A Management Accounting Analysis of the Organisation

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A Management Accounting Analysis of the Organisation

Introduction

Business management is a systematic process of four combined activities such formulating strategies, communicating these strategies throughout the organization, developing and carrying out tactics to implement the strategies and developing and implementing controls to monitor the success of the strategy in terms of achieving strategic objectives of the organization. To do these activities smoothly by management, management needs related information which comes from recorded data by the company, supplied by the management accountant.

Management accounting is the process of the preparation of financial and related information used by managers inside organizations to do the above four business management activities. It is a decision-making tool and analytical system. Management and organization are now a day very closely interrelated.

The success of an organization depends upon effective management practices and effective management depends upon accurate related information because without proper information any taken decision can not be beneficial for the organization. Thats why management accounting analysis of every organization is important for effective management which is a pre-condition of productivity and profitability. So management accounting is concerned with accounting information that is useful to management (Reading Material).

It helps in the best utilization of available resources, the analysis and interpretation of financial information and in every activity of management such as planning and policy formulation, forecasting, decision making, organizing, coordinating, motivating, leading and controlling. There are various types of tools and techniques used in management accounting, such as (Weilrich, 2001):

financial planning;
financial statement analysis;
ratio analysis;
fund flow and cash flow analysis;
break-even analysis, standard;
costing, budgetary control, material control, marginal costing, responsibility accounting system, operation research and management information system.

Management Accounting Analysis

A Management Accounting Analysis of an organization means to evaluate the total management accounting system in which the evaluation of the budgetary system, exercise of variances analysis, practising an appropriate costing system, following an accurate material control system and in every process the use of updated software are included, followed by the organization, to identify that whether the followed system is effective and efficient for the business management. Bata India Ltd is one of the leading companies in the Bombay Stock Exchange.

Its former name was Bata shoe Company limited and was incorporated on December 23, 1931, under the company act 1913 and this name was changed to Bata Shoe Company Private Limited on April 6, 1956, and finally, its name was changed to Bata India Limited on April 23, 1973.

The principal activity of Bata India Limited is to manufacture different types of footwear, which includes rubber, canvas, leather and plastic footwear. It is also involved in the business of accessories and garments.

Management Accounting System

The structured Management Accounting System means an exercise of a formal system of management accounting where the management is supplied every related information at the time and every step of managerial decision making such as defining the problem, analyzing the problem, selecting or developing alternatives, selecting the best alternatives, putting the decision into action and following up decision are maintained effectively by the management with the help of management accounting.

The Bata India Limited follows the structured management accounting system from 2004 because from this time it is using the Point of Sales (POS) Management information system which objectives were to provide centralized information about sales and inventory by which the company had been able to get all necessary information which helped to make a plan about sales, production and inventory levels.

Budget and Budgetary Control

Budget means the numerical presentation of a plan and it is a plan of operations, integrated and co-coordinated, comprising all phases of business activities and summarized to show the financial results of carrying out of the plan. It helps to select a goal where the company wants to reach and the accuracy of the goal depends upon the accurate budget. There are various types of budgets such as sales budget, production budget, expenses budget, plant capacity utilization budgets, capital budgets, cash budget, flexible budget, master budget and so on.

In every organization, there must have a budgetary control system. It is a tool of management to make a plan, to implement the plan and to control the business activities. There are some preconditions of budgetary control such as

Support of top management
participation of executers
Fixing up reasonable goals
presence of sound organization structure
Presence of effective communication system
presence of adequate accounting system
Budget education
constant vigilance
proper motivation
Flexibility and
reasonable cost.

Bata India Limited has above every requirement of budgetary control. Thats why it has effective budgetary control.

To operate a budgetary control system in an organization, the following steps must be taken:

Establishment of Organization (it is divided into two such as
- budget centre and
- preparation of an organization chart);
Formation of budget committees who is responsible for the preparation of budgets;
fixing the budget period which may be one month or one year;
Level of activity which is normally considered as three types such as
- level of activity based on the previous result;
- level of activity based on maximum productivity and
- level of activity based on present productivity and
Determination of limiting factors such as
- sales-related activities (less demand, lack of salesman, lack of storing facilities, inefficient advertisement system and so on),
- plant capability (because of less capital, limitation on import, lack of free space, and so on),
- materials (less supply of materials, high prices and low quality of materials and so on),
- labour (less supply of labour, lack of efficient labour and so on),
- management and
- working capital (lack of working capital, inefficient use of working capital and so on).

Reischauer (1998) states that capital refers to speculation in goods or services that offer benefits over a period of time after their acquisition. Capital budgeting is the making of long term planning decisions for investments and their financing. During the preparation of the capital budget, the company follows four steps such as projects generation, project evaluation with the help of discounting cash flow method considering the time value of money, project selection and project execution.

In the case of the capital budget, the various factors such as prospective investment proposals, cost of the projects, the life of the projects, cash inflow, salvage value of the projects, risk of the projects, discounting rate and technique of evaluation such as net present value method, internal rate of return method, profitability index method and so on, must be considered.

