Management Accounting Report: System and Cost Analysis for Airdri Ltd

This report provides a detailed analysis of management accounting systems, focusing on the case study of Airdri Ltd, a hand dryer manufacturer. It begins with an introduction to management accounting, its role in decision-making, and its evolution. The report then delves into Task 1, exploring management accounting systems, their origins, principles, and the differences between management and financial accounting. It highlights the importance of good information systems, including characteristics like relevance, accuracy, and understandability. The report also discusses the inventory management system, job costing system, cost accounting system, and price optimization system used by Airdri Ltd. Task 2 focuses on different management accounting reporting methods, including inventory management, cost accounting, and performance reports. Task 3 examines planning tools used for budgetary control, discussing their advantages and disadvantages. Finally, Task 4 compares how organizations adapt management accounting systems to address financial problems. The report concludes with a summary of the findings and references used.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1. Management accounting systems.........................................................................................1
P2 Different methods used in management accounting reporting..............................................4
TASK 2............................................................................................................................................5
P3 Calculations of costs using appropriate techniques to prepare income statement.................5
Last in first out (LIFO)..................................................................................................................10
TASK 3..........................................................................................................................................11
P4 Advantage and disadvantage of different types of planning tools used for budgetary control
...................................................................................................................................................11
TASK 4..........................................................................................................................................15
P5 Compare how organisations are adapting management accounting systems to respond to
financial problems.....................................................................................................................15
CONCLUSION..............................................................................................................................17
REFERENCES..............................................................................................................................18
REFERENCES..............................................................................................................................20

INTRODUCTION
Management accounting is considered as a way of presenting accounting information to
managers for better decision making and strategic planning. The main purpose of Management
accounting is to give true and fair views for increasing the profits in a firm (Senftlechner and
Hiebl, 2015). To understand the importance of Management Accounting Equilibrium assets
management firm has been taken that provides consultants services to different companies and
help to make correct business decision. This report is assessing of their clients which is Airdri
Ltd. This company manufactures hand dryers and is based in UK. This report will cover different
topics like management accounting system, reports and planning tools that can be used to control
the budget in a company. Moreover, report will discuss about financial problem which can occur
in an organization while using system.
TASK 1
P1. Management accounting systems
Management accounting means to present the accounting information for formulating the
policies which is adopted by management and it assist day to day activities. In other words, it
helps managers to perform all functions containing planning, organising, directing, staffing and
controlling (Tucker and Lowe, 2014).
According to J. Batty: “Management accounting is the wider term that is used to define
the accounting methods, systems and techniques which, with high knowledge and ability, help
management in its task of profit increasing and decreasing losses (Definition of management
accounting 2019).”
Origin and evolution of management accounting: It was first evolved with technique
of cost accounting while the earlier industrial revolution. It was originated after financial
accounting that can trace its origin to its stewardship role in various trading ventures.
Role of management accounting: It plays a vital role in every business enterprise such
as decision maker, profit maximization, cost accounting, job order costing and inventory
management. Moreover, it helps to provide right direction within organisation by using
management accounting (Englund and Gerdin, 2014).
Principles of management accounting: It involves different types of principles which is
defined below:
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Influence: It includes an influencing way that help to attract the customers like
communication.
Relevance: This means the information which is provided by managers or company
should be useful, and add value to them.
Value: This means that the management accounting must help managers and decision
makers to solve their problems, and to provide benefits. It should be analysed in order to make
decision.
Trust: Management accounting must provide reports which are the result of information
processing. Those reports must be reliable, because of them depend the future of several
stakeholders, and of the same business. It involves stewardship that builds trust (Smith, 2017).
Difference between management accounting and financial accounting
Management accounting Financial accounting
It is used for internal and external management
that help to make decisions.
It is used only for external use.
It does not need to follow GAAP or any other
international standards.
It need to follow Generally Accepted
accounting principles and other standards
applicable as well.
It involves specialized data about the products
of the organisation.
It involves standard financial statements such
as balance sheet, income statement and cash
flow statement.
Management accounting system: It is a set of methods, and logical procedures or
processes used for identify business opportunities, or business risks, and make decisions about
the best source and use of funds within an organization. It is helpful for all company by
maintaining the proper records and transaction in entire company. Management accounting
comprehends various methods and concepts which are necessary for set up a business with
controlling the business activities (Lindholm, Laine and Suomala, 2017). It is important to
integrate within organisation as it help to evaluate the data and interpretation in order to make
profitable company. Moreover, it gives financial and non-financial information that help to take
right action. Such as Airdri is the hand drier manufacturer company which is using different
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types of management accounting system for making right business decision. These systems are
important to be integrated in an organisation as it result in effective management of
organisational functions.
