Management Accounting Techniques for Competitive Advantage

1. Introduction

This financial crisis only one year drastically altered the business climate around the world. It has caused bankruptcies and bankruptcy of financial institutions, a sharp increase in home and mortgage repossessions, dramatically reduced credit options, the abolition of thousands of jobs and rising unemployment, the current crisis is likely to affect the car market which is the primary product of Hadika plc in a significant way. The demand for cars is already decreasing and causing stockpiling in the factories, dealers and ports. While sales of cars that are less expensive are a major part of Hadika’s range of products, haven’t had any significant declines but the future is unclear while the industry is predicted to be more competitive.

Managers of companies, particularly those from smaller companies must be more aware of their costs and efficiencies and also cognizant of accounting methods for management to enhance their efficiency at work in terms of product costs, as well as internal reporting.

The report’s focus is upon (a) the necessity for managers in operational management to comprehend and apply management accounting methods, (b) the similarities and distinctions between management and financial accounting methods and principles, (c) the roles of management accountants, (d) the most appropriate way to classify expenses for the company, as well as (e) the use of management accounting methods in pricing decisions. Then, it examines the effectiveness and the use of accounting methods used by management accountants to increase and maintain the market share of the company.

2. Management Accounting

Accounting for management (MA) basically involves the use of accounting and financial techniques and tools by management of companies to increase efficiency in operations as well as control costs as well as improve sales volume and mix of sales, as well as increase profitability, productivity, and market share. It also gives companies an advantage in competitiveness. [1]

While both are based on similar accounting principles, MA is essentially different from financial accounting.

Financial accounting is the primary recording technique that seeks to give a clear and honest view of (a) the profits, revenues as well as the expenses and profits of companies for specific time periods, in addition to (b) the number of their assets and obligations on a certain date for everyone who uses financial statements. The goal of accounting for financials to present the most accurate and complete image of the operation and assets of companies has led to the creation of a complicated and vast system of accounting, which is shaped by the influence of auditors, accountants, regulators, tax authorities as well as stock exchanges, company managers, and many others. [2] Although the field of financial accounting has developed in various directions across various countries and regions Globalisation is leading to the convergence of various methods, and the gradual development of a globally standardized method of financial reporting. [3]

MA is similar to financial accounting can help in providing a clear picture of the business’s activities. The fundamental approach to MA is quite different, and it functions much more of an internal tool for accounting that assists managers to reduce their expenses and structure of costs, efficiency, and efficiency of operations as well as sales performance and profitability. [4] Based on the same proven accounting techniques such as financial accounting. MA employs more cost accounting methods and has fundamentally developed and expanded from the methods of cost accounting which were developed by John Wedgwood during the great recession. [5]

The utilization of MA as an internal tool for management allows the greatest flexibility in the use and application and allows for its design and development according to the requirements of operating processes, companies, and organizations. [6] MA utilizes well-known costing strategies like batch processes, standard, and activity-based costing. It assists managers in determining the unit cost as well as fixed and variable costs and breakeven points. Methods such as marginal costing, Make or Buy, and Cost Volume Profit (CVP) analyses to aid in the determination of profitability of products and the optimization of the sales mix. Budgeting techniques assist in optimizing operational performance and cash flow through comparison of actual performance with budgets and by examining positive and negative variations. [7]

The company is currently determining the unit cost by taking all expenses incurred by the company into products that are individually produced and then dividing these costs using simple metrics such as sales or production figures. [8] This method while in use by several firms is likely to cause incorrect costing builds-ups, inaccurate data, and faulty pricing choices. [9]

The classification of Hadika’s expenses in Variable Costs, (those that are dependent on production volume like direct and material) as well as fixed Costs, (those that are not influenced by production volumes such as rents, salaries, and depreciation) The company to determine break-even points for different pricing and sales volumes and take appropriate pricing decisions that help to achieve the competitive edge, market share and profit optimization. [10]

CVP analysis will enable firms to assess the impact of different costs, prices, and volume combinations on profitability and aid in making decisions about the sales mix, the introduction of new products, and the gradual phase-out of products that are not profitable and product line. [11] Sensitivity analysis as well as the simulation of volume and cost can aid Hadika in predicting the effect of cost changes and volumes on profitability. [12]

Management accountants are required to prepare statements, records, and forecasts using historic and projected figures for the cost of sales, expenses, and other costs, making the help of the latest methods of management and cost accounting. [13] Their role is rooted in the fundamental accounting and accounting principles, is interdepartmental and multidisciplinary, requiring them to study the nature of various revenues and costs and then analyze them in a user-friendly method for management and also for production, sales, and marketing divisions. [14]

Management accountants rely on standard tools for computing, such as Excel spreadsheets to perform their calculations as well as analysis, the advent of advanced ERP software has helped them substantially and they are capable of providing more sophisticated analyses of impacts of the latest developments in various sectors of business on organizational efficiency as well as profit and cost-efficiency.

3. Application of Management Accounting Methods at Hidaka

Due to the current financial crisis decreasing credit availability, job, and incomes across the developed nations automobile market will likely to be impacted significantly in the coming months. buyers will increasingly seek out vehicles that are low-cost, affordable to operate, and offer the best value for their money.

The current crisis is likely to be especially hard on those with higher incomes because of their wealth diminishing as a result of the market’s collapse. The market for bigger cars is predicted to shrink quicker than the smaller compacts and subcompacts which are less expensive and more efficient to maintain and operate.

