Management Accounting: A Comprehensive Analysis of Apple's Financial Strategies

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Introduction

Managementis the procedure of rendering resources and financial informationto the management in decision making. Managerial accounting is the recognition, measurement, interpretation, and analysis of the accounting information. Management accounting will help Apple ltd in making key decisions, planning resources, evaluating performances, and providing expertise to assist management while formulating and executing the activities. Management accounting has its origin back during industrial revolution in the 19^th century. This report will aid in comprehending management accounting system, differences between financial and management accounting, roles and types of management accounting system, types of cost and their analysis, uses of planning tools and their importance in dealing with financial stress.

Range of management accounting techniques

Cost

The money which has been spent on the production of a product to achieve the project in a state in which it can be used for commercial or any other purpose is said to be its cost. This is the sum of all direct and indirect expenses which has been incurred by the business (Bragg 2020).

Cost-Volume Profit

This helps the business to make effective decisions regarding the production units. The calculation of BEP, PV Ratio, etc. can be calculated with the help of this tool of managerial accounting.

Flexible Budgeting

This type of budget is not static; it changes as per the level of output. This is the estimation of the future events and the expenses or the revenues are forecasted in this budget.

Cost Variances

The distinction between the planned cost and the actual incurred cost is known as variance of the cost. If the actual cost incurred is more than the budgeted or standard expense, by then it is considered as adverse difference and on the other hand if the actual cost isn't actually the budgeted cost, by then it is considered as certain fluctuation (Charifzadeh and Taschner 2017).

Marginal costing

In marginal costing, the fixed manufacturing overheads are debarred from the product’s cost of production. It assigns only the variable cost to inventory. Here, Apple will charge the overheads to expenses in the period it is incurred, whereas variable overheads and direct materials costs are allocated to inventory.

Advantages:

1. It could readily transmit data about contribution margin and variable costs, needed by the management of Apple every day to make decisions regarding operations.

2. It will furnish a better comprehension of the effect of the fixed costs on net earnings as gross fixed cost is displayed in the income statement.

Disadvantages:

1. Fixed cost directly recognizable is related to production. Whereas, fixed cost is treated as a period cost. Resulting in inaccurate cost of production.

2. Here, work-in-progress and finished products are undervalued. This is due to the exclusion of fixed costs from the cost of production (Hasan, 2015).

Absorption costing

It is a method of managerial accounting for comprehending the associated manufacturing costs for a specific product. Apple will need it for reporting income tax and external financial reporting. It is also known as full costing since it incorporates all manufacturing costs of a product.

Advantages:

1. It will help Apple in reconciling their costs with the revenue and determining the deviations.

2. It will aid Apple in determining the gross cost and evaluating their earnings appropriately.

Disadvantages:

1. It doesn’t help management in taking decisions i.e. choice of alternatives, manufacture or purchase, units sold, etc.

2. It doesn’t aid in controlling the costs of production. Hence, Apple will be unable to compare the costs and control it (Nawaz, 2013).

Fixed and Variable Cost

The fixed cost is that part of the cost which doesn't change with the adjustment underway. It stays fixed regardless of whether there is no production by any means.

Variable costing is that piece of cost which changes comparable to the assembling of the items. It is generally called minor cost as it changes with each new unit of creation (Bragg 2020).

Standard Costing

In standard costing the cost is distinguishes and the pre-concluded rates are resolved. These standard rates are differentiated and real result and the distinctions are resolved. If the changes are not positive, by then everything considered the clarification behind the thing that matters is recognized and therapeutic exercises to make great the misfortunes are taken (Charifzadeh and Taschner 2017).

Activity Based Costing

Activity based costing fuses allotment of the overheads (indirect costs) to the different items. This costing strategy is used in the affiliation where there are numerous things are manufactured.

