Apple plc is a company that produces a wide variety of differently products (candy bars, chews and other sweets) in batches using various combinations of highly automated processes. These processes include mixing, cooking and packing. Some but not all, of the processes are common to all products. The company is organised into three divisions and each division is responsible for a particular product. Each division is treated as a profit centre and has its own manager. And the company is currently using traditional accounting systems for all its operations.
Introduction
"Accounting is the collection and aggregation of information for decision makers - including managers, investors, regulators, lenders, and the public" (Schempf, n.d.). The accounting system put an effect on the management behaviour of an organisation. Managerial accounting has effects across the departments, companies and even the countries. The efficiency of the internal system used to be measured by the traditional accounting system. However in 1980s, the traditional cost accountants were heavily criticized. As the business environment was getting more and more competitive, the traditional accounting practices were seemed to be obsolete. The little changes in the traditional accounting system were not in alignment with the rapid radical transformation in the business environment. The evolution of managerial accounting with a more enhanced approach to the cost accounting, performance management, value chain analysis and other perspectives have taken place to keep pace with this multifarious and ever changing business environments.
This report aims to provide an in depth insight into the managerial accounting arena with an emphasis to the Apple case. The report considers the discussion on various aspects of Activity based Costing, Balanced score card approach, Value chain analysis and profitability measurement from different perspectives, which support the decision making processes in an organisation.
1. Managerial Costing
The responsibility of day to day decision making in any organisation lies with the managers within the organisation. Managers use a number of information and data to make numerous decisions during the day to day operations. A significant part of its information comprises of the accounting data of any organisation. Managerial accounting is quite different from the financial accounting as financial accounting as is mostly concerned with providing information to the outside stakeholders of an organisation like the shareholders, suppliers and customers, while managerial accounting offers information to the managers who are inside the organisation (Warren, Reeve & Duchac, 2009). Detailed differences can be seen in the table 1 below:
TABLE 1
Financial accounting Vs Management Accounting
Financial accounting
It communicates economic information to individuals and organisations that are external to the direct operations of the company
it is based on historical information
specific timing- quarterly, half-yearly and annually
The nature of information is objective, auditable, reliable, consistent and precise.
The table 2 below shows the roles of accounting information in strategic and operational decisions, in other words it shows the decisions that companies make and how management accounting information supports those decisions.
TABLE 2
Management functions and the role of management accounting information
Strategic management -
helps in general direction and deciding on competitive strategy
Helps on choice on products, manufacturing methods, marketing techniques and channels
MANAGEMENT CONTROL
It helps in monitoring operations and performance evaluation.
It helps to identify inefficient operations, reward and motivate the most effective managers.
Management accounting information
The techniques that can be used to enhance these decisions includes;
Activity Based Costing
Costing is a significant paradigm in Apple Plc. The organisation has been producing different types of products, segmented in various divisional activities. A proper costing technique is necessary to find out the profitable divisional activities and those which are not making much profit. Activity based costing considers the different activities that take place in an organisation milieus. Various activities are identified as the cost pools and the associated cost is allocated using a number of activities allocated to the respective cost pools. The cost allocation is done as per the contribution of those cost drivers to the various activities.
Activity based costing system takes each of the activity costs with more accuracy, as this considers various related cost drivers. The distortion risk has been quite reduced in the ABC costing, as it takes multiple cost drivers into account to measure the product costs. The costing considers activities relating overhead costs associated to the products and services, offered to the customers. The implementation of activity based costing has certain procedures or execution stages.
The first one demands the organisation to identify the activities related to the object, i.e. the product or the service. The second step determines the activity costs, identifying various cost drivers contributing to each of them. The next step includes collecting the data for various activities and calculating the cost of
The respective product or service (Akyol, Tuncel & Bayhan, 2005). Thus, ABC helped to maintain a proper planning decision/control over the products' costs with detailed realisation of related overheads, providing more enhanced profitability measures.
