Operational Budgeting, Cost Analysis: AirAsia Malaysia Case Study

This case study examines AirAsia Malaysia's operational aspects, including budgeting, cost behaviors, and profitability. It delves into the preparation and analysis of operational budgeting processes, considering income, fixed and flexible expenses, and unplanned expenses. The analysis of cost beh...Read More

Assignment II Individual Assignments
Case Study

Table of Contents
Introduction.................................................................................................................................................2
Body............................................................................................................................................................2
Preparation and analysis of operational budgeting processes..................................................................2
Analyzing the cost behaviours using alternative cost estimation techniques and justifying the selected
cost estimation techniques used...............................................................................................................4
Analyzing the profitability of the organization using activity-based costing statements..........................5
Identifying and analyzing the two types of decision-making processes (OPEX and CAPEX appraisals)
along with justifying the reasons for the selection of these respective appraisal techniques....................6
Conclusion...................................................................................................................................................8
References.................................................................................................................................................10
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Introduction
AirAsia Malaysia is considered the largest travel organization which is present in the Asia
Pacific region. It established its business by providing air transport services, travel and lifestyle
products along financial services to the consumers. The initiation of the company was carried out
as low-cost carriers with the execution of operations in Malaysia, Thailand, India, Indonesia, and
the Philippines. The inclusion of the strong network environment is seen which establishes a
strong customer base environment. AirAsia Malaysia is showing an increase in the activities as a
whole. The continuous innovation processes are carried out with the inclusion of the highest
safety and hygiene standards. The inclusion of the strong standard times along with the execution
of transformation is creating a strong enhancement environment (Airasia, 2021). The provision
of digital financial services along with the inclusion of hotels, holidays, and facilities related to
the travel lifestyle is leading to the increase in the demand for the services appropriately. As a
result of this, it enhances the organizational business practices appropriately. It was established
in Kuala Lumpur in the year 2002 and also is pioneering cross-border joint ventures with the
inclusion of the Thailand and Indonesian units. The execution of strong venturing activities is
carried out in the Phillippines, India, and Japan along with establishing an extensive domestic
and regional network environment. It includes the strong service provision processes within
Malaysian Southeast Asia and the other subcontinents present in this region. This established a
flourishing environment in the revenue generation processes as well as created a strong ability to
drill down the capacity appropriately. The fleet traffic and the financial results are strengthened
with the inclusion of these processes (Centreforaviation, 2021). The report aims to provide a
detailed analysis on the operational budgeting, cost behaviours, profitability, and the decision-
making appraisals of the company AirAsia Malaysia.
Body
Preparation and analysis of operational budgeting processes
AirAsia considers four vital aspects to manage the operational budgeting process. In this case,
the first consideration of the organizational management team has relied on the income. The
foundation of an effective operational budget is very much dependent on the income of the
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organization. If the organizational net income will not be adequate, then the entity may not be
able to prepare an effective operational budget. The organizational management team is very
much focused to consider the pre-tax and post-tax income because the higher amount of tax can
create a negative impact on the overall profitability of the organization. In this case, the
organization may face significant challenges to prepare the operational budget. The
organizational management team is also prioritizing fixed incomes because these expenses are
mandatory for the organization. The management team may not be able to control the fixed
expenses. However, it cannot be denied that a higher amount of fixed expenses can create a huge
impact on the preparation of the operational budget. The third thing that the management teams
of the organization consider is flexible expenses. The management teams can be able to control
the flexible expenses because these expenses are not necessary. The fourth aspect is unplanned
expenses and savings. Unplanned expenses can be considered emergency expenses. So, the
management teams of the organization have to consider the unplanned expenses. If the
organization will not consider the unplanned expenses, then the entity can face massive
challenges in emergencies. So, the organization has to keep some amount of money in reserve
for unplanned expenses purposes (Hfpllc, 2019).
AirAsia is maintaining the operational budgeting process very cautiously. In this case, the
organization creates an operating budget by considering some crucial factors. Material costs,
labour costs, equipment and machinery costs, transportations and storage costs, utilities,
administration, salaries and supervision costs are the main costs that are associated with the
operational budget of AirAsia. However, the practical scenario of the operational activities of the
organization is not very good. In 2020, the deputy chairman of the organization has asked that
the organization has required a huge amount of money to continue the operational activities. So,
in this case, it can be seen that the organization has faced some significant issues to maintain the
operational activities. The operational budgeting processes of the organization have been
strongly interrupted due to the lack of capital. It cannot be denied that it is not possible to get
positive outcomes from each operational budget process. In the case of AirAsia, the same things
have happened. However, the organizational management team follows the basic concept of
operational budgeting. Financial trouble has created a massive impact on the organization. For
this reason, the organization is failed to manage the budget effectively in recent years. The
management teams of the organization have to maintain the right balance between income and
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expenses. If the entity will be able to implement good cost management processes, then the
entity will be able to maintain the operational budgeting processes (TANSKI-PHILLIPS, 2020).
