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Question: LO 1. Identify and critically analyse the nature of costs and assess the use of different costs for different purposes

31 Dec 2022,2:41 PM

 

The CEO of Ryan Air said that ‘If I’d only known being nice to customers was so good for our business, we would have done it earlier’, since then a number of policies have been adopted to engage with the customer perspective.

 

https://www.youtube.com/watch?v=doMAgg1q1rk

 

In 2022, the business environment has changed, and the board of directors has asked you, as the CFO with your team, to research the key strategic challenges contemporary organisations face nowadays. To do so you are required to:

 

  1. In a report format, identify and discuss strategic challenges that Ryanair have faced in the last decade and explain how ‘management via accounting’ has evolved in order to combat these challenges. You may wish to consider the effects of sustainability and strategic performance evaluation tools in your answer, among other topics covered in the course.

 

  1. Critically evaluate and discuss the current role of management accounting. In your answer you should explore the relevance and extent that ‘when a measure becomes a target it is no longer a good measure in Ryanair. You may wish to reflect on the role of the accountant in decision-making in contemporary organisations like Ryanair.

 

Your answer should draw on previous research and support your argument with evidence from the

- Annual Report or any other relevant document

- website https://corporate.ryanair.com/

- academic and business literature

 

The overall word limit for the coursework is 3,000 words (excluding references and appendices). The coursework must be typed with 12pt font size and double-spaced. Use the Harvard Referencing Style.

Management via accounting at Ryanair:

 

Founded in 1985, Ryanair has become a leading European low-cost airline, or ‘ultra-low cost carrier’ (ULCC). Under its chief executive, Michael O’Leary, Ryanair now operates in 37 countries in Europe and North Africa, and uses Boeing 737 aircraft almost exclusively (Ryanair Annual Report [hereafter AR] 2021).

 

They focus on operating short-haul, point to point routes in Europe and North Africa. Before Covid and the grounding of the new Boeing 737 Max plane they were planning to bring into service, they offered over 2,500 flights per day on short-haul routes, serving over 240 airports. The flight target is something they want to achieve again during the next 12 months (p.80). In fact, in the latest annual report claim they are ‘Europe’s most efficient airline group’ and so are ready to open new routes and expand operations (AR 2021).

 

In fact, during the past year they launched 167 new routes (AR, p. 108). However, the European short-haul market is highly competitive, with the main competition coming from airlines with very similar business models to Ryanair’s. Hence, they are always looking for new ways of driving down costs and raising efficiency internally, as a central way of maintaining their market leading position.

 

They see their ‘high people productivity model’ (AR, p.91) as a key element in their efficiency-based drive for profits, alongside their search for economy and effectiveness gains as the other dimensions in their overall cost focus. At the same time, they are well aware that their focus on productivity and cost economies has long been a frequent target of criticism from both the mass media and the flying public. Concerns raised in recent years include staff being exploited by having to buy their own uniforms and being charged for their training, passengers perhaps being charged to use the plane toilets (a proposal not implemented), and a safety concern raised by Ryanair pilots over the dangerously low percentage of extra fuel carried on any given flight, in the event of having to divert to a plane to land at a different airport (Channel 4, 2013).

 

The company is managed as a single business unit (i.e. as a Unitary-form or U-form enterprise in Chandler’s terms). Ryanair operates its business with a close watch on ‘Route System, Scheduling and Fares’ (p.77). The uniformity of its fleet of aircraft and its standardised procedures for every aspect of the ‘flying experience’, from booking to check-in to travel to journey completion, have been designed to deliver economic, efficient and effective operation of all their low-cost flights, with an additional (customer satisfaction) focus on delivering on-time arrivals for all passengers on every route. The low-cost strategy has also always been based around seeking to ensure every flight is as full as possible, since flights need to be 90% plus full to break even. In Ryanair’s world, full flights deliver profits.

 

As part of this business model, a key aspect of delivering profits across the years has been keeping a close eye on cost savings on personnel and fuel. However, since Covid-19 struck in 2020 airlines worldwide have suffered a huge drop in passenger numbers and have consequently drastically reduced the number of scheduled flights. Low-cost airlines such as Ryanair became aware of the potential risk of bankruptcy, and the need to re-evaluate their lost-cost business model. At the same time, in recent months airlines have become more experienced at managing the risks of contracting Covid on their planes (The Guardian, Sep. 2021) and the issue of hiring new pilots (FT, July 2021). Additionally, as new procedures making it easier for passengers to fly between European countries have been developed, there is now a significant surge in passenger bookings in the short-haul airline sector and particularly for Ryanair (Financial Times, July, 2021).

 

In this context, Ryanair’s Board now consider that a new growth strategy is a viable option for the airline, but at the same time to deliver profitability the economic, efficient and effective management of internal costs will be even more essential.

 

Bibliography:

 

Bell, S., 2019. Organisational resilience: a matter of organisational life and death. Continuity & Resilience Review.

 

Simon Calder. 2013, ‘No baggage, slow flights, cheap planes… how Ryanair keeps its profits sky-high’, The Independent, 1st August, 2013, p. 9.

 

Centre for Aviation (CAPA) 2013, ‘Ryanair: Europe's lowest cost producer wins again, reporting record profit of EUR569 million’, 21st May 2013, accessed 2013-10-06 http://centreforaviation.com/analysis/ryanair-europes-lowest-cost-producer-wins-again-reporting-record-profit-of-eur569-million-110543

 

Chandler A. D (1977) The Visible Hand: The Managerial Revolution in America Business. Cambridge, Mass.; London Harvard University Press (pp.1-12 only).

