The Nature and Role of Management Accounting - Essay Example

?Table of Contents Introduction………………………………………………………………………………………..2 Review of the Nature and Role of Management Accounting……………………………………..2 Management Accounting Key Techniques and Methods…………………………………………4 Activity-Based Costing (ABC)……………………………………………………………4 Sensitivity Analysis……………………………………………………………………….5 Analysis’ Strengths and Weaknesses……………………………………………………………..6 Conclusion………………………………………………………………………………………...6 References…………………………………………………………………………………………7 Introduction British Airways plc (BA) is one of the largest airlines worldwide and is considered as the national carrier of the United Kingdom based on its large fleet, international flights and destinations. BA is flying to over 550 destinations and to 155 countries worldwide including Americas, UK, Europe, Middle East and South Asia, Africa, and Asia/Pacific (“British Airways,” 2010). It has been considered as one of the leader in the airline industry worldwide and known for its excellence, quality, and full air and ground services. Aside from being the largest international scheduled airline in UK, BA offered several services and facilities to their customers to guarantee their convenience. The company has been privatised and shares are traded on the London Stock Exchange (LSE) under the ticker symbol BAY (“London Stock Exchange,” 2011). As history trace its origins back, BA was formed with the mergence of BOAC, BEA, Cambrian Airways, and Northeast Airlines last 1974 (“British Airways,” n.d.). However, BA had its initial flight services since World War 1 that is why the airline is said to be as old as a century. Throughout the history, BA had expanded its operations by acquiring several small airlines under its operation. At present, UK and Spanish flag-carriers have merged and come up with a formal agreement that BA and Iberia will combine their operations in a new company called the International Airlines Group (Wearden, 2010). They have decided to merge because of recession that badly hit the operations of the two airlines (BBC News, 2009). The purpose of this paper is to explain how management accounting can supply information to assist the management of British Airways, particularly the key techniques that are favourable to the company. Review of the Nature and Role of Management Accounting Management accounting is an exclusive type of accounting wherein the supplied information is more specific. Furthermore, it “exists to serve managers helping them work as decision makers, planners, and controllers of their respective departments or areas of responsibility” (Atrill & McLaney, 1994, p.14). In other words, the role of management accounting is to assist the managers in making decisions or problem solving, and provide accounting information necessary to make realistic future plans. They are expected to provide financial or economic information particularly available to those in managerial position. These are needed in carrying the tasks of decision-making, planning, and control so that organization will be managed effectively and efficiently. Decision making and planning is one of the crucial tasks played by management accounting. There are instances that the management needs to settle with the best option to be pursued which at the same time favourable to the organization. The determined courses of action will be evaluated as to their costs and benefits which is the role of planning. Furthermore, the information will be more effective if the result of the appraisal showed that the benefits outweigh the costs. Control is the second primary tasked that “involves a comparison of actual performance with the plan so that deviations from the original plan are identified and corrective action is taken” (Bhattacharyya, 2005, p.484). Management accounting and financial accounting are the two areas of accounting wherein they are distinct from each other in terms of the information they provide and to where the information is intended. Management accounting provides exclusive information for those in managerial position, whereas financial accounting information is general in nature intended to all stakeholders. The role of management accounting will be supplemented through the use of different management accounting techniques such as cost accounting, cost analysis, absorption costing, marginal costing, and many more (Armstrong, 2001, p.345). Management Accounting Key Techniques and Methods The role played by management accounting is very crucial considering that sometimes actual outcomes are different from the predicted, and the benefits did not outweigh the costs of supplied information. Because of these drawbacks and to supplement such role, management accounting techniques are introduced. Activity-Based Costing (ABC). One of the management accounting techniques that is useful for the ongoing improvements of British Airways is the activity-based costing. This traditional approach is suggested by many practitioners and academics because the “implementation of ABC has a favourable influence on the financial performance of organizations” (Chapman, et al., 2007, p.663). This feature provides information for cost and performance measurement as what accountants and managers must learned because the concept goes deeper on what is going on with the organization. This technique is also applicable in dealing with severe competition because it will give the organization the ability to control its overhead, and priced their products competitively. Based on the researched of Kennedy (2001), “UK firms adopting ABC outperformed matched non-ABC firms by approximately 27% over the 3 years beginning on January 1 of the year in which the ABC techniques are first implemented.” This technique could be helpful to British Airways particularly when they decided to combine operations with Spanish Iberia. The merged has been successful in the market considering that market shares of both airlines in the London Stock Exchange have increased (Clark, et al., 2010). However the deal between BA and Iberia has to consider several consequences that need immediate attention. One of BA’s major problems is the allocation of costs for labor contracts and employees pension (Clark, et al., 2010). The former has a deficit of $5.65 billion in its employee’s pension