Management Accounting– Report

Management
Accounting

INTRODUCTION
Management accounting is a continuous process or a systematic process which deals with
gathering, classifying, analysing, and process financial and non-financial information in order to
produce reports that are used by managers to make decisions that aim to accomplish the strategy
of the business and analyse the financial information and transfer to the manager for the effective
or efficient decisions (Scapens, 2015). It is periodical report which helps manager to develop
strategy department wise. Brightstar Company is selected for better understanding of these
concepts and it provides various financial solutions to their clients all over the world. Airdri is
one of the client companies of Brightstar which is founded in 1974 by Peter Philipps & Peter
Allen. It is UK based company which offer different range of dryers. This report includes various
topics such as management accounting and essential requirement of accounting system.
MAIN BODY
TASK 1
P1 Management accounting and essential requirement of its system
Management accounting:
Management accounting is the discipline which deals with gathering, classifying,
analysing, and process financial and non-financial information in order to produce reports that
are used by managers to make decisions that aim to accomplish the strategy of the business. It
includes the various practices which help the Airdri Company to achieve their business goals &
objectives.
Origination of management accounting:
Management accounting emerges as a significant activity which helps the organization to
analyse their financial performances. Management accounting originates after financial
accounting because it helps the business to analyse their financial information in useful manner.
There are two industries which plays important role in the evaluation such as textile and railroad
(Origin of management accounting, 2019).
Difference between financial or management accounts:
Financial Accounting Management Accounting
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Financial accounting classifies, analyse, record
and summarize day to day transaction related
to the business activities.
It helps in decision making process for the
internal operational functions. This technique
does not record financial information using
specific standards or principles as it is not used
to serve to external stakeholders.
It is used to determine an accurate financial
position of the company.
Its main purpose is make managerial decisions
following various tactics and measures in order
to concrete the strategy of the business.
Financial accounting is used for the external
stakeholders. It also supports prepares reports
and financial statements which must be
compulsory being consign to authorities,
regulators and other incumbents. If well this
accounting is not focused in the reports
preparation to make decisions, the nature of its
information provides just a general and not-
specialized view of the financial position to
make authentic decision in context to growth
and development.
It is used for the internal purposes only
(Kaplan, 2014). It is also focused in the
preparation of specialized queries and reports
which are generated according with the
business’ needs to make decisions regarding
them.
Different type of management accounting system:
Management accounting system is the method of evaluating operational activities and
implement various systems which increase the organizational productivity as well as profitability
(Otley, 2014). In the Airdri Company, manger follows the various accounting system to enhance
their operational performance in order to achieve their targets and some of systems are discussed
below:
Inventory management system: It is kind of system or software which is used by the
organization to maintain their stock’s level and it will provide the regular update. With the help
of inventory management system, manager of the company can deliver products from warehouse
to the manufacturing area as per the requirement. Manager of Airdri used this system to regular
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track their inventory level. It is essentially required to keep manager update regarding their stock
level. In future, it reduces the chances of shortage as well as wastage of raw material at the time
of manufacturing electric items. For the effective management in the warehouse, manager can
use LIFO, FIFO and other inventory management system. It adds value to the organization to
manage those item that are ready for sale level and regularly track the raw material for the
further functioning.
Cost accounting system: It is also called costing system which is used by the
organization to estimate the economics value of the number, quality, and kind of resources
involved in the production of each unit of product. This framework used for the analysis of
profitability; control overall business cost and valuation of inventory. This system required for
the estimation of Airdri’s product cost which helps in measuring profit margin of the business.
Lower the cost will provide the high profitability and similarly higher cost of product will reduce
the profit margin. Manager of Airdri Company, use the cost management system for the
evaluation of their product cost (Macintosh and et.al. 2012). It helps the manager to analyse all
the aspect and develop strategy which further required at the time of taking effective decision.
Manager ensures that, cost of each unit will be low for the whole production and try to maintain
or minimise the cost because low cost provides the high profit margin. With the help of this
accounting system, organizational efficiency or effectiveness will be increased and in future
provide benefits to achieve their goals & objectives. It add value to the business to reduce their
over expenses.
Price optimization system: It is the mathematical framework which helps in
determining customer behaviour or response to different price range of the products & services.
It also helps in measuring best price of the product which meets with the organizational
objectives such as maximising profit and increase customer base. In the Airdri Company,
manager use this system to determine their customer behaviour in order to satisfy them. It helps
the business to identify their customer demand and their preference which helps in further
decision making process. It is essentially required to know about their customer behaviour,
attitude, value etc (Libby and et.al., 2016). With the help of price optimization system, Airdri
Company set the affordable or suitable price range which can satisfy the customer needs, desire
and willingness to pay. It adds the value to the entity to know the customer behaviour regarding
different price range.
