Management Accounting Report: Airdri's Performance & Systems

This report provides a comprehensive analysis of management accounting principles applied to the case study of Airdri, a UK-based company. It begins with an introduction to management accounting, differentiating it from financial accounting, and outlining its role in strategic planning and decision-making. The report delves into various management accounting systems, including inventory management, cost accounting, job costing, and price optimization, detailing their functions and applications within Airdri. Different methods used for management accounting reporting are also explored, such as accounts receivable aging reports, performance reports, cost managerial accounting reports, and budget reports. The benefits of these systems are discussed, emphasizing how they contribute to improved financial control, decision-making, and operational efficiency. The report concludes by highlighting the integration of management accounting systems with reporting, emphasizing their importance for achieving high performance and organizational goals. The report covers topics like profitability, planning tools for budgetary control, and how Airdri adapts management accounting systems to solve financial problems and achieve sustainable success. References are also provided.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1: Management accounting and different types of systems.......................................................1
P2: Different methods used for management accounting reporting:...........................................3
M1: Benefits of management accounting systems:.....................................................................4
D1: Integration of management accounting system with reporting:............................................5
TASK 2............................................................................................................................................6
P3 Profit and cost calculation by using appropriate management accounting techniques:.........6
P4 Planning tools used for budgetary control:.............................................................................8
M3 Use of planning tools and their application for preparing and forecasting budgets:...........10
P5 Organisations are adapting management accounting systems to solve Financial Problems:
....................................................................................................................................................10
M4 Management accounting can lead organisations to sustainable success: ...........................12
D3 Planning tools respond appropriately respond to solving financial problems:....................13
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................15

INTRODUCTION
Management accounting is defined as a process that deals with the specific reports
preparation about the source and use of funds in order to improve any business performance via a
more efficient decision making process. These reports are prepared, in some cases, using the
financial statements as information source, but also can use other specific queries which derivate
in other particular reports. Financial accounting is the discipline which, indeed, deals more
properly with the financial statements’ preparation . It is the application of skill and knowledge
that will help management in taking effective decisions regarding organisational growth. (Ball,
2016). This is required in planning process and measuring performance of individuals. It
increases efficiency of company in performance operations as well as assist in completion of
goals. For this report, Airdri has been selected which was founded in Oxfordshire (UK) in 1974.
Business partners of the entity are Peter Philipps and Peter Allen. This report consists of
management accounting reports, systems, planning tools used for budgetary control and
responding to financial problems of Airdri etc.
TASK 1
P1: Management accounting and different types of systems
Management accounting: Management accounting refers to a process of identifying,
analysing, recording of accounting information that can be used internally by administrators for
strategic planning and making decisions. It assists them in calculating profit margins for products
used. Since, this is an internal process of circulating information so it becomes complex for
management to attain accurate data (Bazley, Hancock and Robinson, 2014). This is required by
personnel in solving business related problems with effective and efficient decision making.
Airdri hires management accountants which carry an understanding of internal operations within
the firm. By adopting this practice, planning and performance of individuals has improved in the
company.
Management accounting systems: Management accounting system is a process of
controlling, reporting, planning and evaluating performance of an organisation as a whole. It is
largely concerned with providing economic information to managers for achieving organisational
goals. Every management system is designed to give information to individuals based on their
needs and requirements. This involves use of various systems to value inventory, optimise price
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etc. Airdri uses this method to plan and evaluate performance of people employed in company
(Bebbington and Fraser, 2014). The firm also manages its day-to-day operations for getting
effective as well as efficient results.
Inventory management system: It refers to a process of ordering, storing and using a
company's stock that include raw materials, components, pre-assembled components, and
finished products ready to be sold in managing activities of an organisation. This includes
management of raw materials, finished goods etc. It maintains hard and soft resources used to
check if products are available in a warehouse or in any other place which allows to deliver them
in-time when the customers need it. This system ensures that proper stock count takes place
within an entity and goods are ordered from suppliers before lead time to avoid any stock-outs.
One of the best software to keep a track of goods sold is a barcode printer. The major
requirement of this system is for e-commerce, recording product history etc. (Biddle, Ma and
Song, 2016). Airdri uses inventory management system to keep a record of dryers present at the
warehouse. Valuation can be done on the basis of average cost method, LIFO etc.
