Management Accounting System: Dunlop Tyres Case Study

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Management Accounting
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Table of Contents
Introduction...................................................................................................................... 3
LO1.................................................................................................................................. 4
LO2.................................................................................................................................. 7
LO3................................................................................................................................ 10
LO4................................................................................................................................ 13
Conclusion..................................................................................................................... 17
Reference List................................................................................................................ 18
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Introduction
Management accounting system is the process of managing business costs and
operations related to the financial reports of a company. The selected organisation for
study of management accounting is Dunlop tyres. John Boyd Dunlop founded this
company in the year 1889. Its main product is tyres. The head quarter of this company
is at Akron, United States. The company has its branches present all over the world and
in well known for their manufacturing operations. In the following study, the
management accounting system in context to Dunlop tyres is going to be discussed.
Furthermore, the various planning tools of management accounting system used by
different companies are also discussed. Lastly, the comparison of the management
accounting system used by Dunlop Tyres and other companies’ will be discussed. For
the comparison, another company of the same domain will be chosen.
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LO1
P1 Explain management accounting and give the essential requirements of
different types of management accounting systems.
Management accounting system or managerial accounting system is the process of
managing accounts related to the financial reports and statistical information of the
company. This information is required by the managers to take decisions on short-term
basis. Management accounting system is a vital part of any organisation in context to
analysing company’s growth on daily basis. It helps the company’s higher authorities to
evaluate their productivity and profitability on certain products. When a company
launches any new product or item, the management accounting department predicts the
amount of profit or loss they are going to incur from the market. The management
accounting system is slightly different from financial accounting in the context that the
former produces reports on weekly basis whereas the later produces reports on yearly
basis. Moreover, management accounting reports are mainly prepared for internal
assessment and are viewed mostly by the managers and chief executive officers. The
reports are related to sales and revenues generated, amount of available cash, number
of orders in hand presently, raw material availability, storage space availability for final
products, imports and exports and others (Thomas, 2016).
Essential requirements of different types of management accounting systems
There are several of types of management accounting system. Every accounting
system has its own need and requirement in the company. The different accounting
systems are cost accounting system, inventory management system, job costing
system and price optimization system.
Cost accounting system
The cost accounting system is related to the fixation of price of a certain product of the
company in context to the company’s profit and investment made by the company in
designing that product. Any company before setting the price of a product focuses on
their own expenditure made on that product. This includes investments’ in buying the
raw materials, transportation of final products, technologies involved in that product and
others. Based on these factors the cost of the product is fixed (Otley, 2016).
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Inventory management system
Inventory refers to the place where the final goods or products items are stored. Often
inventory and stocks are used interchangeably. Inventory management system controls
the basic outflow and inflow of products to minimise the under stock and over stock
situations. Proper management of inventory reduces the chance of excess production
thereby prevents the company from excess investments.
Job costing system
The job costing system is the process of gathering knowledge collectively, about the
costs associated with the production of the material or item. This information is shared
with the customers in order to give them a proper justification about the price of the
product. Job costing system includes costs of direct materials, overhead costs and
labour costs.
Price optimisation system
Price optimisation system refers to the setting of price of a product depending upon the
demand and requirements of that product in the market. The company has to model
different mathematical programs and surveys in order to know the market demand of
the product before deciding the price of it. In addition to all, the company sets the price
in such a way that they must gain profit irrespective of the market conditions (Ceraolo et
al., 2016,).
P2 Explain different methods used for management accounting reporting.
Management accounting report is the report prepared after successful evaluation of
various management accounting systems. This report helps the company to know about
the overall revenues generated and profit and loss incurred by the company. Depending
on this reports the company does their further planning and take decisions on short-
term basis. There are different methods, which are used in managerial of account
reporting. These are cost reports, budget reports and execution reports (Maas et al.,
2016).
