Directors Report: Management Accounting for British American Tobacco

This report serves as a Directors Report, focusing on management accounting principles and their application within British American Tobacco (BAT). It begins with an introduction to management accounting, defining its importance and various techniques, including financial planning, standard costing, marginal costing, and analysis of financial statements. The report then delves into the practical application of accounting techniques, specifically absorption costing and contribution costing, providing detailed cost analyses and income statements for two BAT products. A key aspect is the interpretation of findings from these techniques, highlighting their roles in decision-making. Furthermore, the report proposes future strategies for BAT, such as product diversification, predicting future demands, risk management, and innovation, to maintain market leadership. Finally, the conclusion emphasizes the crucial role of management accounting in providing information for effective decision-making and the importance of coordination between managers and management accountants.

BAT DIRECTORS REPORT 1
MANAGEMENT REPORT FOR THE DIRECTOR
BY (NAME)
Name
Instructor
Institution
Date

BAT DIRECTORS REPORT 2
Table of Contents
Introduction......................................................................................................................................3
Importance of management accounting.......................................................................................3
Management accounting techniques................................................................................................4
Financial planning........................................................................................................................4
Standard costing...........................................................................................................................4
Costing using Marginal technique...............................................................................................4
Historical cost accounting............................................................................................................4
Analysis of financial statements..................................................................................................4
Application of accounting techniques.............................................................................................5
Absorption costing.......................................................................................................................5
Contribution costing technique....................................................................................................6
Interpretation of the findings...........................................................................................................7
Future strategies for BAT................................................................................................................7
Product diversification.................................................................................................................8
Predict future demands.................................................................................................................8
Identify and manage risks............................................................................................................8
Innovation....................................................................................................................................8
Conclusion.......................................................................................................................................8
References......................................................................................................................................10

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Introduction
British American Tobacco was founded in the year 1902. It came into existence
following a joint venture between the then Imperial Tobacco Company and the United States
American Tobacco Company. The two companies agreed to join hands and reach out to other
territories. Since then, British American Tobacco has been the leading multination cigarette and
tobacco producing company with its head offices located in London. British American Tobacco
is also said to be the largest tobacco company in the world.
Definitions
Management accounting can be defined as an art of identifying, measuring, analyzing,
interpreting and communicating accurate and timely financial or statistical information to
managers with an aim of helping them to make decisions (Drury & Drury, 2013). This definition as
according to Drury.
According to (Maryanne, et al., 2006) management accounting is defined as providing
accounting information in a manner that will help the managers make decision and strategize.
As per the accounting association of America, Management accounting is defined as the
technique for proper laying down of strategies for better future performance (Drury, 2015)
India’s Chartered Institute for Accountants puts management accounting as those methods and
channels which help management to make decisions (Sinha & Vinayakam, n.d.)
Importance of management accounting (Drury & Drury, 2013)
Management accounting will help British American Tobacco in forecasting. Management
accountant will provide sufficient information to the managers on whether to invest on more
assets, to acquire more market or even to increase on the production by buying another
organization. Managers will be able to make decisions of whether to buy or produce raw

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materials. Management accounting will provide information on the cheaper alternative between
producing and buying and then the managers will be expected to opt for the alternative that
maximizes organizations revenue.
Management accounting will help to forecast cash flows. For British American Tobacco
group to be able to fund its future activities there must be sufficient working capital to procure
current assets and to cater for operating expenses. Management accountants are able to use
accounting tools to predict future cash flows and advise the managers on how to come up with
accurate budgets to make proper use of the available resources.
Management accounting enables managers to measure performance variance. There is a
need to keep track of company’s performance from time to time. Management accounting
therefore provides information which compares such performance over a range of period and
indicated which period the performance was poor and highlights some possible causes for the
same.
Management accounting techniques
Financial planning (Kallunki, 2010)
Financial planning is a strategic process of deciding how the business will afford to
achieve its goals. Business has both short term and long term goals which require funding
Financial planning technique helps in deciding in advance where and how to obtain these funds
to finance the business activities for the purpose of achieving the set objectives.
Standard costing
This technique involves the management accountants setting standard costs under most
efficient operation conditions. During normal production, the actual costs are compared with
standards costs and the variance is calculated and analyzed for purposes of controlling costs.
Costing using Marginal technique
This can be defined as the additional cost that is which results when a company
introduces another more product to the production line. In this technique, differential costing and
break even analysis are done to establish the contribution and the profitability of producing extra

