Management Accounting Report: Systems, Costing, and Budgeting Analysis

This report delves into the realm of management accounting, focusing on its application within the context of Rolls Royce. It commences with an exploration of various management accounting systems, including inventory management, price optimization, job order costing, and cost accounting systems, elucidating their requirements and benefits. The report then transitions to an examination of management accounting reporting methods such as performance reports, budget reports, account receivable reports, and inventory management reports. Furthermore, the report showcases the practical application of costing techniques, specifically marginal and absorption costing, through the preparation of income statements. It also includes a detailed analysis of planning tools utilized in budgetary control, evaluating their advantages and disadvantages. The assignment concludes with a comparative analysis of how different organizations implement management accounting systems to tackle financial problems, providing valuable insights into strategic financial management.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1. Explaining different systems of management accounting and their requirements................1
P2. Various methods of reporting which are used in management accounting...........................2
M1. Application and benefits of different management accounting systems within
organisational context..................................................................................................................4
D1. The way in which management accounting systems and reporting are integrated with
process of organisations...............................................................................................................4
TASK 2............................................................................................................................................5
P3. Using costing techniques to prepare income statement.........................................................5
M2. Applying range of management accounting techniques and formulating final accounts.....6
D2. Production of financial reports that can help to interpret the data for business activities....6
TASK 3............................................................................................................................................7
P4. Different planning tools used in budgetary control with their advantages and disadvantages
......................................................................................................................................................7
M3. Analysing the use of planning tools in preparation and forecast of budgets........................8
TASK 4............................................................................................................................................9
P5. Comparison of different organisations on the basis of the ways in which they implement
management accounting system to resolve financial problems...................................................9
M4. Analysing the way in which management accounting lead companies to respond financial
problems.....................................................................................................................................11
D3. Evaluation of the use of planning tools in responding financial issues..............................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Management accounting is a procedure which is focused by managers of companies in
order to evaluate actual performance the business. Main purpose of it is to guide internal
stakeholders such as employees, managers etc. to analyse that business's position is good or not.
If an entity is ignoring it then it can affect the formulating of accurate reports on insider activities
(Abdel-Maksoud, Cheffi and Ghoudi, 2016). The enterprise which is selected for this report is
Rolls Royce. It is one of the major car manufacturing companies which are established in United
Kingdom and selling its products in national as well as international market. This assignment
covers various topics which includes detailed analysis of management accounting, its systems
and reporting, application of costing techniques, advantages and disadvantages of planning tools
used in budgetary control. Apart from this, comparison of two companies on the basis of using
management accounting to respond financial issues is also covered in this project.
TASK 1
P1. Explaining different systems of management accounting and their requirements
Management accounting: It can be explained as the technique which is utilised by top
authorities of an organisation to analyse that the efforts which are made by them for betterment
of company are resulting favourably or adversely. Managers in Rolls Royce also pay attention
towards it so that higher level of accuracy could be provided to internal stakeholders with the
help of management reports.
Management accounting systems: In most of the organisations different frameworks are
followed by managers in order to analyse actual situation of the business, all of them are
considered as the management accounting systems. Top level executives of Rolls Royce guide
managers to follow some of them that may help to collect appropriate data. These are analysed
underneath:
Inventory management system: The method which is mainly concerned with
monitoring and recording of information related to stock used for carrying out operations is
known as inventory management system (Arunruangsirilert and Chonglerttham, 2017). For
organisations such as Rolls Royce it is very important to use it because it helps to keep detailed
information about goods which are utilised for business processes. It is required for the company
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as with the help of it managers will be able to check that inventory is needed for operational
activities or not. Three different kinds of it are discussed below:
 AVCO (Average Cost Method): In this system all the inventory is used for business
activities on the basis of average cost.
 LIFO (Last in First Out): This method guides managers to utilised recently acquired
goods for carrying out operations.
 FIFO (First in First Out): This system demonstrate that if it is used by management
then they should use earlier bought material for manufacturing cars.
Managers in Rolls Royce are using first in first out method as it helps to utilise inventory
properly.
Price optimisation system: For all the organisations it is very important to set
appropriate price for all their products so that large number of customers could be attracted
toward the business. For this purpose, companies such as Rolls Royce apply this system which
helps to analyse responses of clients on different prices which could be set by them for their
goods. It also guides to set the right and most preferable rates for the cars engineered by them. It
is very important for the enterprises to use it because without it, it will be very difficult to figure
out that what price will be right for the products.
