Management Accounting Report: Severn Trent's Financial Strategies

This report comprehensively examines management accounting, focusing on its role within organizations and its impact on business performance. It begins with an introduction to management accounting, differentiating it from financial accounting and highlighting its importance in internal decision-making. The report then delves into various types of management accounting systems, including inventory management, cost accounting, and price optimization, and discusses their applications within the context of Severn Trent, a UK-based engineering company. The report further explores management accounting reports, such as budget reports and performance reports, and analyzes their benefits in monitoring and controlling business performance. A significant portion of the report is dedicated to the benefits of a management accounting system, including job costing, price optimization, inventory management, and cost accounting. The report uses Severn Trent as a case study to illustrate how these systems can be applied to enhance decision-making and improve financial outcomes. Finally, the report also examines planning tools for budgetary control, their advantages, disadvantages, and their role in forecasting and preparing budgets. This report provides a detailed overview of management accounting principles and their practical application in a real-world setting.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
ACTIVITY 1....................................................................................................................................1
PART A.......................................................................................................................................1
Types of management accounting system ..................................................................................2
Management Accounting Reports...............................................................................................4
Benefits of management accounting system and their application.............................................4
Management accounting system and management accounting reporting is integrated within
organisational processes..............................................................................................................5
PART B.......................................................................................................................................6
Annex (A)....................................................................................................................................6
Annex (B)....................................................................................................................................6
ACTIVITY 2....................................................................................................................................8
Part A:..............................................................................................................................................8
Advantages and disadvantages of different types of planning tools...........................................8
Use of different planning tools and their application for preparing and forecasting budget......8
Part B:..............................................................................................................................................9
A comparison of how organisations are adapting management accounting systems to respond
to financial problems...................................................................................................................9
An analysis of how in responding to financial problems, management accounting can lead
organisation to sustainable success.............................................................................................9
An evaluation of how planning tools for accounting help to solve problems and support
organisations with sustainable success........................................................................................9
CONCLUSION..............................................................................................................................10
.......................................................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Management accounting system is considered as main function of an organisation that
gives internal information of business. It includes ability of organisation for providing a
particular commodity, liquidity, capability to meet obligation, financial flexibility of business
and more. The availability of internal information aid company's managers in planning and
allocating scare resources in efficient and effective manner. On the basis of internal information
of business, a company can make appropriate decisions of business related to future growth and
success (Neubauer, H. and et. al, 2012). The present report is focusing on this concept of
management accounting system and how it helps an organisation in monitoring the performance
of business. For this purpose, a reputed engineering company of UK is taken, named by Severn
Trent. It is one of the top ten largest regulated water and sewerage company, that headquartered
in England. To streamline the business and develop a single worldwide image, its line manager
has adopted various techniques of management accounting for promoting an understanding
among its various department.
This assignment is divided into two main activities where first part reveals the
explanation of management accounting, including its different types. In addition to this, it also
shows importance of integration of this concept within organisational processes. On the other
hand, second activity gives an explanation on advantage and disadvantage of different types of
planning tools for budgetary control.
ACTIVITY 1
PART A
Management Accounting
Management accounting is also known as cost or managerial accounting that defines a
process of analysing cost and different operations of business, for preparing internal financial
record, report and accounts (Gates, Nicolas and Walker, 2012). This concept also refers an act of
making sense of costing data and translating the same into useful information for monitoring the
performance of business. It generally handles a number of facets of accounting like margins,
capital budgeting, valuation and product costing. In context with Severn Trent, it is one of the
top most engineering company of UK, that supplies water from Bristol Channel to Humber to
more than 8 million people every day. Through understanding the concept of management
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accounting, its line managers can make effective decisions for supplying water smoothly and
enhancing performance of business.
Management Accounting System:
This system can be defined as internal process of organisation that describes company's
details about financial growth, ability to meet obligations and more. It collates the major
information of business like cash-flow, revenue, outstanding debts etc. for making timely trend
statistical data (Fourie and et. al., 2015). This system also combines both financial and non-
financial data for estimating the success of business in a particular accounting period. Thus,
through management accounting system managers of Severn Trent can make proper decisions
for allocating scare resource in efficient manner. Along with this, as this system is an automated
system therefore, it aid managers of respective company to make proper management decisions
and use internal information of business in a convenient way.
