Analysis of Wal-Mart Managerial Accounting Process Essay
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For the final project of managing finance Wal-Mart Stores Inc is chosen as the discussion target. Being one of the grocery retail shop leaders in the world, Wal-Mart (WM) operates business with 10,000 retail units in 27 countries with about USD444 million of sales in 2012 (Wal-Mart homepage 2012). Driven by the corporate strategies, WM growth rapidly around the world. To support the growth, managerial effectiveness in the operations is very important. Since budget is the first step which put manager’s plan into operation, let’s take a close look at WM’s budgeting process.
Budget reflects a company’s plan, both long and short term, to accomplish business objectives. The focus of the WM’s budgeting system is on providing better quality and services to the customers. WM follows needed considerations in its budgeting process and procedures. They implements flexible budget in its business that identifies overhead cost drivers and allocates capital to those over head costs properly. Through this way, WM is able to make a budget for different levels of activity. WM set goals and objectives and define their mission and vision clearly in their budgeting process. They plan for the stock requirement in order to achieve the forecasted level of sales. Budgeting process is also helpful to measure the performance of different departments in WM. It enables them to manage costs of different levels of action by weighing the actual costs against the budgeted cost (Plunkett, Attner & Allen, 2011, p. 558-560).
WM takes corrective action to control those costs in order to make this closer the flexible budget prepared in advance. WM communicate goals and targets of each employee through budget and continuous report back to the corporate on operation, investment and financial activities based on budget information. Its budgeting procedures help WM to be competitive in cost and to economically use the resources that made better revenue for the company. In contrast to this, in this procedure, prediction is difficult for the manager because they believe on a range of estimates of what to expect financially. In addition, this process also depends on various variables that affects to each other. It is very complicated to prepare and difficult to understand for other employees of the company (Axson, 2010, p. 132-140).
Management Accounting System
Management accounting system (MAS) in WM play a crucial role to improve their business activities effectiveness. Management accounting information are collected, stored and prepared through use of well designed accounting information system. It simplifies getting information to people outside of the organization when necessary. Through use of MAS, WM determines its initial purchase price of raw material including subsequent operating and maintenance costs. MAS help to evaluate the pricing structure’s effectiveness by showing cost, sales and revenue data. It gives idea to the company to decide the price of the product to be competitive in the market. WM disseminates this information to its various parties through conducting formal and informal meetings, conferencing, global network and employees’ survey techniques (Needles, Powers & Crosson, 2010, p. 720-722).
Moreover, WM mainly uses its accounting reports based on principles of GAAP to make inform its stakeholders about its financial position. WM uses the strategic management accounting system which helps to enhance the effectiveness of decision making within the company. WM use MAS for everything from entering in new market to vendors/products selection and even new pricing process, promotion strategies and to distribution (Needles, Powers & Crosson, 2007).
The accounting information from MAS of WM helps in planning, controlling and other managerial activities. Their system also able to come up all kind of alternatives with integrated accounting information which assist management to find out the best strategy for organizational effectiveness improvement (Wal-Mart homepage 2012). WM disseminate managerial accounting information through budgets for all departments which help all departments to facilitate proper integration in all kind of activities within the company.
WM currently uses Vision Suite accounting software that includes different aspects of finance like AR/AP, general ledger, check writing and external accounting integration. This software is faster and relatively cheaper and generates accounting documents automatically. Through this, many types of useful reports can be generated for management to make decisions. On the other side, it can be susceptible for computer viruses and hackers. In absence of proper control and security, it can create problems for the confidentiality of the company (Gilbertson & Lehman, 2008, p. 6, 437 ).
In term of costing process, WM is focus on inventory control since that is the most important part of their business to determine its profitability. To determine the cost of inventory, WM uses several costing method. In order to reduce inventory cost as well as determining accurate cost of products, WM uses both LIFO and FIFO. By using the retail method of accounting, inventories are at low cost or at least at market rate. This will help to increase the effectiveness of operation since WM is retail business and this will facilitates competitive advantage over competitors. According to WM’s 2012 annual report, they use LIFO to determine weighting average cost for products in US and for inventories for international operations are using the FIFO method (Wal-Mart annual report 2012, page 31). These differences way of costing will enhance effectiveness of the company in managing cost. WM accomplish their strategy, “everyday low cost approach” (EDLC) through these costing method (Wal-Mart annual report 2012, page 18).
