Advanced Management Accounting - Assignment

ADVANCED
MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................3
LO 1.................................................................................................................................................3
Purpose of developing & presenting financial information........................................................3
LO 2.................................................................................................................................................6
Management accounting techniques to support organisational performance.............................6
Advantages and disadvantages of different types of variances.................................................10
LO 4...............................................................................................................................................12
Impact of Internal & External business environment on management accounting...................12
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................17

INTRODUCTION
Management Accounting is an activity of preparing & disclosing financials & managerial
reports to stakeholders of company so that they can make important decisions related investment
and expansion. Management accounting also benefits companies in disclosing financials
information of company to its stakeholders and projecting future financial report of company.
Below report explains purpose behind development of financial information to external &
internal users of company. Further, this report includes reasons & benefits of presenting
financials reports to stakeholders of company. Furthermore, this report elaborate different types
of management accounting techniques which helps business firms in enhancing their
performance & profitability in future. Moreover, below report explains meaning of business
environment. At last, this report includes impact of internal & external business environmental
factors on business entities and management accounting.
LO 1
Purpose of developing & presenting financial information
Financial Information contains all the necessary details related to business operations of
organisations. According to (Otley, 2016), Financial information is essential for each
organisation because without financial information a company cannot prepare financial
statements. Thus, Purpose of financial information is to present financial position of a business
entity with the help of Balance Sheet, Cash Flow Statement and Income Statement to
stakeholders of company. Tesco is a multinational retailer which offer variety of grocery items
and other general merchandises in many countries across the globe by establishing superstore,
supermarket and hyper market. Company also disclose its financial information to individuals
with the help of Annual Reports and its online website.
AS per the view of (Gooneratne and Hoque, 2016), Financial Information helps
stakeholders in making various necessary decisions related to investment & resources allocation
which results in profit maximisation. Because, if detailed information related to assets and
liabilities are given in financial statement than manager are able to make decisions related to
further investment and expansion of their business. Further, information related to past years
profits benefits a mangers in making decision related to development and introduction of new
product line. So, it is necessary for accountant of Tesco to present its financial information.

Further, this information should be presented in prescribed form,at given by authority of United
Kingdom. Balance sheet of a company required to be presented by classifying assets and
liabilities, Statement of Cash Flow is prepared by classifying different activities such as
Operating, Financing and Investing. Whereas Income Statement is required to be presented by
differentiating operating and non operating expenses and incomes.
On the other hand, according to (Hayward and et.al., 2017), stakeholders such as
competitors and suppliers sometimes have a negative impact on operations of company. Thus,
Financial information has different importance for each stakeholders.
Stakeholders are individuals who are having interest in business operations of company.
Stakeholders affects profits, market share and customer base of company. These individuals
helps firm in achieving long term success and growth in future. Without Stakeholders Tesco
cannot run its operations and maximise its brand image. Further, companies stakeholders are
Board of Directors, Shareholders, Banks, Customers, Creditors and Competitors. All these
people are having interest in gaining information of financials of company.
Board of Directors (BoD) - Board of Directors of Tesco includes a group of individuals
who regulate & control operations of company. These people form guidelines and regulations for
successful running of operations of firm and they also manage their subordinates. These
individuals also makes various decisions related to corporate & management so that problems of
firm can be resolved(Minnis and Sutherland, 2017).
Board of Director's of Tesco evaluate & analyse all the financial information and make
various decisions in the favour of managers and shareholders of firm. Thus, Board of Directors
also stand for shareholders. Financial information helps BoD in making decisions related to
Dividend Distribution. If company earn sufficient profit in last year than only BoD can decide
as to how much amount of dividend is distributed among companies shareholders and
information about profits its constructed from Income Statement, Balance sheet and Cash Flow
Statement. Thus, this is the reason Board of Directors of Tesco shows their interest in Financial
Information.
Board of Directors also evaluate Financial Information with the purpose of determining
option policy and amount of compensation of employees. Board of Directors also helps company
in setting up its goals & objectives for future is cannot be done if current financial position is not