Types of management accounting system
In order to monitor performance of business and identify relevant information, managers
of Severn Trent can use various types of management accounting system (Faÿ, Introna and
Puyou, 2010). It includes inventory management, price optimisation, inventory management, job
costing and cost-accounting system etc.
Inventory management system refers to the management of stock and inventories of a
business. It tracks goods through entire supply chain process which includes different aspects
like controlling and managing stock levels, reordering quantities, buffer stock and more. Thus,
this system covers overall processes that start from production to retail, warehouse to shipping
and more (Dosch and Wilson, 2010). As complexity of business within engineering and other
field is increasing day by day. Therefore, it becomes essential for companies like Severn Trent to
introduce inventory management software within business. This would help in maintaining a
healthy warehouse and monitor entire performance of business as well. Since present company
supplies water to millions of home on daily basis. Therefore, optimising inventory aid in
avoiding wastages and providing visibility to supply-chain process. Along with this, tracking
records of products also aid in predicting how much sell is necessary in future for enhancing
profitability.
Cost accounting system refers to a framework that provides a company an estimated
cost of its products for inventory valuation, controlling cost and profitable analysis. For this
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process, respective system assesses the input costs of each level of production, including fixed
costs like depreciation of capital equipment (Cullen and et. al., 2013). With respect to Severn
Trent, its cost accountants and engineers can translate specifications related to new products into
estimated costs through comparing estimated costs of services with projected sales prices. This
would help its top management in determining whether offering services on certain price will
prove profitable or not. The main purpose of cost accounting system can be defined into three
main categories- cost control, cost computation and cost reduction. Here, cost control is the first
function of this system that aids Severn Trent in controlling the cost within a specified budgetary
constraints. Along with this, its managers can also allocate limited resources on a particular
project for avoiding wastages (Contrafatto and Burns, 2013). While another main function of
cost accounting system is cost computation that helps in calculating cost of sales for a particular
services per unit. On the other hand, cost reduction aid management of Severn Trent in reducing
the cost source where margins will increase naturally. Furthermore, for estimating the probable
cost of supplying water at different parts of Wales and England, respective company needs to
understand the types of cost accounting system as well. It includes- Job order costing: This concept is used when in a company various produced items are
different from each other as well as has a significant cost (Chenhall and Smith, 2011). It
proves beneficial for those companies that designs goods like custom-made machines,
buildings and more, for meeting specified needs. Process costing: This costing system is used to gather and assign manufacturing costs to
goods that are vary from each other.
Job Costing system refers to an order-specific costing technique, which is used in those
situations where each job in production is different as well as performed to particular
specifications of customers (Burritt, Schaltegger and Zvezdov, 2011). It involves keeping an
account of business direct and indirect costs, which is closely related with a job that requires
high input of labour as well as material. It is likely to consume more power, supervision and
inspection time, etc. While, indirect costs applied within accounting system as an estimated
fraction of direct costs. In general, a job costing system basically analyse three types of
information that are - Direct Materials – The job costing system helps in tracking cost of all materials that are
used for production.
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 Direct Labour – Given system also to track labour cost engaged for a particular job.
 Overhead – The job costing system also helps in allotting overhead costs such as
depreciation, production equipment and building rent.
Price optimising system: This system refers to mathematical concept that helps in
estimating how demand of customers varies at different price levels (Bodie, 2013). In other
words, this concept helps in determining how demand of a service fluctuate with different price
strategies. Thus, this would aid managers of Severn Trent in supplying water services on
affordable rates.
