Green Retailing A New Paradigm in Supply

Question: Discuss about the Green Retailing for A New Paradigm in Supply. Answer: 1. The Company in focus is Sainsbury Plc. Sainsbury is one of leading supermarket chains in the retail sector of United Kingdom. Management accounting is carried out in a dynamic organization to separate the financial functions from the decision-making functions. Management accounting is crucial for any organization to operate with quality and timelines (Demski 2013). However, in this case, Sainsbury being a retail organization deals in management accounting to cope with the external pressures from stakeholders and other interested groups (Adhikari, Biswas and Avittathur 2016). The importances of management accounting in Sainsbury are given as the following. Sainsbury has an effective management accounting system that provides high quality as well as timely information to the relevant people of the organization. Sainsbury has an effective management accounting system that provides high quality as well as timely information to the relevant people of the organization. Sainsbury keeps a track of its assisting managers in directing and controls the operational activities due to management accounting. Management accounting adds value to the retail organization by measuring the performance of the managers on a timely basis. Sainsbury management performance helps in raising the funds in the most suitable manner (Hope and Fraser 2013). The role of accounting policies has played an embedded decisional sustainability at all levels of management in Sainsbury. The management decision making has helped the organization in underlying motivations for corporate, social and environmental reporting (Epstein and Buhovac 2014). Financial accounting differs from managerial accounting based on the representation of the external and internal environment of the organization respectively. However, financial accounting depends on the company whole and its structure. It provides the information relating to the financial position and financial performance of the company (Taipaleenmki and Ikheimo 2013). On the other hand, managerial accounting, also known by analytical accounting' measures, collects, transmits and processes the information for planning. Moreover, it helps in preparing and analysing budgets for internal reports (Kaplan and Atkinson 2015). 2. Cost accounting is based on the systematic analysis of the recording of expenses to determine the cost of each product or service provided by the organisation. Cost accounting is beneficial for the management to fix prices, economise on costs, and maximise profits (Drury 2013). However, classification of costs will enable to provide effective control over decision-making. The different types of cost classification are: By time (Pre-Determined and Historical) Historical costs are determined when the production of a product is done to verify concerning actual operations. Pre-determined costs are based on the specification of all factors based on estimated costs and standard costs. Nevertheless, standard costs are entered with caution as compared to estimated costs (Kiney and Raiborn 2012). By nature or elements (Material, Labour and Expenses) The material is the substance used for the product. However, material costs can be direct and indirect. The direct material will be the cost of part of finished goods observable to its units like components purchased, primary packing, etc. The indirect material is used in ancillary production assigned to specify the physical units such as oil, stationary material, convenient stores, etc. (Needles and Crosson 2013). Labour cost can be distinguished from direct labour and indirect labour. Direct labour can be defined as the wages to labour whereas indirect labour is the labour employed in carrying out a particular task such as wages of the foreman, supervisors, inspectors, etc. (Drury 2013). Expenses can be of two types- direct expenses on specific cost units like design and drawing, hiring of employment or any tool, fees paid to consultants, etc. and indirect expenses that are not directly allocated to cost centres like rent, taxes, insurance, lighting and heating, depreciation, etc. Figure 1 below will depict the various elements of cost. Figure 1 Various elements of Cost Source: (ICSI 2014) By degree of traceability (Indirect and Direct) Indirect costs also known by common costs are difficult to trace to a single product while direct costs are traceable to a single, or a costing unit is taken for some activity. Indirect costs can be the costs incurred in the powerhouse whereas, regarding the product concerned in the powerhouse, the supervisory salaries and fuel cost are direct costs (Su 2013). Association with the product (Period and Product) Period costs are the costs that are used for running the business like rents, salaries, selling and administrative costs, etc. Product costs, on the other hand, are products that are included in inventory values like direct labour, manufacturing overheads, etc. (Drury 2013) By function (Administrative, Selling, Pre-Production, Manufacturing and Research and