Presenting financial information
Characteristics of good information system: Management accounting system should
process relevant, accurate and up to date information in order to provide business reports which
can be used to make decisions about the best source and use of funds for that business. Up to
date system help to accept the challenges and provide better solution. It is needed for
organisation that system should be accurate and reliable that help to make effective business
decision (Badolato, Donelson and Ege, 2014).
Information is presented must be understandable: It is very important for all
organization that information which is provided by company must be easy to be comprehended,
because it help to take correct action further. If managers cannot understand the information,
then they cannot make right business decision. Moreover, it helps to increase the productivity
such as information helps to understand the needs of organisation and make efforts to fill.
The different types of management accounting system are follows by Airdri company that are:
Inventory management system: This is a system which is used to keeping records of
inventory like raw material, finished goods or unfinished goods. This is mainly used in
manufacturing company to maintain the records of stock which are available in an organization.
It helps in stock forecasting, automatic reordering, materials tracking inventory alerts and many
more for keeping records within organization. It is essential required in Airdri as it help to keep
and maintain the records of inventory of their products. The manager of Airdri track the
inventory and make further decision for placing next order. It considers various method to use
the stock like:
LIFO: It means last in first out which can be used by company to sell the products firstly.
FIFO: It mean use the earlier purchased goods which is used for manufacturing. first in
first out that can be used by company to sell the first ordered products.
Weighted average: It means combination of price and units produced to sell the products
within organization.
Airdri is using FIFO method that helps in production of products. This is required for all
enterprise to get the correct information of products and keep safe from damages.
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Benefits: This system help to track the inventory and proper records which is used by
business entity. Its main functionality is Airdri can maintain systematic records of stock and can
place order accordingly. The main benefit is that this system helps the company to control its
stocks and to avoid wastes in production, losses by other reasons such as thefts. On the other
hand, the inventory system make possible for the company to purchase raw materials, and other
manufacturing resources more accurately and according with the strategic steering of the
business.
Job costing system: It is a set of methods, and logical procedures which gather,
organize, and process information about the costs of labor in order to prepare reports that will be
used by decision-makers to manage the business resources. This means a specific contract,
assignment or work which is needed to complete as per customer’s requirement. This is the form
of particular order costing which help to ascertain the cost of individuals or jobs. It is required to
maintain the records of specific jobs or contracts. The manager of Airdri Ltd is using this system
to make estimation of individual unit cost or assignment in order to deliver hand driers. The
essential requirement of such system in Airdri is that it contains specialized rules which are
applicable to all types of jobs and helps in estimation of costs for ascertaining the jobs (Bryson,
Crosby and Bloomberg, 2014).
Benefits: It perform main function to reduce or increase labour units allocation to
different tasks in the production process, and service delivery the work according to speciality
that helps Airdri to analyse the cost of different items which are manufactured.
Cost accounting system: This system is used to estimate the investments, efforts in
monetary units of products and services for the valuation of stock, analysing the cost and
maintaining the profitability. It is very important for organization to maintain the cost of
organization as well as products. It is essentially required in Airdri and other organization to
manage the cost in order to increase the profitability. The manager of Airdri uses such system to
is to estimate as well as record the costs like variable cost and fixed cost.
Benefits: Its main function is to analysis the different cost that are related to
manufacturing activity. Moreover, it helps Airdri to track the record of direct and indirect cost of
business activities.
Price optimisation system: This means a system which is used by company to set the
ideal selling values of all manufactured products. It mainly focuses on to set the prices of
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products and services in order to sell the products. It is utilized by Airdri Ltd for the purpose of
setting the appropriate prices of all hand driers in order to sell. It is required for organization to
use this system in proper manner to analysis the prices of products that help to meet with
customer expectation (Chenhall and Moers, 2015).
Benefits: It help Airdri to set the price of products which is manufactured within
organization. Additionally, it helps to analysis the prices according to customers, competition,
and other important market and business’ facts.
P2 Different methods used in management accounting reporting
Management accounting reporting: This means a process of making different
management accounting reports which involves numerous information about company's
performance. Reports are prepared by the manager of the organization in order to evaluate the
performance and make decision. The main purpose of this reports is to give the inside
information which is received through financial accounting. In Airdri, managers prepare
different types of reports which is described below:
Inventory Management Report: Inventory means goods which is manufactured by
organization in order to sale the products and services. The main aim of preparing this report is
to generate more income with the help to preparing inventory management reports. In Airdri,
managers prepare these reports by containing all information, which relates to maintenance and
recording of inventory. Managers also maintains proper records of inventory by using advanced
technology. This report helps to maintain the proper records of all stock such as raw material
finished goods etc. and prepare inventory reports.
