Management Accounting Report

This report examines the importance of management accounting and its applications in a real-world scenario using Airdri, a manufacturer and supplier of hand dryers. It analyzes various management accounting systems, reporting methods, and cost calculation techniques. The report also analyzes the benefits of budgetary control and different planning tools used to address financial problems.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
P1: Importance of management accounting and various types of management accounting
system.....................................................................................................................................1
P2. Different methods used for management accounting reporting.......................................2
M1. Benefits of management accounting system and its applications...................................4
D1: Management accounting system and its reporting are integrated within organisational
process....................................................................................................................................4
TASK 2............................................................................................................................................5
P3: Calculation of cost using an appropriate technique.........................................................5
M2: Various types of accounting techniques and financial reporting documents..................7
D2: Data interpretation...........................................................................................................7
TASK 3............................................................................................................................................8
P4: Budgetary control and different types of planning tool and their advantages and
disadvantages used in budgetary control................................................................................8
M3: Uses and applications of planning tools for preparing and forecasting budgets............9
TASK 4..........................................................................................................................................10
P5: Responses of management accounting system to deal with financial problems ...........10
M4: Management accounting can lead organisation to sustainable success in responding to
financial problems................................................................................................................12
D3: Planning tools respond appropriately to resolve financial problems.............................12
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Management accounting is a method which support in various management activities
such as planning, organising, directing, controlling. It allows management to develop their
understanding regarding investments and financial decision. It helps company in identifying their
financial position by preparing proper income statement, balance sheet, statement of owner
equity etc. for a financial year. Thus, it is clear from the above that management accounting is
totally based on financial accounting and cost accounting.
Airdri is a manufacture and supplier of various luxury, highly reliable, energy efficient
and beautifully designed hand dryer that suit every wash room. It was founded in Oxfordshire
(UK) in 1974 by two partner Peter Philipp and Peter Allen. This report cover various
management accounting system, reporting method and its benefits that help Airdri to form a
healthy pricing strategy. Management also uses cost method for evaluation of product cost.
Manager Airdri applies different planning tool and budgetary control for its forecasting and take
several accounting system that help them to resolve financial issue for achieving target (Abiola
and Ashamu, 2012).
TASK 1
P1: Importance of management accounting and various types of management accounting system
Management accounting, a part of accounting, can be refer to a procedure of analysing
business costs and operations used to prepare intrinsic financial records, reports and account to
help manager's processes of decision making in attaining goals of business. The main objective
of cost accounting in Airdri (producer of hand dryer), i.e. the process of analysing business cost
and operation cost in order to prepare internal financial reports, records and account which help
their manager in decision making process for achieving sales goals. These reports helps Airdri
managers as it shows the amount of available cash, sales revenue generated, amounts of order in-
hand, state of account payable and receivable, raw material, inventories and outstanding debt.
Thus, it is important for company to measure their performance by preparing financial statement
that help them to expand sales and business. This is done by proper use of several management
accounting system like cost accounting, price optimisation, inventory management and job
costing that are explained below:
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Cost accounting systems: This accounting system known as product costing system
used by Airdri to estimate the cost of their product for making proper profits analysis, inventory
calculation and cost controlling. Airdri is constantly developing a variety hand dryer so it is
important for their management to make a proper use of their resources in effective way with
calculation of product cost properly. In this cost system managers first measure and records all
individual cost, then compare inputs results to output or result that help them in measuring
financial performance. Further, cost accounting system help Airdri to calculate the closing value
of inventory, work in progress and finished goods that help their management in preparation of
financial reports.
Price optimization system: This management accounting system is process of
maximising price against the customer willingness to pay. Airdri is a manufacturer and supplier
of hand dryer and wants to follow price optimisation system for creating a reasonable price in
such a manner that their customer might not get affected and will to pay the price of product.
Inventory management system: This accounting system is related to the process of
keeping an proper record/track of company's inventories. Airdri adopt this system as it help them
in proper storehouse, shipping, production, retail and other inventory movement of its product.