Development) An organization performs some functions. However, Table 1 will classify functions of costs. Functional Costs Purpose Administrative Costs Indirect costs are the costs that cover expenditures on formulating policy, controlling the operations and directing the organization. Distribution and Selling Costs They are the costs that are part of the overheads of a production unit. They are variable in terms of sales commissions and fixed regarding transporting articles to local or central storage. Pre-Production Costs The costs incurred of the trial runs for starting up a new product or a factory. Manufacturing Costs Expenditures incurred for the manufacturing division on direct materials, labour, expenses, packing, etc. Research and Development The costs incurred on the new products, process, or insights by experiment and executing results on a commercial basis. Table 1 Functional Costs Source: (ICSI 2014) Association with accounting period (Revenue and Capital) Capital and Revenue are based on the future period and current period respectively. However, costs for the future period are treated as an asset whereas costs on current period are treated as an expense (Damodaran 2012). By controllability (Non-controllable and Controllable) Controllable Cost is the cost that can be controlled by the budget holder whereas uncontrollable cost is not subject to any supervision by the managers (Kaplan and Atkinson 2015). By changes in volume (Variable, Semi-variable and Fixed) Variable costs are those costs that are related directly and proportionately with the output such as direct materials or labour corresponding to the level of outputs whereas semi-variable costs are those that contain both fixed and variable costs like depreciation (Drury 2013). Fixed costs, on the other hand, are the expenses paid by the organization irrespective of any business activity. However, these costs arise with the passage of time like rent, salary, insurance, etc. (Rumble 2012). The fixed, semi-variable and variable cost can be depicted in Figure 2 below. Figure 2 Fixed, Variable and Semi-Variable Costs Source: (ICSI 2014) Costs for decision-making (Opportunity, Differential, Joint, Sunk, Marginal, Uniform, Replacement, Imputed and Common Costs) These costs are important in the management accounting to carry out the course of direction of the organization. Decision Making Costs Purpose Examples Opportunity Costs The loss of another alternative of action when one course is defined. It is often stated as the next best alternative use. Capital invested in plant and machinery cannot be invested in stock market Differential Costs The difference between the alternatives of total costs Alternative decisions and changes in output Joint Costs The two or more products are a result of factors of production. These are costs incurred at the point of separation. Budgeting cooperation between departments Sunk Costs The costs that have already been incurred and cannot be avoided by decision-making Training, hiring bonus, marketing study, etc. Marginal Costs Aggregate of variable costs Prime cost with variable overheads Uniform Costs It is useful in inter-firm comparison. The cost incurred on common procedures and principles. Differences in size of business and organization or differences in methods of production and production facilities Replacement Costs The cost of replacing one asset with other at its current value Majorly used in insurance policies to cover damage to companys assets Imputed Costs The costs that are useful while decision-making to a particular situation Interest generated on internal funds Common Costs The costs that are incurred in more than one job, product or territory. Electrical expenses, transportation and money costs Table 2 Decision-Making Costs Source: (ICSI 2014) 3. Variable Analysis Predetermined Costing is based on the determination of Variances for the evaluation of production performance. The term variances can be defined as the differences between the actual and the predetermined cost for each of the cost incurred element of a particular period. However, the term Variance Analysis can be defined as the process of analyzing variance by subdividing the total variance in a way that management can provide reasons for off-standard performance (Alex 2014). However, in this way, management can correct errors, improve operations, and organize resources more effectively to reduce costs (Mutea 2014). Variable Analysis can be evaluated based on its performance. If the variable performance analysis is, better than standard then it represents "Favourable Variance" otherwise, it represents "Unfavourable Variance" (Drury 2013). However, the variance analysis can be divided into many kinds, but broadly it can be classified into two types namely flexible-budget variance and sales volume variance. Figure 3 can summarise the types of variance analysis. Figure 3 Types of Variance Analysis Source: (Whitecotton, Libby and Phillips 2013) Flexible-budget Variances Flexible-budget variances are the difference between flexible budget amounts estimated and the actual results for the output achieved. Sales-volume