Management Accounting Report: Financial Analysis of Airdri Ltd

This report examines management accounting principles and their practical application within Airdri Ltd., a manufacturing company specializing in hand dryers. The report delves into various management accounting systems, including price optimization, cost accounting, inventory management, and job costing, evaluating their benefits. It also explores different management accounting reporting methods, such as budget reports, inventory managerial reports, and accounts receivable reports. The analysis extends to cost accounting techniques used in preparing income statements, alongside an evaluation of the benefits of different management accounting systems. Furthermore, the report assesses the integration of management accounting systems with organizational processes and discusses planning tools for budgetary control, ultimately comparing organizational approaches to solving financial problems through the application of management accounting.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1: Management accounting and its different systems..........................................................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.......................................................................................................5
TASK 2............................................................................................................................................5
P3: Cost accounting techniques to prepare an income statement...........................................5
M2: Management accounting techniques and financial reporting documents.......................9
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.........................................................................................11
D3: Critical analysis of financial issues...............................................................................11
TASK 4..........................................................................................................................................11
P5: Comparison of organisation to solve the financial problem with the help of management
accounting system................................................................................................................11
M4: Evaluation of financial issues.......................................................................................13
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Management accounting plays an important and valuable role in making strong financial
stability of an organisation by framing an effective strategies and plans on the basis of financial
information available under financial records. The accounting manager is responsible to analyse
the financial records of an organisation which includes P/L Account, Balance sheet, Cash flow
statement etc. and make decisions accordingly. It includes both monetary as well as non-
monetary transactions. The present assignment report is based on Airdri Ltd. Which is engaged
in manufacturing sector providing hand dryers at affordable prices. The report described the
various management accounting and reporting systems along with their benefits and
requirements within an organisation. The report also explains costing methods which includes
marginal and absorption and its applications on calculation of net profitability. In addition with
this, planning tools to control budget and usage of management accounting system to resolve
financial issues that are faced by an organisation.
TASK 1
P1: Management accounting and its different systems
Price optimization System- This is a mathematical approach used by the company to
determine the responsiveness of customers in relation with different prices for their product and
this technique helps in solving complex calculations. The Airdri can use this technique to
maximise their operating profit by assessing the wants of customer and coating prices according
to it. The company can use this technique through conducting survey and collection of data and
comparing it with cost of operations, inventories and previous prices of product (Arnaboldi,
Lapsley and Steccolini, 2015). This technique requires complex calculation and for that price
optimization software has been developed by the software companies to meet the need of B2C
company or any retail company producing large number of products in different currencies and
the complexity of permutation and combination is an example where company can form pricing
strategies which can applied over the company.
Cost Accounting System- Cost accounting is a system of recoding, classifying,
summarizing the activities and on the basis allocation of cost is divided so that cost can be
controlled. The Airdri can use this approach to ensure that the activities performed by
management and their business practices result in cost efficiency. As the cost accounting
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provides information related to the cost which is required to be allocated and it helps in
comparison of the actual cost that is incurred so that management of the company can take
decision regarding how to operate the activities of business (Cost accounting systems, 2013).
The manager is required to compare current and previous performance of the company but it
does not allow to compare the information with any other company. This information can be
used in the financial accounting but mainly this is used by manager to facilitate decision making.
Inventory management system- Inventory is the finished goods produced by the
company for the objective of sale. This is a method which specify the place where goods will be
placed. This method can be use by Airdri to place their stock at different locations or in many
locations for a planned and regular course of production. The concept which include work-in
progress, stock has extended to service sector from production sector as they are also concern
with the amount of service they provide. The inventory management is used by a retailing
company to maintain proper stock while ordering, shipping, handling and maintaining cost
related to it. This help Airdri in identifying inventory requirement, setting targets, provide
replenishment techniques and help in handling all the functions related to management of raw
material which help the company in maintaining their inventory level (Booth, 2018).
Job costing system- This is a accounting system in which number of job to be assigned
in individual item of their expenses and revenues. A job is a specified project which is performed
for a single customer and a single unit is produced or activities of same type are grouped
together. The method is used by the retailing company that is Airdri to set various job which has
same type of direct or indirect expenses such as direct labour or direct materials and overhead
cost such as indirect labour or quality control etc. This technique is beneficial to determine
profitability of the company as job costing statement is considered as overall statement of profit
and loss and specific to each number. This techniques helps in assessing the cost which is
involved in manufacturing of each job performed for each product.
P2. Explain different method of management accounting reporting.
Budget Report: It is a document contains information related with estimation of cost that
will be incurred in future business activities. It is prepared for one year in relation with financial
activities. This report includes planned expenses and expected revenues and which resource will
be utilised and their cost. The assets and liabilities of the one year is estimated which will be
required for the process of manufacturing. The budget includes the funds and summary of
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expected expenditure and allocation of fund according to that specified summary. The proposals
are also included in the budget report which states how to meet the requirement of expected
expenditures. This approach helps Airdri to estimate the deviations which comes from the
comparison of actual performance and standard performance. The standard criteria is established
through the preparation of budget report. This helps company in improving their performance by
taking steps to remove the deviations (Bromwich and Scapens, 2016).
