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Strategic Accounting for Decision Making

“Super Service” Mini Market.
Contents (Jump to)
Abstract
Chapter 1 – Introduction
Chapter 2 – The Mini Markets
Chapter 3 – Conclusions and Recommendations
Tables

Abstract
One of the key factors in achieving bottom line performance in any business enterprise is a complete understanding of how controlling costs contribute to the attainment of profitability. Walters and Giles (2000)[1] point out that managers who exercise “…flexibility in timing of decisions…” provide themselves with options in equating the viability of opportunities. The utilization of strategic accounting in decision-making represents a departure from past accounting practices whereby it was used to predict fiscal performance and then report on what was achieved. Today’s accounting theory sees this function as an ongoing active component in business operations. The proper utilization of varied accounting principles permits business owners and managers to utilize past results as a foundation for predicting future performance as well as the performance for the addition of new product lines. Horngren et al (1997)[2] indicate that effective planning along with effective control represent critical factors in the achievement of business objectives. They go on to state that through effective planning goals are selected with more care and input and that the achievement of goal objectives calls for the utilization of effective controls.
The introduction of a new section in a ‘mini market’ represents an application of the foregoing whereby the employment of ‘strategic accounting for decision making’ is a process by which the business can be evaluated from differing operational perspectives. The foregoing setting shall be utilized to explore and pose solutions and answers to business conditions and questions with respect to varying business decision-making areas within this setting.
Chapter 1 – Introduction The Setting
An entrepreneur in South Wales postulated that the establishment of a mini market selling a limited variety of varied food items would be able to establish a foothold and survive in a competitive environment that included major supermarkets, Tesco – Safeways, Asda along with other outlets. The main theme for the foundation of this enterprise was based upon offering consumers ‘convenience’ as well as ‘quality service’ in an establishment where they could purchase either a single or multiple items quickly. The foregoing concept proved successful, as this entrepreneur was able to add three more mini markets in the area.
And success brings with it the need to innovative, improve operations and seek areas of opportunity to continue growth. In order to be successful when a business goes through expansion an entrepreneur needs to evolve into a professional manager and understand not only how to delegate, but how to lead as well as communicate and plan. And since sales and profitability are the barometers by which business is measured, the importance of being able to forecast revenues and expenditures, identify probabilities, analyze operations, and control costs are key components of strategic accounting. The foregoing principles became apparent as a result of attending a University course for ‘Budgetary Planning and Control. In order to develop a more sophisticated and effective system, the assistance and input of the managers of the stores was not only an necessary component, it was vital in gathering information as well as insight on the individual operations. Simons (1987)[3] emphasizes that accounting represents an informational as well as control mechanism that managers must utilize to understand the varied components of their business and mold their accounting systems in terms of information gathering and construction, to fit the needs of the entity.
Background Facts and Factors
It was noticed that one of the store managers, located in Aberdare, was committed but lacked the expertise to functionally participate in the formal ‘Budgetary Planning and Control’ system that was being implemented. As a result is was agreed that the company would pay for this manager to attend a course conducted at the ‘Glamorgan Business School Weekend MSC Accounting programme’. At a meeting that called together all of the store managers it was explained that hence forth each store would be rated and evaluated on its individual performance rather than the prior group consolidation basis. This entailed each manager producing a yearly budget for their outlet in consultation with their department managers to generate figures for each retail area. The overall line management organizational structure of the four mini markets is as follows:
Table 1 – Organizational Structure
Managing Director

