Innocent Drinks: A Management Accounting Report - Unit 5 Analysis

This report delves into the realm of management accounting, offering a comprehensive overview of its core principles and practical applications. The study centers on Innocent Drinks Plc, a company producing smoothies and juices, and examines various aspects of management accounting, including its essential requirements and reporting methods. The report explores cost accounting, price optimization, job costing, and inventory management systems, highlighting their benefits and limitations. Furthermore, it provides a comparative analysis of marginal and absorption costing techniques used in preparing income statements. The report also investigates the application of budgetary control tools and how management accounting systems respond to financial problems, illustrating how these systems contribute to an organization's sustainable success. Through this analysis, the report provides a detailed understanding of how management accounting principles can be effectively implemented within a business context.

Unit 5 – Management
Accounting

Contents
INTRODUCTION.....................................................................................................................................3
MAIN BODY.............................................................................................................................................3
TASK 1.......................................................................................................................................................3
P1. Management accounting and essential requirements of management accounting systems................3
P2. Management Accounting Reports.....................................................................................................5
M1. Effective evaluation of vital benefits of explained MA-systems in case of Innocent Drinks:...........6
D1. Evaluate how systems and reporting of MA are effectively integrated within enterprise's processes:
.................................................................................................................................................................7
TASK 2.......................................................................................................................................................7
Usage of the techniques of cost analysis to prepare income statement by using marginal and absorption
costing.....................................................................................................................................................7
M2. Accounting techniques to prepare financial statements..................................................................11
D2. Interpretation of financial data........................................................................................................11
TASK 3.....................................................................................................................................................12
P4. Benefits and limitation of planning tools of budgetary control........................................................12
M3. Various planning tools and their application for projection of budgets..........................................15
TASK 4.....................................................................................................................................................16
P5 Adoption of management accounting systems to respond financial problems..................................16
M4 Contribution of management accounting in sustainable success of the organization while
responding financial problems...............................................................................................................19
D3 Application of planning tools to respond financial issue along with attainment of sustainable
success...................................................................................................................................................19
CONCLUSION........................................................................................................................................20
REFERENCES........................................................................................................................................21

INTRODUCTION
Management accounting term is often widely recognized as concept of management
accounting and may be clearly interpreted as a framework for delivering finance reports and
details to the managerial team mostly for supporting decision-making phase. Additionally,
strategic framework of management-accounting is employed by the organization 's internal staff,
and that's what makes it distinct from processes of financial accounting (March.Kure, Nørreklit
and Raffnsøe-Møller, 2017). The whole study-report is centered on Innocent Drinks Plc, a
corporate entity which is engaged in making smoothies, drinks and juice that are primarily sold
by company in cafes, malls, supermarkets and its different outlets. This study will address a
range of aspects like managerial-accounting and the basic criteria requisite of the distinct-distinct
management-accounting systems as well as the reporting methods/approaches. Moreover, study-
report includes an insight of the multiple budgetary planning tools along with an evaluation
about how all such planning tools and specific accounting-systems, are being used to respond
fiscal issues. It also provides 2 instances of how large multinational companies are
adopting management-accounting frameworks/systems to respond/resolve to financial problems.
MAIN BODY
TASK 1
P1. Management accounting and essential requirements of management accounting systems.
Management accounting can be demonstrated as framework model for conveying and
reporting financial information/data or essential facts to managing personnel to aid in decision-
taking tasks. Further this concept is being used by the enterprise's internal personnel with aim to
fulfill organizational goals and objects.
MA concept proposed systems which act like a assistance and guiding framework for
managers to accomplish critical organizational tasks as well as to generate key information for
managing and decision-taking tasks. MA Frameworks/systems are models that involves timely
monitoring and recording of financial losses on the related data used by business-people and key
stakeholders for the correct budgetary, decision-making procedures, which also provides
corporate performance reviews. The primary goal of MA-systems is to retain integrity and
oversight of expenses and to have a clear image of the profitability of the company (Monden,

