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Introduction

Management Accounting is determined as a presentation of accounting information so as to formulate different kinds of policies which can further be adopted by management of a company in order to perform day-to-day activities. Thus, in simple words, management accounting assist management in doing entire functions that includes planning, organising, staffing, directing and controlling. Airdi is a company which is taken in this assignment and firm deals in manufacturing Hand Dryer thus, this report will discuss about different methods of management accounting for performing business operations in a better manner.

Present report will focus on understanding of management accounting system, along with application of range if management accounting technique is included in this assignment. In addition to this, explanation of use of planning tools for management accounting is mentioned in this report. Other than this, comparison of ways are included in this assignment which different organisation can use for responding to financial issues and problems.

TASK 1

P1 Management Accounting and its different types

Management accounting is considered as a process in which accounting information that are obtained from financial accounting and cost accounting are interpreted, analysed, identified and presented. Thus, it can be said that management accounting assist managers of a company in formulating policies and making decision for day-to-day activities. Therefore, in an organisation management accounting plays a crucial role in determining as well as forecasting cash flow. For operating its business in a better manner it is important that Airdi has proper management accounting department who can help managers in preparing effective reports of budget. Company is manufacturing Hand Dryer, and is well recognised around the globe.

There are different types of management accounting system which Airdi can incorporate for operating its business in an effective manner, therefore, crucial management accounting system are explained below for better understanding.

Job Costing System: This is a system that after monitoring the expenses helps an an individual and management in assigning manufacturing cost for a specific products. Job Costing system can be used by Airdi and is applicable when company's products are identical and can keep a record of order expenses. Therefore, job costing system is used by companies when they have products that are different from one another. A significant variations in products manufactured can be seen such as direct material can be directly linked with direct labour. Main requirement of this, is to evaluate the actual cost and revenues of a product and commodity.

Price Optimising System: This is basically used for controlling the prices of resources, thus, price optimising system can be incorporated by company so as to decide price of multiple goods at the same time. Therefore, for a firm it assist them in determining the effects of demands after fluctuation in different price level. Moreover, Airdi company will use this method in order to determine the price as per customer's segments so that company can know their responses as per different price levels. Main purpose of this is to deliver best quality products to its customers according to the needs and wants under limited period of time.

Inventory management System: This basically guides company with when to order a product and in what proportion. Inventory management system helps firm in minimising the total cost of inventories so that organisation can generate high level of return. Therefore, with the help of this method Airdi Ltd., can manufacture their products and keep them as a stock so that it can be used whenever it is required. This can be further applied by using three different method which is important for managing the inventory system are LIFO (Last In, First Out), FIFO (First In, First Out) and ABC. In relation with Airdi Ltd., they are using ABC form for selling their product. In this category products that comes under the category of A are need for attention because it has a great impact in terms of finance. Likewise, B and C denotes moderate and low-value commodities respectively.

Cost Accounting System: It is determine as a framework which is used by companies in order to estimate cost of their products in order to get profitability. Therefore, it is crucial for Airdi to know what kind of goods are profitable and which one are not. In addition to this, Cost accounting system helps company in knowing and estimating closing value of material inventory, work in progress and inventory of finished commodities so that financial statement can be prepared. This includes two main cost accounting system i.e. job order costing: It is cost accounting system that compile different manufacturing cost separately as per the job assigned. Process costing: This is determine as a cost accounting system that accumulates cost of manufacturing according to the separate process. The main purpose of cost accounting system is to estimate cost and revenue for the company.

P2 Methods for Management Accounting Reporting

Management accounting reporting helps management to determine the actual performance of the organization. These reports are prepared weekly, monthly, quarterly or yearly. It involves collection of data that gives material information about operations of organization. Management reports helps the managers to forecast important business decisions. Airdri Ltd. is a hand dryer manufacturing company. Airdri needs management accounting report for better decision making because it will help the company to determine existing and future operations and will provide accurate financial information. Different management accounting reporting methods are as following:

  1. Budget Reports: Budgeting reports are prepared to analyze related estimated cost. It is prepared on the basis of expenditure of previous years. It will help Airdri to evaluates the performance of different departments and help them to control costs. It will also help in analyzing the actual performance with budgeted performance. These reports helps in providing incentives to employees and motivates them to achieve desired objectives. Therefore, with the help of this report, managers of Airdi Ltd., will be able to compare their business performance in one financial year.
  2. Inventory and manufacturing reports: These types of reports are prepared by manufacturing companies to make inventory and manufacturing process efficient. It includes labor cost, per unit overhead cost and other cost which are included in manufacturing process. This report will help Aridri in comparing different assembly lines of business which provides area of improvement so that performance of the departments and employees can be improved and it will enhance efficiency and effectiveness.
  3. Job costing reports: This kind of reports helps in determine the cost, expense and profitability of particular projects. This report will help Aridri to identify the profitable and non profitable business activities so that they can increase their efforts by focusing on profit making activities. It will help them in reducing wastage of cost so as to make the project more successful.

