Management Accounting Report: Innocent Drinks Case Study Analysis

This report provides a comprehensive overview of management accounting, focusing on systems, techniques, and planning tools. It begins with an introduction to management accounting and its importance in decision-making, particularly for companies like Innocent Drinks. The report explores various management accounting systems, including cost accounting, inventory management, job costing, and price optimization, detailing their benefits and essential requirements. It further examines management accounting reports such as job costing, inventory management, accounts receivable, and product profitability reports. The report also delves into cost calculation techniques, like marginal and absorption costing, and their application in producing financial documents. Planning tools for budgetary control are discussed, alongside an analysis of how organizations adapt management accounting systems to address financial challenges. The report concludes with an evaluation of planning tools and their effectiveness in accounting practices, offering valuable insights for business development and financial management.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1: Management Accounting Systems........................................................................................1
M1: Benefits of Management Accounting Systems....................................................................3
D1: Critical evaluation of management accounting systems and reports....................................3
P2: Management accounting reports............................................................................................3
TASK 2............................................................................................................................................5
P3: Calculation of costs...............................................................................................................5
M2: Application of various types of techniques and producing of financial documents............6
D2: Producing of financial reports for analysis and interpretation..............................................7
TASK 3............................................................................................................................................7
P4: Planning tools used for budgetary control.............................................................................7
M3: Analysis of use of planning tools.........................................................................................9
TASK 4............................................................................................................................................9
P5: Comparison of ways in which organizations adopt management accounting systems to
respond to financial problems......................................................................................................9
M4: Analysis of response to financial problems........................................................................11
D3: Evaluation of planning tools for accounting.......................................................................11
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Management Accounting is a process which is used in accounting and it enables the
managers to apply financial provisions in an effective manner so that they are able to achieve the
distinct goals and objectives of the organization through the taking of different types of short-
term and long-term decisions (Al-Mawali and et.al., 2018). It can be applied in the different
processes of the company which allows them to be able to bring more efficiency and
effectiveness. This allows them to raise the overall profitability level. This report is based on
Innocent Drinks. It is a company which provides smoothies and juices to the various customers
in the market. In this assignment, detailed focus will be made on management accounting
systems, a range of its techniques. Additionally, the use of planning tools and comparison of
ways in which firms use it to solve financial problems will be discussed as a part of this project.
TASK 1
P1: Management Accounting Systems
Management accounting is a tool which can be used to assist the management so that
they are able to achieve better planning and control in the organization (Management
Accounting, 2020). There are various systems which can be used in it. These are explained as
follows-
Cost accounting system- This is used by the organizations so that evaluation of various
types of costs can be done in an effective manner (Amir, Rehman and Khan, 2020). There is a
requirement for Cost Accountants to make the use of it so that they are able to achieve the
various types of goals and objectives. In Innocent Drinks, its use will allow the firm to be able to
segregate the costs and overheads. Also the use of appropriate techniques can be made so that
significant reduction can be made in them to facilitate maximization of profits.
Essential requirements-
 This system should allow the organizations must be able to analyse the overall
profitability level in an effective manner. This will help the management of Innocent
Drinks to be able to analyse the profits effectively and efficiently.
 This system must also enable the firms to be able to value their level of stock and ensure
cost control in the organizations. Thus in this way the managers of Innocent Drinks will
be able to identify the requirements appropriately and reduce the costs.
1

