Comprehensive Management Accounting Report: Airdri Ltd Financials

This report provides a comprehensive overview of management accounting, focusing on its application within Airdri Ltd. It begins with an introduction to management accounting and its importance, followed by an analysis of different management accounting systems like price optimization, cost accounting, and inventory management. The report then explores various management accounting reporting methods, including budget reports, inventory reports, and cost accounting reports. The benefits of these systems are evaluated, highlighting their role in integrating organizational processes. The report delves into cost accounting techniques, comparing marginal and absorption costing through income statements for Airdri Ltd. It further examines planning tools for budgetary control and concludes with a discussion on how organizations adapt management accounting systems to address financial problems. The report utilizes examples and calculations to illustrate key concepts, making it a valuable resource for understanding financial management.

MANAGEMENT
ACCOUNTING

Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Management accounting and need of management accounting system................................1
P2. Explain different method of management accounting reporting...........................................2
M1. Evaluation of benefits of various management accounting systems....................................3
D1 Management accounting system and management accounting reporting are integrated with
organisation process.....................................................................................................................4
TASK 2............................................................................................................................................4
P3: Cost accounting techniques to prepare an income statement................................................4
M2: Management accounting techniques and financial reporting documents............................8
D2. Financial reports which applies to interpret many business activities..................................9
TASK 3............................................................................................................................................9
P4: Advantages and disadvantages of different kind of planning tools of budgetary control.....9
M3: Evaluation of planning tools..............................................................................................10
TASK 4..........................................................................................................................................11
P5 Comparison of how organisation adopt management accounting system so as to respond to
financial problems.....................................................................................................................11
M4: Evaluation of financial issues............................................................................................13
D3: Critical analysis of financial issues.....................................................................................13
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................15

INTRODUCTION
Management accounting is defined as a concept in which business operations and costs
are analysed so that appropriate financial accounts, reports and records can be prepared in a
proper manner. This will benefits the business organisation in taking strategically right decisions
so that high growth can be achieved (Adler, 2013). In order to achieve this, the accounts manager
needs help from financial manager so that annual financial statements can be prepared in a
reliable manner. It will benefits the account manager in taking decisions as per financial position
of firm. This report is written in context with Airdri Ltd that operates in manufacturing and
designing of air dryers that have unique features and consumes less energy. This report is going
to cover about the concepts associated with managerial accounting, managerial reports and their
benefits to a business firm. Beside this, different costing methods and planning tools to control
budget are discussed. At last, measures to resolve financial problems are mentioned.
TASK 1
P1 Management accounting and need of management accounting system
Management accounting is defined as the way to communicate and analyse the financial
data to managers of an organisation so that timely and appropriate decisions can be taken. It
involve different types of accounting systems which are related with the financial terms of a
company associated with internal management. With the help of an efficient management
system, a firm takes important decisions by formulating effective procedures and policies. In
relation with Airdri Ltd., the management accounting systems are going to manage different
activities and functions so that work can be performed desirably. It depends on different methods
which are discussed below:
Price optimisation system: This kind of account management system benefits a firm in
developing an efficient framework which allow to regulate the prices of products or service
properly. This accounting system is vital for a business firm to determine appropriate rates for
specific services or product at equal level. This system is also beneficial in context with
customers as both organisation and client agrees at same price for the services & products which
are offered by firm (Arnaboldi, Lapsley and Steccolini, 2015).
Cost accounting system: In this kind of accounting system, total capital and finances are
calculated which are needed by a business firm to perform different business operations and
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activities. This kind of accounting system will allow a company to evaluate actual cost which is
earned by them with the estimated cost that is decided by Airdri Ltd. management. Beside it, this
system will benefits in calculating entire cost so that profit margins can be identified easily.
Inventory management system: This management accounting system benefits a company
in organising and managing inventories that involves opening & closing stock, raw materials etc.
Main function associated with this management system is that it tracks the amount of resources
and raw material which are avialable in warehouse of company. Other than this, inventory
management system will help concerned company to monitor the amount of finished products
which are present in a business firm (Chenhall and Moers, 2015).