Analyzing the cost behaviours using alternative cost estimation techniques and justifying
the selected cost estimation techniques used
Cost behaviours can be analyzed by considering fixed, variable and mixed or semi-variable
costs. AirAsia belongs to the Airline industry. In this case, it cannot be denied that the cost of the
operational activities is very much high. Moreover, the costs can also be increased suddenly
because there are many things are associated with the operational activities of the organization.
Fuel prices can be considered as the most significant variable costs of the organization. In the
modern era, the prices of fuel have drastically fluctuated. Moreover, the competition among the
rivalries is constantly increasing. The competitors' are trying to satisfy the requirements of the
potential customers. In this case, the entities are investing a huge amount of money to satisfy the
requirements of the customers. These approaches are also increasing the overall variable cost of
the organizations. There are four vital approaches existed that can be used to estimate the fixed,
variable and mixed or semi-variable costs. These cost estimation techniques are account analysis,
high-low method, scatter graph method and regression analysis. Account analysis can be said as
one of the most significant processes through which the organizational management teams can
be able to understand each aspect of fixed, variable and mixed or semi-variable costs. The
organizational management team can be able to evaluate the cost and take significant actions to
minimize the costs. The organization needs to maintain the right balance between costs and
income. So, the entity can consider the Account analysis. Account analysis can be said as very
much effective when an entity requires a quick forecast of costs. Moreover, it will provide
accurate information to the entity. The High-low method is another significant cost estimation
technique that the entity can consider (Saylordotorg, 2021).
The prime advantage of the High-low method is its simplicity. In this case, the team members
will be able to understand the crucial aspects of costs. Moreover, the management team does not
require to access a huge amount of data. They have to consider only two sets of data through
which the entities will be able to get significant outcomes associated with costs. The visual
representation of the method can provide accurate insights into the current trend. If the
management team of the organization will be able to understand the current trends of the costs,
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then they can be able to create more effective plans to minimize the overall costs. The Scatter
graph method can also be used by the organizational entities regarding cost estimation. This
method is very much simple. Moreover, it provides non-mathematical information to the
management teams. In this case, the management team can easily identify the main components
regarding costs. Comparison between current trends and the past trend can also be evaluated by
the management team. The relationship between two variables can be represented very easily
through the scatter graph method. In this case, the organization management team can consider
the fixed and variable costs. Regression analysis can help the management teams of the
organization to predict very effectively. In this case, the management team can be able to create
long term and short term plans. In the case of fixed costs, regression analysis may not provide
significant support to the management team regarding forecasting. But, the organizational
management team can be able to create useful plans regarding the variable costs
(Corporatefinanceinstitute, 2019).
Analyzing the profitability of the organization using activity-based costing statements
Activity-based costing helps the organization AirAsia to manage the overhead costs. If the
overall overhead costs will be reduced, then the entity will be able to enhance the overall
profitability. The activity-based costing approach helps the management team of the entity assign
the indirect costs and overheads more effectively compared to the traditional method. The
organizational management team can be able to put significant focus on the different products
and services through effective implementation of the Activity-based costing approach. The
primary purpose of this approach is to enhance the overall profitability of the organization. The
entities will be able to identify the accurate overhead costs by the method. Moreover, the method
also considers the cost drivers through which the entities can be able to manage the costs
significantly. The product and services qualities can be maintained by the organization by using
the Activity-based costing method. It cannot be denied that effective management of costs
drivers can influence the overall profitability of the organization. the Activity-based costing
approach is a lengthy method. In this case, the organizational management team has to invest a
huge amount of time. But, the results can be very much good if they will undertake the concept
of Activity-based costing (Ohio, 2020).
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The organizational costs are directly associated with the profits. For example, the expenses of an
organization are 20000 RM and it includes 10000 RM as overhead costs. If the Activity-based
costing approach will help the management team of the organization to reduce the overhead costs
then the expenses of the entity will be automatically decreased. The net profit can be calculated
by subtracting the expenses from the income. So, it is clear that the Activity-based costing
approach helps the organizations to generate a significant amount of profitability. Indirect costs
also have been prioritized under the Activity-based costing method. It cannot be denied that the
indirect costs can be controlled by the management team of the organization. The activity-based
costing method is a very systematic approach. In the first step, the management of the entity has
to identify the products and services for which costs will be allocated. After that, the entity has
to consider the indirect and direct costs of each activity. if the entity will be able to allocate the
costs very accurately, then the entity will be able to maintain the overall costs. Activity-based
costing methods can create a positive impact on the performance of the organization. Moreover,
for long term sustainability, Activity-based costing methods is very effective because it helps in
generating profits (KENTON, 2020).
