Management Accounting Systems, Cost Analysis, and Planning Tools

This report provides a comprehensive overview of management accounting, focusing on its importance for business operations, particularly within a small-scale UK company, Airdri, a manufacturer of luxury hand dryers. The report delves into various management accounting systems, including cost accounting, inventory management, price optimization, and job costing, detailing their benefits and applications. It explores different reporting methods such as performance reports, inventory management reports, accounts receivable reports, and budget reports. The report also examines appropriate cost analysis techniques, like marginal costing, and the significance of these techniques in determining product pricing and profitability. Furthermore, it discusses the advantages and disadvantages of different planning tools for budgetary control, emphasizing their role in forecasting, estimating budgets, and addressing financial problems. Overall, the report highlights how management accounting systems and tools facilitate effective decision-making, cost control, and financial planning within an organization.

Management accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK1.............................................................................................................................................1
P1. Different types of management accounting system..............................................................1
P2. Different method used for management accounting reporting.............................................2
M1 Benefits of different management accounting system..........................................................4
D1 Combination of management accounting system and its reports in organisational
operation......................................................................................................................................5
TASK 2 ...........................................................................................................................................5
P3. Appropriate techniques of cost analysis..............................................................................5
M2 Range of management accounting techniques and produce appropriate financial reporting
documents...................................................................................................................................7
D2 Interpret data for a range of business activity.......................................................................8
TASK 3............................................................................................................................................8
P4 Advantages and disadvantages of different types of planning tools for budgetary control...8
M3 Use of planning tools while forecasting and estimating budgets.......................................10
TASK 4..........................................................................................................................................11
P5 Financial problem and accounting system to responses......................................................11
M4 How planning tools help to deal financial problems..........................................................12
D3 Planning tools for solving financial issues..........................................................................12
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................14

INTRODUCTION
Management accounting refers to the process of identifying, classifying, collecting
crucial information related to business activity and reporting these information in accounting
statements that is useful for manger to make effective decision. System of management
accounting are helpful that help in future planning and assets to compare and improve
performance of company (Dražić Lutilsky and Dragija, 2012). Management accounting also help
in measuring various aspects such as investments decision or conclusion to buy or produce a
product. It help management of companies to collect, monitors, identify and analyse information
that assist to form policies and strategies which help in achievement of financial goal. It also help
companies to resolve various financial problem that may arise in the organisation. So, to
understand the importance of management accounting Airdri is selected. It produces luxury hand
dryers which was founded in 1974 and one of the small scale company in UK.
The main aim of this project is understand the importance of management accounting
and its system to the chosen organisation. Manager of companies applies various management
system and report to to maintain stability in company. They adopts various costing method to
calculate net profit and different planning tool which are helpful in maintaining budgets. Project
focus on different accounting approaches to overcome problem of finance within Airdi.
TASK1
P1. Different types of management accounting system.
The practices of collecting important financial information and developing reports by
internal manager that help them in decision making and identifying different approaches to run
company more efficiently is known as management accounting. There are basically various type
of management accounting system that help companies to improve performance, planned for
future and control its operation. It also assist to forecast different future situation with the help of
past experience and develop short and long term financial strategies. In Airdri, manager follows
different system of management accounting to evaluate and analyse information related to cost
performance, inventory and job (Fisher and Krumwiede, 2012). Theses system are described
below.
Cost accounting system: According to this system companies are can analyse, compare
and improve its profitability by figuring actual cost of their product. This system help

