Analysis of Management Accounting Systems and Reports: Innocent Drinks

This report provides a comprehensive analysis of management accounting systems and reports, using Innocent Drinks, a smoothie and juice company, as a case study. It begins by defining management accounting and its importance in organizational decision-making. The report then explores various management accounting systems, including cost accounting, inventory management, job costing, and price optimization, outlining their essential requirements and benefits. Furthermore, it examines different types of management accounting reports, such as budget reports, accounts receivable aging reports, cost managerial accounting reports, and performance reports, highlighting their significance in analyzing financial information. The report also includes a critical evaluation of these systems and reports, emphasizing their integration within organizational processes. Finally, it applies cost analysis techniques to prepare income statements using both marginal and absorption costing methods, demonstrating practical application of the concepts discussed.

Management
Accounting

INTRODUCTION
Management Accounting refers to the use of different types of financial provisions in a
highly effective manner so that the managers of an organization are able to achieve their various
goals and objectives in a highly effective manner without problems and issues (Abernethy and
Wallis, 2019). It helps the managers a lot by enabling them to be able to take different types of
decisions. Its usage is also helpful in analysing and interpreting the available financial
information and making valid conclusions as well as recommendations. This is required so that
the management is able to take the organization towards the achievement of sustainable success
in the future time period. This report is based on Innocent Drinks. It is a company which
provides various types of smoothies and juices to its customers and clients. In this project, focus
will be made on demonstration of understanding of management accounting systems, application
of a range of its techniques. Additionally, analysis of use of planning tools and comparison of
ways in which the organizations can make the use of its systems to solve their financial problems
will be discussed as a part of this project.
TASK 1
P1: Management Accounting Systems
It is a process through which the managers can take decisions through the proper analysis
and interpretation of the available financial information (Ahmad, 2017). In Management
Accounting different types of systems are used. These are explained as follows-
Cost Accounting System- In this system, there are various types of techniques and
methods which can be used so that the computation of the costs can be done in a highly effective
manner (Botes and Sharma, 2017). In the context of Innocent Drinks, the managers can make the
use of this system so that they are able to find out their costs and use the right techniques so that
they can be reduced. This allows the organizations to be able to raise their available level of
profits. Also when this system is used appropriately, it results in proper identification and
apportionment of overheads of the different types of departments in the organization.
Essential requirements-
 The use of this system must be able to help the managers to ensure that they are able to
identify the various types of costs in the organization and ensure their segregation. In the
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context of Innocent Drinks, this will make sure that its managers are able to use it for the
purpose of identification of costs.
 By making the use of this system, the managers will be able to identify the ways through
which they can reduce the costs in an effective manner. In Innocent Drinks, this is
required so as to facilitate the reduction of the various types of costs.
Inventory Management System- It is the combination of technology, processes and
procedures which ensure the monitoring and maintenance of goods whether assets, raw materials
and supplies or finished products which are required to be provided to the vendors or the
customers (What is an Inventory Management System? Definition of Inventory Management
Systems, Benefits, Best Practices & More, 2020). In this system, the managers of an organization
use the various types of techniques so that they are able to properly manage the level of
inventory in the company in an effective manner. It has systems like LIFO, FIFO etc. which can
be used for tracking the inflows and outflows of the stock items. In Innocent Drinks, this system
has to be used so that the managers are able to identify their inventory requirements and track the
inwards and outwards movement of the stock items.
Essential requirements-
 The use of this system within the organizations helps in the proper management of the
stock level. This has to be done so that there is neither a shortage of the stock nor it is
excessive. It should be present in an appropriate quantity. Thus in this way it can benefit
the managers of Innocent Drinks.
 This system must be able to help the managers so that they are able to effectively reduce
the cost of maintenance of the inventory. In this way their overall costs can be controlled
thereby leading towards an enhancement in the profits. Therefore, in this manner this can
be very advantageous for the managers of Innocent Drinks.
Job Costing System- In this system, organization's managers are able to identify the
costs which are associated with different types of job orders (Dekker, 2016). This is useful for
those firms which are indulged in the production of products and services. In the context of
Innocent Drinks, this system can be quite helpful to ensure that various types of job orders are
managed in a proper manner. Thus the firm can identify its excessive job costs and can apply the
correct techniques for ensuring their reduction in an effective manner.
Essential requirements-
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 This system should help the managers in making sure that the inwards and outwards
movement of job orders can be properly managed. In Innocent Drinks this can be very
helpful.