Difference between financial and management accounting
Basis Management accounting Financial accounting
Meaning This system benefits a company in
collecting relevant information and
details which allow them in
formulation of effective policy and
plans so that business can earn high
growth.
It is used by business firms to
prepare accounts. This system
benefits them in ensuing a stable
financial presence and position in
the market place.
User It has involvement of internal
authorities which create effective
policies and plans. For example,
management, manager, CEO etc.
In this system those parties are
involved which are present
outside the company. For
example, banks, investors and
other financial institutions.
Time focus It is done for future use. It is performed to acknowledge
past data.
P2. Explain different method of management accounting reporting
Management accounting report involves the data and information that is concerned with
the actual performance of various operations which are performed by a firm. Mainly, a company
takes their financial decisions after checking their report of management accounting. It benefits
the company in formulating effective plans and strategies so that business operations can be
performed in an advantageous manner. Different types of management accounting reports are
discussed below:
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Budget report- With the help of this report, a company can find out the estimated expanses
and actual earning by performing different activities and business operations. In accordance with
this budget reports, Airdri Ltd. Can measure and calculate the accurate outcomes for their
expenditure and income. Due to this, organisation will be capable to estimate the price for next
years. In case of Airdri Ltd., this report will allow the company to measure their true
performance in market (Evans, Burritt and Guthrie, 2013).
Inventory report- This accounting report covers complete information about the stock
which are presented in the warehouse of a company. Beside this, inventory report helps in
measuring the costs which is generated because of inventory such as transportation cost that
incurred due to supply of raw material, ordering cost etc. In case of concerns company, this
report will allow in recording current inventory and associated costs.
Cost accounting report- This kind of report involve detailed information related with the
total expanses incurred by a company. This report is used in all kind of activities and operations
which is performed by company. This report helps in analysing if the cost for an aspect is viable
or fixed. In context with Airdri Ltd., this report allows to cover the costs before the sale
procedure and the income which is received after selling (Grabner and Moers, 2013).
M1. Evaluation of benefits of various management accounting systems
Management accounting system provides huge benefits to the organisation because they
are incurred with proper financial data record that helps to generate effective results for the
organisation. Moreover it also helps them to accomplish their goal with objective with high
efficiency and effectiveness. Some benefits for management accounting system are as follow:
Advantage of inventory management
 AirDri implemented this system because it helps them to manage the inventory according
to the needs of the consumer. Example- Inventory management system helps them to
maintain their effective asset liability ratio through monitoring their current asset position
in organisation.
 Another benefit is that it helps an organisation to order required inventory through which
it is unnecessary cost to manage them will be reduced.
Advantage of cost accounting system
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 The cost accounting system is more useful for AirDri as it helps them to predict out those
factors due to which there cost will be increased in the market. It results that it helps them
to cut extra cost and increase profit for the organisation.
 Cost accounting system helps financial department in order to find out actual cost that is
invested by them to produce their product or service that is delivered to customers.
D1 Management accounting system and management accounting reporting are integrated with
organisation process
AirDri focuses on management accounting and management reporting due to which it is
easy for them to integrate between different activities of them. Through this financial department
of the organisation develops and executed the plan due to enhance more productivity in their
organisation. Example- it helps them to record the cost of inventory along with the stock that is
present in organisation warehouse. So in future they order sufficient amount of inventory.
TASK 2
P3: Cost accounting techniques to prepare an income statement
Cost: It refers to an amount which is paid or sacrificed to gain something. It is usually
valuation of different aspects that include efforts, resources, time invested, material used, risk
incurred and opportunity sacrificed in manufacturing and delivery of products and services. All
th expenditures a costs but all costs are not expenses. It is classified into two types which are
discussed as under:
Marginal costing: It is a principle in which the variable costs are charged against the cost
unit and fixed costs of the period are written off in full against the overall contribution. Due to
adding only variable cost while making calculation of net profits of company, the profitability
has been increased through which the investors can easily be attracted (Hartmann, Perego, and
Young, 2013).
Absorption costing: It is a method which mainly considers both fixed and variable costs
as products costs. It is mainly used for reporting purposes which includes both financial and
taxation reporting. Due to adding both marginal and absorption cost, the profitability has been
decreased but reflects actual financial position of company through its financial statement. Thus,
it can help company in retaining trust and loyalty of existing shareholders (Absorption costing,
2018).