Cost reports
Cost reports are the reports related to the determination of cost of a certain product. In a
cost report it is mentioned how the price of a certain product is done. This includes
overhead labour cost, direct cost, raw materials cost, transportation cost and others,
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divided by the total number of products manufacture. The managers and chief executive
officers need the cost reports. The cost reports are prepared in a brief and precise
manner. It enables the managers to estimate a prediction of profit or loss by seeing the
cost price and selling price. Moreover, it also helps the managers to make further plans
in order to control income limit (Kihn and Ihantola, 2015).
Budget reports
A budget report is one of the most important reports, which are made in prior to
production, and manufacturing of the product. Preparation of budget report requires
information and data of early years related to the product. These data are used in order
to predict the future of that product in context to profitability of the company. it is
because when a company does not see any growth and demand of a particular product
in the market they usually do not prefer to manufacture that product any more. Rather
they prefer to design any upgraded and modified version of the same product in a
limited budget, which may bring them a profitable earning (Maskell et al., 2016). Thus,
budget reports are very much useful in designing a new product of the company.
Execution reports
An execution report is a report, which is meant extensively for the internal organisation.
This report is all about the planning and decisions, which were taken by the company in
order to achieve a particular objective. The execution report also consists of the
different techniques and strategies adopted by the company to accomplish their task.
The managers check this report and examines whether every planning and decisions
taken by the organisation are performed well or not. If they found some plans are not
executed properly, then it is their responsibility to execute those plans and programs.
Thus, execution reports are useful in context to understand and identifying the
execution of different plans of the company to achieve success and reputation in the
market world (Smith, 2017).
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LO2
P3 Calculate costs using appropriate techniques of costs analysis to prepare an
income statement using marginal and absorption costs.
Marginal Costing
Particulars Amount (£)
“Direct materials” 10
“Direct labours” 20
“Variable production overheads” 5
“Per unit cost of products” 35
Table 1: Marginal costing report
Budgeted Income statement by marginal costing method
“Particulars” Amount (£)
“Production Units” 18000
“Sales unit” 16000
“Sales price per unit” 50
“Sales value” £800000
“Cost of sales” -
“Opening stock” -
“Variable production overhead” 630000
“Closing stock” 70000
“Total cost of sales” 560000
“Contribution” 240000
“Less: fixed production cost” 100000
“Profit” 140000
Table 2: Budgeted marginal cost sheet
(Source: Created by the learner)
Actual Income statement
Particulars Amount (£)
“Production units” 19000
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“Sales Unit” 16000
“Sales price per unit” 50
“Sales value” £ 800000
“Cost of sales” -
“Opening stock” -
“Variable production overhead” 760000
“Closing stock” 120000
“Total cost of sales” £640000
“Standard profit” 160000
“Adjustment under absorption costing” -5000
“Profits” £155000
Table 3: Actual Income statement of marginal costing
(Source: Created by the learner)
Absorption Costing
Particulars Amount (£)
“Direct materials” 10
“Direct labours” 20
“Variable production overhead” 5
“Fixed production overhead” 5
“Total per unit cost” £40.00
Table 4: Absorption costing
(Source: Created by the learner)
Budgeted Income statement
“Particulars” Amount (£)
“Production units” 18000
“Sales units” 16000
“Sales price per unit” 50
“Sales value” £800000
“Cost of sales” -
“Opening stock” -
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“Variable production overhead” 720000
“Closing stock” 80000
“Cost of sales” £640000.00
“Adjustment for the under absorption” -10000
“Profits” £150000.00
Table 5: Budgeted Income statement of Absorption costing
(Source: Created by the learner)
Actual Income statement
“Particulars” Amount (£)
“Production units” 19000
“Sales units” 16000
“Sales price per unit” 50
“Sales value” £800000
“Cost of sales” -
“Opening stock” -
“Variable production overhead” 760000
“Closing stock” 120000
“Total cost of sales” £640000
“Standard profits” 160000
“Adjustments under absorption costing” -5000
“Profits” £155000
Table 6: Actual income statement of Absorption costing
(Source: Created by the learner)
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LO3
P4 Explain the advantages and disadvantages of different types of planning tools
used in budgetary control.