2019). In this regard below explained are certain MA systems that must be adopted by Innocent
Drinks Plc:
Cost Accounting system: This system relates to costs and could serve to control costs and
increase productivity. From using this framework, administrators can determine the costs of each
single product that can help to support their operations. Such a framework is used by companies
to measure cost of their all products in order to assess their efficiency. This is important to the
organization's cost estimation and planning of all tasks. In Innocent Drinks such a system
facilitates effective controlling of costs and keep track of allocation of costs. This also assist to
asses the main factors which are leading increase in overall costs of making smoothing and
drinks. It's essential requirements involves proper recording, reporting and allocation of different
costs along with appropriate description about classification of multiple costs (Aifuwa, Embele
and Saidu, 2018).
Price-optimization system: Such a framework relates to establishing the effective rates and
costs of items produced by organization with aim to enhance demand of its products. It's also
vitally important for corporation to determine right prices while maintaining profitability level.
This system can facilitate Innocent Drinks with processes which are focused towards analyzing
the minor as well as major impact on product's demand because of shift/change in its products'
prices. This system requires use of interpretation tools and analytical methods to identify key
factors and changes occurred due to change in prices of its different products along with setting
prices to gain competitive advantages.
Job-costing system: This is unique but essential system which all corporation like Innocent
Drinks to allocate costs to their major job-process with aim to enhance the accountability. In
corporate entities like Innocent Drinks, this is system is effective in recognizing how much costs
are incurred towards a particular job-process. Essential requirement of this system is to adequate
categorization of all the business job-processes and assignation of multiple costs to such
recognized job-processes (Kumarasiri, 2017).
Inventory management system: This system primarily proposes effective management of
inventories and related items. This system facilitates effective controlling over all the processes

which are directly or indirectly concerned with managing and utilizing inventories in business
purposes. This is a means that lets corporations like Innocent drinks to track it’s all inventories
like items to make smoothies, packing materials, finished goods etc. through supply chain within
enterprise. It develops the entire series from making requests with different wholesaler to ensure
the fulfillment of its customer demand, displaying 's entire path of making of finished goods.
Organizations can minimize repetition by carefully reviewing products, separating cases and
agreeing on more genius key choices. This system vitally require recording of each movement of
stock/inventories in or out at different level and also reasonable classification of inventories
within an organization context (Harrison and Lock, 2017).
Difference in management accounting and financial accounting:
Basis Management accounting Financial accounting
Necessary This accounting is not essential for
companies to implement in their
operations.
While financial accounting is essential
for companies to implement.
Informatio
n
Under such accounting financial and
non financial information included.
On the other hands, under such
accounting only financial information is
included.
Rules and
regulation
In this accounting, there is no specific
role and regulation to prepare internal
reports.
There are different kinds of rules and
regulations which need to applied in this
accounting.
Outcome Under this accounting, internal reports
are prepared when company needs.
In this accounting, financial reports and
statements are prepared in the end of
accounting period.
Essential requirements of Management Accounting systems:
Relevance- Knowledge for one and everyone is valuable. Management accounting reviews the
best available tools for details related to the action being made, the decision-makers and the
process of decision-making being used. The most important and valuable information for
judgment is decided, collected, and organized for assessment by coming to terms with the criteria
of shareholders.