Management Accounting Reports
Accounting reports are considered as an important part in accounting management that
helps in identifying and controlling the performance of a company. Through this concept, ability
of company's managers can enhance for preparing different reports of business either in weekly,
quarterly or monthly bases (Baldvinsdottir, Mitchell and Nørreklit, 2010). This would aid to
obtain accurate as well as reliable statistical information that helps in taking effective and
efficient decisions for success of business. In context with Severn Trent, by using concept of
accounting reports, its managers can record internal information of business like transactions,
invoices, profit and loss statement, income statement, balance sheets and so on, for evaluating
organisational growth. In this regard, different types of management accounting reports,
including their benefits can be described in following manner:-
Budget reports- Budget refers to an estimate cost and revenue of a business of a
particular accounting period. It serves as a road map for achievement of business objectives. In
context with Severn Trent, its managers can prepare budget for planning future expenditures and
managing company’s finance as well.
Performance reports- This report provide additional information related to a budget
variance. It would managers of Severn Trent in review the performance of business as well as
employees on individual level (Arroyo, 2012). Through this process, necessary modification can
be created for improving performance of business.
Cost managerial accounting report- This managerial accounting system helps in
computing the costs of goods per unit that are manufactured. Here, overall raw material costs,
overhead expenses, labor costs, inventory waste and more, are taken into deliberation. Then total
cost is divided by total amounts of goods produced. In this regard, cost managerial accounting
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report provides a summary of entire information. It also increases managers’ ability for realizing
the cost prices of each item versus its selling prices. In addition to this, profit margins of business
can also be estimated as well as monitored through given reporting system.
Benefits of management accounting system and their application
Determining the current performance of business and gathering internal information of
business is the main purpose of accounting business, that helps in making proper decision for
increasing growth of business (Mat, Smith and Djajadikerta, 2010). In this regard, main benefits
of this system in context with Severn Trent can be analysed in following manner:-
Job costing system- As water is considered as the most crucial part of a life therefore,
using it in efficient and proper manner is essential for those companies, that deals within such
business. In context with Severn Trent, preserving water and supplying to every human being
refers to the biggest challenge. Therefore, through job costing system its maintenance technician,
design engineers and other people that plays an effective role in hydro-geology, can take proper
decision related to estimation of cost incurred on each job.
Price optimisation system- This system evaluates how demand and behaviour of
customers fluctuates with changing prices (Lukka and Vinnari, 2014). Through this process,
managers of Severn Trent can find smarter ways to offer its services on affordable rates.
Inventory management system- Integrating this management system within accounting
software aids Severn Trent in providing a competitive edge to business. This would help in
minimising risk, automating the process, avoiding wastages and more. Here, major benefits a
company can get by integrating the concept of inventory management software is preventing
stock-outs and excess stock; inventory visibility to supply chain process; reducing labour
expenses; compiling accurate financial reports; enhance automation and more.
Cost accounting- This function of accounting system aid Severn Trent in determining on
which project company needs to make investments, for high return. For example: Making
investment in certain projects like in renewable technologies, reducing the usage of chemicals in
purification of water, finding smarter ways related to testing purity of water etc., how much
prove beneficial for business.
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Management accounting system and management accounting reporting is integrated within
organisational processes
Budget Report – This type of reporting system helps Severn Trent in controlling and
planning the budget more appropriately (JOSHI and et. al., 2011). As it helps in estimating future
expenses as well as incurred incomes through which proper budget can be prepared. Along with
this, it also helps in covering the risks in budget which may occurred during a specified period
and make available some funds for covering financial issues as well.
Cost managerial accounting report – It will be integrated with company because it
shows actual cost structure of company which is related to production. There is included
different types of cost to present actual value of each cars such as overhead cost, direct cost and
indirect cost.
Performance report – Integration of performance report within business aid management
of Severn Trent Aston martin in determining current performance of business. For this purpose,
it prepares report on the basis of targets achieve in a particular period.
PART B
Annex (A)
Budget 2019 2020 2021
Cost
Centre
Budgeted
production
overhead
costs in £)
Basis of
production
(overhead
absorption)
Cost
per
Hour Hours Cost Hours Cost Hours Cost
A 66000 22000 3 24200 72600 26620 79860 27500 82500
B 75000 15000 5 16500 82500 18150 90750 19500 97500
C 83600 41800 2 45980 91960 50578
10115
6 51500
10300
0
Annex (B)
(a) Labour hour: -
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Product X = £6000*1 = £6000
Product Y = £8000*2 = £16000
Labour hour = £2,64,000
------------
22,000
= £12 per hour.
