Comprehensive Management Accounting Report: HARRODS Ltd Analysis

This report provides a comprehensive overview of management accounting, focusing on its application within HARRODS Ltd., a small-scale retailer in the UK. The report begins by defining management accounting and its importance in evaluating a firm's financial position and market performance. It discusses various accounting systems, including traditional, lean, and throughput methods, alongside transfer pricing. Task 1 details different accounting systems and their benefits, while Task 2 explores reporting methods such as financial planning, cost accounting, and financial statement analysis. The report highlights the significance of management accounting reports, including job costing, sales, and inventory management reports. The benefits of implementing a management accounting system are also discussed, such as increased profitability, cost control, effective decision-making, and financial resource management. The analysis covers the benefits of the system and the different types of reports used by the company for financial analysis and decision-making.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS

INTRODUCTION
System of management accounting is most important for the business enterprise as it is
used to evaluate the firms financial position and its actual liquidity ion market. It is also
considered as process that involves collection of data and preparation financial statements by
using various management accounting methods and systems of reports that is used to gain an
understanding about the business growth and improvement (Zimmerman and Yahya-Zadeh,
2011). In order to make correct business and strategic decisions companies needs to adopt
management accounting system that will provide them better analysis of there actual financial
positions and market position. This report is based on analysis of HARRODS Limited which is
small scale retailer in UK which has a limited number 50 employees at there workplace. Further,
management accounting system is prepared for the enterprise in order to keep monthly and
weekly report of enterprises of business regarding their financial condition or performance in
market (Baldvinsdottir, Mitchell and Nørreklit, 2010). Turnover of organization has not been
exceeded from not exceeded from 500000 euros. In this study, various traditional and new
methods accounting has been discussed in order to provide a complete understanding about the
benefits which they will provide to organisation. Further, present study has required to be done
on small business enterprise by using different tools to carry out reporting of system of
management accounting. Moreover, advantage s and disadvantages of different tools used for
planning have been discussed in the report which are used for control the budget.
TASK 1
P1 Management accounting and needs of various kinds of accounting systems.
From: Management accounting officer
To: general manager
Company: HARRODS Ltd.
Subject: Management accounting system
According to Institute of management accountants (IMA) “Management accounting is
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considered as profession that involves the making partnership process of decision-making in
organization, development of planning and performance management system and providing and
expertise in the method financial reporting and control in order to support management in
formulations as well as application of organisation's strategy” (Ward, 2012). It is system that
supports in taking the present operational data and preparation of various important informative
reports. It usually consists of internal systems that HARRODS have been used to measure and
analyse its process for the management of business enterprise. The important components of
management accounting are considered as budgets, performance reports, sales, internal
management and reports related to income and expenses and also returns on investments
reports. Moreover, it also includes trend chart, variance and other important financial reports.
Various kinds of this important system has been mentioned above:
 Traditional method: This type of methods have been used by the different accountants
in which the cost which is incurred on production overhead are to be clearly determined
on the product which is manufactured in the enterprise (Renz, 2016). For the completion
of calculation it usually involves direct cost, labour charges and other expenses. Further,
utilization of this cost accounting method includes the cost driven that primarily results
in occurrence of expenses like direct material labour and machine hours.
 Lean method: It is generally considered as change that are needed to HARRODS
accounting, control, calculation and process of manufacturing to support lean
manufacturing and lean thinking. It consists of different ways to measure the work of
organization and their progress in lean. Further, accounting system involves the
accounting, control as well as process used to take decision (Cinquini and Tenucci,
2010). There are various important methods that has been used by management to take
information about there future financial position in market and adopting various
measures in order to get the actual results. It also eliminates the waste within the
accounting process by removing them down to the lowest amount of activities. Thus,
here the accountants are needed to lean manufacturing and using the lean thinking to get
the actual information and results.
 Throughput accounting: Further, this system of accounting comprises classification of
various constraints which are used in the production system of enterprise (Vaivio and
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Sirén, 2010). It is usually depended on the principle of simplified system of
management accounting. In present context, to improve the profitability, HARRODS
always uses this system also assist them to develop effective and successful business
decisions.
 Transfer pricing: This is also most important cost accounting method that is used by
enterprise in order to reduce the cost of operations (Van der Stede, 2011). It involves the
cost of transferring goods from one subsidiary of company in country to the subsidiary
of company in another country. It is used to calculate the prices in transfer of products
and services that is being adopted by management accounting system. It helps the
HARRODS limited in calculation of cost and expenses in transfer of goods.