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Above mention management accounting system help the Airdri Company to improve
their efficiency or effectiveness. Manager adopts these systems which further required building
effective strategy and helps in achieving business goals & objectives.
Benefits of the management accounting system:
Management accounting system Benefits
Price optimization system:  It helps in identifying customer’s behaviour
regarding different price range of the product.
 With the help of price optimization system,
manager of Airdri identify the customer buying
behaviour which further helps in developing
strategy.
Cost accounting system:  With the help of cost accounting system,
manager of Airdri identify each unit cost.
 It further helps in reducing product cost and
develops effective strategy for the future.
Inventory management system:  This system helps the Airdri to keep track their
level of stocks.
 Effective implementation will reduce the
chances of shortage as well as wastage in the
production level (Kaplan and et.al., 2015).
P2 Different method of management accounting reporting
Characteristics of good management accounting systems:
 Reliability: It provides the true information, because organization required reliability of
information because it further helps in developing strategy and decision making process.
 Accuracy: By using this information system, organization gets the accurate information
which helps in implementing strategy.
Reasons of understanding overall management accounting system:
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In the Airdri Company, management have to analyse that it is important for the business
to develop strategy and then execute in proper way which further help in decision making
process. Some of the reasons discussed below:
 Management accounting systems used for the understanding and comprehensive analysis
where manager of the Airdri analyse the financial position of the company.
 Accounting reports used by the manager to formulate strategies for the effective
outcomes. If it is not understandable by the other parties, then organization not able to
perform their activities.
Management accounting reports are used for the evaluation of performances of individual
as well as organization.
Budget report: This report used for the internal usage where top management estimate
the various values from standard to the actual outcomes. Every organization produce budget to
understand their operational expenses and business goals. Budget will be prepared on the basis of
past experience which helps in future to face difficult challenges. Budget report includes the
source of earning as well as expenditure which required to estimate for the further functioning.
In the Airdri company, manager can follow this budget which help the business to estimate their
overall expenses or revenue (Horngren and et.al., 2012).
Performance report: This report will be produce for the evaluation of employees as well
as business performance. It will help the manager to analyse the success of project because it
contains the budget for each activity. Performance report will be developed for the measurement
of individual performance which helps the top management to identify the efficiency or
effectiveness of their work.
Inventory management report: Top management use this report which helps the
organization to know accurate availability of stock in the warehouse for the manufacturing.
Manager start tracking sold items, avoid the wastage in the manufacturing process and shortage
as well. Because the conditions will affect the productivity as well as profitability of the
company (Hopwood and et.al., 2014). In the Airdri Company, manager use the inventory
management report for the analysis of stock level and its requirement. It is important to keep
their eyes on inventory level because excess stock will increase the wastage which increase the
product cost and it directly affect the profit margin. On the other hand, shortage of raw material
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also affects the production as well as demand of the customers. Manager of the Airdri Company
can use LIFO or FIFO method to manage their inventory level.
There is various management accounting reports which is followed by the manager of
Airdri Company. It helps the business to operate their operational activities and reduce the cost
for the longer period which increases the profitability. With the help of above mention reports,
organization can achieve their business goals & objectives.
TASK 2
P3 Calculation of net profit by using marginal or absorption costing method
Macroeconomic techniques:
Cost: It is the monetary value which is spent by the organization at the time of
manufacturing goods and it can be direct or indirect:
 Direct cost: It include those cost which directly linked with the manufacturing of product
such as direct labour material, commission, wages etc.
 Indirect cost: This cost includes the overhead expenses which are not related to the
manufacturing units. It includes the selling administration expenses which are required to
sell their products in the market.
Cost analysis: It is systematic approach which focus on measuring cost or output
relationship where management analyse the cost of input in relation to the actual outcomes.
Overall cost will determine the optimum level of production.
Cost-volume profit: In this analysis, manager identify the impact which can change as
per the cost or volume used in the operations for generating operating profit. It is also known as
break even analysis which helps the business to provide clear idea regarding their production unit
which coven the manufacturing cost.
Flexible budgeting: This budget can change according to the volume or functions and it
include the variable cost which helps the business to increase their production level as per the
requirement.
Cost variances: It is the difference of actual or budgeted cost which identified by the
manager in order to use it in effective way. Organization have to ensure that, different
department will perform each function under the budgeted amount.