disclosed to them. Further, they also show interest in financial information to ensure capital
investment and availability of resources with company.
Shareholders- Shareholders are asserts of company and they contributes towards
sustainable growth of organisation. Shareholders includes all the individuals who are investing in
shares of Tesco and showing interest in purchasing shares of company. Financials information is
disclosed to shareholders by company with the purpose of maximising its market share because
shareholders make investment decision in accordance with current financial performance of firm.
If company is gaining profits in last few years than shareholders make decision to purchase its
shares.
Further, Existing Shareholders of company needs details of firms financial information to
analyse & evaluate Risk & Return of their Equity Investments. Thus, it is necessary for
company to disclose accurate information of company to its shareholders to gain their trust.
Shareholders also has an impact on financial position of firm if their investments are profitable
than they make more investments with this future financial position of company gets stronger.
Banks- Banks are financial institutions which provides funding to companies so that they
can expand & diversify their business. Banks provide loan to company after evaluating &
analysing companies financial strength & weakness. Thus, banks shows interest in financial
information to check credit worthiness of Tesco. If companies financial statements are showing
that it is earning profits and paying instalments & interest on existing loan a timely basis than
bank will give more loan to it.
Thus, it is also necessary for managers of Tesco to give actual & exact financial
information to banks.
Customers- Customers are group of individuals which helps companies in gaining more
profits. A loyal customer is interested in gaining knowledge about financial information of
company. Further, customers who resale companies products in retail market evaluate data of
financial statement because fluctuation in companies financial information affects profit margin
of retailers.

Moreover, customers also affects financial position of company. Foe Example- If
customers of Tesco is satisfied with it financial performance than prefer to buy its products
which in turn enhances profits and customer base of company.
Customers also use financial statements such as Income Statement to check production
efficiency of company and availability of raw materials and finished goods with the firm(Deasy
and et.al., 2016).
Creditors- Creditors are financial institutions other than banks which provides funds to
company so that it can pay its liability on time. Creditors offer funding to companies on the basis
of credit worthiness and past records of Tesco. With the purpose of checking solvency &
liquidity of company creditors shows interest in financial statements of company. Creditors go
through Balance Sheet and Cash Flow Statement of company to check liquidity of firm.
Competitors- Competitors are companies which are operating their business in same
industry and offering same products & services which are offered by the company. Tesco
analyse financial statement of its competitors so that it can make strategies more powerful than
its competitors and compete with them. Competitors also show interest in gaining knowledge
about financial information of company with the purpose of reducing competition and with this
company is also able to know any strategies related to merger or acquisition.
From the above report it is concluded that it is necessary to disclose financial information
of a company to its internal & external users as it helps company in generating revenue and
making important decisions related to expansion & diversification of business operations of
company. Further, it is also concluded that accurate & clear information of companies financials
is to be disclosed to stakeholders as they are backbone of a business entity.
LO 2
P 2. Management accounting techniques to support organisational performance.
Management accounting techniques is an effective process of effectively identifying,
evaluating, recording and summarizing which eventually helps in effective decision making.
Management accounting techniques helps in performance management and measurement to
execute the operation which leads to higher operational efficiency and standards. Management
accounting techniques helps in effective financial planning and statement analysis foe strategic

decision making to reach higher goals and objectives. Standard costing and budgetary control are
few techniques to optimally utilize the resources(Hamilton and Webster, 2018.).
Cost accounting:
Cost accounting is an effective process to identify, allocate, analyse and record the cost of
the company. Cost is an amount of expense incurred during a particular process. It helps in
measuring financial performance and take necessary measure to evaluate and control the cost for
higher sustainable growth and development of Tesco plc. The key purpose of cost accounting is :11 Cost control: Cost control is an effective practice to effectively identify cost and reduce
expenses which leads to higher operational efficiency, performance, productivity and
profitability of the business. It helps in effectively preventing wastage and set particular
standard to maximize organisational goals and objectives. It helps Tesco plc. to control
the cost of the business so that economies of scale can be achieved.11 Cost computation: Cost computation is an effective measure which helps in analysing
and evaluating the expenditures and expenses of the business. This helps in identifying
the cost attached with the activities for higher sustainability growth and development of
the business.11 Cost reduction: Cost accounting is an effective framework which helps Tesco plc. in
reducing their cost of production for higher profitability and success of the business (Cost
Reduction: Meaning, Techniques and Advantages | Organisation, 2019). This strategy
helps in reduction of per unit cost without impairing the quality of the product. Cost
reduction help in definite increase in margins which leads to higher competition and
increase in revenue for Tesco plc(Prajogo, 2016).
 Cost volume profit analysis
Cost volume profit analysis is an effective technique which helps in determine the
variation in the level of cost and volume affect the operating income and profit of the company.

