Unit 5: Management Accounting Report - Airdri Ltd Financial Analysis

This report provides a detailed analysis of management accounting principles and their application within Airdri Ltd, a medium-sized organization serving clients in various sectors. The report begins with an introduction to management accounting, emphasizing its role in financial and management...Read More

Unit 5. Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1. Management accounting systems.....................................................................................1
P2 Different methodologies used in management accounting reporting;..............................3
M1. Benefits of management accounting systems.................................................................4
D1. Management accounting system and accounting reports are integrated within
organisational processes.........................................................................................................4
TASK 2............................................................................................................................................4
P3 Calculations of costs using appropriate techniques to prepare income statement............4
M2 Different techniques of management accounting system ...............................................9
D2 Interpret data for a range of business activities................................................................9
TASK 3............................................................................................................................................9
P4 Advantage and disadvantage of different types of planning tools used for budgetary control
................................................................................................................................................9
M3 Uses of different planning tools and their application for preparing and forecasting budget
..............................................................................................................................................11
TASK 4..........................................................................................................................................12
P5 . Compare how organisations are adapting management accounting systems to respond to
financial problems:...............................................................................................................12
M4 Responding to financial problems, management accounting can lead organisations to
sustainable success...............................................................................................................14
D3 Evaluate planning tools for accounting period to respond financial problems appropriately
..............................................................................................................................................14
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Management accounting is the process where analysis of business activities is presented
to management for the purpose of facilitating financial as well as management decisions. It
includes application of skills along with knowledge while preparing accounting information in
order to assist managers for formulating policies to control operations at workplace
(Abdelmoneim Mohamed and Jones, 2014). To understand management accounting concept,
Aon Consulting is selected which is a medium size organisation and serves clients which are
operating in sectors related to retail, hospitality, construction as well as manufacturing in order to
provide information to take business decisions in effective manner. Airdri Ltd is one of its clients
and the report is based on such company. The report includes management accounting systems
along with methods in management accounting reporting. It also includes calculations of costs by
using appropriate techniques to prepare income statements. It further discusses about planning
tools along with various ways through which usage of management accounting for responding
towards financial problems.
TASK 1
P1. Management accounting systems.
Management accounting encompasses various methods as well as concepts which are
necessary for planning business actions along with controlling by evaluating performances and
interpreting the same. Financial along with non-financial information’s are presented through
such accounting to organisational management in order to forecast budgets, assist in planning as
well as in depth analysis of business activities. Such accounting helps managers in stock
evaluation, capital budgeting analysis, break even analysis and many more. Financial managers
provides timely as well as accurate financial along with statistical information to middle level
managers in order to take daily and short term decisions for the betterment of business. Different
management accounting systems used at Airdri Ltd are as follows:
Inventory management system: This system is used for keeping records of stock and is
considered as important system in any organisation. Inventory is used for raw material,
unfinished goods or finished products. It helps in stock level forecasting, materials tracking,
automatic reordering, inventory alerts and many more. It is used for determining goods available
through entire supply chain along with business operations procedures. It covers production to

retailing, shipping, warehouses where products are kept in stock (Bloomfield, 2015). This system
is essential required at Airdri Ltd to keep as well as tracking inventory in order to maintain
productivity within the business units. Inventory management system helps in assisting required
inventory, real time movement as well as different types of inventories required in completion of
projects. Such system provides various benefits in the form of managing stocks and placing next
orders whenever required before shortage of required inventory.
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Cost accounting system: This system is used for estimating product cost for the purpose
of valuation of inventory, controlling expenses as well as analysing profitability. Estimation of
actual cost is very necessary for any business enterprise. It encompasses activities based on
understanding, recording, analysing, classification as well as summarizing expenditures
associated with products or services. The essential requirement of this system is to estimate as
well as record the expenses like variable and fixed costs and so on. Managers of Airdri Ltd uses
such system to check reimbursement of associated financial products. With this system,
comparison between budgeted and actual costs can be done in effective manner which helps in
taking corrective decisions related to increasing profitability.
Price Optimisation system: Such system is a mathematical analysis which determines
perception of customers towards value of products or services. It helps in determining value of
organisational products which will meet objectives related to maximising operating profit. The
selected company uses this system to set prices of its financial products based on customer
expectations (Bagautdinova, Kundakchyan and Malakhov, 2013). Executives optimises prices by
understanding client perceptions which results in maintain relationships as well as increasing
profits. It benefits in reducing wastage in order to optimise prices by taking effective decisions.
The essential requirement of price optimisation system is to analyse review of clients towards
prices of investment as well as securities of the company.
