Management Accounting - Airdri Assignment

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Management accounting and requirement of its system...................................................1
P2. Different type of management accounting reports...........................................................3
M1. Importance of different management accounting system...............................................4
D1: Various reporting method and accounting system integration........................................5
TASK 2............................................................................................................................................6
P3. Techniques used to analyse cost with marginal and absorption costs..............................6
M2. Various type of Accounting tool and techniques............................................................8
D2. Financial report for the data of business activities..........................................................8
TASK3.............................................................................................................................................9
P4. Different planning tool used for budgetary control..........................................................9
M3 Analysis of various planning tool and its application for forecasting...........................10
P5: Financial issue and resolution........................................................................................11
M4 Analysis of planning tool to deal with financial issue...................................................12
CONCLUSION .............................................................................................................................12
REFERENCES .............................................................................................................................13

INTRODUCTION
Management accounting is a process of collecting business information and than record
that information in management reports. It is a system which is followed by the management of a
company to generate reports that may provide actual information of company's performance and
its position in market (Amidu, Effah and Abor, 2011). It helps the internal stakeholder of an
organisation to gather information of operational and executional activities of the business and
form crucial decision in context of the business. Managers monitor, control and analyse the
information and than make policies and strategies to attain organisational goals. It help the
managers in strategic decision making which is used to resolve possible issues that may occur.
The company chosen for this project report is Airdri, it is a manufacturing company of hand
Dryer. It is also a leading importer in UK.
This project reports consist detailed information of management accounting, its systems,
reports, their types, benefits of management accounting system, different costing techniques,
various planning tools that are used in budgetary control and how organisation is using
management accounting to respond financial problems that they are facing.
TASK 1
P1 Management accounting and requirement of its system
Management accounting refers to the examination of accounting data by the managers to
find the accuracy of the information which has been recorded in the books. It help the internal
stakeholders to analyse the performance of running business and its position in the market.
Management accounting system is used by various organisations to evaluate the transparency of
the data which has been recorded by the managers in the books of management (Bennett and
James, 2017). In Airdri it is used by the management to analyse various information such as cost,
inventory and performance. There are four different types of management accounting like cost
accounting, price optimisation, inventory management and job costing system. These systems are
explained below:
Cost accounting system: A cost accounting system is used by a company to analyse its
actual profitability by estimating actual cost of its products. It helps the managers and internal
stakeholder to assess the cost which is involved in the manufacturing process of the company. In
Airdri it is used to record all the production related activities that are performed by the company.
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It help to examine the flow of inventory. It is very beneficial for the organisation because it helps
the managers to get the exact information of cost which is involved in manufacturing process.
There are three different type of cost accounting systems. Standard costing which is used to
analyse the difference between actual cost and budgeted cost, Marginal costing, it help to
identify the cost of additional units of production that are produced by the organisation and at
last absorption costing in which the manufacturing cost of units are absorbed from the sale of
same units.
Inventory management system: It is mainly used by manufacturing companies as it
may provide exact information of inventory. It helps the managers to track the inventory while it
is in transit, warehouse or in production (Bryer, 2013). The managers of Airdri use inventory
management system to record the activities that are related to inventory. It help the management
to keep an eye to their goods that are taken in and out of the organisation. There are three types
of this system. LIFO, FIFO, AVCO, In LIFO the recently received inventory will be used first by
the company for production. In FIFO the earlier received stock will be used first for
manufacturing process. In AVCO the inventory will be used on average basis for the production
process of products. It is very important for the company because it may facilitate managers
while analysing the inventory information.
Price optimisation system: This system is used by organisations to find the best prices
of their products that may lead the organisation toward its organisational goals that are profit
maximisation and customer satisfaction. In Airdri price optimisation system is used to examine
customer's reactions toward their price changing strategies. It help the managers while deciding
the right prices for their products by studying the behaviour of the customers and determining
their needs and wants. It also help to make effective pricing decisions which will lead the
organisation toward success. It is very advantageous for the company because it help to set
appropriate prices for the products by recording the reaction of customers toward price changing
strategies of the company.
Job costing system: It is concerned with the process of analysing the cost which is
involved in different activities of the company. Managers of company are responsible to record
cost of various production segments in management reports. In Airdri it is used to determine cost
of different jobs that are totally different form each other and performed according to the
specifications of customers (Carlsson-Wall, Kraus and Lind, 2015). It also separates the direct
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and indirect costs which include the cost of material, labour and overheads of activities. It is very
beneficial for the organisation because it can provide the exact information of different costs that
are included in process of manufacturing.
P2. Different type of management accounting reports.
