Management Accounting Systems

Assignment Brief

Management Accounting (L4)

Assignment Context and Business Scenario

Demonstrate an understanding of management accounting systems.

Select a company of your own choice and assume you have been appointed the Assistant Management Accountant of that company which has been operating in the industry for a number of years, which has undergone a number of changes over some time, and has expanded into new markets through acquisitions. 

The Finance Director considers that the existing management accounting system needs to be revamped to make it more relevant to the changes that have occurred.

You are required to review the existing system, and conduct a research on developments in management accounting, with the view to recommending comprehensive changes to the company’s management accounting system, and preparing a report of same to the Finance Director for review and onward submission to the Board of Directors.

Your report must consider a number of themes in management accounting. Specifically it must recommend changes that cover the following:

1. Management  accounting and management accounting systems,
2. Management accounting techniques for determining costs,
3. Management accounting planning tools, and
4. Response to financial problems using management accounting.

Your report must also provide examples of income statements prepared on the basis of absorption costing and marginal costing. In order to do this, you may use the data attached to this assignment brief, or you may collect your own data for that purpose. These may be presented as appendices appropriately referenced in the body of your report.

Your report must be appropriately structured. The following is suggested as a guide of how a good report should be: 

• An introductory section with brief a description of your selected company and what the report is about.
• The main section (body) of the report, which may be subdivided on the basis of the four themes listed above corresponding to the tasks on the next page.
• A concluding section that briefly summarises your work.
• All calculations must be disclosed in the appendix

The following issues are required to be carried out:

LO1: Demonstrate an understanding of management accounting systems

Provide a brief description of your chosen organization and then explain management accounting and the essential requirements of different types of management accounting.  You should also explain different methods used for management accounting reporting. 

Having explained management accounting and different methods used in management accounting reporting, you are required to evaluate the benefits of management accounting systems and their application in your chosen organisation.  

As demonstration of your ability to apply the management accounting systems, use your chosen organization to critically evaluate how management accounting systems and management reporting is integrated in your organisation.  

LO2: Apply a range of management accounting techniques.

Using examples from your chosen organisation, calculate costs using appropriate techniques of costs analysis to prepare an income statement using marginal and absorption costs.  In addition to calculating costs, you should accurately apply a range of management accounting techniques and produce appropriate financial reporting documents. You must attach all financial data you use as an Appendix.

Based on your understanding of management accounting techniques, you should produce financial reports that accurately apply and interpret data for a range of business activities. 

LO3: Explain the use of planning tools used in management accounting

The budget is an important control tool.  Explain the advantages and disadvantages of different types of planning tools used in budgetary control (Please note the calculation of these tools is not necessary).  You are also required to analyse the use of different planning tools and their application for preparing and forecasting budgets.

LO4: Compare ways in which organisations could use management accounting to respond to financial problems. 

Using your chosen organisation and another organisation, compare how organisations are adapting the following management accounting systems to respond to financial problems:

• Benchmarking 
• Key performance indicators 
• Balance score card 
• Activity based costing (ABC) 
• Financial governance

You should analyse how, in responding to financial problems, management accounting can lead organisations to sustainable success. Use examples from your chosen organisation.  

Based on your knowledge of planning tools, you are required to critically evaluate how planning tools for accounting respond appropriately to solving financial problems to lead organisations to sustainable success.  Use examples from your chosen organisation.

Grading Criteria

Learning Outcome Pass Merit Distinction

LO1 Demonstrate an understanding of management accounting systems.

P1 Explain management accounting and give the essential requirements of different types of management accounting systems.

P2 Explain different methods used for management accounting reporting.

M1 Evaluate the benefits of management accounting systems and their application within an organisational context.

D1 Critically evaluate how management accounting systems and management accounting reporting is integrated withinorganisational processes.

LO2 Apply a range of management accounting techniques

P3 Calculate costs using appropriate techniques of costs analysis to prepare an income statement using marginal and absorption costs.

