Management Accounting Report for Innocent Drinks Company

This report provides a comprehensive analysis of management accounting principles, focusing on their application within the context of Innocent Drinks. It begins with an introduction to management accounting, emphasizing its role in decision-making through financial data analysis. The report then delves into various management accounting systems, including cost accounting, inventory management, job costing, and price optimization, outlining their essential requirements and benefits. Different types of management accounting reports, such as accounts receivables aging reports, performance reports, budget reports, and cost reports, are also discussed, highlighting their significance in organizational processes. Furthermore, the report explores cost calculation techniques, specifically marginal costing and absorption costing, providing their advantages and disadvantages. The integration of management accounting systems and reports within organizational processes is also examined, emphasizing their impact on different departments such as finance, HR, marketing, and production. Overall, the report offers a practical understanding of how management accounting contributes to effective business management and decision-making.

Management
Accounting

INTRODUCTION
Management Accounting refers to the use of different types of provisions so that the right
decisions can be taken by the managers after performing the required analysis and interpretation
of the financial data, facts as well as information (Abdel-Maksoud, Cheffi and Ghoudi, 2016). If
it is used effectively and efficiently by the management then it can help a lot in achieving the
desired short-term and long-term goals as well as objectives. It is the role of management
accountants to make sure that they can correctly use its methods. This can help a firm in
achievement of strategic advantage in the future time period. In this way it can grow
substantially in the market and can attain sustainable success. This report is based on Innocent
Drinks. It is a company which sells different types of drinks in the market. In this assignment,
focus will be made on management accounting systems, application of its techniques.
Additionally, the use of planning tools and comparison of ways in which companies use this data
to solve problems will be discussed as a part of this project.
TASK 1
P1: Management accounting systems
Management accounting- It is an important decision-making tool which is used
internally by the management. Different types of tools like budgeting, variance analysis, CVP
analysis and BEP are some of the main tools which are used under it.
Difference between Financial Accounting and Management Accounting-
Basis Financial Accounting Management Accounting
Information It makes use of only the
monetary information
available within a company.
It makes use of monetary as
well as non-monetary
information available within
the firm.
Users of information Internal as well as External
users use its information.
Only the internal users make
use of its information.
Reports It only makes use of
summarized reports.
It makes use of detailed
reports.
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Types of management accounting systems-
Cost accounting system- In this system, a detailed analysis of different types of costs of
the organization is done (Al-Mawali and et.al., 2018). In this way it can help the firms like
Innocent Drinks so that they are able to perform a specific analysis of their costs. This will lead
towards application of rectifying techniques so that these costs are reduced.
Essential requirements-
 Cost accounting system should help the management of companies to maintain the
records with the required accuracy. Therefore this can help the managers of Innocent
Drinks a lot because they will get the information which is up-to-date. When the
management of the company is able to ensure that it can maintain detailed records of the
costs then in this way it will be able to apply the techniques in a better way to reduce the
costs.
 Cost accounting system can help the managers of firms to reduce the costs effectively.
The managers of Innocent Drinks can be benefited from this and can maximize their
overall level of profits. This can be done by them when they are able to apply the
appropriate techniques to assess where the costs have increased so that they can be
reduced in an effective manner.
Inventory Management System- In this system, there are various methods like LIFO,
FIFO etc. which help the management of a company to properly manage the stock level
(Almasan and et.al., 2016). Records can be maintained by the managers if they are able to track
the inwards as well as outwards movement of the stock. In this way, Innocent Drinks can be
benefited because their managers will be able to manage the information related to the inventory
of the companies without problems and issues.
Essential requirements-
 Inventory management system must help the companies to make sure that they are able to
use the correct methods so that they are able to manage their stock well. In this way
Innocent Drinks can manage and maintain their inventory. In this system, the companies
are required to ensure that they maintain a computerized system to track and manage the
different types of stock items so that they are not mismanaged.
 Inventory management system should help the firms so that they are able to identify the
problems with their inventory valuation and can rectify it. This helps companies like
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Innocent Drinks. Therefore in this way they can ensure that profits can be enhanced
because the costs related with the inventory management can be reduced effectively
without facing problems.
Job Costing System- In this system, the companies which primarily deal in
manufacturing manage their job orders (Alsharari, 2018). Innocent Drinks can make use of it so
that they are able to ensure timely completion of orders.
Essential requirements-
 Job costing system must help the companies to manage their job orders. In this way it can
help Innocent Drinks. This can be done by maintaining a detailed record of the inwards
and outwards movement of the job orders in an effective manner which can thus be quite
helpful for the organizations.
 Job costing system needs to help firms in finding out and resolving the different issues
related to job orders. Managers of Innocent Drinks can use it effectively to sort out their
issues. This can be done by ensuring that the managers are able to find out the problems
in the management of job orders and use ways through which they can solve them.
Price Optimization System- In this system, help is provided to companies in optimizing
the level of price (Bento, Mertins and White, 2018). Thus the managers of Innocent Drinks can
make its use to set a right price in the company for raising the level of profits.
