Management Accounting: Systems, Reporting, Costing Techniques, and Budgetary Control

This document provides an in-depth analysis of management accounting, including different systems, reporting methods, costing techniques, and planning tools used in budgetary control. It focuses on the application and benefits of these techniques in the context of Rolls Royce. The document also explains how to prepare income statements using marginal and absorption costing systems. Additionally, it discusses the advantages and disadvantages of various planning tools used in budgetary control.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
LO1..................................................................................................................................................1
Explaining different systems of management accounting and their requirements......................1
Various methods of reporting which are used in management accounting.................................2
LO 2.................................................................................................................................................5
Using costing techniques to prepare income statement...............................................................5
LO 3.................................................................................................................................................9
Different planning tools used in budgetary control with their advantages and disadvantages....9
LO 4...............................................................................................................................................11
Comparison of different organisations on the basis of the ways in which they implement
management accounting system to resolve financial problems.................................................11
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15
APPENDIX (P3)............................................................................................................................17

INTRODUCTION
Management accounting is a procedure which is focused by managers of companies in
order to evaluate actual performance the business. Main purpose of it is to guide internal
stakeholders such as employees, managers etc. to analyse that business's position is good or not.
If an entity is ignoring it then it can affect the formulating of accurate reports on insider activities
(Abdel-Maksoud, Cheffi and Ghoudi, 2016). The enterprise which is selected for this report is
Rolls Royce. It is one of the major car manufacturing companies which are established in United
Kingdom and selling its products in national as well as international market. This assignment
covers various topics which includes detailed analysis of management accounting, its systems
and reporting, application of costing techniques, advantages and disadvantages of planning tools
used in budgetary control. Apart from this, comparison of two companies on the basis of using
management accounting to respond financial issues is also covered in this project.
LO1
Explaining different systems of management accounting and their requirements
Management accounting: It can be explained as the technique which is utilised by
managers of the organisations for the purpose of assessing business costs and operational
activities so that financial reports could be prepared for future (Arunruangsirilert and
Chonglerttham, 2017). Managers in Rolls Royce also pay attention towards it so that higher level
of accuracy could be provided to internal stakeholders with the help of management reports.
Management accounting systems: It is the combination of internal systems of the
organisation so that all the processes and procedures of management could be measured and
evaluated (Ghasemi, R. and et.al., 2016). Top level executives of Rolls Royce guide managers to
follow some of them that may help to collect appropriate data. These are analysed underneath:
Inventory management system: The method which is mainly concerned with
monitoring and recording of information related to stock used for carrying out operations is
known as inventory management system. For organisations such as Rolls Royce it is very
important to use it because it helps to keep detailed information about goods which are utilised
for business processes. It is required for the company as with the help of it managers will be able
to check that inventory is needed for operational activities or not. Three different kinds of it are
discussed below:
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 AVCO (Average Cost Method): In this system all the inventory is used for business
activities on the basis of average cost.
 LIFO (Last in First Out): This method guides managers to utilised recently acquired
goods for carrying out operations.
 FIFO (First in First Out): This system demonstrate that if it is used by management
then they should use earlier bought material for manufacturing cars.
Managers in Rolls Royce are using first in first out method as it helps to utilise inventory
properly.
Price optimisation system: For all the organisations it is very important to set
appropriate price for all their products so that large number of customers could be attracted
toward the business. For this purpose, companies such as Rolls Royce apply this system which
helps to analyse responses of clients on different prices which could be set by them for their
goods. It also guides to set the right and most preferable rates for the cars engineered by them. It
is very important for the enterprises to use it because without it, it will be very difficult to figure
out that what price will be right for the products.
Job order costing: All the organisations perform different activities for carrying out
operations and to keep detailed track of all of them this system could be used. Management in
Rolls Royce are utilising it to accumulate and assign engineering costs to different units that are
manufactured by it. It is essential for the company to use it as it is required to segregate the
expenses on the basis of different jobs which are performed according to conditions of
patronages (Banham and He, 2014).
Cost accounting system: It can be defined as a framework which is focused for the
purpose of estimating costs of various items manufactured by the company. Rolls Royce's
managers are using it estimate the right cost which have taken place while engineering the cars
so that most profitable operations could be determined. It is very important for the management
to use it as with the help of it forecasting of future expenses could be performed.
Various methods of reporting which are used in management accounting
Management accounting reporting It is the process of generating management reports
so that all the activities of the organisations could be planned and regulated systematically. It is
also used in decision making and performance measuring (Weetman, 2019).
