Management Accounting at Venture Corporation Limited - Case Study Example

Findings from research have shown that in order to strategize in an organization, the management requires sources of information to be used in decision making. There is a relationship between the changes in the firm’s management accounting, the system of control and this affects the performance of the company. Management accounting and control systems has an area of interest in the recent past among accounting researchers. Some researchers focus on a single system for example the Activity Based Costing (ABC) or Total Quality Management (TQM) while others concentrate on different components which are generally referred to as the formal management accounting system. Traditional management accounting methods such as cost volume analysis, traditional budgeting and variance analysis are very important in the present manufacturing environment in order for a company to meet the global competition. This paper looks at the relationship between management accounting system and a company in Singapore. Venture Corporation Limited was founded in Singapore in 1984 and mainly deals in manufacturing of electronics. The company is a global company that provides high-tech products and services, offers world class management and innovative technology. The company has an excellent track, qualified expertise and expertise placing the company as a first class service and products provider. The company is highly reputable and this has earned it world class customers such as HP, Intermec, IBM and other multinational companies. The company’s policies and method of production have led to high profits and sales for example in 2009 achieved sales of S$3.4 billion and reported annual profits of S$143million as suggested by Epstein and Lee (2009). The company also meets the requirements of the international standards and it was awarded the award for Aerospace Division in Europe and for completing its expertise in material resourcing and process re-engineering placing it in a favourable position meet international environmental standards. The company plays a major role in manufacturing of high mix, high volume or low volume products using complex technology to produce quality output. The manufacturing system is web-based, real time relationship with their customers and suppliers from the initial production ensuring that a quality output is produced at a cost that is efficient. It has a networking system that helps customers to optimise the overall supply cost by developing solution that reduce the production costs, inventory costs, material costs and manufacturing overheads as stipulated by Epstein and Lee (2009). This also helps the company reach the customers on time and at a minimal cost. The company should be involved in social responsibility by producing quality output, fair in treatment of its employees, use production methods that are environmental friendly community outreach programmes. Management accounting is the provision and the use of accounting information to managers in an organization to act as a basis of decision making and allow them to be efficient in their management and control as explained by Hopwood, Chapman and Shields (2008). It is also known as cost accounting since it provides important data for the operation of the business. Managerial information reports to those inside the organization for motivating, planning, controlling and performance. This mainly emphasizes on future decisions and timeless information is required. Management accounting gives detailed information on all the departments in an organization such as the products and the number of employees. Management accounting provides forecasting, monitoring costs inherent to the business, variance analysis and reviewing. This is the main role of management accounting in company and it is the basis of decision making Venture Corporation Limited. Management accounting is used in the company to make pricing decisions as it helps establish a budget, actual costs incurred in the processes, products or departments, analysis of profitability and the use funds. There are various approaches of management accounting that can be used in the company for decision making including standard costing, activity based costing and marginal costing or cost volume profit analysis as explained by Albrecht, James and Monte (2007). Costs are basically divided into three classes which are materials, labour and overheads also known as indirect expenses. Costing helps managers understand the costs associated in running a business. In the past, costs were divided into fixed and variable costs and managers based their decisions on variable costs. This has however changed since managers must understand all costs in order to make comprehensive pricing decisions. Activity based costing involves assigning costs based on the activities involved in production. The process is tedious and involves attributing the cost of each activity to the ultimate final product as explained by Boer (2000). This method of costing is time consuming, tedious and has higher chances of errors. Standard costing takes into account the historical costs and this is used as the basis of allocating the fixed costs over a given period of time. This method allows for full costing of the unsold inventory. This method basically enables managers to ignore fixed costs and decisions are made according to the standard cost. The method was not accurate since it led distortion in the unit costs for large companies with mass production that produced one product. Large firms like the Venture Corporation Limited have decentralized responsibility of different centres or department in an organization. The performance of these centres is evaluated based on factors such as the standard and actual costs, return on investments or divisional profits. The major role of the management accounting system is to evaluate the performance between different departments. According De Wall (2006) to transfer pricing is used to assess goods and services exchange between different departments. External pricing involves balancing the prices to be set to generate revenue per unit. The main issue lies with setting prices that will maximize profits, mark-up cost is set for customers that do not mind and should be the highest amount set. This should also be the cost set for goods with inelastic demand and they can also use the cost plus formulas in setting their prices which is based on costs being absorbed. The company can use the break even analysis to determine whether the company is making profits from the production of a particular product. This analyzes the potential profitability the can be made from the sales in relation to the expenditure. It is defined as the point where the total cost is equal to the total revenue (TR=TC) as stated by Abdel-Kader and Luther (2006). Venture Corporation should base accounting decisions on this analysis in order to determine the profitability of the products. This analysis is closely related with the break even concept, the only difference is that it is expressed as a percentage and it is used to measure the strength of a business. This helps a business