Rent-A-Car's Management Accounting System

The assignment provides a detailed analysis of Rent-A-Car's management accounting system, highlighting its strengths and weaknesses. It covers various management accounting theories and practices, such as budgeting, forecasting, and performance measurement. The document also discusses the importance of monitoring and controlling activities in service sector organizations like Rent-A-Car. A conclusion is drawn that Rent-A-Car has a good management accounting system in place, which contributes to its growth in the market.

MANAGEMENT ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
LO 1.................................................................................................................................................1
P1 Explain management accounting and give the essential requirements of different types of
management accounting systems...........................................................................................1
P2 Explain different methods used for management accounting reporting...........................3
P3 Calculate costs using appropriate techniques of costs analysis to prepare an income
statement using marginal and absorption costs......................................................................5
P4. Types of planning tools used in budgetary control:..................................................10
P5 management accounting systems to respond to financial problems...............................13
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................17

INTRODUCTION
Management accounting is a process of collecting previous data, analysing and measuring them,
making plans for achieving organisational goals accordingly. It is a process used for decision
making process. Rent-A-Car industry is an american company which was established in 1957 by
St. Louis, Missouri. The company rents the car and also it oversees commercial fleet
management, sales used car, lorry, etc. This study will disclose different management accounting
reports, different management accounting tools, management accounting techniques,
determination of costs of the organisation. This assignment will also cover the marginal costing
and absorption costing with their examples, different budgetary planning tools along with their
advantages and disadvantages. This study will also suggest how management accounting system
responds to different financial problems.
LO 1
P1 Explain management accounting and give the essential requirements of different types of
management accounting systems.
Management accounting is an accounting system is application of knowledge and skills to
prepare and present financial and other information related to decision making in such a way so
that they could help them in decision making, planning and organising operation of
industry(Kaplan and Atkinson, 2015.).
Management accounting is a process of looking forward and taking decision which could
help them to create a better future of the organisation. Management accountants are also known
as value-creators as they work for creating more value of the organisation in future than its
historical values.
essential requirements of different types of management accounting system:
Knowledge and skills related to management accounting of Rant-A-Car can be experienced from
different fields and functions of the organisation like pricing, valuation, efficiency auditing,
marketing etc.
some essential requirements of management accounting system are as follows:
11 Cost accounting system: cost accounting system of the industry is the very important
gathered by managerial accountant of Rent-A-Car. It shows the cost company incurred by
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the organisation with a view to get cost associated with the product or service provided
by the industry to its customer(Quattrone, 2016.)..
11 Accounting related to cost of the company can be gathered through its cost
recordings, cost analysing, cost reports, vouchers, etc. a management accountant
needs to gather a detailed information relating to cost through various factors so that
he can get the actual cost of the product or service and can make plans to reduce its
cost and get maximum returns.
Benefits
 This system is helpful for the company to be cost effective.
 Management can make effective decisions in order to make the company cost effective
and enhace its profitability.
 It also enables company to utilize its resources more efficiently and effectively.11 Inventory management system: inventory management system enables the company to
use its inventories efficiently in order to reduce inventory cost to the company. This
system shows how Rent-A-Car can properly reduce its use of its inventory along with
maintaining same stock level to fulfil customer's needs and demands. It helps the
company to control misappropriation of stock. For appropriate using the inventory
company can use different methods like LIFO, FIFO. Weighted average inventory
system, etc.
Benefits
 it helps the company to have control overuse of inventory in the organisation.
 It enables Rent-A-Car to track its inventory level in the organisation.
 It also helps the company to increase profitability of Rent-A-Car.11 Job costing system: this system is being used by the company where the job is being
performed by the company in different process. It enables Rent-A-Car to find out cost of
specific job to the company. It shows the cost of direct material, direct labour, overheads
etc. direct material and direct labour are those who are used at the time of producing the
product. Whereas overheads are operating cost to the company.
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Benefits
 through this system Rent-A-Car can know the cost of each job performed by the company
 it helps the management get to know the wastage of cost at each level of business through
which company can become more cost effective.
 It helps the company to reduce the cost in order to increase its profit.
P2 Explain different methods used for management accounting reporting.
