Management Accounting on Airdi Company

The present report will focus on understanding the management accounting system along with the application of range if management accounting technique is included in this assignment. In addition to this, an explanation of the use of planning tools for management accounting is mentioned in this report. Other than this, comparisons of ways are included in this assignment that different organizations 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 is obtained from financial accounting and cost accounting is 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 organization, 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 that can help managers prepare effective reports of budget. company is manufacturing Hand dryers 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 specific products. A 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. Significant variations in products manufactured can be seen, such as direct material being directly linked with direct labour. main requirement of this is to evaluate the actual cost and revenues of a product or commodity.

Price Optimising System: This is basically used for controlling the prices of resources; thus, price optimisation 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 their needs and wants within a limited period of time.

Inventory management System: This basically guides company with when to order a product and in what proportion. Inventory management system help firms minimize the total cost of inventories so that organizations can generate high level of return. Therefore, with the help of this method, Airdi Ltd. can manufacture their products and keep them in stock so that it can be used whenever it are required. This can be further applied by using three different method which are important for managing the inventory system: 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 come under the category of A are needed for attention because it have a great impact in terms of finance. Likewise, B and C denote moderate and low-value commodities, respectively.

Cost Accounting System: It is determined 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 systems, i.e. job order costing: It is a cost accounting system that compiles different manufacturing cost separately as per the job assigned. Process costing: This is determined 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.

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P2 Methods for Management Accounting Reporting

Management accounting reporting helps management 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 help the managers forecast important business decisions. Airdri Ltd. is a hand dryer manufacturing company. Airdri needs a 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 follows:

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 evaluate 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 help in providing incentives to employees and motivate 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 costs, per-unit overhead costs, and other costs that are included in the manufacturing process. This report will help Aridri in comparing different assembly lines of business, which provides areas of improvement so that the performance of the departments and employees can be improved, and it will enhance efficiency and effectiveness.
3. Job cost reports: This kind of report helps in determining the cost, expense, and profitability of particular projects. This report will help Aridri identify 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 the behavior of customers as per different pricing strategies. Other than this, it assist firm in evaluating the quality of work which is being done.

Price Optimization 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, the company can maximise its profits.

Cost Accounting System and its Benefits:

This system measures the efficiency of processes that are being incorporated by the company for making improvements. A cost accounting system is applicable for reducing the 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

TASK 2

P3 Cost calculations to prepare an Income statement

Cost indicates the value of money which is being put or used for manufacturing product so that the same can be delivered to its customers. This includes material required, resources, time, 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 come under operating expenses, which cannot be avoided by a firm. This is also used in break even analysis so that the 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 determines the 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 make effective decision for their business operations.

Net income = sales revenue minus marginal cost of goods sold = contribution minus fixed cost.

Absorption Costing: 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 minus Cost of goods sold) = (Gross profit minus Selling and Administrative expenses)

Working Notes:

Income statement on the basis of marginal costing:

Income statement according to absorption costing:

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 companies, with the help of this, forecast their sales in order to know at which point firm can generate a high level of revenues. Therefore, in relation with Aridi Ltd., Through break-even analysis, they are being able to determine how much products is needed to be manufactured so as to reach the estimated cost level.

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

1. Sales revenue in relation with Break-Even points

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

1. Margin of safety after selling of 800 products

Formula for MOS

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

Margin of safety (MOS): It is determined 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 an actual sale of 800 units and its break-even sale is of 500 units, than their marginal cosy will be of 37.5 units.

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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 determined as a technique that assists firms in recording account transactions and through this company, they can further evaluate the difference between standard and actual cost.

Marginal Costing: This kind of technique is applicable and the accountant of Airdi Ltd. can use for decision-making as it control cost and maximizes 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, and 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 on a small scale. Therefore, every single pound in business is precious. Moreover, budgetary control also helps in reducing risks which may arise due to  natural disasters (earthquakes, floods, etc.), fluctuations in economic conditions (changes in demand and supply, exchange rates, interest rates, inflation, return on investment, etc.), innovation and introduction of new technology and terrorist attacks. These kinds of risks can affect organization unfavourably. Thus, for reducing these risks, some control planning tools are given below:

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 a proper future budget plan and prevent business from severe conditions like natural disasters, terrorist attacks, and more. These tools also help enterprises 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. The profitability of an organization depends on finances. Sometimes a company faces some issues related to finances; these issues are common and do not depend on location or industry. The sooner a business discovers its issues, the sooner it can achieve a better position in the industry. The following are most common reasons for financial problems:

Overstock of equipment: sometimes organizations purchase a lot more equipment than they need, and this leads to an overstock of equipment. Buying equipments more than needs can create the problem of blockage of funds. Investing a large amount in equipment can cause harm to the 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 is not required. This will bring money back, and the company will use this money in the organization to increase profitability.

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

Therefore, for resolving such mentioned financial issues, employers of Aridri Ltd. have used the 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 the performance of each department and identifying in which areas modifications are required. As per relation with Aridri, Key Performance Indicator helps in identifying issues related to financial and non-financial performance. According to the current situation, this company faces various problems related to finance. It includes an overstock of equipment to enhance business; this firm has invested more than it needs in 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 the interest of shareholders and assist them in making investments for further activities. Moreover, they make more action plans by which, in the future, occurrence of such issues can be reduced.

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 that prove 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. Aridri has faced losses due to extra expenses and debts. Therefore, by bench-marking technique, they can analyze reasons by which such problems have been raised. Further, they can develop effective strategies and plans that help in reducing occurrence of financial issues in future.

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

M4 Analysis on how management accounting leads 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 expenses 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. use KPIs and benchmarking 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 businesses forecast and make proper future decision by providing necessary information related to business activities. As various discrepancies occur 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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