Management Accounting Tools for Financial Problem Resolution

This assignment provides an in-depth analysis of management accounting tools and their effectiveness in resolving financial problems. The case study of Airdri Ltd. highlights the company's struggles with achieving sales targets, poor performance, and financial difficulties. Using management accounting systems, such as KPIs and planning tools, the company can improve its performance and resolve financial issues. The assignment concludes that management accounting is a crucial tool for supporting companies in modifying their overall financial status.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK1.............................................................................................................................................1
P1. Importance of different kind of management accounting system....................................1
P2 Different type of management accounting reports............................................................3
M1 Benefit of various kind of system. ..................................................................................4
D1: Importance of Several reporting approaches and integration of accounting system.......5
TASK 2............................................................................................................................................5
P3: Method utilized by company to analyse cost...................................................................5
M2: Different form of Accounting techniques and tools.......................................................8
D2 Formulation of business statements from collected data..................................................8
TASK3.............................................................................................................................................8
P4 Assorted planning tool help in controlling budget. ..........................................................8
M3 Analysis of various planning tool and its application for forecasting...........................10
TASK 4..........................................................................................................................................11
P5: Financial issue and resolution of these problem and comparison with other company.11
M4 Analysis of planning tool to deal with financial issue...................................................12
CONCLUSION..............................................................................................................................12
REFERENCES .............................................................................................................................13

INTRODUCTION
In recent time, company uses different concept and procedure of management accounting
in order to determine, examine, figure out and record useful financial information. This collected
data is presented to internal management so that they can make effective decision to improve the
performance and productivity of company (Amidu, Effah and Abor, 2011). This system help to
measure financial issue and operation performance and help management to improve
performance. Airdri hand dryer manufacturer uses techniques and system of management
accounting that help them to manage their operation and business in impressive manner.
In this project, various accounting system and reporting method is discussed that is useful
for Airdri. Company makes budgets and use different planning tool those are helpful in control
of their resources. Issue of financial problem is solved by using management accounting system
is also covered in this report.
TASK1
P1. Importance of different kind of management accounting system.
Management Accounting is considers as a process of making management report and
accounts that help them manager to have accurate and timely financial information to make long
and short term decision. Management accounting is the preparation of monthly or weekly data,
report for internal managers and other officer that is important for measure and improve
performance of employee. These report are generally summary of available cash balance, sales
income, account payable and receivable, stock in hand etc (.Carlsson-Wall, Kraus and Lind,
2015). Management of Airdri collect important data that help them to organise and manage their
available resources effectively. So, management accounting is that important tool for Airdri
which help their top manager in better planning and controlling of resources this will help to
increase profit. Manager of company uses different accounting method, system and tool which
ease the work of management activity. It is important in many ways some of these are discussed
below:
 Help in decision making- Having accurate information help manager to make valued
decision that have positive result to the organisation.
 Identify future goals- Assorting of data by manger help in examine and identify goal and
aid in making proper action plan to achieve these future plan.
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 Easy in plan formation- Planning is important for every organisation as it help in proper
use of resources. Manager of Airdri have proper plan to use their resources and attain all
predefined goals.
Management accounting is a managerial activity that includes internal system that Airdri uses to
evaluate and compare its processes for their manager. These system are cost accounting, stock
management, price optimisation and job costing that is discussed underneath:
 Cost accounting system: Manager uses this system in recording, categorising, estimating
the cost of every operation, products for analysis of company profits.. This costing
system is further classified on the basis of its uses those help management such as
normal, actual and standard costing (Granlund 2011.Johnson, H.T., 2013). Airdri is a
manufacturer of hand dryer so their manager through this system tracks the flow of funds
and also record and compare cost involved in the production of product.
 Inventory management system: This system is associated with effective analyse and
measurement of all non capitalised inventory used within an organisation. The
management uses two main type of inventory management system like periodic system
that is recording of stock on monthly or weekly basic and perpetual system. Airdri also
follow various method of these system such as FIFO, LIFO and ABC analyses which
help in effective management of available resources. Manager of Airdri uses this system
in creating effective work order, maintain bills of products and all manufacturer related
invoices.
