MANAGEMENT ACCOUNTING

Home
breadCrumb image
MANAGEMENT ACCOUNTING




MANAGEMENT ACCOUNTING

Name of the Student

Name of the University








Authors Note






















Introduction

Management accounting is the process by which organisation prepare a report relating to the performance of the organisation. In this report, understanding of the managerial accounting system’s application in the organisation is found. Profit is found using both absorptions costing and marginal costing is found and analysed the difference. Different planning tools are discussed in this report. Comparison of the base of accounting technique between the organisations using the various system is made. It has been discussed how organisations are using management accounting tools to identify as well as respond to their financial problems. The concepts of financial governance, with a focus on principal-agent relationship and management accounting’s role in sustainable success of organizations are also discussed.

The chosen organisation is Nestle. Nestle is a dairy product manufacturer specialised in selling a dairy-based product like Nescafe, Milo, Kit Kat, Milkmaid, Maggi, Bar-One, Milky bar, and Nestea. Nestle commenced its business in the year 1866. It was founded by Henri Nestle. Nestlé’s key competitors are Mondelez, Mars, Kraft foods, Danone, Hershey's, Heinz and Unilever. Its key stakeholders are Academia, Communities, Consumers, Customers, Employees, Governments and etc.

The largest contribution in the business of nestle is from its dairy department which has a share of 21.8 billion euros in its revenues of 2019. The company is situated and having production related activities in Switzerland and South East Asia, but most of its revenues is generated from other parts of the world, with a major share of the US market. In 2018, it spent over 1.38 billion on its development and growth in the US market.




LO1: Understanding of Management Accounting Systems

1. Role of Management Accounting

Management accounting practises of presenting financial information, which is used by the manager for making a financial decision. This report prepared in the management accounting is for the use by the managers for making short term and long term decisions in the market. Managerial accounting is not guided by any standard as in case of financial accounting. The data can be modified in the managerial accounting as per the need of the organisation and the end-user. Using managerial accounting, the following decisions can be made like cost classifications, operational budgeting, operational performance reporting. Management accounting uses modern and traditional techniques for analysing the cost information (Šiška, 2016).


Planning- Management accounting helps in developing data which will help manager in planning processes by providing report that will help in estimating the effects of various action that Nestle would be able to achieve the desired objectives. This help the management to identify the profitable products.


Control- A major step in the management accounting is the preparation of reports such as performance reports in certain areas. It ensures the internal management to establish good control over the activities of the organisation. The reports also facilitates comparison and look behind the cause of deviations in estimated and actual figures.


Decision making- It is an important feature of management accounting. This system of management accounting covers a warehouse of valued data for forecasting the consequences of various activities. It can support the manager in taking a variety of decisions related to business. After using its tools such as variance analysis and standard costing, valuable and significant information is contributed to the manager, which helps in decision making.

2) Difference between managerial accounting and financial accounting

Particulars

Managerial accounting

Financial accounting

Information is used by

The information produced is used by internal management like managers and employees

The information is used my external management like shareholders, government, banks, lenders.

Use of the information

This data helps in decision making, controlling, and planning.

This is used for preparing and recording data for a particular financial period or at the end of the period.

Time for which is used

It uses historical data for forwarding decisions

It is used mainly for historical use

Nature of the data

The data it presents is mostly financial as well as non-financial

The data it presents is mostly financial on which managerial decision is taken.


3) Different Management accounting system

Job costing system- It is a costing method which is used to collect information regarding a specific job or production. It used to analysing all the direct cost and indirect cost in the process.

This method is used in the organisation for determining the cost of specific jobs which are done in accordance with the customer specification.


Inventory management system- It is a process used for analysing and tracking the inventory during the entire supply chain process. This starts from purchasing raw material till the time of sales of good.

Inventory management system is used by the organisation for handling the supply chain, inventory Management, Barcoding & Tagging, and in the Inventory Tracking.


Price optimising system-This is a strategy used by the organisation to know about the price sensitivity level of the customer. This is used by the organisation to increase profitability by changing prices and checking the reaction of the customer to this change.