Product costing:
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Fixed cost: This cost will be define as fixed because it will not change with production
such as employees salary, rent of building etc.
Variable cost: It includes those expenses of the production which can change as per the
time such as cost of raw material, labour rate etc.
Cost allocation: It helps the organization to identify and assign the cost for the cost
objects. Where each activities will be analysed in term of cost such as cost of product, research
product, Sales region etc.
Normal Costing: It is the simple costing method which uses the actual data in order to
calculate the cost of product with the exception of manufacturing overhead.
Standard costing: It is the traditional cost accounting method which helps the business
to evaluate their product cost by using historical cost of the products.
Activity based costing: In this costing method, organization analyse the cost on the basis
of each activity which required to execute for the completion of project.
Role of costing in setting price:
Cost of inventory:
Inventory cost: This cost is related to the procurement and storage of raw material such
as ordering, carrying and holding cost which required estimating by the organization.
Different type of inventory cost:
 Ordering cost: It is the cost incurred at the time of purchasing goods which include the
transportation cost, finding suppliers or cost of electronic data interchange (Types of
Inventory cost, 2019).
 Holding cost: It is also known as carrying cost which organization have to spend for
maintaining their inventory level otherwise all the stock can waste due to various reasons
such as inventory service cost, storage cost etc.
 Shortage cost: It is also called stock out cost when organization face the problem of
stock out and it will disturb the production, emergency shipment and customer loyalty.
Benefits of reducing inventory costs in the organisation:
 It helps the business to reduce their maintenance cost
 It provides the flexibility in the manufacturing process
 It reduces the wastage at the time of manufacturing products and further increases the
productivity or profitability.
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Valuation method:
 LIFO: This method is using latest purchased stock for manufacturing goods.
 FIFO: In this method, organization uses the inventory which is earlier purchase by the
business.
Manager of Airdri, use the FIFO methods where first entered stock will be used for the
production of products.
Cost variance: It is the difference of actual or budgeted cost which helps the Airdri
organization to analyse their actual performance. If it is good then it provides the high profit
margin or if, it is bad than manager have to re-evaluate the budget and all the activities for the
further improvement otherwise it affect the productivity or profit margin of the business.
Overhead cost: It includes the ongoing expenses which is mandatory to do the successful
completion of Airdri operational functions. Such as accounting, legal expenses, depreciation,
insurance etc.
Calculation of the costing in the Galway Plc by using marginal or absorption costing
method will be discussed below:
Marginal Costing: It is the costing method which helps the organization to identify each
unit cost of their products. Change in the total cost as per the change in the single unit produce
will be consider in the marginal costing (Hansen and et.al., 2017). It includes the variable cost
and other overheads because fixed cost remain constant for the whole period of production. In
the marginal costing techniques, fixed expenses are excluding for calculating each unit cost of
product.
Cost per unit according to the variable cost method
Marginal costing
Direct materials per unit 8
Direct labour per unit 5
Variable production overheads per unit 3
Marginal Cost per unit 16
Calculation of net profit by using marginal costing method:
8

Inventory valuation:
Inventory cost as per marginal
May June
Opening inventory 3200
Closing inventory 3200 1280
Absorption Costing: It is the accounting method which required for calculating each unit
cost of the product which includes variable as well as fixed cost. Along with this, it includes the
manufacturing overheads such as material and labour. Included cost can be direct or indirect, so
manager majorly focuses on reducing product cost because it will reduce the profit margin
(Corbett, 2018). So manager have to adopt effective strategy or practices which reduce the cost
per unit.
Determine the inventory value according to the cost per unit previously calculated
Per unit Direct materials cost 8
Per unit Direct labor cost 5
Per unit variable production overheads cost 3
Absorbed fixed productin cost per unit 10
Cost of sales 26
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Calculation of net profit by using absorption costing method:
Particulars May June
Fixed production cost standard 4000 4000
Fixed production cost actual 5000 3800
Under/over absorbed cost 1000 -200
Last in First out method (LIFO):
10

AVCO (Average cost Method):
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TASK 3
P4 Advantage or disadvantage of planning tools which is used for the budgetary control
Budget for the planning and controlling:
Budget: It is the estimated report which include all the expenses as well as revenue
which required analysing for the further functioning of operations. Every organization generate
budget to divide the budget among the various activities. It further helps in controlling budget, so
employees are capable to achieve their task in the given amount of budget.
Budgetary control: It is referring to the efficiency which indicates that how efficiently
manager use the budget in order to control or monitor the cost of product in the financial year.
