Reference no: EM132186278 , Length: 3300 Words

MANAGEMENT ACCOUNTING ASSIGNMENT -

The overall aim of this assignment is to introduce the fundamentals of management accounting which apply to the wider business environment and the organisations which operate within that environment. Students will explore how management accounting uses financial data to aid planning decisions, and the monitoring and control of finance within organisations.

Assignment Title - Lessons to learn in Cost Management - Case of RYANAIR

Ryanair was founded in 1985 by the Ryan family to provide scheduled passenger airline services between Ireland and the UK, as an alternative to the then state monopoly carrier, Aer Lingus. Initially, Ryanair was a full-service conventional airline, with two classes of seating, leasing three different types of aircraft. Despite a growth in passenger volumes, by the end of 1990 the company had flown through a great deal of turbulence, disposing of five chief executives and accumulating losses of IR£20 million. Its fight to survive in the early 1990s saw the airline restyle itself to become Europe's first low-fares, no-frills carrier, built on the model of Southwest Airlines, the highly successful Texas-based operator. A fresh management team was appointed by Tony Ryan, headed up by Michael O'Leary. The new formula effected a turnaround in the fortunes of the company, and by 1997 the company was floated in an IPO on the Dublin Stock Exchange and on the NASDAQ.

Here are the key elements which make up Ryanair's strategy:

Low Operating Costs:

Management believes that Ryanair's operating costs are among the lowest of any European scheduled passenger airline. There are four main expenses which Ryanair is able to control and/or reduce and therefore works hard to do so:

(i) aircraft equipment costs;

(ii) personnel expenses;

(iii) customer service costs; and

(iv) airport access and handling costs:

(i) Aircraft Equipment Costs: Ryanair's initial strategy for controlling aircraft acquisition costs was to purchase used aircraft of a single type, however this no longer became viable. In March 1998, Ryanair announced that it would start purchasing new Boeing 737-800 "next generation" aircraft. The 737-800s represent the latest generation of Boeing's 737 aircraft and share certain basic attributes in common with Ryanair's current fleet. Although Ryanair's acquisition of the 737-800s has already, and will continue to significantly increase the size of its fleet from that in 1998 and thus significantly increase its aircraft equipment and related costs (both on an aggregate and per aircraft basis), management believes that its strategy of limiting its fleet primarily to three variants of a single type of aircraft from a single manufacturer enables it to limit the costs associated with personnel training, maintenance and the purchase and storage of spare parts, as well as affording greater flexibility in the scheduling of crews and equipment. Management also believes that the terms of the Boeing contracts are very favourable to Ryanair.8

(ii) Personnel Expenses: Ryanair endeavours to control its labour costs by continually improving the productivity of its already highly-productive work force. Remuneration for employees emphasizes productivity-based pay incentives, including commissions for onboard sales of products for flight attendants and payments based on the number of hours or sectors flown by pilots and cabin crew personnel within limits set by industry standards or regulations fixing maximum working hours, as well as participation in Ryanair's valuable stock option programs.9

(iii) Customer Service Costs: Ryanair has entered into agreements on competitive terms with third party contractors at certain airports for passenger and aircraft handling, ticketing and other services

Low fares:

These are used to stimulate demand, they target fare conscious leisure or business travellers who might otherwise not travelled at all or use other methods of transport such as car, coach or trains. Ryanair sells it seats on a one-way basis unlike most traditional carriers this change came into effect in November 2001. Ryanair sets its fares on the basis of the demand for particular flights and by reference to the period remaining to the scheduled date of departure. 70% of seats on a flight are sold at the minimum available fare assigned for the route, once these are filled the price per seat rises6 . Ryanair's Dublin to London (Stansted) is its most popular route in terms of passenger volume; with fares ranging from €19.99 (can be lower during special promotions).

Task 1 -

Scenario: Assume you work for a Management Accountant Consultancy firm that has been approached by RYANAIR for consultancy on a number of issues related with the field of Management Accounts.

Your line manager has asked you to first prepare a write up for the clients laying down the scope of Management Accounts. This section of the Report will form a prelude to the main report (that will be touched upon in the later tasks) Your write up should cover full Task 1 [P1, P2, M1 & D1]

P1 - Explain Management Accounting and give the essential requirement of different types of management accounting systems.

