Management Accounting Report: Ryanair Financial Problems and Solutions

This report provides a detailed analysis of management accounting practices within Ryanair, focusing on various aspects such as the definition and importance of management accounting, its differences from financial accounting, and different management accounting methods like job costing, contract costing, and service costing. The report explores the benefits of implementing a management accounting system in Ryanair, particularly in cost accounting and inventory management. It further examines product costing techniques, specifically absorption and marginal costing, highlighting their impact on profit and loss statements. The report also delves into the pros and cons of budgeting tools, application of planning tools, and the financial problems faced by Ryanair. Finally, it discusses financial governance, setting up an effective management accounting system, and implementing budgeting policies, providing a comprehensive overview of the financial management of the airline.

Running head: MANAGEMENT ACCOUNTING
Management Accounting
Name of the Student:
Name of the University:
Author’s Note:

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Table of Contents
Requirement of Task 1.....................................................................................................................2
Definition of Management Accounting.......................................................................................2
Importance of Management Accounting.....................................................................................2
Difference between Management Accounting and Financial Accounting..................................3
Different Types of Management Accounting Method.................................................................4
Benefits of Management Accounting System in Ryanair............................................................5
Integrating Management Accounting System and Report in Ryanair.........................................5
Requirement of Task 2.....................................................................................................................6
Product Cost Under Absorption and Marginal Costing Techniques...........................................6
Requirement of Task 3.....................................................................................................................8
Pros and Cons of Budgeting Tools..............................................................................................8
Application of Different Planning tools....................................................................................11
Requirement of Task 4...................................................................................................................12
Financial Problems of Ryanair and Southwest Airlines............................................................12
Financial Governance................................................................................................................12
Setting Up an Effective Management Accounting System and Strategies................................12
Implementation of the Budgeting policy...................................................................................13
Reference.......................................................................................................................................14

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Requirement of Task 1
Definition of Management Accounting
Management Accounting is also considered as a part of accounting process which is
adopted by business to formulate internal management reports which can be used by the
businesses in order to take management decisions (Fullerton, Kennedy and Widener 2013).
Management accounting helps businesses to assist in day to day activities of the business.
Management accounting helps businesses to perform functions which are important for the
business, like planning, organizing, staffing, directing and controlling.
As per the Institute of Cost and Management Accountants, London, the preparation of
accounting information which can help the management in formulation of policies which can be
related to planning and control of business with the application of professional knowledge and
skills (Soin and Collier 2013).
The use of management accounting in modern times has become very much essential so
as to ensure that the effective management. Management Accounting is closely associated with
effective decision-making process and also strategic management of the business.
Importance of Management Accounting
The importance of the management accounting in a business is immense in today’s
dynamic environment. The management accounting processes links various level of management
that is top level, Middle level and lower level management with the each other and facilitates
effective communication between each level so that the policies and strategies are clearly
communicated among the executives of different levels (Juras 2014). Management Accounting

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divides the entire business units into various sections, departments and divisions which can
effectively recognize the cost units. Management accounting system is also useful for
maintaining effective control in the business. Management accounting involves methods which
can be used by the management effectively for the purpose of setting of performance standards
and then measuring the actual performance of the business in terms of standard set and analyze
the cause of any variances which might have occurred (Ahmad 2013). In addition to this,
management accounting can be effectively used by the top-level management to take effective
management decisions.
Difference between Management Accounting and Financial Accounting
Point of Distinction Financial Accounting Management Accounting
Purpose Financial Accounting is used
for communication of
financial position of the
business (Scott 2015).
Management accounting is
mainly used for the purpose
of Decision Making process.
Primary Audience The primary audience of
financial accounts are
external parties such as
investors, debtors.
The primary audience of
management accounts are
internal users such as
management personnels.
Requirement This is to be prepared by the
company on a mandatory
basis
This is optional for the
business to prepare.

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Focus The focus of this type of
accounting is based on past
transactions.
The focus of this type of
accounting is to aid the
management to make future
decisions.
Different Types of Management Accounting Method
The different methods which are used by the management as a management accounting
tool are explained below:
 Job Costing: This is a method which is sued by the management to allocate the costs
which are associated with the products on the basis of the job or batches in which the
product is produced (Braun 2013). The technique is used by businesses where there is a
number of products which are produced during the period.
 Contract Costing: This is a method of costing which is mostly used by construction
business. The costing is done over a period of time and the costing is done on the basis of
the contract which is engaged between the client and the management. Contract costing
facilitates effective costing for construction industries (McLean 2013).
 Service Costing: This is a costing technique which is used by business which are engaged
in providing services to the business. The method is also known as operating costing and
is very much effective in identifying the cost units of a service providing industry and
determining the costs which are to be allocated on such basis (Sakao and Lindahl 2015).
The management of service industry is effective in determining the price which is to be
charged for the services which is provided by the business.

