Management Accounting Report: Business Analysis for Innocent Drinks

This report, prepared for Innocent Drinks by a consultancy firm, provides a comprehensive overview of management accounting principles and their practical application. It begins with an introduction to management accounting, differentiating it from financial accounting and highlighting its importance in decision-making, problem identification, and price setting. The report then delves into specific management accounting systems, including cost accounting and inventory management, and explores the use of methods like FIFO. Furthermore, it examines management accounting reporting methods such as budget reports, inventory management reports, and performance reports. The core of the report focuses on cost analysis techniques, demonstrating the application of marginal costing and absorption costing through income statements. Finally, the report discusses planning tools used for budgetary control, including cash budgets and capital budgeting, to aid Innocent Drinks in financial planning and decision-making. The report concludes with a discussion of management accounting systems and reports integration, and a conclusion summarizing the key findings and recommendations.

Management accounting
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Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
P1 Concept of management accounting.................................................................................3
P2. Methods of management accounting reporting................................................................6
TASK 2............................................................................................................................................7
P3 Techniques of cost analysis .............................................................................................7
TASK 3..........................................................................................................................................13
P4 Planning tools used for budgetary controlling................................................................13
TASK 4..........................................................................................................................................15
P5 Management Accounting System....................................................................................15
CONCLUSION ............................................................................................................................17
REFERENCES..............................................................................................................................19
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INTRODUCTION
Management accounting refers to an assistance tool used by managers, this tool helps
them to formulate plans to achieve long term and short term objectives of the firm. It helps
managers by analysing and interpreting results provided by financial accounting. Management
accounting aims at improving quality of information provided to management about business
operations, with the help of this information, managers decide their future course of action
(Bobryshev and et.al., 2015). This report is drafted by consultancy firm AJ and sons for their
client Innocent Drinks. Innocent drinks is in business line of manufacturing juices and smoothies
which are sold in supermarkets, it is headquartered in United Kingdoms. This document is
divided in three parts, where, first part throws light upon management accounting systems and
how they are applied on business processes. Second part focuses on application of management
accounting techniques on a given set of data. Last part studies about use of different type of
planning tools in order to solve financial problems faced by Innocent Drinks.
TASK 1
P1 Concept of management accounting
Management accounting (often referred to as managerial accounting) is the process of
conducting various studies on all facets of accounting information, in order to help managers to
frame policies and also do planning for future actions. It is for internal use to make perfect
business plans while, on the contrary, financial accounting aims at furnishing internal as well as
external related parties with financial information (Chenhall and Moers, 2015).
Basis of comparison Management accounting Financial accounting
Meaning An accounting system which
assist managers to formulate
policies and strategies using
results of financial accounting
An accounting system, that
only prepares financial
statements, and gives no
comparison or analysed
results.
Compulsion It is not compulsory to do It is compulsory for every
organisation.
Users Internal users Internal and external
stakeholders.
Information Provides monetary as well as
non monetary information
Provides only monetary data
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Time period There is no fixed time frame to
conduct analysis
On the contrary, time frame is
fixed, usually, one accounting
year to prepare financial
statements.
Importance of management accounting is elaborated below, which proves why it should
be used by Innocent Drinks, though there is no compulsion:
 Decision making: The basic purpose of doing management accounting is to assist
management in decision making (Ghasemi and et.al., 2016). In this, various
analytical charts, tables, forecasting can be done done to help managers of
Innocent Drinks to formulate their policies and strategies.
 Identification of problem areas: There may be some problems that may arise in
future, and with the aid of management accounting, managers of Innocent Drinks
can foresee those problems and will prepare their organisation accordingly.
 Price setting: Various tools of management accounting provide essential
information to marketing and production managers, in order to help them to fix
prices of their products.
Innocent drinks can adopt practice of management accounting in order to make required
changes in policies and strategies. Management accounting is a useful aid for every function of
Innocent drinks like, marketing, production, sales, finance, etc.
