Management Accounting Report: BAT plc and Financial Analysis

This report delves into the realm of management accounting, exploring its core principles and practical applications. The report begins with an evaluation of management accounting and its systems within an organization, highlighting their essential requirements. It then elucidates various reporting methods employed in management accounting, followed by a detailed examination of cost calculation techniques, including marginal and absorption costing, and the preparation of income statements using these methods. Furthermore, the report analyzes the advantages and disadvantages of planning tools used for budgetary control, providing insights into their impact on financial performance. Finally, the report investigates how organizations leverage management accounting systems to address financial challenges, offering a comprehensive overview of the subject matter. The report uses British American Tobacco (BAT) as a case study to illustrate the concepts. The report includes calculations, financial statements, and analyses of various accounting methods.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
P1. Evaluate management accounting and management accounting system along with essential
requirement of it, in the organization...........................................................................................1
P2. Explain different methods which used in management accounting reporting.......................3
P3. Calculate cost by using various techniques and then prepare income statement by using
marginal or absorption costing method........................................................................................4
P4. Advantage or disadvantage of planning tools which used for budgetary control..................7
P5. Analyse how organization adopt management accounting system to respond financial
problems.....................................................................................................................................10
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Management accounting is a professional skills which used to prepare financial or
accounting information. It will assist by internal management in order to formulate policies,
planning for the control of business operations. It is used for internal people which make it
different from financial accounting (Definition of Management Accounting, 2019). Main
objective of management accounting is to use collected information and take effective decision
in order to achieve business goals & objectives. In order to understand management accounting
concepts, this report select British American Tobacco plc which is UK based multinational
manufacture company (British American Tobacco plc (BAT), 2019). Company founded in 1902
by James Buchanan Duke and they serve worldwide area.
This report include various topic such as management accounting concept and essential
requirement of accounting system. In addition, management accounting report, method of
calculating cost, explain different tools for budgetary control and how different systems helps in
responding financial problems.
MAIN BODY
P1. Evaluate management accounting and management accounting system along with essential
requirement of it, in the organization
Management accounting: It is a process of collecting information which further help the
manager to formulate strategy and used in decision making process. This accounting used for
internal purpose by using financial data. It help the managers of British American Tobacco plc to
develop financial statement which is beneficial for the stakeholder to take necessary actions
regarding their investment.
Key functions of management accounting:
 Provide data: With help of management accounting, manager able to collect data which
is very important because all the decisions will going to take with the help of it.
 Analyse & interpret data: After collecting information, it is very important to interpret
and analyse in the decision making process.
 Use as communication mode: With help of management accounting, manager able to
collect information and represent in effective manner which further used by the manager,
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owner and investors for their future strategies. Financial information helps in
communicating their financial position and further actions will be based on it.
 Provide qualitative or quantitative information: Management accounting provide
qualitative as well as quantitative information. Net income or loss, total assets &
liabilities, cash inflow these are quantitative information for the organization
(Almaktoom, 2017). Growth or decline in the financial figures will helps in analysing
weather business perform well in their field or not. It will be consider into qualitative
information.
Management accounting system: There are various internal systems which is used by
the organization to measure or evaluate performance. It will further helps the stakeholders such
as creditors, investors, managers, owner etc. Some of accounting systems discussed below:
 Inventory management system: It is a system or software which helps the organization
to keep track their inventory level. Mostly it is used by manufacturing company to
maintain their records regarding stock. It is essentially required to analyse the availability
of material at the time of manufacturing goods (Carlsson-Wall, Kraus and Messner,
2016). In context of British American Tobacco (BAT), manager follow this system and
maintain proper records. It further helps in formulating strategy and taking decision in
respect of increasing productivity as well as profitability. There are three types of
inventory system such as LIFO, FIFO and Weighted Average but British American
Tobacco company follow FIFO method to manage inventory level.
 Cost accounting system: It is also called costing system where it helps in estimating and
evaluating cost of each item. Manager use this system to identify cost and develop more
effective strategy to reduce its cost because it further helps in increasing profit margin. In
British American Tobacco plc, it essentially required to identify tobacco's cost and
further maintain for the whole production period. This system also include two different
types of costing such as product costing or activity based costing to evaluate their product
cost and develop strategy accordingly.
