Management Accounting: Tesco's Financial Strategies

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MANAGEMENT ACCOUNTING
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Table of Contents
Scenario 1....................................................................................................................................................3
Scenario 2..................................................................................................................................................10
Absorption and Marginal Costing..........................................................................................................11
Variance analysis...................................................................................................................................14
Inventory report for the Company.........................................................................................................16
Reference...................................................................................................................................................18
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Scenario 1
The term "management accounting" is a term related to the management of the accounting
process and systems. It can be defined as a process to cover the data related to finance in a
systematic order so that management faced no issue or problems regarding the management
accounting process. The process of management accounting us start as to measure, identifying,
interpreting and analyze with the communication of the information related to financial that help
in attaining the organizational desired goals or targets. It refers the manager professional as well
as interpersonal skills in the process of construct information because it will aid to management
of the Tesco Company to take their better decisions which indirectly or in any other way make a
profit to the company (Arroyo, 2012).
In the business of Tesco organization, it uses different management accounting systems for the
management of their business activity like control cost and inventory, implementation of price
theory and other. These systems made a benefit to the company in their respective field and able
to use their resources in an optimum way so over wastage is can be eliminated. Following are
some systems of management accounting which can be analyzed each in below:
Job costing:
The purpose of this system is to distribute or allocate the manufacturing price of the item into
each and every unit which is to be produced. This is done due to overvalued and undervalued of
cost is made to each individual unit perfectly. This method used by the Tesco Company because
of it manufactures a different unit of product and each one is required to cover the cost. This
system of management accounting is also important to those firms where they made a contract
with each other company and want to reimburse the cost included in the production or
manufacture of goods by the company who take the contract like Tesco company. This method
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also works when the order received from the customer and the production of goods is start in the
direction of the company, generally the company (Richards, et. al., 2019).
Cost accounting:
This method used By the Tesco firm in order to manage and take control over the cost for the
motive of analysis the profitability of the product which is sold in the market. This method
included two costing system in which the cost of the product is allocated like use activity cost
method or traditional cost method. This system helps the management of the Tesco Company as
from this system management know the cost and able to measure the performance of the
company at a financial level by using the actual result with the standard. Through this, it aids in
finding the actual cost of the product and find whether the unit is able to generate profit or not, if
not then use some analytical tools which help in making the improvement in the production cost
of the product. Such tools are operating costing, budgeting costing, marginal costing and more
(Graham, 2019).
Inventory management:
This method help to the Tesco company management in order to check the stock which is used in
the process of production for the ultimate purpose of selling them. The company uses different
methods to control the flow of inventory because it is necessary to take control of the use of
inventory to check whether the inventor usage is optimum or overuse. So to prohibit of use of
extra inventory over the required, this system out some standard so inventory can be managed
easily. This also benefits as it provides the actual amount of stock that is available for sale.
Through this, the manager also prepares a budget for the future for inventory and able to make
their decision on quick time as the entire detail of inventory is submitted into the inventory
system.
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The Tesco organization uses various types of reporting system which include the company
budget in various field like performance budget, cost budget and other which is discussed in
below to understand the importance of these reporting systems within the organization of Tesco.
Budget reports: The feature of this reporting system of management accounting is that it
contained the entire information regarding the source of income and area of expenditures. From
this, it also provides an advantage in the constructing new budget for the new period of time by
taking the information from the previous budget and also help in making improvement in new
budget by comparing the actual result with the budgeted plans. Hence it is played a significant
role in achieving the Tesco Company desired goals and task effectively and efficiently by the
remove of variance in the new budget (Caruana, et. al., 2019).
Cost reports: Under this report, it has the potentiality to contain each information regarding the
cost of the product which is being produced by the Tesco Company. Through this, management
takes the benefit and make their decisions in quick time or means take less time in order to make
a decision.
Performance reports: This report is that report which contained the performance of something
like the performance of the employee, and other. It has various advantages to the firm like
company raise the funds from outside sourcing by presenting the performance report in front of
the borrower because this report included company each activity performance whether it is
related to the financial or non-financial. It also helps company management in order to compare
the company previous performance with the current performance or any year performance.
The company performance report is shown by the balance sheet, income statement, and
statement of cash-flow. These are considered company reports which consist of the company
performances regarding the company's financial position (Arend, et. al., 2017).
