Background to Apple
Apple is a multinational manufacturer and distributor of consumer electronics and personal computers. They produce and market a diverse range of products, including Mac and iPad computers and tablets, iPhone smartphones and iPod mP3 players. Additionally, Apple develop, produce and market software. Helft and Vance (2010) recognise Apple as being the most valuable technology company in the world, achieving worldwide sales of $65.23 last year.(what is this number million or billion or what)
For the company, the central tenants of competitive advantage are innovation, stylised design and brand image, and reputation. The target market is generally perceived as being between the age of 16 and 40, with a slant towards the male consumer. The central competitor for the company is Microsoft and the PC market in general. Research has indicated that the typical Apple consumer displays higher levels of education and affluence than their PC counterparts.
Manufacturing operations are contracted out to Foxconn and Inventex, who both operate out of factories in China. There has been some controversy in this area due to the conditions which workers are subjected to. There have been additional criticisms pertaining to the environmental credentials of the raw materials and production methods used, though improvements in this area have been made.
As a result of Apple's focus on the development and production of innovative consumer electrics, the company expends significant resources on R&D and manufacture. To facilitate this, there is a substantial informational requirement for management within the company. The specific nature of these needs are identified below, in Diagram 1.0 (Informational Needs Analysis)
Diagram 1.0 Informational Needs Analysis
Current Market Behaviour
Overheads / Indirect costs
Direct Costs (raw materials etc)
Manufacturing Processes / Innovations / Developments
Issues in Management Accountancy
Management Accountancy is a relatively recent development in the business field, and relates to the accumulation and use of data, information and knowledge to shape the direction of the company and inform management decisions (Heidmann, 2008).
Contrasted with financial accounting, managerial accounting is generally introspective, aimed at aligning and streamlining internal operations. The data collected and analysed is for management use, rather than being used for external stakeholders, and additionally management accounting is generally forwards facing, rather that retrospective.
There have been a a number of different methodologies proposed for the effective gathering and analysis of management accountancy data, all aimed at maximising the efficacy of operations. The American Institute of Certified Public Accountants (1999) recognises that the use of this data generally pertains to three broad areas; the development of strategic, the management of risk and the optimisation of performance.
Originally, the central method forwarded by management accountants was variance analysis, in which the difference between budgeted and actual costs was assessed. However, the central criticism of this method was that the techniques used for actual cost analysis are relatively primitive and fail to accurately identify the full costs associated with the product (Weetman, 2002) As such, two central mechanisms have been utilised in more recent management accountancy practice; these are life-cycle cost analysis and activity based costing.
Activity based costing centres around the distinction between direct and indirect costs. Normally, the direct costs of an individual product can be relatively easily identified, but there are a number of indirect costs that may be associated with a product, but not generally ascribed to it. (McWatters et al, 2008) identifies that traditionally, these costs were accounted for by ascribing an arbitrary percentage to the budget, but increasingly this became less and less effective in accounting for indirect costs, especially as technological progression increased overhead costs. Thus, there was a risk that businesses were ineffectively costing products, due to the fact that additional indirect costs were not being recognised or were being disguised through the 'subsidy' achieved by products that are intensive consumers of indirect costs.
Thus, activity based costing looks in detail at the costs associated with each individual activity along the production line, and then ascribes a cost to this, including all indirect overhead costs. Then, each product is costed according to the percentage share of each activity that it uses.
Life-cycle cost analysis focuses on the cost of the product throughout the duration of its life, taking into account the sourcing of materials, production and overheads, cost during the use of the product (and the duration for which this use can be expected to occur) and finally the cost of disposal. The implications of this are two fold. Firstly, in terms of financial benefit for business operations, it recognises that management can control and optimise the entire production stage of product development, manufacture, distribution and sales by influencing the design of the product. Additionally though, it has benefits for the consumers because it improves design by building in long term value and decreasing the cost associated with use and disposal, which will generally fall to the consumer rather than the company.
The central advantage of these two methods of accounting is their recognition of the multifaceted nature of business operations and the way that diverse issues can impact upon the costs associated with production of products. Thus, whereas many companies might have focused on the reduction of core elements of production such as raw materials, management accountancy in its more modern incarnation aims to examine data pertaining to the company and its operations, and analyse the true implications of all activities. These methods of management accountancy have the ability for a company to shape its operations strategically so that it gains competitive advantage in the market, to reduce the negative financial implications of risk, and to ensure the production is efficient.
Applying Management Accountancy in the Apple Context
As identified above, two central elements form the fundamental basis of Apple's operations - research and development, and manufacturing production.
The heavy reliance on Research and Development highlights the need for Apple to adopt an Activity Based Costing approach to production. It is recognised that $4.6 billion has been spent by Apple over the past four years on the development of new products - some of these may require significant development time but prove to be less fruitful in the market. However, if a general budget is ascribed to Research and Development, then there is a significant risk that the more successful projects will 'subsidise' those that required a large R&D budget, but proved to be less successful. Additionally, the production stages used in the production of each individual product may be overlooked as a 'black hole' for money. Where many different products use the same, low cost process, this can be considered cost effective and thus reduces the overall cost associated with the product. However, where one product makes exclusive use of an activity that has high overhead cost associated with it, this is likely to add significant costs to the product.
However, there are also arguments that indicate the use of life-cycle costing as the central method of management accounting for Apple. For example, the problems that Apple have experienced with both their environmental credentials and their human rights record indicate the value to be found in adopting a whole life cost method of management accountancy. If management access diverse ranges of data, including the impact that these two controversies are having on their operations and sales, then it will be possible for them to identify the implications of maintaining these current raw materials choices and production methods. Outsourcing to China may prove to be the most 'efficient' or cost effective method of production when assessed on a direct costs basis, but the wider implications on the business may mean that the negative PR resulting from this choice is ultimately less cost-effective.
What is clear from this assessment is that the use of more traditional management accountancy methods such as variance analysis are not suitable for Apple, due to the multifaceted nature of the company's products, and the intensive reliance on business elements that are often classed as in-direct costs.
Conclusions and Recommendations
The report has explored the use of two modern management accountancy methods and applied them practically to the example of Apple. It has identified that a traditional method of management accountancy would be unsuitable in the context of Apple's operations, but that either a whole-life or activity based approach to management accountancy would be beneficial for the company. The use of both methodologies may be somewhat more time consuming for the business, and be more data intensive, but as demonstrated throughout the report there are a number of advantages to be yielded that allows the company to more accurately assess the cost and values associated with each product. This means that operations can be both strategically aligned, and made more efficient. Support operations can also be managed effectively to reduce risk, thus reducing associated costs.
Strengths and Weaknesses of the Analysis
In order to identify more effectively which of the two proposed methods of management accountancy should be favoured, more information about the internal abilities of the company and the processes associated with product development and production would be required. A rough indication of the number of processes involved in the production of Apple products, the full range of products available, and the current systems employed in distribution and other related support activities would all assist in identifying whether changing the design (through life-cycle cost) or the coordination of production (through Activity Based Costing) would be more effective.