1.0 Brief description of company
McDonald’s Corporation is one of the largest fast food restaurants in the world with over 35,000 retail outlets distributed in over 100 countries. It was founded in 1940 and its headquarters are based in the U.S. The company sells diverse food items, coffee, soft drinks, and different types of beverages in 6,714 restaurants operated by the company and 29,544 franchised restaurants (Yahoo! Finance, 2015). In this regard, McDonald’s operates as an affiliate, a franchise, and company owned entities. The company has managed to expand rapidly across the globe with some analysts arguing that McDonald’s should be awarded for uplifting the standards of quality services in each of the market it ventures into.
The objective of this paper is to analyze the budgeting procedures and processes for MacDonald’s regarding the preparation techniques, evaluation uses, and differences between different business divisions. It will also assess how McDonald’s collects, prepares, and stores management accounting information. It will focus on how management accounting system (MAS) is used to disseminate information throughout the organization. Another thing to be examined is the costing procedures and processes of McDonald’s in regards to the approach and method that the company utilizes. Processes of making capital decisions within the company will also be analyzed. This will be determined by how the techniques are utilized, ways of selecting and managing the projects, processes of choosing the methods, and techniques of evaluating performance. Lastly, the paper will analyze the mechanisms or criteria that are used by McDonalds to select the most appropriate methods of acquiring capital, and it will also assess the company’s capital structure.
2.0 Description of firm’s budgeting process
McDonald’s is a fast food chain that has employed different techniques to keeps its costs of operations low over the years. Various programs have been implemented by the company to generate maximum revenue while at the same time cutting costs and reducing the amount of money that goes into the expense account. All those issues are factored in the budgeting practices at MacDonald’s. Neely and Adams (2000, p.28) say that the budgeting process consists of strategic techniques that are used to forecast and estimate the financial plan of an organization. Studies have shown that McDonald’s is highly sensitive to any price changes, whether in food products, rents, or labor. This is due to the fact that these issues have a huge impact in the way the company generates its revenues. About 83% of McDonald’s operated expenses are attributed to three major categories of instruments, and they include food and paper (34%), payroll and employee benefits (26%), and occupancy and other operating expenses (23%).
2.1 Budgetary Attributes
McDonald’s had a difficult year in 2014, with a 21 percent decline in sales during the fourth quarter earnings. The company also missed the expectations set by the Wall Street and analysts are of the opinion that several months may be required before new strategies can start translating into profits. In addition, there was a drastic reduction in stock levels. According to McDonald’s CEO Don Thompson, the company ended the year struggling but decisive actions were taken in order to regain momentum in market share, sales, and customer count. The management has also focused on capitalizing investment in its technology in order to deliver on its commitment to enhance sustainability and growth in profits for all stakeholders (Colman, 2004, p.15). There was a 1.0% decline in global comparable sales which indicates a negative customer traffic in all major segments
Other important budgetary instruments are revenues and operating income. Consolidated revenues and operating income declined by 2% and 9% respectively. This was mainly because of the previously disclosed supplied issues that occurred in APMEA (Asia/Pacific, Middle East and Africa), as well as weak operating performance in the U.S. (Crawford, 2015, p.32). Taxes also had a huge impact on the budgeting process. Studies show that there was 35.5% effective tax rate particularly because of the increase in reserves associated with different tax matters. In addition, there was 13% decrease in the diluted earnings per share of $4.82. $6.4 billion was returned to shareholders through share repurchases and dividends. This was in connection with the company’s 3-year cash returns that targets years starting from 2014 to 2016.
3.0 Management accounting information system
3.1 MAS in Budgeting
Management accounting can be described as a branch of accounting that enables managers to acquire appropriate information that can be used in decision-making. Therefore, management accounting system (MAS) is a technique that is also referred to as standard costing and it is commonly utilized to cost services and products. According to (Colman, 2004, p. 16), MAS provides important data to managers to help in controlling and planning different business procedures. At McDonald’s, MAS is used to ascertain a standard for various business activities such as the amount of materials used to produce a certain product or amount of time spent on a certain activity.
3.2 MAS in Planning and Control
Fast food retailer McDonald’s is among one of the best-known examples that utilizes MAC to cost its products. For instance, one of its standard products known as Big Mac has its recipe written as ‘two 1.6 oz (45g) patties, lettuce, cheese, special “Mac” sauce, onions, pickles, and three part bun. Therefore, it is easily to cost the ingredients of a product to attain a standard ingredient cost. Drury (2005, p.20) says that the accounting data that MAS offers enables the management team to make accurate and timely control and planning decisions. It is important to share and distribute MAS information across different divisions of the organization. This will assist in analyzing how the periodic budget targets, probably in every quarter of the year, can be attained by comparing the main budget estimates and the actual figures.
