Financial Analysis of Tesco using Management Accounting Techniques

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Management accounting
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Table of Contents
Introduction....................................................................................................................................3
Task 1..............................................................................................................................................4
Part 1...............................................................................................................................................4
A).....................................................................................................................................................4
B):....................................................................................................................................................6
c)......................................................................................................................................................7
D).....................................................................................................................................................8
Part 2).............................................................................................................................................9
Task 2............................................................................................................................................11
Part 1.............................................................................................................................................11
Part 2.............................................................................................................................................12
Task 3............................................................................................................................................16
P5:..................................................................................................................................................16
Conclusion....................................................................................................................................18
References.....................................................................................................................................19
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Introduction
This report is based on the management accounting and its impact on the financial performance
of the ‘Williams Performance Tenders ltd.’ Management accounting is the process of collecting
financial information, interpreting and communicating them to the top management to take
financial decisions. This system entails of various other systems such as cost accounting system,
inventory management system, job costing system etc. There exist various techniques which help
a managerial accountant in collecting financial information. A number of management reports
such as job cost report, budget report, performance reports etc. are prepared in order to take
sound financial decisions. The various planning tools such as budgets, variance analysis and
financial statements serve as a major aid in interpreting the financial information and decision
making. Absorption costing and marginal costing techniques are also undertaken and a profit and
loss statement for both has been made to determine the difference. Management accounting is a
great system to take efficient and effective decisions.
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Task 1
Introduction
Managerial accounting is a study of managerial aspect of accounting. In this system the
management redesigns the accounting functions to fit in the operational needs of the firm.
Managerial accounting undertakes the use of management information system. This information
system provides relevant and timely information to aid in decision making. Management
accounting system also serves as a major aid in planning and strategic decision making for an
organization. All the accounting information is presented to the management in such a way that it
can be utilized by them to form policies, execute control and achieve the desired organizational
goals.
Part 1
A):
Management accounting or managerial accounting is a process of identifying, analysing and
measuring, interpreting and communicating the financial information to take decisions in an
organization (Butterfield, 2016). Management accounting refers to the integration of
management and accounting. This is a system which provides accurate and efficient economic
and financial information for the formation of management reports. This helps in efficient
organizational decision making for short as well as the long term. This involves taking
accounting information from all departments and operational divisions. This information is
further passed on to the top management which analyses the information and then takes suitable
decisions.
The essential requirements of different types of management accounting system are as follows:
 Inventory management system:
Inventory management is a system of tracking and keeping a check on ordering, reordering and
storage of goods throughout the entire supply chain (Pontius, 2019). This system helps to keep a
check on the stock requirements. It is an essential requirement for a manufacturing firm. The
various methods used for inventory management are LIFO, FIFO, weighted average cost of
capital etc. These help an organization to take decisions regarding the economic order quantity,
costs, re order quantity etc. The essential requirements of IMS are as follows:
o Proper control over physical inventory present in the warehouse. For an inventory management
system to work properly, it is a pre requisite to keep a proper control on inventory. This avoids
wastage and pilferage of the stock.
o A proper record needs to be maintained for amount of inventory purchased and used in the
production process. A separate record needs to be maintained for closing, opening and work in
progress.
 Job costing system:
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Job costing is a system of analysing and assigning cost to a particular product or service. This
involves the direct material cost, direct labour cost and the overheads cost. This system helps the
company to determine the cost for job. This enables them to set the prices and profit margins for
their products. The essential requirements of job costing system are as follows:
o A proper record of the cost of direct material, direct labour and overheads must be maintained.
o A proper record of cost on labour, idle time cost must be maintained.
o The overhead classification and absorption methods must be used to keep a track of overhead
costs.
 Cost accounting system:
Cost accounting system helps to estimate the overall cost of a product for determining the
profitability of a product (David, 2018). This helps the company to determine which products are
profitable and which are not. This is done through two methods called job order costing and
process costing.
o The scale and nature of business needs to be properly examined before implementing cost
accounting system.
o The cost accounting system must be implemented in such a way that it is able to identify the cost
of each job order or process at all stages of production.
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B):
Management accounting report refers to the documents that are prepared by the managers to
present information regarding various aspects of accounting in a precise and concise manner.
These reports form the basis for many decisions and policies. Also, they help to take strategic
decisions.
The different methods used for management account reporting are
 Job cost reports:
Job cost reports is a detailed document which tracks the overall cost and revenue for particular
project. An organization undertakes job cost report in order to understand which projects are
profitable and which are not.
