Unit 5: Management Accounting Principles and Planning Tools

This report delves into the principles of management accounting, differentiating it from financial accounting and highlighting its role in internal decision-making within companies like Sainsbury's. It covers essential aspects such as inventory management, budgetary control, and investment appraisal systems. The report further examines various management accounting methods, including investment decision-making, ratio analysis, and cost management techniques, and how these are applied. It evaluates the integration of management accounting within Sainsbury's, assessing its benefits and providing recommendations. Furthermore, the report explores planning tools used in management accounting, including marginal costing and budgetary control, and provides a comparison of companies responding to financial problems. The report also includes the use of absorption and variable costing methods, the importance of the generally accepted accounting principles and the role of management accounting for a company.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
PART 1............................................................................................................................................3
Principles of Management Accounting.......................................................................................3
Role of management accounting and management accounting system.......................................4
Use of techniques and methods of management accounting.......................................................5
Evaluation of management accounting integration within the Sainsbury company....................6
Benefits of MA functions to the Sainsbury company..................................................................7
Recommendation.........................................................................................................................8
PART 2............................................................................................................................................9
Planning tools used in management accounting..........................................................................9
Comparison of companies responding to financial problems....................................................12
CONCLUSION..............................................................................................................................14
REFERENCES................................................................................................................................1

INTRODUCTION
Management accounting (MA) is also known as managerial accounting which helps the
managers of the company can collect and use financial and non-financial information and
resources in their decision-making process. The fact about this is that management accounting
report is only available to the internal users of the financial statement not external users. The
non-availability of the information to the public is a point which make MA different from the
financial accounting. The main objective of the MA is to use statistical data and, on this basis,
making accurate and better decision. So, in this context, the report will cover principles of
management accounting. The role of management accounting system and its integration within
the Sainsbury company. Sainsbury is a retail sector company having second largest supermarket
chain located in UK that offers groceries, clothing, homeware, electrical etc. products to the
customers. The company is having operation in around 70 countries and uses digital marketing
strategy for their business growth. The company also have their own online shopping channel
despite many stores and supermarket all over the world.
MAIN BODY
PART 1
Management accounting and essential requirements of different types of MA
Management accounting is a practice defined as managerial accounting utilised to to get
access to the information that can support the best level of decision making at the organisation
level. The concept of the management accounting is to prepare the reports of the business
operations that can support the manager to make both long term and short-term decisions in the
organisation (Alamri, 2018). The concept of management accounting is all about with support of
information and data related to business take up the best decision that can maximise the overall
growth of the business entity.
Essential requirements of different types of management accounting
Management accounting systems
Management accounting is performed with support of different systems that can favour
the business entity to achieve the best level of growth objectives in the market. All these systems
allow the company to enhance the overall decision-making process of the organization.

Inventory management system
Inventory management system is an important aspect of the management accounting
practice. This is a system m that allow the management of company to take strong decisions to
manage or control the inventory hold in the stock (Amir and Chaudhry, 2019). In the time of
covid 19 crisis the inventory management has become a huge challenge for the company. This is
essential that the business entity take strong decision about the level of inventory that needed to
hold in the organisation.
Budgetary management system
Budgetary management system is another core system part of the management
accounting. This is a system that is about to take strong decision over the budgetary requirements
of the company. Budget is a process that involves and allows the company to predict the future
expenses and make decision about cost controlling and other such areas.
Investment appraisal system
Investment appraisal system is a practice involve under management accenting that
involve managing the investment decision making of the business enterprises. This system is all
about undertaking the best potential investment decision that can support the company in
maximising the financial resources hold by the business entity (Saeidi and Othman, 2017).
Cost management systems
Cost management system is also a crucial management accounting system that used by
companies. This is a system that is about to manage the overall cost incurred in different
business processes.
Methods of management accounting reporting
Methods of management accounting reports
Management accounting is done with favour of different methods. All these methods can be
demonstrated in the following manner.
 Investment decision making methods: are among the key methods. This involves
payback period method, net present value, internal rate of return and other such
techniques (Amir and Chaudhry, 2019). These methods favour the entity to take the best
suitable investment decision making.

