Managing Operations and Finance: Role of Management Accounting, Investment Appraisal, Business Plan and Budgetary Control

This article discusses the role of management accounting, investment appraisal, business plan and budgetary control in managing operations and finance. It explains different techniques and tools used in operational management, such as ABC costing, net present value, internal rate of return, profitability index, and payback period. It also provides insights into Cucumber Ltd's mission statement, financial targets, and areas of improvement for each department. The article is relevant for students studying operations and finance in any college or university.

MANAGING OPERATIONS AND FINANCE
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Contents
SOLUTION 1- ROLE OF MANAGEMENT ACCOUNTING...................................................................3
SOLUTION 2 - INVESTMENT APPRAISAL...........................................................................................5
SOLUTION 3 – BUSINESS PLAN AND BUDGETARY CONTROL......................................................8
SOLUTION 4 – BALANCED SCORECARD APPROACH....................................................................11
CONCLUSION.........................................................................................................................................13
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SOLUTION 1- ROLE OF MANAGEMENT ACCOUNTING
Management accounting, as the name suggests, is the study of accounting related to financing. It
is the process of preparation of management books and accounts and reports that provide the
information related to the entity, be in financial terms or statistical terms so as to enable the top
management to take short term decisions. Such management reports usually comprises of
information’s such as revenue generated, cash-in-hand, abnormal gains /losses, creditors /debtors
information, the outstanding liabilities, advances received and made, any abnormal income or
loss, or any other material information that is likely to be disclosed (Peterson & Fabozzi, 2012).
The role of management accounting is as follows:
 Designing of Reports: The management accountant prepares accounts and reports on
finance and cost accounts and does such preparations for decisions required to be made
frequently in the short run.
 Forecasting Future Prospects: Such accounting plays an important role in formulation of
such plans and actions after considering the future forecasts for the entity. It includes
formulating strategic or corporate planning.
 Monitors the Capital Structure: It is the duty of management accountant to monitor the
capital structure and maintain a favorable mix of debt and equity securities. He is
expected to consider the various cost theories such as leverage, trading on equity, cost of
capital, etc and then make reports on raising fund and their reasons.
 Control: The management accountant prepares reports related to costing such as budgets,
variances analysis, standard costs, cash flow statement, fund flow statement, performance
analysis, investments and responsibility accounting, etc for control.
 Decision - Making: The management accountant holds an important position in the entity
and holds a better position than many other accountants & employees. He instructs
executives and employees the need for establishing control and the different ways to do
so. He extracts the relevant information from irrelevant data and represents the same in
his books in clear words.
Management accounting is often confused with financial accounting (Adelaja, 2015). However,
the two are different and can be differentiated as discussed below:
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 Financial reports are based on the entire business results. Management accounting reports
are detailed in nature and are more like weekly reports.
 Financial reports are prepared to ascertain the profitability aspects of a business while
management reports are prepared to define the causes of troubles and proposed solutions.
 Financial reports have to contain the information that are true and fair while management
accountant focuses on all kinds of information be it estimates rather than proved and
completely correct information. In simple words, management reports if contains
incorrect information, it won’t create troubles for the management but incorrect
information in the financial reports will create legal troubles or ethical troubles depending
on the nature of incorrectness.
 Financial reports are prepared carefully as it is distributed to both internal and external
stakeholders while the management reports are for the internal stakeholders only.
 Financial reports have to be prepared and presented in compliance with various
accounting and auditing standards while management reports doesn't have to be prepared
according to some rules or regulations as it is used for internal purposes only.
There are different techniques of cost models used. However, let us discuss the most
common cost models used by operational managers (Rivenbark, Vogt, & Marlowe, 2009):
 ABC Costing: Activity based costing is the model where different activities of the
business are identified and then the cost of such are associated to the products & services
as per the consumption made by each of them.
 Cost Breakeven Analysis: This analysis helps a business to identify its breakeven point
where it will acquire a position of no profits, no gains. It lets a business to know the
number of units it has to produce to bear all its fixed & variable costs and thereby, earn
an income over that.
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SOLUTION 2 - INVESTMENT APPRAISAL
Investment appraisal or capital budgeting is the process of determining whether the firms
planning of investment in long term assets such as machinery, equipments, research projects,
new products, etc are worth enough to invest money into. The main purpose of adopting such
practices is to maximize the value to the shareholders of the firms and earn income in the long
run and so as to fulfill the wealth maximizing objectives of the business (Bierman & Smidt,
2010) .
Different Capital appraisal techniques are used as per the stakeholders and investors
expectations. Such different techniques for capital investment appraisal are discussed below:
 Net Present Value (NPV): This technique is used to determine the actual cash flow into
the firm be it negative or positive after netting of all the committed fixed costs. All firms
strive to get a positive NPV. It involves calculation of a cash flow at a particular time
(say, present year) discounted at a rate to bring it back to the present year and calculate
the NPV by netting total cash outflows from cash inflows.