Overhead absorption on labour hour: -
X Y
Overhead absorption = 1*12 = 2*12
= 12 = 24
Total Overheads = £6000*12 = £8000*24
= £72,000 = £192,000
(b) Using ABC approach of inventory management system: -
Machine hour per period:
Product X = £6000*4 = £24,000
Product Y = £8000*2 = £16,000
Cost driven rate: -
Production set up = £179,000 = 2893 per set up.
60
Order handling = £30,000 = 416.666 = 417 per order
72
Machine cost = £55,000 = 1.375 per order
40,000
Overhead using ABC approach: -
X
Set up = 15*2983 = 44,745
Order = 12*417 = 5004
Machine cost = 24000*1.375 = 33,000
Total 82749
Y
Set up = 45*2983 = 134,235
Order = 60*417 = 25,020
Machine cost = 16000*1.375 = 22,000
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Total 181,255
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ACTIVITY 2
Part A:
Advantages and disadvantages of different types of planning tools
Budget refers to a statement for estimating income and expenditure in business during a
particular period. It includes planned sales and volume, liabilities, cash flow, assets and more.
Through this statement, managers of Severn Trent can forecast costs required for manufacturing
the and planned activities to controlling the same for increasing its efficiencies. Similarly, the
term Budgetary control defines as a procedure of preparation of budget for conducting entire
operations in limited budget. The main objectives of a budgetary control process are planning,
coordinating, efficiency and economy, increase in profitability, anticipation of future capital
expenditure and more. In the regard, through budget respective company can forecast cost taken
by each department for conducting their activities and then compare it with actual and standard
result, for examining budgeted figures. For budgetary control, Severn Trent can use a number of
planning tools as given below:-
Scenario tool: This planning tool of budgetary control is used to estimate future situations
of a business that may affect strategic objectives of a company. Since it is difficult and
complicated to predict about future expenses but it is needful for growth of business as well.
Therefore, through this planning tool Severn Trent can prepare effective organizational strategies
for accomplishment of company’s goals.
Advantages – This tool helps in estimating the situations uncertainties can be occurred
therefore, respective company can make plans for reducing the same.
Disadvantages – Future estimation seems to be difficult for obtaining accurate information
so, such kind of estimation impact mostly on decision making process, that may future growth of
business.
Contingency tool: It is a budgetary control tool that helps in preparing plans for responding
towards emergency and its potential impact on business (Ewert and Wagenhofer, 2012).
Developing such a plan, aid an organisation in making decisions for managing human and
financial resources, as well as being aware of technical and logistic responses.
Advantages –Contingency planning tool is considered as best tool that enables a firm in
preparing plans like disaster-relief operations to overcome from future uncertainties.
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Disadvantages – It is basically reactive not proactive in nature, therefore, to manage a
situation may avoid the undesirable aspects of environment.
Forecasting tool: This planning tool is applied in business to anticipate with future and
potential issues that may harm a business. Here, projections mostly rely on strength of previous
data of business to predicate about future. This tool helps in concerning with budget, overhead
and cash flow more appropriately.
Advantages – This tool helps in improving performance of business to produce better
outcomes in future. The main objective of forecasting tool is to get more revenue and profit by
exceeding customer satisfaction.
Disadvantages – It is not possible for a company to accurately forecast about future of
business therefore, making decisions in this regard may result in financial ruin.
