Management Accounting Report: Tesco's Systems and Strategies Analysis

This report provides a detailed analysis of management accounting practices within Tesco, a leading retail company. It explores various aspects of management accounting, including cost accounting systems, price optimization, job costing, and inventory management. The report examines different types of management accounting systems used by Tesco, such as cost accounting, price optimization, job costing, and inventory management systems, highlighting their benefits and applications. Furthermore, it delves into the generation and significance of management accounting reports, including performance reports, inventory management reports, account receivable reports, budget reports, and job cost reports. The report also discusses the integration of management accounting systems and reports with organizational processes, emphasizing their role in evaluating business performance and informing strategic decision-making. Additionally, the report touches on the importance of appropriate costing techniques and the advantages and disadvantages of planning tools used in budgetary control, concluding with an overview of how management accounting systems can be adopted to address financial challenges and contribute to sustainable success within the organization. The report is concluded with references.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Management accounting and requirement of its systems......................................................1
P2 Management accounting reporting........................................................................................3
M1 Benefits of management accounting system........................................................................4
D1 Management accounting system and its reports are integrated with organisational process 5
TASK 2............................................................................................................................................5
P3 Appropriate costing technique...............................................................................................5
M2 various costing techniques....................................................................................................7
D2 Data interpretation................................................................................................................7
TASK 3............................................................................................................................................8
P4 Advantages and disadvantages of planning tools used in budgetary control.........................8
M3 Use and application of planning tools is preparing and forecasting budgets.......................9
TASK 4..........................................................................................................................................10
P5 Adoption of management accounting system to respond financial problems.....................10
M4 Management accounting can lead sustainable success.......................................................12
D3 Planning tools can lead organisation toward success..........................................................12
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Management accounting is used to analyse the ways in which company is performing its
operational activities and effective execution of business by manager. It is a process of
generating various business reports that provide business information to internal stakeholders.
Managers analyse such information and than make strategic decision in order to enhance
performance of their company (Management accounting. 2018). It directs managers to analyse
cost which is involved in different activities of an organisation so to increase profitability.
Company chosen for this project report is Tesco, it is a leading retailer in its industry and its
headquarter is in Welwyn Garden City, Hertfordshire, England, UK. Main objective of this
reports is to figure out that the way in which various reports and systems of management
accounting helps internal stakeholder to make strategies to increase productivity.
This project report covers various topics such as management accounting systems and its
reports with benefits, various costing techniques to calculate operating profits, advantages and
disadvantages of planning tools used in budgetary control and use of management accounting
systems to deal financial problems.
TASK 1
P1 Management accounting and requirement of its systems
Management accounting: It refers to the process of controlling, managing, recording
and measuring accounting information which is presented to internal stakeholders to examine
performance of a company (Wickramasinghe and Alawattage, 2012). In Tesco managers use it to
formulate different policies that are going to be implemented within the organisation. It assist
managers to keep information of day-to-day activities of business.
Management accounting system: It guides managers and owners to get information of
various activities that are executed by their organisation. It provides data of costs, inventory,
customer's needs, appropriate pricing for product and different jobs that are performed according
to specification of clients. Management of Tesco use this system to keep a track record of each
action which is taken by organisation's staff and other members. Various types of management
accounting systems are used by managers of the company. These systems are as follows:
Cost accounting system: It is used by different kind of firms such as manufacturing,
retailing, distributing etc. to estimate actual costs that are involved in their production, supply
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chain and distribution activities. In Tesco this system is used by managers to determine all the
costs that are related to their products. Estimating accurate costs can lead an organisation toward
success and helps to increase profitability by deciding accurate prices for products (Suomala,
Lyly-Yrjänäinen and Lukka, 2014). There are three different costing systems that are used by
organisations. Standard costing, which is used to determine difference between budgeted and
actual cost of products. Actual costing, is utilised to record actual costs of labour, material and
overheads that are incurred at the time of manufacturing. Normal costing, is used to allot costs
to products and it is based on actual data. In Tesco standard costing method is adopted by
managers to analyse variation in standard and real cost. It is very important for the organisation
because it helps to determine exact costs of products.
Price optimization system: When a company is using price optimisation strategies this
system can help to analyse customer's reaction toward the same. Managers of Tesco use price
optimisation system to set best price for their products which can help to achieve organisational
goals such as customer satisfaction and profit maximisation. It facilitates managers or marketers
of Tesco to determine customer's willingness to pay for products and decide prices accordingly
which can help to attract maximum customers. It is beneficial for the organisation as it guides to
set that price for products which can create urge in customers to buy products.
