Management Accounting Assignment : Airdri Limited

MANAGEMENT
ACCOUNTING

Table of Contents

INTRODUCTION
Management accounting is the part of accounting and it is continuous process of internal
system to measuring and identifying financial information for managers. It is different from
financial accounting because management accounting related to internal system and financial
accounting related to external system (Ball, 2013). In internal system, reports and accounts
provide to top management for decision-making process and in external system; reports and
accounts are provided to outsider of the business. Because of these reports taking effective
decision and invest further for gain more profit. In the particular report selected, company Airdri
limited, which is the first hand dryer manufacturer in the world. Business partners Peter Philipps
and Peter Allen founded it in 1974. The aim of the report to find out financial data regarding to
planning and decision making to control finance in an organisation. The report focused on
management accounting systems and their essential requirements in the context of a company
and determine their benefits. Apart from define different management accounting reports, which
are integrated with organisational process. In addition, apply a range of management accounting
techniques to produce appropriate financial accounting documents. Define different planning
tools, which are used in management accounting.
TASK 1
P1 Management accounting and their essential requirements
Management accounting is the process to produce different financial reports to present
finial statements of the company in front of two management, which can help to them in
decision-making process. In these reports, provided information related to financial and
statistical information and provide on accurate and timely basis.
Different types of management accounting system
Management accounting system focused on observation and determination the effect of
management decision (Bouten and Hoozée, 2013). An effective management accounting system
reaches into all sections of a business such as IT, finance, marketing, human resource, operation
and sales. In managerial accounting both types data financial and non-financial which can help to
top management in effective decision-making process. Different systems of management
accounting applied in efficient manner to fulfil requirement of a company. There are mentioned
different management accounting systems -
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Inventory management system – According to this system all business activities related
to manufacturing on the inventory of a business are considered as the part of this system. In
Airdri limited, it is enforced through the management in the subject to maintain all records as
well as their clients. The company has applied different inventory system in order to manage and
control stock level according to requirements these are LIFO, FIFO and AVCO. According to
LIFO method last in first out method apply, it meant which stock come last, that should sale first.
In FIFO method first in first out it mean which stock come first that was first sale. In AVCO
method average cost method which material used on average basis of manufacturing process.
The manager of Airdri limited apply FIFO method to manage all business activities and keep all
detailed records (Cadez and Guilding, 2012).
Price optimization system – This system mainly used by manufacturing company in
order to know perception of different customer according to products and services. Based on
customer feedback company has to set particular amount of their products and services.
Management of Airdri limited has to apply this system to know actual price of their products and
provide financial services according to them. Best suitable price attract to customer for purchase
their items, it will increase sale of company, and they are earning more profit and get success.
Job costing system – The particular system applied by different organisation in order to
record performance of job of their specific customers... According to this system, the company
has record all activities of their customers and decided how to provide product and services to
them. In Airdri, limited mangers follow all information, which is related to cost and specific
production or other job. This information important to record to submit cost information under a
contract where cost are reimbursed. With the help of this system measure accuracy of company's
predication system (Carlsson-Wall, Kraus and Lind, 2015).
Cost accounting system – In the system used a particular framework for an organisation
in order to predict the cost of their products as well as profitability which is related to operating
activities in the subject to evaluate total expenses which are faced by company to deliver a
service. In Airdri limited applied cost accounting system to keep record of accomplishment of
each product and services, which is manufacturer by company and sale out to their customers.
The particular system followed by company for providing valuation of different products and
know about cost control. It is categorised into two parts first one in job order and second process
costing.
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P2 Different methods used for management accounting reporting
Small as well as large companies are use different management accounting reports to
record of accomplishment and take detailed information about the company, which is related to
different departments. These reports are used by companies in planning, measure performance
and decision making process. The particular reports belongs to each departments and present
detailed information to manager to provide help in decision-making process (DRURY, 2013).
