How Can Management Accounting Techniques Assisst the Management of a Real Life Company - Essay Example

?How can management accounting techniques assist the management of a real life company Table of Contents Introduction 3 TopShop and its business model 4 Management accounting technique 6 Strengthens and weaknesses of the analysis 8 Reference 9 Introduction In the contemporary business environment, companies have realised importance of management accounting to improve the quality of their decision making process. As the companies have to face the increasing completion in the market; hence they cannot rely solely on traditional accounting. Traditional accounting can only provide information about day to day activities, the total revenue as well as expenditure incurred and profit earned by the company. However, this information fails to give in-depth information about cost incurred at different point of operation. To be successful, a company has to improve its profitability. This can be done by increasing the revenue and minimising the operational cost. Sales can be increased with the assistance of the marketing department but to minimise the cost, all the departments should work hand in hand. Cost can be controls if management have adequate information about the point where it is incurred and this information can be acquired through managerial accountancy. The main motto of the given assignment is to discuss the role of management accounting for providing required information to the management for effective decision making. This assignment will discuss business model of “TopShop”. It is a famous retail company in United Kingdom that deals mainly with women clothing and fashion accessories. After discussing the prevailing business model, different information necessary for decision making will be identified. The role of management accounting tools for generating this information will also be discussed in details. Finally, the strengths and weaknesses of the analysis will be used to explain how the derived information can assist the organisation for gaining better control over cost and profitability. The limitation of the analysis will also be pointed out. TopShop and its business model TopShop is a chain of retail clothing stores that operates in more than 20 countries. It is a part of Arcadia Group that operates several other retail brands such as Burton, Miss Selfridge, Topman, Dorothy Perkins and Wallis. Arcadia Group Limited is UK's largest privately owned clothing retailer that operates approximately 2,500 outlets. These outlets offer street’s best known fashion brands to different market segments (Arcadia Group Limited, n.d.). TopShop is mainly engaged in selling of women clothing and accessories. The company is also focusing on on-line selling of the products. This retail chain offers clothes mainly for young females. Other fashion products like shoes, accessories, make-up and gift items are also available in these outlets. TopShop was launched in 1964 to cater the growing demand for fashionable clothes among females in UK. From then onwards it turned out as a style symbol that caters the imagination of fashion icon people in UK’s retail industry. Within UK the retail chain has over 300 outlets and around 100 outlets are operating in international territories. Considering its success in the target market it is quite difficult to accept that this brand once had its beginning in the basement of Peter Robinson department store. It took almost a decade for the brand to emerge out as a stand alone retailer. Back in 1994, TopShop got an opportunity to acquire its own identity. At that time 90,000 sq ft area was acquired at London Oxford Circus to open a unique outlet solely for TopShop. This outlet gave an identity to the retail brand; till date this outlet is world’s largest fashion store that attracts more than 200,000 shoppers per week. The brand image of the company is enough to attract international designers. The retail has a history of collaboration with some well known international designers like Celia Birtwell and Kate Moss that gave an extra edge to the brand name of TopShop. With time, the retail managed to develop its own talent base; in 2005, TopShop disclosed its in-house designed clothes in London Fashion Week. The “unique fun and irreverent approach” towards style made it a popular one among people who prefer to remain ahead in the fashion world. From 2000 onwards TopShop’s collection is available over 30 countries in international market. Through online retailing, the company’s customer base has expended drastically (TopShop, n.d.). After understanding the business model of TopShop, a retail chain, it can be said that its success depends on effective management of the supply chain. It offers different products (clothes, shoes, accessories and gift items) for students, professionals and fashion lovers. To avail required goods at different retail outlet, management has to maintain efficient supply chain. TopShop, being a part of Arcadia Group, use the companies supply chain structure. However, the cost incurred in maintaining the supply chain is allocated to TopShop. Therefore, profitability of the retail chain depends on the operational cost associated with the supply chain. Smooth functioning of the supply chain will not only minimise the cost of operation but will also guaranty growth in customer satisfaction and ultimately high revenue for the company. Apart from offering designer clothes and accessories, the retail also operates its own in-house production unit were goods are sold under its own brand name. These expenses are debited in the books of count of TopShop. There are other operational points like customer care department, marketing department, R&D department, finance department, purchase department, IT department were cost is being incurred. Therefore, the management requires in-depth information about these departments to measure their performance and value addition against the cost incurred. Management accounting technique While deciding the role of management accounting in the retail sector, it is important to identify its core operational