BAE Systems: Management Accounting Report and Financial Analysis

This report provides a detailed analysis of management accounting practices within BAE Systems. It begins with an introduction to management accounting and its essential requirements, followed by an exploration of various management accounting systems such as price optimization, job costing, inventory management, and cost accounting. The report then delves into different management accounting reporting methods, including budget reports, performance reports, cost accounting reports, and accounts receivable reports, evaluating their benefits within the organizational context. Furthermore, it examines the integration of these systems and reports within BAE Systems' organizational processes. The report also covers the application of cost analysis techniques for preparing income statements and the advantages and disadvantages of planning tools used for budgetary control, along with the role of management accounting in addressing financial problems and achieving organizational success. The report concludes by highlighting the importance of adapting management accounting systems to respond to financial challenges and the use of various planning tools to resolve financial problems.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
ACTIVITY 1....................................................................................................................................1
PART A...........................................................................................................................................1
Management accounting and essential requirements of its systems............................................1
Different method of management accounting reporting..............................................................3
Evaluation of benefits of various management accounting systems...........................................4
Management accounting system and reporting integration within the organisational processes 5
PART B............................................................................................................................................6
Appropriate techniques of cost analysis to prepare an income statement...................................6
ACTIVITY 2..................................................................................................................................11
PART A.........................................................................................................................................11
Advantages and disadvantages of different types of planning tools used for budgetary control.
....................................................................................................................................................11
Use of planning tools for preparing and forecasting budgets....................................................13
PART B..........................................................................................................................................15
Organisations are adapting management accounting systems to respond to financial problems.
....................................................................................................................................................15
Comparison among two organisation that used techniques to solve the financial problems ....16
Management accounting in solving financial problems and ultimately leading to organizational
success........................................................................................................................................17
Various Planning tool to resolve financial problems.................................................................17
CONCLUSION..............................................................................................................................18
REFERENCES..............................................................................................................................19

INTRODUCTION
Management accounting includes various procedures that are related with identifying,
collecting, examining, interpreting along with communicating financial information to the
managers for completion of organisational goals (Adler, 2013). It is used by internal stakeholders
for different purposes such as effective planning, choosing alternative business processes and
evaluating performance of entity. It helps the administration in preparation of reports by
providing accurate timely facts about various operations happening in a company. In different
firms management accounting helps to analyse cash flows, motivate employees and analyse
financial performance. For this report, BAE Systems has been selected which is an engineering
company whose headquarters are situated in Farnborough, UK. It is a defence, security and
aerospace company. The report emphasises on different types of management accounting
systems, reports, valuation techniques used by companies for effective and efficient output. It
includes types of planning tools used for budgetary control by preparing budgets. The report also
consider ways by which organisations are adapting management accounting systems to respond
to financial problems in order to attain sustainable success.
ACTIVITY 1
PART A
Management accounting and essential requirements of its systems
Management accounting: This is defined as a process of accounting where decisions
regarding preparation of final accounts, performance evaluation of staff are taken within the
structure of a company. It helps in co-ordinating with several departments of an organisation by
allocating supervisors which ensures that targets have been achieved. To overcome any financial
problem that may arise during the process of management accounting, employees are advised
discuss it with the higher authorities. This is required by management in optimising price,
valuing inventory, calculating receivable days etc. BAE Systems invest in new technologies by
making strategic decisions with the help of management accounting. With the help of
management accounting, it appoints experienced people and allocate them responsibilities to
monitor the activities performed by different departments (Arroyo, 2012).
Management accounting systems: It refers to a system which measures price levels
opted by a company, recovery of bad debts, cost assigned to various levels of production i.e.
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direct material, labour and overhead. This is designed to estimate the productivity of employees
working at an organisation by implementing various managerial accounting techniques like
maintaining job sheets, time scale charts etc. It is required to manage and plan different activities
happening in a business environment by appointing managers.
BAE Systems follows management accounting techniques to assign tasks to labour
involved during the production process. It evaluates working hours performed by every
employee with the help of time scale charts, job sheets etc.