Management accounting is related to every department of business and results into a
management accounting system, some of them are explained below: Cost Accounting system: It is branch of management accounting which analyses and
interpret all types of cost incurred in an organisation. This process helps managers to
analyse which cost centre has excess expenses and which area needs more investment, so
that, they can generate more returns (Kostyukova and et.al., 2018). Innocent drinks can
use this system to analyse cost of different activities, this will help mangers to see their
incurred cost pattern, and will help them to go for cost cutting on high cost consuming
centres, and then, they can take required corrective measures. Inventory management system: Inventory management refers to management of
inventories of a company. This management starts from planning of ordering and ends
with the exit of it from company. This means, that from where to purchase, what and how
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much to purchase, where to store, and how they will go out for production or sale, all
tasks come under inventory management system. There are several methods to record
inventory, namely, FIFO, LIFO, Weighted average, etc. (MaasSchaltegger and Crutzen,
2016). Choice of methods depends on number of factors like nature of inventory,
warehousing facilities, etc. Since, Innocent drinks deals in perishable products like
juices , smoothies, therefore, it is advisable that they should use FIFO method as this
means that product will take exit first, which came first. Use of this method will lead to
minimum wastage.
 Price optimisation system: There are basically three factors which are considered in this
system to set price for a product:
 Willingness to pay: This willingness of customer to pay for a particular product
depends on competitors rates, location, satisfaction expected out of brand or
reputation of brand in market. Keeping in view, all above explained factors. Prices
should be fixed. In context of Innocent drinks, managers should analyse the
bargaining power of customers, availability of substitutes, taste and preferences of
customers, etc. before fixing the prices for their product.
 Incremental profit: Above factor was for customers, now this factors is considered
keeping in view of producer. The prices should be set keeping in view all types of
cost incurred and also the opportunity cost, so that reasonable profit can be generated
out of that transaction (Malina, 2017). Every cost incurred by Innocent drinks in the
process of production, promotion, transportation or any activity should be kept in
mind, and also, if any opportunity cost is there, that also should be considered.
 Objective and constraints function: This factor is related to options available at a
point of time, and what is the objective that needs to be achieved at that point of time.
Both the things should be considered and than the price setting should be done. For
instance, if there is a choice with the company that they can choose only one
supermarket to sell their products to ultimate consumers, than their objective is to sell
their product at possible maximum profit and constraint is that they can choose only
one supermarket, therefore, they should choose that place, which offers maximum
contract price.
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P2. Methods of management accounting reporting
As much application of management accounting systems is necessary, it is equally
important to convey results of these systems to managers. The information is conveyed in form
of written detailed statements and these statements are known as management accounting reports
(Phan, Bairdand and Su, 2017). These reports helps managers to take administrative decisions.
Some of the reports are explained below: Budget report: These reports consist information about budgets of all departments and
the result of variances as well, which helps managers to see what gone wrong which
resulted in variance in actual and budgeted figures. Managers of Innocent drink can use
this these reports to analyse the over/under budgeted departments and than they can
decide future course of actions for those specific departments. Inventory management report: This report consists of each and every detail related to
inventory of an organisation such as, quantity purchased at what price, what quantity has
been used, storage cost, carrying cost, ordering cost, economic order quantity, etc.
Innocent drink can use this report to determine information about costs relating to
manufacturing, transportation, storage etc., this will help then to decide about cost cutting
if required. Performance report: This report can be divided into two categories that are- reviewing
performance of company as a whole and reviewing performance of each employer
separately. This review is generally done at the end of a fixed period of time. This report
also help in reviewing financial performance of the company. Innocent drinks can use
this report to see whether the performance of the company and also the employees is
according to the expectations, and if not, than what are the factors that caused that lag in
performance.
 Accounts receivable ageing report: This report relates to credit extended by the business.
This statement includes data about debtors, date of transaction, amount blocked in credit.
This report also specify data about time period extended for credit facility (such as 30
days, 60 days) which is in accordance of credit policy of business. Innocent drink can use
this report to evaluate their credit policy and also can regulate their recovery system.
Other managerial reports are cost accounting report, order information report, competitor's
analysis reports, etc., these reports are also necessary for growth and success of a business.
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Integration of management accounting system and reports
Managerial reports are the written detailed statements of the management accounting
systems. This reporting is necessary to provide managers with required information which assist
them to take administrative decisions like inventory management policies, finance managers to
formulate policies about budgets (Shichkov, 2018). Managers further use this informations to
advice top level management to formulate strategies so that any lag in the whole specified period
can be corrected. This integration of management accounting system and management
accounting reports leads to success of business.
TASK 2
P3 Techniques of cost analysis
Marginal costing: This is a costing technique used to determine relationship between
volume produced and the cost incurred in that production. Marginal cost can be defined as the
additional cost of producing an additional unit (Johansson and Kriström, 2018).
Absorption costing: This costing technique refers to process of capturing all
manufacturing costs incurred and than allocating these costs over all units produced. These
captured costs can be direct and indirect as well.
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