Financial Analysis of Unilever UK: A Management Accounting Perspective

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Management Accounting
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Table of Contents
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................4
Task 2.............................................................................................................................................10
Conclusion.....................................................................................................................................17
Bibliography..................................................................................................................................18
Appendix........................................................................................................................................20
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Introduction
If professional knowledge is applied for preparing accounting information for assisting
management, then this application can be defined as management accounting. This helps in
planning for business operations and provides support for controlling it. The theory of
management accounting goes back to the time of industrial revolution. Economic advancement
was noticeable in Middle East. Business records has been found, which goes back to the time of
Chaldean-Babylonian. There was other civilisation, which used management accounting. There
were many small industries, which used it and dates back to 3500 BC. Chao dynasty in China
took MA to a higher level of sophistication. They were the first people to introduced double
entry techniques. Methods these civilisations were using are not enough for making decisions
from these figures. The advancement of MA happened during the industrial revolution under the
British people. During the time of 1830, the population was increasing in Britain and they were
investing in many industrial sectors. This required them to invent new accounting techniques and
MA was improved due to this (Parker et al., 2017).
MA is very important in any organisation, as it gives them certain amount of control over the
business. Unilever can forecast their sales future by MA. It will make their decision-making
easier and they can find proper areas for investment. The company can forecast cash flows and
this will give clear idea about revenue they might generate in future. Budgets can be prepared
and it is vital for business. The rate of return can be analysed from this.
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Task 1
Introduction
Management accounting is an indispensable system for business firms as it keeps track of all the
internal processes in the business firms. It is a combination of different systems and it can be
used in monetary and non-monetary both the functions. Various systems of management
accounting serve different purposes in the business firms. Cost accounting and budgeting are the
key functions of this system and it is helpful for improving the business environment of
administration. Application of these systems within the organisation atmosphere is important and
integration of several reporting systems makes the internal systems of management accounting
highly effective. Management accounting facilitates usage of planning tools for budgeting in the
business firm.
In this division of the report, details of management accounting with suitable explanation of
various systems of management accounting will be analysed. It will help to understand the use of
tools of planning in the context of Unilever UK (Unilever.com., 2019). This report will provide a
through detail explanation for the understanding of the subject
Part 1
a. Explain management accounting and give the essential requirements of different types of
management accounting systems.
The development of analysing and calculating cost and operation within the organisation is
called management accounting. It improves the interior function and financial events. It helps to
prepare financial report, record and make decisions to the managers. It is mainly used in the
business firms for serving the purposes of budgeting and costing of the administrations.
Essential requirements of different management accounting systems will be given below:
Cost accounting system
Cost accounting organism is used in the administrations for managing expenditure of production
and costing of individual fabrication can be managed. Key importance of this system is to assess
the inputs of each step in the costing system and all the costs in each step can be measured
individually (Maskell et al., 2016). Unilever can use cost management accounting for the
decision-making and it helps to take the decisions regarding reducing cost of construction. The
cost of management accounting depends on the information received by the business firm.
Various types of organisms of cost accounting are used within business firm.
The system has importance in the business firm such as the problems within the production
system can be drilled down to the root and it helps the business forms to solve the problems of
the processes easily. Trend of the costing can be analysed with the help of this system and the
revenue and the expenditure in the company can be clustered with the help of cost object
analysis. It helps in compliance of budget and the capacity of the business firm to bear the
expenditure can be analysed.
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Job costing system
In this system, the cost is accumulated from each of the job of a production system. The costs of
different jobs can be determined differently under the production process. The prices of the
products can be quoted with the help of this system (Kumar et al., 2015). Generally, the process
of job costing can accumulate the information of direct material, overhead and the direct labour.
This system will help Unilever to become more attractive to the customers. It ascertains costs in
each job so the total costing becomes less and the double counting of cost within a production
process will be eliminated. This system is required in the business firm for the requisition of
material and for billing the materials of the products within the business firm. The wages can be
accumulated with the help of this system in business firms. Unilever will be benefitted by using
this for managing different types of overheads in the process of production.
Standard costing system
This instrument is used in planning budget and evaluation of cost in the business firm.
