P3: Calculate costs using appropriate techniques of cost analysis

Management
Accounting
1

INTRODUCTION ..........................................................................................................................3
TASK 1............................................................................................................................................3
P1 management accounting and give the essential requirements of different types of...............3
management accounting systems...............................................................................................3
P2: Explain different methods used for management accounting reporting...............................5
TASK 2............................................................................................................................................6
P3: Calculate costs using appropriate techniques of cost analysis..............................................6
P4. Advantages and disadvantages of different types of planning tools.....................................9
P5: Compare how organizations are adapting management accounting systems to respond to
...................................................................................................................................................13
Financial problems...................................................................................................................13
CONCLUSION .............................................................................................................................15
REFERENCES..............................................................................................................................16
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INTRODUCTION
In business context, the concepts of gathering, analysing, posting, measuring and
evaluating internal financial information into useful accounts is knows as management
accounting (Aksoylu and Aykan, 2013). Cost accounting or managerial accounting is a
systematic process of presenting meaningful financial data that help internal manager to
formulate various policies, take respective decision and control different function and operation
within company to increase total productivity and profitability. This report is based on Airdri,
which is a small hand dryer manufacturing company in UK.
In this report, demonstration of various types of management accounting system and
reports have been discussed. In addition proper explanation and application of different kind of
accounting techniques are used to prepare income statements and different types of planning tool
that help in proper planning are discussed. Apart from this the use of management accounting in
respond to various financial problem are defined in this project.
TASK 1
P1 management accounting and give the essential requirements of different types of
management accounting systems.
The defined procedure of maintaining accurate management accounts and reports which
provide authentic and yearly financial information which is essential required by management of
company in order to make take day to day important decision is known as management
accounting (About Management accounting, 2019). It also supports in preparing budgets and
provide strength to planning process to evaluate and measure the company performance during a
time frame. The main elements of subjectivity in management accounting are:
 To make effective use of resources to grow and maximise profit.
 To create strategies and methods that support to reach the desired goals of company.
There are different types of management accounting system that are used by management
of Airdri for different purpose in order to increase the productivity and overall performance.
These systems have various crucial functions such as:
Provide and modify data: In business context, data is useful information that helps in
making valuable decision. Different types of system like cost accounting system helps to provide
accurate data related to total cost included in production process (Boiral, 2016). These systems
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also support to make effective modification in total expenses of a specific period so that profit
margin can be increased in future.
Serves as a mean of communication: Different systems of management accounting are
beneficial for company as they act as best mean of communication among different department
within an organisation. Inventory management system is used by internal management of Airdri
to record total stock available in warehouses and this information is provided to production team
in order to manufacture number of hand dryer in specific time frame.
There are various types of management accounting system which are used in Airdri that
provide authenticity, accuracy and appropriative to the different function. Some of this system is
discussed underneath:
Financial accounting system: This system mainly helps to provide the proper guidelines
to manager of Airdri to prepare final accounts concerning following assets, liabilities and
operating results. All those system that hold the information related to financial records is known
as accounting system such as in Airdri receivable accounts record the traction of customer, sales
to record any type of sales done in system etc. these accounts are mapped to take meaningful
decision (Bromiley and et.al, 2015).
Cost accounting system: The manager of Airdri use to asses and measure the exact
detail to total cost that are incurred at each level of producing and selling hand dryer. There are
two types of costing method such as product costing and activity based costing that are used by
respective company to record the total expenses during a time frame. Product costing is used
determine the total expenses such as worker wages, purchases and transportation cost etc.
pertaining the development of Hand dryer. They use this costing to streamline production cost in
order to maximise profit. Activity based costing helps to ascertain and assigns the total costs to
overheads operation and then assigns these costs to valuable hand dryer.
Management accounting system: This system help to use the company financial
information and prepare authentic reports that are confidentiality used by internal manager of
Airdri. The main advantage of this system is to have proper control within company so that
unprofitable activity can be eliminating from the company (Malinić and Todorović, 2012). These
internal reports ease the process of decision making and determine the ways to increase the
efficiency and productivity of manufacture process. Manager of company use to analyse the
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trend lines to forecast future sales and prepare budgets in order to increase the profit in an
accounting year.
