Management Accounting Techniques in McDonald's: A Case Study Analysis

Desklib provides past papers and solved assignments. This report analyzes McDonald's management accounting.

1
Managementaccounting

2
Table of Contents
Introduction...............................................................................................................................3
Management accounting and management accounting systems...................................3
Company Overview.............................................................................................................3
Management accounting....................................................................................................4
Requirements of management accounting.....................................................................5
Methods used for reporting management accounting...................................................5
Benefits of management accounting systems................................................................6
Management accounting techniques...................................................................................6
The use of planning tools of management accounting......................................................8
Financial Budgets................................................................................................................8
Operating Budget................................................................................................................9
Response to financial issues with the use of management accounting.......................10
Benchmarking....................................................................................................................10
Key performance indicators.............................................................................................11
Activity based costing (ABC)...........................................................................................12
Conclusion..............................................................................................................................13
Reference List........................................................................................................................14

3
Introduction
The study has been conducted to analyse the importance of management
accounting in an organisation. The case study organisation is McDonalds. The paper
includes a brief description of the of the McDonalds. From the view point ofrevenue,
the company is considered to be the world largest restaurant. The paper is basically
focused on the management accounting. Different methods used for management
accounting reporting has been reflected in the paper. The reports of management
accounting include of the details of the McDonalds available cash, the current state
of the companies accounts receivable and payable, recent generation of sales and
revenues and others.In the study benefits of management accounting system has
been discussed such as management accounting increases the bar of the
profitability, simplifies the process of decision making for the preparation of financial
statements, helps the management to have control on the fluctuation in the monetary
funds, increases cost transparency, enhances flexibility and freedom in the
McDonald’s.
Management accounting techniques has been discussed in the paper briefly. The
management accounting techniques includes financial statement analysis, financial
planning, fund flow analysis, cost accounting, standards costing, cash flow
statement, budgetary control, marginal costing, decision making accounting and
revaluation accounting. In the paper the cost of the company has been identified
through the costing technique known as activity based costing. An example has
been taken to show the calculation of cost of the company. The use of planning tool
o management accounting has been discussed in the paper. The study would
reflectthere are many organisations that establishes budgets for the departments,
divisions, units or for the whole organisation. The budget is made for a year. Budget
help the manager’s to co-ordinate their resources, facilitate performance evaluations
for the managers and for the units. The study compares the ways in which
McDonalds uses the management accounting to respond to the financial problems.
Overall the study discusses all the aspects of management accounting.

4
Management accounting and management accounting systems
Company Overview
Restaurants are the hospitality facilities where varieties of food are offered to the
customers. The chosen organisation is McDonald’s. McDonald’sis a company that
offers fast food in the United States. The company was founded as a restaurant
1940. The company was operated by Richard and Maurice McDonalds. From the
revenue the company is the world largest restaurant. In 2017, it has about 37,240
restaurants in about 120 countries and along with that the company serves 67 million
customers each and every day all over the world (Alhelalat, Ma’moun&Twaissi,
2017). Mc Donald’s has gathered US$5.2 billion in the year 2017, with an annual
revenue of US$22.8 billion in the same year. In 2017, it has 2,35,000 employees in
the operations at different locations all around globe (Lee, Hallak&Sardeshmukh,
2016). The core competencies of the organisationare to provide and offer
convenience to people, when the people want to eat fast food in competitive prices.
The company tries to provides best value for money to their customers. The
Competitive advantage of the company is that it focuses on consistency of quality
and the use raw materials, and production of food all over the world
(Stierand&Dörfler, 2016). Thus, MacDonald’sprovides best quality of fast food at
affordable prices which the competitors cannot offer. There are various activities that
are performed by the staffs of McDonald’s. The company has expanded their
business all across the world and it becomes a difficult task for the company to
manage their operations. However, due to the management accounting information
the company manages their operations and reports accordingly that helps the
company to get advantage over the competitors.
Management accounting
Management accounting is the process of measurement, identification, analysis,
integration, preparation, accumulation, communication of information and
interpretation of the information that is used by the managers of the organisations in
order to plan, control and evaluate within an organisation so that the accountability of
the resources is maintained.Management accounting is also known for the preparing
the financial reports for the non-management individuals or group of people such as
tax authorities, regulatory agencies, creditors and shareholders. CIMA (Chartered
Institute of Management Accountancy) defined management accounting as