With the help of these reports, the company has prepared effective strategies and policies. The
manager of Airdri limited produce various reports, they are as following -
Budget Report – Small as well as large business can prepare budget report to estimate
performance of a company generated whole report. These reports related top each department to
understand the grand scheme of their business. In the context of Airdri, limited budget estimation
is mainly based on previous experience though a great budget always caters for unexpected
circumstances that might arise. In the list of budget includes all incomes & expenditure. A
company tries to accomplish its goals and objectives at the time of budget amount. These report
guide to manager regarding to employee incentive, renegotiate terms and suppliers.
Performance Report – The report are created to appraisal the performance of a company
as a whole as well as for each employee at the end of the term. These report are prepared
according to department wise where assess performance of each employees and analysis their
performance regarding to appraisal system. These reports uses by manager of Airdri limited to
prepare strategic decision about the future of an organization. Individual can awarded for
providing deal as per requirement. Performance related report provide performance and capacity
of work in specific time. It is critical for company to measure performance of each employee
based on their work (Hall, 2016).
Cost managerial accounting report – Managerial accounting can compute the costs of
manufactured. There are including all raw materials cost, labour, overhead and any added costs.
The total of these items are divided by the amounts of product produced. The particular cost
report provide all details information about them. The manager of Airdri limited provide the
capacity to realize the cost of different items versus their selling prices. These reports provide a
clear picture all the mention cost related to production.
Inventory and manufacturing report – These reports are provided detailed information
related to manufacturing of goods. It also provides remaining and used stock in process of
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manufacturing. With the help of this report, the manager of Airdri can estimate which time they
need to material for production and how much stock going to wastage. By viewing, this report
manager can ensure about the continuous supply of finished products and facilitates the
unhandled production. It can reduce dependencies on other organisation and on the time order
material from production site for continue manufacturing of items (Hiebl, 2014).
Account receivables aging reports – The particular report helps to manage and control
flow of the cash in a company. This report belongs to finance section where recorded all detailed
information related to credit policy. There are mentioned breaking down the remaining balances
of clients into specific time periods which can allow to managers for identify the defaulters as
well as find issues in the company regarding to collection process.
M1 The benefits of management accounting systems and their application in the organisational
context
There are defined different system, which are applied in organisation. These are provided
different benefits in order to get success for long time.
Inventory management System – When the system apply in the company so company
can track all records and maintain for further activities. It is important to know position of stock
level at each stage in manufacturing company because it is primary resources of a company. The
company also use inventory system related software which can help to easily track all record and
reduce the amount of wastage quantity (Kihn and Ihantola, 2015) .
Cost Accounting System – The particular framework used by the firms to predict the cost
of their products for profitability analysis, cost control and inventory valuation. This system
mainly based on job order costing and process costing. With the help of this system apply
techniques for the costs of products, processes and projects in the subject to correct amounts on
the financial statements.
Price Optimization System – This system provides many advantages of a company in
order to get success and long time growth. To assess actual price of each product so for this
apply this system. Because it can help to know different reaction of different customer according
to their products and prices. They can take feedback from customer according to that set best
suitable price. It can help to attract more customer to purchase their products and services.
Job Costing System – The particular system apply in company so company can get
information as compare of previous job with current job. This system through get pricing
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strategies for the future perspectives. It can provide all detailed information which is related to
direct materials, direct labour and overhead. These items provide all detailed information for
fulfil the requirement of the customers (Kokubu and Kitada, 2015).
D1 Management accounting system and management accounting reports integrated within
organisational process
Management reports Integrated with in organisational process
Budget Report The particular report integrated with the process of Airdri
limited in order to understand business activities from the
future perspectives. In this report, include budget of each
section in order to predict income and expenses to reduce
upcoming risk in future.
Performance Report This report indicates the performance of individual and
organization for making smooth organisational process. With
the help of this report, know actual performance of every one,
which can help to take appropriate decision and make
strategies. This report help provide appraisal of employees
according to their performance.
Inventory and manufacturing
report
This report mainly prepare by manufacturing company to know
inventory system at each level of an organisation. This report
prepare by company to know used and unused inventory in
producing process. It can help to know quantity of raw
material, remaining goods and finished goods (Merchant,
2012).