Inventory management system- In the organizations, this system is quite helpful for
ensuring that the level of stock is properly and effectively managed (Borker, 2016). With its
help, the managers can ensure that they are able to identify the way stock can be managed in an
appropriate manner. The management of Innocent Drinks therefore should make its use so that
they can identify the costs of managing inventory and apply different techniques to reduce them.
Essential requirements-
 This system should allow the managers to make the use of systems like LIFO, FIFO etc.
to be able to track and manage the movement of various types of items. In this way it can
help the management of Innocent Drinks.
 With the use of this system the management can ensure that they make their inventory
processes more better. The managers of Innocent Drinks will be benefited in this way.
Job costing system- For the organizations, the use of thus system is very helpful in
ensuring that the various job costs are identified properly (Coad, Jack and Kholeif, 2016). If the
managers make its use effectively and efficiently this will make sure that the job costs are
reduced and the profits are enhanced. Thus the managers of Innocent Drinks must use it to bring
more efficiency and effectiveness in the management of job orders.
Essential requirements-
 This system should help the management to ensure that detailed job costs are identified
effectively and efficiently. In this way, Innocent Drinks will be able to assess the job
costs in an effective manner.
 The use of this system should help the managers to be able to improve the overall job
performance. Thus this will benefit Innocent Drinks.
Price optimization system- The management makes the use of this system so that it is
able to use various types of models and assess the price to be used in an appropriate manner (Dai
and et.al., 2017). Thus here the managers of Innocent Drinks will be able to ensure that they
select the right price for earning higher-level profits in the future time period.
Essential requirements-
 This system have different types of mathematical models which can help the management
to be able to forecast the data in an appropriate manner. This can ensure that Innocent
Drinks is able to set right price.
2

 In this method, the managers must make sure that the historical is data collected. This
will help the management of Innocent Drinks to derive right conclusions and
recommendations.
M1: Benefits of Management Accounting Systems
Cost accounting system is useful for the proper estimation of the various types of costs in
the organization. Also it can help in reducing costs effectively. Inventory management system is
quite useful in proper tracking of inventory items. It can be used to manage the costs related to
stock management. Job costing system can help in tracking of job orders. It can be useful for the
reduction of costs incurred in job orders. Price optimization system is helpful in setting right
price for the products. Further it can be helpful in maximization of profits. Thus in this way these
systems are highly beneficial for the managers of Innocent Drinks.
D1: Critical evaluation of management accounting systems and reports
In the organizations, the managers are required to take proper steps so that they can
ensure their successful integration. This will enable them to make sure that they are able to attain
higher-level of efficiency and effectiveness. Thus in this way the management of Innocent
Drinks will be able to bring the required improvements in their different processes by removing
deficiencies and variations. Thus the targeted level of profits can be achieved by the management
in the future if the proper integration can be facilitated in the right manner.
P2: Management accounting reports
All the important information that provide help to managers in decision making process
are to be concluded in the management accounting report. For this different reports are to be
prepared.
Job Costing Report: It is a report that is prepared by experts in which all the relevant
information is recorded to calculate the cost of manufacturing job (Endenich and Trapp, 2020).
Allocation of cost on the basis of labour, materials and overhead for specific project are
mentioned under the report. Innocent Drinks prepare different varieties of drinking items
according to requirement of customers so proper reports are maintained by professionals that is
considered at the time of decision making activity. To evaluate production performance against
estimated standard, this report act as a important management tool. Information related to
number of orders, their specification, date of order, details of ordering party are to be recorded
3

by the organisation. It becomes beneficial to prepare as it supports in ascertaining cost of each
job.
Inventory Management Report: Under this all the stock related data related to specific
period of time are covered. Carrying cost and risk of overstock, under stock, obsolescence issues
etc. are reduces if proper management is done after considering the related report. It also covers
information related to different method like LIFO, FIFO and Weighted Average of stock
maintenance. Innocent drinks by maintaining and observing this report, set their reorder level
along with reorder quantity so the stock is easily available to consumers at every point of time.
The report covers reorder level information so innocent drinks can easily restock the product. It
becomes beneficial to prepare report as it help to increase sales also.
Accounts Receivable Report: The report covers all the details about debtors, bills
receivable, re discounting of bill etc. to reflect credit sales (Golyagina and Valuckas, 2016). By
preparing this report,to make evaluation of payment term with debtors and to made necessary
changes as per requirement. Average collection period information are also mentioned in the
report. Supporting documents such as invoices, vouchers, and negotiable instruments are also
attached in it. Innocent drinks prepare accounts receivable report and with the help of this
collection letters covering overdue balance are prepare for respective debtors in this way it help
organisation.
Product Profitability Report: This report reflects information related to revenue
generated from sales and also by reducing manufacturing cost of product (Kalkhouran, Nedaei
and Rasid, 2017). Separation of product that are making good profit and those are not set in
market for earning gain are done after analysation of report. Forecasting profitability for
introduce of new product in market is also become possible with deep analysis. Innocent drinks
prepare this report that help to sort their annual sales related to different product. The product
manager of Innocent drinks studied the report that helps in taking decision to choose best
profitable alternatives among available to increase the profit. Unnecessary cost can easily be
eliminated by the expert managers with the help of this report.
4