Newport Penarth Cowbridge Aberdare
Each manager was directed to compile the following:
‘Profit and Loss Account’ for their individual mini markets for the period ending 31/21/04,
a breakdown of staff salaries,
employee composition by mini market section,
percentage of floor space allocated to sections,
asset value of each cost center within their mini markets,
and, a Forecast of Profit and Loss for the six month period 01/01/05 through 30/06/05
The foregoing produced an interesting response from one of the department manager of General Groceries at the Aberdare mini market. The analysis of floor space in that section found that there was under-utilized space that could be put to better use. The manager had conducted some research and uncovered that there was no location in Aberdare where one could have photographs developed or enlarged. The idea was broached with the store manager and after gathering of some additional information regarding the cost of film it was included in reports to be presented at a meeting of managers and the owner. These were to consist of the following:
A comprehensive comparison of the Aberdare and Penarth mini markets that includes their relative strengths as well as weaknesses.
An analysis of the profitability of the profit centres in Aberdare.
Because each mini market was henceforth to be operated as individual business entities, options as well as constraints with regard to raising capital to expand operations at the Aberdare location also were to be included.
Budgetary planning and control was delegated to the manager of the Penarth mini market. The foregoing was based upon the fact that all managers had attended a seminar on this subject matter.
Proposals for new revenue sources.
Report on ‘working capital management’ emphasizing debtor control and the lack of a link between it and profit / cash flow.
Presentation of the Forecast Balance Sheet and Profit and Loss Account for the Aberdare Super Service mini market in 2005.
Chapter 2 – The Mini Markets 2.1 A comprehensive comparison of the Aberdare and Penarth mini markets that includes their relative strengths as well as weaknesses.
In developing a basis for comparison of the Aberdare and Penarth the constant that is attributable to both locations is the general layout of the locations and organizational style. As shown by Table 3 the Penarth mini market does not have a sales area devoted to ‘alcoholic drinks and cigarettes’ as well as a separate defined space for the ‘administrative office’. And while the specifications do not provide information on this point, the allocation of 50% of space in the Penarth mini market to ‘stores’ would seem to indicate that this area also is utilized for administrative functions. The other difference in general layout between the two subject locations is the absence of ‘alcoholic drinks and cigarettes’ section at the Penarth mini market. As these products represent traffic builders as well as profitable items, alcoholic drinks at the Penarth mini market they are assigned to the ‘general groceries’ area for alcoholic drinks and most likely checkout location for cigarettes. This aspect indicates a weakness in the Penarth mini market as the sales of alcoholic drinks and cigarettes contributed 7% to revenue.
Table 2 – Organization of Aberdare / Penarth Mini Markets
Mini Market
Organization
Aberdare
% of Total Area
Penarth
% of Total Area
1. Fresh Meat Area
10
10
2. Dairy Products
20
15
3. Stores
22
50
4. General Groceries
28
10
5. Frozen Foods
10
15
6. Alcoholic Drinks
and Cigarettes
5
7. Administrative
Office
5
Total
100
100
The allocation of 50% of floor space to ‘stores’ in the Penarth mini market represents a sizeable amount of area devoted to a non-sales function and would seemingly create a more cluttered layout for the remaining departments. For consumers accustomed to the spacious layout of major supermarkets such as Tesco – Safeways, and Asda the loss of floor space at Penarth as well as definitive section for ‘alcoholic drinks and cigarettes’ could negatively affect sales performance. However, the operating profit as shown by Table 4 for both locations is extremely close, recording 19% for Penarth and 17.4% for Aberdare.
Table 3 – Financial Comparisons for the Penarth and Aberdare Mini Markets
Penarth Aberdare
Operating Profit
Sales
19%
17.4%
Cost of Sales
Sales
50%
50%
Expenses
Sales
31%
32%
Interest cover
20 x
31
Gearing
20%
12.5%
Current Ratio
2:1
3:1
Quick Ratio
1:1
2:1
2.2 An analysis of the profitability of the profit centres in Aberdare
In calculating the profitability of each department at the Aberdare and Penarth mini markets, areas 3 (stores) and 7 (administrative office) need to be removed in order to calculate the relative profitability of the remaining sales areas. The calculations relating to the aforementioned were derived from Table 5 below.
Table 4 – Organization of Aberdare / Penarth Mini Markets
Mini Market
Organization
Aberdare
% of Total Area
Penarth
% of Total Area
1. Fresh Meat Area
10
10
2. Dairy Products
20
15
3. Stores
22
50
4. General Groceries
28
10
5. Frozen Foods
10
15
6. Alcoholic Drinks
and Cigarettes
5
7. Administrative
Office
5
Total
100
100
