Analysis of Management Accounting Systems at Tesco: A Detailed Report

This report provides a comprehensive analysis of management accounting systems, focusing on their application within Tesco. It begins by defining management accounting and exploring different types of systems, such as cost accounting, inventory management, job costing, and price optimization. The report then details various management accounting reporting methods used by Tesco, including accounts receivable aging, job cost reports, inventory and manufacturing reports, cash flow analysis, budgetary control, revaluation accounting, and statistical techniques. Furthermore, the report includes the production of income statements using both absorption costing and marginal costing techniques, providing a comparative analysis of the two methods. The report also discusses different planning tools and their advantages and disadvantages. Finally, it addresses adapting management accounting systems to respond to financial problems, offering practical insights and recommendations for Tesco's financial management.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK ..............................................................................................................................................1
P.1 Defining management accounting and different types of MA systems that could be used
by Tesco..................................................................................................................................1
P.2 Different methods used by Tesco for management accounting reporting.......................4
TASK 2............................................................................................................................................5
P.3 Production of income statements showing absorption costing and marginal costing
techniques...............................................................................................................................5
TASK 3..........................................................................................................................................10
P.4 Explaining advantages and disadvantages of different types of planning tool..............10
TASK 4..........................................................................................................................................13
P5. Adapting management accounting systems to respond to financial problems..............13
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
The performance of a business is reflected through accounting. There are two branches of
accountancy, fiscal and management. Financial division deals with fiscal data and transactions.
Management Accounting (MA) have wider scope, as it considers both monetary and
administrative information of business and aids the governance in significant decision making. In
presented report a detailed analysis is done of management accounting systems, its relevance and
applications in the organisation and it is carried out on the basis of Tesco, a leading retail chain
in retail sector in economy of UK. With these various reporting methods which can be used in
enterprise is presented, income statements are prepared on marginal and absorption accounting
technique. Different planning tools considerable in governance of firm, their advantages and
disadvantages are reported as well.
TASK
P.1 Defining management accounting and different types of MA systems that could be used by
Tesco.
Management accounting:
Management accounting is designed to produce financial data information for an
enterprises and to supply the same to those who need it. It requires utilization of qualified
information and skills for preparing accounting statements. This is done in such a manner that
can assist management of Tesco for development of policies and in planning and controlling of
operation of organisation.
“Management accounting system are deployed for providing information that can be used by
managements of an organisation for making quality decision.”
“The term management accounting, observes, Board and Carmichael, covers all those services
which can assist management and other departments in formation of policies and effective
control of operations of the organisation.”
This can be defined as a process of identification, measurement, summarization, analysis
and communication of financial information along with significant data related with operation
and administration of Tesco. All this information is critically evaluated by the management of
organisation in process of decision making so that proper steps and decision can be made for
growth and administration of firm (Ward, 2012). This is also referred as cost accounting system.
The main difference between financial and management accounting is that, the former one
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provides information that assist decision of outsider stakeholder, while later one focus on
providing data and information for aiding mangers in decision making process.
Functions of management accounting system: Provide data: data relevant for past progress and for making future forecast are provided
by management accounting. Analysis and interpretation of data: meaningfully analyses data is done for effective
planning and decision making. Means of communication: forwarding plans upward, downward outwards through
organisation.
 Facilitates control: helps in translation of given objectives into strategies and plans for
effective achievement of goals.
Difference between management and financial accounting
Basis Financial accounting Management accounting
Period of Data evaluation After a definite time period At regular interval's
Objective Supply information in form of
P&L account, income
statements etc. for outside
stakeholders.
It is designed to provide
accounting information for
internal use of management
Precision Higher Lower
Legal compulsion Compulsory for every
business.
No need for every business to
install this system.
Different types of management accounting systems that can be applied in Tesco:
management accounting system is a frame work in which various objectives, functions
and elements are incorporated and evaluated for decision making. These are referred as
standardized system which aims at analysis, identifying and communication of information.
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Cost accounting system
This system can be defined as cost ascertainment, related with a specific product or
activity. In this cost are allocated either through activity based or traditional form of system. This
is defined as identification of all the expenses and allocating it to relevant product or activity.
For activity based cost system, expenses related with specific operation is allocated to
that directly. Other expenses which are related with overall operations of organisation is
allocated on proportionate basis to all departments or activities. In this cost is measured and
recorded individually to assist management in decisions related with inventory and control of
expenses for specific area of business.
Inventory management system:
This is a system in which inventory orders are controlled and overseen. In simple words
this means that when and how much to order for raw material to ensure smooth production
activity (Hilton and Platt, 2013). The components are stored and used so that production and
sales of goods can be kept in a proper order. This system is related with keeping record of
inventories sold in stores of Tesco. It involves, determination of units of various products
required to be maintained in stock so that goods are readily available for sales in its stores.
