How Employing Strategically Accounting Management May Reduce the Impact of Threats for Business - Literature review Example

Outsourcing is an important requirement especially these times when competition and turbulence in the market is unpredictable. MiPie is an example of organization that has considered outsourcing as an alternative to improve on profitability since outsourcing reduces on expenses ensuring minimal resources are maximized. MiPie aimed outsourcing production on pies while maximizing on brand imaging as well as sales to ensure they increase their market position within the European Union. However, the decision of outsourcing was not supported by all departments, an aspect that is clearly indicated by production and marketing directors in refuting opinion of finance manager’s. Even though, the marketing and production directors’ views were different but also between them, there was clear principle difference. Some of the views presented were that even though their could be an increase of sales some costs were inherent and thus the entire process was unviable. The difference in opinion may be understood through evaluating the existing approach to outsourcing opinion. This means that evaluation of these methods is presented as follows: Existing operation £ (0000) Revenues at the beginning of the year 60 Add: sales 60 Less: total variable cost 38 Less: total fixed costs 10 72 Outsourcing Revenue from previous year 60 Add: sales 65 Less: outsourcing costs 35 Less: total fixed costs 14 76 With outsourcing, the company would have made more in terms of the revenue because of the increased sales and reduced fixed costs. The option of outsourcing will make the company machinery to lie idle and yet this is a capital investment that cost the company in terms of maintenance and depreciation. In addition, the future of the company employees would be put at risk because there would be no more jobs for them to do. The company will therefore incur more costs laying them off than retaining them in the company. Having considered these factors the company decided not to outsource because of the long term effects to the company. A marketing plan is an important issue in the marketing perspective that MiPie can introduce. A marketing plan usually contains market segmentation, 4Ps, and other factors that can guide an organization towards maximizing on the minimal resources that are allocated to the marketing department. Other important components of a marketing plan are budget, control, and evaluation that determine the entire capability of the marketing plan. The contents of a marketing plan provide a foundation in which an organization can rely on into ensuring that all activities of an organization are successful. It helps and provides a guide to all organization activities, operations, and departments into ensuring that the objectives and strategies of an organization are achieved. The outsourcing approach championed by MiPie will release some resources that will be channelled to marketing. For example, the revenues that will be collected from production costs can be used to market aggressively ensuring that the brand image is improved while more consumers can appreciate the presence of the product in the market. A strong brand is important because in the future, the cost of marketing will decrease while other market dynamics such as franchising can be introduced. All this will translate in increase of revenues for MiPie and hence increase market penetration in European Union. Investment appraisal is an important factor assessment tool for MiPie organization (Guilding, Cravens and Tayles, 2000). Some of the important factors that are associated with investment appraisal approach are to determine whether the organization can recover from production cost, to determine whether some savings have been made from the new strategy, and to determine whether there was revenue collection from the new investment. The investment appraisals that have been used by MiPie management include the rate of return, payback, internal return rate and the value of the net present. These investment appraisal approaches have their benefits and shortcomings, and this can be understood through analysing each of the investment appraisal approaches. Roslender and Hart (2002) defines Payback as a method or approach that is used to calculate the investment time of the projects, and the time that will be required for the initial costs and expenses can be paid back. This appraisal method can take different approach, and for example, MiPie management has used this method to appraise the wind turbines and the water lagoon. In the case of wind turbines, MiPie found out that the payback period is 71/2 months while for the water lagoon was 0.9 months. From this simple analysis, it is evident that the water lagoon project is favourable because it takes a shorter time for investment payback compared to wind turbines. Ewert and Wagenhofer (2005) says that another important approach is that of accounting return rate since the aim of numerous investments is to give profit and revenues to an organisation and the payback period should be favourable. Commonly initialised as ARR, the accounting return rate for MiPie showed that it was 6.6% for the water lagoon while for the wind turbines was 8.6% yielding £1.66 and £4.0 million respectively within the span of the project i.e. five years. According to the AAR approach, it is evident that the wind turbine contributes more profits for MiPie compared to water lagoons that contributes less than a half of what wind turbine generated. Another important method that can be used for project appraisal is the NPV (Guilding, Cravens and Tayles, 2000). The NPV method was used by MiPie to determine whether the investment is viable, risks associated with the project, and to determine whether the project ill payback eventually. Even though NPV approach is important, the approach embraced by MiPie did not present the actual position of finance for both projects because calculations were done only for the wind turbines leaving out the water turbines. Moreover, the calculations did not place into consideration the 