Job costing system: It is a system which is used to analyse costs of different jobs or
activities that are executed in bulk or according to customer's specification (Soin and Collier,
2013). Managers of Tesco use this system to determine cost of labour and overheads which is
involved in their products. It also assists to ascertain cost of distribution and supply chain, which
is used to set appropriate prices for products of Tesco. Job costing system is advantageous for the
organisation as it can help to get idea of accurate costs that are involved in different jobs.
Inventory management system: In large organisations this system is used to keep a
track record of different inventories. It help managers to track inventory of a company when it
goes out or taken in. It include ordering, storing and using inventory which is going to be used
for different business activities such as distribution and others. In Tesco inventory management
system is used to keep detailed information of stock whether it is in warehouses or any other
places. There are three different types of this system that are LIFO, in which recently received
inventory is used for sale first. FIFO, in which earlier received goods are used by companies to
sale first. AVCO, in this system stock is used on average basis for sale. In Tesco FIFO system is
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followed by managers as it is very important for the company because it helps to maintain all the
information of goods.
P2 Management accounting reporting
Management accounting reporting: In every organisation some reports are generated to
record information of various business activities to analyse business performance and its ability
to maximize profits in coming years. It helps internal stakeholders to determine position of
company in market (Richardson, 2012). Tesco is a retail company, which is a large organisation
hence, it is very important for managers to create management accounting reports which can
assist owners and managers while formulating strategies to attain organisational goals. Process of
recording information is called reporting. Such reports also help to make decision to increase
profitability and enhance productivity by gathering information of different departments of the
company. Following reports are generated by managers of Tesco:
Performance report: In an organisation performance evaluation is very important
whether it is for individuals, whole organisation or activities and such reports helps to evaluate
performance of all of them. These reports help managers to evaluate presentation of employees
and than provide them rewards to motivate them to perform their duties more effectively. In
Tesco it is created to evaluate performance of whole organisation to make strategic decision that
can helps to enhance the quality of executional activities. It is very important as it can provide
deep insight into working activities of an organisation.
Inventory management report: The companies who are maintaining inventories on
regular basis, such reports are generated there to record each activity. Managers of an
organisation try to make higher profits by supplying goods on time to clients but it is not easy
because managing inventory accurately is a complex task. Such reports facilitate s the work of
managers by providing them transparent information of stocks. In Tesco this report is created to
reduce faults in distribution chain by keeping detailed data of goods that are supplied to different
clients. Inventory management reports are very important to generate because it helps to compare
different supply chains of the organisation.
Account receivable report: A company who is providing goods to its clients on credit
should create this report because it provides information of exact outstanding amount of different
clients. It is tool which is used to manage cash flow of an organisation. As Tesco is a large
company hence it is essential for managers to generate account receivables reports, in which
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information of owed amount of various customers can be recorded. Managers of Tesco use this
report to evaluate total outstanding amount which needs to be recovered from debtors. It is very
important for the organisation as it leads collection department while analysing defaulters of
payment (Banerjee, 2012).
Budget report: Management of an organisation use budget reports to analyse that
allotted budgets are effectively used by various departments for their activities or not. Budgets
are mainly based on past year's data and current trends of market (Renz, 2016). In Tesco
managers use these reports to assign funds to activities according to their requirements. A budget
report contains information of different sources of incomes and earnings. It is very important for
the organisation as it can help managers to evaluate effectiveness of allotted budgets.
Job cost report: In large companies job cost reports are generated to show costs that
may take place while completing a specific project and than compare these expenses with
budgeted, this helps to evaluated profitability of that particular project. In Tesco, management
create such reports to examine most and least profitable jobs, so that they can select right job to
be performed and which can help to earn higher profits. These reports are very beneficial for the
organisation as helps to increase profitability and productivity.
M1 Benefits of management accounting system
Management accounting
system
Benefits
Cost accounting system  Help managers to evaluate cost of various activities
such as distribution and supply of products
 Direct managers while finding causes of costs.
Price optimisation system  Guides managers to set best price for their products to
attract maximum customers.
 Helps to evaluate customer's reaction toward price
changing strategies of the company
Job costing system  Lead mangers while assigning costs to different
departments.