P2 - Explain the different methods used for management accounting reporting

M1 - Evaluate the benefits of various management accounting systems and their application within Ryanair. Base your discussion on the cost factors that directly affect the airlines.

D1 - Critically evaluate how management accounting systems and management accounting reporting is integrated within organisational processesin the context of Ryanair.

Task 2 -

Scenario: RYANAIR, being a low cost 'No Frills" airlines cannot find it feasible to offer free meals on board. Passengers on board desirous of food need to buy it. Keeping in view the demands of its customers, RYANAIR has recently introduced "RYAN ECONOMEAL" sale on board on all its popular destination flights, which is a continental snacks pack with the choice of one soft drink. The trial sale of this economy meal pack is proposed to be made in the first instancon London Spain route which commands heavy traffic.

The production of this refreshment pack has been taken up in collaboration with a company named Cordell Company. RYANAIR executives want to know what are the profits under Absorption Costing and Marginal Costing . Your line manager has provided you with the client's data for 6 months and wants you to prepare income statement under both Absoprtion Costing and Marginal Costing. Subsequent to that the data is to be interpreted and explained.

The following information is available for the months January to June for the "RYAN ECONOMEAL" package.

	£
Unit Selling Price	10
Unit Variable Cost	6
Fixed Cost per period	300000

RYANAIR produces only one product and the budgeted activity is expected to average 150,000 per month.

2017	Jan	Feb	Mar	Apr	May	Jun
Units sold ( 000s)	150	120	180	150	140	160
Units produced (000s)	150	150	150	150	170	140

1) No opening inventories at the start of the period 1.

2) Actual manufacturing fixed overheas incurred £ 300000 per period.

3) We shall assume that non manufacturing fixed overheads are £100,000 per period.

P3 - Calculate costs per unit under both absorption costing and marginal costing and explain why do they differ. Explain how they are used to prepare an Income Statement under Marginal Costing and Absorption Costing

M2 - Accurately apply the results obtained in P3 above to produce an Income Statement using

1. Variable Costing Statements

2. Marginal CostingStatements .

D2 - Produce a Financial Report that accurately applies and interprets data for a range of business activities carried out at RYANAIR.

Note: Please refer to separate guidelines for more details on how to prepare the Financial Report.

Task 3 -

Scenario: Airplanes can only carry so much weight, and, sometimes, it might be more profitable for a carrier to transport high-value cargo than a few extra customers. In that case, an airline might not even try to sell every seat.

RYANAIR sells tickets online against full payment paid by the traveller through any mode but falls within the remit of Cash Sales. However, for cargo transporters, RYANAIR allows credit sales against mutually agreed terms in order to attract new business.

Your line manager has provided you with the data for 6 months in respect of RYANAIR.

	Oct £000	Nov £000	Dec £000	Jan £000	Feb £000	Mar £000
Credit Sales	250	250	250	260	260	280
Cash Sales	60	60	65	75	80	90
Credit Purchases	170	180	180	200	200	200
Other operating expenses	90	90	90	122	123	123

1. 80% of the value of credit sales is received in the month after sale. , 10 % two months after sale and 8 % three months after sale. Balance is written off as bad debt.

2. 75% of the value of credit purchases is paid in the month after purchase and the remaining 25% paid two months after purchase.

3. All other operating cost are paid in the month they are incurred.

4. RYANAIR has placed orders for 4 forklift trucks that will cost £ 25000 each. The scheduled payment date is in February.

5. The cash balance as at 1 January is estimated to be £ 15000.

Prepare a Cash Budget for each of the three months of January, February and March.

P4 - Explain the advantages and disadvantages of different types of planning tools used for budgetary control. Prepare a cash budget for RYANAIR for each of the months January, February and March.

M3 - Analyse the use of different planning tools and their application for preparing and forecasting budgets in the context of RYANAIR.

Task 4 -

Scenario: Refer to an extract from the vocational scenario.

P5 - Compare RYANAIR with one of the two Easy Jet or Southwest Airlines in order to establish how organisations are adapting management accounting systems to respond to financial problems.

M4 - Analyse how, in responding to financial problems, management accounting can lead an organisation such as RYANAIR to sustainable success.

D3 - Evaluate how planning tools respond appropriately to solving problems in the context of RYANAIR, leading to sustainable business development.

Attachment:- Assignment File.rar