Job costing system: This system is used for accumulation of information related to
expenses associated with particular tasks or service. Accumulated information helps in
submitting expense information to top level management for the purpose of reimbursement of
expenditures. It is used for analysing accuracy on estimation system where prices are quoted in
such a manner that allows reasonable profits. Airdri Ltd uses such system to make estimation of
individual unit expense in order to deliver products or services. The essential requirement of
such system is that it contains specialized rules which are applicable to all types of jobs and
helps in estimation of costs pertaining with particular job.
P2 Different methodologies used in management accounting reporting;
Cost accounting report: Cost accounting is a process of collecting, analysing,
classifying and reporting the data and information’s so that the cost of any project or process can
be calculated and after that the cost can be controlled efficiently. There are various different
reports are prepared to analyse the cost such as budget reports, cost centre reports, variance
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reports etc. Airdri Ltd. Prepare different cost accounting reports so that it can allocate the cost
to various cost centres, maintain the cost trend, analyse the budget compliances and discover
and control the causes of variance.
Performance Report: Performance report is a report that is prepared to analyse the
performance or efficiency of any person or activity. Performance report is prepared by the
individual unit expense organizations so that it can set some measurements to achieve its
objectives and compare the success of outcomes in relation to the measurements (Bargate, 2012).
The cost accounting management of the Airdri Ltd. prepares performance report for each and
every project and employee so that efficiency and capability can be measured. This procedure
helps in controlling the cost and managing the workforce. It also improves the communication
with internal and external stakeholders of the organization.
Budget Report: Budget report is a report that covers all the variances and causes of
variances between budgeted or estimated outcomes and actual results in relation to any activity
or project. This report helps the management to set the measurements for the performance report.
Airdri Ltd. prepares a budget report at the end of any project. This procedure helps the
organization in finding out the errors in budget, moderation in budget and controlling the cost
and adverse variances. It also assists the management in the direction of fund and finance
management.
Inventory Management Report: inventory is the goods held by the organization for the
purpose of sale and it is the major source of income. Inventory management report contains all
the information about the maintenance and recording of the inventory. This report contains all
the information about the stock of goods produced by the organization. The Management of
Airdri Ltd maintains a proper record of the stock with the help of advance technology. An
effective record keeping of the inventory helps the management to track the availability of the
products, minimise the cost of storage and maximise the profitability, automate the integration
among the different departments and achieve a high happy customer base.
M1. Benefits of management accounting systems.
Management accounting system is important for all types of business organisations as it
provides necessary information to make critical decisions which benefits the company (Collis
and Hussey, 2017). In reference to Airdri Ltd, all systems benefits in one or other way. Cost
accounting system benefits in collecting detailed information related to costs involved in
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manufacturing procedures at selected business. Inventory management system benefits in
keeping up dated information based on available along with required inventory to carry out
manufacturing procedures without any delays. Price optimisation system benefits chosen
company by analysing behaviour as well as perception of customers towards prices of financial
products. Job costing system benefits in accumulation of information based on associated costs
with specific job as well as service.
D1. Management accounting system and accounting reports are integrated within organisational
processes
Management accounting systems and reports both are interrelated with each other in
many ways. Without accounting systems it is not possible to prepare accounting reports and on
the other hand systems helps in making business decisions to face uncertain circumstances
arising at workplace (Demerjian and et.al., 2012). Managers of Airdri Ltd uses inventory
management system to provide detailed information related to raw materials, semi-finished as
well as finished products for the preparation of inventory reports. At the same time, cost
accounting system helps in preparing budgets as well as performance reports to know about
expenses along with income. Moreover, managers of chosen company prepare account
receivable reports by using price optimisation system which helps in determining prices of
various products.
TASK 2
P3 Calculations of costs using appropriate techniques to prepare income statement
Marginal Costing: It is a most common kind of costing method that emphasises on
systematic classification of expenses into fixed and variable. Under this method after
classification of expenses or costs a fixed or variable contribution per unit is calculated
by considering only variable production overheads. On other hand all fixed cost are
charged as period costs.
Absorption Costing: Under this method all overheads related to production is irrespective of
their nature are charged to unit cost of product. Here no classification of expenses is
required in fixed or variable (Demski, 2013).
