Analysis of Management Accounting Systems at Nisa Retail Store

This report provides a comprehensive analysis of management accounting practices within Nisa Retail, a UK-based retail company. It explores various management accounting systems employed by the company, such as cost accounting, budgetary control, batch costing, job cost systems, and inventory management, highlighting their significance in financial management and resource allocation. The report details the essential requirements of these systems, emphasizing their role in cost assessment and decision-making. Furthermore, it examines the reports used by Nisa Retail for management accounting reporting, including job cost reports, budget reports, payroll reports, cost reports, sales reports, and manufacturing reports. The report also includes a comparative analysis of marginal and absorption costing methods, demonstrating their application in calculating net profit and highlighting the differences in their approaches and impact on financial statements. The analysis covers the preparation of income statements using both methods, and the impact on the final net profit. The report concludes by discussing the uses of management accounting systems for reducing and overcoming financial shortfalls and constraints, which is a critical aspect of the financial success of the company.

MANAGEMENT
ACCOUNTING

INTRODUCTION
Management accounting is a process in which various kinds of financial as well as non
monetary transactions and informations are to be recorded, interpreted as well as analysed by the
financial employees. It is one of the most and highly required aspect in each and every kind of
firm whether it is on small, medium or large scale. It requires for the business entities in order to
manage the overall firm and its process in highly effective and appropriate manner. In order to
analyse and explain management accounting in context to small firm there is Nisa retail store
company is selected which operates in retail industry of UK. The present study focuses on
various systems and reports which are used in the company for management accounting and
reporting. Further, it shows preparation of profit and loss account using two costing methods that
are marginal and absorption along with their differences. Apart from this, it describes about
number of planning tools and techniques and their merits demerits as well. At the end of study,
uses of management accounting systems for reducing and overcoming financial shortfalls and
constraints.
TASK 1
P1 Management accounting and its systems along with essential requirements in Nisa retail store
Management accounting is the highly and mostly used method by each and every
company for analysing day to day transactions and informations whether these are related to
financials or non financials. In the current case Nisa retail store company is using the
management accounting approaches which is highly helpful in smooth functioning kpof the
entity process. On the basis of management accounting the company able to utilize data and
informations as well as resources which are available in the firm in effectual way. Apart from
this such kind of accounting is helps to the company in order to allocate all the financial
resources in adequate manner to each and every organisational departments and functions
(Management accounting – What is management accounting?, 2017). Cost is a key and sensitive
factor of all the companies and on the basis of this aspect prices to sale products and services are
to be determined. If Nisa retail store is not able to derive total cost of production in appropriate
manner then cannot charge effective selling price of its products and services. Hence, with the
help of management accounting process it easily able to know cost and expenses incur in the
whole operation process. In addition to this, there are list of management accounting system is
used by the Nisa retail company in order to resolve various kinds of problems by which it able to
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become more financially sound. Further, list of approaches of management accounting used by
the chosen business entity are elaborated as below:
 Cost accounting system: Another method which is used by the Nisa store is accounting
for cost which is the most important for it. In the business world, cost plays an integral
role and helps to the company for assessing selling price of goods and services which are
manufactured by firm (DRURY, 2013). By using the respective aspect and approach Nisa
retail company can easily know that in order to manufacture various items and services
there are how many amounts is incurred as a cost. Apart from this, when level of total
cost is identified high then management can take corrective actions to overcome such
kind of constraints.
 Budgetary control: Another system of management accounting is budgetary control
where level of budget for the further year will be comes into control. On the basis of this,
resource allocation is done to every function of organisation in effectual as well as
adequate manner. When the management of Nisa retail enterprise implement the current
system then can make future strategies and tactics as well. Because future profit and loss
situation is to be estimated.
 Batch costing: The system or approach apart from above which is used by the selected
firm Nisa retail store is batch costing where every division of the firm is to be evaluated
in terms of cost. For instance, the company produces three kinds of food products and
dishes then divisions will be total three (Strumickas and Valanciene, 2015). Further, it
helps to know cost which are arisen in each division or batch of the entity.
 Job cost system: It is a management accounting system which shows and describes about
the several costs which are associated and incurred with the particular or specific process.
According to the respective system the entrepreneur of Nisa retail firm is highly able to
analyse those expenses which related to the each business process. Essential requirement
of the job cost system for the business entity is to accumulate and analyse expenses of
every process which is associated with the whole firm. The job cost system requires
mainly three types of data and informations which are such as direct labour, expenses of
direct material and various overhead costs.
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 Inventory management system: In respect to the management accounting systems, other
approach used by the Nisa retail store is related to managing stock and inventory. There
are different techniques by which the firm able to manage as well as utilize the overall
stock which it has in the company. Further, such methods are first in first out, weighted
average and last in first out (Pondeville, Swaen and De Rongé, 2013). Such kind of
management accounting approach require and need for the Nisa business entity in order
to overcome problems which are associated with the stock and inventory aspect.
