Management Accounting Report: Innocent Drinks Ltd Case Study Analysis

This report provides a detailed analysis of management accounting practices, focusing on Innocent Drinks Ltd. It begins with an introduction to management accounting, its systems, and reporting methods, including inventory, cost, and performance reports. The report then delves into costing methods, comparing absorption and marginal costing through income statement preparation. Budgetary control and planning tools are examined, followed by an exploration of financial problems and potential solutions within the context of the company. The report covers various management accounting systems like inventory management, cost accounting, and price optimization, providing insights into their application. The income statements are prepared using absorption and marginal costing, and the report concludes with a summary of the key findings and recommendations for Innocent Drinks Ltd. The report also includes the calculation of contribution margin and working notes for the income statement, to provide a comprehensive overview of management accounting concepts and their practical application.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1. Management Accounting and its systems:.......................................................................1
P2. Management Accounting Reporting:...............................................................................3
TASK 2............................................................................................................................................4
P3. Preparation of income statement with Absorption and Marginal Costing:......................4
TASK 3............................................................................................................................................6
P4. Budgetary control and planning tools:.............................................................................6
TASK 4............................................................................................................................................8
P5. Financial problems and solutions:....................................................................................8
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Management accounting that is also known as managerial accounting is a branch of
accounting which provides financial content and material to the internal stakeholders for
effective decision making regarding daily activities. It is useful for internal operations which
enables completion of functions like planning, organizing, staffing, directing and controlling
(Schaltegger, Burritt and Petersen, 2017). The alternate name is managerial accounting and is
entirely different from financial accounting. The information is used in formulating policies and
planning within the organization. This assignment is about Innocent Drinks Ltd. Which
manufactures JOJO juice which is famous in UK. In this report, meaning of management
accounting systems, its types, conclusion, reporting systems and its kinds together with its
importance. Along with this, calculations of marginal and absorption costs, benefits and
limitations of budgetary planning tools, identification & explanation of money related issues.
TASK 1
P1. Management Accounting and its systems:
Managerial accounting can be defined as an overall process or set of activities that
identify, measure, accumulate, analyse, prepare, interpret and communicate the information that
can be utilised by the management to evaluate, plan and control the operations of an
establishment to ensure the accountability and appropriate use of its finds and resources. This
process of accounting also includes the preparation and presentation of accounting reports for
other stakeholders such as creditors, tax authorities, governmental regularities and shareholders.
It includes both the financial and non-financial data as well which are used in making decisions
by the managers.
Management accounting system is works as an outline or structure that comprises number
of techniques, tools and methods applied to do evaluation of operations of entities. It has number
of systems which have been elaborated below:
Inventory management system: This system is used to maintain by overseeing finished
goods and raw materials from the point of supply chain to the final delivery to customers
(Takeda and Boyns, 2014). It performs number of functions which are necessary for tracking the
availability of stock within the organization. With the use of this, Innocent Drinks can control
costs related with inventory for creating positive outcomes. There are many challenges that are
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faced by a manufacturing company in keeping details regarding existing stock, raw materials,
suppliers etc. Hence, this system is developed in a way in which the difficulties may be removed.
This system aids in managing centralised track of every assets by giving their specifications.
Cost accounting system: This accounting system is a process followed by the
management to ascertain cost of each product that is being produced. The other name of the
system is product costing system that assists an organization to manage and have better control
on the costs associated with manufacturing goods. It has two branches viz. Job costing and
process costing. Innocent Drinks can use this to estimate actual costs which have been incurred
in producing its products (Bryer, 2013). It is also used in profitability analysis by estimating
correct cost of the product. The information in this assist an organization to determine final value
of raw material, degree of completion and stock of saleable goods. which are reflected in
financial statement.
Price Optimization system: This system is about assessing the appropriate and right
prices which should be invest in products or services of a company. It helps an organization in
determining different prices for variety of goods by considering demand and willingness of
customers. It helps in estimating price of products at different levels of demand which is the
combined with costs and inventory levels for better outcomes. There is a particular process
which is followed in this system. Hence, Innocent Drinks can use this to fix right price of the
juices according to quality and composition so that sales can be increased.