Balanced Score Card Approach
The balanced score card is the recent addition in the arena of performance management. It has gained much familiarity in a number of organisations to adopt this approach to track the performance. Apple Plc has various divisional within the organisational structure, which means the organisation has more than one divisional manager. To track and evaluate the performance of the managers in a common scale is very much necessary to maintain the healthy competitiveness within them. In the recent financial turmoil there have been certain cases which have proved that the managers are now more concerned with their short term achievements, rather than attainment of the long term interests of the respective organisations. As a consequence companies are being unable to shape up their future strategies as the managers are more concerned with their individual assessments. Traditionally the financial profitability used to be used as the proper assessment tool for the managers and their divisions. However organisations have realised that the success of the managers and organisations can depend on a number of factors, finance being a significant part of the same.
The framework aligns the financial measurements and operation measurements altogether in line to provide better customer satisfaction through various activities within the organisation. It has four perspectives, integral to this performance management framework. Balanced score card approach has accumulated financial perspectives, internal processes, customer perspective and innovation and learning towards the achievement of the vision strategy, an organisations posses (Pienaar & Penzhorn, 2000).
Therefore balanced scorecard provides a frame work to translate a strategy into operational terms and this, is well summarised on the graph 1 below;
TABLE 1
In the measurement of financial perspectives companies mostly considers return on investments, earning per share and return on equity apart from the net profitability of the various divisions. The factors which are of utmost importance from the customers' perspective are the quality, time and proper service. In this part the divisional performance is measured through a comprehensive measurement of customer retention, customer satisfaction, customer profitability etc. The internal processes which contribute to establish the customer satisfaction includes operational processes, innovation and customer management processes. Learning and growth perspectives consider the managerial ability to drive the work force to fulfil the divisional and organisational goals in alignment with its long term strategies. Through the accumulation of many approaches towards performance management, the balanced score card offer a better performance evaluation and performance management approach for the organisations hence support management control decisions.
The Value Chain Analysis
The value chain has enabled the companies to understand the behaviour and sources of the product differentiation through a disaggregation of the company's various strategic activities. The value chain accumulates a number of value creating activities starting from the acquiring of the raw materials to the delivery of the ultimate finished goods to the end users. The value chain has helped the organisation to identify those significant activities, which are able to add more value to the customers (Recklies, 2001). The value chain has been evolved from the difficulties to optimally manage the interconnected relationship between the various activity stages towards more enhanced and effective way to manage the activities to ensure the competitive advantage of the respective organisation hence supports Apple in making strategic management decisions.
Large companies also involve a large number of supporting elements in their business value chains. Apple also has certain involvements from a number of significant sources like suppliers, customers etc. Adding value to these elements is of much significant to sustain the growth of the large businesses like Apple Plc. The value chain analysis is an effort to analyse those value chain contributors and add value to the elements.
2. Costing systems Approach in Apple Plc
There are a number of challenges, which organisation would have to face due to the use of traditional costing system. This costing method is supposed to misrepresent the cost as they consider the overhead costs in proportion to the direct costs portions.
Fixed production costs are absorbed into product division costs by using fixed overhead absorption rate, based on the regular level of production for the period. Apart from that also there are certain limitations of the traditional costing techniques, (absorption costing system) presently in practice within the organisation. Traditional costing ignores some significant cost components like technological cost, distributions, discounts etc. (Popesko, 2010).
In recent times, the quality of the service provided has been quite crucial element for an organisation to survive in this competitive environment. So, no doubt that the service related cost has seen a faster pace in the last few years. Traditional costing approach does not include this significant amount of service cost and thus end up in an erroneous calculation of the product or service cost.
A number of organisations calculate the manufacturing cost through the allocation of the relative labour cost. This approach has been quite inappropriate as the cost absorbed here is much lesser than the overhead cost and even most of the overheads do not consider the labour cost or the labour hours involved. Traditional costing approach can be taken in an organisation where there are less no of divisions with homogenous outputs. However, as Apple has different divisions with certain processes in each of them, it is suggested that the company should use the Activity based costing.
GRAPH 1
The organisation should identify its activities or cost pools as mixing, cooking and packaging. In this case the determining cost drivers machine hours, set up numbers, labour hours etc. The product cost would be calculated through the proper allocation of costs in those activities as per the contribution of the cost drivers in each of the activities. In the traditional costing method the overhead costs were allocated in proportionate with the direct costs, which would bring enough distortion to the product cost calculation (Popesko, 2010).
The ABC approach can bring significant improvement in the cost calculation with the proper identification of overhead costs related to the products.
The table below shows the differences between traditional costing system and ABC system.
