Evaluation Of Operational And Financial Management: A Case Study On Cucumber Limited

The role of management accounting and financial management

The current assignment would focus on evaluating the operational and financial aspects of Cucumber Limited, which is a manufacturer of smart phones located in Manchester, UK. The first section would deal with describing the role of management accounting in the management process of the stated organisation along with explaining the differences between management accounting and financial accounting. The various techniques would be evaluated for evaluating the various costing models that could be used in operational management. The second section would lay emphasis on the evaluation of capital investment appraisal techniques, which are useful in undertaking investment decisions. The third segment would describe the role of business plan and budget in operational management of the case organisation along with identifying the areas that need special attention. Finally, the assignment would shed light on discussing the usefulness of balanced scorecard approach and this approach would be applied in the context of the case organisation.

1.

Generally, management accounting has three basic roles in an organisation, which are enumerated as follows:

This denotes the need of fulfilling reporting requirements as well as outside regulations (Fullerton, Kennedy and Widener 2014). Hence, the accountants of Cucumber Limited need to realise expenses and revenues effectively along with valuing liabilities and assets. The design and operation of systems related to cost management are developed on the part of the management accountants, which help in inventory valuation through cost apportionment to products.

The management accountants of Cucumber Limited help in planning by preparing comprehensive budgets for depicting operational plans and by evaluating the financial effects of capital projects. The aspects of control concern the operation and design of systems for giving oversight of the use and resource conservation to accomplish organisational plans. These systems are associated mainly with accounting along with non-financial performance measures for assessing activities and individuals of the organisation.

As commented by Otley (2016), competitive support signifies the provision of financial services to the management team for improving the competitiveness of an organisation. This role involves the management accountants of Cucumber Limited in strategic processes. They provide direct support in developing the organisational strategies. They are involved in ascertaining product profitability, distribution channels and customers and ultimately, the pricing decisions.

The various techniques that are used in analysing various costing models used in operational management include the following:

This denotes the use of identical costing principles through several undertakings for cost comparison or common control. 

Different costing models for operational management

This is used for determining marginal cost by differentiating between variable cost and fixed cost. The impact of changes in volume or type of profit could be ascertained (Keller 2015).

The actual cost is contrasted with the standard cost arranged previously and the cost of deviation is evaluated by reasons. As a result, the management could examine the reasons for the variances to undertake appropriate corrective actions. 

This is the procedure of charging variable costs as well as fixed costs to processes, operations or products. However, it is not identical to marginal costing due to the exclusion of fixed costs (Heizer 2016).

2.

From the provided case study, it has been identified that Cucumber Limited is planning to diversify its current products. For this purpose, it has considered four different proposals, out of which only one and the most feasible proposal would be chosen. The evaluation is carried out with the help of various investment appraisal techniques and the outcomes are presented below in the form of a table

            NPV is the most popular technique of capital budgeting, which considers the time value of money. The NPV of the investment project is used as the base for accepting or rejecting proposed project investments like buying inventory, machinery, equipment, expanding or adding current plant assets along with installing new plants (Baum and Crosby 2014). From the above table, it could be found that the fourth proposal would be extremely beneficial for Cucumber Limited, as it has the greatest NPV. This positive NPV implies that the proposal would produce higher rate of return compared to the discount rate of 10%. Thus, in terms of NPV, the fourth proposal is recommended to Cucumber Limited.

In the words of Burns and Walker (2015), IRR is the rate at which an investment ensures in generating a return at the time of its economic life. It is the rate of discount at which the present value of the net cash inflows of a project is identical to the present value of net cash outflows. The higher the IRR in contrast to the discount rate, the better it is for the organisation. In this case, the IRR for the third proposal is highest, since it is obtained as 27.43%. In addition, it is higher than the discount rate of the proposal, which depicts that this proposal would provide the highest return on investment for Cucumber Limited.

Capital investment appraisal techniques

Payback period could be defined as the time needed for an organisation to recover the overall investment cost. It is a significant determinant of whether the project could be undertaken, since the organisation does not desire for greater payback periods (Andor, Mohanty and Toth 2015). In case of Cucumber Limited, even though all the proposals have lower payback periods in contrast to their economic life, the lowest payback period is observed for the first proposal. However, it has been argued by Johnson and Pfeiffer (2016) that this method does not lay any emphasis on the time value of money and inflation having negative impact on the project or proposal. Based on the above evaluation, the first proposal is suggested to Cucumber Limited in recovering their investment cost.

ARR is the amount of profit or percentage of return, which an organisation could estimate depending on the overall investment. However, it fails to take into account the time value of money, which implies that the returns obtained in later periods might value less in contrast to those currently obtained (Žižlavský 2014). The higher the rate of the return, the greater is the feasibility of the project or investment. In case of Cucumber Limited, the second proposal has the greatest ARR, which signifies that this proposal needs to be accepted.

            Since the four different methods have identified four different proposals to be feasible for the organisation, NPV is taken into consideration, since it is the superior measure of investment appraisal technique. Hence, it is recommended to Cucumber Limited to progress with the fourth proposal for maximising its return on investment.  

3.

Cucumber Limited could use ERP system in identifying blockages in the flow of operations related to the organisation. If it does not have the system installed, meetings should be conducted regularly with the departmental heads. This would help in reviewing the synergistic working procedure of each department with the other departments and the way through which synergy converts into effective operations throughout the organisation (Stevenson and Sum 2015). This is because cooperation and communication among the departments would help in ensuring operational efficiency. In addition, it could make planning for variable business scenarios along with assessing the response capabilities of the administration staffs to sales, production and delivery needs (Barr 2018). This is because the operations generally break down in accounting functions and order processing at the time the departmental ability is overwhelmed through business flow.

