Management Accounting: Jaguar Land Rover Case Study

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Management Accounting
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Table of Contents
Activity 1.........................................................................................................................................3
Introduction..................................................................................................................................3
Part A...........................................................................................................................................3
Part B...........................................................................................................................................5
Conclusion.................................................................................................................................13
Activity 2.......................................................................................................................................14
Introduction................................................................................................................................14
Part A.........................................................................................................................................14
Part B.........................................................................................................................................16
Conclusion.................................................................................................................................17
Bibliography..................................................................................................................................18
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Activity 1
Introduction
Managerial accounting is required to manage the internal financial functions. Various systems of
administrative accounting are helpful for serving several purposes in the administration.
Managing profitability, controlling performances and planning the goals are most important
advantages of these systems. Different planning tools are used for serving the purpose of
budgeting and costing in the administration. In these report examples, based discussion will be
provided for the understanding of managerial accounting.
Jaguar and Land Rover Automotive Plc will be analysed to discuss the application of
administrative accounting. Jaguar and Land Rover automotive Plc is a type of subsidiary
administration and it has been established in 2008 (Annualreport2018.jaguarlandrover.com.,
2019). Headquarter of this administration is situated at Coventry in United Kingdom. It has more
than 40k employees all over world and the recent net income of this administration is £1.1
billion. In this report, how the subsidiary is applying administrative accounting to achieve
optimum profitability will be analysed.
Part A
Discuss management accounting by explaining the essential requirements of different types
of management accounting system.
Business revolution in 19th century has made the room for administrative accounting. It is the
method of preparing report analysing the previous data of administration. Profitability
management and costing are the advantages that can be achieved from applying these systems.
Different methods of these procedures are used in various places of the administration. Crucial
requirements of the methods in the administration will be given below:
Cost accounting systems
Cost accounting system is required in the administration for understanding and managing the
cost of production. This system is applied in the overall production process (Kaplan and
Atkinson, 2015). Previous cost of the administration is analysed and the future estimation of the
cost can be done in this process. Expenditure can be reduced and profitability of administration is
directly related to the costing and it is useful to make the production process more beneficial.
Process of cost accounting includes tracking raw materials to managing the delivery. Different
methods of cost accounting impose cost in different ways and all the methods of cost accounting
are beneficial in different ways.
Inventory management systems
This procedure is required in the administration for managing the inventory and all types of
inventory can be managed by this system. It is required in the administration to handle all the
inventory and operational efficiency. Internal fraud and wastage of inventory can be reduced at
optimum level by following this method (Chenhall and Moers, 2015). Several methods of system
of managing stock such as FIFO, LIFO and Just-in-time are beneficial for the administration for
serving several purposes. FIFO makes sure that the products manufactured first are sold first and
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LIFO makes sure that the last produced products are sold first. In case of Jaguar, old models lose
their attractiveness. It follows FIFO managing style of inventory. This styles is most beneficial
for this administration.
Explain different methods used for management accounting reporting.
Budget report
Performances of administration are recorded in this type of report and the variance can be
calculated as per the actual and standard performance. Result of analysis of the previous data is
included in this budget (Maskell et al., 2017). All the sources of earning and expenditures are
enlisted in this report. Achieving goals becomes easy by this method and the performance of the
management can be implicit from this report. It is sometimes used for the purpose of controlling.
Cost managerial accounting report
Knowing the detailed costing is essential for further growth of administration. This report
includes detailed cost of all the processes and probable profitability can be chosen from this
method. It is used to forecast the future, it is useful for updating all the recent information related
to cost, and most to least costly processes can be determined from this report. In order to prepare
this report, the previous reports are analysed and management of the entire costing is done in that
way.
Evaluate the benefits of management accounting systems and their application within an
organisational context.
Systems of management accounting are used to serve several important purposes n different
departments of the administration. Both the financial and non-financial performance can be
tracked by this system of administrative accounting. Benefits of application this system in Jaguar
and Land Rover Automotive Plc will be given below:
Planning
Planning is important to set goals, Jaguar has a systematic way of achieving goals, and the
resource allocation of this administration is highly effective. Application of planning makes the
internal processes more effective and the efficiency of resources can be improved by this
(Shields and Shelleman, 2016). Performance can be augmented by handling risks in the
administration. Available resources can be used properly and the profitability can be boosted.
Organising
Organising the processes help in improving the administration among various departments.
Communication within the departments can be augmented and the overall performance can be
improved by applying these systems in Jaguar.
