Management Accounting Report: Analysis of Heron Bros. Ltd

This report provides a comprehensive analysis of management accounting practices, focusing on Heron Bros. Ltd., an engineering firm. It explores various management accounting systems, including inventory management, job costing, price optimization, and cost accounting, detailing their applications and benefits. The report also examines diverse management reporting methods, such as budgeting reports, accounts receivable ageing reports, performance reports, and cost managerial accounting reports, evaluating their significance in providing financial and statistical information for decision-making. Furthermore, it critically assesses the integration of management accounting systems and reporting within organizations, emphasizing their crucial role in decision-making processes. The assignment also delves into the application of absorption costing and marginal costing techniques for net profitability calculations, as demonstrated through an annex. The report highlights the advantages and disadvantages of planning tools and the role of management accounting in addressing financial problems and achieving sustainable success, as well as how organizations adapt to financial challenges.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Activity 1................................................................................................................................3
Management accounting and different types of management accounting systems................3
Various methods used for management reporting..................................................................5
Evaluation of the benefits if management accounting systems..............................................6
Critically evaluation of management accounting systems.....................................................6
Activity 2................................................................................................................................7
Management accounting techniques and financial reporting documents...............................9
Financial reports which used for interpreting various business activities............................10
Advantages and disadvantages of different types of planning tools which is used by budgetary
control...................................................................................................................................10
Usage of several planning tools for designing and forecasting budgets..............................11
Analysis of how in responding to financial problems, management accounting can lead
organisation to sustainable success......................................................................................11
Comparison of how organisations are adapting management accounting systems to respond to
financial problem..................................................................................................................13
Evaluation of how planning tools for accounting help to solve problems...........................14
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................17

INTRODUCTION
Management accounting refers to the process of analysing business costs and operations
to framed and prepare internal financial report, records and account to aid managers decision
making process in achieving business goals. Basically, it can refer to the process of presentation
of accounting information in order to formulate the policies and procedure that can be adopted
by the management and assist its day to day activities (Ax and Greve, 2017). It is beneficial for
management of the firm because it help in preform all its functions including planning,
organising, staffing, directing and controlling. Management accounting is a periodic report which
is designed by the management department of the company after a specific time period so that
they can have proper information about the cost and can manage various accounts. This
assignment is related to Heron Bros. Ltd. which is an engineering firm and incorporated in 1982.
This organisation operate its business in building and civil engineering contractors based in
Northern Ireland, UK.
This report will discussed about the different type of management accounting, benefits of
management accounting system and various methods of management accounting reporting.
Further will discussed about the advantages and disadvantages of different types of planning
tools that are used in budgetary control.
MAIN BODY
Activity 1
Part A
Management accounting and different types of management accounting systems
Management accounting
It is also know as marginal and cost accoutring and is the process of identifying,
measuring, analysing, interpreting and communicating information for the pursuit of an
organisation's objectives. Basically, it the combination of two words as management and
accounting. It refers that management accounting is a type of accounting that is related to the
management of internal part of business (Bennett and James, 2017). There are different types of
management accounting system, some of them are as following:
Inventory management system- It is a type of management accounting system and
consider the process and procedure which oversee the monitoring and maintenance of stocked

products while the products are firms assets, raw materials and suppliers and can be finished
goods that are ready to sent to vendors or customers. It is one of the most important management
accounting system because it help in tracking the status of goods and services. In Heron Bros, the
firm use and implies this system for tracking products and services and checking the financial
products like mortgage loan's clarification and others (Bobryshev and et. al., 2015). It is
concerned with supervision and management of stock and non capitalized assets of the
enterprise. With the help of this management accounting system, the management of the
company can reduce cost and achieve appropriate inventory management.
Job costing system- It refers to a type of costing which is applied in industries, where
production cost is usually measured by the number of completed jobs. It monitor production cost
systematically by dividing them in overhead, direct material and direct labour costs and
estimating them at their actual value. In Heron Bros, job costing are used to make control on the
use of raw materials, labour hours and equipment by allocating the cost of each customer order
separately. The management department of the firm can applies this system at that time when the
products are identical to keep track of order expenses.
Price optimization system- It another type of management accounting system which is
applied by the organisation to take control the prices of resources. It is method which can used
by the management department of the find in context of declining the price of various different
products at a time. With the help of this method, it can be monitored that how demand will
fluctuate at different standards of prices. In Heron Bros, by adopting this method, the company
can monitoring pricing structures fro promotional pricing, discount pricing, initial pricing and
others. It is important for the company because with the help of it, the firm can links its business
volume with profits and increase profits by maintaining the same standards of customer
retention.
Cost accounting system- It refers to a framework which is implied by companies to
calculate the cost of their goods and services for profitability analysis, cost control and inventory
valuation. The main objective of this method is to capture an organisation's manufacturing costs
by analysing the input of each step of production. There are two cost accounting systems like job
order costing and process costing (Chenhall and Moers, 2015). Job order costing analyse
manufacturing cost partly for each job whereas cost accounting system accumulates production
cost separately for each process. In Heron Bros, the management department of the company can