Identifying and analyzing the two types of decision-making processes (OPEX and CAPEX
appraisals) along with justifying the reasons for the selection of these respective appraisal
techniques
OPEX (Operational Expenditure) appraisal is considered as the appraisal which is used for the
identification of the amount which is spent by the business for the execution of the daily
operations. These are seen to be consisting of the bulk of day-to-day expenses and also enable
the organization to focus on the minimization of these costs. As a result of this, the organization
can be easily able to execute careful planning and management processes to reduce the daily
operational costs. The operational expenditures include salaries, utilities, internet, office rent,
inventory, and others. The organization can be easily able to report these expenses in the income
statements and also can be deducted from the taxes that are required to pay by the organization
every year. Apart from this, the administrative expenses, accounting and legal fees, property
taxes, business travel expenses, and the interest paid of the debts are tracked with the inclusion of
this appraisal process. The ordinary and the customary costs are included which helps the
organization to execute the operational processes. Thus, it is determined to be essential for the
organization to track the expenses that are beard by the organization every year (Kissflow, 2020).
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CAPEX (Capital Expenditures) appraisal is considered as the appraisal which is implemented to
purchase the goods and services appropriately. It enables the organization to improve efficiency
as well as the future with the consideration of futuristic needs. As a result of this, it establishes a
strong business management environment for the organization to improve in the business
processes. The capital expenditures include the consideration of fixed assets such as property,
plant, and equipment present in the organization. The different definition of the features with the
inclusion of capital expenditures is seen with the inclusion of longevity environment
appropriately. The purchasing of the processes is seen which leads to the growth of the benefits
with the inclusion of longer than one tax year. As a result of this, the physical assets include the
equipment present in the organization, building improvements, computers, and vehicles and
trucks. It is also indicating the situation of referring to the funds that are used by the business for
acquiring, maintaining, and upgrading the fixed assets. These are also considered as the long-
term assets which establish a useful productive environment to strengthen the accounting period
environment (Accountingforsustainability, 2021).
The OPEX appraisal decision-making process is seen to be implemented by AirAsia Malaysia as
it enables the organization to analyze the daily expenses that are beard by the organization. The
implementation of this process helps in the execution of planning and management processes of
AirAsia Malaysia so that it can be easily able to reduce the expenses. The reporting of these is
carried out in the income statement of the company AirAsia Malaysia. The inclusion of property
taxes, business travel expenses, and the interest paid on the debts are illustrated with the
implementation of this appraisal process. The execution of the research and development
processes of the expenses and the costs of the goods sold are represented in the income
statement. The operational expenses present in the business processes are thoroughly tracked so
that the minimization of the expenses carried out by AirAsia Malaysia can be made. With the
help of this process, the measurement of the efficiency of the organization can be determined
over time with the inclusion of profitability activities. The core measurement of the activities is
carried out with the inclusion of operational expenditure processes of appraisal. This helps to
strengthen the business processes appropriately and also establishes a more profitable
environment for the execution of the business processes. It is also considered as the short-term
expenses that are carried out by AirAsia Malaysia for the execution of the daily activities. This
process includes the weekly, monthly, or annually payment processes that establish a huge load
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on the operational practices. For this reason, the selection of this respective appraisal technique is
made so that the analysis of the activities can be properly carried out (ROSS, 2021).
The CAPEX appraisal decision-making process is seen to be implemented by AirAsia Malaysia
as it enables the organization to improve the machinery, buildings, and office infrastructure.
AirAsia Malaysia includes the strong generation of the profit in the future along with including
the capital expenses. The assets purchasing processes are carried out with the improvement of
the productive life environment along with establishing a strong existing asset environment as a
whole. The funds are implemented by the organization to make growth in the acquiring of the
processes as a whole. It establishes a strong maintenance environment along with upgrading the
fixed assets present in the organization. The deduction of the tax through the depreciation every
year leads to the development of spreading costs appropriately. The useful life of the asset is
seen to be surrounding the different types of capital expenditures along with executing the
purchasing processes appropriately. The updating of the older equipment along with expanding
the useful life of the existing fixed assets. The capital expenditures are seen to be represented by
AirAsia Malaysia in the balance sheet under the property, plant, and equipment section
appropriately. It is listed in the investing activities in the cash flow statement section. The fixed
assets are seen to be depreciated over time with the spreading out of the costs of the assets which
is present over the asset. The depreciation is seen to be creating a helpful environment that leads
to an increase in the capital expenditure processes. It is also allowing the company to remove the
significant spread of the activities. The depreciation establishes a strong beneficial environment
for the organization which enables the organization to remove the impact created on the
organization. The shareholders are seen to be involved in receiving the dividends appropriately
so that they paying of close attention to focus on the different numbers. The payout of the
income is carried out with the continuation related to the improvement of prospects for the
establishment of future profits appropriately (Cgma, 2021).