Estimation of the required cost can be done. Cost of direct materials and standard cost of
manufacturing can be determined. The cost of direct material and labour can be estimated. This
method can be used in several systems of costing in the business firm (Huang et al., 2017). It
will help Unilever in several ways. Controlling of cost can be improved by using this system in
the business firm. Decision-making and managerial planning can be improved with the help of
this system in the administrations.
Standard costing can help planning the cost in the manufacturing process of Unilever and the
organism of managing inventory in the administration can be done in a better way. Standard
costing helps to set the value of merchandises and competitiveness of the pricing will be
increased in Unilever by suing standard costing.
Inventory management system
This system helps to manage the scheduling of inventory with the production process of the
business firm. It helps the business firms to prevent the wastage of inventory and the earning can
be increased with the help of this system. It is useful in the organisational process for prompt
delivery process (Dale and Plunkett, 2017). Unilever will be benefitted with this system with the
improvement of tracking and transparency of the production process in the business firm.
Inventory managing is mostly done with the help of software and by this system, the entire assets
can be tracked within the company. It increases transparency of the system.
From the different types of inventory management system Unilever uses FIFO inventory system
and it helps them to sell the first produced one first. It increases the quality of inventory
management along with the quality management of the production.
Price optimisation system
This system is used in the administration for understanding willingness of the customers for
paying the price for products of the business firms. It increases the attractiveness of the products
and competitive management analysis can be done with the help of this system. The volume and
prices of the products can be assumed with the help of this system. Unilever can analyse the
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revenue and earnings of business firm from the price optimisation system of the administration
(Sanni and O'Neill, 2019).
Prices of the products can be analysed with the analysis of the average spending of customers
and a proper market research. It calculates the total cost of the production process. It augments
the profitability in the business firm. Unilever uses this system to decide the prices of different
brand in the administration.
b. Explain different methods used for management accounting reporting.
It is an significant objective of the management accounting and it helps to authenticate the
information within the administrations. Different organisms of reporting in the management
accounting track financial information. Various reporting system will be explained in this
portion.
Budget report
This report analyses the disparity between real and the benchmark performance. It controls
performances of the resources in business firm. Cost and revenue of the administration can be
assumed with the help of budget report and the variance of the actual and standard can be done
with the help of this reporting system (Maas et al., 2016). Errors in the budget can be found by
this report and the required correction can be done with the help of this report. Revision of the
budget report can be done if needed and it increases efficiency of the processes. The internal
problems of the administration can be done by this report. Expenditure of the company can be
managed properly by the efficient implementation of budget.
Sales report
Sales report is prepared in the business firms for depicting the detailed volume of production and
sales in the business firms (Makarenko et al., 2017). Different areas of the business firms can be
determined and performance of resources can be controlled with the help of sales report. The
future trend of the sales can be determined by this report and it helps to improve the
performances of the business firms. The sales team of the business firms can track performance
and it improves effectiveness of administrations.
Divisional department report
Reports of different divisions are included in this type of report. It determines the sales of
different divisions within the business firm and the performance of the divisions can be tracked
by this report (Manyaeva et al., 2016). It includes the sales and the cost of different department
within one report. The strong performing division can be determined and the unique selling point
of the administration can be determined with the help of this report.
Cost report
This includes the details costing of the production in business firm. It includes the total costing
of the cost report. Expenditure of the business firm by the total cost of production can be
determined.
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c. Evaluate the benefits of management accounting systems and their application within an
organisational context.
Management accounting has a huge importance in business firms. It has different functions to
apply in the administration and it will help the business firm to become more effective. Different
functions of this system will be explained below:
Planning
Goals of the administration can be set with the help of proper planning. It augments the
effectiveness of resources and a direction is provided to different sections of the business firms.
Risk of the administration can be reduced with the help of proper planning. Proper planning in
the administration can reduce wasteful activities (McVay et al., 2016). Unilever can perform
more effectively and innovation will be increased in Unilever. Decision-making regarding the
application of different systems in the company becomes easier by proper planning and standard
of controlling can be augmented with this function.
Organising
Management accounting increases organisation within different systems in the business firm.