 Accounting Rate Of Return: In this technique, the profit that can be earned from the
chosen project is estimated and compared with the initial investment to be made for such
a project. It is obvious that projects that will yield higher rate of return will be preferred
over the projects with lower rate of return. However, such a technique is usually not
adopted for decisions as it doesn't consider the time value of money.
 Internal Rate of Return: IRR is a discounting rate that targets to make NPV zero by
computing cash outflows and inflows on the present date. It is one of the most used
techniques and is generally considered to calculate the efficiency of the investment made.
IRR is calculated by making NPV zero and equating so as to derive the discounting rate.
It is probable that if the cost of capital exceeds IRR rate, the project will be rejected and
if the cost of capital is lower than the IRR rate, the project is more likely to be accepted.
IRR make use of time value of money to derive a discounting rate.
 Modified Internal Rate Of Return (MIRR): The IRR concept fails to answer that why the
intermediate cash flows aren't reinvested and gradually, a low discounting rate will be
calculated always. Thus, a better analyzing technique is developed called modified
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internal rate of return when it is assumed that the reinvestment rate equals with the rate of
cost of capital.
 Profitability Index: Profitability Index calculates the value per unit of investment. This
method is basically a ratio of the profits through investment to the pay off of the project.
 Payback Period: Payback Period is the calculation of time that would be involved for
getting the initial investment back. It is considered to be one of the easiest methods and
usually projects with longer time periods are not preferred over projects with shorter time
periods for investment decisions.
 Discounted Payback Period : This is almost similar to the previous discussed technique,
that is, payback period with the only difference that it considers the time value of money
and therefore, calculates the discounted value of cash flow and that is how, payback
period is then calculated.
The company wants to expand its business and for expansion there are various proposals
available. However, the company has four proposals available. It has to accept the best proposal.
So, in order to take up the best proposal the company needs to find the Net present value of all
the four proposals and the one with highest NPV should be selected (Dayananda, Irons, Harrison,
Herbohn, & Rowland, 2008).
Cash flows (£ms)
Year
0
Year
1
Year
2
Year
3
Year
4
Year
5 NPV
PV factor @ 10% 1 0.91 0.83 0.75 0.68 0.62
Proposal 1 -24 16 12 8 4 -8
PV of cash flows for
proposal 1 -24 16 12 8 4 -8 8
Proposal 2 -19 2 8 8 12 10
PV of cash flows for
proposal 2 -19 2 8 8 12 10 21
Proposal 3 -16 6 8 6 6 4
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PV of cash flows for
proposal 3 -16 6 8 6 6 4 14
Proposal 4 -32 6 10 18 16 12
PV of cash flows for
proposal 4 -32 6 10 18 16 12 30
Discount rates at 10%
0 1.00
1 0.91
2 0.83
3 0.75
4 0.68
5 0.62
Since, proposal 4 has a positive and the highest NPV the company should accept proposal 4
(Menifield, 2014).
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SOLUTION 3 – BUSINESS PLAN AND BUDGETARY CONTROL
The business plan in the operational management is prepared to determine the procedures to be
undertaken to carry out the operations of a business. This plan usually considers factors such as
labor efficiencies, time duration taken, equipment usage, targets of the company etc (Seitz &
Ellison, 2009). A business plan includes the role of all the departments that has to meet up with
the required targets so as to achieve the overall target of the business. As per the case study
given, Cucumber Ltd has six departments where each of the departments have different targets
and all this has to be adopted to fulfill the mission statement of the company (Peterson &
Fabozzi, 2012). The role of business plan in the case organization is:
 It sets the future destination for a business and allows it to work towards a
determined goal and therefore, binds the management to work accordingly.
 A smart and detailed business plan if shows enough potential can convince the
attractive investors to invest their money into it.
 It defines the different activities of business operations and the different level of
managers and employee. Therefore, defines the organizational structure of the firm.
In a management process, one of the most important tools used and prepared is Budget. Budget
is an estimation of costs and revenue from the operations of the business. A business needs it to
establish a control over its costs and sets a profit target for the organization. The role of budget in
the case organization is (Schroeder, 2014):
 It points out the operational and financial objectives of the business.
 It helps in showing the management of cash, that is, how the cash is being
allocated for different activities and how such cash expenses can be controlled.
 It shows a sale forecasts as well so as to determine the budgeted profits and
specifies the standards for measuring the performance of the company.
 It helps in the preparation of the variances report that is the difference between
the expected and actual costs (Fridson & Alvarez, 2012).
As per the case study given, Cucumber Ltd has its mission statement of being recognized for
providing qualitative mobile phones at affordable prices by both customers and employees.
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The company has a financial target of earning £5m as profit before tax and having return on
capital employed at least 18% (Rosenfield, 2009).
The following Calculations will show us the levels of sales units required to be achieved by
Cucumber ltd in order to attain the level of profit of Pound 5 million.
