Accounting Management at Shell Company - Case Study Example

?Question A) The organization that I have chosen is Shell which is a group of petrochemical and energy companies. The Shell group was formed when Royal Dutch Petroleum Company in the Netherlands merged with the Shell Transport and Trading Company in the United Kingdom, and is now the 5th largest company in the world. The aim of Shell is to meet the growing needs of energy with environment friendly and economically sustainable means (Shell). The strategy of the company is to innovate technologically and provide environment friendly energy to generate profitable growth and increase shareholders’ returns. B) Rhonda Abrams has described the company objectives as a statement which reflects the main goal of the organization and its principles (Rhonda Abrams, p. 61). It is necessary that the company forms a concise objective statement so that it is well understood and communicated throughout the organization. Keeping this definition by Rhonda into consideration, I think that the company aims and objectives of Shell are well defined due to the fact that it clearly states the principles of the organization which is environment friendly development of resources. Also it is a clear and concise statement that can be easily retained by its employees. When it comes to strategy, Jeremy Kourdi describes a company strategy as a plan which guides an organization to achieve greater success and higher profits (Kourdi, p. 3). It keeps into consideration the long term goals of the company and keeping this into consideration, I think Shell has formulated a good company strategy which clearly outlines its aim to innovate and meet the rising needs of energy also taking care of the shareholders’ returns on their investment. This statement mentions its long term goals as well as their concern for the investors, so I think it is a good strategy statement. C) Management accounting information is the information which is necessary for the higher management to take into consideration when taking important decisions regarding the organization. It allows the management to make well informed decisions which can drastically help the company to achieve improved results. Management accounting information is future-oriented which means that unlike financial accounting, it does not just report the past performance of the company but also highlights the sections which can be improved to achieve greater efficiency and profitability (Shanker). There are basically three types of management accounting information which can be significant for business decision making. This information can be classified into three statements or reports which include the cost allocation reports, budget reports and forecasting statements. The first type of management accounting information that can be used by Shell management is the cost allocation reports. This report consists of the information regarding the money invested, or supposed to be invested, in particular projects. Organizations today have limited resources and they need to evaluate very carefully the projects they invest in. In the case of Shell, most of its projects involve huge investments and they cannot afford to make a mistake in choosing the right project. Therefore, Shell management can use the cost allocation reports to evaluate the projects which give highest possible return and also are in line with its company goals and strategy. The second type of management accounting report is budget report which usually has to be formulated and presented at the start of the financial year. A budget report will consist of the money the business should invest in each business operation and function. Managers usually refer to master, standard and flexible budgets to take decisions. Master budgets include all the allotted resources for expenditures of the whole company as well as for separate departments. On the other hand, standard and flexible budget can help the management to compare the actual and budgeted expenses of the company which can again provide very useful information to the Shell management. Last but not the least important is the forecasted statement. This statement involves the predicted sales and production and this provides valuable information to the managers. The top management at Shell can use the forecast statements to focus more on the projects which are expected to give higher revenues which will increase the profitability of the company. Forecasts can also help in the allocation of resources by determining the future consumer demand because with this available information, the managers at Shell can either increase or decrease the production of particular projects (Vitez). Therefore, this management accounting information can help the managers throughout the world, and Shell in this case, to make crucial decisions based on this information. D) The annual report of the considered organization which is Shell in this case, consists of the information from the financial year ending 31st December 2011 (Shell, 2012). The information is this annual report of Shell is not suitable for management decisions due to several reasons. Firstly, the information in this annual report is financial information and not management accounting information. The major difference between these two types of information is that financial information is past oriented while management information is future oriented. Past information is rarely useful for decision making because the business world is so dynamic today that the management cannot use the historical information to make important decisions. It has to take into consideration the future predictions of the market and industry and only then it will be able to make effective decisions. The second most important factor is that the financial information can only be referred or used by the shareholders, creditors and regulators for auditing purposes. It cannot be used for the management because financial information will seldom influence the decisions and strategy of the top management. The top management will usually refer to the management accounting information to decide among its various available options and come to a decision. The third major factor of why the information in this annual report of Shell is inappropriate for management decisions because actually this information is never meant to be for the decision making of the top management. The management accounting information is always kept secret within the organization and it is never published. This information is not published due to the fact that the think tanks of the competitor organizations which can be Chevron in this case can use this information to predict the future decisions of Shell and then can take decisions to counter those of Shell. As a result, this information is kept confidential. Therefore the simple fact that this annual report consists of financial information and not management accounting information makes it inappropriate for management decisions. Question 2 A) Peter B.B. Turney (Turney, 1996) noted that Activity-based costing (ABC) came to surface in the 1980s as more and more shortcomings were discovered in the absorption cost accounting methods. The first organization to adopt Activity-based costing (ABC) method was a John Deere Company in United States. Since then, companies like Procter & Gamble and Caterpillar are making use of this accounting method, recognizing the benefits it brings in terms of cost savings, effectiveness, more