Income statement under Marginal costing method for month of May & June
May June
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Selling per unit price 50 15000 25000
Less: Various Marginal Costs
Per unit Direct materials cost -8 -2400 -4000
Per unit Direct labour cost -5 -1500 -2500
Per unit variable production overheads cost -3 -900 -1500
Contribution 10200 17000
Less: Variable selling commission 5% of sales revenue -750 -1250
Fixed Cost
Fixed selling expenses -4000 -4000
Fixed admin expenses -2000 -2000
Fixed Production cost -4000 -4000
Net profit -550 5750
Income statement under absorption costing method for month of May & June
May June
Sales 50 15000 25000
Less: cost of sales 26 -9880 -13000
Gross profit 5120 12000
Under/over absorbed production overhead 1000 -200
Less: S&D expenses
Fixed selling expenses -4000 -4000
Fixed admin expenses -2000 -2000
Less: Variable Sales commission 5% of sales revenue -750 -1250
Net Profit/loss -630 4550
Per unit Direct materials cost 8
Per unit Direct labour cost 5
Per unit variable production overheads cost 3
Absorbed fixed productin cost per unit 10
Cost of sales 26
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May June
Actual production overhead 5000 3800
Standard rate 4000 4000
Under/over absobed production overhead 1000 -200
Material cost variances:
Given information is as follows-
Standard price(SP)- £10 @ per kilograms
Actual price (AP)- £ 9.5 @ per kilograms (20900/2200)
Actual quantity (AQ)- 2200 Kilograms
Standard quantity(SQ)- 1000 Kilograms
Material price variance (MPV)= (SP-AP) * AQ
(10-9.5)* 2200= £1100 F
Material usage variance (MUV)= (SQ-AQ)*SP
(1000-2200)*10= £12000 A
Material cost variance (MCV)= Standard material cost- actual material cost
Valuation of closing stock using LIFO
Date Reference Purchase Issues Balance (Inventory)
Units £/Units £ Total Units £/Units £ Total Units £/Units £ Total
05/01 Previous balance
(inventory) 40 3.00 120.00
05/12 40 3.00 120.00
Bought 25 units
at £ 3.60 each 20 3.60 72. 20 3.60 72.00
05/15 20 3.60 72.
Issued 36 units 16 3.00 48. 24 3.00 72.00
05/20 24 3.00 72.00
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Bought 20 units
at £ 3.75 each 20 3.75 75. 20 3.75 75.00
05/23 Issued 10 units 10 3.75 37.5 24 3.00 72.00
10 3.75 37.50
05/27 9 3.75 33.75
Issued 25 units 25 3.00 75.00
05/30 Issued 5 units 5 3.00 15.00 4 3.75 15.00
Valuation of closing stock by using weighted average method:
05/01 Previous balance
(inventory) 40 3.0000 120.0000
05/12 Bought 25 units at £
3.60 each 25 3.60 90. 65 3.2308 210.0000
05/15 Issued 36 units 36 3.2308 116.307
7 29 3.2308 93.6923
05/20 Bought 20 units at £
3.75 each 20 3.75 75. 49 3.4427 168.6923
05/23 Issued 10 units 10 3.4427 34.4270 39 3.4427 134.2653
05/27 Issued 25 units 25 3.4427 86.0675 14 3.4427 48.1978
05/30 Issued 5 units 5 3.44 17.2135 9 3.4427 30.9843
M2 Different techniques of management accounting system
Use of different techniques along with management accounting systems provides a
framework for systematic presentation of financial information. Cost accountants and employees
of management can apply these techniques to compute the financial performance of company
over a particular period (Gullkvist, 2013). It provides detailed and relevant information about
company's performance to higher level managers for taking business decisions.
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D2 Interpret data for a range of business activities
By applying marginal costing method in order to prepare income statement it has been
analysed that entity's profit is GBP 1050 in the month of May and GBP 5750 in the month of
June. Whereas as per absorption costing method profit is GBP 2450 in the month of May and
GBP 4750 in the month of June. Such difference is arise due to different treatment of fixed costs
in both methods. Under marginal costing fixed cost is regarded as period cost.
TASK 3
P4 Advantage and disadvantage of different types of planning tools used for budgetary control
Budget –Budget simply implies to projection. It is prepared by business enterprises to
estimate its performance in coming period. Budget in business context called as statement of
projection. Management and accountants in business organisation prepares different kind of
budgets to critically evaluate actual performance of business enterprise in near future. While
preparing budgets accountants first analyse the past trends and scenarios to increase the
reliability and accuracy of budgets (Kanellou and Spathis, 2013). Various budgets cover different
financial and monetary aspects of enterprise. It provides assistance in business processes related
to planning and decision-making. Budget gives a strong basis for preparation of strategies and
formulation of action plan. For effective budgetary control within a business enterprise
management, budget plays a vital role. Airdri Ltd, also emphasises on preparation of budgets for
implementation effective budgetary control system. In company manufacturing heads and
managers of production department prepare different budgets to assess under or over statement
of any expenses or income.