activities. A retail outlet sells large amount of finishes products that require regular updating of data. The sale to stock ratio is low because large portion of working capital remain engaged in inventory. As the business cycle is short in length, hence cash-flow balance is quite critical. The suppliers are always in hurry for their payments whereas the customers prefer to make delay. Therefore, any disturbance in cash in-flow as well as cash out-flow can result in short term solvency which adversely affect market image of the brand. A situation can be that there is a demand for some specific product which is not available in the outlet but it is present in the warehouse. In such situation, the total cost incurred comprises of loss of sales as well as cost associated with inventory management (LumenSoft Technologies, 2007 p.2). If an organisation relies solely on traditional accounting, it can never get required information to measure efficiency of operational activities. Traditional accounting just provide historical information about revenue and expenditure to calculate profit earned in the financial year but it is inadequate to take any proactive action to improve portability of the business. A retail outlet can confirm poor management if it encounter over crowded cash counter during festive session, the invoice process take time and customers has to wait long and inaccurate data in the invoice such as mistake in weight, item or amount. These are the signal of inadequate availability of information that can be rectified with help of management accounting system. With help of management cost accounting tools, company can generate ample reports that provide in-depth information about performance of different departments. Among these tools, activity based management (ABM) is the one that has gained high popularity. Activity based management can be segregated in two distinct section; the first one is activity based costing (ABC) where cost incurred at different point in the operational process is identified and then allocated to specific activity centre. The second section deals with strategic decision were management take decision about re-engineering of the activity (if required). There are other techniques of management accounting such as cost volume profit analysis where the management calculate contribution ration that reflects profitability of the business. Breakeven point is also calculated to determine what should be the sales in terms of unit and amount to retain the business operating (with zero profit). The risk associated with the business can be derived after considering the safety margin. Apart from the above mentioned techniques, activity based costing can be effectively used by TopShop to have a better control over the cost and profit earned. To apply ABC, management has to first set the objective to be achieved. Then the whole operation should be segregated in core processes and assisting processes. Later on, different activities associated with each of the core process should be identifies. This task becomes quite easy if the company assign a team that possess sound knowledge of the business operation. The task of the team members is to accumulate different cost incurred in the process of production. These costs are accumulated to develop a common pool. Now, cost has to be assigned to the respective cost drivers. Selection of these cost drivers can be on the basis of cause-effect relation or information derived from the root level employees who conduct the activity. Finally, the cost should be assigned to the respective product, process, department or the customer (Heisinger, 2009, p.117). The management of TopShop should follow the above mentioned process to get in-depth information regarding cost incurred at different points of its operation. After considering this information, management can decide where any of the process requires re-engineering. If the cost incurred at an activity is higher than the economic value added by it, management can either replace it or abolish it completely. This will assist in reducing the cost and enhancing the efficiency of the retail chain. Strengthens and weaknesses of the analysis This assignment provides theoretical explanation of some of the commonly used management accounting tools (ABC, ABM and CPV). While discussing the techniques it has also been explained that how they overcome the limitation of traditional accounting system. The process of developing a plan for implementing and controlling ABC in TopShop provides in-depth explanation that how a retail outlet can use this technique to re-engineer its operational activity and reduce the operational cost. The information given in the assignment are applicable to other retail outlets also, hence it can assist other retail chains to enhance their efficiency and profitability. This assignment do suffered with certain limitations that need to be discussed. Being a privately held company, Arcadia Group Limited does not reveal much information regarding its operations and financial performance. As the annual report of the company is not published on its website, it was difficult to determine its operational efficiency in terms of profitability, inventory turnover period, payable and receivable turnover and so on. Availability of such information could have helped in providing more realistic information that how TopShop can get benefited by using management accounting practices. Reference Arcadia Group Limited. No date. About Us. [Online]. Available at: http://www.arcadiagroup.co.uk/about/index.html [Accessed on January 17, 2011]. Heisinger, K. 2009. Essentials of Managerial Accounting. Cengage Learning. LumenSoft Technologies. 2007. Complete solution for Retail Chain Operations. A White Paper on Retail Chain Issues. [Online]. Available at: http://www.naxtor.com.au/RCMS_Whitepaper.pdf [Accessed on January 17, 2011]. TopShop. No date. History. About Us. [Online]. Available at: http://www.topshop.com/webapp/wcs/stores/servlet/StaticPageDisplay?storeId=12556&catalogId=33057&identifier=ts2-about-us&intcmpid=W_FOOTER_WK39_HP_UK_ABOUT_US [Accessed on January 17, 2011]. Read More