Price Optimization system is used in the organisation to modify setting of price by the consumer sections by using some mathematical formulas to assume the customer response when a product is made available at different prices. It helps the company to determine a final price, which could be profitable to its business.


Cost accounting system- it is a structure which is used by companies to assessment of the cost of the goods. Valuing the precise cost of products is crucial for profitable processes. A company must know which goods are moneymaking and which ones are not, and this can be determined only when it has assessed the precise cost of the product. As nestle has different product line so it becomes important for the company to manage its costing systems for effective performance of the company. This system helps in calculating the cost of every product the company offers so that best cost can be estimated which gives the company best results. This are used in the organisation in the form of profitability analysis, inventory valuation and cost control. This system also helps in finding the deviation and also to take corrective actions.

4) Benefit of Management accounting system and application

Job costing system- It helps in analysing costs throughout the manufacturing process. Using this accurate profitability can be found. In Nestle, this method is used for measuring the indirect cost and check profitability for a particular batch.

Inventory management system- It helps the organisation to simplify the process of inventory management and ensure cost saving in inventory handling. In nestle it helps in avoiding stock out and storage of excess stock.

Price optimisation strategy- It help in automating the entire process by maintaining consistency in processes. In nestle it is used for Price optimisation by managing the margin of sales.

Cost accounting system- reliable contrast between the various products and services inside and outdoor of an association with the products and services accessible in the market. It also supports to accomplish the lowest cost level of product with maximum competence level of operations.

5) Essential requirement for the system

Job costing system- the essential requirement for job costing method is total job costing, predetermined overhead rate, and the total job cost.This are to be properly analysed for taking decision for a particular job

Inventory management system- The essential requirement for inventory management is EOQ, Re-order level, Inventory tracking. This are analysed to check the free movement of inventory.

Price optimisation strategy- the essential requirement for price optimisation strategy are Initial price optimization, Promotional price optimization, and the Markdown optimization.

Cost accounting system- Necessary collaboration and contribution of managers from various divisions of the company is required.


6) Management Accounting Report

Budget report- This is used to determine the expenditure in different process and which expenditure level are high. Using this data, the excess expenditure can be brought down to normal level. Budget report is considered as one of the major tools for maintaining control over expenses that are frequently used in the organisation(Honggowati et al, 2017).

Investment appraisal report- Investment appraisal report is used for analysing the profitability of the investment in the asset. Using this report, analysis of the affordability and the strategic fit is analysed prior to investment in the asset. Payback Method is a form of investment appraisal report used for analysing how quickly the organisation can recover the investment.

Job cost report- job cost report is the management tools used for evaluating the performance of the project or the production. This job costing report is used by organisation for analysing any discrepancies which might arise in the production processes. This report focus on the financial values of the organisation to analyse the production performance.

Aged receivable analysis report- This report helps to know at what time the payment has to be collected from the accounts receivables of the business. It presents the names and due dates of debtors in a clear format and reminds the business of the dates when the bill receivables have completed their maturity period. This ensures no delay is reported in collection of funds. It also tells the amount which is still outstanding from the debtors.

Performance report- Performance reports are shaped to evaluate the performance of an organisationas well as for each worker at the end of a period. Sectional performance reports are generated in Nestle. Executives use these performance reports for making ofimportant strategic decisions regarding the future of the organization.



8) Discussion on the Management Accounting Report

Performance report

Prepared- performance report is prepared by gatheringrelevantdata, reviewing performance related documents, and by compiling a list of achievements of improved performance in business activities.

Use in Nestle

This is used in nestle for drafting goals for the coming period and sharing of the preparations with the manager.

Beneficial

It is beneficial for the management for comprehend and recognize the growth abilities within their company and the total performance of the association.

Challenges- the performance management system and tools is required to fit with the exact needs of the association and there is absence of Integration.

Accounts receivable aging reports

Prepared-Accounts receivable aging reports is prepared by separating the invoices which are not yet paid and checking the days outstanding in their collection, from other available invoices which are not related to accounts receivable.

Use in Nestle

It is used to know when the collection from a debtor becomes due. These reports help Nestle in better management of its debtors in the business (Rikhardsson and Yigitbasioglu, 2018).

Benefit

These reports are beneficial forchecking if the business is missing out on any debtors which are due from a long time.