M2 Accurately apply a range of management accounting techniques and produce appropriate financial reporting documents

D2 Produce financial reports that accurately apply and interpret data for a range of business activities

LO3 Explain the use of planning tools used in management accounting

P4 Explain the advantages and disadvantages of different types of planning tools used in budgetary control.

M3 Analyse the use of different planning tools and their application for preparing and forecasting budgets.

D3 Evaluate how planning tools for accounting respond appropriately to solving financial problems to lead organisations to sustainable success.

LO4 Compare ways in which organisations could use management accounting to respond to financial problems

P5 Compare how organisations are adapting management accounting systems to respond to financial problems.

M4 Analyse how, in responding to financial problems, management accounting can lead organisations to sustainable success.

Sample Answer

Report on Management Accounting Systems at Tesco plc

Introduction

This report has been prepared in my role as Assistant Management Accountant at Tesco plc. Tesco is one of the largest retailers in the world, operating across the UK, Europe, and Asia. Over time, the company has diversified its activities, expanded into new markets through acquisitions, and adopted new technologies in its operations. With such developments, it has become important to review and strengthen the existing management accounting system so that it remains relevant and capable of supporting the company’s strategic and operational decisions.

The discussion will focus on four key areas: the role of management accounting and its systems, techniques for determining costs, planning tools in management accounting, and the way organisations use management accounting to respond to financial problems. The report will also present income statements prepared on the basis of absorption and marginal costing.

Management Accounting and Management Accounting Systems

Management accounting can be defined as the practice of providing financial and non-financial information to managers in order to support decision making, planning, control, and performance measurement. Unlike financial accounting, which is mainly aimed at external users such as shareholders or regulators, management accounting is directed towards the internal needs of an organisation.

Different management accounting systems exist to suit the requirements of businesses. For example, cost accounting systems are concerned with measuring and controlling costs associated with operations and production. Inventory management systems focus on monitoring stock levels, wastage, and reordering, which is highly relevant in a retail business such as Tesco where thousands of products are handled daily. Some systems are more specialised, such as job or process costing systems, which record the costs of particular jobs or processes. In Tesco’s case, process costing supports the monitoring of expenses linked to distribution and supply chains. Pricing and profitability systems are also significant, since Tesco needs to manage margins carefully across different markets.

Management accounting relies heavily on reporting. Reports can be in the form of budgets, forecasts, variance analyses, or profitability assessments of specific departments, products, or regional operations. Increasingly, dashboards with key performance indicators have become common in large organisations like Tesco, where decision makers need to see real-time data across business units.

The benefits of a sound management accounting system for Tesco are wide-ranging. It improves control of operational and distribution costs, supports strategic planning through forecasts and budgets, and enhances visibility of profitability across markets and departments. In addition, it ensures that financial data is linked with non-financial indicators such as customer satisfaction, allowing for more balanced decision making. Tesco integrates its management accounting processes within its enterprise resource planning system, which ensures that sales, inventory, and financial information flow seamlessly across the business. This integration strengthens both the accuracy and timeliness of reporting.

Management Accounting Techniques for Determining Costs

In practice, Tesco makes use of a range of costing techniques to guide decision making. Two of the most important approaches are absorption costing and marginal costing.

Absorption costing includes both fixed and variable costs in the calculation of product costs. This method is valuable for long-term pricing strategies, since it ensures that overheads are fully covered. Marginal costing, by contrast, only considers variable costs when assessing product profitability. It highlights the contribution made by each product towards covering fixed costs and earning profit, making it useful for short-term decisions such as promotional campaigns, product discontinuation, or entering new markets.

The following example illustrates the difference between these methods. Suppose Tesco records sales of £100,000, variable costs of £60,000, and fixed costs of £20,000. Under absorption costing, the cost of sales would include both variable and fixed costs, totalling £80,000, leaving a profit of £20,000. Under marginal costing, variable costs alone would be deducted from sales, giving a contribution of £40,000. From this contribution, fixed costs of £20,000 would then be subtracted, also leaving a profit of £20,000. While the overall profit figure is the same in this case, marginal costing gives a clearer picture of how each sale contributes to covering fixed costs, which is extremely useful for tactical decisions.

Continued...