Management Accounting - Airdir Ltd Assignment

MANAGEMENT
ACCOUNTING

INTRODUCTION
Management accounting is the process of identifying, analysing, measuring, interpreting
as well as communicating information to manager of company for pursuit goals. It is also known
as cost accounting and it is the information which help in taking better decision related to
company (Anderson, 2017). Management accounting system is different from other type of
accounting system because it include deep information related to monetary and non monetary
transactions. This assignment is based on Airdir Ltd. Which design and manufacture warm hair
dryers, reliability and so on. They have 40 year experience within manufacturing industry. This
report will going to discuss different type of management accounting system . As well various
methods utilise for management accounting reporting will going to be explained below. Along
with, advantages and disadvantage of planning tool used for budgetary control. In the end cost
will be calculated through appropriate technique for preparing income statements by using
marginal as well as absorption cost.
TASK 1
P1
Management accounting is presentation of accounting information for formulating
policies which are adopted by the management as well as assist daily basis activities. In simple
words, it assist management in performing all functions including planning, organising, staffing,
directing and controlling. Management accounting involve different type of accounting system
which play important role in different type of business firms. There are several accounting
system which can be use by Airdri explanation of these are as follows :-
 Cost accounting system – This type of accounting system is also called product costing
system or costing system (Butcher, 2019). It is framework utilise by companies for
estimating cost of their products for valuation of inventory, profit analysis as well as cost
control. Cost accounting system help in estimating cost of products which is important
for organisation profitable operations. This will help company in controlling their cost
manufacturing activities. Airdir hand dryer manufacturing can implement this accounting
system within their working because it help in controlling cost of manufacturing
activities.

 Inventory management system – It is type of accounting system which refer to proper
management of stock such as raw material, finish goods and so on within organisation.
With the assistance of inventory management system business firm can take decision
related to purchasing of raw material and future production. Because it help in identifying
availability of stock within warehouses. Respective accounting system will assist
company is identifying availability of raw material, finished goods and other decision
related to inventory. Such as in the Airdri hand dryer manufacturing Plc company can
apply this accounting system within their working for evaluating availability of raw
material as well as finish goods within organisation. So that, they can order more if
required.
 Price optimisation system – It is an accounting system which assist in determining price
of products and services within effective level. Price optimisation system will help in
analysing reaction of customers at different price level (Dyckman and Zeff, 2015). In
addition to this, when price optimisation system is absent within working of Airdri then it
is difficult to identify right price of product. Thus, respective accounting system is
important for organisation in finding right price of their product and services. So
implementation of price optimisation accounting system by Airdri help in allocating
accurate price of product and services within business firm.
 Job costing system – It is type of accounting system which help in determining cost of
job at different activities separately. Job costing system is advantageous in providing
detail information related to cost of jobs as well as business firm can take appropriate
decisions related to job. Generally, respective accounting system play important
controlling cost of jobs (Essa, Dekker and Groot, 2018). In simple word, job costing
method utilise within an industry as well as it utilise for checking that cost of production
exceed overhead and price of material as to provide profit for entire procedure. So,
generally job costing system is applied by Airdir Ltd with the motive of evaluating job
cost that is allotted for different activities within business firm.
P2
There are several method utilise for preparing management accounting report by business
firm for managing their financial as well as non-financial performance. Thus, Airdir can prepare

their different accounting report with the assistance of accounting systems. Explanation of
different accounting reports are mention below :-
 Performance report - This is the report which depicts the performance of different
aspects which are happen within the organisation or any kind of work which performed
by the individual. This report includes the results of the performance which get after the
comparison of the actual with budgeted or standard. This will help to determine the
variance in between the two figures and in between the performance of employee along
with the reason and further this will be used by the management of the organisation for
application of the techniques which help in last to overcome from such variances and aid
to attain the set targets. Airdri is small organisation which offers hand dryers. It is a
manufacturing organisation which uses this report for two different purposes such as
monitoring of the employee performance and ascertainment of the quality of product
(Farrell and Gallagher, 2015). The overall contribution of this report is seen over their
functioning which allows the employees to word hard utilise optimally which help to
generate quality product in end.
 Inventory report – It is type of report which provide information related to quantity of
raw material as well as finish goods available within warehouse of Airdri. With the
assistance of inventory report business firm get information that how much stock is
available at present so that if their will be requirement of purchasing Airdri can purchase.
Thus, respective organisation prepare inventory report for managing their raw material
and product. Furthermore, implementation of inventory report provide assistance in
getting information related to several type of overhead in the procedure of storing stock.
Same as Airdir hand dryer manufacturing company can also prepare their report related
to managing raw material as well as prepared product.
 Account receivable ageing report – This is type of management accounting report
which is related with providing detail information as well as data to organisation about
total payables within market area and debtors overdue (Gibassier and Alcouffe, 2016). In
addition to this, most of the companies get information related to dates on which payment
is due. Thus, main objective of respective report is to assist organisation in collecting
amount from debtors. Business firm prepare account receivable ageing report for getting
information related to total amount which is due in market by different debtors.

