A Report on Management Accounting Systems and Techniques at Harrods

This report delves into the application of management accounting principles within the context of Harrods, a luxury department store. It begins by highlighting the importance of management accounting in the decision-making process, emphasizing its role in cost analysis, target market determination, purchase analysis, and growth/developmental decisions. The report then explores different types of management accounting systems, including cost accounting, inventory management, job-costing, and price-optimizing systems, detailing their functionalities and benefits. Furthermore, it evaluates the advantages of these systems for Harrods, such as cost control, efficient inventory management, and accurate job costing. The report also analyzes the use of absorption and variable costing techniques, illustrating their differences and impact on profit calculations through numerical examples. The report examines the planning tools that can be used to undertake effective management accounting standards in an organisation, with case studies of Nero Ltd. Finally, the report provides an overview of the benefits of implementing these various systems and techniques within a business framework.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
SECTION I......................................................................................................................................1
LO 1.................................................................................................................................................1
1.1 Importance of management accounting in the decision making process.........................1
1.2 Different types of management accounting systems........................................................2
LO 2.................................................................................................................................................3
2.1 Evaluation of benefits generated by different accounting systems adopted by Harrods..3
2.2 Use of absorption and variable costing techniques in management accounting..............5
SECTION II.....................................................................................................................................7
PART A...........................................................................................................................................7
PART B............................................................................................................................................9
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................13

INTRODUCTION
Management accounting system undertaken in an organisation assists the managerial
team to in its managing activities to be undertaken in that venture. It provides accurate
information about the statistical as well as financial matters to the mangers in order to mange
day to day activities of a firm, ensuring short term decision making processes. These accounts
are prepared on weekly or monthly basis, unlike financial accounts that are prepared annually. It
provides a clear picture of an organisation to the concerned authorised personnel, such as
departmental mangers and top executives of the firm. These accounts shows amount of cash
available with a firm, the revenue generated from sales, pur5chase order with the venture, a
record of debtors as well as creditors, bad debts that are to be received in future and availability
of inventory as well as raw material stock. The present venture undertaken in this report is
Harrods, which is a London based luxury departmental store.
SECTION I
LO 1
1.1 Importance of management accounting in the decision making process
Management accounting assists the managers in undertaking minor as well as major
decision making processes in the context of operational activities of a venture, as it provides
report regarding the day to day activities that are being performed in that organisation. These
information can be used by mentioned venture to make decisions regarding any uncertain
situations that may occur in a company on daily basis (Schaltegger and Burritt, 2017). The
various ways, in which the cited organisation can be benefited by adopting management
accounting standards in decision making process is explained in detail as below: Cost analysis: The information generated from management accounts is used by the
appointed managers at present firm to analyse the production cost that has been incurred
in the manufacturing process of its products. The price of the product to be offered to the
customers is decided or fixed in accordance with this production cost. This process of
deciding costs for a product is termed as relevant cost analysis. Deciding target markets: After determining the costs, the venture need to decide the
audience to whom the products are needed to be sold. This target market can be
generated is a result of effective management accounting system maintained by Harrods.
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Accordingly, advertisement campaigns can be undertaken to achieve the target market
and generate more number of customers as a result (Cooper and Qu, 2017). Purchase analysing: As management accounting keeps a record of inventory stock
available with the mentioned venture, thus, it enables the managers to make availability
of raw materials as and when required. This is termed as analysing the purchase decisions
to be made by the management team. This analysis assist the venture in avoiding any
kind of hindrances in the process of its production related activities.
 Growth and developmental decisions: Information included in management accounts
assist the managers to have a clear concept about both the current operational activities of
cited firm and the future potentialities that lies with the company. Generating these
opportunities requires the mangers to undertake effective changes in the workings of
mentioned firm and impose decisions thereon to achieve its object of long term growth as
well as development (Ax and Greve, 2017).
These are the major areas of operations where, management accounting assist the
mangers to undertake relevant decision making process in the present organisation, i.e. Harrods.