TABLE 3
As Apple Plc was into production of various kinds of food products which are quite similar in the nature, there have been certain processes which are quite similar in nature. The product cost would be determined using the contribution of the activities in each of the three product divisions. Through the proper allocation of contribution operational activities and overheads, it would be easier for the organisation to find out the most profitable as well as the least profitable divisions and divisional activities. In that case company would be able to pay more attention to those less profitable activities to minimise the divisional cost, hence the overall cost of the company. Attainment of sustainable profit margins through minimisation of cost would enable the company to achieve a competitive position against its competitors.
Finally, Absorption costing system concentrates on total cost i.e. both variable and fixed etc, it is not so useful for management or managers to use it in making decisions such as planning and control;
Again since the emphasis is on total cost, the cost volume profit relationship is ignored. And thus ABC system is much more appropriate to be used in a company like Apple.
2. Performance Measurement System in Apple Plc
In Apple Plc, profitability has been the only measurement to assess and compare the performance of their major operating divisions and their managers. The organisation has three different operational divisions, each being responsible for single product. Generally the profit amount is calculated taking the sales amount and deducting the cost of sales from the same. However there can be certain product divisions, which can incur more cost on the same sales amount due to the different raw materials requirement of their products, labour cost and overhead. The graph 2 below is an example of how different product divisions can incur different costs.
TABLE 2
In that case, generalising the divisional performance on the basis of a single scale of profitability is not an appropriate approach to take on.
The benchmark scales must be different for each of the products. Apart from this, there also have been quite a few loopholes in the present performance approach of Apple. The profit amount calculation does not take the intangible gains into account. It does not consider the capital expenditure which would create future gain of an organisation in the long run. As the managers are assessed on the basis of the profitability of their divisions, they can ignore the overall interests of the organisations and prefer to take any means which cannot be in the organisation's best interests. It is time that Apple should reconsider their performance management system and move to a more comprehensive ones. Profitability depends on a number of factors. For an instance, changes in either the value of the sold units or the overall percentage of the market served by the organisation can change the profitability of the respective company.
Apple Plc can use price premium to assess the manager's ability to fetch more value through product differentiation. To equate the performance targets, the company can introduce residual income concept. The residual income is measured as deducting the capital charge amount from the profit amount. This would ensure that the managers would invest in certain projects with an internal rate of return higher than the company's cost of capital.
Economic value added (EVA) is another approach to develop an enhanced comparative performance measurement for the divisions in Apple Plc, as this considers the intangible investments like investments in training, research etc. If the company wants to rely on a single performance measurement, Eva can be a better choice however the dilemma with measuring performance with the only financial measures, e.g. profit margin, ROI, and EVA, is that financial measures are "backward - looking.
Thus, it is preferable that the Apple Plc takes a more comprehensive approach of balanced score card, integrating all of the competitive measurements discussed above. The performance management system must encourage the managers to take the profitable means which will ensure the attainment of the overall organisational goals through the fulfilment of their own individual goals. See the strategic framework for action on graph 3 below.
Balanced Scorecard is a set of performance measures constructed for four dimensions of performance:
Financial
Customer
Internal processes
Innovation
Balanced Scorecard use performance measures that are attached to the company's strategy for success. Therefore balance is a key factor for using this technique.
See below how balance can be achieved:
Performance is assessed across a balanced set of dimensions (financial, customer, internal processes, and innovation).
Quantitative measures are balanced with qualitative measures.
Finally there is a balance of backward-looking measures
Graph 4 below shows how well the four dimensions of balanced score card are attached to the company's strategy.
GRAPH 4
Conclusion
In most of the cases the loopholes of the accounting systems come visible in tough times, as in the time of recession. The recent recession has not been an exception. There have been few cases where the organisations have moved to bankruptcy as managers were unable to pull on control over the financials of the organisation. They tried to fetch a higher profit margin at a cost of the company's sustainability. Choosing the short term profitability over their long term strategies has been proved destructive for those firms. Companies are now more aware of the limitations of the traditional approach. Now, the organisations are intended to have a more comprehensive managerial accounting approach for their cost accounting, performance measurement and value chain analysis. The managers of the organisation must be motivated to prefer sustainability over short term profitability. Apple must introduce the changes into its approaches to sustain in the extremely competitive business environments.