 Help to increase profitability by distributing funds to
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activities according to their requirement.
Inventory management system  Help to improve accuracy on different inventory orders.
 Increase the level of transparent information by keeping
record of every activity.
D1 Management accounting system and its reports are integrated with organisational process
Management accounting system and its reports help internal stakeholder to evaluate
performance of business of Tesco. Managers take decisions to attain organisational goals by
analysing information which is recorded in different reports. Accounts receivable reports provide
information of actual owed amount by various clients and direct managers to tighten credit
policies so that it will reduce outstanding amount. Inventory management reports guides
managers to maintain supply chain effectively and identify areas where modifications is required
to improve profitability of organisation. Performance report are generated by management to
evaluate effectiveness of performing different activities. Cost accounting system can help
managers to determine actual costs of their products and job costing system helps to assign costs
to different activities according to their requirements.
TASK 2
P3 Appropriate costing technique
Cost: It is a monetary value of different expenses that are involved in the manufacturing
of a products. It includes direct labour, material and overheads. It is an amount which has to be
paid by the buyer to the seller of product (Parker, 2012). There are three different types of costs
fixed, variable and semi variable. Fixed costs are the costs that does not change with the
production, variable costs change with the production if units produced increases than variable
cost will also increase, semi variable costs are those costs that are partially fixed and partially
variable.
As Tesco is a retail company, so there manufacturing costs are not applicable here but
distribution costs are considered for the company. It is suggested to the mangers to set
appropriate cost for their products because before buying product customer will always try to
figure out actual cost of that particular product.
(a) Calculation of the average production costs and marginal cost per unit is,
Average production cost per unit = total cost of production/total actual production units
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= 30000+20000+12000+10000/36000 = 72000/36000
= 2 Rs. per unit
And Marginal production costs per unit = total additional cost of production /additional no. of
produced goods,(4000*2) = change in cost/ change in quantity
=8000 / 4000 = 20Rs. Per unit marginal cost of additional marginal production.
(b) Budget trading account : It is an accountant which is used to examine or record the
activities where the organisation has spent its allotted budget.
Particulars Amount Particulars Amount
Direct material 30000 Sales 288000
Direct labour 20000
production overhead 12000
Fixed production overhead 10000
Balanced gross profit 216000
288000 288000
(1)Marginal costing: Marginal costing is the accounting system in which variables costs
are charged to cost units and fixed costs of the period are written off against the aggregate
contribution. Calculation of operating or net profit by using marginal costing approach is as
follows:
Particulars Amount
Sales 288000
Less: cost of goods sold -50000
Less: variable production overhead -12000
Contribution 226000
Fixed production overheads 10000
Administrative expenses 6000
Selling and distribution expenses 5000
Net profit 205000
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(2) Absorption costing: absorption costing is techniques which is used to apportionment
total costs to the cost centre in order to determine the total cost of production is known as
Absorption costing. Calculation of net profit by using absorption costing techniques is as
follows:
Particulars Amount
Sales 288000
Less: cost of goods sold -50000
Less: variable production overheads -12000
Less: fixed production overheads -10000
Gross profit 216000
Less: Administrative expenses -6000
Less: selling and distribution expenses -5000
Net profit 205000
Therefore under both marginal and absorption costing is same, however this is not
unusual to see different profits under both techniques. This difference in profits is due to use of
different inventory valuation methods under both techniques (Otley, 2016).
(c) Heinz, should go ahead this production but should increase the production and minimise
the cost of production. Although Heinz must increase the productivity in order to
maintain future profits and growth of the organisation.
M2 various costing techniques
Managers of Tesco us two different techniques marginal and standard. Both the
techniques are described below:
Marginal costing: This techniques is used by managers while selling, supplying or
distributing extra units. It helps to determine the cost of that extra unit. Such type of cost is
recovered from the revenues of same units.
Standard costing: This approach is applicable while analysing the variation between
actual and budgeted cost of different units that are sold by the company.
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D2 Data interpretation
From the above calculation it has been analysed that total gross profit of budget trading
account is 216000. The mangers of Tesco has used two different techniques to calculate net
profits that are marginal and absorption costing. While using marginal costing it has resulted
205000 as net profits. While using absorption costing it has resulted 205000 as net profits. The
company can choose any of these techniques as both have resulted the same.