Management accounting concerns with receiving financial accounting data through its past
records and making decisions for its better growth. On the other hand management accounting
reporting refers to preparation of reports for the decision making process. For the purpose of
performing management accounting tasks, there are some methods that can be follows:
1. Cost reports : cost reports are prepared for evaluating product cost of the organisation.
This report contains cost incurred by the company in the past, reviews on the past cost
accounting system and ideas to improve it as well. Product cost means cost of product
manufactured. Which includes raw material cost, overheads, labour, etc. cost reports
shows the actual cost which is used to compare it with selling price and get the profit
margin of the industry(Malmi, 2016).
Managerial accountant of Rent-A-Car prepares cost reports to get the knowledge
about hourly labour cost of labour, overheads, car maintenance cost, work cost etc. this report
shows the actual costs incurred by the company in last few years in detail which helps the
managerial accountant to analyse the cost and find some way to minimise the cost and control
the wastage of cost.
2. Job costing report : in job costing report, Rent-A-Car prepares a cost report of each
process performed in the business. Job costing report includes cost to each department of
the company along with estimated revenue from that department in order to detrmone
profitability of the company. With the help of budgetory report manager sees the
estimated cost of each department. After comparing it with the job costing report,
manager get to know the point of inefficiency of the business through which the company
becomes more cost effective.
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3. Budget report : budget reports plays a very important role in measuring company's
actual performance. Small companies prepares their cost budget as a whole whereas
budget of large industries could be prepared department wise. However, these companies
need to compile all the budgets of its different department and prepare a single report to
get overall performance of the company.
Rent-A-Car prepares its budget frequently. Budget reports give an idea about company's future
expenses. These are prepared on the basis of past experinces of the company. In order to
minimize the cost, it is essential for the company to prepare its budget. Company will go towards
efficiently achieving the goals if it is working accordance with the set budgets.
4. Account receivable ageing reports : this report is essential for those companies which
are who relieses account receivable heavily. Through these reports manager of the
industry can get information about average time in which credit could be reliesed from
the clients, average amount of defaults over the period, and identifying the defaulters of
the company as well. To control the defaults in account receivable, company can make
the some rigid policies for account receivable process(Tappura and et.al.,2015).
Through these reports industry can estimate the amount of bad debts which can be incurred
during the whole year. It can help to maintain a balanced amount of provision for bad debts and
also to find some ways to minimize them.
5. Performance reports : These reports shows the performance of the employees of the
company as a whole at the end of terms. These reports are used by the managerial
persons to view the performance of the employees. Generally these reports are of use for
human resource manager of the company. These reports are used by the managers key
factor to be considered while decision making regarding human resources i.e. employees
of the company.
Theses reports are helpful for taking decisions related to performance appraisal, salary
increments, etc. these report contains a deep detailed description about the performance of the
employees(Bui and De Villiers, 2017). 6Financial reports: as the name says it all, financial
reports are reports which includes financial statements of the company of last few years.
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6. 6. Financial reports financial report concerns with putting together data related to
financial accounting of different years and comparing them with each other in order to
measure the actual performance of the industry over the period of time.
RENT-A-CAR prepares financial reports of the company every year in order to get actual
performance and actual variation in position of the industy every. On this way management can
be able make best decision for the company.
7. Other reports : along with the above stated reports, Rent-A-Car industry prepares some
other reports like competitor's analysis, order information reports, consumer behaviour
reports, etc. these all reports are helpful for the organisation in their decision making. All
the reports of the company related to the management accounting, are prepared for
helping the managers of organisation in different ways. Every report needs to be analysed
in detailed carefully for the purpose of decision making. And making the decisions more
efficiently for the company's growth in the market(Bromwich and Scapens, 2016).
All the managerial reports are prepared by Rent-A-Car industry for the sake of enhancing the
performance of the company in future compared to its historical performance.
P3 Calculate costs using appropriate techniques of costs analysis to prepare an income statement
using marginal and absorption costs
Marginal costing: marginal costing is a process of costing which shows the variation in total
cost of the company over the year. Total cost of the industry may vary due to variation in the cost
of inputs, increase or decrease in quantity of the product, etc.
Marginal costing have various advantages like as it is the most simple method of costing top be
understand, there is no problem in calculating fixed overheads, it provides facilities to have
control over variable cost by as it is charged against the contribution(Hall, 2016).
However, there are also some disadvantages of this method of costing for example, there
is of no use where there is no separation of expenses into fixed and variable, due to technological
development, there is an increase in fixed costs of the company and if we calculate net profit
from this method, we can even get negative results.
