Management Accounting Report: Financial Analysis of Harrods Ltd

This report provides a comprehensive analysis of management accounting principles and their application to Harrods Ltd, a UK-based retail organization. The report begins with an introduction to management accounting, its essential requirements, and its role in effective business operations. It then delves into various management accounting reports, including ratio analysis, job cost reports, and performance analysis reports. The core of the report focuses on different costing methods, specifically marginal and absorption costing, comparing their approaches and implications for decision-making. The report also evaluates budgetary control systems, outlining their advantages and drawbacks. Finally, it suggests management accounting systems to address potential financial challenges faced by Harrods Ltd, including cost accounting, inventory management, and price optimization. The report concludes with a summary of the key findings and recommendations for enhancing Harrods Ltd's financial performance and strategic decision-making.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1) Management accounting and essential requirements of its systems................................1
P2) Different management accounting reports.......................................................................3
TASK 2............................................................................................................................................5
P3) Various costing and differences between marginal and absorption costing methods.....5
TASK 3..........................................................................................................................................10
P4) Advantages and drawbacks of budgetary control system.............................................10
P5) Management accounting systems for reducing financial problems of Harrods Ltd......12
CONCLUSION..............................................................................................................................15
REFERENCE.................................................................................................................................16

Illustration Index
Illustration 1: Income statement through marginal costing method................................................6
Illustration 2: income statement through absorption costing method..............................................8

INTRODUCTION
Management accounting is an essential decision making tool for effective business
operations. It is useful for management of entire business activities organized by entity and
providing better quality of services. The present report is based on understanding different
aspects of management accounting for Harrods Ltd. It is a small scale retail sector's organization
of UK that provides clothing, food and drink services across country. Different management
accounting systems and their significance are to be expressed. In addition to this, through this
assignment, various methods used for implementing management accounting can be determined
through this assignment. However, several costing techniques and difference between marginal
and absorption costing is expressed. Moreover, critical evaluation on different budgetary control
systems regarding decision-making process is to be determined. Along with this, learners are
able to understand various accounting systems for improving services of Harrods' Ltd through
this study.
TASK 1
P1) Management accounting and essential requirements of its systems
Management accounting:- It is multidisciplinary approach remains helpful for
management of overall business operations effectively. In this regard, different factors involved
such as; finance, costing, inventory and performance of Harrods Ltd get managed efficiently.
However, it plays crucial role in expansion of small scale organization and increasing its
efficiency at high level. Including this, different costing methods are used for price determination
as well varieties of ideas are created to prepare strategies regarding business activities (Bennett,
Schaltegger and Zvezdov, 2013). It influences productivity and profitability of firm to sustain its
good reputation in market for long time period. It influences allocation of fund and resources for
providing better quality services by applying different techniques. Including this, it also affects
environment of organization to build up relationship among employees of the firm. Apart from
this, it is determined that management accounting is useful to make decisions for enhancing
business and competitive strategies of entity also to carrying on it effectively. Therefore, by
using management accounting tools, balance between production and distribution of goods can
be created systematically through its actual position and reasons behind imbalance. However,
varieties of innovative ideas are generated through this technique useful for expansion of entity
and making place in market by facing competition. Hence, management accounting is one of the
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great tool for providing better quality services as well generating ideas for optimum utilization
of resources (Bui and de Villiers, 2016). In this process, management accounting is beneficial
for creating effective goodwill in market for long term period and also to maintain customers'
attraction towards product services. Hence, management accounting is beneficial for marketing
and business approach to achieve systematic management of all business operations. Through
this system, forecasting and decision making for further business operations is created
adequately for management of all business activities expand small scale entity. Similarly,
enhancing organization's efficiency to attract consumer and increasing demand for products at
large scale. Thus, it has been determined that management accountant of organization prepares
planning strategy related to its expansion and uses different tools for decision making to
enhance quality services of product provided by Harrods' Ltd.
