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The relevance of management accounting in Tesa UK and its function in improving company operations are discussed in this study. In company, management accounting is critical. Because it encompasses management accounting systems, reporting methodologies, and planning tools, it is regarded as a fairly wide notion. Several of these heads are discussed in this paper. It also represents how budgets aid in planning, administration, and accounting, as well as the many types of budgets and their significance in a company. This study will also illustrate how management systems, reporting, and planning strategies aid in the resolution of financial issues.
LO1: Understanding Management Accounting Systems
Management Accounting
Management accounting can be defined as the system of recording the transactions, analysing the transactions and then reporting to its final users. The transaction includes all the day-to-day transactions as well as the major transactions which plays an important role in decision making. Analysis is done with the help of systems of MA such as standard costing, CVP analysis etc. Reporting is very important part of management accounting; reporting is done to the management so that the management can make important decisions which are favourable for the company. He reporting is done with the help of budget reports, cost reports, inventory reports, etc (Amara and Benelifa 2017).
Tesa UK is the firm profiled in this research. Tesa UK, which has been based in Milton Keynes since 1985, is a completely owned subsidiary of Tesa SE. Automotive, flexographic, printing, building supplies, corrugated packaging, newsprint and paper manufacture, and painting and decorating are among Tesa UK's top markets. Management accounting aids in the analysis of financial data and the making of key and required decisions in this firm so that it may expand more effectively.
Role of Management Accounting
Management accounting is a mixture of executive frameworks and the accounting of the organization. The principal job of this branch of accounting is to coordinate every one of the capacities and cycles of the business with the frameworks of the management accounting with a goal to make the destinations and objectives of the association attainable. This branch of accounting helps the organization to establish control on the resources of company, developing plans for the future, evaluating different alternatives for business, making relevant business decisions which are favourable for the company, managing the inventories, eliminating the abnormal expenses etc.
History of Management Accounting
Roots of management accounting are very strong and this is because the management accounting is not a conventional technique, it was begun before the 19th century, it was first used in 1880, from year 1880 to 1925, the technique was majorly focused on the costing of products and analyses of the benefits which are derived from the products. After that period, the technique started to spread its scope and other techniques are also developed, the evolution of the management accounting through the years is being shown by the help of the diagram given below.
Difference between Management Accounting and Financial Accounting
On the basis of reports – The reports under financial accounting are prepared on the basis of IFRS or International Accounting Standards, or other relevant regulations prevailing at the time, on the other hand, there is no such requirement for the reports of management accounting, they are prepared as per the requirement of the company.
On the basis of legal requirements – The preparation of financial statements is required by the corporate laws or other prevailing laws, but the reports of management accounting are not to be prepared mandatorily.
On the basis of users – The users of the financial accounts are outsiders such as creditors, banks, government as well as the insiders such as management and shareholders. Where as the management accounting is only used by the insiders of the company which is mainly the management of company.
On the basis of disclosures – The financial statements must be disclosed and published by the company, on the contrary, the management accounting are reports kept as a secret and these are not published anywhere.
Management Accounting Systems
These are the well-defined accounting systems that assist management in calculating different company operations in order to provide a foundation for making good judgments. There are set procedures for implementing this system, which are relevant to all types of businesses, large and small. Tesa UK uses this system to calculate costs, whether for a product or a work, or to manage inventories, among other things.
Types of Management Accounting System and their essentials
Cost Accounting System:
Meaning:
Ascertainment of cost is very significant function of a production process and this cost is ascertained by the help of cost accounting system. This system enables the organization to calculate and consider all the cost which is material, labour and overheads (Huang et al. 2019).
Essentials:
The cost accounting system must not be ready-made, it shall be tailor made as per the requirements of the organization.
The data which is being used in ascertainment of the cost shall be accurate and genuine.
The top management and the executives of the company shall have the intention to install an effective cost accounting system.
Inventory Management System:
Meaning:
Inventory is a broad term and it includes WIP which is partial finished goods, finished goods which is ready to be sold in market and raw material which is about to be used in the production process. In inventory management system, all the three components of the inventory are valued, stored and manage. This system makes sure that the procurement and issuance of the inventory is as per the requirements of the company (Mukhopadhyay, Bose and Roy 2020).
Essentials:
The items of the inventory shall be identified and classified.
Inventory requires significant storage; therefore, the business shall have enough storage for the inventory.
Management of inventory is a complex procedure and therefore there must be regular internal checks.
Price Optimization System
Meaning:
Pricing strategy is very crucial for the company. A good pricing strategy can increase the sales of the company to the highest and a bad one can shut down the company. Pricing decisions are taken by considering three main factors which are demand and supply forces, cost of the product and price of the competitor. Price optimization system is used by the management and in this all the three factors are considered as per their relevancy and the price of the product is determined. The price determined is optimum and it is calculated by taken in to consideration all the three factors.