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AirDri is small sized organisation of UK thus the managers likely to use marginal costing
method which help them to show high profitability than actual in order to attract new investors
for getting financially help. Here are the calculations of net profitability of company using both
these methods which clearly differentiates the net profits while using these different costing
methods:
Income statement for the month of May (Marginal costing)
Particulars Amount (in £)
Sales
Less- Marginal costs
Less- Opening inventory
Add- Closing stock
Gross profit
Less- Fixed cost:
Less- Sales commission
15000
(6400)
-
3200
11800
(10000)
(750)
Net profit 1050
Working note:
Calculation of sales amount (300x50) = 15000
Calculation of marginal cost: (Direct material cost+ direct labour cost+ variable production
overhead: 8x300+ 5x500+ 3x500)= 6400
Calculation of fixed cost: (Fixed selling expenditures + Fixed administration expenditures
+ Fixed production cost - (4000+2000+4000)= 10000
Income statement for the month of June (Marginal costing)
Particulars Amount
Sales 25000
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Less- Marginal cost
Less- Opening stock
Add- Closing stock
Gross profit
Less- Fixed cost
Less- Sales commission
(6080)
(3200)
1280
17000
(10000)
(1250)
Net profit 5750
Working note:
Calculation of sales amount (500x50) = 25000
Calculation of marginal cost: (Direct material cost+ direct labour cost+ variable production
overhead- 8x380 + 5 x 380 + 3 x 380)= 6080
Income statement for the month of May (Absorption costing)
Particulars Amount
Sales
Less- Absorption costing:
Direct material cost- 4000
Direct labour cost- 2500
Variable production cost- 1500
Fixed production cost- 3000
Less- Opening stock
Add- Closing stock
Gross profit
Less- Fixed cost:
Fixed selling expenditure- 4000
15000
(11000)
-
5200
9200
(6000)
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Fixed administration expenditure- 2000
Less- Sales commission (750)
Net profit 2450
Income statement for the month of June (Absorption costing)
Particulars Amount
Sales
Less: Absorption costing:
Direct material cost- 3040
Direct labour cost- 1900
Variable production cost- 1140
Fixed production cost- 3800
Less- Opening stock
Add- Closing stock
Gross profit
Less- Fixed cost:
Fixed selling expenditure- 4000
Fixed administration expenditure- 2000
Less- Sales commission
25000
(9880)
(5200)
2080
12000
(6000)
(1250)
Net profit 4750
Budgeted and actual cost of metal used in
producing Product A
Budgeted material cost 2kg at £10/kg
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per unit of the product
Actual output 1000 units
Actual material
purchased and used 2200kg
Actual material cost £20,900
Actual material cost 10450
May.1
Opening
Inventory of 40
units @£3 each 120 10570
May.12
Bought 20 units
@ £3.60 each 72 10642
May. 15 Issued 36 units 118.8 10523.2
May.20
Bought 20 units
@3.75 each 75 10598.2
May. 23 Issued 10 units 34.5 10563.7
May.27 Issued 25 units 86.25 10477.45
May.30 Issued 5 units 17.25 10460.2
M2: Management accounting techniques and financial reporting documents
Technique for management accounting helps finance department of AirDri to prepare
essential accounts such as cash flow statement, balance sheet, profit and loss account etc. This
results that it is easy for organisation to identify their current financial position in the market. In
context of AirDri tools and technique like ratio, ledger helps them to increase their financial
position in industry due to which more investor are attracted towards them. Usually cost
accounting system along with financial statement are most tools for organisation to monitor their
financial position.
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D2. Financial reports which applies to interpret many business activities
It is essential for every organisation to maintain the proper record of their financial
transaction such as purchasing of raw material, revenue and expenses etc. As it is necessary for
AirDri because it helps them to evaluates the current financial position of the organisation.
Further it also analysis or measure the actual cost that is invested by organisation to complete
their project and business activities.