 Price optimization system: It is an mathematical analysis which helps the organization
to identify customer behaviour on different price range for the product. It is also used to
identify that customers objectives will meet with organization and maximise operating
profit. This system required by British American Tobacco plc to identify customer
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buying behaviour which further helps the manager to set their product price accordingly
(Chenhall and Moers, 2015). Managers of the company use all the relevant information
and formulate strategy in order to achieve goals & objectives. Further it will be used in
future decision making process.
P2. Explain different methods which used in management accounting reporting
Types of management accounting reporting:
Budget report: It is very critical report which is used to measure whole organizational
performance and it will be prepared departmental wise for large size organization. Almost every
business develop budget report which include all the necessary strategy or schemes on the basis
of previous information. This budget include all the source of expanses or earnings which help
the manager to formulate strategy and in future it helps in achieving business goals & objectives
(Management Accounting Reports, 2017). In context of British American Tobacco (BAT),
manager follow this report to evaluate overall performance of the organization which helps in
analysing actual position of the company.
Performance report: In order to analyse individual as well as whole organization
performance, manager produce performance report. Manager of British American Tobacco plc
use this report to make strategic decision for future (Jamil and et.al., 2015). With the help of this
report, individual awarded for their commitment or contribution in the organization. Performance
report provide deep analysis which further helps in measuring working capacity of an individual.
This report beneficial in terms of measuring performance and develop strategy towards
completion of their mission. If manager found that any employees performance not up to the
market then manager provide required training to improve those lacking area.
Cost managerial accounting report: This report include different types of cost which
required to analyse in order to calculate product cost. At the time of calculating cost these items
will be included such as raw material, overheads, labour cost etc. Cost report will provide overall
summary of the product related information. It help the manger to analyse product cost and it
further helps in setting product price (Jukic and Hedi, 2014). Profit margin will be monitor with
the help of this report so this report help the manager to identify all the required factors which
further used in decision making process and formulating strategy.
Above mention report help the manager to identify actual position of business operations
and further it provide benefits at the time of formulating strategy for the future.
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P3. Calculate cost by using various techniques and then prepare income statement by using
marginal or absorption costing method
Case 1:
Case 1
a)
Cost card (marginal costing method)
£/unit
Direct material 40
Direct labour 18
Variable overhead 7
Marginal cost 65
Selling price 140
Marginal cost 65
Contribution/Profit Margin 75
Case 1 (b)
Statement of profit/loss (January)
Marginal Costing
DR (£) CR (£)
Sales Revenue @ selling price/unit (140*10000) 1,400,000
Direct material @ unit cost (40*11000) 440000
Direct labour 198000
Variable Cost
Less closing inventory (marginal cost) 65000
Fixed production overhead 30000
Less cost of sales 603000
Profit 797,000
Case 1 (b)
Statement of profit/loss (February)
Marginal Costing
DR (£) CR (£)
Sales Revenue @ selling price/unit (140*10100) 1,400,000
Direct material @ unit cost (40*11100) 444000
Direct labour 199800
Variable Cost
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Less closing inventory (marginal cost) 65000
Fixed production overhead 30000
Less cost of sales 608800
Profit 791,200
Case 1 (b)
Statement of profit/loss (March)
Marginal Costing
DR (£) CR (£)
Sales Revenue @ selling price/unit (140*10200) 1,428,000
Direct material @ unit cost (40*11200) 448000
Direct labour 201600
Variable Cost
Less closing inventory (marginal cost) 91000
Fixed production overhead 30000
Less cost of sales 588600
Profit 839,400
Case 2:
Case 2 (a)
Cost card (absorption costing method)
Direct material 400000
Direct labour 180000
Production overhead 70000
Total cost 650000
Absorption cost of product 48.1481
Selling price 1400000
Total cost 650000
Profit 750000
Case 2 (b)
Statement of profit/loss (January)
Absorption Costing
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DR (£) CR (£)
Sales Revenue 1400000
Variable Cost
Direct material 440000
Direct labour 198000
Less closing inventory (marginal cost) 48148.1
Fixed production overhead 30000
Less cost of sales 619852
Profit 780148
Case 2 (b)
Statement of profit/loss (February)
Absorption Costing
DR (£) CR (£)
Sales Revenue 1414000
Variable Cost
Direct material 444000
Direct labour 199800
Less closing inventory (marginal cost) 48148.1
Fixed production overhead 30000
Less cost of sales 625652
Profit 788348
Case 2 (b)
Statement of profit/loss (March)
Absorption Costing
DR (£) CR (£)
Sales Revenue 1428000
Variable Cost
Direct material 448000
Direct labour 201600
Less closing inventory (marginal cost) 48148.1
Fixed production overhead 30000
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Less cost of sales 631452
Profit 796548
Case 2(c)
Reconciliation Statement
Between Marginal Costing and Absorption Costing
£
Profit/marginal costing 797000
Increase in Stock Level 100
Marginal cost /unit 65
Absorption cost/unit 48.1481
Difference 16.8519
Profit/ absorption costing 780148
P4. Advantage or disadvantage of planning tools which used for budgetary control
Zero based budget: It is a budgeting tool which helps the organization to estimate their
expenses and it will be evaluate for every new period. Basically, there is no need of previous
budget calculation because it is start from the “zero base” (Klychova and et.al., 2014). Every
activity in the business operation will be evaluated as per their needs or cost.
