Posted: May 25th, 2022

Management Accounting at McDonald’s

McDonalds ACCT

Management Accounting at McDonald’s: Real World Applications of Academic Knowledge and Theory

While academic settings of course provide suitable environments for learning in a concentrated and focused fashion, in many areas of knowledge they are simply not adequate to truly prepare learners for the real world. Management accounting is one such area; while the knowledge obtained through schooling is unquestionably advantageous to the future accountant or accountancy-related professional, it cannot provide the real world experience that solidifies such learning through a direct and practical application of the facts, formulas, and theories learned. The following pages attempt to address this gap somewhat by providing an analysis of actual management accounting features and practices at a large and well-established organization.

McDonald’s: Company Overview

McDonald’s is a very well-known and well-recognized business and brand throughout the world, with its international spread quite extensive and still growing (McDonald’s, 2011; Hoovers, 2012). Not only part of the quick service restaurant (“fast food”) industry but in fact the original innovator and creator of the industry as well as its clear and strong leader for more than half a century, McDonald’s offers a variety of hamburger and chicken sandwiches, fries, and many other food products along with a variety of beverage choices, with substantial international variation in product offerings where applicable or desired (McDonald’s, 2011; Hoovers, 2012). The company is highly profitable, which it uses to drive growth.

One of the reasons McDonald’s has been able to achieve the growth and profitability levels that it has sustained for so long is due to the franchise structure of the business — while the corporation does own and operate some restaurants, the majority of McDonald’s restaurant locations are owned and operated by various franchisees (McDonald’s, 2011). Some of these franchisees are themselves rather large private corporations and others are smaller and more independent businesses, but all of them pay licensing fees, profit percentages, and many of them pay rent to the McDonald’s corporation (McDonald’s, 2008; McDonald’s, 2011; Hoovers, 2012). Not only does this structure directly impact the profitability and growth potential of the company as a whole, but it also has a significant impact n the management accounting structures and practices at McDonald’s.

Budgeting Process

With McDonald’s basic operation long solidified and standardized, the budgeting process at the company is relatively straightforward for such a large company. Contracts in place with many suppliers, some of whom are full-owned subsidiaries of the McDonald’s corporation and others of whom are wholly dependent on McDonald’s for their own survival, make price stability for the materials and supplies McDonald’s uses quite strong, enabling the company to make budgeting estimations with a high degree of accuracy and consistency (McDonald’s 2008; McDonald’s, 2011). The company also has very standardized labor practices, even having attempted to patent its sandwich making process, which also makes budgeting more certain and consistent (Hoovers, 2011).

The basic budgeting process at McDonald’s begins with an assessment of sales expectations, based on sales records which the company regularly maintains and from which it has grown quite adept at extrapolating future sales trends (McDonald’s 2008; McDonald’s, 2011). As the cost for producing items is generally known down to the penny, McDonald’s is then able to establish budgets for procurement and distribution, and as the corporation is not actually involved in the day-to-day costs of running most of the McDonald’s-branded restaurants its budgeting process accounts for far less in terms of these variable and varied costs throughout its extensive international operations (McDonald’s, 2011). With substantial profit margins, McDonald’s is also able to incorporate a fair amount of leeway in its budgets, however cost control strategies are quite strong and deviations from the budget tend to lead to company investigations and adjustments to practice rather than adjustments to established budgets and spending (McDonald’s 2011).

In addition to budgeting processes for the basic operations and functionality of McDonald’s restaurants, which is ultimately the core source of profitability for the franchising corporation, McDonald’s has careful budgeting processes in place for improvements, upgrades, and company evolution (McDonald’s, 2008). Constant market research fuels new ideas for development and expansion, including detailed price and return-on-investment projections that the company uses to determine how to allocate earnings (McDonald’s, 2008). From this, budgets for dividend payments, improvements, and other changes are made (McDonald’s, 2008)

Management Accounting Information System

Information systems have been adopted at all levels of McDonald’s operation in order to provide greater efficiency, accuracy, and consistency with the company. With the collection and utilization of more substantial and more correct information regarding all of the company’s operations, McDonald’s is able to control its budget and costs even more closely, and individual franchises are also able to cut costs and increase profitability. This is also good for the bottom line of the overall McDonald’s Corporation, which depends on store operations and sales even if they are not a direct part of the corporate entity (MCDonald’s, 2011; McDonald’s, 2008). While McDonald’s does not publicly share specific and detailed information regarding its proprietary information management systems, including its management accounting information systems, certain details can be gleaned for its operations (McDonald’s, 2011).

Integration in information management systems is key for a company as large and widespread as McDonald’s, with operations consisting of high-level corporate machinations to franchise negotiations and supply distribution to the day-to-day sales operations of individual stores which — even if not directly owned by the company — still very much affect the company’s finances. This is no different when it comes to management accounting information systems, and in fact most of the information systems the company utilizes in some way allow for or support management accounting tasks (McDonald’s, 2011). Even systems involved in direct customer interactions can be seen as part of management accounting systems.

