Discuss about the Management Accounting for Concepts and Applications.
New Business Strategy
Blue Moon, Pty Ltd. designs and produces sailing boats. It had excellent reputation but recently its profit and market share have started to decline due to new competitors entered into market. So, after evaluation of internal strengths and weakness Rob Inglis, the firm’s owner realize to implement new business strategy to survive in the market.
It is required to understand organizational objectives and long term goals before implementation of new business strategy (Ward, 2012).
By implementing new strategy Blue Moon wants to achieve business mission and competitive advantage also. The mission of business to attract customers and making more profits by changing in the following:
- Reduce actual range of sailing boats and increases selling price thus profit margin increases.
- Change in organizational culture.
- Change sub-contracting strategies.
- Change the job costing system.
- Change the approach to distribution.
- Improved boat design and develop new skills thus customers preferred their products.
So, new business strategy helped Blue Moon to come over its present situation.
Key Success Factors (KSF)
Key success factors are the group or combination of adequate information that is required to complete one or more desirable business objectives. An example should be created to understand, one of the key success factors in promoting sales of boat products might be to change the design and techniques of manufacturing as per new aspects of demand.
Customers and market defined to key success factors. It is not defined by company. Key success factors revolve around processes, skills and systems. (Lawrimore, 2011)
When Blue Moon’s profits decline, Rob made market research to find the reasons. Research aimed at investigating the sales potential for boats designed to deliver higher performances in terms of speed and sailing experience.
By evaluating opportunities and threats in the market and own strength and weakness, they implement new business strategy. They improve their product quality and reducing cost. Key Success factors of Blue Moon are:
Technical Research and Development:
The research revealed that there are significant opportunities. The research also revealed that the demand for low cost sailing boat will decline in the medium period to long term as the recent economic crisis is affecting to a large extent middle class families, thus decreasing their purchasing power. So research was main key success factor for Blue Moon to know customer wants and they improve their product accordingly.
Innovative and High Quality Product:
New clients want innovative and superior or high quality products with excellent and better customer service. Customers get satisfaction by receiving superior products in competitive market. Blue Moon changed the quality of their product thus customers preferred them in all available options in the market.
Reduce Blue Moon’s actual range of sailing boats by focusing on the best performing ones, increase selling prices and, therefore, improve profit margins. Earning profit is main organizational objective for all companies as well as of Blue Moon. So they reduce cost but increase selling price to earn more profits.
Change in Distribution Approach:
Customers want good distribution channel for saving time and money. Blue Moon’s reputation would depend on the ability of distribution department. They applied new strategy on distribution approach to save time and source of customers.
Management Accounting System
Management accounting system firstly collects financial data from operations of business and then converts the information into analysis report. Management Accounting is a process of decision making on the basis of financial and non-financial information. By adopting management accounting system, Blue Moon can achieve better position among the competitors.
Blue Moon, Pty Ltd. is considering the below techniques and tools, it should include in its revised Management Accounting System (MAS). Following are the tools or techniques which should be included by Blue Moon in new MAS:
- Strategic planning
- Flexible Budget
- Allocation of Overhead Cost
- Analysis of Variance
- Analysis of Cost Volume Profit (CVP)
- Cost-Plus Pricing or Target Costing
- Techniques of Capital Budgeting
Strategic planning is a managerial process which is used by organizations to set their objectives and goals. It includes the following:
SWOT analysis: SWOT analysis is basically based on four parts which tells about Strengths, Weaknesses, Opportunities and Threats about particular person, company or organization. Blue Moon’s owner, Rob firstly researches the market to know the threats and opportunities available in front of them. After then find organizational strength and weakness to focus on strengths and reduce weaknesses (Pahl & Richter, 2009). The new competitors who guaranteeing for lower prices and shorter production time than Blue Moon, they were threats for Blue Moon and opportunity was that, performance of the boats produced by new competitors was inferor. Implementation of new strategy works as strength and declining profitability due to entrance of new “on-line” competitors was weakness of Blue Moon. The SWOT analysis can be applied to analyze strength and weakness of internal factors, and opportunities and threats of external factors. It helps to identify strengths, to reduce weaknesses and know about available opportunities.
Porter’s Five Forces Model: This model is given by Michael E. Porter to identify and analyze five competitive forces which give to shape every industry and structure of industry. It also helps to identify strengths and weaknesses of an industry (Hill & Jones, 2009).
