Revision:A Level Accounts Module 4 - Social accounting

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Social accounting In this section we look at issues relating to social accounting. The sections we cover are:

• Social accounting
• Marginal costing and contribution
• Break-even analysis
• Limitations of break-even for decision-making

Social accounting

Throughout the course we have generally assumed that the main objective of any business has been that of profit maximisation - to earn as high a profit as possible. In the case of limited companies, this objective is informally enforced, by the procedure of shareholders electing directors to act in their interest (in maximising profits). However, there are occasions when the objective of the firm may move away from profit maximisation on to other objectives. Other objectives of a firm may include revenue maximisation (where a firm aims for maximum possible sales), or survival (especially for new firms, or firms experiencing economic difficulty).

All of these objectives are still grounded in the world of finance and money. Increasingly, it would appear, firms are starting to consider actions for the business which do not appear to support any finical objective. Many firms are now acting in a manner where profits, or sales are sacrificed in the interest of social objectives. Actions may be undertaken by firms which appear to benefit other groups in society, other than the shareholders. The idea of taking into account other groups interests in known as social responsibility.

Social responsibility

A firm that is being socially responsible may produce reports that show the impact by the firm on the world in which it operate. This may focus on the environmental impact of the firm's activities (e.g. pollution), the impact on employment as well as the effect on the local community where it operates. Trying to produce data or accounts that focus on the firm's impact on the wider world is known as social accounting

A firm does not operate in isolation. It is affected and has an effect on the community in which it operates. The size of the firm will have be the main determinant of the size of the impact that will have on others - a small, sole trade will have a small effect on society, whereas a large multinational firm may have a higher impact on more than one country.

Changing behaviour to take into account external (i.e. outside the firm) factors may lead to a conflict between the desire to achieve social objectives and the desire to maximise the profits for the firm. In this case, we would have to consider why a firm might wish to be socially responsible. The following covers some basic motivations behind why a firm would want to be social responsible:

Government requirements

At present there is no UK legislation that specifies any inclusion of social accounting in a firm's annual report. However, if the inclusion of social accounting or social reporting was to become a legal requirement, then it may make some sense to produce these ahead of the law being passed. Any firm that is already complying with any future change sin the law may get the opportunity to actually influence government policy in this area. Also, the firm will have the experience necessary in this area of accounting which give a slight edge to the firm if change sin the law are made.

Competitive advantage

Firms that use social accounting and act in a socially responsible way may use this to their advantage when competing with other firms. It can be used to promote the firm from the perspective of the consumers - who would probably prefer firms to act in more socially responsible way. Firms that appear to be more 'caring' may experience higher sales (but possible higher costs) than firms that do not adopt this approach. Firms may also be able to charge a higher price than their rivals if they adopt this approach - by giving the firm a unique selling point.

Motivation

Evidence suggests that employees in an organisation are more likely to be motivated if the firm adopts a socially responsible approach to its activities. This may lead to higher productivity (and lower costs) but also to lower labour turnover (where fewer workers leave the organisation - thus saving on recruitment costs).

Environmental disasters

Some firms may adopt a socially responsible approach as a defensive reaction. This may be done to ward off bad publicity. If a firm is seen to be willing to take action, after negative publicity, then the public are more likely to be sympathetic than if the firm does not respond to public opinion. It may costs the firm more in the short-run but may eventually lead to profits been higher than what they would have been if the firm had not changed policy.

Scenarios in social accounting

Firms will often face conflicts between the financial objectives of the firm and the social objectives that a firm may wish to satisfy if it is socially responsible. Even if the firm has not desire to be seen as socially responsible, there will be situations when a firm may have to be seen as acting socially responsible as to act otherwise may damage the long term profitability of a firm. According to the examination board specifications, there may be a whole range of different scenarios where the firm may be forced to act in a way in which profitability of the firm is composed. These could be as follows:

The closure of an unprofitable branch in a deprived area

By allocating costs and revenues to the branches of an organisation, it may be seen as in the interest of the firm's profitability to close down a loss-making branch. However, the negative publicity from the local community that would arise out of the closure, as well as unfavourable coverage in the media may lead to the firm changing its mind. The effects of any pressure felt by the firm would probably be determined by the size of the branch to be closed and the extent by which the firm feels it could cope with any bad publicity.

The replacement of labour by advanced technology

Although the cost of implementing advanced technology into the firm's activities may be very high, the firm may still be able to save money in the long run (and therefore boost profitability) be replacing workers with capital equipment. Trade union pressure may have some influence on the firm's actions. If the firm's workforce is highly unionised then the management may be less willing to 'take on' the workers and may back down. A compromise may involve some workers accepting voluntary redundancy and a gradual introduction of new technology.

The effects of using non-renewable, rare or scarce material

Non-renewable resources are those which, once used, cannot be replaced. Oil, coal and other fossil fuels are non-renewable. The use of these often causes higher pollution then other types of power, which can cause damage on the local area. There is also the possibility that higher taxes may be introduced by the government in the future on carbon emissions. Firms will often face negative publicity from pressure groups if they rely heavily on the use of non-renewable resources. Firms that were involved in the cutting down of rainforests received unfavourable publicity in the media.

Trading which has political or ethical implications

Firms may decide to ignore profitable opportunities for sales because the market that they would be selling to would have significant political or ethical implications. Firms that trade with countries that have oppressive regimes and violations of human rights could face negative publicity and possible boycotts by customers. Closer to home, firms in the UK may face bad publicity if they are seen to exploit vulnerable groups or try to sell products which are potentially harmful to certain groups in society. For example, the sale of tobacco or alcohol faces certain restrictions on where it can be sold and advertising restrictions.

Excessive cost saving in health or safety measures

Health and safety legalisation will impose extra costs on a firm. Having to meet certain regulations may mean that extra training has to be provided for employees, or that certain parts of the physical environment have to be altered to comply with legislation. For example, firm may have to change the physical environment to meet the health and safety acts. Although this may appear to damage profitability Firms that try to cut corners and avoid necessary health and safety measures may find that it back fires on the Fines for non-compliance with legislation may be high. There is also the chance that the firm may find it harder to recruit and keep workers if he firm does not provide a pleasant, safe environment to work within.

Exam tips - social accounting

• Each situation will be different, you will not really be able to rehearse answers to this section of the course

• Try to think about the situation as if it were really happening, to you! What would your response be in this situation, what factors would you consider?

• The answer (usually in the form of a report) must focus on the concerned stakeholders, you will gain very few marks if you miss the point and answer it from the viewpoint of any inappropriate stakeholder

Comments

These notes are aimed at people studying for AQA A Level Accounting Unit 4, but will also be suitable for other courses and exam boards.

Originally submitted by duke_stix on TSR Forums.