 Cost accounting report - This is a report which includes costs of all the activities which
are conducted by a company in manufacturing the product. In case of Airdri,
management accountant of this company uses cost accounting report to record all the
costs incurred in producing their products which hand dryers. This report helps an
organisation to estimate their future costs and earnings. Costs accounting report can be
developed by using two methods which are job order costing and process costing.
In case of job order costing, all the costs incurred while doing a job is considered
(Ionescu, 2016). For example, In Airdri, management accountant uses this report to transact all
the costs expenses incurred while doing a particular job that is manufacturing hand dryers for a
particular customer group. In case of process costing, Airdri transacts all the costs incurred while
completing a process which can be manufacturing a particular part of hand dryers. The main aim
behind developing these reports is to help organisation to know total costs which has incurred so
that it can be controlled and evaluated further. Along with this, respecting accounting system will
help in allocating funds and resources in more appropriate manner.
P4
There are several planning tool that may be utilise by Airdri for their budgetary control as
well as for improving its effectiveness in business operations (Lobianco and et. al., 2016). Along
with this there are some advantages and disadvantage also of different planning tool utilise for
budgetary control. Explanation of these are as follows :-
Incremental budget – This type of budget is prepared by utilising previous period budget
as well as actual performance which is based on incremental amounts added for new budget
period. Within incremental budget, resources are allocated on the basis of previous period.
 Advantages – Incremental budget is stable as well as change is gradual and with the
assistance of this manager can operate their division on consistent basis. Respective
budgetary tool is effective because it respond to the modifying business environment.
Along with this, resources are allocated within efficiently as well as economically. Disadvantage – One major disadvantage of incremental budget is that it has more
emphasis on short term advantages as well as goals by ignoring long term achievement.
Along with this, procedure of preparing incremental budget may be rigid. By this Airdri
hand dryer manufacturing company sometimes not able to respond available threats and
opportunities within external business environment.

Zero based budget – It is method of budgeting in that each and every expenses have to be
justified for new period (Michelon and et. al., 2016). Process of zero based budgeting get start
from zero base as well every function in business firm is analysed for its need and cost.
 Advantages – There are no such huge expenses will incur in preparing zero based budget
as it will framed by justifying spendings. Along with this, it assist in finding out
redundancies within business operations. As well it also assist in waste elimination and
focus on uses of resources. Disadvantages – As above discussed there are several advantages of preparing zero
based budget but it is not easy to frame it. Moreover, company who design this budget
may go through long term planning loss but it is not useful within manufacturing sector.
Flexible budget – It is type of budget which can be change as well as adjusted as per the
time scale of business operations. As compare to fixed budget, flexible is more sophisticated as
well as useful. Respective budget will get flex because it involve variable rate of activity per unit
instead of fixed total amount. Thus, flexible budget is most effectual tool utilise for measuring
manager's efficiency.
 Advantages – Major advantage of flexible budget is that accountant within an
organisation is free to establish budget for any type of activity. Along with this, flexible
budget assist organisation in assessing performance of several departmental heads. Disadvantage – Within flexible budget there is cost linearity as well their will be no
specific record in firm (Papazov and Mihaylova, 2015). As flexible budget is based on
assumption of continuity because of that it don't consider any type of going concern.
Fixed budget – It is the budget which don't change as well as flex by increase or decrease
in volume of sales, units produced and some other activities. Fixed budget is also named as static
budget. In simple words, it is financial plan which don't get change within budget period as well
this is an easy way for management to plan out expenses and operations when it has been assume
that sales volume and total revenues will be a set amount during a period.
 Advantages :- Major advantage of fixed budget is that it can be implement as well as
follow in easy manner. Along with this, there is no need to update fixed budget on
continuous basis.

