Stand-Alone Project: Case Study in Managerial Accounting

Financial accounting is one of the key aspects of managing and running an organization. Accounting for management involves various activities such as costing, budgeting, and reporting, activities that have a huge impact on the productivity, efficiency, sustainability, and growth of an organization. In this paper, the implications of these activities, and their effect on the performance of Apple Inc., are explored. The organizational culture, performance, model, and accounting elements of the company are discussed to acquire a better understanding of the role of managerial accounting in the management of the organization. The various tools and methods that Apple Inc. uses to make informed decisions on costing and management of internal process and users are also discussed.

Company Profile

Apple Inc. is one of the largest global telecommunications and media organizations. The company is based in Cupertino, California, and has been on the Fortune 500 list of companies for many years. Apple Inc. deals in the design, manufacture, marketing, and sale of media and communication devices and services, alongside related software, networking solutions, services, accessories, and third-party digital content. The company operates using its Americas – North and South America; Greater China – China, Hong Kong, and Taiwan; Europe – India, European countries, Africa, and the Middle East; Japan, and Rest of Asia Pacific – Australia and rest of Asia business segments (Apple Inc.,2020). The services and products of the company include the iPad, iPhone, Mac, iPod, Apple TV, Apple Watch, professional and consumer software applications, iOS, OS X, and watchOS operating systems, Apple Pay, iCloud, and various service, accessory, and support services.

Over the last five years, the company has been evolving from the traditional organization that was operational during the leadership of the late Steve Jobs into a more conventional, decentralized, top-down hierarchy company that focuses on product quality and financial performance under the leadership of Tim Cook. Apple Inc. operates in the highly dynamic and competitive technology industry, an industry that is characterized by low switching costs for consumers and constant technological changes. There are many competitors in the industry, with companies such as Samsung, Hewlett Packard, Google, and Amazon.com being the key competitors of Apple Inc. The companies in the technology industry invest heavily in research and development to ensure that they beat their competitors by remaining ahead of them. Apple Inc. uses a strategy of countering low-cost strategies used by competitors by focusing on the consumer – improving consumer experience and satisfaction through fast product transition and innovative services and products.

Instead of focusing on providing products and services at low prices, like its competitors, Apple Inc. focuses on providing customers with innovative hardware, reliable services, and streamlined software at a premium cost. Therefore, the company major focus is on the tech-savvy and financially-capable market segment of the global market. The company has, over the years, been successful at providing its target market with unmatched user experience, which can be shown by the immense consumer loyalty that the company enjoys. Its strategy can be summarized as product differentiation and consumer focus. The company differentiates its services and products based on simple but attractive design, combined with advanced functionality. The continuous improvement of existing products and services is also a strategy by which the company has ensured consumer satisfaction and loyalty.

Part B: Cost Behavior and Cost-Volume-Profit (CVP)

Apple Inc. uses cost behavior in the categorization of items in the development of a typical contribution format income statement. The company identifies its variable costs as the cost of sales and the fixed costs are categorized under operating expenses and other expenses. A look at the company’s financial reports reveals that the company basis its forward-looking financial statements on factors such as product pricing, component (variable) and other (fixed) costs, and product mix, factors whose changes influence the expected performance and outlook (Apple Inc., 2020). The quarterly financial statements of the company also imply that CVP analysis is part of the decision-making tools that the company uses. However, CVP analysis forms a very minor part of the decision-making process, especially regarding product sales. Apple Inc.’s business model is mostly focused on customer experience, with a major focus on applications, software, interfaces, and solutions.

The sale of hardware and devices, such as iPad, Mac, and iPhone units, forms a large part of the revenues of the company. However, a huge portion of revenues comes from the sale of software, services, and solutions (Apple Inc., 2020). The sale of software and services is not directly linked to the sale of hardware and devices. Therefore, CVP analysis by itself cannot provide a clear view of the profit per unit and contribution margin for the organization. For decision-making purposes, the company should, therefore, continue using CVP analysis as a tool, but also use other tools to supplement it, such as the Customer Lifecycle Costing. This way, the company will acquire a comprehensive view of performance, which will enable it to optimize the customer base and achieve organizational growth in the future.

Part C: Activity-Based Costing (ABC), Job Order, Process Costing, and Cost Allocations

ABC method of allocating overhead costs is best suited for large organizations such as Apple Inc. This is because large companies have multiple products and complex operations and ABC enables them to allocate expenditures more conveniently. It is easier and more comprehensible to allocate expenditures to cost-centers than considering costs per process or costs per batch. Apple Inc.’s primary cost-centers include warranty costs, research and development, non-software services, sales, engineering, marketing costs, handling costs, and shipping costs (Rosenman, 2011). The secondary cost pools of the company include employee salaries and benefits, and administrative costs. Companies use ABC in the management of various costs. For example, Apple Inc. has continuously been increasing research and development expenditure as well as marketing costs, while minimizing its administrative costs through ABC (Apple Inc., 2020). This effective management of costs and capital is one of the reasons why the company has been able to successfully establish and scale up its global operations.