FIFO, LIFO and weighted average are an example of inventory management system. This
system is concerned with minimizing the total cost of inventory, while maximising the ability to
provide customer with product in a timely manner. Airdri use various inventory management
techniques to keep right amount of goods in hand to fulfil their customer demands that help them
to maximise profit such method are stock review, EOQ, Just-in-time technology (JIT) and ABC
analysis.
Job costing systems: This process involve the accumulation of cost of material, labour
and overhead for a specific job or a services. Airdri uses this system to keep records of any direct
and indirect cost that is involved in production of its product. Manufacturing firm like Airdri use
job costing to control the use of raw material, labour hours and rate of equipment by allocating
the cost of each customer order separately. With the help of this costing system, management set
their performance which help to quote price that allows to make a reasonable profit.
P2. Different methods used for management accounting reporting
Management accounting reporting refers to the formation of management reports that
help organisation in decision making and support its internal shareholder. This report consist of
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organisation cash availability, sales revenue, present status of company account payable and
receivable etc. Airdri wants to expand their position in market so the maintain proper financial
reports like trading account, profit and loss statement, cash flows and balance sheet. There are
several type of managerial accounting report like performance reports, account receivable,
inventory and manufacturing reports, job cost reporting that help an organisation to analyse their
performance of business and make profit (Bourne and et. al., 2014).
Various management accounting report are :
Performance report: A detailed statement that measure the result or performance of
some activity in term of success over a given period of time. This reports includes collecting and
distributing project detail, communicating project plans, usage of resources and forecasting of
project progress etc. Airdri prepare performance report for each employee on the basis of their
annual performance, detailing there activities versus there action plan. It also focus on current
status of risk and issue, variance in result, work completed during reporting period, work to be
completed, forecast project completion and other relevant information that attract stakeholder.
Account receivable reports: This report helps a company to keep a proper record of list
of past due and invoice payment. It shows all unpaid customers invoice grouped by the number
of days outstanding. Airdri prepare this report to keep track of its unpaid customer, total amount
of outstanding customer invoices, on the basis of number of days outstanding that might be 0-30
days, 31-60 days, 61-90 days and more than 90 days. This report help the collection department
of Airdri to find those invoice which are overdue. Management of company also uses account
receivable report to find out the effectiveness of the credit and collection function.
Inventory management reports: In manufacturing companies like Airdri, these report
are very valuable as it help their management to centralize data on inventory cost, labour and
other overhead if are included in production process. These report helps Airdri to review status
of the inventory by location and time period , profitability to the business, turnover of company,
demand of product etc. that help manager to make a sensible decision for company's operation
(Bryer, 2013).
Job cost reporting: These reports provides information about the current cost related to
various job in a company and help them to estimate accurately cost about, how the job is going
to finish. Management of Airdri create this report to identify various cost like direct labour,
equipment, production etc. It help manager to analyse recovery amount of investment that is
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involved in the production of product. This proper job reporting help a company to give positive
impact on their performance.
M1. Benefits of management accounting system and its applications
Management accounting system Benefits
Cost accounting system  It helps in measurements and improvement in
efficiency of business.
 It help to determine profitable activities of a
business.
Price optimisation system  It help management to price a product according
to demand.
 It help industry and life- cycle pricing.
Inventory management system  Proper inventory balance and turnover is
maintain.
 It help to overcome the situation of stock-outs in
an organisation.
Job costing system  It enables to increase the performance of Airdri
employee's.
 It is flexible enough to calculate particular
indirect cost.
D1: Management accounting system and its reporting are integrated within organisational
process
Airdri uses various management accounting system and its reports for effective planning
and controlling so that they are able to increase their efficiency and earn more profit. Company
use its resources in a great manner that will be helpful in dealing with future
circumstances/events which might be risky and effect their performance. Airdri uses Inventory
management system and report to keep proper records of inventory and price optimisation
system to find out the best price of the product to maximise their sales and earn decent profit.
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Airdri keeps proper records of account receivable by ageing reporting that help them to alter
their credit policy to recover due amount (.Carlsson-Wall, Kraus and Lind, 2015).
