Management Accounting Report: Cost Analysis for Heatrod Element Ltd

This report provides a comprehensive analysis of management accounting principles and their application within Heatrod Element Ltd, a UK-based manufacturer of household heaters. The report explores various management accounting systems, including price optimization, cost accounting, job costing, and inventory management systems like LIFO, FIFO, and AVOC. It delves into the presentation of financial information through management accounting reports, such as performance reports, budget reports, and accounting receivable reports. The core of the report focuses on calculating costs using absorption costing and marginal costing techniques, comparing their impact on net profit, and analyzing the reasons for profit variations. Additionally, the report examines the use of budgets for planning and control, and the identification of financial problems within the company, offering insights into how these tools support effective decision-making and financial management.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Management accounting and several types of essential systems................................................1
TASK 2............................................................................................................................................3
Calculate cost using appropriate techniques...............................................................................3
(b) Reason for analysing variations in profit...............................................................................6
TASK 3............................................................................................................................................7
Using budgets for planning and control......................................................................................7
TASK 4............................................................................................................................................9
Identifying financial problem......................................................................................................9
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Management accounting is the process of analysing business costs and operations to
prepare internal financial report, records and account for the managers (Arroyo, 2012). These
reports provide help to manager in decision making process to acquire business goals and
objectives. In general terms it is the act of making sense of financial and costing data and
interpreting that data into useful information for management and officers within an
organization. In this report, to better understand the topic of relevant topic manufacturing
Heatrod Element Ltd which based on UK and manufacturing household heaters at reasonable
prices. The overall report focus on the different types of management accounting system as well
as report. There are calculating net profit through marginal costing and absorption costing.
Additionally, determine several planning tools and accounting tools can help to face off various
financial problem.
TASK 1
Management accounting and several types of essential systems
In modern era, in every organisation required to systematic approaches through internal
manager that use to manage and control the basic needs of business. Management accounting is
systematic process which is used to collect, examine, measure and evaluate meaning financial
information and posting them in correct accounts so that valuable decision is made to improve
and increase profitability of business operations. Heatrod Element Ltd can use different types of
management accounting system these are -
Price optimisation system – The particular system based on the mathematical analysis
that carry out the information regarding to product and services by the fluctuation in price. It
records the information then applies it on cost and inventory to assistance and deciding price to
increase the profit. In Heatrod Elements Ltd, this system can help to set best prices as per the
requirement of customers and it will help to company to increase gross provide and production
(Chenhall and Moers, 2015) .
Cost accounting system – It is mostly applied by manufacturing company in order to
computation of valuation of inventory, profitability and cost control. Cost accounting system
tacking the process of inventory (i.e. raw material, work in process and finished goods) to
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analysis actual cost of production. In the context to Heatrod Element Ltd used the system to
evaluate total cost involved while manufacturing valuable product.
Job costing system – It is kind of cost accounting system where cost of a single unit has
been calculated. The particular system can be used to calculate value of different types of
product and it is especially used by manufacturing industry. In reference to Heatrod Element Ltd
can use the system to analysis the total number of employees who can involve in production unit
as well as set prices of heater to focus on overall expenses.
Inventory management system – It is a system that include of producing and oversees the
inventory of the firm. For each organisation inventory management system plays role of success
key because it can track a record of stock at each stage. As a result it can help to reduce wastage
and increase productivity. In context to Heatrod Element Ltd can apply the system in order to
know production units and aware for stocks.
 LIFO – Last in first out is method of inventory which can defined that stock come in last
that was going first out.
 FIFO – First in first out selling those stock which is come first in the company.
 AVOC – In the method used material on average cost for the production.
Presenting financial information
Through management accounting provide financial information to top management
which is related to internal system and record into reports. These Information should be relevant
to the user, reliable, up to date and accurate because it can help to decision making process and
understand to actual position of the company (DRURY, 2013) .
Different types of managerial accounting reports
Management accounting reports are the important parts of the reports that can help to
understand business activities of different departments. The reports will be prepared by manager
of company and present into financial and statistical form. It is mainly prepare to take short term
decision on daily basis and provide way to business finance. A manager of the Heatrod Element
Ltd prepare different types of management accounting reports to present actual performance and
analysis future improvement and development -
Performance Report – The performance report present all detailed information of
company as well as employees. With the help of report analysis budgeted and actual variance
and take appropriate action if the variance is unfavourable. If variance is favourable that time
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provide reward to those employees who contribute effectively. The internal manager of Heatrod
Element Ltd produce the report to compute and measure for better improvement.
Budget Report – Every organisation can prepare budget report to predict the cost and
expenses to analysing future situation. Through budget report examine all department to estimate
expenses then effectively prepare report. An ideal budget report help to user to make comparison
between estimated and actual results. The Heatrod Element Ltd can prepare report to prepare
plan for increase profitability and execute as per the plans (Hiebl, 2014).
Accounting Receivable Report – The particular report presents summary of the accounts
receivables. The report prepare by manager to define detail information to those person who can
take money from company and payment in future. A business can collect payments from their
customers and unused credit memos which are not collected yet. To increase sales volume
prepare report by Heatrod Element Ltd to sale out heater on credit basis and provide advantage to
create systematic list of customers.
