Management Accounting Techniques Used by Harrods Limited (2017)

This report provides a comprehensive analysis of the management accounting systems employed by Harrods Limited. It begins by describing various systems, including cost accounting, inventory management, price optimization, and job costing, and their importance to the company's operations. The report then delves into different management accounting reporting methods, such as budget reports, accounts receivable aging, job cost reports, and inventory manufacturing reports. A significant portion of the report is dedicated to preparing income statements using both marginal and absorption costing techniques, offering a comparative financial analysis of Harrods Limited's performance. The report also discusses the advantages and disadvantages of different budgeting tools and examines how organizations adapt management accounting techniques to overcome financial crises. The analysis includes financial statements, providing insights into the financial health and performance of the company.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
TASK 1............................................................................................................................................1
P1 Describing various systems of MA which are considered by Harrods Limited at the
workplace...............................................................................................................................1
TASK 2............................................................................................................................................3
P3 Preparing income statement (I/S) by taking base of two techniques of MA i.e. marginal as
well as absorption costing......................................................................................................3
Segregation between marginal and absorption costing..........................................................5
TASK 4............................................................................................................................................6
P4 Advantages and disadvantage of different budgeting tools.............................................6
. Managers may have the knowledge of other department but they don't know the strategic goals
and financial objectives of the overall organisation. ....................................................................10
P5 Comparing how organisations are adapted management accounting techniques to over
come financial crisis.............................................................................................................10
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

TASK 1
P1 Describing various systems of MA which are considered by Harrods Limited at the workplace
Business Report
From: Management accounting Officer
To: General Manager
Harrods Limited
Subject: Systems of management accounting
Date: 6th December 2017
Introduction
A procedure through which financial plans are prepared as well as implemented and
evaluated at the workplace is referred as management accounting. It is used by only internal
stakeholders of the selected business which include managers, owners and employees. Further,
it comprises with various kinds of approaches as well as systems which are presented through
the current business report. In addition to this, essential needs of MA's systems under Harrods
Limited are described throughout the report.
Systems of MA
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Illustration 1: Systems of management accounting
(Source: Messner, 2016)
Cost accounting system: At the workplace of every organisation, cost is very essential as
well as crucial part. The reason behind this is that, expenses create direct impact on profitability
and business perfection of Harrods Limited. On the basis of this specific system, accountant
able to make calculation of total expenditures incurred for producing and selling retail items.
Along with this, the expenses are to be shows by segregating in different ways like fixed,
variable, production, semi-variable etc. In addition to this, key components involved under this
system are like overheads, labour as well as material. Moreover, it consists of target costing,
environmental, activity based, throughput, standard cost accounting etc (Messner, 2016).
Considering to this, cost incurred for selling and distributing every unit is determined easily in
Harrods. Therefore, decisions for considering pricing method is taken in proper and fruitful
manner. Hence, essential need of cost accounting is to derive cost of production and make
correction accordingly, if required.
Inventory management system: Stock at the workplace is highly needed to utilise and
manage properly as it is very crucial part of the firm. Higher the inventory at the end of year
leads to reduce capability of business of generating sales and enhance stock turnover ratio at the
fiscal period ending. On the basis of this mentioned system of MA, Harrods Limited able to
manage as well as decline total stock available within firm. When this specific aspect decreased
consistently then firm able to make more sales and turnover in financial year. As revenue
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generated in more proportion, then the retailer easily able to boost up its turnover ratio
(Inventory Management, 2013). Therefore, profit generation capacity of the firm will be
improved up to a greater extent in the retail segment of UK. Apart from this, for managing
stock it is essential to analyse its total value. Further, there are three methods considered for
inventory valuation i.e. weighted average, LIFO as well as the FIFO.
Price optimisation system: Along with the stock and cost, price is another key factor of
the company which must be determined in an appropriate manner. A monetary factor at which
retail products and services are to be sold among customers is termed as price. It is not
necessary that accountant of Harrods Limited charge one particular price of products up to long
term. This aspect differ within sometimes which leads to derive purchasing and consumption
level of consumers. At different level of Central Systemcharges, number of customers also
differ by which sales and profit of the retailer vary. Furthermore, basic need of price
optimisation is to select one particular price at which more numbers of customers purchased
retail items (Cadez and Guilding, 2012). On the basis of this method, Harrods Limited able to
determine that which price will be supportive for it to generate more profit and boost up
financial performance in retail sector of UK.