Essentials:
Pricing strategies used by the company in past
Pricing strategies used by the competitors of the company.
Details of all sort of orders whether completed or in progress.
Reporting in Management Accounting
It is a MA approach that comprises reporting strategies that assist management in evaluating the performance of company operations by comparing them to criteria established during the planning process. Tesa UK, use the reporting mechanism of the MA in a manner that the communication between the department and communication between the department and the top management is free from barriers and errors. The main objective of MA reports is to provide a hassle-free management information system for the company.
Budgetary reporting
Budgeting is all about forecasting the future revenues that will be generated and planning the future costs and expenses accordingly. This reporting approach aids Tesa UK in reviewing the company's financial facts and data in accordance with industry standards (Barr and McClellan 2018).
Performance reports
Performance reports are used for managing and comparing the performance of departments and employees, the performance of the departments and its employees are integrated with the goals and objectives of the company and comparison of the performance is done so that variances may be identified and corrective action taken. Performance does not just refer to a company's net value; it also refers to how well it performs in all aspects of its operations. Tesa UK uses a performance report to estimate performance based on financial data (Bartz Thompson and Rice 2017).
Cost Report
Cost is the major element of price of the product and therefore the calculation of cost is very important. Calculation of cost is very crucial as there are many processes, service departments in the company the of which shall be allocated to the product. Therefore, the cost reports help the management in providing the information about the costs incurred at each stage of production and after that. Because Tesa UK has so many goods, it's critical to have cost estimates for each one. The standards should also be compared to the real so that the firm can determine whether cost management is vital or not.
Benefits of MA system and their application in context of organization
Cost Accounting System
Benefits:
It helps the company Tesa UK to ascertain the cost of the manufacturing and production processes.
The cost accounting system in the Tesa UK, helps the company to control cost and monitor the cost on a regular basis which will ultimately lead to improve cost efficiency.
The cost accounting system helps the management for making the budgets as it gives the accurate present costs and the forecasting becomes easy.
Application:
Standard cost accounting is used in the Tesa UK. In this the business established some standards at the beginning of the production process and then compare it with the actual results which are achieved at the end of the production process.
Activity based costing is applied in the company, in this the cost incurred in each activity is allocated to the different products by the help of the cost drivers. This is used by the company for allocating the overheads to the products.
Marginal costing is used by the management of the company for analyzing the break-even point and margin of safety sales (Huang et al. 2019).
Inventory Management System
Benefits:
The accuracy of the inventory cost is ensured by the help of the inventory management system.
The valuation of the inventory is easy when Tesa UK implemented the system of inventory management effectively in their material procurement and other processes related to inventory.
Inventory management system provides record each and every transaction related to inventory and it helps in maintaining better relationship with the supplier and the customers of the company.
Applications:
With the help of this system, the company is calculating the economic order quantity and all the order are made accordingly.
Management of the company is valuing its inventory at weighted average cost, and the frauds and manipulations in the inventory is eliminated (Mukhopadhyay, Bose and Roy 2020).
Critical Evaluation of the MA systems and reporting
Advantages
Planning – The management accounting system and reporting helps the company to plan the future projects and operations of the company. The reports of the MA help the company to make budgets and projections.
Controlling – The company ensure control on the activities and the operations by implementing different MA systems and preparing MA reports.
Communication – The MA reports are used to ensure proper management. Similarly, the MA systems provide a platform for the management of the company to provide better system for the communication (Topazio et al. 2020).
Limitations
Personal bias – Sometimes the users and makers of the MA systems and reports works with a prejudice towards some matters and therefore the reliability of the system and reports become low.
Data dependent – All the planning and forecasting in MA is dependent on data, and in case the data is not original, the results will not be as per planned.
Integration of the MA within organizational process:
For greater performance, there should be a balance of items in any business. As a result, management accounting systems and reporting approaches should be balanced as well. If they are utilized independently, they are useless. As a result, management accounting systems assist in calculating and determining various corporate financial activities such as the cost of each job, the cost per unit produced, inventory management, and the best pricing. Reporting approaches, on the other hand, aid in analyzing the extent to which they have progressed, such as how far they have deviated from the standard work cost, stand price, and standard production cost. The firm will be unable to make effective and remedial choices if the variance is not calculated (Topazio et al. 2020).
LO2: Application of Management Accounting Techniques
Data Used
Absorption Costing
It is a way of determining profit and loss based on the number of units sold. As a result, all costs, both fixed and variable, are calculated based on the number of units sold. The distinction between these two strategies is that this one focuses on the fixed cost, which varies depending on the number of units sold (Hojna and Stryckova 2018).
