As defined by Dury (2005), management accounting provides suitable information for 'decision-making, planning, control and performance measurement'. CIMA, furthermore, indicates that the information includes financial and non-financial information (cited by Mangena, 2010a). Chenhall and Morris (1986) explicate the role of MAI, which is to support managers or executives to smooth their decision-making process and improve the quality of decision, which at the end improve the effectiveness and efficiency of the organization. Mangena (2010a) concluded into four main roles of MAI, 'strategic management", "planning and decision making", "management control" and "financial reporting'. Therefore, as follow, we will discussion each role of MAI in the context of the case.
Strategic management includes new product development, fix asset replacement and manufacture plan for multi products and so forth. At this point, MAI can provide various accounting information to give the direction, which then formulate the strategy. We can take the manufacture plan of multiproduct as an example. According to the case, Apple plc. has two several products, which share the facilities together. We can assume that there are two products, candy bar and chew, which will be produced for the same period. How does the manager make his decision correctly? This can be done by calculating the contribution margins. The basic assumptions are given in table 1.
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Hereby, the contribution margins analysis by the management accounting can provide insight into this problem. It can be assumed that the contribution margin for Chew and Candy Bar are as follows:
Table 1 Assumption for contribution margin
Variable costs per unit
Contribution margin per unit
Contribution margin ratio
If the decision is made based on the contribution margin ratio above, there will result in an opportunity cost for the company, when \ we consider the constraints factors. The result from table two should be considered as objective, which is far more different from the previous analysis.
Table 2 Analysis of Constraints
Contribution Margin per unit
Machine-hours required per unit
Contribution margin per machine hour
Total contribution margin for 600 machine hours
We can find that, if the both of the sales of Chew and Candy bar are stable, the chew can give â‚¤39000 more profit or contribution to Apple plc. This show the evidence that MAI can assist the manager through the whole decision making process.
Second of all, the MAI is useful when doing the budgeting, in long-term and short term cash flow management and so on. As the traditional upside down budgeting, Apple plc. may encounter in a loss due to the higher cost of new product than the expectation of customers. This not only wastes the R&D resource of the company, but also loses an opportunity to build its competitive advantages. In terms of target costing, the MAI can help the researcher to design the product from the customer perception, which is bottom-up type. Therefore, Apple plc. can trace the cost of the new product and keep them in minimum. By this way, the new product is more profitable on one hand and feasible on the other hand.
Furthermore, the MAI also improve the performance measurement system, which is an important part of the management control. Due to the decentralization of management, the traditional control and incentive system is problematic, in particularly with independent sales and manufacture division. The managers from different division will only consider its own benefit, but not the business as a whole. Moreover, although benchmarking can be performed, economic outcome is still arguable for its representative for the true performance of the manager (Brancato, 1995). Therefore, non-financial information is needed, such as consumer complaint, savings on materials and so on. Finally, financial reporting is the basic function of MAI, which is more focus on the external reporting, such as the corporate social responsibility report.
2. Performance Measurement system
Performance measurement system (PMS) is key component of the management control system, as Bhimani et al., indicated (2008). The contemporary performance measurement system (PM) consists two different types of measures, the financial and non-financial measures. The final purpose of the PM is to improve the organizational, divisional or individual performance. Therefore, it should emphasize on the controllability and should be line with the company's strategies, organizational structure and so on (Brancato, 1995).
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First of all, as Brancato (1995) argues, a financial performance measure is calculated by using historical accounting information, and then is lack of prediction for future. Comparing to the BSC, intangible assets are ignored, such the contribution to intellectual capital. Furthermore, Perrit (2000) argue that profit margin overlooks the capital and the cost it consumed, which cause the problems when allocating the resource. An example is the managers tend to make the equipment replacement, since it will result in high profit margin, but irrespective of the cost of the equipment. Fourthly, the controllability problem for the traditional PM is proposed by many scholars, such as Neely (2007) and Bhimani et al. (2008). This means the manager cannot perform as well as he can, due to imperfect PMS. Apple plc. has encountered in this dilemma. The division managers cannot control or reduce the cost of the products by their effort due to the absorption costing system.
With regard to the four major disadvantages of the PM that Apple plc. used and indicated above, Apple plc. firstly need to set up the objective of PM, that to improve the performance, but not only assess them. There are several alternatives for Apple plc. to complement it PMS, such as BSC, Economic Value Added(EVA), Quality Management, ABM and so on. As a result, BSC is best solution. Because BSC is an integrated performance measure, which combines financial and non-financial measures and concerns about the internal business process and business objectives, as created by Kaplan and Norton (1992). Drury (2005) stated that BSC is 'a strategic management technique for communicating and evaluating the achievement of the mission and strategy'. Moreover, BSC can benefit the company by its long-term orientation, reflection on economic income and transparent evaluation.