Tax accounting system: It is a system that is mainly meant for the tax purposes and
dictates the particular rule which must be followed by each company and individual firms when
preparing annual tax return. In Airdri, this system focuses solely on particular item like income,
investment losses or gains and other business transaction that influence the individual tax burden.
P2: Explain different methods used for management accounting reporting.
In small sized organisation such as Airdri, there is a need of recording each and every
dealing of business so that regular decision is made for future improvement. To maintain a
systematic record of entire business dealing and financial happening in accurate format different
types of accounting reports are prepared. Some of these methods are discussed underneath:
Trading and profit and loss accounts: The main purpose of preparing this reports is to
calculated and measure the total profit made by Airdri over a period of time. Manager of Airdri
use to determine the gross profit or gross loss attained by producing and selling designer hand
dryer. This statement give the detail about Airdri capability to generate profit by driving revenue,
cutting cost and detail of revenue and expenses that includes net sales, COGS and selling and
Administration expenses (McLean, McGovern and Davie, 2015).
Balance sheet: It is consider being valuable financial report or statements that discloses
the total worth of a company at a given point of time. This report is mainly prepared by the
internal management of Airdri to provide an elaborated idea about actual and current financial
position. It shows the total of asset that is owns, total of liabilities that is owes by company as
well as actual amount invested by Airdri in business. The main use of balance sheet is to
determine the working capital is enough to sustain its operation, calculate the net worth so that
possible issuance of dividend can be made from retained earnings.
Cash flow statements: This report basically helps to determine the main and primary
cash flows happening during the specific period of time (Takeda and Boyns, 2014). As cash flow
statements are depended on the cash basis of accounting therefore it is very significant in order to
evaluate and measure the cash position of a company. In Airdri, this financial report is prepared
to determine the upcoming cash position so that they can plan and coordinate its total financial
operation in respectful manner. It also help to determine the total cash that will be generated
from operation and total money required to run basis production operations.
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Important system of management accounting in relation to preparation of authentic
reports is defined below:
Inventory management systems: This system assist to manage the available inventory
in warehouses that provide support to the entire supply chain of Airdri in order to grow profit. By
using this system internal manager of company keeps a valid record of total finished hand dryer
ready for sales, quantity of goods in transit and actual raw material that can be used in producing
goods.
Job-costing systems: This system is mainly helpful for Airdri to estimate the beneficial
and related information with cost of specific job or task. The system merely highlights on cost or
expenses acquired for or related with all and each work and assign them to such job. In
respective firm job costing system is mainly used at lower band at which different cost are
classified according to the nature and then these cost are categorized by bookkeeper of company
as per system to decrease difficulty in exploration of total performance of several operations.
Price-optimising systems: By implementing this system manager of Airdri uses to fix
the prices of hand dryer as per the need of customer so that profitability of business can be
increased. Thus it is stated that by implementing the concepts of price system valuable decision
related to pricing are made to ensure profit margin. Therefore, with the help of this system
respective company is able to sell hand dryer at lower prices than their competitors by analysing
the trends and business scenarios.
TASK 2
P3: Calculate costs using appropriate techniques of cost analysis
In business context, the outlay spent by an organisation to buy essential requirement of
business in known as cost. In simple term, an amount that is incurred or spent by user in order to
receive something is known as costs. Expenses or cost are mainly the monetary valuation of
material, resources, efforts, time and utilities consumed and opportunities involved in
manufacture and delivery of goods and services. It is stated that all expenses are consider as cost
but all cost are defined as expenses. There are various kind of costs and costing methods that are
useful in setting prices for Airdri with the main motive to increase profitability.
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Fixed cost: This kind of cost does not change with the changes in level of production and
are also referred as overheads costs. They are recorded as same in case if Airdri produces 100
hand dryer or 1000, such as rents, salary, depreciation etc.
Variable cost: On the other side this costs keeps on changing with the fluctuation in total
unit of outputs. In case if volume of producing hand dryer increase in Airdri, then variable cost
related with labour, material usually gets increased.
Absorption costing: This costing is also known as full costing that includes fixed
overheads charges that are included while producing total unit of Hand dryer in Airdri during a
specific time period. In other term, absorption costing is the total cost of a finished good that
mainly includes the cost of direct labour, material, variable overhead and fixed overhead.
