(PDF) Management Accounting Assignment - Airdri

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Management accounting system and essential requirements of its types.........................1
P2 Management accounting reporting and its methods..........................................................2
M1 Benefits and applications of management accounting system.........................................4
D1 Integration of management accounting system and its reporting.....................................4
TASK 2............................................................................................................................................4
P3 Calculation of cost using an appropriate technique..........................................................4
M2 Various types of accounting techniques..........................................................................7
D2: Data interpretation...........................................................................................................7
TASK 3............................................................................................................................................7
P4: Advantages and disadvantages of Budgetary control planning tools...............................7
M3: Analysis of different planning tools and their application for preparing and forecasting
budgets..................................................................................................................................10
TASK 4..........................................................................................................................................10
P5: Comparison between organisations management accounting system to resolve financial
problems...............................................................................................................................10
M4 Analysing financial problem that can lead organisations to sustainable success..........11
D3: Evaluation of financial planning tools for responding financial issues.........................12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Management accounting is the process of inspecting all the activities happen in and
around an enterprise while considering the requirements of the enterprise. It helps managers to
take decisions within the organisation by providing them accurate information of business and
position in the market. It produces reports and records of internal environment of the business,
and these reports are normally private and for insider use only. It is a decision making tool that is
helpful in passing judgement about the organisation. It has an important place in the business and
widely imposed by managers to achieve predetermined goals and amended control over the
business (Arjaliès and Mundy, 2013).
Airdri is hand dryer manufacture company in Witney, England, UK. It was the first hand
dryer manufacturer in the world to obtain the Quite Mark TM from the noise abatement society.
It uses management accounting to get broad knowledge of the customer's needs and preferences
to provide them best product. It is the world leader in the hand dryer development companies.
The dryers supplied by Airdri consumes low energy and these dryers are environment friendly.
By providing best products to the customers it is becoming the first choice of the customers in
UK. In this report different planning tools are used to determine cost, profits and risks of the
organisation, and those tools are used to resolve financial problems. Management accounting
system and its reporting help to analyse the market position of organisation.
TASK 1
P1 Management accounting system and essential requirements of its types
Management accounting system elaborated Airdri's financial system and develops reports
for internal and confidential use by managers. It is used to form strategies to run business in a
cost efficient way. These reports include budgeting, break even charts, product cost analysis, and
forecasting of recent trends for the business. Airdri's outstanding management system help to
control the business activities and to make such policies that are helpful in the resolution of
financial problems. Types of management accounting system are described below:
Inventory Management system – It allows Airdri to control and handle inventory
activities from the time goods get into a ware house until they move outside. It is the assemblage
of technology and operations that administer the observation and maintenance of products. In
this system inventory control, purchasing, inventory optimization, back ordering etc.
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responsibilities are beard by the management. This system in very important for the management
to keep a record of inventory and to minimize the waste of inventory in improper activities.
Price optimization system – It refers to the system where price of the product depends
upon the demand of the customer. If Airdri set prices too high for the customers then customers
won't be able to purchase the product, but it focuses on the customer's demand and this behaviour
is helpful to set a positive image in the mind of customers. This system is used by company to
determine customer’s behaviour that how they will react to the price change. It is also helpful for
the company to set those price that help to meet the objectives of company (Coad, Jack and
Kholeif, 2015).
Cost accounting system – It is used by Airdri to keep a track record of all the costs
involved in the production of each unit of product. It helps the management to form strategies,
planning, controlling, staffing and other functions of decision making process. It provides
information to the management to implement such functions that can help to increase
profitability and productivity of the business. It helps to evaluate the business's running status
and effectiveness of product among the customers (Bromwich and Scapens, 2016).
Job costing system – It is used by Airdri to accumulate direct material, direct labour and
overheads involved in the production of the particular product. It may have to be tailored to the
needs of the customers. This system assures that revenues are related to the expenses recovers in
the same time period. With the help of this system, managers can keep trail of the cost of each
activity, keep data which is frequently more applicable to the dealings of the business. It is used
to measure the cost which is involved in the production of a particular product.