management to evaluate actual cost which is involved in the production of product. Through cost
accounting system manager can compare and control its cost that is spend on producing a
product. Airdri is a manufacture of luxury hand dryer that require lot of amount for production
therefore this system is useful for company. Cost accounting system has mainly three type of
costing approaches such as actual, standard and normal costing. In Airdri, manager uses this
system to record all cost incurred in production of hand dryer. This help them to known actual
information about cost expenses and they control their cost.
Inventory management system: In this system, manager determine the actual data of
stock lying in their warehouse. Manager keep record of inventory that is in transit, storage or in
production process. Stock lies within company in three primary form that is raw material, goods
in progress and finished good. In Airdri, manager uses this system to record the total product
present in there production departments. They also manage and record the total flow of raw
material and finished hand dryer with this system. Some important techniques of inventory
management system to maintain effective report of their inventory like perpetual and periodic
inventory, FIFO, LIFO and JIT.
Price optimization system: This system help companies to find best price of product
that will not affect their customer, or the increasing price against the customer temperament to
pay. Companies uses the formula of price optimisation that depends on total demand of their
product, level of competition and the cost of manufacturing its goods. In Airdri, management
uses this system to ascertain the best prices that will meet its main objective of maximising
functional profit. Manager uses different data in price optimisation that includes operating cost,
inventory, historic price and sales.
Job costing system: It help in calculating and examining cost of individual job which is
concerned in various operation activity followed in the organisation. Job order costing system is
used only when the produce product are sufficiently different from each other. Management of
Airdri applies this system to examine direct and indirect individual job cost that is incurred in
production of hand dryer. This help them reduce the cost of individual if required and increase
the efficiency of their business operation (Johnson, 2013).
P2. Different method used for management accounting reporting.
Reports are crucial for every organisation as it shows the actual overview of an
organisation and its overall performance for an accounting year. Accounting repost are

systematic record of each financial transaction that are useful for internal manager as these report
focused on segments of business. By segmenting, manager get the accurate detail about
operation and examine the drivers of the company. For example, with the help of report manager
analyse about the performing or marketing department for a certain period or profit obtain from
sales.
Accounting report are further useful for shareholder and other creditor to know about the
financial position about company. So report are prepared by internal manager at end of every
quarter to have the overall view about the company business. Management accounting reports
are important for small enterprises like Airdri, that help in making important strategies to reduce
cost and maximise profit. Manager of Airdri prepare different type of report to ease decision
making that are explained below:
Performance report: These report are elaborated statements of various activity that help
to measure the result to ascertain the success of those activity over a specific period of time. It
basically address the result of an activity or the work performed by an individual. The
performance report compare the actual performance result to the budges or standard performance
as well as the deviation between the two illustration. In Airdri manager uses these report to
compare the performance of employee. Such as every employer are provided with annual
performance report comprising detail information of their activity performed during year versus
their original action plan. Report also helpful in improving performance of worker if required.
Inventory management report: These report provide the accurate detail information
about stock available within an organisation. Inventory report assist to strong the supply chain.
Improve data on stock, labour employed and other overheads involved in production process
(JOSHI and et. al, 2011). In Airdri, manager form stock report to analyse miscellaneous
distribution transmission so that supply of company could be improved. With the help of these
report manager maintain total availability of stock, goods in transit and track total finished hand
dryer in the warehouses that help in proper flow of product.
Account receivable report: One of the important report for company as it record the
descriptive information of those buyer who have purchased goods on credit. This report help
manager to ascertain the total outstanding amount from debtors on the basis of owned date.
Manager of Airdri, maintain these report to calculate exact amount that is to be recovered from

market and estimate the total earning from these credit. It also help in improving credit policy
and increase the efficiency of collection process of company.
Budgets reports: These are crucial report for company as it aids manager to identify and
control expenses during an accounting year. Manager evaluate the total cost during a year so that
they could estimate budgets expenses for the whole year and ascertain the point to reduce
additional cost. Management of company maintain cost or expenses budgeted report that help
them to control extra expenditure incurred in production of hand dryer. This budgets report also
useful to make effective strategies about future expenses that increases the efficiency of
production activity of Airdri. With the help of these report manager forecast about the financial
growth and revenue generation capacity of company.
M1 Benefits of different management accounting system.
System Benefits
Cost accounting system:  This system aid management so that they can analyse
most profitable products for Airdri.
 It help to track and record direct costs that are involved
in producing a product.
Inventory management
system:
 This system help to increase efficiency and profitability
of company by maintaining stock.
 It gives the detail transparent information of stock
available in warehouse and finished good.
Job costing system:
Price optimization system:
 This system help in determining the profitability of
individual job involve in production process (Kuula,
Putkiranta and Toivanen, 2012).
 It provides detailed information of cost like labour and
overheads that is incurred on different jobs with Airdri.
 It helps managers to ascertain faithful prices for
products by furnish the accurate data of cost.
 This system is crucial for Airdri as manager are
endeavour to expand its bottom line.