(Source: Integrated Management 2006)
Blue Moon can identify bargaining power of suppliers and buyers which help in decision making. They can find threats of new entrants, threats of substitutes and degree of rivalry which will be beneficial for management also. By this evaluation, they can improve their product performance.
Value Chain Analysis: A firm has some internal activities which can be analyzed by the techniques of Value Chain Analysis. The primary purpose of value chain analysis is to identify that which is the most important and profitable activity to the business entity and which will be more valuable for the firm. Blue Moon can analyze and evaluate internal activities and could be improved if some changes required (Navy & Johnstone, 2015).
A flexible budget changes according to volume of activities. In compare to static budget, flexible budget is more valuable (Shim, Siegel & Shim, 2011).
Flexible budget is prepared in the end of financial year to evaluate the performance of the activities. Blue Moon can identify valuable performance by preparing flexible budget.
Overhead Cost Allocation:
Allocation of overheads is a process of allocate the overhead cost to a particular division or cost center. Blue Moon should be allocated overhead cost to the particular cost unit. If process of allocation of overhead cost is proper, it will help to find actual profits (Weil & Maher, 2005).
Variance analysis is the analysis to know the quantitative difference between actual and planned behavior. Blue Moon can control over business by variance analysis. Difference between budgeted output and actual output comes under the variance analysis. It helps to management of Blue Moon in reducing variance (Berger, 2011).
CVP analysis refers to Cost Volume Profit analysis. Blue Moon can used to determine how change in cost and volume effects the profits of the organization. Assumptions taken during cost volume analysis which are: Selling price/unit, variable price/unit and total fixed cost remain unchanged (Rajasekaran & Lalitha, 2010).
Total revenue and the total cost (both fixed cost and variable cost) are same at the point of cost volume profit. It is also referred as breakeven point, where the situation of neither profit nor loss.
Target Costing and Cost-Plus Pricing:
Target costing is a technique to identify a cost of product life cycle. Blue Moon can set a target cost by eliminating a required profit margin from a competitive market price. It helps in determining the cost of product.
Cost plus pricing is a method of cost to settle down the value of goods and services. By adding direct material cost, direct labor cost and overhead cost of a product and after that percentage for profit margin has been added so that the price of the product can be derived.
Capital budgeting techniques:
Capital budgeting is a forecasting process of capital invested. Organization’s long term investments can be determined by this planning process (Albrecht, Stice, Stice & Swain, 2007). Capital budgeting consists of various techniques which are presented below:
- Payback period: Blue Moon can be analyzed that how much time is required to recover the investment cost by it.
- Discounted payback period: It is helpful to calculate payback period in respect with time value of money.
- Net present value: Blue Moon can identify divergence between present value of cash inflows and present value of cash outflows by NPV.
- Accounting rate of return: Blue Moon can recognize individual’s expectation for profit based on an investment made by them.
- Internal rate of return: The rate of return which is used to calculate profitability of investment. So it will be beneficial for Blue Moon to compute their profitability.
- Profitability index: Profitability index used to identify the relations between costs and benefits by calculated ratio. It is used for ranking projects.
All the above techniques should be included by New Moon in its new management accounting system. These all techniques help in survival for long run and achieving organizational goals and objectives.
Albrecht, W., Stice, J., Stice, E. & Swain, M. 2007. Accounting: Concepts and Applications. (e.d. 10): Cengage Learning
Berger, A. 2011. Standard Costing, Variance Analysis and Decision-Making: GRIN Verlag
Hill, C. & Jones, G. 2009. Strategic Management Theory: An Integrated Approach. Cengage Learning
Lawrimore, E. W. 2011. Strategic Management Theory: An Integrated Approach. Lulu.com
Navy, H. & Johnstone, R. 2015. Commodity and product identification for value chain analysis. World Fish
Pahl, N. & Richter, A. 2009. Swot Analysis - Idea, Methodology and a Practical Approach. GRIN Verlag
Rajasekaran, V. & Lalitha, R. 2010. Cost Accounting: Pearson Education India
Shim, J. K., Siegel, J. G. & Shim, A. I. 2011. Budgeting Basics and Beyond. (e.d. 4): John Wiley & Sons
Ward, K. 2012. Strategic Management Accounting. New york. Routledge
Weil, R. L. & Maher, M. W. 2005. Handbook of Cost Management.(e.d. 2): John Wiley & Sons