Initially, the implementation of BSC require Apple plc. to define its strategic objective, strategies, and form the key performance indicators (KPIs) for its managers (Assiri et al., 2006). After identify the KPIs, the objectives are need to be set up and measurable. An example of the BSC has been shown below, as well as it is measurement method.
Figure 1 Example for Balanced Scorecard
Source from: Alsyouf, I. (2006) "Measuring maintenance performance using a balanced scorecard approach", Journal of Quality in Maintenance Engineering, Vol. 12 Iss: 2, pp.133 - 149
One the other hand, there is a main obstacle for Apple plc. to implement the BSC, which is absorption costing. In contrast, the ABC could allocate the cost reasonably, and make the managers responsibly. To cope up with this, ABC can be adopted. Yet, neither ABC nor BSC can solve the problem separately, due to management accounting system is an integrated system.
However, BSC has some limitation as Ittner and Larcker (2000, cited by Bhimani et al., 2008) argued. One of them is the complexity of BSC will result in long-term development period, in other word time consuming, and costly. The reason is the large amount of information is required and experiments and improvements are as well needed to make on and on. Training is vital among nineteen other factors, after examination of implementation BSC by Assiri et al.(2006). In addition, the quality of the information is doubtable. Furthermore, Mangena (2010) argues the difficulty in establishment of the KPIs.
Over all, to improve the PM in Apple plc., the absorption costing should be changed, firstly. The implementation of comprehensive BSC will be much more complex and costly, but can be considered to outsource the service to professional companies.
3. Costing system
The costing system used in Apple plc. is the absorption costing. It does not focus on the fix cost or overhead, but related to direct labour. This means the production cost is made up of total direct cost and production overheads. This is not given enough attention, because the fix cost is only small part in the total cost in past. However, the contemporary environment has great changes, such as automated manufacturing technology, which also result in increasing investment in fix assets (Proctor, 2002). If we still allocate cost like the traditional method, it will result in bias and inaccuracy. For example, it will make high-volume and low-complexity products overcosted (Kaplan and Cooper, 1998, cited by Proctor, 2002). As mentioned, it also causes various management problems, such as the inaccurate of performance measurement, decision making and so on. Overall, the absorption costing is not suitable in this context, which has several products and shared process. (Mangena, 20010b)
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Therefore, new costing system need to proposed and examined and then implemented. These methods contain ABC costing, marginal costing, relevant cost and variable cost. ABC is promising, when compared to others. There are four aspect that ABC concerns about, 'the first is support cost is nothing to do with the volume. Secondly, support costs will respond to the complexity. Thirdly, the activities cause costs and finally, products or services consume activities' (Mangena, 2010b).
Figure 2 Comparison between Traditional costing and ABC(Mangena, 2010b)
At the beginning, two important reasons can derive from figure 2. For one thing, different cost pooling, of which ABC has flexibility to gather information based on activity. For another thing, unlike single cost drive (volume), ABC uses multiple cost drivers to make the data more sufficient and integrated. These all indicate that ABC has an explicit cost structure for product, which can help the managers to get knowledge of the product and lead to the right decision.
Given that the features of ABC, there are four kinds of companies can benefit from ABC. First kind is the company with large overheads towards total cost. Second of all, company has more than one cost driver, rather than volume. Third is company that adopts multi-product strategy. Last one is various resources are involved in the production (Mangena, 2010b). In this case, Apple plc. is thought to be suitable for ABC.
ABC can develop into Activity-based Management (ABM), which contains both cost and profit management by utilisation of ABC information. Take the data in table 1 and 2 for example, it suggests that chew's cost of chew is less than using absorption costing, therefore there is a potential price reduction for chew, while there is a need to raise the price of candy bar, because it is undercosted. As well, ABC can enhance the Apple plc.'s ability of activity analysis and improve its business process, such as raise the success ratio of new product development.
Therefore, Apple plc. should employ ABC costing as the base management accounting system, either because it advantages towards traditional costing system, or the benefits it can provide. However, some few limitations are supposed to demonstrate (e.g Mangena, 2010b, Gunasekaran et al., 1999).firstly, the complexity of ABC is the main problem when implementing, such as large amount of information and diverse cost driver. Innes and Mitchell (1995) even argue that the benefit from ABC will trade off by the cost of design. After all, as the recommendation for performance measurement, the implementation of ABC also needs s to seek help from professional and experienced companies.
As discussed, management accounting information plays an important role through the whole business process, such as formulation of strategy, business planning, control management and financial reporting. Unlike the traditional accounting information, MAI provide long-term and insightful information, which has future prediction. The MAI-based management accounting techniques are widely used and useful for business decision making. In this report, Balanced Scorecard is proposed to improve the Apple plc's performance measurement system. The ABC costing is recommended to replace the absorption costing. The advantages and disadvantages of these two techniques are as well discussed in the paper. Overall, the specific or action plan for the improvements require further studies.
Word Count: 2122 (exclude the reference and tables)