Value- It forecasts the effect on valuation. Management accounting ties the operations of the
enterprise to its fundamental business model which involves an in-depth view of the larger
macroeconomic climate. It includes analyzing knowledge along the road of value creation,
calculating future prospects, and focusing on costs, expenditures, and the probability of value
generation opportunities.
Credibility- Stewardship shapes authority. In making the judgment process even more
purposeful, transparency and oversight support. Trust and stability are enhanced by balancing
near-term market interests toward lengthy value for shareholders. Specialists of strategic
management are considered to be ethical, accountable, and mindful of the values, necessities of
government, and relational responsibilities of the company.
P2. Management Accounting Reports.
Management Accounting Reports: MA is a comprehensive concept which emphasizes on
reporting of information thus reports are essential aspects of it. It proposes multiple kind of key
reports which are also linked with above explained systems. Innocent Drinks should also apply
these reports to properly adapting such systems. Here below are several crucial reports linked
with MA, as follows:
Inventory management report: In order to effectively manage a corporation, it's really
critical to control and manage inventory as carefully and efficiently as practicable. One means to
do so is to use and prepare inventory management report. Reliable, up-to - date as well as
appropriate inventory management report can help managers to uncover trends, recognize
deficiencies and capabilities, and patch gaps and inventory wastage. With these insights,
manager can take action to increase profitably while reducing unnecessary costs. This in case
Innocent Drinks, allow managing team to track movement of stocks and to minimize inventories
costs and wastage.
Cost Report: This report is also act as fundamental requirement for manufacturing
enterprise like Innocent Drinks to manager their production costs. This report basically records

systematic sub categorization of different-different costs along with different columns like
department wise costs, process wise cost, activity wiser costs etc. in Innocent Drinks this report
can be used to find out costs incurred in preparing a single drink or smoothie. This report's data
can be used by managing personnel to optimize costs and enhance profit margin (Smith, 2015).
Accounts-receivables report: Accounts receivables are the sum owed by businesses to the
organization for the selling of goods on credit-basis. In most corporate entities, accounts
receivables are usually executed by producing invoices, either by sending or digitally delivering
this to the clients. In exchange, the buyer must settle within a defined timeline termed credit
lines. An accounts receivable aging report genera lists accounts receivables depending on their
credit terms, aging — such that, how lengthy they are being unpaid. An accounts-
receivable aging report, also recognized as Debtors Book. In Innocent Drinks, such report will
help company to detect concerns soon afterwards they emerge and avoid significant issues from
happening later related to account receivables' collection.
M1. Effective evaluation of vital benefits of explained MA-systems in case of Innocent Drinks:
MA systems Evaluation of Benefits/advantages
Cost Accounting System It is beneficial for Innocent as this enable mangers to minimise
their overall production costs and act as allocator causes that
increases costs.
Inventories Management
System
This offer advantage to company by optimising inventories
wastes, losses, theft and thereby optimising inventories costs.
This allow allocate factors leading to increasing stock handling
and storage costs.
Price-optimisation System It is advantageous for company to find out appropriate price rates
for its different range of items as well as to increase overall
demand to achieve competitive profit goals.
Job Costing System This enable Innocent to establish accountability within job

processes by effective allocation of costs together with proper
justification (Routledge.Kenyon and Kenyon, 2016).
D1. Evaluate how systems and reporting of MA are effectively integrated within enterprise's
processes:
Here in organizational context an integration relates to combining two or more aspects of
business with each other to facilitates a cumulative framework. As discussed above all systems
and reports are integral part of management-accounting which supports overall managerial
framework as a whole. But here notable thing is that each system and report are designed to
overcame the issues involved in organizational processes like to manage inventories processes,
inventory MAS and report are proposed in MA mechanism thus it can be regarded as
fundamental integration. Further different accounting processes offers wide range of information
which are subsequently used by managers in cost accounting system, inventory MAS and other
systems as well as to prepare managerial reports. So integration herein between organization's
processes, systems and reports is significant to for achieving business targets and adapting MA
mechanism (Routledge and Kaarbøe, 2017).
TASK 2
Usage of the techniques of cost analysis to prepare income statement by using marginal and
absorption costing.
Marginal costing- It classifies costs as marginal or variable and fixed. All the variable costs are
aggregated to find out contribution per unit in this method.
Cost per unit:
April May
Variable Manufacturing cost
per unit
5 5
Closing stock £10000 £15000

