EXECUTIVE SUMMARY 2
SECTION 1 2
INTRODUCTION 2
SECTION 2 2
DISCUSSION ON ACTIVITY BASED COSTING (ABC) METHOD 2
2.1. Background, explanation and critical evaluation of ABC 2
2.2. Advantages of ABC 3
2.3. Limitations of ABC 3
2.4. Applicability to Ryann Air 4
SECTION 3 4
BALANCED SCORECARD 4
3.1. Explanation and evaluation of BSC 4
3.2. Limitation of BSC 5
3.3. Balanced Scorecard for Ryan Air 6
SECTION 4 7
BUDGETING 7
4.1. Critical evaluation of the role of budgeting 7
4.2. Activity-Based Budgeting, including advantages and limitations 7
SECTION 5 8
CONCLUSION 8
SECTION 6 9
PRESENTATION AND REFERENCING 9
EXECUTIVE SUMMARY
This report provides strategy and business model of Ryan Air. Methods of strategy includes advantages and limitations of activity-based costing, implementing balanced scorecard and activity-based budgeting.
The report finds the prospects of the company would like to support future growth. Recommendations discussed include:
1. Embrace social media.
2. Target business customers.
3. Consolidate position in existing and new markets.
4. Develop capabilities to move into the long-haul sector.
The report also investigates the fact that the analysis conducted has limitations. Some of the limitations include:
1. Activity-based costing may be a bad decision for airline businesses as it requires a high level of framework utilization.
2. Implementing balanced scorecard may bring up employee resistance, cost and time, incomplete information.
3. Activity-based budgeting may cost a lot of time and effort, and hard to recognize.
SECTION 1
INTRODUCTION
The purpose of this report is to introduce the strategy and business model of Ryan Air. This includes the uses of activity-based costing, balanced scorecard and activity based budgeting. Also, the advantages and limitations and listed in this report.
Activity-based costing is an accounting method which recognizes the relationship between costs, activities and products, and through this relationship, it doles out indirect costs to items less self-assertively than traditional method. Balanced Scorecard approach is to take an all-encompassing perspective of an association with the goal that efficiencies are experienced by all departments. Budgeting systems facilitate the value creation process and it is an invaluable component of a company's planning and control efforts which the system forces managers to plan and promotes coordination. The budgeting systems also supports responsibility accounting and reporting.
SECTION 2
DISCUSSION ON ACTIVITY BASED COSTING (ABC) METHOD
2.1. Background, explanation and critical evaluation of ABC
Activity based costing doles out manufacturing overhead expenses to items in a more consistent way than the traditional approach of basically allocating costs on the basis of machine hours. Activity based costing initially assigns expenses to the activities that are the real cause for the overheads. At that point, it allocates the cost of those activities just to the products that are actually demanding the activities (Accountingcoach.com, n.d.).
The basic thoughts of activity-based costing. Proceeds to indicate how ABC allocate costs more precisely to products and clients by (Robert S. Kaplan, 1997):
1) Distinguishing the activities being performed by organizational resources;
2) Assigning resource expenses to the activities;
3) Recognizing every product, services, and clients of the organization; and
4) Assigning activity expenses to these outputs by activity cost drivers.
Additionally, covers activity attributes, for example, the cost hierarchy, value and non-value added, and business forms, and distinctive sorts of action cost drivers: transaction, duration, and intensity. Closes with the admonition to adjust the advantages from more exact cost estimates with the cost of building up a suitable activity-based cost system.
2.2. Advantages of ABC
Activity-based costing or ABC is complicated and expensive to transport yet there are as yet many organizations taking to use ABC strategy in view of its advantages or favourable circumstances (Kfknowledgebank.kaplan.co.uk, n.d.):
1) ABC provides a more exact cost for each unit. Therefore, valuing, sales strategy, performance management and decision-making ought to be improved.
2) It gives a much better understanding of what drives overhead expenses.
3) ABC perceives that overhead expenses are not all identified with production and sales volume.
4) In many businesses, overhead expenses are a significant proportion of total costs, and management needs to comprehend the drivers of overhead expenses in order to end the goal to deal with the business appropriately.
5) Overhead expenses can be controlled by managing cost drivers.
6) It can be connected to determine realistic expenses in a complex business condition.
7) ABC can be applied to every single overhead cost, not just production overheads.
8) ABC can be utilized simply in benefit costing as in product costing.
2.3. Limitations of ABC
Activity-based costing framework enables supervisors to oversee overhead and comprehends gainfulness of items and clients and in this way, is an effective device for decision making. However, activity-based costing has various numbers of limitations or disadvantages (Accountingexplanation.com, n.d.):
1. Implementing an ABC system is a major task that requires significant resources. Once it is implemented, an activity-based costing system is expensive to maintain. Information concerning various movement measures must be gathered, registered and entered into the system.