The key assumptions attached with this techniques is that:
 Sales price remains constant.
 Variable cost remains constant.
 Total fixed cost remains constant.
 Cost are affected with the change in volume of production.
Cost volume profit analysis helps in determining and effect of product cost and sales
volume on the net income or operating profit of the Tesco plc. This technique helps in
determining the relationship between cost, volume and profit. Fixed cost do not change, it
remains constant with the change in the volume of units. Variable cost varies with the change in
the level of production (What is Cost Volume Profit Analysis (CVP)?, 2019).
Formula of Cost volume profit analysis:
Profit= Revenue- Fixed cost- Variable cost
Marginal and absorption costing

Marginal costing is an effective costing technique which is referred to as increase and
decrease in the cost while producing one additional unit. Marginal costing is also referred to as
incremental cost. It is an effective decision making process. It is an effective process in which
only variable cost is accumulated, so that cost per unit can be accumulated. Marginal cost vary
with the variation in the level of production.
Absorption costing is a cost accounting method which helps in analysing the the value for
inventory. It includes and identify all the cost of producing a product which includes both
variable cost and fixed cost. It is an effective method to identify the actual cost of producing an
inventory in a cost effective manner. This method helps in evaluating the fixed overhead cost to
value the true cost of manufacturing a particular unit of product. In absorption costing both fixed
and variable cost are considered while evaluating the product cost(Omeje, 2017).
Standard costing
Standard costing is an accounting technique which helps in effectively identifying the
variances from the set standard budgeted plan. This method helps in effectively comparing
standard revenue and cost with the actual results and outcomes, so that cause of variance can be
determined. This method helps in identifying the cause of deviation so that necessary action van
be taken to reduce the effect and effectively achieve organizational goals and objectives.
Budgeting & Budgeting Control
Budgeting is a method of preparing future plan of companies financials with an objective
of achieving organisations objectives. Budgeting helps company in performing its business
operation in a manner so that it can achieve profits. If Accountant of Manager prepare budget of
its upcoming year by making estimation of expenses, income & profits than it benefits company
in achieving profits by eliminating unnecessary cost. Various types of budget is prepared by
company such as sales budget, production budget and cash budget.
On the other hand, Budgetary Control is a technique used by organisations through
which companies set their future goals in accordance with its future financial plan. With the
helps of budgetary control techniques managers of Tesco are able to compare their actual
business performance with the planned one and make necessary decisions to achieve required
results. These techniques helps companies in improving their performance(Freeman, 2016).

Capital Budgeting
Capital Budgeting is an activity through which a business entity can make decisions
related to its investments & expenses. According to this technique managers of Tesco will
determine as to what type of expenses and investments are beneficial for company and how
much return company receive from a particular investment. For Example- Tesco is making
investment in establishment of a new supermarket than this techniques helps in evaluating &
determining as this investment is profitable for company or not and if this investment proposal is
not so beneficial than company evaluate other alternative. Thus, returns of different investment
alternatives are determined under this technique.
Advantages and disadvantages of different types of variances.
Marginal and absorption costing
Advantages of marginal costing
 It is an effective method to determine the cost of production and control cost of
production (Advantages and Disadvantages of Marginal Costing Technique, 2015).
 This method helps in accurate and strategic decision making by relatively contributing
top the profitability of the business. This method also helps in optimum allocation and utilization of resources.
Disadvantages of marginal costing
 It is not effective process for pricing decision as this method ignores fixed cost of
production. This is based on historical data and does not give accurate picture of the increse in cost
and production of a particular unit.
Advantages of Absorption costing
 It gives more accurate and reliable information regarding the inventory manufactured.
 It gives higher operating income as compared with marginal costing. This method takes into consideration fixed cost for more true results to calculate cost of
producing each unit (Advantages and disadvantages of absorption costing, 2018).

