Roles of Management Accounting in Appraising and Managing Major Investment Decisions

Topics: Investment, Net present value, Capital budgeting Pages: 8 (2432 words) Published: March 4, 2011
Management accounting is a system of providing financial and non-financial information that guides managerial actions, motivates behaviours and supports and creates the cultural values necessary to achieve organization’s strategic objectives. Often firms are required to decide on large investment decisions which will span for years. In this regard, management accounting plays a vital role in appraising and managing them through the capital budgeting practices which are meant to enhance its value and supply chain, key success factors and benchmarking with competitors which are all interlinked and customer driven. In actual practice, however, it is a very complicated measure as it needs to coordinate with the firm’s strategy and its competitive positioning and merely decide upon net present value (NPV) for approval or rejection measure does not provide holistic approach for firms. This essay illustrates on the implications of capital budgeting practices to coincide the firm’s investment strategy as of the cases on Caterpillar Inc and Intel Corporation and how management accounting plays a role in managing them financially and non-financially. But first, the essay will start off by defining strategy, operational effectiveness and competitive advantage using Singapore Airlines as an example.

Airline industry is regard as one of the worst performing industries in the Fortune Global 500 rankings and its outlook from 2008 onwards remains bleak.[1] Yet, Singapore Airlines (SIA) has consistently performed better than its competitors.[2] The key, lies on its implementation of duel strategy: differentiation through service excellence and innovation, together with simultaneous cost leadership in its peer group.[3] Strategy, according to Porter, means performing different activities from rivals’ or performing similar activities in different ways by imposing fit and trade-offs to achieve sustainability.[4] It means choosing a different set of combined activities to deliver a unique mix of value.[5] But strategy alone is not enough to achieve competitive advantage as operational effectiveness (OE) carries substantial amount of importance. Operational effectiveness means performing similar activities but better than rivals performing them. It allows firms to utilize its inputs to maximize its value at a given cost, thus, moving towards productivity frontier.[6] Operational effectiveness alone is not sufficient to achieve competitive advantage although it is necessary as it promotes homogeneity, which results in zero-sum competition, static or declining prices and pressures on costs that compromise companies’ ability to invest in the business for the long term.[7] SIA Competitors are hot on SIA’s heels, trying to close gap in both excellence and efficiency but the fit that SIA has created is not easy to outperform. What more, SIA achieves a differentiation strategy without a cost penalty.[8] Malaysian Airlines’ service quality is high but its efficiency is nowhere near SIA’s. [9]As such, in building its competitive advantage, SIA successfully indentifies opportunities to create superior customer value through its excellence service and invest in mutually-reinforcing activities to ‘position’ the firm which sustain.

As for Caterpillar Inc, it has been making progress possible and driving positive and sustainable change on every continent for more than 80 years. With 2008 sales and revenues of $51.324 billion, Cat is the world’s largest and leading designers and producers of earth moving equipment.[10] This achievement will not be possible without implementation of management accounting systems. During the year 1985 to 1994, Cat had undergone a shift from mass production to synchronous-flow manufacture in all of the firm’s key facilities.[11] The change was due to the fact that Caterpillar has out-dated manufacturing system which put the firm at risk at three major areas: cost, availability and quality which are the essential...
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