Management Accounting System, Reporting, and Analysis for Avian Ltd

This report provides a detailed analysis of management accounting systems and reporting methods, focusing on their application within Avian Limited, a UK-based engineering company. The report begins with an introduction to management accounting, emphasizing its role in internal analysis and str...Read More

MANAGEMENT
ACCOUNTING.

Table of Contents
INTRODUCTION...........................................................................................................................1
ACTIVITY 1....................................................................................................................................1
Part A...........................................................................................................................................1
Different techniques and methods used for management accounting reporting:.........................3
Management accounting system and management accounting reporting is integrated within
organisational processes:.............................................................................................................5
PART B........................................................................................................................................6
Annex (A)....................................................................................................................................6
Annex (B).....................................................................................................................................6
ACTIVITY 2....................................................................................................................................8
Part A...........................................................................................................................................8
Uses of different planing tools in forecasting budget..................................................................9
Annex (c)...................................................................................................................................10
Part B.........................................................................................................................................11
Comparison of how organisations are adapting management accounting systems to respond to
financial problems......................................................................................................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Management accounting refers to systematic and managed presentation of financial and
accounting information or data to prepare new policies which is used by management to perform
their day to day activities in effective manner (Bromiley and et.al, 2015). This report exhibits
management accounting system, essential requirement of various management accounting
system and various management accounting reporting along with benefit of these system and
their application in the context of Avian Limited, an UK based reputed engineering company.
Company is engaged in manufacturing of hang gliders and other markets recreational aviation
products. This report also contains explanation about different planning tools, use of planning
tools to handle financial problems,advantages and disadvantages of different types of planning
tools used for budgetary control and, how management management reporting and system is
integrated within organisational processes.
ACTIVITY 1
Part A
◦ Management accounting system is mainly used by business organisation for
internal analysis. It is a set of various activities like identification, selection, analysis, collection
and evaluation of raw information data or information in order to convert them in relevant
information for management. Managerial personnel with help of such information, formulates
and implements one or more strategies to achieve organisation's goals and objectives within
scheduled time. Key focus of system of management accounting is to develop a systematic
framework which open the path for success of business organisation (Takeda and Boyns, 2014).
In Avian Ltd., this system is applied by managerial personnels to recognise, select, collect and
evaluate accounting and financial information that assist in framing strategies and action plans.
Various type of management accounting system such as cost accounting system, job costing
system, inventories management system price optimisation system etc. are adopted by
management to track problems and analyse overall performance of company for a specific
period. Following are some key management accounting system applied by management of
Avian Ltd., as follows:
Inventory management system: It is most essential system used by business enterprises.
This management accounting is adopted by business enterprises to trace or monitor inventories
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during the whole supply chain. This system is used to analyse the real time movement of
inventories in business organisation. In Avian Ltd, this system is used by company to manage or
organise the various kind of inventories like raw material, finished goods, work in progress and
other spare tools to ensure that demand and availability of particular inventories in
manufacturing of hang gliders. This also help to minimise the overall inventories and storage
cost to maximise profits. Company has unique inventories because company is manufacturing
aviation products, so it is essential for company to record and track them to avoid loss or theft of
inventories.
Price optimisation system: Price optimisation system is a type of management
accounting system which is adopted by business enterprises to evaluate in which way consumer
can respond at one or more price levels in respect of different - different products and services. It
also help to evaluate the relationship between price and demand of product. This system is help
in fixing the most appropriate retail price of product (Boiral, 2016). Avian Ltd apply this method
to minimise price of different hang gliders, para gliders and rigid wing hang gliders, to gain
competitive advantages while marinating their profit margin. This system support company's
policy of providing its product at lower price as comparison to its competitors.
Cost accounting system: It is essential management accounting system for business
organisation engaged in production and manufacturing of various products. This system is
mainly used by business organisations to optimise there production and manufacturing cost of
each product or unit. It assist accountants to identify any excessive or unproductive cost incurred
within organisation. Its also point out towards any area of operation in which any additional cost
may be incurred in near future. In Avian Ltd, cost accounting system is applied to minimise
company's various cost related to manufacturing of hang gliders, para gliders and rigid wing
hang gliders. Company takes some big contract to supply large number of hang gliders at lump-
sum amount, such lump-sum amount is determined by company by using cost accounting
system.
Job costing system: This is job or task oriented management accounting system which is
adopted by business enterprises that require allocation of different cost to various jobs and task.
This system is applied for internal analysis of different costs by segregating them in particular
job or task analyse the efficiency of specific job. In Avian Ltd, this is applied to accumulate and
allocate manufacturing and production costs to single unit. Company is using this system to
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assign costs to major job related to manufacturing of hang gliders and other products. Following
are some informations which are required for job costing system, as follows:
Direct martial: Detailed information of cost related to direct material is required for
classification of total direct material cost to particular task. In Avian Ltd, accountants and
engineers provide information of direct material to implement job costing system.