Inventory Managerial Report- It is the report which provides information about the
current availability of stock at present with company in their warehouses. It enable an
organisation to meet customers requirements on time by keeping sufficient level of stock which
can be possible through contacting suppliers to sully needed raw materials on time. This can
result in increased profitability and eliminate waste resources and time. The Airdri can use this
report to know that how well inventory is managed and resources are used effectively (Bryer,
2013). This report will help to grow the business if product profitability is ensured and inventory
control report is analysed to know that how much inventory is required to be a successful
business. The forecasting of inventory which will be require in future is necessary to have right
quantity of stock in the business so that demand of the customer can be fulfilled and wastage can
be reduced by not keeping extra stock. Reduction of wastage will lead to reduction in cost of
manufacturing which will allow company to coat price which is accepted by the customer (Lee,
2012).
Account Receivable Report- The account receivables is a list of invoices of which
amount will be received in future and includes credit memos which are specified with the range
of date. This report is a primary tool to calculate the overdue regarding future payment. It is a
collective approach which contain contact information of customer. This report is used by the
Airdri to determine the effectiveness of credit collection period. This report is created through an
accounting system software. This is a tool which helps in identifying potential bad debts which
allow company to make a provision account for doubtful debt and credit department uses this
report to analyse the current status of any due amount which is left to be received. This report is
used by finance department of Airdri to estimate about the credibility of the company which
allows company to take better decisions for future operation which wi8ll result in acquiring
growth for the company (Garrison and et. al., 2010).
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M1. Evaluation of benefits of various management accounting systems
There are several accounting systems that supports the organisation in managing their
funds in optimal manner. Some of them along with benefits are described as below:
Type of accounting system Benefits Evaluation of benefits in
context of organisation
Inventory management
system
 It directs the managers
of Airdri in making
balance between
inventory systems and
exact requirement.
With the help of using
such system, company
will be able in
manufacturing
products in effective
manner.
This system makes positive
impact on existing customer
base and profitability of Airdri
as this system provides right
direction to production
department to produce
products in demanded
quantity. This will increases
the customers base of Aridri
as well as profitability.
Cost accounting system  It is more helpful in
computing overall
costs of several
operations and
functions.
 It will also prove
beneficial for Airdri in
making stability of
prices and maintaining
profitable position in
market.
This system makes overall
huge impact on the financial
position of Airdri by
managing and monitoring total
cost incurred in production
process by comparing actual
cost with standard cost. This
increases the possibilities of
receiving maximum return
after selling of its
manufactured goods and
services.
Price optimisation  This method will be
also prove beneficial
in analysing reaction
This system makes huge
impact on the existing
customer base of AirDri by
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of customers on
different price of
products and services.
 It will provide benefits
to company by
reducing time through
removing unessential
activities from
operations.
assisting manager to set
pricing strategy which can
easily accepted by its loyal
customers.
Job costing system  It is beneficial in
computing cost of
each job that is
assigned to different
activities.
 With the help of this
system pricing of
offering will be
calculated easily that
will decide good
financial position of
firm in market.
Using such system ensures
AirDri to get expected return
on its produced goods and
services by making proper
allocation of cost to products
and services in profitability
ratio.
D1 Management accounting system and management accounting reporting are integrated with
organisation process
Management accounting and reporting systems are interconnected with each other that
will assist the management in forming effective decisions for betterment of firm. In addition to
this, this system will be proved assistive for the management in forming budget report so that
good financial position can be gained in market. For an instance, cost accounting report can be
prepared with the help of costing accounting system who provides an appropriate information
about the actual cost incurred in production process. If the management of AirDri failed to
interrelated with these two then the chances of occurring errors and mistakes will be more.
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TASK 2
P3: Cost accounting techniques to prepare an income statement
Cost: It is an amount which is incurred or invested to produce something which can be
easily sold in the market in order to meet customer's needs and requirements. It consists of two
types of methods such as marginal and absorption costing method. The management of Airdri
should control cost in order to secure available funds that will be useful in future time period.
Marginal costing method: It is a method which includes only variable cost due to which
such method is also known as variable costing method. It is more useful to adopt by Airdri as
using this method will facilitate them to show more profitability in their financial statement
which can easily attract investors (Lee, 2012).
Calculation of profit using marginal costing:
Income statement under Marginal costing method for month of May & June
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Absorption costing method: It is the method which includes overall cost such as
variable and fixed cost in order to calculate net profitability of company. It shows accurate
financial position of an organisation which help them to retain the loyalty of their shareholders
(Absorption costing, 2018).
Calculation of profit using absorption costing
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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
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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
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:
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