TASK 3
P4 Advantages and disadvantages of planning tools used in budgetary control
Budget and budgetary control: Budget is the estimation of revenues and expenses over
a specified period of time. Moreover it is a financial plan for a specified period usually a year. It
is sum of money allocated for a particular purpose and the summary of intended expenditures
along with proposals for how to accomplish them. Budgetary control is the process of controlling
and managing budgets in an effective way. It helps managers to allot budgets to different
activities according to their requirements (Lavia López and Hiebl, 2014). In Tesco it is
implemented to plan and forecast budgets. Planning tool are used in budgetary control to help the
management in its attempts to cope with the uncertainty of the future, relying mainly on data
from the past and present and analysis of trends. There are three planning tools that are used by
the managers of company:
Forecasting tools: it means a predictions about the future. Moreover it is a systematic
analysis to make predictions about what will happen in future. There are two types of forecasting
techniques long term forecasting and short term forecasting (Chenhall and Moers, 2015). Tesco
use short term forecasting while creating budgets and estimating expenses. Long term
forecasting pertains both quantitative and qualitative data and based on experts advice and
opinions and insights. Following are the advantages and disadvantages of forecasting tools.
Advantages Disadvantages
It provides the business with valuable
information that it provides the business with
valuable information that the business can use
to make decisions about future.
It is based on future predictions, as no one can
absolutely predict the exactly.
It helps in saving the staffing costs and Any unforeseen factors can render a forecast
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reducing inventory costs. useless, regardless of the quality of data.
It helps the company in focusing about the
future predictions continuously.
Forecasting methods may use same data but
deliver different forecasts.
Contingency tools: These tools are mainly concerned with the estimation of
unfavourable or negative events that may take place. It also guides managers to make plan to
deal with such type of events. In Tesco such tools are used by managers to identify possible
future consequences and make strategies to resolve them. Following are the advantages and
disadvantages of contingency tools:
Advantages Disadvantages
Help managers to get an idea of possible
negative or unfavourable events.
Cost and time involved in the implementation
process of such tools is very high.
Guides companies to be prepare to deal with
various consequences that can occur.
These tools are very complex to understand so
the company has to train employees before
executing tools.
It also help managers to identify errors in
distribution system to increase effectiveness.
The nature of this tool is reactive not proactive
which means it can only guide at the time of
risk or uncertainty.
Scenario tools: It is making assumptions on what the future will be and how the business
environment will change. Moreover, it is identifying a specific set of uncertainties, different what
might happen in future of business (Otley and Emmanuel, 2013). Some of advantages and
disadvantages of scenario planning are as follows:
Advantages Disadvantages
It may allow real insights and unlock
creativity.
It requires continuous and effective supervision
of managers which is not possible in some of
the organisations.
It allows for bushiness to think outside the box
or explore.
It can be used in long term planning it is not
suitable in short term planning.
It is an emerging method designed to energise Budget for implementing this tool is very high
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thinking of managers of organisation. and few companies cannot afford it.
M3 Use and application of planning tools is preparing and forecasting budgets
Management of Tesco uses three planning tools that are forecasting, contingency and
scenario. All these tools helps mangers to forecast possible future events that may affect the
ability of performing operational activities. Managers can plan and forecast budgets with the help
of planning tools because it can help to estimate possible future events.
TASK 4
P5 Adoption of management accounting system to respond financial problems
Financial problems: It refers to the situation in which an organisation have to face
various problems due to lack of monetary resources (Hilton and Platt, 2013). Many companies
are facing such type of issues because they do not have sufficient funds to execute their
operations. Tesco is also dealing with various financial problems. These problems are explained
below:
 Improper money management system: This problem occurs when accounting or
money management department is not following proper system to record monetary items.
There are various reason of this problem such as when fund handling department is not
properly trained, error in the system which is used by members. Another reason of this
problem is that when the department is not following principles and conventions of
recording finance related information. This type of issue can lead the organisation toward
high losses. In Tesco managers are not following proper system while recording financial
information in the books and this creates of such type of issue.
 Unplanned expenses: These are the expenses that are not planned and occur suddenly.
When such type of expenditures take place than managers have to use financial resources
to deal with same (Herzig and et. al., 2012). Management of Tesco is also dealing with
these expenses and have to spend money. For example if there is any error in supply
chain and managers have to use funds to modify the same, this will create financial
problem because this expense is not planned by management and they have not reserved
money to deal with the same.
