Management Accounting for Cadbury Schweppes plc - Case Study Example

Running Head: Management Accounting for Cadbury Schweppes plc Management Accounting for Cadbury Schweppes plc of Student Name of Subject Course Name of Professor 26 February 2008 1. Introduction This paper seeks to analyse the information needs Cadbury Schweppes plc for the purpose of determining the use and application of management accounting methods and techniques. By providing an example on how Cadbury Schweppes plc could link these information needs and methods and techniques, hence this paper hopes to help the company on how it could benefit from these methods and techniques. In the process of application, however, limitations of methods and techniques will have to be explained as good precaution for any problems that may be caused in applying or misapplying the same. 2. Analysis and Discussion 2. 1 A brief summary of the company's business activities, its recent history, and current position. Cadbury Schweppes is a London -based confectionery and beverage company which presently produce Fairtrade or organic products and sells the same through its subsidiary called Green and Blacks. Johann Jacob Schweppe, a watchmaker and silversmith was one of the founders having developed a method to charge water with carbon dioxide. John Cadbury has also begun independently his own vending tea , coffee and later chocolate business in the UK and sometime in India and had his company named Cadbury Brothers Limited. After being succeeded by his sons after retirement, the post World War I period saw the company to have made a financial merger with J.S, Fry and Sons Limited. The name of Cadbury Schweppes was therefore a result of the merger between the two companies in 1969. The combined company now has a portfolio of chocolate and drink brands that it sells in around 25 countries (Cadbury Schweppes, 2008) . It had acquired also some companies which it very big today. It presently competes with Unilever, Premier Foods, Arla Foods UK, Reckitt Benckiser and Associated British Foods.(Telegraph.co.uk, 2008) 2. 1.1 Identify and outline examples of what you consider to be important information requirements which could aid the managers of this business. (500 words) The most important information requirements which could aid the managers of the business include the information that are related to issues like planning & decision making, monitoring the business performance, building and maintaining a competitive advantage. In planning and decision making the managers are guided to what will produce the attainment of the companies' corporate financial objectives. Planning is not only limited to day to day operation of the business but also how the business maximizes its revenues and profits and many areas of its operation. Updated information of revenues and expense accounts of the company are therefore very relevant for the company managers to effectively plan and make decision. Revenue accounts refer to accounts as a result of delivering goods and services to clients. Expense accounts include the cost of production like direct labour cost, raw materials and the factory over head associate with production. Monitoring the business performance presupposes knowledge of data of measurements that would tell managers whether they are accomplishing their objectives are not. The financial information on revenues, expense, assets and liabilities are therefore relevant information for the company to effectively have monitoring activities. 2.1.2 The four suitable costing and management accounting methods/techniques applicable to the information needs earlier identified. The following are the chosen methods or techniques: Budgeting, Variance Analysis, Absorption Based Costing and Cost Volume Profit Analysis. Budgeting techniques is applicable to the information needs of company for activities like planning & decision making and monitoring the business performance of the company. A budget includes revenues and accounts that are projected normally within a short term period. Since the company has also production facilities it also requires the use of Variance Analysis in monitoring the production performance of its production department and facilities as way of controlling cost and as a way of further improving performance to attain its financial objectives. Absorption Based Costing is actually used already by the company in presentation of the company for its incomes statements used for external reporting. Since the income statement is being used to influence investors then indeed the company must be benefiting from the same. Since the company is also very much interested in knowing the profitability of every product that it produces, it will always be in need to the concept of marginal cost pricing or the CVP (Cost volume profit). Thus it will have to classify its cost into variable and fixed cost to be able to attain this objective. 2. 2 Illustrative examples on application of the methods and techniques chosen for information needs for Cadbury. (500 words) To apply budgeting techniques for the company, an estimate of revenues and costs are needed for each department to have responsibility as to control. Of course not all departments are revenues centres normally this should be concern of marketing department. For other departments, the responsibility would in terms of cost control without compromising the objectives of marketing to product maximize revenues under the lowest cost possible is a must. The company can then use the information on revenues and expenses to prepare a schedule of revenues and expenses called a budget and for which estimate profit levels are assumed. The company would then be doing planning & decision making as it monitors business performance of the different department of the company using the budget in the short term. Closely linked with budgeting, the company could then use variance analysis by comparing the actual revenues and costs as against the prepared budget. Responsible officers would be asked why they failed to work with agree targets and this has therefore the effect of ensuring responsibility in the jobs of the officers and managers. Since variance analysis monitors the production performance of its managers from the various department, cost would most likely be controlled and revenues would most likely be attained and hence would make closer to bring efforts to what were targeted earlier during planning time. Absorption based costing as has been used for a long time and has really helped the company in controlling the cost of its inventory and which are very much relevant to the pricing of its products. For the company to have really succeeded over the years considering in its pricing strategies is a thing that is very much notable as the products that the company sells are considered to be known brands where advertising cost may almost become cost that is directly linked with product while traditionally it is not. As stated earlier income statements (Cadbury