plan and it needs to be settled immediately otherwise Iberia will pull out of the agreement. Financial analysts suggested that through the cost information of ABC technique, costing would be easy for BA based on an individual demand for each activity. For example, if BA will adopt ABC technique they will have an accurate allocation of their resources, a further understanding of their overheads and a better control of their operating expenses (Jackson, et al., 2009, p.171). Deficit problem about their employees’ pension plan and loses caused by cutting of flights will be controlled as what they actually planned if they (managers) used ABC in making decisions. Sensitivity Analysis. This is one of the techniques that is usefully applied in making decisions, planning, and in assessing risks. One of the great examples of airline investments is the merging of BA with Iberia which is a very risky decision. However, through sensitivity analysis, BA managers will have the chance to look at each of the inputs individually and crucially assessed the outcome of the project in the near future. Questions about the vulnerability of different decisions will be answered by this technique; for instance, how the profits of BA will be affected if they merged with Iberia. All of the options are being tested to know the impact of results. Say for example, BA has two options to consider in order to cut its cost. The first option is to merge with Iberia so that operating expenses will be reduced or lessen its number of destinations to control overhead. There are also management accounting techniques whose concept are not applicable to the present situation of BA. Among of the cited techniques are ratio analysis and variance analysis or standard costing. Management accounting is future oriented and the concept of these techniques does not meet the criteria. Although analysis of past cost is necessary in a financial review, the concept is still not suitable to the present situation of BA. Using historical data particularly in the financial statements are not anymore reliable in computing ratios because the company’s financial documents are now consolidated. The consolidated financial statements of International Airlines Group are the appropriated data that will coincide with the futuristic approach of management accounting. Analysis’ Strengths and Weaknesses Role must be recognized first so that implementation of management techniques will be more effective. Accountants and managers must understand on why strategies need to be changed from time to time just to cope up with the constantly changing environment. Say for example, most of the airline companies nowadays are considering the idea of merging. This idea must be supported with evidences and information that must be forward-looking so that the analysis will be considered secured. There should be a broader view of the organization, and accounting information should also be extended to all individuals that form part of it. This analysis will be reinforced further if accessed to financial accounts, competitions, and budgetary system of BA is made available. All accounting data should also be futuristic and not historic to coincide with the concept of management accounting. There is a myopic focus on this analysis considering that most of the time the topic is focused on the merging activities of BA and Iberia. If all the needed evidences are made available such as complete market research in all concerned areas, then there would be great insights on what other techniques the company should consider. Conclusion BA has proven its identity to become one of the leaders in the airline industry. With this, it is necessary to conclude that despite of the global recession the airline still managed to improve its strategies and expand its resources. Combining operation with Iberia is good opportunity for BA to establish reputation and consequently increased its market share. Although merging had produced problems, BA still managed to maintain its image and reputation in the market. By applying the different management accounting techniques, managers learned to make better decisions and careful planning to control costs. References Armstrong, M., 2001. A handbook of management techniques: the best selling guide to modern management methods. 3rd ed. UK: Kogan Page Ltd. Atrill, P. & McLaney, E., 1994. Management accounting: an active learning approach. USA: Blackwell Publishing. Battacharyya, A.K., 2005. Principles and practice of cost accounting. 3rd ed. New Delhi: PHI Learning Pvt. Ltd. BBC News, 2009. BA and Iberia agree merger deal. BBC News, [internet] 12 November. Available at: http://news.bbc.co.uk/2/hi/business/8356780.stm [Accessed 05 January 2011]. British Airways, 2010. British Airways at a glance. [Online] Available at: http://www.britishairways.com/cms/global/microsites/ba_reports0910/overview/glance.html [Accessed 06 January 2011]. British Airways, n.d. Explore our past: 1970-1979. [Online] Available at: http://www.britishairways.com/travel/history-1970-1979/public/en_gb [Accessed 05 January 2011]. Chapman, C.S. Hopwood, A.G. & Shields, M.D., eds. 2007. Handbook of management accounting research, Volume 2. The Netherlands: Elsevier. Clark, N. Sorkin, A.R. & Mouawad, J., 2010. British Airways and Iberia merger deal. The New York Times, [internet] 8 April. Available at: http://www.nytimes.com/2010/04/09/business/global/09ba.html?_r=1 [Accessed 07 January 2011]. Jackson, S.R. Sawyers, R.B. & Jenkins, J.G., 2009. Managerial accounting: a focus on ethical decision making. USA: South-Western Cengage Learning. Kennedy, T., 2001. The impact of activity-based costing techniques. Journal of Management Accounting Research, [e-journal] 13 (1). Abstract only. Available at: http://scitation.aip.org/getabs/servlet/GetabsServlet?prog=normal&id=JMARXX000013000001000019000001&idtype=cvips&gifs=yes&ref=no [Accessed 07 January 2011]. London Stock Exchange, 2011. Stocks. [Online] http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/prices-search/stock-prices-search.html?nameCode=BAY [Accessed 05 January 2011]. Wearden, G., 2010. BA and Iberia sign merger agreement. Guardian.co.uk, [internet] 8 April. Available at: http://www.guardian.co.uk/business/2010/apr/08/ba-iberia-sign-merger-agreement [Accessed 06 January 2011]. Read More