Marginal Costing: It is a type of cost that is related to producing an extra unit of output.
Such as, in case of Airdri if the total cost of producing 3 units of hand dryer is 1550 and if one
extra 4th hand dryer is produced then total cost is 1900. So the marginal cost of the 4th product is
350.
Income statements using marginal costing:
Under
marginal
costing
Cost per
unit
Direst Material ($7*5) 35
Direst Labour ($8*4) 32
Variable O/H 5
Marginal cost per unit 72
Selling price 100
-Marginal cost per unit -72
-variable selling price -4
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Contribution per unit 24
January
Sales (10000*100) 1000000
Cost of sales:
Opening inventory 0
Material (14000*35) 490000
Labour (14000*32) 448000
Variable o/h (14000*5) 70000
1008000
-Closing inventory (4000*72) 288000
720000
280000
-Variable selling cost (10000*4) -40000
Contribution 240000
-Fixed costs -24000
-Fixed selling expenses -3000
Actual Net profit/(Net Loss) 213000
February
Sales (12500*100) 1250000
Cost of sales:
Opening inventory (4000*72) 288000
Material (10500*35) 367500
Labour (10500*32) 336000
Variable o/h (10500*5) 52500
900000
-Closing inventory 144000
756000
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494000
-Variable selling cost (12500*4) -50000
Contribution 544000
-Fixed costs -24000
-Fixed selling expenses -3000
Actual Net profit/(Net Loss) 571000
Income statements using Absorption costing:
Under Absorption
Costing
January
sales (10000*100) 1000000
Cost of sales:
Opening inventory 0
Material (14000*35) 490000
Labour (14000*32) 448000
Fixed o/h 24000
Variable o/h (14000*5) 70000
1032000
-Closing inventory (4000*72) -288000
744000
Gross Profit/Loss 256000
-Fixed selling expenses 3000
-Variable selling cost (10000*4) 40000
Actual Net profit/(Net Loss) 213000
February
Sales (12500*100) 1250000
Cost of sales:
Opening inventory (4000*72) 288000
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Material (10500*35) 367500
Labour (10500*32) 336000
Fixed o/h 24000
Variable o/h (10500*5) 52500
1068000
-Closing inventory (2000*72) 144000
924000
Gross Profit/Loss 326000
-Fixed selling expenses -3000
-Variable selling cost (12500*4) -50000
Actual Net profit/(Net Loss) 273000
P4. Advantages and disadvantages of different types of planning tools
In business term, formal statements that are prepared to make accurate and appropriate
estimations related to total expenditure, income, costs and financial resources are knows as
budgets. Nowadays every organisation prepares budgets that support to make plans and
strategies in order to accomplish expected goals. There are number of uses for preparing budgets
that are defined in the context of Airdri:
 Budgets aid management and other staff member to recognize or examine several
problems associated to proper execution of action strategies and plans.
 It also helps in tracing and monitoring of total revenue and capital resources that are
required to progress the actual financial position which further support to attain
objectives.
Budgets are prepared:
 By forecasting income and expenses on the basis of last year performance.
 By analysing previous, trends, scenarios etc.
Types of Budgets
Zero based Budgets: ZBB provide top level strategy of an organisation. This is a
method of budgeting in which all expenses for each period are specific. Budgets are usually
prepared keeping in mind the needs and requirement of the organisation for future course of time
period. This process is can be adopted by Airdri under which budget starts from zero base.
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Furthermore the needs of the company are analysed. Airdri budget should be made regardless of
the previous years. This budgeting can help Airdri in lower costs for organisation by avoiding
increase or decrease to its prior period's budget.
Advantages: In Airdri ZBB is helpful to make a valid track of current movement of cash
inflows and outflows within specific year. That further support to accomplish cash affectivity in
order to reduce any kind of opposing liquidity situation.
Disadvantages: In particular time within organisation like Airdri, it is not easy to assess the
actual cash position due to credit sales and purchase in that cases ZBB totally fails and can
impact business performance (Thomas, 2016).
