Management Accounting For Decision Makers -Myassignmenthelp.Com

Question: Discuss About The Management Accounting For Decision Makers? Answer: Introducation The flying airlines company has two options- either it can replace the loader truck with the conveyor belt now or it can wait for an year to replace the same. The airlines can take the decision based on two things. The first option is to look on the cash flows of the company ignoring the depreciation tax shield and the other is to take a decision keeping in mind the depreciation tax shield. (Chandra, 2014) Cash flows in both the cases ignoring the depreciation tax shield If the Airlines company takes the decision to replace the loader now then it will have a net cash outflow of $75000. As we know that the total cash outflow ( annual variable operating cost) will be $80000 whereas the cash inflow i.e. the amount received on selling the loader is $5000. So, we can conclude that the net cash outflow if the company takes the decision of replacing the loader by conveyor belt now will be $75000. In the second case, the operations manager is thinking of replacing the loader next year. His decision will be finalised only after comparing it with the other option. So, he calculates the total cash outslow for this situation as well. The total amount of money spent will include the cost of purchasing the conveyor belt i.e., $20000 along with the annual variable operating cost i.e., $50000. Therefore, total cash outflow will be $70000. The airline company should buy the conveyor belt now itself rather than to wait for one more year because this will help them to save $(75000-70000) = $ 5000 this year. Cash flows assuming that there is a depreciation tax shield We all know that depreciation is a non cash item that is reflected as an expense in the profit and loss account. However, depreciation also provides as a tax shield. We consider money saved to be money earned and so it will affect the cash flows of the company. Let us see the impact of this tax shield on both the situations. (Shah, 2009) In the first situation, the annual depreciation is $25000. Assuming the tax rate to be 30%, we can say that the tax saving is $25000*30*= $7500. Therefore, the net cash flow in the first situation is $(80000-5000-7500) =$ 67500. In the second situation, tax saved = $(20000*30%) =$6000. Therefore the total cash outflow of the Airlines company would be $(20000+50000-6000) = $64000. Therefore, the cash outflow is less when the company chooses to purchase a new conveyor belt without waiting for one year based on both the options. On the basis of financial grounds, the Airlines company should continue with the non stop flight as it provides more profit than the alternative. The calculation of profits under both the circumstances are shown in the below table: PARTICULARS NON STOP FLIGHT STOP IN FIGI FLIGHT Passenger Revenue 240000 251000 Cargo revenue 80000 80000 Total Revenue (A) 320000 331000 Flight crew cost 2000 3400 Fuel 21000 26000 Meals and services 4000 4900 Aircraft Maintenance 1000 1000 Additional charges 5000 Total cost (B) 28000 40300 Total Profit (A-B) 292000 290700 Although the passenger revenue is more in case of a stop flight but still it is unable to generate as much profit as non- stop flight. The reason for this might be the increase in flight crew cost, fuel expenses, meals and services and also an additional charge of landing. The increase of expenses is exceeding the increase of the revenues. (Bhattacharyya, 2011) The company is able to earn a profit of $292000 if it continues with the alternative of non- stop flight from Sydney to Hawaii whereas if it thinks of stopping at Figi then it would be able to earn profit of $290700 only. Therefore, we can conclude that the company should continue with its current idea of non- stop flights. (Epstein and Lee, 2012) The above answer is based on the financial ground but there are also certain non financial grounds that the company has to look upon before taking any kind of decision in a company. The company should also look upon the following factors- The company has to analyse whether it will be able to match the industry standards if it rejects or accepts a particular project and then work accordingly. A company cannot survive in the long run by earning profits only so it should also look upon the customers needs and sometimes take decision based on their satisfaction. (Hart, Wilson and Fergus, 2012) There is also a requirement of improving reputation of the business and relationships in the community. It also has to see whether there is an availability of suitable manpower and technology to take up a certain project. The company should identify all the strengths, weakness, opportunities and threats relating to the project before taking any final decision. We can also say that it must carry out SWOT analysis. The company should keep a watch on the environmental constraints. It is better to reject such projects whose outcome will harm them more than it will benefit them. (A) Spare capacity means operating below the maximum sustainable capacity. In this case, if there is a spare capacity in the airlines then the special tourist charter offer should be accepted on financial grounds. This can be proved by the following calculations. (Atrill and McLaney, 2009) PARTICULARS SPECIAL OFFER Passenger Revenue 250000 Charter income 160000 Cargo Revenue 0 Total revenue(A) 410000 Variable expenses 85000 Fixed cost 80000 Total expenses(B) 165000 Total profit(A-B) 245000 The profit earned usually was $110000 but on acceptance of the special offer the company is able to earn an extra profit of $(245000-110000) = $135000. (Libby, Libby and Hodge, 2017 A company cannot take its decision based on the financial ground only. It also has to see whether it is acceptable on the non financial grounds or not. The other factors that the company should look at are- It should check whether acceptance of this offer would affect the goodwill of the company in a better way or not. It should always keep in mind that the acceptance of this offer does not affect the existing customers as it can be harmful in the long run. It should check the future prospects of accepting this order. It should not happen that the acceptance of such offer provides short term benefits to the company but proves to be harmful later on. So, the company should also analyse the opportunity cost before taking a final decision. In the case of no spare capacity, the company can either continue with the usual flights or it can accept the special offer. Therefore, a comparative analysis has to be carried out in order to know which option would help to generate higher profits. (Piper, 2015) If the company keeps on carrying out its usual business then it would earn profits of $110000 (as per the table below). But if the company accepts the special offer then it will be able to earn $160000. So, it should accept the offer on the basis of financial grounds. PARTICULARS USUAL Passenger Revenue 250000 Cargo Revenue 30000 Total revenue(A) 280000 Variable expenses 90000 Fixed cost 80000 Total expenses(B) 170000 Total profit(A-B) 110000 However, this comparative analysis is not enough for the company to take a decision. The following factors should also be considered: There may be a lower demand for a short period due to seasonal variation but the company should not take the decision based on this period because it may harm the company in the future. Acceptance of such offers should always take into consideration the satisfaction of the customers, employees and the workers. It should look upon the other competitors and see if this act would match up with the industry standards. It is very important to compete well to generate higher revenue. Acceptance of such offer should have an adverse impact on the companys reputation. There are chances that the company may lose its valuable customers just because of short term profits. This should not happen and therefore, the term of the offer should be properly analysed References Atrill, P. and McLaney, E. (2009).Management accounting for decision makers. Harlow: Financial Times/Prentice Hall. Bhattacharyya, D. (2011).Management accounting. Noida, India: Pearson. Chandra, P. (2014).Fundamentals of financial management. New Delhi: Tata McGraw-Hill Education. Epstein, M. and Lee, J. (2012).Advances in management accounting. Bingley: Emerald. Hart, J., Wilson, C. and Fergus, C. (2012).Management accounting. Frenchs Forest, N.S.W.: Pearson Australia. Libby, R., Libby, P. and Hodge, F. (2017). Financial accounting. New York, NY: McGraw-Hill Education. Piper, M. (2015).Accounting made simple. [United States]: [CreateSpace Pub.]. Shah, P. (2009).Management accounting. New Delhi: Oxford University Press.