Ques: Compare and contrast three planning tools used in management accounting, indicating how effective you judge each to be and why?
The three management accounting tools are:-
- Financial statement analysis and planning
- Management reports
- Cost analysis
Financial statement analysis and planning:
Through financial statement analysis and planning, it is easy to identify the profit and loss statement as well as balance sheet of the company which are important for analysing the performance of the company in different period of time (Abdel, 2011). This further helps to understand the rate of growth of business, ratio analysis and develop effective decision for the company (Otley, 2016).
Advantages:
- Measuring organisational proficiency
- Capacity of the company
- Profitability volume and loss statement
- Helping in future forecasting
- Understanding overall financial position of the organisation
Disadvantages:
- Cannot predict the reliability of information
- Accounting technique is complex
Management reports:
This is another management accounting tool through which the decision maker of the organisation develops appropriate reports including charts and graphs as well as statistical analysis so that it is possible to understand the profitability volume or loss of the company (Coad, Jack, and Kholeif, 2015). This also plays a crucial role as an identification of profit and loss of the existing company and decision making behaviour (Zimmerman, 2015).
Advantages:
- Predicting organisational performance
- Useful in assessing budgetary control
- Making effective decision for the company
- Evaluating financial activities
Disadvantages:
- Lack of proper information
- Risk of lack of analytical knowledge
Cost Accounting:
Cost accounting is another tactic of management accounting where the business representative can identify the actual cost in different sections such as product manufacturing, labour cost, variable cost, fixed cost, departments wise cost as well as branch cost and through this tactic, it is easy to identify the cost of the company (Debarshi, 2011). Through this process, it is also possible to identify the investment of the firm and it further helps to analyse the cost and budgetary control of the company over different period of time (Jackson, Gallery and Balatbatt. 2015).
Advantages:
- Maintenance of proper investment
- Reliable check on accounting
- Control of labour cost
- Proper valuation of inventories
- Control in budget
- Manage materials and other inputs
Disadvantages:
- Does not provide proper information
- No adjustments in case of inflation
- Cannot understand the actual value of asset
Evaluating the management accounting tools:
- Analysing the financial position of the company
- Identifying the organisational performance
- Evaluating the proficiency of the company
- Effective for decision making behaviour
- Predicting future sustainability
- Managing budgetary control
- Reducing financial problems in the company
All the management accounting tools are effective to analyse the financial position of the organisation.
Through these tools, it is also easy to evaluate the performance of the brand as well as assess the efficiency of the firm in running their business activities (Fullerton, R.R., Kennedy, F.A. and Widener, 2014). These tools are also beneficial to make effective decision for running the business sustainably. These tools are also useful to predict the future sustainability of the business by analysing the profit and loss of the firms.
Part B: Using specific case studies as examples, compare the ways in which management accounting is applied, the effectiveness of management accounting in dealing with financial problems and preventing the financial problems in the organisations
Case study of Tesco:
Evaluating management accounting tools used by Tesco:
Relevant costing
Full costing
Cost accounting
Tesco is using the tools of relevant costing, full costing and cost accounting for managerial accounting system where it aims at identifying the performance of the business in near future. Tesco Loyalty card is one of the most popular inventions where the brand tries to distinguish the customers who are purchasing on the daily basis from the company. Though it is costly for the company to introduce such cards for the loyal customers, it will maximise the profitability of the firms by retaining more loyal customers for their organisational products and services. Through the cards, it is also possible to promote the organisational products and manage the budgetary control for successful promotion (Butler and Farell, 2015). Relevant cost accounting and cost analysis in this regard are effective for Tesco to assess the future cash flows which can be maximised through such strategy of introducing customer loyalty cards. Through predicting future cash flows, the organisation decides that the loyalty card program should be continued in future as it helps the company to manage the budgetary control and maximise the portability of the company.
Analysing the management accounting technique of Tesco
The management accounting tactics of Tesco is beneficial for the company to predict future success. Through this invention, the company also can mitigate the financial issue of low profitability volume. Through loyalty program, the company can attract more audiences in the market and maximise values for them (Wood, 2014). This further provides a scope to strengthen their customer’s base and secure future sustainable development. Hereby, the management accounting tools and techniques are useful for the brand to predict future success and develop effective tactics for gaining high market share.
Evaluating management accounting tools used by Walmart:
Financial statement analysis
Financial accounting and statement analysis
Managerial reports
Walmart as a reputed retail brand aims at managerial accounting technique in order to predict the future sustainable development for the company. Walmart decides to expand their business over the international market through online promotional tactics and in this regard the managerial accounting tools such as managerial reports and financial statement analysis are beneficial for the company to analyse the business environment. In this regard, the company aims at invest in marketing tactics which is costly, but through managerial reports and financial statement analysis, it comes to know that the investment in marketing technique is beneficial for the brand in near future. Through financial statement and analysis of the financial reports, the company decides that it invests in the marketing tools for successful promotion of the bushiness (Cooper, Ezzamel and Qu, 2017). Though the marketing investment is costly, it will be advantageous as the brand can improve visibility of their products and promote the brand at effective market. Moreover, through marketing investment, it can strengthen their customer’s base and in this regard the financial statement further influences the decision makers to invest in the marketing tools as the company is successful in maximising its profitability.
Analysing the management accounting technique of Walmart
The management accounting tactics used by Walmart are therefore beneficial for the company to maximise the organisational profitability and enhance the chances to expand their business through marketing strategic planning. The accounting tools are useful to predict future success sin the investment in marketing strategic planning.
Moreover, through the accounting tools, the company also can mitigate the financial issues and analyse the managerial reports for successful promotion of the brand. The company also utilises the managerial reports and financial statement which will provides a scope to the company to understand the favourable business environment where the company can expand their products and services and attract the customers successfully.
Reference List
- Abdel, M.G., 2011. Review of management accounting research. New York: Palgrave Macmillan.
- Butler, S. and Farell, S., 2015. Tesco reports record £6.4bn loss. The Guardian, [online] 22 April. Available at: http://www.theguardian.com/business/2015/apr/22/tesco-suffers-record-64bnloss [Accessed 30 April 2018].
- Coad, A., Jack, L. and Kholeif, A.O.R., 2015. Structuration theory: reflections on its∙further potential for management accounting research. Qualitative Research in Accounting and Management, 12(2), pp.35-39.
- Cooper, D.J., Ezzamel, M. and Qu, S.Q., 2017. Popularizing a management accounting idea: The case of the balanced scorecard. Contemporary Accounting Research, 34(2), pp.991-1025.
- Debarshi, B., 2011. Management accounting. New Delhi: Pearson Education.
- Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2014. Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management, 32(7-8), pp.414-428.
- Jackson, A.B., Gallery, G. and Balatbatt. M.C.A., 2015. The impact of litigation risk on the strategic timing of management earnings forecasts. Accounting and Finance, 55(2), pp.467-495.
- Otley, D., 2016. The contingency theory of management accounting and control: 1980–2014. Management accounting research, 31, pp.45-62.
- Wood, Z., 2014. Tesco market share shrinks to lowest level in almost a decade. The Guardian, [online] Available at: http://www.theguardian.com/business/2014/mar/11/tesco-market-shareshrinks-lowest-level-decade-aldi-supermarket [Accessed 30 April 2018].
- Zimmerman, J.L., 2015. The role of accounting in the twenty-first century firm.∙ Accounting and Business Research, 45(4), pp.1-25.