Management Accounting Report: Jaguar Land Rover Financial Analysis

This report delves into the application of management accounting principles within Jaguar Land Rover, a British multinational engineering company. It begins with an introduction to management accounting systems and their importance, followed by an analysis of Jaguar Land Rover's use of inventory management, price optimization, job costing, and cost accounting systems. The report explores the benefits of these systems and their functions in planning, organizing, controlling, and decision-making. It also discusses the techniques used in management accounting reporting, including process costing, activity-based costing, variance analysis, and overhead allocation. Furthermore, the report provides an understanding of the types of costs, the importance of management accounting in the organizational context, and its role in forecasting, make-or-buy decisions, and cash flow management. The report concludes with a budget analysis. This report is valuable for students studying management accounting and provides insights into real-world applications.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
ACTIVITY 1....................................................................................................................................1
Part 1............................................................................................................................................1
Part 2............................................................................................................................................6
ACTIVITY 2....................................................................................................................................7
Part 1............................................................................................................................................7
Part 2..........................................................................................................................................11
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Management accounting can be defined as the process of formulating and managing
reports that are presented in front of internal stakeholders in order to provide them detailed
information regarding organisation's performance. Under this procedure various activities are
performed such as managing, controlling, planning, analysing, evaluating and monitoring
different tasks that are executed by organisation (Ascui and Lovell, 2012). It helps managers to
form strategies decisions for betterment of company. The business entity which is selected for
this report is Jaguar Land Rover which is British multinational engineering company of cars
established in UK. It was founded in year 2008 by William Lyons and William Walmsley.
Currently it is owned by an Indian company TATA motors. Its headquarter is in Whitley,
Coventry, United Kingdom.
Various topics are covered under this report such as understanding of management
accounting systems and its reporting, application of a range of its techniques, use of planning
tools that are used in budgetary control etc. Apart from this, the way in which it helps to deal
with financial problems is also discussed under this assignment.
ACTIVITY 1
Part 1
Management accounting: It comprises of accounting and financial activities required
for the operation of business. Presenting information about sales, cost, budgets to the internal
stakeholders is the main function of this activity as this helps managers in effective decision
making. It also includes preparation of reports based on the past trends so that future
uncertainties can be dealt and growth of the business is ensured. Adopting this method is
important to determine the position of the organisation (Boučková, 2015).
Management accounting systems: These are the methods that are being used by the
managers in evaluating the various aspects of business. Different accounting systems are being
incorporated by the jaguar land rover for the smooth running of operation. Essential information
can be gathered through this methods which are useful for analysing those areas of business
where decisions needed to be taken. Such systems are discussed below:
Inventory management system- These are concerned with analysing the inventory level
of business. It keeps track of stocks and articles that are used in the production of goods, every
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single detail from determining the location of articles to the quantity of items. For the smooth
running of business it is important that no hindrances come in production and sale process hence
this system is adopted for the maintenance of stock and leads to improved decision making.
Nowadays technologies are being used for this purpose, special software are being developed
that effectively record the cost of the item, order level, their location, volume etc. Systematic
arrangements of these items helps in improving the profitability of business. Jaguar land rover
has adopted this method in order to effectively maintain the spare parts and articles of their
vehicles (Bromiley and et.al., 2015).
Price optimisation system- This system makes use of mathematical analysis in
understanding the customers response with regards to the varied prices of products and services.
Through this method managers of company can determine what prices should be set so that cost
can be covered and profits can be maximised. This system is very essential as high rates can lead
to the loss of customers while low amount is responsible for the organisation's lack of growth.
This system helps in gaining the competitive advantage in the market. Jaguar land rover is
considered an expensive brand because of the high rates of their vehicles. Price optimisation is
used by the company to differentiae the prices set by the competitors and maintaining the brand
image.
Job costing system- As per this method organisation have to manage the cost associated
with different tasks being performed in the organisation. Accountants analyses the amount about
the cost of labour and materials that has been put in production of goods and services Various
costs like direct material, direct labour and overhead are part of manufacturing process. The main
function of this system is to control the expenses, lowering risk and maximising the profit. The
purpose of using this system is to determine the profits and loss on each job (Bui and De Villiers,
2017). When product is made it has to go through several phases and each step adds to the value
of commodity. Therefore this system helps in interpreting the total cost. Jaguar land rover uses
Job costing software in controlling the use of raw material, labour and tools while manufacturing
cars. Mangers of the company take identify unnecessary and invisible expenses and take
decisions to eliminate them for the purpose of increasing the revenues.
