Management Accounting Techniques and Sainsbury's Financial Health

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MANAGEMENT
ACCOUNTING
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Table of Contents
INTRODUCTION........................................................................................................................3
LO1 UNDERSTANDING OF MANAGEMENT ACCOUNTING SYSTEMS........................................4
P1 EXPLANATION OF MANAGEMENT ACCOUNTING AND THE ESSENTIAL REQUIREMENTS
OF DIFFERENT TYPES OF MANAGEMENT ACCOUNTING SYSTEMS.......................................4
P2 EXPLANATION OF DIFFERENT METHODS USED FOR MANAGEMENT ACCOUNTING
REPORTING...........................................................................................................................6
M1 EVALUATION OF THE BENEFITS OF MANAGEMENT ACCOUNTING SYSTEMS AND THEIR
APPLICATION WITHIN SAINSBURY........................................................................................7
LO2 RANGE OF MANAGEMENT ACCOUNTING TECHNIQUES...................................................9
P3 CALCULATION OF THE COSTS USING APPROPRIATE TECHNIQUES OF COSTS ANALYSIS
TO PREPARE AN INCOME STATEMENT USING MARGINAL AND ABSORPTION ....................9
M2 APPLICATION OF A RANGE OF MANAGEMENT ACCOUNTING TECHNIQUES AND
PRODUCE APPROPRIATE FINANCIAL REPORTING DOCUMENTS.........................................11
LO3 USE OF PLANNING TOOLS USED IN MANAGEMENT ACCOUNTING.................................12
P4 EXPLAIN THE ADVANTAGES AND DISADVANTAGES OF DIFFERENT TYPES OF PLANNING
TOOLS USED IN BUDGETARY CONTROL..............................................................................12
M3 ANALYSIS OF THE USE OF DIFFERENT PLANNING TOOLS AND THEIR APPLICATION FOR
PREPARING AND FORECASTING BUDGETS.........................................................................14
LO4 COMPARE THE WAYS ORGANISATIONS COULD USE MANAGEMENT ACCOUNTING FOR
FINANCIAL PROBLEMS............................................................................................................17
P5 COMPARISION OF HOW ORGANISATIONS ARE ADAPTING MANAGEMENT
ACCOUNTING SYSTEMS TO RESPOND TO FINANCIAL PROBLEMS......................................17
M4 ANALYSIS OF HOW, IN RESPONDING TO FINANCIAL PROBLEMS, MANAGEMENT
ACCOUNTING CAN LEAD ORGANISATIONS TO SUSTAINABLE SUCCESS.............................18
CONCLUSION.......................................................................................................................... 19
REFERENCES........................................................................................................................... 20
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INTRODUCTION
This assignment is based on the concept of management accounting and its application in
real life. Management accounting is a tool to organize the financial resources of the
organization. Management accounting makes the company forecast its future opportunities
and future financial health of the company. This assignment will include the management
accounting techniques and preparation of an income statement that will be from both the
methods of absorption and marginal costing method. There are different types of the
budget which every department of the organization maintains and thus there are
techniques for controlling budget with some advantages and disadvantages. The application
of budgetary planning tools in the forecasting of budget, with the organization's
management accounting system in solving the financial problems, is done in this
assignment. Sainsbury is the retail chain in the UK that provides retail services in the grocery
with a range of 90,000 products. Sainsbury is focused on valuing customers and
providing them the best service range this company was established in 1869.
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LO1 UNDERSTANDING OF MANAGEMENT ACCOUNTING SYSTEMS
P1 EXPLANATION OF MANAGEMENT ACCOUNTING AND THE ESSENTIAL
REQUIREMENTS OF DIFFERENT TYPES OF MANAGEMENT ACCOUNTING
SYSTEMS
According to the Institute of Cost and Management Accountants, London management
accounting is the application of knowledge and analytical skills for formulating accounting
data in such a way so that it helps management informing decisions. The management
accounting term is inclusive of both management and accounting so the accounting used in
making the correct management decisions is called management accounting. Management
accounting is used only for the internal purpose of the company not for publishing it like
financial statements (Garrison et al., 2010).
There are several types of management accounting system-
1. Cost accounting system- in this system the company prepares accounts for
calculating the costs of producing per unit of the company and using it to making the
managerial decisions regarding the purchasing of raw material (Garrison et al.,
2010).