TASK 2
Calculate cost using appropriate techniques
Cost – It is indicate the amount of the money which are spend by business in order to
create or manufacturing of goods or services. Cost contains of all required cost to get an asset in
place and ready to use. There are defined different types of cost - Direct & indirect cost – Direct cost can be described in accurately way and applied in
directly manner. It is typically provide advantage a single cost object therefore categorise
of any cost either as direct cost or indirect cost. Indirect cost are those expenses which
can apply to more than one business activity as well as can not assign indirect expenses
regarding to specific cost objects (Kokubu and Kitada, 2015). Fixed and variable cost – When a cost can not change after change in business activities
that are known as fixed cost. A variable cost will change as per the requirement and
affect by change in the level of activity to material cost. For example – direct cost
 Product and non production cost – The production cost related to manufacturing of
products like material and labour cost on the other side non production cost are
considering as other cost of the business like administrative cost and selling costs.
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Absorption Costing – It is described as a method where compute the cost of product
with indirect expenses as well as direct costs. At the time of calculation variable and fixed cost
are connected to manufacturing unit and it will related to manufacturing company. For example,
Heatrod Elements Ltd is manufacturing company which can adopted particular technique in
order to control cost through reducing utilisation of resources (Kotas, 2014).
Absorption costing for Quarter 1:
Particulars
Amount (in
￡)
Sales 66000
Less: Cost of sales
production cost (78000*0.65) 50700 0
Semi-variable (78000*0.20) 15600
Total Variable cost 66300
Less: Closing stock 10200
56100
Gross profit 9900
Less: -400
9500
Selling and distribution as fixed 5200
Net Profit 4300
Absorption costing for Quarter 2:
Particulars
Sales 74000
Less: Cost of sales
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…. ….Opening stock 10200
COGS (66000*0.20) 13200
production cost (66000*0.65) 42900
…. ….Total Variable cost 66300
Less: Closing stock 3400
62900
Gross profit 11100
Less: selling expenses -2800
8300
Fixed expenses 5200
Net profit 3100
Working note
…. ….Fixed costs 16000
…. ….Budgeted cost of production
80000 per
units
…. ….Budgeted fixed cost 0.2
…. …..Variable cost per units 0.65
Marginal Costing – It is considering as technique of costing where has been charged to
production cost units and fix costs are not taken to determine to total production cost. It is
focused on various items such as office and administrative expenditure, manufacturing expenses,
selling and distribution overhead to calculate the cost of production. Heatrod Elements Ltd apply
the technique of marginal costing in order to manufacturing additional unit (Otley and
Emmanuel, 2013).
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Quarter 1
6

Particulars Amount (in ￡)
Sales 66000
Less: Cost of sales
Opening inventory 0
… ….production cost (78000*0.65) 50700
Less: Closing stock (12000*0.65) 7800
42900 42900
Contribution 23100
Less:
… ….Fixed overhead 16000
…. ….Fixed & selling expenses 5200
21200
Net profit 1900
Quarter- 2
Particulars Amount (in ￡)
…. ….Sales 74000
Less: Cost of sales
Opening inventory (12000*0.65) 7800
….. ….production cost (66000*0.65) 42900
Less: Closing stock (4000*0.65) 2600
48100
Contribution 25900
Less:
…. ….Fixed overhead 16000
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…. ….Fixed & selling expenses 5200
21200
Net profit 4700
… ...Reconciliation
… ...Working note Q1 Q2
… ...Variable costing profit 1900 4700
… ...Opening inventory 0 7800
… ...Closing stock 7800 2600
Absorption costing profit 4300 3100
… …Opening inventory 0 10200
…. …Closing stock 10200 3400
(b) Reason for analysing variations in profit
As per the above calculation it has been analysed that both costing method useful to
calculate net profit and present differences. The main aspects which is critical to be taken into
accounts is connected to the fixed overhead expenses which is become reason of that differences
are arises. The same has been shown underneath -
On the basis of first quarter –
Overhead absorbed - 66000*0.20 = 13200
Fixed overhead costs – 16 so there are getting Under absorption about 1600
In 2nd quarter -
Total absorbed expenses: (74000*0.20) = 14800
Fixed costs = 16000 so there are under absorption approx 1200
So there are understand the differences between both profits due to fixed overhead -
Particular Q1 Q2
…... ….Profit from 4700 5900
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absorption
-2800 -1200
….. …..Profits as from
marginal 1900 4700
TASK 3
Using budgets for planning and control
Preparing a budget – Budget is based on the predetermination which is started before
the starting of project. Every company planning to prepare budget after analysis all departments
then predict income and expenses. There are record the amount of sales, purchase and
availability of resources. The amount collect of these items then submitted to budget committee.
They can evaluate resources then prepare budgets for different units which is submit to budget
department. After analysing and do changes prepare budget of specific department. There are
defined different types of budgets and their merits and demerits -
Operating Budget – It is form of budget where consist of all the revenues and expenses
for the specific accounting period of time. Eventually, there are consisting of various sub budgets
which is essential for the sales budget and it is prepared first. These types of budget prepare of
quarterly, half yearly and annually basis. In Heatrod Element Ltd, adopt particular budget to any
sis performance for short period of time (Sánchez-Rodríguez and Spraakman, 2012).