3.3 Benefits of MAS for McDonald’s
In actual facts, McDonald’s has managed to do its way using a coined term that is known as “McDonaldsization.” This concept derives most of its attributes from the use of MAS. Most products produced by the company are standardized. This makes it easy to analyze how a major organization such as McDonald’s utilizes standard costing processes to not only cost its products and services, but also to measure performance (Crawford, 2015, p.33). In addition, MAS is effectively applied in McDonald’s due to the fact that most of its products such as Big Mac have very little variation. Another benefit of MAC for McDonald’s is that it can be appropriately used as a standard costing for different products based on the value of ingredients that are used. For instance, the fact that the values of different ingredients have different cost implies that the management must increase the costs of certain products in comparison to others.
4.0 Costing Process
McDonald’s sells both differentiated and standardized services and products in all its outlets across the globe. Therefore, the company needs to utilize the costing procedures due to the fact that the similar products and services have relative revenue and cost streams or cash flows. Companies can utilize the costing process to determine the cost outlays, which includes both indirect and direct expenses (Sievanen and Tornberg, 2002, p.151). This will enable the management to establish the most appropriate pricing strategies that will achieve the profit margin that has been set. At McDonald’s, changes in commodity as well as different other operating costs has the ability of adversely affecting the results of the company’s operations.
4.1 Importance of Costing Processes
Studies have shown that the profitability of the restaurants that are owned and managed by McDonald’s partly depends on the ability of accurately anticipating and reacting to changes in commodity prices. Products that are affected by costs include food, fuel, paper, utilities, supply, and distribution. When commodity prices become volatile, they have the ability of adversely affecting the profitability of the restaurants. Costing is affected by price fluctuations as a result of climate conditions, seasonal shifts, industry demand, food safety concerns, and international commodity market. Eggers and Bangert (1998, p.63) say that costing processes tend to determine the true cost of specific activities that are used in delivery of products and services. In addition, costing informs the managers about the specific areas that should be focused on so as to improve service delivery, enhance business processes, enhance quality, reduce cost, and enhance employee performance.
4.2 Activity Based Costing
Due to the fact that company products are both differentiated and standardized, the management uses different costing techniques to come up with the most appropriate selling price. As stated above, the major expense segments at McDonald can be classified into three main groups. This implies that different costing procedures have to be utilized. To start with, activity based costing (ABC) is a technique that is used to trace all the costs involved in the production of a particular service of product (Atrill & McLaney, 2009, p.54). To put into perspective, some of the cost factors that affect McDonalds include increasing energy prices and rising food costs, changes in seasonal weather patterns, drought, and import and export bans.
Identifying the cost drivers is a crucial factor for the ABC system (Abdallah, et al., 2009, p.41). In ABC, the support activities that are used in the production of McDonald’s services and products are employee wages and benefits. Statistics indicate that McDonald’s had more than 440,000 employees by the end of 2013. According to the New York Times, the median wage that was being paid by McDonald’s was $8.90 per hour. The company has been pressurized to increase its wage rate and although this cost can be passed easily to customers, it may ultimately lead to reduction in the number of customers. It is important to note that majority of McDonald’s customers consist of the low wage income group and therefore, any increases in price may lead to loss of customers.
4.3 Target Costing
Cost variance tends to affect the way the company decides the selling price of each product and service. Target costing can be described as a costing technique where the organization analyzes the existing selling prices at the market and works backwards to determine the most appropriate target cost (Atrill and McLaney, 2009). This implies that target costing must consider the intended sales volume and the price at which each product will be sold at. In the case, the major suppliers of McDonald’s provide 260 million pounds of chicken, 400 million pounds of beef, and 25 million pounds of fish per annum. Recently, the increase in the price of beef was attributed to severe weather conditions, changing weather patterns, and increased export activities. From the above analysis, McDonald’s has to analyze different factors that affecting the commodities acquired by the company so that it can accurately determine the most appropriate selling price.