2. ABC produces numbers, for example, product margins, that are chances with the numbers created by traditional costing systems. Be that as it may, managers usually utilize traditional costing systems to run their operations and are regularly utilized in performance evaluation.
3. Activity-based costing information can be effectively misinterpreted and must be utilized with care when used in decision making. Costs allocated to products, clients, and other cost objects are just conceivably significant. Before settling on any significant choice using activity-based costing information, managers must distinguish which costs are relevant to the decisions at hand.
4. Reports created by this framework does not fit in with generally accepted accounting principles (GAAP). Therefore, an association engaged with activity-based costing ought to have two cost systems – one for internal use and one for external reports.
2.4. Applicability to Ryann Air
Applying traditional Activity Based Costing to services may lead to bad business choices. One reason is that ABC inherently expects a high level of framework utilization. Assembling plants consistently work at 80+% of capacity, with every unit of production demanding a lot of resources. Administrations show simultaneous production and consumption, which when combined with strong seasonality designs leads to moderately low utilization– frequently 50% or lower (Tom Considine, 2012). ABC suggests that services with lower usage would have a higher per item burden than services with high usage. The higher burden can lead to higher costs which can lead to lower market share and this even higher burden. On the other hand, high working influence implies that there could be a great advantage by bringing the cost down to increase market share and in this way, improve contribution to fixed costs. A superior type of ABC would think about the assumption of low utilization.
SECTION 3
BALANCED SCORECARD
3.1. Explanation and evaluation of BSC
As explained by the Balanced Scorecard Institute, the balanced scorecard was outlined by Drs. Robert Kaplan and David Norton "as a performa
nce measurement framework that added vital, non-monetary performance measures to traditional financial metrics to give directors and executives a more adjusted view of organizational performance" (The Improve Group, n.d.). Balanced scorecards were initially used as a part of the revenue driven sector, with organization characterizing vital needs and then planning measures and key performance indicators to monitor how well those techniques are being executed.
The balanced scorecard sees an organization from four points of view. The organization at that point creates goals that satisfy every perspective and gathers information for each one (The Improve Group, n.d.). These perspectives are as follows:
1) The financial perspective: In public and non-profit sectors, the focus is regularly on adjusting income with expenses.
2) The internal business process perspective: This perspective demonstrates "how well a business is running, and whether these forms result in products and administrations that conform to client requirement".
3) The customer perspective: It is important to deliver to customers. From this viewpoint, an organization would consider goals, for example, increase satisfaction with products and services delivered, or the public impression of the organization.
4) The learning & growth perspective: Includes worker learning and corporate cultural attitudes and leadership. The goals from this point of view would endeavor to maximize both individual and corporate improvement.
If an organization is not bound to these four perspectives, it may freely build up its own perspectives to look at relying on what is critical to the organization’s success. Because of this, organizations are currently deviating from the balanced scorecard and creating ones that are a superior fit, depend upon their general objectives. This has enabled evaluation to come in to play. Starting as a passive document, after some time the balanced scorecard has evolved to "give a system that gives performance measurements, as well as enables organizers to distinguish what ought to be done and measured" (The Improve Group, n.d.).
What is used to be looked at as a benchmark, the last consequences of a scorecard are being assessed by interpreting the information and investigating options for improvement. Evaluation is not just used after the adjusted scorecard is delivered; it additionally plays a huge part in the scorecard's original development. Evaluation can help (The Improve Group, n.d.):
1) Define what an organization’s key performance indicators are, especially in the client and internal business areas;
2) Determine the source of information are on the balanced scorecard; and
3) Collect and outline the information.
3.2. Limitation of BSC
The balanced scorecard can be an effective approach to organize and manage an organization's business activities by ensuring balance over significant areas of focus. In any case, while numerous organizations have held onto the balanced scorecard as a strategic planning technique, others have discovered that it comes with certain drawbacks (Leigh Richards, n.d.).
Employee Resistance. While there are many individuals who are strong supporters of the balanced scorecard and its utilization in strategic planning and process management. Some employees may feel that it is just "the flavour of the month," and resist its implementation. This is especially valid if the implementation requires employees to experience training activities or contribute extra time to find out about the balanced scorecard and its utilization. Organizations that are effective in the use of the balanced scorecard need to have the support of everybody in the organization to make most extreme progress (Leigh Richards, n.d.).