Cost managerial accounting
report
This report important part of organisation process because
inventory primary source of any organisation. With the help of
this report, know cost of each product and services, which are
produced by company. It presents direct labour, direct material
and overhead.
Accounts receivable Agin It is the integrated the process of Airdri limited because this
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report report presents those clients who take material on credit. With
the help of this report, know cash inflow and outflow to dealing
problems with accounts. It can help to solve by to apply
different strategies.
P4 Advantages and disadvantages of different types of planning tools used for budgetary control
Budget – It is a formal statement where recorded predict amount of income and expenses
which is based on plans and objectives. The particular document estimate that makes by
management to estimate income and expenses for an upcoming period to accomplish goals of the
business.
Budgetary control - Budgetary control is a kind of tool which manages the performance.
In these managers sets the financial goals and compare the actual performance of the company. It
includes various planning tools in it which have own importance in the context of performance
management. In these, controlling technique managers prepares various kind of budgets and then
compare the performance (Parker, 2012). Apart from these features, it is beneficial in making
estimation of future income and expenses that helps in making plans and strategies to achieve the
goals. Budgetary control system includes various kinds of tools. Some planning tools are
mentioned below:
Forecasting tool- Forecasting tool is a tool that protects a business from the uncertainty
of the future. It predicts about the future activities based on some assumption that helps in
budgeting because budgeting is totally based on the forecasting. Herein, it is important to know
that this does not forecast accurately, it makes just an estimation. In addition, its framework of
working is the past activities, organisation's nature and many more factors. This forecast the
different activities with the use of various techniques like expert opinion method, Delphi method
etc. Airdri Company applies this tool for predicting the different aspects of budgets. It has some
advantages and disadvantages that are described below:
Advantages:
 This tool helps the company in identifying those activities, which can be beneficial for
the company. Due to this company can allocate their resources effectively in meaningful
activities.
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 It helps the company in offering only those products and services according to the
demand pattern in the market.
Disadvantages:
 Forecasting tool is based on the past information and sometimes it becomes difficult for
the company to find all the past information and data. In that kind of situations,
companies fail to predict (Richardson, 2012).
 It requires too much time and cost for accurate forecasting and this may prevent the
company from focusing on other activities.
Solution
 This tool provide help to estimate income and expenses regarding to future
Fixed Budget- Fixed budget is also known by the static budget. This type of budget does
not due to change in sales or volume. It is suitable for those kind of activities that can be remain
fixed in the future. Airdri Company use this tool for the activities that are going to be unchanged
in the budgeted time duration. Static budget has some advantages and disadvantages, which are
described below:
Advantages:
 Fixed budget are easy to maintain because these budgets allows company to track the
performance without any issues. As well as it does not require to be updated each month.
 This type of budget helps the companies in making planning according to the future goals
and objectives.
Disadvantages:
 This budget cannot be change in accordance to the variation in the sales or other factors.
Due to this sometimes companies cannot make changes in the compulsory situation of
change.3
 The framework of this budget is the past activities and information and it is not possible
for the new businesses.
Solution
 There is using fixed amount that are continue for maintenance and other expenses.
 It can help to create proper planning regarding to future business activities.
Flexible Budget- Flexible budgets are the budges, which can be change as per the need
of organisation. It is also known by the variable budget. This is appropriate for the kind of future
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activities, which can be flex further. Airdri Company use this budget, which helps them in
making the changes in the budget when they wants to change in it (Schaltegger and Csutora,
2012). Flexible budget has some advantages and disadvantages, which are following:
Advantages-
 Variable budget is helpful in the performance management because it makes easy for the
managers to evaluate the performance of organisations and individuals.
 This budget is less stressful; it does not put pressure on the company because
organisations can make changes in this as per their suitability.
Disadvantages
 Due to regular and more changes, this budget can become confusing to understand. As
well as it needs to circulate in the entire company whenever there is any change in
budget.
 Flexible budget enables cheating in the company because the standard of performance
evaluation can be change to hide the inefficiency of workers.
Solution
 The particular budget provide flexibility and any time change amount of cost od
particular items.
