Report on Management Accounting Major Factors for the Success

Question: Indicate the main purposes of management accounting and its relevance to the management of organisations. Evaluate the main cost structures of organisations and methods of their calculation. Determine appropriate methods of calculating break-even, profitability and capital input costs. Answer: Introduction Accounting is one of the major factors for the success of the organization. It gives the decision makers of the organizations all the economic information so that they can take proper decisions. Managing accounting has become extremely essential for all big or small firms as every firm has to maintain a proper systematic record and to check the current financial situation of the company. This particular assignment will cover the importance of managing accounting for the company Sainsbury and will highlight the different types of cost that the company implements. The organisation which is emphasised for Management accounting is Sainsbury Plc. Sainsbury is rated as one of the emerging supermarket chains in the retails sectors of United Kingdom. Management accounting concept is performed under a dynamic organisation to intersect the financial operation from the decision making process (Libby et al. 2012). The concept of Management accounting is essential for proper and smooth functioning of any organisation to operate within the parameters of rendering quality and time management. Meanwhile in the case of Sainsbury which is a retail organisation dealing in management accounting to deal with external pressure from the peripheral of outside force and other interested groups. The importance of management accounting in Sainsbury is listed below Sainsbury has an impactful and systematic management accounting which renders performance within the framework of quality as well as timeliness delivery of information to relevant individual within the organisation. Sainsbury stores the records of its assisting managers in directing and controlling the operations within the parameters of Management accounting. The concept of management accounting adds core values in the effective performance of retail organisation by measuring the activities of the corporate group of people such as top level management Sainsbury management performance extends a raising hand in generating funds through appropriate approach The role of accounting policies has a positive impact in implanting the sustainability in decision structure at all level of management in Sainsbury. Financial accounting concept is different from management accounting. Management accounting is based on external and internal environmental factors of the organisation. On the other hand financial accounting deals with company as a whole. It provides the shareholders and the stakeholders about the financial position of the company (Amihud and Mendelson 2012). Management accounting is also defined as analytical accounting measures which is responsible for collecting, transferring and analysing budgets for processing information on planning, moreover its is helpful in preparing and analysing the budgets based on internal organisation reports. Financial accounting emphasis on past records and reports of certain quarter or year where are management accounting is more oriented towards presenting and forecasting for future. Cost accounting is a systematic analysis of the expenses recording to evaluate the cost of each service or product provided by the company (Kokubu and Kitada 2015). For management, cost accounting is extremely beneficial to maximize profits, economies on costs and fix prices. However, for management control over decision making classification of cost is required. The various type of cost classification is described as follows: By time (Historical and pre-determined) Historical costs are evaluates when the production of a commodity is done to verify regarding actual operations. The specifications of pre-determined costs are based on all factors of standard costs and estimated costs. However, standard costs are entered with a caution compared to estimated costs. By elements or nature (Labor, Material and Expenses) For the product, material is the substance (Spraakman 2015). Material cost can be both indirect and direct. The indirect material is often used in ancillary production to highlight the physical units such as stationary material, oil, convenient stores, etc. The direct material is the cost of portion of finished goods observable to units such as primary packaging, components purchased, etc. Labor cost can also be differentiate from indirect labor and direct labor. Direct labor costs can be described as the wages of the labor whereas indirect labor indicates the labor employed in doing a particular task such as wages of the supervisors, foreman and inspectors etc. There are two types of expenses- indirect and direct expenses. Direct expenses indicates on things such as specific cost units like drawing, design, hiring of employment or any other tools, fees paid to the consultants, and indirect expenses that are not allocated directly to cost centers like taxes, rent, lighting, insurance and depreciation, heating etc. By degree of traceability (Direct and Indirect) Indirect costs are also recognized by common costs are very difficult to identity to a single commodity whereas direct costs are traceable to a particular, or some other activity is taken by costing unit. Cost incurred in different powerhouse can also be referred as the indirect costs whereas concerning the product in the powerhouse, the fuel cost and supervisory salaries are associated with the direct cost. Product association (Product and Period) The cost incurred to run a business such as salaries, rent, administrative and selling costs, etc are associated with the period costs (Dutta et al. 2016). On the other hand, the costs that are added in inventory values like manufacturing overheads and direct labor are the direct costs. By function (Selling, Administrating, Manufacturing, Pre-Production and Research and Development) Administrative Costs The cost that covers the costs of formulating policy is associated with Indirect costs, controlling and directing