Management Accounting Report: Techniques for Financial Analysis

This report delves into the realm of management accounting, focusing on its application within Innocent Drinks. It begins by defining management accounting and exploring various systems like price optimization, cost accounting, inventory management, and job costing. The report then examines different management accounting reporting methods, including cost reports, budget reports, performance reports, and inventory management reports, highlighting their benefits and applications. The analysis extends to the calculation of costs using techniques like absorption costing, culminating in the preparation of an income statement. Furthermore, the report discusses planning tools used in budgetary control, comparing their advantages and disadvantages. Finally, it addresses how organizations adapt management accounting systems to solve financial problems, providing a comprehensive overview of the subject matter and providing real world examples.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1. Definition of Management accounting..................................................................................1
P2. Different methods that are exploited for the purpose of management accounting reporting
......................................................................................................................................................3
M1. Illustrating benefits of systems with their application..........................................................4
D1. Critical evaluation about usage of management accounting systems and reporting are
integrated with business procedures............................................................................................5
TASK 2............................................................................................................................................6
P3. Calculation of various cost through appropriate cost analysis techniques for preparation of
income statement for company....................................................................................................6
M2. Application of various management accounting techniques as well as producing accurate
financial reporting documents .....................................................................................................9
D2. Producing financial reports which accurate apply together with interprets data................10
TASK 3..........................................................................................................................................10
P4. Advantages and disadvantages of types of planning tools in budgetary control used by
entity..........................................................................................................................................10
M3. Analysing utilisation of multiple planning tools with their applications in preparing and
forecasting budgets....................................................................................................................13
TASK 4..........................................................................................................................................13
P5. Comparison about the ways organisations adapt systems of management accounting for
responding problems associated with finance............................................................................13
M4. Analysing how companies responds for financial problems and leading sustainable
success........................................................................................................................................16
D3. Evaluating the ways planning tools responds appropriate for solving financial problems
for leading sustainable success..................................................................................................16
CONCLUSION..............................................................................................................................17
REFERENCES..............................................................................................................................18

INTRODUCTION
Management accounting refers to application of professional skills, competence and
knowledge to prepare accounting information which assist managers in devising policies for
planning and control undertaking operations (Armitage, Webb and Glynn, 2016). It also includes
multiple facets if accounting that aims to improve information quality which is delivered to
management related to operation metrics of company. To understand management accounting,
Innocent Drinks is chosen. It is a client of consultancy company that is AJ and Sons. Innocent
Drinks makes variants of smoothies, juices and sell them at coffee shops, supermarkets along
with other outlets. It have achieved sales of approx two million smoothies in a week.
The report demonstrates understanding of systems of management accounting and
methods which are opted in management accounting reporting. It also apply techniques of
management accounting to prepare financial statements. Further, the report explains usage of
planning tools in budgetary control and compares activities of two organisation in the manner
they uses management accounting for responding financial problems.
TASK 1
P1. Definition of Management accounting
Management accounting: It is defined to process which measures, recognise, interpret,
analyse and share financial data for pursuing towards organisational objectives and goals. It is
concerned with utilisation of accounting data which is gathered through cost accounting together
with financial accounting in order to devise policies, plan, control, monitor and from decisions
by management. Moreover, it is the concept which is used for elaboration of accounting
techniques, methods or systems that are couples with particular knowledge, assists management
in operations of maximising revenues and minimising losses (Ostaev and Et. Al., 2019). In
Innocent Drinks, objective behind using management accounting is for assisting in planning
together with devising future policies, coordinating operations and communicating updated
information to management.
Management accounting systems: These are said to confidential methods that are used
by internal managers to identify ways to manage business more effectively. Following are certain
management accounting systems with essential requirements on Innocent Drinks:
1

Price optimisation system: It is describes as petition of mathematical investigating in
organisation for determining the ways consumers reacts towards distinct prices of products
through various channels. In Innocent Drinks, the system is used for deciding prices that should
best fulfil objectives including maximising operation profit and hence forth. Following are
essential requirement of price optimisation system in Innocent Drinks:
 To discover an alternative through highest achievable performance within provided
constraints by minimising undesired aspects addition to maximising desired one.
 To determine how demand among consumers for products changes at distinct levels of
prices and then using information for setting prices that improves profit (Sanni and
O'Neill, 2019).
Cost accounting system: It refers to framework that is applied by company to
approximate cost of commodities with the hope of valuing inventory, controlling multiple costs
and analysing profits. It is kind of system in management accounting that managers of Innocent
Drinks uses with aim to capture production cost of firm by weighing input costs at each
production stage addition to fixed cost such as capital equipment depreciation. Essential
requirements of this system in the company are mentioned below;
 To allocate cost on the basis of activity based costing as well as traditional costing
(Geibel, 2018).
 To track cost and control them through making decisions that are concerned with
increasing productivity and profitability of Innocent Drinks.
Inventory management system: It is the system which control along with oversees
ordering, utilisation and storing components that are applied by organisation in producing goods
that it sells. In Innocent Drinks, inventory management system effectively track quantities in
storing location and also ensures that managers have information to make sufficient decisions for
inventory. Essential requirements of inventory management system are below:
 To keep proper track of available stock and manage reorder level.
 For categorising materials together with managing inventory in warehouse of Innocent
Drinks in order to provide required inventory to manufacturing place on right time.
Job costing system: The system refers to allocating manufacturing cost to single item or
batch of merchandise (Koelsch, 2016). The system is applied by managers of Innocent Drinks
2