We are Provided with the following data:
Sales price per unit 150
Variable cost per unit 100
Contribution 50
Let the number of units to be sold be x units
then,
total contribution = 50x
We know,
Profit = Contribution- Fixed Cost
In order to achieve the required level of profit of 5 million
5000000 = 50x-1500000
therefore,
X = 130000
Therefore in order to achieve the desired level of profit of pond 5 million, the company will be
required to sell 130000 units
Cucumber Ltd
Budgetary Control Report
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Product Activity
Units
130000
units
Sales Price per unit 150
Less: variable cost per unit 100
Contribution per unit 50
Contribution from 130000
units 6500000
Less: Fixed Cost 1500000
Budgeted Profit (target) 5000000
The following illustrative report shows the areas of improvements and targets set up by each
of the departments as well as the measures to be taken (McLaney & Adril, 2016).
 The company is planning to spend more on the production facilities so as to bring
significant improvements in the product.
 Mr. Brown is intending to improve the performances of the staffs and other workers. For
this, he has devised a policy of minimum qualifications of the staffs where direct
manufacturing staffs should be qualified to NVQ level 4 and the supervisors must have
Bask (Honors) level.
 Mr. Brown has also set target for defects in finished goods to be 5% that will be rectified
and has set up a new measurement system for improving the quality.
 Another department called Customer Support Department, has set up a target of
answering all calls within four rings (Girard, 2014).
 The HR department is looking forward to improve the employee turnover. It aims at
retaining the employees as a rapid movement of skilled employees has been observed. It
is aiming to reduce the employee turnover from 25% to 15%.
 The company has planned to conduct a survey within 4 weeks among its customers after
completed sales. The target of the company is to achieve the “Excellent” rating by at least
80% of its customers.
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 The company doesn’t own a detailed budgetary plan due to which the sales target cannot
be set. It is recommended for the company to use the cost breakeven analysis cost model
to determine the level of breakeven sales. It can set the sales target to achieve its target of
earnings before tax $5m (Zack, 2009).
 The cost centre of Screen Product shows negative variances which are one of the major
concerns for the company and needs improvements. The control should be established
over the production as where the budget defines a production of 3000 units, the actual
production is 4000 units. This automatically increases the costs provided per unit cost as
set by the budget is less than per unit cost in reality. For example, the material cost per
unit as per the budget is £10.33 but in reality it is £9.75. The same has been observed in
case of other costs too. This means because of the over production, the company is
suffering from negative variances (Rayman, 2009).
SOLUTION 4 – BALANCED SCORECARD APPROACH
Balanced Scorecard is an approach used in the strategic management to evaluate the performance
of various activities and functions of the entity and proposing the improvements and analyzing
the outcomes (Paul, 2014). It is a measure to provide the information to the business enterprises
regarding both qualitative and quantitative information which are used by the top level
management of the enterprise to make decisions in a better way for the entity (Piper, 2015). The
balanced scorecard focuses on the four areas which can be summarized as below:
1. Profitability from financial perspective. This perspective shows how the strategy is being
implemented and executed and whether such strategies are improving the operations of the
company (Pratt, 2009).
2. Customer Satisfaction from customer perspective. This perception is all about providing the
best to the customers and maximizes the wealth maximizing objectives. This perception
helps a business to survive in the long run (Zyla, 2013).
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3. Internal business processes perspective. This perception is focusing towards stability and
sound procedures and policies of an organization. This fills in the gap between financial and
customer perspectives (Mattessich, 2016).
4. Learning and growth perspective. This involves training and other improvement measures for
the labor. It assures that the employees possess such skills and knowledge so as to be able to
make up with the targets and be able to sustain the competition.
The balanced scorecard of the case organization is as follow (Taillard, 2013):
PERSPECTIVE TARGET PERFORMANCE
MEASURE
Customer Perspective Achieving “Excellent” rating by
at least 80% customers to
ensure customer satisfaction
Survey to be conducted within
4 weeks after every completed
sales
Internal Business
Perspective
Quality improvement and
reduction of defects to
maximum of 5%
Implementation of new
measurement system,
purchase of fixed asset with
positive NPV
Innovation & Learning To have qualified staffs Direct manufacturing staffs
should be qualified to NVQ
level 4 and the supervisors
must have B.Sc (Honors)
level
Financial Perspective Target of earning £5m and
ROCE of at least 18%
Proper budget control
preparation ,
Elimination of negative
variances, expanding
production facilities
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CONCLUSION
This case study relates to manufacturing firm known as Cucumber Ltd. Though it is a small
company but has highly skilled workers in it. There are various departments in the organization
to carry out its operations. In this assignment, the company has proposed to take up a new project
in order to expand its production. There were four proposals available to the company so based
on the NPV of these projects it was found that Proposal 4 shall be accepted as it has positive and
the highest NPV. Also, the company had certain problems in budgetary planning for which
certain strategies are adopted. However, there has also been an intention of reducing the
employee turnover. These changes are made by the company in order to achieve its targets of
recognizing customers as well as employees and providing good quality products at reasonable
prices.
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