Price optimisation system: For all the business entities it is very important to set
appropriate prices for all its products so that large number customers could be attracted. In BAE
Systems price optimisation system is used by managers for the purpose of analysing expectations
of customers and then set appropriate prices for all its products so that higher profits could be
generated. It is required for the company because it guides managers to determine best suitable
price for all its products that are sold to clients (Bouten and Hoozée, 2013). With the help of this
system managers try to achieve long term business objectives by meeting expectations of clients.
Job costing system: It is a system which is used by most of the manufacturing and
engineering companies for the purpose of recording information different jobs that are performed
by the company. In BAE systems this management accounting is used by managers in order to
identify the costs that are related to different activities which were performed according to
specifications of clients. It is required for the enterprise because it guides managers to identify
cost of all the jobs that are performed separately.
Inventory management system: It is defined as a system which is used by managers of
companies to control, manage, record and track inventory which is going to be used for
production activities. With the help of it managers can analyse that warehouses of organisation
are having sufficient amount of inventory for production. It ensures that managers are doing a
proper inventory count and tracking the goods which have been delivered by supplier or kept in
the warehouse. This system is required as well as followed by every level of management i.e.
top, bottom, clerks, retailers etc. BAE Systems has hired a personnel who maintains stock sheets
for the products that have been placed and orders goods which are in high demand before the
lead time with the use of inventory management system. There are three different inventory
management system that are LIFO, FIFO and AVCO. In LIFO recently received goods are used
for production activities, in FIFO earlier acquired inventory is used for manufacturing activities
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and in AVCO goods are used on average basis for production activities. In BAE systems FIFO
method is used for manufacturing activities.
Cost accounting system: This system is designed to monitor the cost associated with
different types of business. It comprises of fixed, variable, production, sunk cost etc. This is
used by companies to track the value of products & services (Cadez and Guilding, 2012). It
involves how a company allocates funds to various units i.e. direct material, labour overheads
etc. for the units of production. This is required by companies to maintain profitability status of
various units in an organisation. BAE Systems uses cost accounting system to measure value of
its goods and attain profit margins.
Different method of management accounting reporting.
Management accounting reports: The reports prepared after analysing information
received from different departments are termed as management accounting reports. Such reports
aid towards planning for future, making effective decisions as well as measuring performances of
employees along with organisation as whole. The accounting reports are considered as
statements that helps in identifying aspects of different accounting systems. Managers of BAE
Systems uses accounting reports to get fair as well as accurate picture of business operations.
The following management accounting reports are as follows:
Budget reports: This type of accounting report is important report as it provides various
sources of revenues along with expenditures. This report is prepared by considering previous
year budgeted results. Organisational managers uses budget report to determine expenditure
levels. It plays significant role at the time of plans by preparing short term as well as long term
budgeted statements. Proper analyses of such report benefit the organisation to maintain control
over financial results. Financial managers of BAE System prepares budget reports for the
purpose of anticipating expenses as well as incomes for future time period that will help to take
decisions related with business growth and expansion. It provides analyses of all variable factors
that can affect operations of business.
Performance reports: Organisational managers prepares performance reports to analyse
as well as evaluate performances of staff members in different activities or projects. Such report
is used for monitoring financial as well as non financial informations in order to foster actual
results (Figge and Hahn, 2013). Being the BAE System the large engineering organisation, the
managers prepares departmental performances to make critical decisions for improvement of
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performances of different departmental members. By analysing the performances various
training, development and reward policies are set that helps in increasing commitment as well as
improvements in performances of employees. This type of report is used by managers,
shareholders, government authorities and so on to analyse performances that are based on present
along with future operations or events. After the proper evaluation of individual performances at
work place through such reports, managers of selected firm formulates policies, strategies and
plans as to improve the performances for successfully attainment of objectives.