Cost accounting system: It is defined as a process of recording, classifying, analysing,
summarising and allocating cost of product to managers within an organisation. This is used by
companies to estimate and track monetary value of goods & services. The two main types of
costing techniques are job order that determines how a company allocates price to different units
of production like direct material, labour, overheads whereas process involves assigning
manufacturing cost to the units produced at various levels of production (Boyle, Carpenter and
Hermanson, 2014). It is required to have a proper accounting system that analyses profitability of
various departments in a firm. Airdri Limited apply system of cost accounting to calculate the
price of its products & services and also offer discount on older versions of dryers.
Job costing system: It is defined as a system which is used to record cost of different
activities of an organisation. This involves manufacturing allocates cost to various activities
happening at a service or job such as assigning salaries to individuals, maintenance of
equipment’s, performance appraisal of employees etc. This needs to consider use of direct
material, labour and variable overheads in production process. It is required to maintain cost
sheets to track how much material is used in developing a product, estimate working capacity of
labour etc. Airdri manufactures electric dryers for which there is a requirement of efficient
labour (Cheng, Wang and Wei, 2015). To check their competency, company can maintain punch
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clock machines by which arrival and going of employees can be recorded. This will help
management of Airdri to achieve estimated targets for daily transactions of an establishment.
Price optimisation system: This is a system that applies various numerical methods to
evaluate that how a company may react to different products and services offered in terms of
setting the price of products and services. With the use of this system, price of goods can be
identified and minimised according to perspective of customers and demand. Different types of
strategies are used to optimise cost levels like penetration pricing, price skimming etc. it is
required to make best use of resources as well as increase profitability position of a firm. Airdri
maximises the price of products that have high demand in market and minimise the value of
goods that are not running in economy. The company identifies under performers in the field and
remove them from business as they diminish the recognised value.
P2: Different methods used for management accounting reporting:
Management accounting reporting: This can be defined defined as a procedure of
briefing where diverse kind of dossiers are created by the managerial accountants to derive an
estimation of income and expenditures for a particular time period, extended credit facilities
offered to customers etc. With the help of management accounting reporting, directors can
evaluate the performance of an organisation as a whole. These are required by every entity i.e.
small, medium or large to track and evaluate the revenues and expenditures of the enterprise for
a particular time period. Airdri consists of various departments like production, sales,
manufacturing etc. So, to keep an idea of the funds used by these units, the company prepares
management accounting reports. It also identifies the amount that is owed by debtors.
Accounts receivable aging report: It is a report that tells how much money is owed by
the customers. This provides extended credit facilities to the clients so that they are able to pay
on time. The report ensures that there are no bad debts and outstanding expenses. In case of
many defaulters, it is advised to tighten credit policies offered. It also calculates receivable
collection days with the help of sales revenue (Bessis, 2015). The process is crucial for
maintaining the liquidity ratio of the firm. Airdri prepares accounts receivable report by offering
cash discount to debtors so that bad debts are recovered on time.
Performance report: This report allows to measure the quality, quantity and on-time
work fulfilment not just of each employee. It can measure this attributes in sections, departments,
divisions, business units, etc. This includes giving incentives as well as effectiveness based
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assessment of the employees in order to enhance their productivity and get them motivated.
Efficient and impressive results can be attained from the workers by following this practise on a
regular basis. An organization may attain the growth by rewarding the effective employees and
training the under achievers. This is required in getting out the best potential from within an
individual. Airdri distributes bonus to its employees at the closing of financial year by analysing
their entire efforts with the help of performance report.
Cost managerial accounting report: These are the detailed statements which determine
price associated with products & services. It assists management to plan and control the activities
of an organisation. This include value of raw materials, finished goods etc. This report help
mangers to estimate profit margins as they have a clear idea of all the costs related to goods &
services. These are also used to identify liquidity problems that might occur in an entity
(Ginzburg and Ryzhkova, 2014). It is required to determine the expenses of a firm over a period
of time. Airdri prepares expenses management report to keep an idea of how much funds are
used in developing a dryer. The company maintain records of material used in making a finished
good.
Budget reports: It is a report which is prepared by managers to compare actual with
historical performance during an accounting year. These are the estimation of revenue and
expenses of a company within a particular time period. It is made to measure performance of a
company and will have different sections of report depending on the financial needs. They are
required by managers to monitor inflows and outflows of cash. Airdri prepares budget reports to
get an idea of how much funds have been allocated to different functional units.
M1: Benefits of management accounting systems:
Management accounting systems Benefit & application
Inventory management  It helps to maintain the optimum
level of goods in inventories and
control the caring cost.