On the other hand, manage have to set financial or performance goals with the help of budget
where actual performances will be compared with the another one (Chenhall and et.al., 2018). In
the Airdri Company, organization uses the various planning tools to control their budget. Some
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of the planning tools discussed below and this budget have some advantage as well as
disadvantage.
Different types of budget:
Zero based budget: This budgeting method include the latest estimation of expenses for
each new period. In this method, all the estimation will start from the scratch and there are no use
previous budget information. Because organization have to develop budget after actual
evaluation. Manager of Airdri Company can adopt this budget which provide accuracy as well as
increase the efficiency of their operational activity. There are various advantages and
disadvantage of using zero based budgeting and it is discussed below:
Advantage:
 It will justify all the operating expenses and focus on those areas which generate revenue.
 This budget provides the accuracy as well as increase the efficiency which helps in
achieving business goals & objectives of the Airdri company (Chenhall and et.al., 2016).
Disadvantage:
 It is costly method which affect the organization and profit margin because evaluate from
the starting will take lots of time as well as money too.
 It is time taken process, because manager has to done all the estimation from the starting.
So they have to spend their regular time as well as efforts to develop zero based budgets.
Master Budget: This budget is the combination of various divisional budgets which
include the different functional area. This budget will be prepared on the quarterly or yearly
basis. In this budget, management include the company’s strategy and also provide the directions
to follow. It is the central planning tool which can be used by the manager of Airdri Company to
direct the further path which includes the various activities.
Advantage:
 With the help of this budget, owner of the company can regular review the budget of each
department.
 All the functional budget included in the single report (Chapman and et.al., 2016).
Disadvantage:
 It is time taken process because estimation of each division will take lots of time.
 It is costly process because it includes the money, time and efforts as well.
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In the above mention budget, manager of Airdri have to follow master budget which help
the business to identify those divisions which use the over resources for the completion of their
task. So manager will take appropriate action against to improve the performance.
Alternative methods of budgeting:
Operating budget: This budget includes the expenditure which is required to reduce for
the further functioning of business venture. Manager of Airdri Company can use this budget to
enhance their performance through reducing their product cost which increases the productivity
as well as profitability.
Cash only budget: It is traditional budget which is required discipline to perform their
task. This budget includes the cash and cash related aspect which is required to analyse by the
organization. This budget required low spending to maintain their budget which further helps in
achieving business goals & objectives. Airdri can adopt this budget for the effective or efficient
performance in the organization.
Behaviour implication of budget:
 Budgeting helps in managing current expenses which required managing such as office
rent, salary and other fixed overheads. Fixed expenses are difficult to reduce so reduce
the variable overheads.
 With the help of operating budget, manager predict the future expenses (Burns and et.al.,
2013).
 Operating budget required huge time because it will include the intense research It is based on the financial outcomes, basically there are no assumptions.
Pricing:
Pricing strategy:
 Penetration pricing: It is the marketing strategy used by the organization to attract more
customers for the new product & services. Here, organization uses the low price for the
product to expand its reach.
 Price skimming: Under this pricing strategy, business set the high price of their products
to focus only premium type of customer.
Airdri Company uses the penetration pricing method to expand their reach where they set
the low price of product to attract more consumers.
Evaluate how competitors determine their prices:
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Competitors analyse the market condition and demand of the product after targeting their
customer. It will help the organization to set their product price after conducting market research.
So manager of the Airdri Company also analyse the market research and then set their product
price (Competitive pricing strategy, 2018).
Supply and demand considerations:
Supply and demand, both are depending upon the customer if the product has higher
demand in the market then organization have to increase their supply. For this, Airdri company
have to conduct proper research which help them to analyse the market demand which further
help the manager to operate their operational function according to it.
Strategic planning:
PEST analysis:
Political Social
Government stability affects the Airdri
company for example: change in the policy of
export & import duty. Manager has to develop
strategy as per these factors.
Consumer buying patter also affects the
business and its productivity or profitability.
So manager of Airdri have to build strategy
after analysing this factor.
Economic Technological
Change in the tax rate will affect the
productivity or profitability of the Airdri. So
manager required to consider these factors.
Change in the technology will affect the
company as well as provide the opportunity to
develop innovative strategy which increases
the market share of the Airdri company.
SWOT analysis:
Strength Weakness
High customer base is the strength of the
Airdri company which helps in increasing
demand in the market.
Due to small organization, Airdri is affected
with their competitors.
Opportunity Threats
With the help of innovative ideas, Airdri Trade restriction become threats for the Airdri
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company can produce new product which fulfil
the demand of customer as well as market.
company which affect the productivity or
profitability.
