Introduction to Management Accounting
Management accounting is the process of analyzing the costs which are incurred by the business and also the activities of the business in order to prepare internal business reports, accounts and records which can be of help in the decision-making process (Hilton & Platt, 2013). In simple words it is the process of analyzing financial and cost related data for the purpose of taking important decisions.
Nowadays management accounting System are widely used in businesses for the purpose effective reporting and decision-making process. There are many kinds of management accounting system with different objective and components (Fullerton, Kennedy & Widener, 2013). However, the basic purpose of following such a system is to analyze the data and communicate the same. Some of the management accounting process are given below:
- Cost accounting system: in case of cost accounting system cost allocation to the products are done on the basis of either activity based costing or traditional method of costing(DRURY, 2013). Cost accounting enables the business to identify the production costs and step by step departmental cost associated with the product. The system measures and records costs of the product then compare the results with the standard set by the management for analyzing the performance of the company.
- Inventory Management: Inventory management refers to the process of keeping track or records of the stocks or inventory of the business(Dekker et al., 2013). It involves keeping track of the inventory through all process such as sales, purchase (Wild, 2017). The objective of inventory management is to accurately understand the present inventory level of the organization.
- Job costing: Job costing refers to the allocation of costs on different batches of product or individual products. This type of costing method is applied when the products which are to be produced are different from one another(Braun, 2013). The costing technique considers the three major costs which are direct material, direct labour and overhead costs.
Methods used for Management Accounting Reporting
The different methods which are used for management accounting reporting are given below in details:
- Cost Reports: In such types of reports management computes and records costs of the goods which are manufactured. The computation is done considering direct material costs, labour costs and overhead expenses of the product(Dale & Plunkett, 2017). The cost reports present the management with insights of costs of the product and thereby estimate the profit associated with the product.
- Budgets: One of the most used tools of management accounting is budgets. It helps the management to forecast the expenses which the business will incur in near future and also plan for the same. Budgeting techniques are used by the management to plan for the future of the business and also measure the current performance of the business(Midrigan & Xu, .2014). There are various types of budgets which are prepared by the management such as sales budget, master budget, cost budget and similar other kinds of budgets.
- Performance Reports: The management utilizes budgets such that they are able to measure the actual results in terms of income and expenses of the company with the budgeted figures. The difference is than computed and for the purpose of evaluation is recorded in a new budget which is known as performance report(Boons et al., 2013). Such reports are prepared on yearly basis, quarterly basis or semi-annual basis as per the requirement of the company.
Benefits of Management Accounting System in Ryanair
Ryanair is engaged in providing passenger airline services and is one of the most successful airline brands in UK. The business model of the company is to maintain the costs of the business as low as possible. The benefits which are associated with the management accounting system which are applicable to Ryanair are given below:
- Cost accounting system: The business model of Ryanair is minimization of costs which are associated with the business. The cost accounting system will be useful for the business as it will help the management to keep the costs which is incurred by the business under check. The personnel costs and customer services cost of Ryanair can be maintained with the help of budgets relating to costs. Another benefit of the same, is to forecast the costs for future periods.
- Inventory Management: The main advantage of using inventory management system is that it keeps the aircraft equipment under check and maintains the records for the same. Another benefit which can be pointed out is that the management with the inventory records is able to estimate accurately how much more equipment might be required and the costs associated with the same.
Integrating Management Accounting System and Report in Ryanair
In the case of Ryanair, the management of the company needs to implement management accounting techniques such as cost accounting system, inventory management system. The management can use the cost accounting system to keep the costs of the business in further in control and such can also be used for preparation of cost reports which can be used by the management of Ryanair to analyze the performance of the business.
In addition to this, the management can also implement inventory valuation techniques so that the company can keep track records of the equipment purchased, discarded, loss with their respective costs as well. This will help a great deal in the effective management of the business. The management accounting system and management reporting techniques can go hand in hand and effectively help the management in taking decisions.
Product Cost Under Absorption and Marginal Costing Techniques
The difference between marginal costing and absorption costing technique is in the allocation of costs of the products. In case of absorption costing both fixed and variable costs are considered to be part of the products costs whereas in case of marginal costing only the variable part of the products costs are considered to be part of the products costs (Drury, 2013).
The income statement under both the methods are prepared by considering the selling price of the products and multiply with the quantity to be sold in order to get sales revenue of the product. Then the costs associated with the product are deducted to get gross profit under both the methods. The only difference lies in the treatment of fixed overhead expenses. In case of absorption costing, the fixed overhead is included in the cost of the product and thereby not shown in the profit and loss account. However, in the case of marginal costing the fixed overhead expenses are shown in the profit and loss statement itself.