developed easy and flexible cost accounting system which help in satisfying the needs of
different users and can be accept by the needs of the firm also.
Various methods used for management reporting
There are number of methods that can be used by the organisations for management
reporting. These various management accounting reports are beneficial for the management in
preparation of essential reports (Fourie and et. al., 2015). In Heron Bros, these reports help
mangers to provide correct and relevant financial and statistical information and data. These
accounting reports play an important role in the internal management of a business and include
monetary and non monetary information. There are different kind of report which are mentioned
below:
Budgeting reports- These kind of report method help the company to develop the plan to
determine the firm performance and making evaluation about the cost control and performance
of the department. Budget managerial accounting reports are critical in considering the
organisation's performance because it is created and developed as a whole for small businesses
and according to the department. In Heron Bros, the company generate a overall budget to
monitor the grand scheme of its business. The management department of the company
formulate the budget on the basis of its previous experiences. In this company, these budget
report are applied by the management department to provide incentives to the workers so that
they can encourage them to attain their desired goals.
Accounts receivable ageing report- This report method is a critical tool which is used to
manage cash flow if the firm extend credit to customers of its business. This report include
information about credit transactions which is beneficial for that kind of business which make
their business transactions by credit. This report consist date on which transactions take place
and this help the finance department to have proper information about the transactions that how
much money is due in the market by customers and help in reducing and removing credit
calculation complexity. In Heron Bros, this report method help in preparing report and checking
the overall collection from the consumers (Hopper and Bui, 2016). It bring transparency in credit
collection and help in finding problems with the company's collection process.
Performance reports- These are those reports which are prepared by the management
department of the company to analyse the performance of something. In context of management
accounting, this report method refers to the evaluation of employees and organisations

performance. Within an organisation, it help in reducing the complexity in deciding which
employee are eligible for reward and which is not. In Heron Bros, the management department
of the company use this report method for analysing and determining the performance of the
employees so that they can check the performance of each employees activities.
Cost managerial accounting report- This accounting help in computing the costs of
goods and products that are produced. A cost report provide the summery of all the information
which is used by the company for manufacturing products (Kaplan and Atkinson, 2015). In
Heron Bros, it help in calculating all the expenses which are generate before selling. If there
sales are less than expenses it means the firm is in loss and if selling cost is more than expenses
then the company is in profit. The management can use this report method for monitoring loss
and profit so that they can develop future plans and policies to earn more profit and reducing
loss.
Evaluation of the benefits if management accounting systems
Benefits of cost accounting system- It beneficial for firm because it help in identifying
reason regarding high cost which is generating in the process of goods and services offering. It is
important because it make easier to gather information for financial accounting processes.
Benefits of Inventory management system- It is useful because it help in tracking
information relate to products and services and help in saving time and cost.
Benefits of job costing system- The one and main advantage of it is that it permits
mangers to calculate the profit which is earned on individuals jobs and helping them to better
ascertain. It is useful because it help in continuous monitoring of all the business activities
specially cost occurring activities.
Benefits of price optimisation system- It provide a framework to monitor the customer's
reaction at different price standard. Within an organisation, it help in analysing the level of price
which is suitable and essential for customers as well as firm.
Critically evaluation of management accounting systems
In the context of organisational process, the integration of management accounting
reporting with accounting system is crucial because both typically link with each other. For
example, within an organisation, if the management department of that firm want to design some
marginal reports, it is essential that they must have proper and accurate information about the
management accounting systems (Kokubu and Kitada, 2015). If they do not have knowledge