TASK 2
P3: Calculation of costs
5

Techniques used by Innocent Drinks to determine the profitability level-
Marginal costing- It is a technique through which the organizations can determine their
profitability level. It is helpful in making sure that the managers are able to determine the Break-
even point effectively and efficiently (Kariuki and Kamau, 2016) (Lay and Jusoh, 2017). It is a
point at which the firms neither make profits nor incur losses. Thus in this way the management
of Innocent Drinks will be able to use this technique in an appropriate manner.
Absorption costing- It is a method through which the various types of costs can be
determined in the organization. Thus by making its use the managers of Innocent Drinks will be
able to make sure that the profitability level can be determined. Further, the organization can also
ensure the proper treatment of overheads by making use of this technique.
M2: Application of various types of techniques and producing of financial documents
These techniques can be used by the managers so that they are able to make sure that they
can properly determine the level of profits which the organization is earning. By making their
use, the managers of Innocent Drinks will be able to estimate the profits but will also be able to
6

produce relevant financial documents which will identify the financial situation of the company.
In this way, the various types of short-term and long-term decisions can be taken by the
management which will be helpful for the organization in the future.
D2: Producing of financial reports for analysis and interpretation
With the appropriate use of these techniques, the management of Innocent Drinks can
prepare financial reports which can be quite useful for analysis and interpretation. Thus in this
way the company will be able to derive the conclusions and recommendations through which it
can decide the future course of action which it needs to take. Thus this helps the management to
be able to take the appropriate decisions in the future time period without facing different types
of problems and issues.
TASK 3
P4: Planning tools used for budgetary control
In the organizations, there is a requirement to make the use of various types of planning
tools for budgetary control (Szychta, 2018). An explanation of some of these tools is as follows-
Cash budget-
It is a budget through which the management can determine the cash receipts and
expenses during a particular period of time i.e. mostly a year (Tekathen, 2019). In Innocent
Drinks, it can be used so that the proper management of cash can be done.
Advantages-
 By making the use of this budget the management can ensure that a proper track record of
various types of cash receipts and expenses can be made in an effective manner. Thus in
this way it is able to provide an advantage to the managers of Innocent Drinks.
 In the organizations, this budget can be used so that the managers are able to identify the
approach to be adopted to ensure proper liquidity. For Innocent Drinks, this can be quite
beneficial for management of liquid assets in a proper manner.
Disadvantages-
 This budget is not useful for the firms because it can create an impact on the level of
flexibility. Thus in this way this can impact the operations of Innocent Drinks.
7