 Airdri maintains proper inventory
count due to which managers are
only allowed to buy goods that are
not present in warehouse and vice
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versa.
Cost accounting  It checks accuracy of financial
statements prepared by managers.
 By preparing final accounts, Airdri
can measure the liquidity and
profitability position.
Job costing  It provides a detailed analysis of
raw materials, labour and
overheads incurred at particular
section or cost centres (costs,
investments, and expenses) in each
department, and according with
each process executed.
 Airdri estimates the products used
in developing a well-equipped
dryer by keeping a check with
department head.
Price optimisation  It becomes a time saving technique
if intelligent pricing strategies are
used as this will require less
resources.
 Airdri hires well efficient labour
for designing it's products. By
following this, profit can be
maximised with less use of labour.
D1: Integration of management accounting system with reporting:
An organization prepares its management accounts to help the management in planning
and organizing its strategies in order to achieve organizational goal but without management
accounting system, managerial accounts are only manifest statements. Managerial accounting
system make impressive framework and measures by using these documents so that these
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informations be used. Reporting system of these accounts, provides the help in analysing
performance of different factors and find out variances and develop necessary system so that
required level of profitability can be achieved. Management accounting system and reporting is
essential for fulfil the purpose of managerial accounting process and aids the management in
achieving high performance and huge profitability.
TASK 2
P3 Profit and cost calculation by using appropriate management accounting techniques:
Marginal costing: It is a approach which changes with per unit of production. This is a
technique where variable cost i.e. direct material, labour, overhead is charged whereas fixed cost
is subtracted by contribution. It implies an additional charge with every extra unit consumed.
This helps in determining the price and valuing stock. On break even point fixed charge is
always equal to contribution.
Airdri uses marginal cost approach to determine cost and measure net profit. It also helps
in controlling cost as well as making decision regarding price of products.
Particulars May June
Sales 15000 25000
less: variable cost
Direct material 2400 4000
Direct labour 1500 2500
Variable production
overheads 900 1500
Contribution 10400 17000
less: fixed cost
Selling expenses 4000 4000
Administration expenses 2000 2000
Production cost 4000 4000
less: sales commission 750 1250
Net profit 1150 8250
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Absorption costing: It is a technique which includes manufacturing costs assigned to
units produced. This involves writing off the closing inventory and adding opening that arise in
the process of production. It includes direct material, labour, overhead and a fixed portion of
cost. This considers the effect of both variable and fixed cost. With the help of this technique,
profits can be tracked more accurately as it considers non revenue generating departments for the
allocation of costs. Airdri adheres to the matching principle by ensuring revenue matches
expenditure incurred during the manufacturing of products (Horovitz and Webb, 2015).
Particulars May June
Sales 15000 25000
CoGS
Opening inventory 3200
less: variable cost
Direct material 2400 4000
Direct labour 1500 2500
Variable cost of production 8000 6080
Fixed overhead absorbed
(working note-1)
Over-absorbed 1000
Under-absorbed -200
less: closing inventory - -1280
Gross profit 2100 10700
less: selling & distribution
expenses
Selling expenses 4000 4000
Administration expenses 2000 2000
Net profit -3900 4700
Interpretation: The profit & loss as per marginal costing in the month of May & June is
-550, 5750 respectively. This major difference in the profit arose due to absence of opening
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inventory in the month of May. Whereas, if we look at the net profit figure for absorption costing
in both months, there is a difference of 3100 due to presence of fixed production cost.
Table 2:
Date Purchase Issues Inventory
Units Cost Total Units Cost Total Units Cost Total
May 1
Previou
s
Balance
(invent
ory) 40 3 120
12 May
Bought
25 units
at £
3.60
each 25 3.6 90 65 3.3 214.5
May 15
Issued
36 units 36 3.3 118.8 29 3.3 95.7
May 20
Bought
20 units
at £
3.75
each 20 3.75 75 49 3.525 172.725
May 23
Issued
10 units 10 3.525 35.25 39 3.525 137.475
May27
Issued
25 units 25 3.525 88.125 14 3.525 49.35
May 30
Issued
5 units 5 3.525 17.625 9 3.525 31.725
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Workings:
Average cost of inventory (1) 3.2 (40*3 = 120 + 20*3.6 = 72) / (40+20)
Average cost of inventory (2) 3.45 (24*3.2 = 76.8 + 20*3.75 = 75) / (20+24)
P4 Planning tools used for budgetary control:
Budgetary control: Budgetary control is a framework that is used to assist the
management to set measurements and performance goals, compare and analyse outcomes and
control and improve results. With the help of different budgets, management tries to identify the
variances between standard and real current outcomes and in case of adverse variance, it tries to
control reasons behind adversity (Koh, 2014). Various types of budgets are the planning tools for
budgetary control which may be used by the management of Airdri limited. Some of them are
presented below with their advantages and disadvantages:
Cash Budget: Cash budget is a list of cash receipts and cash payments which can occur
in the company over a particular period of time. It involves all the pecuniary proceedings
whether they are functional or structural, operating or non-operating in nature. Cash budget is
basically prepared to classify and recover the weak areas of business due to which there is huge
and negative cash flow. The advantages and disadvantages of a cash budget regarding respective
company are as under:
Advantages:
 Cash budget is prepared to aid the administration in decision and making planning for
upcoming period.