Cost accounting report: This type of report is used with the purpose to compute costs of
various products that are manufactured at work place. It considers costs that are associated with
raw materials, direct costs, overhead costs and other added costs. Calculations of expenses is
done with the help of cost report before offering the product or service for selling purpose. It
records information related with investments, employees, product lines and many more in
systematic manner Top level management uses such report to compute profits along with losses
for accounting period and to formula plans for uncertain situations.
Accounts receivable report: Such report is used to get categorise accounts receivables
on the basis of length of time remaining for clearing invoice. It helps in managing all business
operations in critical manner. Various entities uses such report at the time of planning collection
calls as well as forecasting cash flows. The organisations that performs operations in credit terms
generally uses this type of accounting report with the purpose to determine allowances to
doubtful accounts. Accountant professionals of BAE System prepares account receivable report
in which all the credit transactions are recorded in systematic manner which includes dates, name
of creditor, amount and other credit details (Fullerton, Kennedy and Widener, 2014). They
collect information and provide reports to managers for the purpose of making provisions for
potential bad debts and to revise doubtful accounts. In context to selected company, such report
is generated by using software system that reconfigures the data or information for distinct
ranges of amount and dates.
Evaluation of benefits of various management accounting systems
Systems Benefit & organisational context
Price optimisation system  This system is used by managers in BAE
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system to set appropriate prices for all the
products.
 In BAE systems price optimisation system is
used by managers to determine reaction of
clients on different prices set by company.
Job costing System  This system is used in BAE systems for the
purpose of analyse costs involved in such
activities that are performed according to
specification of clients (Gibassier and
Schaltegger, 2015).
 Job costing system is used by managers in
BAE systems to analyse profitability of
different jobs performed by company.
Inventory management System  It helps in recording and tracking of
inventory from one place to another by
installing computer software.
 In BAE Systems inventory management
system in order to keep a track record of
inventory so that situation of empty
warehouses can be ignored.
Cost accounting System  It increases liquidity and profitability
position of a company by maintaining a
balance between income and expenses over
a period of time.
 The company appoints high skilled
accountants that prepare financial statement
keeping in mind of all the gains and losses
occurring in an organisation.
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Management accounting system and reporting integration within the organisational processes
Management accounting systems as well as reports plays essential function in
organisational process as they helps in running operations in efficient manner. Various type of
accounting systems are cost accounting system, job costing system, inventory management
system and price optimising system helps in conducting organisational activities in order to
attain objectives of a company. Accounting reports provides detailed information related to
departmental functions and present the same to top authorities to make decisions that facilitates
organisational processes towards goals (Herziget and et.al., 2012). Based on the reports,
performance of any company is analysed and appropriate decisions are taken to conduct
operations in adequate manner. Thus, management accounting systems as well as reports are
integrated with organisational processes of BAE System.
PART B
Appropriate techniques of cost analysis to prepare an income statement
ANNEX (A)
Marginal costing method: Marginal cost is the defined as the extra cost incurred with
every additional unit produced. It is a change in total cost of goods by change in product output.
This is important in making decisions regarding the company as it calculates net profit which
shows the position of a firm. Contribution per unit remains constant while profit per unit
modifies with an alteration in sales. BAE Systems uses marginal cost approach to estimate the
volume of sales as well as any modification in variable cost.
Absorption costing method:It is a costing method where both fixed and variable cost
associated with product are apportioned to different cost centres within a company. This
technique ensures that the cost incurred in production of goods & services is recovered from
sales revenue. It analyses under/over absorbed overheads which help in controlling cost of an
organisation. BAE Systems prepares its income statement using absorption costing method
which helps in getting a more clear picture related to the cost associated with different products
& services (Hiebl, 2014).
Income statement by marginal costing method
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Income statement by absorption costing method(1st quarter)
Working note:
1.
2.
Income statement by absorption costing method(2nd quarter)
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Working notes:
1.
2.
Interpretation: There is a slight difference between net profit calculated using marginal
and absorption costing for both quarters. This is because while considering variable cost of
product, MC approach does not account for fixed overheads whereas in AC method they are
considered.