 Price optimisation system: This system is connected with evaluation and calculating the
prices of product that are likely to give best income or outcome and increase profitability
of business. This not only the process of fixing price but also to hit or achieve revenue
and margin targets through total sales of product. In Airdri Manger uses this system to
find and fix best price of their hand dryer that will not effect the customer demand and
company is going to maximise their profit by satisfying customer.
 Job costing system: This system includes the recording and accounting of cost that are
incur to a particular job as well as cost of employee involved in business operation. This
system have types of costing method also such as batch costing product and process
costing. Manager of Airdri with this system account different cost involved in production
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of hand dryer and calculate and measure the cost of individual job associated with
production (JOSHI and et. al., 2011).
P2 Different type of management accounting reports.
Every organisation that wants to grow should follow management accounting system and
and maintain report. Formation of accounting report help to provide a fingertip information about
company performance. These recording and reporting must be prepare by manager at end of
every quarter that will give clear view of business of company (Klychova, Faskhutdinova and
Sadrieva, 2014). Small scale company like Airdri uses management report in making important
strategic for achieving its goal. As these report are fairly maintained and shows holistic overview
of operation operated in company. Reporting is a useful documents that consists all relevant
information about financial and non financial detail in organized way. Reports prepared by
manager and finance manager help shareholder and other investor to make valuable decision for
their investment within the company.
Accounting report help manager of Airdri to make decision in various critical situations
that can effect the performance of individual and company. Management of company uses these
report to make a brief record for specific purpose such as detail analyse of sales, production
process profitability etc. They also use these report to track, calculate and report all expense
incurred by Airdri in production process and income generated during sales. There are different
type management accounting reports that is followed in Airdri to record overall transaction
happen within company. This help management to know current position of company and
investor have detail information about company. Some of these are discussed below:
Performance report: It is one of most important activity performed by management to
analyse and compare performance of employee with actual and budgets. These are the elaborated
statements that measure the actual outcome of a activity with with budgeted result over a specific
period of time (Mistry, Sharma and Low, 2014.). For example, employee annual performance
report, success report of a project and product etc. In Airdri, management form annual
performance report for each of their employee to measure and compare their performance. This
help manager to identify that worker are working effectively in the company in right direction
and if required they can make changes and increase their efficiency to perform work.
Inventory management report: This report consist summary of closings and opening
stock within the company. Manager through these report manage stock movement that are kept
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by Airdri. They review the current status of company stock by location, time of arrival and
departure of inventory etc (Moser, 2012). Airdri produce luxury hand dryer so their management
makes proper and effective stock report as this product is expensive. Management use this report
to find out the profitability, turnover, demand for the inventory. There are different techniques
which are taken into account by Airdri management such as Just-in-time, EOQ and turnover
ratio.
Account receivable report: This report provides the detail information of all the unpaid
customer bills and unused credit memos that help management to recover those amount. It also
help management or collection person to determine those bills which are due in the coming
period. In Airdri, Manager prepare these report to find out all those buyer who have still
outstanding invoice depending upon their credit date. This also help them to figure out exact
financial position of company and predict upcoming revenues from debtors.
Job costing report: These report are prepare by the management to track the overall cost
involved on an individual job in the previous period. This report have following category such as
labour cost, material cost, production overheads etc. With the support of Job report, manager of
Airdri are able to gather and arranged actual expenditure incurred by company while
manufacturing hand dryer. Job costing reporting will increase the profitability from an individual
job within organization.
M1 Benefit of various kind of system.
Management accounting system easy the work of manager to predict future attainment of
organisation goals (Schaltegger and Csutora, 2012). Airdri, uses all accounting system to manage
and control effectiveness of its business operation. These different system have various
advantages to the company that is discussed below:
Management accounting
system
Advantages to Airdri
Cost Accounting System Help to fix cost of product through different tool and costing
method.
Help to find best selling prices in different condition.
Inventory Management
system
It aid the process of stock maintenance and build more organise
warehouses (Ward, 2012).
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It improve the stock order which does not effect the business.
Price optimisation It offer more cheap price to customer as per their demands etc.
Job costing system This system help to identify the total cost incurred on individual
job and financial position of company.
D1: Importance of Several reporting approaches and integration of accounting system.
As management of Airdri uses different report and system of management accounting.