about it then they can not prepare reports and take effective decisions. In Heron Bros, with the
help of various managerial reports, they can design management report and minimize the issues
and problems which are arising during the time of preparation of accounting reports.
Part B
Activity 2
Absorption costing- It is a type of costing method which is useful for calculating all the
production cost which consist fixed an variable cost (Maas, Schaltegger and Crutzen, 2016). It is
a full costing method and help the firm to analyse the cost of manufacturing which are incurred
by the firm on goods and products.
Marginal costing- It is an another method of costing in which variable cost eliminates as
the unit cost and fixed cost considered as period cost.
LM Engineering Ltd. can uses both these costing methods according to their objectives and
purposes. Here are the calculation of net profitability of LM Engineering Ltd. using both
marginal and absorption costing method:
Annex (A)
Budget 2019 2020 2021
Cost
Centre
Budgeted
production
overhead
costs in £)
Basis of
production
(overhead
absorption)
Cost
per
Hour Hours Cost Hours Cost Hours Cost
A 66000 22000 3 24200 72600 26620 79860 27500 82500
B 75000 15000 5 16500 82500 18150 90750 19500 97500
C 83600 41800 2 45980 91960 50578
10115
6 51500
10300
0
Annex (B)
(a) Labour hour: -
Product X = £6000*1 = £6000
Product Y = £8000*2 = £16000

Labour hour = £2,64,000
------------
22,000
= £12 per hour.
Overhead absorption on labour hour: -
X Y
Overhead absorption = 1*12 = 2*12
= 12 = 24
Total Overheads = £6000*12 = £8000*24
= £72,000 = £192,000
(b) Using ABC approach: -
Machine hour per period:
Product X = £6000*4 = £24,000
Product Y = £8000*2 = £16,000
Cost driven rate: -
Production set up = £179,000 = 2893 per set up.
60
Order handling = £30,000 = 416.666 = 417 per order
72
Machine cost = £55,000 = 1.375 per order
40,000
Overhead using ABC approach: -
X
Set up = 15*2983 = 44,745
Order = 12*417 = 5004
Machine cost = 24000*1.375 = 33,000
Total 82749
Y
Set up = 45*2983 = 134,235
Order = 60*417 = 25,020
Machine cost = 16000*1.375 = 22,000
Total 181,255
Annex (c)

Year X PV@ 12%
Dis Cash
Flow Y PV@ 12%
Dis Cash
Flow
0 -5000 -8000
1 2500 0.893 2232.143 1500 0.893 1339.286
2 1000 0.797 797.194 2000 0.797 1594.388
3 1000 0.712 711.780 2500 0.712 1779.451
4 500 0.636 317.759 1000 0.636 635.518
5 1500 0.567 851.140 1000 0.567 567.427
6 1000 0.507 506.631 2500 0.507 1266.578
Total 5416.647 7182.647
Payback Period = Initial Investment
Average Cash Flow
Project X = 5000 = 4
1250
*Average Cash Flow = 7500 = 1250
6
Project Y = 8000 = 4
1750
*Average Cash Flow = 10500 = 1750
6
NPV: -
Project X = Dis Cash Flow – Initial Investment
= 5416.647 – 5000
= £416.647
Project Y = Dis Cash Flow – Initial Investment
= 7182.647 – 8000
= - £817.353

Management accounting techniques and financial reporting documents
To formulate financial reports and statements, techniques of management accounting are
important and essential. Within organisations, the management department of firms formulate
financial documents such as balance sheet, cash flows and p&l etc. by using these kind of tools.
In Heron Bros, the financial documents are prepared by the managers so that they can get
information about different marketing financial statements and manage the fund of the firm.
Financial reports which used for interpreting various business activities
Financial reports are reflected by the business activities in a suitable manner which is
easy to understand. With the help of financial statements and documents such as balance sheet,
budget, p&l etc., the organisation can monitor its financial position. In Heron Bros, financial
reports are useful because they help in showing activities and operations of a business in a
financial form (Messner, 2016). In this company, the management of the firm prepare various
financial statements for analysing the effectiveness of business operations and activities.
Part A
Advantages and disadvantages of different types of planning tools which is used by budgetary
control
Budgetary control is a process of prepare budget for different activities and formulating
the future financial performance and goals by determining the last budgets. It is a tool and
technique which is used by the managers to monitor and control the financial activities and
operations of an accounting period (Nitzl, 2016). In Heron Bros, the mangers of the company
consists different factors to set financial and non financial objectives for several departments.
Advantages and disadvantages of different planning tools are as following:
Contingency planning- It is a planning tool which is implies by the firms to manage different
types of risk that arising suddenly or in unexpected situation during the time of performing
different operations in the company. In Heron Bros, it help the management department of the
firm, in developing plans and formulating strategies to overcome those issues and problems
which are generating at workplace.
Advantages- It help in minimising the chances of arising problems and issues by
designing appropriate back up plans. It help in taking right decision and correct action regarding
unexpected issues.