2. Inventory management system – inventory management is a combination of
ordering, storing and using the same for manufacturing of products. The inventory is
inclusive of raw material, work in progress goods and finished goods thus
management of these to reduce costs is the aim of inventory management.
Inventory management is applicable to all the companies that have tangible
products to offer (Garrison et al., 2010).
3. Job costing system- the times where company have its specific job works and for
that specific job the costing involved is calculated in the job costing system. This cost
includes the cost of raw material, cost of machinery, direct labor, direct overheads,
etc. this method is used to calculate the cost of job work done or the product costing
for the tailor-made services or custom based services. For example, if the company
gets an order from a specific buyer to manufacture custom made 100 units so to
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calculate the specific cost of manufacturing one unit is to be determined including all
the costs of manufacturing (Garrison et al., 2010).
4. Price optimization system- every company has its own pricing strategies and
methods to determine the price of the product, management accounting helps in
analyzing and determining the pricing of the product. To bring out a competitive
advantage the company has to range its prices in the range of its rivalries and so that
company's pricing is not too high and not too low to survive in the competitive
market. If in the case the company wants to penetrate in the market it has to
sacrifice for its profits at first and then slowly making the prices rise. Sometimes the
audience is price conscious and sometimes it is quality conscious so to decide the
price according to the buying behavior is price optimization system (Garrison et al.,
2010).
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P2 EXPLANATION OF DIFFERENT METHODS USED FOR MANAGEMENT
ACCOUNTING REPORTING
Management accounting reporting is the representation of accounting to help the managers
in short term decision making for day to day operations and monthly reporting.
Budgets- budgets are the tool to determine the costs that will be used to perform a certain
set of activities. Budgets are made for a specific department, specific product and for
specific company or brand. Budget is specially made for the future and to forecast the range
of revenues, costs or expenditure in the company or department. At Sainsbury, the
individual retail store wise budget is maintained by each store and overall the company’s
annual or monthly budget is maintained (Garrison et al., 2010).
Inventory management report- The system of inventory management report is a
management report that involves management of all the stocks including raw material,
work in progress and finished goods. The main business of Sainsbury is to provide retail
services where a large amount of inventory of grocery and other products is to be
maintained for these proper inventory management strategies and methods are to be used.
Since Sainsbury have mainly finished goods in its inventory so it has to maintain them
according to their dates, usage. There are 3 methods basically for inventory management
that includes LIFO, FIFO and average method (Garrison et al., 2010).
Investment appraisal report- this report is focused on determining the best investments.
The inflow or the results from the existing investments are also to be evaluated and
analyzed. The funds that the company has invested in are they earning profit currently and
will they be profitable in the future. For Sainsbury, it has its major stakeholding in Argos, so
the financial health and profits of Argos have an impact on the investment report of
Sainsbury (Garrison et al., 2010).
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M1 EVALUATION OF THE BENEFITS OF MANAGEMENT ACCOUNTING
SYSTEMS AND THEIR APPLICATION WITHIN SAINSBURY
Management accounting helps the management in decision making regarding the short
term and long term problems and strategic issues. The management accounting helps the
manager to forecast and analyze the future trends for the company and its products.
Benefits of accounting management are-
1. Inventory management – Through management accounting the proper accounting of
inventory its inflow, and outflow is recorded with due respect of time and expiry of
products especially the perishable goods. At Sainsbury, there are various products
that are of perishable nature so LIFO accounting method is used and for the
beverages like wine which are better when they are old so the FIFO method is used
for accounting hence the stock is maintained according to the nature of the product
and its expiry. Inventory management is not limited to holding the stock but also
related to ordering the stock on time without any gap and thus to order stock in
minimum cost is also the matter of concern in inventory management. Inventory
management also involves minimizing the holding cost, ordering cost and balancing
the overall cost through the EOQ model (Garrison et al., 2010).
2. Decision-making ability – Through management accounting the manager gets
assistance in analyzing the trends of current and future revenues of the company.
For Sainsbury, the analysis of a company's internal health is necessary for making
strategic decisions. Through statistics and charts, management accounting helps in
analyzing the competitor’s strengths and its position. Whether the company needs
to lower its price or to reduce its costs or to improve its quality etc., these questions
are to be answered through management accounting (Garrison et al., 2010).
3. Investment management- since through management accounting the profitability of
the investment in the near future can be determined and analysis of the future
investment options in which investment can be done and how much investment
needs to be done in how many years it will pay back etc. so for managers at
Sainsbury the management accounting is beneficial (Garrison et al., 2010).
