Management Accounting Report: Financial Analysis of Brightstar Company

This report provides a comprehensive analysis of management accounting principles and their practical application within Brightstar Company, a financial consultation service provider based in the UK. The report delves into the core concepts of management accounting, emphasizing its role in internal decision-making and financial planning. It explores various management accounting systems, including price optimization, cost accounting, inventory management, and job costing systems, highlighting their benefits and organizational applications. The report further examines different types of management accounting reports, such as budget reports, performance reports, inventory management reports, and accounts receivable reports, detailing their significance in business operations. A key component of the report involves the production of income statements using both marginal and absorption costing methods. Additionally, the report addresses planning tools for budgetary control and their application in preparing and forecasting budgets. Finally, the report defines financial problems and compares different organizational approaches using management accounting systems to resolve these challenges, aiming for sustainable success.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
P1: Management accounting and essential requirement of various types of management
accounting system.......................................................................................................................3
P2: Different types of management accounting reporting.........................................................5
M1: Benefits of management accounting systems and their organizational applications...........6
D: Critically evaluate the accounting system or accounting report with the organisation..........7
TASK 2............................................................................................................................................7
P3: Produce income statement by using marginal or absorption costing method.......................7
...................................................................................................................................................10
M2: Apply accounting techniques to produce financial reporting documents.........................10
D2: Prepare and apply financial reports to interpret data for business activities......................11
TASK 3..........................................................................................................................................11
P4. Planning tools for budgetary control...................................................................................11
M3: Application of planning tools for preparing and forecasting budgets...............................13
TASK 4..........................................................................................................................................14
P5: Define financial problem and comparison different organisation by masking the use of
management accounting system................................................................................................14
M4: Management accounting in response to solve financial issue that can lead to the
sustainable success....................................................................................................................16
D3: Planning tools to resolve the financial problems...............................................................16
CONCLUSION..............................................................................................................................16
REFRENCES.................................................................................................................................18

INTRODUCTION
Management accounting analysis the business activity that assist the internal management
to make sound decision. It is the formulation of accounting information that help the manager to
carry on day to day business activities. Both financial and non financial information are the part
of management accounting to maximize the profitability successfully (Atrill, McLaney and
Harvey, 2014). For the better understanding of report Brightstar company has been selected
whose headquarter is in UK. It offer financial consultation services to the client of various sector
like retail, manufacturing as well as hospitality. Amongst different financial service seeker, one
of them is Airdri company which take the help to Brightstar to formulate better financial
decision. This report cover following topics such as management accounting and requirement of
management accounting system. Access different types of management accounting report and
prepare income statement with the help of marginal and absorption costing. Further, define the
various planning tool which are used for budgetary control. Further, use of effective accounting
system to solve the financial problem faced by company are covered in this report.
TASK 1
P1: Management accounting and essential requirement of various types of management
accounting system
Management Accounting: This accounting approach can be defined as a process of
collecting, recording and presenting data in such manner that it may assist the management to
make effective planning and decisions for a specific period of time. Managerial accounting is
different from financial accounting as financial reporting is useful for external users while
management accounting used by internal stakeholders specially the managers. Managerial
accounts hasn't any specific formate as they are not statutory to be prepared. These can be
formatted as per the convenience of the accountant.
Management Accounting Systems: This system is evolved to provide information and
data for preparation of managerial accounts. Management accounting system collects all the data
and material subject matter whether it is financial or non-financial in nature (Byun and Roland-
Luttecke, 2014). It is a kind of accounting adopted by companies to maximise and enhance the
gross profit by coordinating expenses and revenue. With the help of this method, administration
of Airdri limited creates various reports and budgets, design strategies accordingly and focus on

analysis of performance of the firm. Some of the systems used by respective firm are described
below:
Price Optimisation system: Price optimisation is a mathematical method to record the
reaction and behaviour of the customers towards different set of prices for number of products.
For this purpose, a sales model and cost model is created. After conducting customers' activity
regarding prices, a preferred set of prices for plurality of products is provides in this system.
With the support of Price optimisation system directors of Airdri limited are competent to figure
out the best possible price of their goods that will draw in ample number of customer and support
them to maintain desirable profit. This system is used to fix the product price by analysing the
cost of production, understanding customer needs and evaluating desired profit.
Cost Accounting System: A cost accounting system is a model used by organizations to
evaluate the cost of their products for inventory valuation, profitability investigation and cost
control. It is essential to find out the original cost incurred by various cost centres in order to
manufacture a product for deriving desired profit, execute planning and making future decisions
efficiently . This system includes job order cost, process cost, direct costs, non-operational costs,
etc. The administration of respective organization follows cost accounting system for measuring
efficiency, identifying the unproductive functions, deciding the prices and future planning. This
framework further useful to calculate and examine the entire profitability of business and in case
of unfavourable outcomes, healing actions can be taken to achieve desired results.
Inventory Management System: This system is used for keep an eye on every single
movement of inventory produced by organization. Inventory management system tracks goods
through the whole production process. It covers information from purchase of raw material to
warehousing and shipping of the inventory. It also includes sales return, damaged goods, goods
sent on consignment and WIP. Management of the chosen company uses inventory management
software to record the information of inventory so that time and energy can be saves and queries
of the customers may be solved rapidly, timely and satisfactorily. By following this practise, firm
is capable to get rid of the shortage of stock situation, save the carrying cost and create happy
customer base.
Job Costing System: this costing method is used to estimate and evaluate the cost
associated with a specific task , job or service (Chamizo-Gonzalez, and others, 2015). The job
order costing system is used when the various items produced are sufficiently assorted from each