Cash Budget
Cash budget prepared by accountants and managers to compute the real flow whether in
flow or out flow within a business entity. This kind of budget only focuses on cash and cash
related aspects of business organisation. It provides a true image of organisation's position in
term of liquidity. Airdri Ltd also use cash budget to identify and improve the weak areas which
lead to negative cash flow or excessive cash outflow. For effective cash handling and
management, company is using information of cash budget. In company cash budget is prepared
department-wise by various departmental heads.
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Advantage:
 This budget help business entities in tracking of movement and flow of cash or cash
related items (Maher, Stickney and Weil, 2012). In Airdri it helps mangers in monitoring
cash flow and in effective cash management.
 In Airdri, trough cash budget managers accumulate funds for future contingency to
ensure its availability of funds in future.
Disadvantage:
 Approaches used in preparation of cash budgets sometime may be manipulative and does
not show real performance of entity. So in Airdri this budget is only used for internal
cash management not for reporting purpose.
 Cash budget is some time fails to detect the fraud done by accountants due to avoidance
of accrual concept.
Operating Budget
This budget is prepared by entities while considering only operational expenses and
income incurred during a particular period. It contains estimation of income and expenses
concerned with operating functions of entity (Malinić and Todorović, 2012). In Airdri Ltd first
managers prepare different small budgets thereafter they prepare a complete operational budget
with help of such budgets. It is used by company to evaluate operational efficiencies and
performance in coming time period. This budget is significant as it covers all operational
activities and functions. As company is manufacturing hand dryers, production heads in
company prepare sub budgets than a complete operational budget is prepared by management to
assess its operational efficiencies related to activities of manufacturing processes.
Advantage
 Managers in Airdri with help of this budget organise and control company's day to day
operations.
 It assists entity in allocation of any weak operational area and provides a basis for
overcoming from such weakness.
Disadvantage
 This budget is prepared normally on daily basis so practical implication of operational
budget is complex and consumes times (McLaren, Appleyard and Mitchell, 2016).
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 Data of operational budget for small size enterprises like Airdri is not so much relevant as
it covers only operational part and requires preparation of sub-budgets.
Master Budget
Master budget is most relevant and widely used budget. Normally it is part of financial
statements. A master budget acts as a summary budget as it involves all other budgets. It is used
by business entities for assessment of combined and total performance. It covers all financial and
accounting aspects business entity to provide a detailed and complete picture of organisation's
position. Airdri Ltd is using this budget to take manufacturing and other business decisions.
Management in company with help of this budget prepare plan for effective implementation of
strategies.
Advantage
 Master budget is used by Airdri to identify any probable financial event that may create
hazard for company in future.
 Master budget also help company to make effective coordination between different-
different product segments and departments.
Disadvantage
 Practically it is very time consuming task or job for company to prepare master budget
along with consolidated financial statement.
 Combining different budgets to prepare master budget can lead to increase in chances of
error or mistakes.
M3 Uses of different planning tools and their application for preparing and forecasting budget
Preparation of budgets requires some tools and methods which lead to increase in
accuracy and efficiency of results of budgets. Planning tools are essential tools and methods for
systematic budget preparation processes. Planning tools like cash budget, master budget etc.
provide a basis for estimating figures of future. Managerial personnel’s can make reliable
estimate of future performance on entity. For reporting purpose managers can apply these
planning tools (Mitchell, Van Buren III, Greenwood and Freeman, 2015). For intense in Airdri
managerial personnel’s and accountants are using planning tools at large level to increaser their
forecasting ability to prepare a more realistic budgets. For loan and other funding purpose budget
prepared by applying planning tools are admissible.
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TASK 4
P5 . Compare how organisations are adapting management accounting systems to respond to
financial problems:
In all kind of organisations and business entities whether small, medium or large, at all level
of activities and functions there some problem may arise due to dynamic business environment.
Financial problems are issues or facts that may arise due to lack or shortage of monetary funds or
resources. Early asses of financial problems help business entities to achieve sustainability in growth
and ensure survival. In small or medium sized entities like Airdri ignorance of financial problem can
lead to insolvency in long run. In respective company managers put their efforts towards solving
different financial problems. In this context following are some major financial problem that Airdri is
facing, as follows:
1. Lack of liquid funds: This is a major financial problem of Airdri. Company having
adequate funds but company's liquid funds are very low, so sometimes company is
not able to pay its day to day expenses. It directly connected with company's working
capital position (Morden, 2016). As company is manufacturing entity so company
should maintain adequate liquid funds for any sudden expenditure or contingent
manufacturing expense. Frequent shortage of liquid funds can even stop the
manufacturing process of hand dryer in company.