Challenges

It is time taking analysis for calculating all the unpaid debtor and then analysing of the days they remain unpaid.

Budget reports

Prepared- it is prepared by analysing of the step costing points, analysing the funding, analysing the revenue forecast.

Use in Nestle- It is used to know the variance of budgeted and actual amount of various production activities is Nestle.

Benefits-This helps to enquire into the cause of such variance and how it can be avoided in the future. (Alborov et al, 2017).

Challenges- budgeting report faces the challenge of inaccuracy as it depends upon the forecasted revenue data.

Inventory management report

Prepared- It is prepared to know the current level of inventories in the business and how much is being taken out of the business.

Use in Nestle- The firm use this report to ensure enough stock of inventory is maintained in its warehouses.

Benefit-It benefits the company by helping it avoid the situation of running out of goods at important times. It guides the business on optimum level of inventory that must be present.

Challenges- analysing the customer demand and accurately tracking the inventory as per the demand.

Job costing report

Prepared- It keeps a record of costs involved in an activity. The report also states how these costs will be incurred and any measures to minimize these costs. An analysis is also done for comparing estimated and actual costs involved in a job.

Use in Nestle- This is used in nestle in assessing the cost of a particular job, when an order is specially processed on a customer’s demand (Ozyurek and Uluturk, 2016).

Benefit- it is beneficial to know the true costs behind a particular activity, as in the case assessment of costs for a particular job, so that profit percentage can be determined.

Challenges- lack of clarity in the objective and the control over the system of a particular project

Investment appraisal reports

Prepared- It is prepared to check the returns on various investment proposals.

Use in Nestle- This reports is used in Nestle to find out which investment opportunity will be the best for the company.

Benefit-The organisation use these report for delivering important data to decision-makers.

Challenges- knowing the future flow of cash from the investment by keeping the present values in consideration.

9) Benefit of Integration of Accounting System

By integrating the accounting system it becomes easy to review all the transaction. This will ensure higher visibility of the transaction (Nazarova et al, 2016). By integrating the accounting system, the organisation can ensure more reliable managing of the data entry. This will ensure speedy decision making by streamlining the operation process. This will enhance business productivity by eliminating the time consuming task.



LO2: application of management accounting techniques

1) Profit and loss calculation for Nestle

In absorption costing, the net profit comes out to be £745684 for 2019. As the revenue is £1462500 and subtracting cost of sales of £716815. Non production cost which relates to the marketing cost of £10000 and research and Development cost of £1672, and the fixed selling cost 9790. By subtracting all these expenses from gross profit, we get £745684

In marginal costing, the net profit comes out to be £743538 for 2019. By subtracting the variable cost of goods sold is £697500, from the revenue we get product contribution margin of £765000. For calculating the variable non-manufacturing expenses, Nestle have a variable selling expense of £10000 and variable admin expenses of £1672.

2) Different management accounting techniques

Different management accounting techniques are capital budgeting, trend analysis, Inventory valuation, and margin analysis.

Capital budgeting is a tool used for evaluation and ranking of the investment done in a project or in an asset. Capital budgeting is used in preparation of budget report and in the performance report of an organisation. This is used for evaluation of major projects and investments, this help in analysing project cash flow and inflow to get the expected return (Weigel and Hiebl, 2018).

Trend analysis is used for aged receivable analysis report, as the trend analysis helps in identifying the debtor performance and how long it take debtors to pay for the sales. By using the trend analysis a clear and precise information can be available(Prabowo, Leung and Guthrie, 2017).

Inventory valuation help is calculation of inventory management accounting. In this inventory is valued on the basis of FIFO LIFO and weighted average method. This provide report about the monetary amount which is associated with the cost of goods at the end of the period.

Margin analysis report is used for reporting the revenue COGS and the gross margin on a specific date. This report presentsa summary as well as detailed information. The job costing system uses this report for analysing cost for each individual project.