5
recording the financial reports for the managers of the organisation so that the
accuracy and reliability of the report is maintained.
Requirements of management accounting
Management accounting requires that values are evaluated and results are obtained
in the period when the transactions took place. At some level management
accounting also tries to forecast the results or the outcomes of the future
implementations. Along with that it also tries to identify the effects of future outcome
for long time. However, it is unfortunate that the future outcome cannot be predicted
and hence the role of management accounting is only limited to the analysis of the
past information and data. Through the management accounting timely reports are
prepared that helps the management to take day to day decision. The reports of
management accounting consist of the details of the organisations available cash,
the current state of the companiesaccounts receivable and payable, recent
generation of sales and revenues and others.
Methods used for reporting management accounting
The reporting of the management accounting involves various methods. Through
these methods there is proper reporting of the management accounting. Some of the
methods are Budgets, cost schedules and variance analysis. Budgets are the
financial documents that are used to forecast the future income and expenses. For a
food manufacturing organisation, the budget would involve the items that are
expected to be produced, sold and the resources (labour, material and overhead)
that are consumed and purchased.
For instance, with the use of a simplified sales and production model such as, the
initial phase in the budget process is the use of historical or past accounting
information. Along with the use of forecasts in order to produce a budget ofthe units
sold and the price charged for a period of time. The budget may be prepared on
weekly, monthly or annual basis. A budget that is prepared for the production of units
involvesthe opening inventory and closing inventory that produces budget for labour
usage, direct overheads and raw materials used. The preparation of the budget
helps the mangers in the production planning. The preparation of budget helps in
comparing all the details with the actual results and thus it would enable too control
the production process over a time period.

6
Benefits of management accounting systems
There are a lot of benefits of the management accounting systems. The
effectiveness of management accounting helps in improving the performance of the
company. Management accounting increases the organisations performance.
Many organisations opt for the management accounting because it increases the
efficiency of enterprise in performing their operations. Management accounting
contributes towards the better performance with the help of evaluation and
comparison. Management accounting helps to makes the process easier so that
desired results are achieved or obtained. productivity of the company is enhanced
that motivates the employees for performing better. Hence overall, the management
accounting increases the efficiency of the organisation at a whole.
There are a lot of benefits of management accounting system in Mc’donald such as
management accounting in Mc’donalds increases the bar of the profitability of the
company. It also simplifies the process of decision making for the preparation of
financial statements. It also helps the management to have control on the fluctuation
in the monetary funds. It increases cost transparency. It enhances flexibility and
freedom in the Mc’donald’s. It also helps in marginal costing such as fixing selling
price of the product manufactured in the organisation. Hence, overall management
accounting helps in increasing the efficiency of Mc’donalds. Through these many
ways the management accounting systems and reporting is integrated in Mcdonalds.
The reports are prepared with the help of management accounting tools and
techniques. The company uses many tools and techniques of management
accounting to make report for the key stakeholders of the company.
Management accounting techniques
The important tools in the management accounting are financial statement analysis,
financial planning, fund flow analysis, cost accounting, standards costing, cash flow
statement, budgetary control, marginal costing, decision making accounting and
revaluation accounting.
Management accounting techniques are used based on the financial accounting
information such as analysing financial statement through ratio analysis, comparative
statements, cash flow and fund flow statements and return on capital employed. The
management accounting based on the costing information is marginal costing and

7
absorption costing. Mc’donalds, costs are calculated with the appropriate techniques
of the cost analysis. This is done to prepare the income statement based on the
absorption and marginal costs.
There are different types of cost accounting approaches such as activity based
costing, standard costing, marginal costing and life cycle costing. The basic cost
elements are expenses or overheads, labour and raw materials. Materials are direct
and indirect. Labour is also classified into direct and indirect. There is production,
administration, distribution and sales overhead. These cost are classified by nature,
functions behaviour (fixed, variable and semi-variable), time, normality and decision
making costs.
Example of McDonald’s costing, that is management accounting technique known as
“Activity based costing” would help in getting better understanding of the way cost is
calculated. Activity based costing would help to derive the cost, that would in result
help in preparing the income statement. Once the cost is calculated through the
management accounting technique it would be easier to report.
The application of activity-based costing in McDonald’s is a two-stage process.
Managers provide overhead cost information from the general ledger. In order to
create a product, the first step is to identify the activities. Then each activity is
separated into its own cost pool. Then the total overhead of each cost pool is
determined. Then activity cost drivers are assigned to cost pool. Cost drivers
controls the changes in the costs such as units, parts, batches and hours. For
example, the purchasing cost is driven by the number of purchased parts. Then the
total overhead in each cost pool is divided by the total cost drivers to in order to get
the cost driver rate. Now lastly, the hours, units, batches or parts used by the activity
is multiplied by the cost driver rate. It could be better understood with an example.
For example, the number of setup the product consumes is considered to be the cost
driver of the batch level activities. There are two products P1 and P2. P1, number of
setup is 1 and P2, number of setup is 3. Total overhead cost is $1080 and the total
cost driver unit is 4. Now, the total overhead rate is divided by the total cost driver
unit in order to get the consumption intensity. Hence, the consumption intensity
amounted to be $270.00 ($1080/4). For product 1, the setup is 1 that is multiplied by
the consumption intensity and amounted to be $270(1*$270) and for product2, the