Marginal costing formula - sales- variable cost = fixed cost + profit
Marginal statement
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Budgeted Actual
Particulars
Per unit
(in £)
Figures
(in £)
Total
(in £)
Per unit
(in £)
Figures
(in £)
Total
(in £)
Sales revenue 30 90000 30 90000
Cost of production
DM expenses 15 30000 10 35000
DL expenses 10 20000 20 19000
5 10000 5 11000
35 60000 35 65000
Opening stock 0 0
Less: Closing stock 5000 1050
Less: COGS 55000 63950
Contribution 35000 26050
Less: fixed
overhead 1000 1000
Profit in the
month of
September 34000 25050
Interpretation in the above example sales of the company is 90000, vairables costs of the
company like cost of goods sold, direct material cost, labour cost, selling and distribution
overhead, variable production overhead and commission, which totalled 65000, whereas it was
budgeted to the amount 60000. Contribution has been got by deducting total variable cost from
total sales. Which amounted 63950 and it was budget to 35000. Fixed cost of the company is
production overhead amounting to 1000 which is equal to budgeted. we got net profit by
deducting total cost from contribution amount which result in 25020. for the year through
marginal costing method.
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Absorption costing: absorption costing can be defined as absorption of all the cost of goods
manufactured to the particular unit. It includes all the direct costs like direct material, direct
labour, etc. in other words we can say that total cost incurred on the product while its
manufacturing(van Helden and Uddin, 2016).
This method is a good method as it shows accurate profit of the industry, it also matches with the
accrual & matching concept, it avoids saperation of costs, it makes the manager more responsible
towards their departments..
however, there are also some limitations of this method like it is quite difficult to
understand, it provides no help to managerial decisions, it is arbitrary while approprating fixed
overheads.
Absorption costing
Particulars Figures (in £) Figures (in £)
Direct labour (DL) 10 2000 * 10 = 20000
Direct material (DM) 15 2000 * 15 = 30000
Variable overhead (VO) 5 2000 * 5 = 10000
Fixed overhead (FOH) 5 2000 * 5 = 10000
Total manufacturing cost per
unit 35 2000 * 35 = 70000
Budgeted profitability statement
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Particulars Per unit (in £) Figures (in £) Total (in £)
Sales 30 90000
Cost of production
DM 15 30000
DL 10 20000
VOH 5 10000
FOH 5 10000
70000
Beginning inventory 0
Less: Ending stock 5000
Less: Cost of goods
sold(COGS) 25000
Gross Budgeted profit 65000
Less: Under absorption 20000
Net standard profit 45000
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Actual p&l
Particulars Per unit (in £) Figures (in £) Total (in £)
Revenue 30 90000
Production cost
Material 15 35000
Labour expenses 10 19000
Variable overhead 5 11000
Fixed overhead or expenditure 5 10000
35 75000
Stock at the starting of month 0
Less: Stock at the ending of
September 5000
Less: COGS 25000
Standard profit 65000
Less: Under absorption 10000
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Budgeted profit 55000
Interpretation: in the above example, we are calculating net profit through absorption costing
method. We have sale of 90000, cost of manufacture is 70000. which has be calculated by
adding material cost 30000, labour cost 20000, total variable overhead 10000 and fixed overhead
equal to 10000. Gross profit of the company has been absorbed by deducting cost of sales from
sales. Company has incurred , total variable and fixed cost 20000. With these data, we got net
profit 37500 by deducting total cost from the gross profit. Whereas the budgeted profit of the
company was 55000 hence, company has gained an under absorbed profit by 17500.
Comparison:
AS it can be seen that we have calculated net profit through marginal costing method and
absorption costing method from same set of data. But we got different results from both the
methods. The difference arrived because we don't include commission and amortisation cost in
absorption costing method. Rent-A-Car got more profit from absorption costing method in
comparison to marginal costing method(Van der Stede, 2016).
Hence, we can say that absorption costing is the best method to be used for calculation of
net profit. As it results in more net profit generation from absorption costing method.