the operations the organization. Selling and Distribution Costs Distribution costs are the costs that covers a part of the overheads of a production unit. They are variable in terms of commissions, sales and fixed in case of transporting articles to central or local storage. Pre-Production Costs It is the costs that incurred because of the trial runs for starting up a new factory or a product. Manufacturing Costs Expenditures associated with the manufacturing division on labour, direct materials, , packing, expenses, etc. Research and Development It is the costs incurred on the new process, products, or insights by executing and experiment and results on a commercial basis. Table 1: Administrative cost Source: (Ahmad 2016) Association with the period of accounting (Capital and Revenue) Revenue and Capital are based on the current period and future period respectively. However, future period costs are treated as assets. On the other hand, current period costs are treated as expenses. By controllability (Controllable and Non-controllable) The costs that a budget holder can control are known as controllable cost and the costs that are not subject to any supervision is referred as uncontrollable cost. By changes in volume (Fixed, Semi-variable, Variable) Variable cost is proportionately or directly related with the output such as labor corresponding or direct materials to the level of outputs. On the other hand, semi-variable cost contains both variable and fixed costs like depreciation. Similarly, fixed costs are those costs that paid by the company irrespective of any other business activities. However, these costs arise with the time like salary, rent, insurance, etc. Figure 1: Fixed, Variable and Semi-variable cost Costs for decision making In management accounting, these costs are very important to carry out direction of the organization. Decision Making Costs Purpose Examples Opportunity Costs When one course is defined, it is the loss of another alternative of action. Capital invested in manufacturing company cannot be invested in stock market Differential Costs The difference between the alternatives of total costs Alternative decisions and changes in output Joint Costs The two or more products are a result of factors of production. These are costs incurred at the point of separation. Budgeting cooperation between departments Sunk Costs The costs that have already been incurred and cannot be avoided by decision-making Training, hiring bonus, marketing study, etc. Marginal Costs Aggregate of variable costs Prime cost with variable overheads Uniform Costs It is useful in inter-firm comparison. The cost incurred on common procedures and principles. Differences in size of business and organization or differences in methods of production and production facilities Replacement Costs The cost of replacing one asset with other at its current value Majorly used in insurance policies to cover damage to companys assets Imputed Costs The costs that are useful while decision-making to a particular situation Interest generated on internal funds Common Costs The costs that are incurred in more than one job, product or territory. Electrical expenses, transportation and money costs Table 2: Decision making cost Source: (Bzostek 2015) Meaning of Variance Analysis During the evaluation of production performance, it is essential to have a knowledge related to the predetermined costing and variance in this particular scenario is known to be foundation of the process. The term Variance refers to the difference between the forecasted cost and the actual cost of an element over the certain period. However, the process known as Variance Analysis actually refers to conduct effective analysis of variance, which provides some effective information to the management about the basic reason of the dissimilarities(House, 2008). Therefore, variance analysis is a significant process, which plays effective role to assist in the decision-making by the management. With the help of the process, the managers can take measures to improve efficiency in the operations and find the suitable idea to allocate resources in the right direction. The determination comes from the variance analysis is made by looking at the performance of the firm. If the operating or financial performance of the organization is better than the expected outcomes, then it will be called as Favourable Variance. The contrast scenario on the other hand is known as the Unfavourable Variance (Cho 2011).Apart from the basic sense portrayed about the Variance Analysis, it should also need to mention that the process can be classified in different types. The major two types of variance analysis are known as Sales Volume Variance and Flexible-Budget Variance. With the help of a picture, the major types of Variance Analysis can be elaborated (Katsikas et al. 2015). (Two Major Types of Variance Analysis; Source: Image.slidesharecdn.com, 2016) Flexible-Budget variance the definition of flexible0budget variance is known as the difference between the estimated amount of the budgeted figure and the actual amount that is achieved by the business(Cordero, 2012). Sales-Volume Variance in case of sales-volume variance, it refers to the difference between the flexible budget amount and static budget amount. Problems and Limitations of Different Types of Variance analysis Some of the major problems or challenges associated with the process of variance analysis are discussed in the following portion: Variance analysis is largely used for developing the external reporting and computation of tax, which is an unaccepted method. During the process of conducting analysis, the significant contributions of the fixed cost is not considered. It is a major fact that the long-running effect of the fixed cost can make it a variable factor, which is not considered in the variance analysis process. Due to the process of variance analysis, different types of issues are faced by the management as the process is done in the end of the month. However, the managers gather information from the key areas of the business in the daily basis to deal with issues. Variance analysis is often not included in the recording of accounting information because of