Management accounting: A report on the usage of management accounting in AstraZeneca

Management accounting

Introduction

As a Junior Accountant I am going to present a report to the board for the purpose of suggesting about the usage of the management accounting in the business organization. For doing the analysis AstraZeneca have been chosen which multinational pharmaceutical is and biopharmaceutical firm. The company has got the portfolio regarding the products for several disease in areas of cancer, gastrointestinal, infection, respiratory and the inflammation.Several types management accounting system would be explained by which important information can be obtained which can be helpful in taking the important decisions of the company. For the practical understanding profit or loss would be estimated with the help of the absorption and the marginal costing method. Several kinds of the planning tools will be explained in this report by which the organization can make use of those tools for progress of the business. Comparison would be made among the two companies with regards to the usage of the management accounting system for solving the financial problems and for attaining the sustainable success.

LO 1Introduction of Management accounting

Management accounting is the process of evaluating the costs of business operation and preparing the internal report of financial data & accounts for the top level management of the organization, so the decision can be taken easily & the goals of the business can be achieved efficiently. In other words it refers to analyzing the financial data & translating or interpreting that information into meaningful information for the management of the organization. Management accounting is also termed as cost accounting or managerial accounting.

MA is concerned with analyzing or assessing all the financial data of organization and making the report on the basis of those financial data for the management of the organization and which may assists the management in effective decision making. (Broccardo 2014)

According to CIMA, MA is refers to the process of accumulation, analysis, identification, preparation, measurement, communication & interpretation of information that is used by management of organization for planning, controlling & evaluating within an organization and to make sure the proper use of responsibility for its resources. (CIMA)

According to GAAP, MA considers the accumulation of financial data or information in various bases of data, and the reporting & classification of that information for the serial users of information. (GAAP)

Need of MA in Astra Zeneca

• It is useful for managers to create or make strategies or decisions.

• It is essential for the management in utilizing the resources in better way.

• Effective decision of the organization can be easily taken by creating MA.

• It assists the managers in framing the policies of business

Management accounting origin

Since the 19^th century, MA has roots in industrial revolution. Most of the entities were strongly controlled by mangers or owner, during early period. And the financial report effective decisions were also taken by mangers.

Applications of MA

1. Controlling – It is concerned with the process of controlling the organization by framing the policies & rules trying to bringing the actual outcomes closer to standard outcomes and identifying & removing the deviation in process, MA is used by Astra Zeneca to identify the deviation in management process.

2. Financial planning – MA is prepared by analyzing the financial data & communicating the information to management, so it’s used by Astra Zeneca to frame the financial plan of organization. (Sherman 2018)

3. Measuring the performances – Regularly measuring the performance is essential for every organization, it increases the productivity & efficiency of organization, MA assists the Astra Zeneca to measures the performance of company in better way.

Benefit of MA for Astra Zeneca

• MA help the management to evaluate all the financial data and the problem can be easily identified by preparing the report.

• The Astra Zeneca can get the competitive advantage in the market, by preparing the report of MA, it is basically refers to producing the goods in cheaper price in comparison with the compotators of company.

• Astra Zeneca can take effective decision in operation of business, by using reports of MA.

• MA helps the management to control the organization in effective manner.

Differences in Financial accounting & Management accounting

Bases	Financial Accounting	Management Accounting
Meaning	It refers to accounting system that aims to prepare the financial statement of company and that provides the financial data to all the stakeholders of company.	It refers to accounting system that aims to provide important information of financial statement to the management, so the effective decision can be easily taken.
Format	There is a specified format of preparing the financial statement. (Garbowski et al, 2019)	There is no specified format of preparing the financial statement.
Users	It is uses by internal & external stakeholders.	It is only uses by internal management of an entity.
Aims	It aims is to provides financial data to shareholders.	It aims to support the management in framing & making the planning & decisions.