Merit of operational budget
 It can help to easily get particular goals and objectives of a company.
 With the help of budget get information of strength and weakness of company. Through operating budget recognise all problems and solved on time
Demerit of operation budget
 There are identified of lack of communication in between various sections.
 Variance analysis can take much more time to reach the management.
 It is not easy to predetermination of data in accurate way.
Master budget – The overall budget of a company includes all the sections or lower
budgets. It is considering as an expensive business strategy that documents anticipated potential
sales, manufacturing levels, capital investments and even loads to be acquired and repaid. In the
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context of, Heatrod Element Ltd follow the budget calculate of balance sheet as well as income
statement.
Merit of master budget
 Through particular budget analysis overview of the budget which define financial
position of Heatrod Element Ltd. It can help to supplying the resources to every sections fairly.
Demerit of master budget
 It bring out short information of sectional budget as well as it can not provide minor data
of the lower budget.
 It is not easy to update a master budget (Schaltegger and Burritt, 2017).
Cash budget - It is a statement that described about the all cash revenues and
expenditures which is based on assumptions for specific accounting period of time. The
particular budget has been produced after preparing of all budgets such as sales budget, master
budget, capital budget and purchase budget. There are recoded items of capital and revenue
receipts and payments. It is a document which is mainly prepare for external stakeholders and
after publishing can not change easily.
Merit of cash budget
 The specific budget can help to minimise the cost and profit maximization. Cash budget influence to think critically and forecast to carefully of company's financial
situation.
Demerit of cash budget
 It is difficult to analysis financial information through particular budget because in the
budget can not including non cash items.
 Predicted and figures can easily be influenced by ulterior motives.
Pricing Strategies – In present time every business focus on their pricing strategies to attract
more customers. These pricing policies can help to determine the cost and expenses of the
company in effective manner. The Nero Ltd follow the two types of pricing policies in order to
provide support to products at the time of producing in the specific accounting year. It has been
analysed that after the valuation of competition of a commodity to support to customer and
change the business organization. There are defined two methods -
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 Cost plus pricing – It is consist as most important approach which is used by Nero in
order to fix cost of goods then manufacture at the period of time. The particular method
contains of cost of labour, overhead cost and material to recover through selling goods.
 Full costing pricing – It can happen as an effective practices the cost of product is being
from as firms and is related to direct costs units to produce at the period of time (Suomala
and Lyly-Yrjänäinen, 2012) .
TASK 4
Identifying financial problem
The management accounting can help to solve problems of financial activities. This is
why because it include different types of tools and techniques which becomes basis to reduce
from any type of problems.
Financial Problem – It is defined any type of critical situation which can relate to
financial activities of business and create problem. There are identified different type of financial
issues that will discussed below: Unequal Cash flow – It is created in an organisation when company's cash flow did not
match so it will be required to record every activities like operational, investing and
financing. In the absence of cash inflow and cash outflow to create chances of financial
crises.
 Spending More than income – It is a type of issues which can happen when company
can not focus on their income and much more spend in comparison of revenues. Due to
this issues company face of lack of fund (Tucker and Lowe, 2014) .
Methods to indicating the financial issues
Key performance indicator - Key performance indicator are measurement of a business
process and function that shows the success or progress of business. Key performance indicators
(KPI) are business metrics used by corporate firm and its managers to track and examine crucial
factor of the business. performance indicators shows how well a business is doing. Without
KPIs, it would be difficult to evaluate the performance of a organisation.
Benchmarks - Benchmarking is a process that measures the performance of a company’s
products, services against those of another business observed to be the best in the industry. The
factor of benchmarking is to identify internal possibility for improvement. Benchmarking helps
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the business to understand how one small piece of a product , processes can be play a role in
success.
Financial Governance - Financial governance comprises to collecting, managing,
monitoring and controlling the financial information. Financial governance refers how
companies lead financial activities, managing the performance through controlling data,
compliance the aspects and disclosures of statement. Financial governance defines personal
responsibility of the company’s management and internal controls for the quality of reported
financial statements.
Basis Nero Ltd TPG Processing
Financial Problem The company is facing of the
different types of problems which is
related to income. So it is presenting
that company can spend money in
compare to revenues (Ward, 2012) .
The presented company face the
problem of unequal cash flow. It
will crate many problems in
reference to financial operations.
System To overcome from these financial
problem the manager of the
company adopt cost accounting
system which can help to arrange
records in systematic way
To sort out of particular issues
there is need to focused on the
uses of inventory so there is need
to apply inventory management
system due to large amount of
company is contains of
manufacturing process and
maintain to record of cash
receipts and payments.
CONCLUSION
From the above report it has been concluded that management accounting essential part
of any organisation which can provide all appropriate information to top management. Different
types of management accounting system can help to decision making process and various reports
such as budget report, performance report and accounts receivable report analysing to all
departments and present actual performance of company. These reports contains all reliable data
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