 Disadvantage – Major disadvantage of fixed budget is its lack of flexibility as well
company is not able to change budget during that year even if their modification within
business level operations.
M1
There are different type of accounting system within management accounting system as
explained above. Each and every accounting system have their importance explanation of these
are as follows :-
Type of management
accounting system
Benefits of management accounting system
Cost accounting system It is beneficial accounting system which help in providing detail
information and data related to cost of different activities
(Richardson, 2015). Thus, an organisation can manage cost of their
different activities through cost accounting system.
Inventory management
system
This management accounting system is beneficial for management
of stock which stored in warehouse. Implementation of inventory
management system help business firm in taking decision related to
buying raw material as well as production.
Price optimisation system It is accounting system which help Airdri in assigning accurate price
of goods or services. Along with this, price optimisation system
help in identifying behaviour of customers at difference level
offering by respective organisation.
Job costing system Job costing system is beneficial for organisation in computing cost
of job separately. Along with this, respective costing system record
cost in more appropriate manner as well as facilitates cost control by
comparing actual and estimates.
D1
Management accounting system as well as management accounting report is combined
with each other because with the assistance of these integration business firm can prepare

management accounting report (Russell-Smith and et. al., 2015). Thus, Airdri can frame their
accounting reports like, inventory and accounting report with the assistance of accounting cost
and inventory system. Thus, it shows that management accounting system as well as reporting
both are linked with procedure of company.
M3
Budget preparation need application of planning tool which are mention above for
enhancing efficiency as well as effectiveness of business operations by enhancement in staff
members working style. Above mention planning tool play essential role in systematic procedure
of any budget. Moreover, it involve master budget, cash budget, flexible budget and many more.
With the assistance of using these planning tool in budgetary control staff members can make
appropriate estimate of company's probable performance. Along with this manager can also use
this for preparing report.
D3
For management accountant planning tool is support system because it react smoothly on
organisational problem related to finance (Sargiacomo, D'Amico and Di Pietra, 2016). For
instance, a critical master budget may be utilise by Airdri company for evaluating their internal
environment, which provide assistance to management accountant for taking prudent (calculated)
decisions. Such planning tools provides detailed groundwork so that essential areas of financial
issues will get evaluated and give solution. Providing solutions of financial issues result in
raising function of organisation in short term.
TASK 2
P3
Marginal costing method – It is an costing technique in which marginal cost i.e.,
variable cost is charged to units of cost, whereas, fixed cost for particular period get completely
written off against its contribution (Zhang and Zhang, 2017). In simple term, marginal cost
implies the additional cost which occur by the production of an extra unit output.
Absorption costing method – This is type of costing technique in that fixed as well as
variable cost both are considered in equal manner. Under absorption costing method, fixed cost
is taken as cost of unit similar as variable cost is also consider as unit cost.

Income statement under absorption costing method for month of May & June:
Particulars May June
(in £) (in £)
Total sales 10.5 4200000 3780000
Less: Cost of Goods sold
Opening stock -
Variable production cost 1300000 1300000
Fixed indirect production
expenditure 600000 600000
Closing stock 4.75 - 190000
Total cost of goods sell 1900000 1710000
G.P. (Gross profit) 2300000 2070000
Selling & Distribution expenses - -
Administrative cost - -
N.P. (Net profit) 2300000 2070000
Income statement under Marginal costing method for month of May & June:
Particular May June
(in £) (in £)
Total Sales 10.5 4200000 3780000
Less: Cost of Goods sell
Opening stock - -
Variable production cost 1300000 1300000
Less: Closing stock 3.25 - 130000
Total cost of goods sell 1300000 1170000
G.P. (Gross profit) 2900000 2610000

Fixed indirect production cost 600000 600000
Selling & Distribution costs - -
Administrative costs - -
N.P. (Net profit) 2300000 2010000
Calculation of material cost variances
As per the given data, three types of material variances calculated which are as follows-
 MCV(Material cost variance) = Standard material cost (SMC) – Actual material cost
(AMC)
 MPV (Material price variance) = (Standard price – Actual price) X actual quantity
purchased and used
 MUV (Material usage variance) = (Standard quantity – Actual quantity) X standard price
M2
For preparing financial statements management accounting technique is useful because
this will provide framework for presenting financial report. Thus, within this project Airdir
company can prepare their income statement by using both absorption as well as marginal
costing method.
D2
According to the above mention income statements it has been interpreted that within
absorption costing method net profit earning by business firm is £2300000 in May. On the other
hand, in June profit earned by company through respective costing method is £2070000. Apart
from this, by using marginal costing method profit gaining by company is £2300000 in May.
Whereas, in June profit earn by them is £2010000.
But profit generated by company is high through absorption costing method, so company
have to utilise this method for conducting their costing activities within more effective way.
CONCLUSION
From the above discussion it has been concluded that management accounting is essential
part of company as well as play important role within functioning of business operations. With
the assistance of different accounting system an business firm may accomplish their
predetermined goals as well as objectives within effective manner. In addition to this income

statements is also helpful for an organisation because it help in identifying actual financial
position. It will be prepare through absorption method or marginal method and organisation will
select that method which will be suitable for them.