D1 Combination of management accounting system and its reports in organisational operation.
Accounting system and different report plays a crucial role in every organisation to grow
and expand their business. These system and report aid to record, measure and compare actual
performance of company and employee working within an organisation. Various management
accounting report contains detail information of cost, outstanding amount, financial position of
business firm with an accounting year. Performance report gives detail information about actual
performance of employee whereas inventory management report provides the exact information
of total stock available within Airdri. Account receivable report are helpful for manager as it
gives detail content related to total amount outstanding from debtors and budget report help to
record and control total expenditure happen in Airdri.
TASK 2
P3. Appropriate techniques of cost analysis.
Cost is defined as an amount paid by buyer to seller in order to get or purchase a
particular product. In addition, business firm define cost as a monetary value i.e. being collected
by seller from buyer by selling their goods and services. Cost by seller includes total cost of
material, labour and other additional overheads. It is also observed that all expenses are treated
as cost but all cost are not considered as expenses because some cost are incurred in profit
making activity. Manager of every company desire to earn maximum profit so they fix best price
of their product that can achieve total cost of production (Kapić, 2014). They determine the
suitable cost of product and services that are offered for sale so company could generate
maximum profit. As customer are attracted toward faithful prices so manager should manage all
type of direct and indirect cost in order to earn more revenue. Airdri managers fix cost or selling
prices for the hand dryer that may attract more customers and aid to acquire more market share.
Cost of products includes different direct and indirect expenses. Following techniques are
followed by managers of chosen company to calculate their net profits:
Marginal costing: It is refers to the total cost that in incurred in producing one additional
unit of product. Marginal cost are analysed and measured to determine the best point where
business entity can achieve maximum profit (Monroy, Nasiri and Peláez, 2014). Marginal
costing is a coding system where variable cost are charged to cost units and the fixed cost scene
to the applicable period is carved off in full against the input for that period. This costing is also

known as variable costing also only variable cost are assembled as cost per units is determined
depending upon variable cost
Absorption costing: This method of costing is related to expensing of total cost that is
connected with production of a particular product and commonly known as full costing method.
It includes direct cost such as wages or bonus for worker involved in production, raw material
used in producing goods and all other overheads cost like bills, additional utility bills.
Absorption costing method includes everything which is a direct cost involved in producing a
product as the cost base. The main aim of this system is to ensure that all cost incurred in
production of product must be recovered by fixed selling price of those goods and services. It
includes the following components such as prime cost, indirect overheads, selling and
distribution costs of Airdri.
Break even analysis: It is considered to be one of the crucial point at which every cost
and expenses needed to provide equal outcome for company. It help Airdri to determine a point
where new goods are more beneficial or profitable. Manager of company use this tool to

determine total number of hand dryer Airdri is going to sell so that lest cost are covered. Break
even is a point at which total expenses are equal to total revenue (Moser, 2012).
A. Total number of product sold
Sales per unit 40
Variable costs VC = DM + DL 28
Contribution 12
Fixed costs 6000
BEP in units 500
b. Calculation of breakeven point in accordance to sales revenue
Sales per unit 40
Variable costs VC = DM + DL 28
Contribution 12
Fixed costs 6000
Profit volume ratio PVR = Contribution / sales * 100 30.00%
BEP in sales 20000
c. Calculation for getting desire profit of 10,000
Profit 10000
Fixed costs 6000
Contribution 16000
Contribution per unit 12
Sales 1333.33
Margin of safety: This is a part of Break even analysis that indicate the total amount of
sales which are above break even point. Margin of safety is termed as more reliable ways to
provide effective structure as an end sales volume which would be depend as appropriate
business range to overall break even analysis.
d. The margin of safety, if 800 products are sold
Actual sales in units 800
Break even sales in units 500
Margin of safety 37.5
M2 Range of management accounting techniques and produce appropriate financial reporting
documents
Management accounting techniques are useful in calculating net profit margin and the
help in increasing efficiency of company. Management of Airdri, applies various costing method