1.2 Different types of management accounting systems
There are majorly four types of management accounting system that can be adopted by
the mentioned venture, i.e. Harrods, viz. Cost-accounting systems, inventory management
systems, job-costing systems and price-optimising systems. A brief explanation of these
techniques or systems is presented as under: Cost accounting system: As per this system of accounting, the cost of manufacturing a
particular product for mentioned venture is being calculated in order to undertake
profitability analysis. It is of utmost importance for an organisation to determine the rate
of profit that it generates by providing its products or services in the market. Inventory management systems: Inventory management of a venture refers to managing
the stock of the company. Analysis of inventories available with the cited firm, ensures
that organisation to accordingly generate new orders and serve more customers and thus,
bringing more and more profits. Keeping in record the availability of raw materials to
conduct the production process in a smooth as well as effective manner helps the
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managers of present enterprise to avoid any last minute rush (Kenno and Free, 2017). In
general terms, inventory management deals with maintaining a balance between the
demand for its offerings in the market as well as supply to the desired customers. Job-costing systems: This system of accounting deals with recording information about
the costs incurred in the production process of a particular product of mentioned venture.
Such a technique of management accounting required when the customers are to be
provided with cost details under a certain contract. The various types of information
included in this accounting system includes, direct materials, direct labour and
overheads.
 Price-optimising systems: This kind of accounting method deals with the demand
variations at different price levels. In other words, it records the demand of customers for
the products offered by an organisation at different levels of prices. The data collected
can be used by the mangers to determine a price for the products that can bring more
customers for the venture and thus, enable the same to earn more profits (Christ and
Burritt, 2017).
These are the various management accounting systems that can be used by the appointed
managers of mentioned organisation to arrive at a particular decision.
LO 2
2.1 Evaluation of benefits generated by different accounting systems adopted by Harrods
The different accounting systems adopted by managers at present company, have several
benefits that can be enjoyed by the venture through effective implication of the same. A detailed
discussion of benefits generated by above mentioned systems of accounting is present as below:
 Benefits of Cost accounting system: These system of management accounting ensures a
firm to generate numerous beneficial returns. The cost accounting system adopted by
cited venture, i.e. Harrods, generates the following listed benefits for the business:
 This accounting system assist the mentioned organisation to control its cost by
recording various input cost for the generation of desired output.
 It is utilised in an effective way by the managerial team of the company to undertake
efficient decision making process (Lasyoud and Roslender, 2018).
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 It assists the firm to determine the the price for its offerings as per the production cost
incurred.
 It also helps the present organisation to determine its idle inventories. Along with all these, the cost system of management accounting ensures the present
firm to take necessary measures in order to reduce its cost related to production.
 Benefits of Inventory management systems: Great inventory management accounting
adopted in cited business organisation, has the following positive impact on the
efficiencies of that venture.
 It helps business to maintain the necessary stock as and when required or demanded
in the market.
 It also ensures avoiding idle inventory stocks with the firm , which results in high end
losses.
 Also, it assist the mangers in planning the production activities as per the inventory
available in warehouse (Abernethy and Wallis, 2018). Also, it enhances efficiencies on the part of employees, as a result of effective as well
as efficient planning undertaken.
 Benefits of Job-costing systems: The benefits generated from this method of
management accounting, for Harrods, are listed as follows:
 This type of management accounting helps the present venture to determine cost of
each job performed separately.
 Along with the cost generated, it ensures the firm to determine the profits earned with
each job undertaken regarding the production related activities.
 The budgetary system of the present organisation gets effective as results of job
costing. The cost of overheads can be pre determined by the appointed mangers in order to
undertake effective decision making process (Abeygunasekera and Yigitbasioglu,
2017).
