The Main Role of Management Accounting of British Airways - Case Study Example

British Airways Background This airline is the UK’s highly domestic and internationally booked airline with enormous home and international destinations. For instance, BA flies to approximately over 550 destinations across the globe. Additionally, beside scheduled flight services, the airline offers freight, mail and ancillary services to both domestic and international. According to the British Airways Report (2009), the firm was privatized in 1987, there after the company has exceedingly continued to develop increasingly regardless of the stiff competition in the aviation industry across the world. The recent economic downturn impacted heavily on the airline industry, nevertheless, BA has worked to maintain its attractiveness thus it future is filled with hope. For example, the BA main objective is to become the most responsible airline in the world through coming up with guiding principles that are geared towards strategic decisions thus will assist the company in achieving this critical objective (British Airways Report, 2009). Products: The company products include domestic flights and across Europe; sometimes also referred to as short haul products. Short haul products are products like UK Domestic, Euro Traveler, and Club Europe. Secondly, the company also offers long haul products, which include world club, world traveller, and world cargo. Processes: the company has developed lean processes that will provide the accounting, control and measurement the will necessitate lean operations across the company. Competitors: British Airways is a company that operates globally hence it has global competitors like South West Airlines, Emirates Airlines, Etihad airlines, Air France, Virgin Atlanta, Swiss Airways, and DHL. Policies: the company has various policies including privacy policy, baggage free policy, and sex discrimination policy. Management Accounting and its role Management Accounting is a task that involves gathering, classifying, summarizing, evaluating and reporting information that is essential in assisting managers in their day today decision-making and control activities (Hart & Wet, 2008). Management accounting key focus is on planning and controlling company’s internal activities; the latter is completely different from financial accounting where the core emphasis is on reporting to shareholders, creditors and public regulators. In this regard, management accounting demands the collection, analysis and interpretation not only cost or financial data but also other data including sales, price, product demand while measuring physical quantities and capacities. Management accounting employs both financial and cost accounting techniques that includes marginal or direct costing, standard costing, and budgetary control. In this view, management accounting is an extension of cost accounting to new management perspective. The main role of management accounting is to provide economic information to managers in order for them to achieve organizational goals and objectives (Weetman, 2006). It has been established that information flow system is critical when designing management accounting system. Owing to this, managers at each level must be equipped with clear understanding of the objectives and goals assigned while receiving flow of relevant up-to-date information. Management accountants for this matter are tasked with providing forecasting and planning, variance analysis, re-examining and scrutinizing costs coherent within the business organization. To expand on this, effective management accounting systems together with management accountants must rather should generate information that allow proficient allotment of costs between cost of commodities sold and stocks for profit reporting both internally and externally (Kim & Thorne, 2005). Consequently, they must provide relevant information for managers to make better economic decisions. Lastly, they should provide information for forecasting and planning, performance capacity and continuous integrations (Steven & Bragg, 2007). Information needs Business organization management accounting information needs to fulfil the requirements of internal users. The overall need of this information is aimed at meeting the following objectives: Planning: This involves choosing an appropriate cause of action and stipulating how the action will be realized in the organization. Planning entails identifying alternatives and then selecting one from the alternatives that will facilitate in furthering or achieving organization’s goals. When making such choices, managers are called upon to balance the opportunity against demands made on the firm’s resources (Horgan et al., 2002). Good plans and forecasts of managers are best formally expressed in budgets. These budget preparations are always under the directives of management accountants or the controller: the accounting department manager. Directing and Motivating: managers are also bound to oversee the daily activities in order to maintain the functionality of the organization. Managers are tasked with assign duties to employees, arbitrate disputes, answer questions, and solve on-the-spot conflicts while also making decision that affects customers and employees (Sarker & Yashmin, 2005). Given this effect, they direct the work particularly that that accomplishes routine activities. Management accounting data like daily sales reports are used this for the daily decision making (Horgan et al., 2002). Controlling: When accomplishing control function, managers are tasked with ensuring that the plan is followed consistently. Feedback usually signals that operations are on track. In more complex organizations, feedback is provided through detailed reports that compare budgeted results to actual results. These performance reports usually identify where operations are inconsistent with the plan and where the organization requires additional attention for optimal performance (Horgan et al., 2002). Other informational needs are: Collection: this entails collection information in money terms