 Budget reports:
Budget report is a detailed document which is based on the past performance and current goals
that need to be achieved, by an organization. These budget reports help to analyze the current
performance, take corrective steps and find the deviations in performance. Budget reports serve
as a great tool for cost control and cost reduction (Moqbel, 2015).
 Performance reports:
Performance reports help to compare the actual performance with the budgeted performance.
This helps to find out the performance deviations and analyze whether the firm is achieving the
desired objectives or not.
 Opportunity reports:
Opportunity reports helps to identify the future opportunities and threats that can occur in a
business in future. This helps the firm to take the strategic decisions and avoid losses due to
uncertainties.
 Accounts receivables aging reports:
This report contains the information regarding the debtors of a firm. It contains the debtors which
are due in the near future. This report is a great tool while devising the debtor’s policy for a firm.
This contains detailed information for debtors that are due in 30, 60, and 90 and above 90 days.
 Inventory and manufacturing report:
Inventory and manufacturing report refers to the ones which keep a track of the inventory
manufactured per hour, the amount of waste material, idle time in manufacturing etc. This report
helps to identify the faults in manufacturing process.
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c)
The benefits of management accounting system are various. These are listed as follows:
 Provides information to management for taking timely and efficient decisions (Breuer, et. al.,
2013). The management accounting information system provides economic and financial
information to the mangers to take which aids in decision making.
 It helps the management to plan for the future. The budget reports and performance report help
to identify the future opportunities and trends. Also, it helps to find variances in budgeted and
actual reports.
 The managerial accounting helps to make strategies for the future. This provides the managers
with appropriate information for policy and strategy formation. It helps in framing strategies
keeping in mind the strengths and weakness of the organization.
 It also aids in avoiding risks. It helps the organization to identify the risks and threats in the
external organization. Also, risk avoiding strategies can be made in advance for the firm.
 It also helps the firm in planning, controlling and organizing the day to day activities in the firm
efficiently and effectively.
 The management accounting is used in planning functions to plan for the goals to be achieved. It
also helps in profit planning, sales forecast etc. All this planning is done with the information
provided by managerial accounting information system (Breuer, et. al., 2013).
 Management accounting collects information from all departments and all levels of the
organization. Then, this information is utilized to take decisions for the whole organization.
Therefore, this helps in coordinating the departmental objectives with the overall organizational
objectives.
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D):
The preparation of various managerial reports provides concise and simplified information to the
management for decision making. For instance, the budget report (Zamfir, 2015) helps the
organization to have a clear focus on the goals that need to be achieved within a given time
frame. This integrates the organizational processes with the targeted goals (REZNIQI et. al.,
2014).
The preparation of accounts receivables reports help the organization to formulate the debtor’s
policies. This report also helps to keep a track of the debtors that are due in the near future and
avoids any confusion. This helps to keep a control on debtors and the bad debts can be identified
on time.
The inventory and manufacturing reports help the organization,’ Williams Performance Tenders’
to keep a track of the inventory that came in the firm, the number of units manufactured, the
number of units still in work in progress (Gartenstein,2018).
All these managerial reports form the basis for strategy formulation, policy making, decisions
etc. These help the organization to integrate the interdepartmental roles with the overall strategy
and goals of the firm.
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Part 2):
Managerial accountants prepare budgets, analyse financial statements, and undertake variance
analysis etc. to collect, measure, interpret; analyse the financial information in order to take
financial decisions. These three planning tools are used by managerial accountants in the
following ways:
 Budgets:
Budgets refer to the detailed document which contains an estimate of income and expenditure for
a given period of time. This serves as a great planning tool for managerial accountants of’
Williams Performance Tenders’ organization. Budgets set an estimated performance standard for
the current year and the actual performance is measured with this. Each department of the
organization sets a separate budget for itself and tries to achieve the targeted results. This helps
to keep a check of any variances or deviations (Zamfir, 2015).
With the help of various budgets the organization can also estimate the amount of fund
requirement by each department for the financial year in order to achieve their goals.
Management accounting aids in preparation of these budgets by providing relevant financial
information to the organization.
 Variance analysis:
Variance analysis is the process of measuring the budgeted performance with the actual
performance. This comparison helps to detect the variances or deviations found in the actual
performance (Pollard, 2014). Variance analysis helps to take corrective actions for all the
variances found.
