MANAGEMENT ACCOUNTING

Management Accounting



Management Accounting

Watson Circuits Plc. (WCP) operate in the circuit production industry: a market identified as competitive in terms of price and quality. In 2005, the market share price of WCP fell, the company lost £1.7 million, highlighting a potential recession in the market expected to last over a year. WCP receives 40% of annual orders from large contracts, 40% from repeat purchases and 20% from small orders. The company produces customised batches of electronic circuit boards for approximately 15 major customers in the defence, computer, electrical goods and automotive industries. The main recession impact for WCP will be the reduction in demand, due to the internalisation of circuit production by these large clients. Economists, and managers alike, have persistently argued: increased efficiency is the most suitable defence against recession. WCPs inability to establish an appropriate management accounting system, highlighted most dramatically in that until 2004 only one qualified accountant was employed bya company with an annual turnover of £26 million, resulting in no past data to analyse or identify inefficiencies. Therefore, several potential management accounting methods are proposed, and evaluated in respect to their applicability, and suitability for WCP.

WCP have consistently invested in, and prioritised, technological enhancements to improve quality in circuit production. I argue that in order to be competitive in price and quality, thereby differentiating their product in the highly competitivemarket, WCP needs to be financially efficient. Kaplan argued the use of new management accounting as a predictive tool rather than mere reporting, by representing a closer reality of organisational behaviour, can aid managerial activities (Kaplan, 1983). Enhancing this prospect, subsequent managerial accounting methods were developed: activity-based costing, target cost management, quality costing, and renewed approaches to measuring performance(Bhimani, 2003:3).

WCP should have financial representation at board level, and he/she needs support throughout the organisation. This will require a complete overhaul of the organisations internal culture, with particular reference to financial stringency in all aspects. Until now, WCP have simply produced annual accounts for shareholders and to satisfy accounting regulations, it is assumed that there has been some annual review of performance but nothing substantial. Reviewing annual accounts means that: valuable time has been wasted in making necessary decisions and corrections to poor trends in your business… monthly/quarterly records are required(Gripper, 1989:2). Therefore the first management accounting system I would recommend is the construction, and review, of monthly accounts. The multitude of benefits a monthly system affords includes rolling budgets, forecasts, identifying real and potential problems quicker, and avoiding unintentional use of overdrafts. By implementing monthly accounts WCP can introduce a monthly budgeting system. There is evidence to suggest that formal annual and monthly budgets are relied upon extensively by successful organisations (Chenhall, 2003). Budgets aid planning activities, especially during uncertain times, by encouraging managers to consider problems before they arise(Duxbury, 2007:2). The unification of sub-divisions, increased communication, motivation via targets and evaluative advantages will aid WCP in improving their efficiency. However, it is essential that the budgets set are at the optimum point, in terms of ...