 Job order costing – It is the most common cost accounting system used by Airdri. It
distributes cost to the products based upon the production bulks. It is used to identify the
cost related to a specific bulk of the products, and used for the small size of the group of
the products in Airdri.
 Process costing – In Airdri it is used to divide cost to product based upon the division in
which the cost occurs. It is used when identical units are almost aggregate produced. It is
enforced when there is vast production of related products.
P2 Management accounting reporting and its methods
Management accounting reporting is the clear picture of how Airdri is performing in the
market. It provides an atomistic prospect of the business. It is used for estimating, decision
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making, measuring performance of the company. It provides insider content of the organisation
to the management through financial accounting. These reports help managers to figure out costs
of the components that are produced through raw information. This system is used by Airdri to
make budget reports, to approximate future risks and to get information of work status of the
company (Ji, 2017). Types of management accounting reporting systems are discussed below:
Account receivable report – It is used as a collection tool for Airdri, as it provides
information of all due payments of the customers. It is helpful for the management to find out the
potency of the credit and collection activity. These reports provide the actual information of
pending amount and the time when the amount is receivable. An organisation required these
reports because these reports consist information of debtors, and specify the amount which is
outstanding. It is a cyclic report that differentiates Airdri's account receivable reporting to the
duration of time an account has been owed. It is used as a tool to regulate financial capability of
customers. These reports are preconditioned to identify that how much money is payable by the
customers of the company and how it can be collected from those customers. In such type of
reports customers are listed in alphabetic order or by the amount outstanding (Klychova,
Faskhutdinova and Sadrieva, 2014).
Budget report – It is an insider report which is used by Airdri to compare forecasted
projections to actual projections. These reports are based on future predictions and estimation;
these can be inaccurate or there can be error in the budget report. Financial data of the company
is recorded in it, so these reports are also known as finance reports. It should be always an
elaborated document but it depends on the owner of the company that they want it to be detailed
or precise. It provides a detailed summary of the income and expenditures to the finance handler
of Airdri. It shows budgets of various departments of company, it includes transaction,
productions, sales and merchandising budgets. These reports are very important for the
organisation to get the insider report of the organisation and to keep a record of fund utilization.
Inventory and manufacturing report – In business inventory may be characterised as
goods or services produced by the company. Proper recording of inventories presses the utility of
financial authorities for prospective and existent capitalist of Airdri. There are many different
ways for each company to manage inventories in their own way. These reports are helpful in
estimating performance of business and this will also help the business to grow faster. These
reports show the process of product manufacturing from warehouse to supply. These reports are
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helpful for the company to manufacture reports with less mistakes. Managers use these reports to
resolve inventory and production related errors (Laine, Paranko and Suomala, 2012).
Job cost report – This report lists each job Airdri is operating on and lists the total cost
obtained on the job in the earlier period. Job costs are also fallen in some concepts like labour
cost, material cost, overhead cost etc. It evidences the current cost of a product. This report is
helpful for Airdri to identify problems and correct them before they turn out of the hand. It can
determine a unit that continually execute above or below budget, or a product that needs to be
improved. These reports refer particular fields allowing Airdri to make reports on productivity,
utilisation and employment. It offers miscellaneous reports to the company to help and manage
business in a cost effective manner.
M1 Benefits and applications of management accounting system
Management accounting system is helpful for Airdri to keep a track of cost, to pass
judgement on the position of the business, to improve productivity and to produce such products
so that the company will remain at the same position in the market. It helps Airdri to increase
profitability in a cost impressive way so the company and the customers both can last in the
market. It is also beneficial to keep a record of inventory for Airdri, to minimize waste in the
production.
D1 Integration of management accounting system and its reporting
Management accounting system and its reporting are used by Airdri to control budget, to
identify credit ability of the customers and to get insider information of the company to take
appropriate decisions. It is used to identify the cost involved in the production and to plan that
how that cost will be recovered from the revenue of the same.
TASK 2
P3 Calculation of cost using an appropriate technique
Cost: It is a monetary assessment of activity, equipment’s, resources, time and
substitutes, risks etc. All the expenses that are involved in the production are cost of that
particular product. When a company want to earn a high profit then the company have to set the
appropriate cost for the products. It is the worth which is concerned with the production of the
product. For customer’s cost is the amount that they have to pay the seller to buy a particular
product (Leitner, 2013).