Requirement essentials of management accounting systems:- There are several
management accounting tools used for overall business operations and decision making process
to implement service qualities to achieve sustainability of firm for long term period. Some of the
main management accounting systems can be understood as follows:- Cost accounting system:- Under this accounting system, management accountant of
organization recognizes cost incurred on expenses in manufacturing and production
system of goods. However, by using costing methods, price determination is created that
proceed to prepare income statement. In this process, actual financial position of Harrods
Ltd is identified on the basis of which several ideas are created for balancing incurred
expenditures and gained revenues of the entity. Including this, profitability of firm can be
enhanced at high level through this system that is interlinked with further business
operations. Inventory management system:- Inventories organization keep safe through this system
that is useful for adequate production and distribution of goods. In this regard, optimum
allocation of resources and their management can be obtained efficiently. However,
keeping goods in warehouses, stores and business entities that is considered as decision-
making tool for producing and distributing goods. Including this, decisions are made
regarding inventory management and production of products.
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 Price optimization system:- Under this management accounting system, different
techniques for optimizing prices are determined for cost effectiveness. As per which,
several ideas are created for setting adequate cost of product related to earning level of
customers. Thus, price optimization system is essential for determining proper cost of
products also affects productivity and profitability of Harrods' Ltd.
P2) Different management accounting reports
Management accountant of Harrods Ltd applies various methods for forecasting and
decision making to expand small scale enterprise and increasing its efficiency. However,
different tools applied for this system can be described as below:- Ratio analysis:- Several ratios are evaluated that presents financial position of
organization including liquidity, current, solvency and debt equity ratio etc. Therefore, by
analysing these ratios critically, different ideas are generated to increase profitability of
firm. In accordance to this, actual comparison is determined among previous years'
operations of Harrods Ltd. However, ratio analysis is essential to present profit earning
capacity of entity. On the basis of which, various techniques can be applied for enhancing
productivity and profit earning capacity of organization also for economic stability
(Corona, Nan and Zhang, 2014). Therefore, ratio analysis is considered as recognition of
actual monetary position as per which strategies are prepared for expansion of small scale
entity and enchanting its efficiency at high level. Hence, management accounting tool as
ratio analysis is beneficial for enhancing profitability of entity that impacts on market
position and reducing risks occur at workplace. However, by applying ratio analysis tool,
proper balance of production and supplement of goods can be obtained that is effective
for future business operations. Thus, ratio analysis is helpful to present monetary position
of entity that shows profit earning capacity of small scale enterprise.
 Job cost reports:- Through this system, price is determined for operating business
activities in further years. However, costing is a technique to prepare income statement
that presents financial position of organization. Therefore, costing is determined on the
basis of market value, competition and quality used in manufacturing and production of
goods. Including this, costing is of different kinds such as; marginal and absorption
costing, activity based costing and so on. However, preparing income statement through
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marginal costing, gross profit is deducted to expenses incurred on variable overhead only
(Germak and et.al., 2014). While, preparation of income statement through absorption
costing, net profit is determined by deducting gross profit to total cost incurred on fixed
and current overheads. Thus, marginal costing is useful for short term decision making
process while in comparison to absorption, it is helpful for long term decision making
plans. However, management accounting tool as costing is a technique for determining
price of products. It present expenditure and income statement for production and
supplement of goods. In accordance to this, several ideas are created for creating balance
between income and expenses. Therefore, through this tool business performance can be
effective that affects profitability and further business operations.
Including this, cost for manufacturing and producing products are determined to prepare
income statement that presents economic profile of organization. In this regard, expenditure
incurred for purchasing raw materials and production are recognized. Therefore, actual price
determination is obtained for economic stability of firm.
 Performance analysis reports:- As management accounting is multidisciplinary
approach, it is useful for increasing working efficiency of employees and analyzing their
contribution in team work for effectiveness of Harrods Ltd. In this way, management
accountant of organization analyses workers' contribution in team work as well entity's
organizational structure also effective for improving their skills (Holden and Lunduka,
2014). Therefore, on the basis of this recognition, different ideas are created for
expansion of small scale enterprise and increasing its efficiency at high level. In addition
to this, strategies are prepared for creating positive environment of entity by establishing
good relationship among employees of the firm. However, innovative techniques are
used for improving employees' skills and encouraging them for better work performance
and effective contribution in working in group. Thus, as per performance evaluation,
different innovative ideas are generated for enlargement of entity and enhancing service
qualities of small scale enterprise in efficient manner.