This give useful information to interested investor and shareholder about the actual financial
status and current market position of Airdri. There are different type of reporting method uses in
Airdri. Performance report is used to measure present and last year performance of company.
Inventory report give the detail information about the stock available within Airdri and job report
is helpful in determining actual cost incurred on each job for completing any project in company.
Account receivable report help management to find out the outstanding invoices of debtors and
ease the collection process by giving detail information.
TASK 2
P3: Method utilized by company to analyse cost.
Cost is consider to be an expenses that have is given by the individual or anyone in order
to make purchase of a particular product or service. In Addition, cost are the monetary value of
material, resources, time used up and opportunity involved in production and delivery of any
goods and services. In business all expenses are cost, whereas all cost are not reasoned as
expenditure because many cost are involved in income generating process (Wickramasinghe and
Alawattage, 2012). In Airdri, management incurred huge amount of cost in order to expand their
business in a greed to attain more valuable outcome. They also spent cost on the production and
creation of hand dryer. These cost have different type such as variable cost that includes handling
of raw material and direct cost are related to the working hours into production. Management of
Company uses various type of costing method such as marginal costing and absorption costing to
compute net income for the actual period. These are discussed below:
Marginal costing: The cost which is involved in the production of 1 additional
component of product that can be suppose by entire uncertain cost obtain to one portion of
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commodity. This costing system includes only variable cost in order to overall sales by which net
profit is calculated for company. These variable cost are cost of direct labour and material
involved, selling cost and management overheads. The main concepts of this costing method is
to allocate resources for maximum result (Windolph and Moeller, 2012.). This seem to be much
impressive manner for calculating gross and net income.
Absorption costing: All those determinate and variable price that is concerned in the
manufacture of commodity within a institution is called absorption cost or full costing method.
This includes cost related to direct labour, material and fixed and variable manufacturing
overheads. In comparison, with marginal costing this is considers more effective costing method
that use to absorb fixed and variable cost during production of product.
Calculation of net profit by using marginal costing method:
Particulars Amount
Sales revenue = (selling price * no. of goods sold = 55 * 600) 33000
Marginal Cost of goods sold: 9600
Production = (units produced * marginal cost per unit = 800 * 16) 12800
closing stock = (closing stock units * marginal cost per unit = 200 *
16) 3200
Contribution 23400
Fixed cost ( 3200+1200+1500 ) 5900
Net profit 17500
From the above calculation it has been founded that net profit calculated from marginal
costing is $17500. As sales for the year were 33000 and COGS were 9600.
Computation of net income by using absorption costing method:
Particulars Amount
Sales = (selling price * no. of units sold = 55 * 600) 33000
Cost of goods sold = (total expenses per unit * actual sales = 23.375 * 600) 14025
Gross profit 18975
Selling & Administrative expenses = (variable sales overhead * actual sales +
selling and administrative cost = 1 * 600 + 2700) 3300
Net profit/ operating income 15675
On the other side manager of Airdri uses absorption costing and the net profit for year is
$15675. So it is observed that net profit form marginal costing is $1875 more than profit from,
absorption costing method. Therefore it has been suggested that Airdri must Apply marginal
coating method to calculate net profit.
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Break even analysis: This analysis is defined as the essential point where cost for any
organisation are equal to overall expenses. It is very important to analysis this point as it help to
deliver best result for Airdri. In general it is consider to be an valuable point from company point
of view as there is no profit or no loss to company. In component all expenditure are equivalent
to all income at break even point.
Total number of product sold
Sales per unit 40
Variable costs VC = DM + DL 28
Contribution 12
Fixed costs 6000
BEP in units 500
b. Calculation of breakeven point in accordance to sales revenue
Sales per unit 40
Variable costs VC = DM + DL 28
Contribution 12
Fixed costs 6000
Profit volume ratio PVR = Contribution / sales * 100 30.00%
BEP in sales 20000
From the above calculation it has been determined that break even point for Airdri is 500
unit. It is also ascertained that BEP sales during an accounting year is 20000. As company sales
800 units at $40.
c. Calculation for getting desire profit of 10,000
Profit 10000
Fixed costs 6000
Contribution 16000
Contribution per unit 12
Sales 1333.33
Margin of safety: It is basically defined as the difference between the intrinsic value of a
share and it actual market price. In general it is consider to be the current sales level that can be
obtained by company before reaching its break even point.
d. The margin of safety, if 800 products are sold
Actual sales in units 800
Break even sales in units 500
Margin of safety 37.5
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M2: Different form of Accounting techniques and tools.