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Airdri is a manufacturing company of hand dryers, so the company has to set the suitable
cost for the products so that customers find the product pocket friendly. Every customer wants to
know the cost of the product before buying it from the seller, if the seller is charging
inappropriate amount for the product then customers refuse to buy the product. Cost is the total
amount of money that Airdri spend on running its business. The cost of product also considers
the loss, damage, injury of it.
Marginal costing: It is the additional cost which occur when company is producing extra
units. When company reached to the breakeven point then the company have to calculate
marginal cost. These are the variable cost involving labour, material and overheads for the
production of additional units. In organisations where average costs are constant then it is equal
to average cost, but in large organisations with high average cost it is comparatively low.
Absorption costing: It means that all the costs incurred in the production, recovered
from the sales of the same. The results of absorption costing are accurate as compare to other
methods. Direct material, direct labour these are the costs allotted to products under an
absorption costing system (Mistry, Sharma and Low, 2014).
Calculation of net profit with the help of margial costing method:
Particulars Amount
Total revenue 33000
Marginal Cost 9600
Total production 12800
Closing stock 3200
Total contribution 23400
Fixed costs 5900
Net profit 17500
Calculation of net profit with the help of absorption costing method:
Particulars Amount
Revenue 33000
Cost of sales 14025
Gross profit 18975
Selling & Administrative expenses 3300
Net profit/ operating income 15675
Break even analysis: Such analysis is done in order to find out the requirement of Airdri
that how much they are willing to sell their products and services on monthly or annually basis
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so as to cover their cost endowed in doing business. It refers to the point at which company is
neither in loss nor in profit but recovering the cost (Proctor, 2012).
a. Calculation of BEP in units:
Sales per unit 40
Variable costs 28
Total contribution 12
Fixed costs 6000
BEP in units 500
b. Calculation of BEP in amount:
Sales per unit 40
Variable costs 28
Total contribution 12
Fixed costs 6000
Profit volume ratio PVR 30.00%
BEP in sales 20000
c. Calculation of desired profit which is 10000
Profit 10000
Fixed costs 6000
Contribution 16000
Contribution per unit 12
Sales 1333.33
Margin of safety: It is the difference between inbuilt value and industry value of the
product. It is the value of investing in which an capitalist only buy products when their market
price is lower then the constitutional value. It is the diminution in gross revenue that can happen
before the break even point of a business is achieved.
d. Margin of safety if company is selling 800 units:
Total sales in units 800
Break even 500
Margin of safety 37.5
M2 Various types of accounting techniques
There are various techniques can be implemented by the management of Airdri in order
to influence the profitability of Airdri company. Following are the techniques:
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Standard costing: It is a management tool and this technique is used by various
companies to identify the difference between actual cost of goods that are produced and the
standard cost of the goods. It is related to the initiation of approximated cost for all activities
inside the company (Ratnatunga and Alam, 2011).
Marginal costing: It is useful to implement to compute net profitability of the
organisation, and it includes variable cost that increases the net profits of the company. So most
of the companies apply marginal costing technique.
Historical costing: It is such a method which believe in acquiring cost of material used
in production process instead of considering market value. It helps the company to find out the
existing profits.
D2: Data interpretation
As per the preceding computation, it is clear that marginal costing method will be more
profitable to Airdri as compared to absorption costing method. It is because of growth in profit
while implementing marginal costing method. While calculating net profits, the marginal costing
method results £17500 as profit whereas absorption costing method results £15675 as profit.
Thus, the variation of £9600 in profit comes due to fluctuation in variable cost. In Break even,
the total number of units sold are 500 and total amount of sales revenue to attain breakeven is
20000. If Airdri is willing to earn minimum profit of £10000, Airdri need to achieve sales
revenue of 1333.33 units, margin of safety is 37.5 when 800 products are sold.
TASK 3
P4: Advantages and disadvantages of Budgetary control planning tools
Budgetary control is a mechanism that helps in identifying the difference between actual
incomes and expenses with estimated incomes and expenses. It analysis the entire budget system
in a way of a control system which is necessary in the beginning, during and after completion of
process. This technique ensures Airdri, UK managers that resources limits are adequate and they
are properly used. Company create their planning process in such a way that helps them in
implementing properly and also identify whether they need any alternatives to generate profits
(Schaltegger and Burritt, 2017).