TASK 2
P3: Calculation of cost using an appropriate technique
Cost: An amount paid by a buyer or customer in order to get something from the seller.
In business, cost is a monetary value which a company has spent in order to produce a product
that may be in direct or indirect manner. Manager of Airdri must be able to determine the amount
of money they spent on the creation of good/product they offer for sale and be able to find out
the cost of customer. Airdri sell more hand dryer after determining accurate cost that led to
increase its market-share. In case management of Airdri are not able to set correct price, they
would sell their product at production price at that time their cost and income would break even
and they would not be able to make a profit.
Marginal costing: It is a technique used by management where in variable cost is
charged to unit of production, while the fixed cost are completely write off. The increase or
decrease in the total cost of a production of one additional unit of output. Airdri uses this concept
to take decision regarding production.
Absorption costing: It is a method of managerial accounting in which all cost whether
fixed or variable linked with manufacturing a particular product are accounted for using
absorption rate. Airdri uses this method to recover all of its cost like labour cost, material cost,
overhead cost by selling their product at a decent price. There manager also uses this technique
to create a proper report of inventory i.e stated in company's balance sheet (Klemstine and
Maher, 2014).
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
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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: Airdri uses this tool to determine what level of sales are required to
cover total fixed cost involved in production of its product. Management uses this tool to
determine the level of sales volume and production level at which business makes neither a profit
nor a loss, but cover all its fixed and variable cost. At break even point, all total variable and
fixed costs are compared with sales revenue in order to regulate sales volume.
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 the actual difference between actual sales of a company and its
break even sales. It is the reduction in the sales that occur before break even point. Under this
process, management analyse production processes and demand of that product to estimate how
much that product, Airdri will be able to sell in a period, these calculation make for company to
produce product (Kumarasiri and Jubb, 2016).
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 types of accounting techniques and financial reporting documents.
There are various concepts and techniques of managerial accounting that are used by
Airdri for the short and long project decision and operational measurement of performance.
Some of these techniques are explained below:
Standard costing: Necessary for cost control as it help in showing the difference in an
expected cost and actual cost.
Marginal costing: The management uses this technique to find additional cost incurred
for the production on an additional units of output. These all method are used for cost control,
decision making and profit maximisation.
Historical costing: It helps a company to provide past data of cost of each job, process
and production sector so that comparison may be made with standard cost and that will benefit in
cost control (Leitner, 2013).
Airdri find marginal costing method best technique to determine net profit of its company
as this can assist in administrating the financial practices and tend to more benefits.
D2: Data interpretation
It is clear from the above calculation that marginal costing method will be more
beneficial for Airdri as compared to any other method like absorption because it help company to
maximise its profit. Marginal costing method results £17500 as profit on the other side
absorption costing method results £15675 as profit, so there is a difference of £1825 in profit i.e
company should go with magrinal costing method. In break even analysis, if company sell
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500units at £40 per unit,- the total sales revenue to reach break even is £20000. If Airdri wants to
earn desired profit of £10000, they have to sell 1333.33 units and if 800units are sold margin of
safety is 37.5%.
TASK 3
P4: Budgetary control and different types of planning tool and their advantages and
disadvantages used in budgetary control
Budgetary control: It is a system of controlling management in which all actual income
and spending of a year are compared with the planned income and spending. This helps
management to identify that plans are being followed or not and if there is a any need to change
those plans in order to make decent profit. This budegry control method used by Airdri managers
to set financial and perfomance goal of their employee with budgets, compare the actual result of
their peformance and adjust those result if needed to improve the quality of employee. This
comparison help management to find out the difference and guide them to make a fair decison
that help in maximising profit.
Cash budget is developed below in order to portray budgetary control techniques.