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 Benefits of Price-optimising systems: The price management system of accounting
maintained by mentioned organisation leads to determine the amount of revenue that it
can generate by selling its offerings in the market. It ensures the venture to undertake an
appropriate decision making regarding the pricing policies of the product to be offered to
customers. It is associated with the demand generated for the product as well as services
offered by the mentioned luxury store in UK, which further determines the value of the
brand ion the market and its advantage over its competitors.
2.2 Use of absorption and variable costing techniques in management accounting
Absorption as well as variable methods of costing are two different approaches of
determining the cost of production incurred by an organisation to produce its products or
services that are being offered. Although, both are costing methods, but, there is a difference
between both these methods in their approaches to determine cost. Absorption costing is a direct
way of costing that can be adopted by a venture of determining the production cost of a products,
whereas, variable costing method is a full costing method that can be adopted by an organisation.
The major difference between both these costs is that, under absorption technique of costing the
manufacturing costs or overheads of fixed nature are recorded in the year or period of time in
which they have been incurred (Ismail and Mia, 2017). While, as per the variable costing method
or full costing method, the fixed overheads are charged when the product is being sold to the
customers. Variable costing method is also termed as marginal costing method (Absorption and
Variable Cost techniques in management accounting, 2018 ).
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With the above numerical value, it can be analysed that, the per unit production cost as
per the absorption method comes to be at 0.85, while, as per the marginal costing method of
production cost, per unit cost is 0.65. the present difference between both these costs has
occurred due to its nature, as marginal cost shows the amount of cost increased due to increase in
production activities, it deals with only variable factors, while fixed cost is considered to be
constant during short run.
With the above interpretation we can conclude that, as per the absorption costing
approach, the gross profit during quarter 1 is 5200 and during the second quarter it is 11100.
while, the net profit during 1st quarter is recorder to be at 4700 and during 2nd quarter net profit is
recorder to be at 5900.
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This illustration records the production cost as per the marginal or variable method of
determining production cost of an organization. The net profit of the venture is calculated in the
1st quarter to be as 1900, and in the 2nd quarter it is 4700. this method involves variable cost and
fixed cost remains constant with each level of production.
The major difference recorded at both these methods is due to the proportion of variable
cost of production incurred. As per the absorption method, it includes fixed cost and the
production cost per unit is high, i.e. 0.85, while, as per marginal costi8ng approach, only variable
costs are considered, which leads to a comparatively lower cost of production, i.e. 0.65.
SECTION II
PART A
LO 3
In order to undertake effective management accounting standards in an organisation,
there is a need to make use of numerous planning tools available for the same. Application of
these tools ensures the manger of mentioned venture, i.e. Nero Ltd, which operates as coffee bars
in London, to undertake various managerial decisions or other managerial functions in an
effective way for its smooth functioning. In other words, it assists the appointed managers of
cited firm in managing organisational strategy, optimum utilisation of available resources,
generating satisfaction on the part of customers and evaluating cost benefit analysis (Bui and De
Villiers, 2017). Some of the basic tools that can be used by the manger in order to undertake
management accounting standards are explained in detail as under:
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 Financial planning: In respect of maintaining required management accounting records,
effective financial planning can help the venture to gain desired returns. Analysis of financial statement: Financial stateme4nts are composed of Profit and loss
statement as well as Balance sheet of the mentioned venture. These statements are
prepared differently for different periods of time. It ensures management to determine the
pace of growth and development of cited company, along with it, undertake various
managerial functions for generalising desired results. Cost analysis or Cost accounting: The management accounts are prepared widely with
reference to the cost accounts prepared to determine the production cost incurred to
generate desired output. This cost analysis enables to manager to determine cost incurred
at different stages and the amount of profits generated (Yoder and Yang, 2017). Fund flow analysis: As per this tool, the manager appointed analyse the fund or capital
that flows within the organisation during different intervals of time. In general terms, it
assists the mangers to determine the working capital required for undertaking different
venture related activities. Cash flow analysis: This tool analyses the movement of cash within the organisation
during a particular period of time. It enables the managers to determine the cost incurred
for inputs and accordingly, the output generated. Standard costing: The predetermined cost of the production related activities is to be
termed as standard costing, in general terms, it is merely an estimation of costs to be
incurred. It enables the mangers to measure the difference between expected as well as
actual performance and accordingly determine its situation of profit or loss generated. Marginal costing: Marginal cost is that cost which is incurred at each stage of
production activities undertaken by the venture. In general terms, it measures the
production increased with the increase of each unit of labour applied in the cited
organisation, thus, assisting the appointed managers to determine the efficiencies of the
personnel employed in that firm (Nielsen and Kristensen, 2017). Budgetary control: As per this tool of managerial accounting system, the mangers are
enabled to perform their major function of identification of future financial needs for
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Nero Ltd. This identification on the part of mangers ensures them to raise funds from
different sources of finance and make availability of funds for smooth functioning of
venture related activities.