Accounting techniques for management, in this case, must be used to analyze and analyze costs, sales volumes, prices, and sales mix to enable the management of the business to take the necessary actions to enhance competitive advantages and to maintain and grow market share.

Variable costing can help managers understand the structure and the number of direct costs for each component and product, and the expected contribution of every product. The products with the highest unit contributions have higher profitability than others Contribution analysis can help managers to identify more profitable products and establish the limits to which prices for these products could be reduced.

The initiatives will also aid the management in analyzing and evaluating “make or buy” options and, if feasible, in outsourcing the manufacturing of specific components from cheaper sources, thus reducing the cost of production for the company. Insourcing components from cheaper producers can bring about the identification of excess employees that can be effectively employed to other areas or be get rid of, both of which will result in cost savings and increases efficiency.

The separation of costs into variable and fixed will help bring the entire fixed cost in focus and create numerous possibilities for cost reductions by identifying (a) inefficient or unutilized employees, rent, or equipment, and (b) high costs for management such as entertainment, travel external consultants electrical, canteen charges and legal costs, opening up a variety of areas where costs can be gradually reduced, without impacting the operation of the business or the morale of the employees.

The comparison of sales forecasts and actual performance, with an examination of variances, and analysis of the contribution of products, can assist the business in focusing on the products that perform poorly that are followed by identifying the causes of poor performance as well as the possibility and potential consequences of introducing price, or, (if the situation so calls for) cutting production.

CVP analysis can allow managers to instantly gain insight into the results of a variety of variations of the sales mix in terms of both individual and composite break-even points and profit and allowing managers to focus on the best sales mix both from the perspective of the market and the company.

Utilizing MA techniques can help the company (a) reduce and control costs (b) concentrate on profitable segments and those that are not using contributions analysis (c) determine price cuts, and (d) strategically transfer benefits to the customer or dealer in order to gain the competitive edge and share of the market.

Analyzing and analyzing Cash Flows which is a key element of MA will assist the company’s management to understand the impact of these adjustments on the cash flow of the business and allow timely corrective actions.

4. Conclusion and Recommendations

Management Accounting techniques aid the management of businesses to improve their understanding of the costs, control and management of costs and the impact on changes in volume and costs on cash flow and profits and, in doing so, aid in making difficult decisions that could profoundly affect the way that organizations work.

While MA methods prove beneficial at any point in time, they are essential during times of greater market competition or market downturn and not just to increase the level of competitive advantages, but also to ensure survival. Their application in these crucial moments is thought to be vital and their expertise is essential in all decision-making levels within the business.

Word Count: 1614 (Excluding Title Page and Table of Contents)

Bibliography

Bell J, and Ansari, S, 1995, Strategy and Management Accounting, Houghton Miffin Company, Retrieved November 24, 2008 from college.hmco.com/accounting/ansari/management/1e/students/modules/mod11.pdf

Bhimani, A, (2003), Management Accounting in the Digital Economy, Oxford: Oxford University Press

Guidry, F., Horrigan, J. O., & Craycraft, C. (1998), CVP Analysis: A New Look. Journal of Managerial Issues, 10(1), 74+

Gul, F. A., & Tsui, J. S. (2001), Free Cash Flow, Debt Monitoring, and Audit Pricing: Further Evidence on the Role of Director Equity Ownership. Auditing: A Journal of Practice & Theory, 20(2), 71

Heymann, H. G., & Bloom, R. (1990), Opportunity Cost in Finance and Accounting, Westport, CT: Quorum Books

Lawrence, C. M. (2006), Cost Management: A Strategic Focus, 3d Ed. Issues in Accounting Education, 21(3), 324+

Mascha, M. F. (2002). Cost Management: Strategies for Business Decisions. Issues in Accounting Education, 17(4), 451+

Riahi-Belkaoui, A. (1992). The New Foundations of Management Accounting, New York: Quorum Books

Riahi-Belkaoui, A. (2002). Behavioural Management Accounting, Westport, CT: Quorum Books

Roberts, C, Westman, P, and Gordon, P, 2005, International Financial Reporting: A Comparative Approach 3 3rd version, FT Prentice Hall, USA

Thompson, R. (1986). Understanding Cash Flow: A System Dynamics Analysis, 23+

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[1] Bhimani, A, (2003), Management Accounting in the Digital Economy , Oxford: Oxford University Press

[22 Roberts, C, Westman, P, and Gordon, P, (2005), International Financial Reporting A Comparative Approach 3 3rd Edition, FT Prentice Hall, USA

[3] Roberts & Others, (2005)

[4] Riahi-Belkaoui, A, (1992), The New Foundations of Management Accounting, New York: Quorum Books

[5] Riahi-Belkaoui, A, (1992)

[6] Lawrence, C. M, (2006), Cost Management: A Strategic Focus, 3d Ed. Issues in Accounting Education, 21(3), 324+

[7] Lawrence, (2006)

[8] Mascha, M. F, (2002), Cost Management: Strategies for Business Decisions. Issues in Accounting Education, 17(4), 451+

[9] Mascha, (2002)

[10] Mascha, (2002)

[11] Guidry, F., Horrigan, J. O., & Craycraft, C. (1998), CVP Analysis: A New Look. Journal of Managerial Issues, 10(1), 74+

[12] Mascha, (2002)

[13] Riahi-Belkaoui, A, (1992)

[14] Riahi-Belkaoui, A, (1992)

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