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units of organization’s goods and services. This technique provides useful information necessary
for controlling costs and making decisions on profit maximization.
Historical cost accounting
This is a technique that provides past accounting data to the management relating to the
costs of each job, process or department. This data is used to make comparison between the
current and the past costs. The variance between the two sets of costs is analyzed and any
necessary adjustments are made to help in controlling the current cost.
Analysis of financial statements
This is the technique which requires the management accountants to analyze the
organization’s financial statements and derive a significant and meaningful data that can be used
to forecast future cash flows. Management need to know how likely funds will be available to
finance future business operations. This is achieved by comparing financial statement for
different periods and analyzing the trends and ratios and using them to project future cash flows.
Application of accounting techniques (Noreen, et al., 2012)
Absorption costing.
Absorption costing is a management accounting technique used to expense all the costs
related to production into produced units. Here, costs are classified according to whether they are
incurred direct to the production process or are as a result of administrative activities. Direct
costs are those costs which are directly associated to the production process. They include direct
materials and direct labor. Overhead costs on the other hand refer to those costs which cannot
easily be traced to the finished product. These include costs such as electricity bills, water bills
and the administrative expenses.
In the given information, the total overhead costs are absorbed into machine hours (Thomas, et al.,
n.d.).
Overhead absorption rate = total overheads / total machine hours (Garrison, et al., 2013).
=350,000/100,000
=$ 3.5 per machine hour.

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To get the selling price for each of the two products, a costing card is needed.
Cost card for B&H strawberry and B&H cherry
Fixed cost (Mishra, 2017)
Type of cost that do not chance or vary.
Total cost (Mishra, 2017)
Refer to the sum of all expenditure on production of goods and services.
Variables cost (Decoster, et al., 2012)
Refer to the type of costs that keep on changing every financial year.
Direct cost (Kallunki, 2010)
Type of cost which is directly linked to a certain operation and can traced.
Labor costs (Thomas, et al., n.d.)
Are cost incurred in hiring workers or laborers.
Overhead costs (Kieso, 2009)
Are costs incurred in the process of production, such as replacing broken equipment and
damaged machine.
B&H strawberry B&H cherry
Direct costs
Material cost 10 11
Labor costs 11 12

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Total direct costs 21 23
Overhead costs 5×3.5 17.5 2.5×3.5 8.75
Total cost of production per unit 38.5 31.75
To obtain the selling price =cost + 25%
=125% × total cost per unit
=125% × 38.5 =125% ×31.75
=48.13 =39.69
Production income statement for B&H strawberry and B&H cherry
B&H strawberry B&H cherry
Total revenue (48.13×10,000) = 481,300 (39.69×20,000) = 793,800
Less: direct costs (21×10,000) = 210,000 (23×20,000) = 460,000
Overheads (17.5×10,000) = 175,000 (8.75×20,000) = 175,000
Net income 96,300 158,800
Contribution costing technique
Unlike absorption costing, contribution costing groups all costs into fixed cost and
variable costs. Fixed costs are those costs which remain unchanged even if the production level
varies. These are costs which are not directly incurred to produce the finished goods and are
however incurred for administrative activities. They include salaries of the management staff and
security men who do not directly take part in the production process. Costs are said to be variable
when they are dependent on the level of production. They are costs of direct raw materials and
wages of the people offering labor to the production process.

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This method subtracts the variable costs from revenue to get the contribution and thereafter
subtracts fixed costs to get the net income.
B&H strawberry B&H cherry Total
Total Revenue 481,300 793,800 1,275,100
Less: Variable costs 210,000 460,000 670,000
Contribution 271,300 333,800 605,100
Less: Fixed costs 350,000
Net income 255,100
Interpretation of the findings
According to the two techniques of management accounting used to compute the
organization’s net profit, it is seen that both methods arrives at the same figure of net profit.
However, these to techniques give different information to the management to aid their decision
making. Absorption costing tries to accumulate all costs incurred into the goods produced. It
assumes that all cost can be attributed to the manufacturing activities and thus all costs are
expensed to the production process. These methods helps the management to measure the
profitability of each product line and hence are in a position to make the decision of which
products to produce and the one to drop based on their profits.
On the other hand contribution costing is used to measure the monetary value added by
producing a certain line of product. It does not put into consideration the fixed costs because
these are costs which would have otherwise been incurred even if the production was zero. It
only considers the costs which can be directly traced to the product and only those which are
incurred due to the production process and which would have not been incurred if the production
level was to be zero. This method helps the managers to make a buy – or – produce decision and
whether to continue with the production of a certain product or to drop it.