Balance scorecard: BSC is the most structured planning tool which uses the strategic
steering of any business to transform it in operational activities that allows to concrete the
organization’s objectives or goals. It is one of the most structured planning tool which uses the
strategic steering of any business to transform it in operational activities that allows to concrete
the organization’s objectives or goals. It is the performance measurement tool which is
developed by the manager in order to keep track proper execution of the various activities. It will
be required to monitor or control the internal functions of the Airdri Company which further
helps in analysing financial position of the business.
(Illustration: Balance scorecard)
TASK 4
P5 Use of management accounting system to resolve financial problem
Financial problem: Every organization faces some financial problems which affect the
production as well as profit margin. In addition, it will become barrier for the organization to
achieve their business goals & objectives. There are some financial problems which faced by the
Airdri company and it is discussed below:
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Wastage of raw material: In the Airdri, wastage of raw material in the manufacturing
level will increase the cost of product and it will automatically reduce the profit margin (Burns
and et.al ., 2011).
Decrease the customer loyalty: Manager of Airdri have to find out the reason of
decreasing their customer because it will reduce the sale as well as profit margin.
Techniques to solve financial problems:
There are various techniques which are used by the organization in order to solve their
financial problem and some of the method discussed below:
Key Performance Indicator (KPI): It is the measurement framework which helps the
business to identify the efficiency or effectiveness of their business goals. Airdri Company can
adopt these techniques which further helps in high or low level performance. With the help of
KPI, manager identify the reason where number of customer will reduce and provide necessary
solutions for it.
Benchmarking: In these techniques, organization measures the business performance
against other company. Benchmarking help in focusing internal opportunities which required
improvement. In the Airdri Company, company face the issue regarding wastage of raw material.
So they have to compare their practices with other organization and then improve for the further
functioning (Bromwich, 2012).
Financial governance: It is the procedure, with the help of this organization collect, monitor,
manager or controls the various financial information. Financial governance includes the
procedure which provides the clear instruction regarding how to manage performance, operations
and disclosure. Organization follows all the rules and regulation which explained in the financial
governance rules & regulation. It is mandatory to follow otherwise it affect the productivity or
profitability. By using financial governance, Airdri identify problem which cause the financial
problem and it will affect the business in terms of productivity or profitability.
Financial governance used to monitor strategy:
Corporate governance plays important role in the organization where they have to ensure
that all the strategic decisions were made in respect of stakeholder. Airdri majorly focus on all
the rules & regulation which they have to follow for the interest of stakeholders. With the help of
this, manager develops policy which further helps in implementing plans for the effective
outcomes. Along with this, establish corporate strategy which clearly define the goals, objective
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or purpose of the company. With the help of financial governance, manager evaluates the
corporate objectives, strategic plan and allocation of financial resources to measure the
organizational goals.
Basis Airdri Galway
Financial problem Airdri face the financial problem due
to waste in the raw material at the
time of manufacturing products.
Higher the waste will increase the
each unit cost and it will directly
reduce the profit margin (Bromwich
and et.al., 2015).
Company face the problems
regarding decrease in the
customer loyalty. This issue
further generate the financial
problem in the organization.
Because it will reduce the
demand as well as profitably.
Management
accounting system
This problem will be solved with the
help of inventory management
system. With the help of this system,
manager regularly track the stock
level which give them clear idea that
how much unit required to order for
the further production. Manage use
the FIFO method to manage their
inventory and reduce the waste.
In the Galway Plc, loyalty of
customers will reduce and it
will be measure after analysing
the low sale of products. So
manager implement the price
optimization system which
helps in identifying customer
behaviour regarding different
price range. After all the
analysis, manager set the price
which meet with the customer
as well organizational
objectives (Ahrens and et.al.,
2017).
Financial governance Airdri company follow the financial
governance for the timely reporting of
financial statements.
In Galway Plc, organization
use financial governance for
the discloser of accounts.
Characteristics of an effective management accountant:
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 Required effective oral or written communication skills which help the manager of Airdri
to solve various problems in the work place.
 Accountant required ability to work with team which increase the efficacy or
effectiveness of work which further help the solving problem.
CONCLUSION
From the above discussion, it has been concluded that management accounting helps the
organization to implement various practices which further enhance the operational activities.
Accounting system or report help the manager to evaluate their performance in order to achieve
business goals & objectives. In addition, planning tool contain various methods which help the
business for the budgetary control. Along with this, management techniques use to resolve the
financial problems of the organization which affect the productivity as well as profitability.
Because further it become barrier for the business to achieve their goals & objectives.
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