Management Accounting Report: Airdri & Brightstar Company Analysis

This report provides a comprehensive analysis of management accounting principles, focusing on the practices and systems employed by the Brightstar Company and its client, Airdri. The report delves into the core concepts of management accounting, including its role in decision-making, the distinction between financial and management accounting, and the essential requirements of an effective accounting system. It explores various management accounting systems such as inventory management, cost accounting, and price optimization, highlighting their benefits and applications within Airdri. Furthermore, the report examines different methods of management accounting reporting, including budget, performance, and inventory management reports. The analysis extends to macroeconomic techniques like cost analysis, cost-volume-profit analysis, and flexible budgeting, culminating in the calculation of net profit using marginal and absorption costing methods. The report underscores the significance of accurate and reliable information for strategic decision-making within the organization. The report analyzes financial data, management strategies, and operational efficiencies. This report is a valuable resource for students studying management accounting.

Management
Accounting

INTRODUCTION
Management accounting is a continuous process or a systematic process which deals with
gathering, classifying, analysing, and process financial and non-financial information in order to
produce reports that are used by managers to make decisions that aim to accomplish the strategy
of the business and analyse the financial information and transfer to the manager for the effective
or efficient decisions (Scapens, 2015). It is periodical report which helps manager to develop
strategy department wise. Brightstar Company is selected for better understanding of these
concepts and it provides various financial solutions to their clients all over the world. Airdri is
one of the client companies of Brightstar which is founded in 1974 by Peter Philipps & Peter
Allen. It is UK based company which offer different range of dryers. This report includes various
topics such as management accounting and essential requirement of accounting system.
MAIN BODY
TASK 1
P1 Management accounting and essential requirement of its system
Management accounting:
Management accounting is the discipline which deals with gathering, classifying,
analysing, and process financial and non-financial information in order to produce reports that
are used by managers to make decisions that aim to accomplish the strategy of the business. It
includes the various practices which help the Airdri Company to achieve their business goals &
objectives.
Origination of management accounting:
Management accounting emerges as a significant activity which helps the organization to
analyse their financial performances. Management accounting originates after financial
accounting because it helps the business to analyse their financial information in useful manner.
There are two industries which plays important role in the evaluation such as textile and railroad
(Origin of management accounting, 2019).
Difference between financial or management accounts:
Financial Accounting Management Accounting
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Financial accounting classifies, analyse, record
and summarize day to day transaction related
to the business activities.
It helps in decision making process for the
internal operational functions. This technique
does not record financial information using
specific standards or principles as it is not used
to serve to external stakeholders.
It is used to determine an accurate financial
position of the company.
Its main purpose is make managerial decisions
following various tactics and measures in order
to concrete the strategy of the business.
Financial accounting is used for the external
stakeholders. It also supports prepares reports
and financial statements which must be
compulsory being consign to authorities,
regulators and other incumbents. If well this
accounting is not focused in the reports
preparation to make decisions, the nature of its
information provides just a general and not-
specialized view of the financial position to
make authentic decision in context to growth
and development.
It is used for the internal purposes only
(Kaplan, 2014). It is also focused in the
preparation of specialized queries and reports
which are generated according with the
business’ needs to make decisions regarding
them.
Different type of management accounting system:
Management accounting system is the method of evaluating operational activities and
implement various systems which increase the organizational productivity as well as profitability
(Otley, 2014). In the Airdri Company, manger follows the various accounting system to enhance
their operational performance in order to achieve their targets and some of systems are discussed
below:
Inventory management system: It is kind of system or software which is used by the
organization to maintain their stock’s level and it will provide the regular update. With the help
of inventory management system, manager of the company can deliver products from warehouse
to the manufacturing area as per the requirement. Manager of Airdri used this system to regular
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track their inventory level. It is essentially required to keep manager update regarding their stock
level. In future, it reduces the chances of shortage as well as wastage of raw material at the time
of manufacturing electric items. For the effective management in the warehouse, manager can
use LIFO, FIFO and other inventory management system. It adds value to the organization to
manage those item that are ready for sale level and regularly track the raw material for the
further functioning.
Cost accounting system: It is also called costing system which is used by the
organization to estimate the economics value of the number, quality, and kind of resources
involved in the production of each unit of product. This framework used for the analysis of
profitability; control overall business cost and valuation of inventory. This system required for
the estimation of Airdri’s product cost which helps in measuring profit margin of the business.
Lower the cost will provide the high profitability and similarly higher cost of product will reduce
the profit margin. Manager of Airdri Company, use the cost management system for the
evaluation of their product cost (Macintosh and et.al. 2012). It helps the manager to analyse all
the aspect and develop strategy which further required at the time of taking effective decision.
