Importance of Management via Accounting - Essay Example

?Management accounting Introduction Accounting has become the most influential form of quantification by the late twentieth century. It creates objective financial flows to which certain Western societies have attached high significance, as it helps them in coordinating and administering people and processes. However, there are certain hidden dimensions of accounting like, evaluation, reporting and monitoring, that takes place within the organization. Now management accounting and management has become almost synonymous to each other. Alfred Chandler termed managerial capitalism as the organizing the process of production and distribution on the basis of multiunit enterprises administered by salaried managers. This paper focuses on management via accounting and applies the same for Ryanair. Importance of Management via accounting The main theme of The Visible Hand is that modern business enterprises utilise the market mechanism for allocating resources and coordinating the activities of the economy. According to Chandler, the traditional American business enterprises were single-unit operations and small in size, which used to produce single product within a small geographical area. The activities of the traditional enterprises were monitored and coordinated by the price mechanism and the market. Eventually, the modern business firm evolved which were larger in size and conducted multi-unit operations, which monitored the production of different products from different locations. The activities of those enterprises were not coordinated and monitored by market mechanism, but by the salaried employees. In simple words, the modern enterprises had suspended the market because the administrative coordination provided higher profit, better productivity and lower cost, compared to the coordination by market mechanism. He emphasised on the fact that management via accounting has created advantages that gained precedence over all other previous forms. The main advantages that it draws are: Lowering internal transaction costs by ‘routinizing the transactions between units’: The organizations with high value supply chain ends up increasing the transaction cost. This requires paying immediate attention by framing policies for reducing the cost. Properly organizing the information or goods between the units involved in the production of goods and services will lead to decrease in the transaction cost (Spulber, 2009; Swinnen, 2007; Pollitte, 2008). Reducing costs for information on markets and supply sources by ‘linking the administration of producing units with buying and distributing units’: Market failures may result from asymmetric and inadequate information. The appropriate and full information is not always perfect since goods information is also expensive. In a market that deals with good and services, inadequate information can lead to various social costs like, market power, low innovation or inefficient allocation of resources resulting from customer deception. Thus, the cost of information available to the market and supply sources linking between the various units like, administration, production and distribution, should be reduced (Kouvelis et al., 2011; Sunstein, 2002). Faster and cheaper flow of goods or services and of information from one unit to another: Goods and services are seen to travel through manufacturers, warehouses, retailers, wholesalers, distributors and customers. The organization should link the sellers and the buyers together via an ongoing communication that can enable the business to effect the decisions taken by each of the business units. Therefore, the organization should emphasize on the fast and cheaper flow of goods, services and information through both down and up the supply chain. By making this flow cheaper and faster, the organization will be able to save lots of cost incurred that can be utilized in other forms (Finch, 2008). Management via accounting provides the organization with lots of value added benefits. They provide information for decision making and planning, assist in controlling and directing the operational activities and finally, help in measuring the performance of different activities in the organization (Dlamini, 2011; Kulkarni and Mahajan, 2008). Modern enterprises are those enterprises that set up or purchase business units that have the capability to operate as an independent enterprise. In simple words, internalizing the activities that could be carried on as several business units and transactions can be carried between them. The transaction cost can be lowered by routinizing the transaction between the units. This plays the most significant role through which other benefits can be derived. This signifies that the administrative unit of producing should be linked with the buying and distributing, which may lead to reduction in the cost of sources of supply and information in market. Moreover, by internalizing the different units, the flow of goods from one unit to another can be coordinated administratively. The productivity increases and the effective scheduling of flows, reduces the cost by increasing. As the effectiveness of scheduling increases, the intensity of the personnel and facilities employed in the process of distribution and production also increases. In addition to this, the administrative coordination leads to rapid payment for the services offered, thereby keeping the cash flow certain. The resultant savings from such coordination is more significant than the results derived from lower transaction and information cost. Management via accounting in Ryanair Ryanair is the ultra-low cost airline which operates in Europe with over 1600 flights daily from 57 bases connecting 180 destinations and spreads over 29 countries. Currently, it has around 410 aircrafts which are exclusively Boeing 737 aircrafts. The company has reported total operating revenue to be € 4,884 million and a profit of € 569.3 million, after deducting tax in the year 2013. The strategic objective of Ryanair is to increase their market share in the air travel market of Europe by 20 percent (Centre for Aviation, 2013). The company manages their operation as a single business unit. This is very similar to the unitary-form of enterprise as suggested by Chandler. Ryanair conducts their business