Management Accounting Effective Team Management Policies

Question: 1. Discuss the importance of management accounting for your selected organisation and differentiate between management accounting and financial accounting. 2. Evaluate different classifications of costs (types, behaviour, function and relevance) with examples. 3. Explain the meaning of variance analysis and discuss the most commonly derived variances, outlining the problems and limitations. 4. Identify different operational budgets and explain the advantages of preparing. Answer: Introduction This assignment is a report, which is to be submitted to the Board of directors of a selected company regarding some issues relating to management accounting. The company selected in this report is Tesco. It is a retail company which has its headquarter in The United Kingdom. However, the assignment deals with the companys management accounting and the financial accounting that differentiates the two. However, management accounting deals with different classification of costs that are caused in the functioning of the company. Nevertheless, variance analysis deals with the differences that are experienced with the main outcomes and interpreted results. However, ascertainment of variance analysis leads to issues that also affect the operational budgets. Hence, the assignment examines the different operational budgets and the role of formulating different operational budgets. Importance of Management Accounting for Tesco The organization selected for this project is Tesco. So various aspects of management accounting relating to Tesco would be discussed in this assignment. Management accounting is important for any organization (Atkinson 2012). Management accounting is the use of accounting information to help the managers take important decisions regarding various aspects of an organization. The importance of management accounting in case of Tesco is highlighted as follows: Management Accounting helps the management of Tesco in the preparation of plans. Planning is a very important function of an organization as it is the first step of management (Barrow 2011). It helps Tesco to provide better services to the customers. The cost control device of management accounting helps in the reduction in the products prices. The customers are provided with quality products at affordable prices (Kapil 2011). Management Accounting helps Tesco to measure the performance of its employees. Management can enforce greater control on the organization because of management accounting (Albrecht, Stice and Stice 2011). It increases the revenue earning capacity of Tesco because it can control costs effectively. Overall efficiency of Tesco as an organization is increased after the application of management accounting. It helps to increase the brand image of Tesco, as quality products are delivered at affordable prices. Financial accounting is the process of recording, classifying and summarizing in a systematic manner the various economic transactions of a company or organization. It deals with the preparation of financial reports at the end of the financial period. Management Accounting actually deals with a broader aspect (Bhattacharyya 2011). Financial accounting is a part of Management Accounting. Management Accounting uses the reports generated from financial accounting and uses it for analyzing various factors and making many organizational decisions. Hence, Management Accounting includes financial accounting within it (Horngren 2013). Different classification of costs Cost is the amount of money per unit that is required for a company to manufacture a product. To manufacture a product a company requires different raw materials, factory, machines and labour (Libby, Libby and Short 2011). These are all a part of the cost for producing the product. It is very important for an organization to control the cost, as a reduction in cost would mean an increase in the profits of the organization(John Y. Lee 2012). Management Accounting helps in the process of cost control. Now cost can be classifying according to various criteria. These are highlighted below: According to nature: Cost can be classified according to its nature. Under this category, cost is usually classified into three types (Spiceland, Thomas and Herrmann 2011). They are material, labor and overheads. According to degree of traceability: According to the degree of traceability, costs can be divided into two types (Horngren, Harrison and Oliver 2012). They are direct expenses and indirect expenses. Direct expenses are directly attributable to a product while indirect expenses are overhead expenses. (Here, expenses means costs). Figure 1 Elements of Cost Source: (Horngren, Harrison and Oliver 2012) According to controllability: Costs can be classified into two types according to controllability. They are controllable costs and uncontrollable costs. The management, like the direct expenses, can control controllable costs (Seal, Garrison and Noreen 2012). The management does not influence uncontrollable costs. Examples are building or factory rent. According to functions: According to functions costs can be product cost or commercial cost. Product costs are total cost of the product (Seal, Garrison and Noreen 2012). Commercial costs include elements such as selling and distribution overhead. According to change in volume: According to change in volume, cost can be of three types, namely fixed, variable and semi variable cost (Horngren, Harrison and Oliver 2012). Fixed cost remains unchanged irrespective of the volume of production, like the rent of the factory, insurance charges. Variable costs vary according to the level of production. Semi variable costs include elements of both fixed and variable costs. Figure 2 Fixed Costs and Variable Costs Source: (Horngren and Horngren 2012) According to association with product: It can be classified into product cost