Clearly, the stores (3) and administrative office (7) do not contribute to sales, and thus are cost expense areas. The following Table 6 distributes gross profitability against sales departments. An area that stands out in the analysis of these two locations is that Penarth has 50% of its available space devoted to ‘stores’ a non-sales area. In contrast, Aberdare devotes just 22% of its available space to this department (stores) and another 5% for administrative function thus losing just 27% as opposed to 50%. The percentage of profitability figures for Penarth sales sections double as a result of deducting the 50% allocated to ‘stores’. By comparing the two mini markets in this manner it is apparent that the Penarth mini market has a higher ratio of sales percentage attributable to the departments utilizing the remaining floor space. The largest discrepancy occurs in the frozen food section which is the third most profitable department at Aberdare (£47,387.5) as well as ranking third in terms of sales (£174,375) behind general groceries, which ranks first in terms of sales (£465,000), and profits (£136,260), and dairy products which ranked second (£348,750 and £124,775 respectively).
Table 5 – Percent Profitability of Aberdare and Penarth Sales Areas
Mini Market
Organization
Aberdare
% of Profitability
Aberdare
Profitability
Penarth
% of Profitability
1. Fresh Meat
13.95
£30,271.5
20
2.Dairy
Products
27.9
£60,543
30
3. Stores
4. General
Groceries
37.2
£80,724
20
5. Frozen
Foods
13.95
£30,271.5
30
6. Alcoholic
Drinks and
Cigarettes
7
£15,190
7.Administrative
Office
Total
100
£217,000
100
In equating the percentage of sales attributable to each department at the Aberdare mini market, stores (3) along with the administrative office (7) were eliminated as these represent expense (support) functions. In so doing the percentage of sales differs from the percentage of space allocation in reaching this calculation.
Table 6 – Comparison of Area Percentage and Percentage of Sales – Aberdare
Mini Market
Organization
Cost
Centre
% of
Total
Area
% of
Sales
Sales
Allocation
1. Fresh Meat
1
10
13.95
£174,375
2.Dairy
Products
2
20
27.9
£348,750
3. Stores
3
22
22
4. General
Groceries
4
28
37.2
£465,000
5. Frozen
Foods
5
10
13.95
£174,375
6. Alcoholic
Drinks and
Cigarettes
6
5
7
£87,500
7.Administrative
Office
7
5
Total
100
100
£1,250,000
Table 7 – Overhead Expense and Net Profit Allocations at Aberdare
Mini Market
Organization
Salaries
Overhead
Cost
Of
Sales
Overhead
Total
Net
Profit
1. Fresh Meat
£44,000
£5,800
£87,187.5
£136,987.5
£37,387.5
2.Dairy
Products
£38,000
£11,600
£174,375
£223,975
£124,775
3. Stores
£40,000
£12,760
£52,760
(£52,760)
4. General
Groceries
£80,000
£16,240
£232,500
£328,740
£136,260
5. Frozen
Foods
£34,000
£5,800
£87,187.5
£126,987.5
£47,387.5
6. Alcoholic
Drinks and
Cigarettes
£34,000
£2,900
£43,750
£80,650
£6,850
7.Administrative
Office
£80,000
£2,900
£82,900
(£82,900)
Total
£350,000
£58,000
£625,000
£1,033,000
£217,000
As one of the points that were mentioned in the meeting of all mini market managers, any activity(s) that was producing a loss was to be discontinued. The preceding directive calls into question the ‘stores’ department at the Penarth mini market. At 50% of the available floor space allocation for that section is grossly out of line with the space allocated at Aberdare at 22%. Interestingly, the Penarth mini market does not indicate an allocation for an administrative office while Aberdare has a specific space for this function at 5% of floor space. As the directive indicated any activity that generates a loss is to be eliminated, the 5% allocated for the administrative office at Aberdare needs to be discontinued. The positioning of the stores department as well as the administrative office at the rear of the store means that existing floor space for dairy products as well as a portion of general groceries could be expanded from the 5% that will become available. Since the subject of adding a film developing department was broached, the utilization of the added 5% in floor space will be covered in a later section.
As administrative functions represent desk space for a computer, files, printer, telephone and allied equipment a small segment of space in the stores area will be utilized for this function. The Penarth’s stores allocation needs to be reduced to a percentage that approximates Aberdare’s 22%. This would open up 28% to be devoted to profitable sales such as diary products and general groceries, significantly expanding these sections as well as providing additional space for small increases in the other departments, fresh meats – frozen foods and space for alcoholic drinks and beverages which is completely missing from the Penarth mini market.
2.3 Because each mini market was henceforth to be operated as individual business entities, options as well as constraints with regard to raising capital to expand operations at the Aberdare location also were to be included.
Options for raising capital at each mini market are governed by prudent business practice. The calculation of factors such as ‘interest cover and gearing provide guidelines by which to operate in constraining the raising of capital beyond acceptable levels. Interest Cover represents an important financial variable for business entities in that it provides a gauge concerning the interest paid on the businesses borrowings as measured against its operating profit (HM Revenue