4.4. Kaizen Costing
Kaizen costing can be described as a technique that involves continuous changes and improvement with the aim of attaining cost control. Basically, McDonald’s has to put into consideration all the major costs that affects the operations of the business and this include employee wages, food and paper costs, and occupancy and other expenses. These costs have to be analyzed and compared to determine the most appropriate prices that can be used to sell a certain product (Wessels, 1997, p.24). For instance, the cost of beef, chicken and fish products tend to fluctuate rapidly due to changes in weather pattern, energy prices, and export and import restrictions. On the other hand, occupancy and other expenses that McDonald’s face tend to remain stable due to long-term lease agreements of land and buildings, insurance, real estate taxes, and other related costs. When these two forms of fluctuating and stable costs are analyzed, they play a significant role in defining the total price of a product.
5.0 Capital Decisions
Capital budgeting is process that is used by organizations to determine if a certain project is worth pursuing. In most cases, the lifetime inflows and outflows of cash from a prospective project are evaluated so as to establish if the generated returns meet the set targets. At McDonald’s, the executive management plays an influential role in determining capital investment decisions. Jansen et al., (2001, p.736) say that capital decisions are important since working capital depend on the nature of financial needs, operations, and business activities of an organization. Ideally, organizations need to pursue all opportunities and projects that tend to enhance the value of shareholders. Nevertheless, since there is limited amount of resources for each new project, capital budgeting techniques has to be used by the management to decide the investment that will yield the best returns over a certain period.
5.1 Accounting Rate of Return
Accounting rate of return on capital tend to analyze how well an organization can generate cash in relation to the amount of capital that the management has invested in the business. It is also known as return on invested capital. Statistics indicate that McDonald’s return on capital (ROC) for the quarter ending March 2015 was 14.4% (gurufocus.com, 2015). The current values indicate that the company’s weighted average cost of capital is 7.1% while return on capital is 18.07%. In addition, the company generated high rate of returns on invested capital compared to the cost that was incurred in raising the needed capital for investment. From these statistics, it is evident that McDonald’s has managed to earn excess returns. In the future, an organization that expects to carry on earning positive excess returns on new investments will see an increase in its value with the increase in growth in the future.
The management team at McDonald’s also puts into consideration various components of ROC. To start with, it can utilize operating income instead of net income to determine the amount of returns on invested capital. In addition, operating income can be subjected to tax adjustment and it will then be computed based on a marginal or effective tax rate. Book values for capital that is invested by the company can also be used to calculating returns instead of relying on market values (Romano, et al., 290). It is important to note that it costs money for an organization to be able to raise capital. This implies that the management team should strive to raise higher returns on the invested capital compared to the amount spent on raising the needed capital. This will provide the company with an appropriate opportunity of earning excess returns.
5.2 Internal Rate of Return
Internal rate of return measures the amount of cash flow that is generated by a company relative to the amount of invested capital in the organization. IRR measures the amount of cash that is gained from the invested resources and this indicates the productivity of an organization. The main reason why an organization decides to select equity and debt is due to the fact that book value is the capital that is received by the organization when it issues debt or when it receives equity investments. According to Romano and Smyrnios (2001, p.286), capital budgeting decisions can also be affected by other factors such as business life-cycle issues, business goals, preferred ownership structures, control issues, age and size of the company, and long-term versus short term financing obligations.
5.3 Payback Period
Payback period is the amount of time that it takes for a particular investment to produce the expected returns. At McDonald’s, the payback period of an investment is measured on yearly basis or over a specific period of time and it also depends on the amount of capital that was invested. The aim of this procedure is to determine the profitability of a particular business, the efficiency and effectiveness of the deployed capital, and the future prospects of capital allocation (Jansen, et al., 2011, p.736). The payback period is also affected by operating income as well as the rates of foreign exchange when it comes to overseas investments. McDonald’s has a financial discipline, processes, and systems that ensure that the capital expenditures of $2.9 to $3 billion can be optimized. Studies have also shown that the payback period of the company’s investment has led to continued profitability over the years. For instance, statistics indicate that McDonald has continued to generate huge amount of revenues and cash flows from its operations, and it has averaged $7 billion over the last few years.
5.4 Net Present Value
Net present value (NPV) is a technique that is used to evaluate the current value of all future cash flows that a project generates after the initial capital investment has been accounted for. This technique is commonly used in capital budgeting to determine the most appropriate project that has the highest possibility of generating the greatest profits (Myers, 2001, p.92). According to the management team at McDonald’s, the business model of the company is resilient and stable and this implies that the growth targets will remain achievable and realistic. The chief financial officer said that McDonald’s investments are uniquely positioned to generate value for the company’s system and all stakeholders.