Manager ensures that, cost of each unit will be low for the whole production and try to maintain
or minimise the cost because low cost provides the high profit margin. With the help of this
accounting system, organizational efficiency or effectiveness will be increased and in future
provide benefits to achieve their goals & objectives. It add value to the business to reduce their
over expenses.
Price optimization system: It is the mathematical framework which helps in
determining customer behaviour or response to different price range of the products & services.
It also helps in measuring best price of the product which meets with the organizational
objectives such as maximising profit and increase customer base. In the Airdri Company,
manager use this system to determine their customer behaviour in order to satisfy them. It helps
the business to identify their customer demand and their preference which helps in further
decision making process. It is essentially required to know about their customer behaviour,
attitude, value etc (Libby and et.al., 2016). With the help of price optimization system, Airdri
Company set the affordable or suitable price range which can satisfy the customer needs, desire
and willingness to pay. It adds the value to the entity to know the customer behaviour regarding
different price range.
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Above mention management accounting system help the Airdri Company to improve
their efficiency or effectiveness. Manager adopts these systems which further required building
effective strategy and helps in achieving business goals & objectives.
Benefits of the management accounting system:
Management accounting system Benefits
Price optimization system:  It helps in identifying customer’s behaviour
regarding different price range of the product.
 With the help of price optimization system,
manager of Airdri identify the customer buying
behaviour which further helps in developing
strategy.
Cost accounting system:  With the help of cost accounting system,
manager of Airdri identify each unit cost.
 It further helps in reducing product cost and
develops effective strategy for the future.
Inventory management system:  This system helps the Airdri to keep track their
level of stocks.
 Effective implementation will reduce the
chances of shortage as well as wastage in the
production level (Kaplan and et.al., 2015).
P2 Different method of management accounting reporting
Characteristics of good management accounting systems:
 Reliability: It provides the true information, because organization required reliability of
information because it further helps in developing strategy and decision making process.
 Accuracy: By using this information system, organization gets the accurate information
which helps in implementing strategy.
Reasons of understanding overall management accounting system:
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In the Airdri Company, management have to analyse that it is important for the business
to develop strategy and then execute in proper way which further help in decision making
process. Some of the reasons discussed below:
 Management accounting systems used for the understanding and comprehensive analysis
where manager of the Airdri analyse the financial position of the company.
 Accounting reports used by the manager to formulate strategies for the effective
outcomes. If it is not understandable by the other parties, then organization not able to
perform their activities.
Management accounting reports are used for the evaluation of performances of individual
as well as organization.
Budget report: This report used for the internal usage where top management estimate
the various values from standard to the actual outcomes. Every organization produce budget to
understand their operational expenses and business goals. Budget will be prepared on the basis of
past experience which helps in future to face difficult challenges. Budget report includes the
source of earning as well as expenditure which required to estimate for the further functioning.
In the Airdri company, manager can follow this budget which help the business to estimate their
overall expenses or revenue (Horngren and et.al., 2012).
Performance report: This report will be produce for the evaluation of employees as well
as business performance. It will help the manager to analyse the success of project because it
contains the budget for each activity. Performance report will be developed for the measurement
of individual performance which helps the top management to identify the efficiency or
effectiveness of their work.
Inventory management report: Top management use this report which helps the
organization to know accurate availability of stock in the warehouse for the manufacturing.
Manager start tracking sold items, avoid the wastage in the manufacturing process and shortage
as well. Because the conditions will affect the productivity as well as profitability of the
company (Hopwood and et.al., 2014). In the Airdri Company, manager use the inventory
management report for the analysis of stock level and its requirement. It is important to keep
their eyes on inventory level because excess stock will increase the wastage which increase the
product cost and it directly affect the profit margin. On the other hand, shortage of raw material
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also affects the production as well as demand of the customers. Manager of the Airdri Company
can use LIFO or FIFO method to manage their inventory level.
There is various management accounting reports which is followed by the manager of
Airdri Company. It helps the business to operate their operational activities and reduce the cost
for the longer period which increases the profitability. With the help of above mention reports,
organization can achieve their business goals & objectives.
TASK 2
P3 Calculation of net profit by using marginal or absorption costing method
Macroeconomic techniques:
Cost: It is the monetary value which is spent by the organization at the time of
manufacturing goods and it can be direct or indirect:
 Direct cost: It include those cost which directly linked with the manufacturing of product
such as direct labour material, commission, wages etc.
 Indirect cost: This cost includes the overhead expenses which are not related to the
manufacturing units. It includes the selling administration expenses which are required to
sell their products in the market.