 Ratio analysis: is another crucial method involved in the management accounting
practice. This involves analysing and interpreting the earlier taken business decision
making on the basis of the results derived. This is done with support of ratios like
profitability ratio, liquidity ratio, efficiency ratio and other such ratios. All these ratios
support and favour the company to critically evaluate the overall performance of
company in the respective market (Wahyuningsih and et.al., 2021).
 Cost management methods: are also a core method that used under the management
accounting. This is done with support of techniques like economic order quantity
techniques, job costing, batch costing, process costing and such related methods. All
these methods favour the company to manage the cost in the best way possible. With
support of the cost controlling company get to achieve the bet level of control over total
cost incurred to deliver the practices.
Principles of Management Accounting
The generally accepted accounting principles of management accounting must adopted by
Sainsbury are as follow:
 Designing and compiling: The accounting information, record, reports and most
important statement which is of the past, present and future must be specific to the
business. It means that MA system must be designed in such a way which reflect the
correct and relevant data about the company and require to comply all the rules and
regulation of the company (Saeidi and Othman, 2017).
 Accounting for inflation: In order to judge the real success of the business it is important
that management of the company must consider rate of inflation in their decision. It is
because the value of the money is not stable all the time it changes over the period. That’s
why it is important to access the value of capital in order to convert it in real value. For
this the company need to use revaluation accounting technique.
 Integration: This reflects that by using and integrating management accounting tools and
techniques the managers of the company can make appropriate and relevant decision at
the same time when actually issue arises. The accounting services is provided at
minimum cost that’s why the company can easily integrate this in their business.

 Controllable and Uncontrollable cost: Generally, there are two types of cost incur by the
business one is controllable and second is uncontrollable. By using the management
accounting technique, the company can control this controllable cost as there is no
technique available to business for controlling the uncontrollable cost.
 Appropriate means: It is stated that the most appropriate way should be adopted by the
company in order to accumulate, record and presenting the financial information of the
company such as ratio analysis, cash flow statement, break-even analysis, budgets etc.
For large companies like Sainsbury, they need to use advance technology with proper
software for this (Wahyuningsih and et.al., 2021).
Role of management accounting and management accounting system
Financial accounting is useful and available for all stakeholders of the company for making
proper decision but managerial accounting is only available to internal management of the
company for making better and suitable decision. The role of management accounting that
Sainsbury company have to use in their business are as follow:
 Fewer number of crunches: As compared to the financial accounting understanding and
grabbing information from management accounting is quite an easy task. It is because
MA do not follow the principles and standards set by financial accounting. Though
accountant must reflect accurate report but a non-accountant person can grasp this
information without having deep knowledge which is not possible in case of financial
accounting. The role of MA is that the managers of the company use the financial
information and trends for planning the operations of the business (Alamri, 2018).
 Looking to the future: The role of management accounting is to prepare and create
budgets for the upcoming years which reflects the expected figure based on the past year
actual revenues and expenses. This helps the business to identify the minimum cash
balance requirement by preparing monthly cash budgets. With this the management
accountant can easily make decisions for the future.
 Available whenever need it: Managerial accounting statements and their tools and
methods available to the business wherever they need it. The use of cash flow is available
to the company all the time and they also can update it even at the mid of the period etc.
 Follow the money: The role of this accounting is to look at the business current finances
and make arrangement of finance which may be required in future. The format of the MA

is flexible and it follow the time value of money. The cash flow statement of MA reflects
only cash inflow and outflow and do not include any non-cash related items (Vailatti, Da
Rosa and Vicente, 2017).
Use of techniques and methods of management accounting
Particulars Details (€)
Sales units 10000
Sales 200000
Direct Material cost 50000
Direct Labour cost 24000
Variable production overheads 14000
Fixed production overheads 19000
Variable distribution and admin. expenses 7000
Fixed distribution and admin. expenses 4500
Income Statement under Absorption costing
Particulars Amounts (€)
Sales revenue 200000
Production cost 10000*11.4 (114000)
Gross Profit 86000
Less Fixed distribution and
admin o/h
(4500)
Net Profit 81500
Working Note:
Calculation of production cost per unit
Particular Per unit
DM cost (50000/10000) 5
DL cost (24000/10000) 2.4
Variable production o/h (14000/10000) 1.4
Fixed production o/h (19000/10000) 1.9