to determine the amount of profits of profits or losses made and to determine whether they are over or less than the break even point. It is expressed as: = margin of safety (current output- breakeven output) *100 Overhead Absorption Rate (OAR) is a method used to allocate overheads that are included in the total cost of a product. The charging of the overheads to the units costs is calculated separately for each cost centre. The OAR for a specific cost centre is calculated as: =Total overheads of the cost centres/ Total numbers of units of absorption The company can also use the Cost- Volume Profit analysis as it expounds on the information from the breakeven analysis. It is useful for short-run and elementary instruction. The critical point in this analysis is where the total revenue is equal to the total costs as explained by Albrecht, James and Monte (2007). The company uses this form of analysis since it simplifies short-run costs and allows for computation of the target income sales. The main disadvantage of this analysis is that it assumes that the variable costs and revenues per unit are constant. The method is appropriate for small changes from the current sales and production and it assumes a slight division in the fixed and variable costs, though all costs are variable in the long-run. Financial ratios and non-financial ratios are used management accounting to assess the overall performance of the company and financial position of a company as explained by Bull (2008). These ratios give detailed information concerning the company to the management and other external users. The examples financial ratios that are calculated by the company include-: Profitability ratios- These are used by both external and internal users to determine the company’s use of the resources, and the regulation of the expenses to generate returns. An example is the gross profit margin calculated as; Profit margin =Net profit/ Net sales Return on equity calculated as; =Net income/ Average shareholders equity There are other forms of ratios known as the liquidity ratios that are used to measure the ability of a company to pay its debts. Examples include; Current ratio =Current assets/ Current liabilities =Current assets- (Investments + Pre-payments)/ Current liabilities Activity ratios are used to assess the effective use of the resources owned by the company. They include: The average collection period; =Accounts receivable/ (Annual cash sales/ 365 days) Market ratios- this is used to measure the response of investors to owning the shares of a listed company for example; Earnings per share; =Net earnings/ Number of shares The company uses a budget as a management tool for the control of its activities as it compares the actual performance and predicts future financial trends of the company. Using variance analysis enables the management to identify business opportunities, identify the variances and investigate why they occurred enabling the management meet the objectives. The variances can be caused by factors that include the morale of the employees, team building as explained by Lee, Johnson and Joyce (2008). Today’s market is considered to be full of uncertainties and is highly competitive which is has led to new management systems and budgeting to address these issues. Venture Corporation Limited uses these new management accounting policies to lead to proper operation of the business. The company has all the information required to make decisions concerning outsourcing which is normally referred to as make-or-buy decisions. The corporation should weigh between the options and find the one which is cheaper hence reducing on the overall cost of production a explained by Epstein and Lee (2009). Companies make such decisions when the firm has developed a product that is a modified product or in situations where there is change in demand, diminishing capacity and has problems with the supplier. Venture Corporation should not outsource products that fit with the competencies, those that require specialized manufacturing skills and equipment and the key products in a company. The key products are very important since they determine the reputation of the company and the products should be produced internally. The company should consider the current volume of output, associated fixed costs, direct and indirect costs involved in the production and compare it with the cost of buying the product. If the cost of production exceeds the cost of buying then the company should consider outsourcing the specific product as suggested by Hopwood, Chapman and Shields (2008). The company is established in a permanent location and this helps the company reduce the fixed costs incurred in form of rent. Management accounting has evolved over the years with changes in the business world as organizations identify, analyze and communicate information towards the achievement of the goals and mission. Various companies in recent years have adopted newer accounting techniques such as ABC based on the costs incurred, size of the and complexity of the changes. Recent reports have shown that the current management trends are focussed on the cost accounting system, budget performance evaluation, information for strategic analysis and decision making as explained by Abdel-Kader and Luther (2006). At present the management of companies is focussing on the financial reporting instead of cost management in an organization. Management accounting is one of the most important aspects in determining the success of a business. This is however inappropriate as it emphasizes on financial accounting and neglects the internal reporting system in a company. In evaluation of performance of departments financial or non-financial indicators are important, for companies on Singapore 48% of the Return on Investment (ROI). The role of management accounting in a business very important in a business and companies should practise it to ensure profitability. Venture Corporation Limited should consider outsourcing some products to reduce on the cost of production and should employ modern accounting methods in order to be at par with the global standards. The company should also use ABC since it is the most appropriate for the particular business. References Alberetch, WA, Stice, JD & Swain, MR 2007, Accounting: concepts and applications, 10th edn, Cengage Learning. Abdel-Kader, M & Luther, R 2006, "Management accounting practices in the British food and drinks industry", British Food Journal, vol. 108, no. 5, pp. 336-357.  Boer, GB 2000, Management accounting education, yesterday, today, and tomorrow. Bull, R 2008, Financial ratios, how to use financial ratios to maximise value and success for your business, Elsevier Science & Technology. De Waal, A 2006, Insights from Practice, Is your organisation ready for beyond budgeting?, Measuring Business Excellence, vol. 9, no. 2, pp. 56-67. Epstein, M J & Lee, JY 2009, Advances in management accounting, vol. 17, Emerald Group Publishing. Hopwood, AG, Chapman, CS & Shields, M D 2008, Handbook of management accounting research, vol. 3, Elsevier. Lee, RD, Johnson, RW & Joyce, PG 2008, Public budgeting systems, 8th edn., Jones & Bartlett Learning. Read More