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For all the business entities it is very important to formulate management reports so that
actual and accurate information about operational activities could be collected. The process
which if focused for the purpose of formulating them, is known as management accounting
reporting. If these are not formed by companies then it may affect the mindset of stakeholders
such as employees because they will not have any idea of that organisation in which they are
working. Different methods of performing this process are discussed underneath:
Performance report: Large as well as small organisations formulate different reports to
keep detailed information of performance of operations and staff members. It is also one of them
that helps management of companies such as Rolls Royce to analyse that business is showing
favourable results or not. With the help of it they can also get aware of efforts of employees to
attain organisational objectives. It is very beneficial for the enterprise because with the help of it,
it will be easy for management to offer rewards, bonuses and compensation to workforce
according to their performance (Guffey and Harp, 2016).
Budget report: Most of the organisations compare their actual and budgeted figures in
order to analyse that projected goals are achieved or not. This report is one of the major
documents which could be used for same purpose. Managers in Rolls Royce are using it to
maintain financial spendings according to requirements of different manufacturing activities.
This report may provide various benefits such as reduction in overspending of funds so it should
be created by management.
Account receivable report: For large and small companies which are offering credit to
the clients or retailers it is very important to keep detailed information of all the debtors. For the
purpose of recording this data account receivable report could be generated. It is one of the
primary tool which is used by managers of Rolls Royce so that they can calculate the due amount
of clients. This report is very beneficial for the company because it helps in the analysis of the
owed amount of clients and tighten credit policies so that the outstandings could be recovered on
time (Harrison and Lock, 2017).
Inventory management report: The companies which are operating business under
manufacturing sector it is very important to keep detailed information of stocks which are used
to carry out operations. It is formed by managers of Rolls Royce in order to get real time insight
into the movement of goods which are used to engineer cars. This report is advantageous for the
company because with the help of it management will be able to check the stock left on hand.
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Application and benefits of different management accounting systems within
organisational context:
Management
accounting systems
Benefit and application
Price optimisation
system
Management of Rolls Royce are applying this system within the
organisation because it helps in the analysis of appropriate rate for the
cars that can help to meet organisational goals such profit
maximisation by meeting expectations of clients.
Inventory
management system
In Rolls Royce inventory management system is applied by managers
for the purpose of maintain use of goods. It is beneficial for the
company as it helps to monitor and maintain the process of utilising the
inventory for business operations.
Job order costing This system is applied in Rolls Royce by managers in order to assign
and accumulate costs to jobs performed by the company. Main benefit
of it is that it helps to segregated expenses according to the nature of
job performed.
Cost accounting
system
In companies such as Rolls Royce this system is applied by managers
to keep detailed information about cost which is related to
manufacturing activities. Main benefit of it is that it guides
management to to estimate accurate cost for most profitable products.
The way in which management accounting systems and reporting are integrated
with process of organisations: All the organisations such as Rolls Royce have one common
goal which is profit maximisation and for this purpose it is very important for them to conduct all
the business processes in systematic manner. In order to reach the long term objectives different
types of management accounting systems and reports are used by managers of Rolls Royce. For
example, price optimisation is used to figure the best suitable price for all the cars so that selling
activities could be performed. On the other hand, performance reports are generated by
management to check that staff members are performing well or not so that appropriate bonuses
and rewards could be offered to them on the basis of their efforts.
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LO 2
Using costing techniques to prepare income statement
Marginal costing system: It is a costing system which is utilised by business entities
such as Rolls Royce in order to analyse additional cost which takes place due to production of
additional units. With the help of it managers determine the optimum quantity for production
(Hiebl and Mayrleitner, 2017). An income statement showing its calculations are as follows:
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Interpretation: From the above statement it has been analysed that profit for May and
June are -550 and 5750 pounds.
Absorption costing system: It can be defined as a system which is focused by
organisations to capture all the costs which are associated with manufacturing activities of a
particular products so that all of them could be recovered from the sales of same units. It is
utilised by managers of Rolls Royce for the purpose of making sure that the expenses which have
taken place are being absorbed from the sales of same units (Kieso, Weygandt and Warfield,
2019). Calculation of it is shown in the income statement below:
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Interpretation:
From the above calculations it has been determined that profits from absorption costing
are higher than marginal. These are 1050 for may and 9792.4 are for June. It has been
recommended to the organisation to use absorption costing to reflect higher profits in books.
Applying range of management accounting techniques and formulating final
accounts: For all the business entities such as Rolls Royce it is very important to use specific
techniques of management accounting so that actual position of company and results of its
operations could be determined. Some of them which could be adopted by management of the
company are discussed below:
Standard costing: It can be defined as the process of analysing the different between
actual and standard figures. With the help of it managers of Rolls Royce will be able to find the
causes of variation between all their current and budgeted records.