and time period based cost. Product cost is recognizable in any product. It consists of direct labour, direct overheads and direct overheads(John Y. Lee2012). Time period cost c insists of selling expenditure and administrative expenditure. Example of a time period cost is rent of a building. Elements of cost can be classified as follows: Cost consists of material, labor and expenses. Material can be direct and indirect. Labor can be direct and indirect. Similarly expenses can also be direct and indirect. All the indirect elements include some overhead charges (Horngren and Horngren 2012). They are production overheads, administration overhead, and sales overhead and distribution overhead. Relevant and Irrelevant costs: Relevant costs are those costs, which change by the decision of managers (Horngren, Harrison and Oliver 2012). Irrelevant costs are those, which do not get affected by the decisions. Shut down and sunk costs: The manufacturer has to shut down the operations of manufacturing due to some factors. But still then, costs incur to the organization. Examples are the cost of warehouse rent, cost of maintenance, depreciation cost etc. These costs are known as shut down costs (Horngren 2011). Sunk costs are those costs that are historical in nature. They are also called past costs. Investments in plant and machinery, investments in buildings are example of these costs. These costs are generally considered to be irrelevant in case of decision-making. Imputed or hypothetical costs: There are some kinds of costs, which do not involve cash outlay. These costs are not involved in cost accounts, but they are considered important in case of decision-making process by the management (Fields 2011). These are known as imputed cost or hypothetical costs. These are an important aspect of the cost or management accounting. Opportunity costs: These are also a very important type of cost in case of management accounting (Epstein and Lee 2011). Opportunity costs actually refer to a type of cost which have been foregone on account of not using facilities that were intended to be used in the manner that was required. It is difficult to understand this type of cost. It needs further explanation to understand it. These were in short explanation of various types of costs that are classified according to various categories (Eldenburg 2011). A reading of these would give a basic idea of the concept of costs. This is a very important aspect of management accounting. The study of cost is required to con troll the costs of an organization Variance Analysis Variance Analysis refers as quantitative investigation for viewing at the difference between actual as well as planned behaviour for the same. It helps in maintaining and bringing control over business activities in an overall manner. It is effective from the variance amount on trend line on apparent terms (Drury 2012). Variance analysis mainly involves investigation for ascertainment of differences for the main outcomes of the interpreted results in the most appropriate ways. This particular analysis helps in allowing management for understanding fluctuation and changed situation for the same. Problems and Limitations of Variance Analysis Time Delay Most of the accounting staff complies with the variances at the end of the month. It occurs before issuing the results from the management team in an overall manner. In a competitive environment, management needs proper feedback for conduction of faster course of action (Bhimani 2012). It relies mainly on advertisements and warning flags for generation of production cost at Tesco. Variance Source Information Variance fails to locate the accounting records in its activities (Atkinson 2012). Staff members sorts out the information on material bills, labour routings as well as overtime records for determination of related problems for the same. Extra work is considered cost-effective and fails in correcting problems based upon the information in the near future. Standard Setting Variance analysis fails to compare actual results from arbitrary standard and derives attributes of political bargaining in an overall manner (Young 2012). It should essentially engage in comparing actual results from arbitrary standard and yield information in the most appropriate way. Variance analysis fails to resolve the issues for maintenance by department management of Tesco It indulges in poor performance from the last year projected under types of managers It fails in training given to new staff members of the maintenance department in an overall manner. Behavioural issues Variance analysis mostly encourages short-termism and inherent tendency from the short-term quantified objectives as well as results. It mainly process sub-optimal behaviour among the employees of Tesco and attempts for incorporate budget slacks (Seal, Garrison and Noreen 2012). It is important to consider the fact that Tesco should have wide range of quantitative as well as qualitative measures for adopting long-term analysis and alignment with strategic decisions. Operational Budgets of Tesco Tesco believes in preparing operating budgets that will help in maintaining day-to-day working of business organization. Operating budgets are written a year in advance based upon financial projections on monthly and quarterly basis. Operating budgets helps in tracking actual expenses of Tesco and projects future expenses for allowing building related investments in an overall manner. Operating budgets is a statement that helps in presenting financial plan and enables responsibility centres during specified time (John Y. Lee 2012). This particular budget reflects the operating activities that include revenues as well as expenses for the same. Types of Operational budgets Expense Budget Expense budget is one type of operating budget that addresses the expected expenses for specified budgeted period of Tesco. It mainly involves three