linked to transactions resulting from the organization’s business operations Recording and classifying: this is basically book keeping purposes. Summarizing: this is entails summarizing data to come up with reports that are of benefit to the various users of accounting information both internally and externally (Hugh et al., 2005). Methods and Techniques There are a myriad of techniques and methods through which a company can undertake management accounting. The table below is a recommendation of management accounting techniques that British Airways Company can employ in order to increase its current and future profitability. Techniques Description Budgetary control This is a system of management control where all operations like sales, purchases, and production are foretold early enough and results when known can be weighed against the planned targets. This will BA managers to make sure that they steak to company’s operational plans in order to meet targeted objectives (Shil et al., 20010). Variance Analysis This virtually the variance between standard costs, real costs, standard measures, and real measures. Interpreting together with computing these differences will help the company understand how the company is fairing on in the market. Cost-Volume-Profit Analysis According to Garrison and Noreen, (2004) it is a technique that helps managers to comprehend and understand relationship among cost, volume and profit. Ratio Analysis This is a statement containing information contained in both the balance sheet and the income statement that is essential and vital in establishing the financial soundness, profitability and liquidity of the business organization (Maheshwari, 1989) Cash-flow Statements According to Weygandt et al (2007) cash flow statements are basically the cash payments, cash receipts and the net changes in cash culminating from operational, investment and financing actions within a defined operational time. Activity based analysis (ABC) According to Kaplan and Atkinson, (2001) is a technique that provides precise and correct methods of allocating the expenses of support and indirect resources to performance, trading methods, goods, services, and customers. Responsibility accounting Garrison and Noreen, (2004) alluded that department managers must be held accountable for only those goods and services that they can actually control Balance Scorecard This comprises of improved set of measures derived from the organization’s strategy to anchor its strategy across the company. In this regard, company’s management is tasked with translating the company’s strategy into performance that help in the employees understand the strategy and hence can do something about (Knight & Collier, 2009). Total Quality Management (TQM) With regard to Garrison and Noreen, (2004) it comprises of two vital features; focusing on attending to customers and organized problem solving through teams comprising of forefront employees Segment Reporting A segment in this regard is a section of the company where managers need specific information like cost, revenue or profit data. Successful devolution in any business organization demands comprehensive segment reporting. Further, individual segment reports with regard to different company segments are needed together with the organization’s vast income statement for enhanced management accounting (Garrison and Noreen, 2004) Strengths and Weaknesses of the Analysis The research and analysis of the report wholly relied on secondary data source that was highly economical, time saving, helped in the general understanding of the problem, and also allowed to access information that would have been otherwise impossible to get. The analysis performed can help set a platform for the primary research. In contrast to the above mentioned benefits of the secondary data; the latter is sometimes obsolete and does not fit the marketing research factors for instance you may require specific information like disposable income only to find the data available giving you gross income. The accuracy of the secondary data is not known. In some instances the data might be outdated. Reference British Airways. 2009. Annual Report and Accounts. Available at http://www.britishairways.com/cms/global/microsites/ba_reports0910/pdfs/Strategy.pdf Cadez, S. 2006. The Application of Strategic Management Accounting Techniques in Slovenian Manufacturing Companies. Zagreb International Review of Economics and Business, vol. 9, no. 1, pp. 61-75 Garrison, H. R., and Noreen E. W. 2004. Managerial Accounting. New Delhi: Irwin McGraw – Hill. Hart F. J. De and Wet De J. 2008. EVA and Innovations in Decision Making and Financial Management‟, Working paper series. Horngren, CT, Sundem, GL., and Stratton, WO. 2002. Introduction to Management Accounting. New Delhi: Pearson Education (Singapore) Pvt. Ltd. Hugh, M. C., Hobbs, D., and Ellis, D J. 2005. Management accounting: principles and applications. London: Sage Kaplan, S. R., and Atkinson A. A. 2001. Advanced Management Accounting. New Delhi: Addison Wesley & Longman Singapore Pvt. Ltd. Kim L S., and Thorne, H. 2005. Management accounting: information for managing and creating value. Sydney: McGraw-Hill Australia Knight K., and Collier M. P. 2009. Target Costing in the Automotive Industry: A Case Study of Dynamic Capabilities. Working Paper Series. Maheshwari, SN. 1989. Management Accounting for Bankers. New Delhi: Sultan Chand & Sons Publishers. Sarker B. J. and Yeshmin F. 2005. Application of Responsibility Accounting: Bangladesh Perspective. The Cost and Management, vol. 33, no. 6 Shil N. C., Alam Mohammad F. and Naznin M. 2010. Cost and management accounting practices in Bangladesh: a survey. International Journal of Managerial and Financial Accounting, vol. 2, no. 4, 1, pp. 364-382. Steven M., and Bragg, J. 2007. Management accounting best practices: a guide for the professional accountant. New York: Willey and Sons Weetman, P. 2006. Management accounting. London: Prentice Hall Wegmann, G. 2007. Developments around the Activity-based Costing Method: A State-of-the Art Literature Review. Working Paper Series. Read More