 This budget helps to evaluate the cash in hand requirement during the specific time.
 This budget is also helpful in avoiding access of debts and loans and saves funds.
Disadvantages:
 Cash budget is depends on estimations which are difficult to evaluate.
 It only includes cash transactions so there may be huge chances of omitting some
material non-cash statements and information.
Master budget: This budget is an overview of overall functional, departmental and
subsidiary budgets within a particular time. The important information and estimated results of
every functional budgets are briefly recorded in master budget. A master budget is mainly used
by firms for assessment of mutual and entire performance by seeing all financial and accounting
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aspects of business (Maduekwe, 2015). The management of selected firm is experiencing some
advantages as well as disadvantages of the master budget, which re as under:
Advantages:
 Master budget aid respective company to make effective co-ordination among various
product sections so that important decision can be made.
 This budget also helps in allocating the funds and resources within each and every
division fairly.
 This budget is a material documents and revenue derives from master budget can be
represented in financial accounts and statements.
Disadvantages:
 Master budgets are very complex to understand. Expertise is necessary to derive the
information from this budget.
 This budget is treated as final document for managerial accounting so it is very difficult
to update or make changes in master budget.
Zero Based Budget: Zero-based budgeting method prepares budget without considering
previous information provided by previous year budgets. It starts estimating the costs with a zero
value and justify the reason behind every increment in any cost (Machado, 2016). It is totally
opposite of incremental budgeting approach hence rectify the disadvantages of the same. The
respective firm is defining some benefits and limitations of zero based budget which are as
under:
Advantages:
 Zero based budget helps in avoiding unnecessary and waste cost centres because it
justifies increases in costs.
 This budget also helps in complying with new technology and strategies as it does not
derive its data from previous data and evaluate everything from the zero.
Disadvantages:
 Zero based budgeting is a new budgeting approach hence it demands a lot of time and
skills in order to calculate everything from the bottom.
 Sometimes this budget eliminates those costs or expenses which may be fruitful in long
term but not providing profit for the short term period.
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M3 Use of planning tools and their application for preparing and forecasting budgets:
Forecasting can be referred as the detailed presentation and projection of estimate
incomes that will adjust the future expenses of an organization's micro and macro economic
business environment. Budgetary control is the most important planning tool for the management
accounting in order to present and forecast budgets. All planning tools helps in preparation of
strategies in order to solve issues and looks for alternatives. It creates strategies to co-ordinate
among different sectors with the help of master budgeting and investigate monetary effects with
cash budgeting and then assist the management choosing its way and determining its planning.
P5 Organisations are adapting management accounting systems to solve Financial Issues:
Financial Problems: These issues are the fund related difficulties that bother the
administration and create hurdles to operate its daily basis activities and transactions. The
financial issues can be arisen by micro environmental factors as well as macro environmental
factors. Most of the times, companies suffer from these difficulties because of some external
components but it may be happen due to internal and create huge losses for an organization
(Fisher and others, 2018). There are so many financial issues can arise in front of the
organization which are mentioned below for Airdri Limited:
Delayed payments from clients: The establishments that derive their business on most of
the credit terms, have to provide their business offerings to their customers on credit. Sometimes
due debtors fail or delay their part of payment that becomes a huge reason of lack of the money
within the firm and make it hard to maintain regular activities.
Unforeseen Expenses: These expenditures are the unplanned overheads which were not
estimated at the time of budget preparation but suddenly have occur in the middle of the financial
period because of some unexpected incidents. These overheads are unplanned weight on the
estimated budget plan and reduce the profit margin of the establishment.
