Management Accounting Report: Airdri's Financial Performance Analysis

This report provides a comprehensive overview of management accounting systems and their application within a business context, using Airdri, a hand dryer manufacturer, as a case study. The report begins by identifying essential management accounting systems such as cost accounting, price optimization, inventory management, and job costing, detailing their functions and benefits. It then explores various management accounting reporting methods, including performance, inventory management, accounts receivable, and job cost reports, explaining how these reports are used to monitor and improve business operations. The report delves into cost analysis, employing marginal and absorption costing techniques to prepare income statements, and discusses the merits and demerits of planning tools used in budgetary control. It also examines how management accounting systems can be used to respond to financial problems, contributing to an organization's sustainable success. Overall, the report offers practical insights into how management accounting principles can be applied to enhance financial decision-making and improve business performance.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1: Essential management accounting systems used in an organisation....................................1
P2: Various methods used for management accounting reporting..............................................3
M1: Benefits of management accounting systems within organisation......................................4
D1: Management accounting systems and reporting integrated in processes.............................5
TASK 2............................................................................................................................................5
P3: Cost analysis to prepare an income statement......................................................................5
M3: Management accounting technique for producing financial reporting................................7
D2: Analysis of data comes from income statements.................................................................7
TASK 3............................................................................................................................................8
P4: Merits and demerit of using planning tools used in budgetary control................................8
M3: Analysis of several planning tool and its application for forecasting.................................9
TASK 4............................................................................................................................................9
P5. Management accounting systems to respond to financial problems.....................................9
M4: Financial problems, management accounting can lead organisations to sustainable
success.......................................................................................................................................11
D3: Planning tool respond to financial problems......................................................................12
CONCLUSION..............................................................................................................................12
REFERENCES .............................................................................................................................13

INTRODUCTION
Management accounting is a process of identifying costs that involve in business
operations. It also help in preparing accounting reports which assist in decision making process.
Its objective is to aid in planning and formulating policies of future and provide solutions to
strategic business issues. Airdri is a well established manufacturer of hand dryers located in
United Kingdom. They provide highly reliable, beautifully designed and energy efficient hand
dryers throughout the world.
In this project report, various management accounting systems are analyse and its
reporting methods are identified that are used in preparing effective reports. Cost of product and
income is determined with the use of marginal and absorption costing techniques. Different
budgetary control planning tool are evaluated that helps in preparing and forecasting budgets. At
last, several management accounting systems are used for responding company's financial
problems (Amidu, Effah and Abor, 2011).
TASK 1
P1: Essential management accounting systems used in an organisation
Management accounting refers to process of tracking company's internal cost involves in
its operations which helps individual, management and business in making decision. Its main
objective is to provide information that assist in planning, recording, organising, controlling and
directing for business activities. The management accountant of company plays an important role
in performing various tasks to ensure organisation's financial security that help in achieve overall
objectives. Airdri is a small size company and wish to expand its business in future. Company
follow management accounting for providing accounting information that help in dealing with
future course of actions. So, it use several management accounting systems in order to run its
business effectively (Carlsson-Wall, Kraus and Lind, 2015). Cost accounting, price optimisation,
inventory management, job costing systems are four different types of systems that Airdri using
for achieving its objectives on time. Various management accounting systems are explained
below:
Cost Accounting System: This approach is mainly used for cost ascertainment and
control to achieve maximum profits. It is an essential and ongoing process that provides cost
information to management and decision makers. This system deals only with cost related
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aspects. Raw material, labour and overhead are the basic elements of cost. Actual, standard,
normal and activity based costing are the various cost accounting approaches that assist in
evaluating an appropriate cost of product. Airdri use cost accounting system for recording,
determining, analysing and evaluating costs that are associated with process or operations of
hand dryers. Company determine a suitable cost of its product on the basis of activity based
costing where it identify and assign costs that incurred during manufacturing process. By this its
product true cost is evaluated that aid in individual product profitability (Granlund, 2011).