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4. Cost minimizing- through the accounting systems and the implementation of cost-
saving accounting techniques the management can save a lot of cost from wasting
(Garrison et al., 2010).
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LO2 RANGE OF MANAGEMENT ACCOUNTING TECHNIQUES
P3 CALCULATION OF THE COSTS USING APPROPRIATE TECHNIQUES OF
COSTS ANALYSIS TO PREPARE AN INCOME STATEMENT USING MARGINAL
AND ABSORPTION COSTS
The cost of the company can be calculated from various techniques or methods these
methods are categorized on the basis of variable and fixed costs.
Absorption costing method – absorption costing method is a managerial accounting tool to
calculate the costs of the product of the company. In the absorption costing method, the
fixed and variable both the costs are added in the production cost of the product that the
company serves. Fixed overheads or fixed costs include those which remain fixed
irrespective of the changes in production units like the salary of employees, and on the
contrary, the variable costs are dependent on the number of units produced by the
company (Zimmerman and Yahya-Zadeh, 2011).
Marginal costing method- In the marginal costing method, only the variable cost is only
considered and included in the product cost, not the fixed cost. Since the fixed cost is
excluded from the product cost the actual cost of production is determined, this is method
is also used in the specific job or project work (Zimmerman and Yahya-Zadeh, 2011).
Figure- Income statement of Sainsbury
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Source- (Sainsbury, 2018)
INCOME STATEMENT OF SAINSBURY
By Absorption Costing Method
Particulars £ million
Sales revenue
Cost of sales
Gross profit
Selling and administrative overhead
Operating profit
28,456
(26,574)
1882
(1415)
467
INCOME STATEMENT OF SAINSBURY
By Marginal Costing Method
Particulars £ million
Sales revenue
The marginal cost of sales :
Variable production overhead
Variable administrative expenses
Contribution
Fixed costs:
Fixed selling and administrative overheads
Fixed manufacturing overheads
Net profit
28,456
(24556)
3900
(3433)
467
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M2 APPLICATION OF A RANGE OF MANAGEMENT ACCOUNTING
TECHNIQUES AND PRODUCE APPROPRIATE FINANCIAL REPORTING
DOCUMENTS
The costing involved in absorption costing method and in the marginal costing method is the
same but there are times when the production cost per unit from both the costing methods
is not same so then the deviation in the pricing and cost of the product is filed by the
recompilation statement that involves the closing and opening cost of fixed inventory.
Particulars Amount
Absorption costing profit
Add: fixed cost of the opening inventory
Less: fixed cost of the closing inventory
XXX
(XXX)
XXX
Marginal costing profit XXX
Since there is no deviation in the absorption cost and marginal cost so there is no need to
prepare the reconciliation statement for Sainsbury.
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LO3 USE OF PLANNING TOOLS USED IN MANAGEMENT ACCOUNTING
P4 EXPLAIN THE ADVANTAGES AND DISADVANTAGES OF DIFFERENT
TYPES OF PLANNING TOOLS USED IN BUDGETARY CONTROL
Budget is formulating of activities and plans for the future in quantitative or monetary
terms. Since there are different budgets in the company according to the departments,
business units, project, etc. so the actual performance has to be controlled and monitored
with the standard budget and should be used compared time to time for better efficiency
and better results. These will help Sainsbury in planning its budgets for the future.
The planning tools for budgetary control are-
Flexible budget or Roll over budget- the rollover budget is a tool for planning budget that is
only designed for the short term and short time period instead of designing it for the whole
year. This is a very helpful and flexible technique which makes the management change in
the budget every month or quarterly according to the changes in the environment and
internal conditions of Sainsbury. In the rollover budget, the negative budget of this month
can be rolled over to next month (Zeller et al., 2013).
Advantages- This budget analyzed the current market trends and the budget is updated
every time and hence the budget becomes more applicable and relatable (Zeller et al.,
2013).
Disadvantages- The disadvantage of rollover budget is that its very time consuming as there
are multiple budgets to be formulated (Zeller et al., 2013).
Static budget- The static budget is formulated once and for the whole year and need not be
made every month or every quarter. A static budget is rigid and hence it is not dependent
on the volume of the production. At Sainsbury, the static budget will be used and will be
helpful even if there is a change in its volume (Zeller et al., 2013).
Advantages- The advantages of static budget are that it needs to be reformed on the
changes in the volume of products. Less time-consuming process and is very easy to
formulate (Zeller et al., 2013).
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