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Future strategies for BAT
For BAT to continue leading the market, it needs to lay down the following strategies
which will help in dominating the market.
Product diversification (Achimugu, n.d.)
At the moment, BAT is producing only two products, B&H strawberry and B&H cherry.
There is a need for BAT to research on other products which are likely to have a good demand in
the market. This will help the company to make more profit by having a wide variety of products
available for sale. However, while making this decision, the managers should ensure that such
products have a positive contribution to the company.
Predict future demands
The aim of producing goods and services is to sell them to the customers. The company
should be able to predict future demands of its customers. Managers should be able to identify
the customers’ needs and preferences towards the company’s products. The target here should be
to improve and maintain the product’s ability to satisfy the consumers wants. Proper research is
needed on the consumption behavior of both the existing and prospectus customers.
Identify and manage risks
There are always risks of venturing into new products. BAT managers should critically
evaluate the company’s strengths and weaknesses and capitalize on the strengths. This will
ensure that the company resources are used in the most appropriate way and that wastage is
avoided as much as possible.
Innovation
Technology has become indispensable in the modern era of business. For any business to
become a market leader, it needs to invest a lot in technology and modern methods of
production. This can be achieved by utilizing employee’s talents and using the available
technology appropriately. This will help in reducing costs and hence maximizing revenue.
Conclusion
Management accounting is a very important tool in decision making. Managers are the
most consumers of the management accounting information. It is believed that information is the

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best tool for decision making and management accounting is there to provide such information.
BAT managers should ensure that they utilize all the financial and statistical date provided to
them by the management accountants. Easily interpretable statement can be interpreted to mean
easier and quicker decision making on the side of the management. On the other hand
complicated and inadequate information will inappropriate the management hence compromise
the ease and the pace at which decisions are made. Investing in research is a prudent step for
managers take if want to drive organizations towards success. There should be therefore a good
co-ordination between the managers and the management accountants if the company is to
succeed (Achimugu & Ocheni, 2015).
References

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Achimugu, A., n.d. Management Acounting and MAnagementStrategies Decision in Organizations.
International Journal of Accounting, Volume Vol 4.
Achimugu, A. & Ocheni, S. I., 2015. Application of Management Accounting Technique in the Public
Sector of Nigerian Economy. Journal of Good Governance and Sustainable Development in Africa, 2(4),
pp. 81-87.
Charles, M., 2016. Management Accounting. 3rd ed. s.l.:s.n.
Decoster, Don, T. & Eden, S. L., 2012. Management Accounting: A Decision Emphasis. 2nd ed ed. New
York: John Wiley and Sons Inc.
Drury, C. M. & Drury, C. M., 2013. Management and Cost accounting. Second ed. New York: New York.
Drury, M. C., 2015. Management and cost accounting. Bussines Journal, pp. 12-40.
Dwivedi, D. n., n.d. Manegerial Economics. 7th ed. s.l.:s.n.
Garrison, Ray, H. & Eric, W. N., 2013. Mangement accounting. 2nd ed. Chicago: Richard D. Irwin.
Kallunki, J.-p., 2010. The Effect of Organizational Life Cycle Stage on the Use of activity-Based Costing.
2nd ed. Olulu: University of Olulu.
Kieso, K. K., 2009. Managerial Accounting. 2nd ed ed. Santa: University of California.
Maryanne, . M. M., Don , R. & Hansen, 2006. Management Accounting. 2nd ed. Ohio: South-western
College Publishing.
Mishra, T., 2017. Elementary Cost Accounting. 3rd ed. s.l.:s.n.
Mishra, T., 2017. Manegerial Economics. 2nd ed. Bombay: s.n.
Noreen, E. W., Ray, H. & Garrison, 2012. Management Accounting. 3rd ed. Chicago: UP.
Saker, S., 2007. Manegement Accounting. 4th ed. Chicago: s.n.
Sinha, I. B. & Vinayakam, N., n.d. Management Accounting-Tools and Techniques. Mumbai: Himalaya
Publishing House.
Thomas, C. R., Charles, M. S. & etl, n.d. Manegerial Economics. 2nd ed. s.l.:s.n.

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