3) Difference in marginal and absorption costing

The main reason behind why the difference arises is because absorption costing allocates a portion of fixed cost of overhead to both the closing inventory and the actual unit sold. However in the marginal costing, it tries to allocate all its cost which are fixed to the period. This result in lower profit figures for the organisation (Alsharari, 2019). Under the marginal costing, it apply those cost to the inventory that incurred in the production process when each unit is produced. Under the absorption costing, all the cost are applied to all the unit produced. It is also due to the IAS 2 on inventories where it state that inventory to be valued on absorption basis in the financial statement because of the production overhead.

4) Difference between Marginal Costing and Absorption Costing


5) The circumstances under which each is useful

Absorption costing is used in fixed cost of operation in the organisation. These are salaries, rentals and calculation of bills in the organisation. This can be helpful in analysing the prices of products by evaluating the profits for each product in the product line.

Marginal costing is used for planning of profit that help in analysing the profit and different level in the sale and in the production(Rogulenko et al, 2016). This is used in the circumstances about fixation of the selling price, export decision and for the decision regarding make or buy. Using the breakeven analysis and the p/v ratio these circumstances can be better monitored.



LO3: Planning tools in management accounting

1) Discussion of planning tools

Sales budget-

Sales budget is an economic plan, which demonstrates how the resources in the organisation are required to be allocated for accomplishment of the forecasted sales. The main objective of sales budget is to design the budget for high consumption of resources and forecast sales. The info compulsory for preparation of the sales budget which comes from different sources.

Advantages

  • This budget helps in making programming for the entire sales target to achieve.

  • Sales budget helps in allocating the resources in the efficient way.

  • It gives the base to the company to manage and evaluate the progress of sales and the performance of the company.

Disadvantages

  • Sales budget is prepared without taken inconsideration the future trends or change in environment.

  • Preparing a sales budget requires so much time to be invested.

Sales budget do not consider any expenditures which have benefits in future. . (Small Business - Chron.com. 2020)


Production budget-

It takes into account the expenses which will be incurred in the production process at a certain level of production. It is usually as safety stock to protect for unforeseen increases in demand.

Advantages

  • Production budget provides detailed information regarding the better pricing, cost per unit.

  • This budget make possible to consider direct or indirect cost which cna be controlled for better profits.

  • This budget not only includes production expenses but also the overhead expenses done while producing.

Disadvantages

  • It is not possible to allocate all the expenses to a specific activity.

  • The benefits are not justified by the costs since the large amount f data is collected.


Labour budget- labour budget is required for calculating the amount of hours by the workers which will be required to produce the units. A more difficult and direct labour budget will compute not just the total quantity of hours that isrequired, but also be including the break down this info by labour grouping.

Advantages

  • Labour budget helps in ascertaining how much cost can be calculated to complete the task.

  • Labour budget also helps in increasing the understanding of how much of the total expense is of labour charges.

Disadvantages

  • Labour cost keeps on changing as per the production requirements so it is not a proper rigid way to estimate cost.

Errors in labour budget can lead to errors in the production budget as labour budget is a part of production budget. . (efinancemanagement.com. 2020)



Material budget-Material budgeting denotes to the process of making material or purchase budget in relations with measure and money value of materials to be obtained in a stated time period. Not only does it helps in assessing the material cost over a time period, but it also evaluates the material requirement.

Advantages:

  • By preparing this budget the company can keep a regular check over activities so that the problem of over and under stocking cannot be faced.

  • Material budget helps in managing the cash flows in a better way.

  • Material budget is prepared quarterly so it keeps a regular check so that errors can be avoided.

Disadvantages

  • As the environment is fluctuating so it can be accurate all the time, the company has to modify it from time to time.

  • Preparing a material budget is a complex process as it involves so many things that have to be considered.


Activity based budgeting-it is a system that is used by the organisation which is used for the sole purpose of analysing, recording activities that incur cost for the company. In this method the organisation tries to scrutinise every possible cost which can be eliminated or reduced and this will help in the creation of an efficient budget. This method is used for analysis because this method help in reducing cost by pulling out more profit from the sales.

Advantages

  • Activity based budgeting helps in evaluation of activity at every competitive edge.

  • This budget will help in removing bottlenecks and hindrances that come in between the production activity.

  • Activity based budgeting helps in improving the relationship between management and the employees.

Disadvantages

  • For making a effective activity bases budget management should have a deep understanding for the same As it is a compex process.