Particulars Jan Feb Mar Apr May June
Cash inflows
Investment 8000
Credit sales 2000 3000 3000 4500 1500 3500
Total inflows 10000 3000 3000 4500 1500 3500
Cash outflows
Fixed : Equipment’s 2000 2500 1500 2000 1200 1500
Variable : Direct material 300 300 200 300 150 500
Total outflows 2300 2800 1700 2300 1350 2000
Net cash flow 7700 200 1300 2200 150 1500
Opening balance 0 7700 7900 9200 11400 11500
closing balance 7700 7900 9200 11400 11550 13000
Budgetary control is a control of an organisation that involves the use of budgets and
reports, throughout the period of action, evaluate and control day-to-day operation in accordance
with the goals specified by the budgets. This a routine process followed by Airdri to prepare
budgets and report in an appropriate manner. This includes following steps like-object are set for
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each employee performance, actual figures are recorded and these reports are then compared for
studying the performance and if performance is less than budgeted norms, a remedial action in
taken for growth. There are three planning tool used in budgetary tool that are explained below:
Forecasting tools: It is a process in which business look at there past activities plus their
current position in the market to predict a future. It help management of Airdri to predict sales,
budgets, market trends that help them to set and meet objective which help in increasing profit.
Manager on their experience, knowledge and judgement can forecast internal and external
factors that might affect business of Airdri (Makrygiannakis and Jack, 2016).
Advantages Disadvantages
 It is a basic tool for growth of Airdri as
it force them to continually think about
their future.
 It help Airdri to be prepared for a drop
in sales in future due to any external
and internal factor.
 Many a times it led to invalid expert
opinion because of uncertainness in
market
 It led to inaccurate result as the quality
of data provided in not correct.
Contingency tools: It is a risk identification process used by Airdri to figure out all those
possible events that might disrupts business and developing a back-up plans related to these
events. This tool help company in preparing events such as loss of data, employee performance,
customer demand and other disruptive. It basically identify the key risk, rank those risk, create a
contingency plan and last maintain that plan to work at the time.
Advantages Disadvantages
 It help small scale companies like
Airdri to minimize loss of production.
 It plays a key role in success to any
organisation.
 It only focuses on situation and not on
tools and resources.
 It is not easy to figure out all type of
contingency variable.
Scenario tools: Management of Airdri uses this tool to study the efficiency of strategic,
tactics and plans under a range of possible future events. It is basically outlook for the future
scenario and how these may affects strategies of the organisation. Using these scenario, manager
make better decision whenever there is any problem or changes occurs.
Advantages Disadvantages
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 It help Airdri managers to reframe
existing decision by providing a new
context for decision.
 It is a creative tool and a forward
looking term beyond the normal 1-2 =
year business plan approach
 It is unable to measure accurate result.
 It is difficult to make accurate scenario
because of changing market trends.
M3: Uses and applications of planning tools for preparing and forecasting budgets
Planning tools are used by Airdri in various content like forecasting demand of customer
for their hand dryer, prepare budgets for financial position and performance of employee's,
prepare them for any possible future UN-predicative event. Budgetary control help them in
preparing a proper system to figure out risk and uncertainty that might occur in future. Various
important tools like forecasting, scenario and contingency tool help management to determine
the future and make them prepare to overcome any of the unexpected thing happen (Pavlatos,
2015).
TASK 4
P5: Responses of management accounting system to deal with financial problems
Financial problems are faced by every small or large scale business thus it is that state
where company is not able to arrange sufficient fund to run its business, arrange salary for there
employee. Hence, management must keep all factor in mind while utilizing the resource and fund
in their day to day activities. Airdri also faces such big issue because of the following reason:
Lack of budgeting and money management skills: Airdri faces the problem of dearth
of cash and money to run their activities because manager really don't have the skills to form a
proper budget and use their fund correctly.
High debt level: Airdri faces the problem of bad debt as there debt level is rising faster
than both incomes and assets. Late payment by credit customer will affect the internal as well as
external system of company.
Decrease in income : This is another major setback faced by Airdri at some point or the
other. Company is making a decent sale at regular interval but is not able to generate profit
because Hand dryer are sold at production cost as there is more competition in market.
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Paying bills late : Airdri is not able to pay bills on time as well due to the problem in
cash flows etc.
More spending on promotion and coupons: To increase sales, Airdri is spending more
of their income on promotion activity and these promotion are not able to attract customer so
there in no sufficient sale (Schaltegger and Burritt, 2017).
