Management Accounting: A Comprehensive Analysis for Connect Catering

Management Accounting

Introduction

This report seeks to explain the concept of management accounting and implication of various systems in Connect catering company. It also focuses on reporting techniques that is used by the company in comparing the actual and forecasts. In the other part of the repot, various management accounting techniques like margin of safety, breakeven point and marginal and absorption costing will be used by catering company. Addition to it, implication of planning tools in forecasting budgets and how the financial problems of two big industry players like Tesco and Sainsbury uses management accounting tools in removing financial performance. Also, how these management accounting tools will be used by connect catering for effective management.

Task 1

Management accounting is that accounting concept which helps the manager in taking the critical decisions on the basis of the financial information given by the finance department. This will help in taking the important decisions regarding the flow of business activities. Management accounting helps in identifying, analyzing, summarizing and communicating the financial information to the managers (Bragg 2020).

According to CIMA, “Management accounting is a process of understanding the financial information to be used by the management to plan, evaluate and control various business activities to ensure the application of appropriate action plans.

Role of management accounting

1. Planning

Planning refers to the estimation of business activities by the formulation of proper action plan so that goals can be achieved in the most appropriate way. Connect catering uses MA to make a plan of ho, when and by whom different operation will be carried out.

2. Organizing

Organizing means allocating of resources in an optimum way so as each activity gets required resources for maintaining efficiency and effectiveness. MA helps the company in allocating resources whether financial, human or natural.

3. Controlling

Controlling is a process of comparing the actual results with the budgeted figures so that deviations can be known and corrective actions can be taken. In connect catering, controlling help in understanding the performance of the company in respect to standards.

4. Directing

Directing refers to the skills like leadership, motivation and guiding towards the achievement of objectives. Connect uses this to consul and improve the skills of the members and the leaders so that business perform successfully (Amara and Benelifa 2017).

Difference between financial accounting and management accounting

Basis	Management accounting	Financial accounting
Meaning	MA refers to the understanding and analyzing of financial statements prepared by the management so as to take critical decisions.	FA refers to the preparation of financial statements which will help in understanding of financial health of the company.
Usage	MA is used by internal users for taking management decisions	FA is used by the external users to take decisions regarding investments.
Time basis	MA helps in taking decisions for the future.	FA emphasis on taking decisions on the basis of the past performance.
Accounting standards	It is not necessary to follow GAAP, IFRS and some other standards.	In FA it is necessary to use these standards in a proper way.
Nature of information	Timelines of information is necessary.	Precision of information is necessary.

Management accounting systems

Various management accounting systems used by Connect Catering are:

1. Cost Accounting system

Cost management system is an accounting system which helps in calculating the cost of goods and services. This method will help in estimating the cost for the present and for the future information on the basis of the past records. In connect catering; this system helps in calculating the cost of all the services by analyzing the previous cost sheets, competitor’s strategies, and financial performance and production sheets.

Essential requirements

• Relevance

CAS gives reliable results regarding the cost estimated as it will include all the figures and records which happened recently. Connect Ltd uses this system to get reliable results regarding the cost of the product.

• Up to date

As cost of the product or service is affected by multiple ways and it keeps on fluctuating therefore the cost estimated is up to date depending on the current situation.

• Who requires it?

CAS is required by the production manager as he will calculate the cost of the product by considering various parameters. Apart from its management, competitors, customers and so on, requires this system (eFinanceManagement 2020).

Benefits

• This system helps in determining the cost of the product.

• It helps in estimating the optimum selling price of goods and services given by connect catering.

• Cost management system helps in meeting the completion in the catering industry.

2. Inventory management system

Inventory management system helps in monitoring the stock of the company whether raw material, work in progress and finished goods. This system helps connect catering to set policies by determining the level of stock that the company that will minimize the carrying cost, lead time and so on. Thus, system includes EOQ, LIFO, FIFO, Carrying or ordering cost and so on.

Essential Requirements

• Accuracy

Inventory management system includes all the information related to economic order quantity, safety stock and hence provides accurate information to the connect catering so that estimation regarding stock quantity can be done.

• How often it is required?

Inventory management is required weekly or monthly, as the trends changes very dynamically and the management has to be updated always, regarding the same.

• Who requires it?

In connect catering this system is required by various users like the production department, competitors, suppliers, labor and so on (May, Atkinson and Ferrer 2017).

Benefits

• This system is helpful in managing uncertainties like under stocking or overstocking of inventory.