operations as “a single fleet of aircraft that is deployed through a single route scheduling system’ (Ryanair, 2013, p. 185). The uniformity and standardization of the fleet of aircraft and their procedures in every aspect of the flying experience, from booking till the completion of the journey, is designed in a way that ensures that the low cost flight is delivered in an effective, efficient and economic way. However, the low cost strategy is based on the fact that the fights are full up to their whole capacity, since full flights delivers optimum profit. As Ryanair’s main strategy is based on providing ultra low cost facilities to their customers along with the add-ons, the management had mainly focused on reducing the operating cost as far as possible without compromising on the safety of the passengers. Some of the strategies adopted by Ryanair to reduce their cost are the use of secondary airports, standardization of fleet, point-to-point services, maximum utilization of aircraft along with cheaper product design, no frequent flyer program and also, to increase staff-passenger ratio (Lawton, 2000). The compensation of the employees is based on the productivity-based pay incentives. Revenues have also increased because of offering reserved seats or fast-track boarding for some additional charges and even, charging for the luggage that are not carried to the cabin. Through these measures, the organization has saved ?80million fuel costs per year (Calder, 2013). Volatility in the price of the fuel cost along with the continuous upwards trend has created a major concern among the airlines. Ryanair, in this context, has adopted several measures that lead to more economic and efficient utilization of fuel. The airline has stressed on the fact that fuel cost is one of the major operating cost for them. The passengers are also given incentives to carry low weight and small bags for reducing the weights of the plane, thereby leading to the reduction of the fuel cost. The organization aims to reduce the fuel cost on each and every flight. In this regards, the organization is utilizing its flight crews who, focuses on the departing time, maximizes the possibility on on-time arrival which is an indicator of customer satisfaction and on-time departure of the flights that helps the pilots in reducing the flight-speed. All these measures help in reducing the fuel consumption. Before the departure of the flight, the fuel load is carefully measured and is kept as low as possible. This is done in order to ensure that the weight of the airplane is less and the fuel consumption is restricted. Apart from this, the aviation authority requires every aircraft to maintain certain level of minimum fuel referred to as “margin of safety”, so that the aircraft does not face any problem during any unanticipated circumstances. The organization takes care of fulfilling to this requirement also. However, in recent times, the pilots are seen to raise safety issues against the airline. The pilots has emphasized on the fact that they were pressurized by the management to carry lower amount of fuel in the flights in order to reduce the operational cost (Channel 4, 2013; Wright, 2013). On this issue, the Irish Aviation Authority had claimed the statement to be a misguided attack and Ryanair fully complies with the international and European regulations, while dealing with their operational activities. This along with the immediate action taken by the airline has eradicated the issue (Clark, 2013). Conclusion The view of Alfred Chandler regarding invisible hands has revolutionised the business history. His work has enhanced the understanding of people regarding the large business firms that has provided huge contribution in making America the richest country in the world. The management via accounting as proposed by Chandler has been used in context of Ryanair. It is seen that the company has effectively used this technique in cutting their fuel cost, which is a major operational cost for them. Reference List Calder, S., 2013. Once again, changing what passengers do: I'll price luggage out of the hold, says Ryanair chief Michael O'Leary. The Independent [online] Available at: [Accessed 29 November 2013]. Centre for Aviation, 2013. Ryanair: Europe's lowest cost producer wins again, reporting record profit of EUR569 million [online] Available at:  [Accessed 29 November]. Channel 4, 2013. Dispatches: Survey of Ryanair pilots that reveals deep rooted concerns about passenger safety [online] Available at  [Accessed 29 November 2013]. Clark, N., 2013. Ryanair Fires Pilot Who Questioned Airline’s Safety on TV. The New York Times [online] Available at: [Accessed 29 November 2013]. Dlamini, T.L.P., 2011. The Significance Of Management Accounting Practices Totlp & Sons (Pty) Ltd In R.S.A [online] Available at: [Accessed 29 November 2013]. Finch, B.J., 2008. Operations now. 3rd Ed. New York: Tata McGraw-Hill Education. Kouvelis, P., Dong, L. and Boyabatli, O. and Li, R., 2011. Handbook of integrated risk management in global supply chains. New York: John Wiley & Sons. Kulkarni, M. and Mahajan, S., 2008. Management Accounting. New Delhi: Nirali Prakashan. Lawton, T.C., 2000. Flying lessons: Learning from Ryanair’s cost reduction culture. Journal of Air Transportation World Wide, 5(1), pp. 89-106. Pollitte, W.A., 2008. The effect of vertical networks on channel governance adaptation: A transaction cost economics approach. Ann Arbor: ProQuest. Ryanair, 2013. Ryanair Annual Report 2013 [pdf] Ryanair. Available at  [Accessed 29 November 2013]. Spulber, D.F., 2009. The theory of the firm: Microeconomics with endogenous entrepreneurs, firms, markets, and organizations. Cambridge: Cambridge University Press. Sunstein, C.R., 2002. The cost-benefit state: The future of regulatory protection. New York: American Bar Association. Swinnen, J.F.N., 2007. Global supply chains, standards and the poor: how the globalization of food systems and standards affects rural development and poverty. Oxon: CABI. Wright, O., 2013. Exclusive: Safety warning as budget airlines such as Ryanair cut fuel levels for flights. The Independent [online] Available at: < http://www.independent.co.uk/travel/news-and-advice/exclusive-safety-warning-as-budget-airlines-such-as-ryanair-cut-fuel-levels-for-flights-8749046.html> [Accessed 29 November 2013]. Read More