TASK 3
P4: Advantages and disadvantages of different kind of planning tools of budgetary control
Budget- It work as an internal tool for the organisation that is mainly used to measure or
calculate the expenses and income for the upcoming year. In context of AirDri it is useful for
them as it monitor the target or goals on regular basis such as monthly, half-yearly and quarterly.
Apart from this it helps them to evaluate the cost that is incurred to attain their desired gaols.
Types of budget- Budgets that are generated by AirDri are as follow:
Cash flow budget- The main function of this cash flow budget is to record all the cash
transaction whether they are income or expense for the organisation. So in the future it is easy for
the organisation to manage and invest their properly that helps to increase their profits by cutting
down extra expenses that are incurred in their operations (Lachmann, Knauer and Trapp, 2013).
Financial budget- The main function of financial budget is to evaluate and maintain the
proper records of financial that are present in the organisation. For this fund flow, cash flow,
financial ratio etc. are the major tool to prepare an effective budget. AirDri develops their budget
which are beneficial for organisation, employees and customers.
Budgetary control- This is the process through which it is easy for organisation to utilize
their budget for the whole year in optimum way. Finance department of AirDri develops budget
in order to complete their activities effectively. While they also formulates budget for the small
organisation that help them to control their expenses by completing their operations within the
decide budget.
Contingency tool- AirDri uses this tool to control the negative situation that create
barrier in the organisation. With formulating contingency tools it is easy for organisation to
respond positively in complex situations (Lambert and Sponem, 2012).
Advantages
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 It helps an organisation to deal with difficult situation by maintain their regular profits
which result that does not loss their stability at time of up and down in industry.
 Management of AirDri find out that which department or individual is responsible for
this difficult situation.
Dis-advantage This type of budget are hard to maintain which determines that it is complex to prepare
and implement them in the organisation.
 Contingency budget are developed for uncertainties which is not sure that they take place
in the organisation.
Forecasting tool- This tool is most useful for the organisation because it helps them to
formulate effective business strategy for the organisation. AirDri uses this quantitative and
qualitative tool to implement forecasting tool in the organisation. for this they take the base of
present and past data that is stored by the organisation (Morden, 2016).
Advantage Forecasting tool helps an organisation to deliver their essential information between all
departments of the organisation.
 Another benefit to execute forecasting tool that it helps them to formulate budget
according to the market conditions.
Dis-advantage
 The major drawback of this that they uses only present scenario and aspect that impact
on budget of the organisation.
 In present scenario there is high competition exists in market due to which there are
regular changes in market conditions. It creates difficulty for AirDri to predict the
industry.
M3: Evaluation of planning tools
Planning tools help company to control unnecessary expenses that are not covered in
budget process. AirDri use these tool to reduce cost of operation and complete operational
activities with allotted budget. Like forecasting tool help management to make estimation about
future expenses and to prepare budget to formulate future policy by control this expenses (Nitzl,
2016).
Planning tools are executed by an organisation to monitor and control the unnecessary the
expenses which are not involved in the budget process. AirDri implement this tool to minimize
their operating cost. This results that all departments of the organisation accomplished their
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activities within pre-decided budget. Moreover planning tools such as budget helps them to
control their expenses for upcoming future.
TASK 4
P5 Comparison of how organisation adopt management accounting system so as to respond to
financial problems.
Financial problems
These are the major issues and concerns which are faced by a business firm while
operating in marketplace. Due to these issues, an organisation get impacted in a negative manner.
In relation with the Airdri Ltd., there are various reasons due to which financial issues takes
place. In this respect, some of the issues are discussed below:
Cash flow problem: This kind of problems takes place which an organisation do not posses
sufficient budget to pay back their liabilities and debts. Airdri Ltd. Can face this kind of issues
when their expenses and rates are increased and their earned income decreases in a considerable
manner (Soltes, 2014).
Lack of skilled workforce: It is another important reason due to which a company can
face financial issues and problems. If employees of a company will not have proper idea about
the finances and accounts, it will be difficult for them to resolve problems associated with it in a
desired manner. In context with Airdri Ltd., this issue can reduce the inefficiency.
