Analysis of Management Accounting Systems in Tesco

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Management Accounting
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Table of Contents
Introduction.................................................................................................................................................3
LO1.............................................................................................................................................................4
P1 Explain management accounting and give the essential requirements of different types of
management accounting systems.............................................................................................................4
P2 Explain different methods used for management accounting reporting..............................................7
M1 Evaluate the benefits of management accounting systems and their application within an
organisational context..............................................................................................................................9
D1 Critically evaluate how management accounting systems and management accounting reporting is
integrated within organisational processes.............................................................................................11
Lo 2...........................................................................................................................................................12
P3 Calculate costs using appropriate techniques of costs analysis to prepare an income statement using
marginal and absorption costs................................................................................................................12
M2 Accurately apply a range of management accounting techniques and produce appropriate financial
reporting documents..............................................................................................................................15
D2 Produce financial reports that accurately apply and interpret data for a range of business activities16
Lo 3...........................................................................................................................................................21
P4 Explain the advantages and disadvantages of different types of planning tools used in budgetary
control...................................................................................................................................................21
M3 Analyse the use of different planning tools and their application for preparing and forecasting
budgets..................................................................................................................................................23
Lo4............................................................................................................................................................24
P5 Compare how organizations are adapting management accounting systems to respond to financial
problems................................................................................................................................................24
M4 Analyse how, in responding to financial problems, management accounting can lead organisations
to sustainable success............................................................................................................................26
D3 Evaluate how planning tools for accounting respond appropriately to solving financial problems to
lead organisations to sustainable success...............................................................................................27
Conclusion.................................................................................................................................................28
References:................................................................................................................................................29
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Introduction
Tesco is known as supermarket store which work as a leading retailer in all over the world. The
report gives you knowledge about management accounting and its role in the activities of
business operationsof Tesco Plc. It explains different sub-systems of management accounting
which are used in the Tesco Plc. for their effective running and gives actual and correct
performance report of the company so that we can analyse the exact financial position of the
organization. The report explain all the techniques in different segments like initially it explains
some budgetary, demand reports etc. thereafter costing techniques are explains that how
optimum utilization of resources and high income can be earned and after this different models
of budget are given which will help in taking decision for effective and efficient planning and
implementation and at the end to check the correctness of these techniques different subsystems
are explained in this report for Tesco Plc.
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LO1
P1 Explain management accounting and give the essential requirements of different types
of management accounting systems.
In present scenario management needed different types of information to execute its functions
more effectively and efficiently. For achieving these increasing demand of management,
different specific branches of accounting have emerge like management Accounting Financial
Accounting tax accounting cost accounting social responsibility accounting etc.
In different subfields of accounting, management accounting is also a subfield of accounting and
in this report we are specifically concerned with the topic management accounting.
The main aim of management accounting is to show the information of accounting in this way so
that the management can use this information in business planning and controlling its business
operations. It is the duty of management accountant to make the accounting data useful with the
help of management accounting techniques and concepts in such a way so that the managers can
take decisions easily with the help of that data. The techniques are budgetary control, ratio
analysis, cash flow statement, fund flow statement etc.
Management accounting is a tool, which enables the management accountant to use its skills and
its professional knowledge in making the accounting data more useful in such a way so that the
management can use it easily in formulation its policies and make planning for running the
business operationsof Tesco Plc. (Faulkender, et. al., 2012).
The essential requirements of management accounting system are as follows:
Price development system:
It is a technique in which price tendencies are used. With the help of this technique it is analysed
that which price is most suitable for the product after the study of consumer behaviours
regarding to different market conditions and the prices of other competitive products. After the
study final price is decided for the product to attract the customer. For example, the Tesco Plc.
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Company working in retail sector and it used price development system to facilitate for setting
the appropriate prices to gain and sustain the customers.
Price development systems requirements are as follows:
 It is required the detailed data regarding to market changes for implementation price
development system successfully.
 Competitor’s strategies have to be followed and considered
 Consumers taste and preferences and changed behaviour should be studied continuously.
Stock management system
Stock management system is an arrangement in which it is analysed that how much stock should
be maintained at a time in the godowns. For this analysis of different techniques are used they
are FIFO, EOQ, Weighted average etc. with the use of these techniques value of stock and cost
of stock is measured(Faulkender, et. al., 2012).
Essential requirements of this system are as follows:
 Controlling and security system must be good
 Purchasing of inventory and quantity of utilization and ratio of wastage and how much
stock is returns should be recorded on continuous basis.
 For enabling the automation system modern company should adopt updated stock
management system for various types of inventory item.
Cost accounting system:
As the name specifies that the cost management system is related to production companies. In
this system control over expenses is analysed so that final price can be decided for the product so
that product can survive in the competitive market (Ghanbari&Vaseli, 2015).
Essential requirements of this system are as follows:
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 Each and every cost must be recorded in classified manner.
 Thorough check up of ups and downs in the changes of resources allocation and
absorption
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P2 Explain different methods used for management accounting reporting.