Weak Internal Control System: Most of the times, upper management could not find the
padding or mismatching in the accounts or ignores the minor mistakes. Sometimes there are
some employees in the administration itself who have ulterior intentions and manipulate
financial accounts. This kind of behaviour indicates poor management and internal control over
the process which have adverse impact over the profitability (Cordery, 2015).
There are some methods and techniques that are followed by the management of Airdri
Limited for identifying the financial issues and their reasons, presented below:
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Benchmarking: This is a method of analysing the efficiency of the workers as well as
the operations and activities taking place within the establishment. Under benchmarking process,
the strategy is applied that firstly include analysis of an entity that is deriving its business within
the same sector and situations (Stead and Stead, 2017). Further step is to decide and implement
some measurements and indicators for each individual and activity in order to maintain a level of
standards in the work performance and efficiency. The last step is to determine the variances
between actually derived outcomes and set measures whether it is favourable or adverse. Airdri
Limited implemented this method to identify the delayed receipts from the clients.
Key Performance Indicator (KPI): This is a method that mainly focus on highly
efficient operations and activities. The key indicators are the crucial standards that provide
concentration on functional performance improvement. In KPI method, top management attempt
to examine whether establishment is going on the right direction of its objectives and goals or
not. This method helps the management to identify the clear picture of its goals and detect the
unexpected expenses and poor fund management system.
Financial governance: This can be defined as an entire process of assembling,
recording, classifying, analysing, summering, managing, monitoring and controlling financial
informations (Russell, Milne and Dey, 2017). The process of financial governance also involves
controlling and handling financial performance with the assistance of available materialistic
information. After determining the financial issues with the help of KPI and benchmarking
techniques, the management of Airdri Limited applies financial governance in order to solve
those issue.
Comparing the organizations using Management Accounting System:
Airdri limited Galway Plc
The establishment is suffering from the issue
of funds lacking because of the delayed
paymetns due to this organisation was facing
cost of maintaining the funds for payments.
Galway Plc is suffering from the problem of
increasing in its manufacturing and production
costs because of which per unit profit margin
of the organization is getting lower.
The establishment be able to identify this
problem with the help of Key Performance
Indicators and implemented the rules and
The selected establishment is capable to solve
this issue by utilising price optimisation system
that provides aid in diminishing the cost and
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guidelines and following the standards
accordingly.
selecting suitable price.
Managers implemented inventories
management system to record the holding
inventories in the form of non payments. The
system helped to decide the minimum recovery
period form debtors.
By implementing the price optimisation system
organisers be able to determine the cost of the
particular product and services as per their
demand in market.
M4 Management accounting can lead organisations to sustainable success:
An organization needs an effective system that can helps to solve its financial problems.
Management accounting is a process that involves different types of tools and methods to solve
various financial problems according to the situations. With the help of KPI, benchmarking,
balanced scorecard and other techniques an organization is able to find its loop holes and weak
points on time. Performance indicator helps in tracking the efforts of the workforce as well
(Farooq and AbdelBari, 2015). With all these financial governance tools management is able to
summarise all information and optimise it in order to enhance the productivity and control the
workforce working in the organization
D3 Planning tools respond appropriately respond to solving financial problems:
Various types of planning tools and techniques provides assistance to achieve the
objectives of an organization by evaluating estimates, preparing budgets, reducing costs and
increasing revenue. These tools helps the management to plan and execute daily transactions and
operations. Master budget provides overall view of operational and functional structure of firm
and helps in allocation of funds in different departments accordingly and zero based budget
provides help in justifying the reason behind every cost centre so that ineffective costs can be
ignored (Rowlinson and others, 2015). All the financial problems which are either created by
micro environment or macro environment can be reduced with the help of these planning tools.
CONCLUSION
In conclusion of this report it has been stated that management accounting assists
companies in order to record and classified material informations and preparing various budgets
during a particular time period. Management accounting system helps in many ways and provide
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informations to make firmer decisions. Reporting of this accounting system helps in improving
performance by taking remedial actions against variances. Various budgets provides a base to
perform operations, create income statements for the uses of internal stakeholders and financial
governance is mandate to achieve effectiveness in regular business activities and sustainable
success. After a critical evaluation of all the factors, reporting system of the accounts helps in
analysing performance of different units. It also finds variances and develop necessary system.
Various types of planning tools helps in estimating income & expenditure during an accounting
year, preparing budgets, reducing costs, increasing revenue etc. This assists in planning as well
as executing daily transactions in a business. In simple words, management accounting is
foundation on which organization creates its business building with financial accounting
materials.
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