Resource consumption is one of the factor which has to be considered while preparing this budget. . (Small Business - Chron.com. 2020)



Flexible Budget- flexible budget does not remain static which means it is flexible for making adjustments, unlike fixed budget which cannot be changed once it is made. This budget leaves scope of changes or adjustments when the activity for which the budget was prepared is still in progress.

Advantages

  • Flexible budget helps in analyzing and knowing the variances in the budget and the actual data.\

  • Helps in acquisitions of project.

  • This budget helps in better planning for profits for future.

Disadvantages

  • Making a flexible budget is a complex process.

  • There can be so many possible errors which can be occurred while preparing that budget as it is based on assumptions. (efinancemanagement.com. 2020)


Continuous budgeting- itis the process of repeatedly addition of one more month to the end of a multi-period budget as every month passes. In this it is ensured that the budget process keeps on flowing, and necessary adjustments can be made each time a budget is renewed.

Advantages

  • This budget helps in planning business activities in a better way.

  • The management and the company will prepare the company for adapting changes in this dynamic environment.

  • The company will able to manage its spending wisely.

Disadvantages

  • It is a time consuming process.

  • It will demoralize the employees.

  • It is prepared on uneven updates of the surroundings.


Zero-based budgeting (ZBB)- It is a technique of budgeting under which all expenditures are acceptable for every new period. The method of which begins from a zero base.

Advantages

  • This budget helps in efficient use of resources.

  • This budget helps in elimination of waste resources.

  • Comparison between old and new projects can be done.

Disadvantages

  • It is costly process.

  • It is not apt for long term planning

This budget is not useful for manufacturing firms. . (efinancemanagement.com. 2020)




LO4: Management Accounting Respond To Financial Problems

The selected organisation is Nestle and is compared with Unilever

Financial problem refers to the hindrances which occur in the business and by which the company will not be able to its long term or short term obligations and limits the purchasing power of the company. (Dolgikh and Slepuhina, 2019)

Financial problems of Nestle

  • Price fluctuations

  • Ineffective control of organizational structure.

Financial problems of Unilever

  • Dependence on retailers

  • Limited business diversification

Ways by which company can resolve financial problems

  1. Benchmarking

Benchmarking is that financial tool which allows the company to adapt, grow, drive and bloom. It is a process of measuring the key matrixesand comparing it with the competitors and other companies so that the performance of nestle and Unilever. Financial problem of nestle can be removed by this tool as it will help the company to compare the prices of goods with the competitors and can set the price which is most optimum. Benchmarking is a tool which can be used by Nestle and other organizations to earn competitive advantage as it will help in identifying the various opportunities by understanding the business operations and by comparing it to competitors.



There are four types of benchmarking:

  • Performance benchmarking

Performance benchmarking is the first step to identify performance gap. For doing this the execution, collecting, analyzing of data is done so that the financial problem can be removed. In nestle the information can be gathered and analyzed for better performance.

  • Practice benchmarking

It involves gathering of the qualitative information and how activity is considered through people, processes and technology. It gives Nestle the best practices that can be applied to other areas.

  • Internal benchmarking

Internal benchmarking is a good tool to understand the financial position of the company. This tool is applicable in large organizations like nestle and other organization, where areas of business are more efficient than others, as it will help Nestle to understand the internal operations of the company and to find out the loopholes for the same.

  • External Benchmarking

It is the tool by which one or more organization agrees to participate. Sometimes you need third party to facilitate data collection. This type of benchmarking is highly valuable but requires more time and effort. In Nestle, external benchmarking helps in collecting data with the help of third parties or any other external source as the information gathered from them play a very keen role in preparing an efficient budget and for taking effective . decisions.(Mor, Bhardwaj and Singh, 2018)

Different ways in which the companies can use benchmarking

  1. Call centre

They can benchmark the customer satisfaction by asking their customers to rate their services. They can also collect data by waiting cost, call lengths.

  1. Technology

They can benchmark by monitoring their competitor’s products and price and comparing it to their own company.

  1. Healthcare

They benchmark the data about their patient, like waiting time, services, and recovery time.