Job order costing: All the organisations perform different activities for carrying out
operations and to keep detailed track of all of them this system could be used. Management in
Rolls Royce are utilising it to accumulate and assign engineering costs to different units that are
manufactured by it. It is essential for the company to use it as it is required to segregate the
expenses on the basis of different jobs which are performed according to conditions of
patronages (Banham and He, 2014).
Cost accounting system: It can be defined as a framework which is focused for the
purpose of estimating costs of various items manufactured by the company. Rolls Royce's
managers are using it estimate the right cost which have taken place while engineering the cars
so that most profitable operations could be determined. It is very important for the management
to use it as with the help of it forecasting of future expenses could be performed.
P2. Various methods of reporting which are used in management accounting
Management accounting reporting: For all the business entities it is very important to
formulate management reports so that actual and accurate information about operational
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activities could be collected. The process which if focused for the purpose of formulating them,
is known as management accounting reporting. If these are not formed by companies then it may
affect the mindset of stakeholders such as employees because they will not have any idea of that
organisation in which they are working. Different methods of performing this process are
discussed underneath:
Performance report: Large as well as small organisations formulate different reports to
keep detailed information of performance of operations and staff members. It is also one of them
that helps management of companies such as Rolls Royce to analyse that business is showing
favourable results or not. With the help of it they can also get aware of efforts of employees to
attain organisational objectives. It is very beneficial for the enterprise because with the help of it,
it will be easy for management to offer rewards, bonuses and compensation to workforce
according to their performance (Guffey and Harp, 2016).
Budget report: Most of the organisations compare their actual and budgeted figures in
order to analyse that projected goals are achieved or not. This report is one of the major
documents which could be used for same purpose. Managers in Rolls Royce are using it to
maintain financial spendings according to requirements of different manufacturing activities.
This report may provide various benefits such as reduction in overspending of funds so it should
be created by management.
Account receivable report: For large and small companies which are offering credit to
the clients or retailers it is very important to keep detailed information of all the debtors. For the
purpose of recording this data account receivable report could be generated. It is one of the
primary tool which is used by managers of Rolls Royce so that they can calculate the due amount
of clients. This report is very beneficial for the company because it helps in the analysis of the
owed amount of clients and tighten credit policies so that the outstandings could be recovered on
time (Harrison and Lock, 2017).
Inventory management report: The companies which are operating business under
manufacturing sector it is very important to keep detailed information of stocks which are used
to carry out operations. It is formed by managers of Rolls Royce in order to get real time insight
into the movement of goods which are used to engineer cars. This report is advantageous for the
company because with the help of it management will be able to check the stock left on hand.
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M1. Application and benefits of different management accounting systems within organisational
context
Management
accounting systems
Benefit and application
Price optimisation
system
Management of Rolls Royce are applying this system within the
organisation because it helps in the analysis of appropriate rate for the
cars that can help to meet organisational goals such profit
maximisation by meeting expectations of clients.
Inventory
management system
In Rolls Royce inventory management system is applied by managers
for the purpose of maintain use of goods. It is beneficial for the
company as it helps to monitor and maintain the process of utilising the
inventory for business operations.
Job order costing This system is applied in Rolls Royce by managers in order to assign
and accumulate costs to jobs performed by the company. Main benefit
of it is that it helps to segregated expenses according to the nature of
job performed.
Cost accounting
system
In companies such as Rolls Royce this system is applied by managers
to keep detailed information about cost which is related to
manufacturing activities. Main benefit of it is that it guides
management to to estimate accurate cost for most profitable products.
D1. The way in which management accounting systems and reporting are integrated with process
of organisations
All the organisations such as Rolls Royce have one common goal which is profit
maximisation and for this purpose it is very important for them to conduct all the business
processes in systematic manner. In order to reach the long term objectives different types of
management accounting systems and reports are used by managers of Rolls Royce. For example,
price optimisation is used to figure the best suitable price for all the cars so that selling activities
could be performed. On the other hand, performance reports are generated by management to
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check that staff members are performing well or not so that appropriate bonuses and rewards
could be offered to them on the basis of their efforts.
TASK 2
P3. Using costing techniques to prepare income statement
Marginal costing: It is a costing technique which is utilised by business entities such as
Rolls Royce in order to analyse the implications of variable cost on the output of all the cars that
are manufactured by them. With the help of it managers determine the optimum quantity for
production (Hiebl and Mayrleitner, 2017). An income statement showing its calculations are as
follows:
Particulars AMOUNT
Sales..... 427500 427500
Less: variable cost.....