Job Costing system: This system includes procedure of cumulative data and information
regarding costs attributed to a particular service task or manufacturing process. Job costing
system is useful in assessing cost of a specific product or service and provide chance to measure
it with the standard in order to find the gap. This information is provided to customers in order to
receive the payment from them. This system is fruitful in production of heterogeneous products
having characteristics different from each other and there is a particular cost for every item.
Costs are categorised into direct material, direct labour and overhead which are used to find
actual value of the goods (Maskell, Baggaley and Grasso, 2017).
From the matter presented above, it can be concluded that accounting method used by the
internal management is a broad process that includes numerous activities for helping the
managers in making decisions to be implemented within the organization. Furthermore, there are
different kinds of systems having their individual utility. Hence, one or more than that can be
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chosen by entities for having better control on aspects related with manufacturing of products or
services.
P2. Management Accounting Reporting:
Reporting is important to have overall view of performance of the company for making
better policies and strategies. Management accounting reporting helps the entities in having a
clear picture of the business. It is presented to internal management of the enterprise to make
impressive decisions so that goals & objectives can be attained. It is prepared as a document
which can be used for making long as well as short term goals. Some the reports of managerial
accounting are mentioned as below:
Inventory reporting system: This report is prepared to give details about stock or
inventory of the company (Endenich, 2014). It shows the raw material available during holding
period which is used in taking better decisions by managers. The matters which are taken into
this are holding period, storage cost together with other important features. Furthermore, the
methods which may be used in this for valuation are LIFO method (Last in First Out), FIFO
method (First in First out) and average weighted value method. Each of these have their
individual merits and demerits together with utility. Inventory is an essential part of an
organization which requires continuous overseeing and recording the results in report. Innocent
Drinks can include the information regarding its current stock as well as the time for
replenishment. Apart from this, with the use of methods as discussed above, it can value the
stock for making better decisions.
Cost accounting report: The report in cost accounting is about the element of cost
involved in producing per unit. Some of the components covered in this are labour cost, material
cost, variable manufacturing cost, standing cost etc. It is necessary to ascertain cost in order to
have better control and to minimise it through effective strategies and approaches. It can be
beneficial in adjusting costs based on the findings in the report (Holsapple, ed., 2013). The
information is related with the costs of products, processes, projects for helping the manager to
have better control and make decisions which will produce favourable outcomes. Innocent
Drinks can be benefited with this report in determining the costs and differentiate them into
variable and fixed. The overall impact would be such that unnecessary wastage of costs can be
reduced.
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Performance report system: Innocent Drinks can use this report to examine the
performance of each employees with the standards in order to find any variances. It is required to
enhance the efficiency and potential of the establishment. It helps in making decision regarding
appraisals of employees based on the review of their performance. Also, it helps in making
improved policies and programmes for people working within the organization for boosting their
morale and reward them. This can make them work more hard and with full efficiency. With this
report, Innocent Drinks can focus on each of its employee and reward them on the basis of final
performance. It is also useful in providing training or development sessions to the staff for
increasing their efficiency.
Job costing report: It a tool of which is helps the company to track on-going tasks or
projects. It is useful in identifying problems or defaults during a particular job which are
evaluated for reducing them. It helps the management for assessing the issues in a project during
and once it is completed. It can be said that, it is a continuous process which examine errors
followed by detail evaluation for knowing the reasons. This report can benefit Innocent Drinks to
find the mistakes in manufacturing process for removing them in order to increase the efficiency.
TASK 2
P3. Preparation of income statement with Absorption and Marginal Costing:
Absorption Costing: This technique of management accounting, all the costs which are
associated with production, relevant as well as relevant costs are taking into account. Thus, fixed
costs along with historical costs are included for determining the profit and used in preparing
income statement of the entity (Windolph and Moeller, 2012).
Marginal costing: In this, variable costs are covered and included while fixed cost of
production are written off completely as they are treated as period costs. The cost which are
taken into account are called relevant costs. Contribution is used to write off fixed cost which
definitely has effect on the final result.
