CaseStudyQuestions x
Case study Entries
Case study Entries
Please use references/material from Folowing book if possible:
Title: Management Accounting for Decision Makers – Author(s): Atrill, P. and McLaney, E
Date of Publication: 2018 – Edition: 9th – Publisher: Pearson
Include at least 2 academic or business reference or wider reading for each Entry.
Visual: Please try to include at least one image, diagram, table, graph… in each Entry (even simple stuff like descriptive diagram that supports the text explanation)
Case Study Background : Gogo Airlines low-cost carrier
Gogo Airline is a full-service long-distance airline based in the country of Greenburg. Over the past decade, GoGo Airline has earned a reputation for providing intercontinental passengers with high levels of service and hospitality. The airline is very popular in Greenburg due to the ongoing marketing efforts by the CEO.
In 2015 air travel in the region received a massive boost due to an increase in the number of new budget airlines operating additional routes and rising national income levels which encouraged more people to fly, and to do so more often. At present, budget airlines hold 40% of the market share of air travel in Greenburg. The growing popularity of budget airlines has put pressure on fullservice carriers such as GoGo Airlines, which cannot compete with the former on prices.
The Challenge
The rise of budget airlines has posed a dilemma for GoGo Airlines. On the one hand, there is a danger that GoGo may lose its pricesensitive passengers. On the other hand, GoGo airline’s parent company believe there might be huge opportunities from an increased preference for air travel.
GoGo Airlines CEO has noted new budget carriers are mainly concentrating their efforts on short to mediumhaul routes. He is of the opinion this should not pose immediate problems for GoGo Air as it operates long-haul routes, but may be problematic if the budget airlines expand into the long-haul route market.
GoGo Airlines CEO has commented competing on price was not an option as much of its reputation depends on providing excellent services. Compromising on that to cut costs would be a disastrous precedent for a premium brand. Alternatively, if the group did nothing, it risked further encroachment by low-cost competition.
The Strategy
The group decided to develop a lowcost airline, MegaSaver Airways, for the medium to the longhaul category. This separate airline would have a drastically different business model, target audience and service.
Work Description:
1st Entry (400 – 500 Words) :
Before the advent of large-scale industrialisation, globalisation and privatisation, business managers and owners were known to rely on their experience and instincts to make financial decisions. This strategy is no longer viable in the contemporary business environment.
Due to greater competition managers and owners must rely on quantitative and qualitative data to evaluate the implications of their proposed approach. Quantitative and qualitative methods can provide reliable evidence to guide financial decisions on production, distribution, marketing and personnel management. These methods also help managers forecast future business conditions and enable them to adjust their strategies as needed.
Managers are responsible for making business decisions at each level of a business to achieve organisational objectives. These decisions can range from strategic decisions through to managerial decisions and routine operational decisions. The decisions should be based on sound qualitative and quantitative data.
Question:
You should consider the potential concerns that might arise if management at GoGo Air make strategic decisions using intuition instead of qualitative and quantitative data.
2nd Entry (400 – 500 Words) :
While managing the affairs of a business a manager may need to make strategic decisions between
· Making or buying
· Accepting or declining special contracts
· Closing or continuing business activities
To make the above decisions, managers should be aware of the costs and benefits which result directly from each option. This unit will focus on the costs arising from various options. Managers should separate costs which are affected by accepting or rejecting a decision (i.e. relevant costs) from those that remain constant and are independent of the decision (i.e. irrelevant costs). Irrelevant costs should be ignored in the decision-making process as they will be borne by the business regardless of whichever decision is accepted.
Principles of costing:
Costing systems enable businesses to calculate the cost of their products. Accurate costing is important as it influences the price at which a product will sell.
Two commonly used costing systems are the traditional costing and activity-based costing (ABC) system. Traditional costing assigns a manufacturing overhead based on factors such as the number of direct labour hours or machine hours required to produce an item. Activity-based costing allocates the costs of manufacturing a product in accordance with the activities required to produce it.
Data:
The costs associated with MegaSaver Airways are as follows:
1. £2,000,000 has already been spent to evaluate the feasibility of the project
2. The annual rental costs of the new headquarter is estimated to be £300,000 per annum
3. New equipment costing £1,500,000 will need to be bought and will be depreciated on a straight-line basis over ten years
4. A manager who earns £100,000 per year and currently works for GoGo Airlines on a full-time basis will be required to spend 25% of his time managing the new budget airways.
Question:
State, with reason(s), if the following expenses are relevant:
· the cost of the feasibility study
· rent charged to the project
· the cost of new equipment
· depreciation on the new equipment and
· manager’s salary
3rd Entry (400 – 500 Words) :
Strategic management accounting is the branch of accountancy which recognises the influence of the external environment on an organisation’s operations. Strategic management accountants consider the impact of external
In the 1980s, management accounting was criticised for becoming too internally focused on operational issues and providing little help to managers in making strategic decisions. Simmonds introduced the term Strategic Management Accounting (SMA) in 1981. Simmonds defined SMA as “the provision and analysis of management accounting data about a business and its competitors, for use in developing and monitoring business strategy”.
SMA provides managers with a range of business models which can assist them in making decisions. SMA recognises the role of political, economic, socio-cultural and technological factors in determining the success of a business and, therefore, advocates that managers consider these factors before making strategic decisions.
Question:
Describe how GoGo Air’s management team might use strategic management accounting techniques to make financial decisions about the future of the company.
4th Entry (400 – 500 Words) :
Performance Measurement:
Decentralisation is the delegation of decision-making responsibility. Decentralisation is a necessary response to the increasing complexity of the environmental factors and the growing scale of the organisation’s operations.
A danger of decentralisation is that managers may use their decision-making freedom to make decisions that are not in the financial interests of the organisation. Some managers may be tempted to make decisions which can increase their personal bonuses at the expense of the long-term financial viability of the organisation. To overcome this problem, senior managers introduce systems of performance measurement to ensure, among other things, all managerial decisions are in the best financial interest of the organisation.
Managin working Capital:
Working capital management is the management of all aspects of the current assets and current liabilities, to minimise the risk of insolvency while maximising the return on assets.
Working capital management refers to the strategy used by managers to control the level of current assets and current liabilities, to ensure the most financially efficient operation of the company. The primary objective of working capital management is to ensure the company always maintains sufficient cash flow to meet its short-term debt obligations.
Question:
Implementing an appropriate system for performance measurement and working capital management can help a business to improve productivity and achieve its objectives.
Consider the benefits and issues associated with implementing a system for performance management and working capital management within an organisation like GoGo Air.