Disadvantages- This planning tool consume more cost and time when the managers of
the firm wants to update the changing situations. It create various conflicts during the time of
generate different backup plans for emergency.
Flexible budget- It is a tool that can be used by the management department of the firm for
making change in the budgets during the time when it is required. With in an organisation, these
budgets are applied to estimate the successful and unsuccessful areas in the operations of last
performance during a financial period. In Heron Bros, the mangers of the company designer
these kind of budgets for those operations which are variable in nature. It help the firm in making
change easily in those activities which have requirement fro it.
Advantages- This tool is beneficial because it help in offering correct result which consist
several range of different activities differently. It help in bringing coordination between various
activities and operations of Heron Bros.
Disadvantages- The main issue of this tool is that these budgets are difficult for managers
to understand because they are not fix at certain time (Otley, 2016). These budgets consider and
include various variables so it is hard to formulate them.
Usage of several planning tools for designing and forecasting budgets
Budgetary control help in defining a clear image of an organisation by offering tools and
techniques which are helpful for preparing and formulating the financial performance and goals
for future by determining the past performance. By using these planning tools and techniques,
Heron Bros can formulate several strategies, schedule and back plans to reduce and minimize the
hurdles in its business operations (Quattrone, 2016). With the help of flexible budgets, the
management department of the company can formulate different budgets for different types of
budgets which are variable in nature. By using all these planning tools like flexible budgets and
contingency planning, the firm can develop budgets and gaining profit by maintaining financial
position properly in competitive environment.
Part B
Analysis of how in responding to financial problems, management accounting can lead
organisation to sustainable success
Financial problems: Financial problem of an organisation is related to fulfilling basic
requirements of related to funds. There are different types of financial problems and issues that a
company face which directly affects its profitability and productivity. Thus, in order to overcome

this situation in best effective way it is required for an organisation to formulate efficient
strategies in order to increase its profitability. Heron Bros is taking advantage of different types
of measure to deal with company problem related with finance. Mentioned below there are some
issues related to finance:
 Problem of cash flow: This problem arises within organisation when they do not possess
cash for making payments for liabilities, they have opted for. These issues arises when
organisation do not earn more profit. Heron Bros has invested more in capital expenditure
for branding their products and were not able to pay back to their creditors. .
 Risk management: It is a most important factor that helps an organisation to effectively
sustain their business in a competitive environment that consist different types of
uncertain risk. Thus, in order to more competitive advantages it is required by an
organisation to develop various strategies to effectively manage and decrease associated
risk. Therefore, in order to cope up with these risk Heron Bros formulated best effective
strategies to manage risk related factors.
 Money management: It is a formative technique in which various related to spending,
tracking, budgeting and saving monetary resources that is available within an
organisation . It will effectively help management to control and manage their monetary
funds which they can utilize in other related activities in order to increase its profitability
(Maas, Schaltegger and Crutzen, 2016). Heron Bros effectively formulate different types
of strategies and provisions in order to effectively manage their money in related
departments within an organisation.
 Working capital: This form of capital is a money which is available in an organisation
to effectively manage company daily basis activities in order to meet financial liabilities.
As shortage of capital lead an organisation towards facing many severe issues (Messner,
2016). Heron Bros may deal many short term issues and debt related problems that affect
company daily basis operations.
Financial governance: This factor effectively defines numerous ways with the help of which an
organisation can effectively able to monitor, collect and control their financial information. With
the help of effective financial governance organisation management can easily able to evaluate
their future opportunities and overcome challenges. In regard with this, higher mangers holds the
responsibilities to manage accuracy of organisation financial statements.