Strategic management accounting

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BE111 Management Accounting I Assignment

1. Report of Cake4U Ltd.

Strategic management accounting has been defined as “a form of management accounting in which emphasis is placed on information which relates to factors external to the firm, as well as non financial information and internally generated information (Armstrong 2001).” One of the elements of strategic management accounting involves provision of the organization's strategy and managing strategy operation. In order to behave consistently with an organization's strategy, it has to develop an integrated structure of performance measurement which can be used to explain and manage strategy. In order to support a decision of a long term nature, a management accountant will accept any data which are unthought-of, for the typical business until fairly recently. The role of a management accountant is concerned about the skills required to operate effectively. Particular skill is needed e.g. communication skills which influence the attitude and behaviour of others. By participating in planning, decision making and control of the business in addition to providing accounting information, management accountant plays an important part in achieving the objectives of the business.

I have prepared two graphs with the information provided by Mr Schilder Dassen regarding the forecast price and quantity behaviour of the new product for Cake4U Ltd.

In Figure 1, we can see that the fixed cost stayed the same in a period and increase steadily in each period. It is because the firm is increasing the speed of the mixture machine which means we have to increase the number of employees or increase their wages in order to coordinate with the plan, the machinery cost will also lends to a greater cost when fixing the machines. The variable cost and total cost increase slightly in proportional when the quantity is increasing. This graph shows that variable cost is more likely to grow quickly during the sale. It is because Cake4U Ltd is adding more flavour to increase the variety of the cake. Therefore variable cost increases rapidly at first as the firm will provide all flavour and research on the products, to see which product sells the best and then the variable cost will increase slightly slower as the firm will concentrate on the best-selling flavour cake.

In Figure 2, the line of the graph is unstable before the quantity in 900(‘000). It is because the Cake4U Ltd is carrying out a new product and it hasn't had a stable price at first. The firm will conduct a research of the latest data in order to set up the most suitable price for the customers and the firm itself. The price stays the same in the quantity in 1000(‘000) with the price goes down because the demand stays the same even the price decreases. This information tells us that the total cost stays the same even the revenue (price x quantity) is decreasing, which lends to a decrease of profit.

I am going to explain why price is missing when the quantity is in 900(‘000) by a supply and demand graph:

From Figure 3, we can see that when price 1 (P1) meet the maximum quantity, it is equilibrium but it will exceed the limit if it carries on the supply 1. In order to increase the demand, we have to decrease the price and increase the supply to fit in the equilibrium point. Therefore the supply curve has moved from supply 1 to supply 2. The period which the supply curve is moving, will be the missing price in the quantity 900(‘000) at the firm will still adjust the equilibrium point.

Cost reduction strategy will be suitable for providing the best value for money because it can helps the firm to lower the cost by reducing and identifying the waste in the firm. For example, variable cost is increasing rapidly in the first stage, we can reduce the cost by increasing the effectiveness of the workers e.g. teach the un-skilled workers, so it can have the same production with higher effectiveness. It can also buy a larger quantity when manufacturing the product which reduces the variable cost e.g. produces more package at a time. The data has shown that the highest quantity has the lowest price which means we should have a greater profit when we produce more and sell in a lower price. However, we shouldn't set the price too low. We can see this by using total contribution margin ( TCM) as it is the slope of the profit line.

Figure 4 shows that the forecasted profit of Cake4U Ltd (the area between fixed cost and TCM). It shows that the lowest price doesn't contain the highest profit but with the price of 50pence has the highest profit as it produces in high quantity with a suitable price. Therefore the cost reduction strategy should take this as an account.

2. The ethical conduct for Management Accountants has to keep a suitable level of professional expertise by developing knowledge and skills which means they have to improve frequently in order to understand the recent environment. They also need to perform information and recommendations with relevant laws and regulations professionally, accurately and clearly as their duties are to help the firm which isn't allow going wrong. If they break the law or give the wrong information, it will damage the whole company. To be a management accountants have to keep information confidentially except if they have permission or legally required. In this case there is no permission to give Ruth Hamilton any information as I have to protect the information of the contract for Cake4U confidentially. It has the role to inform all relevant parties in a correct use of confidential information and do not use the information which is unethical and illegal, therefore I would tell Ruth that it is illegal for me to discuss with anyone which aren't the participated parties. If I tell Ruth about the contract and then lend to other parties un-satisfaction, it will damage the image of Cake4U and even the stakeholders will leave which create a huge implication for the company. We should also avoid any possibility that would cause prejudice and should carry out an ethical obligation, therefore I am not able to provide information just for Ruth as it would create prejudice if other bidders do not know the information. Moreover, I have to refuse any gift or favor that Ruth would provide i.e. the season tickets. It is because this is an exchange action that would influence the contract. However, I am able to provide the information which is published by the company to the public so that Ruth can understand the reports, analysis or my recommendations. To be a management accountant has to be integrity, which is able to recognize and communicate limitations professionally that would forbid the responsible judgment or implicate the performance of the contract. Therefore I will not support Ruth Hamilton as it will harm the reputation of the profession.

3. Most firms work for profit as it motivates the production effectiveness but ethical consideration may involve costs. If a firm behaves unethically, it will have profit only in the short term but will lose in the long term, it is because it has damage the reputation of the firm. An ethical consideration can be seen as a unique selling point of the firm as customers will purchase the product which helps the environment e.g. fair-trade, Starbucks set fair-trade as its USP to attract customers that they will pay a reasonable cost to the farmers if customers purchase the coffee which makes them feel they have paid for a reasonable price that increases the sales and lend to increase the profit maximization. However, when the firm comes to a special occasion such as Christmas Sales, it has to cut off its price in order to attract more customers and it might lend to predatory pricing. It will be unethical to drive out the competition as it might cause elimination. For example, Windows operating system is free to be downloaded and it has eliminated its competitor such as Netscape.

The wages or the workplace of the workers will be manipulated in an unethical way when the managers think that there are too many workers or the wages are too high but the profit of the firm is not acceptable. Managers will then cut down the wages or the workplace of the workers which decreases the variable cost in order to increase the profit. Managers can also reduce the size of product and enlarge the packaging in order to create a larger product look and set a higher price for the customers which is known as deceptive packaging. This helps the firm to set a higher price but with the same variable cost and a better profit. Moreover, the managers are able to decrease the operational cost which lends to decrease the quality of the product with a low expectation for customers, but a higher profit will be made as the total cost is decreased and the price remains the same.