Proper organising helps to augment clarity in the relationship of different systems of business
firm. Maximum usage of the resources is another advantage of effective organising in the
business firm. Changes can be adapted easily in the business firm and the administration within
different systems will be more effective with the help of organisation in different systems.
Controlling
Controlling is another benefit of management accounting system. It improves the performances
of resources. Unproductive elements of the resources can be removed from the organisational
processes. Effectiveness of the resources can be increased by controlling process of the
organisation (Nan, 2016). Unilever can increase the profitability by controlling the performances
of resources. Goal oriented nature of the business firms will be stronger and the goals can ebb
achieved more effectively. Discipline is essential within the processes and controlling will
increase the discipline in business firm.
Decision-making
Management accounting tracks the performances of different areas of the business firm and it
helps to make the decisions effectively in the business firms. Decision-making needs supports of
different systems and planning and controlling of the internal processes help in making decision
effectively and fast in the administration.
d. Critically evaluate how management accounting systems and management accounting
reporting is integrated within organisational processes.
According to Otley (2016), various systems of management accounting are used to serve
different purposes in business firms. Cost accounting system tracks all the detailed costing in the
business firms and the costs are reported through cost report. On the other hand, Chenhall (2015)
the performance report includes the performances of the business firm in several areas and the
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performances are reported though the sales report and it helps to find out the weakest and the
strongest areas of the business firm. The system is applied for the improved performance of the
resources and the report is prepared to record the performance for further references.
From the critical evaluation, it can be stated that the reporting and accounting systems both are
integrated in the business firm together for better performance.
Part 2
Analysis of three planning tools in management accounting:
Activity based costing
In this technique, the cost is ascertained as per activities of entire process. This method is
responsible for assigning costs into several activities. Individual activities are identified and the
costs of different processes are pooled in the business firm for the activity based costing (O'Shea,
2018). It helps to allocate overheads for different processes in the business firms and the
synchronisation within the processes can be increased with the help of this costing method.
Advantages
This method helps to assign the correct costs to the products. Reliability of the product cost can
be increased with the help of this costing method. This process of costing can identify behaviour
of cost. The costs of the processes can be reduced and the activities can be improved with the
help of this method. All the activities can be traced by this method and the overhead cost can be
traced with this method (Drury, 2017). Management of costing can be done effectively with this
costing method. Cost reduction can be done effectively by applying activity based costing. This
method is more beneficial for service industry.
Disadvantages
Though this method has several advantages, yet high expense is a huge disadvantage of this
system. Application of activity based costing is a complicated method and it cannot be applied in
all the business firms. Choosing the drivers of the processes is difficult in the activity based
costing system and this is not applicable in the smaller firms.
Break even analysis
Break even analysis is done to understand the amount of sales that needs to be achieved by the
business firm for preventing the loss of production. It provides the numbers of unites to be sold
by the administration to earn the money that has been spent by the business firm. This method
has some assumptions such as all costs are variable cost (Ptak and Schragenheim, 2016). It
considers that fixed cost will not change ever at all levels of production. It assumes that the
change in variable costing is directly proportional to the production volume of the business firm.
It thinks that the selling price of the products will remain constant even after considering the
competition of the market.
Advantages
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The profit and losses of the business firms can be measured in different levels in this analysis
and it helps to assume the changes in sales prices of the products. Relationship between the
different costs can be analysed with the help of this system and the effect of cost efficiency with
changes in profitability can be analysed in this process.
Disadvantages
The assumptions are the key disadvantages of this method. It assumes that the fixed cost will be
same forever and the variable cost of production will change with each level of production. The
process of break-even analysis is time consuming and it does not consider changes in the sales
prices even after hard competition of the market.
Discounted cash flow methods
Discounted cash flow methods are used for investment appraisal in business firms. It helps to
consider the more profitable option of investment in the business firm.
Advantages
This method is capable to estimate the closest different in the intrinsic value of cost and it is
considered one of the most advantageous methods of the valuation of projects. It helps to prepare
a different cash flow with the discounted rates and the short-term conditions of market and the
non-economic factors cannot change the value of this method (Theriou, 2015). It is most
applicable for the high degree of confidence of the flow of cash for future.