 Advantage: It help managers to justify all operational expenses in the production period
and force them to consider those area which generate revenue.
 Disadvantage: It will take lots of time and efforts to prepare this budget. Along with this,
it required closely review and justify each element of budget.
Capital budget: This budget include capital expenditure as well as large amount inflow or
outflow of cash which mostly used in investment projects. This budget helps the organization to
identity weather they should invest in a project or not.
 Advantage: It provide understanding regarding risk and its further effects because it
provide opportunity regarding investments.
 Disadvantage: Wrong decision will impact investment which further effect the
organization and profitability.
Operating budget: This budget used to record income and expenses related to the
operational activities (Marr, 2015). It will try to reduce expenses and encourage employees to
working hard and achieve sales target.
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 Advantage: It helps in projecting future expenses with the help of evaluating past and
current expenditure. It helps in increasing accountability because every transaction
recorded.
 Disadvantage: Operating budget required deep study and analyses to reduce its activity
cost. Along with it, they required professional people to produce this budget.
From the above discussion, Home Furniture Ltd follow capital or zero base budget which
helps the organization to identify accurate flow of investment or liquidity.
Alternate methods of budgeting:
 Master budget: It is a combination all functional budget which include budgeted
financial statements, cash forecast and financial plan. This budget prepare on quarterly,
monthly or yearly basis. It include various strategies to reduce overall expanses and
increase profitability(Miller, 2018). Master budget used to evaluate performance of each
functional department and further develop strategy to improve it.
 Cash budget: This budget involve the expected cash inflow or outflow during the period
of production. Basically it is a projection of cash over the revenue or expanses of the
business operations. It helps the organization to identify liquidity of cash which required
to perform daily activities.
Behaviour implication of budget:
There are some behaviour implications of budgets which discussed below:
 Dysfunction behaviour where budget positively impact the organization and helps in
achieving business goals & objectives.
 Participative budget where organization follow the structure such as top down or bottom
up. In top down, top management develop budget and include lower level operations as
well. In bottom up, People get affected due to budget such as lower level employee at the
time of preparing budget.
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Case 3:
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Case 4:
P5. Analyse how organization adopt management accounting system to respond financial
problems
Financial problem: Every organization face some challenges which further converted
into financial problems and give lots of pressure to the people who involved in the organization.
Financial problems affect the production as well as profitability, so it is very important to resolve
it as soon as possible (Shields, 2015). Home furniture Ltd company also face some issues
regarding finance which discussed below:
Uneven flow of cash: In context of Home Furniture Plc, Company face the problem
regarding cash flow because expenses are more than revenue which impact the performance of
organization.
Unnecessary expenses: At the time of manufacturing goods, there are lots of activities
which not provide any kind of profit but it will increase the cost. It will become a financial issues
for the organization which impact production and profitability as well.
Benchmarks: It is a comparative tool which helps the business to compare its process or
performance as per the industry and other organization. Comparison should be based on quality,
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time and cost of product. It can be used by the Home Furniture Ltd to resolve their financial
issues and enhance their performance.
Key performance indicator (KPI): It is a performance measurement tool which helps
the business to identify that how organization effectively achieve business goals & objectives
(Shin, Ennis and Spurlin, 2015). KPI would be consider under two types such as financial or non
financial measurements and it discussed below:
Financial: It is based on the components of financial statements and it include income
statement, cash flow or balance sheet.
