Analysis of Management Accounting Tools and Techniques in Tesco Plc

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MANAGEMENT ACCOUNTING
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Table of content:
Contents
Introduction:....................................................................................................................................3
LO1..................................................................................................................................................4
LO2..................................................................................................................................................7
LO3................................................................................................................................................13
LO4................................................................................................................................................16
Conclusion:....................................................................................................................................20
References:....................................................................................................................................21
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Introduction:
In the context of the management accounting system, a brief detail on management accounting
tools and technique will be studied and help in finding how these will help in the organization in
order to achieve the business objectives and make high profits. A management accounting is just
like act a profession, help in decision taking devising plans and provide expertise in preparing
the business financial reporting. It also helps in making regulation on the management in the
process of formulation and implementation. It is a profession that involves management decision
making, planning, and performance of management systems. It also providing expertise planning
in the financial reporting system and help in controlling to aid management in the construction
and application strategy of the organization. Here is the Tesco Plc. the company is selected. With
the reference of Tesco Plc. the company, company objectives in management that it should make
a proper plan with proper execution, decision process and last that to control over the business
affairs. The Tesco Plc. the company is one of the leading growing company in the UK and it is
third in the number of UK top companies in terms of earning revenue and from this it secure 9th
place in the retail market.
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LO1
Management accounting is an internal procedure. It is used in analyzing for the purpose of
identifying the business activities cost and operations in order to make financial reports and
accounts for the help of management in order to take decisions regarding achieving a business
set of objectives. It is also known as cost accounting or managerial accounting. In simple words,
it can be said as an act of data related to financial and cost that help in converting these into
useful information for the internal management within Tesco Plc. company (Richardson, 2017).
Preparation of accounts and other business records is the accounts department internal part or
process that helps management or managers or external parties in order to disclose true, fair and
transparent reports that helps external users for making a decision regarding investment in the
business.
In Tesco Plc. the company uses a management accounting system in the following manner:
Management accounting system changes its use in different parts. Each system is designed in
such a way that assists the management in the decision-making process. Following are the most
common types of management accounting:
Cost accounting system: It is the process followed by the Tesco Plc. the company in order to
estimate the cost of the products for making analyze of profitability and cost control and
valuation of inventory. There are two main costs i.e. job order cost and process cost (Breuer, et.
al., 2016).
Inventory management systems: It is core business activities related to the control and use of
inventory in the process of production. Inventory means the stock available in the warehouse for
the selling. With the help of this system, the management is able to control the unwanted and
unnecessary use of inventory (Daraban, 2017).
Job costing system: It is the process of providing the total costs associated with the production
or in providing services for a particular job. It is mainly used in that case where the
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reimbursement is made by the company to the customers or clients. It includes the basic three
costs viz. direct material, direct labour, and overhead costs.
Price optimization system: It is used to know or evaluate those customers who are willing to
pay a high price by changing in demand curve in inflation and in the recession period.
The Tesco Plc. company’s management team make their financial reports each year for the
purpose of evaluating their efficiency for achieving their set of business goals. The earlier report
of the company has been taken into consideration while preparing their current year reports for
the purpose of comparison in their net profitability. The report can be prepared for any number
of days depending upon the condition and requirement if the business. It is mostly prepared for
quarter and yearly but it is not necessary that should be only made for these periods. Some of the
Tesco Plc. the company reports that aid in management accounting (Gornjak, 2014).
Manufacturing reports: This report is mainly used for the department of production or
manufacturing units for the purpose of gaining the knowledge of business profitability. This
report includes two cost viz. labour and inventory cost.
Receivables report This report of Tesco Plc. the company shows how much cash is available in
the business. It shows the company total of unpaid customers. This aging report of management
is the Tesco Plc. company primary tool that is used for determining the invoices is overdue for
the payment.
Cost report: It is the report in which all the business activities costs are stated. It helps in
finding out the profitability, by comparison, their estimated earnings. The cost report of Tesco
Plc. the company is also assisting to know their investment in WIP (work-in-progress). The
management has used these reports in order to reduce wasted and used costs.
Budget reports: It is a report that is used by the management of Tesco Plc. company for the
purpose of comparing their budgeted performance with the company actual and real performance
during a particular period. It also helps in making all departments as a single team to make
efforts to achieve company goals (Daraban, 2017).
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Management accounting has multiple benefits. With the effective use of management accounting
system, it is possible to enhance the Tesco Plc. company performance. Let us look at the benefits
of management accounting.
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Advantages:
 It helps in measuring the Tesco Plc. company real performance with the budgets.
 By the use of the application of budget and planning the company business activities can
be managed better.
 It helps in increasing business efficiency.
 It also helps the company management in order to improve the relationship between staff
and management (Gornjak, 2014).
Limitations:
 The conclusion derived by the management is largely based upon the accuracy of
financial and cost accounting because these two are the primary source for making a
conclusion.