Direct labour..... (15*5000) 75000
Direct material..... (18*5000) 90000
Variable production..... ( 9*5000) 45000
Variable 10% of sales value..... 42750 252750
Less: direct labour..... (15*500) 7500
Direct material..... ( 18*500) 9000
Variable prod..... (9*500) 4500 -21000
Contribution..... 195750 195750
Less: fixed exp...... (180000/4) -45000
Profit for the year 150750 150750
Absorption costing: It is a method which is used in cost accounting for the purpose of
calculating the cost of a single unit or whole production by considering all the direct and indirect
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costs. It is utilised by managers of Rolls Royce for the purpose of making sure that the expenses
which have taken place are being absorbed from the sales of same units (Kieso, Weygandt and
Warfield, 2019). Calculation of it is shown in the income statement below:
Particulars AMOUNT
Sales..... (4500*95) 427500 427500
Variable cost.....
(15+18+9*5000) 252750
Variable cost..... (15+18+9*500) -21000 231750
Cost of goods sold..... 276750
Gross profit before absorption..... 150750
Under/over absorption..... 6819
Gross profit after absorption..... 157569
Less: Fixed expenses..... -45000
Net profit..... 112569
M2. Applying range of management accounting techniques and formulating final accounts
For all the business entities such as Rolls Royce it is very important to use specific
techniques of management accounting so that actual position of company and results of its
operations could be determined. Some of them which could be adopted by management of the
company are discussed below:
Standard costing: It can be defined as the process of analysing the different between
actual and standard figures. With the help of it managers of Rolls Royce will be able to find the
causes of variation between all their current and budgeted records.
Normal costing: This technique of costing is used by most of the enterprises for the
purpose of deriving actual data for all the products. In Rolls Royce managers can use it to
allocate the overheads in accurate manner (Knyvienė, 2014).
Historical costing: This technique states that all the assets and liabilities which are used
by companies such as Rolls Royce should be recorded on its original cost rather than the market
value. With the help of it actual and accurate financial position could be analysed by managers.
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D2. Production of financial reports that can help to interpret the data for business activities
From the income statements which are generated for marginal and absorption costing it
has been determined that the first method is showing profits of 150750 pounds for the company
and the another one is resulting in the net income of 112569. There is a difference of 38181
pounds which has taken due to ignorance of fixed cost in the marginal costing. According to the
analysis it has been suggested to the Rolls Royce to use the first method while calculating profits
as it has resulted in higher profits.
TASK 3
P4. Different planning tools used in budgetary control with their advantages and disadvantages
Budget and budgetary control: In most of the business entities different plans and
strategies are formulated for the purpose of controlling expenses which are taking place due to
operational activities. Budget is also considered as one of them that guides management to find
that organisation's performance is being enhanced as compare to previous year or not. In Rolls
Royce different types of budgets such as zero based, operating and master are generated that
helps management to allocate funds to all the activities according to their requirements (Kraus,
Håkansson and Lind, 2015).
In order to facilitate the controlling procedures a specific procedure is followed by
managers of different companies which is known as budgetary control. With the help of it
actual performance of business could be enhanced because it helps managers to find the reasons
which are resulting in variation between actual and budgeted plans. In Rolls Royce it is also
focused by managers for the purpose of planning, coordinating and controlling the process of
allocation of budgets. All the planning tools which are used by management of the company are
described below:
Operating budget: It can be defined as one of main budgets which are formulated by
managers of organisation for the purpose of classifying all the operating activities in appropriate
manner. With the help of it costs to all of them are allocated in order to recover all of them. It is
used by managers of Rolls Royce for the purpose of estimating the total value of different
resources which are required for the enhancement of performance of all the operations. All its
favourable and adverse impacts on the business are as follows:
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 Advantages: Operating budget is also known as operational budget so it keep accurate
information about all the costs which are related to different operations which are carried
out by the company. It helps to make the process of budget building more flexible
because it helps management to allocate resources appropriately (Lapsley and Rekers,
2017).
 Disadvantages: The time which is required to formulate it is very high so it may affect
the consideration of managers from operations to budget formulation. While formulating
it accurate information is required and if it is biased then it may affect the accurate
formulation of budgets.