 This system should be able to help the managers to identify the right techniques through
which job order costs can be reduced. In the context of Innocent Drinks this can be very
helpful.
Price Optimization System- In this system, there is an use of various types of
mathematical models and techniques so that the managers are able to identify the right price to
be used which will be quite helpful for the purpose of raising the level of profits in an effective
manner (Endenich and Trapp, 2020). Forecast of prices is done through the use of this system
within the organization. For Innocent Drinks, the use of this system is helpful in ensuring that
profits can be raised by setting the right price.
Essential requirements-
 This system should be able to identify and forecast the demand level of various goods in
the organization. This will help the managers of Innocent Drinks.
 This system must help the managers in setting the right price so that the profits can be
maximized. For the managers of Innocent Drinks, this can be quite helpful.
P2: Management Accounting Reports
These reports are quite helpful for the managers to be able to identify and analyse the
different types of findings in an effective manner (Honggowati and et.al., 2017). They
summarise the given information and thus this helps them to identify the main points on
which they can put their focus. Their use is helpful for the management of Innocent Drinks
to be able to analyse and interpret the findings in a proper manner.
Different types of reports are used in Management Accounting. These are explained as
follows-
Budget Reports- In these reports, there is a complete analysis of the budgets which are
made within the organizations (Kostyukova and et.al., 2018). Cash Budget, Production Budget,
Operational Budget, Master Budget are the forms of various budgets which are prepared within
an organization. In these reports an overall summary of all of them is desired so that the findings
can be used appropriately by the managers. This creates help for them in doing better planning in
the context of the organization. An overall report of findings of various budgets is made here in
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the right manner so that the management in the organization can ensure that it maintains a good
financial position within the organization. When these reports are used within the organization
they are quite helpful for the managers to do proper analysis and interpretation and make valid
recommendations and conclusions to be used in the future time period. In the context of Innocent
Drinks, these reports are very helpful in ensuring that the expenses can be kept in check and the
incomes are forecasted effectively and efficiently.
Accounts Receivable Aging Reports- In these reports, detailed analysis of the accounts
receivables of an organization is made (Kumarasiri and Jubb, 2016). A list of debtors is prepared
and the amount which is due is mentioned. Thus those debtors can be identified who have not
paid their dues since a long time in the organization. This can help the managers to be able to
make recoveries of their dues within the stipulated period of time to maintain regular inflow of
cash. With their usage, the managers of an organization are able to ensure that proper records of
the debtors are maintained. For the managers of Innocent Drinks, these reports are highly useful
because they are required to identify the debtors who have not paid their dues on time. Thus in
this way a proper track record of debtors can be maintained in a highly effective manner.
Cost Managerial Accounting Reports- With the use of these reports, a proper analysis
of the various types of costs is made within the organization (Lapsley and Rekers, 2017). A
company's management can make sure that by identifying these costs they are able to make use
of appropriate techniques to be able to reduce them which will be very helpful in raising the
overall level of profits. In this way variations and deviations in the costs can be identified and the
techniques can be used to rectify them. By making their use, the managers of Innocent Drinks
can make sure that they are able to properly manage the costs in a highly effective manner. Also
a proper analysis of the overheads can be made within the company which will be quite helpful
in ensuring that the right segregation can be done.
Performance Reports- By making the use of these reports, analysis of overall level of
performance can be done in a highly effective manner (Maas, Schaltegger and Crutzen, 2016). If
there is any scope for the improvement then the managers can ensure that the improvement is
carried out specifically in the respective area so that the level of performance can be enhanced.
This will help them in making sure that the company is able to attain sustainable success in the
future time period. There are various types of departments within an organization such as
Production, Finance, HR, Sales, Marketing etc. For the managers of Innocent Drinks it is quite
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important that the performance can be effectively analysed and thus it will help them a lot in
identifying deviations and variances if any and using rectifying techniques to remove them.
M1: Benefits of Management Accounting Systems
Cost Accounting System is helpful in finding out various costs. Also it helps a lot in
reducing the costs in an effective manner. Inventory Management System helps in finding out
the stock level and ensuring their management. Also it is helpful in maintaining a track record of
inflows and outflows of the inventory level. Job Costing System is helpful in identification of the
right job costs in a proper manner. Also it helps a lot in proper maintenance of job orders. Price
Optimization System is helpful in finding out prices using models. Also it ensures that that the
right prices are set in the organization with the use of appropriate techniques.