The preparation of every budget depends upon the sales budget and it depends upon the availability of sales information of the past years. From 2004 the company can get all information about sales and inventory, as a result, the different budgets could be prepared regularly and during the preparation of different budgets, it tries to confirm the participation of all responsible members of the company such as directors, senior managers (senior vice president, vice president, general manager), middle managers, junior managers, selling managers and shop managers.

Variances Analysis

Differences between standard price and actual price and standard quantities and actual quantities are called variances. The act of computing and interpreting variances is called variances analysis. There are various types of variances such as cost variances (material cost variances, labour variances and overhead variances) and sales variances. It is a comparison between actual and budgeted costs and revenue. It may be favourable or unfavourable. When actual information is less than standard or budgeted information, it is called favourable and when the actual information is higher than the standard of budgeted information, it is called unfavourable and at that time the company must take initiative steps to control this situation. At first, the reasons for variances must be identified otherwise an effective control system is not possible to be taken.

Costing System

In every manufacturing organization, to determine to control the cost of manufactured, an appropriate costing system must be exercised. Bata India Limited manufactures different types of footwear, which includes rubber, canvas, leather, plastic footwear, accessories and garments. To determine the manufacturing cost of the above products, a job costing system is followed.

ICMA, London defines Job Costing as the category of basic costing methods which is applicable where the work consists of separate contracts, jobs or batches each of which is authorized by specific order or contract.

Examples of manufacturing jobbing type industries are- printing presses, ship-builders, shoemakers, furniture makers, construction engineers, machine tool manufactures, garments makers and so on. Since Bata India Limited is a shoe, accessories and garments maker, it follows a job costing system.

ABC System

ABC system or Selective Control System is a procedure of material control. In it, the economy in purchases is the striking point to consider. In the case of the ABC system, the organization divides its inventory into three groups as A, B and C. the group of A is constituted by 10 per cent of inventory which prices are 70 per cent of the organizations investment, the group of B which is consisted of 20 per cent of inventory which prices are 20 per cent of fund investment and the group of C which is consisted of 10 per cent and which prices are 10 per cent. Classifying the inventory into A, B, and C items allows the firm to determine the level and types of inventory control procedures needed.

Control of the A items should be most intensive due to the high rupee investments involved, while the B and C items would be subject to correspondingly less sophisticated control procedures (Inventory Management, n.d.). There are various types of advantages of the ABC system and the advantages of the ABC system are as follows (Inventory Management, n.d.):

the ABC system helps to give importance to the control of A groups inventory because a large amount of capital has been invested against A groups inventory.
it helps in developing a scientific method of controlling inventories, Clerical costs are reduced and stock is maintained at optimum level.
it helps in achieving the main objective of inventory control at minimum cost. The stock turnover rate can be maintained at a comparatively higher level through scientific control of inventories.

Since Bata India Limited has various types of materials and these are different based on prices and quantity, the ABC system is appropriate in this organization for material control and this company also follows the ABC system.

Break-Even Analysis

Break-even analysis is an important tool for the evaluation of organisational performances. It is also called the cost volume profit analysis. The break-even point means a point where there is no profit or loss. It can be stated in terms of money and also units. The equation for the calculation of break-even point is

BEP (in units) = fixed cost / per unit contribution

Per unit contribution = per unit sales price per unit variable cost

BEP (in taka) = fixed cost / variable cost as a percentages of sales

If any organization can not go over the break-even point, it must suffer a loss. Hence an organization will go on production when the demand for its product in the market is higher than the break-even point in units. Again an organization can also continue its production in a short run period (one or two months normally) in sprite of suffering loss because there is a chance to be gain able in long run (normally one year) when the fixed cost will cover by the contribution.

If the organization can meet the break-even point one tine and the selling price, fixed cost and variable cost are not changed, the difference between the selling price and variable cost will be established as profit. But in many cases, the selling price, fixed costs or variable costs will not remain constant resulting in a change in the break-even.

Hence the break-even point analysis is not a job for one time, it must be calculated by the company on a regular basis in the company to changes in costs and prices and in order to maintain profitability or make adjustments in the product line. There are three basic pieces of information needed to evaluate a break-even point (Holland, 1998:25):

Average per Unit Sales Price: ____________________

Average per Unit Variable Cost: ____________________

Average Annual Fixed Costs: ____________________

The Bata India Limited calculates the break-even point every year. The break-even point was in 2004, 7568.4 million Indian rupees (6939.1 + 629.2), in 2005, 6986.8 million Indian rupees (7083.8 97.0), in 2006, 7428.3 million Indian rupees (7702.1 273.8) and in 2007, 8268.8 million Indian rupees (8674.8 406.0).

In the year 2004, the company did not meet its break-even point and thats why it suffered a loss of 629.2 million Indian rupees. But in the year 2005, 2006 and 2007, the company enjoyed profit and the earned profit was increasing day by day. The net profit was in 2005, 97.0 million Indian rupees, in 2006, 273.8 million Indian dollars and in 2007, 406.0 million Indian rupees.