when smoothies processed are distinct from one another. Essential requirements of this kind of
system are as discussed:
 Accumulating and applying information for assigning costs in order to process products.
 Ascertain reliable estimates for monetary values related to overheads, direct material and
information labour which are made on producing particular products or jobs. In Innocent
Drinks.
In Innocent Drinks, all the mentioned management accounting systems are applied for the
purpose of managing inventory, controlling costs, improving profits, optimising prices and
reducing risks.
P2. Different methods that are exploited for the purpose of management accounting reporting
In an organisation, various types of methods are opted for management accounting
reporting which are said to aggregation of financial addition to non financial information that are
obtained from accounting records of company (Pavlatos and Kostakis, 2018). Within Innocent
Drinks, distinct reports of management accounting are prepared for managing operational
functions and keeping record of employee workings. Some of methods that helps managers of
Innocent Drinks in generating management accounting reporting are as explained:
Cost report: In a business, management accounting calculates all types of costs of
products manufactured. For this purpose, cost report is used as it considers all labour costs, raw
material overhead plus any additional types of cost to prepare management accounting reporting.
All the data are properly summarised within cost report. With this reporting method, managers of
Innocent Drinks are capable to view cost values of juices and smoothies verse selling prices.
Moreover, the method assist administrations in controlling and planning margins of profit.
Budget report: This method is crucial in management accounting reporting as it is based
in preparing and sharing budgets with different departments of company (Alsharari and Youssef,
2017). Budget reports measures performance of firm and are prepared as whole in Innocent
Drinks as medium sized entity. The report guides managers to have re-negotiating terms with
suppliers and vendors, better employee incentives and cutting costs. It also makes managers to
look towards increasing sales demand and reducing expenses for saving money.
Performance report: It refers to detailed statement which measures outcomes of certain
activities ion context to its success within defined time frame. Management accountants of
Innocent Drinks makes effective use of budgets for comparing actual expenditures with revenues
3

to budgeted variables and them list or update the information on performance report. With the
report, managers plans future demands of its smoothies and juices and accordingly makes
changes in prices.
Inventory management report: It is summary of existing stock and stills information
such as quantity of stock available, products that are selling more and fastest, category
performance etc related to status together with performance of inventory. For successfully
growth of Innocent Drinks, it is crucial to manage inventory level in accurate and optimally ways
as possible. It is responsibility of purchase manager of the company to ensure accurate stock
levels are maintained in order to manufacture and sell variants of juices and smoothies. The
reporting method records all types of transactions that are related to allocation of inventory to
different departments and their end results (Heinzelmann, 2018).
All the defined methods are properly implemented by administrators of Innocent Drinks
for determining performances of employees and business, managing inventory level, estimating
budgets and many more.
M1. Illustrating benefits of systems with their application
Mentioned below are benefits and application of various management accounting systems
in Innocent Drinks:
Management accounting
system
Benefits and application
Price optimisation system The system benefits Innocent Drinks by analysing behaviour
of customers for changes in prices and making quick decision
for optimising prices for smoothies and juices as per demands.
The system is applied for discover an alternative and ascertain
how demand within consumers for its smoothies and juices
changes at well-defined price levels then using same
information to set prices which increases profit (Abdul-Hadi,
2017).
Job Costing system The system benefits the company by accumulating three
types of direct material, information labour and overhead. It
benefits Innocent Drinks by controlling cost together with
4