This serves as a major planning tool to avoid any variances in the future years. Management
accountant undertakes the past year data of variance analysis to take future decisions. This helps
in avoiding the same mistakes in the future. The financial performance can be improved for the
upcoming years and mistakes can be avoided.
 Financial statements
The financial statements are a great planning tool for the management accountants. The trading
account, profit &loss statement and balance sheet help the organization to identify their financial
performance. This serves as a planning tool to prepare budgets for the future. This is an effective
planning tool because it helps to understand the financial performance, the financial strengths
and weakness of the firm.
With the help of these planning tools the firm can analyze the financial performance and can
improve upon its weakness. This helps to avoid financial risks in the future as the firm is better
prepared and planned to face challenges. This also aids in financial management and allocation
of funds. These financial planning tools also aid in decision making. The accountant analyzes the
information so obtained with the help of planning tools and then makes strategies and policies
for the firm.
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The management accounting also undertakes SWOT analysis so that the firm can do strategic
planning. This helps to take strategic decisions based on the internal and external factors. The
budget, variance analysis and financial statements are effective planning tools as they help the
management accountants in decision making. This also helps in cost reduction and cost control.
Budgets also help in controlling the cost. This provides a scope to increase the profit margin of
the firm. The planning tools help to overcome the financial problems as well.
Conclusion
The management accounting proves to be an efficient and effective system for the company,
‘Williams Performance Tenders’. This company undertakes the preparation of various
management reports. The management reports helps to take better financial decision. The
management inventory system also helps to keep a track of the inventory in an efficient manner.
The overall implementation of management accounting helps organization to avoid risks, face
uncertainties and analyse the trends in the business environment.
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Task 2
Part 1
Marginal costing:
Marginal costing is the cost fluctuation in the total cost of the production that makes the
additional cost of the production. Marginal costing is the variable cost is adding on direct labor,
direct material and fixed cost (Kumar, p. 2019)
Statement of Profit for Eymen Ltd
MARGINAL/VARIABLE COSTING
Particular
Detail
s May (in £)
June (in
£)
Sales(units) 300000 270000
Selling price per unit 13 13
Total Sales (a) 3900000 3510000
Less: Direct Material Per unit 0.75 0.75
Less: Direct Labour Per unit 1 1
Less: Variable production overhead Per unit 0 0
Less: Variable selling and administration overhead Per
unit 0 0
Total Variable cost per unit 1.75 1.75
Total Variable cost (b) 525000 472500
Total Contribution (a)+(b) (c) 3375000 3037500
Less: Total fixed cost
Fixed production expenses (d) 0 0
Fixed Variable and administration expenses (e) 0 0
Total fixed Overhead (d)-(e) (f) 200000 200000
Total Profit (c)-(f) (g) 3175000 2837500
Absorption costing
Absorption costing is the calculation of the cost of the product, indirect expenses and direct cost.
It includes the all cost in the production as a fixed and variable cost. Such as direct cost, direct
material, factory overhead etc.
Statement of Profit for Eymen Ltd
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ABSORPTION COSTING
Particular Details May (in £) June (in £)
Direct Material (A) 225000 225000
Direct Labour (B) 300000 300000
Direct expenses (C) 0 0
Prime Cost (A+B+C) (D) 525000 525000
Add:-factory/production overhead (E) 200000 200000
Factory cost (D+E) (F) 725000 725000
Add:-Administration overhead (G) 0 0
Cost of production (H) 725000 725000
Add:-Opening stock of finished stock (I) 0 0
Less:-closing stock of finished stock (J) 0 390000
Cost of goods sold (H+I-J) (K) 725000 335000
Add:-selling and Administration overhead (L) 0 0
Cost of sales (K+L) (M) 725000 335000
Profit(balancing figure) (N) 3175000 3175000
Sales (O) 3900000 3510000
Reconciliation of profits under Marginal and Absorption costing
Particular
May (in
£) June (in £)
Profit as per Marginal Costing 3175000 2837500
Add:-under recovery of production overhead 0 0
Add:-under recovery of selling and administration overhead 0 0
Total 3175000 2837500
Add:-closing stock of finished goods 0 390000
Less:-opening stock of finished goods 0 0
Profit as per Absorption costing 3175000 3227500
Part 2
Financial analysis of the company
Particulars 2018 £ m
Gross profit 3350
Net profit 1208
Total assets 44862
Sales 57,491
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