 Late payments by clients: This problem may take place when clients of the company are
not paying their outstanding amount on time and continuously making defaults in
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payments. Tesco is a large company and it offer credit to the customers, some of them do
not pay their owed amount on time this increase the possibility of financial problem.
Following techniques are used by management of Tesco to resolve financial problems:
KPI (Key Performance Indicators): It is techniques which is used by companies to
evaluated that how effectively the managers are trying to achieve organisational goals. In Tesco
managers use KPI to determine success or failure of different projects. Following are the two
types of KPIs:
 Leading KPI: This type of KPI is used by different organisation to estimate possible
event that may take place in future and output of an implemented plan of managers. In
Tesco management use this KPI to deal with unplanned expenses as it may help to
predict such type of problem and managers can plan in advance to deal with the same.
 Lagging KPI: It is used to dictate that a plan is executed successfully or not. It is mainly
output oriented and cannot be influenced or changed (Fullerton, Kennedy and Widener,
2014).
Financial governance: It is technique that guides companies to maintain, monitor,
control and record financial information in proper way. It also evaluates that how a organisation
is managing financial performance by analysing its financial reports. In Tesco it is used to deal
with improper money management system, as it guides companies how to maintain proper
financial information this will help managers to establish a good money management system
within the organisation.
Benchmarking: When a business is trying to compare its processes to others,
benchmarking is the right tool for this purpose (DRURY, 2013). It helps to measure performance
and implement strategies that can help to tight credit polices by comparing it to competitors. In
Tesco this techniques is used to resolve problem of late payments from client by tightening credit
policies. It is possible when managers compare its policies with competitors and figure out that
where modifications are required.
Tesco Sainsbury's
Benchmarking is used by the managers of the
company to be more effective than
competitors.
JIT (Just in time) techniques is used by
managers to decrease the time involved in
distribution activities.
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Financial governance is used to maintain and
monitor business information in effective
manner to reduce possibility financial issues.
Managers use JIT to identify the areas where
modification is required.
KPI is used by the company to determine the
way in which company is performing its
activities in effective manner.
JIT techniques helps to enhance profitability of
the company.
M4 Management accounting can lead sustainable success
Managers of Tesco use three different techniques to resolve financial problems. These
techniques are KPI, benchmarking and financial governance that helps to deal with problems like
unplanned expenses, improper money management system and late payments by clients. This
can lead the organisation toward success as it helps to maintain financial strength.
D3 Planning tools can lead organisation toward success
Planning tools such as forecasting, contingency and scenario can help to deal with
financial problems by estimating them in advance because planning tools are mainly used by
various organisations to forecast possible future events. These events can be related to financial
and managers will get the idea of such consequence and they may plan in advance to deal with
the same.
CONCLUSION
From the above project reports it has been concluded that management accounting is the
process of making strategies that can help to attain predetermined organisational objectives. It
reports guide managers and internal stakeholders to analyse performance of the organisation by
examining the information which is recorded in management reports. Its system assist managers
to determine costs that are involved in its activities and information of goods by keeping a track
record of inventory. Marginal and absorption costing techniques are used by managers to analyse
that which technique will best suits to their organisation. Three different planning tools are used
by managers to plan and forecast budgets and deal with financial problems. These tools are
forecasting, contingency and scenario.
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REFERENCES
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DRURY, C. M., 2013. Management and cost accounting. Springer.
Fullerton, R. R., Kennedy, F. A. and Widener, S. K., 2014. Lean manufacturing and firm
performance: The incremental contribution of lean management accounting practices.
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Herzig, C. and et. al., 2012. Environmental management accounting: case studies of South-East
Asian companies. Routledge.
Hilton, R. W. and Platt, D. E., 2013. Managerial accounting: creating value in a dynamic
business environment. McGraw-Hill Education.
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enterprises: current knowledge and avenues for further research. Journal of
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Renz, D. O., 2016. The Jossey-Bass handbook of nonprofit leadership and management. John
Wiley & Sons.
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Soin, K. and Collier, P., 2013. Risk and risk management in management accounting and
control.
Suomala, P., Lyly-Yrjänäinen, J. and Lukka, K., 2014. Battlefield around interventions: A
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Online
Management accounting. 2018. [Online]. Available through:
<https://cleartax.in/s/management-accounting>
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