AF6010 - Strategic Management Accounting Analysis Report for Flyme Plc

This report provides a comprehensive analysis of strategic management accounting for Flyme Plc, a UK airline company. It explores three costing methods: operating costing, target costing, and activity-based costing, evaluating their application in understanding and reducing direct costs. The report then compares incremental budgeting, the current method used by Flyme Plc, with zero-based budgeting and activity-based budgeting, assessing their potential to reduce overhead costs. Finally, the report critically evaluates the use of the balanced scorecard to improve company performance. The analysis includes discussions on the advantages and disadvantages of each method, along with recommendations for Flyme Plc to improve its financial performance and customer service. The report is structured into three essays, each focusing on a specific aspect of strategic management accounting relevant to the airline industry, providing insights into cost management, budgeting strategies, and performance measurement techniques.

Running head: STRATEGIC MANAGEMENT ACCOUNTING
Strategic management accounting
Name of the Student
Name of the University
Author Note

STRATEGIC MANAGEMENT ACCOUNTING
Table of Contents
Essay 1:......................................................................................................................................2
Comparing three costing methods helping Flyme Plc to understand and reduce direct cost:....2
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................2
Conclusion and Recommendation:............................................................................................5
Essay 2:......................................................................................................................................5
Comparing two budgeting methods with the current method used at Flyme Plc that will aid a
reduction in overheads...............................................................................................................5
Introduction:...............................................................................................................................5
Discussion:.................................................................................................................................6
Conclusion and Recommendation:............................................................................................8
Essay 3:......................................................................................................................................9
Critically evaluating the use of balance scorecard for improving the company’s performance:
....................................................................................................................................................9
Introduction:...............................................................................................................................9
Discussion:.................................................................................................................................9
Conclusion and Recommendation:..........................................................................................11
References list:.........................................................................................................................13

STRATEGIC MANAGEMENT ACCOUNTING
Essay 1:
Comparing three costing methods helping Flyme Plc to understand and reduce direct
cost:
Introduction:
Flyme Plc. is an airlines company that operates in the aviation industry and Operating
Costing is the correct method that should be followed by a firm operating within a service
sector. However, if the scenario is viewed from above, there are two more costing methods
that might be relevant in the service sector and those are target costing and activity based
costing method that would be discussed in the section below.
Discussion:
Operating Costing can be described as the method of costing applied especially by the
firms operating within the service sector or imparting services directly to the customers for
ascertaining the operating cost. Operating Cost can be illustrated as those expenses which are
incurred due to the normal propagation of the business. For an airlines company, Operating
Costing shows the carrying cost per passenger per kilometer or mile. Labor and fuel are the
two major costs that affect an airlines company the most. Labor costs are expenses that could
be fixed in the short-run but the fuel price cannot be fixed in the short-run. To reduce the loss
arising from fluctuations in the fuel price, the airline companies enter into future contracts so
that they could minimize and someway fix the future price and reduce risk of uneven oil price
fluctuations in the international market. The percentage of cost attributed to labor in the total
operating cost varies roughly between 30% - 35% while fuel costs around 10% - 12% of the
total operating cost. The other operating costs includes maintenance, luggage handling, taxes
paid, travel agent’s commission, advertisement and promotions and many more (Adler,

STRATEGIC MANAGEMENT ACCOUNTING
2018). There are multiple benefits of using the operating costing especially in the aviation
industry, they are as follows:
 It helps in the ascertainment of cost of operating the flights.
 It helps in ascertaining the price that should be charged from the customers for using
the service of the airlines.
 It helps the airlines for preparation and presentation of quotation price of the different
classes of tickets available for the passengers.
 It helps in effective managerial decision making by the top level management due to
availability of relevant data generated through operating costing.
 It helps in maintaining a proper check on the maintenance activities and thereby
helping management in getting a precise data on the maintenance costs.
 It helps the pricing department in getting fair amount of data for fixing accurate prices
that could fetch a considerable profit and at the same time keep help the firm in
attaining a competitive edge in the aviation sector.
 It helps ineffective cost control.
 It helps in the comparative analysis between the owned flights and the flights taken on
operated on lease. These information is very valuable for the top level management in
strategic decision making.
 It helps the management in taking effective decision regarding the payload carriage of
each flight and thereby allocating the empty flights with logistics carriage to balance
the loss.
Target costing method is the method under which the experienced person and experts
is responsible for ascertaining the cost price. That is the price points are determined in
advance and helps the business to achieve consistent profits. The target costing process
involves some step which comprise of conducting research on the costs incurred by the

