Management Accounting Report: Techniques for Innocent Drinks

This report, prepared by a consultancy firm for Innocent Drinks, delves into management accounting principles and their practical application. The report is segmented into three key areas: an overview of management accounting systems and their integration within organizational processes, including cost accounting, inventory management, and budgeting. The second part focuses on the application of various management accounting techniques, such as marginal and absorption costing, using provided data to calculate costs and analyze profitability. The final segment explores the utilization of planning tools, specifically budgetary control and capital budgeting, to address financial challenges and support strategic decision-making within Innocent Drinks. The report emphasizes the benefits of management accounting in planning, decision-making, identifying problems, and strategic management, offering insights into how Innocent Drinks can leverage these techniques for improved performance.

Management
Accounting
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Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
P1 Explain management accounting and its essential requirements...........................................3
P2. Explain different methods used for management accounting reporting...............................6
TASK 2............................................................................................................................................7
P3 Calculate costs using appropriate techniques of cost analysis..............................................7
TASK 3..........................................................................................................................................12
P4 Planning tools used for budgetary control...........................................................................12
TASK 4..........................................................................................................................................14
P5 Management accounting system..........................................................................................14
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................18
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INTRODUCTION
Management accounting is the provision of financial and non financial decision making
information for managers (Bobryshev and et.al., 2015). It is an accounting practice different
from financial accounting as it includes both monetary as well as non monetary factors into
consideration. Reports produced out of different management accounting systems provides
information whenever and wherever required. This information is used by management to
determine variances from the planned targets and to take necessary corrective steps.
This report has been made by consultancy firm AJ and sons in the context of their client Innocent
Drinks. The report is categorized into three parts. First part covers information about
management accounting systems and their integration within organisational processes. Second
part covers application of a range of management accounting techniques using given sets of data.
The last part covers the use of planning tools by management accounting to respond to financial
problems in organisation.
TASK 1
P1 Explain management accounting and its essential requirements
Management accounting is the practice of identifying, measuring, analysing, interpreting
and communicating financial information to managers for the pursuit of an organisation's goals.
It is also called managerial accounting (Carlsson-Wall, Kraus and Lind, 2015). It is aimed to use
internally by managers only to make well informed business decisions while financial accounting
is aimed at providing financial information to both internal and external stakeholders.
Basis for comparison Management Accounting Financial Accounting
Purpose and user It is used for internal decision
making purpose only by
management
It is used by both internal and
external stakeholders to take
their relevant decisions
Regulation It is not under regulation of
any law or statute.
It is governed by standard
laws, rules and regulations by
different authorities.
Audit It is not subjected to any kind
of audit or external
It is subjected to multiple
audits such as tax audits,
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investigation. corporate audit, etc.
Contents It includes both financial and
non-financial information.
It is only concerned with
financial information.
Management accounting is very beneficial and hence is being used widely now. Few benefits are
as follows:
 Planning and decision-making – In management accounting, financial information and
non financial information is presented at regular intervals (Charifzadeh and Taschner,
2017). This presentation includes forecasts, budgets and in-depth analysis. Hence, it
assists the management in planning the business activities and decision-making.
 Identifying early signs of problems – Management can identify early if a product is not
performing well, by comparing the accounts prepared and the actual performance of
product. This will aid in overcoming the constraints early on and avoiding future losses.
 Strategic management – Based on the information presented in management accounts, the
management can take decisions about continuing a product or modifying the sales
strategy. Since management accounts are not subjected to any law, management can
decide the areas that require more analysis, investigation and accordingly draw up
strategies.
Innocent Drinks can also adopt management accounting techniques to know if they
require any strategic changes to suit the current market situation such as changes in pricing,
location, marketing, etc. It can help them find shortcomings and plan better for the better future
of the company.
The study of management accounting are interlinked with each segment of business and
department of organisation. A few of the most common management accounting systems are as
below:
 Cost accounting system – It is an accounting system designed for manufacturers that
tracks the flow of inventory continually through the various stages of production.
Material flow cost accounting is a powerful tool when it comes to the identification of
resource inefficiencies in production systems (Sanjay Borad, 2020). This accounting
system is beneficial for companies to address those areas in which company's expenses
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are higher. The main purpose is to identify unwanted expenses and cut them so that
revenues can increase.
In Innocent Drinks, this accounting system can provide information about costs of different
activities company is undertaking. This can help managers determine whether or not they are
cost economical company. It will help them determine variances in different activities. They can
decide on cost cutting on high cost consuming activities or might feel need to pump more
resources in some activities which can earn them more profit by a little effort by the
management.
 Inventory management system – It is a discipline primarily about specifying the shape
and placement of stored goods. Information about raw material procured, finished goods,
remaining stock is recorded on regular basis (Chenhall and Moers, 2015). Various
approaches such as FIFO, LIFO, etc. to record inventories.
This can help managers of Innocent Drinks know the information related to their
inventory turnover, daily consumption of raw material, finished goods and the goods left in
stock. Since, the company deals in perishable products, it is essential to follow First in First
Out(FIFO) method so that wastage is minimised. Inventories should be ordered with Just-in-time
approach so that storage cost can be minimised and freshness of the product is guaranteed.
 Price optimisation system – Price optimization is the process of finding that pricing sweet
spot, or maximising price against the customers willingness to pay. It is based on price
determination as per the external environment factors such as competitor's prices, market
trends, demand of the product, etc.