D1: Critical evaluation of management accounting systems and management accounting reports
These systems and reports are very much crucial for the managers so that they are able to
make their right use by ensuring their proper integration within the processes of the organization.
For the managers of Innocent Drinks it is quite helpful to ensure that this is done so that they are
able to take the right decisions which will help them to ensure the achievement of sustainable
success for the organization by maximization of the available profits.
TASK 2
P3. Compute the costs through utilise the appropriate techniques of cost analysis to prepare the
income and statement of marginal and absorption costs
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
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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
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
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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
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
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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
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
Interpretation- From the above calculations, it can be interpreted that profits for April
and May is 13000 and 22000 with the use of Marginal Costing technique. By making the use of
Absorption Costing Technique the profits are 19000 and 25000 respectively. Thus it has been
seen that there has been a considerable increase in the level of profits between April and May in
a span of 1 month.
As there are several methods of costing which is assort and optimise by the specific
company where they can particularly detect the cost in an effective manner. In Innocent Drinks
as usually used as well as they follows two types of costing to measure and control their internal
and external cost incurred:
Marginal Costing: According to this cost method, it fluctuates the variable cost to the units of
production where the written off fixed cost is behalf of level of contribution (Makrygiannakis
and Jack, 2016). As per this method is optimise through Innocent Drinks company is to measure
the actual profit generates from the expenses reduction.
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Advantages: Easy to Adapt: The marginal cost is tool which easier to understand by the financial
expertise or manager to operate (Manyaeva, Piskunov and Fomin, 2016). It having
objective as enhance the benefit to identify involvement of fixed cost in cost of
production aspect.
 Useful for Public orientation: The marginal cost is highly assorted for public utility for
undertaking. It support to enhance the increasing of capacity of utilisation as it only
happens when company implies the lowest charge in their product. Through this strategy
or benefit people can easily approached their product as per their buying capacity.
Disadvantages: Difficult to cost differentiation: By the time of calculating of fixed and variable cost it
makes very difficult to measure and compare the total cost factor of product.
 Lack of Understanding: As per the marginal costing perspective, it needs to having
better understanding about its concept to the managers and financial expertise where it
not convinced as well as not potential enough by assorting to the management.
Absorption Costing: In this cost method, it helps to provides the better understanding of overall
cost incurred in the organisation background (McLaren, Appleyard and Mitchell, 2016). It
undertakes the direct and indirect cost to the company expenses aspect. In the context of
Innocent Drinks management team as well as financial department can analysis the overall
costing involvement to detect the profits.
Advantages: Provide optimum calculation: To optimise this costing method, it helps to enhance the
facilitates the right form of calculation in the situation of sales prediction in future aspect
and differentiate with variable cost (Nielsen, 2018).
 Helps to manager: It support to the work of manager as it make them more responsible
for the providing the cost and services to the particular department of the organisation . It
also helps to measure the gross and net profit from the income statement.
Disadvantages: Not having support in Managerial Decision: According to the Absorption decision
making is not enhance any help to making managerial decisions at the time of final stage
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of product selection in context of design, buy the raw materials choices of alternatives
and sold to earn desired profit.
 Disturb the preparation of Flexible budget: It will not support to forming the structured
of fixed and variable cost in terms of final budgeting, as it disturbs the balance between
them without not factor of distinction.
M2: Application of Management Accounting Techniques
These techniques can be used by the organizations to find out the costs and their level of
profits in the future time period. Through their use, financial reporting documents like
Cash Flow Statement, Fund Flow Statement etc. can be prepared which help in analysis
and interpretation. Thus in the context of Innocent Drinks it is helpful for the management
to use these techniques properly so that the results can be obtained. Thus profits can be
enhanced by making appropriate use of these methods which will ensure that the firm
attains a much-desired strategic edge over its various types of competitors in the market
without problems and issues.
D2: Producing of financial reports
With the use of these techniques the management of organizations can make sure that it is
able to prepare reports for the purpose of right analysis & interpretation. For the managers of
Innocent Drinks, it becomes highly crucial that they are able to use them for making valid
recommendations and conclusions which can be helpful in the future time period. They can
identify their shortcomings and can make sure that they are able to remove them. Also
comparison can be facilitated with the other companies to find out scope for improvements to be
made. Thus success can be achieved if the management utilizes them effectively and efficiently.
TASK 3
P4: Advantages and Disadvantage of planning tools
In an organisation for performing budgetary control function various planning tools
should be considered. Some of these tools are explained below in detail-
Sales Budget : At the time of preparation of sales budget total sale expenses and revenue
related to a particular period of time is to be considered (Nitzl, 2016). Sales manager considered
various factors such as economic conditions, seasonal fluctuation, competition in market etc. to
prepare sales budget.
