Tesco Plc Key Techniques and Methods of Management Accounting - Case Study Example

1. Introduction Tesco Plc is one of the leading hypermarkets in the world, and the company’s largest market is the United Kingdom. It offers enormousrange of products like food and clothing in their general merchandising, and other non-food lines like banking and personal finance. The company also gives higher interest in digital marketing activities through its subsidiary, Tesco.com. Today, the company is operating in 13 markets outside UK namely: US, Ireland, Czech Republic, Poland, Hungary, Slovakia, Turkey, India, China, South Korea, Japan, Thailand, and Malaysia. Its global competitors are Wal-Mart (US), Carrefour (France), and Metro while its domestic competitors (UK) are Asda, Sainsbury, and Safeway. Tesco has been more profitable both in global and domestic market because of its powerful force like one-stop shopping and marketing mix expenditure. Globally, it is the fourth-largest retailer and the second profitable retail chain (Deloitte, 2010, p.19). Despite of recession Tesco is doing even better, in fact it managed to cut its price and offered-money off as part of its strategies. This promotion has paved the company to a larger increase in sales volume, increase in profit margin and most of all, it gains the biggest market share in UK with about 30% (Finch, 2010). Tesco has been a successful corporation because it knows how to deal with its management accounting system. However, it has been thrown with so many criticisms in terms of its unjust practices with its suppliers. The main thrust of this paper is to explain how management accounting can supply information to assist the management of Tesco, particularly the key techniques that are favourable to the company. 2. Review of Management Accounting According to Horngren, et al., (2007, p.5), management accounting is the “process of identifying, measuring, accumulating, analyzing, preparing, interpreting, and communicating information that helps managers fulfill organizational objectives.” It is also one of accounting’s specialties whose nature has changed and expanded overtime, and its scope has been wider. Management accounting is mostly associated with information, and this information is particularly available only to those in managerial position (Coombs, et al., 2005, p.10). Every now and then, the interest for management accounting is increasing because it does not only deal with record keeping but in a much broader concept of decision making process. It is closely related with the internal structure of an organization with a purpose to overcome inefficiencies. Management accounting and financial statements are different in various ways and the most common is the nature of its usage. Unlike the financial statement, the outcome of management accounting is not intended for the stakeholders of the organization; however, it is solely designed for managers for them to be more equipped in their management and control functions as well as to serve organizations internally. Also, it does not rely on historical data because its approach is futuristic and forward looking. According to Chadwick (1993, p.1), the role of management accounting is to “provide relevant information which will assist management with decision-making, planning economic performance, controlling costs, and improving profitability.” Because it is more concerned on the organization’s internal structure, its process is focused on the areas of finance organization and business team. It is a dual reporting relationship which indeed is significant to the business. In order for management accountants to successfully play their role they are allowed to use the various management accounting techniques. Such key techniques include financial accounting, cost accounting, financial management, analysis of financial statements, cost control techniques, management information system, statistical analysis, and inflation accounting (Rao, 2003, p.13). 3. Analysis: Key Techniques and Methods of Management Accounting Assisting the management in decision making is a crucial role of a management accounting system because decision sometimes produced different actual outcomes from the predicted. However, with the aid of different management accounting techniques, roles will be supplemented. The long-standing criticism that levelled at Tesco is the issue on how it dealt with its suppliers. Tesco had been alleged for discrimination against their suppliers and for threatening them to be delisted from their suppliers’ lists if they did not cut prices. Therefore, a financial management technique (decision accounting) particularly a sensitivity analysis is applicable to this risky situation. Even though the issue has been denied by Tesco and claimed that they are having good relationship with their suppliers, the criticism has been intensified. That is why the company needs to set investment decisions and applied variety of planning activities to counter the issue. Through the help of sensitivity analysis, the decision maker will have the chance to examine the outcome and each of the sensitive factors individually (Atrill & McLaney, 1994, p.106). Armed with all the needed information, the company will be able to come up with a decision whose events are within its control. For instance, Tesco can have a price rates agreement with its suppliers or perhaps an advanced order to prevent the danger of higher rates in the future and to warrant that the