Management Accounting Practices of EasyJet Plc - Case Study Example

Management Accounting Practices of EasyJet Plc Table of Contents Introduction 3 Overview of EasyJet Plc 3 Management Accounting Information of EasyJet Plc 3 Budgeting and Variance Analysis within EasyJet 5 Activity Based Information within EasyJet 5 Recommendation 6 Conclusion 6 Reference List 6 Appendices 8 Appendix 1 8 Introduction EasyJet Plc is the top airline of Europe operating on more than 600 routes athwart thirty countries with their fleet of more than 200 Airbus aircraft. The company employ 8000 people comprising of 4500 cabin crew and 2000 pilots. EasyJet Plc acquires a strong position in the main markets of London (EasyJet, 2015). The company by no means compromise on security and safety. They challenge themselves to find novel means to make the travel affordable and easy. The aim of EasyJet Plc is to provide market leading incomes to their shareholders through continuing to be a top European network at main airports with an obvious emphasis on making the travel inexpensive for their customers (Annual Report, 2013). The combination of various destinations and convenient airports signifies that the company have wide appeal across various customer types and geographies. More than half of their sales derive from outside the United Kingdom. The main purpose of this report is to show the management accounting practices of EasyJet Plc. It will focus on how the management accounting information could help the managers of EasyJet Plc. Overview of EasyJet Plc EasyJet Plc use their cost advantage in the strong markets in order to deliver operational efficiency and point-to-point low cost fare, thus creating the difference through providing friendly service for their customers. The ambition of the company is to be the preferred short-heave airline of Europe, delivering market foremost returns. Their basis is to make the travel affordable and easy for the customers (Annual Report, 2013). In the year 2014, the company celebrated their historic deal with the Airbus and opens their Naples base as a component of their Italian growth plan. In the same year, they open the Hamburg Base and also applied current cutting edge expertise for the foremost time in the aviation (EasyJet, 2015). Management Accounting Information of EasyJet Plc The management accounting systems are primarily designed to assess the effectiveness of internal practices of the organization. It is concerned with offering information to the managers i.e. who control and direct the operations of the company (Geense, 2005). The information related to management accounting includes costs’ details of the services and products of the company, budgets, variance analysis, and other information which help managers in their control and planning activities. These all are also regarded as the tools of management accounting (Garg et al, 2003). The main rationale in the management accounting is that the decision making depends on the incremental analysis. This indicates that the key to business dilemmas include the computation of the variation in revenue and the variation in costs. This will show whether the variance is favourable or unfavourable (Jiambalvo, 2007). The budgets are applied in the process of planning. The main principle of managerial accounting is to present information in order to facilitate performance measurement and cost control practices in the organization (Schaffer and Heidmann, 2008). The managers of EasyJet can use the accounting data to decide whether the company is at a profit or loss, how much the debtors owe, as well as how much the company owes others. The information which the managers of EasyJet are likely to require is the revenue and costs figures for the year 2013 and 2014. This figure will be needed to do the budget variances. A variance took place when there comes a dissimilarity between actual and the budget figures. Variation could be whichever favourable/positive or unfavourable/adverse. The managers of EasyJet PLc can compare the budgeted figures of revenue and costs with the actual figures and then make their decision on the basis of the variance arrived. As the EasyJet’s Annual Report for the year 2014 does not include any budgeted figure therefore variance will be calculated based on the revenue and costs figures of 2013 and 2014 (EasyJet, 2014). The managers would require the values of investment and income for the purpose of planning, decision making, and control. The employees of the company would need information about the ability of the company to meet their wage demands as well as provide employment safety. The managers of EasyJet could apply the net present value as well as internal rate of return method of budgeting by taking into account the cash flows of five years, cash outflow and the discount rate. They can compare these figures with the competitors’ figures in order to evaluate their performance in comparison to their competitors. In order to remain cost-effective, the internal rate of return as well as net present value of EasyJet should be more than their competitors. If EasyJet decides upon selling some of its flights, then they need to decide to whom the product i.e. fight to be sold. By using the techniques of activity based costing, the business can settle on the activities needed to produce a product line. Determining which customers are profitable permits the company to focus their advertising towards those customers. The managers of EasyJet may use activity based costing method in order to allocate the overhead cost. The activities which have an impact on the overhead costs are purchasing materials, setting up machines, running machines, gathering products, and inspecting the finished products. EasyJet comprises of low overhead costs and make use of their aircraft efficiently as well as involves punctual performance (Annual Report, 2013). Budgeting and Variance Analysis within EasyJet The monetary plans organized by the managerial