Management Accounting: Apple Plc, Absorption Costing

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Management accounting refers to the provision and use of accounting information by managers within an organization to guide them in making concrete decisions that will provide them with valuable opportunities to redefine and shape their competitive advantage in a market place. Management accounting is primarily concerned with the internal activities of the organization and therefore central to key organizational functions (Kaplan et al 1987).

The success behind contemporary organizations lies on their ability to synthesize management accounting information without any discrimination, evaluate their industry performance as well as reviewing their internally implemented systems to determine if their effective or not. Management accounting is a very instrumental activity especially in big organizations whose structures are defined by numerous line functions that they undertake. It is therefore important for managers to understand and distinguish the meaning and role played by management accounting information and financial accounting information (Kaplan et al 1987).

As we have explored, management accounting information is confidential and highly restricted for internal use while financial accounting information is for public use. In financial accounting the managers are charged with the responsibility of looking at the firms past and historical performance while management accounting is futuristic. Managers are more future focused and pays very little attention to the historical performance. It is therefore categorized into: Risk assessment, performance management, and strategic management. Under risk management the responsibility of managers is a broad framework mechanism for identifying, predicting, detecting and reporting risks to ensure that there is an effective achievement of core organizational objectives. Performance managers are responsible for developing a culture of business decision making and managing the performance of the entire organization and to liaise with higher level managers in recognizing and accepting the management accountant as a strategic partner in the organization (Thomas 2008).

Role of management accounting in an organization (Apple plc)

It appears that there is total confusion in this company; managers are unaware of the nature and role of management accounting. It is ironical that the meaning of management accounting is a vocabulary for these managers in such a big company when they should take the lead in bursting in diverse accounting knowledge. Apple plc is a manufacturing firm with three distinct division each responsible for the production of a specific product (Kaplan et al 1987).

This implies that for success to be realized here management accounting must feature prominently. Before the management decides on whether to adopt this accounting practice or not, it is important that they become aware of its roles. This can be explained as follows: (Kaplan et al 1987).

Strategy formulation

Organizations have multiple internal objectives which must be achieved to guarantee subsequent future performance. Management accounting will set course of actions that when adopted will ensure that these objectives are efficiently and effectively achieved. The course of action will define what an organization needs to change to maintain or improve its performance (Thomas 2008).

Planning and construction of activities

Management accounting will entail setting both specific and general objectives, allocating timeframe and design of how these objectives should be achieved. Remember that failure to effectively plan could be a recipe for confusion and hence conflict. It is important that managers recognize the importance of management accounting on this basis (Bromwich & Bhimani 1994).

Decision making process

Decision making is not spontaneous and takes every bit of second and careful thinking. Using accounting information will guide managers in deciding on what actions to take or which lines of business are promising that should need positive recommendations. Managers are usually assumed to be rational and that most important decisions they make are either influenced in one way or the other (Kaplan et al 1987).

Safeguarding the organizational asset

A characteristic of good managers is that they should be apple to provide maximum protection to the organizational assets. These assets are instrumental in achieving the organizational objectives and assure managers for subsequent performance. Management accounting will provide a guideline for safeguarding these assets. Apple plc manages should understand that the only way of achieving this objective is to adopt management accounting (Kaplan et al 1987).

Economics

Management accounting will ensure that the scarcely available resources i.e. capital, time, labor and natural resources are used optimally. Economic resources are becoming more limited at a time when we really need in the production process. Only efficiency and effectiveness can make an organization to prosper. This is the requirement of management accounting (Bromwich & Bhimani 1994).

Supplement to the preparation of financial reports

We are all aware that financial statements are prepared within a predetermined period mainly at the year end. Management accounting reports will form the basis of producing such reports. The data extracted will be mainly from the internal reports generated on a weekly or monthly basis. It’s therefore upon the Apple plc managers to decide on whether to adopt this accounting practice or not (Bromwich & Bhimani 1994).

The current Performance Evaluation system (Profit margins and bonuses)

Performance evaluation refers to a system of assessing and reviewing employee’s performance overtime and rewarding accordingly. Performance evaluation is critical especially in large organizations that hire many personnel. In Apple plc we see the current system as causing eyebrows across the organization (Thomas 2008).