M3 Use of different planning tools and their application for preparing and forecasting budgets
Planning tools of budgetary control plays an important role in the preparation of accurate
budgets. This is why because, various planning tools consists all necessary information, which is
required during the estimation of incomes and expenses of budget. In addition, it provides a kind
of framework of designing the pattern of budgets (Shields, 2015). Herein, the selected company
Airdri applies a range of tools of budgetary control for making the accurate estimation of
budgets. So overall, planning tools are too much crucial for budget forecasting. These tools are
playing important role to predict the amount of income and expenses because it can help to know
upcoming risks.
TASK 2
P3 Calculate costs using appropriate techniques of cost analysis to prepare an income statement
Cost – It is defined as an amount which is used by every organisation to show different
tasks and projects in effective manner. Cost is very important part of any organisation because it
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can control cost maintain business activities. It can help to create level of profit and determine
the terms like direct material, direct labour and different resources.
Cost Control – To control cost of business's operation and production so there is need to
analysing the cost. The concept of cost control help to reduce amount of different activities
which is not appropriate for business. Cost control include the process of to find out different
amount in actual budget from budgeted amount. It is mainly applying on inventory to manage in
different stage of production. There are two essential techniques which can use to define for cost
that is -
Absorption costing – It is a method of costing where include all expenses and all costs
related with manufacturing of particular product and it is based on generally accepted accounting
principles. There are mentioned direct costs connected with manufacturing a product where
include wages for workers. In this method raw material used in producing a product and all of
overhead cost like utility cost which can depend on producing a good. This is an important tool
of budgetary control and it does not change in the entire budgeted time.
Profit and loss statement under absorption costing
Particulars May June
Sales Revenue @£13 3900000 3510000
Less – Cost of sales
Opening Inventory Nil Nil
Direct Material 450000 450000
Direct Labour 600000 600000
Fixed Overheads 400000 400000
Less – Closing Inventory Nil 390000
Gross profit margin 2450000 1670000
Less – Non production cost Nil Nil
Net Profit 2450000 1670000
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Marginal Costing – It is a principle where by variable all variable costs are charged to
cost units and fixed costs referable to the particular period in written off in full against the
contribution for that period. It is the find out of marginal cost and their effects on the changeable
profits in volume. It can show difference between fixed costs and variable cost because marginal
cost divided into two parts fixed and variable costs (Taipaleenmäki and Ikäheimo, 2013). They
use planning tools like forecasting tool, fixed budget and variable budget. Each of these planning
tools plays a significant role for company's cost analysis.
Profit and loss statement under marginal costing
Particulars May June
Direct Material 300000 300000
Direct Labour 400000 400000
Total variable cost 1050000 1050000
Production units 300000 300000
Sales units 300000 270000
Closing inventory - 30000
Per unit variable cost 3.5 3.5
PART 2
Financial Statement
2013 2014 2015
EBITDA £ 2088795 £ 1272645 -£ 27006
Profit after tax £ 1477895 £ 1284655 -£ 289449
Working capital £ 5696692 £ 6538567 £ 5780597
Employee Numbers 41 37 44
Total Liabilities £ 3562318 £ 1512926 £ 1552906
Total Assets £ 11309034 £ 10465811 £ 9616342
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Reporting period 12 12 12
Turn over £ 11325680 £ 10845593 £ 9350336
Net Assets £ 7746716 £ 8952885 £ 8063436
Interpretation – From the above report it has been analysed that the earning of the company in
2013 to 2015 such as £ 2088795, £ 1272645 and -£ 27006. It can show in 2013 and 2014, the
position of the company is good but in 2015 it will go down. There are analysing of total
liabilities and total assets to that will be decreases, it means bad position of the company.
Turnover of the company based on the net income and after tax deduct amount of tax and
interest. After the tax amount of the company from 2013 to 2015 - £ 1477895, £ 1284655 and -£
289449. It can show company in 2015 have bad position that's why face critical situation.
Accounts 2013 2014 2015 2016 2017
Cash £ 4078765 £ 2319289 £ 930175 £ 785570 £ 1050753
Net Worth £ 7746716 £ 8952885 £ 8063436 £ 8110743 £ 7118401
Total Current Assets £ 8982810 £ 7705704 £ 6953681 £ 7100830 £ 6399433
Total Current
liabilities
£ 3286118 £ 1167137 £ 1173084 £ 1038187 £ 974117
As per the above table, it is determined that in 5 years cash continue increasing of
company year on year and it will affect to net worth in order to as increase and decrease way.
