Management Accounting: Planning Tools and Adaptation to Solve Financial Problems

This report discusses the use of planning tools in management accounting and how organizations adapt to management accounting systems to solve financial problems. It also explores the advantages and disadvantages of different budgetary control systems and planning tools. Case study of Asda is used to illustrate the concepts.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Question 1....................................................................................................................................1
Question 2....................................................................................................................................3
Question 3....................................................................................................................................3
Question 4....................................................................................................................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Management accounting refers to providing of financial information and resources to
management of a company to aid them in the decision-making process (Alsharari, 2017). For this
project, Asda has been selected which is a British supermarket dealer. In this report, specific
analysis will be made on explaining the use of planning tools and comparison of ways in which
organisations adapt to management accounting systems for solving their problems.
MAIN BODY
Question 1
Budgetary control refers to a process of determination of results by budgeting figures of a
company for the future period and then comparing it with actual performance to find out
deviations (Liff and Wahlstrom, 2018). Asda's management can use this technique to ensure that
its actual results are according to the standards set and if there is any variance then rectifying
measures can be taken by it to improve performance.
Types of budgetary control systems-
Cash budgeting- Cash budget refers to an estimate of cash receipts and payments for a
certain period of time. It can be used by Asda to ensure that its liquidity levels are maintained
and there is no shortage of cash.
Advantages-
 It helps in better management of cash.
 Potential deficits can be identified easily.
Disadvantages-
 This system reduces the flexibility level in the company.
 It can be easily manipulated.
Capital budgeting- Capital budgeting is used to determine the projects where investment
should be done to maximise returns of business. Asda's management can use it to make sure that
its funds are invested in the right project.
Advantages-
 It helps in determination of risks.
 It enhances decision-making abilities.
Disadvantages-
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 The decisions taken are often irreversible in nature.
 It sometimes lead to investment in wrong projects.
Zero-based budgeting- In it, the budgets are justified for a new period and there is no
base of previous year used (O’Grady, Akroyd and Scott, 2017). Asda can use it to approve its
expenses for a new period without doing any comparison.
Advantages-
 Justification needs to provided for all the expenses.
 It results in efficiency in allocation of resources.
Disadvantages-
 It can result in manipulation.
 Its preparation is a time-consuming process.
Rolling budget- It is a budget which is prepared continuously and is prepared as an
extension of previous year's budget. Asda can utilise it to prepare continuous budgets spanning
over a period of time.
Advantages-
 Its preparation consumes comparatively less time.
 It is quite easy to make changes.
Disadvantages-
 It requires skilled workers to prepare it.
 Its preparation is costly.
Operational budget- It refers to forecasting of operational revenues and expenses over
future periods. The management of Asda can use it to ensure that its operations are efficient.
Advantages-
 Tracking of expenses is possible using it.
 It helps in deciding investments to be done.
Disadvantages-
 Its preparation is time-consuming in nature.
 It leads to strategic rigidity.
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Question 2
Management accountants can use varied range of planning tools which can aid them in
gaining substantial competitive advantage. Asda's managers can use the following planning
tools-
Cost accounting- It refers to a systematic set of procedures which help a firm in
identification of costs and their segregation on the basis of various factors (Rückeshäuser, 2017)
(Ruggeri and Rizza, 2017). Asda's management can use it for gaining competitive advantage by
effectively reducing its excessive costs incurred. Thus it will help the company in surging ahead
of its rivals and increasing its profits. Also it can avoid unnecessary costs and overheads to
maximise its profitability.
Budget control- It is the process of preparing budgets for a future period. The budget
which is prepared is then compared with the actual performance to identify deviations if any. If
there are variations then corrective action needs to be taken. The managers of Asda can use this
tool for gaining competitive advantage as they can identify their mistakes made in the past and
make sure that they are not repeated in the future. Also controlling procedures need to be set for
developing effective strategies to counter the rivals.
Pricing strategies- Pricing strategies refer to the use of varied options by a company to
set prices in such a manner that maximum profitability can be ensured. Asda's management can
ensure that prices are set to gain competitive advantage so that maximum number of customers
can be attracted towards the products of the firm. It can adopt competitive pricing strategy for
this purpose in which it needs to follow the pricing pattern of competitors and set the prices
accordingly.
Financial statement analysis- It is done by the managers of the company so that right
decisions can be taken by the management for the betterment of the firm. Asda 's management
analyses profit & loss account, balance sheet and other statements to ensure maximum
competitive advantage can be gained by taking important strategic decisions.