STRATEGIC MANAGEMENT ACCOUNTING
organization, computing the maximum profit, product engineer and analyzing the final
activities. System of target costing can be used by Flyme to lower the costs and improve
service. For each platform team, the performance goals and cost objectives are determined by
the system of target costing.
The costs related to changing configuration of aircraft or adding new components are
more visible with the implementation of target costing. A business case based on lice cycle
must be satisfied by the changes that are incorporated into the plane and this has the
implication that the customers must be willing to pay for the non-recurring or the incremental
cost of change (Pels et al., 2017).
Another costing method that can be adopted by Flyme Plc to gain an understanding of
the direct cost and simultaneously reducing it to address the declining gross and net profit
generated. This method of costing would enable the management of organization to
understand the services and products with the net profitability. This method of management
accounting has been applied as a modern alternative that assist the business to make effective
and value base decisions by providing relevant information. The rationale behind this method
of costing is that the increase in administrative overhead due to the service and customers
should be assigned with costs that has the aim of improving service and effective decision
making in the organization (Pavlatos & Kostakis, 2018).
The adoption of ABC for the airline company like Flyme Plc is regarded as
particularly significant as the direct actual cost of the products is allocated for identifying true
cost. Any activities that do not add value in initiating efficient and effective allocation of
resources can be effectively identified by ABC. Managers would be able to understand
overhead resource allocation that helps the business to account for cost in the manner that is

STRATEGIC MANAGEMENT ACCOUNTING
similar to the production. The tool of activity based costing can be used by the organization
in balancing and determining their low cost services with the strategies adopted.
Conclusion and Recommendation:
All the above discussed method of costing can be widely adopted by the company as
the efforts are made by the management in utilizing the human resources, equipment and
related technologies and thereby supporting horizontal thinking and creative approaches
amongst staffs (Phang et al., 2019). In addition to this, the strategy of introducing and
effectively testing new measures that would help in providing quality service to the
customers and such strategy could be supported by the adoption of activity based costing
(Nevries & Payne, 2017). This in turn would help in increasing the personnel productivity by
keeping the air fare low and utilizing the equipment efficiently.
Essay 2:
Comparing two budgeting methods with the current method used at Flyme Plc that will
aid a reduction in overheads.
Introduction:
The current method of budgeting used by Flyme Plc is incremental budgeting which
is regarded as the most common method of budgeting because of its simplicity and also easier
to understand. The adoption of this particular budgeting is considered appropriate when there
is no change in primary cost driver year on year. This process of budgeting relies on the idea
that making some changes to the current budget would help in bringing development to the
new budget. In this type of budgeting, the base amount is determined by the current budget
and the amounts of new budget is determined by subtracting or adding the incremental

STRATEGIC MANAGEMENT ACCOUNTING
amount. One important point that should be kept in mind is that the determination of
applicable margin changes does not make use of standard formula in this budgeting process.
The assumptions on the incremental changes are used to determine the marginal changes
(Yılmaz, 2018).
Discussion:
This budgeting methods offers some advantages in terms of funding stability,
simplicity, operational and consistent stability and reduction in internal rivalry. It is ensured
by the incremental budgeting that there is stability in the funding of business over time
(Plowman, 2017).
The specialized knowledge required in the process of zero based budgeting is
destroyed by the management turnover. This particular budgeting technique is considered
useful in situations of high uncertainty and the event of substantial change. However,
compared to incremental budgeting, zero based budgeting is considerably more costly as the
cost incurred is higher compared to incremental budgeting. The entire budget must be
justified by the managers in case of zero based budgeting and is considered to be very useful
in event when no specific knowledge is possessed by the managers with monitoring rights
and decision ratification. This zero based budgeting gets converted into incremental
budgeting when the managers with decision control possess the knowledge because of their
promotion (Koklic et al., 2017).
The allocation of resources as per the benefits and needs is represented more by the
adoption of zero based budgeting. The questioning attitude is created under the zero based
budgeting and the man focus is on the output relating to money value. In addition to this, with
the help of this budgeting, the involvement of staffs increases that results generating greater
interest on the job and causes motivation to increase. The other benefits of this method of