  1. Hospitality

In this sector everything is compared like food cost, consumables, employees’ benefits.



  1. Key performance indicator

Key performance indicator is a measure to evaluate the performance of the company to achieve specific goal. This tool helps the management or board of directors to focus critical result areas which will affect the performance of the company on a large level. In the chosen company: nestle, they can chose this tool to focus on the key areas of deviations or issues like nestle is facing the issue of price fluctuations and bad control over organization as it is a key area so this tool will help the company in indentifying these important areas so that effective decisions can be taken.

Organization carries out financial and non financial Key performance indicators by understanding the business operations as a whole as every company has its different key area which majorly affects the company’s performance. They follow this concept by calculating all the variances and they indentifying the main areas of deviation which need immediate attention.

Financial KPI’S are the concerning areas in terms of the financial data based on the income statement and the balance sheet. Financial KPI can be seen if any negative deviation occurs in numbers like decrease in sales, increase in operating expense or price fluctuations, etc. Non financial KPI includes the key areas which are very important to the company but are not seen in numbers like customer relationship, employees, quality of goods and services, cycle life, etc. (Mor, Bhardwaj and Singh, 2018)

Examples:

  • Marketing KPI

  • Percentage of new web sites.

  • Conversion rate

  • Average lead score

  • Durations and page viewed score.

  • Manufacturing KPI

  • Production volume

  • Production cost

  • Capacity utilization

  • Cycle time

  • Retail and ecommerce KPI

  • Transaction volume

  • Sales per square volume

  • Inventory to sales ratio

  • Revenue per employee



  1. Balance score card

Balance score card is used to evaluate the various internal companies’ function so that it can be improved with their resulting outcomes. Balance scorecard is used to give feedbacks to the company so that manager does can understand the use and can take critical decisions regarding it. Its main aim is to gain maximum benefits by achieving goals efficiently and effectively.

There are four perspectives of balance scorecard:

  • Financial perspective

Financial perspective includes the perception of shareholders like what the investors exactly want and what can be the issues faced by which can be resolved. As it is important for the company to know this as if the shareholders will not be happy then it will adversely affect the performance of the company. Different organizations whether manufacturing, construction, FMGC, every shareholders aim is to get maximum returns and the company aim is to k now what shareholders want. Nestle financial perspective will be to provide maximum wealth to the shareholders of the company and to provide them with utmost dividends and best results.

  • Customers perspective

Customer perspective in balance score card says that what customers want from us and how do they see the company. If the company will e able to make a very good picture in the eyes of the customer then this will help the company in solving financial problems. Different organizations have different perceptive customers so the mind set of customer different from company to company as Construction Company’s customer requires lower cost of flat, or building. FMGC Company’s customer requires quality of goods and at lower prices and as per the customer. As nestle has different product lines so they have different type of customer for different product line, therefore the company has to understand the perspective of all the customers.

  • Business process perspective

This is the internal perspective of the company’s managers, employees, board of directors. This perspective is to answer yourself that where the company is and what is the area of operation the company excels, as it will help the company in fighting with the problem in a better way. Business process should be optimum for every company’s growth and therefore the company should think about the important pillars of the company and their perceptions like nestle understands the place where the company should be and what can be the options.

  • Learning and growth perspective

Learning perspective is the area where the company has a scope of growing and where they can create more and more value. Growth perspective is the suggestion how the company can grow in future. Every organization has different business structures and has different growth structure and perspectives as every company has different goals, assets, liabilities and other areas. Nestle aims to grow to a big level and for that the company related to understand the perspective and the pathway for growth which is practical and reliable, (Bragg, 2020)

Different companies using balance score card

  • Manufacturing companies

Manufacturing companies use this tool to know the fluency of the productions and the internal activities of the company which take place and addressing the feedbacks from them.

  • Retail companies

Retail companies use balance scorecard to evaluate business operations on different levels so that the company understands where they are going and what can be the possible recommendations for better growth.



  1. Activity based costing

Activity based costing is that method of estimating cost of each activity which is included in the production of a given good. This system assigns the cost to each activity that goes into production. Many businesses use cost of goods sold to calculate the overheads. But this costing system, it considers both direct and overhead cost to create a product. It also helps in controlling cost by telling that on which areas the cost can be cut down.