types of attributes. These include fixed, variable as well as discretionary expenses (Horngren, Harrison and Oliver 2012). Discretionary expenses are that expense that depends entirely on the managerial judgment and determination with utmost certainty. This involves legal fees, research and development fees and related accounting fees for the same. Revenue Budget Revenue budget is one of the operational budgets that help in identifying the revenues of Tesco. It mainly predicts the future projected sales in an overall manner. Profit Budget Profit budget is the combination of expense as well as revenue budgets of Tesco. It is prepared in one statement for showing gross as well as net profits for future projection purpose. These particular budgets make use of financial resource allocation of Tesco and check on the adequacy level in expense budgets (Horngren 2011). It relates completely from anticipated revenues, assigning responsibility to the managers as well as control activities for viewing at the shares of Tesco. It helps in predicting the financial performance of a particular organization. Advantages of Operating Budgets Management of current expenses Tesco focus on managing the current expenses like fixed overhead costs. These costs include office rent as well as staff salaries at Tesco organization. These expenses ensures trimming of budgets for reducing staff members and work hours for the same (Fields 2011). It helps in tracking related operating expenses like cost of store and considerable savings in an overall manner. It will benefit total budget of Tesco and enables financial strain in the near future. Projection of future expenses Tesco believes in evaluating with actual past expenses and benefits from the budgets and going forward in the most appropriate way. This particular budget estimates the last year operating expenses and prepares the financial plans for the upcoming years (Epstein and Lee 2011). It recalls overestimated past expenses and budget lines for corresponding necessary costs. This particular budget helps in overcoming the issues and deficient attributes from the previous budget of Tesco as well as projected reserve for the same. Reserve building Operating budget helps in liberating in place of restricting of business activities. It helps in analysing reduced debts and possesses goals for building financial reserves in the most appropriate way (Eldenburg 2011). It includes unexpected incomes from the budget preparation. This can be taken care of by cash reserves and inventory for the same. Accountability Operating budget involves the expenses and incomes generation in Tesco Corporation (Bhimani 2012). These retail supermarkets prepare the operating expenses for keeping track of items prevailing in the particular business enterprise. Tracking Operating budget helps in keeping track of the entire business organization (Bhimani 2012). It helps in notifying deviation from the operating budget for the same. Conclusion The assignment can be concluded on the various aspects of management accounting relating to Tesco have been discussed with a view of different aspects that are analysed in the assignment. Nonetheless, the importance of management accounting was brought into consideration. The management accounting has been classified into different costs, types of variable analysis to ascertain the actual and proposed budget and the importance of operational budgets. However, costs are assessed to be important for carrying out business operations and budgets are analyzed to assess the financial and managerial performance of the organization, Tesco. Thus, evaluation of all these operations is significant according to organizational perspective because it helps in forecasting the detailed future performance. Recommendations It is advisable to Tesco for conducting effective management accounting plan for solving the issues as well as smooth functioning of business enterprise. In the first task, emphasis is given on the management accounting plans for Tesco Plc multi-corporation company. It is recommended to Tesco for involving proper planning and organizing ways for final decision-making process. It provides essential accounting information in various aspects of particular business organization. It is advisable that Tesco should prepare effective plans for attaining future goals as well as objectives in the most appropriate way. It is recommended for providing best services at affordable prices. Tesco leads the position as largest supermarkets and retail chain with thousands of employees as a whole. They should find innovative ways in satisfying the current needs as well as expectations of the customers. They should try hard in retaining the existing customers as they are cost effective in comparison wit h acquisition of new customers in an overall manner. In the next section of the study, cost classification plays an important role in manufacturing particular products. It is advisable to classify the cost with respect to nature, traceability for designing proper elements of costs for the same. Variance analysis proves to be effective quantitative investigation that brings out difference in actual and planned behaviour. It is important to consider the fact that Tesco should find innovative ways in maintaining as well as bringing effective control over the business enterprise. Delay in time should be managed with effective team management policies and proper coordination with the employees working in Tesco. Proper training to employees will help them in understanding their responsibilities and job role in a better way. Continuous feedback session from employees and potential customers will help in gathering recent facts on the level of improvement on urgent basis. Lastly, it is concl uded by recommending Tesco preparing operational budgets for maintaining records in an effective way. 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