Manager of organization uses different type of tools and techniques of management
accounting which support them in get suitable information by the internal manager of company
This help to evaluate net profit and ease the process of decision making (Zainun Tuanmat and
Smith, 2011). Some of these are defined below:
Marginal costing tool: With support of this tool manager of company are able calculate
overall cost that is incurred in order to produce an additional part of product and services. Thus it
is consider to be the best effective tool in order to evaluate overall net profit for Airdri during an
accounting year.
Historical cost: In general the process is related to recording and measurement of
intrinsic value of assets hold by company. This is called historical tool of accounting as it record
the actual value of assets when it was purchased in balance sheet prepared during financial year.
D2 Formulation of business statements from collected data.
Management of Airdri apply various costing procedures to maximise overall profit and
make valuable decision to increase the productivity of different business operation. Management
of Airdri, uses absorption and marginal costing method to find the best result of net profit during
an accounting year. So the net profit from marginal costing is equal to $17500 which is much
higher than result from other method. The result are consider to be effective as they have been
calculated while considering total fixed cost involved during production process. It was clear that
manager must further use marginal costing to evaluate net income for Airdri As result from
absorption only $15675.
TASK3
P4 Assorted planning tool help in controlling budget.
In present time, every company uses types of planning tool in order to predict the future
risk so that proper plan can be made to achieve predefined target. Large and small companies
uses proper budget in order to control expenses and improve profit. Such as Airdri uses
preplanned budgets to program and standard performance of worker and enterprise activity,
control expenses, and increase efficiency in operation and develop new product etc. It is the
future recognition of total sales and profit company is effort to earn in the upcoming time.
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Budgetary control process : This process is defined as the basic tool used by manager
of company to compare their actual income and expenses from the already planned earning and
expenses. For example, manager of Airdri uses budgetary control in order to calculate total cost
involved on different business project and make effective plans to control expenses to improve
profitability. It is also helpful in reducing the reason of excess expenses and avoid the waste
factor that increase cost for company.
One of the main objective of budgetary control is Planning, under planning process
several types of plans are prepared to achieve desired goals, the plans are Long and Short term
plans, Operational plans etc. (Kuula, Putkiranta and Toivanen, 2012). So manager of Airdri uses
various types of planning tools for budgetary control such as forecasting, scenario planning and
contingency planning.
Forecasting tool : Risk are defined as uncertainties that may reduce the performance
and productivity of company. In general it support to make an estimation about the happing of
future on the basis of information collected from past events. Manager of company like Airdri,
use forecasting tool in order to analyse the future risk that may be the main reason for the
reduction of market share and goodwill. This tool further help them to cope with the
uncertainties by creating effective plans. Some of the basic advantages of this tool is discussed
below:
Advantages:
 It help to predict about the future uncertainties by considering the past and present
happing.
 Manager of Airdri make valuable plan and budgets with the support of forecasting tool to
overcome any future issue.
Disadvantages: The demerit of forecasting tool is as follows:
 It is not easy to predict about future as many times the condition of past and present can
be totally different. As an manager of Airdri can not absolutely certain what the future
holds.
 It is a lengthy process as analysis of past and present event requires more time cost to get
best future result.
Scenario planning tool: It refers to the presumption regarding the facts that, what is
going to be done and by whom it will done , mainly this pertain the scenarios regarding the
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future concerns. It can be termed as the effective planning tool which is used determining a
specific set of intellectual state, several realities that what might happen in future with the
organisation. It is simple, and non-trouble,in applying or forming. moreover, forming this set
several assumptions are made which are effective for long term direction for the organisation.
The Airdri depends on several scenario that leads to drastic effects on the operational activities
of the organisation.
Advantages: Scenario planning is simple and easy to understand and to apply and mainly
specialized to promote the level thinking and make it futuristic. This all will enhances the
organisation planning for future.
