Management Accounting Systems: A Unilever Case Study Report

Desklib provides past papers and solved assignments for students. This report analyzes Unilever's management accounting system.

Management Accounting
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Table of Contents
Introduction...................................................................................................................... 3
LO1: Demonstrating an understanding of management accounting systems..................4
L02: Application for the range of the management accounting techniques:...................10
LO3: Use of planning tools used in management accounting........................................14
LO4: Comparing ways in which companies can use management accounting systems
for responding to financial problems..............................................................................16
Conclusion..................................................................................................................... 19
References.....................................................................................................................20
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Introduction
In present complex business environment, management accounting can be considered
to be of prime importance as it helps in timely presentation of financial and managerial
information to the management and assist them in making useful routine decisions. For
the current assignment, the Unilever company has been selected which is a UK based
organization. The report analyzes the implementation of management accounting
system within the organization. It will also examine the essential requirements of system
along with the planning tools and how management accounting solves financial
problems.
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LO1: Demonstrating an understanding of management accounting systems
P1: Explanation of management accounting and essential requirements of
management accounting systems
Definition of management accounting and systems
According to CIMA, the management accounting is defined as the process of
accumulating, identifying, measurement, analysis, interpretation, preparation and
communication of the information that is needed by the management to ensure proper
usage and accountability of resources by effective planning, evaluation and exercising
required control over the organization.
Management accounting can also be described as the branch of accounting assists in
reporting and measurement of the financial and non-financial information that allows
management accountants to make informed decision for fulfilling the objectives of the
company (Banerjee, , 2012). Thus, from the above two definition of, management
accounting is referred to as the Information System (IS) whose major aim is to provide
essential support for motivating and influencing the effective managerial decision
making activity within the organization.
Different types of management accounting systems:
The management accounting system mainly comprises of information system that are
based on the financial accounting, management accounting and cost accounting. The
different types of management accounting system majorly help in the decision making in
the internal matters of the organization. The different systems are as follows:
Cost accounting system: The system provides information related to cost per unit of
the product, service cost, standard product, variance analysis, cost determination for the
pricing purpose, capital budgeting and the information related to projected cost for
budgeting purpose.
Inventory management system: The system provides information with the various
elements related to inventory costs and other costs that are important for taking different
types of inventory related decision within the organization along with appropriate
planning and establishment of control systems for the management of the inventory
(DRURY, 2013). The different methods that are used for inventory management within
this system includes the economic order quantity (EOQ) model of decision making, the
MRP (Materials Requirement Planning) system and the JIT (Just-in-time) system of
inventory management.
Job-costing systems: The system involves the two major types of costing system that
are basically utilized for the assignment of cost to the services and products. These are
identified as the process costing system and the job-order costing system (Fullerton, et.
al., 2013). The process costing system is mainly used by organizations that are
manufacturing multiple units of a single product for a longer duration that passes
through different processes while the job order costing is used in circumstances in
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which diverse products are manufactured and period costs are required to be allocated
and traced for specific job.
Price optimization system: The system has been evolved from the cost information
and accounting system that is required for supporting equitable pricing policy and
decision along with the fulfillment of organizational planning and control objectives. The
analysis is made regarding the demand and supply relationship in order to control
competition and costs.
Essential requirements of different types of management accounting
The management accounting is essentially required within the organization due to the
following reasons:
Timely information: The good management accounting systems is essentially required
within the organization in order to obtain accurate and timely information about the
different aspects such as cost and price etc in order to control cost for the reason for
profitability measurement and improvement and the subsequent improvement in the
production processes (Hilton and Platt, 2013).
Accurate reports: The management accounting system are also required within the
organization as they help in development of accurate cost reports that assist the
manager in making correct decision related to pricing for addressing to the competitor
products, new product launch and the discontinuation of the obsolete products
Performance evaluation: The system is also required with the company so that the
performance measurement and evaluation of managers can take place on the basis of
performance reports (Kaplan and Atkinson, 2015). This provides a clear picture to the
management regarding the employees with high efficiency and productivity in
comparison to employees with lower productivity and efficiency.
Origin, role and principles of management accounting
In earlier times till the dawn of industrial revolution in the 19th century, the basic purpose
of accounting information is the profitability analysis and thus, the information is
exchanged between the owners and external parties such as customer and suppliers. In
tradition era, due to absence of internal processes, the management accounting did not
have any significant role within the organization (Otley and Emmanuel, 2013). The
double-entry bookkeeping system was widely for the fulfillment of information needs of
the owners and entrepreneurs. Later on, MA was developed within organization having
hierarchical structure for determination of costs during conversion processes and
providing summary regarding the performance measurement of the managers and
different processes. The MA was also used for assessment of the viability of the capital
investment.