So as to allocate cost to different products, WM uses the activity based costing (ABC) system. ABC system enables the WM to better understand the cost structure and cost drivers. On the basis of this, WM takes effective decisions regarding price structure. The ABC approach can exhibit the actual work done relating with production more accurately in order to be useful in management accounting. The ABC system is used by management to collect a full cost view. VM can reduce the overhead cost by minimizing the number of cost drivers (Leitner, 2007, p. 5).
In contrast to this, there is possibility that as per this method, costs can be more than profits. Apart from this, it also requires data input from multiple departments that can create greater risk of failure of data inputs. The cost of managing the system is also high due to having more cost pool volume. For instance, Wal-Mart is a large organization, as cost accounting information is difficult to separate, due to the presence of multiple product lines and numerous machine setups in complex production environments (Drury, 2006, p. 350-362).
Capital Decision Making Process
Evaluation of investment appraisal techniques is useful in capital decision making process by bringing together financial and strategic aspects of the project. The capital investment decisions of WM are mainly driven by its financial priorities such as growth, leverage and returns on investment. The major concern of WM is international expansion and its profitability (Wal-Mart annual report 2012, page 28). WM select and manage projects through the below steps:
1. Project information collection – collect information such as past performance, costs, benefits and associated risks. 2. Evaluating the project – Use cost benefit analysis, net present value, IRR etc to evaluate the project. WM uses discounted cash flow (DCF) investment appraisal technique in capital decision making process. They only invest its capital in projects that meet stringent payback periods and yield at least a required rate of return in a DCF analysis (Brigham & Daves, 2012, p. 544-549). 3. Selecting project – WM uses NPV and IRR method to evaluate projects’ alternative. For selecting projects, they will based on different criteria of the projects, but also taking into account the incremental revenue, time, company reputation etc..
The above help WM to ensure optimal utilization of their capital resources. For example, WM’s new solar project in California, they focused on DCF method to decide that it should invest its capital in this project or not. After implementing this technique, WM determined the average payback period for its energy saving projects that was 6.3 months. It also provided an annual return on investment of 190 percent on these projects that was profitable for the company. Therefore, WM wants to consider these discount flow values for its new solar project in order to make profits as future prospective (Ailworth, 2012).
In term of capital acquisition decision, the main criteria are the long term sustainability and stability in performance. The cash flow is the main source of capital that ensures the long term success. WM considers market position, market trend, credit policy, financial status and stakeholders’ interests before deciding the best sources of acquiring financial capital. Sometimes, it also considers the financing cost to arrange the capital for running its operations. Credit rating of the company influences the WM’s decision on capital structure because its good rating helps it to take the credit from the financial institutions (Kronwald, 2010, p. 5-16).
Instead of issuing common equity, WM is relying more on funds borrowing from market. Additionally, capital structure of WM is risky as their financing rely heavily on debt or loans that may impact earnings. WM has been operating at 1.71 debt equity ratio (Yahoo Finance, 2012). Funding decisions of WM is associated with capital rising through debt more because of taking benefits of tax deduction and lower financing cost. “It has some implications such as funds generation; positive impact on financial result or company performance and meeting needs on operation and investment” (Seidman, 2004, p. 77-80). This is important to maintain low capital cost while achieving the company goals in the capital structure of the company (Wal-Mart Annual report 2012 page 28).
In order for the company to make effective managerial decision, various kinds of processes and approaches in budgeting and costing are necessary. WM implemented a well quality budgeting process which improves their effectiveness in accomplishing their objectives. Their budgeting process helps to motivate and improve effectiveness of employees and also help to create long term objective for the organization. They use MAS to do have the most cost effective vendors and products selection and also to manage all the accounting information to improve the effectiveness of the managerial decision. In order to reduce the total cost of products and maintain competitive position in the market, WM selected the appropriated costing process and procedure. Given their effective method of capital resources and effective capital structure for obtaining capital which helps WM to be efficiency in a lot of capital decision making as well as objectives accomplishment. In summary, the overall managerial accounting practices with WM is quite effective.
Information Sources and Methodology
Most of the information of this discussion was collecting from the annual report of WM for 2012. In addition, finance text books, journals and web sites are being used as well. For the annual report, 3 years has been reviewed in order to have a more clear picture of their growth as well as if there were any managerial practices or process been changed. A lot of information about WM’s financial and managerial accounting systems such as budgeting/costing process, capital structure etc are available in those
resources. Observation methodology is used to analyze information.
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