Income statement by absorption costing method-
Particulars November (£) December (£)
Sales 50 500000 600000
Less: Cost of sales -340000 -408000
Gross profit 160000 192000
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Variable selling overheads (10% sale
value) 10000*5 -50000 -9000
Fixed selling expenses -14000 -60000
Fixed Administration Overhead -26000 -14000
Under/overabsorbed prod expenses 9000 -26000
Net Profit 79000 83000
Cost of good sold November December
Opeining inventory - 68000
Sales units 340000 408000
(-) Closing inventory -68000 -
272000 476000
Income statement
Particulars November
(£)
December
(£)
Sales 50 500000 600000
Less: Cost of sales
Direct Material Costs 18 -180000 -216000
Direct Labour costs 4 -40000 -48000
Variable Production Overheads 3 -30000 -36000
Contribution 250000 300000
Less:
Variable selling overheads (10% sale
value) 10000*5 -50000 -60000
Fixed selling expenses -14000 -14000
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Fixed Administration Overhead -26000 -26000
Fixed production overheads -99000 -99000
Net Profit 61000 101000
Working notes -
1) Variable cost
DM £18
DL (W) £4
VPO £3
£25
2) Variable selling overhead 10% of sales
Selling price £50
Variable selling £5
3) Calculate contribution per unit for month of November
Variable cost £25
Selling cost (+) £5
Total variable cost £30
Contribution
Selling price £ 50
Total variable cost (-) £30
£20
4) Calculation of opening stock
November (units) December (units)
Sales 10,000 Sales 12000
Production (-) 12000 Production (-) 10,000
Closing stock 2000 Opening stock 2000
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Opening stock – 2000* £25 = £50,000 – closing stock
TASK 3
P4. Budgetary control and planning tools:
Budget: Budget is described as a formal statement in which revenue and expenses that
can be earned or incurred over a particular future period are estimated. It is used as an internal
tool by the management for making appropriate budget for different requirements (Cleary, 2015).
Furthermore, it can be prepared for short as well as long term depending on the targets to be
achieved. It is significant for companies which are used as standards against which the actual
outcomes are measured for determining variances. This makes it effective for the organizations
to evaluate and make modifications in the existing budgets so that resources can be utilised for
increasing the performance.
Budgetary control: It is about the utilisation of limited resources in an optimal way in
which managers analyse and manage expenditures and functions in a specified time. In this,
goals are decided and budgets are prepared accordingly which are used for comparing the actual
results in order to evaluate the performance. In this, budgets are prepared along with actual
outcomes and budgeted figures/expected results for identifying the difference. It has number of
designing methods which may be followed by managerial accountant of Innocent Drinks to
control all the processes and their related costs for getting desired results. The tools have been
explained below:
Sales budget: As the name suggest, it is connected with the budget for sales of products
or services being produced by organization (Bagautdinova, Kundakchyan and Malakhov, 2013).
It refers to estimation of sales for future financial period. Also, the income generated from the
sales is included in this. It is prepared on the basis of prevailing economic conditions,
competition in marketplace, production capacity, etc. Every organization should forecast the
demand of goods or services before deciding sales budget. Furthermore, past records are also
used in developing current budget. The pros and cons of sales budget are described as under:
Advantages: It assists the establishment to attain sales targets expeditiously leading to
enhanced productivity and performance.
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Disadvantages: It is a time consuming process which requires efforts and techniques to
prepare it.
Master budget: It is the large data regarding different functional units of a company. It
can be made on monthly or quarterly basis. It is considered as central planning tool to manage all
the activities of an organization (Nørreklit, 2014). It works as strategic plan for future situations
of the company with regard to every areas such as purchase, production, sales, finance, human
resource etc. The individual budgets of each of such departments are consolidated at one place.
The benefits and limitations of master budget are provided under:
Advantages: It creates a bird's eye view of the business in which the budget belonging to
every department is added. Same goes with the allocation of budgets.
Disadvantages: The collective sum does not show the specific source or area for which it
has been prepared.
Capital budget: This budget consists of two terms viz. Capital and budget, where former
is categorised into receipts and payment reflecting loans, borrowings, and purchase of assets,
machineries, shares etc., respectively. Hence, this budget is prepared for making investment or
spend the financial resources for making purchase. It is used to improve the profitability of the
entire organization. Some of the merits and demerits are mentioned below:
Advantages: Investment is a huge and prime activity through which a company earns
income. Hence, it assists in making appropriate decisions.