Normal costing: This technique of costing is used by most of the enterprises for the
purpose of deriving actual data for all the products. In Rolls Royce managers can use it to
allocate the overheads in accurate manner (Knyvienė, 2014).
Historical costing: This technique states that all the assets and liabilities which are used
by companies such as Rolls Royce should be recorded on its original cost rather than the market
value. With the help of it actual and accurate financial position could be analysed by managers.
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LO 3
Different planning tools used in budgetary control with their advantages and disadvantages
Budget and budgetary control: In most of the business entities different plans and
strategies are formulated for the purpose of controlling expenses which are taking place due to
operational activities. Budget is also considered as one of them that guides management to find
that organisation's performance is being enhanced as compare to previous year or not. In Rolls
Royce different types of budgets such as zero based, operating and master are generated that
helps management to allocate funds to all the activities according to their requirements (Kraus,
Håkansson and Lind, 2015).
In order to facilitate the controlling procedures a specific procedure is followed by
managers of different companies which is known as budgetary control. With the help of it
actual performance of business could be enhanced because it helps managers to find the reasons
which are resulting in variation between actual and budgeted plans. In Rolls Royce it is also
focused by managers for the purpose of planning, coordinating and controlling the process of
allocation of budgets. All the planning tools which are used by management of the company are
described below:
Operational budgetary control: It is the combination of all the tools and techniques
which could be used by business entities for the purpose of taking control over all the operational
activities. Different elements of it are discussed below:
 Forecasting: It is the process which is used by the companies to estimate future expenses
so that budgets to deal with them could be formulated in advance. It facilitates the
managers of the company to be prepare to face all the uncertain events which may take
place in future.
 Standard costing: It is the costing technique in which difference between expected and
actual costs. With the help of it predetermined cost of executing operational activities.
 Variance analysis: It is a technique which is used by companies such as Rolls Royce for
the purpose of determining the reason behind the variances which are taking place
between actual and budgeted figures. With the help of it the management will be able to
take effective decisions for future.
 Flexible budget: In all the organisations different budgets are prepared on annual basis
for the purpose of keeping record of all the activities. Some of them which could be
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modified with changes in business figures then these are known as flexible budgets. In
rolls Royce these are used by managers to analyse actual position of business.
All the advantages and disadvantages of it are as follows:
Advantages Disadvantages
This planning tool keep accurate information
about all the costs which are related to
different operations which are carried out by
the company. It helps to make the process of
budget building more flexible because it
facilitates management to allocate resources
appropriately (Lapsley and Rekers, 2017).
If organisations such as Rolls Royce are
willing to use it for long term objectives then it
may not be the right choice because it is based
upon estimation.
It facilitates the communication between
different departments because it consolidates
information of all the operational activities.
The level of rigidity in the formulation of it is
very high for which an experienced employee
is required which may result in increased cost
for the company.
Capital budgeting: It is a budgeting technique which is used by organisations to
determine the best suitable investment from end number of alternatives. There are various types
of it which are used by managers of Rolls Royce while planning for making investment in a new
project. Description of all of them is as follows:
 NPV: This technique of capital budgeting is used to determine the net present value o an
asset which could be acquired by an organisation after a certain period of time by making
investment in a business project.
 ARR: With the help of it, organisations try to figure out average rate of return which will
be received by them from the projects in which investment is made. The higher rate
shows the investment decision of the organisation is very good.
 IRR: It is the interest rate which works as a measure of determining interest rate of a
business project. With the help of it, attractiveness of different alternatives could be
determined.
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 Payback period: It is the period in which the investment will repay the amount of whole
investment. The project with smallest pay back period is considered as the best suitable
alternative.
Advantages Disadvantages
With the help of capital budgeting appropriate
decisions for the enhancement of business
performance could be formulated because it
helps to analyse different investment options
and then select the best one.
The time which is required to use capital
budgeting techniques is very high so it may
affect the consideration of managers from
operations to them.
Capital budgeting can help the managers to
attract large number of investors by providing
higher returns to the existing ones.
While formulating it accurate information is
required and if it is biased then it may affect
the decision making of investing in business
project.
Analysing the use of planning tools in preparation and forecast of budgets
All the manufacturing companies are mainly concerned with attainment of their long-
term goals and for this purpose different planning tools are used by them. In Rolls Royce
managers are using capital budgeting and operational budgetary control tools. All of them are
facilitating the managers in the process of forecasting and preparation of future budgets (Larsson,
2015). With the help of all of them managers will be able to analyse the future expenses and then
form budgets according to them.