In every business there is a need to prepare accurate and appropriate management
accounting report so that can be helpful for internal manager to measure and improve
performance of employee as well as of company. These accounting report provides valuable
information to manager like trim cost of production, high-performing employee employee, invest
in those product and good that provide best return to the company. These report are especially
important for small firm like Airdri that help their management to derive important strategies for
achieving their goal. Manager record all applicable information in organised manner so that they
can have actual picture about the operation performed by company (Chang, 2013). Accounting
report are also prepared in the faith of shareholder and other creditors so that the might have the
exact information about the Airdri. This help them to make precious decision about the
investments within the company.
Management of Airdri prepare accounting report to make important decision in respect to
measure and improve performance of employee working with them. By these report they gather
all the specified information like cost involved in production, sales analyse, financial
performance etc. As Airdri is a manufacturer of hand dryer so it requires lot of money and
workforce to run its business. So, management of this company generate these report quarterly,
monthly to track, calculate and measure all expenses incurred in production of and also record
income generated within a period. There are various type of management accounting report that
are prepared by manager of Airdri to record all happing and figure out the current position that is
benefited for shareholder. Different type of report are performance report, inventory
management report, account receivable report and job cost report that are useful of Airdri and are
explained below:
Performance Report: These are very important for company as management use this
performance report to analyse and compare the execution of worker working in company with
actual and budgets performance. The estimated budgets of performance for a specific period are
usually the actual performance from prior year or period. Some basic example are, annual
performance report of employee, report related to various project and production of product
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report etc. Airdri is small business firm so their manager prepare these yearly report to measure
and compare the performance of employee involved in production of . So they are able to figure
out the efficiency of worker and in case if required they can improve the efficiency which result
in achievement of company goal (Dražić Lutilsky and Dragija, 2012).
Inventory management reports: Every company makes these report especially those
organisation that produce physical with down break disposition find these inventory report very
valuable. They gather centralize data on cost of stock, labour and all other production overhead
involved in producing a product. Management a with these report manage stock movement
within company like time of arrival, exploit of inventory, stock stored in warehouses etc.
Manager of Airdri prepare accurate and effective stock report as they will be able to figure out
the profitability, turnover and demand for their stock. There are different techniques adopted by
manager of Airdri to maintain their stock such as, ABC analysis, Just-in-time, EOQ analysis.
Account Receivable Report: These report plays an important role for every company
that offer credit services to their buyer. This report provide full information about all the unpaid
invoices and idle credit note depending upon the days of outstanding. Account receivable report
are useful in improving the credit collection system and increase the inflows within the company.
Collection department through this report determine those bill which are due. In Airdri manager
prepare these report to find out all outstanding bills of buyer according to their credit date.
Through this process they will be able to generate inflows from unpaid invoices and can easily
detect the financial position of Airdri (Fisher and Krumwiede, 2012).
Job costing report: these report are prepared by management to view the total cost
incurred in a single project compared to the expected income output by that particular project.
Manager prepare these report to calculate the profitability of the specific type job involved. By
using these report manager of Airdri record the total cost incur on production of hand dryer and
try to control these cost if required. This report involve the calculation and measurement of
labour cost, material cost and production overhead etc. that will increase the profitability of
company.
M1. Importance of different management accounting system
Accounting system are very important for manager that help them to forecasted future
attainment of company goal. There are various management accounting system that aid the
management to increase the profitability of company. Manager of Airdri follow all management
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system that help them to increase the effectiveness of their business operation. These accounting
system have different advantages to the company that are described underneath:
Management accounting system Benefits
Cost accounting system  It helps to analyse the actual cost of the products
that are manufactured by the company.
 Assess the profitability of products by examine
economic products.
Inventory management system  Help to keep an eye of activities that are related to
inventory (JOSHI and et. al., 2011).
 Managers can keep a track the location of the
stocks of the company.
Price optimisation system  May help to record the reaction of the customers
on price changing strategies of the organisation.
 Managers can decide the right price for its
products.
Job costing system  Cost of each activity or job can be analysed
easily.
 It provides the accurate information which help to
record right cost in the books of management.
D1: Various reporting method and accounting system integration.
Management accounting system and reporting are crucial for every small organisation as
it provide useful information about the current financial position and status to shareholder and
other investors. Managers of Airdri applies and prepare various important report to calculate and
increase the profitability of its business. They prepare performance report to measure and
improve last year performance of employee to achieve company goal, inventory reports are
prepared to record the available stock, movement of inventory within Airdri. They also make
account receivable report to determine the outstanding invoices of buyers and improve the
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collection process of company (Klychova, Faskhutdinova and Sadrieva, 2014). Job report help
them to figure out the total cost incurred on individual job for completing project in Airdri.
TASK 2
P3. Techniques used to analyse cost with marginal and absorption costs.