Innocent Drinks can use this system to determine optimum prices it can charge on its
various products in accordance of customer feedback. It can also take decision on policies like
uniform pricing at all centres or multiple pricing policy. Company can also decide whether they
can charge premium prices at some fixed time at few centres or do they need to introduce under
pricing at some centres to increase customer attraction.
 Job costing system – Job accounting is the process of assigning the costs to incur to a
specific job the business is involved with. It aims to measure cost of each particular job
so that its profitability can be ensured (Chiarini and Vagnoni, 2015).
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This accounting system can help managers of Innocent Drinks ascertain cost of their each
product and whether it is running cost efficient or not. It will also help them knowing the
profitability of their each product in the market.
 Budgeting, trend analysis and forecasting – Budgets are extensively used as a
quantitative expression of the company's plans of operation (Collis and Hussey, 2017).
Managerial accountants utilize performance reports of deviations of actual results from
budgets. It also reviews trend-line for certain expenses and investigate unusual variances
or deviations.
The positive or negative deviations from a budget also referred to as budget-to-actual
variances will help management of Innocent Drinks to analyse what are the appropriate changes
needed to go forward. They may also include the use of historical pricing, sale volumes,
geographical locations and customer tendencies to make better strategies.
P2. Explain different methods used for management accounting reporting.
As much as it is important to determine factors affecting business prospects, it is
important to present them in formal written manner containing information regarding different
segments of a business. These reports are used by managers as per their need to take suitable
steps in administrative decision-making. Information about some reports is as follows: Budget report – It helps managers analyse their department's performance and control
cost. Budget is usually based on actual expenses and trends over years. Budget report of
Innocent Drinks can help the managers ascertain whether any specific department was
over/under budgeted, if they need to trim costs or would they be needed more funds in
future Inventory management report – This report generally include items such as inventory
quantity used, inventory waste, material needed or remained unused, hourly labour costs
or per unit overhead costs (Dekker, 2016). Managers at Innocent Drinks can prepare this
report to determine information about material turnover, juice/drinks manufactured and
stored, etc. Accounts receivable ageing report – This report is a critical tool for managing cash flow
related to the credits extended by company. This report include information related to
name of debtors, date of transaction, receivable amount, etc. Receivables that are due for
more than 30 days, 60 days and 90 days are separately recorded. With the help of this
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report, managers at Innocent Drinks can decide whether they need to tighten credit policy
or other changes which can help company receive its money sooner.
 Performance report – This report is created to review the performance of a company as a
whole as well as for each employee at the end of a term. This report contributes in
measuring financial performance of a company. Managers at Innocent Drinks can use this
report for detailed knowledge on profitability, return, loss, cash availability, etc.
Other managerial accounting reports include cost accounting reports,order information reports,
competitor's analysis, etc. which are also vital for businesses and are prepared as per the
requirement of the organisation.
Integration of management accounting system and reports
Managerial reports shows the result of the application of various management accounting
systems. Reporting is essential for management to devise corrective strategies needed to be taken
such as on doing inventories management, finance managers at Innocent Drinks find loopholes in
recording inventories (Kostyukova and et.al., 2018). They will report this in inventories
management report to senior management which will further take steps to either eliminate
shortcoming or will change strategy. Integration contributes to guide managers for better
decision-making for sustainable success of business.
TASK 2
P3 Calculate costs using appropriate techniques of cost analysis
Costing is a system for assigning costs to an element of a business. Costing may involve
only the assignment of variable cost, which are those costs that vary with some form of activity.
It may also include the assignment of fixed costs, which are those costs that stay the same,
irrespective of the level of activity.
Marginal costing - Marginal Costing is a costing technique wherein the marginal cost,
i.e. variable cost is charged to units of products while the fixed cost are considered as the cost of
the period (Lavia López and Hiebl, 2015).
Absorption costing - Absorption costing, is a managerial account method for capturing
all costs associated with manufacturing a particular product.
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Interpretation of data.
In the above part of report two income statements are produced which are interpreted
below in such manner:
From income statement prepared under marginal costing, this can be find out that there is
net profit for both months including April (£13000) and May (£22000). There is variation in net
profit because of higher sales in month of May. On the other hands, under absorption costing net
profit is of £19000 and £25000 for similar time period. The rationale behind difference in total
net profit under both techniques because of way of taking fixed and variable cost in process of
income statement preparation.
TASK 3
P4 Planning tools used for budgetary control
Budgetary control is process of measuring deviation of actual performance from the
budgeted one. In the process of this analysis, budgets are prepared for a specified future period
and at the end of this period, differences between actual and budgeted figures is calculated
(Maas, Schaltegger and Crutzen, 2016). This process of comparison refers to as monitoring
performance. This calculation of variance helps the management to take corrective actions (if
required) without any delay. These budgets relates to every function of organisation. In relation
with Innocent drinks limited, following planning tools can be used:
Capital budgeting- An organisation tends towards growth (growth in scale of production,
growth in sales, etc.), this objective can be accomplished by acquiring various major projects or
investments. Acquisition or construction of a new project or investment are examples which
require capital budgeting (Nørreklit, 2017). Purpose of capital budgeting is to help managers to
select one of the alternatives available with organisation, this selection is done with the help of
methods like, pay-back period, internal rate of return, net present value etc. In context of
Innocent drinks limited, tool of capital budgeting can help to evaluate different alternatives and
select one out of them.
 Advantages- Major benefits from this tool are protect company from future risk that can
create havoc if wrong alternative is selected and also evaluate and control various
expenses associated with an investment.
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