other and each has a significant cost. These specific jobs or units sent to the customers
immediately after production and the cost can not be calculated under cost management
accounting system hence job costing system is used. Accountant of the selected firm prefer this
method to calculate cost related with particular unit or consignment and also for rewarding
employees according to their performance.
P2: Different types of management accounting reporting
Management Accounting Reporting: In today's economy world, establishments are
capable for efficiently organising and controlling the multi-purpose functions by making
valuable reports. These reports are chiefly provide the overall performance overview of
organization and find out loop holes of business so that they can be developed (Corvellec, 2018).
Different reports are important statements for managerial accounting which assist the liable
person at different level to take effective decision to attain the objectives and aims. The key
objective for preparing various management accounting reports is to ensure effectiveness and
success of managerial accounting system. The list and uses of different reports prepared by
selected firm is as under:
Budget Reports: Every organization prepares some estimated budgets before starting any
job or financial year. At the end of the specific task or time, this standard values are compared
with actual outcomes to find out the differences. The reports which include all budgeted data,
actual data and compared variances within it, is known as budget report. Budget reports are read
by the both managers as well as external stakeholders. Directors uses these reports in order to
create financial plans and projects while out side user read it for making investment decisions
and analysing the management system of company. Airdri limited prepares budget report to
convince its investors and making financial strategies.
Performance report: Performance reports are created by the management for the
organization as a whole as well as individual employee and activity. These reports are prepared
to examine the accountability of performance up to the standards. The role of performance
reports is vital for any company to keep a surgical measure of their strategy towards their
operation. Standard and actual achievements are compared with available records and reasons
behind variance is also find out. Receiver of this performance report is authorised or liable to
take remedial steps in case of adverse variances. Managers of respective company prepares this
report to generate key strategies about reward policies and training & development practises.

Inventory management reports: This report is generated by the administration to keep a
detailed record of inventory which alternatively helps in increasing the sales volume by
decreasing costs. This report contains content about actual production of finished goods and
degree of WIP. In respective firm, with the help of inventories report manager are aid to keep a
record of total raw material required for production, degree of work in progress and total stock
that is ready to be deliver as per demand of market. The report also discloses the appropriate
method used by the firm in order to evaluate the proper amount of its inventory which are LIFO,
FIFO and weighted average method. It also support to improve the supply chain of company as
enabling Airdri limited to provide goods on actual demand of customer and resolve any issues
related with finished goods.
Accounts Receivable Reports: Accounts receivables are the amount that an organization
demands from its customers. Accounts receivable ageing report is a statement of unpaid debtors
which includes outstanding amount from customers, due dates for receipts, overdue, interest on
over dues, contact details of debtors, bad debts and other necessary details about receivables.
This report helps the support team to give time to time suggestions for recovery of debts so that
changes of late or omitting payments can be eliminated. Regular practise of the said report assists
the management of Airdri limited to develop a strong and effective credit policy and improve its
debtor turnover ratio.
M1: Benefits of management accounting systems and their organizational applications
Systems Benefits
Inventory management system  This system helps the firm to manage the record of
inventory used in different level such as at the raw
material or while processing in finished good
Cost accounting system  Cost accounting is used to manage the expenses of
business by reducing the cost which help in
effectively internal decision of business.
Job Costing system  Such system is beneficial for Airdri company to
accumulating costs of specific job.
Price optimising system  It help the firm to determine most suitable price

which company can set based on customer response
D1: Critically evaluate the accounting system or accounting report with the organisation
Management accounting system and reports are important for organisation as it helps to
maintain the proper records of accounting transaction and information. The manager of business
industry can make effective business decision by using different management system. Such as by
using inventory management and cost accounting system it can control inventory and cost of
products and prepare report for making effective decision that help to accomplish objectives.
TASK 2
P3: Produce income statement by using marginal or absorption costing method
Marginal costing method: Marginal costing is an essential accounting system which
allow management to make suitable decision. Under this costing technique product cost are
considered as variable cost whereas cost of the period is categorised as fixed cost. Here, profit
volume ratio is used to calculate the profit and determine the cost of other or next unit due to
which existence of any change in opening as well as closing stock of company hardly affects to
per unit cost.
Absorption costing: This is one of the widely used as well as accepted approach. Within
absorption costing all the fixed as well as variable cost fall under the product cost unlike
marginal costing. It determine the actual cost of each unit due to which any change in the
opening and closing cost affect per unit cost (Fagbemi and Olaoye, 2016).