A firm should devise evaluation criteria that recognize the existing skill base and technical competencies of employees within an organization. In this firm the use of Profit margin to determine the performance standard fails to recognize the contribution of other divisions. The use of profit margin is associated with the following limitations. (Thomas 2008).

Unhealthy departmental competition: where a firm uses profit margin to measure the general performance, it should be noted that there are other departments that will not be identifiable with profitability but their contribution is of significant value to a firm. This might cause dire consequences as interdepartmental competition begins to materialize. The result is that other managers will feel undervalued and may be demoralized. Unhealthy interdepartmental competition is a recipe for conflict in an organization. Where this becomes the scenario, the performance of the company will be put to a standstill. Managers who feel derecognized may be opting to join rival firms.

Margin based evaluation systems may also encourage subjectivity. Different managers will be working to achieve the margin target and not carefully the organizational objectives. (Sapp et al 1990).

Apple plc is a medium sized firm with different divisions this may perpetrate a culture of deviation from the organizational standard for general performance. Again it’s very difficult to be applied in not for profit oriented organization. There is no profit what do you use? However this performance evaluation system is advantageous in a dynamic and competitive environment where a company must make a profit to survive. It is also encourages individual supervision on department where a department must toil in order to be compensated. (Sapp et al 1990).

Proposal

There is already misconception between the managers in different divisions and it’s highly likely that the company is facing a conflict. To help remedy the situation the management must look into new systems of performance evolution. As we have discussed above that compensation of employees is based on the ultimate performance it is equally important that there must be a reliable and fair system of reviewing employees’ performance and therefore reciprocate them accordingly.

In own view I suggest a situation where the performance review is based on the individual performance. This will help boost the morale of specific managers and employees directing reporting under his/her division. It will encourage individual participation rather than group bonuses. Another way is to provide options for promotions based on the individual performance. Where individuals perceive that their hard effort is rewarded by promotion, there will be hard work displayed by each and every employee and further help inculcate a spirit of professionalism and innovativeness in all departments within Apple plc. The modern world is suffering from the scars of global credit crunch and only organizations that value the welfare of their employees will survive.

Apple plc should therefore not sleep with all eyes closed. It is strategically important to carry out a diagnosis process on all its levels of management in order to determine whether it is actually meeting its industry performance standard. In general a poorly used performance evaluation systems can cause the company dearly, the essence of an evaluation process is to guide the company in determining the extent to which it’s meeting its objectives. The method used should be one that takes into account that employees are human beings and their efforts should be compensated in a manner that does not need seem to annoy them (Kilger 2002).

The current costing method (Absorption costing)

Apple’s costing tradition is to allocate common costs on all products using absorption costing system. This costing technique refers to all normal costs whether variable or fixed costs are charged to cost units produced. In this case the cost units are the products from the various divisions. This method if well adopted should accrue the following benefits: This technique ensures that every element of cost i.e. all costs of production, administrative, distribution, and finance both variable and fixed are absorbed. It gives guidelines on a firm to be cost effective by accumulating all costs and charging them on all cost units. Absorption costing is prudent and objective as it does not undervalue stock. This means that accountants can place maximum confidence in using absorption costing especially where a firm holds large amount of inventory. It can be depicted to portray the true and fair view in line with international standard 1 that gives the framework of preparation and presentation of financial statement and valuation of inventory (Sharman 2003).

Apple plc may not be able to experience profit fluctuation especially during periods of unprecedented changes when price becomes susceptible as absorption costing is consistent provided that production remains the same. Stable profitability can provide a basis for setting strategic goals (Sharman 2003).

Limitations of Absorption Costing as used by Apple plc

Since this technique uses fixed cost, it’s argued that it may not provide managers with realism in making future important decisions. Fixed costs will continue to be incurred as long as an organization undertakes any decision to assume management responsibilities. It is therefore irrelevant for decision making and will be incurred anyhow (Sharman 2003).

Much work should be paid to variable costs that will increase with an increase in of the factors of production and any extra unit produced. In this situation an unprecedented increase in production is very critical for managers in making future strategic plans. This can adversely affect their decisions and hence performance. In a rapidly changing environment managers should mainly focus on variable costs that come with decisions to enter into new market, produce extra units or to produce different product design (Sharman 2003).