Types of Inventory Cost

1. Cost of Purchase – It infers the worth that ought to be paid to the supplier of stock with regards to the stock.

2. Ordering Cost - It includes the cost which is incurred on storing and holding the inventory

3. Cost of holding - The expense which is caused and paid for holding or storing the stock.

• Income Statement as per Marginal Costing

• Income Statement as per Absorption Costing

• Reconciliation Statement

Working Notes

Use of planning tools used in the accounting

Planning tools are the instruments that assist in guiding organizational actions concerning the execution of a program, intervention, or initiative. Mostly planning tools are initiative-specific and incorporate action item checklists, sample meeting agenda’s etc. The key objective of planning tools is to convert the objectives of Apple into their achievements. It will help Apple in encompassing a path towards developing strategy, achieving goals and improving the business’s growth (Kareska, 2017).

Apple can adopt the following tools:

1. Standard costing: It is used by Apple to recognize the variances or differences between the budgeted costs that should have been incurred for the goods produced and the actual costs of the goods produced.This will help Apple in analyzing the areas in which remedial action is needed.

Advantages:

1. Managerial planning: Planning is the proceeding of utilizing resources in the most appropriate manner, maximizing the profits for Apple.

2. Cost control: Standard costing will allow Apple to compare standard costs with actual costs to evaluate the performances and take action to control the costs of Apple through the principle of exception.

Disadvantages:

1. Frequent revision needed: With business environment constantly changing and future being uncertain, the fixating standards need revision at regular intervals.

2. Expensive: Making and revising the standards need a good level of expertise. Furthermore, standards are fixed for variable and fixed overheads. Therefore, incurring heavy expenses are needed for fixing the standards (Ekergil and Gode, 2020).

Example –Ideal standard costing which involves assuming of perfect operating conditions and no allowance for wastage is made. Attainable standard which involves assuming of the efficient but not the perfect operating conditions.

2. Cost-volume-profit analysis: It is a point when the total revenue is equal to the total cost. Apple will experience no income or loss at this point. It is used by Apple to evaluate how deviations in volume and costs affect a company’s operating and net income.

Advantages:

1. Detailed perspectives: It depicts a detailed snapshot of the Apple’s operational activities. It aids managers in determining what future holds if the variables are altered.

2. It aids in decision making by providing managers with the benefit of being answerable to particular pragmatic questions needed in the analysis of business.

Disadvantages:

1. It serves unrealistic assumptions for Apple such as price and cost cannot remain persistent when the market conditions keep fluctuating.

2. Number of units could not be only chauffeur for the total revenue and total costs of Apple Ltd (Abdullahi and Musa, 2017).

Example – The CVP analysis make use of the several assumptions which can involve sales price, fixed costs and the variable cost per unit. This can include the several equations for the price, cost and the other variables. The formula for CVP is the fixed cost/contribution margin

3. Budgeting: It is a monetary plan for a specified period, often one year. It is written depiction of financial performance of any particular department, specified project, business unit or entire organization. Advanced planning will help Apple in tracking its resources and their optimum utilization.

Advantages:

1. Evaluating performances: Apple will be able to determine the variances in business performance and take corrective measures if needed.

2. It allows Apple in controlling its expenditure and well-utilizing its income as budget is a “plan for spending”.

Disadvantages:

1. A budget may demotivate, ifthe set targets are too difficult or too easy to achieve. Staff generally aims to achieve the target and not exceed it.

2. The usefulness and success of budgeting depends upon the participation and cooperation of all management members of Apple Ltd (McQuerrey, 2019)

Example – There are different types of the budgeting method which are the zero based budgeting which includes the making the budget with the zero base and incremental budgeting which involves the making use of the budget of the previous year and in accordance to that preparing the new budget.

Comparison of the organizations using management accounting systems

Financial problem or financial stress is the incompetence of to repay the dues or debts of an organization.Financial resources are an integral part of any business to survive the predestined ups and downs. Appleshould reorganize the stress and transform them into actions that should be achieved within a specific timeframe. It is very essential to utilize the present resources appropriately so the efficiency and effectiveness increases. Apple must focus on day-to-day activities as well as the long term decisions to retain the productivity of organization (Gruszczynski, 2015).