M1 Benefits of management accounting system

Job Costing System and its Benefits:

By incorporating this system, Airdi Ltd., can evaluate changes in behaviour of customers as per different-different price strategy. Other than this, it assist firm in evaluating the quality of work which is being done.

Price Optimisation System and its Benefits:

With the help of this method Airdi Ltd.,can determine the attitude and behaviour of consumers based on different prices. As a result, through this method company can maximise its profits.

Cost Accounting System and its Benefits:

This system measures the efficiency of process which is being incorporated by company for making improvements. Cost accounting system is applicable for reducing cost of a commodity.

Inventory Management System and its Benefits:

Through this system Airdi Ltd., can improve their accuracy level and effectiveness as well. It is being used by most of the companies because of its cost and time saving tendency. With the help of this, stock of inventory can be maintained which can be used for future purpose.

D1 Critical evaluation on management accounting report integrated within organisational process

Types of Reporting

Integrated within organisational process

Budgeting Report

Airdi, with the help of both integrated organisational process and budgeting reports can make path for companies activities so that targeted goals and objectives can be achieved in an effective manner.

Job Cost Report

Main purpose of Airdi Ltd., should be of achieving cost objectives so that price strategies can be decided by minimising overall cost of a product.

Inventory and manufacturing report

This report will provide benefit to Airdi Ltd., to track and monitor procedure of inventory.

TASK 2

P3 Cost calculations to prepare an Income statement

Cost indicates the value of money which are being put or used for manufacturing product so that the same can be deliver to its customers. This includes material required, resources, time and utilities etc., Furthermore, cosy are of two types:

Fixed Cost: These are constant and doesn't change even after increase or decrease in number of products or services which are being produced or sold. Fixed cost comes under operating expenses which cannot be avoided by a firm. This is moreover used in break even analysis so that level of pricing can be determined. For example: property taxes which has to be

Variable Cost: These are the cost which vary with the proportion of production output. Variable cost can increase or decrease and it depends upon the goods produced. Therefore, it can be said that this depends upon the products which are manufactured per unit. In order to calculate variable cost one can use this formula that is given below:

Total variable cost = Quantity of output X Variable cost per unit of output.

Marginal Costing: This determine as a rate at which a change in total cost can be seen because of the increase in production by one unit. Marginal cosy is important for an organisation as it helps a company in taking effective decision for their business operations.

Net income = (sales revenue – marginal cost of goods sold) = (contribution – fixed cost)

Absorption Costing: It is a cost accounting method for valuing inventory. It includes all the costs of manufacturing a product like fixed and variable costs. This costing method gives a more comprehensive and accurate view on how much it really costs to produce your inventory. The components of absorption costing are: Direct material, direct labour, variable manufacturing overhead and fixed manufacturing overhead. It is possible to use absorption costing to allocate overhead costs for inventory valuation purpose. Absorption costing is a time-consuming and expensive costing system.

Net Incomes = (Sales revenue – Cost of goods sold) = (Gross profit – Selling and Administrative expenses)

Working Notes:

Income statement on the basis of marginal costing:

Particulars

 

Amount

 

 

 

Sales revenue = (no. of units sold x selling price of each = 600 x 55)

 

£33000

Marginal Cost of products sold:

 

£9600

Production = (units produced x marginal cost per unit = 800 x 16)

12800

 

closing stock = (closing stock units x marginal cost per unit = 200 x 16)

3200

 

Contribution

 

£23400

Fixed cost ( 3200+1200+1500 )

 

£5900

 

 

 

Net profit

 

£17500

Income statement according to absorption costing:

Particulars

Amount

 

 

Sales = (selling price x no. of units sold = 55 x 600)

£33000

Cost of goods sold = (total expenses per unit x actual sales = 23.375 x 600)

£14025

Gross profit

£18975

Selling & Administrative expenses = (variable sales overhead x actual sales + selling and administrative cost = 1 x 600 + 2700)

£3300

 

 

Net profit/ operating income

£15675

Break-Even Analysis: This is a kind of tool which is used by company in order to determine calculations so that on the basis of this margin of safety can be examined. In addition to this, it assist firm in determining the relationship between variable and fixed cost. Most of the company with the help of this, forecast their sales in order to know sat which point firm can generate the high level of revenues. Therefore, in relation with Aridi Ltd., Through break-even analysis they are being able to determine how much products are needed to be manufactured so as to reach the estimated cost level.