LO 4
Comparison of different organisations on the basis of the ways in which they implement
management accounting system to resolve financial problems
Financial problems: All the challenges which may take place to lower availability of
finance are known as such issues. There are various causes of them such as overspending of
financial resources. Currently Rolls Royce is also dealing with such challenges which are as
follows:
Unplanned expenses: Sometimes such expenses may take place within the companies
which are not planned or forecasted previously. Rolls Royce is also facing some of them and the
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major one of repairing of machinery. In order to deal with all of them funds are used by
managers which results in low monetary resources (Nakajima, Kimura and Wagner, 2015).
Poor management of money: When all the cash which is received and paid by the
organisations such as Rolls Royce is not managed properly then it may result in financial
problem. In this situation the managers will not have information of actual availability of funds
for operations which may affect the decisions regarding spending of finance.
Late payments from clients: Rolls Royce is a very large organisation and it offers credit
to its clients such as retailers. Sometimes they refuse to make the payment on time which may
affect the availability of money for operational activities.
Reduces profits due to lower productivity: It is also a financial challenge which is
faced by Rolls Royce due to lower productivity of staff members. This problem may take place
due to lower benefits to employees and in this situation they will not work with high quality
which will result in low profits.
Inappropriate management of different activities: If organisation is not able to
manage all the activities which are performed by it in systematic manner then this problem may
result in financial challenges such as lower funds.
In order to respond all the above described problems the organisation is using different
techniques which are as follows:
Benchmarking: It can be defined as management accounting technique which is used by
large as well as small companies to compare their policies with competitors in order to check
errors in their system. It can help managers of Rolls Royce to compare its credit policies with
other companies to tighten its credit policies (Rudman and Kruger, 2014).
Key performance indicators: These are different types of indicators which are used by
companies to determine success and failure of the business processes. There are two types of
them which are financial and non financial and both of them could be used by managers in Rolls
Royce for the purpose of resolving money related and other challenges of business.
Balance score card: It is a business management tool which is used by managers to align
day to day activities of all the staff members. With the help of it, Rolls Royce can improve
internal functions and productivity of employees because with the help of it they will be able to
identify the problem.
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Activity based costing: It is a costing technique which is mainly used to assign accurate
and appropriate costs to different activities which are performed by the company (Activity based
costing, 2019). With the help of it, financial problems could be dealt properly as it guides the
managers to ignore the possibility of insufficient funds to operational activities.
Financial governance: For all the companies it is very important to comply with specific
financial principles while formulating final accounts or managing funds. With the help of it
managers in Rolls Royce can reduce the possibility of poor management of funds as it guides the
accounting professional to formulate accounts according to rules and regulations.
Comparison of the company with other company is as follows in which both of them are
using management accounting to respond financial problems:
Management
accounting
technique
Rolls Royce Aston Martin
Benchmarking Management within the organisation are
using this technique to deal with late
payments from clients by comparing its
credit policies with competitors.
Managers use this technique to
compare its position with other
companies to reduce possibility of
lower profits.
Key
performance
indicators
Financial KPI is used by managers in
order to find the causes of sudden
expenses so that the possibility of these
expenditures could be reduced.
Management within the company are
using non financial KPI to find errors
in supply chain management.
Balance score
card
Management is focusing on the use of
this tool for the purpose of dealing with
lower profits due to low productivity
because it can help to keep track record
of performance of all staff members and
provide them compensation accordingly
(Seow and Wong, 2016).
It is used by managers of the company
to allocate appropriate benefits to
employees according to their
performance which is recorded in it.
Activity based
costing
This technique is used to manage and
maintain all the activities which is
It is used by management to make
sure that appropriate costs are
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creating lack of funds for the company
as it can help to assign cost to all the
activities according to their
requirements.
allocated to all the activities so that
possibility of overspending of budget
could be reduced.
Financial
governance
In order to deal with the problem of
improper fund management this
technique is used by managers because
it guides to comply with all principles
of finance which are required.
This technique is used to figure out
that all the financial principles are
complied by management or not
(Storey, 2014).
Analysing the way in which management accounting lead companies to respond
financial problems: Most of the companies are facing financial challenges and Rolls Royce is
also dealing with them. These are unplanned expenses, late payments etc. and to deal with all of
them different management accounting techniques such as KPI, benchmarking, Activity based
costing, balance score card etc. are used. With the help of financial key performance indicators
problem of unplanned expenditures is dealt because it guides to identify them.
Evaluation of the use of planning tools in responding financial issues: If organisations
such as Rolls Royce are not able to maintain the utilisation of funds then it may result in
financial challenges such as unplanned expenses, improper management of money and late
payment by clients. In order to overcome such types of issues managers can use different
planning tools such as operational budgetary control and capital budgeting tools. All of them can
help to estimate such issues in advance so that management may get aware of them and
formulate strategies in advance to respond.