Price Optimisation System: It is a process of identifying maximum price that customer
is willing to pay for company's product or services. This system determine variation in demand
of product or services at different price levels through various channels. It help in determining
initial, promotional and discount price of a product. It is also necessary for evaluating price of
goods or services to meet organisation's objectives. Airdri follow this system for establishing the
optimum price of its product for customer segments in order to target more buyers. Company use
initial price optimisation for creating a secure customer base of its hand dryers in achieving
desired goals such as maximisation of operating profits.
Inventory Management System: This system is important for managing flow of
inventory from manufacturer to warehouse. It helps in tracking stock at different level of
production. It is a continuous process of moving stock in or out from organisation's location.
First in first out, last in first out and weighted average are the different methods of inventory
management. Airdri use inventory management system for managing its inventory on regular
basis as they receive new orders for hand dryers and moves that order out on time. It also aid in
determining inflow and outflow of inventory and finds FIFO method is the best method for
evaluating inventory flow within manufacturing process (Johnson, 2013).
Job Costing System: In this system cost of product is determine under specific
production job. It assign manufacturing costs to a single or batches of product. Direct material,
labour and overhead used in course of job are the three types of information that are needed in
this system. This information is necessary for every job under which company's deal. Airdri is a
hand dryers manufacture and distributor, so it deals in two different jobs. It follow job costing
system to determine accumulated costs and revenues of hand dryers at each level of production
in order to estimate profit.
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P2: Various methods used for management accounting reporting
Reporting is a process of providing information regarding activities that runs in an
organisation in order to aware management about its working. It also provide accurate and
current information that company use in preparing extract reports. Management reporting system
is necessary for monitoring the company's mission. This system is valuable for protecting
company by presenting a complete image of it's performance. Company create management
accounting reports on monthly, quarterly, half yearly or yearly basis according to its operations.
Airdri is a small scale company and wants to estimate their performance regularly. So they create
management accounting reports such as performance, inventory management, account receivable
and job costing on quarterly basis in order to measure its progress (JOSHI and et. al., 2011).
These reports are continuously created throughout the accounting period as per company's
requirements. These reports are described below:
Performance Report: It is created to review the organisation's performance as a whole.
Management used this reporting system for planning, measuring, regulating performance that
attained in decision making. This reports involves information regarding resource utilisation,
collection of data and its progress that assist in forecasting future success to various stakeholders.
Status, progress, forecasting and variance reports are the types of performance report. Airdri use
this reporting for comparing its actual costs or revenues with the budgeted for a period.
Performance report is a detail statement which measures outcomes of business activities in terms
of its progress over a particular period of time. By this company create an effective performance
reports which shows how efficiently it spent money on useful activities.
Inventory Management Report: This report is used to centralise information about
inventory costs, labour and overhead those are involve in manufacturing process. It also display
inventory status by its availability in an organisation. Inventory management reporting track cost
of goods sold that avoid under and overselling by creating custom reports. Airdri use this
reporting system for dealing with over or under stock situation of inventory. This report displays
an inflow and outflow of inventory that helps in maintaining a balance of inventory within
company. Inventory management report is also used for reviewing profitability and demand of its
product in future (Klychova, Faskhutdinova and Sadrieva, 2014).
Account Receivable Report: It provide detail information about unpaid customers in list
form on various date. This tool is used by collection department to determine bills which are
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overdue for payments. Account receivable report is important for those organisation which offer
credit to its customers. Airdri also offer credit facilities to its buyer. Therefore, it use account
receivable report for identifying the duration of collection period within operations. This report
provide a detail about its unpaid customers, outstanding balances and credit memos which
company have to recover within accounting period. By this company create appropriate aging
report which helps in establishing credit period in order to recover credit on time.