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TASK 2
P3) Various costing and differences between marginal and absorption costing methods
Costing is considered as determining price for producing goods and services of
organization. On the basis of this costing methods, income statement is prepared that present’s
financial position of Harrods Ltd. For this process, management accountant uses different
techniques such as marginal, absorption, demand based and competition costing, activity based
and so on. It generates position of incurred expenses and gained revenue therefore difference
between expenditures and income can be obtained (Hou and et.al., 2013). In this regard, costing
methods, their significance and comparison can be expressed as below:-
 Marginal costing:- Under this costing method, net profit is evaluated by deducting gross
profit to variable costs incurred on expenses for production of goods. It is useful for
decision making for short time period business operations. It is because there is only
variable expenses are deducted with gross profit earned by Harrods Ltd. Therefore,
marginal costing believes that decisions related to get adjusted according uncertain
changes, different ideas can be generated for systematic planing procedures. Therefore,
marginal costing is interrelated with effective price determination and presenting income
statement in efficient manner (Pettersen and Solstad, 2014). In this regard, management
accountant of the entity evaluates following income statement that presents financial
position of Harrods Ltd can be described as below:-
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Interpretation:- As per presented data calculation, it is interpreted that Harrods Ltd has
incurred £ 6600 on business operation for production and distribution of groceries and food
items. However, on this expenditure, it gains £ 21000 as sales revenue which is quite effective
for profitability. However, earned gross profit is measured as £ 14400. Thus, it is recognized that
profit earning capacity of small scale enterprise is good also organization can implement
strategies for better goods in future time. Further, in context to marginal costing, s net profit
identifies as difference of gross profit to expenses incurred on variable overhead that is £1800.
Thus, net profit organization earned is £12600. According to overall interpretation, it can be
forecast that company can make decisions for investment in further years. However, in future
time profitability ratio of Harrods Ltd would be increased at high level by applying different
strategies. It has been obtained that entity's profit earning capacity is effective and further
implementation can be achieved efficiently.
Income statement through marginal costing
Sales (660*3)
less: variable cost of production (700*13) 9100
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Illustration 1: Income statement through marginal costing method

Less: Closing stock (100*13) 1300
Variable cost of sales 1800
Contribution 13200
Less (Other costs)
Sales overhead 600
Production overhead 2000
Advertisement cost 700
Selling cost 600
Net profit 9300
Absorption costing:- Through this costing method, decisions for long time period is
made regarding business operations. It is because for measuring net profit of Harrods Ltd, gross
profit is deducted from total cost incurred on overhead expenditures including fixed and
variable. However, decisions for operating business activities can be taken for further years
(Pettersen and Solstad, 2014). In accordance to this costing method, it is believed that investment
and funding for long time periodicity can do effectively. Hence, absorption costing is interrelated
with effective price determination and generating proper innovations. In addition to this,
investment for adopting changes and new technologies is recognized through this technique
regarding heavy investment and long-time business operations.
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Interpretation:-After calculating gross profit as £ 14400 by deducting sales ( £ 21000) to
expenses ( £ 6600), evaluates net profit is evaluated. For calculating net profit, gross profit is
deducted from total expenses including fixed (£ 3300) and variable (£ 1800) that is £ 5100.
Therefore, net profit earned by organization is £ 9300 which is in favour of organization for
decisions regarding long time period. Therefore, on the basis of this data interpretation, it has
been identified that organization can prepare strategies for further business operations and
increasing its profitability at high level.
Differences between marginal and absorption costing:-
Bases Marginal costing Absorption costing
8
Illustration 2: income statement through absorption costing method

Profit variation For calculating net profit,
gross profit is deducted with
cost incurred on variable
expenditures only.
Net profit is determined
through balance of gross profit
to total expenses including
fixed and variable.
Time periodicity Suitable for short time period
business operations.
Appropriate for operating
business activities for long
time periodicity
Belief It is believed that only variable
expenditures are enough to
evaluate net profit earned by
organization.
It has belief that it is necessary
to add fixed expenses with
variable for calculating net
profit margin. However, It is
useful to make decisions for
long term periodicity.
Emphasis It emphasis on present
financial position of firm.
It emphasis on generating ideas
for increasing business and
competitive strategies for long
time period.
TASK 3
P4) Advantages and drawbacks of budgetary control system
Budgeting is a technique of forecasting and decision making for further business
operations. In this process, current business performance is recognized and further several ideas
are generated to apply for enhancing efficiency of Harrods Ltd. Therefore, it is an approach for
formulating and implementing strategic ideas regarding further business operations. It sets target
also them for optimum allocation of resources and fund to increase productivity and profitability
of firm (Quinn, 2014). Thus, systematic management of entire business operations is obtained
through preparing agenda to implementing action plans to expand of small business unit and
incensing its efficiency for further implementations.