Steps of budgetary control:
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 Establish a target of performance which linked all the levels of management in the
preparation of budgets.
 Recording of actual performance based on information collected.
 Compare the actual performance with planned one.
 Respond to difference between planned and actual performance control.
 Calculation on the variances and reasons for their differences.
 Respond immediately if needed to redress the situation.
Budgetary control planning tools is used to regulate various budgeted figures for future
and compare them with actual performance. Some planning control tools are mentioned below:
Forecasting Planning: This planning tool begins with definite assumptions based on
manager’s experience, knowledge and judgement. It is used as forecasting techniques that helps
in making future estimation based on previous and current analysis of Airdri, UK production and
sales trends, so that company takes important decision regarding expenses and revenues.
Average forecasting, qualitative and quantitative approach, time series, judgemental forecasting
and many more forecasting methods are used as planning tool. This tool is helpful for company
in evaluation of production, selling and distribution and estimation of budgets (Smith,
Brännström and Jansson, 2015.).
Advantages Disadvantages
 Airdri, UK provides valuable
information for decision making with
the use of qualitative and quantitative
forecasting tool.
 It technique helps in company's
operations with bring favourable
results.
 Future events are unpredictable Airdri,
UK finds this as disadvantage of
forecasting because it is different in all
cases as it is unexpected element that
can make this method unprofitable.
Scenario Planning: In this tool company analysis several companies to create a long
period flexible plan which helps in prediction of uncertainties in the company and make plans
accordingly. Scenario planning tool sets a framework for Airdri UK on the basis of statistical,
historical details of company to become more demanding and fast growing in future with well-
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defined ways by which they can alter it according to the situation for grouping options and
creating fruitful future.
Advantages Disadvantages
 Airdri UK is using this approach not
only for current accounting period but
also for upcoming accounting years.
 It is an appropriate planning tool
company is considering it for weak
points and respond them into long term
planning
 This planning approach can change the
internal culture of company by make
them free from uncertain and
impossible situations and management
will not focus on future innovation.
Contingency Planning: This budgetary control planning tool prepare company to
respond properly in an emergency situation like unexpected results other than expected plan. It
helps in risk assessment that Airdri UK may face in future and work effectively for future
uncertain events. Company using this planning tool as a positive side against the happening of
unpredictable functions. In the situation of crisis this tool is often developed and prepared for any
uncertainty (Sisaye and Birnberg, 2012).
Advantages Disadvantages
 Airdri UK uses this tool as to minimize
loss in production by working
continuously without any unexpected
circumstances.
 It is a task and performance oriented
technique which emphases on better
decision making.
 Company finds contingency as a
complex tool for some situations
because management can't ignore
variable factors which are also
related to uncertainty.
M3: Analysis of different planning tools and their application for preparing and forecasting
budgets
Airdri, UK analysis the needs of an effective budgetary control process to set operational
and financial objectives of forecasting budgets. Company is basically using three planning
control tools like forecasting, contingency and scenario tools. A good planning tool i.e.
contingency helps company in production loss minimization which impact on the performance
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management of company and avoid unsuccessful scenarios based on forecasting. Scenario
planning tools are flexible and applied by company in specific situation. These tools help in
achieving estimated target for corrective measures.
TASK 4
P5: Comparison between organisations management accounting system to resolve financial
problems
Financial problems are related to shortage of money in functioning of organisation that
causes stress and trouble to management. Funds management, cash flows, inadequate amount of
financial resources, financial market instability and many more financial problems are facing by
company. Every organisation in the economy especially small scale company like Airdri, UK
needs to maintain strong financial position by adopting advanced and latest technologies in their
performance so that it achieves maximum optimum output and not faces financial issues like
delay in manufacturing products because of loss performance of employees and recovery of
debts. To overcome from financial issues company needs to determine the sources of troubles
that means if they lose money from particular fault, overspending or unable to pay their debts.