Master budget: In most of the business entities different types of budgets are formulated
by business entities in order to check that all the activities are being allotted proper monetary
resources or not. It is mainly formulated for the purpose of keeping aggregation of all of them. In
Rolls Royce managers are preparing it to keep brief information of all lower level budgets which
are created to maintain business processes. All its positive and negative implications of business
are discussed below in the form of advantages and disadvantages:
 Advantages: It helps to reduce complexities which could be faced by analysers while
analysing the budgets because it keeps brief information of all of them. It facilitates the
communication between different departments because it consolidates information of all
of them.
 Disadvantages: There is a lack of specificity in master budget because brief data is
recorded in it. It is very difficult to update it because it is a aggregation of various lower
level budget and if a small figure is changed by managers then it may increase their work
of forming budget (Larsson, 2015).
Zero based budget: It is one of the main budget which is formulated in all the business
entities. While formulating it, it is very important for management to make sure that they are
justifying all the costs which are related to the new period. It is formulated by management of
Rolls Royce in order to analyse all the costs and needs for a new accounting year to determine its
performance and compare it with previous year. There are various advantages and disadvantages
of it which are discussed below:
 Advantages: With the help of it appropriate decisions for the enhancement of business
performance could be formulated because it helps to analyse the results of all the years
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separately. It also provides efficiency in the process of allocation of financial resources
because it takes only current year's data in to consideration.
 Disadvantages: If organisations such as Rolls Royce are willing to use it for long term
objectives then it may not be the right choice because it is based upon cost and benefit
analysis. The level of rigidity in the formulation of it is very high for which an
experienced employee is required which may result in increased cost for the company.
M3. Analysing the use of planning tools in preparation and forecast of budgets
All the manufacturing companies are mainly concerned with attainment of their long term
goals and for this purpose different planning tools are used by them. In Rolls Royce managers
are using master, operating and zero based budgets. All of them are facilitating the managers in
the process of forecasting and preparation of future budgets. For example, zero based is formed
with a zero balance at the starting of all the years which can help managers to allocate funds to
all the activities properly. Operating budget keeps information of operational overheads which
can help to estimate future expenses which can help to formulate future financial plans
effectively.
TASK 4
P5. Comparison of different organisations on the basis of the ways in which they implement
management accounting system to resolve financial problems
Financial problems: All the challenges which may take place to lower availability of
finance are known as such issues. There are various causes of them such as overspending of
financial resources. Currently Rolls Royce is also dealing with such challenges which are as
follows:
Unplanned expenses: Sometimes such expenses may take place within the companies
which are not planned or forecasted previously. Rolls Royce is also facing some of them and the
major one of repairing of machinery. In order to deal with all of them funds are used by
managers which results in low monetary resources (Nakajima, Kimura and Wagner, 2015).
Poor management of money: When all the cash which is received and paid by the
organisations such as Rolls Royce is not managed properly then it may result in financial
problem. In this situation the managers will not have information of actual availability of funds
for operations which may affect the decisions regarding spending of finance.
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Late payments from clients: Rolls Royce is a very large organisation and it offers credit
to its clients such as retailers. Sometimes they refuse to make the payment on time which may
affect the availability of money for operational activities.
Reduces profits due to lower productivity: It is also a financial challenge which is
faced by Rolls Royce due to lower productivity of staff members. This problem may take place
due to lower benefits to employees and in this situation they will not work with high quality
which will result in low profits.
Inappropriate management of different activities: If organisation is not able to
manage all the activities which are performed by it in systematic manner then this problem may
result in financial challenges such as lower funds.
In order to respond all the above described problems the organisation is using different
techniques which are as follows:
Benchmarking: It can be defined as management accounting technique which is used by
large as well as small companies to compare their policies with competitors in order to check
errors in their system. It can help managers of Rolls Royce to compare its credit policies with
other companies to tighten its credit policies (Rudman and Kruger, 2014).
Key performance indicators: These are different types of indicators which are used by
companies to determine success and failure of the business processes. There are two types of
them which are financial and non financial and both of them could be used by managers in Rolls
Royce for the purpose of resolving money related and other challenges of business.
Balance score card: It is a business management tool which is used by managers to align
day to day activities of all the staff members. With the help of it, Rolls Royce can improve
internal functions and productivity of employees.
Activity based costing: It is a costing technique which is mainly used to assign accurate
and appropriate costs to different activities which are performed by the company (Activity based
costing, 2019).
Financial governance: For all the companies it is very important to comply with specific
financial principles while formulating final accounts or managing funds. With the help of it
managers in Rolls Royce can reduce the possibility of poor management of funds.
Comparison of the company with other company is as follows:
Management Rolls Royce Aston Martin
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