The different principles of management accounting can be identified as:
Relevance: The management accounting information should provide the basis for
decision making that is different from financial information. Further, the principle also
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provides that the information have predictive value (Parker, 2012). That means that the
information should be evaluate the impacts of future, present and past transactions and
should have a confirmatory value.
Faithful representation: The principle should be sufficient in presenting the information
with utmost faith and truthfulness. The information that is required for decision making
should be neutral and free from any type of biases on the part of material error.
Difference between management accounting and financial accounting
Basis Management accounting Financial accounting
Key users Internal stakeholders like
employees and department
managers for planning and
controlling the internal activities
(Ward, 2012).
External stakeholders like
shareholders, investors,
customers etc. for making
investment decisions
Time focus Future perspective Historical perspective
Statutory
requirements
It is not required to follow any
GAAP and IFRS reporting
procedures.
The financial reports are to
be prepared as per the
IFRS and GAAP rules and
regulations.
P2: Different methods used for management accounting reporting
The various managerial reports that are prepared by the managers help in the
performance evaluation of the business and are as follows:
Cost and sales reports: These reports primarily focus over the volume and quantity of
output that is produced within the organization. The major content of the reports provide
information related to sales, overhead, material cost and labor cost variances
(Wickramasinghe and Alawattage, 2012). The core purpose for the preparation of these
reports is to identify the causes of the variance and to know the reason for isolated off-
standard performance. Further, the reports are also helpful in the optimum utilization of
available resources.
Budget reports: The budget reports assist the managers in the preparation of
operational budgets and cash budget and thus, the content of the report provides
information regarding budgets such as inventory budget, fixed assets, marketing, selling
and distribution and production (Aalto, 2012). The budget control reports are also
helpful in managing the difference between the actual and the budgeted expenses and
taking appropriate measures for managing the cause of divergence.
Segment, departmental (responsibility), and divisional reports: The reports provide
information with respect to the responsibility center managers with respect to the
revenue, investment and costing decisions. Along with this, the method used for
calculating the amount in respect of the above elements such as return on investment
and residual income can be determined through these reports (Wyatt, 2012). The
reports are helpful in the analyzing the performance of the decentralized units for each
of the responsibility accounting managers.
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Investment appraisal reports: The report provides assessment of information viability
on the basis of techniques such as internal rate of return, accounting rate of return,
Payback and the net present value. The report enables the manager to know the
profitability of different projects before investing organizational and financial resources
in such projects.
M1: Benefits of management accounting systems and their application within the
chosen organization
Planning: The management accounting is required in the organization for planning the
short term objectives of the business and thereafter the determination of alternatives of
the business. The planning function helps in choosing the best alternative from the list
of options available. The alternative is chosen that helps in expanding the objectives of
the business (Bogsnes, 2016). Planning in management accounting is also required for
developing budgets so that guidance can be received with respect to selected
alternative.
Directing and motivating: These requirements enable the mangers to ensure that
routine activities are performed as per the previously laid drawn plans. The different
activities that are included under this are effective communication, problem solving,
employer-employee relations and conflict resolution and management.
Controlling: It makes sure that plans are properly followed and the variance analysis
reports can be considered as a useful source for this. The necessary corrections are
made when deviation is found between the actual and budgeted reports.
D1: Integration of management accounting system and reporting within the
organization
The systems theory can be used for explain the relation and integration of management
accounting systems and reporting with the company’s entire information system (IS).
The integration of different types of management accounting system is important within
the organization as it assists the managers to work in accordance with the other
different sub systems of the company, for example the production system that helps in
the attainment of corporate objectives of business.
The integration of cost and sales report with the cost accounting system helps in
enhancing the effectiveness and efficiency along with the better and more effective
utilization of res0orces achieved within the company (Brealey, et. al., 2012). Further, the
reports such as budget reports, inventory and other performance reports are integrated
with the cost accounting system and of the organizations like Unilever so that
appropriate and timely decision can be made with respect to the actual expenses and
the budgeted expenses. The managers can subsequently reduce the costs incurred
over inventory storage on the basis of inventory reports.
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L02: Application for the range of the management accounting techniques:
Different types of the cost incurred in the organization are:
Fixed cost: These are the costs which are implemented in the organization irrespective
of the production takes place in the organization. It is the type of the expense incurred in
the organization irrespective of the increase or decrease in the production activities in
the organization (Ruiz-de-Arbulo-Lopez, et. al., 2013). These costs of the company are
independent from the other business expenses incurred in the companies.