P2 Reports which are prepared and used in the Nisa retail stores for management accounting
reporting
At the business environment there are various kinds of reports are to be prepared which
helps to the company in order to analyse business performance. The management accounting
records day to day as well as small transactions either they are financially or non financially.
When the Nisa retail store going to make and prepare different financial statements like as profit
and loss account, statement of financial position, cash flow account, shareholder's equity etc.
then management accounting plays an important role. On the basis of various small reports such
financial accounts are to be prepared which are shown as below:
 Job cost report: The account in which financial informations are to be treated related to
each and every type of product or division is known as job cost report. On the basis of
such respective report the company such as Nisa retail is able to analyse cost and
expenses which are incurred to produce one type of products within a division. The total
amount at the end of quarterly or yearly is treated in the statements of profit and loss as
an expense (Fullerton, Kennedy and Widener, 2014).
 Budget report: Another management accounting report is related to budget from which
the company determine and keep record for the future fiscal year. With the help of
respective kind of report the firm determine those kinds of profits and losses, incomes
and expenses which will be comes into consideration at the workplace. In the budget if
net cash balance at the end of month is positive and increasing trend then it shows that
Nisa retail able to manage its cost and generated profit. On the other side if net cash
position is of reducing trend and not provide beneficial results then make the strategies by
which can combat such shortfalls.
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 Payroll report: As per the respective kind of account or report the Nisa retail company
records those kinds of expenditures which are relating to the employees and
organisational members. In the firm all the personnel take charges of the duty which is
given by them to the business entity (Chenhall and Moers, 2015). Further, such charges
and other benefits are transacted in the payroll report. Number of expenses recorded in
the report are like as salary, compensation, wages, benefits, monetary appreciation and
rewards, bonuses, allowances etc.
 Report of costing: The report in which total cost whether it is related to employees,
production, selling and distribution, fixed or variable all are recorded is called as cost
report. On the basis of current report total expenses of production is to be identified and
at the point where cost enhance then corrective actions are to be made by the
management.
 Sales report: On the basis of current and respective kind of report the Nisa retail's
management record revenue generated by it. It shows turnover of the overall firm in
which any kind of expenses are not deducted (Christ, 2014). Higher the amount of sales
clearly describe that it has effective and attractive strategies to increase buying behaviour
of consumers towards it.
 Manufacturing report: In the manufacturing report Nisa retail enterprise record level of
output which is produced in the firm. Apart from this, by using manufacture report the
company assess that how many numbers of products and services are produced. On the
basis of total production units cost of every unit as well as pricing decisions are taken by
the managers of Nisa retail.
TASK 2
P3 Calculation of net yield on the basis of marginal and absorption costing
Net profit is an amount or sum of money which is determined in the firm after deducting
all types of direct and indirect expenses from revenue of turnover generated by the entity. Every
company seeks towards higher and maximize profit level at the end of fiscal year. In context to
this, for calculating net yield there are different methods are used by the management and among
them two are marginal and absorption which are used in the present case (Goretzki, Strauss and
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Weber, 2013). On the basis of data given income statement or profit and loss account is prepared
using such both the costing methods which are stated as below:
Income statement with the help of marginal method of costing:
Particulars Amount
Sales or revenue (35*600) 21000
Less: COGS
Opening stock (700*13)
9100
-Closing stock (100*13) (1300)
Contribution margin 13200
Less: other expenses
Sales Overhead cost 600
Fixed production overhead cost 2000
Cost of Administration 700
Cost of selling 600
Net profit (NP) 9300
Income statement with the help of absorption method of costing:
Particulars Amount
Sales or revenue (35*600) 21000
Less: COGS
Opening stock (700*16) 11200
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- Closing stock (100*16) (1600)
9600
- Over absorbed fixed overhead (500)
Gross profit (GP) 11500
Less: absorbed costs
Sales overhead 600
Cost of Administration 700
Cost of selling 600
Total cost of absorbed (1900)
Net Profit (NP) 9600
From the above stated income statement it can be visualised that amount of net profit
differs in both the costing approaches. It can be clearly stated that net profit generated by the
company according to marginal method is worth of 9300 GBP. On the other hand side amount of
net income which is earned in accordance to absorption costing is worth of 9600 GBP. When the
management going to interpret and analyse business performance then it will high in the
marginal where it has to pay more amount of tax due to high net income. When talking about the
level of costs it also differs due to using different kind of expenditures. Key reason behind
occurring such differences are that marginal method consists with only direct and variable
overhead expenses (Boyns and Edwards, 2013). While another method of costing consists with
all kind of costs whether it is direct, variable or fixed overheads.
Difference of marginal as well as absorption costing
Marginal costing approach Absorption costing approach
In the marginal costing method there are When the Nisa store company calculating net
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various number of direct as well as variable
expenses are to be included which are
identified as below:
 Direct material cost
 Direct labour charges
 Variable overheads expenses
profit on the basis of absorption method then
type of costs which are used are identified as
below:
 Direct material cost
 Direct labour charges
 Variable overheads expenses
 Fixed overhead costs
 Selling and distribution cost
While computing net profit using respective
cost then amount of total expenses are lower
which lead to increase net income at the end of
years (Ramli and Iskandar, 2014).