Further, there various different examples which are linked with the management accounting
system are described above: Cost accounting system: Also known as product costing system which is considered as
a framework by management of enterprise to estimate the cost of their products for
recognising the profitability of enterprise Estimation of accurate cost of production is
considered as critical for the profitable operations. It provides an understanding to
HARRODS about the products which are considered as more profitable for them in
market. System of inventory management: Important method that has been used by
management of HARRODS in order to manage of cost of stock which is remained in
hand of enterprise at the end of financial year (Christ and Burritt, 2013). It is also
considered as a component of supply chain management which provide its major
assistance in controlling the inflow of products towards the warehouses from the hand of
manufacturers. Price optimisation: This important method has been used in this regard for the
mathematical analysis by cited organization in order to described of products for
influencing the customers. Job costing method: This method of accounting is used to calculate the cost of which is
made on production of individual product or batches of product. Further, this method of
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accounting has been used at the time developing products in effective in order to
differentiate from others.
 Batch costing: It is also important method that is being used as cost method which helps
in development of goods which have been measure by enterprise in terms of batch not as
individual items (Lambert and Sponem, 2012). It includes the comparison of cost of
various sizes of batches that has been produced in different methods. This method of
accounting has been used to manage the cost in order top control the Budget of products
selling prices and margin.
P2 Various methods that is used for accounting system.
To: General managers
From: Management accounting officer.
Company: HARRODS Ltd.
Subject: Management accounting reports.
Management accounting also refers to cost accounting which concentrates internally on
information gathered from financial method of accounting (Haiza Muhammad Zawawi and
Hoque, 2010). These accounting reports are considered as those which includes the cost,
expenses, balance sheet, budget and performance of enterprise. These mainly involves the cost
reports of products, Budgetary and performance report.
Significance of management accounting reports.
 Helps in analysing the actual cost and expenses.
 Controlling the Budget for production of goods and services.
 Reduction in expenses and overhead cost of producing single or batch of products.
 Helps in forecasting the future.
 Helps in making the decisions.
 Supports in analysing the performance variances.
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 Also, helps in analysing the rate of return on investments.
There are some significant methods which are needed to be used by HARRODS limted
in reporting within MA system. These important method are mentioned above: Financial planning: Implementation of financial planning of enterprise helps to carry
out the analysis of business functions. Thus, when the organization aims to carry out the
effective financial planning then it supports them to expand there financial position and
condition. Cost accounting: It mainly refers to the process of recording, classification, analysis,
summarizing, allocation and evaluation of various alternative business course of action
used to control the cost (Lukka, 2010). It aims to advise the management of enterprise
on the most appropriate course of action. Also, helps in disclosing the information
related to cost of products, process, departments and obtains the effective information.
Further, there are some changes have been identified by organisation through by this
method in order to increase the business performance.
 Financial statement analysis: Moreover, Harodds limited carries out the analysis of
financial statements and also involve the profit and loss account this has removed the
companies financial statements so that they will able to enhance there financial position
in market (P. Tucker and Lowe, 2014). Apart from this, financial statements of
enterprise are always being used at the end of financial year.
In addition to this, there are some important accounting reports have been formulated by
management of HARRODS in management account system in order to analyse the cost and
determinations company's profitability and business performance in retail industry. These
important business reports are as follows:
 Job costing report: Most important of system that supports in tracking the cost and
revenue of products in market (DRURY, 2013). As per IMA, Job cost report involves
the cost which is incurred by company in order produce one single or batch of product
for some specific business project.
 Sales report: This reports consist of sales trend of company products and services in
market. Further, it has been made to determine the sale of items for particular period.
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HARRODS also needs to use this accounting report in order to gain complete
understanding of sales.
 Account receivable report: This report of accounting implies that business have the
rights to achieve as it provides appropriate products and services to their clients.
 Inventory management report: These are considered as a reporting system that
provides information about the amount of stock which is remained unsold, amount of
sold and stock which is required in enterprise (Ferreira, Moulang and Hendro, 2010).
Thus, it can be said that these reports which provide support to the management in
getting the actual analysis of financial position and helps in managing the cost of operations.
Benefits of management accounting system
These are some important benefits of system like:
 Increase the profitability of enterprise by reducing the cost operations and as well
expenses which are needed to made on products. Through this, management of
HARRODS will be able to control their cost.
 It provides benefits to enterprise by reducing the cash outflow in comparison to inflow of
cash from markets (Flamholtz, 2012). Owner of enterprise can also assume its future
business expenditure. Further, the budget will based on past financial information.
 Beneficial in taking effective business decision to increase the performance.
 Helps in reducing the debt on enterprise in market and also supports in getting the
financial resources from market in the forma of equity.
Integration of systems and accounting process of enterprise.