Absorption costing emphasizes mainly on total cost attributable to a product, it appears that total cost profit volume relationship is ignored. In a normal situation relationship between total cost incurred in producing a product and its associated profit margin is matched to provide important data for predicting present and future trends in analyzing the industry as well as financial performance. This is why absorption costing may be misleading (Sharman 2003).

Proposal

I propose the following accounting techniques that the management can use in place: Marginal Costing, Activity Based Costing, balanced score Card and Economic Value Added. These are some the costing techniques that are still being used in the modern business. Some of these techniques try to incorporate the current tradition in the production place, for instance marginal costing concentrates on marginal costs i.e. the extra costs incurred for producing any extra unit (Sapp et al 1990).

The contemporary business situation requires that managers become objective and prudent enough especially when making decisions which are strategic and sensitive that when affected may lead to total failure. This is why it is important to focus on variable costs which will only be incurred when an organization undertakes any additional decision to alter their production unit (Sapp et al 1990).

Activity Based Costing

Activity Based Costing refers to a costing technique where activities are identified in an organization and relevant costs are assigned to all activity resource i.e. products and services. Activity Based Costing gives an organization opportunity to ascertain the true cost of its individual products and services for the rationale of recognizing and abolishing those which are unprofitable and reducing the prices of those which are over priced. In fact activity based costing is the most appropriate accounting technique to be used by Apple plc since it is a highly recognized tool for understanding product, customer cost and profitability. It can be therefore used for making strategic decisions like pricing, procurement, and measurement of structural process suggesting further improvement (Friedl et al 2005).

Merits of this costing technique

Apple plc has three divisions that are responsible for manufacture of specific products, managers can easily identify inefficient product, department activity within these divisions. The production of the identified products can be improved or stopped. This can help alleviate any unnecessary interdepartmental competition.

Production managers can also put more effort in producing most profitable products and departments. This may bolster up firm’s industry performance and guide its managers in doubling production of these profitable products (Friedl et al 2005).

With the identification of cost within activity and a product, activity based costing can be used to control cost at departmental level as well as at individual level. These can provide important information to cost accountants. Finally activity based costing technique can be used by the unit managers to identify unnecessary costs associated with a particular activity or product and therefore make informed decisions appropriately (Friedl et al 2005).

Limitations

Activity based costing is expensive and difficult to apply. It has been cited as irrelevant and inefficient and a waste of resources if not carefully used. This means that mangers must take time thinking about the classification of cost centers and activity. It requires adequate resources to achieve maximum usage. This implies that small organizations can not effectively use it. However Apple plc is equally large enough to adopt this system (Friedl et al 2005).

It is argued that the use of activity based costing lost ground long time ago when techniques like balanced score cards and economic value added hit the market. This left unmarked desire and little relevance in the production.

Another disadvantage is that this technique is mostly used in the public sector. Its prevalence in the private industry is not wide spread. So this makes it to be at odd with other conventional methods (Friedl et al 2005).

Conclusion

Management accounting is key to any effective running of organization. Managers need to evaluate their performance both in the long-term and short run. This should be done on a predetermined time band to determine the effectiveness of internal control systems i.e. accounting techniques adopted by an enterprise, variances, cost benefit analysis, profitability and etc. adequate controls will be an assurance for good future performance.

References

  1. Bromwich & Bhimani. Management accounting pathways to progress. CIMA, 1994.
  2. Friedl, Gunther; Hans-Ulrich Kupper and Burkhard Pedell. “Relevance Added: Combining ABC with German Cost Accounting”. Strategic Finance 2005: 56–61.
  3. Kaplan, Robert and Bruns. Accounting and Management: A Field Study Perspective (Harvard Business School Press, 1987).
  4. Kilger Wolfgang. Flexible Plankostenrechnung und Deckungsbeitragsrechnung. Updated by Kurt Vikas and Jochen Pampel (11th Edition). Wiesbaden, Germany: Gabler GmbH. 2002
  5. Sapp, Richard, David Crawford and Steven Rebishcke “Article title?” Journal of Bank Cost and Management Accounting (Volume 3, Number 2), 1990
  6. Sharman Paul A. “Bring On German Cost Accounting”. Strategic Finance (2003): 2–9.
  7. Thomas S. Clausen. Appraising Employee performance Evaluation Systems.2008

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