Management Accounting System

It is concerned with taking all the financial information of the company & developing the reports for confidential & internal use of management so the effective decision can be taken & the efficiency of operation can increase. (Broccardo 2014)

Types of Management accounting system

1. Job Costing system

JCS is refers to the process of determining the costs that is incurred in specific job in manufacturing the product & services. The JCS is useful for management of the company in ascertaining the cost that is related with the specific job or particular activity. (Phillips 2017)

Essential requirement of JCS for Astra Zeneca

The JCS system is essential for Astra Zeneca in determining the raw material cost &labor cost that is incurred in specific job done by individual and specific production department. It assists the Astra Zeneca to understand the effectiveness of specific job. For example: As AstraZeneca is a manufacturing company of medicines then there will be so many jobs that has to be considered for preparing the medicine and hence this system is will help in calculating the cost of each job in detail by considering the past records and figures.

Benefits of JCS for Astra Zeneca

The JCS is provides benefits to organization in taking the efficient decision in reference to new services & products provided to customers.

2. Inventory management system

IMS is refers to the system that is used by company in keeping the records of inventory level. It helps the company to separate the raw material, finished goods, semi finished goods & work in progress goods of the business. It is significant system of accounting that reduces the over & under stock situation in an organization. (E- Finance management 2019)

Essential requirement of IMS for Astra Zeneca

It is essential for every organization to control the level of inventory. IMS is used by Astra Zeneca to control inventory level. It helps the organization in separating the finished &semi finished goods and also reduces the over stock conditions.

Benefits of IMS for Astra Zeneca

One of the major benefit of IMS for Astra Zeneca is that level of inventories can be easily controlled by using this system. And the efficiency of production level is also increased by this system. For example, if AstraZeneca is selling 2600 units annually then this system will allow the company in making the average balance of the stock and also the EOQ will help in knowing the optimum quantity to order that will minimize the carrying cost.

3. Price optimization system

POS is refers to the process of computing or determining the prices of services & products. That will consumer willing to pay. Proper optimization price of product increases the sales & it also increases the customer satisfaction. And POS is one of the essential systems that assist the management in making the prices of products.

Essential requirement of POS for Astra Zeneca

It is required by Astra Zeneca in determining the products price by considering the expenses incurred in manufacturing the product & the demand of product in the market.

Benefits of POS for Astra Zeneca

By analyzing & determining the price of product, the organization can easily earn the better margin in products.

All the above three management system report helps the Astra Zeneca to control the organization for ex. IMS helps to control the inventory level or production of the business and POS helps to control the prices of business and the JCS helps to control the cost incurred in specific job.

Types of management accounting report

1. Job costing report – The JCS is prepared by the top level management of an organization & the objectives of preparing this report is assigning the cost incurred in manufacturing the product & the cost of particular product. This reporting technique helps in segregating the cost in each job so that the deviation for every part. For example: As AstraZeneca takes in accounts various job heads to produce a unit. As Labor expenses for a unit $50 and expenses for machine usage came out to be $21.

2. Budgeting report – The budgeting report is prepared by management of organization that focuses in estimating the sales production, cost of products and other information related with manufacturing the product. Budgets are prepared on the basis of the past records which help in smooth functioning of the company and the management. For example: forecasted expenses related to depreciation will amounts to $200 annually. Also, sales are estimated to be $28000.

3. Debtor ageing report – The Debtor ageing report is refers to the report that is prepared to find out the unpaid balance of invoices and the duration of those unpaid invoices and it also includes the amount of cash collected from debtors. It is useful of organization in ascertaining the bad debts amount of debtors. This report will help in planning the business activities depending on the time taken by the debtor. For example: if the debtors takes 50 days to pay back then the companies will plan its advertising expenses according to it and if debtors delaying in paying back then the company’s responsibility is to recheck the debit policy.

Integration of MA reports with the Astra Zeneca

Report type	Integration
Job costing report	There are various cost incurred in manufacturing the product and that is divided with the basis of job done by specific person.
Budgeting report	Planning & strategies are prepared on the basis information of budgeting report.
Performance report	The performance measurement outcomes can be ascertained for the year.
Debtor aging report	The total unpaid invoices and total bad debts from debtor can be computed with this report.
Manufacturing & stock report	Production level of company can be determined.