These financial problems must be solved for Airdri if they wants to perform well in the
market, to overcome these problem following tools must be adopted which are explained below:
Key Performance Indicators (KPI):- It is one the most important tool used by Airdri to
set quantitative measure, examine the performance of its business over a period of time. These
policies are used to determine company efficiency in achieving its strategic and operational
goals. It also help Airdri to compare its financial position and performance against other business
within the same industry. It is an indicator Airdri use this at multiple level like in high level, it
may focus on overall performance of the company, while in low level it may focus on individual,
employee's or department to measure their success at reaching targets. These key performance
indicators are classified as financial metrics, customer metrics, process metrics and people
metrics. There are two type of KPI as explained below:
Leading Indicators: these types of indicators help management for prediction of future
events, observe market condition and make easy for policymaker to predicts significant changes
in the economy. Airdri management uses these measurable in order to have a hints as to where
the economy is headed (Tessier and Otley, 2012).
Lagging Indicators: it look back at historic performance, it is easy to measure. Airdri
uses lagging indicators to measure how they are doing in their business. With the help of this
indicator management keeps in mind how to reduce its spending on coupons and promotion
activity.
Financial governance: This refers to a process of collecting, managing, monitoring,
controlling financial information in an organisation. Airdri use financial governance to keep a
record of their financial transaction, performance, operation and it help to control data and
complains. To a company like Airdri, these are the policies and procedures use to manage
business data and ensure that data is correct. It includes internal control, workflow, data tracking
and security.
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Benchmarking: Airdri uses this method to understand and measure the current position
of its business in relation to there performance and identify areas where they can improve there
performance. It is a effective process in which organisation compare its own operation versus
operation of competitor that help them to generate ideas for improving their own techniques,
technology, approaches etc. to reduce cost and increase profit and generate more customer
satisfaction (What is Benchmarking, 2018).
Techniques such as Benchmarking, Financial governance and KPI can help this
company to resolve their financial issues by pre determining future contingencies.
Airdri Pavestone
 KPI provides ability to set goals and
attain those goals.
 Financial governance help to keep
record of financial transaction,
performance etc.
 Benchmarking helps to compete with
competitors and to set a positive market
image to attract more customer.
 Just-in-time technique that is used to
reduce production time.
 Valuation of inventories can be easily
done.
 It is applied by the organisation to
increase efficiency and decrease waste
in production units.
M4: Management accounting can lead organisation to sustainable success in responding to
financial problems
Proper management accounting is a useful tool to deal with financial problems. Airdri use
various accounting tools like KPI, financial governance and benchmarking to deal with such
financial problems. Benchmarking is a unique method used for comparing its result with its
own organisation and other companies in the industries. Financial governance are used to
provide information so that company may deal with internal problem. KPI is an helpful indicator
that help Airdri to resolve financial issue related to expenses involved in promotion activity. It
help company to set prescriptive goal and make sure that these goal are achieved with a series of
action (Proctor, 2012).
D3: Planning tools respond appropriately to resolve financial problems
Airdri uses main three type of planning tools to overcome with their financial problems
that are forecasting, contingency and scenario tool. Scenario tools are used by company to
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determine changes that are going in the market and these changes may lead to financial problem.
Forecasting tool help to forecast about future demands of customer from past events and it also
help to predict risk related to the organisation working. Where as contingency tool used by Airdri
to determine all the possible uncertainty that might occur in future that could led to a huge
financial problem so these tools make proper solution to overcome those problem (Youssef,
2013).
CONCLUSION
From above report, it has been concluded that management accounting and its reporting
are very important. As it ease the process of decision making. This also help in budgetary control
to overcome and resolve financial issue. Various cost system are discussed in the above report
which were used by organisation to set a decent cost of their product to increase sale and
maximize profit. Organisation use various planning tool in budgetary control to determine future
risk and make ease the process of decision making ability. Planning tools like forecasting,
contingency and scenario are described that are benefited for their business.
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REFERENCES
Books and Journals
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