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Benefits of Management Accounting System in Ryanair
Ryanair is airline company which is engaged in flight services which are provided to the
customers of the business. The business model of the company is focused on low cost of the fare
which is charged by the business. This is one of the main reasons for which the business is
considered to be one of the successful brands of airline in UK. The benefits of management
accounting implementation are mention below:
 Cost Accounting System: The airline business follows the business model of charging
low fares from the customers of the company. Management accounting techniques
specializes in maintenance of cost of the business and effective implementation of
strategies help business to maintain the cost of the business which is related to the flight
fares which are charged by the business. An effective cost accounting system not only
will help the business in maintaining the cost of the business but also help in forecasting
the expenses of the business.
 Inventory management: Management Accounting methods also incorporate inventory
management system which will be useful in the case of Ryanair. The system facilitates
the business to effectively value the stocks of the business which are important in case of
an airline industry. In addition to this, the management will be able to compute the costs
which are associated with the inventory stocks of the business.
Integrating Management Accounting System and Report in Ryanair
It is recommended that Ryanair should incorporate management accounting techniques so
that it can lead to overall development of business processes and improvement in the internal
structure of the business. In addition to this, integrating such management accounting methods

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will facilitate the business to take accurate management decisions and also help in forecasting of
results of business with the help of budgetary controls.
Requirement of Task 2
Product Cost Under Absorption and Marginal Costing Techniques
The basic difference between Absorption and Marginal Costing techniques is in
allocation of the costs of the products. Absorption costing charges and considers both fixed and
variable costs in the cost of the product whereas marginal costing only considers the variable
portion of the cost in the cost of the product.

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As shown in the above figure, the total cost of the product is arrived at by summing up
the fixed and variable costs of the business in the case of Absorption costing and the above table
also shows that the marginal costing techniques considers only the variable costs which are
associated with the products of the business.
The profit and loss account which is prepared by the business on the basis of the
absorption costing and marginal costing is distinct because of the treatment of fixed overhead

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expenses of the business. In case of profit and loss account which is prepared under absorption
costing considers the fixed cost as a part of the cost of the production of the business which is
shown as a combined figure of $ 12,00,000 for the first four months and then it changes. The
above table shows that the business incurs losses for the month of March and June which can be
attributed to the high cost of products of the company. In case of profit and loss account which is
prepared on the basis of marginal costing system, the fixed costs do not form a part of the cost of
production as shown in the table above. The profits which are shown by the statement of profit
and loss account prepared under marginal costing system is $ 2,00,000 which is fixed for the first
four months and then the profits increases.
Requirement of Task 3
Pros and Cons of Budgeting Tools
The advantages of using budgets in the business of Ryanair are mentioned below in
details:
 Budgets are regarded as an important tool in business as it helps the management to
effectively forecast important estimates such as net profit, sales turnover, growth and
similar other indicators of the business. It can be effectively used by the management to
estimate the income and expenses of the company and also estimate the costs of the
business department wise.
 Budgets are an excellent way to communicate the plans of the top-level management of
the lower subordinates of the business. Budgets effective relay the plans or standards
which are set by the senior management to departmental heads so that all departments can
clearly understand the goals of the business and make efforts to achieve the same.

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 Budgeting techniques can also be used for the purpose of supervising and controlling the
performance of the business effectively. This facilitates the management to measure the
performance of the business and that of the employees of the business effectively.
 In addition to this, Budgets are also used in strategic management techniques such as
benchmarking and therefore it can be clearly be identified that Budgets are universally
applicable in the business and overall management of the company.
The disadvantages which is related to application of Budgetary control in a business are
discussed below:
 Budgets are prepared forecasting changes in prices and also market fluctuations, however
budgets are not effective when there is change in the external factors such as new
technological development which will increase the level of production of the business
(Aminbakhsh, Gunduz and Sonmez 2013). In such a case, the budgets become obsolete.
 The cost of setting up a budget and implementing the same is a costly process and
therefore it is not applicable to all organizations especially the small one.
 The estimates of the budgets depend on the accuracy of the judgements of the business
and forecasting ability of the business.
Cash Budget

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Workings for Cash Budget Preparation

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Application of Different Planning tools
The tools which can be used by the management of Ryanair for the purpose planning are
discussed below in details:
 Budgetary Control: The management of Ryanair can effectively implement budgetary
control which can be used by the business as a planning tool (Alviniussen and
Jankensgard 2015). Budgets can be used by the business for estimating future sales,
profits, revenues which the business can generate and also the costs which the business
will be incurring during the period.
 Pricing Strategy: Management can also use pricing strategies to evaluate the price which
the business is charging during the month. The pricing strategies is useful for the purpose
of computing the fare of the business. This strategy considers the cost of the business and
thereby is useful in computing the selling price of the business.
 Strategic Management: The management can use strategic management for the purpose
of setting the long-term business objectives of the business. The strategies of the business
can help businesses to facilitate the planning of the management.