LO2 Profit and loss statement

Absorption Costing

Absorption costing is a method of costing that is used for calculating the profit of the manufacturing concern in their production process. In this method absorption cost statement is prepared, in which different costs such as prime cost, factory cost and selling & administration cost is calculated and total of these three costs is called the total cost. This total cost is deducted from the revenues generated from the sale of the products and profit is calculated. In this method the variable cost is absorbed on the produced units only. And the fixed overheads and fixed cost is also absorbed on the units which are produced in the financial period. The Fixed overheads are apportioned on the various type of products and levels which are included in the manufacturing process and these are charged from the revenues on the basis of units produced only. In this method fixed cost per unit is also calculated (Bragg 2019).

Advantages:

• The absorption costing method is GAAP compliant and it is also recognized by ASG (UK) for inventory valuation and preparing financial reports.

• The profit which is calculated in this technique is more accurate as the fixed cost is charged as per the production units (Freedman 2019).

Limitations:

• The understanding of this method is more complex and therefore the management of AstraZeneca faces some difficulties in understanding the workings.

• This technique requires more research and therefore it is more time consuming.

The calculation of profit of AstraZeneca as per Absorption Costing

Absorption Costing
Particulars	Amount	Amount
Sales	23565	23565
opening inventory	2890
Variable cost :
Direct material	3299.1
direct labor	2167.98
variable production overheads	2356.5
Fixed cost:
fixed production overheads	2818.585
Less: Closing inventory	3193
Gross profit		10339.17
selling and distribution overheads	1603
administration overheads	2192.134
selling and distribution overheads	1252.015
Net profit		19488.57

Assumption:

Variable cost is 40% of total sales

• Direct labor=23%

• Material= 35%

• Production expenses= 25%

Fixed cost is 30% of the total sales

• Production= 45%

• Administration= 35%

• Selling= 20%

Selling price= £10

Production units = 23565+closing stock- opening stock= 2659.5

Marginal Costing

Marginal costing technique is known as variable costing. It means the cost which is incurred to produce a new unit. Marginal costing helps in CVP analysis and it enables AstraZeneca to calculate P/V Ratio, BEP and Margin of safety to analyze the future events and helps in preparation of budgets and decision making. In marginal costing, the fixed cost element is deducted on the basis of time, the whole amount of fixed cost is charged against the revenues and profit is calculated accordingly (Acoma 2017).

Advantages:

• The calculations are easy to calculate, and the management of AstraZeneca Ltd. is able to understand the calculations.

• The fixed cost of the current period is charged fully from the revenues of current period and therefore the comparison of cost becomes easy (Acoma 2017).

Disadvantages:

• This method is not able to provide the analysis if the company has many vertical products, it is useful only in case of single product.

• It does not take in to consideration the time factor, comparison between of two mutually exclusive projects which have different time period is not possible in this technique.

Calculation of Profit of AstraZeneca as per Marginal Costing

Marginal Costing
Particulars	Amount	Amount
Sales	23565	23565
opening inventory	2890
Variable cost :
Direct material	3299.1
direct labor	2167.98
variable production overheads	2356.5
fixed production overheads	3181.27
Less: Closing inventory	3193
Gross profit	10701.85	10701.85
Variable selling and distribution overheads	1603
Fixed administration overheads	2474.32
Fixed selling and distribution overheads	1413.9
Net profit		19932.64

Reconciliation

The profit calculated as per marginal and as per absorption is different; this is due to the inclusion of fixed cost element in the opening and closing stock and therefore reconciliation statement is prepared. The reconciliation for the difference between marginal and absorption is done below.

Reconciliation statement
Particular	Amount
Net profit as per Marginal costing	19932.64
Less: Fixed cost as per closing stock	444.071
net profit as per Absorption costing	19488.57

Recommendation for the company

The marginal costing technique is also used in CVP analyses. With the help of this statement and it can also make decisions regarding the breakeven point, margin of safety, etc. But the income statement as per absorption costing is more recognized and it is also accepted by the regulatory authorities for reporting and valuation purposes. Therefore it is advisable for the company to use absorption costing for reporting purpose and it can also use marginal costing for decision making purposes.