These issues can be resolve by proper use of management accounting systems financial tools in
an effective and efficient ways (Van der Stede, 2015). Some tools are explained below:
Key Performance Indicators: This tool is used to measure employee’s performance on
the basis of their previous performance which is compared with the actual performance. This
approach is also used to identify effective and efficient working of company to achieve success.
Focusing on the performance of Airdri, UK is considering the percentage of revenue from
returning buyers as a potential KPI and management also give reward to high performer in order
to promote their workforce. The key steps of identifying KPI are having a pre characterized
process and their requirements, qualitative or quantitative measurement of the outcomes and
comparing it with goals then evaluation of variances and modified resources to achieve short
period objectives. 'Leading Indicators' and 'Lagging Indicators' are the two types of KPI.
 Leading indicators is mainly focuses on organisation's manufacturing performance and
it's future growth but these predications are not accurate always like Airdri, UK is using
this KPI indicator as to solve issue of delay in manufacturing products which impact on
job profitability.
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 Lagging KPI indicators measures the employees performance in terms of success or
failure of business. Company lagging is measured by satisfaction of consumers as success
or failure in their performance.
Benchmarking: This approach is used to measure performance of employees using
particular indicators like cost, productivity, hours per unit of measures resulting in company’s
progress. It is tool which compares company performance within process or outside and
executive favourable practices to alter their performance. There are three types of benchmarking
techniques which an organisation applies in different levels of management such as process,
strategic and performance benchmarking. Airdri, UK is using performance benchmarking for
increasing motivation among employees whose efforts and talent helps in completing task on
time in an efficient manner which leads to profitability (Benchmarking, 2018).
Financial governance: It is a guidelines made for employees of company so that they
work effectively in a right direction to achieve maximum profit in near future. This rules and
regulations helps in minimizing the chances of conflict between employees which straightly
impact on the performance and operation of company.
Comparison:
Airdri, UK Sollatek Ltd.
This company deals in manufacturing of hand
dryer with an aim of increasing market.
This company deals in offering electronic
equipment’s with an objective of energy
consumption.
This is a small size company thus adopt
Benchmarking and KPI financial tools for
employees appraisal so that they achieve target
in a given period of time.
This company market is much large than
Airdri, UK and it adopt financial governance
financial tool to maintain its position in the
market.
M4 Analysing financial problem that can lead organisations to sustainable success
Airdri, UK analysis financial issues which causes defects in products and insufficiency of
funds that affects the organisation profitability. Therefore, company finds KPI and
Benchmarking as a preferable financial tools which is also adopt by another company when they
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are new in market. This tools helps in profit maximization and performance appraisal (van
Helden and Uddin, 2016).
D3: Evaluation of financial planning tools for responding financial issues
KPI and Benchmarking are the two types of financial tools used by Airdri, UK for
creating strong position in small scale market and set objectives for enlarging in future. These
techniques help company in adopting innovative and up to date technology which promote both
employees and company to achieve target on given time frame and also increases their efficiency
in market.
CONCLUSION
The above project report concluded that management accounting plays an important role
in taking several managerial decisions which impact directly on the performance of the company.
Management accounting reporting like inventory management report helps company in proper
management of reporting. Marginal and absorption costing methods of costing are used in
determination of company's operating revenue which is also helpful is increasing company's
sales and decreases their non-related costs. Budgetary control planning tools is applied by
company is such a way that helps in forecasting their budgeted profits and their contingency
planning tools applied in unexpected or unpredictable events which company faces during
process. Company uses financial tools like KPI and Benchmarking to deal with financial
problems and generate more business. Above all points helps management to take proper
decision based on information and quality of product for achieving desired goal.
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REFERENCES
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Ratnatunga, J. and Alam, M., 2011. Strategic governance and management accounting: Evidence
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Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts
and practice. Routledge.
Sisaye, S. and Birnberg, J. G. Eds., 2012. An organizational learning approach to process
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Smith, D., Brännström, D. and Jansson, A., 2015. Redovisningens språk. Studentlitteratur.
Van der Stede, W. A., 2015. Management accounting: Where from, where now, where to?.
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Online
Benchmarking. 2018. [Online]. Available through:
<https://www.tutor2u.net/business/reference/what-is-benchmarking>.
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