Pricing means the determination of sales price, discounts, payment terms, credit and mode of payment. There are variously internal and external factors which are influenced in the pricing (Hornby, and Macleod, 1996),

In the internal factors, the objectives of the firm, features of the goods and services, price elasticity of the product, the product life cycle and existing stage if it, production cost, marketing costs and other elements of the marketing mix are included. In the external factors, the features of the market such as demand, supply, customer and competition, buying behaviour of the customer in respect of particular goods and services, buying power of customer, burgeoning power of customers and suppliers, the pricing policy of other related company that means competitors, rules and regulations provided by the government in respect of pricing and social responsibilities and consideration are included. They are four objectives of pricing such as

The maximization of profit in the short-run (Hunt, and Forman, 2005);
The optimization of Profit in the long run;
A favourable return on investment as required;
a favourable return on sales turnover as required;
accomplishing a certain sales volume;
accomplishing a specific market share;
Deeper dissemination of the market;
going toward the inside in the new markets;
Target profit on the entire product line, irrespective of profit level in individual products (Technical Teachers Training Institute, n.d.);
maintenance competition out, or maintenance it under check;
keeping equivalence with the competition;
fast turnaround and early cash delivery;
becoming stable prices and margins in the market;
providing the commodities at prices affordable by weaker sections and
Making available the goods and services at prices that will motivate economic development.

From various pricing systems, the Bata India Limited follows a cost-based pricing system. It first determines its expected total fixed costs and per-unit variable cost of the expected performance and adding an expected profit with the expected costs, the selling prices are calculated. The predetermination rate of the indirectly charged expenses to the goods and services is one of the important considerable factors and thats why during the determination of the overhead rate the company must be very responsible and the expected increase and decrease of the overhead expenses and the satiable basis of overhead rate must be considered by the company.

Management Accounting Information

The Bata India Limiteds using the POS (point of sales) management information system from the year 2004 in the data recording system. As a result, it can get easily all necessary information when it is needed. The effective communication and dissemination of the management information system with the management is the precondition of the productive performance of all activities of business management. In the Bata India Limited, these activities are done very effectively and thats why its sales revenues were increasing day by day such as in 2004, 6939.1 million Indian rupees, in 2005, 7083.8 million Indian rupees, in 2006, 7702.1 million Indian rupees and in 2007, 8674.8 million Indian rupees.

In the company, the computerized accounting system is followed in case of every section such as sales recording, production cost recording and so on. As a result, the management is always provided with all related information and the analysis and interpretation of the information by the management information system (Kirk, 1999).

Conclusion

In 2004, the company faced a loss of 629.2 million Indian rupees, but from 2005, the performance of the company is improving (Hyvönen, 2008) which had helped in every basic function such as planning, directing and motivating, controlling and performances. This study thinks that the management system of that organization is successful because every objective of the management accounting system has been achieved by the company. In 2007, its gross margin is 50.74%,

its EBITDA margin is 6.65%, its SG&A margin is 21.23% comparing with the industry and its total revenue is 12.63%, its EBITDA is 26.73%, its Diluted EPS before Extra is 48.33% and its gross profit is 46.10% higher over the prior year. All of these are the indicator of productive performance of the company. Hence this study wants to give advice that to the company, to maintain the same improvement in its performance, the company has to maintain its existing management accounting system and has to improve its existing system with the present world and the technology development.

References

Harold, Weilrich, Koontz, (2001), Management: A Global Perspective 10 th Ed. Tata McGraw Hill, New Delhi.

Holland, Rob. (1998), Break-Even Analysis, Agricultural Development Centre: University of Tennessee. Web.

Hornby, Windham B. and Macleod, Miles (1996), Pricing behaviour in the Scottish computer industry, Management Decision Journal, Volume: 34, Issue: 6, 31 42.

Hunt, James M., and Forman, Howard. (2005), Managing the influence of internal and external determinants on international industrial pricing strategies, Journal of Industrial Marketing Management, Volume 34, Issue 2, 133-146.

Hyvönen, Johanna. (2008). Linking Management Accounting and Control Systems, Strategy, Information Technology, Manufacturing Techno-Logy and Organizational Performance of the Firm In Contingency Framework. OULU. Web.

Inventory Management. (n.d.). The ABC System of Inventory Management. Web.

Kirk, Joyce (1999), Information in organisations: directions for information management, Information Research Journal, Vol. 4 No. 3.

Reading Material. Advanced Management Accounting. Web.

Reischauer, Robert D. (1998), Statement of Reischauer Robert D. Brookings Institution, before the Presidents Commission to Study Capital Budgeting. Web.

Technical Teachers Training Institute, (n.d.), Pricing & Costing, Workshop on Marketing of Educational Institutes, Programmes And Services. Web.

Wallenius, J (2004), Present State of the Technology Development in the World Research and Development of Nitride Fuel Cycle Technology in Europe, Japan Science and Technology Agency, 17-23.

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