Budgeted Profit as Per absorption costing
£s
£s
£s
£s
Month 1
Month 2
Turnover
40
288000
40
292000
Les Full cost of sales
25
180000
25
182500
Opening stock
25
5000
25
12500
+ Production
113000
122000
Less Closing Stock
25
12500
25
5000
Adjustment
100500
117000
Over absorption/(under-absorption)
-4000
-3500
Gross profit
96500
113500
Less Non-production cost
Variable cost
Fixed cost
20000
20000
Budgeted Profit
76500
93500
Marginal Costing
Marginal costing is a method of determining cost and net profit for the year in order to assess performance. It's a per-unit variable cost idea. The separation of variable and fixed expenditures in this approach is based on the unit generated. The profit is derived by subtracting the fixed costs from the contribution, as well as all other indirect costs (Labro 2019).
Budgeted Profit as Per Marginal costing
£s
£s
£s
£s
January
February
Turnover
40
288000
40
292000
Less variable cost of sales
20
144000
20
146000
Opening stock
20
4000
20
10000
+ Production
148000
156000
Less Closing Stock
20
10000
20
4000
Contribution
138000
152000
Less Fixed cost
Production
40000
40000
Non-Production
20000
20000
Budgeted Profit
78000
92000
Reconciliation
£s
£s
Profit as per marginal costing
78000
92000
Adjustment of differences of valuation of stock
Opening Stock
1000
2500
Closing stock
2500
1000
Profit as per Absorption costing
76500
93500
LO3: Planning tools used in Management Accounting
Sales Budget
The budget prepared for sales contains all the relevant information about the sales of company. It includes information regarding estimations of future sales of unit and price per unit, which gives the estimated total revenue of the company.
Advantages:
Helps in framing the programs for sales as to achieve the target for sales of the firm.
The allocation of expenses can be done to different products etc.
Can be used as a parameter or a yard stick for making the evaluation of the actual sales with the budgeted sales.
Limitations:
Future events are not forecasted effectively with the help of a sales budget.
Some organizations are not able to accept this measure very easily.
The process of sales budget is time consuming and also huge cost is incurred in the process.
Production Budget
This budget is prepared for ascertaining the quantity of materials which will be produced by the company. This is prepared by the company on regular basis as per the requirements of the company, it can be prepared for monthly, quarterly and annually by the company.
Advantages:
Provide a basis for preparing the sales budget.
It enables the company to utilize its resources to the best possible extent.
Also helps in preparing the purchase budget of the company.
Limitations:
Sometimes the quantity calculated is inaccurate and all the budgets based on production budgets become ineffective.
The decision making becomes rigid, as everything is pre-decided, there is no scope of amendments.
While preparing the budget for production, only the financial outcomes are discussed and non-financial factor are fully ignored.
Zero based budgeting
The budget in which the budget s prepared from scratch is termed as zero-based budgeting. In this the data from previous periods is not used, every line item of the budget is prepared by taking the actual expenses or cost as a base.
Advantages:
The estimations provided by this budget are considered more accurate as the base for predicting the future events is actual figures of the previous periods.
It provides better coordination and communication within the different departments of the organization.
The redundant activities are minimized with the help of these budgets.
Limitations:
As everything is to be estimated from scratch, this process consumes a lot of time.
For executing the preparation of the zero-based budget, high degree of information and high quantity of manpower is required by the company.
Lots of information and manpower along with a significant time, makes this process a very expensive process.
Kaizen budgeting
A philosophy according to which, a budget is improved continuously with the passing of time is known as kaizen budgeting. It does not keep focus on the predetermined expectations and estimations, it enables the organization to make amendments in the budget of an ongoing activity.
Advantages
This process helps in motivating the employees as the inclusion of employees working at the operational level is also done in this technique.
Preparation of these budgets requires information and efforts from all the departments of the company, and it helps in developing the team work within the organization.
It helps the organization in eliminating the need of short-term planning by making changes at the time of execution.
Limitations
It is not an easy task, to make amendments in the ongoing activity of the company.
The dependency of the technique is more on the operational employees of the company.
Sometimes too much creativity and innovation at the time of execution of the activity can also backfire the company.
LO4: Management Accounting to respond financial problems
Whether a company is huge or small, financial challenges are prevalent. Financial concerns have a detrimental influence on the performance of the entity. Managers of entities can design plans for resolving financial challenges using planning tools and MAS.
Some of the Financial issues face by Tesa UK
Cash Flows
Tesa UK works in the manufacturing industry. The manufacturing process needs a sufficient level of working capital. Both companies' debtor collection periods are long, indicating ineffective working capital management. As a result, there is less cash inflow, and both firms' liquidity is decreasing (Loutzenhiser and Mann 2021).