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Advantages:
 Planning for making organisation budget can be done easily by Innocent Drink with the
help of using sales budget as it shows revenue generate information.
 As Sales Budget shows detailed information regarding credit sale and cash sale which is
to be considered at the time of investment. If after analysis it is found that Innocent
Drinks have adequate amount of money than investment can be made by it.
 Sales Budget enables Innocent Drinks to have better cash flow and manage funds
effectively.
 Performance of employees can easily be judged ..
Disadvantages:
 Sales budget is not 100% accurate because it is prepared on the basis of forecasting of
sales and no one can predict future accurately.
 Large amount of money is spend by Innocent Drinks to improve their sales by doing
advertisements on television, radio, newspapers, magazines etc.
 As Innocent Drinks involve huge credit sale so it will increase the chance of loosing
money.
 Difficult to prepare budget for newly established organisations because no past trend or
figure are available on the basis of which production is to be made.
Production Budget : Production Budget is to be prepared to reduce cost of production
and also to maintain the level of stock in stores (Otley, 2016). It is necessary to adjust stock
production with the help of sales forecasting, it may differ from enterprise to enterprise. Under
production budget several budgets is need to be prepared such as material budget, labour budget,
research and development budget etc.
Advantages:
 Production budgets helps Innocent Drinks to make availability of stock at every point of
time .
 Innocent drink by preparing production budget can save their time as raw material are
easily available for production.
Disadvantages:
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 Innocent Drinks spent lot of time to prepare various budgets like material, labour,
research budgets at the time of preparing production budget so it is a time consuming
activity.
 Pollution is increased in environment because large number of machines are required in
Innocent Drinks to produce goods which creates health issues to workers of Innocent
Drinks.
Financial Budget : Financial Budget shows the need of short term or long term capital
requirement. Regular supply of adequate fund on time is the major objective of it (Quattrone,
2016). It also helps to estimate firms expenditure and profit after considering cash flow
statement.
Advantages:
 By preparing financial budget it became easy to Innocents Drinks to do financial
planning to address liabilities before it become uncontrollable.
 Financial Analyst of Innocent Drinks spend more time to analyse market deeply and to
see earning potentials which reduces the chances of mistake because deep analysis is
done .
Disadvantage:
 Lots of time consume by Innocent Drinks to create a budget so large number of
employees are unusually involved.
 Innocent Drinks only considered financial outcomes which also create problems in
future.
Personnel Budget : Personal Budget helps to find out the need of manpower requirement
in particular point of time in different departments as we all known that human resources plays
an important role in organisation. (Rikhardsson and Yigitbasioglu, 2018). Need of number of
skilled and unskilled labour can easily be understand with the help of analysis of this budget.
Adequate number of employees are required and proper training are to be provided to workers .
Advantages:
 Employees skills is also increases because proper training should be provided by
Innocent Drinks with the help of experts.
 By giving employees, value for their handwork Innocent Drinks more likely to increase
retention of employees in their organisation
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Disadvantages:
 Lot of time wasted by Innocent Drinks in recruitment of large employees and on training
to improve their skills.
 Conflict between employees occurs in Innocent Drinks as it involve large number of
employees in same level .
M3: Analysis of the use of planning tools
Planning tools for budgetary control are useful for the management to be able to make
short-term, medium-term and long-term plans for the future time period. Through their use
the managers can make sure that they are able to achieve the distinct goals and objectives
of the organization. Planning for achieving the desired success level can be made
effectively when they are used by the management. For the management of Innocent
Drinks these tools are quite useful as their managers can make their use if they are required
to derive the valid conclusions and recommendations. Analysis, Interpretation and Critical
Judgement can be made through them. Thus the managers should be able to apply them by
maintaining the accuracy level when they make their use.
TASK 4
P5: Comparison of organizations in the use of management accounting systems to respond to
financial problems
Financial Problem- It is a situation where an organization faces constraints related to its
financial position (Schaltegger, 2018). It can lead towards losses for the company and can
decrease its level of profits. Like other organizations Innocent Drinks also faces certain financial
problems. These problems are as follows-
 Improper management of inventory- In Innocent Drinks, the stock level is not
managed in a proper manner. This is creating an issue for the organization because there
is a difficulty in the tracking of various stock items.