P4. Types of planning tools used in budgetary control:
Budgetary control is a management activity in which actual income and expense in
compared with standard or planned income and expenses. To make this compare Rent A Car first
set the standard result by taking help of financial planning tools and techniques than it calculate
the degree and amount of variation so that budgetary control tools can be used to minimise the
variation. Planning is long termed concept than budgetary. Budgetary planning is the process of
set standard and benchmark for every activity practice in organisation . Rent A Car use these
benchmarks to compare actual performance with expected outcome. If manager find high
variation in wanted and actual result, then corrective action are taken by company. If manager
find low gap in result, then appreciation , rewards are given to employee for their efficient work
and cost cutting efforts(Bui. and De Villiers, 2017)
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Production Budget
Production budget calculates number of production unit must be produce in order to meet
the demand. This demand need driven from sale forecast and in hand finished inventory. This
budget also calculates the amount required for production. For instance when Rent a Car know
that its demand will weaken in next month , then company can cut down the production and vice
versa. This budget are made for generally for monthly basis. Production budget help Rent A
Car to ignore a situation where company can be fail to meet demand requirement of customer.
In case a company use outsourcing in production then budget also includes would be amounted
and charges to avail that product and service. Like Rent A Car owns driver form employments'
service provider company . In such case if demand will increase, production budget of Rent A
Car also incudes the changes that would be pay for appoint extra driver in company. Production
budget can be affected by price changes of input avail form outside the company. Like if petrol
price will go up, then risen price will increase the cost of production , if price of petrol will go
down , than it will consider as cost saving for Rent A Car , because now company has to pay
less actual amount than anticipated amount (van Helden. and Uddin, 2016)
Advantages of production budget.
 Cost of production can be manage timely which also help in offering reasonable price to
customer for product and service. For instance Rent A Car avail driver one month before
when actual demand will change, if company did not use proactive procurement action
than it would lead to increase in cost.
 Organisation can successfully meet the expectation and requirement of customer , which
help in increase Rent A Car's good will and image in market.
 Company get to know about various factor that can affect its cost and sale.
Disadvantage of production Budget
 Production budget making is very time consuming process.
 Production budget consider only financial result and outcome. Quality of service and
production is totally ignored in it.
 There is high scope of unethical practice like budgetary slack, in which manager
deliberately take low level of revenue and high expense estimate so that he can easily
meet the budgetary variances
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 it is made based of forecast and assumptions so budget contain high risk of inaccuracy.
Any slight change can affect the organisation with huge intensity.
Incremental budgeting
Incremental budget are made upon previous year budget. Rent A Car use this budget
because it believes that some department will use some amount of previous in year in currebnt
year. This is best budget for the organisation in which company ise same overheads each year.
For instance Rent A Car previous year budget included cost of car maintenance. This cost will
use in each year because it is essential expense for company. In case company had some amount
left in this head, it would be use in next year too. It is the simplest form of budget an organisation
can opt in absence of extensive budget analysis in company.
Advantage of Flexible budget:
 It minimises the confit in department regard allocation of resources.
 Lack of complexity of budget help in saving the time.
 Success rate of budget can be easily predict as it made by suing previous year overheads.
 Any changes can be easily identifies.(van Helden. and Uddin, 2016.)
Disadvantage of Flexible Budget
 it is a unrealistic thinking that company can use same overheads because production Is
affected by change in industry,. For instance Rent A Car add now adopt policy to change
its tyre in every 10 month. Now company has to add up this new expense in budget.
Flexible budget do not allow this.
 Employee get nothing for their cost reduce efforts.
 High scope of budgetary slake activities as manager know everything about previous
budget.
 Importance and priority of resources changes with time, which also ignored in flexible
budget.
It gives rigidity to accounting activity in organisation which can be lead to outdated budget
practice.(Kaplan. and Atkinson, 2015)
P5 management accounting systems to respond to financial problems
Financial KPI:
Financial problem of an organisation can be seen as lack of working capital, law cash
inflow, high long term borrowings, inadequate retain earning, too much tax payments, high
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overhead expenses, late payment received form customer, law risk tolerance power, high sale but
low profitability etc. An organisation can solve its financial problem by financial monitoring and
controlling. Financial monitoring mean, company must have latest and accurate financial data so
that variation can be find, controlling efforts are done to minimise the gap between actual
financial performance and standard or desired financial performance.
Financial KPI measure profit and revenue of Rent A Car, which help in getting the idea
of financial performance of company. KPI gives key financial information to its leader and
manager. For this purpose company set up KPI dashboard. Financial KPI generate real time
report of key finance figure like current ratio, cash flow, burn rate, net profit margin, working
capital, current account payable, quick ratio etc. Here are the some key financial indicator which
reflect the financial condition of company are given below:
Operating Cash Flow (OCF):
OCF measures the total cash inflow generated by an organisation by business operation
perform on daily basis. Company take investment and borrowing decision with the help of result
given by OFC . For instance If organisation has positive cash flow than it can use it for its
growth and expansion decision, where negative cash flow lead to external borrowing to meet the
expenses..External borrowing put burden of high interest payments to debt and equity holder
which eventually lower the profit of company, because company has to pay huge amount to
payback to these stakeholders. So organisation must try to meet short term expenses with it’s
retain earning or by short term borrowing, where to meet capital expense Firm can go for long
term borrowing.