Disadvantages: It is a complex task which requires technicality and use of skills or
knowledge.
Incremental budget: Additive budget is generated with the help of previous years budgets
or by considering the actual performance in which amounts are added for making it a new budget
(Ball, Grubnic and Birchall, 2014). In order words, adjustments are made to current or existing
budget for determining new budget. It is based on assumptions which can also make the entities
to reduce for getting desired budget which is suitable for the business. It has number of benefits
and limitations which are discussed below:
Advantages: It is easy to implement as it does not require extensive analysis. Hence, the
level of complexity is low in this.
Disadvantages: If more funds are added to existing, then the spending of each
department will also be increased.
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TASK 4
P5. Financial problems and solutions:
Financial problems: Financial issues are the circumstances due to that distressful
situations within the organization can be created. These are the difficulties or hard times which
affect the business adversely leaving an impact on the performance or efficiency of the entity.
There can be number of factors viz. Internal and external (Kumarasiri and Jubb, 2016). These
require quick solution for mitigating the negative effect. Some examples of financial difficulties
are delayed payment of bills, missed payments, increasing debt from credit cards or loans, and
many more such problems. The major financial problems faced by Innocent Drinks at current
scenario are as follows:
Unpredicted expenses: These are the funds or expenses which have not been made part of
the budget but need at the time of contingencies. The events may occur without any prior
intention hence, it can result in huge financial loss to the company. It may be due to blockage or
breakdown of machineries, technical issues, changes and many more. If the company has limited
budget then unforeseen circumstances can cause substantial problems for the business.
Trade cycle: Economic conditions and business cycle cannot remain stable and there are
always fluctuations in this which affect the working of organizations in every industry. The main
issue and downfall come when there is recession causing loss to companies. These are
unavoidable and every organization should have effective strategies and sufficient income in
order to survive these situations (Grabner and Moers, 2013).
In order to evaluate these problems for finding appropriate solutions which can help the
management to resolve the issues, tools and techniques are there which can be used. Some of
these have bee elaborated below:
Benchmarking: It is the process which is used by corporations to analyse the
performance. The entity which is successful and performs the best in the industry is considered
the standard against which the operations of the company are evaluated to find an outcome.
Some of the elements which are considered in this are cost of production, quality of the products
and time consumption. It helps the administration in making better decisions.
KPI (Key Performance Indicator): KPI is a method that provides assistance to
management for reviewing the performance of the whole undertaking. In this way, it can
determine whether it has achieved its goals or not. It can be used by organizations in finding out
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the unit which is profit making so as to focus on them. This also give chance to the management
for making appropriate decisions (Siverbo, 2014).
A comparison regarding financial problems in Innocent Drinks with Coco Cola is as follows:
Basis Innocent Drinks Coco Cola
Financial problems It is currently facing the
problems of maintaining
expenses as the expenditure
exceeds the income. It should
stop spending on non-profit
making and non-value added
areas as soon as possible.
The main issue in this is to
manage the stock effectively as
it is a huge company
conducting business at
international level. The
managers may apply
appropriate management
accounting system.
Management accounting
system
When the situation arise in
which the expenditure started
to cross the available income
then it can overcome through
the system of cost accounting.
This will allow it to reduce
cost with better control
(Morden, 2016).
The issue in maintaining the
stock in insufficient way is
huge and should be resolved
for which Coco Cola can use
the system of stock
management which will help it
to manage the stock.
CONCLUSION
With the assistance of above mentioned description, it can be concluded that managerial
accounting functions are extremely significant for handling the internal financial and non-
financial regular operations of an establishment. Various accounting tools provided by the
managerial accounting system and reports such as job costing system, price optimisation system,
accounts ageing reports, etc. to derive the required information and potential from the entity.
Assorted financial tools such as budgets and evaluation techniques like KPI and
benchmarking help the administration in identifying and analysing financial problems that
affects the day to day business as well as profitability of the establishment. It also provides
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