Schweppes, 2008) published for outside use makes applicable absorption costing, hence the company would most probably not have any chance forget the costing method since it is the one required by the international standards for which many international companies may just have to comply. The company has engaged in the production of many branded products. For the company to have no means on whether it has to produce an additional unit of its series of products is simply not believable. As the company is also very much interested in knowing the profitability of every product that it produces, it will always be in need of the concept of marginal cost pricing or the CVP (Cost volume profit). Thus it will have to classify its cost into variable and fixed cost to be able to attain this objective. The company may be believed to have applied marginal costing in its packaging of its chocolate products under different weight category or sizes (Cadbury Schweppes, 2008). The said strategy to maximize profit under is a careful balancing act of what sizes could sell more of the companies products in relation to what its competitors are also trying to do under different segments of the market. 2. 3 An explanation on how the company benefit from the use identified information needs and methods and suggestions to assist business performance of the company. The advantage from budgeting is already obvious as it is a convenient way to plan and make business decisions so as to bring results within targets that will meet company objectives. A benefit of absorption costing that cannot be discounted is the need to have paid fixed cost and which necessitates inclusion in the production cost. Selling price based on total cost is safer in case of uncertain demand as compared with marginal costing. Hence no wonder external users want to consider total cost rather than fixed cost because demand may be uncertain (Williamson, 2000, Atkinson, et. al, 2007) The company would be able to benefit from the use of break even analysis under cost volume profit or marginal cost with knowing whether it should continued production of a certain product or should it rather buy from other manufacturers and merely repackage certain confectionary products. Other benefits of marginal costing or CVP are as follows: It is simple to understand; the fact that fixed overhead is not charged to production, the variability of charges is avoided; Necessarily the illogical carrying forward of fixed cost for stock valuation is avoided. It also affords better return to business because alternative sales could be more readily available as it affords flexible budgeting. Arbitrary allocation of fixed cost is also avoided an it easier to demand responsibility from managers since cost becomes more controllable. Short term planning by the use of breakeven analysis would be of better use for the company (Williamson, 2000, Atkinson, et. al, 2007). 2.4 Outline of any limitations of the techniques that were identified and explanation on how these might adversely impact on the effectiveness of the method/technique for the purpose intended. The respective limitations of the techniques are discussed under each type. Under budgeting, the limitations are as follows: (1) There is some reservations as to the accuracy of the estimates; (2) There could be adverse reactions from employees: (3) It usually requires a great of work to develop a good budget; (4) There is less flexibility as a result of approved budget; (5) It can also be an expensive toll and its implementation is not automatic. The variance analysis, on the other hand, would have the following limitations: (1) Like budgeting it will also limit flexibility and; (2) It could demotivate employees if wrongly implemented. The limitations of absorption costing would be as follows: (1) It is unsound to carry a portion of fixed cost over the subsequent accounting period as part of the closing stock as this would be vitiating the cost of cost of the present period because of the carried fixed cost (Williamson, 2000) . (2) There is dependence of the level of output which may vary from period to period and this creates variability of units cost due to carried portion of fixed cost as explained earlier. Hence different inventory methods under absorption costing would yield different results. (3) In case of comparison of cost for control, the use of absorption costing would not be reliable unless fixed overhead rate is based on normal capacity (Williamson, 2000, Atkinson, et. al, 2007). The disadvantages of Marginal or Cost Volume Profit are as follows: (1) To separate fixed from variable cost is not easy and could mislead result (2) Most probably the stocks and work in progress are understated because of exclusion of fixed cost from inventories. (3) To apply fixed overhead is conditioned on the use of estimated and not on actual cost hence the possibility of under or over absorption is always there. Real profit cannot complete without the fixed overhead. Thus it could not be disregarded completely as it is part of the cost. Any error in costing because of the wrong used of methods because of wrong estimate necessarily result to wrong profit and lost opportunities and resources for the company. Business lives not just in the short term hence long term growth would rather use absorption cost since profits could be measured more reliable (Williamson, 2000, Atkinson, et. al, 2007). 3. Conclusion It can be concluded that a manufacturing company like Cadbury Schweppes plc could only benefit much from he use of management techniques and methods (Dury, 2004) discussed than those that are not engaged in manufacturing. The concepts have been used by manufacturing from the time they may have started operating although the said methods may have been called by another name. Budgeting is essential to control and decision making while variance analysis it is indispensable element it. Absorption costing would also be continually be used for external reporting because of the completeness in cost used although for management purpose it must continue using marginal costing as well since management connotes control and flexibility, if it wants to be accountable in attaining its targets in term of short term profits. Each method or technique has its own use at particular area in business subject to limitations as discussed in the paper. 4. Bibliography Atkinson, et. al (2007); Management Accounting, Prentice Hall PTR Cadbury Schweppes (2008) Company Website and Annual Reports, {www document} URL http://www.cadburyschweppes.com/, Accessed February 26,2008 Dury (2004) Management and Cost Accounting, CENGAGE Lrng Business Press; 6 edition Telegraph.co.uk, Cadbury Schweppes -Profile and Financial Report {www document} URL 2008, http://shares.telegraph.co.uk/, Accessed February 26,2008 Williamson, D. (2000) Cost Volume Profit Analysis and its Assumptions and Their Pitfalls" {www document} URL http://business.fortunecity.com/discount/29/cvpass.htm, Accessed February 26,2008-02-27 Read More