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The Tesco Company’s management accounting system and the application of this is an asset the
company to improve the company's decisions (long term or short term). The long terms decisions
are those which are taken for the period of more than one-year whilom short term decisions are
which is based on achieving short term goals and the period of this is up to one year.
If the company planning regarding the objective is clearly stated and formulated then it is easy to
achieve the task within period with the best quality in their performance. This is done because of
company management delegate authority and responsibility to each department and department
delegate same to each employee in order to achieve their departmental goals which have
ultimately added the efforts in achieving the organizational goals. Following are the importance
of management accounting system and its applications which helps in finding the reason why it
is necessary for the Tesco organization:
 Help in determining the aim.
 Aid in plan preparation.
 Easy to make decision and judgment.
 Provide the tool for measuring the performance of the company.
Both systems and reporting of management accounting are integrated and interlink with each
other in the Tesco Company as it has been seen from the points that already discussed. Each has
its importance in the business and potentially vital as a system of management accounting aid to
finding the stock level, determine cost incurred. On the other hand, reporting helps in preparing
the company budget for each individual so that management can focus on each budget to attain
the budgeted figures because the ultimate objective of the budget is to provide success
organization and survive in the industry market. It also is noted that management accounting
reporting helps in discover the issues that were created within the business and this can be sorted
by the use of management accounting systems through the found reason behind them. For
example, if there is some issue within the organization regarding the inventory or cost it can be
improved by overseeing the performance of this and analysis them (Graham, 2019).
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In the Tesco organization, various types of planning tools are used which help to reach the level
of attaining constant success. Following are the techniques of planning tools out of total which
help in understanding the use within the organization and thus help in the prediction of budgets.
Following are the Planning tools which help to survive in the market and enable to attain
constant success. It is universal said that both advantages and disadvantages have the different
face of the same coin so this is also applicable to the planning tools which is going to analysis
benefits and demerits each of planning tools,
Benchmarking: It is the process by which the company compares its actual performance with
the performance standard set by the specific industry (Duan, et. al., 2016). There are some
advantages and disadvantages of this tool:
Advantages Disadvantages
It is progressive in nature. It has demerits as it only compared numbers.
It helps in a competitive market where
completion is high.
From this finding of an exact solution may
difficult.
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Cash-Flow analysis: It helps in analyzing the Tesco company inflow of cash and outflow also.
Following are merits and demerits of this planning tool regarding the Tesco Company.
Advantages Disadvantages
Helps in satisfying the needs of the customer. The biggest disadvantage of this as it only
reveals the cash inflow and outflow. This not
shows the exact liquidity position of the
company.
Able to know the cash available in business
through which management take decision-
based on cash position (Arend, et. al., 2017).
Not useful when changes made in the company
except cash capital which cannot be measured
in money term.
Break-even analysis: It is a financial tool which is used by the company in order to find the
stages at which level a company earn the profit. From this company can find the break-even
point also where neither buyer nor seller bears any loss. Following are some advantages and
disadvantages to it.
Advantages Disadvantages
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It is very easy and simple to use and easily
understandable.
It is based on the future if the future remains
constant so it may not be useful when
conditions changes frequently.
Enable to find the profit or loss situation at
various level of production.
Used only for short term purpose.
The above planning tools have various uses and also are helpful in preparing the budgets and
forecast them. This is done by planning tools as break-even analysis based on future so future
production of the unit can be forecast and budget for production can be made. Benchmarking
also is helpful in the forecast by the study of standard which is already set by the influence
industry. And last but not least cash-flow analysis help in the forecast the future cash inflow and
outflow which ultimately help in construct budget for cash so management can take a decision
on quick time (Arend, et. al., 2017). Other Benefits of these planning tools which aid in
sustainable success in business to the Tesco organization.
 Enhance performance, profitability, and efficiency.
 Aid in the decision-making process with minimum time.
 Aid in managing the issue and sorted them.
These are assisting Tesco Company to overcome the situation regarding the financial problems
through the various applications of the management accounting system and its methods.