Disadvantages of Absorption costing
 Absorption costing can inflate the profit results because absorption costing take into
consideration fixed cost which is irrespective of the output of production. Absorption costing is not an effective process to control cost of the company and does
not take effective strategic decision.
Standard costing
Advantages of Standard costing
 This method helps in controlling the cost of the business by effectively analysing the
cause of variance or deviation, which leads to effective decision making and growth of
the business. Standard costing helps in effectively measuring the inventory and saving cost of
production.
Disadvantages of Standard costing
 This method is time consuming, expensive and labour intensive process. This method also reduces morale of workers as managers ignore performance of
employees who does not perform well(Voinov and et.al., 2016).
Budgeting & Budgeting Control
Advantages of Budgeting & Budgeting Control
 This technique helps managers of Tesco in effective utilisation of its resources. It also benefits company in preparing future financial plans according to current trends in
market.
Disadvantages of Budgeting & Budgeting Control
 An organisation is not able to operate its business according to budget in changing
situation which is a disadvantage for company. Budgets are prepared on the basis of historical data thus, this method does not give
accurate result and does not helps company in achieving its objectives.

Capital Budgeting
Advantages of Capital Budgeting
 This technique helps company in maximising wealth of its shareholders which in turn
enhance market share & brand image of firm. It helps management in taking investment decisions by evaluating returns form different
alternatives and this techniques also beneficial for company as it control cots involved in
organisations operations(Locke, Lucas and Grayson, 2016).
Disadvantages of Capital Budgeting
 Capital Budgeting techniques only helps in making long term decisions it is not affective
in developing short term decisions such as cost minimisation.
 This method consider time value of money according to which longer the time horizon
higher will be the profit. Thus, this method gives profit only for long run.
LO 4
Impact of Internal & External business environment on management accounting
Business Environment consists of variety of internal & external factors which influence
business operations of a firm. Factors which are influencing business activities of a company
directly or indirectly affects management and accounting process of a firm. Business
environment benefits companies in developing strategies and identifying opportunities which
further helps company in maximising profitability and performance in long run.
Factors which affects operations of a business are supply & demand of products &
services, government, competitors, suppliers, banks, investors, changes in economic factors,
environmental changes, globalisation and various other macro & micro factors(Al-Dhubaibi and
Abdullah, 2016).
External Business Environment
This environment include different types of factors which are available outside of
business but influence business activities of company. If companies operations gets affected than
accountants of company are also required to change their management & accounting techniques.
Thus, these factors has an indirect impact on management accounting used by Tesco. These
factors are further classified in to two types. Which are discussed below-

Macro Business Environment- All the environmental factors which indirectly influence
business activities of Tesco and other organisations are termed as Macro Business Environment
Factors. Factors such as Globalisation, change in economic situation and government laws
influence management accounting and business of organisations. Affect of these factors of
management accounting are discussed below
 Globalisation
Many companies are expanding their business in international market by establishing
their stores in more than one countries. These change (business expansion in new countries)
require huge amount of investment for managers of firms are require capital and they also needs
to make decision as in which location is gives them higher profits. Management accounting is
required in evaluating different alternatives. For Example- Tesco is using capital budgeting
technique in its decision making and now company is planning to establish a store in next 3
months than capital budgeting technique does not give accurate result to company. Further,
Tesco is offering its products & services in many countries across the globe for which company
have to use different costing method, accounting method and decision making techniques for
each countries.
Management accounting of Tesco also gets affected as it is an international company
thus, it has to disclose its financial information in all the countries it is offering its products &
services. Managers need to publish companies annual report in different languages so that it can
be circulated to all of companies stakeholders.
 Change in Legal Factors
Government formulate different laws and provisions which leads to change in accounting
methods and management techniques. If there is a change in Taxation Policy than managers &
accountant of Tesco has to make decisions so that they can assess their profits & income in
accordance with new policy. Thus, with this management accounting gets affected.
 Economic Factors
Economic factors includes change in interest rates, tax rates, inflation and unemployment
in an economy. If there is situation of inflation in country than managers of Tesco has to change
techniques of cost accounting and company also has to change its future financial plan so that it
can offer products at an affordable rate. If company is using tradition method of budgeting than