The function to be performed in this system are creation of purchase order, receiving,
storing, allocating, adjusting and disposing the inventory. Also, functions related with sales
orders, packaging and shipping of product from Tesco Outlet is performed.
Job costing system
this system focuses on allocation of manufacturing cost of individual component
produced in Tesco. It is applied in situations where processes related with production of various
goods, differs from one another. In this data and financial information related with cost of
particular product or job is determined. This will help Tesco to provide information of particular
job to consumer under contract in which costs are refundable. This system assists organisation in
accurately executing cost per unit of a product and aids management in deciding the sales price
that can be quoted for specific products.
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Price optimisation system
In this system mathematical analysis s applied in Tesco, that determines how consumer
will react to different prices for their products and services distributed through various channels.
Main objective of Tesco is to maximise its operating profits and to determine prices.
P.2 Different methods used by Tesco for management accounting reporting
Some important tools and techniques used in management accounting of Tesco are as
follows:
1. Accounts Receivable Ageing: It is a type of periodic report that separates company's
accounts receivable according to their length of time in an invoice that has been
outstanding. It can help in indicating certain number of customers that are becoming
credit risk takers. This is a management tool and which reveals whether the company
should keep doing business or not with consumers who are late payers.
2. Job Cost Reports: Specific projects that are financed by Tesco are represented in
this type of reports with their expenses. Company is able to evaluate profitability of
job because they generally match with an estimation of revenue. Tesco could put
emphasis on additional efforts wherever needed instead of wasting time and money
on jobs with low profit margins as this has helped it in identifying high earning areas
of the business.
3. Inventory and Manufacturing: If a physical inventory is maintained by Tesco or
produces products, it can make use managerial accounting reports for efficient
utilization of manufacturing processes.
4. Cash Flow Analysis: In Tesco, this analysis is done to navigate movements of cash
from one period to another. It is also used to find out reasons for cash balance and
changes between two periods.
5. Budgetary Control: Tesco uses this method to estimate and arrange future financial
needs according to an order. Financial performances of concerned business are also
controlled with this method. It helps company to direct business operations in a
desired direction.
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6. Revaluation Accounting: To represent capital properly revaluation is done of fixed
assets as per accounting methods with asset value in Tesco. Also, helps in finding out
fair return on capital employed.
7. Statistical and Graphical Techniques: To make the information more valuable and
meaningful many graphical and statistical techniques are used by accountant of
Tesco. Methods which are used by company are; least square, regression, quality
control, etc.
8. Management Reporting: This report is prepared on the basis of balance sheet and
profit & loss account, as these discloses strengths and weaknesses of different areas
of operating and financial activities in Tesco. These identifications are highly useful
for management in controlling and decision making.
9. Historical Cost Accounting: Tesco uses this technique to examine predetermined
costs to evaluate performance. It simply means that costs are recorded after being
incurred.
These are the tools and techniques used by Tesco in order to manage accounting
functions. All methods of management accountancy put emphasis on different segments of
account and helps in maintaining and controlling them (Renz, 2016). There is a good deal of
management accounting techniques available but are not used by Tesco.
TASK 2
P.3 Production of income statements showing absorption costing and marginal costing
techniques.
a) Calculation of cost per unit
Average production cost (absorption costing)
Items Units produced amount in £
Direct material 40000 30000
Direct labour 20000
Production overhead
Variable 12000
Fixed 10000
Total cost 72000
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Cost per unit 1.8
Average production cost (Marginal costing )
Items Units produced amount in £
Direct material 40000 30000
Direct labour 20000
Production overhead
Variable 12000
Total cost 62000
Cost per unit 1.55
b) Preparation of Budgeted trading and P&L account:
Budgeted trading and P&L account
Absorption Costing method
Particular Units sold Rate per unit ( in £) Amount in £
Sales 36000 8 288000
Less: cost of production 1.8 64800
Gross profit 223200
Less: expenses
Administrative 5400
Selling and distribution 4500
Net profit 213300
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Budgeted trading and p&l account
Marginal costing method
Particular Units sold Rate per unit Amount in £
Sales 36000 8 288000
Less: cost of production 1.55 55800
Gross profit 232200
Less: expenses
Selling and distribution 4500
Administrative 5400
Fixed production overhead 10000
Net profit 212300
Assumption:
In above calculation it is assumed that both selling & distribution and administrative
cost are fixed, as nothing is mentioned about proportion of distribution.
Interpretation:
From above calculation it can be interpreted that, though administrative and selling &
distribution expenses are considered to be fixed, cost per unit differs in both marginal (£1.55)
and absorption (£1.8) methods. In absorption method manufacturing expenses are counted in
valuation of production expenditure. Selling & distribution and administrative both fixed –
variable expenses are considered as period cost. So they are not considered in cost per unit
calculation.