Nestle uses this method to assign the cost of each activity. This will help the company to ascertain the cost and also can control the cost. Different organization can use this method differently. As it depends on what type of organization is and how business operations are carried out. Different organizations uses activity based costing as:

  • Production company


Production company uses activity based costing to calculate the cost of each activity like procuring raw material, technology uses, labour charges and other expenses.

  • Retail industry

Retail industry uses this tool to know the cost of each activity which will be selling expenses, administration expenses and employee’s salaries, office expenses, summaries to calculate the cost of each activity.

Under activity based costing, the first step by which the cost can be ascertained is by identifying the number of activities which are necessary for creating a product. Then separate each activity into cost pool, which means separating the activity into individual costs. Then assign cost to each individual cost then divide the total cost of individual cost by total cost to calculate the cost driver rate. Then the rate is multiplied by the number of machine hours.

  1. Financial governance

Financial governance is a way by which the company manages, monitors, evaluates, and understand the financial performance of the company and also to track the financial statements of the company so that the organization can understand that and critical decisions can be taken. Financial governance includes the management of internal controls, financial policies, work flow, financial control, data security and other issues. Financial governance is important as it ensure the accuracy of financial data, helps in maintaining regular reports and disclosures. And as they are a reliable source then it helps in estimating and budgeting of various plans, models for future growth. Nestle uses financial governance to monitor its flow of operations so that the company can excel in business and future growth. This concept helps the company to keep a check on everything and also to check the fluency of work. Other organizations also use this tool so that efficiency can be maximized and decisions can be taken aptly. Transparency of information is an added advantage of this concept.(Small Business - Chron.com. 2020)

Management accounting plays a key role in making an organization a better platform to grow. This concept includes so many systems, planning tools and reporting techniques which help the company in making critical decisions regarding different business concepts. This accounting term helps in planning, controlling, directing and managing of business operations which will help the company taking the organization to a better level. Every organization faces financial problems but how well the company take steps to solve the problem is a important part and also management accounting has different tools like balance scorecard, financial governance, KPI’s, benchmarking to solve different financial issues.In the given company which is nestle, management accounting reporting system helps in identifying the financial problems like price fluctuations and ineffective organizational structure. And for removing these issues the company can use the explained tools like benchmarking, KPI’S, Balance scorecard and other tools. (Dolgikh and Slepuhina, 2019)



Financial Governance and the principle agent relationship

Financial governance is how a company exercises control on its financial data which includes collecting, managing and interpreting its financial information. It is about ensuring the financial data is reliable and at the company has complied with compliance policies and disclosures.

Agency theory is a major element in the area of financial governance. An agent is the representative of principal and it has to be ensured all actions done by an agent are in the best interest of its principle. For a company, the shareholders represent the principals who have surrendered their funds to the directors / executives appointed by them, who act as an agent, having a purpose of management of their funds. The agency theory here implies that the executives, as the agents of the shareholders, should work in a way to generate maximum returns on their investments. If any of their action is against the interest of the principle, then conflict arises and financial governance exercised by the company is questioned.

How Nestle uses financial governance

Since 2015, Nestle has appointed nine new independent directors who possess diverse experience and expertise which is important for its development. The company has been focused on research and development activities to gain a competitive advantage in its market area. It is committed to give best returns in the industry to its principals and frequently organises road shows and investor meetings to convey its strategic vision (Source : Nestle)

How other organisations use financial governance

Sainsbury’s, a retail chain in UK is committed to increase its shareholder’s investments and works in the best interest of them. It has constituted various committees such as audit committee, remuneration committee and nomination committee to name a few, who work in alliance to respond well to its financial governance (Source: Sainsbury’s)

Rio Tinto Ltd. considers financial governance as a critical factor in its success. It makes its financial statements in in compliance with government codes and accounting standards. It also runs a confidential whistleblowing program to keep a better check on business and safeguard its shareholders’ interests. (Source: Rio Tinto)

Management accounting and sustainable success

Sustainable success: Sustainable success for a business is about getting long term prosperity. It focuses on the success which keeps on growing, instead of being at the peak for some time and later falling down.