Direct Labour: Second one is information of direct labour cost engaged in
accomplishment of particular job or task. In Avian Ltd, accountants provides data of workers
engaged in performing particular task in manufacturing process.
Different techniques and methods used for management accounting reporting:
Reporting is significant aspect of management accounting under which various middle
level manager report organisation's performance and to top managerial personnels. By using
these report top management take strategic decisions and frame new strategies while considering
organisation's objectives and goals. Main motive management accounting reporting is to provide
a complete and true picture of management accounting process and its numerous elements. Here
reporting is done as per requirement of business organisation without any statutory requirement,
thus no formal formate is prescribed (Thomas, 2016). But there are many methods and
techniques which are used by manager and accountants to report various matters to top
management. In Avian Ltd, this reporting is done by managers engaged in different activities
and department, than on the basis of such reporting various strategic decisions are taken by
management to ensure achievement of objectives and goals. Management accounting system
also point out towards need of improvement in existing strategies. Following are the major
reporting methods and techniques used by Avian, as follows:
Variance analysis: This reporting method is applied by management to critically
evaluate any deviation occurred between actual and estimated amounts to allocate any weakness
in manufacturing and production process. This method also help to evaluate the main reason of
difference or variation. Variance or difference may be favourable or adverse, an adverse
variation require special consideration for improvement. In Avian reporting is done by managers
to report any variation between projected amount and actual amount to analyse the area of
weakness in manufacturing process of hang gliders.
Budgeting: It is most commonly used method of reporting under which managers
forecast the amount of income and expenses to prepare a statements which exhibits a complete
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and detailed comparison of present and future performance of organisation. In Avian budget
reports are prepared by head or managers of different production departments to provide a
complete picture about organisation's performance in near future which assist top management
to take financial decisions.
Performance Report: This reporting method mainly focus towards assessment of overall
performance along with employees performance. It emphasises on effective utilisation of human
resources within organisation. It also help to minimise the over all employee cost to increase
profit. In Avian, using performance report is used to evaluate the performance of managers,
engineers, administration employees etc. and they all are promoted as per their performance in
company. Company prepare their internal policies related to employees as per performance
report.
Activity based costing (ABC): Under this system of reporting managers classifies
various costs to overhead activities and, then assign them to different costs. With help of this
reporting system, business enterprise can critically evaluate the unique relationship between
various products, demands costs, functions, overheads and products (Aksoylu and Aykan, 2013).
This methods critically analyse the effect of various indirect cost on each unit or single product.
In Avian Ltd reporting is done by managers to identify and allocate various indirect expense but
Indirect costs like staff salaries, management costs etc. are not so much easy to allocate to a
particular product.
Standard costing: In standard costing method reporting is done by managers by
identifying or analysing any difference between the standard and actual amount of item related
to production process. This system help to evaluate the overall efficiency of business
organisation to perform its functions in comparison of previous performance of business
enterprises Generally reporting is done by managers on weekly, monthly, quarterly or annual
basis. Reporting can be done on monthly, quarterly or annually as per organisation's
requirement. In Avian Ltd, managers first set standards as per past performance of company,
experiences, trends and scenarios then any any unfavourable difference is reported by them to
analyse and evaluate the effect of such variation.
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Management accounting system and management accounting reporting is integrated within
organisational processes:
Integration of management accounting system and reporting within Avian Ltd develop a
systematic way to operate its functions while emphasising on predicted results and objectives
efficiently. In Avian Ltd, Performance report on company represents various process that help
management to develop a projection for manufacturing of aviation products and increase
expenses or costs leads to reduction is project cost and increase in probability. A effective
integration of processes of organisation and standard costing leads to requirement of emphasises
towards attaining standard profits that assist in fixing strategies and blue print of actions. In
company accounting processes and activities give a groundwork to prepare different reports in
course of management accounting system (Yazdifar and et.al., 2012).
Benefits of management accounting systems:
Combination of one or more management accounting system within a business enterprise
ensures the attainment objectives and goals of organisation because such management
accounting systems have their unique advantage and benefits. Following are some significant
benefits of various management accounting system for Avian Ltd, as follows:
Different accounting system Benefits
Price optimisation system  Avian analyse the attitude of client at
different product costs.
 It provide assistance in increasing
overall operating profits while
maintaining most considerable prices.
 It assist in segregation of customers
according to their behaviour at different
price level.
Job costing system  It help Avian in forecasting of various
costs and expenses during the whole
manufacturing process.
 It represents duplication or multiplicity
of efforts as the same kind of job or
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task is eliminated
Cost accounting system  Avian make assessment of efficiency of
various manufacturing processes and
then assist in making improvement
 It determine the cost of each product of
company and optimise price to gain
competitive advantages.