• This will help connect catering in making strategic plans

• By managing inventory, the company can take an advantage of economies of scale

3. Job costing system

This system includes the estimation of costing related to every job that has incurred to achieve desired objectives. By using this system Connect catering can know the optimum cost and resources that should be assigned to each job so that best results can be achieved.

Essential Requirements

• Reliability

Job costing system gives reliable results as it includes past costing reports and their results so that future estimations can be done aptly. Also, connect catering can use this system to calculate the cost if any special order comes and specific requirements has to be fulfilled.

• Documents required

Job costing system requires so many documents like cost sheets, competitors strategies for the same, inventory reports, past performance sheets, order receipts and the requirements and so on.

• Up to date

As the cost of a product or project changes from project to project depending on the requirements. Therefore, costing of the job keeps on changing or the management keeps it updated so as to earn maximum profits or can beat competitors.

Benefits

• By using this system, the company can estimate or control the cost of various jobs.

• This system will help Connect ltd to know its optimum selling price.

• It also helps in earning maximum profits from every job (Drury 2018).

Management accounting Reporting

Management accounting reporting techniques will help the company in take effective decisions on the basis of the comparison between actual results and the standards. This will help Connect catering in knowing deviation and talking corrective actions in key areas.

Various management accounting reporting techniques that can be used by Connect catering are:

1. Job costing report

Job costing report is the end result for job costing system. This is because in this the actual cost of job is compared with the standard cost that will be optimum and hence the company will able to determine the performance and the utilization of resource for that particular job. In connect catering this will help in identifying key profit earning areas so that corrective actions can be taken there first.

Advantages

• This reporting technique will help in taking corrective actions as soon as deviation is known.

• By the use of this method the efficiency of working will also be increased.

• It will help in analyzing the cost of various job so that cost do not exceed than expected.

Disadvantages

• As the cost differ from job to job and due to updating the cost will fluctuate so comparison will not be right.

• It is a little complex process to calculate the cost of each and every job.

2. Performance report

Performance report includes the difference between expected profitability and the actual profitability. It will also help in understanding the reasons for any deviation, if occurred. In connect catering; this report helps in knowing how well the company performed in terms of every product line separately like transportation, preparation, investments and so on.

Advantages

• This reporting technique helps in understanding of returns the company gets in terms of the performance.

• It can identify the key areas where more attention is needed.

• Performance report will help in examining performance of different service independently.

Disadvantages

• This can get affected by personal biasness.

• Many quantitative factors are not considered while computing the performance of the company.

• It is a complex process to calculate the correct values (Besuglov and Crasselt 2020).

3. Cost management report

This report includes the variance between the actual cost of the product or service with the estimated cost. This will help in demonstrating how well the company performed as per the expectations. Cost plays a very important role in profitability of the company therefore the variance in this report should always be positive.

Advantages

• Helps Connect catering in understanding the actual cost.

• It will help in considering and the reason for the variation. This will help in long run.

Disadvantages

• Sometimes unfavorable variance occurs due to acceptable reason which is not considered in this report.

• It can get affected by window dressing (Lasyoud and Alsharari 2017).

Task 2

Costing techniques

1. Marginal costing

Marginal costing is that costing technique which helps in ascertaining the net profit of the company by differentiating in fixed and variable cost. This also explains the change in profit or cost as per the production level changes.

Advantages: -

• Effective cost control

• Treatment of overhead simplified

Disadvantages: -

• Not able to provide complete information

• Difficult to analyze various overheads (Rubin, Babbush and McClean 2018).

2. Absorption costing

Absorption costing is that managerial method which helps to record total cost of manufacturing for a specific product of Connect catering company. It includes total cost of production such as direct, indirect cost, direct material, labor, insurance etc.

Advantages: -

• Consideration of fixed cost

• No need to divide fixed and variable cost

Disadvantages: -

• Not useful method in decision making

• Not help in cost control process (Hojná and Kafková 2017).

