Management Accounting: Principles, Techniques, and Applications in Diageo

This article discusses the principles, techniques, and applications of management accounting in Diageo, a UK-based manufacturing company. It covers topics such as financial planning, variance analysis, investment appraisal techniques, and key performance indicators. The article also explores different planning tools and their effectiveness in dealing with financial problems.

Management accounting

TABLE OF CONTENT
INTRODUCTION ..........................................................................................................................3
MAIN BODY...................................................................................................................................3
PART 1............................................................................................................................................3
Principles of management accounting.........................................................................................3
Management accounting and management accounting system roles..........................................4
Utilization of techniques and methods for the management accounting.....................................5
Integration of management accounting in the organization.........................................................6
Benefits of management accounting functions............................................................................7
CONCLUSION................................................................................................................................7
PART 2............................................................................................................................................9
INTRODUCTION...........................................................................................................................9
Utilization of planning tools in management accounting and differences between them...........9
Comparison of ways for management accounting for its application and effectiveness for
dealing with financial problems.................................................................................................12
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Management accounting is the presentation of the financial information which shows the
internal purpose of the management that allows the business in making the key decision. The
managerial accounting is the one which encompasses the many facets of the accounting allowing
the company in making decision (Abdusalomova, 2020). Diageo is the UK company which is a
manufacturing company that manufactures many alcoholic beverages. It is a multinational
company and is the largest producer of Scotch whiskey in the world. This project demonstrates
the understanding of the management accounting system in the organization. With the help of
this project different application of the management accounting techniques is going to be used.
MAIN BODY
PART 1
Principles of management accounting
The principles of the management accounting are as follows,
Designing and compiling:
Management accounting helps the Diageo to design the accounting information, records,
statements and also other evidence which allows the business in the future to meet the
requirements which are particular to the relevancy of the business.
Management by exception:
Management accounting follows the budgetary control system and also the standard
costing techniques. This allows the management accounting in making comparison of the actual
performance of the company to the findings in management accounting.

Control at source accounting :
The best way of controlling the cost is by controlling at the point at which it is incurred.
Management accounting enables the business to understand the utilization and usage of the
services to be understood and employed (Charifzadeh and Taschner, 2017).
Accounting for inflation:
For an enterprise earning profit is essential and due to the change in the value of money
the profit which the business is not the same as it contributes towards the business with the help
of real value and money. The rate of inflation is calculated and understood by the management
accounting.
Use of Return on Investment:
The rate of return shows the efficiency of the business. Management accounting helps the
business to analyse how much return it has made out of its investments with the calculation of
return on investment.
Management accounting and management accounting system roles
The roles of management accounting systems is to advise the managers to for the
financial implications of the business which helps in the business decision-making for aiding the
business to growth and development of profit. Management accounting helps in the preparation
of the reports, budget, commentaries and also financial statements. Management accounting
system is the system which provides critical informations to the management about the
utilization of the operations of the business for its decision-making. A manufacturing company
like the Diageo utilizes these systems for management of its costs and process. The management
accounting systems vary from industry to industry about what they are utilized for. Some roles of
management accounting systems is to collect the data which is required in the field of accounting
which informs the management of the business operations (Englund and Gerdin, 2018)
Management accounting systems utilizes the budget for the planning of the business operations.
These systems utilize the performance reports for noting the deviation of the actual results in
comparison to the budget analysation.
Utilization of techniques and methods for the management accounting
Some important tool and techniques which are used in the management accounting are,
Financial planning :

Main objective of Diageo is to maximize its profit with the help of management
accounting. Management accounting does this by the help of proper financial planning which is
the most important tool of business objectives achievements.
Financial statement's analysis:
Both profit and loss account and balance sheet are very important financial statements
which are considered to be very important tool for the analysation of the different period. It helps
the management accounting to understand the rate of growth of which the business is concerned
with.
Cost accounting ;
The cost accounting is the presentation of the cost data which product wise or even the
process wise helps the department of the branch. The determination of the cost of the data helps
the business to compare with the predetermined ones (Agustia, Sawarjuwono and Dianawati,
2019). Comparison between the two costs enables the management to decide the reasons for
which its is responsible. For example Diageo has the raw materials of £50000 as the opening
stock and a closing stock of £40000. This organization purchases £145000. There fore the
calculation of Cost of material consumed would be, (50000+145000)- 40000
155000.
Fund flow analysis :
This analysis of the organization allows the business with the movement of fund from
one period to the another. This analysis is considered to be very important for the comparison of
the use of funds of two different years of the organization. Fund flow analysis is also useful for
the finding the working capital changes and funds.
Cash flow analysis :
This analysis is that tool of management accounting which helps the business to find out
the movement of cash from one period to the another. It shows the changes in the cash balance
between two periods. With the help of this tool the operations of cash and its movement in a
period can be understood.
Standard Costing :
It is the predetermined cost which helps the business to provide the measurement of the
actual performance of the business operations. This technique of management accounting is