8
setup is 3 that is multiplied by consumption intensity and amounted to be
$810(3*$270). Hence, for both the product the cost incurred is $270 and $810 that is
equal to $1080. Hence, by this way Activity based costing helps in proper allocation
of costs and it result in setting prices of the product that helps in increasing
profitability.
The use of planning tools of management accounting
Budgetary control is such a process where there is as preparation of budgets for
different activities and there is a comparison of the budgeted figures in order tofind
deviations if any, thatwould be eliminated in future. Hence, budget is considered to
be a mean and budgetary control is considered to be the end result. Budgetary
control is believed to be a continuous process that helps in coordination and
planning. Budgetary control also provides a method of control.Mubarak (2015)
opined that “Budgetary control is such a system where there is a coordination of
costs that includes the preparation of budgets, establishing responsibilities,
coordinating the departments work and in addition comparing the actual performance
with the standard or budgeted performance. After that acting upon results so as
achieve maximum profit.
There are many organisations that establishes budgets for the departments,
divisions, units or for the whole organisation. The budget is termed in financial terms
and generally it is made for a year. Budget help the manager’s to co-ordinate their
resources, facilitate performance evaluations for the managers and for the units. In
addition, budget helps the managers to define the standards that are needed to be in
the all control systems. Moreover, budget provides unambiguous and clear
guidelines about the company’s resources and expectations.
There are different types of planning tools in budgetary control that is operating
budgets, financial budgets and non-monetary budgets. Each of the budget
techniques have their own advantages and disadvantages.
Financial Budgets
Financial budget is the identification of outflows of funds and sources for the
expected operating results and budgeted operations for a particular period of
time.Financial budgets providedetail aboutwhere the organization is expected to get
the cash for the upcoming time period and the way the organization is planning to

9
spend it. Basic sources of cash include, the sales of assets, sales revenue, the
issuance of loan and stock.On the contrary, the common uses of cash consist of
paying expenses, the purchase new assets, repaying debts and paying dividends to
the shareholders.The financial budget types include capital expenditure budget, cash
budget and balance sheet budget.
Cash budget is basically a forecast of the cash receipts and the disbursements in
against of the actual cash that is measured. Cash budget provides an important
control in theorganisation as the incoming and outgoing cash are break down into
monthly, weekly, and on daily basis so that the enterprise can be sure that it is able
to meet the current obligations.Capital expenditure budget basically concentrates on
some of the major assets such as land or machinery and a new plant. The balance
sheet budget forecasts the company’s balance sheet and the way a budget would
look like when all the budget is prepared.
Advantages and disadvantages of financial budget
Advantages
Creating a financial budget helps in spreading financial awareness of the earnings
and spending’s of the business. Financial budget would be outlining the amount that
the business is earning every month from its sales and additional income. Financial
budget also reflectsthe amount that the business is spending on operational
expenses such asfixed utility bills and office supplies. Along with that financial
budget provides opportunities for business. It is used a communication tool and as a
financial planning tool.
Disadvantages
The disadvantages are that it takes a lot of time to prepare a financial budget.
Budgeted numbers are considered inviolate by all the units and departments and
there less amount of flexibility once the budgeting exercise is completed. The senior
management’s focus is entirely on the financial budget and all the strategies are
made according to budgeted numbers. The estimation may go wrong and that can
create conflict in the organisation.