Calculation of marginal costing: -

Marginal costing
Particulars	April	Amount	May	Amount
Sales	16000		16000
cost of sales
Less: Opening Inventory	0		4000
Variable cost of production	10000		12000
Direct labour
Less: Closing inventory	4000		8000
		2000		-8000
Less: other variable cost	0		0
Contribution		2000		-8000
Less: Fixed cost
Fixed manufacturing cost	4000		4000
fixed manufacturing overheads	15000		15000
Net profit of the year		-17000		-27000

Absorption costing: -

Absorption Costing
Particulars	April	Amount	May	Amount
Sales	16000		16000
cost of sales
Less: Opening Inventory	0		4000
Variable cost of production	10000		12000
Direct labour
Less: Closing inventory	4000		8000
		2000		-8000
Less: other variable cost	0		0
Contribution		2000		-8000
Less: Fixed Cost
Fixed manufacturing cost	3200		2666.667
fixed manufacturing overheads	12000		10000
Net profit of the year		-13200		-20666.7

Reconciliation statement: -

Reconciliation Statement
Particulars	April	Amount	May	Amount
Net profit as per Marginal costing	-17000		-27000
Less: fixed cost of closing inventory	800		1333.333
Net profit as per Absorption costing	3000	-13200	5000	-20666.7

According to the Reconciliation statement the negative difference between both costing method is adverse net profit of company with marginal costing method and the amount of closing stock is 800 in April and 1333.33 in May.

Calculation of BEP and margin of safety: -

Breakeven point
Particulars	Amount
Sales per unit	9.5
Variable cost per unit	5.5
Fixed cost	16500
Contribution	4
Breakeven point	4125

Breakeven point when manager's salary is 6000
Particulars	Amount
Sales per unit	9.5
Variable cost per unit	5.5
Fixed cost	17500
Contribution	4
Breakeven point w	4375
Breakeven point in value	10416.67

Margin of safety
Particulars	Amount
current sales level	2500
Break even sales	4125
Margin of safety	-1625
Margin of safety in percentage	-65

According to the calculation of BEP, on the point of 4125 units company will get the no profit and no loss situation and needs to increase their sales to get maximum profits for their organization. Margin of safety is the situation of after BEP where company will get profit or loss and according to the calculation company is facing loss by -65 that means they needs to maintain their position in market.

Task 3

Planning tools

Planning tools is that concept of management accounting which will help in planning all the business operation for future on the basis of the financial information provided by the management so that goals can be achieved efficiently and effectively.

Planning tools that can be used by Connect catering is:

1. Budget

Budget is a framework which is prepared by the management of the company to predict the future business operations on the basis of the past records so that company performs smoothly and according to the plan. Connect catering can use this tool to predict the amount for every revenue or expense that can or will happen in future so that contingencies ca be faced bravely.

There are various types of budget (Bragg 2020).

• Sales budget

This budget includes the forecasting of number of units that can be sold, what will be the selling price and how much percent the company’s sales will be in credit.

• Production budget

Production budget helps in estimating the production units, its various expenses, cost of each product, duration of manufacturing and the whole process of converting the raw material into finished goods.

• Flexible budget

Flexible budget is a budget which contains estimation of the company’s activities relating to various capacities and in the cost is divided into variable, semi variable and fixed.

• Fixed budget

Fixed budget is made on the maximum capacity of the company and in this cost is not segregated into various parts and the decisions on the basis of this budget are not that reliable (Velichko 2020).

Advantages of budgeting

• Budgeting helps connect catering in forecasting future events in monetary terms.

• It gives a complete framework or a pathway that will be helpful in understanding the way of working so as to achieve desired objectives.

• Budgeting will give Connect catering in facing the unforeseen activities of the company as if any pandemic occurs, this will lower down the business and effective budgeting will help in managing expenses.

Disadvantages of budgeting

• Sometimes budgeting ignores various quantitative factors which affects business like goodwill, trademark and so on. This will impact the results from the same.

• Budgeting involves so much of expertise therefore it is a complex and a time-consuming process.

• It can easily get manipulated by the accountant or a management of the company (Latkovska 2020).

2. Standard Costing

Standard costing is that planning tool which helps in preparing standards of each business activity. Standard costing is a substitution process of expected cost for actual cost. This tool helps in establish the standards of cost so as the operations run accordingly and smoothly. Connect catering uses this tool to know the standard of cost like how much the food items, fuel and power, raw material, salaries and so on.

Advantages

• Standard costing helps in forecasting budgets for subsequent period. If the company has proper standards then there will be a basis of comparison of actual data.

• This planning tool will help the company in understanding the inventory cost for the period as the cost keeps on changing as per the requirements.

• Depending on the standards of cost the company can be able to fix a price of goods so as to earn optimum profits.

Disadvantages

• Standard costing is sometimes get affected by manipulation of data by the accountant hence the actual standards are not created.

• Sometimes the contracts are of cost-plus contracts. This is not supported by standard costing.