  1. Products that are to be sold in Break-Even points.

Sales per unit

40

Variable costs   VC = DM + DL

28

Contribution

12

Fixed costs

6000

BEP in units

500

  1. Sales revenue in relation with Break-Even points

Sales per unit

40

Variable costs   VC = DM + DL

28

Contribution

12

Fixed costs

6000

Profit volume ratio PVR = Contribution / sales * 100

30.00%

BEP in sales

20000

  1. Quantity of goods that are to be sold so as to generate a profitability of £10,000

Profit

10000

Fixed costs

6000

Contribution

16000

Contribution per unit

12

Sales

1333.33

  1. Margin of safety after selling of 800 products

Formula for MOS

Margin of Safety = Budgeted or actual sales – Sales required to Break-Even

Actual sales in units

800

Break even sales in units

500

Margin of safety

37.5

Margin of safety (MOS): It is determine as a principle of investigating the difference between break-even and budgeted sale of an organization. According to the above given calculation it can be analysed that if a company has a actual sale of 800 units and its break-even sale is of 500 units than their marginal cosy will be of 37.5 units.

M2 A range of management accounting techniques

Management accounting has a wide range and it includes several techniques that assist an organisation in collecting valuable internal information. Therefore, by using these kinds of techniques managers of Airdi Ltd., can prepare a report which can further help company in taking effective decisions. Henceforth, some of techniques that can be incorporated by the firm are explained below:

Standard Costing: It is determine as a technique that assist firm in recording account transactions and through this company can further evaluate the difference between standard and actual cost.

Marginal Costing: This kind of technique is applicable and is accountant of Airdi Ltd., can use for decision making as it control cost and maximize profits in return.

D2 Analysis and Interpretation of data

With the help of above data mentioned it can be evaluated that management accounting uses various kinds of methods for calculating cost of product according to the unit manufactured. Under absorption cost all cost are incorporated for the calculation part whereas, in marginal cost, only the variable cost is taken into consideration. Therefore, with the help of this, the value that is evaluated on the basis of absorption and marginal cost is £15675 and £17500 respectively.

TASK 3

P4 Advantages and disadvantages of different types of planning tools for budgetary control

Budgetary Control

Budgetary control refers to planning that helps management in allotment of duties and authorities, to assist in estimating the plans and policies for future, set standards for result, provide aid to analyze the standard and actual performance with which management can analyze performance of operations. It helps in minimizing the wastage in unprofitable areas of operations and focus their time and skills in profitable areas. Every organization need to prepare budget to allocate resources to mid-level and lower-level for better functioning of operations and to achieve objectives and goals.

As any other organization Aridri ltd. also needs budgetary control for smooth functioning of its operations. Managers needs to control finance activities in less productive areas because this company deals at small scale. Therefore, every single pound in business is precious. Moreover, budgetary control also helps in reducing risks which may arise due to  natural disaster(earthquake, flood etc.), fluctuations in economic conditions(changes in demand and supply, exchange rates, interest rate, inflation, return on investment etc.), innovation and introduction of new technology and terrorists attack. These kinds of risks can affect organization unfavourably. Thus, for reducing these risks, some control planning tools are given below:-

Planning Tools

Usage

Advantage

Disadvantage

Forecasting planning tool

Planning is viewed as a roadmap for an organization to achieve its goals and objectives. Forecasting means prediction for future activities. Therefore, forecasting tools are used to anticipate future uncertainties related to the business. In context with Aridri, forecasting tools can be used for analysing the risk and opportunities that may occur in future.

Aridri Ltd. can use forecasting tool to build out strategies to reduce risk and achieving competitive advantages.

As no one can predict future with certainty, any kind of change can be harmful for the organization because then it will not be according to the forecasting.

Contingency planning tool

Contingency refers to happening of an emergency event and this tool assist management in managing funds for emergencies that may occur in near future. In context with Aridri Ltd. it can help in managing emergency events by building out strategies.

It help Aridri Ltd. in minimising the negative impact of emergency events on organization. This will help them for the smooth functioning of operations.

It can be expensive for the organization because they have to train their employees for the emergencies.

M3 Analysis on use of different planning tool for preparing and forecasting budgets

Controlling budget of a company is one of the main function of management accounting. Under this process, managers can use different planning tools like contingency and forecasting tools. Using these techniques, they can prepare proper future budget plan and prevent business from severe conditions like natural disasters, terrorists attacks and more. These tools also help enterprises to develop policies and strategies for budgetary control as well. Thus, in context with Aridri Ltd., these planning tools aid its managers and working staff to work more efficiently.

