Management Accounting Of Premier Foods Accounting Essay

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Premier foods are a British food company which has headquarters in St Albans, Hertfordshire. It is a member on the London Stock Exchange and constituent of FTSE 250.

Their primary three divisions are:

Grocery- It comprises of the shelf stable grocery products.

Chilled - It has following products chilled and frozen meat-free products and retailer branded chilled ready meal and cake businesses.

Hovis- It comprises of wrapped bread, morning goods, bulk and bagged flour.

It manufactures food brands which incudes, Mr Kipling cakes, Bisto gravy, Sharwood's Asian foods, Batchelors soups, Hovis bread, Loyd Grossman sauces, , Quorn meat free products, Ambrosia custard and rice pudding, Branston pickle and Hartley's jams, marmalades and jellies etc.

Premier Food's key competitors are Associated British Foods, Unilever, Northern Foods, Green core, Interlink and Warburton's. Despite its marketing successes, returns in Premier's bakery division remained low, while competition from Warburton's and Allied Bakeries remained intense.

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Premier Foods is the UK's largest supplier of grocery goods. Their business model is to utilize this scale for competitive advantage. It uses this scale to reduce costs and working capital by procuring more effectively. Their focus on the UK and presence in a broad range of categories gives it a deep insight into consumer trends in British food segment. This insight enables company to work closely with customers as their chosen category development partners across priority markets.

Strengths of Premier Foods

It is UK's largest branded ambient grocery manufacturer

A leading supplier of chilled food products

A strategic focus on the UK and on growing their brands

It is known for UK's largest bread baker and flour miller.

II Review of management accounting

Concept of Management Accounting

Business must keep record of day-to day events so that it can know its position clearly in the overall competition. The systematic record of these daily events of a business leads to complete a financial picture which is known as accounting.

Management Accounting can be defined to be a tool that helps to add value to an organization. Its ultimate aim is to effectively use all the company's resources through people management which is done in an ever changing and competitive environment. The value addition is through effective resource mobilization and utilization by people and to create the desired value for the customers. A Management accountant has a role to play to the result of the process of evolution through the life cycle stages. This activity is undertaken to strategically allocate and utilize resources for the maximum return for the organization. (IFAC, 1998).

Purpose of Management Accounting:

It is used for understanding of cost behavior and is fundamental to managerial accounting.

It is used to help the management to provide operating statements and short-term financial statements.

To facilitate budget process covering all functions of a business.

Financial accounting, Cost accounting and Budgeting and forecasting are within the scope of the Management Accounting.

It focuses on direction setting, structuring, control, and change.

To provide data analysis, reporting, coordinating and decision making on management.

Key Techniques: The key techniques include Cost Management, Value Management, Performance Management and Budgetary Control and Financial Plans. Abdel-Kader, M. and Luther, R. (2006)

III. Essential Techniques

Costing systems

One of Premier Food's moves was putting a right system in place. It is UK's largest supplier of ambient grocery goods. This business model is used to utilize for competitive advantage to reduce costs and working capital by procuring more effectively. The Group generally expects the effects of input cost changes and resulting pricing changes to even out over the long term. However, there can be a delay, or stagger, between input costs changing and pricing in the market changing to reflect them Bescos P and Mendoza, C (2000).

Premier has a centralized procurement function with a global sourcing strategy. The Group purchases a lot of raw materials each year. In recent years there has been a major increase in the cost of raw materials and other input costs such as utilities. Any delay in passing on increases in raw material costs to customers or to source raw materials of an acceptable type or quality adversely affect the results of the Group.

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It was seen that the company followed a system of Variable costing rather than the Absorption Costing because of the nature of its business. Costing of quality factor was also taken into consideration since food industry place a lot of importance to it. Premier Foods

Budgeting

Budgeting is an important technique for planning and controlling the activities of an organization. Budgeting is used for planning and for controlling costs. The company uses Flexible Budgeting system more than the fixed system. The Company can go for 'What if' Analysis from time to time for better budgeting. Cropper P. and Drury C. (1996)

Cash flow forecasts are prepared every quarter as part of the Group's overall budgeting. Forecasting performance is monitored against this each month. We recommend the company to use activity based budgeting (ABB) .Budgeting is more important than costing and formed important part of the long term strategic planning.