ANNEX (B)
Absorption costing Method: It is a costing technique which values both opening as well
as closing inventory. By following this method, a more accurate picture of activities performed
by a company are stated. This includes the impact of direct material, labour, variable and fixed
production overheads. It is used for tax reporting (Ismail and King, 2014).
Activity based costing method: It is an approach where cost of manufacturing overhead
is assigned to production unit. According to this system, it recognizes relationship between
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manufacturing products, cost, overheads and then allocates value to products. This is also used in
target costing, estimation of profit, customer analysis etc. It splits cost pools and then assigns
them to individual cost drivers.
(a) Labour hour: It is a concept which calculates number of hours labour has worked in an
organisation. This can be defined as productive effort of one person during an hour of production
for goods & services. The labour hour rate is calculated by dividing total overheads to hours
worked.
(b) Using ABC approach:
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Overhead using ABC approach: -
Interpretation: According to labour hour rate, value of overhead per unit has doubled
resulting in increase of total overheads for both X and Y product. While calculating cost drivers
for each department i.e. production, handling, machine cost value for product X has decreased as
compared to another.
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ACTIVITY 2
PART A
Advantages and disadvantages of different types of planning tools used for budgetary control.
Budgets: The written statements that provides estimation of costs over specified
accounting period. The budgets are compiled as well as re evaluated by managers on periodic
basis as per the requirements. It provides complete estimation of expenses and revenues for
future time period. It is an internal tool at BAE Systems as it is used by management not by
external parties. Preparation Of budget is essential as describes the ways activities will be
conducted at peak time to measure efficiency. It aid towards setting organisational goals,
planning for contingency situations along with measuring results. Business entities prepares
budgets to understand the needs of funds and at the same time make arrangements of funds with
the purpose of attain objectives without any hurdles. For instance, accountants of BAE System
prepares budget and circulate the same to management of the company as to follow the
particulars in order to reach near to objectives and achieve beneficiary results (Kaplan and
Atkinson, 2015).
Budgetary control: A system that is used to control costs at various stages. It
encompasses preparation of budget, establishing responsibilities, coordination between
departments, comparing actual and budgeted results and acting towards unsatisfactory results in
order to maximise profitability. In other terms, it refers to planning activities in advance as to
control business operations in effective manner. Such control helps management of BAE System
to set goals by setting standards for performances that results in making higher profits.
Furthermore, it plays important role in enhancing productivity by emphasising on actual budgets
along with anticipatory budgets. In budgetary control, various tools are adopted my management
that results in controlling budgetary performances. Some of the planning tools with advantages
as well as disadvantages are as follows:
Flexible budget: A financial plan which changes as per the needs of the company. Such
tool helps in complete analysis of deviations between standard output and actual performance. It
helps in attainment of objective related with cost control at different levels of operations. Such
budget is prepared By managers of BAE System after classifying all expenses in distinct
categories such as fixed, variable and semi variable as the usefulness depends on accuracy for
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which all expenses are mandatory to be classifies in appropriate manner. It represents expense
amounts that are necessary to achieve level of specified outputs. A logical comparison is
provided to compare the allowances with actual costs.
Advantages:
 Flexible budget helps managers to incorporate with irregular payouts and allows the
business to utilise the funds when needed to deal with urgent situations.
 Such budget benefits BAE System to provide accurate as well as appropriate outcomes
by covering distinct transactions according to objectives of company.
Disadvantages:
 The procedures involved in forecasting flexible expenses is cumbersome as well as
involves complex plans (Kastberg and Siverbo, 2013) .
 Flexible budget lacks mobility at the time of allocating resources to under performing
areas and results in additional costs that results in diminishing funds of BAE System.
Master budget: This type of planning tool is considered as aggregate of other budgets
that are formulated by different functional areas of business (Master Budget. 2018). In simple
words, it involves other financial budgets along with budgeted income statement as well as
balance sheet. It is used as strategic management plan in which managers formulate strategies for
future time period along with current year forecasting. It is presented in various formats such as
monthly format, quarterly format and yearly format. Managers of BAE System uses master
budget to direct operations and to judge performances as well as incorporate modifications in
order to achieve desired outcomes. The elements of master budgets includes direct labor budget,
production budget, direct material budget, sales budget and so on.
