Week 2 Workshop Solutions(2) - Week 2 Solutions to Workshop...

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Week 2 - Solutions to Workshop Exercises 1.4 Management accounting is defined as ‘processes and techniques that are focused on the effective and efficient use of organisational resources to support managers in their task of enhancing both customer value and shareholder value’. Value creation is a central focus for contemporary managers. Customer value refers to the value that a customer places on particular features of a good or service (and which is what leads to them purchase the product). Shareholder value is the value that shareholders, or owners, place on a business—usually expressed in the form of increased profitability, increased share prices or increased dividends. 1.7 The ‘Real life’ report of changes in the airline industry on page 5 illustrates the increasing competition in the industry and the pressure to reduce fares. This pressure makes the need to have a clear idea of the business’ costs imperative. The article shows a move from having few airlines servicing a particular route to having several airlines servicing it. When there were few airlines flying from Sydney to Los Angeles they were able to charge a premium—essentially it was a sellers’ market where the seller could have great influence over the price. With more providers on this route we move toward a buyers’ market where the buyer has great influence over price due to the ability to turn to another airline with a lower fare. The balance between supply and demand has changed on this route. The providers now need to keep a close eye on methods of cost containment, their actual costs and what causes them and how long they can sustain low fares. Without adequate information it is not unusual for a firm to struggle because it charges prices below the product cost. This cannot be sustained for long. The impact of cost cutting exercises needs to be analysed by the management accountant. For example, most costs in an airline do not change with the number of passengers. The cost of the aircraft, the fuel for a flight and the number of staff involved in the flight are static. Once airlines were inclined to provide food for all seats but now a last-minute passenger in Business Class or First Class can be told that refreshments are not guaranteed. You may also have seen a report in 2010 of how much an airline saved by putting one olive fewer in a meal in First Class! The management accountant can also help by analysing the likely result if various marketing approaches are adopted. Hence, ways to increase Business Class sales requires analysis of the cost of providing more business class seats (and fewer Economy seats) and the fare that will provide the required profits. Other changes to remain competitive may include better service in Business and First Class (for example, flatbeds and complimentary pyjamas) and cost saving in Economy (for example, not providing a blowup neck pillow on long haul flights and removing moisturiser from the toilet bags provided on long haul flights). We have also seen an introduction of
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