Performance evaluation

Reporting of performance evaluation of business units is important for Management accounting. It is most critical and challenging for business. Customer satisfaction, labor efficiency or innovations are some of the Qualitative factors should be taken into consideration other than the factors like financial ratios, ROI, profit, costs, variance analysis.

More recently "Economic Value Added" (EVA) is gaining popularity among the management. It can be defined as adjusted operating income minus a capital charge, and implies that a manager's action only adds economic value when the resulting profits exceed the incremental cost of capital. Kinney, M. and Wempe, W. (2002)

Balance Scorecard is another measure becoming very popular developed by Kaplan and Norton. It looks at four perspectives financial, customer-related, internal business processes, and learning and growth.

Financial and non financial measures are both important. Though financial measures is more popular we recommend that non financial measures should be tan into consideration for management accounting purpose.

The effects of recession and financial crisis dominated the performance of Premier Foods in UK in 2009.Uncertainity prevailed as regarding consumer shift from branded products to own label. The company in 2009 made a remarkable level of earnings. This activity helped strengthen the financials, helped to reduce the debt burden of the company, profits rose and a positive cash flow was seen in the company. Most importantly, it improved the performance of all key brands in a highly competitive marketplace. Mendoza, C. and Bescos, P. (2001)

The Five Star Environmental Award programme (FSEAP) provides the framework through which environmental performance improvement is encouraged, delivered and managed within Premier Foods.

Information for decision-making

Management accounting can provide a lot of information for decision making for the management. Management accountants can use tools like Cost Volume profit Analysis, Customer and Product Profitability Analysis for decision making for short and long terms. Other factors like NPV, IRR, discounting cash flows and payback period are used for evaluating different business and decision making regarding projects. Roslender, R. and Hart, S. (2003)

We recommend using modern techniques like Sensitivity Analysis, Computer Simulation, probability analysis and 'what if' for risk analysis to the company for its different brands.

Strategic analysis

Strategic Analysis should focus on both Internal and External environment. Generally external environment is ignored as more focus is done on internal environment analysis. For example effect of the Competitor's action, decisions and cost structures are important for the current and future business.

Food companies are, at present, more interested in conventional long-range planning and lateral competitive analyses. There is strong competition between manufacturers in the grocery business. The market is served by a number of well-established companies that operate on both a national and international basis. Premier is the largest food producer in the UK. Their business model is to use this scale to drive competitive advantage .The focus on the UK and the range of categories it operate in also give them a deep insight into consumer trends in food. The scale allows the company to procure more effectively and the consolidation of their asset base helps to drive efficiency. Rudder, A., Ainsworth, P. and Holgate, D., (2001)

Premier Food's size and scale coupled with their focus on the UK enable them to work with customers to provide consumers with more choice and convenience and to coordinate activity to drive. Their strength in bargaining position gives them significant leverage over their suppliers in terms of dictating pricing, product specification and the level of supplier participation in promotional campaigns and offers. Long range forecasting will be very important in future term planning.

IV. Strengths and weakness of the analysis

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From our analysis above we can say that budgeting, planning, performance evaluation is most important for management accounting practices. Time is of the essence so information needs to be procured in a timely manner and accurately so importance of communication in management process cannot be ignored.

We have listed different techniques above. While some are new and some traditional some of the measures like Strategic management analysis is gaining importance. For example product life cycle analysis is usually carried out by production specialists. Higher adoption and importance of some strategically focused techniques such as Analysis of competitive position and Analysis of competitors' strengths and weaknesses, profitability analysis, customer satisfaction will play a major role in the Management accounting in the future. Scapens, R., Ezzamel, M., Burns, J. and Baldvinsdottir, G. (2003)

One of the things though observed is that traditional management accounting is still very much present in the food sector and Premier food follows such practices. We expect that in the coming future it will be changed with more modern practices and techniques as indicated above.

Finally, we observed that cost of quality and the analysis of competitor strengths and weaknesses are likely to become more widespread. These practices reflect the increased competitive and regulatory pressures faced by organizations. Bhimani, A. (2002)

Conclusion

We conclude that Premier food is one of the largest food brands in the UK market the management system is still not very developed and lack the modern management accounting techniques and systems. It needs to adapt to this measures quickly to effectively manage its large brands. Management practices of costing budgeting and well long term planning will make it survive in the long run and compete with the large food industry in the UK.