STRATEGIC MANAGEMENT ACCOUNTING
budgeting is that allocation of resources are done to activities that are of higher priority and
results in scrutinizing the activities closely and making quick decisions and also results in
elimination of programs of lower priority. However, this method of budgeting has some flaw
as its application is time consuming and selectively to the areas that is of most concerned to
the management (Eugenio et al., 2016).
When comparing zero based budgeting with that of incremental budgeting, it is
observed that former is somewhat complicated compared to latter that is easily
understandable. The certainty of errors and risks is minimized in zero based budgeting as the
expenditure incurred on non-value adding activities can be mitigated and thereby making the
procedure and operations effective. However, this budgeting do not involve carrying out of
any detailed analysis compared to the detailed cost analysis done under incremental
budgeting. There is also no improvement of the tasks under zero based budgeting as against
learning and encouraging innovation under incremental budget (Khairat, 2017).
Another budgeting method that can be adopted by Flyme Plc to reduce overhead cost
and this method account overhead costs using the activity based costing for preparing the
budget. Under this budgeting technique, the budget for the current year is not determined
using the budget of past year. In this technique, cost that are incurred in performing the
activities are researched and analyzed deeply. In the case of incremental budgeting, the past
data are used for preparing the operational budgets that is the budget for previous years is
used as the basis that uses incremental amounts that is added to the period of new budget. The
allocation used in the previous period is used as the basis of allocation in the current year as
against activity based budgeting that do not uses data from the previous years in budget
preparation. Such characteristics of activity based budgeting entrust employees to ensure
customer satisfaction in the best way possible and thereby helps in improving the relationship
between the customers and organization. In spite of various advantages that can be reaped by

STRATEGIC MANAGEMENT ACCOUNTING
the organization using activity based budgeting, there are some drawbacks too. Such flaws
are in the form of complexities, understanding, and involvement of cost and resource
consumption. It is important for the business to incur costs for training employees so that the
budget can be exercised effectively (Campa et al., 2016).
Flyme Plc is experiencing higher turnover of staffs and there is complains on the
inconsistent services from flight to flight. It would be efficient to adopt the activity based
budgeting as the cost drivers are justified for preparing the budget. All the steps involves in
performing any activity is identified under this budgeting technique and this results in the
elimination of all the activities that are not relevant. Flyme would be able to save on costs
because of elimination of all such activities and this can be used to provide service to the
customers at lower costs and thereby assisting the organization in gaining competitive
advantage. One of the important facts of the activity based budgeting is improvement in the
relationship between the customers and organization as it helps in providing customers with
best quality service at best price unlike incremental budgeting that does not offer any
incentives for cost reduction (Raynus, 2016).
Conclusion and Recommendation:
From the detailed devaluation of other two budgeting techniques that is activity based
budgeting and zero based budgeting, it has been ascertained that these two budgeting
methods offers several benefits compared to incremental budgeting and would also help in
curtailing the situation of increasing costs and declining profit margin. Therefore, the
overhead costs incurred by Flyme Plc can be reduced by the adopting these two budgetary
measures.

STRATEGIC MANAGEMENT ACCOUNTING
Essay 3:
Critically evaluating the use of balance scorecard for improving the company’s
performance:
Introduction:
Balance scorecard is a strategic tool of measuring performance that evaluates the
performance of business using various types of non-financial and financial measures. This
strategic tool is based on the idea that make use of lead indicators for evaluating, motivating
and communicating individuals with the expectation that the performance for the company
would improve due to the current actions taken. Flyme Plc can improve their overall
performance of doing business by implementing balance scorecard as it helps in boosting the
performance using the combination of goals, metrics and improvement in the process
(Weygandt et al., 2018).
Discussion:
Typically, balance scorecard comprise of four perspectives that is used for measuring
performance and this incorporates customer, financial, learning and growth and internal
business process. All such four areas are interrelated as they form a cohesive framework that
is used by the management using the non-financial, and financial measures to improve the
long term goals of the company. These four areas of perspectives are analyzed for measuring
the performance. The financial perspective of any business can be measured using the various
measures such as revenue growth, return on assets and profit growth percentage (Dugdale,
2017). On other hand, with regard to the customer perspective, some criteria that can be used
by the organization is accounting for the customer satisfaction, customer complaints and
customer reviews. Internal process perspective provides information on the steps that is taken

