Management Accounting Report: Financial Analysis for Vectair Holdings

This report provides a comprehensive analysis of management accounting principles and their application within Vectair Holdings. It begins with an introduction to management accounting, differentiating it from financial accounting and outlining various management accounting systems like cost accounting, inventory management, and job costing. The report then delves into different management accounting reports, such as cost accounting, inventory management, budget, financial, and accounts receivable reports, highlighting their significance and benefits for Vectair Holdings. Furthermore, it explores the integration of management accounting systems and reporting for long-term profitability, followed by a detailed examination of absorption and marginal costing techniques, including calculations and break-even analysis. The report also discusses the importance of generating financial reporting documents and interpreting business activity data. A significant portion is dedicated to planning tools for budgetary control, comparing Vectair Holdings with Nisa, and analyzing management accounting techniques for sustainable success, concluding with an evaluation of planning tools to address financial challenges. The report aims to provide a thorough understanding of management accounting practices and their strategic importance for business decision-making.

MANAGEMENT ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
A. Explaining management accounting and different type of management accounting system
................................................................................................................................................1
B Different management accounting reports and their importance in organisation...............3
C. Benefits of management accounting system in Vectair Holdings Ltd...............................4
D). The integration of management accounting system and management reporting in
organisation............................................................................................................................5
TASK 2............................................................................................................................................6
A.1 Absorption costing and Marginal costing........................................................................6
A.2 Calculation of absorption and marginal costing..............................................................6
B. Calculation with the help of break even formula...............................................................8
..........................................................................................................................................................8
C. Significance of generating financial reporting documents................................................8
D. Interpreting data of business activities performed in above case......................................9
TASK 3............................................................................................................................................9
A. Advantages and Disadvantages of different types of planning tools used for budgetary
control.....................................................................................................................................9
C. Comparison of Vectair Holdings with Nisa in adapting different management accounting
systems to respond financial problems.................................................................................10
C. Representing application of planning tools for purpose of forecasting, analysing and
preparing budget...................................................................................................................12
D. Analysation of management accounting techniques for sustainable success..................12
E. Evaluation of planning tools that could be used to solve financial problems..................13
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Management accounting is referred as specialised branch of accounting as it plays very
important role for surviving and accomplishing growth in business entity. In the present scenario,
there is huge requirement for presence of appropriate management accounting system for
ensuring about proper and efficient day to day non financial and financial activities. The present
report will discuss about its significance and types on basis of Vectair Holding (SME). In the
similar aspect, it will show various information related to management accounting reports and its
significance to management. This report will represent advantages and limitations of accounting
systems along with their application. It will articulate about different range of management
accounting techniques such as absorption and marginal costing. This report will also provide
importance of these techniques along with Break even and Margin of safety. Furthermore, it will
discus about different planning tools on basis of budgetary control with their merits, demerits
and its application. For comparing various parameters for responding to financial problems,
NISA has been considered with proper evaluation.
TASK 1
A. Explaining management accounting and different type of management accounting system
It is a process which manages income and expenses of a business. Accounting is a
process of systematic recording, measuring and communicating information about day to day
financial transactions of company.
Financial and management accounting are two main type of accounting system:
Financial accounting: this accounting system keep record of all transactions in an
organisation. As per the guidelines, all the transactions in a company are recorded, summarized
and presented in a financial report which helps in evaluating overall financial performance. .
These statements are considered to be used by external people like shareholders, investors,
government, auditors etc. to evaluate the financial strength of an enterprise. Examples are
Income statement and balance sheet (Otley, 2016).
Management Accounting is a process which helps in identifying, measuring, analysing
and communicating information to managers so that organisational goals and objectives can be
determined. The basic difference between management and financial accounting is the users of
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the information. Managerial information provided by management accounting is used by
management of company, where financial information is used by both outsiders and management
of company. Management accounting helps in determining business expenses to maintain
internal fiscal report and record, which help in decision making process of management of
company in achieving pre-determined goals.
Different types of management accounting system that are required by Vectair Holdings
are:1. Cost accounting system: This system is used by manufacturers to record the flow of
inventory through various production stages. It helps in estimating the expenses of the
goods produced for determining revenue, inventory valuation and cost- effectiveness. It is
important for a firm to know which products are profitable and can be determined by
knowing accurate cost of production (Cost Accounting system, 2018). Cost accounting
system involves actual costing, nominal costing and standard costing. It consists of
actual, normal and standard cost which are described as follows: Actual cost is referred as an expense on actual aspect which are used for acquiring asset
along with supplier invoiced expense and delivering cost and appropriate setup. Normal cost is used for proper valuation of products which were manufactured as it
comprises direct material, direct labour and manufacturing overhead is identified on its
particular rate (Fullerton, Kennedy and Widener, 2014).