Conclusion
The report accomplishes a detailed analysis on the operational budgeting, cost behaviours,
profitability, and the decision-making appraisals of the company AirAsia Malaysia. It provides a
strong analysis environment to execute the preparation and analysis of the operational budgeting
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environment as a whole. The analysis of the cost behaviour environment with the
implementation of alternative cost estimation technique processes. The appropriate justification
of the respective cost estimation technique implemented is provided in this report. The
appropriate analysis of the profitability of the organization is seen with the inclusion of the
activity-based costing statement processes. The identification of the strong analysis of the two
types of decision-making appraisals which are OPEX and CAPEX are considered in this report.
A suitable justification for the reason for the selection of this is provided for AirAsia Malaysia as
a whole. This reflects the strong analysis of the activities environment as a whole for the
organization. Thus, the accomplishment of detailed information on AirAsia Malaysia is gained in
this study.
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References
Accountingforsustainability, 2021. CAPEX A practical guide to embedding sustainability into
capital investment appraisal. [online] Accountingforsustainability.org. Available at:
<https://www.accountingforsustainability.org/content/dam/a4s/corporate/home/
KnowledgeHub/Guide-pdf/A4S%20Capex.pdf.downloadasset.pdf> [Accessed 10 January 2022].
Airasia, 2021. About us — airasia newsroom. [online] airasia newsroom. Available at:
<https://newsroom.airasia.com/about-us> [Accessed 10 January 2022].
Centreforaviation, 2021. AirAsia Airline Profile | CAPA. [online] Centreforaviation.com.
Available at: <https://centreforaviation.com/data/profiles/airlines/airasia-ak> [Accessed 10
January 2022].
Cgma, 2021. CGMA TOOLS How to evaluate capital expenditures and other long-term
investments. [online] Cgma.org. Available at:
<https://www.cgma.org/content/dam/cgma/resources/tools/downloadabledocuments/how-to-
evaluate-capital.pdf> [Accessed 10 January 2022].
Corporatefinanceinstitute, 2019. High Low Method vs. Regression Analysis. [online] Corporate
Finance Institute. Available at:
<https://corporatefinanceinstitute.com/resources/knowledge/finance/high-low-method-vs-
regression-analysis/> [Accessed 10 January 2022].
Hfpllc, 2019. Basic Elements of a Budget | Harvest Financial Planning | Valparaiso Financial
Planner. [online] Harvest Financial Planning. Available at: <https://www.hfpllc.com/basic-
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KENTON, W., 2020. Activity-Based Costing (ABC). [online] Investopedia. Available at:
<https://www.investopedia.com/terms/a/abc.asp> [Accessed 10 January 2022].
Kissflow, 2020. CapEx vs. OpEx: What's the Difference | Definitions, Examples. [online]
Kissflow. Available at: <https://kissflow.com/finance/capex-management/capex-vs-opex/>
[Accessed 10 January 2022].
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Ohio, 2020. Using Activity-Based Costing to Increase Profitability | Ohio University. [online]
Ohio University. Available at: <https://onlinemasters.ohio.edu/blog/using-activity-based-costing-
abc-to-increase-profitability/#:~:text=The%20main%20goal%20of%20using,overall
%20performance%20of%20an%20organization.&text=Overall%2C%20profitability%20is
%20increased%20as,pricing%20while%20maximizing%20their%20returns.> [Accessed 10
January 2022].
ROSS, S., 2021. CAPEX vs. OPEX: What's the Difference?. [online] Investopedia. Available at:
<https://www.investopedia.com/ask/answers/112814/whats-difference-between-capital-
expenditures-capex-and-operational-expenditures-opex.asp> [Accessed 10 January 2022].
Saylordotorg, 2021. Cost Estimation Methods. [online] Saylordotorg.github.io. Available at:
<https://saylordotorg.github.io/text_managerial-accounting/s09-02-cost-estimation-
methods.html> [Accessed 10 January 2022].
TANSKI-PHILLIPS, M., 2020. What Is an Operating Budget? | Overview, Components, &
Example. [online] Patriot Software. Available at:
<https://www.patriotsoftware.com/blog/accounting/what-is-an-operating-budget/> [Accessed 10
January 2022].
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