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Management accounting plays a important role in todays organizational environment. Management Accounting consists of certain techniques which helps to achieve the companys success. This report is for the board of directors of Tesco Plc located in Luton. As a Management Accounting Consultant I have analyzed how management accounting can help the organization to take business decision for emergency and future situations and thus improve the profit of the business.
Tesco Plc is a global grocery and all-purpose merchandising trader. The organization is having all-purpose stores in 14 countries including Europe, Asia and North America and the organization is leading in UK, Malaysia and Thailand in grocery. When the company was started its basic focus was in UK and expertise in food and drink. It has differed in both geographically and product, including clothing, financial services, internet services, health, electronics etc.
The Tesco Plc is having three types of stores.
Tesco Superstores:- In this category of stores, which is larger and mainly out of town hyper- markets which consists of almost products of Tesco Plc.
Tesco Extra:- In this Category of stores , the stores are larger and contains grocery products and some non-food products.
Tesco Metro:- In this category of stores, it is located within the city which is a combination of Tesco Extra and Tesco Superstars.
The Policies with Tesco Plc are 'Trading Fairly' which includes four basic principles.
Trading:- Ensuring to work with the suppliers who share Tesco Plc values.
Monitoring:- To get the truth about the workers working in their Supply chain.
Improvement- Supporting the suppliers and improve the organization.
Transparency:- To be honest and open for the customers, suppliers and environment.
The company's major competitors are ASDA, Sainsbury's, Morrisons, Amazon etc. The survey shows it as a major market share in UK. This is a very good sign for company's efficiency.
The role of the management accounting manager helps the business organization to take major decisions for business.
Business strategy formulation.
Audits conducted for internal business.
Competitive landscape impact explanation.
Advising for financial propositions of projects.
According to the analysis of the Tesco Plc the problems faced by the organization are:-
Since the company is selling thousands of products, the organization needs to focus on costing of product.
In order to improve the hidden costs of inventory maintenance.
In order to improve the quality of processes and products.
Management accounting can be defined as the practical science which creates the value within organisations which includes both private and public sectors. (CIMA, June 2009)
Dyson, (2010) However, Management accounting is one of the way looking into accounting, which refers for the use of financial accounting data by the managers in order to make decisions for future business within the organisation.
Since it is based on making future judgments using the past financial figures, it is therefore forward looking and progressive in nature.
Dependant on the accuracy of data of financial and cost accounting.
It is basically used for internal management users like top management and does not have any strict guidelines as making financial accounting.
It is affected by the prejudice of top management which may tweak in benefiting themselves rather than shareholders.
Based on proper data and analysis of feasibility and profitability the business decisions can be made. It can be prepared for anytime (Weekly or Monthly) and it is flexible in nature.
Proper evaluation of management is not possible because it does not follow management principles.
Based on the most managerial accounting theorists and writers some of the techniques and methods of management accounting are:-
Direct and Indirect (Overhead) Cost- For Example, Direct Cost includes the wages paid for the employees for converting raw materials to finished product and Indirect Costs include indirect labour, insurances taxes etc. for the product development.
Make or Buy Decisions- For Example, Automotive Parts, Outsourcing, Visiting Professors in College or University.
Opportunity Costs- For Example, The cost of profit lost by making Chairs instead of the tables.
Contribution Margin- For Example, If we buy a burger in Mc Donald we will get coke free.
Payback Period- For Example, If a product is launched than at what time or years do the company get the investment.
Techniques and Applicability of Management Accounting
Dyson, (2010) There are some techniques of Management Accounting that helps to take business decisions. After the careful evaluation, the key techniques for the Tesco Plc to overcome the problems which will help the company to take decisions for improvement business strategies are given below:-
Cost-Volume-Profit (CVP)- Direct Costs and Indirect Costs
Relevant Cost- Opportunity Costs
Make or Buy Decisions
Cost-Volume-Profit (CVP)- Direct Costs and Indirect Costs:
Cost-Volume-Profit analysis is an analytical process which helps in understanding the cost behaviour of products and provides data for management decision-making.
Total Costs= Direct Costs+ Indirect Costs.
With the help of this method the organization can precisely estimate the cost of various products and services so that the organization can identify which are unprofitable and also to reduce the products which are expensive.
The Cost-Volume-Profit method provides the organization's resource costs through various activities (offers) to the products and services provided for the customers. The basic purpose of this method is to understand the product, customer cost and profit. This method is carried out in making some strategic decisions such as pricing, identification and outsourcing.
Since the Tesco is dealing with various grocery products business the CVP method helps to understand the costing of their products and is very useful method. In case if the company is charging more or less for any of the specific product the CVP method will help company to take decision based on costing of the products in a situation. This is based on the direct and indirect costs of a particular product which accounts for total cost. This is one of the important method for the company. With the help of this technique in a company it helps to increase its profitability.
Opportunity Costs are the profit made by selecting one alternative over the other. It is the net return if the source was replaced by the other source. Opportunity Costs focus on the on-going development and also improve the return of the organization based on investment, quality and efficiency. This help to achieve continues development of flow of process. and employee participation. This technique helps to make decision to reduce the order of the stock which reduces the employee participation. This helps to reduce the warehouse space and costs. However, this technique or system are often misunderstood. The idea is simple i.e. Additional inventory is waste. The company should follow new techniques to adopt for the changes. Opportunity costs helps to define the inventory stock and how it relates to management by saving space and costs. Opportunity Costs helps the organization to use the resource more efficiently.
Now if we consider Tesco, it is one of the very useful technique for the organization. Since it is a very big organization dealing with various products a proper inventory maintenance is necessary. In order to have effective control of the inventory usage the technique Opportunity Costs is necessary. Here the Opportunity Costs is used because if we reduce the space by reduction of additional inventory this can help reduce cost and thus improves the profit of the organization which is the opportunity for the organization . This helps to reduce the space and cost of the Tesco which in turn increases the profitability.
Make or Buy Decisions:
Make or Buy Decisions is the act of choosing a product of manufacturing in-house and or to purchase from a external source. The most important factor are cost and quality of the product. However, the company may introduce its own brand by purchasing suitable quality of products and manufacture them and to maintain the standards as per the other manufacturing products. In this technique the marginal cost is important which includes arbitrary fixed cost whether the organization purchases the product externally or manufacture by own by using suitable raw materials.
We all know that the quality of the processes and product is the key tool for the organization. Therefore, it is necessary for the organization to improve the quality of products and processes as per the required standards. Basically, Tesco is one of the famous brand in UK. Hence even the customers will have high range of expectations on quality of products and processes. So it is one of the important duty of the organization to maintain product's quality. Therefore, in order to achieve this the organization should ask for quality products from the dealers and suppliers.
Strengths of the analysis of report:
This report of Management accounting helps organization to calculate the plans and budgets which covers all aspects of the business. For Instance: Research, Production, Marketing, Selling and Budgeting. It is one of the important branch of the finance which is very useful for making decisions for the success of the company.
This report helps to cover all aspects of the business including the financial matters of the organization and assists the managers to make decisions. For Instance: Use of appropriate methods and techniques to overcome the problems faced by the Tesco Plc.
This report is for Tesco in Luton which helps them to make profit and further can also be used to all branches of Tesco worldwide.
Weakness of the analysis of report:
This report of Management accounting does not have set of standard rules.
This report when measuring performance based on techniques and methods provides a great deal of bias for top management.