Strategic Accounting for Decision Making

Strategic Accounting for Decision MakingSuper Service Mini Market.Contents (Jump to)AbstractChapter 1 knowledgeabilityChapter 2 The Mini MarketsChapter 3 Conclusions and Recommendations turn offsAbstractOne of the nominate factors in achieving bottom line performance in any work enterprise is a complete understanding of how controlling cost contri simplye to the attainment of favourableness. Walters and Giles (2000)1 point erupt that managers who exercise flexibility in timing of decisions provide themselves with options in compare the viability of opportunities. The utilization of strategic history 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. Todays accounting theory sees this function as an ongoing active component in dividing line operations. The proper utilization of varied accounting principles permits product line owners and managers to utilize past res ults as a foundation for predicting future performance as well as the performance for the addition of new fruit lines. Horngren et al (1997)2 indicate that effective preparedness along with effective control represent critical factors in the achievement of business objectives. They go on to bow that through effective preparation 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 fragment in a miniskirtskirtskirtskirtskirt foodstuff place represents an application of the foregoing whereby the employment of strategic accounting for decision making is a ferment 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 IntroductionThe SettingA n entrepreneur in South Wales postulated that the establishment of a mini market selling a limited variety of varied diet items would be able to establish a foothold and survive in a competitive environment that included major supermarkets, Tesco Safeways, Asda along with an some other(prenominal) outlets. The chief(prenominal) 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 each 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 elaborateness an entrepreneur needs to evolve into a professional manager and understand not only how to delegate, but how to lead as well as blow over and plan. And s ince gross revenue 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 be 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 man-to-man 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 spring their accounting systems in terms of information gathering and construction, to fit the needs of the entity.Background Facts and FactorsIt was noticed that one of the store manager s, 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 guild would pay for this manager to attend a course conducted at the Glamorgan Business School Weekend MSC Accounting programme. At a opposition 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 desegregation 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 commission organizational structure of the four mini markets is as followsTable 1 Organizational StructureManaging DirectorNewport Penarth Cowbridge AberdareEach manager was directed to compile the succeeding(a)Profit and bolshy 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 situation 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 30/06/05The foregoing produced an interesting response from one of the department manager of General Groceries at the Aberdare mini market. The depth psychology of floor space in that section found that in that location 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 hobbyA 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 report 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 sense of balance Sheet and Profit and Loss Account for the Aberdare Super Service mini market in 2005.Chapter 2 The Mini Markets2.1 A comprehensive comparison of the Aberdare and Penarth mini markets that includes their relative s trengths 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 dedicate to soaking drinks and cigarettes as well as a separate defined space for the administrative authority. And while the particular(prenominal)ations 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 2 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 close lik ely 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 MarketsThe 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 be 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 MarketsPenarth Aberdare2.2 An analysis of the profitability of the profit centres in AberdareIn cal culating 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 MarketsClearly, the stores (3) and administrative office (7) do not contribute to sales, and thus are cost expense areas. The following Table 6 distributes piggish 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% all ocated 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 AreasIn 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 Percenta ge and Percentage of Sales AberdareTable 7 overhead Expense and Net Profit Allocations at AberdareAs 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 existent floor space for dairy products as well as a portion of general groceries could be expanded from the 5% that provide 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 on 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 Penarths stores allocation needs to be reduced to a percentage that approximates Aberdares 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 Customs, 2005)4. This figure is arriving at by dividing the operating profits of the mini market by the interest paid during the same fiscal period. The preceding ratio illustrates the relationship of gearing with respect to the profit and loss. Simply stated, gearing describes the debt compared with the mini markets equity capital (Randall, 2003)5Table 3 Financial Comparisons for the Penarth and Aberd are Mini MarketsPenarth Aberdare2.4 Budgetary planning and control was delegated to the manager of the Penarth mini marketIn fulfilling this aspect of the directives discussed in the managers meeting the balance between improving operational performance through decision making precedes budgetary planning as the direction and changes to be employed must first be decided upon and all impacting variables considered. One such example is the allocation of space at the Penarth mini market whereby the stores department occupies 