to calculated net profit for accounting year like marginal and absorption costing method. There
are important tool such as historical tool and marginal tool used in these techniques of costing
that are explained below:
Marginal tool: This tool helps to determine the total profit that company is going to
earned determining overall marginal or variable cost involved in production of product. Manager
of Airdri adopts this tool to ascertain the variable cost and net profit that absorb fixed cost.
Historical tool : It is related to the recording of asset in balance sheet and other statement
on the date of purchase so that management ascertain exact amount of depreciation.
D2 Interpret data for a range of business activity.
From above calculation, it is observed that management of Airdri tries to make best
result from marginal and absorption costing techniques. As a result, net profit margin generated
from marginal costing is $17500 and by absorption costing the profit is $15675. It can be said
that marginal costing method gives $1865 more net profit margin from absorption costing so it is
clear that marginal costing is more benefited for Airdri to calculate net profit. Break-even point
of Airdri has been asceratined by selling 500 units and BEP sales are $6000 in an accounting
year. If company wants a desired profit of $10000 than total units then which is to be sold is
1333.33 and margin of safety is 37.5.
TASK 3
P4 Advantages and disadvantages of different types of planning tools for budgetary control.
Budget act as blueprint of any organisation in concern with its total operation in the form
of monetary terms. Budget act as an operational plan usually expressed in financial terms which
includes expected income and expenditure (Öker and Özyapici, 2013). Budget control helps in
clearly identification of cost areas that is controllable and uncontrollable. Airdri uses budget
reports as this reports helps them to review any problem that is relevant to finance and facilitates
effective solution.
BUDGET CONTROL
Budgeting control is a continuous process that allows to evaluate comparison between
actual results with the budgeted results. Budget controlling is crucial for Airdri to control an
individual activities and meet the objectives of policies of the organisation. The main
characteristics of budgetary control are as follows:

 Budgetary control helps in settlement of budgets for each section and department of the
organisation.
 It allows to record and control the actual performance of each section.
 Budgetary control helps in continuous comparison evaluation of budgeted and actual
performance.
 It also enables to analyse the reasons of deviations.
In order to establish or install a budget control system Airdri emphasise on few important
steps which includes firstly, establishment of budget centres. Secondly, it focus on preparation of
an organisation chart and budget manual. Thirdly, organisation focused on requirement and
appointment of budget officer along with this budget committee is formed. Then at last,
determination of different level of activities takes place.
Budget forecasting tools: With the help of company's budget, it is possible for the
executives of Airdri to create future budget forecasting plans to lookout outside in order to gain
more opportunities in the market for extending its business. Some of the budgeting forecasting
tools adopted by Airdri are trend analysis, forecasting sales pattern, seasonal forecasting on
market demand and focusing on past achievements. Trend analysis allows to find out trends that
is going on in the market and is in demand of customers. Airdri executives evaluate trend
analysis reports and make alteration in the budget for future product development investments.
Sales patterns helps Airdri to forecast the budget as they are able alter on those products budgets
which are better than the others products (Ruiz-de-Arbulo-Lopez, Fortuny-Santos and
Cuatrecasas-Arbós, 2013).
Advantages of budget forecasting
 It provide clear flow of information to take budgeting action in future.
 Helps to act and invest on those products which are in trend and demand.
Disadvantage of budget forecasting
 Budget forecasting is not applicable in those case where communication channels are
blocked between top level management and low level management.
Cash Budgets: These types of budgets are prepared by manager of companies in order to
maintain proper record of all relevant cash transaction happen during an accounting year. Cash
Budget are prepared to control expenses and save suitable amount to maintain profit that is the