10% discount. Thus, the following is the re-evaluation for both projects: NPV for wind turbines = (10.0) - 2.5×0.909+ 2.7×0.826+2.9×0.751+3.0×0.683+3.2×0.621 = (10.0) - 2.2725+2.2302+ 2.1779+2.049+1.9872 = (0.7168) NPV for wastewater lagoon = (5.0)-1.32×0.909+1.34×0.826+1.50×0.751+1.70×0.683+1.80×0.621 = (5.0) - 1.19988+1.10684+1.1265+1.1611+ 1.1178 =0.44898 From these re-evaluations, it is evident that water lagoon project has a positive NPV while the wind turbine has a negative NPV. This means that the organisation should implement the water lagoon project because it is positive compared to the other project. Lapsley and Pallot (2000) says that many authors have discussed the issue of management accounting in marketing indicating the importance of acquisition of strategies that are durable and provide an organization with competitive advantage through developmental process, and the relationship between different entities with the internal and external environment. Soin, Seal, and Cullen (2002) support this aspect when they say that continuous relationship with both internal and external environment leads an organization to embrace change in its orientation and structure, while Guilding, Cravens and Tayles, (2000) says frequent dynamics in the environment has resulted in many organizations embracing new measures. These new measures include market orientation geared towards customer satisfaction that has become the back borne for business management. The organizational structure that exists provides a reason in which management accounting becomes inherent in the way organizations operate. Management accounting is aimed at recording and then reporting internal information that is associated with financial analysis. The aim of financial accounting deals mostly with internal controls and decision making while management accounts work on front-end of financial workflow. This means that the management accounting brings together various departments into gathering and assessing financial information. The role of management accounting has transformed from its dormant role of collecting and reporting function into an important component in the decision making process. Numerous benefits and drawbacks are associated with management accounting resulting in a tricky solution. Guilding, Cravens and Tayles (2000) argue that management accounting can contribute to improvement of profitability because of monitoring of the operational processes. Some of the strategies that are embraced by management accountants are waste reduction, cost allocation, and efficiency reviews that translate in improvement of company’s revenues. Improper allocation of resources may result in interfering with recouping costs of labour materials and overhead. Even though profitability is an important factor for management accounting according to Bhimani (2006), the efficiency and effectiveness of management accounting may be inhibited by actions of other supportive recordings. All the management accounting is associated with cost accounting, financial accounting and other types of records and thus the strengths and weakness of the outcomes directly depends on the strengths and weaknesses of other records. Executive managers are required to make decisions, and Guilding, Cravens and Tayles (2000) says that the decisions determine the success of the organization. Through management accounting, the executive ace objective review in which they base their decisions. Moreover, cash flow calculations and sales forecasting can be calculated by management accounting and greatly aids in success of organizational projects (Khan and Jain, 2006). However, the stage in which management accounting is in may contribute into biased outcomes. Decisions made through this approach are based on intuition rather than scientific approach and hence the decisions that are made may be biased. Management accounting contributes towards efficiency in financial reporting because the accountants are intimately involved in collection and reporting of financial information. Deviations and variances in accounting policies can be found in advance and corrected before the financial statements are released to the external stakeholders. Creating effective and reliable financial recordings and reporting ensures that the organizations can have better financial credibility and hence creating a competitive edge resulting in improvement of market share. Management accounting provides a means in correcting the variances and deviations, and thus the entire approach may be misused by irresponsible management teams or those individuals who do not want the truth to be open. Thus, management accounting may provide a base in which inappropriate financial reporting is done. According to Ewert and Wagenhofer (2005) and supported by Lapsley and Pallot (2000) say that accounting provides a foundation in which organization can be determined to be successful, and also aids an organization to succeed in its endeavours. This is attributed to the fact that all information that is provided by the accountants or accounting provides a base in which the actions of managers and employees can be influenced, and hence directs the operations of an organization (Guilding, Cravens and Tayles, 2000). To some extent, accounting information can be referred to as the social constructs that determines the approach in which an organization can succeed. In the same view, accounting cannot operate in a vacuum but requires theories that aids in accounting process, and to provide a base in which loopholes can be avoided. Another important tool that can be used by an organization is budgeting especially when it comes to planning and control is concerned (Siti-Nabiha and Robert, 2005). Some of the qualities that a good budget should have included are been specific, realistic, measurable, time scaled and achievable. Budgets are very important since it enables managers to have a guideline into achieving organizational goals and objectives (Lapsley and Pallot, 2000). A good example and influence of a budget is the way MiPie Company utilizes it in determining organizational process, provides a means of analysing the marketing environment, predict