Variable distribution and admin o/h
(7000/10000)
0.7
Total 11.4
Income Statement using Variable costing method
Particulars Amounts (€)
Sales revenue 200000
Less Marginal cost of sales:
Direct material 50000
Direct labour 24000
Variable production O/Hs 14000
Variable distribution and
admin. O/Hs
7000 (95000)
Contribution 105000
Less Fixed production O/Hs 19000
Less Variable distribution and
admin O/Hs
4500 (23500)
Net profit 81500
Note* The profit under variable and absorption costing is same because the sales unit and
production unit is same.
 The Sainsbury company can use the management accounting techniques such as marginal
costing income statement for identifying the most accurate profit of the company.
 It is also useful for planning the financial policies and practices of the company which
help them in determine the accurate amount of capital requirement.
 The company can also use it for the purpose of analysing the financial statement and
performance of the business using ratio analysis tool (Dahal, 2018).
 With the help of historical cost data, the management of the Sainsbury company can
easily use the past data for present and future cost ascertainment and distribution.

 By using the standard costing method, the company can calculate and analyse the
variance between the actual and standard income and expenses along with profits. This
helps them in adopting proper pricing strategy with the help of which they can grow and
develop their business to next level.
 The use of budgetary control technique in the business is that it directs the whole
operation in a desired way and help them in achieving the best and suitable return on
investment if any.
Evaluation of management accounting integration within the Sainsbury company
Integration of management accounting within the business helps the Sainsbury company
management accountant in adopting various opportunities for the purpose of improving their
decision-making process. It is because different sources of information provide variety of
competitive advantage and stakeholders requirement to the company in for of both opportunity
as well as challenges. It also helps the Sainsbury in analysing the impact of opportunity cost over
the performance of the business. By implementing the management accounting practices and
tools the company can identify the requirement of the capital for their further expansion and
development. As, Sainsbury is a largest supermarket chain so the company have to put their
focus on the supply chain and inventory management. With the help of just-in-time management
accounting technique, the Sainsbury company can make sure that their will be no shortage of
stock arises in the warehouse of the supermarket and stores of the company all over the world
(Aureli and et.al., 2019).
Along with that by applying and using economic order quantity technique the company
can easily identify the optimum requirement of the stocks at a particular period of time. This
order quantity helps the company in managing their holding and ordering cost very well because
at this point the holding and ordering cost of stock is always equal. Being a large company,
Sainsbury need to manage the working capital for their day-to-day operations and funds for
managing the maintenance cost of the supermarkets and stores which are all over the world. And
this requires lots of funds that the managers of the company need to acquire from the market and
best sources. So, for this purpose management accounting method such as capital budgeting
helps the company in calculating and identifying optimum capital structure for their company
growth (Wu and Wang, 2020).

Benefits of MA functions to the Sainsbury company
Management accounting functions can provide variety of benefits to the Sainsbury company
which involves:
 Increases efficiency of the company: By evaluating and comparing the data it helps the
company in improving the efficiency of the performance of the company. Basically,
indirectly MA helps in motivating the employees of the company and help them in
achieving their regular targets in minimum time. With the help of MA, the employees
receive promotion in return of their performance which further increases the overall
productivity of the company (Amir and Chaudhry, 2019).
 Increases the bar of profitability: The management accounting tools such as capital
budgeting and budgetary control helps the company in managing and cutting extra and
unnecessary cost which indirectly increases the profitability of the company.
 Simplifies the decision-making in financial statements: As for the purpose of making
decision the management accountant wants proper and simplified financial statement
with facts and clear interpretation. This helps the accountant taking best and suitable
decision which is in the betterment of the company.
 Enables the fluctuation of business monetary funds: Monetary funds is the most
essential factor of the business which need special consideration of the company.
Because this fund is helpful at the time of emergency and urgency. Not only that
management accounting also helps the company in eliminating the sources which misuse
the funds of the company.
 Cost transparency: In any business the majority of the expenses and cost generate from
the information technology and management accounting work closely with the IT
departments. And the impact of which is that it provides the cost transparency to the
business.
 Flexibility and freedom: As management accounting is a flexible in nature and does not
require monthly and yearly reports. That’s why the accountant get enough time to prepare
the exact, relevant and perfect report for making appropriate decision.
Recommendation
By analysing the principles and techniques of management accounting it is recommended
to the Sainsbury company that they must apply management accounting tools in their business