Cost accounting report: This means a report that can be used to collect, classify,
analysis and reporting the data for ascertaining the cost of products and services. It helps to
calculate the cost efficiently and manage the cost within industry. In Airdri, managers prepare
cost accounting reports for allocating the cost in to various cost centres and maintaining the cost
trend within company. This report is useful to calculate the cost of products and help to make
further business transactions (Fullerton, Kennedy and Widener, 2014).
Performance Report: This report is prepared by managers to analysis the performance
of company as well as employees who help to accomplish the goals. It is mainly used for
evaluating the efficiency of industry and improve the performance that help to make profitable
organization. In Airdri, managers build such type of report that help to maintain the performance
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of activities and make improvements as per requirement. Moreover, this report helps to control
the cost and managing the workforce in order to increase the productivity.
TASK 2
P3 Calculations of costs using appropriate techniques to prepare income statement
Microeconomic techniques:
Cost: It is the expenses, which is incurred for a product or services being sold by
business entity. It involves all cost, which is required within organisation. It involves mainly two
type of cost such as:
Cost analysis: This is the process of comparison between actual and standard cost for the
purpose of reporting and disclosing on condition in order to improvement.
Cost volume profit: This is an accounting technique, which is used to identify the effects
of sales volume and product cost for maintaining the operating profit within enterprises.
Moreover, it helps to find out the relationship among cost and revenue (Honggowati et.al., 2017).
Marginal Costing: This is a costing method, which can be used to know the profits of an
organization. It involves a systematic classification of expenses and cost a fixed and variable
contribution per unit.
Cost per unit according to the variable cost method
Marginal costing
Direct materials per unit 8
Direct labour per unit 5
Variable production overheads per unit 3
Marginal Cost per unit 16
Calculation of profit using marginal costing
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Interpretation:
From the above calculation it has been interpreted that Galway Plc is getting net profit
and net loss in May and June is 550 and 5750 GPB. In May it earned net loss due to more
spending and in June it earned net profit.
Determine the inventory value according to the cost per unit previously calculated
Inventory cost as per marginal
May June
Opening inventory 3200
Closing inventory 3200 1280
Absorption Costing: This is another method that defines profits of the organization after
analysing the cost. In this method, all overheads are related with production or unit cost of
products. Herein, no classification of expenses is needed in fixed and variable cost (Kaplan and
Atkinson, 2015).
Determine the inventory value according to the cost per unit previously calculated
Per unit Direct materials cost 8
Per unit Direct labour cost 5
Per unit variable production overheads cost 3
Absorbed fixed productin cost per unit 10
Cost of sales 26
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Calculation of profit by using absorption costing
You need to determine the amount of overhead under absorbed and over absorbed
Particulars May June
Fixed production cost standard 4000 4000
Fixed production cost actual 5000 3800
Under/over absorbed cost 1000 -200
Product costing
Fixed cost: This type of cost does not change with output. For instance, rent, insurance,
salaries and payment on loan.
Variable cost: This types of cost vary with production in units. For instance, Piece rate
labour, commission etc.
Cost allocation: It is a continuous process of distributing the cost in multiple entities,
business units and cost centres. In simple words, cost allocation is process of dividing the cost in
to different cost centres.
Normal costing: This is a costing method, which is used in derivation of cost. In this
costing, actual data is mainly used to derive the cost for a product with manufacturing overhead
rate's expectation.
Standard costing: It is different from normal costing such as it is used to predetermine
about cost.
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Activity based costing: This is a costing method, which can be used to identify
company's activity and assign the cost of each activity to all product and services according to
actual consumption of products.
Role of costing in setting price: Costing plays different types of role in order to set the
prices. It identifies the cost and analysis in order to set the prices of products. It plays a role in
formulating a pricing strategy that helps to make right pricing decision.
Cost of inventory
It states that the cost which is associated with storage, procurement and management of
inventory. It is mainly related with cost of manufacturing stock in all enterprises.
Different types of inventory cost: There are different types of inventory cost which is used by
Airdri company:
 Ordering cost: It includes expenses which is incurred to create and process an order to a
supplier. It involves the determination of economic order quantity for inventory items.
 Carrying cost: It contains expenses that are associated with holding inventory as per
period of time (Maas, Schaltegger and Crutzen, 2016).
 Stock out cost: It is the cost which is associated with the lost opportunity created by
debilitation of inventory.
Benefits of reducing inventory costs to an organisation: Reduction in inventory cost is
beneficial for all organization as it helps to reduce the waste, avoid excess safety stock, demand
forecasting and shorten the product life cycle in order to maximize the profits. Airdri is getting
profits continuously by reducing the waste or inventory cost.
Valuation methods: This is techniques or methods that helps to evaluate the inventory
cost within entire business entity. It involves DCF analysis, comparable company analysis and
DCF method to evaluate the inventory.
Overhead costs: It means expenses or cost which are associated with running a business
that can be connect to create or produce a product or services.
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Last in first out (LIFO)
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