changes or issues that may occur, and to device strategies that can counter the negative influences (Guilding, Cravens and Tayles, 2000). For example, in the case of MiPie Company, the accounting department came up with a budget since there were changes in market especially those of interest rate in some materials, and thus the budget places into consideration these changes (Soin, Seal, and Cullen, 2002). Generally, budgets are an important inclusion in accounting system since it provides an organization with an overview and means in which activities can be coordinated to ensure all activities are successful. Managers’ main role is to coordinate organization activities through creating supportive departmental and employees relationships (Marriott and Marriott, 2000). This means that managers with the help of accounting system enable managers to communicate their views to the entire organization. Moreover, budgeting and accounting defines the roles of the employees while each employee aims to achieve annual budget requirements (Lapsley and Pallot, 2000). Understanding and allocating roles ensures that all the employees are accountable and responsible in formulating and implementing their duties in a manner that is efficient and effective (Bromwich, 1990). In addition, accounting and budgeting control activities of the organization since the budget defines the limits of each section or department. Budgeting is also an important tool because the clearly defined goals provide means for managers to define their focused participation while providing them with the underlying force to base their targets (Guilding, Cravens and Tayles, 2000). This means that it gives the organization a base or performance evaluation, and control. Budgeting also contributes towards motivation of employees because the defined goals and frameworks ensure equitable distribution of resources and thus employees appreciate equal consideration (Soin, Seal, and Cullen, 2002). Other benefits associated with budgeting include inflation detection, cost effective strategies, improves on coordination and tire communication process (Saren, Maclaran, Goulding, and Elliott, 2007). Budgeting also identifies the appropriate time in which an organization can embrace outsourcing, while ensuring the organization sticks with the organization goals, mission, and vision (Weetman, 2006). Even though a budget is beneficial to an organization, threats are associated with it if the budget is drafted for long periods (Sisaye, 2006). For example, budgets inhibits introduction of new strategies or ideas, some of the ideas in the budget may be outdated, and thus the benefits of budgeting are unviable. Accounting management also brings into consideration decision-making since it is an important factor in guiding operations of an organization (Lapsley and Pallot, 2000). Financial analysis and reviews provides important pointers into the future of an organization especially when it comes to issues such as cash flow. This is because relevant costs and revenues are important in decision making especially when it comes to marketing mix, discontinuation, and outsourcing. Most of the organizational activities are based on appropriate accounting for their formulation and implementation into ensuring the organization is successful in their activities (Lapsley and Pallot, 2000). Ahrens and Chapman (2006) and supported by Steffan (2008) argues that accounting management is important in decision making since the outcome of financial and operation analysis provides a base in which product mixing usually in capacity constraints. DeMaris and Copeland (1984) states that balancing accounting management and decision-making ensures that an organization can maximize on those factors that causes restriction on the output of a firm. In addition, through accounting management, the organization can concentrate on those products or services that have greater revenue yields, and can contribute more to the way organizations operate (Guilding, Cravens and Tayles, 2000). Jazayeri and Hopper (1999) say that management accounting is important in those scenarios where outsourcing processes are required. Outsourcing is a new strategy that many organizations maximize on to ensure that financial expenses are minimized while increasing revenue collection (Soin, Seal, and Cullen, 2002). However, it is important to state categorically that all outsourcing approaches are beneficial to an organization. An example is MiPie Company that tried to embrace outsourcing but their financial analysis showed that it is not a strategic means (Guilding, Cravens and Tayles, 2000). This factor can be understood through analysis of MiPie marketing director who showed that marketing budget would increase but other factors at the end could not be beneficial. Some of the factors that were placed into consideration by MiPie organization includes expenses incurred, loose of jobs by employees, and employment of employees who are proficient in the new project (Lapsley and Pallot, 2000). Generally, in the fields of management and accountability within an organization, organizational theories are important. This is attributed to the fact that they determine the behaviours and expectations of a certain organization. Moreover, organizational theories lay down the roles and means of setting strategies that are beneficial to an organization. Numerous theories exists but no single theory can guide an organization to success but numerous theories should be brought together to ensure that the organization is successful. It is evident that much organization faces numerous challenges especially when they embrace new technologies but employing strategically accounting management may reduce the impact of these threats. References Ahrens, T., and Chapman, C. 2006. Doing qualitative field research in management accounting: Positioning data to contribute to theory. Accounting, Organizations and Society, vol. 31, no. 8, pp. 819-841 Ahrens, T., and Chapman, C. 2007. Management accounting as practice. Accounting, Organizations, and Society, vol. 32, no. 1-, pp. 1-27 Bhimani, A. 2006. 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