Job cost Report: This report is prepare to determine current status of cost and revenue at
each various levels of job. Job cost report create a list of every job on which company working
and listing total costs incurred on previous period job. This reporting provide a detail of total cost
of product accrued in one project compared with expected revenue generate by that project.
Airdri deal in two jobs of hand dryers like manufacturer and distributor. It use job costing system
for preparing this report where cost incurred in each jobs like manufacturing and distributing
activities are evaluated on the basis of its revenue.
M1: Benefits of management accounting systems within organisation
Management accounting systems Benefits
Cost Accounting System It assist in controlling expenses that incurred
during manufacturing process.
Company use this system for determining its
earning on the basis of estimated cost.
Price Optimisation System It determine the exact cost of product that
customer is willingness to pay.
It aid in increasing the future demand of
product that generate more revenues.
Inventory Management System Accountant use this system to determine the
accumulating cost of inventory for accounting
reporting purposes.
It help in tracking issues like over and under
valuation of inventory in process.
Job Costing System This system helps in evaluating cost at each job
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level that help in next process.
It assist in determining which job is more
profitable.
D1: Management accounting systems and reporting integrated in processes
Company use performance, inventory management, account receivable and job costing
systems of management accounting for creating an effective reports. Airdri use performance
reporting for identifying employees and operations performance with a specific time period. It
also follow account receivable reporting for determining its collection cycle in order to recover
due amount earlier. Company use inventory management reporting for evaluating position of
inventory in the process. At last, it use job costing reporting for estimating its total cost and
revenue at each level of jobs. These above reporting methods help in effectively working within
organisation.
TASK 2
P3: Cost analysis to prepare an income statement
Cost: It is a monetary value given up in lieu of products or services offered by an
organisation. Material, efforts, time utilised and risk incurred in manufacturing of a product is
included in the cost of that products or services. Costing is process and technique of allocating
costs. Airdri use costing technique for recording and classifying appropriate cost of its product in
order to increase its sales practices. Internal and external reporting are the purpose of using this
technique. Company follow marginal and absorption costing tool for preparing income
statement. These costing techniques are explained below:
Marginal costing: It is tool used for evaluating the maximum production quantity, where
variable cost is charged to additional unit of an item produce. It is a technique in which fixed
cost is written off against its contribution. Airdri use marginal costing for determining the extra
cost involved in producing an additional unit of output. Here the term marginal means variable
which includes the cost of direct material, labour, expenses and variable overheads in production
of goods. It helps in determining of price on the basis of variable cost and contribution that assist
in evaluating product's profitability (Mistry, Sharma and Low, 2014).
Absorption costing: In this technique where all manufacturing cost that are absorbed by
units produced. Cost of product includes direct material, labour and both fixed & variable
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manufacturing overheads. It is also known as full absorption method. Airdri use absorption
costing for determining product cost which includes overall manufacturing cost. This method is
also used for accumulating the costs linked with a production process and distribute them to
individual products.
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
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: It is used to determine a point where company's total cost of
product is equal to its revenue. It is based on fixed, variable costs per unit of sales and revenue
generated. Airdri use break even analysis to determine no profit – no loss situation, where
company receive revenue equals to costs associated with product.
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
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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
Contribution per unit 12
Sales 1333.33
Margin of safety: It is a position where intrinsic value of product is equal to its market
value. It is determine by difference between actual sales and break even point. Airdri use this
method for evaluating its revenue above BEP that represent the margin of safety (Moser, 2012).
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
M3: Management accounting technique for producing financial reporting
Company use marginal and absorption costing technique for determining its net operating
income. It finds marginal costing is best method for calculating cost that assist in financial
reporting method. In marginal costing technique, company charging variable costs that help in
decision making. Company measure net profit which includes cost of product consists of both
fixed and marginal overhead under absorption costing method. With helps of these two methods
Airdri evaluate marginal costing is an effective method the helps in decision making process.
