do not also rise. For example, A 12 ct. box of pillows is one unit and sells for £60, and one pillow sells for £12 in retail. The unit selling price then increases to £70 the contribution margin is decreased because the profit of the unit decreases. 

Fixed costs are another factor to consider in a Cost-Volume-Profit Analysis. Fixed cost by itself does not increase or decrease, but a fixed cost per unit may show a change in rates. If the fixed price per unit decreases then the Items produced will decrease, and the sales of the item will be lowered until there is no more of the product to sale

Assumptions in cost volume profit (cvp) analysis

Certain underlying assumptions place definite limitations on the use of CVP analysis. Therefore, it is essential that anyone preparing CVP information should be aware of the underlying assumptions on which the information is to be derived. If these assumptions are not recognized, serious errors may result and incorrect conclusions may be drawn from the analysis.

Some of the key assumptions underlying cost-volume-profit analysis are as follows

1. All costs can be classified as fixed and variable while developing and applying cost-profit-analysis including the break-even analysis, it is assumed that all costs can be classified into fixed and variable costs.

2. Costs will be linear within the relevant range Cost-volume-profit (CVP) analysis assumes that total fixed costs do not change in the short-run within the relevant range. Total variable costs are exactly proportionate to sales volume. But in reality, cost behavior may not remain constant.

3. Difficulty of steps fixed costs relevant range for many costs is very short. In that case it becomes very uncomfortable to compute the required volume because it is difficult to say that which the relevant range for our needed volume is.

4. Selling price remains constant for any volume Indeed, most often quantity discount is offered for different lots of purchase.

5. There is no significant change in the size of inventory Application of cost-volume-profit (CVP) analysis is possible only under following two situations:

* Either the company should follow variable costing for the inventorial product cost.

* Or all the production volume should be sold within the same period.

Cost-volume-profit Analysis: Some Limitations

C-v-p analysis, though it is a very useful tool for decision making, is based upon certain assumptions which can rarely be completely realized in practice. Hence the fragility of these assumptions places limits on the reliability of c-v-p analysis as a tool in decision making. To overcome these limitations, and to retain the usefulness of c-v-p analysis it is necessary to limit the volume range to be examined so that the behaviour of both fixed and variable costs may be more accurately determined. The basic assumption that the cost-volume relationship is a linear relationship is realistic only over narrow ranges of output which is called the relevant range.

The break-even chart presents an extremely simplified picture of cost-revenue-volume relationships. Despite its limitations, the real usefulness of c-v-p is that it enriches the understanding of the relationship between costs, volume and prices as factors affecting profit, enabling management to make assumptions which will assist the decision-making process in the short-run planning period.

03] Relationship between long and Short-term decision-making in the context of investment appraisal.

Short-Term Financial Decisions

A short-term financial decision plans a period that does not exceed one year. In other words, it requires a company's physical and financial resources for up to 12 months. To render short-term financial decisions, corporate executives heed short-term, or current, assets and liabilities. Current resources include cash, accounts receivable, marketable investment assets and inventories. Short-term debts include accounts payable and salaries due. Short of an adequate financial-management policy, department heads may have no way to determine how much cash the company will need in the next six to 10 months and how to raise funds on stock markets.

These short-term decisions apply the 'relevant costing' approach introduced in Relevant Costs and Revenues in which only the cash flows that will be affected in the future need to be evaluated.

For these decision scenarios we will retain most of the assumptions introduced in Fixed Costs, Variable Costs and Contribution but we can abandon the single product (or constant mix) assumption needed for simple graphical representation of break-even, and construct a more plausible multiple product

Investment Decision-Making (Long-Term)

Capital investment decisions typically involve a substantial initial cash outflow or payment to purchase a productive asset of some sort (a machine, a company, etc.), followed by a series of improved cash inflows reflecting cost savings or additional contribution earned over the asset's useful life. The initial cash outlay to purchase an asset can be determined fairly easily since it occurs at the present time. However, the productive life of a capital asset may be very long and attempting to forecast the cash inflows arising from a particular investment over many years is inevitably highly subjective.

Long-term investment decisions are more likely to alter the level of fixed overhead costs incurred each year, so that a variable costing approach will often fail to show the full cash-flow consequences of an investment decision. When financial information is prepared to help to identify the relevant financially quantifiable consequences of alternative courses of action it is always important to consider carefully whether a particular decision would have important consequences that are difficult to present in financially quantifiable terms.

04] Following are main drawbacks or limitations of ratio analysis:

Limited Use of Single Ratio

Sometime, we cannot compare our ratios with others.

Lack of Adequate Standards 

We could not make standards of all ratios.

 Inherent Limitation of Financial Accounting 

Changes of Accounting Procedures 


Ratios are not Substitute of Financial Statements 

Wrong Interpretation 


This study has observed that operation management, finance and strategic decision making how much important to the business. Organizations can use operations as an important way to gain an advantage on the competition. By linking operations and operating strategies with the overall strategy of the organization (including engineering, financial, marketing, and information system strategies) synergy can result. Decision making is the fundamental skill for any successful execution. But decisions at strategic level are hard to make. They require large amounts of resource and commitments, which may be irreversible.

An understanding of the financial concepts will help to do the job better and get ahead. Finance also an information system and resource to business. These short-term decisions apply the 'relevant costing' approach introduced in Relevant Costs and Revenues in which only the cash flows that will be affected in the future need to be evaluated. Long-term investment decisions are more likely to alter the level of fixed overhead costs incurred each year, so that a variable costing approach will often fail to show the full cash-flow consequences of an investment decision. . However, this study has established that for organisations to achieve high efficiency through operation and finance activities and strategic decisional making.