Controlling
Controlling is important to improve overall performance and the resources can be evaluated
properly by applying these functions (Boiral, 2016). Controlling performance will increase the
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effectiveness of the overall performance and the unproductive processes can be eliminated from
the administration.
Critically evaluate how management accounting systems and management accounting
reporting is integrated within organisational processes.
According to Otley (2016) methods of administrative accounting are important to evaluate the
inner performance of the management. All the systems are integrated to improve the costing and
budgeting processes of the administration. The information of administrative accounting are
prepared depending upon the application of systems. These are helpful to manage efficiency and
the effectiveness of the administration can be improved by this methods. It makes the
administration more profitable and controlled in many ways.
On the other hand Quattrone (2016) stated that though these systems are essential for the
administration yet it has several limitation. These systems make the administration more
dependent on the pre determination of all the factors. Sudden uncertainty cannot be handled by
the administration properly due to application of these systems.
Part B
Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs.
Question 2
Cost analysis under 1st quarter
Amount Amount
Direct material £
18.00
Direct labour £
15.00
Fixed cost per unit £
15.00
£
75,000.00
Variable cost per unit £
9.00
Units of production 5,000
Sold unit 4,500
Selling price of all
units
£
95.00
Opening stock Nil
Closing stock 500
Fixed Distribution
Cost
£
180,000.00
Variable Distribution
cost
10% of revenue
Table 1: Cost calculation in 1st quarter
(Source: Created by the learner)
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Income statement in 1st quarter under absorption costing
Particulars
(Absorption)
Amount Amount
Revenue £
427,500.00
Less:
Manufacturing cost
Variable cost
Direct material cost £
18.00
Direct labour cost £
15.00
Variable
manufacturing
overhead
£
9.00
Fixed Factory £
15.00
Cost of goods
manufactured
£
57.00
£
285,000.00
Add: Opening Stock £
-
Cost of Goods
available for sale
£
285,000.00
Less: Closing stock 500 £
28,500.00
Cost of goods sold £
256,500.00
Add: Under absorption of
factory overheads
or
Less: Over absorption of
factory overhead
Cost of goods sold at
actual
Gross profit on sale
Less: Fixed selling and
administrative expense
£
180,000.00
Variable selling and
administrative expense
£
42,750.00
Total Non
manufacturing cost
£
222,750.00
NET OPERATING
INCOME
£
33,750.00
Table 2: Income statement under absorption costing
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(Source: Created by the learner)
Income statement in 1st quarter under marginal costing
Particulars (Marginal) Amount Amount
Sales £
427,500.00
Less: Variable cost
Direct material £
18.00
Direct labour £
15.00
Variable overhead £
9.00
Cost of goods sold £
42.00
£
210,000.00
Contribution £
217,500.00
Less: Fixed manufacturing
overhead
£
15.00
£
75,000.00
Other fixed expenses £
15,000.00
Net profit £
127,500.00
Table 3: Income statement under marginal costing
(Source: Created by the learner)
Cost analysis under 2nd quarter
Amount Amount
Direct material £
18.00
Direct labour £
15.00
Fixed cost per unit £
12.71
£
75,000.00
Variable cost per unit £
9.00
Units of production 5,900
Sold unit 3,000
Selling price of all
units
£
95.00
Opening stock 500
Closing stock 2900
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Fixed Distribution
Cost
£
180,000.00
Variable Distribution
cost
10% of revenue
Table 4: Cost analysis under 2nd quarter
(Source: Created by the learner)
Income statement under absorption costing
Particulars
(Absorption)
Amount Amount
Revenue £
285,000.00
Less:
Manufacturing cost
Variable cost
Direct material cost £
18.00
Direct labour cost £
15.00
Variable
manufacturing
overhead
£
9.00
Fixed Factory £
12.71
Cost of goods
manufactured
£
54.71
£
322,800.00
Add: Opening Stock £
500.00
Cost of Goods
available for sale
£
323,300.00
Less: Closing stock 2900 £
158,664.41
Cost of goods sold £
164,635.59
Add: Under absorption of
factory overheads
or
Less: Over absorption of
factory overhead
Cost of goods sold at
actual
Gross profit on sale
Less: Fixed selling and £
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administrative expense 180,000.00
Variable selling and
administrative expense
£
28,500.00
Total Non
manufacturing cost
£
208,500.00
NET OPERATING
INCOME
-£
43,864.41
Table 5: Income statement under absorption costing
(Source: Created by the learner)
Income statement under marginal costing
Particulars (Marginal) Amount Amount
Sales £
285,000.00
Less: Variable cost
Direct material £
18.00
Direct labour £
15.00
Variable overhead £
9.00
Cost of goods sold £
42.00
£
247,800.00
Contribution £
37,200.00
Less: Fixed manufacturing
overhead
£
12.71
£
75,000.00
Other fixed expenses £
15,000.00
Net profit -£
52,800.00
Table 6: Income statement of 2nd quarter under marginal costing
(Source: Created by the learner)
Apply a range of management accounting techniques and produce appropriate financial
reporting documents.
