Accounting Questions

 Accounting Questions

Student’s Name

Institutional Affiliation

 

 

 Accounting Questions

Discussion 1: Mixed Costs

Strategy Comparison

        
 One of the strategies applied in all airlines is exploring modern technology to reduce fixed and variable costs. Through the use of technology, the companies can improve the efficiency of their services as well as reduce other related costs primary in managing operations that would involve a high level of human capital (Javad & Bijan, 2017). Through benchmarking, the companies can identify specific metrics that enable them to compare the costs of the firms with the aviation industry, and that enhances their ability to adjust variable cost like the amount of money used in advertisement programs. The firms also hire employees only if necessary, and that helps to control both fixed and variable cost used in areas such as administration. The idea of negotiated transfer prices is also used among different companies to assist in cost saving when budgeting for new products (Javad & Bijan, 2017). Alaska Air Group, Inc. tends to reduce its cost when buying cheaper and used aircrafts, and it focuses on allocation based budget. However, Turkish Airline uses cost-based budgeting because it invests only in areas that have been planned during the previous financial year.

Conversion of Fixed Costs to Variable

         The Airline Companies apply the concept of outsourcing as the primary strategy for converting fixed cost to variable one. For example, companies hire independent firms to delegate the management of public relation matters. Before selecting any company to provide such services, they sign performance contracts that highlight the objectives that the companies want to achieve. It is necessary to note that all the activities that the firms outsource are those for which they are not hiring full-time employees (Javad & Bijan, 2017). For example, hiring professionals who are responsible for inventories or designing specific products that are used by the firms. Therefore, using methods such as production incentives and sales commission help airline companies to convert the fixed cost to variable one. Alaska Air Group, Inc net profit for 2017/2018 financial year was $ 250 million due to increase in the number of passengers while the loss was $ 217 million because of merger-related cost.

Discussion 2: Airline Financial Accounting

Frequent-flyer Programs

         Qantas and Lufthansa have quite similar frequent flyer programs. Qantas allows the passengers to collect points for shopping in Qantas rewards store, purchasing wine, using travel insurance, and booking hotels. Lufthansa grants points only for certain mileage. Both airlines provide benefits such as awarding miles, booking guarantee, flying one class higher, priority check-in, etc. For Qantas, frequent flyer revenue has been increasing over the past ten years, and the liability has shown the same trend. As for Lufthansa, both revenue and liability balance for the frequent flyer programs have been declining over the same time.

Advantages and Disadvantages

        
The airlines benefit as they allow the company to track the behavioral trends. These programs provide information on how passengers earn their points, which can be used in future forecasting. Also, the frequent-flyer programs ensure the loyalty of the passengers (Knorr, 2019). Credit card companies also serve as a short-term source of financing as they presale the tickets. However, at the same time these programs cost a lot of money to the airlines, and this is a major disadvantage.

Incremental Cost Method and Deferred Revenue Method

            The incremental cost method does not require airlines to defer the revenue. Instead, the airlines record the liability for the marginal cost of providing future services to the passengers (Javad & Bijan, 2017). Considering the fact that a significant portion of the airline's costs is fixed, this method allows the companies to reduce the selling price of a mileage credit. According to the deferred revenue method, on the other hand, the liability for the fair value of the outstanding mileage credits is recognized (Knorr, 2019).

Airline Accounting

         The specifics of the airlines accounting lie in the following spheres:

Maintenance accounting: the maintenance expenditures can be capitalized or not based on the classification of ‘minor’ and ‘major’ events;
Revenue accounting: ticket breakage revenue is recognized on the day of the flight, not on the day of sale;
The loyalty programs accounting: the companies recognize the frequent flyer bonuses as liabilities;
Travel vouchers are treated either as deferred revenue or a deduction from revenue based on their type.
Discussion 3: Absorption and Variable Costing

Comparison of
Absorption and Variable Costing

           
The primary difference between these costing methods lies in the fact that variable