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Scenario 2
Cost
Cost is the element which indicates the overall expenses incurred on the production activities of
the product for the business. This includes all the direct and indirect expenses for the company
on their operational activities so that they are able to justify the price and cost of the product
(Accountingtools, 2019). Here the major component of the cost is listed for the company which
had a major impact on the decision making of the company.
 Variable Cost – This cost is identified as the cost which had fluctuation nature according to
the volume of sales and production for the company. Further, variable cost is directly related
to the volume of sales off the company and highly variable in the context of production and
sales level of the company.
 Fixed Cost – Fixed cost is directly related to the capacity of the production of the company
and they are fixed in the nature for overall cost but variable for the per-unit cost
(Accountingtools, 2019). Fixed cost includes all the fixed charges which are incurred on the
production activities where they have zero output from their production unit.
Company is engaged in production activities of single products. The company wants to identify
the price of the product on the basis of the cost of production activities. Here Galway Plc can use
two costing tools of management accounting system which helps them in the identification of
price of the products in the market. Further, this method also helps in better presentation of the
cost element which can be helpful in identification of the profit for the company.
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Absorption and Marginal Costing
Marginal Costing
Marginal Costing is the method which helps in better evaluation of the profit by segregation of
fixed and variable cost of the company during their production activities. Marginal costing is the
tool which helps in identification of the profit or margin for the unit sold by the company in the
market.
Income statement as per marginal Costing
Marginal cost analysis on the financial information of Galway Plc is indicated that company is
suffering from the financial loss of 550 due to the major fixed cost of the production activities
and in the month of June company is able to retain the financial profit of 3250 by an increase in
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Amount ( In Unit ) Units Amount (£) Amount ( In Unit ) Units Amount (£)
Sales 50.00 300 15,000 50.00 500 25,000
Variable Cost -
Direct material 8.00 300 2,400 8.00 500 4,000
Direct Labour 5.00 300 1,500 5.00 500 2,500
Production Overhead 3.00 300 900 3.00 500 1,500
Sales and Commission 2.50 300 750 2.50 500 1,250
Contribution 31.50 300 11,100 37.00 500 18,500
Fixed Cost -
Fixed Production overhead 13.33 300 4,000 10.00 500 5,000
Fixed Selling Expenses 13.33 300 4,000 10.00 500 5,000
Fixed Administration 6.67 300 2,000 5.00 500 2,500
Total Cost of production / Cost of Sales 51.83 300 15,550 43.50 500 21,750
Net Profit Under Marginal Costing (1.83) 300 (550) 6.50 500 3,250
Particular May June

the sales of the company. During the month of May, the company is able to sell 300 units and in
the month of June, the company sold 500 units in the market.
Absorption costing technique: This is the tool which helps in better assessment of the cost
which is absorbed by the production unit while the production of the product for the sales of the
company. Further, absorption costing includes all the expenses which are absorbed by the cost
centers of the production unit of the company. Absorption costing provides an adequate
presentation of the financial and cost information on the project for the company to identify the
profit from their operational activities.
Income statement as per Absorption Costing
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Amount ( In Unit ) Units Total Amount ( In Unit ) Units Total
Sales 50.00 500 25,000 50.00 380 19,000
Cost of Good sold
Direct Material 8.00 500 4,000 8.00 380 3,040
Direct Labour 5.00 500 2,500 5.00 380 1,900
Prime Cost 13.00 500 6,500 13.00 380 4,940
Production overhead
Variable Production Overhead 3.00 500 1,500 3.00 380 1,140
Fixed Production overhead 10.00 500 5,000 10.53 380 4,000
Factory Cost 26.00 500 13,000 26.53 380 10,080
Administration expenses 5.00 500 2,500 5.26 380 2,000
Cost of production 31.00 500 15,500 31.79 380 12,080
Variable Sales Comminssion 2.50 500 1,250 2.50 380 950
Selling and distiribution expenses ( Fixed) 10.00 500 5,000 10.53 380 4,000
Cost of Sales 43.50 500 37,250 44.82 380 29,110
Add : Opening Inventory - - - 43.50 200 8,700
Less:- Closing Inventory 43.50 200 8,700 44.82 80 3,585
Cost of Good sold 43.50 300 13,050 44.82 500 22,408
Net Profit Under Absorbtion Costing 6.50 300 11,950 5.18 500 2,592
May June
Particular