With the help of total current assets and total current liabilities there are calculate working
capital and current ratio of the company -
Working capital = Current Assets – Current liabilities
2013 = £ 8982810 - £ 3286118 = £ 5696692
2014 = £ 7705704 - £ 1167137 = £ 6538567
2015 = £ 6953681 - £ 1173084 = £ 5780597
2016 = £ 7100830 - £ 1038187 = £ 6062643
2017 = £ 6399433 - £ 974117 = £ 5425316
Current Ratio = Current assets / Current liabilities
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2013 = £ 8982810 / £ 3286118 = 2.73
2014 = £ 7705704 / £ 1167137 = 6.60
2015 = £ 6953681 / £ 1173084 = 5.93
2016 = £ 7100830 / £ 1038187 = 6.84
2017 = £ 6399433 / £ 974117 = 6.57
As per the above calculations shows about the working capital of the company has been
increased in mid of the year after that it is decreased due to decrease amount of current assets and
current liabilities. It is also affect on the current ratio of the company and their it is increased
year by year. The current ratio shows the liquidity of the company in order to know availability
of the cash in business.
M2 Apply a range of management accounting techniques and produce appropriate financial
reporting documents
The particular accounting technique the company has analysed actual position of the
company with the help of absorption costing method and marginal costing method. These
methods provide to determination and predication of accounting techniques to know accurate
balance of profit. There are described different types of management accounting techniques in
the context of Airdri limited some are given below -
 Historical cost accounting – This method used by company to calculate value of assets
in the subject to accounting way. The assets of a company mainly based on the nominal
and original cost that was selected by company according to their rules and regulations
(Ter Bogt and van Helden, 2012). The particular method based on the general accepted
accounting principles. In the context of Airdri limited, apply this method to take decision
of present products price because of previous product prices. Due to this company
concentrate on the activities, which are quite important, because they need not to update
the budget and this saves the time.
 Financial planning – In this method design a planning to calculate about the finance and
money through decision policy. This accounting helps to know various source of money
and apply a particular plan. It is very important technique because it is efficiently use in
finance. The Airdri limited apply this technique to make upcoming plans. When company
have much more defaulters that time company complete transformation to tighter credit
policies as cash flow is critical to the operation of any business.
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D2 Produce financial reports that accurately apply and interpret data for a range of business
activities
In the particular table it has been analysed that solved numerical of company is getting
net profit in both the method of income statement. In the absorption, costing method company is
selling 270000 units of £3510000 and it is deducted by cost of goods sold to get gross profit of
£2450000 in may and 1670000 in June. This is the net profit in the absence of selling and
manufacturing overhead (Ward, 2012). As well as it works as an important tool for them in the
variable working environment
In the marginal costing method sales is of £3510000 and that is deducted by the marginal
cost of sales to get the contribution. There are calculated per variable unit that is 3.5 per unit This
contribution is deducted by the fixed overhead of £ 400000 to get net profit of £2450000. It is
recommended that company has applied marginal costing technique to analysis cost as well as
profit. Herein, the selected company Airdri implements the budgetary control system, which is
very important for them in making estimation of revenues and costs, as well as provide a basis of
performance evaluation.
CONCLUSION
From the above-mentioned report, it has been concluded that management accounting is
important part of any organisation, which can control and manage all business activities after
applying different systems. All system are related to each section and perform all business
activities in specific manner. Different management accounting reports are presented
performance of company and it is related to organisational process. The company has applied
different planning tools in order to understand budgetary control. These tools helpful in
preparing budget for each section. To solve calculation of and produce financial reports with the
help of costing method such as absorption costing and marginal costing. For this financial report
apply different techniques and apply a range.
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