• Standard costing is made in prior to the original financial year but the environment keeps on changing therefore it does not consider these changes (Foroughi, Stott and Manyoky 2017).

3. Variance analysis

Variance analysis is a tool that is used to compare the actual cost or actual performance with the comparison to standard costing or performance. Variance can be favorable or unfavorable. In connect catering this tool will help in knowing the deviations and taking corrective actions so that forecasting of budgets for future can be done aptly.

Advantages

• Variance analysis helps the management in knowing the difference between actual and standard so that they can focus on key areas.

• This tool will help the company in forecasting future budgets on the basis of the previous deviations.

• Variance analysis helps in identifying areas of cost overruns for immediate actions.

Disadvantages

• This tool takes a longer period of time in taking actions. This will hamper the productivity.

• Sensitivity analysis between variable is a major limitation of this planning tool (eFinanceManagement 2020).

Task 4

Financial problems of Tesco ltd: -

• Lack of innovation hat helps in cost cutting

• Wide range of undeveloped property

Financial Problems of Sainsbury ltd: -

• Growing cost of company

• Low margin rates of product

Here are some management accounting tools which is used by Tesco and Sainsbury ltd: -

Base	Tesco ltd	Sainsbury Ltd
PEST analysis	PEST analysis helps to know about political, economic, social and technological effects on Tesco ltd: - Political- major impact of Brexit with prolonged uncertainties and FDI restrictions. Economic- Fluctuation of interest and exchange rates and increasing number of wages and pension effect the sales of company. Social- Increasing use of social media and growing number of single households. Technology- increasing use of RFID technology and mobile payments (Adamyk 2019).	PEST analysis helps to know about political, economic, social and technological effects on Sainsbury ltd: - Political- Political relations of Qatar and UK affect the business of Sainsbury. Economic- Decline of GBP after impact on the earnings of Brexit. Social- Increasing demand of organic food with increasing consumer support helps to earn more profits for company. Technology: - Increasing use of data driven the retail consumers insights about their products.
SWOT analysis	SWOT analysis helps to know about strength, weakness, opportunities and threats of Tesco Ltd: - Strength- Perfect and strong financial performance by the innovations of new technologies and products. Weakness- Company is not able to control their cost and cut down the overseas operations of business. Opportunities- Artificial intelligence in retail department and engagement of consumers with their products. Threats- increasing competition in retail market and cyber security threats.	SWOT analysis helps to know about strength, weakness, opportunities and threats of Sainsbury Ltd: - Strength- Strong market share with diversified business and perfect quality of food position. Weakness- Only operating market and decreasing food margins may reduce their profit margins. Opportunities- Expansion in global market and marinating technological help for their consumers. Threats- major impact of Brexit on their share prices and increasing competition in grocery market (Aksu and BAYAR 2019).
Balance score card	Tesco ltd company is using balance score card for the strategic performance management to track overall performance of company which helps them to achieve their set targets of company.	Sainsbury ltd also use balance score card to know about the performance of each department and improve such discrepancies so that they can earn more profits for company.

Management accounting system and tool for Tesco and Sainsbury ltd: -

1. Cost accounting system: - CAS helps Sainsbury and Tesco ltd to control their total cost of company with the help of budgets or some other techniques so that they can earn more profits of their organization at the lowest cost (Marota, Ritchi and Abadim et al. 2017).

2. Activity based costing: - ABC costing helps Tesco company to track their each and every business activity so that they can know about company’s undeveloped properties and take their decisions. It should also help Sainsbury ltd to maintain their low margins which guide them to increase their profits.

Management accounting system used by Connect catering company: -

• Job costing system: - Job costing system should help Connect catering company to know about total cost of specific job of business so that company should know about actual cost of each job of company.

• Inventory management system: - Connect catering company should inventory management system to track entire inventory throughout whole production process. So that company can ignore the situation of excess and shortage of inventory.

Conclusion

Through this report it has been concluded the importance of Management accounting system in Connect catering company that it is been important to track all over inventory, maintaining cost and knowing total cost of each job of company. Report also helps to know about the importance managerial report and their uses in company. It also helps to know about different management accounting techniques such as marginal and absorption costing with their calculation. Report increases our knowledge of budgets with their advantages and disadvantages other than that it has been providing financial problems of Tesco and Sainsbury ltd and how will they use management accounting tools such as PEST, SWOT and balance score card and lastly it also helps to know about management accounting systems that should be use by Connect catering company.

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