 Standard cost is replicated as practice for substituting expected cost on actual aspect with
reference to accounting records and periodically differences in expected and actual cost.2. Inventory management system: it is a system that uses company's inventory, ordering
and storing it. Vectair Holding's input and finished goods and services are essential part
of the business activity. This system is important as it lets the production department the
need to restock certain items, purchasing of raw material and at what price should be
purchased. The main objective of this system is to check the requirement of more
inventory or the extra inventory level or shortage of stock . It should consider various
techniques such as Just in Time, FIFO, LIFO and periodic inventory in Vectair Holding.
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3. Just in Time (JIT): It is referred as common method for increasing efficiency and to
reduce cost. It would decrease waste by attaining goods with basic necessity.
4. Periodic inventory: This system is updated on periodic duration with absence of effort to
record sales of inventory as well.
5. Job costing System: It is a process of assigning costs that is incurred by a specific job
done by company. It systematically divides overhead, direct material and direct labour
cost to estimate their real cost. it is an essential system for allocation of expenses of every
goods and maintain record of every expenses.
B Different management accounting reports and their importance in organisation
Accounting reports are significant part which helps the management of company to know
the actual picture of company's overall performance. The management of large-scale business
makes the accounting reports on quarterly which will help them to make important strategic
decisions to improve company's performance.
There are many types of management accounting records which are important to provide
accurate information from different departments of Vectair Holdings Ltd:
1. Cost Accounting reports: A cost report offers information to the management about all
raw material costs, overhead, labour cost etc. This report helps the manager to know the
cost price of items and their selling prices. The profit margins of the products are
estimated on the basis of information provided by these reports (Cooper, Ezzamel and
Qu, 2017).
2. Inventory management report: These reports help centralised record on stock
expenses, workers, and other overhead expenses in the process of production activity.
3. Budget reports: These reports are fundamental for any management accounting
information and are vital in measuring company’s performance by preparing it
department wise. A budget is prepared on the historic performance of company. Budgets
are also prepared to meet any unforeseen circumstances, like shortage of financial needs,
inclusion of all sources for earning and expenses. This helps the management to control
complete expenses of company.
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4. Financial Reports: It is comprised of information related to financial performance over
a specific time period, or based on financial records, revenue statements, balance sheet,
statements of cash flow etc. These financial reports are mandatory for all business.
Financial reports are used by management as well as outsiders like shareholders,
investors, auditors, general public etc. Internal manager uses these to see financial
performance to make strategies for improvements . While, outsiders use it to check
financial position before any investment.
5. Account receivable report: This report offer credits to customers and allows the
managers to identify the defaulters with the help of remaining balance of customers after
specific time period. These also helps to solve issues of company’s collection process.
Importance of management accounting reports
The above stated reports of management accounting will help in forecasting future about
cash flow. It would be playing major role in make of buy decisions. The variances of
performances are understood in easier aspect. In the similar aspect, cost could be controlled with
appropriate allocation of resources. Last but not least, the rate of return must be analysed in
proper aspect.
C. Benefits of management accounting system in Vectair Holdings Ltd
Management accounting involves internal system which helps an organisation uses to
measures and determine its activity for management. Most important components of managerial
accounting are budgets, managerial performance records which compare real results with
budgeted records. The followings are different type of management accounting that can help
Vectair Holdings Ltd. :
1.Cost accounting system: it is a system which is used by management to determine the
expenses of their goods to evaluate the actual revenue, stock valuation and expenses control.
Cost accounting system is important for Vectair Holdings as this system will individually
measure and record the cost and compare it with estimated cost which assist the manager in
measuring the financial performance. This system is an essential part of management accounting
system of company as it gives analytical tools budgetary control, marginal costing, standard
costing which can be applied by the management of company to enhance their predictability
efficiently (Suomala, Lyly-Yrjänäinen and Lukka, 2014).
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2. Inventory management: the process of controlling and forecasting of amount of goods
required for sale. Inventory management system is very important as it correctly
understand the stock requirenmnt and maintain the stock level. This system is important
for Vectair Holdings in tracking quantities across the stocking location, it helps the
manager to have insight and capable to make sufficient inventory decisions.
3. Job Costing System: it is a process of assignment manufacturing expenses to all goods
in inventory. The information provided by job costing is important for evaluating the
corrective estimating system of the company that is helpful in estimating price of
products (Job costing, 2018).
D). The integration of management accounting system and management reporting in
organisation.
The integration of management accounting system and reporting is very important for
Vectair Holdings for attaining long terms profitability and sustainable success. The importance
of accounting system and reports for company are:
 The purpose of preparing reports is providing information to various levels of
management, that will help in proper functioning of business operations.
 It enables the management to evaluate as the business activities are functioning according
to the predetermined targets and standards.
 However, it helps in measuring the actual performance of company with the budgeted
targets, correct actions will be taken by management if any unfavourable variances are
found.
 It could be critiqued that, managerial reports helps in motivating the employees to work
more effectively in order to increase the earrings of organization, the reports helps in
maximizing the profitability of the company (Tappura and et.al., 2015).
 Managerial reporting helps in collecting information and bringing out the relevant
information that would be included in the report.
Management accounting has become an important part of management, it not only enhances the
performance of the management but it also improves the performances of employees.