Variable cost: These are the cost of the company which is continuously gets changes
with the change in the production output of the company. The variable cost of the
company gets increase or decrease with the increment or reduction in the production
volume of the company.
Different techniques used in the management accounting:
Standard costing; These are the costs which are usually associated with the cost
incurring in the company in respect of the direct labor, material and the overhead
expenses. These costs represent the standard cost to be incurred in the production not
the actual cost of production take place in the companies.
Activity based costing: This method allocate the cost to the products on the basis of
the activities and the resources which are incurred in the production process of the
companies. This cost allocates the specific cost to the individual activities that are taking
place in the companies (Simpson, et. al., 2013).
Marginal costing: This method of costing basically considers the increment and the
reduction in the production cost of the company as per the production units of the
company. This method do not considers the inclusion of the fixed cost for the
determination of the production cost of the entity.
Absorption costing: This method is also popularly called as the method of the full
costing. This method is considered as the accurate method for calculation of the total
cost of the company. This method considered the fixed cost while the calculation of the
total production cost of the company. This method is called as the accurate method of
costing.
Here are the presentation of the income statements using the marginal and the
absorption costing:
Income statement by marginal costing:
sales unit 5500 units
sales price per £ 90
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unit
variable cost per unit:
Direct material 15
Labor 7
variable overhead 3
variable cost per unit £ 25
Marginal costing:
Particulars amount
Sales £ 495000
cost of sales
opening stock 0
variable cost 125000
Closing stock 0
Total cost of sales 125000
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Contribution 370000
less Fixed cost 100000
Profits £ 270000
Income statement using the absorption costing:
sales unit 5500 units
sales price per
unit £ 90
Absorption costing
total cost per unit
Direct material 15
Labor 7
variable overhead 3
Fixed overhead per unit 18
total cost per unit £ 43
Sales £
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495000
cost of sales:
Opening stock: 0
Variable cost 237500
closing stock 0
Total cost of sales 237500
Less: Fixed cost other then
production o/h 0
Profits
£
257500
The reason for the difference between the profits by both the methods can be due to the
consideration of the fixed cost in calculating the total per unit cost under absorption
costing (Sani and Allahverdizadeh, 2012).
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LO3: Use of planning tools used in management accounting
P4: Explaining the merits and demerits of different types of planning tools used in
the budgetary control
Operating budget: This type of planning tool for budgetary control assists in
forecasting and analysis of the future expenses and projected income over a certain
period of time in future. The major advantage of this budget is that it can be easily
prepared for planning and forecasting the income and expenses on annual, weekly and
monthly basis (Ittner and Michels, 2017). The disadvantage of the budget is that the
managers are required to collect information regarding sales, manufacturing cost,
production cost etc which is a tough task.
Cash budget: This is the budget that helps in the determination of inflow and outflow of
cash on the basis of different operations of the business over a particular time period.
The core merit of this budget that it help is forecasting and planning the future cash
requirements within the business by considering factors such as accounts receivable
and accounts payable. The demerit of the budget is that it is useful only when the cash
is management in an appropriate manner.
Static or fixed budget: This is the budget that is fixed in nature. The core benefit of the
budget is that only small changes can be made in the existing figures of sales and
revenue for preparing the next year budget. The demerit of the budget is that it does not
take into account the changes in the various elements of cost which affects the
suitability of budget.
Capital budget: The budget aims at planning and developing the existing capital of the
business for the reason of improving the long term profitability of the business. The
major advantage of the budget is it enable the managers to plan and forecast for
different capital expenditure alternative in the business (Klychova, et. al., 2014). The
disadvantage is that it requires a long term planning for determining the capital outlays.
Sales budget: This is one of the major budgets and is considered as the initial point for
the preparation of several other budgets. The advantage of this budgetary planning tool
is that the forecasting and estimation can be made regarding the quantities to be sold in
future for earning a specific amount of sales and profit (Ward, 2012). The demerit of this
budget that if the sales quantity is wrongly calculated then it would lead to inaccuracy of
other budgets based on sales figures.
Pricing strategies and the determination of competitors’ price through supply and
demand considerations
There are different types of marketing based pricing strategies such as:
Premium pricing: This is the pricing strategy in which the organization places its
products is relatively higher category in comparison to the existing competition on a
permanent basis. The perception is based on multiple factors such durability, quality,
after-sales service and the quality of the product.
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