effective strategic decisions and other factors. On the other hand, Gunasekaran and Sarhadi (Gunasekaran, 1998) were of the opinion that the studies conducted by Cooper and Kaplan had inspired adoption and endorsement of Activity-based costing, particularly in manufacturing companies. This was fundamental as organizations needed scientific data to be convinced to change from their traditional cost accounting methods. Gunasekaran and Sarhadi further added on that since Kaplan’s study in 1987 which inspired use of Activity-based Costing in manufacturing sector, it has since then evolved to have been adopted by various non-manufacturing companies too, such as marketing. With time, it was realized that the benefits Activity-Based Costing was bringing to manufacturing sector, could be extended to other non-manufacturing sectors too. Subsequently, other organizations that assessed greater benefits in its adoption also pursued activity-based costing. Activity-Based Costing has been generally used in companies for various reasons, which may include enhancing productivity, create budget, and build customer relations, strategic decision-making, and resolving external issues. Kingcott (Kingcott, 1991) pointed out the advantages of Activity-based Costing in their study. Accounting-based system was also being used as the new cost system targeted at variables such as reducing cost and performance evaluation. Kingcott found in his study that the short-comings of the new cost system could be a costly exercise for companies in terms of the system’s implementation and its maintenance, thus acting as a deterrent for many. Kuchta and Troska (Troska, 2007) suggested that Activity-Based Costing is a suitable tool gauging and maintaining customers’ profitability. Cooper and Kaplan (1992) also confirmed the use of ABC due to the generally-held viewpoint regarding ABC being an effective tool to implement better strategic and operational level decision. This is because ABC is said to provide better information to help this happen. Bogdanoiu (Bogdanoiu, 2009) found that Activity-Based Costing links the relationship of end-products and resources used in the process, which enables the identification of the product costs with the activities by the use of the suitable cost drivers. B) The ‘ABC Paradox’ has existed due to a variety of reasons, as highlighted by the on-going studies on the subject. Cobb, Innes and Mitchell (Cobb, 1992) conducted a survey to determine as to what are the reasons because of which companies were not adopting ABC. They found out mainly that their product offering was not such that would gain a lot because of ABC’s adoption. Other than this there were obstacles in linking cost drivers to products, coupled with the fact that there weren’t enough means at disposal for gathering the required qualitative data. Also, in some cases, it was believed that the costs or inputs to implement ABC far exceeded the benefits they think they would gain. The research conducted by Argyris and Kaplan (Argyris, 1994) indicated that at times it is because of certain individuals who are opposed to implementing ABC, that the organizations fail to implement ABC as a consequence. They have discussed in their research that Activity-Based Costing possesses the ability to expose such information which can be harmful or detrimental in any way to higher-level executives. Some are just concerned about the effect it would have on the profitability on their individual departments. In his subsequent works on the same subject, Kaplan (Kaplan, 2004 & 2007) acknowledges the “ABC-paradox? as he believes there is a misbalance between benefits of Activity-Based Costing and its dissemination in organizations. His findings indicated that many companies found it cumbersome to gather and process data and to bear its costs and this led them to leave Activity-Based Costing completely or have such inexact data estimates of the processes and the costs that the system was rendered ineffective and useless. Cohen, Venieris, Kaimenaki (Sandra Cohen, 2005) researching on the adoption rate of ABC in various Greek organizations of different natures and reasons leading to change in cost accounting system, categorized companies into groups depending on their approach towards ABC. They identified that inclination to adopt ABC was co-related to the extent to which their current cost-accounting system was meeting organization’s needs. Consequently they identified ‘ABC deniers‘, as those who do not feel the need to switch, since they are too content with their current cost-accounting system. In their study, they also came across such organizations that were yet unaware of ABC and its benefits and thus could not possibly have implemented it. Gosselin (Gosselin, 1997) links determinants to levels of ABC implemented in the organization while discussing the ABC-Paradox. His research points out that the spread of ABC adoption is directly related to structure, differentiation and other variables in an organization. According to Gosselin, mechanistic business and those with considerable levels of differentiation are more inclined to replace traditional cost-accounting with Activity-Based Costing. Those with high Research & Development fall into the category of “Prospectors”. These are highly active in making the most of opportunities. Organizations which are more differentiated usually have higher number of hierarchies in their structure. Mechanistic organizations are robust and proactive in making most out of the latest practices in the industry. Works Cited Argyris, C. R. (1994). Implementing New Knowledge: The Case of Activity-Based Costing. Bogdanoiu. (2009). Activity Based Costing from the perspective of competitive advantage. Journal of Applied Economic Sciences. Cobb, I. I. (1992). In I. I. Cobb, Activity-Based Costing--Problems in Practice. Gosselin, M. (1997). The effect of strategy and organizational structure on the adoption and implementation of activity-based costing. Accounting, Organizations and Society, 105-122. Gunasekaran, A. S. (1998). Implementation of Activity Based Costing in Manufacturing. International Journal of Production Economics, 231-242. Kaplan, R. S. (2004 & 2007). Time Driven Activity Based Costing. Harvard Business Review. Kingcott. (1991). Opportunity-based accounting: better than ABC. Management Accounting. Kourdi, J. (n.d.). What is Business Strategy? In J. Kourdi, Business Strategy: A Guide to Taking Your Business Forward (p. 3). Rhonda Abrams, E. K. (n.d.). Company Description. In E. K. Rhonda Abrams, The Successful Business Plan: Secrets & Strategies (p. 61). Sandra Cohen, G. V. (2005). ABC: Adopters, Supporters, Deniers and Unawares. Managerial Auditing Journal, 981-1000. Shanker, S. (n.d.). How Can Managers Use Accounting Information? Retrieved from Chron.com: http://smallbusiness.chron.com/can-managers-use-accounting-information-3950.html Shell. (2012). Annual Report 2011. Retrieved from Shell: http://reports.shell.com/annual-report/2011/servicepages/downloads/files/entire_shell_20f_11.pdf Shell. (n.d.). Who We Are. Retrieved from http://www.shell.com/home/content/aboutshell/who_we_are/ Troska, K. D. (2007). Activity Based Costing and Customer Profitability. Cost Management. Turney, P. B. (1996). Activity Based Costing: The Performance Breakthrough. Kogan Page. Vitez, O. (n.d.). Types of Management Accounting Information. Retrieved from eHow: http://www.ehow.com/list_6546067_types-management-accounting-information.html Read More