Question No. 8
a. State whether, and why, absorption or marginal costing would show a higher company
profit for the period, and calculate the difference in profit depending upon which method is
used.
Costing of two products under absorption costing
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Absorption Costing Product A Product B
Direct material £
1.20
2.3
Direct labor £
1.40
1.5
Fixed cost per unit £
1.10
£
1.10
Variable cost per unit £
0.70
0.8
Total Cost £
4.40
£
5.70
Units of production 250 100
Opening stock 0 25
Sold unit 225 110
Selling price of all units £
5.70
6.9
Closing stock 25 15
Table 7: Costing of two products under absorption costing
(Source: Created by the learner)
Costing of two products under marginal costing
Marginal Costing Product A Product B
Direct material £
1.20
2.3
Direct labor £
1.40
1.5
Fixed cost per unit £
1.10
£
1.10
Variable cost per unit £
0.70
0.8
Total Cost £
3.30
£
4.60
Units of production 250 100
Sold unit 225 110
Selling price of all units £
5.70
6.9
Opening stock 0 25
Closing stock 25 15
Table 8: Costing of two products under marginal costing
(Source: Created by the learner)
Profitability analysis
Profit under absorption costing
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Particulars (Absorption) Product A (£000) Product B (£000)
Amount Amount Amount Amount
Net revenue earned £
1,282.50
£
759.00
Less - Cost of goods sold
Stock in hand (opening
inventories)
- £
25.00
£
142.50
Cost of production (material +
labor + fixed overhead +
variable overhead)
£
4.40
£
1,100.00
£
5.70
£
570.00
Closing inventories £
110.00
£
15.00
£
85.50
Total cost of goods sold £
990.00
£
342.00
Gross profit £
292.50
£
417.00
Check for over or under
charging
Actual overheads spent £
146.25
£
208.50
Overhead costs charged £
55.00
£
42.75
Over charged £
201.25
£
251.25
£
91.25
£
165.75
Net profit (profit for the year) £
91.25
£
165.75
Table 9: Calculation of profit under absorption costing
(Source: Created by the learner)
Profit under marginal costing
Particulars (Marginal) Product A (£000) Product B (£000)
Amount Amount Amount Amount
Net revenue earned £
1,282.50
£
759.00
Less - Cost of goods sold
Stock in hand (opening
inventories)
- £
25.00
£
115.00
Cost of production
(material + labor +
variable overhead)
£
3.30
£
825.00
£
4.60
£
460.00
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Closing inventories £
82.50
£
69.00
Total cost of goods sold £
742.50
£
391.00
Contribution margin £
540.00
£
368.00
Less - Fixed costs
Fixed production
overhead
£
275.00
£
137.50
Net profit for the year £
467.50
£
253.50
Table 10: Profitability under marginal costing
(Source: Created by the learner)
Difference of profit
Product A
Profit under absorption costing = £91.25 (£000)
Profit under absorption costing = £467.50 (£000)
Difference of profit = £ (467.50 - 91.25) = £376.25
Product B
Profit under absorption costing = £165.75
Profit under absorption costing = £253.50
Difference of profit = £ (253.50 – 165.75) = 87.75
The calculation is showing that marginal costing is more favourable for the production of these
products. In case of product A, the profit was lower than product b as the selling price of this
product was less than the other one. Due to high cost and less selling price, this product is less
beneficial.
On the other hand, product B is more beneficial as the selling price is more of this product;
hence, the cost has been covered by leaving higher profit for the administration.
From absorption and marginal both the methods, marginal costing is more of assistance.
Marginal costing is more beneficial as comparison of cost is between the two products.
Consumers can spend on both the products at a time. It makes marginal costing more beneficial
for the administration. Stable amount of inventory is another reason for making the marginal
costing more beneficial for the administration.
b. Calculate the break-even sales revenue for the period (to the nearest £000) based on the
above mix of sales. The selling prices of Products A and B were £5.70 and £6.90 per unit
respectively.
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