Management accounting in manufacturing organisations

by John on April 5, 2017 at 9:01 pm
Posted In: Ch 17 - Strategic Performance measurement, Ch 18 - Multinational Organisations, Ch 19 - Cost Management, Value Creation and Sustainable Development, Ch 2 - information, Ch 22 - Management Accounting Change (Implementation), Ch1 - changing contexts, General management accounting

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The origins of management accounting can be credited to pioneers in the manufacturing sector during the industrial revolution of the late 19th century and early 20th century. As organisations grew in size and business complexity (e.g., more complicated transactions, separation of owners and managers), there was a greater demand to be able to control operations more, to monitor (manager and employee) behaviour, to report and evaluate performance, and more.

These sorts of demands were met with an influx of emergent management accounting techniques. So, it was during this period that we witnessed the emergence of early MA tools such as standard costing techniques, budgeting and net present value capital appraisal techniques.

However, the manufacturing organisation of the 21st century faces fundamentally different challenges and context and, with that, many questions can be asked with regards to the relevance and fit-for-purpose of today’s armoury of management accounting tools – even so-called “advanced” techniques such as activity-based costing, lean accounting and the balanced scorecard.

Today’s manufacturing landscape is typically characterised by such attributes as: immense global competition, where production and other costs are therefore key for survival and success; greater consumer demands, in turn requiring flexibility and agility on the part of the manufacturers; mind-blowing technological change in production techniques, including robots; seismic informational technological advance, digital, wireless and other forms of making the manufacturing family closer and ‘smaller’; and new and emerging economies but still with continuing global financial problems and prevalent policies of austerity.

This characterisation of the contemporary manufacturing field is non-exhaustive – it is a minefield of ongoing development – and the above characteristics are far from independent, they intertwine. So, can we really expect a relatively static portfolio of management accounting tools and techniques – indeed, rather undeveloped for many decades now – to still fulfil its expected role of informing managers’ decision-making? This is just a probing question (for discussion), and I certainly have no answers!

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Management accounting and popular culture

by John on March 22, 2017 at 8:14 pm
Posted In: Ch 2 - information, Ch1 - changing contexts, General management accounting, Uncategorized

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Popular culture is significant in contemporary life – culture of the masses rather than the elites. It lies in the influences on everyday people of such day-to-day phenomena as sport, music, fashion and shopping, cinema, theatre, celebrities, magazines, TV, radio and social media.

Most people probably don’t associate popular culture with management accounting (or vice-versa). To the lay person, accounting normally connotes ways to manage manufacturing companies or glossy annual reports distributed to shareholders.

But, on the contrary, management accounting is everywhere in and around the globalised landscape of popular culture. Absorb the following facts, for example:

  • Star Wars – the Force Awaken had a production budget of $245 million, and worldwide box office receipts of $2.07 billion
  • The film Forest Gump took $660 million in box office receipts and was the winner of 7 Oscars in 1995 and nominated for 7 further categories. Yet it made no profit!
  • Between 1992 and 1997, the English Premier League received £191 million in global TV revenues. From 2016 to 2019, it will receive £5.1 billion in global TV revenues
  • British vlogger, Zoella, is reported to be earning at least £50k per month, mostly from YouTube and sponsorships. Some U.S. vloggers are multi-millionaires!

There are many other examples like these which could illustrate just how important finances are implicated in popular culture. So, important and relevant, clearly, to all the above examples, are: revenues, costs, profits and much more from a financial (and associated non-financial) lens.

Now hands up who still doesn’t see any connections between management accounting and popular culture?

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Loss-making rail routes in Ireland

by admin on February 27, 2017 at 10:44 am
Posted In: Ch 11 - Cost-Volume-Profit Analysis, Uncategorized

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Image from irishrail.ie

A review report by the Irish National Transport Authority published in 2016 makes for some interesting reading. It highlights the issues faced by many rail companies world-wide in that not all routes are profitable. When this occurs, many States subsidise services in the general public and social interest.

The 2016 report includes an interesting use of a breakeven approach to identify poorer performing routes. The analysis calculated the cash per journey required to breakeven. This was done by taking total cash costs less revenue divided by the passenger journeys on each route. The report notes that all government subvention, capitalisation, depreciation and exceptional costs were excluded. It identified four poorly performing routes, as shown below.

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What this graphic shows taking the first route as an example is that about €550 per passenger journey is needed to cover what we might classify as the running and  maintenance costs.I like its simplicity, and I don’t think  anyone would be prepared such a fare. Using such figures, the rail company or the State has to decide if it can subvent to that amount on an on-going basis. The latter to routes seem to be more workable in terms of a combination of increased fares, cost cuts and/or subvention.

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US Army – poor management controls

by admin on February 13, 2017 at 8:13 pm
Posted In: Ch 7 - Planning & Control: theories and principles, Uncategorized

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Image from military.com

According to a report on Fortune, the US Army accounts certainly do not eek of military efficiency. The report notes “the Army made $2.8 trillion in wrongful adjustments to accounting entries in one quarter alone in 2015, and $6.5 trillion for the year”. That’s trillion, with 12 zeros, yes!

The military is of course the biggest spender of government funds in the US. The budget for 2017 is nearly $600 billion (that’s 9 zeros), but the errors noted above seem to have been accumulating over time. The Fortune article notes:

  • The Army lost or didn’t keep required data, and much of the data it had was inaccurate
  • there has been no way to know how the Defense Department – far and away the biggest chunk of Congress’ annual budget – spends the public’s money
  • DoD and Army managers could not rely on the data in their accounting systems when making management and resource decisions
  • the Army lacked receipts and invoices to support those numbers or simply made them up.

If this were any normal business, I would have to say it seems to be lacking in minimal and even simple accounting and management controls. But there again, one can imagine how difficult it may be to “control” spending in war zones, or even trace assets or expenses. I can’t imagine an auditor for example going to Iraq or Syria to verify a tank or similar asset has actually been lost

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Inventory management

by Liz on January 30, 2017 at 6:55 pm
Posted In: Ch 19 - Cost Management, Value Creation and Sustainable Development

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amazon-and-inventory

Inventory management is key to maintaining low costs. In management accounting text books we often discuss inventory management systems like ‘Just In Time’ – the examples we analyse are often manufacturing companies.  However, inventory costs are just as important for companies where their operations are based around fulfilment centres, such as Amazon. A significant risk identified in Amazon’s 2015 annual report relates to the risk of inventory holding.

Internet retail companies often operate on providing large scale offerings; however, they typically have to respond to seasonal trends and rapid changes product lifecycles. Overstocking and understocking can result in loss of sales and increased cost of sales, both of which impact on the operating margins. Companies such as Amazon, who operate on very small operating margins require strict monitoring of their costs. For example, at Amazon basically every 100 dollars of revenues more than 95 are absorbed by cost of sales and operating expenses.

For companies like Amazon it is essential that the inventory costs are monitored and the operating teams are proactive in adapting to the purchasing trends of consumers. This is where the use of big data and data analytics is integral with the management accounting systems because algorithms predicting changing consuming patterns can help to reduce the costs of sales, which include the inventory costs.

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