Inventory Management System  It assist Avian Ltd to enhance the
accuracy and timely delivery of
inventory orders.
 It enhance the efficiency in
management of inventory and save
money and time.
PART B
Annex (A)
Budget 2019 2020 2021
Cost
Centre
Budgeted
production
overhead
costs in £)
Basis of
production
(overhead
absorption)
Cost
per
Hour Hours Cost Hours Cost Hours Cost
A 66000 22000 3 24200 72600 26620 79860 27500 82500
B 75000 15000 5 16500 82500 18150 90750 19500 97500
C 83600 41800 2 45980 91960 50578
10115
6 51500
10300
0
Annex (B)
(a) Labour hour: -
Product X = £6000*1 = £6000
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Product Y = £8000*2 = £16000
Labour hour = £2,64,000
------------
22,000
= £12 per hour.
Overhead absorption on labour hour: -
X Y
Overhead absorption = 1*12 = 2*12
= 12 = 24
Total Overheads = £6000*12 = £8000*24
= £72,000 = £192,000
(b) Using ABC approach: -
Machine hour per period:
Product X = £6000*4 = £24,000
Product Y = £8000*2 = £16,000
Cost driven rate: -
Production set up = £179,000 = 2893 per set up.
60
Order handling = £30,000 = 416.666 = 417 per order
72
Machine cost = £55,000 = 1.375 per order
40,000
Overhead using ABC approach: -
X
Set up = 15*2983 = 44,745
Order = 12*417 = 5004
Machine cost = 24000*1.375 = 33,000
Total 82749
Y
Set up = 45*2983 = 134,235
Order = 60*417 = 25,020
Machine cost = 16000*1.375 = 22,000
Total 181,255
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ACTIVITY 2
Part A
In business term, the term budgets is defined as the important formal document that are
designed by every types of organisation in order to predict the overall income and expenses
during an accounting year. Manager of Avian use to prepare budgets that support to estimate
about the total expenses used in order to increase the productivity of different operation and
income generate form these investments (Malina, 2018). In business context, the process related
to setting of specific performance standard with the support of budgets that is known as
budgetary control. This help company to measure and evaluate the actual performance of
company during a year. In order to increase the effectiveness of budgets different types of
planning tools within budgetary control are used. These are define below:
Functional Budget: These kind of budgets are mainly prepare by the manager of
company for a specific business function. This comprises purchase budgets, sales budgets, labour
and personal budgets etc. In context of Avian limited manager use to prepare production budgets
on yearly basis so that it help to specify the total expenses needed to run the production operation
of hand gliders. This also help to keep the record of total revenue collected by company within
specific period. Some useful advantages and disadvantages are defined below:
Advantages: It helps to provide the benefits to company by keeping a valid track of
monetary resources that are implemented in different business activity. This Budget also aid to
maintain a systematic record of income so that meaningful decision are made for increasing
revenues.
Disadvantage: This kind of Budget need lots of time, specification, cost and efforts for
preparation, so it is not possible to make budgets for complex activities.
Zero based Budgets: This is consider one of the main planning tool that is helpful for
companies to start a fresh budgets every time by saving time and efforts. The process of ZBB
includes preparation of budgets from the initial level with taking help from last year budgets so it
is depended on re-evaluation of every aspect of cash flows and mainly justify the total expenses
that are involve in different activities (McLean, McGovern and Davie, 2015). In Avian ZBB help
the manger to predicts the entire cost relevant to production that is actually needed by in doing
different kind of business operation. These estimation are not based on previous year expenses
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but depends on total activity required to complete production process. The following advantages
and disadvantages are as follow:
Advantages: This budget helps to provide the efficiency and accuracy in business
operation because it includes re-evolution of each item of cash flows thus it reduces the
unprofitable activities. It also used to provide strength to communication network between
various departments so that activates are performed in better manner.
Disadvantages: This type of budget mainly required skilled work force and is more time
consuming process. Due to which it is not easy for every type of company to prepare Zero based
budgets.
Flexible Budgets: In recent time, it is observe that almost every company is adopting the
concept of flexible budgeting because it help them adjust against different types of situation
faced by company during a time frame. This allows manager of respective company to make
modification within original budgets so that specific business uncertainness can be controlled in
better manner (Bennett and James, 2017). Flexible budget are based on the changes, which arises
due to change in the variable cost, semi-variable cost and fixed cost. Manager of Avian use to
prepare this budget and includes upcoming expenses apart then business cost that can arise in
future due to sudden changes. They also record the future sources from where company can
generate more revenue in upcoming time. There are some advantages and disadvantages of this
budgets that are discussed below:
Advantages: The chief gain of flexible budget is that it permits management to take well
cost control actions and is efficient with the present data related to company.