Job costing system: The selected company selling different range of products which are
like cloths, food items, apparels etc. On the basis of this system of MA, Harrods Limited able to
determine that cost of sales is up to which level incurred under products of each job. Once
expenses came into consideration for selling every product of job then company can derive
pricing level in an appropriate direction (Joshi and Li, 2016). Henceforth, essential need of job
costing is to assess cost of goods and services of each job occurred at the workplace of Harrods
Limited and on the basis of this make pricing decisions.
Conclusion
It can be summarised from the present analysis that, basically four types of systems are
considered by Harrods Limited which are part of MA. Cost accounting and job costing
approaches are supportive in terms of determining total cost of production and expenses
incurred to produce products under each job. Apart from this, stock management and price
optimisation is helpful to Harrods for reducing inventory level and derive one profitable price of
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retail goods and services respectively.
TASK 2
P2 Explaining the different methods used for management accounting reporting.
From: Management accounting Officer
To: General Manager
Harrods Limited
Subject: Systems of management accounting
Date: 6th December 2017
Introduction:
Sir,
In according to the management accounting report of Harrods limited it can be said that it
include the decision making, devising planning and performance management system of the
enterprise. This depend on the report which is to be given by the financial manger to assist the
management in the formulation of the plan (Pemsel and Wiewiora, 2013). The management
accounting is important in Harrods as this help the company to:
 Analysis the cost of all the products and services offered by the firm.
 Allocation of the resources according to the activity cost techniques.
 This will also help Harrods in forecasting the future and then to plan accordingly.
The different types of Management accounting reports are as follows:
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Illustration 2: Types of management accounting reports
[Source: Collier, 2015]
Budget report: in this type of report the overall budget of the company is decided and then
allocated by the management of Harrods. This also involve using the last year's budget in
preparation of current year budget by also keeping the inflation and cost of product in mind.
Harrods will list out all the possible sources of the fund and also seeing the expenditure and
revenue of the firm then to set the budget. This also help the management of the company to
analyse the performance in the market, departmental performance and also to control the cost of
the firm.
Accounts receivable ageing: this is used to assess the long and short term debts of the firms.
Who all are the debtors of firm, how much debt they all own and what among them are the
doubtful debts. The accounts receivable will analyse the amount of debts which are increasing
for the firm and will, find the effective solution helping them to gain the payments again. This
will be useful for Harrods to identify the relevant source of debt and making the report of it.
Job cost report: this report will be showing the expenditure made by a specified project of the
firm. Then after they analyse the expenditure made by all different type of project is causing to
the firm then they will allocate the budget according to the costing. This is very helpful in
identification of higher earning and lower earning areas of the firm and then controlling the cost
of them accordingly. This is used to analyse the expenses made by the project which is in
progress are the present time and them correcting the area of wastage as soon as possible.
Inventory manufacturing report: raw materials are the main source of production of the firm
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and to control them is also very important. The inventory of the firm are used by the
management to make their manufacturing process more and more efficient. The inventory
manufacturing report will be covering certain area of production like that of inventory waste,
hourly labour cost or per unit head cost of the firm while producing any product.
Conclusion: it can be summarised that management accounting there are many types of report
which need to be generated. They all are having their own importance in the firm and help in
decision making and cost allocation of the products of the firm which are been manufactured.
Management accounting is having its own importance in the firm and its decision making
process as this help the firm in reducing the cost and expense incurred by the task or job of the
firm.
TASK 2
P3 Preparing income statement (I/S) by taking base of two techniques of MA i.e. marginal as
well as absorption costing
Preparation of financial statements is very essential part of every organisation because it
supports to assess financial performance of the firm within industry. On the basis of performance
pertained effective business decisions like investing, financing, expenses making, dividend etc.
are taken into account. In the present part of the project, income statements are formulated which
show profitability position of the company. To prepare profit and loss accounts different methods
are available at there. Herein, marginal and absorption these two costing techniques are
considered by Harrods Limited for preparing such accounts. Further, statements and analysis is
presented below:
Income statement based on marginal costing
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Considering to the above statement of income it can be said that, at the end of fiscal year
the retailer generates revenue worth of 17500 GBP by selling 500 units. On this particular sales
amount Harrods Limited is capable for earning 4300 GBP net income which is not higher and
lower. On the basis of this, it can be assessed that management of cited firm is capable for
managing total costs incurred within firm. Being a retailer any kind of manufacturing costs are
not has to bear to it. Therefore, expenses for packaging and selling several retail items are
properly managed by it. Due to this specific reason, it becomes able to generate this profit
amount at the end of accounting period. Moreover, it should apply those strategies which support
to manage and control over the unproductive costs. The reason is that, these will help to improve
net profit and boost up financial performance in the retail sector of UK.