TASK 4

P5 Comparison on how organizations are adapting management accounting system to resolve Financial problems

Finance is vital part of an organization without which a company cannot operate in desired manner to achieve its goals and objectives. Every organization needs finances for smooth functioning and achievement of goals and objectives. Profitability of an organization depends on finances. Sometimes company faces some issues related to finances, these issues are common and does not depend on location or industry. The sooner a business discover its issues, the sooner it can achieve better position in industry. The following are most common reasons for financial problems:

Overstock of equipment: sometimes organizations purchase a lot of equipment than its need and this leads to overstock of equipment. Buying equipments more than needs can create the problem of blockage of funds. Investing large amount in equipments can cause harm in estimated budget. Company lost opportunities for use or investment of these blocked funds. Company can deal with this financial issue by reselling the stock which are not required. This will bring money back and company use this money in the organization to increase profitability.

Too much debt: In an organization one of the major financial issue is excessive debt. Being in this kind of situation company will not be able to attract investors and not satisfy its shareholders and stakeholders as the enterprise is not in the condition to pay good returns to them. In this case reputation of organization will be at stake as they don't have enough assets to repay the debt. This will lead the to bankruptcy.

Therefore, for resolving such mentioned financial issues, employers of Aridri Ltd. has used following two major techniques of management accounting as shown below:-

KPI (Key Performance Indicators): This system provides techniques by which a company can address finance related issues. It also helps in checking performance of each department and identify in which area, modification are required. As per relation with Aridri, Key Performance Indicator helps in identifying issues related to financial and non-financial performance. According to current situation this company faces various problems related to finance. It includes overstock of equipment where to enhance business, this firm has invested more than need on machinery. Along with this, debt of business also goes high, due to which this company fails to retain interest of stakeholders. Therefore, using financial KPI, managers of this firm develop strategies by which they can gain interest of shareholders and assist them to make investment for further activities. Moreover, they make more action plans by which in future, occurrence of such issues can be reduced in future.

Bench-marking: This systems also plays a vital role in improving performance of a company. It check progress report of business by comparing with previous record in order to evaluate strategies proves better to give advantage. If performance of business is not much improved then this technique provides ways by which improvement in operational activities can be done. As Aridri has faced losses due to extra expenses and debts. Therefore, by bench-marking technique they can analyze reasons by which such problems has raised. Further, they can develop effective strategies and plans that helps in reducing occurrence of financial issues in future.

Comparison of Aridri with Hoffman Brothers, which is one of its competitor

Aridri Limited

Hoffman Brothers

· Aridri is one of the finest manufacturing company whose products are found in best quality. For managing and responding financial issues, this enterprise has used KPI technique. This tool helps in making strategies by which they can achieve sales target in given span of time.

· This firm adopt bench-marking system which helps in tracking performance of all departments and compare progress of business with its previous performance. This will aid in formulating unique and effective strategies by which financial problems can be resolved.;

· This enterprise deals in construction sector and provide services like heating air conditioners, plumbing and electrical and appliance repair. It also deals in small sector, therefore, different types of financial issues. To resolve such problems, its managers used to prepare proper budget plan first. They provide guidelines to workers to perform as per demand of business so that problems related to finance can be reduced.

· Its management team also use contingency tool to respond financial issues

M4 Analysis on how management accounting lead to sustainable success

Management accounting plays a vital role industries to gain sustainability in business. As per Aridri Ltd., way by which this management can lead success in business can be explained as:- This system provides various tools and techniques by which managers can formulate different plans and strategies to control budget. It also helps in giving solutions to this firm in managing finance and expense as well by tracking business activities. It includes different type of management reports like cost, budget, cost, inventories etc.

D3 Evaluation of how planning tools respond to solve financial problems

Since finance is most important aspect of businesses therefore, to resolve financial related issues, management accounting provides various techniques. For example- Managers of Aridri Ltd. KPI and Bench-marking tools to address financial issues. It also helps in taking proper action to resolve such issues and develop strategies through which occurrence of financial problems in future can be reduced. This firm also use contingency and forecasting plans to control budget so that employers can respond from those issues which may affect business in future. Along with this, importance of management accounting for resolving financial issues can be explained by following process

Formulate Plans and Strategies: Concept of management accounting can aid managers of Aridri to prepare plans as per objectives and goals of business. As currently, this firm wants to enhance sales performance by 10% to 12% in upcoming to years. Therefore, formulating plans as per desired manner, aid working staff to work in right direction so that set targets can be achieved in given span of time.

Implementation of plans: Management accounting also helps in executing plans and strategies more successfully. For this process, it give direction to managers how to allocate resources to different departments in precise manner.

Conclusion

From this report, It is concluded that management accounting is an important managerial concept for a company. It helps business to forecast and make proper future decision by providing necessary information related to business activities. As various discrepancies are occurred in business which increase much difference between actual and estimated outcomes. Therefore, techniques of management accounting help managers of a company to build on positive variance as well as negative one. It also provides techniques for a company to resolve financial issue and formulate strategies by which occurrence of such problems can be reduced.

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