April May
Sales 56000 70000
Less: Marginal cost of sales 20000 25000
Variable Manufacturing cost 30000 30000
Opening stock 0 10000
Closing stock 10000 15000
Contribution 36000 45000
Less: Fixed Non-Manufacturing Cost 5000 5000
Less: Fixed Manufacturing Overhead 18000 18000
Net profit 13000 22000
Absorption costing- It segregates costs as production or manufacturing costs to find out gross
profit instead of per-unit contribution
Cost per unit:
April May
Variable Manufacturing cost
per unit
5 5
Fixed Manufacturing
Overhead
3 3
Cost per unit 8 8
Closing stock 16000 24000
April May
Sales 56000 70000
Less: Cost of sales 32000 40000
Fixed Manufacturing Overhead 18000 18000
Variable manufacturing cost 30000 30000

Opening stock 0 16000
Closing stock 16000 24000
Gross profit 24000 30000
Less: Fixed non manufacturing cost 5000 5000
Net profit 19000 25000
Reconciliation statement April May
Net profit under marginal cost 13000 22000
Add: Closing stock 6000 3000
Net profit under absorption cost 19000 25000
Variable cost per unit 49
Total fixed cost 140000
Selling price 60
Contribution (Selling price-variable
cost per unit) 11
PV ratio (Contribution per unit/selling
price*100 18.33
BEP in units (Fixed cost/contribution
per unit)
12727.2
7
BEP in sales (Fixed cost/PV ratio) 763636.
4
Margin of safety in units (Selling
units-BEP in units)
7272.72
7
Margin of safety in sales (Sales
revenue-BEP in sales)
436363.
6

M2. Accounting techniques to prepare financial statements.
There are a range of accounting methods and each of them provides a systematic
framework to prepare financial statement (Taschner and Charifzadeh, 2020). Such as in above
part, income statements have been prepared by using absorption and marginal costing. As well as
breakeven point is also computed in order to know about level on which company will gain no
profit and no loss.
D2. Interpretation of financial data.
In the above part two income statements have been prepared which presents different
outcomes. Such as in the absorption costing net loss of 13000 pounds and net profit of 15000
pounds for month of April and May. While in marginal costing, the net loss is of 7000 pounds
for month of April and net profit of 17000 pounds for May. This is so because of consideration
of expenses in different under both methods.
TASK 3
P4. Benefits and limitation of planning tools of budgetary control.
In different types of business entities, a range of financial practices and methods are
implemented with an aim of successful operation of various kinds of operations. The budgetary
control is one of the key approach which is applied in the context of projecting further financial
activities.
Budgetary control is a strategy which ensures that the budget is structured in such a way as to
allow for the most detailed financial plans (Nyamwanza, Madzivire and Madzivire, 2020). It's an
approach that compares predictions with real outcomes to assess variations. Eventually, under it
a wide range of planning tools are included and each of them has own significance and some
drawbacks. In regards to innocent drinks limited, these planning tools are defined in a such
manner that are as:
1. Production budget- A production budget provides sets of units produced over a time
period for an adequate accounting tactic. This is a significant financial plan that can help

a firm by providing accurate figures on raw resources. Without an appropriate production
budget, it will become difficult for businesses to provide sufficient knowledge on how
much products are to be delivered and the services available. As in Innocent Drinks
Limited, their accountant draws up an estimate so that their management department may
take appropriate steps and make reasonable decisions on the procurement of raw
materials and the development of new products. This budget has certain advantages and
disadvantages such as:
Advantages Disadvantages
This promotes the lowering of production
costs because it standardizes processing.
Actual stock of products is becoming
sufficient to handle. This is because
underneath it, evaluation of the required
raw material is given that leads to the better
decision-making by supervisors. For
example, their management take corrective
measures in Innocent Drinks limited to
purchasing sum of new raw material for
production.
One of the primary drawbacks of a
production budget for a company is that it
takes more time and resources. Like the
business above, they are also facing this
problem of higher time usage as well as
expense for planning this budget. Due to
this issue, small companies cannot
implement it in their financial planning.
Below an example of production budget is mentioned which encompasses all necessary
details that are included under it:
2. Operational budget- The operational budget records all day-to-day activities in a
commercial corporation (Hutaibat, 2019). This type of budget can be used by the