Incremental Budget: This is a vital part of management accounting. Under this budget
for the current fiscal year base for working is allocated under upcoming years. It is a budget
prepared using previous and actual performance of an organisation. This method can be used by
Airdri because it is simple in nature that helps the company in dealing with various departments
with consistence. Furthermore continuity of funding will help Airdri in achieve target with
efficiency. Incremental budgeting can be suitable for Airdri because funding are fixed with little
requirement. It can also help company to ensure stability of budget in upcoming year.
Advantages: This budget is mainly used by management of Airdri to categorize the problems of
last year and effectively plans for future period. In company incremental budget also support to
ascertain the specific subdivision which is spending outside its limits so that valuable decision
are made.
Disadvantages: The major disadvantage of incremental budgets is that it lacks specificity. In
Airdri the dollar amounts and figures are a collective amount of all section's expenditures and
earnings. Due to some future contingencies it is not easy to predict accurately about future.
Operating Budget: It primarily consists of several sub-budgets. The most being sales
budget which usually the first to be prepared (Yazdifar and et.al., 2012). Operating Budget
basically includes details of all income and expenses that are estimated by an organisation. It is
prepared in advance for a particular that a firm expects to achieve in future. Airdri can use
operating budget that will help company in getting short-term budget in which capital outlays is
excluded because it is a long-term cost. Operating Budget helps the entire business to track the
financial activities with efficiency. Furthermore this budget indicates both money the
organisation spends and money that is projected to come.
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Advantages: This budget is short in nature, thus help manager of Airdri to plan effectively about
day to day operations so that increase accountability and profit can be increased.
Disadvantages: It is consider being more time consuming budgets as one particular department
is needed to be engaged for budgeting of daily activity, therefore many time manager use to
ignore important aspects of business due to repetition (Kihn and Ihantola, 2015).
Sales Budget
Product EC 1 Product EC 2 Product EC 3
Forecast unit sales 2000 3000 4000
*Price per unit 100 130 150
Total net sales 200000 390000 600000
Production
Budget
Product EC 1 Product EC 2 Product EC 3
Forecast unit sales 2000 3000 4000
+Closing Inventory 600 1000 800
Total Production
required 2600 4000 4800
-Opening Inventory 500 700 800
Units to be
manufactured 2100 3300 4000
Material usage
budget (wood)
Product EC 1 Product EC 2 Product EC 3
Units to be
manufactured 2100 3300 4000
*Material needed
kg/unit 5 3 2
Production Needs 10500 9900 8000 28400
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+Closing Inventory 18000
-Opening Inventory -21000
Total raw material
needed 25400
*Raw material / kg 8
value of raw material 203200
Material usage
budget (Varnish)
Product EC 1 Product EC 2 Product EC 3
Units to be
manufactured 2100 3300 4000
*Material needed
kg/unit 2 2 1
Production Needs 4200 6600 4000 14800
+Closing Inventory 9000
-Opening Inventory -10000
Total raw material
needed 13800
*Raw material / kg 4
value of raw material 55200
Labour usage
budget
Product EC 1 Product EC 2 Product EC 3
Units to be
manufactured 2100 3300 4000
*Hours needed
hr./unit 4 6 8
Production Needed 8400 19800 32000
*Labour wages 3 3 3
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Total labour wages 25200 59400 96000
Cash flow forecast for the 3 months period Jan-18 to March-18
01/11/2017 01/12/2017 01/01/2018 01/02/2018 01/03/2018
opening Cash balance 12000 36150 -7150 21600 20000
cash inflows
cash sales 30000 27000 33000 36000 39000
credit sales 70000 63000 77000
Total cash inflows 42000 63150 95850 120600 136000
cash outflow
purchases 50000 50000 70000 80000
wages 5850 7150 10400 13000 16250
3150 3850 5600 7000
overheads 10000 10000 12000 15000
Total cash outflows 5850 70300 74250 100600 118250
Closing Balance 36150 -7150 21600 20000 17750
P5: Compare how organizations are adapting management accounting systems to respond to
Financial problems.
In present business era, it is observed that each and every kind of organisation faces some
kind of financial problems that reduces the financial stability, sustainability, productivity,
profitability of company. It is noticed that no organisation can work in proper manner without
experiencing any kind of big or small problem or financial issue. Therefore, it is very much
crucial for Airdri to recognize these financial difficulties with the help of various management
accounting approaches.