STRATEGIC MANAGEMENT ACCOUNTING
internally such as operations and production. Learning and growth in the final perspective of
the measure used in the balance scorecard that explains the company’s development or
improving performance with respect to the employee qualifications and new project. The
performance of the companies operating in airline industry can be effectively evaluated using
the approach of balance scorecard (Cooper et al., 2018).
Regarding the customer perspective, that is the customer satisfaction and response to
the service, Flyme Plc can use some measures such as decreasing profit compared to total
number of customers, ratio of profits generated to customers and customer attraction
measured by ascertaining the ratio of number of passengers by total number of seats. Any
decrease or increase in the profits of company compared to number of customers can track
the profitability level. That is the profitability position of the company can be measured by
the total number of customers reserved the seats as against the total number of seats. The
mixed customer review has negatively impacted the reputation of company as inconsistent
level of quality and service are offered from flight to flight. The loyalty and retention of
customers also contributes to the performance of company and this can be measured by the
ratio of changing number of customers (Tsafarakis et al., 2018).
It is important to measure the overall performance of Flyme Plc as the company’s
market share is losing due to the other airlines. Measuring the financial performance is
critical to the performance of Flyme because of increasing cost and declining net and gross
profit margin. The measure of profit growth can be used that depicts the ability of the
company in increasing the total profits. In addition to this, company can also use current ratio
for measuring its ability to clear the short term debts using the current assets such as stock of
refreshments (Lieberman et al., 2017).

STRATEGIC MANAGEMENT ACCOUNTING
The perspective of internal process of Flyme Plc can be measured by using the ratio
of the ability of Airline Company that make use of their staffs to increase the passengers.
Using the employees to increase the passengers can be measured by the ratio of number of
passengers to the total number of employees. Another measure that can be used by the
company to use their current employees to increase the number of flights, is the ratio of flight
by the number of employees (Höglund et al., 2016).
Flyme Plc is experiencing higher staffs turnover than usual due to the complaints
from the cabin crew concerning lack of training. The rate of employee turnover can be
measured by the difference in total number of employees during any particular time frame.
This particular measure is incorporated in the perspective of learning and growth of the
balance scorecard. A fall in the total number of employees in the organization radically
implies that employees are leaving the company as they do not prefer to work in the
particular organization. In case of Flym Plc, the complaints of customers is suspected to be
associated with the lack of training to staffs. Moreover, profit generated per employee is
another variable of perspective of learning and growth that provides information on
organization’s ability to create profit as a percentage of total employees. Choosing the
appropriate method of measuring performance is considered significant as it helps in effective
evaluation of the performance (Chiu et al., 2017).
Conclusion and Recommendation:
From the overall analysis of the different performance measurement using the balance
scorecard, it has been ascertained that the key factor on map for Flyme Plc is the employee
turnover, profit generation per employees, total number of passenger to total number of
employees and significant differences in stock refreshment and variation in price, quality,
cost and volume and profit growth margin. Also, the important balance scorecard dimensions

STRATEGIC MANAGEMENT ACCOUNTING
is the customer dimension and financial dimension followed by learning and growth. The
dimension of internal growth process to Flyme has least importance and therefore, it cannot
be accepted as the indicators of measuring the performance of company.
One fact obtained is that the other dimension of balance scorecard is significantly
impacted by the dimension of finance and customers. In addition to all these, falling market
share of the company due to the prevalence of high competition. Therefore, the main
objective of the company is to increase their competitive power by defining and addressing
the strategic issues. Various issues identified from the application of performance
measurement tool should be addressed by the company that would help in increasing its
market share, lowering the cost and increasing the net profit generated.

STRATEGIC MANAGEMENT ACCOUNTING
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STRATEGIC MANAGEMENT ACCOUNTING