Advantages:
 Formulating master plan helps in identification of problems at current state and planning
for future.
 Master budget helps accountants of BAE System to allocate funds in distinct
organisational areas and communicating the same in order to uncover potential
bottlenecks.
Disadvantages:
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 For preparation and monitoring master budget, organisations require to hire professionals
of financial analysts who are expert in tracking and reporting all operations. It adds
additional expenses to management.
 Master budget is prepared on the basis of assumptions that has chances be proved wrong
after some time period.
Capital budget: A process that helps in evaluation of investments along with expenses
for the purpose of analysing returns on investments. At the time of formulating such budget, it is
necessary to follow organisational objectives. It is prepared by considering profitable projects,
capital expenditures and available financial resources to identify investment opportunities,
evaluating proposals, choosing profitable investment, capital budgeting as well as reviewing
performances (Otley and Emmanuel, 2013). Managers of BAE Systems uses this type of tool to
take right decisions that leads the business towards great heights.
Advantages:
 Such budget helps managers of selected organisation to understand risks along with their
effects that helps in making decision for investment opportunities.
 It benefits companies to choose the investment projects wisely that increases wealth of
the owners and getting competitive advantages.
Disadvantages:
 Procedures of such budget does not focuses towards non financial aspects that results in
providing unfair profitability results.
 The techniques applied for preparation of capital budget are assumes and unreal that
increases chances to affect long term durability of business.
Use of planning tools for preparing and forecasting budgets.
Planning tools acts as guidances to take appropriate actions in order to attain business
objectives in effective manner. It is considered as essential tool that aids towards decision
making to improve efficiency of operations as well as sustaining in the competitive market. By
using planning tools, organisations make various provisions and implements the same to improve
financial position of the firm. Planning tools are applied to analyse deviations between current
year performances with past year performances as to define problems that hampers operations to
attain desired objectives. At BAE System, planning tools such as capital budget, flexible budget
and master budget are used to analyse situations, planning activities and making decisions. All
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these tools are applied with the objective to execute the actions and controlling activities to
balance workload of staff members and completing projects on specified time. Planning tools are
also applied At BAE System to facilitate communication of information between various
departmental functions to make decisions as to allocate resources in efficient manner that enable
to reach organisational objectives (Quinn and Jackson, 2014).
Annex C
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PART B
Organisations are adapting management accounting systems to respond to financial problems.
Financial problems: The situations that causes financial pressure on organisations are
termed as financial problems. It results in bad credit rating as well as affects ability to manage
daily operations of any organisation. All businesses whether small or large faced some type of
financial problem. There are considered as the situations that hampers business operations and
impacts on profitability of companies. The list related with financial problems is too long and
managers frame various strategies to overcome from such problems. Some of the financial
problems faced by managers of BAE System are as follows:
 Cash flow problem: Since BAE System is an engineering company and requires
financial resources to acquire various software. The managers of such company provides
credit services to their clients as well as paying taxes to governments that results in more
outflow and less inflows of cash (Renz, 2016). Thus, organisation facing cash flow
problem.
 Sudden expenses: Such financial problem occurs at BAE System as some departmental
managers are not able to effective plan activities due to which unplanned expenses occurs
and to deal with sudden expenses top managers have to use funds that creates situation of
over utilisation of funds.
 Late payments: BAE System provides credit facilities to various customer segment
which results in late payments by potential clients and hence leads towards problem of
financial resources to achieve daily operations for the company.
Financial governance: Different companies adopt different ways to collect, analyse,
monitor as well as control financial information. Such governance is termed as different financial
15

principles that are mandatory for any business to follow for the purpose of dealing with financial
problems. Managers of BAE Systems follows financial governance to track transactions,
performance management in order to resolve problems associated with funds.