2. Cash mismanagement: In Airdri, there is another financial problem of poor
management of cash. Due to this company is facing issues like loss or theft of cash,
excess cash expenditure, and negative cash flows. It is required for company to
manage cash effectively because mismanagement of cash in company can lead to
adverse liquidity condition.
Following are some significant techniques that are used by managers to solve financial
problems in Airdri, as follows:
Benchmarking: Benchmarking is a systematic process of setting certain levels and criteria
and putting efforts towards achievement of these criteria or asses performance of entity based on
such benchmarking criteria. Main motto of benchmarking is to recognise the areas of improvement
within business entity (Needles and Crosson, 2013). In Airdri management by using benchmarking
technique can analyse the way by which financial problem can be solved. It also provides data related
to improvement in organisation's performance.
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Key financial indicators: These are certain measures that assist entities to allocate dull
financial areas and financial problems. Under this technique various key certain areas like gross
profit margin, liquidity ratio etc. are analysed to identify and solve financial problems. In Airdri,
managers using analysis of key financial indicators can solve main cause or area of operation which
leads to mismanagement of cash funds and solve this problem at early stage. Various key financial
indicators can also be used by company to solve the financial problem of shortage of liquid funds in
manufacturing and production process.
Comparison between Airdri and TPG processing company:
Airdri TPG
 Airdri is facing problem of lack of
liquid funds, As as result of this
financial problem company is not able
to effectively handling of day to day
manufacturing activities and functions
which leads to decline in productivity
level. In long run it may lead to
reduction in profit margin.
 TPG is continuously facing problem of
excessive costs or increase in
manufacturing and production costs.
Due to this company's profit margin per
unit has been decreased.
 Airdri can use cost accounting system
to solve such financial problem.
Managers through cost accounting
system analyse the different activities
which is main cause of such financial
problem. By use of cost accounting
system, cost accountant in company
can track record of various costs
incurring shortage of liquid funds
within in day to day operations.
 Managers in TPG can use price
optimisation system to control
excessive costs and expenses in
manufacturing activities. By adopting
price optimisation system company can
allocate are of operations causing
increase in cost. It can also help
company to increase their profit margin
per unit.
 Airdri is applying SWOT analysis as
company wants to find out root cause
of lack of liquid funds. Using it
 Whereas TPG is using balance
scorecard for solving excessive costs'
problem. Using balance scorecard
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company can recognise its weak areas
and variables affecting company's
liquidity. This tool also add value in
shipping business strategies as it
provide a chance to view things form a
new perspective.
company evaluates figures and fiscal
events causing excessive costs. This
tool make improvement in integration
of managerial processes and empowers
personnels.
M4 Responding to financial problems, management accounting can lead organisations to
sustainable success
Every small or medium size enterprise like Airdri wants to make expansion and achieve
sustainable success but due to financial problem it is very difficult, thus it is essential for
business entities to respond such problems within reasonable time. In Airdri managers can apply
management accounting systems to solve its financial problem. As company can use cost
accounting system to capture the area related to mismanagement of cash. Managers always tries
to recognise and respond to financial problem but in dynamic business environment and tuff
competition it is complex, so it is required for managerial personnels to apply management
accounting system to identify and respond to these problems at early basis (Robalo, 2014).
D3 Evaluate planning tools for accounting period to respond financial problems appropriately
Planning tools act as a frame work for accountants and managerial personnel’s to smoothly
respond to different financial problems. For intense master budget is used by business entities for
overall internal analysis, which assist managers to take strategic decisions (Zoni, Dossi and Morelli,
2012). Planning tools such as master budget, inventories budget, cash budget etc. provide a detailed
groundwork for systematically identification of main area of financial problem and solve them at
early basis. Responding of financial problem can boost the performance of business organisation
within a short period.
CONCLUSION
From above report it has been articulated that management accounting systems and its
various elements are significant for a business entities. Managers at different level can apply
management accounting systems like cost accounting systems, inventory management system, cost
accounting system etc. to achieve overall development within organisation, which can lead to
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enhancement in profitability. Various planning tool and techniques are also vital for managerial
personnel’s to take strategic or business decisions and prepare blue print for achievement of
organisational objectives and goals. Reporting is essential part of management accounting as it
assists in communicating the overall performance of entity to higher level management.
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