From the preparation of income statement by marginal and absorption costing it can be said that the net profit as per marginal costing is $19932 and from absorption costing is $19488. Therefore the balance of closing inventory with respect to fixed cost is $444.

LO 3 Planning tools

Different kinds of planning tools are as follows:

1. Budget

Budgeting can be understood as the process related to planning about the spending of the money. This spending plan is known as the budget. Creating of the spending plan would allow you’re for the advance determination whether the firm would have the enough amount of money in the future or not.

Types of budget

There are different kinds of budget which can be explained as follows:

Zero based budget

This is the budgeting method under which all the expenditures are justified regarding the new period. Under this the zero is taken as the base and each of the function of the company are measure for the costs and needs (Sandalgaard and Bukh, 2014).

Advantage

• This method helps in the efficient allocation of the resources department wise.

• This method can provide more accuracy in results as compared to others as this involves relooking each and every items of the cash flow.

Disadvantage

• This is a time consuming method as compared to other methods

• There requirement of the high manpower under this method (Sandalgaard and Bukh, 2014).

Incremental budget

This is also the traditional budgeting method under which the budget is prepared on the basis of budget of the current period or actual performance as the base under which the incremental amount are then added to the period of new budget.

Advantage

• This method makes sure about the continuity of funding for the departments

• The impact of the changes can be seen immediately (Rossi, 2014)

Disadvantage

• Lack of innovation and there is no cost reduction for the managers

• Encourages the higher amount spending for the purpose of obtaining the favorable variances

Rolling budget

This budget involves continuous update towards the new budget period after the completion of recent budget period. Rolling budget involves the incremental extension of the present budget model. Business have always got the budget that extends one year towards the future.

Advantage

• Usage of this budget reduces the risk related to errors from the prediction

• This method forces the managers to do the review of the budget in a regular manner (Rogulenko, et. al., 2016)

Disadvantage

• This method have less focus on the core operations of the firm

• This method is highly expensive and time consuming method

Benefit to the organization

The budgeting method can be helpful in steering the organization on the original financial strategic path and for the purpose of observing which can benefit during competing on costs. Through this organization would be able to anticipate about the future expenses and in accordance to that firm would be able to control their expenses which can assist in progress in the business operations.

2. CVP analysis

This method can be used for the determination of how the changes in the expenses and the volume can impact the operating income of the company. For doing this analysis many of the assumptions can be made which includes the sales price per unit, variable cost per unit and the constant fixed cost (Rogulenko, et. al., 2016).

Advantage

• This can help the managers of firm in finding the breakeven point

• CVP analysis can be used for the evaluation of the investment proposals

Disadvantages

• This method limits the multi product operations

• Proceeding with method can have the chances of error

3. Variance analysis

This involves the study related to deviations of the actual behaviors as compared to the planned behavior in the management accounting. This method is concerned with how the difference related to planned and actual behavior showcase the impact on the performance of the business (Siyanbola and Remo, 2013).

Advantages

• This can be helpful for the managers in making efficient, detailed and forward looking the budgetary decisions.

• This method facilitates the assigning of the responsibilities and engagement of the control mechanism on the departments

Limitations

• Factors are not analyzed in detailed manner

• Reduce accuracy in decision formulating process

Benefits to the organization

With the help of the CVP analysis organization would be able to know the point up to which there would be no profit and no loss and on the basis of this they can decide about improving the production and sales of the company to get the good profits.

LO 4 Comparison among two organization

Financial problems faced by AstraZeneca

• Insufficient working capital

• The firm have faced the issue related to mispricing

• Firm have got good amount of sales but the profits are less

• Late payment of bills

Financial problems faced by GlaxoSmithKline

• Firm have faced the issues regarding mixing of the personal and the business expenses

• Firm have faced the issues not paying the bills on time

• Firm is unable to raise the enough amount of capital

• Firm have got the problems related to management of inventories (Li, et. al., 2013)

Comparison among the two firms for using the management accounting methods for solving the financial problems

Benchmarking

AstraZeneca is using the Benchmarking method for gaining the independent perspective regarding how well the organization is performing as compared to other organization. Through this method firm is able to drill down into the performance gap by which they are able to find the areas for improvement.