 Revaluation accounting: This technique of accounting system of management adopted
by mangers in mentioned venture, enable them to recognise the actual or present valuer
of asset holdings of the firm, as revaluation accounting revalues the holdings of a
venture. In general terms, it assist the managers appointed to analyse the rate of return to
be gained on capital employed in an organisation. Decision making accounting: In order to prepare an effective accounting system to
assist the management personnel of an organisation, there is a need to undertake effective
decision making mechanism by appointed mangers of present company. Management Information System (MIS): This is a widely introduced system of carrying
communicational activities in a venture. The managers at Nero can use this tool in order
to carry necessary messages or decisions within the organisation. Statistical techniques: This tool requires the mangers to keep a record to statistical data
of the business. There are various methods that can be used in the context of statistical
techniques, namely, least square method, regression method as well as quality control
method. Reporting of management: As discussed earlier, management accounting standard are
considered in a venture with a view of executing a effective decision making mechanism,
thus, to ensure the same in present business organisation, the mangers are required to
prepare reports to be present in front of top executives, which further leads to exercising
the decision making activities (Smith, 2017).
 Ratio analysis: This analysis is concerned with determining the proportion or ratio
between physical as well as monetary targets of a venture. This analysis would enable the
manager of cited company to carry out its various functions in an effective way, such as,
planning, organising, directing as well as controlling.
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PART B
LO 4
Management accounting system adopted in accordance with the appropriate, above
mentioned planning tools plays an essential or important role in solving any financial problems
that may be faced by a venture. The roles as well s responsibilities to be performed by managers
highly determine the effectiveness of various planning tools adopted to undertake effective
management accounting standards, thus, solving a pertaining financial issue (Quinn and Craig,
2018). These tools assist the managers appointed at mentioned firm in carrying its various
functional activities, a detailed evaluation of which is presented as under: Planning: It is most important or primary function that need to be performed by a
manager appointed at an organisation. Planning is considered to be as a core essential for
a venture. Planning deals with generation of a framework by the appointed managers for
carrying various venture related activities of a business. They act as the guidelines issued
by leaders for its subordinates to perform a particular job assigned. Adopting or
maintaining management accounting standards in accordance with the planning tools
enable the management personnel to undertake this function of management in an
effective way. Management accounts enables the mangers to determine the availability of
various required resources such as, financial resources, labour resources and physical
resources. All these resources comprise of the core necessity of production activities of
Nero Ltd., i.e. without these resources the process of production is incomplete. Organising: The function of planning needs to be followed by organising the resources
in the way in which they have been planned by the concerned managers of mentioned
venture. This function of management can be assisted with effective management
standard of accounting adopted by the venture. These accounts enables the mangers to
determine various needs of an organisation and accordingly, organiser the available
resources to ensure its optimum allocation as well as utilisation. Decision making: It is to be considered that the basic object behind maintaining
management accounting system by the mentioned organisation is to enable managers to
undertake an adoptable decision making process in case of some financial problems that
may arise in a firm, during a particular period of time. These accounts presents a clear
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