accountants are called budgets. These plan aid employees to understand the goals of the company and how much funds are required to attain them. The general budgeting techniques are method of net present value and internal rate of return (Albrecht et al, 2007). Favourable variance means that arrived figure is better than what is actually expected and the unfavourable variance means that arrived figure is worse than forecasted (Mishra, 2009). Other reasons for favourable variance are that the expenses were lower and the revenues were more than expected. Adverse variance takes place when expenses were higher and revenues were lower than actually expected (Reddy, 2004). If the net present value and internal rate of return of EasyJet Plc is more than its competitors then it means the company is giving good performance in the airline industry and one may consider towards doing investment in this company. Variance analysis information could be used within the company to keep control on the expenses of projects by monitoring budgeted against actual costs. Efficient variance analysis could help EasyJet spot trends, opportunities, issues, and threats towards long-term or short-term success. Variance between the actual and planned costs would help the managers in deciding the goals, strategies, and objectives of the company. As budgeted figures are not provided in the annual report of 2014 therefore, as an alternative they can also calculate the variance by comparing the revenue and costs of 2013 and 2014. Somehow, it will also give an idea on whether the overall profit of the company is increasing or decreasing (See Appendix 1). By comparing the total revenue and costs of 2013 and 2014 it can be said that the overall profit is increasing by £103. It shows that the overall variance is favourable and it will help the managers to set their goals and objectives accordingly. Activity Based Information within EasyJet Under the activity based costing method, costs are based on the activities executed in the course of production and services (Rajasekaran and Lalitha, 2010). By using the activity based information, the managers of EasyJet could recognize and eliminate those services and products that are considered as unprofitable and could also lower the costs of those services and products that are overpriced. They could also recognize and eliminate the service or production processes which are useless. The activity based information can also be used by the managers as a means for understanding customer and product cost as well as profitability based on performing and production processes. It is used by the managers to support the strategic decision like outsourcing, pricing, identification as well as measurement of method improvement initiatives (Annual Report, 2013). Recommendation Looking at the worldwide scenario, it is fairly evident that modifications are happening in the entire airline industry. Increasing number of participants makes this business very aggressive and the participants are to struggle to arrive at their market position. The main challenge is the rising cost of fuel. The report of 2014 indicates that the cost of the fuel have risen as compared to 2013. So, it is recommended to EasyJet Plc to cut their fuel cost. To be profitable it is required to work on cutting cost. This can be attained if reduction could be made in the accompaniments that the company grants to their customers. As aircraft is the main contributor of the carbon dioxide gases, so EasyJet can also adopt the green initiative. The fuel efficient engines will facilitate greater savings for the company. Conclusion The EasyJet is the only short haul airline of Europe which has the benefit of its considerable position in all the main airports and has its presence in most of the main routes of European short heave aviation. The managers of EasyJet can use the accounting information to determine the profitability position of the company. Variance analysis information will help the managers to keep control on the expenses of projects by monitoring budgets against actual costs. The managers of the company can make decision regarding their outsourcing and pricing policies by applying the budgeting, variance analysis, and the activity based information. Further, the green initiative will help the company to enhance their brand image. Reference List Albrecht, W., Stice, J., Stice, E. and Swain, M., 2007. Accounting: Concepts and Applications. United States of America: Cengage Learning. Annual Report, 2013. EasyJet Plc: Annual Report and Accounts 2013. [pdf] Available at: < http://corporate.easyjet.com/~/media/Files/E/Easyjet-Plc-V2/pdf/investors/result-center-investor/annual-report-2013.pdf> [Accessed 28 Jan 2013]. EasyJet., 2014. Results foe the year ended 30 September 2014. [pdf] Available at: < http://corporate.easyjet.com/~/media/Files/E/Easyjet-Plc-V2/pdf/investors/results-centre/2014/2014-full-year-results-18-nov.pdf> [Accessed 28 Jan 2013]. EasyJet, 2015. EasyJet Plc. [online] Available at: < http://corporate.easyjet.com/about-easyjet.aspx?sc_lang=en> [Accessed 28 Jan 2013]. Garg, A., Ghose, D., Hudick, J. and Nowacki, C., 2003. Cost Management: Roles and Practices in Management Accounting Theory. [pdf] Available at: < http://www.imanet.org/PDFs/Public/SF/2003_07/0703garg.pdf> [Accessed 28 Jan 2013]. Geense, I.M., 2005. Managerial Accounting. [online] Available at: < http://www.managerialaccounting.org/> [Accessed 28 Jan 2013]. Jiambalvo, J., 2007. Managerial accounting. New Delhi: John Wiley & Sons. Mishra, S., 2009. Engineering economics and costing. New Delhi: PHI Learning Pvt. Ltd. Rajasekaran, V. and Lalitha, R., 2010. Cost Accounting. New Delhi: Pearson Education Publication. Reddy, R.J., 2004. Management Accounting. New Delhi: APH Publishing Corporation. Schaffer, U. and Heidmann, M., 2008. The Role of Management Accounting Systems in Strategic Sensemaking. Heidelberg: Springer Science & Business Media. Appendices Appendix 1 Read More