Cost accounting system- This system refers to the process of determining the
expenditure incurring throughout the operations of business. Costs are the essential element of
business and is present at every sector organisation. Therefore measuring them is equally
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important. This system analyse the cost of company by evaluating the input as well as fixed
costs. It helps in optimal utilisation of budgets and allocating resources to the required areas and
information provided by this method is later used in the preparation of financial statements.
Jaguar land rover apply this system to understand the total costs of their vehicles. Decisions are
then taken by the manager whether to control it not and how much more is needed to be invested
for increasing the profitability of the business (Burns, 2014). Job costing system and process
costing are it's component. Types of costs which are part of part of this system are explained
below in detail:
 fixed cost- These costs remain fixed and not change with the level of out put though cost
accounting system takes into account depreciation cost.
 Variable cost- These are the costs that fluctuate with the increase in the level of output
and it comprises of labour and materials.
 Overhead cost- In the manufacturing business it is mainly concerned with taxes,
insurance etc.
Benefits of Management accounting system:
Inventory management system
 It helps in controlling the fluctuation in the stock level which happens due to change in
the demand and supply (Chiucchi, Gatti and Marasca, 2012).
 Using this system Jaguar land rover ensures appropriate usage of time, money and
efforts.
Profit maximisation system
 This helps the Jaguar land rover in retaining the large customers base.
 Another benefit is it ensures that cost are being covered and profits are maximised.
Cost accounting system
 This is useful in allocating the problems and errors
 Through this Jaguar land rover ability to increase sales can be explored by reducing the
excess cost.
Job costing system
 Cost incurring at each stage of production can be determined and planning can be done to
control it in the next stage.
 Separate information about profits earned on each job is known.
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Functions of management accounting
 Planning- Managers of jaguar land rover can do planning for the short term and long
term after acquiring data from these systems. This information is then used by them to
prepare budgets and alternatives can developed to deal with uncertainties (Li, 2013).
 Organising- Management accounting ensures that data is organised in in orderly manner.
Reports of different departments helps mangers of jaguar land rover to take decisions of
their respective unit without disrupting other activities.
 Controlling- Management accounting perform this function by identifying the extra
expenditure that are increasing the cost and helps the jaguar land rover in reducing and
controlling cost.
 Decision making- From the various alternative choosing the most viable one is a difficult
task which only be performed by the managers if the management accounting is done by
the organisation. Effective decision making helps in improving the growth of business
(Macinati and Anessi-Pessina, 2014).
It's importance within the organisational context:
 Forecasting future- As business environment is full of uncertainties therefore
management accounting is essential for the organisation as it provide help in predicting
the results of different prospects and their affects on the business.
 Make or buy decision- Information gathered through management accounting helps in
understanding the managers whether it will be profitable or not for the organisation to
buy raw materials and converting them into products.
 Forecasting cash flows- Management accounting helps the organisation in maintaining
the cash flows and ensuring liquidity in the business. Comparisons are made based on the
current performance with previous results and financial position of business can be
determine (McLellan, 2014).
 Rate of return- Investments made by the organisation on projects generate rate of return
management accounting will helps in evaluating the expected results on the different
projects. Managers can use this information in order to maximise the profits of
organisation.
Techniques used in management accounting reporting:
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Process costing- It refers to the process of identifying the the direct cost and allocating
the indirect cost of manufacturing process. Under this cost are assigned to individual unit of
products that are being produced in the organisation. Usually it is adopted by those companies
where homogeneous goods are being manufactured. This system is useful in keeping track of
money being spend on different areas of business. When goods are produced in bulk but sold in
smaller lots it is required to maintain the proper flow of items and determining the cost at each
stage of production. Each phase in the production of vehicles in jaguar land rover involves usage
of raw material, labour and manufacturing overhead thus applying this system company to
determine the average cost of each item. Main advantage of this system is it ensures
improvement the overall quality of products (McManus, 2013).
Activity based costing- It is an accounting method that involves in finding and
distributing the cost to the different activities of the business. In the organisation machines and
labour are used for performing various tasks such as designing, producing and selling etc. Thus
Jaguar land rover has adopted this method in identifying expenses on each activity and
allocating the cost. This system is used by company as it helps in improving the financial
stability of business by removing those products and services which are not profitable and also
eliminating those activities which are adding to the cost. Decisions can be taken by the
management on how the organisation should pursue it's goals. This concept ensures the overall
increment in productivity of business.
Variance analysis- It is an analysis of difference between the planned and the actual
numbers. By calculating the variances overall of picture of the organisation's performance of
particular time period can be determined. Manufacturing and engineering companies such as
jaguar land rover uses this to asses the actual and standards cost. It's main purpose is to tell a
difference between budgeted and the actual amount. These cost are important to determine as
these are used in evaluating the performance of organisation. As per this analysis managers can
take control on the operations and measures can be taken in order to enhance the performance of
the organisation (Modell, 2012).