Part D: Budgeting and Variance Analysis

An analysis of Apple Inc.’s public financial statements shows that the company applies both activity-based and incremental budgeting processes. The projected future costs for overhead expenses are based on the company’s strategic targets that are partly based on the previous year’s data and performance. All the companies in a highly competitive industry, such as the technology industry, need to have flexible budget approximations to ensure that they can respond fast and appropriately to market changes or unexpected shifts. For this reason, Apple Inc.’s budgets are activity-based and are tied to strategies that ensure that they are adaptable to constant changes that occur in the global economy. The company ensures that it has budget items that are easily variable in case of unexpected shifts in the market.

Part E: Cost, Profit, and Investment Center

The annual and quarterly financial statements of Apple Inc. show that the company is segmented into divisions that are geographically-based. The segments of the company are the Americas, Europe, Greater China, Japan, and Rest of Asia Pacific. Each of these is a cost, profit, and investment center that reports outcomes of operations and overall sales separately to the company’s headquarters. All these segments provide customers with similar products and services, even though they are separately managed to ensure that activities and services are aligned with the regional environment. However, strategic decisions are controlled by the company’s chief executive, Tim Cook, a group of senior company executives, and the heads of activity divisions. Since Tim Cook took the company over from the previous leadership, the company has been evolving into a more collaborative and decentralized organization, with more collaborative decision-making dynamics and strategies. Nevertheless, the company remains largely centralized to ensure that the focus on quality is maintained.

The financial performance evaluation of the geographical company segments is done using the bottom-line net incomes and operating income of each segment. However, the organization also uses a Balanced Scorecard in the evaluation of the overall performance – the entire organization. Apple Inc. measures performance on the team and individual levels through peer assessment, 360-degree assessment, and annual performance reviews (Apple Inc., 2020). Organizational performance is evaluated using the Balanced Scorecard tool (Tudorache, 2017). For the Balanced Scorecard, the organization has five key performance indicators that are effective in the determination of the overall health of the company – customer satisfaction, employee commitment and alignment, core competencies, market share, and shareholder value (Tudorache, 2017). While the company has been successful at achieving global presence, its global business strategy has been recently questioned, with doubts expressed on its sustainability as a result of increased economic and social issues caused by the elongation and fragmentation of international supply chains (Lehman & Haslam, 2013). Such elongations have developed in an attempt to capture value that is within the reporting thresholds of the company. The company needs to consider sustainability as a key indicator in the performance assessment since the five key indicators of performance used are unable to capture the challenges related to sustainability and social responsibility before they become a huge problem.

Part F: Decision-Making Policies

The reporting of the geographical segments is based on a management approach where information that is discussed in the internal meetings and reports is included to facilitate performance assessment and management decisions. For the development of financial statements, data from all the reportable geographical segments is used as the source, after the consideration of exchange rate data, and other financial adjustments (Lehman & Haslam, 2013). Financial reports are then developed and used to asses the performance of the company and each of its segments, projecting future targets and costs, and developing strategies. Internal company reports are used in management decision-making, especially on the stock repurchase and the dividend payouts. Overall, the company’s operation management involves ten main decision areas that cover all the aspects of the company, ensuring that they continue performing at an optimal level – goods and services design, process and capacity design, quality management, location strategy, layout design and strategy, inventory management, supply chain management, job design and human resources, maintenance, and scheduling.

Decision-making and accountability are roles that are executed at different levels of management depending on the complexity, gravity, and scale. The highest order decisions are made by the senior vice-presidents of operations, software engineering, hardware engineering, and human resources, together with the Chief Operations Officer, Chief Design Officer, and the Chief Executive Officer. Other decisions are made by respective departmental heads and managers depending on the complexity. The company’s top ranks of chief officers, vice presidents, and senior vice presidents are the users of the internal reports, which are used for strategic and operational decision-making and evaluation. These top personnel highly rely on the data and information provided by separate company segments. Therefore, other items, besides the financial data, have to be provided in the individual segment reports of the company. These items include performance projections and consumer trends. The additional information provided in the segment reports will help in the performance assessment of each company segment, besides being used in the financial bottom line evaluation.

Conclusion

Apple Inc. is one of the best-performing technology companies in the world. The company has a global presence, with geographical segments that provide products and services to customers across the world. The above evaluation and discussion of the company’s cost behavior, cost allocation, performance assessment, budgeting, and decision-making shows the importance of managerial reporting and accounting to the organization. The findings of performance evaluation inform management accounting decisions, which influence the productivity, efficiency, and future performance levels of the company through the management of company resources. Managerial accounting also helps the company to effectively communicate its needs, key issues and challenges, problems, and developments to the internal stakeholders. The performance of company segments and the overall outcome evaluation are also dependent on the company’s internal accounting reports.