D2: Analysis of data comes from income statements
Company use various costing method for determining net operating that assist in dealing
with several management issues. It use marginal and absorption costing method for evaluating
net profit. 17500 is the net operating income that company generate under marginal costing and
15675 net profit under absorption costing method. Therefore company find marginal costing is
the most suitable technique for determining net operating profit because it profit exceed to 1825.
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TASK 3
P4: Merits and demerit of using planning tools used in budgetary control
Budget: It refers to a financial plan prepared by the company for the defined period of
time, usually for a year. It consists of sales volume & revenue, cost & expenses and cash flow
projections. It is considered as one of the important tools used by the “Airdri” to make early
planning for attaining set objectives that are helpful in attaining sufficient amount of profit in
near future. There are various types of budgets which a company used to prepared during an
accounting period in order to generate or control their addition costs those are incurred on the
production of various products related with the hand-dryers. Some of the essential budgets are,
sales, production, fixed and variable as well as cash flow budget. In order to manage these
budgets “Airdri” can use below mentioned planning tools that can guide them to make
investment in right areas while producing any kind of products (Schaltegger and Csutora, 2012).
Some of them effective planning tools are:
Forecasting tools: It is one of the reliable planning tools that can assist management in
order to control their future risks those are going to be arises within the Airdri. It is basically
beginning with the certain assumptions that are associated with the administration experiences,
knowledge and future decision making. Airdri can uses forecasting tools to determine how to
allocate their budgets or plan for anticipating expenses for upcoming period. It works as
decision-making tools which will be used by the company to assist in budgeting, planning as
well as estimating future aims and objectives. Like for example, production planning is basically
considered as projection of future business activities.
 Advantage: Airdri can use wide range of forecasting models to assess effective possible
results for the company. This technique used by an individual organisation in only those
situations in case the data available and the firm in which the organization is operating.
The primary advantage of using this tools is to delivery with valuable data that a business
can sue to make future decision regarding the future of Airdri.
 Disadvantage: The biggest disadvantage of using this planning tools is that no one can
exactly forecast the future events. It is because of the qualitative nature of forecasting,
Airdri can come up with various situation relies upon the analysis of the data.
Contingency tools: Another important tools which will be defined in a number of ways.
Although, sometime contingency planning is thought of as an operation and maintenances stages
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of activity. Because of this particular nature, Airdri can uses this tools to identify and integrates
at every stages of project life cycle (Ward, 2012). In order to get more successful, stakeholders
of Aridri must continuously re-examine areas of operations those are significant with an aim on
certain things such as business process and alternative analysis of the products.
 Advantage: Using any kind of contingency plan which would means that, in case the
unexpected events a business can maintain the best state of operations that relies on
harshness of the disaster. An effective plan can outline all those responsibilities for which
employees are responsible for saving the time for additional cost of production.
 Disadvantage: Because of inappropriate literature company can lead to suffer from any
kind of problems like fund crises and additional expenses during the time of contingency
situation.
Scenario tool – This planning tool is concerned with developing a range of possibilities
which can occur in future. This tool helps an organisation like Airdri to plan for future so that
issues and problems can be tackled (Scenario planning, 2018).
 Advantages: This tool can be performed by internal staff of the company and is highly
beneficial for the company as by developing future possibilities, future contingencies can
also be handled.
 Disadvantages: This tool requires a lot of skills and money which can result into a
financial burden for the organisation. Future is uncertain due to which there are high
chances of wastage of efforts.
M3: Analysis of several planning tool and its application for forecasting
Company use forecasting, contingency and scenario planning tool for controlling
organisation's budgets. In forecasting tool, company predict future events in order to effective
working in upcoming years. Uncertain and unforeseen situation that might influence future
operations are considered under contingency tool. In scenario tool help in determining short and
long term planning on the basis of past events.
TASK 4
P5. Management accounting systems to respond to financial problems
Financial problem may be described as those situation where money worries can cause
stress to an individual or an organisation. In a business approach these problems are termed as
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