Management Accounting

Activity Based Costing

Activity based costing is the method of assigning the overhead and indirect costs starting from salaries and utilises to the products and services. It is mainly a system of accounting the cost, based on the internal activities which are any events, unit of work, tasks etc. to achieve the ultimate aim. The Activity based costing mainly provides a more accurate method of products or service costing, leading to accurate pricing system (Cooper and Slagmulder, 2017). Hence, the corporate leader focuses on the Activity based costing in order to identify different cost factors in producing a particular product or providing an efficient service to the ultimate users, it increases the efficiency of the financial management team to provide clear and concise information about each factors of production and manufacturing by detail discussion about the expenditure on different factors such as employees salary, incentive, utilises, overhead cost, administrative expenses and other indirect costs (Childers and Maggard-Gibbons, 2018). It further raises the understanding of overhead and cost drivers to analyse the factors of expenditure and also eliminate the unnecessary costs in the organisation. Hereby, the aim of using Activity based costing is to increase efficacy in budgeting system and developing clear expenditure and cost structure for better financial management and arranging capital for further investment.

The major process of identifying the Activity based costing is such as,

Exploring the organisational products and services for starting analysing the existing factors

Identifying the activities and activity pool related to the products and services

Directly tracing or estimating the costs of each activity and cost objectives in the firm

Assigning the costs and activities pool successfully

Calculating the activity cost drivers role in the production and manufacturing in the firm

Assigning the cost to cost objectives including direct and indirect costs

Proposing the reports successfully by computing the total cost of the products by adding all the direct and indirect costs assigned to the

products

These are the major activities through which it is possible to calculate the Activity based costing and assess the internal process and existing factors for assessing the direct and indirect cost associated with the products and services. For implementing the Activity based costing in the organisation, it is essential for the managers to identify the activities of calculating overhead cost. For example, in order to manufacture the clothing products in the clothing manufacturing brand in the UK, it is important to identify the activities associated with the production of the clothing (Childers and Maggard-Gibbons, 2018). The activities in this regard are such as machine set up in the firm, quality inspection, sourcing the quality raw materials including the organic clothing materials, cotton or synthetic materials, as well as the other activities are production order management, hiring the workers and calculating the machine hour worked in the firm to produce the clothing, managing the supply chain for sourcing the quality raw materials and also material receipt and distribution management. These are the total activities to produce the quality clothing and deliver it to the ultimate users across the market. the costing of all the activities through direct and indirect costs are calculated well in order to support the entrepreneurs to manage their costing and arrange capital as per the production and manufacturing units in the firm to serve the customers proficiently (Maelah et al., 2017). Hereby, through this systematic way, it is possible for the organisations to calculate the activity based costing in order to analyse the production and manufacturing activities strategically and maintain its economies of scale in long run so that the firm can maximise their profitability by cost leadership techniques.

For accounting management, the activity based costing is hereby beneficial to identify the direct and indirect costs of the production and manufacturing activities in the organisation, where the corporate leader explores different activities related to the production and manufacturing of the company to calculate total cost of producing the quality products.

The above mentioned table is the example of the activity based costing, where the corporate leader is able to review the activities which are essential to manufacture the product A. the major activities involved to produce the product A are such as Purchase orders, machine set up, product packaging, machine testing and calibration as well as maintenance and cleaning. As per the unit cost, the total cost of each activity is calculated as per the activity based costing. After that, the total cost of producing the product A is calculated. Hence, the activity based costing is beneficial to identify the existing activities involved in manufacturing the product A and it also provides a scope to the corporate leader ton choose the best methods to product the product so that the quality of the products or services can be maintained (Plowman, 2017). Hence, the activity based costing is beneficial to differentiate the direct and indirect costs, calculate the overhead costing and compute the final costing of the products which helps in pricing strategy of the organisational products.