for their future growth. For application of management accounting system in the business the
Sainsbury company need to follow the process which involve planning, performance rating and
maintaining operational status. The company will be able to use and analyse the data of the
employees input and output and interpretate and rank the employee’s performance from 1 to 10.
In order to apply the MA methods, the company need to first ensure that they are as per their
business nature and requirement or not. If not, first they need to fix the management accounting
system as per the business specification. After application the managers of the company need to
analyse the cost of production before and after using marginal and standard costing. The
application of this the company can also analyse the break-even sales which basically reflect the
no profit and no loss point of the company (Yigitbasioglu, 2017).
The margin of safety concept helps the company in identifying the profitable sales of the
company. By doing this the Sainsbury make improvement in their sales and reduce their cost and
earn high profit as compared to earlier period when the company does not apply MAS. But
because of the budgets which is basically based on the expected figure the company might get
wrong reports and biased interpretation. If the company make wrong decision regarding the
investment their may be chances that company might bear loses in future. Such loses may affect
the business in such a way that they need to permanently close their stores and supermarkets.
That’s why it is recommendable to the company that before such implication they have to do
proper research about the same (van der Kolk, 2019).
PART 2
Planning tools used in management accounting
Comparing of planning tools
Financial Statement Analysis Cost analysis Budgetary Control
The profit and loss statement
and the balance sheet are the
two most relevant financial
statements that investors look
at. The financial statements
There are a variety of direct
and indirect costs associated
with manufacturing,
including raw materials,
labour, and other variable
The budgetary method is used
by management to control
and schedule the allocation of
resources that control the
business's activities. It is an

are examined for various
periods in order to determine
the company's strengths and
weaknesses. It can be used to
determine whether a
company's operating costs are
high or low, as well as the
amount of debt and
receivables, variable expenses
and fixed assets, and, most
importantly, the company's
net profit, which is used by
shareholders and investors
(Samuel, 2018).
expenses. The total cost of
production can be calculated
using costing methods and
divided by the total number
of units produced. It assists in
determining the cost per unit
of output, as well as the
pricing per unit. This has
aided Sainsbury in
determining the costs that can
be cut, such as moving to a
low-cost tender supplier that
provides the same standard.
effective method of directing
business activities that allows
the company to earn a profit.
This is also an exercise that
aids in improving
communication and achieving
a common goal across
various parts of the
organization (Taipaleenmäki,
2017).
Advantages:
a) Financial planning
helps in cost
estimations which can
come of use in future
projects to be
undertaken.
b) It provides an insight
how the company has
to go about a project
through financial
analysis.
c) Financial planning
aids in determining
the appropriate rate of
return on projects as
well as the
maintenance of
working capital and
cash flow balance.
Advantages:
a) Cost analysis can help
to know all the
production costs
which incurred and
helps in profit
realization by
calculating per unit
cost.
b) It helps in knowing
where the operational
costs can be
controlled.
Advantages:
a) Planning: It lays out the
strategies for achieving the
company's goals. It assists in
determining what can be
accomplished early on, as
well as checking on costs and
calculating funding sources.
b) Coordination: This refers
to how well a company
organization's teams or
divisions work together. The
committee assigns
departments tasks and duties
and keeps in touch with them.