 Mismanagement of job orders- In Innocent Drinks, the job orders are not being
managed properly. For the company it is creating a problem because it is leading to an
increase in the job costs. The profits level of the organization has reduced as a result.
Techniques which are used to solve financial problems-
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 KPIs- KPIs refer to Key Performance Indicators (Tan, 2019). They are of two types-
Financial an Non-Financial. Financial KPIs can be used for assessing quantitative
performance. Non-Financial KPIs can be used for the assessment of qualitative
performance. They are used in order to analyse and evaluate the overall performance in a
highly effective manner. By using them, the managers of Innocent Drinks can make sure
that they are able to solve the financial problem related to inventory. This is so because
by use of proper metrics they will be able to analyse the flow of inventory in detail.
 Benchmarking- Benchmarking refers to setting of various types of benchmarks and
standards (Tekathen, 2019). These can be set according to the industry in which a firm
operates so that the performance can be assessed properly. By making their use,
managers of Innocent Drinks can solve the financial problem related to job orders. This is
so because they can set the right benchmarks and standards for these orders and thus in
this way are able to make sure that they are followed while completing them.
Financial Governance- It refers to the way in which a company is able to collect,
manage, monitor and control the financial information (Zyznarska-Dworczak, 2018). It is used
by the organizations in order to maintain the financial discipline in an effective manner. In
Innocent Drinks, it is required so that it is able to manage its transaction properly. This will
ensure that it is able to achieve the desired level of success in the future time period.
Comparison of organizations-
Basis Marks & Spencer Waitrose
Financial Problem Marks & Spencer is facing the
financial problem of excessive
costs in its operations which is
leading towards a decrease in
its overall level of profits.
Waitrose is facing the financial
problem of low profits which
has happened due to wrong
price selection by the
company.
Management Accounting
System Used
Marks & Spencer is making
the use of Cost Accounting
System.
Waitrose is making the use of
Price Optimization System.
Application of the system Marks & Spencer can use this
system by identifying the
Waitrose can make the use of
this system by using the
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various types of costs and
segregating them in a proper
manner effectively and
efficiently. This can help the
company to find out excessive
costs so that they can be
reduced.
mathematical models in such a
manner so that the prices can
be set according to a change in
the demand levels. This can
ensure that the profitability can
be enhanced effectively and
efficiently without problems
and issues.
Thus from the example of Marks & Spencer and Waitrose it can be recommended to the
managers of Innocent Drinks that they must make the use different types of Management
Accounting Systems to be able to solve the financial problems. By making the use of Inventory
Management System the problem related to inventory can be solve by the organization as it will
be able to find out the right way through which the stock can be managed and tracked. Also by
using Job Costing System the problem related to job orders can be solved as it will help the
company to be able to track and manage the job orders effectively. Thus it requires proper
application of these systems by the management to be able to solve the problems.
M4: Analysis of response to financial problems
If the organizations are able to identify their financial problems on time then they can
make sure that they can solve them so that they are able to identify the ways through which they
can solve them in an appropriate manner. Thus the managers of Innocent Drinks are required to
identify ways through which they can solve them. This will ensure that they take the organization
on the path of achieving the desired level of sustainable success in the future time period. Also
they should make sure that these problems do not arise in the future time period within the
context of the organization.
D3: Evaluation of planning tools
The organizations are required to make the correct use of planning tools so that they can
respond in a proper manner towards their financial problems. This can be done through the
framing of plans for the future time period. Through the application of appropriate plans
the organizations can achieve their goals and objectives. The management of Innocent
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Drinks is required to make their use so that they can identify and solve their financial
problems. They must ensure that these problems are not incurred again in the future time
period. Thus in this way an organization will be able to achieve sustainable success in the
future time period if it makes the right use of these tools.
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CONCLUSION
From the above report it can be concluded that management accounting is an approach
through which the managers can learn to take the various types of decisions which enables them
to take the organization towards the path of achievement of sustainable success. These can be
short-term, medium-term and long-term in nature. It is useful for finding out problems and issues
in the organizational processes and rectifying them. It is essential to conduct relevant analysis
and interpretation to derive conclusions and recommendations which can be useful. It has various
types of systems which can be used by applying them in various processes. Its reports are useful
for doing the relevant analysis and interpretation. The costs can be calculated when the right
techniques are used. There are various advantages and disadvantages of planning tools which are
used for budgetary control. Organizations are making the use of management accounting systems
to be able to solve their financial problems.
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REFERENCES
Books and Journals:
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