10
Operating Budget
An operating budget reflects the organisations projected or estimated revenue and
the expenses that are associated in the upcoming year. Operating budget is
presented in the income statement format. The operating budget is started with
revenue and after that it reflectseach expense type. The variable costs are also
included, or that costs which varies with the sales, for instance, the production labour
and cost of raw materials. The operating budget also comprises of fixed costs, like
monthly rent on land space.
Advantages and disadvantages of operating budget
Advantages
The advantages of operating budgets are managing current expenses, building the
financial reserve, increases accountability. The operating budgets importance is that
it helps in managing the current expenses. The Starting point for an operating budget
is fixed overhead costs, like staff salaries and office rent. Hence, the operating
budget helps in managing the expenses. Along with that it also helps in projecting
the future expenses. Operating budget also builds financial reserves.
Disadvantages
There are several disadvantages of operating budget such the compilation of an
operational budget along with a long-term view of the organisations financial needs
requires that there is extensive research about it. The generation of accurate
financial estimation or projections also requires thatthere is the analysis of consumer
spending trends, past annual sales and economic conditions in the industry or
market. Hence, it takes a lot of time and is costly.
Response to financial issues with the use of management accounting
There are a lot of problems that the organisations face in the competitive world. The
chosen organisation McDonald’s uses management accounting tools to manage and
respond to the financial problems. However, there are other players in the market or
industry that too uses the management accounting tools to respond and manage the
financial issues.
The management accounting techniques are Benchmarking, Balance score card,
Key performance indicators, financial governance and Activity based costing (ABC).

11
Benchmarking
Benchmarking is considered to be a continuous process of the comparison of
products and services, and the processes with that of the industry, competitors and
also the organisations that are recognised to be the leaders so as to identify and
adopt the best practices. Benchmarking seeks to improve the performance and
effectiveness of an organisation with the help of learning from the experiences of the
effective organisations (Moriarty and Smallman, 2009). Benchmarking is a technique
where by only establishing the best practice standards does not work, it includes the
examination of the process that is used by the high performing organisations.
Benchmarking technique is such a technique that is benefited to the high performing
companies that basically emphasis on the product differentiation strategy. It helps
the managers in focusing on the board business assumptions and principles that
assist in forming variety of policies that helps in sustaining customer service
(Moriarty, 2011).
Benchmarking experiences are applied to boththe organisations that provide
services and manufacturing companies, in this case the comparison would be
between two major fast food companies that is McDonald's and Burger King.
McDonald's is fast food company of American that has captured the American
market in order to get competitive advantage in the world with the help of their quality
of goods and services. The success of McDonald’s lies on to offer of an excellent
balance between price and quality of the products and services.Burger King, Taco
Bell, Wendy’s, KFC and Subway are the main competitors of
McDonald’s.McDonald’s use competitive benchmarking to compare itself from the
competitors with the set of some metrics. Hence, through benchmarking McDonald’s
tries to respond to the financial issues and enhances their performance.
Key performance indicators
Key performance indicator is a management accounting tool that works as a
quantifiable measure that helps a company to measure their performance over a
particular period of time. Some metrics are used to evaluate the company’s
performance. Key performance indicators that are tied to finance are basically
focused on profit, revenue and margins. The profit measurement method is net profit
that is also considered as bottom line. This method shows the amount of revenue

12
that is left as profit for a particular accounting year for the expenses of the company
that is, interest payments, taxes, and the expenses for the same period.
McDonald’s uses KPI to identify the problems that are coming in between the
operations and then the action can be taken accordingly. Finding the KPI’s helps in
achieving desirable goals and also ensures that the restaurant achieves success.
The company uses labour cost percentage, employees turnover and sales per
employee as the key performance indicator. Burger king uses gross profit margin,
waste and menu item profitability. Hence, these ways through the key performance
indicators McDonalds keeps themselves up to date about any financial crisis.
Activity based costing (ABC)
Activity based techniques is one of the powerful mechanisms that helps the
managers to understand the effect of their activities on total costs. The information
that is provided by activity-based technique is beneficial in reconfiguring or
controlling the existing processes of business better as compared to the competitors
(Christopher, 2016). Some other usefulness of activity-based costing is that it helps
the managers in choosing the best possible way to achieve cost advantage. It also
considered to be the techniques that helps in the evaluation of the benefit and cost
that are associated with the development of close business relationships with the
suppliers (Shields, 2015). This helps in understanding the cost advantages that are
associated with the supplier. Hence, the activity-based techniques enhance the cost
effectiveness of the organisations and assist the companies in the implementation of
effective low-price strategies. One theoretical approach best for coping with the
challenge is Activity based costing. Activity based costing (ABC) theory is considered
to be the desirable costing method because it has the ability to trace overhead costs
that allows to do more appropriate and accurate unit costing (Perttula, Kiili, Lindstedt,
&Tuomi, 2017). This method of costing is neglected by the restaurant industry as
restaurants generally establishes the menu prices with the help of contribution
margin analysis. Raab and Zemke (2016) opined that the contribution margin
analysis could be enhanced with the use of ABC costing method.
The major activities are classified into different categories of activities. Unit based
activities, batch level activities, facility sustaining level activities and product
sustaining level activities. McDonald’s follows batch level activities and facility