Management accounting approaches: the tools or techniques that plays important role
to resolve financial problems of any organisations are known as management accounting
approaches. With the help of accounting approaches managers along with employees get
accurate information to effectively utilise financial resources. Management of BAE System
adopts following approaches:
Benchmarking: Using benchmarking approach, organisations measures their plans,
procedures and performances with other organisations with the purpose to find the causes of
problems as well as to implement strategies to overcome the problems that results in
improvements in financial conditions. Managers of BAE Systems uses such approach in order to
prepare benchmarking reports related to management of cash flow problems (Seal, 2012). They
analyses other companies strategies and apply the same to improve efficiency of cash flows.
Here, financial positions are measured with high performing company in same industry.
KPI: Such approach is mainly adopted by businesses to measure performance in different
situations. It includes financial as well as non financial key performance indicators. Financial
KPI is used to analyse unnecessary expenses where as non financial KPI helps in identification
of associated problems with supply chain management, operations management and hence forth.
Financial managers of BAE System uses financial KPI that helps in analysing problems with
sudden expenses that provides information related to unplanned along with unnecessary
expenditures.
Comparison among two organisation that used techniques to solve the financial problems
BAE System Focusrite Company
Problem: The problem faced by BAE System
is cash flow problem and sudden expenses.
Also the organization members are unaware
regarding competitors actions, strategies as
well as plans.
Problem: Focusrite Company managers are
facing financial issue related with late
payments by clients. In such situations,
organisation is not getting payments on time
that hampers their financial position.
Apprpoach: Managers of BAE System can Approach: Managers of Focusrite Company
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use approach of benchmarking that will helps
in understanding other organisational
strategies to overcome problems of unplanned
expenses and cash flow management.
System: Selected organisational managers
should adopt Cost accounting system that will
help in analysing cost of various products
which will lead towards formulating effective
plans so that problem of sudden or unplanned
expenses can be resolved.
can apply approach of key performance
indicator that will help in analysing financial
position of clients and stability of clients to
make payments (Sohn, 2016).
System: By using account receivable ageing
system, company managers of BAE Systems
can analyse the amount that is to be received
from clients and formulating strategies to force
them to make payments.
Management accounting in solving financial problems and ultimately leading to organizational
success
Managers of any company adopts accounting approaches of benchmarking and key
performance indicators that helps in overcoming from financial problems. Both approaches plays
essential function in BAE System and Focusrite Company that helps in attaining sustainable
success. Using such approaches, managers formulates various strategies that benefit the business
to reduce financial issues and at the same time leading towards success. BAE System apply
approach of benchmarking to identify opportunities that reduces gaps with other companies and
to monitor performances of daily routines (Storey, 2014). On the other hand, approach of key
performance indicator is used by Focusrite Company in order to compare actions or
performances with other business units that impacts on reducing financial hurdles in order to lead
towards sustainable success.
Various Planning tool to resolve financial problems.
Planning results in formulation of strategies in present time period for future state in
order to maintain functionality of operations in smooth manner. BAE System along with
Focusrite Company faces financial problems due to unexpected or contingent situations.
Organisational managers of BAE System uses different planning tools that are flexible budget,
master budget and capital budget that helps in predicting as well as forecasting unexpected
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hurdles with the purpose of increasing business efficiency to improve profitability by resolving
financial problems and sustaining in competitive industry (Trucco, 2015).
CONCLUSION
From the above report it can be concluded that management accounting involves various
procedures related with analysing, recording, controlling performance of different departmental
units along with organisation as whole. Managers uses various accounting systems for the
formulation of accounting reports that provides accurate picture of financial status of business.
They uses absorption and marginal costing technique for the calculation of net profits. Planning
tools used by the company are capital budget, master budget as well as flexible budget that plays
important function in formulation of budgets. Financial problems that entity is facing are cash
flow problem, sudden expenses, late payments by clients and many more. Approaches of
benchmarking and key performance indicators are used to deal with such problems and to lead
towards sustainable success.
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