Management Accounting Report: Innocent Drinks Financial Performance

This report provides an in-depth analysis of management accounting principles and their application within the context of Innocent Drinks. It begins with an introduction to management accounting, highlighting its role in financial analysis and decision-making. The report then delves into various management accounting systems, including cost accounting, inventory management, job costing, and price optimization, explaining their essential requirements and how Innocent Drinks can utilize them. Furthermore, it explores different types of management accounting reports, such as job costing reports, inventory management reports, departmental reports, and product profitability reports, emphasizing their importance in analyzing financial data. The report also examines cost calculation methods, specifically marginal costing and absorption costing, comparing their advantages and disadvantages, and recommending their combined use for comprehensive financial assessment. The report includes financial data, calculations, and reconciliation statements to illustrate the practical application of these concepts and support the analysis.

Management
Accounting

INTRODUCTION
Management Accounting refers to making the use of various types of financial provisions
in an effective manner to closely analyse and interpret the given financial information so that the
right decisions are taken by the managers (Bedford and Speklé, 2018). If it is used properly then
it can ensure that higher level of efficiency and effectiveness can be achieved without issues and
problems. Thus the managers can aim for maximizing the level of profits. In this report, focus
will be made on Innocent Drinks. which provides smoothies and juices to the customers in the
market. In this report, analysis will be made on demonstration of understanding of management
accounting systems, application of a range of its techniques. Additionally, explaining the use of
planning tools and comparison of ways in which organizations can make the use of management
accounting to respond to financial problems will also be done as a part of this assignment.
TASK 1
P1: Management Accounting Systems
Management Accounting is a process in which different types of reports are prepared and
data is closely analysed and monitored so that short-term and long-term decisions can be taken.
There are different types of systems under it. These systems are as follows-
Cost Accounting System- In this system, there is a close analysis of the various types of
costs which have incurred (Cooper, Ezzamel and Qu, 2017). When it is used by an organization's
managers it leads towards taking of decisions in order to reduce the level of costs effectively and
efficiently. Thus it will help an organization in targeting the maximization of its profits. Innocent
Drinks can make the right use of this system so that it is able to identify and assess the various
types of costs in an effective manner and therefore ensure that it can target the maximization of
profits.
Essential requirements-
 Identification and segregation of the various types of costs can be done by the
organizations when they make the use of this system in the right manner.
 The managers can make the use of this system so that identification of the appropriate
methods can be made which will thus be quite helpful for the purpose of targeting the
reduction in costs.
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Inventory Management System- With the use of this system, the managers are able to
identify the various types of techniques through which the inflows and outflows of stock can be
managed in an appropriate manner (Gogaev and et.al., 2019). For the managers of Innocent
Drinks, this system is useful so that they are able to ensure proper management of inventory
level in the company.
Essential requirements-
 This system must identify the ways through which the inventory level of an organization
can be managed effectively.
 The use of this system is required to ensure that a tracking system can be used for inflows
and outflows of the stock level.
Job Costing System- This system is used by the organizations so that a detailed track of
record of the various job orders is maintained in the right manner effectively and efficiently
(Hall, 2016). It enables the managers to be able to track the job orders and monitor their inflows
and outflows. In Innocent Drinks, this system is useful because it enables them to track and
manage their job orders in a better manner.
Essential requirements-
 The management and tracking of the various job orders can be effectively done through
the right use of this system.
 With the use of this system the managers should be able to ascertain the job costs and
reduce them by making use of different techniques.
Price Optimization System- This system is helpful for the managers in identifying and
optimizing the prices. With its use the managers are able to set such prices which can help an
organization in the enhancement of the profitability level. In Innocent Drinks, this method can be
used by the managers so that they are able to target the enhancement of the level of profits.
Essential requirements-
 The use of this system must be able to ensure that different types of mathematical models
are used for the purpose of forecasting the price-related data.
 By making the use of this system forecasting of demand of different products and
services can be made effectively. This will be helpful in ensuring that the pricing
strategies are changed as per the fluctuations which are witnessed in the demand level.
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P2: Management Accounting Reporting
Different types of reports can be prepared by the management so that they are able to
analyse and interpret in a much better manner. These reports are as follows-
Job Costing Reports- In these reports, there is a detailed overview of the inflows and
outflows of job orders (Wagenhofer, 2016). They are helpful for those organizations which deal
in giving and receiving these orders. The allow the managers to assess the job costs in a much
better way. Thus the managers of Innocent Drinks can make the use of these reports to ensure
systematic optimization of the processes within the organization. With its use, the deviations and
variances associated with the management of job orders can be identified and rectifying
techniques can be used so that they can be removed. The problems associated with the job orders
can be identified and solved by using them.