Benchmarking: It is the methodology which will be utilized by Airdri so as to evaluate
the presentation of the various items and administrations against those which is viewed as the
best in the same business (Klemstine and Maher, 2014). This will aid in recognizing the different
possibilities through which the entire production level could be increased for better results. It is a
basic procedure and has point by point steps which must be followed by respective company so
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as to achieve the business objectives. It is a helpful practice in which dimension of value is given
more prominent significance so as to assess things by creating fitting correlations. There are two
unique kinds of benchmarking to be specific, inside and outer. In Airdri it is used to ascertain the
problem of lack of money management due to which expenses are increasing day by day and
revenues are not appropriate to recover these losses.
Key performance indicators (KPI): A KPI is concerned about estimating the significance
which will aid in displaying the way by which the Airdri can easily achieve the business
objectives with genuine adequacy and proficiency. By utilizing KPI, the selected firm will most
likely the accomplishment of the organization that whether it can reach to the desired objectives
or not. The KPI can be higher in level which will put accentuation on the total execution of the
business while lower dimension of KPI will put weight on various practical offices like deals,
promoting, HR, and so forth. It is firmly incorporated by the association since this it is most
significant presentation markers and creates different systems for building up the same results. In
context to respective entity KPI is used to ascertain the problem related with special order. As
customers are not getting the desired feature in hand dryer this directly reduces the profit margin
of company (Maas, Schaltegger and Crutzen, 2016).
Financial governance: It is related with the appropriate manners which help the company to
collects, handles, manages and creates financial control on information. For Airdri, it is very
significant because it resolves and provides a guarantee regarding the collected data weather it is
true and contains correct information. Financial governance is also one of the important features
that focus on creating complaint controlling reports and disclosures which provide correct and
dependable results on clear possession and answerability. Different problem such as lack of
money management and special order are resolved by using this management accounting
approach as it support to holds the detail information about the total dealing of company. Such as
keep a proper record of total expenses made during a period and record overall revenues to
calculate and manage the gained incomes. Similarly it help manager to make a valid report about
actual raw material and labour required to fulfil demand of special order (Kober, Subraamanniam
and Watson, 2012)
Flexible Budget
At 12000 units At 14000 units
Direct material 40000 46666.66667
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Direct Labour 24000 28000
Variable Overheads 13500 15750
Fixed Overheads 11000 11000
Total cost 88500 101416.6667
Selling Price 120000 140000
Net profit 31500 38583.33333
At 14000 units Actual Budgeted
Direct material 50000 46666.67
Direct Labour 27500 28000
Variable Overheads 16000 15750
Fixed Overheads 12000 11000
Total cost 105500 101416.67
Selling Price 142400 140000
Net profit 36900 38583.33
Budgeted profit 38583.33
-direct material -3333.33
+direct labour 500
-variable overheads -250
-Fixed overheads -1000
+Selling Price 2400
Actual Profit 36900
Comparison
Aston Martin Bentley
This company produces variety of cars as per
the needs of customer but at the same time,
they faces the financial problem of pricing.
This company also produces designer cars and
faces financial problems of special order due to
which number of loyal customer are increasing
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Because of this, clients are moving to other
option in order to satisfy their needs.
day by day.
There is an urgent need for resolving this
problem as it reduces the overall profitability
of business. So manager of respective company
applies the concept of prise optimisation
system that help to set the best price of
product. This directly aid to increase the sales
figure and raise profit margin in a good
manner.
In order to resolve the issue of special order
manager use to apply the concept of inventory
management system that help them to keep a
detail record of stocks so that special order can
be fulfilled on time as per the need of
customer. .
CONCLUSION
In conclusion, the report management accounting discuss that it help to provide
significant information which support to make important strategies, measuring performance and
improve profit for future. Different type of system and report are being applied by the manager
of respective company that help in measuring total performance of company that support to make
possible improvement. Various costing methods like absorption and marginal costing is helpful
for Airdri to prepare income statements to evaluate net profit for the year. Several planning tool
are beneficial for company to prepare different budgets and analyse the performance of
company. It is also concluded that management accounting system are supportive to resolve
different kind of financial problem which can increase the total productivity, profitability of
Airdri.
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