considered to be very useful for recognizing the deviations found in the operations along with its
reason.
Marginal Costing :
The technique of marginal costing is used for fixing the selling price for the business and
its product with the help of some best strategies, raw materials or resources, production decision-
making and analysation of the decision-making based on the fixed cost, variable cost and
contribution.
Integration of management accounting in the organization
The integration of management accounting in the business operation of Diageo are,
Reviewing products :
As a manufacturing company Diageo brings different range of products for its customers.
The review of the current product range, the management accounting provides the financial and
business statistical analysis which help in the deciding which products are profitable and which
are not (NGUYEN and LE, 2020).
Launching new products:
The launch of the new products of the management accounting is considered to be very
important as it can support the business in every stage. Management accounting breaks down the
details on the products which helps in understanding the accurate picture of the market for that
product. It allows the business to understand the quality and quantity of the products which is
needed to be changed.
Staffing:
Management accounting is also very important for understanding the importance of the
decision-making that allows the business to understand and evaluate the decision of hiring of
new staff (Boyd, 2019). Management accounting is important in making the right decisions as its
allows the business to understand how much is needed for the business to spend on the staffing
and also how much return it gets and can get from the staff the business own (Charifzadeh and
Taschner, 2017).
Benefits of management accounting functions
Some benefits of management accounting functions are,
Decision-making :

The management accounting functions allows the business to make important decision-
making on the basis of costing, economics and statistics. The decision-making is very important
for a business it helps its plan its operations.
Planning :
Management accounting's one of the function is that it is not fixed to a time line, it is a
continuous process. Due to this function the business is allowed to plan its activities on the basis
of the data analysed in the management accounting.
Identification of Business Problems :
The management accounting has the function of maintaining the records and data of all
the products, services, department, assets etc. of the business. Due to which any area of the
business that is having a problem management accounting is able to identify that error
(Massicotte and Henri, 2020).
Strategic Management :
The concept of the management accounting is not considered to be mandatory by any
law. Due to which the business can have its own management accounting structure as per the
requirements of the business. In case the company requires in depth analysis the or investigation
of its operations. With the help of this the business can strategically manage some core areas
which holds high importance for a business.
CONCLUSION
From the above evaluation it can be concluded that management accounting is very
important for providing some framework for the financial decision-making of the business of
Diageo. The application of the management accounting techniques includes the utilization of
some traditional methods such as the standard costing, budgeting and cost volume profit. For its
application some integrated approaches like the Just-in-Time, Activity Based-costing,
Benchmarking and target costing is utilized. The management accounting process is very
essential for a manufacturing organization as it helps the manager in making decisions which in
regard to the given scenario can understand the areas of improvements. Its importance in the
application of cost implications helps in making better and efficient decisions for the
organization.

PART 2
INTRODUCTION
Management accounting is the presentation of the financial information which serves as
the internal purpose of the management for its key decision-making in the business (Saeidi and
et.al.,2018). The role of assistance financial accountant in management accounting is helping the
organization choose and manage the investments made, planning, budgeting, strategizing and
also decision-making. The chosen organization is Diageo. This UK company is a manufacturing
company that manufactures many alcoholic beverages.
Utilization of planning tools in management accounting and differences between them
There are many tools of planning in the management accounting. The tools which can be
applied in the business organization for improvements in the forecasting, systematic planning
and also the elimination of the threats. Some planning tools in management accounting are,
Cash flow budget :
Cash is a very critical issue for the business as it is related to the working capital
requirements. The activities which are present in the cash flow budget are the one which are
utilized for evaluation of the future figures of the financial factors (Vakhrushina and et.al.2018).
The advantages and disadvantages of this planning tool in management accounting are,
Advantages Disadvantages
The cash flow budget allows advanced and
diversified strategy which can be used for
making up for the future shortages of cash.
Due to the number of estimation present in this
tool it lacks accuracy of cash.
This allows the management accounting to
plan better utilization of resources in different
department.
The adoption of this tool in management
accounting sometimes can be problematic due
to lack of coordination in the employees.
Variance Analysis :
This tool of management accounting is the set of some analytical arrangements which are
available to the pre-budgeted standards which provides outcomes which can be utilized in both
financial and non-financial aspects (Ax and Greve, 2017). This is a very popular tool of

determination of efficiency of the business operations. The advantages and disadvantages of
variance analysis are,

Advantages Disadvantages
Very effective in performance evaluation for
the elimination of problems.
For the application of this tool detailed market
research is required.
Provides effective control over the unnecessary
expenses of the business.
Utilization of this tool requires financial
knowledge.
Investment appraisal techniques :
Different appraisal techniques can be utilized in the management accounting as a
planning tool (Ismail, Isa and Mia, 2018). These techniques help the management accounting to
understand financial performance and position of the business.
Advantages Disadvantages
The appraisal techniques helps in suitability
and profitability of the capital projects
evaluation.
Utilization of these techniques requires high
level of skills and knowledge of the
understanding of data and analysis of skills.
Time value of money is said to be one of the
most crucial factor of investment decisions and
appraisal techniques which shows results
filtering the impact of the time factor (Nielsen
and Pontoppidan, 2019).
The results of the appraisal techniques are
subjected to the other economic factors.
Difference between these planning tools of management accounting are,
Variance Analysis Cash flow budget Investment appraisal
techniques
In the variance analysis which
measures both monetary and
non monetary data, its
outcomes can be compared to
the real factors of low
This tool helps in the
allocation of the sufficient
resources to all the
departments. With the help of
this cash availability can be
The investment appraisal
techniques can select the most
suitable techniques for the
organization which will create
the most profit for it.