1. It is most effective accounting system that is interlinked with the creator of value
which provide supports in getting the set standards in business. System of
management accounting is based on actions that performance of enterprise. In
present aspects, management accounting aims to concentrate on the matters
related to increasing the business performance (McNeil, Frey and Embrechts,
2015). It also helps the enterprise in attainment of profitability and also makes the
enterprise more competent as compared its competitor brand. Further, there is
major integration of management accounting systems with the procedure as they
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are followed by enterprise in effective manner to achieve desired outcomes. Apart
from this, it is also concerned with the planning and results which has been used
by management to develop a financial status. It also assists to keep records of
ascertain progress and keep records of financial statements of enterprise. This also
assist in keep records for analysing the progress and results of HARRODS
limited. They also posses that the management accounting system is providing the
effective business functions and operations which requires for creation of various
business advantages.
TASK 2
P 3Calculation of cost using the appropriate techniques and formulation of income statements.
Income statement is considered as financial statements that provides and understanding
about the company financial performance over a specific accounting period. Further, the
financial performance of enterprise that is being assessed by getting summary of how business
incurs its revenues and expenses by both operating and non operating activities (Banerjee, 2010).
It also aims to show the net profits or loss incurred over a specific period of accounting that is
being assisted by net profit or loss incurred over a specific period of accounting. In present
context, there are two method which are used by enterprise in order to prepare the income
statements which are as follows:
 Marginal costing: This method of cost accounting has been used for charging the variable
cost for per unit of products which are developed by HARRODS (Easterby-Smith,
Thorpe and Jackson, 2012). It makes the calculation of cost and profit for enterprise very
simple as it only involves the cost of variables that is being charged in full form against
the contribution towards net rate of return (Singh, 2017). Further, total fixed cost that
needs to be considered as periodic cost and also not allocate to find the various cost of
productions. However, marginal costing method also has its significance with regard to
determination of total expenses which are faced by HARRODS and makes the additional
production unit.
Advantages:
 It is being used to carry out the business interns of inventory that is being considered by
carrying out the closing inventory stock of enterprise.
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 Further, it is also considered as beneficial in making the adjustments for under or over
absorption of overheads in order to decrease the cost of products or improve the quantity.
 It is considered as best way through which the enterprise is needed to interpret its cost of
products and profits upon specific job.
Demerits
 Marginal costing method is not considered as useful in making the price decision within
the enterprise.
 It is not beneficial as it not provides an actual understanding of the cost.
Absorption costing method: It is system of reporting the cost which considers all cost of
production as costs of products without concerning that it is fixed or variable (Smith, 2017).
Further, cost per unit of product under the method of absorption costing consists of direct
material method, labour and both the variable and fixed cost and overheads.
Benefits:
 It is considered as oldest and widely used techniques that helps in ascertaining the cost.
 It will always show the correct profit calculation in case where the product are produced
in order to achieve the sales in the future such as seasonal sales.
 Avoids the separation of cost in fixed and variable cost.
 It also determines the ineffective and effective application of resources through indication
of under absorption and over absorption of factory overheads.
Costs:
1. It creates problem in comparison and control on cost.
2. It is not very helpful or not used by enterprise in making the managerial decisions
3. It does not help in preparation of flexible budget.
Difference between both the methods which are as follows:
Marginal costing Absorption costing
It mainly classifies in the amount of total This method is considered as effective as it
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values for considering the total expenses of
production cost, as per this, it is not carried
forward in upcoming the financial year.
aims in gathering the stock to carry out it other
financial year (Ravisankar and et.al., 2011).
Major reason behind the company is that the
total cost of production at the end of financial
year.
It values the inventory at the total variable cost
of production.
It measures the value of inventory at total
production which is fixed and variable.
Further, when the level of inventory have been
decreased the marginal costing method will
provide the higher profits.
If the rise in inventory level and absorption
costing which will provides the high
profitability to enterprise.
Marginal costing method is often useful for
management of decision making.+
It is being acceptable under the IAS section 2
of inventories.
Income statements in the form of Marginal costing.
Inc ome
statements in the form of absorption costing method.
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From the above statement, it has been interpreted that the organization is able to generate
the better net profits at the end of financial year Moreover, it can also be said that there are both
different values of net profits in both of the method which is mainly the results of deducting the
cost of products. In marginal cost the net profits of enterprise is worth of £7500 while on other
method the net profit which is given is £7800. The main cause of arising such difference is that
both the method contains the different method for calculation of cost of production which is
incurred by HARRODS. Total expenses of enterprise in marginal costing method is £7000.
Further, the marginal costing is analysed as £6700. But the absorption costing method is
considered as effective for enterprise as it provides there actual financial performance of
enterprise.
Application of range of management accounting techniques.s
 Fund flow analysis: This technique of management accounting is being used by
HARRODS to find out the movement of funds from one period to another and it also
helps to understand whether the funds are properly used or not.
 Cash flow analysis: The reason the for cash balances and amendments between two can
also be identified (Chandra, 2011). It defined the cash generated from operations and out
flow of cash in a period.
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