Disadvantages: Flexible budgets are sometime confusing and complex and in nature due
to which operation are not completed on time and may irritates the working staff member on
specific projects.
Uses of different planing tools in forecasting budget
In Avian manager use all kind of mentioned planning tools in order to make effective
strategic decisions so that financial health can be improved and sustainability in the market can
be increased to gain the competitive advantages. Respective company uses these tools as a part
of budgetary control that help to gives better estimation regarding requirement of the funds and
total revenues that could be attained by company in an accounting year. These budgets also
support managers in effective planning about growth and development so implement new
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innovative technique which can help them to reduce their cost of product and increase the profit
margin.
Annex (c)
Year X PV@ 12%
Dis Cash
Flow Y PV@ 12%
Dis Cash
Flow
0 -5000 -8000
1 2500 0.893 2232.143 1500 0.893 1339.286
2 1000 0.797 797.194 2000 0.797 1594.388
3 1000 0.712 711.780 2500 0.712 1779.451
4 500 0.636 317.759 1000 0.636 635.518
5 1500 0.567 851.140 1000 0.567 567.427
6 1000 0.507 506.631 2500 0.507 1266.578
Total 5416.647 7182.647
Payback Period = Initial Investment
Average Cash Flow
Project X = 5000 = 4
1250
*Average Cash Flow = 7500 = 1250
6
Project Y = 8000 = 4
1750
*Average Cash Flow = 10500 = 1750
6
NPV: -
Project X = Dis Cash Flow – Initial Investment
= 5416.647 – 5000
= £416.647
10

Project Y = Dis Cash Flow – Initial Investment
= 7182.647 – 8000
= - £817.353
Part B
Comparison of how organisations are adapting management accounting systems to respond to
financial problems
The management accounting system is very crucial system to solve the financial issues in the
organization.
Financial problem- It is a kind of problem that raises due to lack of fund or money.
Eventually, this type of issue is being considered as one of the major issue in the companies.
This is why because due to this other functions and activities of the organizations get impacted.
There are various kind of financial issues, some of them are mentioned below:
Spending more then income- This is a general financial issue which is faced by the
companies. Under this issue, organizations do more expenses on various activities but earn less.
Due to this issue company, gets unable to manage other functions and activities.
Unequal cash flow- If cash inflow and outflow both are equal then, it is being considered
as an ideal situation. On the other hand, if cash inflow and outflows are unequal then it becomes
a financial issue. In this financial issue, cash generated activities decreases on the other hand the
cash outing activities increases (Malinić and Todorović, 2012).
So these are some general financial issues which are being faced by the companies.
Herein, it is important that these financial issues should be resolve as soon as possible. For this
purpose there are various kind of accounting techniques which are as follows:
Bench-marking- It is a kind of accounting technique which is associated with the
comparing the organization's plans, policies and strategies with the strong companies. Due to this
financial issue facing company can enhance their plans and strategies for better result.
KPI (Key performance indicator)- The KPI is an accounting technique which focuses
on those activities which are high revenue generating for the companies. As well as with the help
of this technique, company can gain good profit by expanding on profitable activities.
Financial governance- It is a kind of system that is related to the collecting, monitoring
and managing the financial information. This plays an important role in solving the financial
issue.
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Comparison:
Basis Avian limited company Gulfstream
Financial issue The company is facing the
financial issue of spending more
then income (Klemstine and
Maher, 2014). This is why because
they are expanding on those
activities which are not beneficial
for them.
This company is facing the issue of
unequal cash flow. It means they
have lack of liquidity or cash. Due to
this their working capital requirement
is also not fulfilling.
Accounting
technique
On the basis of their financial
issue, they need “KPI” technique
to solve their financial issue. It is
kind of technique which identifies
profitable activities. If above
company will use this accounting
technique then they will be able to
make expenditure on profitable
activities. Thus their issue can be
resolve.
Their issue can be solve by applying
“Benchmarking” technique. This is a
kind of technique which compares
the strategies and plans with
successful companies. If above
company will apply this then they
will be able to enhance their plans
and strategies. Due to this they will
earn more profit and it will result in
higher cash generating activities. So
they can overcome from their
financial issue by this technique.
CONCLUSION
From above report its has been articulated that management accounting system is key
element of business organisation in present business environment. Overall objective of different
– different management accounting system is to provide assistance in achievement of
organisational objectives and goals. Various planning tools are used by manager to resolve
financial and other issues. Reporting under management accounting is vital activity to
communicate the complete and actual performance of organisation and any variations.
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Management accounting system and reporting is directly linked with organisational processes.
Lower level management though reporting provide assistance to top management in developing
and implementing various strategies as per organisation's objectives and goals. Planning tools is
also used by managers to support organisation with sustainable success.
13