Variance Sales-volume variances are the difference between static budget amounts and the flexible budget amounts (Whitecotton, Libby and Phillips 2013). The problems and limitations of variance analysis are mentioned as under. It is an unacceptable method for tax computing and external reporting. The fixed costs are not considered in the analysis. It does not consider the long-run effect where fixed costs can even become variable. The analysis is done at the end of the month, which creates issues for the management team. However, the management needs feedback on a daily basis chiefly in the production area. The other reasons that variance analysis is not located in the accounting records because the management has to sort information like labour routings, bills of material, overtime records, etc. It is based on the standard setting where actual results are compared to arbitrary standards. However, this standard setting can be determined by political bargaining such that the analysis will not yield any useful information (Lanen, Anderson and Maher 2011). Problems faced by Sainsbury The setting of budgets for one year would be an issue because variances should be calculated monthly. However, if consumable products variances are adverse, then cheaper supplies (avoid of organic suppliers) can be instituted for better performance if done on a monthly basis. However, if variances are caused due to external factors then the management can be controlled by motivating the staff to cut the costs (Olson 2011) On the other hand, variance analysis of sales revenue of Sainsbury is showing an increasing trend due to the increased promotional activities (Piercy and Evans 2014). 4. Operating budget is a method of developing financial plans for the organization. In this case, Sainsbury makes its operational budget on a yearly basis. However, annual budgets do not need to be developed for longer periods because they are important to anticipate the cash needs along with the experience with the plan. Nevertheless, operating budget is executed to scrutinize maintenance of salaries, operations, and interest payments (McWatters, and Zimmerman 2015). On the other hand, a detailed projection of income and expenses can be forecasted by sales revenue during a given period where capital outlays excluded because they are long-term costs (Dahlby and Smart 2015). There are three types of operating budgets on a day-today basis. Revenue Budget This budget helps in projecting future sales while identifying the revenues required by the organization. Expense Budget The expense budget recounts the expected expenses during the period of the budget. Three kinds of expense budgets are evaluated on operational budget namely fixed budget, variable budget and discretionary budget (this budget depends on managerial accounting judgement that is not built on certainty principles such as accounting fee and legal fees) (Hofstede 2012). Profit Budget The profit budget accompanies both the revenue and expense budgets instituted into the net and gross profits. The uses of profit budgets not only highlight the resource allocation but also check the sufficiency of expense budgets recounted to estimated revenues. According to the financial performance of the organization, it helps in assigning responsibilities to managers along with controlling activities across units (Kaplan and Atkinson 2015). Benefits of Operating Budgets Projecting Future Expenses The evaluation of past expenses can help in budgeting for the coming year. On the other hand, Sainsbury estimates its last year or last quarter's results to write a new budget. Nevertheless, overestimation of the budget can lead to unnecessary costs. However, to avoid unnecessary costs, the deficiencies in the previous budget can be reallocated with overestimated reserves (Davies and Crawford 2011). Managing Current Expenses It helps in managing current operating expenses like cost of office supplies, areas of savings that can be reduced from the total budget. However, fixed overhead costs like salaries and office rent cannot be trimmed as they are the beginning point of budgets. Nevertheless, the fixed overhead costs can only be reduced based on decreasing the staff number or working hours (Drury 2013). Building Reserves An operating budget can help in reducing debt as the projected budget is made. However, a successful operating budget will help in saving, investing, and planning for unforeseen circumstances. Nevertheless, temporary setbacks can be reduced when budget assumes to keep some cash reserves (Carpenter 2013). Accountability A well-written operating budget establishes financial accountability rather than haphazard spending or losing the aim of the goals. However, Sainsbury follows the operating budget to meet its goals by ongoing involvement (Hill and Hill 2012). References Adhikari, A., Biswas, I. and Avittathur, B., 2016. Green Retailing: A New Paradigm in Supply.Handbook of Research on Strategic Supply Chain Management in the Retail Industry, p.290. Alex, K., 2012.Cost Accounting. Pearson Education India. Carpenter, T., 2013. 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