improving efficiency.
Job costing system is applied in the company for allocating
cost to separate jobs or products for generating revenues in
future.
Inventory management
system
Inventory management system benefits Innocent Drinks by
managing level of stock at multiple places with faithful book
keeping. It also prevents material shortage as it properly
optimise stocks within organised stores.
Application of system in the company is based on organising
inventory data in spreadsheets and avoiding situation of
product out-stock together with outrages (Hiebl and Richter,
2018).
Cost accounting system With the system, Innocent Drinks is benefited for eliminating
wastages and losses in production of smoothies and juices for
enhancing profits via cost allocation to distinct products.
Cost accounting system is applied in innocent Drinks for
capturing production cost by weighing cost of inputs in all
production stages.
D1. Critical evaluation about usage of management accounting systems and reporting are
integrated with business procedures
Management accounting is crucial part of accounting which provide necessary
information to top management for planning, organising resources, controlling operations and
taking accurate decision. All its systems integrate with multiple methods for preparing reports so
to work as per procedures of entity to reach successful heights. For example, inventory
management system is used with inventory management report so that managers of Innocent
Drinks are able to track required stock in order to execute process of entity to produce smoothies
and juices within defined time period. Along with this, various other systems such as cost
accounting, job costing and price optimising system are also applied to work as per designed
processes to achieve objectives. With reporting methods that are budget, performance etc are
5

integrated with the system that assist managers and other workforce to comply with procedures
of organisation (Zheng and Feng, 2018).
TASK 2
P3. Calculation of various cost through appropriate cost analysis techniques for preparation of
income statement for company
Cost: It refers to amount which is to be paid fro getting some product or service. In terms
of business, cost is monetary valuation of resources, efforts, risk incurred, opportunities forgone,
materials, consumption of time and unities in production together with delivery of products or
services (Labrador and Olmo, 2019). To analyse cost to prepare income statement, finance
manager of Innocent Drinks uses following techniques:
Absorption Costing: The other cost analysis technique which captures all costs
concerned with producing specific product. In Innocent Drinks, managers uses the technique for
making consideration towards external financial as well as income tax reporting.
Income statements calculated through absorption costing of Innocent Drinks fro the month of
April and May
Absorption costing April (In £) May (In £)
Sales 56,000 70,000
Less: Cost of sales
Variable manufacturing cost 30,000 30,000
Fixed manufacturing cost 18,000 18,000
Closing stock 16,000 24,000
Opening stock 16,000
Total cost of sales 32,000 40,000
Gross profit 24,000 30,000
Less: Fixed non manufacturing
cost
5,000 5,000
6

Net profit 19,000 25,000
Marginal costing: The cost analysis technique in which fixed costs of period and
variable cost are charged for units of cost are written off in complete manner against contribution
is termed to marginal costing (Hutahayan, 2020). In Innocent Drinks, the technique is used fro
analysing circumstances wherein break even point is equivalent with fixed costs. It implies
additional costs that are part in producing extra output units.
Income statements calculated via marginal costing of Innocent Drinks for the month of April
and May
Marginal costing April (In £ ) May (In £)
Sales 56,000 70,000
Less: Marginal cost of sales
Variable manufacturing cost 30,000 30,000
Closing stock 10,000 15,000
Opening stock 10,000
Total marginal cost of sales 20,000 25,000
Contribution 36,000 45,000
Less: Fixed cost
Fixed manufacturing cost 18,000 18,000
Fixed non manufacturing cost 5,000 5,000
Net profit 13,000 22,000
Reconciliation statement
April ( In £) May ( In £)
Profit/loss under marginal cost 13,000 22,000
Add/Less: Closing stock 6,000 3,000
7

Profit/loss 19,000 25,000
Profit/loss under absorption
cost
19,000 25,000
Working note:
Calculation of closing stock
under marginal costing
April (in £) May (In £)
Total variable manufacturing
cost
30,000 30,000
Total produced units 6,000 6,000
Per unit cost 5 5
Closing stock 10,000 15,000
April (in £) May (in £)
Calculation of opening stock
under marginal costing
Opening stock units 0 2,000
Per unit cost 5 5
Opening stock 0 10,000
April (In £) May (In £)
Calculation of closing stock
under absorption costing
Variable manufacturing cost 5 5
8

Fixed manufacturing cost (per
unit)
3 3
Total absorption cost per unit 8 8
Closing stock 16,000 24,000
April (in £) May (In £)
Calculation of opening stock
under absorption costing
Opening stock units 0 2,000
Per unit cost 8 8
Closing stock 0 16,000
Calculation of Break even point Values
Solution:
Variable cost 49
Fixed cost 14,0000
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
9

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
The income statement shows that through absorption costing, net profit of £ 19,000 is
made in April while in May, Innocent Drinks achieved net profit of £ 25,000. At same time,
through marginal costings, net profit of £ 13,000 and in May, net profit of £ 22,000 is generated
by the company.
M2. Application of various management accounting techniques as well as producing accurate
financial reporting documents
In Innocent Drinks, managers have applied cost analysing techniques of marginal costing
and absorption costing to calculate profitability. These techniques helps in analysing, recording
together with controlling multiple operations (Maelah, Al Lami and Ghassan, 2020). Along with
this, reconciliation statement is also prepared and it is analysed that the company attained profit
10