At Apple Inc., the separate segment reports are analyzed and compiled to come up with information that is used in the forecasting of segment and company performance. Managerial accounting helps the senior executives of Apple Inc. to make informed management and financial decisions and to develop effective business strategies to ensure that the company’s future targets and goals are achieved. The analysis of the company shows that managerial accounting plays a huge role in the company’s management, informing decision-making and the strategic direction of the company. All the concepts covered in this course are followed by the company. However, the company should improve its decision-making by ensuring that segment reports include additional information, besides financial data, to provided executives with information necessary for the determination of the performance of each segment. Also, the company should use the CVP analysis tool together with the Customer Lifecycle Costing tool to ensure that it acquires a more comprehensive view of performance. This way, the executives will be able to better optimize the existing customer base while achieving global organizational growth.

References

Apple, Inc. (2020). Apple reports second-quarter results. Apple, Inc. Newsroom. https://www.apple.com/newsroom/2020/04/apple-reports-second-quarter-results/

Lehman, G. & Haslam, C. (2013). Accounting for the Apple Inc business model: Corporate value capture and dysfunctional economic and social consequences. Accounting Forum, 37(4), 245-248.

Rosenman, S. (2011). What Apple does well: Cost management. Seeking Alpha (online). https://seekingalpha.com/article/284455-what-apple-does-well-cost-management

Tudorache, A. (2017). How Apple uses the Balanced Scorecard. Performance Magazine. https://www.performancemagazine.org/apple-balance-scorecard/

STAND-ALONE PROJECT

MA610 Managerial Accounting

Stand-Alone Project: Case Study in Managerial Accounting

Your Stand-Alone Project responses should be both grammatically and mechanically correct and formatted in the same fashion as the project itself. If there is a Part A, your response should identify a Part A, etc. In addition, you must appropriately cite all resources used in your response and document them in a bibliography using APA style.

Each lesson in this course focuses on a different concept in managerial accounting. These concepts apply whether a firm is involved in manufacturing, merchandising, or service, as well as non-profit organizations. The purpose of this project is to help you understand the use and application of the concepts covered in the course. You are being asked to study an actual firm and to report on its use of the concepts covered in this course (A 8-page response is required.)

Part A Select a firm that is publicly traded. This ensures you can access the needed data and information from published financial disclosures and articles found in various business journals such as Strategic Finance, Management Accounting Quarterly, etc.

Note: For large firms, you may want to study only a segment of the firm. If so, ensure that you break down company data for the segment chosen.

Provide the following background information on the firm you selected.

Firm Name

Description of the Industry in Which the Firm Operates

Type of Business or Segment of the Firm (manufacturing, merchandising, service, or non-profit organization)

General Description of the Firm’s Operations, Organization, Products, and Markets

Note: The rest of the report will deal with the concepts covered in this course. Following are concepts that should be discussed in your report. Although some discussion relating to each concept is expected, please feel free to place a greater emphasis on topics of special interest to you. You may also want to place an emphasis on an area of weakness that may result in corrective action by the firm.

Conversely, for your benefit, you may want to explore in depth a topic in which the firm has a real strength. Your study may find areas in which the firm needs improvement. A “no” answer for many of the questions would indicate a weakness in the firm’s systems. In those instances, you should make recommendations. Provide complete details of the recommendations that you make, including why the recommendation is being made and the benefits to be gained. Each of the following components of your report requires a minimum of two (2) pages. This allows flexibility for you to emphasize your areas of specific interest.

Part B Cost Behavior and Cost-Volume-Profit (CVP) (Lesson 1): Assess your firm’s use of these tools.

Does the firm break down their costs by behavior?

Do they determine their break-even point?

Do they use these concepts in the decision-making process? Do you have any recommendations to make?

Part C ABC, Job Order, and Process Costing and Cost Allocations (Lesson 2): Describe the cost system used by your firm.

If your firm is not using ABC costing, do you think that it is a good candidate to do so? Why or why not?

Do you have any recommendations to make?

Part D Budgeting and Variance Analysis (Lesson 4): Describe the budgeting process used by your firm.

Does the process follow the responsibility concept?

Can you ascertain how employees view the process?

Is a flexible budget concept used? Do you have any recommendations to make?

Part E Cost, Profit, and Investment Center (Lesson 5)

Is decision making centralized or decentralized?

How is performance evaluated?

Does the firm follow the decision-making and evaluation concepts covered in this course?

Does the firm use a balanced scorecard?

Do you have any recommendations to make?

Part F Decision-Making Policies (Lesson 6): You were given a number of examples showing how relevant financial information was used in decision making. Review the firm’s policies regarding these decisions.

Does it follow the concepts covered in this course?

Do you have any recommendations to make?

Grading Rubric

Please refer to the rubric on the following pages for the grading criteria for this assignment.

Stand-Alone Project: Case Study in Managerial Accounting

Part A: Introduction and Company Profile

Introduction

Company Profile

Part B: Cost Behavior and Cost-Volume-Profit (CVP)

Part C: Activity-Based Costing (ABC), Job Order, Process Costing, and Cost Allocations

Part D: Budgeting and Variance Analysis

Part E: Cost, Profit, and Investment Center

Part F: Decision-Making Policies

Conclusion

References

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