When the management of Nisa stores going to
calculate net profit with the help of absorption
method then total cost of production is higher
as compare to another method.
Amount of the net income generated by the
company Nisa store is higher in such method
when comparing with the another approach of
costing.
On the other side amount of the net yield which
is earned by the firm is low in the absorption
method of costing which lead to reduce
profitability.
When the firm going to analyse business and
profitability performance in the industry then it
will higher and well in the whole retail sector
of UK.
Apart from this, when the management of Nisa
stores going to interpret profitability ratios then
it will poor in comparison to marginal costing
in the retail industry (Hopper and Bui, 2016).
TASK 3
P4 Advantages and disadvantages of various planning tools used for budgetary control
When the company such as Nisa retail store going to make various kinds of plan for
manage the business process and make it more productive, then use different tools and
techniques. In the accounting and financing world there are various number of planning tools
available among which three are used by Nisa retail entity which are such as budget, financial
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ratios and capital budgeting. Apart from such benefits these have some drawbacks as well which
are analysed as below:
Budget
The planning tool in which more financial data and informations are to be predicted by
the management of the Nisa retail company. With the help of such tool future financial
informations are to be estimated and on the basis of this technique future plan is made in highly
effective way. There are several kinds of budgets are to be prepared by the firm such as cash,
production, direct labour cost, material purchase etc (Kilfoyle, Richardson and MacDonald,
2013). Among them hypothetical example of cash budget is stated as below:
Cash budget
Month
Particulars Jan Feb March April May June
Opening balance 4652 4856 6962 1012 2534 1606
Cash receipts
Revenue and sales 14523 17893 13697 18563 22133 28563
Cash debtors 2452 2942 3451 2764 2895 3624
Total cash receipts
(A) 21627 25691 24110 22339 27562 33793
Cash disposals
Raw materials
purchase 1230 1456 1532 1463 7486 2135
Charges of labour 2346 3124 2644 2452 1321 2314
Creditors 2351 2135 3265 2364 1254 1364
Maintenance 2561 1256 2365 1452 3624 4562
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charges
Purchase of
equipments 4895 7996 9894 7866 7996 8996
Insurance 1234 2531 2942 3246 3852 4852
Taxation charges 924 231 456 962 423 852
Total cash
disposals (B) 15541 18729 23098 19805 25956 25075
Cash balance (A-
B) 6086 6962 1012 2534 1606 8718
Advantages and disadvantages:
The budget is helpful for the business entity in order to predict future financial
informations by which it can know that in the future it will be profitable or not. On the basis of
such kind of informations the Nisa retail store is able to make future plans and strategies in the
effectual way. Further, budget helps to the company for allocating financial resources to the
different organisational functions and departments adequately. When it uses the budgeting tool
and technique then able to assess performance of the business by comparing estimated and
budgeted data with the actual results which are earned.
However, budget is prepared by taking base to the past financial year which is not
effective and effectual for the entire business environment (Wagenhofer, 2016). In the past the
management was performing well and generating more amount of profit. In case, in the economy
is inflation rate arises in the current or future year then the Nisa retail will not able to perform
well as estimated on the basis of past. Apart from this, it is very long process and to make budget
highly qualified employee require who belong from the core finance department. Due to this
higher salary has to pay to that employee which lead to increase total cost of production. Further,
due to long process efficiency and productivity of employees hamper in the business.
Capital budgeting
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Apart from budget, in order to make plan related to finance and investment capital
budgeting techniques are used by the company. When the Nisa retail entity is going to make a
plan for investing money in any project, asset, equipment or any other, then it uses capital
budgeting methods. By this it able to compare two or more mutually exclusive projects and take
profitable investment decisions. Such tools are like as NPV, IRR, ARR, payback period,
profitability index etc (McLean, McGovern and Davie, 2015). Among them IRR and ARR are
stated as below:
Advantages:
 Capital budgeting is helpful for the Nisa retail business enterprise for make profitable and
effective decisions relating to invest money in the project. It helps to compare several
numbers of avenues which are simultaneously available with the company and choose the
best one among all.
 In this, net present value is a tool which consider each and every factor related to project
investment which are such as time element, cost of capital, time value of money, cash
flow of all years etc. Further, by considering all the aspects of project and investment the Nisa retail company
is able to put money in that criteria which will give positive and higher net present value
after completion of the project.
Disadvantages:
 In contrary to number of merits capital budgeting has various demerits or drawbacks
when the selected company uses and implement at the workplace (Alsharari, Dixon and
Youssef, 2015).
 The calculation of some tools of capital budgeting is little typical and for that more
qualified employee is required who take high amount of salary.
 Further, it given from the profit which lead to reduce profitability of Nisa retail in the
overall retail industry. In addition to this, if cost of capital or discounting factor is not
give then it is assumed by the firm by which adequate and effective decision is hamper.
 Moreover, for the every year same percentage of PV factor are taken and in case if
inflation rate increases then Nisa retail will not able to earn return which is calculated
earlier.
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