Capital Equipment
Companies must purchase capital equipment, which requires a large sum of money. If the investment fails to pay off, the corporation will suffer a significant loss and its obligations will grow significantly.
Use of MA to respond to financial issues faced by the company
Benchmarking
Benchmarking compares a company's procedures and performance to that of other firms. The quality, time, and cost of a firm are measured and compared to the factors of another company. It allows a corporation to specify its internal goals for a specific time period (Paisley et al. 2021).
Tesa works in the manufacturing industry. As a result, benchmarking may be used successfully by the firm to compare performance, methods, and outcomes. Tesa UK may define internal goals and objectives, assess company decisions, analyze procedures, find methods that might be more lucrative, and adopt them in their firms. This strategy will eventually lead to profit maximization, which is one of every business's key aims.
Internal Benchmarking – In this, one process of the company is compared with another process of the company, form different branch or a different undertaking. The performance of employees is also compared in the internal benchmarking.
External Benchmarking – The comparison of the companies results or processes or employees is done from the results or processes or employees of any other competitor firm or with the industry average in which the company is conducting its operations with the help of external benchmarking.
Competitive Benchmarking – This is a type of external benchmarking through which the company can compare its factors with the factors of another firm which is in the competitive business.
Product benchmarking – This can also be called as reverse engineering, in this technique, the product of the competitor companies is broken down in to pieces and the comparison is done with the product of the company.
Key Performance Indicators
The quantitative metrics that are used to assess long-term success are known as key performance indicators. These indicators are extremely useful in recognizing and deciding on a company's strategic, financial, and operational outcomes. The focus of financial KPIs is on net profit, sales, and costs. A current ratio is a type of KPI that is used to measure a company's liquidity (Domínguez et al. 2019).
The KPI’s are used by the company for appraisal of the performance of the departments as well as the staff and managers of the department. The analyses shall be a comparison of the set KPI’s with the actual results and the future decisions shall be made accordingly.
Financial KPI’s – These are the indicators which are directly related to the financial results of the company, e.g. – profit for the year or cash flow of the company.
Non-Financial KPI’s – These are the indicators due to which the financial results of the company are not directly affected, but in the long-run it does affect the financials of the company indirectly, e.g. – employee turnover of the company.
Balanced Scorecard
This is a company performance statistic that is used to develop business strategy. The internal functions of the firm are compared to their outward consequences in this method. This method allows a business to collect and analyze feedback on its present strategy and functions. On the one hand, Hawthorn International uses the balance scorecard approach to improve internal processes and increase profitability; on the other hand, Tesa uses it to explore alternative plans (Njehu 2017).
Financial Perspective – It includes all the financial factors of the business. The improvement in financials of the company is analyzed.
Customers Perspectives – The focus is on the target customers of the company, improvement in the satisfaction level of the company must be achieved.
Internal process Perspective – The internal processes of the company must be smooth, there must be good control system which ensures zero errors and frauds within the organization.
Learning and Growth Perspective – The company shall focus on continuous growth and learning of the employees, workers as well as the executives of the company. The research on different aspects shall also be done to ensure the growth of the company.
Activity Based Costing
This is a way of allocating overheads (also known as indirect expenditures) to products and services. Indirect expenditures are those that are not directly related to the manufacturing process. Tesa UK use the ABC approach to appropriately disperse overheads on products. This will lead to the discovery of unusually high indirect expenditures that may be avoided. This unnecessary expense must be avoided, and suitable action plans must be established to eliminate these expenses and reduce costs.
Sustainable development through Management Accounting
MA assists in the planning of company activities based on financial data or conclusions drawn from the application of various methodologies and technologies.
It also aids in the control of important areas through the use of reporting tools, allowing the organization to determine how far it has departed from the standards.
MA aids in improving the financial performance of the firm. The firm may gauge its growth by using it to evaluate financial data and apply scenarios.
The management accounting provides a system through which the production process becomes smooth, all the raw materials and other resources are used optimally to the best of their use and the company is able to earn good profits.
Systems and reports of the management accounting enables a system of internal control within the organization and the chances or errors and frauds are minimized (Labro 2019).
Conclusion
The use of MA approaches to the management of an entity's activities is critical. Manufacturing businesses must establish a solid management accounting system in order for their operations to run effectively. The cost of things created is calculated in numerous ways using marginal costing and absorption costing approaches. The fixed overheads are absorbed on the actual output in absorption costing, and hence the profit differs in both systems. Tesa is dealing with a variety of financial issues. This study discusses management accounting methods and approaches that may be used to efficiently solve financial difficulties in a business.
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