Business planning and budgeting

For improving the operational management, Cucumber Limited could use contingency planning for dealing with disruptions arising out of natural disaster, crisis or emergency situations constituting of electrical and fire outrages or inability of major personnel. Moreover, the organisation could incorporate various procedures under crisis situations. These might include contact information for major personnel and departmental managers, external emergency aid services along with banking and insurance information. Finally, Cucumber Limited could include different individuals to perform the functions in the form of coordinators with entice authority undertaking decisions.

According to the provided case, it has been found that the major concerns revolve around the budget control reports. In addition, adverse variances could be observed in all the overhead costs due to inaccurate estimations. The budget of an organisation needs to be tied closely with its operational plan (Chenhall and Moers 2015). It is of no use for Cucumber Limited to prepare ambitious operational plan, if resources are not sufficient to meet the same. Hence, it is recommended to the organisation to review its budget throughout the year for ensuring that incomes and expenses are kept on track so that it could fulfil its financial commitments and targets (Hill and Hill 2017).

4.

As laid out by Hoque (2014), balanced scorecard is useful for gauging performance along with formulation and implementation of strategy on the part of the business organisations. Those implementing the balanced scorecard set goals in all the business areas and after this; they develop initiatives and targets in order to fulfil these objectives along with the steps to evaluate the actual progress in fulfilling them.

With the help of balanced scorecard approach, the business organisations could seek the following benefits:

• Clarifying strategies in relation to various business dimensions
• Communication of strategic objectives in various areas
• Planning set goals while aligning strategic initiatives (Hansen and Schaltegger 2016)
• Enforcement of systems for accomplishing feedback and involvement of double loop learning

Based on the provided information about Cucumber Limited, the balanced scorecard approach could be viewed from the following four perspectives, which are elucidated as follows:

• Improving group sales by above 10%
• Minimisation of start-up losses by obtaining funds from the market
• Expansion into the cross-border markets to increase the overall sales and productivity of the organisation
• The return on capital employed needs to be increased to at least 15%
• The market capitalisation is to be increased by 2%

• The customer segments willing to save more money on purchase of electronic items need to be focused
• Increasing the product lines for the customers (Martello, Watson and Fischer 2016)
• Improving the quality of smart phones by incorporating new features
• Aiming to make Cucumber Limited global smart phone brand

• Improving safety and health procedures of the organisation
• Improving the overall capabilities of the individuals
• Improving the procedures so that product safety could be ensured (Busco and Quattrone 2015)
• Controls should be improved for avoiding frauds along with assuring conformance to accounting standards

• Creating employment opportunities by providing adequate training and development
• Rewarding the staffs for their efforts along with extending support for their career development
• Leaders need to be formed with higher intensity
• Enhancing the efficacy of whistle blowing policy
• Enhancing inclusivity and diversity
• Employee retention rate should be maintained at 95%

Conclusion

Based on the above discussion, it could be stated that the management accountants of Cucumber Limited help in planning by preparing comprehensive budgets to summarise operational plans and by evaluating the financial effects of capital projects. The aspects of control concern the operation and design of systems for giving oversight of the use and resource conservation to accomplish organisational plans. From the provided case study, it has been identified that Cucumber Limited is planning to diversify its current products. For this purpose, it has considered four different proposals, out of which only one and the most feasible proposal would be chosen. The evaluation is carried out with the help of various investment appraisal techniques, in which it has been recommended to go forward with the fourth proposal based on NPV.

Usefulness of the balanced scorecard approach

Cucumber Limited could use ERP system in identifying blockages in the flow of operations related to the organisation. If it does not have the system installed, meetings should be conducted regularly with the departmental heads. For improving the operational management, Cucumber Limited could use contingency planning for dealing with disruptions arising out of natural disaster, crisis or emergency situations constituting of electrical and fire outrages or inability of major personnel. Moreover, the organisation could incorporate various procedures under crisis situations. Finally, implementing the balanced scorecard would help Cucumber Limited to set goals in all the business areas and after this; they develop initiatives and targets in order to fulfil these objectives along with the steps to evaluate the actual progress in fulfilling them.

References

Andor, G., Mohanty, S.K. and Toth, T., 2015. Capital budgeting practices: A survey of Central and Eastern European firms. Emerging Markets Review, 23, pp.148-172.

Barr, M.J., 2018. Budgets and financial management in higher education. John Wiley & Sons.

Baum, A.E. and Crosby, N., 2014. Property investment appraisal. John Wiley & Sons.

Burns, R. and Walker, J., 2015. Capital budgeting surveys: the future is now.

Busco, C. and Quattrone, P., 2015. Exploring how the balanced scorecard engages and unfolds: articulating the visual power of accounting inscriptions. Contemporary Accounting Research, 32(3), pp.1236-1262.

Chenhall, R.H. and Moers, F., 2015. The role of innovation in the evolution of management accounting and its integration into management control. Accounting, Organizations and Society, 47, pp.1-13.

Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2014. Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management, 32(7-8), pp.414-428.

Hansen, E.G. and Schaltegger, S., 2016. The sustainability balanced scorecard: A systematic review of architectures. Journal of Business Ethics, 133(2), pp.193-221.

Heizer, J., 2016. Operations Management, 11/e. Pearson Education India.

Hill, A. and Hill, T., 2017. Essential operations management. Macmillan International Higher Education.

Hoque, Z., 2014. 20 years of studies on the balanced scorecard: trends, accomplishments, gaps and opportunities for future research. The British accounting review, 46(1), pp.33-59.

Johnson, N.B. and Pfeiffer, T., 2016. Capital budgeting and divisional performance measurement. Foundations and Trends® in Accounting, 10(1), pp.1-100.

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Stevenson, W.J. and Sum, C.C., 2015. Operations management. New York: McGraw-Hill Education.

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