Cost and Time. While the balanced scorecard has been utilized effectively by many organizations that are vocal supporters for its utilization as a strategic planning tool, they admit that it can be a costly and time-consuming tool. Correct use of the tool requires a careful understanding of the process and, unless somebody in the organization has involvement with it, might include the use of an outside specialist to help with the process. Those engaged in the strategic planning process and the use of the balanced scorecard to manage procedures and track results all need learning of how the scorecard functions. For greatest performance, the whole organization ought to comprehend the hypothesis behind the use of the balanced scorecard, the significance of accomplishing balance over the various measures, and how the tool can be used for process improvement (Leigh Richards, n.d.).
Incomplete Information. The usefulness of the balanced scorecard approach is reliant on the estimation of the data that is driving the procedure. While the tool can work, it will only work if both the correct components have been chosen for review and if the data used to evaluate progress is finished, exact and applicable to the area being tended to. For example, in evaluating the effectiveness of training efforts, the quantity of individuals being trained is not as significant as the training they got (Leigh Richards, n.d.).
Many international research projects have exhibited that Balanced Scorecard concept is an extremely well-known device around the globe. In the meantime, together with different success stories there have been additionally few situations where the implementation project is not finalised at all (Marko Rillo, n.d.).
3.3. Balanced Scorecard for Ryan Air
The following are the four perspectives of the balanced scorecard:
Strategy Objectives Measures Targets Initiatives
Financial Increase revenue and profitability Profit margins 20% market value increase per year Additional routes
Reduce costs Revenue growth 20% seat revenue increase per year More frequent flights
Cash flows and costs Further cost reduction
Strategy Objectives Measures Targets Initiatives
Customer Increase market share and customer satisfaction Market share > 0.5% missed bags Customer loyalty programs
Reduce prices Customer satisfaction 10% passenger growth per year Quality management
On-time arrivals < 95% on-time arrivals
Passengers
Strategy Objectives Measures Targets Initiatives
Internal Increase fleet and crew utilization On-ground time < 95% on-time departures Cycle time optimization program
On-time departure > 30 minutes on-ground time
Strategy Objectives Measures Targets Initiatives
Learning Employee training Number of additional courses attended < 70% of employees take at least one course per year Various training programs offered
SECTION 4
BUDGETING
4.1. Critical evaluation of the role of budgeting
A budget is characterized as management’s quantitative expression of plans for a pending period. Budgets are set up at different levels of an organization. The master budget is characterized as the financial plan for the period, which mirrors the organization’s objectives. The master budget incorporates operating and financial budgets. Operating budgets demonstrate the company's arranged sales and operating costs. Financial budgets reflect financing plans, for example, borrowing, leasing, and cash management (Flexstudy.com, n.d.).
Budgeting, when done rightly, can serve in as a planning and controlling system. The organization's objectives and performance objectives are reported in financial terms. Once figured, these plans are utilized consistently. Monthly performance reports analyse budgeted with actual outcomes. To control operations, management can look at the performance reports and take important restorative actions (Flexstudy.com, n.d.).
The part that effective budgeting plays in the management of a business is best comprehended when it is identified with the essentials of management. Many exist
ing meanings of business management can be communicated in terms of five functions: planning, organizing, staffing, directing, and controlling. Management should first make the arrangement. The arrangement is executed by organizing, staffing, and directing operations. To control operations, management must organize proper techniques of observation and report to determine how actual outcomes contrast with plans. Budgeting is concerned essentially with the planning and controlling functions of management (Flexstudy.com, n.d.).
4.2. Activity-Based Budgeting, including advantages and limitations
Activity Based Budgeting (ABB) is a strategy for planning intended to provide more transparency into the budget process. In its most basic frame, ABB is a technique of budgeting in which incomes produced from instructional and research activities are assigned specifically to the unit in charge of the activity. ABB empower greater local planning and accountability and makes incentives for units to more productively manage resources and expenditures (Opb.washington.edu, n.d.).
The benefits of activity-based budgeting method (Sanjay Bulaki Borad, 2017):
1. Evaluation: Activity based budgeting method assesses every cost driver. It takes into every consideration involved in an activity. The irrelevant activities are eliminated and the important activities form a part of the business.
2. Competitive edge: Activity based budgeting system takes out a wide range of unnecessary activities. The saved cost brings about the production of goods and services at lower cost than that of competitors. It likewise encourages the organization to gain a competitive edge in the market.
3. Business as a unit: This budgeting method helps in reviewing the business as a single unit and not as divisions. The managers or the top management prepare the budget for the business unit all in all and not keeping in mind any single division as done on account of different techniques for budgeting.
4. Elimination of bottlenecks: Budgets under activity-based budgeting are set up after profound research and analysis. This study expels all the unnecessary activities of the business. Thusly, the business eliminates a wide range of bottlenecks related with an activity and business capacities are carried out more smoothly.