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Cash budget:- Under this planning tool, management accountant of organization
analyses expenditure and revenue regarding business operations. On behalf of this, several ideas
are created for decreasing expenses and increasing income of organization that impacts on
entity's productivity and profitability. However, forecasting and decision making is done for
further investment and sourcing for allocating adequate fund. In addition to this, cash budget is
related to fund allocation and preparing strategies for further implementations of the entity.
Advantages of cash budget:- It is helpful to present actual financial position of
organization by which further decisions are made for business operations. However, income and
expenditure balance is created that impacts on further business operations. Including this,
financial management of organization and its profitability can be achieved through this system.
Disadvantages of cash budget:- Wrong predictions on investment and strategies are
unable to fund allocation and reaching out set target. It is difficult to decide fixed investment and
transaction of goods due to uncertain changes as well price dynamics. However, inaccurate cash
budget is unable to gain effectiveness and creating balance between income and expenditure.
Thus, it is required for management accountant of organization to analyse actual business
performance critically and further making decisions for further investment at high level. By
preparing cash budget regarding adequate funding can be obtained for price determination as
well making decisions for operating business activities.
Therefore, positive and negative aspects of budgetary control system can be expressed as
follows:-
Characteristics of budgetary control system:- Budgeting and budgetary control system
are beneficial for forecasting and decision making for carrying on entity efficiently. Therefore,
merits of this system can be expressed as below:-
 Presents actual business performance
 Useful for generating several ideas related to expansion of small scale entity
 Optimum utilization of resources and fund
 Helpful for increasing productivity and profitability of firm
 Valuable to increase strength for facing high level of competition
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 Systematic planning procedure for getting adjusted according to changes occur at
workplace
 Creating positive and peaceful environment of entity through building up good
relationship between employee and employer of the organization
 Preparing strategies for development of enterprise and enhancing its strategies at large
scale.
 Thus, budgetary control system is beneficial for forecasting and decision making
for business operations in further years. One of the great advantage of budgetary control
system is that it useful to gain optimum allocation of resources and fund. In this regard,
actual organizational structure is created on the basis of which various strategies are
prepared for increasing effectiveness of firm. A systematic management process is
obtained through this tool to enhance quality services of goods provided by Harrods Ltd.
Along with this, budgetary control system is valuable for reducing excess of production
and raw material as well creating balance for production and supplement of products
provided by entity adequately (Senftlechner and Hiebl, 2015). Moreover, strategy is
prepared to achieve customer satisfaction and also for maintain their attraction towards
goods and services. However, budgeting is valuable for preparing systematic planning
procedure regarding business operations in future time.
Limitations of budgetary control system:- According to critical evaluation, it is
determined that wrong prediction of management accounting tools are unable to prepare specific
strategy for business operations. In accordance to this, inaccurate data as a basis to analyse
business performance remains difficult for effective productivity and profitability of firm.
However, it is costly to prepare budget and recognizing entire business activities so all entities
remains unaffordable to prepare budget. In accordance to this, wrong decision making process is
not suitable for operating business activities in further years. However, due to lack of
coordination in organizational functions and employees, it is difficult to reach out the set goals .
In this process, various obstacles are recognized for implementing action plans. Therefore,
budgetary control system has these obstacles that affect organization's effectiveness. Thus, it is
required for management accountant of Harrods Ltd to analyse current business performance
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critically (Van, 2015). On the basis of which, further planning procedure can be implemented in
further years.
Effective budgetary control system requires to identify accurate data for preparing
strategy related to management of entire business operations. It is useful to gain proper balance
between production and distribution of products. It is usable to making place in market for
expansion of small business unit and increasing its efficiency at high level. Hence, reduction on
excess materials and getting proper financial management.
P5) Management accounting systems for reducing financial problems of Harrods Ltd
Management accounting is multidisciplinary approach that works for entire business
operations. It includes production and distribution of goods, inventory management, proper
costing and performance of employees for management accounting systems. Therefore, different
management accounting systems can be described as below:- Cost accounting system:- Management accountant of Harrods Ltd uses different
techniques for costing that is useful for effective price determination. Therefore, under
cost accounting, different aspects are involved for setting price of goods and services
provided by small size enterprise (Management Accounting, 2016). In accordance to this,
decision making is obtained related to expenditures and income. Therefore, as per current
cost accounting, different substances are applied for pricing and preparing income
statement. In this process, balance between incurred expenses and gained that presents
gross profit and loss. Thus, management accounting tool as costing is liable for price
determination and getting customer satisfaction through setting affordable price for
producing goods and services. It affects on monetary position of organization also solve
issues related to imbalanced income and expenditure for production of goods.