In marginal method all variable price is considered as part of production and all fixed
cost as part of period expenses (Caglio, and Ditillo, 2012.). Variable includes all three expenses
that is manufacturing, selling & distribution and administrative, all of these expenditures form
part of cost per unit of a product.
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C) Advice to Heinz
Form the above calculation it can be concluded that in both the method company will
earn good profits. Cost of production is very low and sales prices are set high. Though price per
unit in absorption costing is high at £1.88 but it considers fixed manufacturing expenditure as
part of per product price giving a net profit of £213300. In marginal costing method value per
unit is £1.55 only but it considered fixed factory expenses of £10000 as part period expenditure
not as per unit value. Hence, giving a profit of £212300.
This is suggested to Heinz that, it can proceed with production plan as both methods are
giving good profits and in order to earn maximum profitability. Company can adopt absorption
method as it will generate higher profits of 10000 as compared to marginal costing technique.
Absorption Costing
This type of costing is also known as full cost accounting and is an accepted technique of
determining cost. In this method value is made up of direct plus overhead costs absorbed on
some suitable basis. In this techniques cost per unit remains same but when each unit fluctuates it
also changes level of output because of fixed cost which remains constant. In case of one product
and no inventory it is very useful. This method is also used in GAAP principles of accounting in
UK. In Tesco while considering absorption cost, all manufacturing costs are treated as product
costs. The COGS (cost of goods sold) would include direct materials, direct labour and overhead.
Advantages of Absorption Costing:
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Illustration 1: Absorption Costing Income Statement.
(Source: Absorption Costing, 2018)

1. Consideration of fixed costs: Importance of including fixed production costs in
determining suitable pricing policy is recognised correctly by absorption costing in
Tesco.
2. Seasonal Sales: This costing method is more reliable in case where production is
done to incur sales in future as it shows correct calculation of profits as compared to
variable costing. All fixed costs will be represented as an expense in the same
accounting period where variable costing might be zero in such cases.
3. Conformity with Accrual and Matching Concepts: Accounting concepts are
matched and accrual with help of absorption costing which involves revenue with
matching costs for a specific accounting period.
Disadvantages:
1. Difficulty in comparison and control of cost: Different costs are obtained from
diverse extents in Tesco as this type of costing depends upon level of output. An
increase in the volume of output normally results in reduction of unit costs and
decrease in output effects in an increased cost per unit because of existence of fixed
expenses.
2. Not Helpful in Managerial Decisions: This type of costing is not very much helpful
in making management decisions like; selection of suitable product mix, etc.
3. Cost Vitiated because of Fixed Cost included in Inventory: A part of fixed cost is
carried forward to the next accounting period as closing stock which is valued at cost
of production.
4. Fixed Cost Inclusion in cost not justified: These costs do not provide future
benefits as selling over heads, administration and fixed manufacturing are period
costs. Tesco also argued about the same.
Marginal Costing
It is a technique in which variable costing is charged to units of cost, while fixed cost is
completely written off against the contribution.
Marginal Cost = Direct Material + Direct Labour + Direct Expenses + Variable Overheads
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Advantages of Marginal Costing:
1. Cost Control: Marginal costing had made it easy to determine and control costs of
production. Management could be able to concentrate on achieving and maintaining a
consistent marginal cost by avoiding the arbitrary allocation of fixed overhead costs.
2. Simplicity: This type of costing is easy to understand and operate and have capability to
combine with other forms of costing without having much difficulty.
3. Maximum return to the business: The effects of alternative sales or production policies
are easily accepted, appreciated and assessed with help of marginal costing to ensure that
decisions taken will yield the maximum return to business.
Disadvantages:
1. Classifying Costs: Since all costs are variable in a long run, it becomes hard to
separate fixed and variable costs clearly. Such classifications may give misleading
results.
2. Recovery of Overheads: There is often the problem of under or over recovery of
overheads as variable costs are implemented on the basis of estimation not on actual
value.
TASK 3
P.4 Explaining advantages and disadvantages of different types of planning tool
Following are some types of planning tools which are used by Tesco in budgetary
control: Zero Based Budgeting- ZBB: All the expenses for each new period must be justified in
this method. This process starts with zero base and every function is analysed according
to its cost and needs within an organization (Zimmerman and Yahya-Zadeh, 2011). It
allows top level strategic goals to implement into the budgeting process.
Advantages:
1. It provides a systematic way to evaluate operations and programmes of activity to the
organization.
2. It allows management to allocate resources according to the priority of programme.
3. It enables departmental budgets to be proved on the basis of cost benefit comparison.
(Zero Base Budgeting: Advantages and Limitations, 2018)
Disadvantages:
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