How management accounting leads to sustainable success of a business

It lies in the fact that management accounting provides the organisations with essential tools and techniques, which can be incorporated in the business for improving its performance. For example, Nestle, in 2015 appointed 9 new independent directors who could lead the organization with the help of their expertise in diverse business areas. This step clearly reflects the company’s aspiration to achieve long term success (Nyman 2019).

Similarly when Rio Tinto uses budgets and variance analysis to keep a check on its mining business, it is being done with an intention to permanently reduce expenses which are unnecessary for the business, leading it one step closer to achieve sustainable success.

Sainsbury’s has also realised its potential to capture a big share in the market. In its stores many products are available at competitive prices. The tool used here is price optimization, which enables the company to know the price label it can affix on its products. The sole aim here is to gain market share and move towards sustainable success of its business.



Conclusion

In this report, the management accounting has been discussed using Nestle organisation. Under this report, differences between management accounting and financial accounting have been discussed. Under this, management accounting reports, such as budget reports, investment appraisal reports, job cost reports, aged receivables analysis report has been discussed properly. Under this report, profit statements using absorption costing and marginal costing principles is prepared. Under this the reason for difference has been provided. In this various planning tools such as variance analysis, responsibility budgeting, standard costing, time series analysis has been discussed with their advantages and disadvantages. At the end part of the report it can be concluded that financial problems faced by Nestle can be removed by the use of tools like benchmarking, KPI’s, Balance Scorecard, financial governance so that the company can grow and perform efficiently and effectively so that profits can be maximized. Board of directors can change some business strategies and policies which can boost up the profitability of the company. Other organizations can also us these tools depending upon the requirements to mitigate the loss and the issues faced by the companies. It can be seen the principle –agent relationship is crucial for any business while exercising financial governance. Also, adherence to management accounting tools leads a company towards sustainable success.
















Reference






Appendix


Absorption costing

sales ( 450000 units * 3.25)

£ 14,62,500.00

Less:

 

variable material cost (450000 units *0.75)

£ 3,37,500.00

variable Direct labour and manufacturing cost ( 450000 units *0.3)

£ 1,35,000.00

variable selling cost

£ 2,25,000.00

Overhead cost

£ 19,315.80

Total cost of sales

£ 7,16,815.80

Gross profit

£ 7,45,684.20



workings : Absorption costing





Allocation rate

 


Budget cost

£ 21,462.00


budgeted Activity level

500000


 

 


Allocation rate

£ 0.04


Allocated overhead cost

£ 19,315.80


units sold

450000



Marginal costing

sales ( 450000 units * 3.25)

£ 14,62,500.00

Less:

£ -

variable material cost (450000 units *0.75)

£ 3,37,500.00

variable Direct labour and manufacturing cost ( 450000 units *0.3)

£ 1,35,000.00

variable selling cost

£ 2,25,000.00

 

 

Total cost of sales

£ 6,97,500.00

Gross profit

£ 7,65,000.00

Less: Fixed cost

 

Marketing and Administration expenses

£ 10,000.00

research and development cost

£ 1,672.00

 Fixed selling cost

9790

total Fixed cost

£ 21,462.00

net profit

£ 7,43,538.00



Reconciliation profit in case of marginal costing and absorption costing

Allocation rate per Unit = Fixed cost / total number of units produced

Total fixed cost =21462

Units produced = 500000

Allocation rate = 0.0429

Allocation of the Fixed manufacturing overhead

45000 units * 0.0429

= 19315.80


Under Allocation =£21462-19315.80

= £2146.20


Reconciliation of profit

Marginal costing Profit + ( Closing stock * allocation rate ) = Absorption costing profit

= £743538+(50000 * 0.0.429)

=743538 + 2146.2

= 745684.2( Absorption costing profit )


Assumptions :

Assumption ( Cerelec)

Total production (thousand)

500000

Total sales

450000

Sales price

3.25

variable cost

 

material cost

0.75

Direct labour and manufacturing cost

0.3

Variable selling cost

0.5

Total variable cost

1.55

Fixed selling cost

9790

Marketing and Administration expenses

10000

research and development cost

1672


26


FAQ's