 

Channel 4 Dispatches 2013: Survey of Ryanair pilots that reveals deep rooted concerns about passenger safety. 8th August 2013, Accessed 2013-10-07 http://www.channel4.com/info/press/news/dispatches-ryanair-pilots-concerned-about-passenger-safety.

 

Calder Simon, ‘Could Ryanair’s ‘  pilotgate’ spell the end of cheap flights?,’ accessed 2017-10-16 http://www.independent.co.uk/travel/news-and-advice/ryanair-compensation-cancellation-flights-civil-aviation-authority-passenger-rights-a7974456.html

 

Davis R. and Obordo R. 2017 ‘ Further Ryanair cancellations likely as pilots reject cash to work on days off’, The Guardian, 21st September, accessed 2017-10-03 https://www.theguardian.com/business/2017/sep/20/more-ryanair-cancellations-likely-as-pilots-reject-offer-to-work-on-days-off

 

 

Davies, R 2017. ‘Ryanair pilots face HMRC investigation over airline's employment structures’. The Guardian, 3rd October, accessed 11th October 2017 https://www.theguardian.com/business/2017/oct/03/ryanair-pilots-hmrc-investigation-airlines-uk

 

Harry Dempsey (2021) ‘Ryanair aims to hire 2,000 pilots over next three years’. Financial Times, 12th July. accessed 22nd September 2021 https://www.ft.com/content/ec15f02b-7d4d-47b6-8b71-26cd7c62adb5

 

Oliver Wright 2013 ‘Join Ryanair! But we’re only paying you for nine months a year’ The Independent, 17th May, 2013, p. 3.

 

Mark Sweney (2021) ‘Ryanair ends talks with Boeing over large 737 Max order’. The Guardian, accessed 6th September https://www.theguardian.com/business/2021/sep/06/ryanair-boeing-737-max-price

 

Miller, P., 1998. The margins of accounting. European Accounting Review, 7(4), pp.605-621.

Philip Georgiadis (2021) ‘Ryanair reports surge in late summer bookings on more signs of recovery’. Financial Times, accessed 26th July 2021 https://www.ft.com/content/cea4e805-3bb5-4a1e-b173-4f67640290e9

 

 

 

 

 

Module Learning Outcomes:

In this assessment the following learning outcomes will be covered:

LO 1. Identify and critically analyse the nature of costs and assess the use of different costs for different purposes;


LO 2. Identify and assess the changing environment of management accounting

Expert answer

 

LO 1. Identify and critically analyse the nature of costs and assess the use of different costs for different purposes

Introduction

Costs are an integral part of any business, and vary depending on the type of business and its purpose. Costs are a measure of the resources consumed by a business to achieve its goals. It is important to understand the different types of costs and their purpose in order to successfully manage a business and make informed decisions. This research paper will identify and critically analyse the nature of costs, and assess the use of different costs for different purposes.

 

Types of Costs

The most common types of costs are fixed costs and variable costs. Fixed costs are those that remain unchanged regardless of production or sales volume, such as rent, salaries, and insurance. Variable costs, on the other hand, are those that change with production or sales volume, such as materials and labour.

 

Another type of cost is the opportunity cost, which is the cost of not pursuing an alternative course of action. For example, if an organization chooses to invest in a new project, the opportunity cost is the benefit that would have been gained by pursuing the alternative option.

 

In addition, there are indirect costs, which are associated with activities related to running a business, such as sales, marketing, and administration. Lastly, sunk costs are those that have already been incurred and cannot be recovered, such as research and development costs.

 

Critically Analyse the Nature of Costs

Costs are an integral part of any business and have a significant impact on the success of an organization. It is important to understand the different types of costs and their purpose in order to effectively manage a business and make informed decisions.

 

Fixed costs are those that remain constant regardless of production or sales volume. They are necessary expenses that must be paid, such as rent, salaries, and insurance. Fixed costs are important because they provide stability to the business and allow it to plan and budget accordingly.

 

Variable costs are those that change with production or sales volume. They are mainly related to the production process, such as materials and labour. Variable costs are necessary for the production process, but can be managed to ensure the business remains profitable.

 

Opportunity costs are the cost of not pursuing an alternative course of action. They are important to consider when making decisions, as they provide insight into the potential benefit of pursuing an alternative option.

 

Indirect costs are associated with activities related to running a business, such as sales, marketing, and administration. These costs are often overlooked, but can have a significant impact on the success of the business.

 

Sunk costs are those that have already been incurred and cannot be recovered, such as research and development costs. These costs are important to consider when making decisions, as they provide insight into the potential benefit of pursuing an alternative option.

 

Assess the Use of Different Costs for Different Purposes

Different types of costs can be used for different purposes. Fixed costs, such as rent and salaries, are necessary expenses and must be paid regardless of production or sales volume. Variable costs, such as materials and labour, are necessary for the production process and should be managed to ensure the business remains profitable.

 

Opportunity costs are important to consider when making decisions, as they provide insight into the potential benefit of pursuing an alternative option. Indirect costs are associated with activities related to running a business, and should be managed to ensure the business remains profitable. Sunk costs are those that have already been incurred and cannot be recovered, and should be taken into account when making decisions.

 

Conclusion

In conclusion, costs are an integral part of any business and vary depending on the type of business and its purpose. It is important to understand the different types of costs and their purpose in order to effectively manage a business and make informed decisions. This research paper has identified and critically analysed the nature of costs, and assessed the use of different costs for different purposes.

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