Current ratio:
Current ratio shows the financial capacity of Rent A Car to pay its financial obligation for
one year. Current assets, liabilities, account receivable and payable are taken into consideration
in current ratio. If company have current ratio<1, that alarming the organisation as it incapable to
meet its financial obligation unless it has high retion earning or additional cash inflow, Although
Retail organisation able to tackle this situation because it has higer receivable turnover in
compare payable turnover because it generates income quickly and make late payments to its
supplier, this saved amount can be used to pay liabilities. High current ratio also not good for
organisation health because as it indicate high assets and cash in company, but in reality
organisation may have law quality receivable. Account department of Rent A Car inform
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marketing department about law operating income and ineffective receivable so that corrective
action can be taken before further loss(Quattrone, 2016)
Current account receivable:
When Rent A Car gives service to its customer but customer not paid for the service yet
but promise to pay in the future, is called current account receivable. It affects the liquidly of
organisation to pay short term obligation. In manufacturing industry companies get high and
quick down payment form customer so company has enough money to pay its short term
liabilities and expenses like payment to supplier, monthly salary to employee, fund given to short
term marketing and other expenses, machine repair and maintain cost etc,
Service sector mostly organisation get its payment late from its customer but they have
to make quick settlement to its supplier and other stakeholder.
Following are the Accounting practices to solving adverse financial situations.
 Proofreading of customer invoices.
 Make accurate journal entries for sales, which enable manage to identify unpaid debts.
 Accounting department must Check copy of purchasing received by purchasing
department.
 Electronic invoicing must be done.
 Take help of automation like ERP for track everything.
 Establish shorter receivable timeline.
 Make clear credit policy and communicate t to customer's
 set day to day sale outstanding objectives
 Remind customer and stakeholder for undue payments.
 Find alternative supplier and Leander, if they charge high for service and product.
 Company must keep its eyes on inventory level
 Manage vendor, debtor carefully.
Benchmarking:
Benchmarking is the process in which Car A Rent set some financial standard which is
expected to meet. For instance company make benchmark for achieve daily sale target, yearly
profit target, expenditure and revenue standard in company. Accounts manager can control
benchmark by continuous monitoring and controlling. Benchmarking help organisation to find
out its capability, highlight risk area, know prioritize activities. Accounts department can use
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audit and cross check for every transaction to know veneration of financial expected outcome.
Accounts department can suggestion to avoid the risk..(Van der Stede, 2016.)
Activities based accounting:
Accounting based accounting is process of identification of overhead activiesa and
allocate the cost to each product and service come in overhead. ABC mostly used by
manufacture industry. ABC system incudes transaction and cost driver. ABC can be divided into
two parts as duration activity and which render information about how much time taken to
compete a work and transnational driver include how many times an activity and event
happened.
Financial governance
financial governance is best for service industry. Financial governance do not deal with
cost and risk associate with product and service. It deals with fraud, misapprociation , corruption
and poor decision making. As service sector do not have any tangible product in hand. It
increases the scope of these unethical practices. Company can not easily find these because of
intelligibility of product. To practice the governance company focus on monitoring and
controlling activities. These activities comprised risk assessments, internal and external audits ,
single data storage, automation in data collecting, managing and controlling the financial data
etc.(Hopper. and Bui, 2016.)
CONCLUSION
From the above studies it has been concluded that Rent-A-Car has a good management
accounting system within his organisation. It has adopted best budgetary plan within the
organisation, it has fulfilled all the essential requirements of management accounting, industry
has also obtained various management accounting methods, company has choosen best
management accounting techniques in his organisation by analysing all the advantages and
disadvantages. Rent-A-Car has studied all the management accounting. Rent-A-Car has studied
all the management accounting theories carefully and analysed all the theories for its businesses
and after analysing organisation has chosen the best technique for its business. In this way we
can say that Rent-A-Car industry have a strong managerial system within the organisation.
Hence, the industry is growing faster in the market.
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