the managers are provided with the limited information related to the labour or overhead details. Variance analysis is a process, which is fundamentally based on the comparing the actual results with the estimated or fictitious results(Hjortland, 2013). The process leads to the standard setting. However, often the standard setting of the organisation is affected by the political bargaining. Therefore, the analysis in those cases cannot bring any useful contributions to the firm (Zenita et al. 2015). Problems faced by Sainsbury In case of the huge operational chain of the company, setting the budget for one year will be a major issue. Therefore, the company should need to set the budget in the monthly basis. However, in different scenarios, the variances in the Sainsbury are caused by the external factors (Cordero 2012). Therefore, the management can face certain problems, as the only option for them will be motivating the staffs to achieve results. The term Operating budget indicates the process of preparing the financial plans of any firm. In terms of this financial planning, Sainsbury prepares its operational budget annually. But it is not mandatory to prepare yearly budgets for a very long span of time. The reason is that this kind of budget predict the monetary requirements in accordance with the operating budget plans. The major function of the operating budget is to examine in a better way the salaries and factors related to the salaries, operations management and payments of the interests, whether the interest rates are paid justifiably (Kaplan and Atkinson 2015). Meanwhile, the income and the expenses which are incurred through the sales revenue can be predicted within a short period of time, whereas the capital which is invested for a long term basis is not included in the calculation of such incomes and revenues. Three different kinds of Operating budgets can be devised on a daily basis. They are as follows: Revenue Budget : This type denotes the budget which helps in detecting the revenues needed by an organization and along with the projection of future sales revenue. Expense Budget: This kind of budget tells about the possible expenses at the time of the budget. Fixed budget, variable budget and discretionary budget are the three various kinds of expense budgets which are examined in terms of the operational budget. Profit Budget: The revenue budgets and the expense budgets together taken into the net and gross profits make the Profit budget. This profit Budget is used for evaluating the expense budgets in accordance with the forecasted revenues, and also for allocation of resources. Depending on the financial planning and success of the firm, this profit budget assists in allocating the managers with certain duties and supervising activities. Merits of Operating Budgets Helps in Projecting Future Expenses: The analyzation of the past expenses can actually assist in making the budget in a better for the up coming year. As for example, Sainsbury predicts its last years annual budget to prepare a new budget. But over evaluation of the budget should be avoided. Moreover, the lacks in the previous budgets can be filled up with the overrated funds (Higgins and Reimers 2014). Managing Current Expenses: The present operating expenses like, salaries of the staffs, rent of the office, various other costs related to the criteria of savings and the fixed costs can be managed using operating budgets. Building Reserves: Amount outstanding can be reduced by using the operational budgets as in this case the evaluated budget is created beforehand. Operating budgets can be used very successfully if they perform works related to economy, investing and economic planning. If the budget of any company is able to preserve money, then it becomes possible for that company to prevent the losses in any year. Accounting: A well planned operating budget can establish economic responsibility, thereby allowing the firm to reach the aims of the company. But, Sainsbury allows the operating budget to assist it in reaching its goals. Recommendations: Regarding this report Sainsbury profitability ratios highlights the moderate reduction during the year 2003 to 2004. This was due to the numerous challenges the firm had to face. Managing accounting has become extremely essential for all big or small firms as every firm has to maintain a proper systematic record and to check the current financial situation of the company. Since the variable cost is proportionately or directly related with the output such as labor corresponding or direct materials to the level of outputs. Due to the process of variance analysis, different types of issues are faced by the management as the process is done in the end of the month. However, the managers gather information from the key areas of the business in the daily basis to deal with issues. Therefore, the company should need to set the budget in the monthly basis. However, in different scenarios, the variances in the Sainsbury are caused by the external factors. During the evaluation of production performance, it is essential to have a knowledge related to the predetermined costing and variance in this particular scenario is known to be foundation of the process. Conclusion: It is very important for the organization to like Sainsbury to understand how to survive in the competitive market in which they operate. Hence markets that require managers to who understand and are completely aware of the internal and external factors which are important concerns for the company. The financial management tools can be used which gives the managers of Sainsbury to set up the strategies of the information in order to make decision in the future. However it is important to highlight the tools of ratio analysis to provide a complete view of the company financial condition, but a deep analysis is necessary to know the depth of the company. Nevertheless the financial management tools are helpful in understanding the management level and the organizational level of decision making. The purpose of this report was to understand the Sainsburys financial performance using the tools of financial management. 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