Budget is one of the most important factors of “management accounting”. It helps the
companies to analyse the present data and based on the current data the estimation of
the future data can be done. It helps the company to allocate resources more effectively
and effectiveness of cash flow in the organisation can be increased by using budgeting
system. It reduces the cost of different processes in the company. Different planning
tools are used in the budgeting of the company. Some of the most effective planning
tools of budgeting will be discussed below:
“Static budget”
This budget is kind of fixed budget that does not consider any other updating factor in
the budget. This budget is done within a fixed structure and it does not consider any
other factors other than what is updated in the budget.
Advantages
This budget is prepared within a proper structure and can be understood in an easy
ways. This budget can be understood by all the employees in the company. High
flexibility of the budgeting process will helps the company to become more profitable
and the effectiveness of the processes will be increased. The expenses of the company
can be prioritise by applying this budget in the organisation. It helps the company to limit
the spending and the finance of the company can be controlled easily.
Disadvantages
This budget does not include any complex calculation and does not consider any
updated information. Any of the information cannot be included in the budget. It is not
sufficient for the companies that deals with more information of the company. It can only
be applied to the companies in which the information and the circumstances does not
changes much.
“Flexible budget”
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This budget includes all the updated information of the company. It changes the data
and the information of the companies and helpful for to calculate all the information in
the companies. It will help the company to become more updated.
Advantages
All the new data can be updated in this budget of the company. It will help the company
to justify all the departments. It is a new method of the budgeting that helps the
company to update all the data and information.
Disadvantages
This method takes more time and it includes complex calculations. It demand more
expert people to be in the company to fulfil the method of budgeting.
“Rolling budget”
This budget adds an incremental period to the existing budget of the company. It is a
continuous process of budget that helps the company to easily update the budget.
Incremental period is added to the existing budget of the company.
Advantages
It is a modern approach of budgeting t8hat helps the company to get more updated
data. It updates all the information and helps to add a period to the existing budget of
the company.
Disadvantages
It includes several complex calculation and cannot used by all the people. It increases
employee demoralisation in the company.
“Zero based budget”
This budget starts calculating the amount of expenditure in the company from zero base
in every stage of budgeting. All the factors of the budgeting are justified in this method
of budgeting. It helps the company to relook on the performance of every department
and then to judge the performance of the companies. All the operation and activities of
the company can be measured by using this budget. It help the authority to rethink
about the goals and the goals can be set from a new base in the company. It always
takes the current data of the company and does not depend on the previous data of the
company. It helps the company to allocate the resources effectively in the organisation.
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It increases the overall performance of the company. Wastage of funding can be
reduced by highly accurate result of this budgeting method of the company.
The advantages and disadvantages will be explained below:
Advantages
High efficiency
This process of budgeting looks on to the different factors and the performance of the
company. It is helpful for the company increase the effectiveness. It measures the
performance of the resources in the company in a highly effective way and helps to
allocate the resources in the organisation efficiently. The high efficiency of this process
is mainly due to the dependency of the process in the current data of the company.
Extreme accuracy
This process gives a relook to each of the departments and the current data is collected
and analysed in the company. In this way, cost of the company can reduced and it
increases the efficiency of the company. All the items of the cash flow are justified under
this method of budgeting. Due to high accuracy it is more preferable for some of the
organisations.
Reduction in redundancy
As this budget checks all the items of the process of budgeting, it reduces the
redundancy of the processes in the company. Reducing the redundancy in the
processes help the company to manage the cost in the company.
Consideration of the economic factors
It is the one method of budget that considers the inflation of economy. Consideration of
inflation helps the company to predict the correct amount of data and it becomes helpful
in turn to the company.
Disadvantages
Time taking
The method takes a huge amount time to be completed. It checks the performances of
all the departments and then calculates the data pf the company, It is not possible for all
the companies to give so much time for budgeting.
Huge human resources
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