Cost analysis: It is systematic approach which focus on measuring cost or output
relationship where management analyse the cost of input in relation to the actual outcomes.
Overall cost will determine the optimum level of production.
Cost-volume profit: In this analysis, manager identify the impact which can change as
per the cost or volume used in the operations for generating operating profit. It is also known as
break even analysis which helps the business to provide clear idea regarding their production unit
which coven the manufacturing cost.
Flexible budgeting: This budget can change according to the volume or functions and it
include the variable cost which helps the business to increase their production level as per the
requirement.
Cost variances: It is the difference of actual or budgeted cost which identified by the
manager in order to use it in effective way. Organization have to ensure that, different
department will perform each function under the budgeted amount.
Product costing:
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Fixed cost: This cost will be define as fixed because it will not change with production
such as employees salary, rent of building etc.
Variable cost: It includes those expenses of the production which can change as per the
time such as cost of raw material, labour rate etc.
Cost allocation: It helps the organization to identify and assign the cost for the cost
objects. Where each activities will be analysed in term of cost such as cost of product, research
product, Sales region etc.
Normal Costing: It is the simple costing method which uses the actual data in order to
calculate the cost of product with the exception of manufacturing overhead.
Standard costing: It is the traditional cost accounting method which helps the business
to evaluate their product cost by using historical cost of the products.
Activity based costing: In this costing method, organization analyse the cost on the basis
of each activity which required to execute for the completion of project.
Role of costing in setting price:
Cost of inventory:
Inventory cost: This cost is related to the procurement and storage of raw material such
as ordering, carrying and holding cost which required estimating by the organization.
Different type of inventory cost:
 Ordering cost: It is the cost incurred at the time of purchasing goods which include the
transportation cost, finding suppliers or cost of electronic data interchange (Types of
Inventory cost, 2019).
 Holding cost: It is also known as carrying cost which organization have to spend for
maintaining their inventory level otherwise all the stock can waste due to various reasons
such as inventory service cost, storage cost etc.
 Shortage cost: It is also called stock out cost when organization face the problem of
stock out and it will disturb the production, emergency shipment and customer loyalty.
Benefits of reducing inventory costs in the organisation:
 It helps the business to reduce their maintenance cost
 It provides the flexibility in the manufacturing process
 It reduces the wastage at the time of manufacturing products and further increases the
productivity or profitability.
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Valuation method:
 LIFO: This method is using latest purchased stock for manufacturing goods.
 FIFO: In this method, organization uses the inventory which is earlier purchase by the
business.
Manager of Airdri, use the FIFO methods where first entered stock will be used for the
production of products.
Cost variance: It is the difference of actual or budgeted cost which helps the Airdri
organization to analyse their actual performance. If it is good then it provides the high profit
margin or if, it is bad than manager have to re-evaluate the budget and all the activities for the
further improvement otherwise it affect the productivity or profit margin of the business.
Overhead cost: It includes the ongoing expenses which is mandatory to do the successful
completion of Airdri operational functions. Such as accounting, legal expenses, depreciation,
insurance etc.
Calculation of the costing in the Galway Plc by using marginal or absorption costing
method will be discussed below:
Marginal Costing: It is the costing method which helps the organization to identify each
unit cost of their products. Change in the total cost as per the change in the single unit produce
will be consider in the marginal costing (Hansen and et.al., 2017). It includes the variable cost
and other overheads because fixed cost remain constant for the whole period of production. In
the marginal costing techniques, fixed expenses are excluding for calculating each unit cost of
product.
Cost per unit according to the variable cost method
Marginal costing
Direct materials per unit 8
Direct labour per unit 5
Variable production overheads per unit 3
Marginal Cost per unit 16
Calculation of net profit by using marginal costing method:
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Inventory valuation:
Inventory cost as per marginal
May June
Opening inventory 3200
Closing inventory 3200 1280
Absorption Costing: It is the accounting method which required for calculating each unit
cost of the product which includes variable as well as fixed cost. Along with this, it includes the
manufacturing overheads such as material and labour. Included cost can be direct or indirect, so
manager majorly focuses on reducing product cost because it will reduce the profit margin
(Corbett, 2018). So manager have to adopt effective strategy or practices which reduce the cost
per unit.
Determine the inventory value according to the cost per unit previously calculated
Per unit Direct materials cost 8
Per unit Direct labor cost 5
Per unit variable production overheads cost 3
Absorbed fixed productin cost per unit 10
Cost of sales 26
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Calculation of net profit by using absorption costing method:
Particulars May June
Fixed production cost standard 4000 4000
Fixed production cost actual 5000 3800
Under/over absorbed cost 1000 -200
Last in First out method (LIFO):
10