Disadvantage: scenario planning needs to professional forecasts. In some cases, there
may be shortage of those scenarios that leads to improper decisioning and may effect the future
growth of the Airdri.
Contingency planning tool: A contingency plan also called the “Plan B” prepares with
the motive to remove the affects of uncertainties that affects the operations of the organisations.
As the future is uncertain and no one can predicts it exactly this planning tool is used to prepared
in order to overcome the organisation from the damage of uncertainties or contingencies. This
render an action that is configured to help Airdri to respond the contingencies or uncertainties
and for ensuring smooth functioning of the organisation.
Advantages: Plan B or contingency planning beneficial in reducing the affects of
contingency which influences the functioning, profitability as well as the performances of the
organisation (Dražić Lutilsky and Dragija, 2012).
Disadvantage: In certain situations it becomes impossible to formulate the contingent
plan on the spot as this plan is formulated after the deep analysis of the the whole possible risk
criteria. And besides this, generally this, plan becomes unusual and it requires extra costs and
time to formulate.
M3 Analysis of various planning tool and its application for forecasting
Budgetary control is important from every company point of view as it help them to
predict about future and measure performance to achieve those future goal. Manager of Airdri
uses various important planning tool for budgetary control such as forecasting tool, contingency
and scenario tool. Contingency tool are useful in controlling business risk those might arise in
Airdri and affect the functioning of company. Forecasting tool is important for manager to
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predict about the future uncertainties and develop appropriate course of action such as examine
of total cost and expenses incurred by the company. While scenario tool are helpful in estimating
and predict various scenario that have negative effect on the profitability and performance of
Airdri.
TASK 4
P5: Financial issue and resolution of these problem and comparison with other company.
Financial problem are refereed to those situation where company faces the shortage of
funds and not able to run their daily activity, faces the problem of salary payments to employee,
late payments of outstanding bills etc. In Airdri, there are various financial problem that
decreases the operation level of company and reduces the profitability. Some of the major
problem faced by companies are discussed below:
Failure in achievement of Sales Target: At the time of accounting session, it has been
found that every single business firm majorly set number of sales target so that they can be
attained right on time with keeping an aim of enhancing sales. This can be done with the help of
a proper business plan. In order to hit targets Aridri Ltd. may develop number of effective
strategies, create a budgetary plan and do many other activities so that accomplishment of targets
can be done. Here, it has been analysed that any wrong move by company's management may
lead the to face financial crisis. Therefore, it is required for Aridri Ltd. to look into every single
aspect and then take initiatives so that failure related situation can be reduced to zero.
KPI (Key Performance Indicators): This system is related with the objectives as they
can be quantifiable. It helps in determining the need for making alteration in business and
measuring business performance. In relation with Aridri, this system is valuable in order to
identify the issues related with non financial aspects and poor performance. According to the
given scenario the company is facing losses as they are having poor sales performance index.
This system is beneficial in order to identify the key factors due to which there is failure faced
and the sales target have not been achieved. Using the factors such as Key Performance
Indicators managers of Aridri, are measuring the performance level of employees, customer
turnover, sales frequency etc. This helps in developing plans and strategies by which the sales
performance can be enhanced.
Comparison
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Airdri Hichrom Ltd
As by using the resolve the major issue of
failure in achievement of sales targets. As
manager develop appropriate course of action
to overcome this financial problem.
This organization is working at minimum
level henceforth; the chances of error can be
more. To issues whole those financial issues
they are required to implement of financial
governance and other accounting tools
efficiently (Kapić, 2014).
M4 Analysis of planning tool to deal with financial issue
Financial difficulty are resolute through with use of respective business tools such as key
performance indicator. It is essential for upcoming constitution, growth and earning that are
anticipated by company. Thus different issues can be resolved with the help of various
management accounting tools and system.
CONCLUSION
In conclusion it has been stated that management accounting is one of the operative tool
that support Airdri to modify the overall financial status of the company. So manager of
company adopt and apply system of management accounting and prepare annual report to collect
and arrange valuable financial information. Similarly, marginal and absorption costing
approaches are chosen to calculate net profit at a particular time period. Various planning tool
have merits and demerits that is implemented by company in order to control budgets. Financial
problem are resolved by use of management accounting system and performance can be
improved.
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REFERENCES
Books and Journal:
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