estimated and actual material price are the same. Another technique favorable to Tesco is the cost or budgetary control. Activity based costing (ABC) is a traditional approach of budgetary control that fulfilled cost efficiency, quality improvement, and maximizing resources (Baker, 1998, p.1). Unlike financial accounting, generally accepted accounting principles are not applicable to this technique because it uses information from different disciplines and not to any particular set of rules. The concept of this technique provides information for cost and performance measurement that is very significant in making decision. Tesco needs to consider this technique because the data that are being served are useful to their ongoing improvement programs such as lean management, operational improvements, product rationalization, supply-chain optimization, etc. This technique also accomplishes the elimination of various imperfections in organizational activities. According to Tooley and Dingle (2004, p.30), ABC is “particularly applicable where competition is severe and the margin of selling price over manufacturing cost has to be precisely determined.” For example, competition around Tesco is very intense and they are losing their market share, this technique will give Tesco an ability to control their operating costs, and priced their products competitively. Furthermore, Tesco could also consider the variable and absorption costing techniques to support the results of ABC. The company could preferably used variable costing for it is a profit maximization variable that only identifies variable costs, e.g. direct material and labour. On the other hand, analysis of financial statement technique particularly the use of ratio analysis is not applicable to the company. The data available in the financial statements are subject to various limitations such as wrong entry of data, and even though the change is very slight the effect is enormous to ratio analysis (Mittal, 2007, p.49). And so, the company cannot entirely rely on the results as well as on the ratio interpretation that is not appropriate to all firms and to all circumstances. Furthermore, the idea of using historical data in computing ratios does not coincide with the futuristic approach of management accounting. Likewise, standard costing and variance analysis are also not recommendable to Tesco. The primary reason is the use of historical data or past costs which are not reliable the moment changes will occur. The nature of these techniques “allows managers to compare present performance with past results” (Armstrong, 2006, p.378); however, for management accounting, the past will not determine the future. For example, Tesco has shift their growth strategy from product oriented to customer satisfaction. With this fact alone, it is very obvious that the company needs a new set of information because if they will continue to use past records they will be misguided and the actual results could be worse than the expected results. 4. The Strengths and Weaknesses of the Analysis In order to make the change successful, there should be a further market research in all of the concerned areas to gain greater insights. All of the company’s stakeholders must be subject for investigation because a myopic focus will only lead to unreliable conclusion. Having an accessed with the company’s financial accounts, cost accounts, and ongoing improvements, the analysis has been fairly deliberated. However, all these information have limitations, and there are also instances that the data are historic and not futuristic. To be considered secured in terms of making an analysis and assessment, the information must in a forward-looking approach. A futuristic approach will determine if the actual results are better than what is expected or it could be worst. To improve this analysis, Tesco must be evaluated in comparison with its strongest direct competitors. The company’s market position, market offers, competitive advantage, and resources are the variables that need to be defined to come up with a more reinforced analysis. In this way, fundamental elements that need to be worked around or overcome will become more transparent. 5. Conclusion The success of Tesco in retailing industry particularly in UK has determined its effectiveness in branding and service delivery. The management accounting system of the company has served its purpose especially in controlling the operating costs and improving profit margin. The different key techniques are all significant to the company and matters only on the purpose of its usage. Futuristic approach is what the company needs considering the rapidly changing business environment. In order to be sustainable, Tesco needs to expand its strategies and diversify the existing through the aid of management accounting techniques. References Armstrong, M., 2006. A handbook of management techniques: a comprehensive guide to achieving managerial excellence and improved decision making. 3rd ed. UK: Kogan Page Ltd. Atrill, P. & McLaney, E., 1994. Management accounting: an active approach. MA, USA: Blackwell Publishing. Baker, J.J., 1998. Activity-based costing and activity-based management of health care. Gaithersburg, Maryland: Aspen Publishers Inc. Chadwick, L., 1993. Management accounting. London: Routledge. Coombs, H. Hobbs, D. & Jenkins, E., 2005. Management accounting: principles and applications. London: SAGE. Deloitte, 2010. 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