Cost is the amount paid by an individual to buy a particular product or services. It is
considered as the flow of money from buyer to seller. In contrast, these are the monetary value of
material, resources, opportunity incurred in production and delivery of good and services. It is
said that all expense involved in business are cost but all cost are not consider as expenses as
some of them can be an income for the organisation. Management of Airdri requires huge
amount of cost to expand their business and improve its operation in order to achieve more
outcome. They also require cost in the production and making of expensive hand dryer. There
are various type of cost such as variable cost that includes raw material cost, labour cost and
fixed cost that are related to the hour involved in production process. In Airdri management uses
various different costing method to calculate net profit such as marginal costing and absorption
costing. These costing system are described below:
Marginal costing: This is defines as the cost that is involved in production of one
additional unit of output. It is used to ascertain the optimal manufacture amount for an company,
where it costs the least amount to produce additional outcome. These costing system only
includes variable cost in the total revenue sales revenue so net profit margin is calculated for an
organisation (Kuula, Putkiranta and Toivanen, 2012). It includes cost related to labour, material,
production overheads and selling cost. This is considers more effective way for evaluating net
profit and thus gives better information for future decision.
Absorption costing: This method includes all fixed and variable cost that is involved in
the production process. It is commonly also known as full costing method that involved cost of
direct labour, fixed an variable manufacture overheads, material etc. to calculate net profit. As
compared to marginal costing this concepts is more effective as it is use to absorb fixed and
variable cost incur during cost of production.
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
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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
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
Break even analysis: It is said to be one of the crucial point at which Airdri neither get
profit or nor goes into any kind of loss outcomes.
A. 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
c. Calculation for getting desire profit of 10,000
Profit 10000
Fixed costs 6000
Contribution 16000
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Contribution per unit 12
Sales 1333.33
Margin of safety: It is consider to be the difference between the market price of security
that is below the estimation of its intrinsic value.
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
M2. Various type of Accounting tool and techniques.
Accounting tools and techniques are helpful for management of Airdri as they get the
accurate and appropriate information about the internal operation and business within the
company. It also help them to make effective decision regarding improvement of costing
system, production process etc. Important accounting tools are discussed below:
Marginal costing tool: This tool is used to ascertain the actual total cost incurred on the
production of one additional unit of output. It involve all variable cost such as cost of labour,
material and other overheads. This is consider one of the best tool in calculating net profit
margin of Airdri by charging variable units,
Historical Tool: this tool is related to the measurement of value of assets that is included
in the accounting period which are recorded on the balance sheet depending on it actual cost
when company acquired them (Mistry, Sharma and Low, 2014).
D2. Financial report for the data of business activities.
Management of Airdri uses different costing method to calculate their net profit and
resolve various internal issue. Manager uses marginal and absorption costing method to calculate
net profit for the current accounting year. The total amount of net profit generated from
absorption costing method is $15675 whereas the amount of profit from marginal costing method
is $17500. These result are calculated by considering the total fixed cost incurred in production
process. Thus result form marginal costing is $1875 more than other system so Airdri must adopt
method of marginal costing to make profit.
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TASK3
P4. Different planning tool used for budgetary control.
Budgets are prepared to predict the financial result and position of a company for future
Small firms like Airdri uses preplanned budgets to plan and measure performance of employee
and business operation, control spending on production activity of hand dryer. It also help them
to control operation and develop new product etc. with the available resources. It is the future
identification of total income and profit company is going to earn in the forthcoming period
(What is budgeting, 2018).
Budgetary control process:
It is consider to be one of the most effective process that is helpful for an organisation to
evaluate total profit and expenses for future period. Under this process, budgeted and actual
prospect those are used to evaluate and remove all kind of difference that must arises in an
organisation. There are various useful centres that consists of effective process to cop-up with
various budget needs (Öker and Özyapici, 2013). Planning is one of the essential tools that can
be taken into account for controlling various issues those are arises in an organisation. Manager
of Airdri uses various budgetary planning tool such as forecasting, contingency and scenario
tools that are explained below:
Forecasting tool: This process is simply making a prediction about the future depending
upon the data collected from past and present research of tendency. Anyone can make a forecast,
the condition is to be right or close enough so that important planning decisions can be based on
the forecast. Manager of Airdri uses this tool to estimate upcoming events for their business and
future projects. Businesses employ a different vesture of forecasting methods to evaluate
potential results stemming from their decisions.
Advantages: The most illustrious advantage of forecasting methods to Airdri is that the
projections rely on the strength of past data. The chief advantage of this tool is that the main
source of data comes from the experiences of well-qualified executives and employees. The vast
majority of business owners mix the hard data with personal strike to develop useful prediction.
Disadvantages: The disadvantages of forecasting is the same as that of any other method
of predicting the future, no one can absolutely sure how the future of business will be. Any
unforeseen factors can render a forecast useless, regardless the quality of data. In some cases,
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one forecasting method shows the interest rate will rise, and another will illustrate the rate will
steady or decline
Scenario tool: It is making assumptions on what the future is going to be and how your
business environment will change overtime in-light of that future. It's a planning tool which
identify a specific set of uncertainties, different realities of what might happen in future of your
business. Its sounds simple, and possibly not worth the trouble or specific effort, however,
building this set of assumptions are crucial for long term organisation's guidance. Management
of Airdri depends upon various scenario that can be resulted in future and have a diverse effect
on their business operation (Tsai and et. al., 2013).