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TASK 2
A.1 Absorption costing and Marginal costing
Absorption Costing
It could be defined as the process of accumulating the costs which is associated with the
production process and apportioning them to individual products. In simple words, absorption
costing means all manufacturing costs are absorbed by the units produced. Hence, the cost of a
finished unit in inventory will also include direct materials, direct labour and both variable and
fixed manufacturing overhead. Mainly it is noticed that, this type of costing is required by the
accounting standards in order to create an inventory valuation that is stated in Vectair Holdings
balance sheet.
These products are not considered as expenses in the month when entity pays for them.
Instead, they are treated as asset which remains in the inventory till the point where they are
charged to the cost of goods sold. Absorption costing is often contrasted with variable costing or
direct costing. Under variable or direct costing, fixed manufacturing overhead costs are not
allocated or assigned to the manufactured products. This costing method is required for external
financial reporting and for income tax reporting (Bromwich and Scapens, 2016).
Marginal costing
It refers to principle where variable cost are charged on basis of fixed and unit cost
attributable for relevant duration which is fully written off against contribution of similar period.
It is pertaining to marginal cost with impact on margin and alteration in volume or output by
separating fixed and variable costs. This concept is directly based on cost behaviour which varies
from volume of result. It is also known as variable costing where each variable cost is
accumulated and ascertainment of cost on this specific basis.
A.2 Calculation of absorption and marginal costing
Profit and Loss statement on basis of Marginal costing
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Profit and Loss statement on basis of Absorption costing
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B. Calculation with the help of break even formula
C. Significance of generating financial reporting documents
With context of marginal costing, fixed cost are not considered in cost of production as it
avoids complicated and different misleading statements. The profit is not overstated due to
absence of absorbing fixed cost on basis of unsold inventory. In this aspect, decisions could be
qualitative through management by considering contributions. These fixed expenses are not dealt
with arbitrary aspect. In the similar aspect, absorption costing, fixed expenses are increased with
aim of production. There are very few fluctuations in profit with constant production along with
sales fluctuations (Wagenhofer, 2016).
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Further, Break-even and margin of safety has been presented for appropriate business
plan which determines cost structure and units for recovering its initial investment cost. MOS is
used for extracting revenue amount will be decreased to give result on basis of break even.
D. Interpreting data of business activities performed in above case
There is extraction of net income on basis of marginal and absorption costing method on
basis of segregation of both fixed and variable cost. Vectair Holding must accept method of
absorption costing because of earning high net income as 17700 as compared to marginal costing
(17500). There is presence of huge production from sales and more profit in absorption costing
because of closing inventory valuation comprises portion of fixed cost of particular time which
was passed in next year.
TASK 3
A. Advantages and Disadvantages of different types of planning tools used for budgetary control
 Cash Budget: It is a calculation of the cash outflow and inflow in an organization for a
specific time period.
Advantages
 Practical Benefits: The most significant advantage of cash budgeting is that, it restricts
the spending and prevents future debts.
 Strategic Implications: It also forces an entrepreneur to think about firm's financial
condition and make practical assumptions of it.
 Seasonal Planning: This type of budget helps in preparing a business financially for
uncertain seasonal fluctuations in sales and expenditure (Lavia López and Hiebl, 2014).
Disadvantages
11 Use of Estimates: It depends upon future estimates of events in which managers try to
evaluate future activities of the company.11 Lack of Flexibility: This procedure includes creation of numbers to enter in the budget,
distributing those reports to management and publishing the budget numbers. Once
published, these numbers cannot be changed.11 Manipulation: Budget numbers can be manipulated by managers with their ulterior
motives to reflect well on themselves.
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 Operating Budget: It is a type of financial plan which is designed to assist firm in
meeting its indebtedness and in order to prolong growth over time.
Advantages
1. Tracking: It helps in keeping track on the entire business, as it indicates both money that
is spent and money that is earned.
2. Preparation: It enables a firm to be prepared for financial responsibilities, as it shows
monthly expenses of a business from which managers get an opportunity put that money
aside to cover those expenses.
3. Investing: It shows operating costs to potential investors of the business to assist them in
making decision of whether to invest in the business or not.
Disadvantages
1. Federal Tax Complications: As, the aim of an organization is to earn profit and to build
operational budget in order to function at a loss can result in generation of an IRS
investigation and audit.
2. Keeping information accurate: Financial information change from one month to
another and it becomes mandatory top change operational budget as well, otherwise new
income figures that are projected through operational budget are termed to be inaccurate
immediately.
C. Comparison of Vectair Holdings with Nisa in adapting different management accounting
systems to respond financial problems
 Bench Marking: It is a process of measuring company's products and services against
the set standards of other competitive businesses which are considered to be the best in
the industry. Vectair Holdings use this management system to respond to financial
problems and measure performance products and services (Coad, Jack and Kholeif,
2015).
 Financial Governance: It is a process of collecting, managing, monitoring and
controlling financial information of a company. In other words, these are policies and
procedures which are used by Vectair Holdings to manage business data and ensure its
correctness.
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