Balanced scorecard approach

Balance scorecard is a strategic management performance metrics that is utilised by the multinational corporations in order to identify and improve their overall performance by improving operational activities to achieve the organisational specific aim and objectives. It is considered as an integrated system of gathering vast range of information related to the business and it further provides an opportunity to the organisational leader to analyse their operations and review the organisational data for making the best solution to the business. Hence, it improves the efficiency of the organisation and also provides a scope to the management team to improve their performance as a whole in long run. Better strategic planning is hereby the benefit of balance scorecard where it is a powerful framework for building and communicating tactics to run the operations strategically (Marimin, Wibisono and Darmawan, 2017). Better management of the information and organisational resources are also possible through this approach, where the managers and leader can review the performance and reallocate the resources for achieving the strategic objectives. Improved performance reporting and budget management are also possible through this strategy where the firms are trying to review their performance and choose the best way to maximise the performance of the employees. In this regard, the organisations try to maintain transparency and accountability in sharing the information and communicating with other stakeholders of the firm in order to choose the best solution for the business (Marimin, Wibisono and Darmawan, 2017). It is also utilised for analysing key performance indicators of the firm where the organisational corporate leader can develop balance scorecard approach and annual report for reviewing the organisational values and market presence, which in turn influence the managers to strategies their business operations creatively for achieving the firm’s objectives.

There are four perspectives of balance scorecard approach, which are finance, customers, business process and learning and growth. These are considered as the key performance indicators of the firm, where the corporate leaders review the performance of the organisation through financial data analysis, budgetary analysis, customer values creation, business internal process generation and innovation as well as the learning and growth opportunities for the stakeholders (Manville et al., 2019). These four perspectives of balance scorecard are hereby mandatory to be analysed well in order to review the firm’s position in the market and strategies the whole business innovatively to meet the ultimate goal (Tsai et al., 2020). The major advantages of balance scorecard approach are such as enhancing firm’s performance, reviewing the financial data for arranging more capital to invest in the business, customer’s relationship management and operational efficacy. Through balance scorecard approach, it is possible to review the financial data and also the customer’s retention in the firm, which further help the business head to develop strategic planning for enhancing their performance and strengthen the customer’s base in long run. Additionally, the business operational efficacy can be ensure through balance scorecard approach, where the organisational leader is able to review their internal process of operation in the market as well as develop creative ideas to run the business operations successfully (Manville et al., 2019). Moreover, the balance scorecard approach provides a scope to improve the learning and developmental activities which increase employees abilities to contribute proficiently in order to achieve the organisational objectives. Hence, strategic planning and enhancing organisational creativity and innovation are possible through this approach where the employees are supported with organisational resources and continuous guidance to work successfully and meet the company aim.

For example, Tesco is a British multinational groceries and general merchandise company, providing the best quality products and services to the customers. The company is successful to gain high market share and strong competitive advantage as compared to other retail firm’s operating in the UK and also across the international markets. Through balance scorecard approach, it is possible to analyse four perspectives such as customers, finance, organisational operations and learning and growth in the context of the firm Tesco (Tesco, 2021a).

Finance

Group sales of Tesco have been increased by 7.1% in this year where the sales volume was £53.4bn. Additionally, retail free cash flow was £1,187m and group operating profit is £1,815m (Tesco, 2021a). Due to this pandemic situation, there is slowdown of the operating profit and cash flows, however, the firm is efficient to diversify their activities and serve the customers through online mode, for which the overall sales volume of the company has been increased during this pandemic situation (Tesco, 2021b).

Customers

The customer's base of Tesco is strong and the brand has the capability capacity for online shopping to 1.5 million slots a week in the UK, and also Tesco supported more than 850,000 vulnerable customers on an urgency basis. Hereby, the strong customer’s base and meeting the customer’s preferences are the major focus of the company to gain high market share. There are diverse products and services of Tesco through which they try to help the customers for choosing their necessary products at affordable price. The company is holding 42.3% of the market together as of May 2021 (Tesco, 2021b).

Operations

As per the operational activities, the firm is successful to create values for the stakeholders including employees, suppliers, shareholders and social communities as a whole. For example, the organisation provides £5bn to shareholders via a special dividend and makes a one-off £2.5bn contribution to the pension scheme. For running the business systematically, the organisation focuses on technological innovation where through company website, the brand is able to handle the online shoppers and deliver the quality products at their place within effective time (Tesco, 2021b).

Learning and growth

There are more than 360,000 colleagues working to serve millions of customers, where the organisation focuses on providing them the opportunity of learning and growth. The internal learning process through training and development and workplace or on the job training facilities further enhance employees capabilities and improve their knowledge to serve the customers innovatively. Hence, the organisation is successful to manage the learning and growth in the firm for supporting their colleagues and leading them towards achieving the future success (Tesco, 2021b).