Inventory Management Reports- In these reports, details regarding the tracking and
managing of inventory level of different items and products are recorded (Honggowati and et.al.,
2017). A detailed overview of inflows and outflows of stock of the organizations is made as a
part of these reports. For Innocent Drinks, there is a requirement that these reports are used
appropriately so that if there are any deviations and variations in stock record then they can be
removed to optimize the various processes without problems and issues. The managers of firm
are therefore required to ensure that they make use of inventory management software and keep
a track record of the stock so that these reports are prepared and used in a proper manner.
Departmental Reports- In these reports, there is a detailed analysis on the specific
performance of each department and their level of overall performance. There are various
departments in a particular organization like Production, Finance, HR, Marketing and Sales.
When these reports are used the departmental managers are able to give detailed overview of the
performance of their respective departments. Also the overheads which are incurred by them are
recorded and allocated according to their respective share. This helps a lot in avoiding under-
apportionment and over-apportionment of overheads. Thus in Innocent Drinks, there is a
requirement that the different departments in the organization are able to provide detailed reports
to the higher-level management so that if there are problems and issues which are pertaining in
their department they can be identified and solved. Furthermore, the performance of the
employees of various departments can be closely monitored. They can be motivated so that their
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productivity level can be enhanced and they are able to enhance their level of performance for
the purpose of achievement of the goals and objectives in the future time period.
Product Profitability Report- In these reports, a thorough analysis of the profitability
level of the products can be effectively determined (Jack, 2017). A firm can produce different
types of products and therefore it becomes quite necessary that it is able to determine their
profitability level. In Innocent Drinks, the managers prepare these reports so that they analyse the
profits which their different products are earning. They can find out the goods which are earning
higher profits and the goods which are not earning the desired profits. Therefore steps can be
taken by the managers accordingly to take the firm on the path of sustainable success in the
future.
TASK 2
P3: Calculation of costs
There are various methods which are used by the organizations so that they can
specifically determine their costs in an effective manner. Innocent Drinks makes use of the
following methods for the determination of their costs-
Marginal Costing-
In Marginal Costing, variable costs are charged to the units of production and the fixed
cost is written off against the level of contribution (Johnstone, 2018). By making the use of this
method, the management of Innocent Drinks is able to make sure that it can determine the
profits.
Advantages-
 It is very simple to understand and use. Its simplicity is quite helpful for the managers so
that they can easily apply this method in the processes of the organization. This offers
and advantage for the management of Innocent Drinks so that they are able to use it in the
right manner to determine their level of profits.
 With the use of this technique, there is no problem of under-absorption and over-
absorption of the overheads. This is especially helpful for the management to be able to
target profit maximization. In the context of Innocent Drinks, this offers an advantage.
Disadvantages-
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 When this technique is used in the organizations, it is quite difficult to be able to
segregate the level of costs effectively. Lack of proper segregation creates difficulties
when the overheads have to be allocated to the departments. This creates a disadvantage
for the management of Innocent Drinks.
 This technique is not very useful from the point of view of cost control in the
organizations. Its usage does not helps the management in controlling the costs and
reducing them. For the managers of Innocent Drinks, this creates a disadvantage.
Absorption Costing-
Absorption Costing is a method which helps in the determination of the overall costs in an
organization. It takes into account the direct as well as indirect costs of the firm (Johnstone,
2020). The management of Innocent Drinks makes the use of this technique so that it determines
the profitability level.
Advantages-
 By making the use of this technique, the managers of the organization are able to
determine the overall costs of production. This is possible because it includes the direct
as well as indirect costs. Thus for the management of Innocent Drinks it offers an
advantage.
 When this method is used in the organizations, the managers can value the inventory in a
better manner. They can accurately determine and monitor the usage of items in the
stock. This is advantageous for the managers of Innocent Drinks.
Disadvantages-
 When this method is used it creates problems related to cost allocation in the firm. It
becomes difficult to allocate the costs to the departments under it. In Innocent Drinks,
this can create a disadvantage for the managers.
 By making the use of this method, the managers cannot take decisions effectively. This is
so because it does not provides certain helpful details to them. Therefore for Innocent
Drinks this creates a disadvantage for the managers.
Justification- For the managers of Innocent Drinks, it is recommended that they make
use of both of these methods for the purpose of determination of profits. This will help them in
assessment of the performance of the company and taking effective decisions in the future.