CONCLUSION
From the above project report it has been concluded that management accounting is a
technique which is beneficial for all the small as well as large business entities because it guides
stakeholders to check actual position of the company. Different system and reports such as price
optimisation, inventory management, budget, performance etc. of it are also utilised by managers
for analysing that the efforts which are made by them are resulting positively or adversely. In
most of the companies different costing techniques such as marginal and absorption are also used
to calculate net income. Management are also concerned with forecasting and formulation of
14

budget for which planning tools such as capital budgeting and operational budgetary control are
used. There are various management accounting techniques which are also used by managers to
respond financial problems. These are benchmarking, key performance indicators, activity based
costing, financial governance and balance score card.
15

REFERENCES
Books and Journals:
Abdel-Maksoud, A., Cheffi, W. and Ghoudi, K., 2016. The mediating effect of shop-floor
involvement on relations between advanced management accounting practices and
operational non-financial performance indicators. The British Accounting Review. 48(2).
pp.169-184.
Arunruangsirilert, T. and Chonglerttham, S., 2017. Effect of corporate governance characteristics
on strategic management accounting in Thailand. Asian Review of Accounting. 25(1).
pp.85-105.
Banham, H. and He, Y., 2014. Exploring the relationship between accounting professionals and
small and medium enterprises (SME). Journal of Business & Economics Research
(Online). 12(3). p.209.
Ghasemi, R. and et.al., 2016. The mediating effect of management accounting system on the
relationship between competition and managerial performance. International Journal of
Accounting and Information Management. 24(3). pp.272-295.
Guffey, D. M. and Harp, N. L., 2016. The journal of management accounting research: A
content and citation analysis of the first 25 years. Journal of Management Accounting
Research. 29(3). pp.93-110.
Harrison, F. and Lock, D., 2017. Advanced project management: a structured approach.
Routledge.
Hiebl, M. R. and Mayrleitner, B., 2017. Professionalization of management accounting in family
firms: the impact of family members. Review of Managerial Science. pp.1-32.
Kieso, D. E., Weygandt, J. J. and Warfield, T. D., 2019. Intermediate accounting. John Wiley &
Sons.
Knyvienė, I., 2014. A new approach: the case study method in accounting. Ekonomia i
Zarządzanie. 6(4).
Kraus, K., Håkansson, H. and Lind, J., 2015. The marketing-accounting interface–problems and
opportunities. Industrial Marketing Management. 46. pp.3-10.
Lapsley, I. and Rekers, J. V., 2017. The relevance of strategic management accounting to
popular culture: The world of West End Musicals. Management Accounting Research.
35. pp.47-55.
Larsson, E., 2015. Management accounting fashion setting-Studies on supply-side actors in
Sweden.
Nakajima, M., Kimura, A. and Wagner, B., 2015. Introduction of material flow cost accounting
(MFCA) to the supply chain: a questionnaire study on the challenges of constructing a
low-carbon supply chain to promote resource efficiency. Journal of Cleaner
Production. 108. pp.1302-1309.
Rudman, R. and Kruger, W., 2014. Using a group work project as an educational tool in
management accounting education.
Seow, P. S. and Wong, S. P., 2016. Using a mobile gaming app to enhance accounting
education. Journal of Education for Business. 91(8). pp.434-439.
Storey, J., 2014. New Perspectives on Human Resource Management (Routledge Revivals).
Routledge.
Weetman, P., 2019. Financial and management accounting. Pearson UK.
Online
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Activity based costing. 2019. [Online]. Available through:
<https://www.cgma.org/resources/tools/essential-tools/activity-based-costing.html>
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APPENDIX (P3)
Galway Plc manufactures and sells a single product .The following budgeted/ actual
information is provided in relation to the production of this product: All costs are in GBP.
Show all workings very clearly.
Selling price per unit 50.00
Direct materials per unit 8.00
Direct labour per unit 5.00
Variable production overheads per unit 3.00
Details for the months of May and June 2018 are as follows:
May June
Production of Product A 500 380
Sales of Product A (units) 300 500
Fixed production overheads are budgeted at £4,000 per month and are absorbed on a unit basis.
The normal level of production is budgeted at 400 units per month.
Other costs
Fixed selling £4,000 per month
Fixed Administration £2,000 per month
Variable sales commission 5% of sales revenue
There was no opening inventory of Product A at the start of May.
You are required to prepare a profit statement based on both absorption costing and marginal
costing techniques and show the reconciliation of profits between the two methods.
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