Disadvantages
High sensitivity of this process causes consideration of changes in the analysis and the method
becomes more complex this way. Due to several small adjustments, the fair value of this method
is not always accurate and it changes continuously. This process is time intensive and it is not at
all cost effective method of planning the expenses. It is not possible to apply in small companies,
as it requires more costs in the business firms.
Conclusion
Unilever is now revising the application management accounting within the business firm.
Several methods of management accounting have been described in this part and it will provide
an understanding of different methods in the administration. Benefits of the management
accounting systems have been provided. Systems of management accounting are needed to serve
different purposes in the administration. Planning tools help to strategise the future of
administration and the evaluation of different planning tools have been provided in this report for
better understanding of the entire method. The overall conclusion that can be drawn from the
above portion is Unilever can use different planning tools and reporting systems of management
accounting for improving overall performance of the business firm and it will help the
administration to become more profitable.
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Task 2
Part 1
Fixed cost
It is the cost, which is not changed with the volume of production until a long period. Some of
the examples of fixed costs are plant, building and machinery (Whittington, 2016). Prices of the
products can be determined by using fixed cost and it has a key role in the determination of
profitability. Fluctuation is very less in this cost.
Variable cost
This cost is changed with the production volume of the company. It has high fluctuation with the
volumes of output in business firm. Variable cost only depends on the amount of sales.
Decreasing variable cost of the company will increase the profitability of the business firm.
Absorption costing
It is the method of costing in which all the costs including variable and fixed are considered at
the time of calculating the production cost (Zakeri and Syri, 2015). It is a beneficial method of
costing for the rising amount inventory.
Marginal Costing
This method of costing is more beneficial for the static and large amount of inventory. It is
associated with the variable cost of production.
Profit and loss statement under Absorption costing
As on 31st May
Particulars
(Absorption)
Amount Amount
Revenue £
4,200,000.00
Less:
Manufacturing cost
Variable cost
Direct material cost £
1.38
Direct labour cost £
1.88
Variable
manufacturing
overhead
£
-
Fixed Factory £
1.50
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Cost of goods
manufactured
£
4.75
£
1,900,000.00
Add: Opening Stock £
-
Cost of Goods
available for sale
£
1,900,000.00
Less: Closing stock 0 £
-
Cost of goods sold £
1,900,000.00
Add: Under absorption of
factory overheads
or
Less: Over absorption of
factory overhead
Cost of goods sold at
actual
Gross profit on sale
Less: Fixed selling and
administrative expense
£
-
Variable selling and
administrative expense
£
630,000.00
Total Non
manufacturing cost
£
630,000.00
NET OPERATING
INCOME
£
1,270,000.00
Table 1: Income statement of Eymen Limited under absorption costing
(Source: Created by the learner)
Profit and loss statement under Marginal costing
As on 31st May
Particulars (Marginal) Amount Amount
Sales £
4,200,000.00
Less: Variable cost
Direct material £
1.38
Direct labour £
1.88
Variable overhead £
-
Cost of goods sold £
3.25
£
1,300,000.00
Contribution £
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2,900,000.00
Less: Fixed manufacturing
overhead
£
1.50
£
600,000.00
Other fixed expenses £
15,000.00
Net profit £
2,285,000.00
Table 2: Income statement of Eymen Limited under marginal costing
(Source: Created by the learner)
Profit and loss statement under Absorption costing
As on 31st June
Particulars
(Absorption)
Amount Amount
Revenue £
3,780,000.00
Less:
Manufacturing cost
Variable cost
Direct material cost £
1.38
Direct labour cost £
1.88
Variable
manufacturing
overhead
£
-
Fixed Factory £
1.50
Cost of goods
manufactured
£
4.75
£
1,900,000.00
Add: Opening Stock £
-
Cost of Goods
available for sale
£
1,900,000.00
Less: Closing stock 40000 £
190,000.00
Cost of goods sold £
1,710,000.00
Add: Under absorption of
factory overheads
or
Less: Over absorption of
factory overhead
Cost of goods sold at
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