Financial Analysis of Mitsui and Co Ltd - Report Example

Financial Analysis Individual Report Executive summary This report will provide a background to Mitsui and COltd company and the businesses that it is involved; in addition, it will also provide an overview of the competitors and the policy of the organization. The report will go ahead to analyse the importance of management accounting and some of the key techniques that include absorption and marginal costing, these techniques will be applied in the context of Mitsui and CO ltd. The report will conclude with finding on the strengths and weaknesses of the Background to Mitsui and CO ltd Mitsui and CO LTD is an iron and steel products manufacturing company that specialises in production of steel and iron goods as well as production of iron and steel for sale. In its line of business the company deals with; iron and steel products and semi finished products such as slabs billets among others, flat rolled steel products such as hot rolled sheets, cold rolled sheets, coated sheets and electrical sheets among others. In addition, the company also deals with bar, shapes, tubular steel and iron products, wide rods, automotive steel, plates, special steel and stainless steel among other products. The company also has other investments in steel and iron businesses such as steel manufacturing operations including electrical furnaces, steel processing service centres that take care of processing and distribution services, steel sales business and production of motor vehicle parts. Apart from manufacture of steel and iron products, the company has other portfolios that include supply of mineral and metal resources to Japan and other areas of the world. The company also has investments in generation of renewable energy, industrial and infrastructure, water treatment and supply, project development in fields such as logistics and social infrastructure. In its integrated transportation systems business unit, the company deals with logistics, financing and sale of motor vehicles, sale and financing of construction machinery, trade and ownership of commercial ships, sale, purchase and leasing of aircrafts and helicopters and rolling stock leasing. The basic chemicals business unit deals with manufacture of industrial chemicals and the logistical support for their clients. The performance chemicals business unit deals with manufacture of agricultural chemicals, performance materials such as plastics and synthetics. In addition, the unit also deals with liquid crystal display material and commodities, semiconductors and supplies for printed circuit board. Energy business unit I and II deals with exploration and processing of energy sources such as oil, gas and uranium among others, in addition it also develops environmental business such as carbon credits, biomass ethanol and hydrogen. The food business unit deals with grains for livestock, energy production and human consumption. In addition, it also deals with food ingredients, distribution, retail support services and agri-foods. The consumer service business unit deals with a wide variety of business activities that include medical and health care services, real estate, housing and engineering materials, media and fashion. The innovation and corporate development unit includes business areas such as IT, financial businesses, logistics and insurance services. Owing to the extensive scope of business activities that Mitsui and CO ltd are engaged in, their competitors include those firms that are engaged in each unit of their business. These include firms that are in the energy business, both renewable and non renewable, those in the iron and steel business, in the transportation sector, financial Ann IT sector, industrial and agricultural chemicals production industry and those in the food production industry. Mitsui and CO ltd is guided by it s corporate governance policy that is based on four principles; these include transparency and accountability, compliance with legal and regulatory requirements on disclosure, confidentiality and timeliness in disclosure and fair and equitable access to information. Review of management accounting Businesses are usually faced with decisions to make every day in running their activities, these decisions determine whether those businesses will fail or succeed; therefore, the way an organization makes these decisions is important if they have to succeed. Management accounting is a discipline that enables the management in an organization to make decisions based on information extracted from financial data of the organization (Macintosh & Quattrone, 2010, p101). Basing decision making on information helps businesses to understand their strengths and weaknesses and are therefore in a better position to capitalise on their strengths and work on their weak points. Importance of management accounting In organizations such as Mitsui and CO ltd, management accounting adds value in a range of ways, some of those ways are explained below; Management accounting provides information which is important for decision making and planning. Management accounting provides information that is important to the management of a business entity, this information is crucial to management as it will help in making informed decision based on relevant and real data. Secondly, management accounting helps in directing and controlling operational services within the business, this is done through allocation of resources. Thirdly, management can use management accounting information to motivate employees to meet certain targets and finally, the information can be used to measure the performance of the organization or to compare different periods. Key techniques and methods used in management accounting Absorption costing This method of management accounting involves absorbing all manufacturing costs in to the number of units that are produced; this means that the cost of a single unit of a product includes cost of direct materials, direct labour and all variable and fixed manufacturing overhead costs (Groot & Selto, 2013, p89). The allocation of costs to various departments or units is usually done on the use basis where the amount of cost that will be allocated to a product will depend on the level of use of the service (Sharman & Vikas, 2004, p30). For instance if one department is found to use 60% of the total labour, then 60% of the labour costs will be allocated to that department. However, if it not possible to determine the level of use of a facility, then survey basis of allocation is used where for instance, if a supervisor is found to spend 30% of his time doing administration duties and the rest in other departments, then allocation of costs will be done on that basis. Using absorption costing in Mitsui and CO ltd will enable management to get a clear view on how various departments and business units are using the various resources available to them. The information from this technique will help in determining the departments or business units that use the largest or smallest resources in the organization therefore help management to put measures to make optimal use of resources in these departments. This will help it compete better in the market since it can be able to adapt to trends in the market easily by varying production to suit market conditions. The information on the level of use of resources will enable the company to choose those products, which use minimal resources and bring optimal profits to the company; this information can be used in pricing of products depending on the cost of producing each single unit (Agrawal, 2010, p 56). Information from absorption costing technique can be used to in planning by allocating resources to various departments depending on their need and profitability. Marginal costing Marginal costing is a method in management accounting that divides cost in to two parts; fixed cost and variable cost. In this case, the marginal cost of a product will be its variable cost and will include direct labour costs, direct material costs, direct expenses and the variable element of overhead costs. In marginal costing, also known as direct costing, fixed costs are not charged on production but are treated as periodical cost (Sopariwala, 2009, p44) Marginal costing in Mitsui and CO ltd can be used to recognise the cost behaviour of each additional product in the various department or business units, the information on cost behaviour will be important in improving business processes, as it will give the management an opportunity to improve efficiency in order to have favourable marginal costs. Improving these processes to reduce marginal costs will definitely have an effect in the overall costs by reducing them; this will enable the company to compete favourably with its rivals. In the choice of the products to produce for its market, Mitsui and CO ltd will use marginal costs of the various products where the products with the most favourable cost behaviours will be introduced to the market. In pricing of the commodities, the management will pay attention to contribution (which is the difference between sales and marginal cost) such that they will fix the price that will leave the most desirable contribution. Information gathered from marginal costing will be important in planning and controlling production activities so that marginal costs remain in the acceptable range. Strengths and weakness of the analysis Due to the wide range of the business activities that Mitsui and CO ltd is involved in, the use absorption costing is very relevant, as it will enable the company to apportion costs to the various business units, which will reveal the most resource intensive business units. For instance, Mitsui has 11 business units each with different product from the other therefore their use of the available resources is different; this information can be compared to their returns to determine their profitability. However, due the large number of activities that the company is involved in, getting information on all the 11 business units and the departments within them to carry out marginal or absorption costing is very difficult due to my inexperience in management accounting especially for large companies. References Agrawal, N. K. (2010). Principles of management accounting. New Delhi: Asian Books. Groot, T., & Selto, F. (2013). Advanced management accounting. Harlow: Pearson Education Limited. Macintosh, N. B., & Quattrone, P. (2010). Management accounting and control systems: An organizational and sociological approach. John Wiley & Sons. Sharman, P. A., & Vikas, K. (2004). Lessons from German cost accounting. Strategic Finance, 86(6), 28-35. Sopariwala, P. (2009). The absorption vs direct costing debate. Journal of Cost Management, 6, 41-46. Read More