6.0 Capital acquisition and structure
McDonald’s utilizes several mechanisms to decide on the most appropriate mechanisms of acquiring capital. The capital structure of the company and the possibility of the investment to generate the highest rate of return are also put into consideration before the management can venture into any project. Scholars argue that focusing on the impact of capital structure is associated with long-term debt and the equity of shareholders (Myers, 2001, p.84). Basically, to measure the performance of capital acquisition and structure, the type of ratios that are used include return of assets (ROA), return on investment (ROI), return on equity (ROE), and net profit margin.
Globally, McDonald’s has managed to maintain financial discipline by managing its investment decision and spending. The goal of making capital allocation decisions is to ensure that the investments elevate the experience of McDonald and enhance growth in market share and sales (Crawford, 2015, p.34). The management primarily concentrates on markets that have the ability of generating the highest returns on investments (ROI) or provide opportunities for the long-term expansion. For instance, using these plans, the management team at McDonald managed to reasonably increase sales in the same store by 2.0%, and the rate was high in stores located rapidly expanding markets.
ROA has been one of the leading priorities when it comes to acquisition of capital. According to the McDonald’s CEO, the company’s priorities when it comes to utilization of case and other types of assets have not changed. The first priority of the company is to reinvest in the business with the intention of driving growth in the future (Horngren, et al., 2012, p.34). After this, all the free cash flow will be returned to the investors over the long term through a combination of share repurchases and dividends. For instance, studies show that McDonalds returned approximately $4.5 – $5 billion to its shareholders. Despite the fact that the short-term environment tends to change rapidly, the management is confident that there are major prospects of creating long-term value for the shareholders, customers, and the entire McDonald’s system.
In conclusion, this document has analyzed how management accounting and finance concepts impact on the value and business operations of McDonald’s. Since McDonald’s was founded in 1940, it has expanded to become one of the largest fast food restaurants in the world. It operates both franchises and company owned outlets in over 100 countries. The budgeting processes put into considerations various factors such as sales, direct labor, overheads, and capital expenditure. In addition, management accounting system is utilized to derive data with regards to items used in the production of each product. This assists managers to make appropriate decision with regards to cost and pricing of a product. Costing also assists in pricing of a product, setting the profit margin and determining employee performance. Over the years, McDonald’s has maintained financial discipline when it comes to capital acquisition and investing its cash to enhance the wellbeing of its customers and shareholders.
Abdallah, W, Henry, T, Murtuza, A, & Weiss, R 2009, ‘Great Galway Goslings: Organizational Context of Managerial Accounting’, Accounting Perspectives, 8, 3, pp. 235-253, Business Source Complete, EBSCOhost, viewed 15 July 2015
Atrill, P., and McLaney, E., 2012. Management Accounting for Decision Makers. England: Pearson Education Limited.
Colman, R., 2004. Better Budgeting. CMA Management, 78(6), 14-16.
Crawford, R 2015, ‘McDonald’s Restaurants puts motivation and reward at heart of business strategy’, Employee Benefits, p. 1, Business Source Complete, EBSCOhost, viewed 15 July 2015.
Drury, C., 2005. Management Accounting for Business. Thousand Oaks: Cengage Learning EMEA.
Eggers, J. and Bangert, C., 1998. Activity-based costing. American Water Works Association Journal, 90 (6), pp.63 -69.
Horngren, C., Datar, S. and Rajan, M. (2012). Cost accounting. Upper Saddle River, N.J.: Pearson/Prentice Hall.
Jansen, R et al., 2011. Social capital as a decision aid in strategic decision‐making in service organizations. Management Decision, 49 (5), pp.734 – 747.
Myers, S., 2001. Capital Structure. The Journal of Economic Perspectives, 15 (2), pp. 81-102.
Neely, A. Bourne, M. and Adams, C., 2003. Better budgeting or beyond budgeting? Measuring Business Excellence, 7 (3), pp.22 – 28.
Romano, C. Tanewski, G. and Smyrnios, K., 2001. Capital structure decision making: A model for family business. Journal of Business Venturing, 16 (3), pp.285-310.
Sievanen, M. Tornberg, K., 2002. Process-based costing: The best of activity-based costing. AACE International Transactions, pp.151-156.
Wessels, W.J. 1997, Microeconomics the Easy Way,Wessels Barron’s Educational Series, New York.
Yahoo! Finance. McDonald’s Corp. (MCD). [Online]. Available at. http://finance.yahoo.com/q/pr?s=MCD+Profile [Accessed on July 15, 2015]
Do you need an Original High Quality Academic Custom Essay?