 The management should possess the knowledge of different market and sector for making
their decision clear and success such as taxation and statistics etc.
 The cost of management accounting is expensive.
 The conclusion is should be implemented at different levels of the Tesco Plc. company
but it is should be found impracticable.
In Tesco Plc. the company, managerial accounting comprises internal systems that this company
is used to measure and evaluate its business process for the purpose of managing the company. It
helps the company to use its resources in the best way of making a unit/company profitable in its
sector. Thus, management accounting and its reporting system help the company to control its
overall business performance (Makrygiannakis, and Jack, 2016).
By the analyzing of the following management accounting tools, the Tesco Plc. the company
makes its decisions in an optimum way.
 Financial planning and financial statement analyze.
 Cash flow and fund-flow analyze.
 Marginal costing and standard costing.
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LO2
In accounting, the term cost is defined as the cash amount or equivalent to cash. A cost is in
money terms. Cost is the monetary value that the person is used to purchase something. In simple
words, the cost is money value which is payable in exchange for purchasing something. The cost
is taken into the account of the selling and distribution process as the part of this Tesco Plc.
company activity. The cost analyzes mean to break down the overall cost of the product into
small parts for the purpose of studying and making a report on it. There is also discussing on
break-even point. It is referred to that point where both the parties either buyer or seller don't get
any benefits. This situation comes in the eye of business when the product is sold at cost price. In
any business like Tesco Plc. company, there are following cost that incurred while production or
providing services.
Fixed cost: This cost is that cost where the production size increase or decrease cannot affect
their cost. This cost is fixed to specific production units or providing services. For instance- rent
of warehouse, building, insurance premium, etc.
Variable cost: This cost depends upon the production process. This cost is that cost whereas the
production varies, the cost of variable also vary according to the production. For instance- direct
material cost, direct labor cost, etc.
Direct cost: Those costs which are directly attributed in the process of production of the
products.
Indirect cost: It refers to that cost which cannot be easily distributed to a particular job or task.
Marginal costing system
Marginal cost is referred to as the additional cost that has been used for the production of a new
unit of products. It indicates the rate of increasing the cost by increasing one unit by which the
total cost of a Tesco Plc. company varies as the production increase. This cost only changes as its
variable cost while the fixed cost of the company is the same as earlier. The formula of marginal
cost calculated - dividing the change in the total cost by the change in the product output
(McLaren, et. at., 2016).
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Particular Amount (£)
Number of units sold 20,000
Unit price(per unit) 50
Cost of direct Material 100,000
Cost of direct Labour 60,000
Variable overhead (manufacturing) 40,000
Fixed overhead (manufacturing) 80,000
Admin expenses and Variable selling 60,000
Admin expenses and fixed selling 60,000
Income statement under marginal costing:
Income Statement
Particular Amount (£) Amount (£)
A. Sales (revenue) 500,000
B. Less: Marginal cost of sales:
Cost of direct Material 100,000
Cost of direct Labour 60,000
Variable overhead (manufacturing) 40,000
Fixed overhead (manufacturing) 80,000 280,000
C. Gross Profit (A-B) 220,000
Less: admin and selling expenses
Fixed 60,000
Variable 60,000 120,000
D. Net Profit (C-D) 100,000
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Absorption costing system:
It refers to the overall cost of the units. It indicates that all the cost related to manufacturing or
producing has directly transferred to the units of production.
All manufacturing cost like overhead cost, direct material cost is under absorption cost.
Income Statement
Particular Amount (£) Amount (£)
Sales 150,000
Less: CoGS _
Gross Profit 150,000
Less: direct labor 50,000
direct labor 30,000 80,000
Net Profit 70,000
Particular units / amount
cost per unit of Budgeted material(£) 2
Budgeted material quantity (kg) 10
Actual output (units) 1000
Actual material purchased and used (kg) 2200
Actual material cost (£) 20,900
Material variance:
MCV = budgeted price - actual price
= -0.5 (unfavourable)
MCV = material cost variance
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MPV = (budegted price actual price) X actual quantity
= 1100 (unfavourable)
MPV = Material price variance
MUV = (budgeted quantity - actual quantity) X budgeted price
= -2000 (unfavourable)
MUV = Material usage variance
Labour Variance:
a) LCV= Standard Labour Cost- Actual Labour Cost
= 15000-17680
=2680 (Adverse)
LCV = Labour Cost Variance
b) LPV= Actual time(Standard rate- Actual rate)
Standard rate = 15000/3000=5
Actual rate = 17680/3400=5.2
= 3400*(5-5.2)= 680 (Adverse)
LPV = Labour rate of pay variance
c) LEV= Standard rate(Standard time- Actual time)
=5(3000-3400)
= 2000(Adverse)
LEV = Labour efficiency variance
The Tesco Plc. the company uses its financial report in order to evaluate their performance with
budgeted plans and procedure. The company financial reports consist of four reports (McLaren,
et. at., 2016).
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