50% of available floor space. The decision making process in this instance revolves around how to reapportion space and to what departments to maximise the return. Another decision-making process entails the introduction of film processing at the Aberdare mini market and the allocation of resources as well as space based upon projections and market research.Decision making entails utilizing a check leaning of steps to assist in arriving at the most viable selection based upon a consideration of factors, facts, influences and alternative options. The following are decision-making procedures to aid in determining what courses of action to takePareto AnalysisThis technique helps to select the most effective changes through following the courses of action that will yield the largest benefits. The technique entails listing the changes that could be made and grouping them into changes that are related. The list items are rankd by the basis of profit, customer satisfaction or other titles basing the scores on the profit generated or reduction in complaints, to utilize and example of the two possibilities indicated. In this manner attention is paid to those items with the highest scores (Reh, 2004)6. opposite ComparisonThrough this technique the importance of options that are relative to each other is worked out. The methodology aids in setting priorities when resources are subject to impertinent demands. Placing options on a grid permits the vari ed options to be compared and then numbered ranging from 0, representing no difference, through 3 which represents major difference(s) are assigned. These values are converted to percentages of the descend score (Marsh et al, 2003)7.Grid AnalysisThe utilization of a grid analysis is employed when there are a number of good possibilities or alternatives. The list of options is placed into rows and factors are put into columns. The relative importance of factors comprising the decision is worked out and shown as numbers. These are utilized to apply varying weights to preferences through the importance of the factors. If this is not apparent then paired comparison analysis is utilized (Olsen et al, 2002)8.Decision TreesThis time proven method begins with the decision that needs to be made which is displace as a square. Lines emanating from this square are drawn to the right for every possible solution with the explanation written on the line. The end of these lines considers the resu lts and if it is not plastered a circle at the end is used to designate this with squares used for decisions. The process is continued until as many possible outcomes as can be thought of are considered (Monahan, 2000)9.PMIThe Plus-Minus-Implications technique weighs the pros as well as cons of a decision. The process entails utilizing a table with the headings Plus-Minus-Implications where one writes the positive (plus), negative (minus) and possible outcomes (implications) of fetching a particular course of action (Hennen, 2004)10. If the decision is not obvious after the preceding then scores are applied in a subjective manner to complete the exercise.Force Field AnalysisThis looks at all of the forces as well as pressures for as well as against change. The process looks to strengthen those forces that support the decision and weaken the impact of those forces in opposition. The forces representing change are listed in one column, with those against change listed in the other, then a score is assigned from 1, representing weak, to 5, representing strong are used (Lewin, 1951)11.Six Thinking HatsLooking at a decision representing all the possible points of view is the basis for this technique. The method forces thinking outside of habitual styles and employs emotional, creative, intuitive, creative as well as negative views so that resistance to change and other factors are considered (de Bono, 1999)12.Cost/ public assistance AnalysisThis relatively simple method entails adding up the relative value of a course of actions benefits and then subtracting the costs that are associated with it. These costs may be one time or ongoing. Time is factored into the equation by looking at the period required for payback or breakeven as well as the costs (risks) involved (Gramlich, 1981)13.Budgetary planning represents actions and activities undertaken by a company over a specified period of time whereby the costs and results are contained in forecasts and projections that consider the factors resulting from the decision making process to arrive at the courses of action (Otley, 1978)14 ). While decision-making is utilized to arrive at the answers or solutions, budgetary planning uses elements that have already been decided upon and worked into a coherent plan. Decision-making represents the phase when possibilities are considered, whereby budgetary planning entails utilizing elements that are parts of the overall plan for the business entity, both new as well as existing.2.5 Proposals for new revenue sourcesThe manager of the Aberdare mini market was approached by one of the departmental managers who suggested that an unutilized space in the General Groceries section could be used for photograph development, amplification, etc. The manager presented the following facts to support the recommendationEquipment utilized in the process of developing and enlargement cost 18,000 with a useable life cycle of three (3) years.Operation of the service woul d entail hiring an additional employee at 15,000 per annum.The cost of photographic paper would wide 0.75, and would represent 36 prints per sheet.The cost of chemicals to develop 36 prints would total 0.40It was suggested that a good marketing promotion would consist of giving customers a free phonograph album with each roll of film that was developed. The cost of each album was presented as 0.80.Competitive pricing put the figure for developing 36 prints at 5.50.In order to retain customers it was recommended that an offer of a free roll of film be provided customers for each roll brought in for developing.Film could be obtained from Fuji at 0.75 per roll.In conjunction with the foregoing the manager of the Aberdare mini market prepared a demand forecast representing film development for the years 2005 through 2007Table 8 Demand Forecast for Films Developed 2005-2007Year200520062007Films Processed11,00012,500