now it needs to adapt zero based budgeting as budget prepared on the basis of historical data is
not appropriate in this situation(Harrison and Lock, 2017).
Micro Business Environment- All the external factors which directly affects operations
of a company are known as Macro Business Environmental Factors. These factors includes
Suppliers, Customers and Creditors and these factors affects management accounting as it affects
pricing & costing decisions of products & services of company. More impact of these factors are
discussed below-
 Customers- Taste & Preference of customers changes according to change in time.
These directly has an impact on sales volume and profits of company. With the change in
customers demand companies are also required to change their business offerings and
expand their business. For Example- If customers of Tesco is increasing with the increase
in demand than it needs to establish more stores for that company has to revise its budget
plan and evaluate cost of its products & services.
 Suppliers- Suppliers are individuals who deliver raw martial to organisations so that they
can perform they can produce products and make them available in market. Supplier may
change price of raw material if supplier is demanding high prices for product than
company needs to change its accounting methods and apply costing methods which
minimises cost so that profits does not gets affected. Creditor's- Change in rate of interest imposed by creditors on loan also affects
management accounting business operations of organisations. For Example- Interest rate
on loan is increased than company is unable to obtaining loans at higher rate that in turn
reduces customer base and profitability of company. Further, managers of Tesco also
face problem in raising funds which reduces expansion of companies business. IN that
situation managers are required to take decisions which does not harm companies
financial situation. Thus, this affects management accounting(Abdel-Maksoud, Cheffi
and Ghoudi, 2016).
Internal Business Environment
All the factors which influence business activity of an organisation and that factors are
available in the business itself are known as Internal Business Environmental Factors. Internal
factors are avoidable and can be handled by organisations. Changes in these factors affects

business activities and decisions of managers of company. Affect of all these internal factors are
discussed below-
 Board of Directors & Managers- Board of Directors of a company are group of
individuals who control and manage operations of firm. These call people support
managers in making decisions and control activities of their subordinates. Board of
Directors of company evaluate financial information of company to make investment
decisions. Different individuals in board have different attitude and thinking so they
prefer to use different management accounting methods and if all managers in company
are giving different suggestions than they are unable to make efficient decision. Thus, it
affects management accounting of company. Management accounting gets affected if
there is change in board members & managers of Tesco because with this a business
entity is require to change its management accounting methods.
 Mission & Objectives- Mission & Objectives of organisation helps it in achieving
success in future and it also helps company in achieving higher amount of profits.
Mangers of Tesco changes its objectives with the change in various business situation.
Thus, company also needs to change its management accounting methods in accordance
with new objective. For Example- If companies objective is to minimise its cost by
maximising profits than it needs to tale decision as to what type of cost accounting
method minimises cost by evaluating various costing methods such as standard costing,
marginal costing and absorption costing.
 Employees- Change in needs & requirements of employees such as demand of higher
wages affects management accounting and managers decision. As with the increase in
demand of wages from employees of Tesco cost of company gets maximised with the
result of this company has to revise its budget. As budget is a method of managerial
accounting it also affects management accounting.
Form the above answer it is concluded that business organisation has to consider changes
in all of internal & external factors as these factors also impacts management accounting
techniques used by company. Further, it is also evaluated that if company is not able to use
effective management accounting technique than its profits gets reduced. Thus, firms has to
evaluate different business environments and change their accounting methods
accordingly(Kaplan and Atkinson, 2015).

CONCLUSION
The above report outlined purpose of preparing & disclosing financial information of
companies to its internal & external stakeholders. Further, this report concludes different types of
management accounting techniques and methods. Furthermore, above report outlined advantages
& disadvantages of management techniques. Moreover, this report summarises internal &
external factors of business environment and their influence on operations of companies business
and on management accounting.

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