Effect of Standard Costing Changes on Firm Operations

The Rise and Fall of Standard Costing and Its Effect on Everyday Operations For European and American Firms
Contents (Jump to)
EXECUTIVE SUMMARY
GENERAL OVERVIEW
ACCOUNTING OVERVIEW
LITERATURE REVIEW

EXECUTIVE SUMMARY The overall purpose of this paper and study is to investigate cost or lean accounting within the operations management realm and how its unpredictable rise and fall allow organisations to continuously learn and utilize knowledge management as a core value. It was also important to use a larger organisation that has history of outstanding operations and customer centered focus upon services. This investigation will require an in-depth study of work processes, communication and leadership with regard to knowledge management as a value within the team construct while looking at how this reflects leaning accounting principles. What tools are available and what kind of evolution is Nestle undergoing in order to remain competitive in a changing economy? How does this change knowledge management and communication company wide? What this study argues is that accounting practices are changing due to the evolving business plan. This is a movement toward modern accounting and it is important to see the relationships between costing accounting, its fluctuations and how they impact the health of the organisation as a whole with regard to productivity and job satisfaction.
How an organisation applies methods of costing into its framework for accounting of expenses and its direct rise and fall over the time period of the product life cycle, directly influences the production, operation, distribution and employee retention of the global company. In fact changes in accounting practices have led to many tried and true business models to no longer exist. Costing and its rise and fall can have a direct relationship with success and competitive advantage in the market place. However the purpose of this study is to explore and reflect upon how accounting practices change operations management and the supply chain management model as a tool of managers and team members alike. Really it is how accounting practices have changed business practices because of new legislation focusing on global companies in Europe and the United States. Accounting costs, expenses and losses reflects the health of the organisation and with change comes confusion. This study argues that with such changes comes a lack of defining the company’s value within the market but also the value it has for its employees, as they become active participants and investors.
GENERAL OVERVIEW How corporate accounting is handled is changing worldwide. How each expense is accounted for within an organisation’s financial sheets has been evolving. Such a proposal for change has received much commentary from not only the financial community and corporate America but also key members of Congress, European union leaders and the public. Such a response results from the uncertainty that such change will benefit businesses and economic growth. It is feared that such change will have the opposite effect and cause world leaders to lose its competitive edge in the global market. The urgency for a solution has only been stressed recently in light of such debacles like Enron and Tyco. It is believed that companies do need to account honestly for expenses but at what price to its employees, the public and the economy? Part of the issue with current legislation to change the practice of accounting for employee stock options is that there is no real way to value their worth. This creates an unsettling feeling among investors and employees struggling to understand this benefit.
ACCOUNTING OVERVIEW What this truly means for any corporation functioning globally or even locally this that effective cost accounting because a volatile issue for management to consider. One could argue that such rise and fall of how costing pays a part in the entire operation has a negative effect upon how the company’s valuation is seen on the open market if done incorrectly. Costing at every step of the product life cycle plays a huge part in how this valuation is decided from inventory at the shop floor level, to everyday operations management, to an employee’s value with the company and their net worth personally. Changes within the global economy in the recent years the disappearance of tried and true business models leaves many with a poor taste in their mouths because one must understand how efficiency, affordability and effective leadership come into play. Effective costing of routine operations and corporate behaviours must be tracked and studied in order to carve the fat. This study aims to look at exactly what the rise and fall of costing means to a global organisation conducting business on many levels. For the purpose of proving the argument that such an evolution of accounting practices has a powerful influence on the organisation, one will look at examples from the shop floor to the continuous management of knowledge and communication. Accounting for such expensing and pricing correctly is what makes the organisation strong but also its people. The benefits of standard costing gives rise to more modern accounting practices today, which then lead to leaner functionality throughout the organisation. It can be argued that by putting a framework of standard costing as accounting practice also leads to a better defined operations team but also leads to a lean supply chain as further innovation is introduced into the organisation. With this in mind, evolved traditional business models like Wal-Mart and Nestle are discussed because these are globally operating corporations with high success rates.
LITERATURE REVIEW PRICING STRATEGIES
It can be difficult to assess why a product has a certain cost or price to the consumer. How is it that companies arrive at certain amount for a product or service? What are the factors that play into this amount and do they change over time while in the market? Mish defines clearly, price as being “the value or worth; the quality of one thing that is exchanged or demanded in barter or sale for another” (2004, p. 985). A mistake that happens to many companies is they allow the market to manage the price of the product and avoid strategic management of pricing in general. What is usually done according to Nagle is “they list the prices based on their own needs and then adjust transaction prices to based on what customers say they are willing to pay. Only a few companies question why someone is willing to pay no more that a particular amount or how that willingness could be changed” (2002, p. 1). In order to be strategic in pricing, a company must confident and understand that “pricing involves managing customers’ expectations to induce them to pay for the value they receive” (Nagle 2002, p.1). Fortunately, when it comes to financial products, many customers remain in the dark about product and services. Sometimes a service oriented company such as the Bank of England can take advantage of such undulation but as more information becomes available due to the Internet, it is becoming increasingly more difficult for a company to set the pace this way. More than not, more companies especially financial ones that rely on customer relationships, allow for a value-based price structure that is contingent on the customer paying when value is delivered. This type of pricing system relies heavily on segmentation of the demographic when it comes to offering promotions and incentives to buster customer loyalty. Much of this applies to financial type products that are well defined for the consumer either through education or these products are a must in life like the credit or loan product. Keeping this in mind, many financial products consist of high quality products and add-ons that when offered by one company allows that company to diversify and establish the price. The table here below aids in illustrating this point.
Table 1: Pricing Strategies
P/Q
Higher Price
Lower Price
Higher Quality
Premium Strategy
Good Value Strategy
Lower Quality
Overcharging Strategy
Economy Strategy
(Anderson

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