Income Statement under Marginal and Absorption Costing
The profit and loss statement which is prepared under absorption costing and marginal costing technique is different as shown in the profit and loss statement under both techniques. The profit and loss account prepared under Absorption costing shows that there is incidence of losses in the month of March and June which is due to the high cost of sales of the company. Whereas in case of Profit and loss account prepared under marginal costing technique shows that the net profits for the first four months is same and the only changes occur in the month of May where the sales of the company increased to £ 17,00,000. The non-manufacturing overhead of the company remains the same for all months which was £ 1,00,000.
Advantages and Disadvantages of Budgeting tools
The advantages of using budgeting techniques in the business of Ryanair are given below in detail:
- Budgeting techniques are very useful for controlling costs of the business and measuring the performance of the company(Marcel, 2014).
- It helps to define the goals, plans and policies of the company and also used for the purpose of communicating the same plans to different departments.
- The technique is useful in measuring the performance of the departments which is done by setting respective targets which the business has to achieve.
The disadvantage associated with the use of budgetary control are given below in point form:
- The accuracy of the budget is the major concern as due to inflation the prices and costs are continuously rising and therefore budgeting might not be effective.
- In addition to this, application of effective budgeting technique is costly and therefore not suited for small business concerns.
- The success of the budget depends on the management’s implementation of the plans incorporated in the budget and also on the judgement and estimation of the management.
Use of Different Planning tools
The different planning tools which are used by the business are discussed below:
- Use of Budgets: The management of Ryanair can use budgets for the purpose on controlling the business activities. The management of the company can use operating budgets, cost budgets.
- Pricing Strategies: The pricing strategies of Ryanair can be used effectively to set the prices of the products of the company and also ensure that the prices set are competitive with the competitors of the business.
- Costing Techniques: The costing techniques of Ryanair which follows minimization of costs of the business. If the business follows effective costing techniques and standard costing techniques then the business will be to carry out the planning process more effectively. In the case of Ryanair activity-based costing techniques will be the most appropriate.
- Strategic Planning: Ryanair can use strategic planning techniques such as SWOT analysis, Benchmarking and similar other techniques in order to gain competitive advantage in the business.
Comparison between Ryanair and Southwest Airlines
The basic problem with the management of the Ryanair faces is related to the estimating the revenues and costs of the business. In many cases the management is underestimating and such brings about undesired changes. The use of proper budget plan along with standard cost enables the company tom measure the performance and variances between estimated figures and actual results.
In the case of Southwest Airlines, the management of the company faces problems which relates cost increasing which is affecting the revenues of the business. Therefore for the management to estimate clearly the costs and reasons for such costs, costs reports are prepared for measuring the costs of the business and also identifying the sources to which maximum cost accrue.
Implementation of the Budgeting policy
If the management of the Ryanair effectively implements the budgeting techniques along with standard costing techniques then the management can analyze the variances and also identify the reasons for such variances. This will help the management of Ryanair in effective estimation process as well (Thurmaier & Willoughby, 2014). This will ensure the budgets which are prepared in future are prepared accurately. Therefore, it appears clearly that effective implementation of management accounting tools the business of Ryanair can improve both planning process of the company and also improve the overall management of the company.
Boons, F., Montalvo, C., Quist, J., & Wagner, M. (2013). Sustainable innovation, business models and economic performance: an overview. Journal of Cleaner Production, 45, 1-8.
Braun, K. W. (2013). Custom fabric ventures: An instructional resource in job costing for the introductory managerial accounting course. Journal of Accounting Education, 31(4), 400-429.
Dale, B. G., & Plunkett, J. J. (2017). Quality costing. Routledge.
Dekker, R., Fleischmann, M., Inderfurth, K., & van Wassenhove, L. N. (Eds.). (2013). Reverse logistics: quantitative models for closed-loop supply chains. Springer Science & Business Media.
Drury, C. (2013). Costing: an introduction. Springer.
DRURY, C. M. (2013). Management and cost accounting. Springer.
Fullerton, R. R., Kennedy, F. A., & Widener, S. K. (2013). Management accounting and control practices in a lean manufacturing environment. Accounting, Organizations and Society, 38(1), 50-71.
Hilton, R. W., & Platt, D. E. (2013). Managerial accounting: creating value in a dynamic business environment. McGraw-Hill Education.
Marcel, M. (2014). Budgeting for fiscal space and government performance beyond the great recession. OECD Journal on Budgeting, 13(2), 1A.
Midrigan, V., & Xu, D. Y. (2014). Finance and misallocation: Evidence from plant-level data. American economic review, 104(2), 422-58.
Thurmaier, K. M., & Willoughby, K. G. (2014). Policy and politics in state budgeting. Routledge.
Wild, T. (2017). Best practice in inventory management. Routledge.