To make the management accounting reports different methods are used. These methods help in
making correct and exact reports for taking critical decisions for the business organization. A
business entity Tesco Plc. makes various types of management reports which are as follows:
Budgeting report:
In management accounting budget report is a planning tool which gives the idea to how much
money spend on different sectors of the organization. It formulates the plans which were relevant
for the company to analysing the performance. Fair budget planning can enables the managers of
the organizations to develop the quality of organizations progress.
Performances reports:
Performance is the parameter to check the variance between standard and actual data. With
regard to management accounting, performance report can be prepared in two ways department
or employee wise. If report is made on department wise then each and every department is
checked and evaluate that which department is doing well and which department wants proper
attention of management (Karmakar, 2018). Tesco Plc. can maintains department wise report to
check the most profitable department and downwards units so that decision can be made for
overall development.
Demand report:
Demand report is maintained by the sales department for assisting the production sector for the
requirements of future needs of the products in the market. With regard to Tesco Plc. demand
report is maintained for various products so that the demand for sales of each and every product
can be calculated and accordingly production capacity can be managed (Oseifuah, 2014).
Debtor aging reports:
Debtors’ aging is most important method to measure the good and bad debtors of the
organization. It reviews the debtors account time to time so that if any overdue is there than it
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can be marked and accordingly credit policy can be implied on that over dues. This model is
mainly used by the finance managers so that bill over dues, doubtful debtors can be checked.
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M1 Evaluate the benefits of management accounting systems and their application within
an organisational context.
Management accounting system plays a very crucial role in managing the operation of business
organizations. Each and every system of management accounting is much upgraded so it is very
helpful in maintaining the data more meaningful in present context. It enables the business more
efficient, accurate and perfect in various aspects. Application like stock management helps in
maintaining appropriate stock level in the business and on the other hand it helps in
maximization of profit also by reduction in cost of the product (Sleath, 2014).
Benefits of management accounting system are as follows:
Better resource allocation:
Management accounting system also beneficial for resource allocation. With the help of demand
report business can analyse how much demand is there in the market and at which price
accordingly business houses produce the goods on optimum price level so that wastage level can
also be reduced and resources are optimum utilized.
Control over expenses:
Application of budgetary report helps in controlling over expense on the products. It is beneficial
because it helps in analysing standard and actual data and any variance is their then it gives the
suggestions also to solve the problem areas.
Measurement of the performance:
Management accounting system helps in performance appraisal also. With the help of
performance report business can check and evaluate the variance between standard and actual
performance and can identify the effectiveness of the business operations (Sleath, 2014).
Risk assessment:
Business contains risk every time. Applications of management accounting system maintain the
data in very systematic manner so that management can easily find and reduce the future risk
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factors by analysing this information’s regarding to market trend by study of various applications
of management accounting system.
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D1 Critically evaluates how management accounting systems and management accounting
reporting is integrated within organisational processes.
Management accounting system and management accounting reporting both are interrelated to
each other because without accounting system reporting can’t be done and without reporting
accounting system is worthless. Accounting system and reporting both are crucially required for
effective running and profitability of the business. Integration of both the activities in the
business is as follows:
Decisions:
Success of the business depends on the management if good management system is their then the
organization runs smoothly but if management is not good then success of organization is in
doubtful mode. Management accounting system and reporting enables the management to take
correct decisions on time with their accurate accounting reports and systems because if reports
were not accurately maintained then how could right decisions come in the business.
Removal of the financial crisis:
Financial crisis can also be reduced if correct data will record on correct time and correctly
measured and analysed by the management. It will also help in optimum allocation of resources.
It also helps in cost cutting if needed so that minimum price can be implied for the products and
also helps in increasing the profit ratio of the business (Parker, 2012).
Continuous improvement:
In business continuous improvement is needed because environment changes rapidly in day to
day life. So it is necessary for businesses to update time to time according to environmental
changes and for this updating management accounting system and reporting is needed to achieve
the goals of the organization on time.
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Lo 2
P3Calculate costs using appropriate techniques of costs analysis to prepare an income
statement using marginal and absorption costs.
Costing is a method for deciding the price of a commodity. In the costing technique all the
expenses which are incurred in making process are recorded one by one and after adding all the
expenses with addition of margin of business commodity price is determined. Costing technique
also helps in reduction the price if unnecessary expenses are levied on products. It also helps in
allocation of resources optimally. In this method market trend also considered for determining
the price. Cost can be calculated but various methods some examples are multiple costs,
department cost, operating cost, job cost, process cost (Parker, 2012).
Absorption costing
Absorption costing is a method in which total cost is included for determining the price of the
commodity like material cost, labour cost, fixed cost, variable cost, overheads cost, selling cost,
administrative cost. In other words we can define absorption cost as total cost.
Marginal cost
Marginal cost is knows as additional cost incurred due to increase of one additional unit in
production. In marginal costing method fixed cost remains constant for a period of time and
variable cost change due to changes in the production level. So variable cost is liable for changes
in the total cost of the product (Hiebl, 2014)
Explanation of absorption costing and marginal costing with the help of example is as follows:
For Tesco Plc. company:
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