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Marginal costing
April (£) May (£)
Sales 56000 70000
Less: Marginal cost of sales
Variable manufacturing cost 30000 30000
Closing stock 10000 15000
Opening stock 10000
Total marginal cost of sales 20000 25000
Contribution 36000 45000
Less: Fixed cost
Fixed manufacturing cost 18000 18000
Fixed non manufacturing cost 5000 5000
Net profit 13000 22000
Absorption costing
April (£) May (£)
Sales 56000 70000
Less: Cost of sales
Variable manufacturing cost 30000 30000
Fixed manufacturing cost 18000 18000
Closing stock 16000 24000
Opening stock 16000
Total cost of sales 32000 40000
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Gross profit 24000 30000
Less: Fixed non manufacturing cost 5000 5000
Net profit 19000 25000
Reconcilation statement
April (£) May (£)
Profit/loss under marginal cost 13000 22000
Add/Less: Closing stock 6000 3000
Profit/loss 19000 25000
Profit/loss under absorption cost 19000 25000
Working note:
Calculation of closting stock under marginal costing
April (£) May (£)
Total variable manufacturing cost 30000 30000
Total produced units 6000 6000
Per unit cost 5 5
Closing stock 10000 15000
April (£) May (£)
Calculation of opening stock under marginal costing
Opening stock units 0 2000
Per unit cost 5 5
Opening stock 0 10000
April (£) May (£)
Calculation of closting stock under absorption costing
Variable manufacturing cost 5 5
Fixed manufacturing cost (per unit) 3 3
Total absorption cost per unit 8 8
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Closing stock 16000 24000
April (£) May (£)
Calculation of opening stock under absorption costing
Opening stock units 0 2000
Per unit cost 8 8
Closing stock 0 16000
Calculation of Break even point
Solution:
Variable cost 49
Fixed cost 140000
Selling price 60
Contribution: Selling price-variable cost per unit
Contribution 11
Break even point (In units): Fixed cost/contribution
BEP (In units) 12727.27
Break even point (In revenues): Fixed cost/PV ratio
PV ratio: Contribution/sales*100
PV ratio 18.33
BEP (In revenues) 763636.36
Margin of safety (In units): Budgeted saels (In units)-
BEP (In units)
Budgeted sales 20000
BEP 12727.27
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Margin of safety (In units) 7272.73
Margin of safety (In revenues): Budgeted sales (In
revenues)-BEP (In revenues)
Budgeted sales (In revenues) 1200000
BEP (In revenues) 763636.36
Margin of safety (In revenues) 436363.64
TASK 3
P4: Advantages and Disadvantages of Planning Tools
For the purpose of budgetary control there can be use of different types of tools. These
tools are explained as follows-
Cash Budget-
Organizations prepare a Cash Budget so that a detailed track record of expenses and
receipts over a certain period of time can be maintained (Kastberg and Siverbo, 2016). In the
context of Innocent Drinks, the use of this budget is very useful as it will allow the organization
to be able to manage its cash operations in a better way and thus ensure that liquidity level in the
organization is maintained properly.
Advantages-
 When this budget is used in the organizations it results in better management of cash and
other liquid resources. Therefore it offers an advantage for the managers of Innocent
Drinks.
 The use of this budget allows the companies to be able to maintain their liquidity
position. For the managers of Innocent Drinks, this is quite advantageous.
Disadvantages-
 While making the use of this budget the companies have very less flexibility. For
Innocent Drinks, this can create a disadvantage.
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 The preparation of this budget increases the expenses for an organization. In Innocent
Drinks, this creates a disadvantage.
Overhead Budget-
This budget is prepared in order to identify the various types of overheads in an
organization during a particular period of time i.e. mostly a year (Li, 2018). It includes the
various types of expenses which are incurred within an organization. In Innocent Drinks, the use
of this budget can be made by the managers so that they are able to identify and segregate the
overheads in a proper manner effectively and efficiently.
Advantages-
 With the use of this budget, the managers can do better segregation of the various
overheads in the organization. This is advantageous for the management of Innocent
Drinks.
 When this budget is used within the companies, the managers are able to use effective
techniques for the purpose of reduction of the overheads. For the managers of Innocent
Drinks, this offers an advantage.
Disadvantages-
 When this budget is used in the companies, this leads towards problems related to over-
estimation and under-estimation of the overheads. In Innocent Drinks, this creates a
disadvantage for the managers.
 With the use of this budget, the managers of the firms are not able to get an overall view
of the financial position of the organization. This can create a disadvantage for the
management of Innocent Drinks.
Master Budget-
Master Budget refers to an aggregation of the various types of lower-level budgets which
are produced in the functional areas of a particular company and can include budgeted financial
statements, cash forecast and a financing plan (Master Budget, 2018).
Advantages-
 The use of this budget is helpful for the estimation of overall surplus or deficit in the
company. For the managers of Innocent Drinks this offers an advantage.
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