Essential requirements-
 This system should help in forecasting the demand level of goods and services and setting
prices accordingly. Thus in this way help is provided to management of Innocent Drinks.
This can be done through the use of statistical and mathematical models and techniques
through which an effective forecast of the demand level can be made.
 This system must help the organizations so that they are able to set a right price and
maximize their profits. Thus the managers of Innocent Drinks are benefited from it. This
can be done by identifying the best price which can be set for the goods through which
higher-level of profits can be targeted.
P2: Management Accounting Reporting
There are different types of reports which are used in Management Accounting by the
managers of a particular company (Bisogno and Vaia, 2017). It requires high-level of skill and
expertise for the managers to be able to prepare them. These reports are as follows-
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Accounts Receivables Ageing Reports-
These reports are quite useful from the point of view of the organizations because they
help them to identify and arrange their debtors. In the context of Innocent Drinks there may be
various debtors of the organization. The company needs to make sure that it manages them
effectively and efficiently. This can be done by maintaining a record of the trade receivables and
identifying those debtors who have not paid their dues since a long time.
Performance Reports-
These reports are primarily used by the companies so that they are able to assess the
overall performance of their core departments (Butterfield, 2016). For Innocent Drinks, they are
useful so that they are able to make a thorough assessment of the variances and deviations.
Thereafter, quick rectifying actions may be taken so that the performance is improved. Thus this
can be helpful in setting targets and achieving them and the productivity of employees will
improve because they will achieve their full potential. Also the organization can use these reports
for the sake of comparison with their competitors so that weaknesses can be identified and the
work is done for the purpose of facilitating improvement.
Budget Reports-
These reports may be used by the firms so that the budgets prepared such Cash Budget,
Production Budget, Master Budget etc. can be summarized and the information which has been
obtained from them is analysed and interpreted. This helps in making recommendations and
valid judgements. In the context of Innocent Drinks, they can be useful for the managers so that
they can take accurate decisions for the future time period. This will enable them to forecast and
plan the expenses related to the firm and the incomes which are going to be earned in the future
time period.
Cost Reports-
In an organization, there are several departments (Endenich and Trapp, 2020). These are
Production, Finance, HR, Marketing, Sales etc. It is required from the companies that they are
able to identify their department-wise costs and overall costs. These costs may be fixed, semi-
variable and variable in nature. Apart from this there are overheads which are required to be
absorbed. In this way, this is going to benefit the companies like Innocent Drinks so that they are
able to use these reports for reducing costs as well as the overheads which are incurred.
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M1: Benefits of management accounting systems
Cost Accounting System can help the companies like Innocent Drinks in determining the
costs and applying correct techniques to reduce them. Inventory Management System can help
the firms to identify their stock level and managing the stocks correctly. Job Costing System can
help the companies to identify their job orders and to ensure their proper management. Price
Optimization System can be useful for the organizations to select the right prices to be used so
that the profits can be maximized.
D1: Integration of management accounting systems and management accounting reports in the
organizational processes
This integration can be done by companies like Innocent Drinks so that they are able to
improve the functioning easily and sort out the issues. In Finance, they can be used for taking
decisions. In HR, they are useful in identifying the efficiency of employees. In Marketing, they
can be used for identification of costs associated with it. In Production, they are useful in making
sure that they identify the techniques through which costs and overheads can be controlled.
TASK 2
P3: Calculation of costs
There are different types of techniques used for calculating costs which can be incurred
within an organization (Endenich, Trapp and Brandau, 2017). These are explained as follows-
Marginal costing-
It is a technique which is used in the companies so that treatment of different types of
costs can be done easily (Frick, Birt and Waters, 2020). In it, variable cost is charged to the units
of cost and fixed cost is written off against the contribution. This can be used by the managers of
Innocent Drinks so that they are able to identify their profitability level.
Advantages-
 The technique of Marginal Costing is quite simple to understand which helps the
managers of Innocent Drinks. By using the managers can make conclusion and
judgements easily as it not very complex in nature and can be applied very easily.
 This technique provides more clarity to the managers in the determination of the level of
profits. The management of the company is able to provide clear information which can
be used in the correct manner by making use of this method.
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Disadvantages-
 Marginal Costing technique does not allows the segregation of costs which creates a
disadvantage for the managers of Innocent Drinks. It can result in the creation of
inaccuracy.
 In this technique it becomes quite difficult to identify the degree of variability of the
semi-variable costs. Creation of this type of variability can lead towards taking of wrong
decisions by the managers.
Absorption costing-
This a method which is used within the companies so that they are able to identify the
overall costs by taking into account direct as well as indirect costs (Hariyati, Tjahjadi and
Soewarno, 2019). Thus in this way the managers of Innocent Drinks can be benefited. Thus the
managers should use it for determining the level of profits.
Advantages-
 Using the technique of absorption costing the managers of Innocent Drinks can determine
the different types of production costs. It takes into account overheads as well which
helps in determining the total costs being incurred.