GSK is making use of the financial benchmarking by which they are able to compare the financial analysis under which they are able to make the comparison with the results in such a manner that complete productivity in the firm can be achieved (Li, et. al., 2013).

KPI

AstraZeneca is using the KPI for the objective of the performance visibility under which actual metrics can be visible to all such as the scores displays who is and more specifically who is not performing.

GSK is making use of the KPI for the objective of improving the decision making in the organization as through this method company is able to make the quicker and informed decisions on the basis of the factual data by which the firm is able to solve the financial problems of the business (Kumar, et. al., 2018).

Balanced scorecard

AstraZeneca is utilizing the balanced scorecard for the purpose of better strategic planning under which they are able to get the powerful framework for the purpose of building and for the communicating strategy. Balanced scorecard helps the firm in giving the strategy map by which managers are able to think about the cause and effect relationship.

GSK is using the balanced scorecard for mapping their initiatives and projects towards the different strategic goals of the organization which assist in making sure that the projects are tightly focused towards getting the strategic objectives (Kumar, et. al., 2018).

ABC costing

ABC costing method is used by the AstraZeneca for the accurate product costing as the ABC can bring the accuracy and reliability towards the costing of the product by targeting the cause and effect relationship.

GSK is using the ABC for improving the decision making in the managers as the firm is making use of the more reliable cost data of the product. Through the ABC costing they are able to fix the prices related to the product.

Financial governance

AstraZeneca is using the financial governance for the identification of the risks in a faster manner as the financial governance can help the firm in signaling the business risks (Silva and Borsato, 2017).

Whereas GSK is using the financial governance for getting more accurate information which helps them to make accurate plans, budgets, models and the forecasts through the financial objectives of the company are achieved and the financial issues are solved.

Comparison among the two firms for using the management accounting systems for solving the financial problems

Cost accounting system

AstraZeneca is utilizing the system of cost accounting for the purpose of valuation of inventory under which accumulation related to cost of inventory is made for the objective of financial reporting.

In case of GSK, they use cost accounting for the trend analysis under which cost are tracked on the line of trends for the objective of discovering the costs.

Inventory management system

AstraZeneca is using the inventory management system for the objective of service management as they can make use of the inventory management software by which they would be able to track the expenses related to material they utilizes for giving the services (Low, et. al., 2019).

GSK is using the IMS for the product identification under which a barcode reader is utilized for the objective of reading barcodes and getting the information regarding the products. The firm is also using the RFID tags and wireless method for the identification of the products. And in this manner they are able to solve the financial problems.

Sustainable success

The sustainability goal of the AstraZeneca is to make use of the capabilities for the purpose of most meaningful impact where the society requires. In the organization the staffs are united by their desire for pushing the boundaries related to science for the delivery of the life changing medicines. AstraZeneca is able to get the sustainability with the help of the science based innovation. The sustainability strategy of the company have been built around the three pillar under which health is given the first priority. The firm have got the 81000 and more healthcare workers who are well trained, 62% of the total electricity which is generated in the organization is through the renewable sources, 45.4 % of the senior and the middle management roles are held by the women in the firm, around $ 15.5 million have been invested into the environmental efficiency project and this way the firm is able to achieve the sustainable success (Lindberg, et. al., 2015).

Conclusion

The report was about the knowledge regarding the implementation of the management accounting system and its benefits to the AstraZeneca. Types of the MA system have been explained like the cost accounting, Job costing system, inventory management etc. several kinds of the reporting system have also been explained which can assist the firm. Case of smoothies was discussed for understanding about the practical parts which involves profit or loss from the absorption or the marginal costing and also the understanding related to the break even analysis. Discussion were made on the several kinds of the planning tools like the budget, variance analysis and the CVP analysis. At the end of the report comparison were made among the two firms with respect to the use of management accounting system for solving the financial issues and for attaining the sustainable success.

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