Non financial: It include those activities which need to analyse that weather it is
beneficial for the business or not. Non financial measurement involve customer relation,
employee operations, quality of product or services etc.
Basis Home Furniture Ltd British American Tobacco plc
Financial problems Company face the problem
regarding uneven flow of cash
and unnecessary expenses (Zhu,
2014). It impact the organization
where productivity as well as
profitability decrease.
This company face the issue
regarding high wastage of raw
material at the time of
manufacturing products. It will
increase product cost which
automatically increase selling
price of product. In result, it will
reduce product demand and it
further impact on production and
profitability.
Management
accounting system
In order to resolve above mention
financial problems, manager
follow cost accounting system
which helps in reducing,
monitoring or controlling product
cost for the whole period of
production.
In order to reduce wastage in the
organization, company follow
inventory management system
which helps in maintaining
records which further used to
develop strategy.
Accounting techniques House Furniture Ltd use Company follow key
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benchmarking technique to
resolve their problem where they
compare business performer and
activities with their competitors
and analyse their strategies. If
competitors used effective one
then it will be implemented
effectively.
performance indicator (KPI) to
identify those activities which is
profitable or not. In order to
improve reduce wastage,
manager provide some training
which helps in reducing wastage
in the business operations.
Case 5:
(a) Total cost of sales:
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(b) Calculate the variances between actual and flexible budget:
The difference between actual and flexible budget is as follows:
Variance = 1550000 - 1275400
= 274600
CONCLUSION
From the above discussion, it has been concluded that management accounting is very
essential for the organization to manage their daily basis transaction and record in effective
manner. It help the managers to formulate strategy by using various accounting report and it will
be prepared through collecting information. With the help of accounting systems, organization
able to increase business performance and productivity. It further used to resolve financial
problems in effective way which helps in achieving business goals & objectives. In order to
perform their task under budget they have to produce budget and monitor regularly which
required for budgetary control.
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REFERENCES
Books & Journals
Almaktoom, A. T., 2017. Stochastic reliability measurement and design optimization of an
inventory management system. Complexity. 2017.
Carlsson-Wall, M., Kraus, K. and Messner, M., 2016. Performance measurement systems and the
enactment of different institutional logics: insights from a football
organization. Management Accounting Research. 32. pp.45-61.
Chenhall, R. H. and Moers, F., 2015. The role of innovation in the evolution of management
accounting and its integration into management control. Accounting, organizations and
society. 47. pp.1-13.
Jamil, C. Z. M. and et.al., 2015. Environmental management accounting practices in small
medium manufacturing firms. Procedia-Social and Behavioral Sciences. 172. pp.619-
626.
Jukic, O. and Hedi, I., 2014. May. Inventory management system for water supply network.
In 2014 37th International Convention on Information and Communication Technology,
Electronics and Microelectronics (MIPRO) (pp. 567-570). IEEE.
Klychova, G. S. and et.al., 2014. Management reporting and its use for information ensuring of
agriculture organization management. Mediterranean Journal of Social Sciences. 5(24).
p.104.
Marr, B., 2015. Key performance indicators for dummies. John Wiley & Sons.
Miller, G., 2018. Performance based budgeting. Routledge.
Shields, M. D., 2015. Established management accounting knowledge. Journal of Management
Accounting Research. 27(1). pp.123-132.
Shin, S., Ennis, K. L. and Spurlin, W. P., 2015. Effect of inventory management efficiency on
profitability: Current evidence from the US manufacturing industry. Journal of
Economics and Economic Education Research. 16(1). p.98.
Zhu, J., 2014. Quantitative models for performance evaluation and benchmarking: data
envelopment analysis with spreadsheets (Vol. 213). Springer.
Online
British American Tobacco plc (BAT). 2019. [Online]. Available Through:
<https://www.bat.com/group/sites/UK__9D9KCY.nsf/vwPagesWebLive/DO6HHJ9F>
Definition of Management Accounting. 2019. [Online]. Available Through:
<https://www.toppr.com/guides/fundamentals-of-accounting/fundamentals-of-cost-
accounting/meaning-of-management-accounting/>
Management Accounting Reports. 2017. [Online]. Available Through:
<https://www.completecontroller.com/types-of-managerial-accounting-reports/>
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