 The technique of absorption costing can be used so that the managers of Innocent Drinks
can accurately track the profits. This can help them in doing comparisons with the other
companies and getting a strategic advantage over them.
Disadvantages-
 As this technique relies a lot on different types of assumptions therefore if they are not
accurate the profits or losses can be skewed. This creates a disadvantage for Innocent
Drinks. This can lead towards showing wrong data in the financial records.
 This technique cannot be used for improving the operational efficiency. This is
disadvantageous for the management of Innocent Drinks. This is so because this can lead
towards creation of problems and issues.
Justification- Both of these techniques are used by Innocent Drinks so that they are able
to determine the profits in the organization. By using them managers are able to perform the
correct analysis and interpretation which helps them in growing substantially in the future time
period and achieving the desired outcomes.
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Marginal costing
April (£) May (£)
Sales 56000 70000
Less: Marginal cost of sales
Variable manufacturing cost 30000 30000
Closing stock 10000 15000
Opening stock 10000
Total marginal cost of sales 20000 25000
Contribution 36000 45000
Less: Fixed cost
Fixed manufacturing cost 18000 18000
Fixed non manufacturing cost 5000 5000
Net profit 13000 22000
Absorption costing
April (£) May (£)
Sales 56000 70000
Less: Cost of sales
Variable manufacturing cost 30000 30000
Fixed manufacturing cost 18000 18000
Closing stock 16000 24000
Opening stock 16000
Total cost of sales 32000 40000
Gross profit 24000 30000
Less: Fixed non manufacturing cost 5000 5000
Net profit 19000 25000
Reconciliation statement
April (£) May (£)
Profit/loss under marginal cost 13000 22000
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Add/Less: Closing stock 6000 3000
Profit/loss 19000 25000
Profit/loss under absorption cost 19000 25000
Working note:
Calculation of closing stock under marginal costing
April (£) May (£)
Total variable manufacturing cost 30000 30000
Total produced units 6000 6000
Per unit cost 5 5
Closing stock 10000 15000
April (£) May (£)
Calculation of opening stock under marginal costing
Opening stock units 0 2000
Per unit cost 5 5
Opening stock 0 10000
April (£) May (£)
Calculation of closing stock under absorption costing
Variable manufacturing cost 5 5
Fixed manufacturing cost (per unit) 3 3
Total absorption cost per unit 8 8
Closing stock 16000 24000
April (£) May (£)
Calculation of opening stock under absorption costing
Opening stock units 0 2000
Per unit cost 8 8
Closing stock 0 16000
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Calculation of Break even point
Solution:
Variable cost 49
Fixed cost 140000
Selling price 60
Contribution: Selling price-variable cost per unit
Contribution 11
Break even point (In units): Fixed cost/contribution
BEP (In units) 12727.27
Break even point (In revenues): Fixed cost/PV ratio
PV ratio: Contribution/sales*100
PV ratio 18.33
BEP (In revenues) 763636.36
Margin of safety (In units): Budgeted saels (In units)-
BEP (In units)
Budgeted sales 20000
BEP 12727.27
Margin of safety (In units) 7272.73
Margin of safety (In revenues): Budgeted sales (In
revenues)-BEP (In revenues)
Budgeted sales (In revenues) 1200000
BEP (In revenues) 763636.36
Margin of safety (In revenues) 436363.64
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M2: Accurate application of techniques
Both the techniques of marginal and absorption costing can be applied by Innocent
Drinks in their organizational processes and provide the company a chance to improve the
functioning. If the firm is able to use both of them in the correct manner then it will surely go
ahead of its competitors and will achieve success. Thus for the managers of Innocent Drinks the
right application of these techniques is crucial so that they can make the right judgement and
make correct recommendations for the management which an be followed.
D2: Producing of financial reports for application and interpretation of data
The reports like Income Statement, Cash Flow Statement, Fund Flow Statement and
Balance Sheet are useful for the management. The managers of Innocent Drinks should correctly
use them by maintaining the accuracy level. In this way they will be able to provide the required
information to the managers for taking decisions. From the findings of these reports the right
recommendations can be made by the management to improve the way things are conducted in
the organization so that they are able to bring the required improvements. Thus in this way they
will be able to create a roadmap which the company can follow for attaining sustainable success.
TASK 3
P4: Advantages and Disadvantages of Planning tools for Budgetary Control
Zero-based budgeting-
It is a method which is used commonly in budgeting (Kosov and et.al., 2016). In it the
forecasted expenses and incomes have no base and have to be justified for a completely new
period. The managers of Innocent Drinks can make its use so that they are able to properly apply
it in the right context to get the desired outcomes.
Advantages-
 The use of this method facilitates the systematic evaluation of the operations and
programmes. This creates advantage for Innocent Drinks.
 The different types of functions of a company are covered under this method of
budgeting. This is advantageous for Innocent Drinks.
 With the use of this method the managers can make sure that they prepare the budget
with a fresh base. Thus in Innocent Drinks this can create an advantage.
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