performance. resolved.
The performance of the
resources cannot be changed
by this analysis an employee
performance can be only
improved by training and
developed.
Cash flow budget may face
operational problems which
can be lack of cash resources
(Saukkonen, Laine and
Suomala, 2018).
The investment decision-
making is very important for
the business, any mistake in
the investment decision can
affect the business of the
company.
Comparison of ways for management accounting for its application and effectiveness for dealing
with financial problems
For handling the financial issues Diageo evacuates the threat for sustainability of its
business. Even though the management accounting is considered to be very suitable and effective
tool the businesses, it does faces some financial problems. These financial problems faced by the
organization can be solved in the following manner,
Key Performance Indicators :
KPI which stands for the key performance indicators are some set of standardized
parameters which can be adopted by an organization to be compared with another organization
or from itself of some different time period. Some application of KPI for analysation of the
financial problems are,
Liquidity ratio :
Diageo utilizes this ratio for measuring the ability of the company in terms of converting
its assets into cash for meeting the short term obligations. This ration shows that the company
has the ability of converting its assets into cash. This influences the investors for investing into
the company.
Profitability Ratio :
The use of profitability ratio helps the business to measure the operating ability of the
organization for meeting the operating expenses. This shows that the business is going to be
capable enough to keep its business operations going in a positive direction.
Horizontal analysis :

This analysis is considered to be very useful for evaluating the financial performance of
the company over a given time horizon, this analysis in the KPI shows that the business has
maintained financial stability (Christine, 2019).
Segment reporting:
The segment reporting shows that the business has the operating ability of specified
segment which can have segment margin for earning the segmented profit of the organization.
Benchmarking :
This term of benchmarking suggests the process which can be used for making
comparison between two companies showing the after-effect of the business operations.
Benchmarking is known to be the most essential tool of systematic management of the business
operations. The application of benchmarking can help the business to improve and also over
come the financial problems. The improvements of this level can insure the profits and
expansion of the organization making major impacts on the internal performance.
 This organization uses benchmarking for the identification of the opportunities of
improvement in the organization and also understanding the effects it has on the business.
 Benchmarking allows the business to note down the performance areas of improvement
by the company.
 With the help of benchmarking Diageo is successful in developing an improvement plan.
 The results which are developed after its identification are used for further more
improvements can be noticed.
Variance analysis :
Variance analysis is the summarization of the analysis which can be differentiated
between the planned and the actual numbers. The sum of the variances given in the picture helps
the business in achieving the overall performance or underperformance of the particular
reporting period. Diageo utilizes the Variance analysis for the comparison of the actual
performance numbers with the predicted one. This shows what the business is doing wrong and
helps the organization in planning future of the price, quantity of materials and labour.
According to the analysis of an organization usually there are two types of variances. Variable
and Fixed. The organization generally makes changes over the results of the variable variances
as they have the tendency of changing. The changes in these variances of the management
accounting generally occurs due to the certain financial problems (Nguyen, 2018).

One of the competitors of Diageo which in itself is very established is Bacardi. This
business is very similar to that of Diageo and has also been very successful in the operations. The
KPI of this organization shows the following,
Earning per share :
This shows that the earning business has on every share. It allows the company to show
the net earning for every common stock holder. This shows that the business is earning from
every investment which is made in it by the investors.
Solvency ratio :
This ratio is considered to be very important in measurement of the capability of the
factors which have a survival importance. The focus of the ratio of debt and its total asset and the
assessment of the amount provided to the creditors is also done with the help of solvency ratio.
The Benchmarking analysis of the two organization shows that the Diageo should utilize
continuous improvement for resolving the financial issues it faces. However, the Bacardi is
doing very well as per this analysis but can improve its productivity and efficiency by
analysation of the market.
CONCLUSION
With the help of this project it can be concluded that management accounting system is
interrelated with information of the business and the accuracy of the decision-making based on
the accurate information. It can be recommended to the Diageo company to utilize the budgetary
control tools for being successful in the business. Also, for the achieving the organizational
targets the business can adopt this method for achieving accuracy in the business performance.
The cash flow analysis method can be also very essential planning tool for the organization as it
will help the business to improve its daily operational cost management that is very important for
the management accounting of the business.

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Online

Boyd, K., 2019. what is management accounting and why is it important for business?[Online].
Available through: <https://www.myob.com/au/blog/management-accounting-
important-business/>