Use of different planning tools and their application for preparing and forecasting budget
Annex (c)
Year X PV@ 12%
Dis Cash
Flow Y PV@ 12%
Dis Cash
Flow
0 -5000 -8000
1 2500 0.893 2232.143 1500 0.893 1339.286
2 1000 0.797 797.194 2000 0.797 1594.388
3 1000 0.712 711.780 2500 0.712 1779.451
4 500 0.636 317.759 1000 0.636 635.518
5 1500 0.567 851.140 1000 0.567 567.427
6 1000 0.507 506.631 2500 0.507 1266.578
Total 5416.647 7182.647
Payback Period = Initial Investment
Average Cash Flow
Project X = 5000 = 4
1250
10

*Average Cash Flow = 7500 = 1250
6
Project Y = 8000 = 4
1750
*Average Cash Flow = 10500 = 1750
6
NPV: -
Project X = Dis Cash Flow – Initial Investment
= 5416.647 – 5000
= £416.647
Project Y = Dis Cash Flow – Initial Investment
= 7182.647 – 8000
= - £817.353
Part B:
A comparison of how organisations are adapting management accounting systems to respond to
financial problems
KPI: It is a measurable value which demonstrates the way a company effectively achieve
its business objectives, in a definite period of time (Miller and Power, 2013). In context with
Severn Trent Water, its Board leadership, transparency and governance principles reflects the
main key performance indicators. All these aspects ensures that operational and strategic issues
are engaged on same governance standards. Its statement of risks, strengths as well as
weaknesses all set out the main key areas of risks then draft assurance plan accordingly.
Benchmarking: It refers to measuring the performance of a company’s products and
techniques against its rivalries at same marketplace (Yigitbasioglu and Velcu, 2012). In context
with Severn Trent, Water and Sanitation Utility Projects has created a benchmark of this
company in other competitors. This company emphasises more on providing pure water and
reducing chemical usage for purification.
Financial Governance: It refers to most crucial factor in a company that helps in
collecting, managing, monitoring as well as controlling the financial information. It concerns
more on how organisations track their financial transactions and manage compliances,
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disclosures and performance, in effective and efficient manner. Through this tool, managers of
Severn Trent can operate major functions smoothly. It includes internal and external audit,
financial policies, workflow, financial controls, data security and more.
Biffa is one of the topmost competitor of Severn Trent Water's rival was founded in
Buckinghamshire, England in 1912. Biffa operates its business in Waste Management Services
industry. As comparison with Severn Trent Water, Biffa has given employment to more than
2,240 employees. Along with this, its strategic objectives i.e. to reduce wastage of water shows
the major key performance indicator of Biffa.
Differences between Severn Trent and Biffa
Severn Trent Biffa
Severn Trent is the second-largest listed water
company of Britain that emphasis on suppling
pure and chemical free water to millions of
people on daily basis.
Biffa is one of the best waste management
company that emphasises mostly on waste
collection, treatment, recycling and disposal
services for local and commercial sectors.
This firm uses KPI tool to improve its financial
performance and set ethical standards for
enhancing the profitability of business.
This firm focuses more to set benchmark
against its rivalries for getting an competitive
edge over them.
An analysis of how in responding to financial problems, management accounting can lead
organisation to sustainable success
Management accounting refers to a tool to analyse entire internal condition of a business
within a specific financial period. It also helps in obtaining information related to business
performance, stock analysis, inventory reports and more in terms of monetary and non-monetary
aspects (Hutaibat, 2012). Therefore, through tracking financial and non-financial activities of
business, management of Severn Trent make plans to make further investment for storage of
water resources and supply water to millions of customers more appropriately. Along with this,
its managers can also take major decisions for achievement of short-term and long-terms goals of
business.
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An evaluation of how planning tools for accounting help to solve problems and support
organisations with sustainable success
For solving financial and other problems of business, a company can use a range of
planning tools. This would increase ability of business for controlling and managing the
operational activities in appropriate manner (Harris and Durden, 2012). Along with this,
planning tools also helps in forecasting the issues which may arise in future due to certain
causes. Through this assumptions, Severn Trent can make plans for dealing with such problems
and enhance sustainability of business as well.
CONCLUSION
It has been concluded from this report that management accounting is the most important
concept in a business, which helps in tracking and monitoring the entire operational activities.
Through this concept, a company can measure its performance of business in terms of financial
and non-financial aspects. Here, management accountants of an organisation can collect
information related to revenue, cash flow and other outstanding debts to gather states, spot trends
and more. All these information helps in preparing a management report for making appropriate
decisions related to day-to-day management. Furthermore, by combining financial and non-
financial data, a company can also drive a success in its business. Along with this, management
accounting provides various planning tools through which a company can analyse estimated
outcomes and make strategies to resolve financial issues as well that may occur in future.
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