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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