These are some of the basic issues which can reduce the productivity and profitability of
a company. Hence, it is very important for an organisation to resolve these issues in a proper and
timely manner with the use of different techniques associated with management accounting. In
this context, some of these techniques are listed below:
Benchmarking: In this technique, the plans and process of Airdri Ltd. Will be compared
with the plans & process of best organisations which are operating in the same sector. Main
objective of using this technique is to formulate suitable changes in the strategies and plans in
accordance with the successful companies operating in market (Suomala and Lyly-Yrjänäinen,
2012)
Key performance indicator: It is referred as a technique which is specifically used to solve
the issues which are associated with finances. In this technique, those activities are given
considerations which are highly beneficial for company in respect with revenues and profits.
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This technique allow the business firm to use their resources and material in an optimal manner
(Wickramasinghe and Alawattage, 2012).
Below is mentioned two companies and their comparison that defines the manner in which
they resolve their financial issues in a proper way:
Basis KEF limited company Airdri Ltd.
Financial issue This organisation is facing issue
because their cash flow is
unbalanced. The main reason behind
this issue is the lack of liquidity or
cash. As company is facing this
problem, their daily basis activities
also get impacted in a considerable
manner. Because of shortage of cash
their manufacturing activities also get
negatively impacted (Lee, 2012).
The concerned organisation belongs
to manufacturing sector and their
most of activities are concerned with
manufacturing only. This company is
spending more money into business
operations and activities than it is
earning. This results in a big financial
issue for the company due to which
their productivity also decreases. It
has resulted in loss of revenue for
company as expanses are considerably
increasing with the passing time.
Management
accounting
technique
In accordance with the above
discussed financial issue, it is very
essential for the company to use
appropriate accounting technique
such as Benchmarking. This
technique will allow the company to
compare their strategies and policies
with different organisations. With the
help of this technique, company can
perform required modifications and
changes in their budgets, finances and
strategies so that better results can be
achieved. If concerned organisation
To achieve high success and profits, it
is very important for Airdri Ltd. To
resolve their above mentioned
financial issue in a timely and proper
manner. Company can solve the
financial problem faced by them with
the help of key performance indicator
technique. In this issue resolving
technique, company will be able to
identify those activities and
procedures that will be beneficial for
them. By using this technique, the
concerned company can invest
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will adopt this technique, they can
easily resolve the financial issue
which is faced by them due to
unequal flow of cash. This will allow
the company to earn high growth and
profit margins so that a stable place
can be achieved in market place.
properly in those business operations
and activities which will results in
increased profit margins and market
shares. Thus, it will allow the firm to
solve and deal with financial problem
in a proper manner.
M4: Evaluation of financial issues
Systems of management accounting such as batch costing system, cost accounting system
etc. help company in preventing financial issues that may arises due to mis-utilisation of funds,
poor planning of management etc. For an instance, cost accounting system facilitate managers to
analyse overall cost incurred in business activities so that price will be set for products and
services after including margin on it. This will increases the profitability of company.
D3: Critical analysis of financial issues
Financial resolving tools such as KPI, Benchmarking etc. should be taken into consideration
by the managers of AirDri as it help in improving the performance level of employees which
decreases the chances of conducting any errors while recording transactions in financial
statements. For an instance, KPI is used to compare the performance of employees with their
past year performance so that decision could be made for increasing their skills and performance
with a hope of getting maximum output to company in near future.
CONCLUSION
From above discussed report, it is concluded that to attain desired results and outcomes, it
is very essential for an organisation to adopt appropriate management accounting systems. By
using different accounting systems like cost accounting system, price optimisation system, an
organisation can take important decisions which can benefit them in gaining competitive
advantage over rivals. There are different type of management accounting reports like inventory
report, budget report etc. which benefits an organisation in forecasting and preparing budgets &
other financial statements in a proper manner. Beside this, report summarised about various
costing methods like marginal, activity based and absorption method to find out incurred
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expenses. Out of all these available methods, activity based method is most easy and appropriate.
There are different type of budget control tools which helps in managing budget of an
organisation. Also, there are various management accounting techniques such as Benchmarking,
key performance indicator etc. which allows the company to resolve financial issues like
Unequal cash flow in a proper manner.
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Absorption costing. 2018.[Online]. Available through:
<https://www.accountingtools.com/articles/what-is-absorption-costing.html>.
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