Advantages: Scenario planning is an emerging method designed to energise thinking.
May allow real insights and unlock creativity and allows for business outside the box.
Disadvantage: Planning of scenario required expert forecast, sometime there may be
lack those scenario that result let improper decision making and may effect the future growth of
the Airdri.
Contingency tool:A contingency plan commonly known as “Plan B” describes what will
happen in a possible, but not expected, situation. Usually, contingency plans are designed to
handle emergency situations. This provide course of action that is designed to help Airdri to
respond to different type of business risk that might have diverse affect of the company.
Advantages: Plan B or contingency planning help to overcome all kind of contingency
or emergency those might effect the performance and profitability of the company. These plans
are developed by providing proper training to the employee. The advantage of using this tool is
to that it eliminates major disruption in the operations of the business.
Disadvantage: In case emergency some time it is not possible to make plan on the spot.
This system require expert opinion in order to plan about any future contingency and if not it
may led to mismanagement within company. It is more involved in some kind of situation
because of its analysis nature.
M3 Analysis of various planning tool and its application for forecasting
Management of Airdri uses different planning tool for budgetary control such as
forecasting tool to predict and develop plans for future uncertainties like total cost incurred etc.
Contingency tool are referred as Plan B that are useful in controlling risk that might effect
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business. Similarly scenario tool are used to estimate and predict various scenarios that have
negative effect on Airdri performance (Wickramasinghe and Alawattage, 2012).
TASK 4
P5: Financial issue and resolution.
Financial problem are consider to those situation where an individual or company faces
shortage of funds. In business company faces various financial problem because of insufficient
funds such as salary payments to employee, late payments of outstanding bill, run their business
operation (Zainun Tuanmat and Smith, 2011). So in Airdri there are various financial problem
that may effect their business activity and reduces the profitability. Some financial problem faced
by Airdri are:
Failure in achievement of targets: Management of Airdri set various targets within an
accounting year such as sales, production, expenses etc. these target are set to be achieved with
accurate business plan. In Airdri the are not able to achieve their sales target they may be
countered by rival business operating in the industry. Their product is not up to the requirement
of buyer as their treads keeps on changing. This is because they faces the financial problem of
failure in achievement of sales targets.
Receiving late payments from buyers: This is one of the biggest problem faced by
Airdri as in order to increase sales they sell their product on credit. So it is very important for
them to collect payment from their client, but as a result collection management is not able to
collect money on time and there is a late payment from their buyer at regular basis.
In contrast to resolve these financial problem management of Airdri adopt two important
resolution which are discussed below:
Benchmarking: It is the process used by companies to compare themselves to other
organisation within the same industry. In general it is the practice of a business firm comparing
key metric of their operation to other companies. Management of Airdri uses this techniques to
compare the sales scheme followed by other similar companies. This help them to adopt
necessary changes to improve their sales performance and achieve targets which were not
accomplished by the business earlier (Windolph and Moeller, 2012).
KPI(Key performance indicators)- This system is related to the measurement of
performance of company in achieving its business objectives. In Airdri manager uses this system
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to measure, compare and improve the collection process. They develop the appropriate plans to
strategies by which the issue of late payment from their client can be enhanced.
Comparison
Airdri Hichrom Ltd
To resolve the failure in achievement of
targets manager uses benchmarking system.
As manager develop appropriate course of
action followed by other similar companies.
To solve issue of late payment they uses Key
performance indicators.
This company uses benchmarking to solve the
problem related to excess payment on sales
activities.
They uses KPI in order to resolve the financial
issue of high level debt that are faced by
company (Zaleha Abdul Rasid, Ruhana Isa
and Khairuzzaman Wan Ismail, 2014).
M4 Analysis of planning tool to deal with financial issue
Airdri faces certain financial problem that are resolved through different accounting tool
such as KPI and benchmarking. They uses KPI to resolve the problem of late payment from
client and benchmarking are used by manager to solve the issue related to achievement of
targets. Problems are ascertain to future and estimated budgets and upcoming events.
CONCLUSION
In this project report, it has been concluded that management accounting is crucial tool
that support company to improve the financial condition of the company. So managers uses
various types of accounting system and reporting methods to record all necessary transaction.
Management adopt marginal costing method to calculate net profit for company and uses various
planning tool to control and various risk related to business. In this report manager of company
adopts various accounting techniques to overcome financial issue.
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What is budgeting. 2018. [Online]. Available through: <https://businessjargons.com/budget-
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