5. Improves relationship: Activity-based budgeting system helps in enhancing the connection between the organisation and its customers. The main goal of this budgeting method is to take out unnecessary activities and serve the clients with the best quality at best price. This enforces the workers of the company to serve the customers in the most ideal way and ensure consumer satisfaction. Thusly, the connection between the organization and the customers improves.
However, there are a few disadvantages of activity-based budgeting (Sanjay Bulaki Borad, 2017):
1. Requires Understanding: Activity-based budgeting requires a profound understanding of different functional areas of the business. If the manager preparing the budget is incapable of understanding and assessing the areas of business, it would then lead to incorrect budget preparation.
2. Complex: It requires research and analysis of different elements. This budgeting method contains estimation of demand and based on that, it does the estimation of resources to be utilized in different activities.
3. Resource Consumption: The process of budgeting in this method consumes a great deal of resources of an organization. It needs to utilize top authorities for conducting various analyses. It is a time-consuming task as well. If the resources are utilized in other operational activities, they can give better returns.
4. Cost Involved: Implementation of activity-based budgeting requires trained workers. A representative, who is not sufficiently trained, cannot deal with the budgeting exercise effectively. So, business needs to bring about additional expenses to train its employees. Also, the procedure requires the contribution of top management, so ends up being costly.
5. Short Term: Activity-based budgeting focuses on short-term objectives of the business. It does not consider the long-term situation of the business. Concentrating more on short-term objectives rather than long-term objectives can end up being fatal for the organization.
SECTION 5
CONCLUSION
By using activity-based costing, services with lower usage would have higher cost per unit than services with high usage. Higher burden could lead to higher costs which then could lead to lower market share.
Having the lowest cost base is Ryanair’s sustainable competitive advantage. Here are a few recommendations to improve Ryanair’s services to customers:
1. Embrace social media and extend its online presence to enhance consumer contacts. Attract larger numbers of customers, increase their loyalty, create a communication channel with them and increase mouth-to-mouth advertising.
2. Target business customers to address low winter season and improve margins. This will require adding frills, flying to primary airports and working with travel agency.
3. Consolidate position in existing and new markets. Take advantage of traditional airlines undergoing restructurings in other and target markets with rising incomes and rising consumer base.
4. Look to develop capabilities to move into the long-haul sector. Attractive growth opportunities in the long term beginning with close proximity routes.
By using activity-based budgeting, direct control of assets produced from activities creates incentives to set needs and develop new activities consistent with the mission and strategic goals of Ryanair.
SECTION 6
PRESENTATION AND REFERENCING
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Kfknowledgebank.kaplan.co.uk. (n.d.). [online] Available at: http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Activity%20Based%20Costing%20(ABC).aspx [Accessed 17 Nov. 2017].
Robert S. Kaplan (1997). Introduction to Activity-Based Costing. [online] Hbr.org. Available at: https://hbr.org/product/Introduction-to-Activity-/an/197076-PDF-ENG [Accessed 17 Nov. 2017].
The Improve Group. (n.d.). What is a balanced scorecard? What role does evaluation play in a balanced scorecard approach? – by Dan Goldstein. [online] Available at: http://theimprovegroup.com/blog/2012-07/what-balanced-scorecard-what-role-does-evaluation-play-balanced-scorecard-approach-– [Accessed 18 Nov. 2017].
Leigh Richards (n.d.). Balanced Scorecard Drawbacks. [online] Smallbusiness.chron.com. Available at: http://smallbusiness.chron.com/balanced-scorecard-drawbacks-4602.html [Accessed 19 Nov. 2017].
Flexstudy.com. (n.d.). Cite a Website – Cite This For Me. [online] Available at: http://www.flexstudy.com/catalog/schpdf.cfm?coursenum=95075 [Accessed 19 Nov. 2017].
Tom Considine (2012). Considering Activity-Based Costing?. [online] Air Transport Research Institute. Available at: https://atrisa.wordpress.com/2012/06/23/considering-activity-based-costing/ [Accessed 7 Dec. 2017].
Opb.washington.edu. (n.d.). Activity Based Budgeting | Office of Planning & Budgeting. [online] Available at: http://opb.washington.edu/activity-based-budgeting [Accessed 7 Dec. 2017].
Marko Rillo (n.d.). Limitation of Balanced Scorecard. [online] Available at: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.464.8879&rep=rep1&type=pdf [Accessed 9 Dec. 2017].
Sanjay Bulaki Borad (2017). Activity Based Budgeting
| eFinanceManagement. [online] eFinanceManagement. Available at: https://efinancemanagement.com/budgeting/activity-based-budgeting [Accessed 12 Dec. 2017].