The point-of-sale information systems used by the company are, in fact, one of they key information systems utilized in management accounting precisely because of the level of integration they utilize (Gaspar, 2010; McDonald’s, 2011). Because these point-of-sale devices record exactly what items are sold at the retail restaurant level, stores themselves and the corporation as a whole can keep much more accurate data regarding inventory needs and costs, and sales records can also be compared to actual inventory (which can be tracked by other information technology systems, as well) leading to information regarding loss through waste or theft, which in turn yields information about store efficiency and possible room for improvement (Gaspar, 2010). All of this information is communicated directly to relevant areas of the McDonald’s Corporation, which is able to aggregate, track, and analyze the information to allow for more efficient and goal-oriented management accounting practices (McDonald’s, 2011).

Costing Process

Though the franchise structure of the McDonald’s corporation and its restaurant operations complicates some features of the company and its operations, it actually provides for a fairly straightforward costing process. Most of the highly variable elements of production and sales are handled by individual stores — labor costs, utilities, materials, etc. — meaning the corporation has much greater stability and thus much greater control over its costing processes. Though affected by and in some areas responsible for these variable costs, McDonald’s costing process does not need to account for them at the same level as individual stores (Gaspar, 2010).

McDonald’s is very careful with its costing process in order to ensure the substantial profit margins its shareholders and its franchisees require in order to remain in operation (McDonald’s, 2008; McDonald’s, 2011). That is, in order for franchisees and the McDonald’s Corporation to be able to see a profit the price of the products sold has to have a fairly significant markup over the actual product costs, and while much of this comes down to individual stores’ operations the absolute (i.e. per-unit and non-variable) cost of raw materials as supplied by the corporation is also a factor. Because McDonald’s Corporation controls the majority if its suppliers either through direct ownership or as the only or primary customer of these suppliers, it not only has strong control over its costs but also has a great deal of accuracy and stability in its costing processes, being able to project and account for any potential changes in material costs on an industry-wide level (McDonald’s, 2011).

With these factors in mind, McDonald’s costing process is very simple to understand. The cost of materials involved in each of the menu items at a McDonald’s restaurant is calculated based on the large-scale materials acquisitions of the corporation, and a number for the establishment of basic menu prices are set according to these cost estimates (McDonald’s, 2008; McDonald’s, 2011). Individual stores or franchise companies must then factor in costs of transportation/materials acquisition, labor costs, overhead, etc., none of which greatly impact McDonald’s Corporation own costing processes (McDonald’s, 2011; Gaspar, 2010). From this, accurate costs and thus consumer prices can be determined.

Capital Decisions

McDonald’s is a highly solvent and cash-heavy corporation, and this has a direct and enormous impact on its capital decisions — and the capital decisions are also directly responsible for the cash-heavy nature of the company (McDonald’s, 2011). The franchise model of operations rather than a company-owned restaurant model is far less capital intensive on one hand, and provides a very low-cost and steady revenue stream of substantial size on the other hands, both of which contribute to a strong inflow of capital that provides the company with abundant leeway in making capital decisions (McDonald’s, 2008; McDonald’s, 2011). The strong investment opportunity that the company has been and remains in the yes of most analysts and investors also provides significant capital availability, should it be seen as required for some reason (Hoovers, 2012).

Capital Acquisition and Structure

Selling increased equity in the company as a means of raising capital (and eroding existing shareholder value) is not really something the company engages in or needs to engage in, however, as its capital acquisition is quite strong without such practices (McDonald’s, 2011). Again, the company’s cash flow from operations, including the rental and licensing/profit fees charged to franchises operations, provide abundant capital both for the paying of dividends and for reinvestment in the company (McDonald’s, 2008; McDonald’s, 2011). This means the company does not need to rely on equity or debt very heavily.

Like any publicly traded company, though, McDonald’s does have capital raised form both of these sources. Shareholder equity in the company is, as of the most recent available information, slightly less than half the level of all assets, meaning liabilities make up the remaining fifty-five percent or so (McDonald’s, 2011). The retained earnings of the company outstrip even its current assets, though, and while long-term debt makes up about the majority total liabilities it is also only about a third of the retained earnings, meaning that McDonald’s could discharge its entire debt in a single year of operation without impacting its operability in the slightest (McDonald’s 2011). The current capital structure of the company reflects the cheapness of money in the current market, and the expanion projects as well as the shareholder value that the company created during the recent period of economic turmoil (McDaondl’s, 2011). It is not likely that capital acquisition efforts through a sale of increased equity or through borrowing will occur in the coming years of economic recovery (if indeed the coming years will actually be marked by such recovery as hoped).

Conclusion

McDonald’s Corporation, like any other company, is not completely transparent in its operations. Its management accounting practices and strategies can be determined to large degree form its required reports and from other industry information and voluntarily supplied data and descriptions Through an examination of these practices, the academic knowledge acquired in managerial accounting academic programs is made more concrete.

References

Gaspar, J. (2010). Introduction to business. Mason, OH: Cengage.

Hoovers. (2012). McDonald’s Corporation. Accessed 31 March 2012. http://www.hoovers.com/company/McDonalds_Corporation/rfskci-1.html

McDonald’s. (2008). Finance at McDonald’s. Accessed 31 March 2012. http://www.mcdonalds.co.uk/content/dam/McDonaldsUK/People/Schools-and-students/mcd_finance.pdf

McDonald’s. (2011). 2010 Annual Report. Accessed 31 March 2012. http://www.aboutmcdonalds.com/content/dam/AboutMcDonalds/Investors/C-%5Cfakepath%5Cinvestors-2010-annual-report.pdf

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