 Preparation of this budget requires the organizations to incur higher expenses and this can
create an impact on the financial position. Thus for Innocent Drinks this can lead towards
a disadvantage.
Operating budget-
In this budget, there is an estimation of operating revenues and expenses over a particular
period of time. By making its use the management of Innocent Drinks will be able to estimate the
working pattern of the organization in a much better manner.
Advantages-
 When this budget is used it can help a lot in the estimation of operating incomes and
expenses which can be quite useful for the companies. Thus this creates an advantage for
the managers of Innocent Drinks.
 For the firms, this budget can create an advantage because by making its use the
operating profit can be enhanced. For Innocent Drinks, this can lead towards an
advantage.
Disadvantages-
 In the organizations, the use of this budget can lead towards a disadvantage because it can
increase their overall level of expenses as preparing it is a costly affair. Thus in this way
it is not beneficial for the managers of Innocent Drinks.
 It is a time-consuming affair to prepare this budget. Thus in this way this creates a
disadvantage for the management of Innocent Drinks.
Master budget-
It is a budget which provides comprehensive and detailed information about the various
types of processes within the organization (Tucker and Lawson, 2016). In Innocent Drinks, it can
be very useful because by making its use the managers can ensure that they can take appropriate
decisions for the future.
Advantages-
 When this budget is used in the firms it can help the managers to get the desired
information related to the processes. In this way an advantage is created for Innocent
Drinks.
8

 By using this budget in the organizations the managers can ensure that they are able to
assess the problems and issues effectively and efficiently and solve them. This creates an
advantage for Innocent Drinks.
Disadvantages-
 Preparation of this budget requires the application of high-level of skills from the
managers. Thus it creates a disadvantage for Innocent Drinks.
 If the managers have to obtain specific information related to a department then they
cannot do so by making use of this budget. For Innocent Drinks, this can create a
disadvantage.
M3: Analysis of use of planning tools
Planning tools are quite useful for the companies as by making their use they can ensure
that they are able to create plans for short-term, medium-term and long-term. Thus in this way
Innocent Drinks can ensure that they are able to prepare strategies to be used in the future. They
can identify the various ways through which level of profits can be enhanced within the
organization.
TASK 4
P5: Comparison of ways in which organizations adopt management accounting systems to
respond to financial problems
Financial problem- It refers to a situation in which the organizations face issues in the
management of their funds (Wnuk-Pel, 2018). This can create financial difficulties for them.
Like other companies, Innocent Drinks also faces certain financial problems. These are explained
as follows-
 Higher costs in job orders- Innocent Drinks is facing higher costs in completing its job
orders. This is increasing its overall expenses leading to creation of an impact on the
profitability level.
 Low profits due to wrong price selection- In Innocent Drinks, the profits have
decreased because the firm has set wrong price for some of its products. This is leading
towards creation of an impact on its financial position.
Techniques for solving financial problems-
9

 KPIs- These are Key Performance Indicators. Their use is quite useful from the point of
view of the organizations because by making their use they can identify the increase in
the overall costs of job orders by facilitating comparison with the set standards. The
management of Innocent Drinks can make sure that they use them to solve the problem
related with job orders so as to maintain efficiency and effectiveness in the organization.
 Benchmarking- It refers to various types of standards which are set within the
organization. Performance can be measured effectively with the use of this technique. In
Innocent Drinks, it can be used so that the problem related with prices can be solved as
the managers can make use of this method to compare their existing prices with the set
standards to identify deviations and variances. They can set prices according to the set
industrial benchmarks and standards.
Financial Governance- It refers to the way financial data is managed within an
organization. It is quite essential so as to maintain financial discipline within the firm
(Yigitbasioglu, 2017). By making its use, the managers of Innocent Drinks can ensure that they
are able to solve the financial problems in an effective manner.
Comparison of organizations-
Basis Tesco Sainsbury's
Financial problem In Tesco, the overheads are not
being segregated in a proper
manner. This is increasing the
costs for the organization.
In Sainsbury's, stock items are
not being managed properly.
This is leading towards
problems and issues for the
organization as it is increasing
the maintenance costs of the
inventory.
Management accounting
system used
Cost Accounting System can
be used here to solve this
problem.
Inventory Management
System can be used here to
solve this problem.
Application of the system This system can be applied by
identifying the different types
of costs and making sure that
This system can be applied by
properly tracking the stock
items and ensuring that
10