 Inventory management:- This management accounting system is useful for adequate
allocation of resources that affects productivity and profitability of Harrods Ltd. In this
management system tool, several kinds of ideas are created to keep goods safe at
different places such as warehouse, factories and stores. Including this, inventory is
presented to provide goods and services of organization (Collier, 2015). In addition to
this, inventory management is useful for reducing excess of raw materials and wastage of
extra goods. Hence, several innovative ideas are created for optimum allocation of
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resources that impacts on productivity and profit earning capacity of small scale
enterprise. In accordance to this, management accountant of firm recognizes current
position of inventories for producing goods and services to customers. However,
management accounting tool is valuable for proper inventory management. It affects
liquidity and financial position of organization also by managing inventories, profitability
of organization can be gained efficiently.
Financial issues occur at Harrods' Ltd can be solved out through using different tools
like; key performance indicators, bench-marking, budgetary targets and so on. These elements
are useful to analyse actual position of entity and further making decisions to improve
organization's performance effectively. However, some of the main elements to reduce economic
issue can be understood as follows:- Key performance indicators (KPI):- Through this system, performance of organization
and workers are analysed that leads to prepare strategies for further operations to enhance
efficiency of Harrods' Ltd. In this regard, financial and non-monetary tools are
recognized for to make decisions regarding business operations. Bench-marking:- It is one of the comparative approach through which all competitive
entities' performances are comprised. Including this, knowledge regarding technology
and product services is acquired. However, market position of Harrods' Ltd is identified
by which financial issue can be solved out through implementing strategies efficiently. Budgetary targets:- Budgetary target is considered as one of the basic tool to achieve
optimum allocation of resources and fund adequately. In accordance to this, potential of
organization is recognized to face competition and improving strategies effectively. Thus,
systematic planning procedure is prepared for improving efficiency and economic growth
of the entity.
 Financial governance:- Funding is as great source to improve economic condition of
Harrods' Ltd. In this regard, investment and sources for finance are identified by which,
innovations for providing better quality services can be implemented. Therefore, fund
can be allocated through government like; borrowing money, issuing shares etc. Thus,
13

financial problem of Harrods' Ltd can be solved out through this system that is useful for
improving performance and economic growth effectively.
Thus, above mentioned management accounting systems are useful to solve out financial
problem of Harrods Ltd. In accordance to this, overall management of business operations can be
effective through using management accounting tools. Therefore, relationship among employees
can build up effectively by managing ad improving their performances. Thus, financial and other
sector implementations can be achieved at high level that affects business environment and
customer satisfaction. Hence, forecasting and proper decision making is done by using
management accounting systems for expansion of small scale enterprise and increasing its
efficiency. Thus, it is an approach that is interrelated with management of entire business
operations and also remains helpful to bridge the gap between actual and standard value of
organization (Quinn, 2014). In this regard, varieties of ideas are created for carrying on business
entity efficiently that affects market value and attitude of customers towards goods and services
provided by small scale enterprise. Hence, financial problems can be reduced through this
system that influences profit earning capacity and varieties of ideas for enlargement of small
business unit at high level.
CONCLUSION
The report has concluded that management accounting components are crucial for
management of overall business operations to improve performance of organization. In this
process, different management accounting tools and systems are determined for decision making
process. However, through this assignment, different costing methods and comparison between
marginal and absorption costing is determined to prepare income statement that presents
financial position of small scale enterprise. In addition to this, critical evaluation of budgeting
and budgetary control system is presented to obtain its importance for forecasting and decision
making process. Moreover, several management accounting systems are expressed to create
organizational structure including financial, inventory, performance and creating environment of
entity. Hence, different management accounting tools are studied and its crucial significance is
gained through presented report.
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Management Accounting. 2016. [Online]. Available through:
<http://www.ddegjust.ac.in/studymaterial/mcom/mc-105.pdf>. [Accessed on 22nd June
2017].
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