Working Notes:
Average cost of inventory (1) 3.2
(40*3 = 120 + 20*3.6 = 72) /
(40+20)

Average cost of inventory (2) 3.45
(24*3.2 = 76.8 + 20*3.75 = 75)
/ (20+24
M2: Apply accounting techniques to produce financial reporting documents
For the preparation of financial reporting document the financial manager of the company
can select various technique that differ from one organisation to another. These documents help
both internal and external party to make sound decision and function successfully like internal
member can identify their performances and set future standard (Jack, 2016). Whereas, external
party include various stakeholders such as customer, government, creditor, investor, financial
institution and so on uses financial information to gain detail information regarding company. In
relation to the manager of Airdri company maintain the routine record which is finally used to
prepare the statements like financial or income statement that determine actual position of
company. Thus, for this method the financial manager can opt efficient costing technique such as
marginal and absorption costing to produce fair result. Additionally, Marginal costing helps the
company to identify net operating income on the basis of fixed and variable overhead. On
contrary, absorption costing is used to obtain gross profit by which decision can be made by
company to decide the selling price.
D2: Prepare and apply financial reports to interpret data for business activities
Financial report include various types of statement such as cash flow statement, balance sheet
as well as profit and loss account (Ram, Maroun and Garnett, 2016). These are the mandatory
report which needs to be prepared by all company of various sectors so that the interest stakeholder
can analyse the data and make the decision either related to investment or withdrawal of amount.
TASK 3
P4. Planning tools for budgetary control
Budget is a document which is prepared by the financial department that contain all the
estimated expense and income which business can incur or make in the upcoming duration. It is
prepared for a confined period which can be monthly, quarterly or annually to attain the short or
long term objective of an organisation. Thus, this is a beneficial tool used by company to conduct
proper planning and enhance the performance of business. In relation to Airdri company, budget
assist the company to evaluate the standard performance and achieve the objective successfully.

Along with that it help the business to manage all the performance by making the optimum use
of financial or non financial resources.
Budgetary control: Budgetary control is used to manage the budget and internal process
of business (Riley and Ward, 2015). As with the help of budget company determine the
standard position which they have to achieve on the basis of their past performance or comparing
with competitors performance. But still there may be the chances of deviation or variances that
arises due to the gap between actual and standard performance. In this case Airdri company can
use budgetary method where each department remain cautious to minimise the chances of
overspending by controlling unnecessary expenses. Hence, it maintain the coordination among
various department of business for the smooth functioning of business.
Master budget: Master budget includes the financial budget along with that income
statement as well as balance sheet of company. This documentation is used to anticipate sales,
capital investment and estimated expenses to be incurred by business. It is strategic plan that help
the business to perform future operations and set strategy for long term. In relation to Airdri
company can make the use of master budget to coordinate the activity of various division of
company so whether it is associated with sales or operations. Such tool helps the manager to
monitor the activity of business and evaluate the performance so that constructive feedback can
be provided and corrective measure can be taken within desired time period. There are certain
advantage and disadvantage in relation to master budget which is defined below:
Advantage:
 Master budget is an effective budget by which manager of Airdri company can conduct
plan and allocate the resources for the different department within the workplace. It provide the brief information regarding various head within master budget (Sadikoglu
and Olcay, 2014).
Disadvantage:
 This budget is not flexible as it becomes tough for the manager to bring modification and
at times control the unnecessary expenses.
 Manager makes certain assumption while preparing master budget which might not be
accurate at all time.
Cash budget: Cash budget is prepared by company to estimate the expected inflow and
outflow of cash for a certain period of time. This help the company to analyse the expenditure

incurred in the sales and purchase of commodity. It is essential that the Airdri company prepare
their budget in such a manner they pay all their dues or expenses and manage the income or
revenue so that inflow gets exceeded then outflow which is profit making situation for company.
Advantage:
 Cash budget helps the Airdri company to properly manage their routine expenses and
provide detail information to the regarding regarding cash transaction. This tool help the company to determine the minimum liquidity or cash needs to be retain
by company that can be used in carrying on the productive activities.
Disadvantage:
 Cash budget has narrow approach as it does not include or ignore non cash transaction
which are essential for firm in order to make effective decision.
 It ignore the credit transaction or bad debts of company which make viable change in the
actual figures displaying profit or loss situation.
Zero based budget: Within zero base budgeting all the expenses of company is justified
for the new period so this budget starts from the zero base to meet the current expectations of
company. In simple words, here budget is prepared from the scratch with the main purpose to
lower down the cost incurred in unnecessary business activities. Thus, this does not depend upon
the previous budget due to which it can allocate the resources effectively and compensate the
weakness by motivating the employee in decision making.
Advantage:
 Zero base budgeting helps the Airdri company by comparing the new project with the old
one to attain the success. This helps in preparation of accurate budget as all the department make effort to look
each and every item and compute the desirable result.
Disadvantage:
 It is time consuming exercise for company to prepare incremental budget at each and
every year.
 It include the involvement of employee which leads to delay and chaos (Seethamraju,
2015) .