Through this analysis, it can be stated that, the balance scorecard approach is beneficial to review the organisational activities and evaluate the creative business strategies of Tesco for running their operations efficiently, so that the company can meet its vision of serving the customers and becoming the high valued firm in the global retail industry.

Budgeting in management performance

Budgeting is the process of creating a good plan for spending money to get higher return on the investment. The spending allows the business head to invest in the creative business planning to generate profitability and effective budgeting system provides a scope to the organisational corporate leader to develop financial accounting to manage cash volume and invest adequate capital for business expansion (Ho, De Jong and Zhao, 2019). Hence, there is great role of budgeting in management accounting and also in the business context where the firms are able to reallocate their cash volume and capital for further investment. Lanning oriented budgeting is beneficial to develop short term, day to day and long run business process by arranging capital. It is a major aim of budgeting in the company, where the corporate leader aims at managing their financial accounting system through developing budget (Maheshwari, Maheshwari and Maheshwari, 2021). It is possible to include the cash flows, expenditure and expected return on the investment, where the financial head ties to develop budget by calculating these factors. It is hereby beneficial or the corporate firms to identify he cost structure and also analyse the future expected return on capital investment. Through this approach, profitability can also be calculated, where the main focus on the brands is to maximise profitability by budget management process. Hereby, the budgeting process is also advantageous for the firms to manage their profitability and control their cash flows through cost management. The financial position of the firm can also be maintained through budgeting and it further provides a scope to the organisational head to improve their cash flows and return on the investment for managing the stakeholders of the firms (Ho, De Jong and Zhao, 2019). Hereby, financial gain and loss can be evaluated through budgeting process where the firm can strategize their business process and improve their financial position in long run.

In addition to this, the other benefits of budgeting are such as funding planning, performance evaluation and cash allocation. These are also major advantages of developing budgetary form where the organisational leader tries to arrange funding for further capital investment. Structured budget is helpful to derive the amount of cash that will be spent on the organisational operations. This information is further utilised in funding needs of the company and restructure the investment plan for future company growth. Cash allocation is another advantage, where the cash flows and managed well in the firm (Ostaev et al., 2019). There is limited cash available to invest in the fixed asset, working capital and in this regard budgetary practice enhances the management accounting process for reallocating the cash available in the company to meet the strategic aim. Performance evaluation is also possible through budgetary activities where the employees set goals in the budgetary period to contribute positively in the organisation so that the financial position of the firm can be maintained (Maheshwari, Maheshwari and Maheshwari, 2021). The bonus and incentives of the employees also depend on the budgetary system and performance of the staff where the workers try to work innovative and reductively to gain higher incentives in a budgetary period of the firm. Hence, budgeting system is beneficial for managing the accounting of the business and it also influence the managers to generate the sense of causing in working efficiently to meet the strategic objective. It also guides and supports the managers to reallocate the organisational resources and cooperate with the employees for further utilisation to create values (Ostaev et al., 2019). The budgeting process provides a means of controlling income and expenditure, and thus it gives an opportunity to the organisations to control the cost structure and adopt cost effective production model to maximise their profitability. It redefines the business objective and continuously guides the strategic management team with adequate data and financial information for developing creative strategies to run the business uniquely (Mauro, Cinquini and Pianezzi, 2019).

Moreover, the budgeting system is playing a crucial role to set up a standard costing system as well as the cyclical and seasonal fluctuations of the industry can also be stabilised through the budgeting process. Hereby, it enhances the credit worthiness of the organisation through adequate finance and it further increase the organisational values and share price of the firm in long run. The budgeting system in management accounting also ensures availability of adequate working capital and control the capital expenditure in a profitable way which in turn facilitates the strategic planning of the managers to run the business successfully (Mauro, Cinquini and Pianezzi, 2019). Through the budgetary control system, the national economy is also improved by providing more employment opportunities, avoiding wastage and utilising the resources and capabilities in the economy (Ho, 2018). Accurate forecast of the customers demand and measurement of the performance of the organisational departments are also possible through budgetary control method and it also encourages the competitiveness of the firm to generate revenue and provide high return on the investment of the stakeholders. Budgeting process hereby empowers the management to decentralise obligations without losing the business control and it also creates an environment for the business to become profitable and gain high markets share in long run.

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Reference List

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