Some of the financial problems faced by Apple:

• Access to funding- Funds are needed for the growth or expansion of business and it is very essential to raise funds via the correct and most optimum source.

• Low liquid ratio- Apple has low liquid ratio that means less availability of liquid assets to be quickly transformed into cash (Latif, 2014).

Some of the financial problems faced by O2 ltd:

• Inconsistent cash flow: Cash in hand is needed for day-to-day operations and inconsistency in the cash flow could hamper the daily operations.

• Excess expenditure: It is important to keep a track of the spending of a business. Unnecessary expenditure could lead to pooling out of funds from the needed areasor reduction in profits (Petersen, 2019).

Apple and O2 ltd. uses the following management accounting system and planning tools to resolve their financial issues:

The systems of the management accounting help the organization to move towards the direction in which it will achieve the sustainable success. The MA systems which help the organization to achieve the objective are stated below.

1. Key performance indicator: These are set of business metrics utilized by the management to trace and analyze the factors that are deemed critical for the success of an organization. It helps Apple focusing on the processes and functions of the business which are considered to be of utmost importance by the management to achieve the goals and their performance targets. Apple is making use of the HR targets and the sales targets which helps them in solving of the financial issues where as Setting KPI’s allowO2 ltd. in recognizing internal opportunities and turning them into goals. The firm is using the financial target method of the KPI by which they are able to set the financial targets and puts efforts for achieving such targets (Badawy, 2016).

2. Activity based costing: It is one of the costing methods that allocate indirect costs and overheads to related services and products.

It allowsApple render an accurate method of service/product costing, directing more accurate pricing decisions. It is used inO2 ltd. in improving product and customer profitability analysis.

3. Financial governance: It refers to the procedure of collecting, managing, monitoring, and controlling financial information. It is applied in Apple in controlling the environment and activities regarding the finances. Under the financial governance of Apple it involves, chairman of board compensation committee, audit committee, compensation committee, nominating committee etc. It aidsO2 ltd. in reducing the risks as well as costs and it will avoid duplication of work too. In case of O2 ltd. Through the financial governance O2 ltd are able to make sure about the confidence of the investor which further allows in balancing between the risk and the profits maximization.

4. Job costing system: It is a methodology of accounting that traces all the costs incurred into creating a product.

By tracing the expenditure related to particular jobs, job costing aids Appletoanalyze whether the cost could be minimized or profits could be maximized (Bragg, 2020).

It helps O2 ltd. in determining the cost incurred in each of the jobs and optimizing the utilization of resources.

5. Price optimization system: It is the analysis by organizations to evaluate how clients would respond to setting different prices for the products or services.

It helpsApple ltd. evaluate its objectives to maximize profits.

O2 ltd. uses different pricing strategies to increase their potential earnings.

6. Inventory management system: It is the procedure by which organizations track its stock, order, sales and deliveries.

It provides Apple ltd. data regarding any excess or shortage of inventory.

It aidsO2ltd in maintaining the stock level as per customer demand and avoiding any expected losses.

7. Capital budgeting method

For the purpose of solving the financial issues of the organization, Apple is using the payback period method through which they are able to know about the projects which would be profitable for them in the future and formula of payback period involves amount to be invested / estimated annual net cash flow.

Whereas O2 ltd. is using the accounting rate of returns through which the rate can be known at which the good returns can be obtained by the organization from an investment and formula for ARR is the average net profits divided by the average investments.

Conclusion

Management accounting aids an organization in planning, executing, analyzing, measuring the performances and rendering assistance to formulate and then interpret the strategies to assure organizational success. It has been analyzed in the report above; that management accounting plays an essential role in enhancing the effectiveness of Apple. Management accounting also provides various solutions to organizational or financial issues of a business. It is important for Apple to keep the morale of employees boosted, build team work, and yet work on increasing the profits. A good management will be able to amplify its outcomes and achieve its objectives. Effective use of planning tools and MAS will improve the processes and simplify its targets, facilitating in achieving objectives.

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