Overhead allocation- This is another accounting tool that involves allocating the indirect
cost to the finished goods. In situations when overhead cost is greater than the direct cost this
method is used. It comprises of two types of cost administrative which has no role in the
production of goods and services and manufacturing overhead which is concerned with direct
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cost. Overhead cost are calculated on the basis of individual department cost and total activity.
By applying this tool managers of Jaguar land rover can take varied decisions like setting prices
of the products. Through the effective allocation this method helps in utilisation of resources in
an optimal manner (Mouritsen and Kreiner, 2016).
Part 2
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
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(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
ACTIVITY 2
Part 1
Budget: It is a financial plan which is formulated by top management of organisation in
order to ignore financial crisis that may take place in future. For all the business entities whether
it is small or large it is vital to form budget so that appropriate monetary resources can be
distributed to the functional department of the company. In order to execute all the operational
activities in appropriate manner managers of Jaguar Land Rover create budgets on the basis of
previous year's data. It helps to estimate income for a future period so that overspending of
money can be reduced and it can be saved for upcoming events (Ngwakwe, 2012). It is prepared
on monthly basis in order to make sure funds are mobilised by all divisions properly.
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Purpose of budgeting: The process which is followed to formulate a budget is known as
budgeting. In order to formulate budget, managers of Jaguar Land Rover first of all gather
information of previous period. With the help of it they create new budget and present it in front
of top executives for their approval. When they approve it then it is implemented within the
organisation. It is very important for all business entities to create budget so that detailed
information of operations can be kept by enterprise. Budgetary control is also very important
element of the company which is required to be focused by managers of Jaguar Land Rover as it
helps to compare actual and budgeted figures of organisation (Pavlatos and Kostakis, 2015).
With the help of this strategic decisions can be taken for betterment of company. Purpose of
budgeting is as follows:
 It helps to provide a road map which depicts the way in which enterprise is going to
perform in future.
 Main purpose of budgeting is to render realistic estimation of incomes and expenses that
may take place in future and affect organisational performance. With the help of it
manager can plan to formulate strategies in advance so that financial crisis that may take
place in future could be resolved appropriately.
Different types of planning tools/ budgets: There are various types of budgets that are
known as planning tools and used by management of Jaguar Land Rover. All of them are as
follows:
Functional budget: The income plan which is formulated with the help of a specific
process or a division of the organisation is knowns as functional budget. It is formed by
management of Jaguar Land Rover to estimate different types of expenses which includes cost of
production, sales, labour, material, overheads, marketing, equipments etc. It is also used to
determine projected sales of the organisation. Managers identify expected incomes and expenses
for a particular time period (Functional budget, 2017). All the budgets that comes under
functional budgets are associated with the organisational functions. Advantage and disadvantage
of them are as follows:
Advantages Disadvantages
With the help of functional budget managers
get targets that are going to be achieved by
them in future.
As it provides targets to managers which may
not be in line with predetermined goals of the
organisation and also result in conflicts among
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functional departments of company.
Functional budgets are more realistic and
motivating because these are familiar with the
issues at the grass-root level.
These are based upon forecasting and there are
various internal and external factors such as
changes in demand, supply, availability of raw
material which can affect the budgetary system
and plans.
Traditional budget: All the budgets that are formulated on the basis of last year's data
are known as traditional budget. In current year it is created in Jaguar Land Rover by its manager
by modifying last period's budget in which expenses are adjusted according to inflation or
deflation rates, demand, supply and consumer preferences. It requires justification of those
transactions that have been changes as compare to last year (Traditional budgeting, 2018). It is a
financial tool which is required by all the business entities to predict future earnings and
expenditures. Advantages and disadvantages of traditional budgets are as follows:
Advantages Disadvantages
Traditional budget is very easy to implement
and organisations does not require experienced
employees to formulate them.
These are fixed and rigid and if once these are
prepared then changes cannot be marked in
them.
Such types of budgets provides opportunity to
the organisation to consolidate various projects
in a large one which helps to improve
performance of them.
These are highly dependent upon past year's
data and it is not possible to get accurate
results with the help of previous information.
Zero based budget: Such budgets are prepared from scratch with a zero base. The
process which is used to formulate it, involves re-evaluating all the items of cash flow statement.
With the help of it justification of all the expenses can be provided that are incurred in different
divisions Jaguar Land Rover. It is very important for the managers to justify all the activities and
explain revenues while formulating zero based budgets (Zero based budgeting, 2019). It is also
considered as a open and transparent way of creating a budget which results in important insight
into consumption. When a company starts to create it from a zero base then it helps to reduce
unnecessary costs and expenses. Advantages and disadvantages of it are as follows:
Advantages Disadvantages
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