Income statement based on absorption costing
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Looking at the above formulated P&L on the basis of absorption method it can be seen
that, Harrods Limited earning same amount of revenue as earned under marginal i.e. worth of
17500 GBP. However, net profit generated by it in this case is worth of 6600 GBP which is
higher as compared to the above mentioned I/S. On the basis of this, financial performance of the
retailer in industry is higher than the marginal costing. Key reason for occurring such difference
is that, both the costing methods are relied upon different nature of costs which are like fixed and
variable. Calculation under the marginal method considers only variable expenses associated
with firm while another uses every kind of costs (Grabner and Moers, 2013). Due to which
amount of total cost and profit both differs up to a greater extent at the end of financial year.
Marginal and absorption both are supportive for preparing financial statement which is
I/S. However, these have some differences which are reflected below:
Segregation between marginal and absorption costing
Marginal costing Absorption costing
This method considered as tool for making
several business decisions at internal level.
Further, managers become able to make
On the another side, it undertaken as an
apportionment of expense which is
implemented under cost centre. Furthermore, it
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effective judgements which support to boost up
business performance in retail industry (Nuhu
and et.al., 2017).
is one of the significant part of responsibility
centres work in an organisation.
Outcome of I/S under this method is
considered in terms of contribution of each unit
sold by Harrods Limited in the market.
Amount determined under the P&L as per
absorption costing is referred as gross profit
earned at the end of year.
Overhead costs incurred under this method is
divided in two portions which are like fixed as
well as variable.
Herein, overhead expenses are segregated in
three parts which involve production or
manufacturing, selling & distribution as well as
administration.
Profit gained by the retailer at the end of
financial year is to be measured in terms of
P/V (profit volume) ratio.
In this method, changes or fluctuations in fixed
income lead to create huge impact on
profitability situations of the retailer (Hiebl,
2014).
Stock is to be measured in marginal costing in
form of non-fixed expenses of the company.
Herein, valuation of inventory is to be done on
the basis of production expenses incurred at the
end of financial period.
At the time of making calculations and P&L on
the basis of marginal costing, there is not
requirement to follow accounting principles,
standards, theories etc.
On the another side, treatment of stock is done
on the basis of International Accounting
Standard 2 (IAS 2).
TASK 4
P4 Advantages and disadvantage of different budgeting tools.
The formulation of plans in numerical terms for future period is called budgeting. Business
prepare budgets for various departments, units, divisions, etc. budgets are generally made for one
year. The comparison of budgets and actual performance of organisation will help in calculating
variances. It will also help managers to find out discrepancies and take remedial actions at
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proper time. It is a continuous process which helps in planning and coordinating. It helps in
controlling as the standard cost are set in this. The main objectives of budgetary control is to
operate various departments of cost with efficiency and economically. It also helps in eliminating
waste and increase in profitability. It is a centralised control system which anticipate the capital
expenditure for future. It corrects the deviations from the established standards. It also fixes the
responsibilities of various individual in the organisation. The various essentials of budgetary
controlling are budget centres, budget committee, budget officer, budget period, budget mammal
and determination of key factor. There are different kinds of tools for preparing budgets.
Following are the various tools:
different tools of budgeting
standards: in this specific standards are set by the manager. It guides the manager to determine
the progress of report. By maintaining the specific cost and amount required for project it helps
the controlling the budget .(Hiebl,, 2014.) .
 Advantages- it helps the manager to focus on other issues because the budget is specific
in terms.
 It provides the benchmark for judging the performance of employees.
 It helps in maintaining actual cost because the standard cost are set for each activity.
 Provides integrity in business as excessive cost reasons can be found out.
 It establish standards like what the cost should be, who will be responsible for them and
if actual costs are under control or not.
Disadvantage:
 they are prepared on monthly basis and are released on the end of each month.
 It becomes difficult for managers to take favourable decisions whether incentives are
provided to employees or not.
 This budget often create variances(.Messner,., 2016.)
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