TASK 4
Question 3
Key performance indicators- KPI is a method for measurement of performance of a
company. It evaluates the success of an organisation on the basis of activity it engages in. Asda
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uses financial as well as non-financial KPIs for evaluating its performance level. The types of
KPIs it uses are as follows-
Financial KPIs- Financial KPIs are indicators in terms of numbers which measure how
well a company is performing in terms of revenue and profitability levels. It is used by Asda to
find out the actual performance in terms of financial facts and figures. Asda uses ratio analysis
tools and contribution margin to check its progress. It uses ratio analysis for interpretation and
contribution margin for finding out break-even point.
Non-financial KPIs- Non-financial KPIs are not measured in terms of numbers but are
very much valuable for the company. These include knowledge, skills, relationships with
customers etc. Asda forms relationships with customers by providing them products of value and
dealing effectively with their grievances.
Advantages of KPIs-
 KPIs provide measurable results in form of either numbers, statistics which help the
company a lot to improve itself if required. It quickly helps in rectifying variances and
deviations.
 KPIs help in framing of strategies for the company by forecasting the requirements that
may occur in the future. Accordingly, the action plan may be framed by the firm to get
the desired results.
Disadvantages of KPIs-
 It can impact creativity and innovation skills of workers of organisation as it expects
them to achieve standardised results which may impact them in the long-term.
 It suffers from the problem of being short-term oriented as sometimes it ignores the long-
term prospects.
Question 4
Carillion scandal refers to financial irregularities that were seen in Carillion plc., a British
multinational company dealing in facilities management (Stacchezzini, Melloni and Lai, 2016).
These irregularities forced the company to go into liquidation and had an impact on all its
stakeholders including shareholders, employees etc.
Role of management accounting in dealing with financial irregularities-
 Auditing- Management accounting facilitates auditing work and therefore helps in
checking of any kind of irregularities which can happen. This helps in avoiding mistakes
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and errors at the primary stage itself thereby helping in bringing efficiency and
effectiveness. This can help in dealing with the irregularity which happened in Carillion
plc. as through regular audits the inefficiencies of financial system can be detected and
addressed.
 Management of financial system- Management accounting helps in managing financial
system of a firm which therefore helps in effective management (Richardson and
Kilfoyle, 2016). It facilitates proper management of financial resources which can help in
dealing with the type of problem seen in Carillion plc. as sound management of finances
can effectively ensure optimum availability of funds.
 Prevention of frauds- Management accounting can quickly detect any fraud which
therefore leads to prevention of irregularities. It can help in dealing with financial
irregularities as seen in Carillion plc. as it detect frauds so that rectifying actions can be
quickly taken for their prevention.
 Regular evaluation- Management accounting facilitates regular evaluation and analysis
of performance in the company which can therefore help in identifying any kind of
discrepancy in performance. This can help in dealing with irregularities seen in Carillion
plc. as regular evaluation helps to deal with discrepancies.
CONCLUSION
From the above assignment, it can be concluded that management accounting provides
crucial information required for checking the financial irregularities and aids the managers in
raising profitability level. Explanation of advantages and disadvantages of planning tools and the
ways in which enterprises adapt to management accounting systems for responding to financial
problems has been included as a part of this project.
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REFERENCES
Books and Journals:
Alsharari, N. M., 2017. The development of accounting education and practice in an environment
of socio-economic transformation in the Middle East. International Journal of
Educational Management.
Liff, R. and Wahlstrom, G., 2018. Usefulness of enterprise risk management in two banks.
Qualitative Research in Accounting & Management.
O’Grady, W., Akroyd, C. and Scott, I., 2017. Beyond budgeting: distinguishing modes of
adaptive performance management. Advances in management accounting. pp.33-53.
Richardson, A. J. and Kilfoyle, E., 2016. Accounting institutions as truce: The emergence of
accounting in the governance of transnational mail flows. Accounting, Organizations
and Society. 55. pp.32-47.
Rückeshäuser, N., 2017. Do we really want blockchain-based accounting? Decentralized
consensus as enabler of management override of internal controls.
Ruggeri, D. and Rizza, C., 2017. Accounting information system innovation in interfirm
relationships. Journal of Management Control. 28(2). pp.203-225.
Stacchezzini, R., Melloni, G. and Lai, A., 2016. Sustainability management and reporting: the
role of integrated reporting for communicating corporate sustainability management.
Journal of Cleaner Production. 136. pp.102-110.
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