Management Accounting Systems and Their Implications for Rio Tinto

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MANAGEMENT ACCOUNTING (ICN)
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Executive summary
The following content had been in alignment of management accounting systems and its various
implications with respect to Rio Tinto. There had been showcased various management
accounting systems such as cash budgeting, absorption coasting along with marginal costing.
The asset management and fixed cost had been termed to be a major constraint that distinguishes
both the costing techniques. Additionally, there had been showcased implication of absorption
and marginal costing through calculation and had been related to formation of income statement.
Additionally, there had been showcased advantages and disadvantages of various planning tools
applicable to management accounting. Development of Budget Model, policies of budget and
budgetary milestone had been contested to be major planning tools highlighting financial
management aspect. New technology setup had been also used by managers and employees who
had been considered the main forecast for Rio Tinto so that budget of their organization is
maintained in business.
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Table of Contents
Introduction......................................................................................................................................3
LO1..................................................................................................................................................3
P1: Explanation of management accounting systems and requirements of its various types......3
P2: Various methods to be used for management accounting reporting......................................4
M1: Evaluation of benefits regarding various management accounting systems with their
applications..................................................................................................................................6
D1: Critical evaluation of integration of management accounting and reporting systems..........6
LO2..................................................................................................................................................7
P3: Cost calculation through use of absorption and marginal costing for preparation of income
statement......................................................................................................................................7
M2: Application of management accounting systems for generation of financial reporting’s....9
D2: Financial report presentation with data interpretation..........................................................9
LO3................................................................................................................................................10
P4: Advantages and disadvantages of various planning tools applicable to management
accounting..................................................................................................................................10
M3: Analysis of various application of planning tools and their applications...........................11
LO4................................................................................................................................................12
P5: Comparison of adoption of management accounting systems with response to financial
problems.....................................................................................................................................12
M4: Organizational sustainability in response to financial problems........................................14
D3: Evaluation of planning tools for solving financial problems..............................................14
Conclusion.....................................................................................................................................15
Reference list.................................................................................................................................16
Appendices....................................................................................................................................18
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Introduction
Management accounting is a process that provides accurate financial and statistical information
to business organization by planning and decision-making. Rio Tinto is a manufacturing
company of world's largest mining and Metals Corporation. This study focuses on different
management accounting systems followed by Rio Tinto Company and this management
accounting system helps the company to compete with rivals in market. It also focuses on a
different budgetary method that can improve costing techniques of Rio Tinto and also help
organization to resolve financial issues in organization. Various advantages and disadvantages
used in budgetary control in an organization.
LO1
P1: Explanation of management accounting systems and requirements of its various
types
Management/managerial accounting systems concept is with the inclusion of several internal
systems which an organisation, in particular, sustains for evaluation of their management
procedures along with measure them for organizational progress. The concept of financial
accounting in this regards is with provision of information toward those who are external to the
organisation for example to creditors and their shareholders (Ammar, 2017:231). In terms of
such, there are available some system which can be entailed by Rio Tinto are namely absorption
costing, cash budget, and marginal costing;
Figure 1: Management of accounting systems
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(Source: created by researcher)
Absorption costing
The concept of absorption costing is indicative towards every cost of manufacturing which is
sustained by Rio Tinto or hat have been assigned to the company (Busco et al. 2015:497). In
order to sustain such costing techniques, Rio Tinto is in requirement of having their direct labour
costs, their direct labour assessment, their overhead variable manufacturing and lastly the
overhead of fixed manufacturing. The costing method is mainly required in order to sustain
external financial reporting along with for income taxation reporting.
Cash budget
The concept of cash budget, as opined by Bui & De Villiers (2017:5), subtends to provide details
regarding an organization's cash flows through both inflows and outflows periods of budgets.
The primary purpose of having a cash budget is regarding provision of statuses of Rio Tinto
highlighting their cash positions during any duration period. In order to correspond to cash
budgeting, there is a requirement of having the stipulated time period, desired position of
companies and their management of expenses. This would be inclusion of Rio Tinto’s payrolls
along with income receipts and advertising.
Marginal costing
The marginal cost concept is subjected to be increment or decrement in total production cost in
order to sustain production of an additional item. In Rio Tinto, it can be computed within
situations where there had been obtained the breakeven point. Under marginal costing, there is a
requirement of difference calculation concerning their contribution over fixed costs which can be
termed as net profit or net margin. Here in terms of such, there stay requirement of increasing
contribution rate that stays with emphasis on costs (Hopper & Bui, 2016:11).
P2: Various methods to be used for management accounting reporting
Concept of management accounting reporting can be leveraged as for involving decision making
aspects along with appraising performance management system and devising various financial
plans. Various methods that can be entitled to reporting of management accounting can be
conferred as variance analysis, cost schedules, and budgetary controls;
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Figure 2: Management accounting reporting
(Source: created by researcher)
Variance analysis
The concept of variance analysis is subjective for Rio Tinto managers to entail their management
over various sorts of actual and budgetary costs regarding structuring of their project. The
conduction of variance analysis by Rio managers within every set milestone would be beneficial
for assessment over company’s financial data. In addition to this, managers can confer to
differences if any existent regarding their actual and set budget costs. This would be beneficial
for making any required adjustments regarding their business goals or objectives or even their
strategies. It would also lead to identification of causation of budgetary differences if exists any
thus eliminating any sort of financial calculation biases.
Cost schedules
Rio Tinto can entail costing schedules reporting a technique for their assessment of schedules
and budgets prior to any initiation of financial projections. Such a method would be beneficial
for provision of costs along with time frameworks along with setting layoffs of groundwork tasks
regarding restructuring. It would be this helpful for production team sot be guided through a
structured output which would be beneficial for entailing to profitable projects. There can be
made allowance of management of opportunity costs. Thus it stays beneficial through
eliminating any sort of project delays which would be beneficial for continuation of RIO's
restructuring project.
Budgetary control
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Budgetary control would be beneficial for Rio Tinto's managerial department through sustaining
defined objectives, programmes, and plans and thus expressing them in form of quantitative or
financial terms. This would give the company an overview of their financial expense requirement
along with set costs that would be beneficial for decision making regarding sustainability of
projects. The budgetary controls would also be beneficial for Rio through producing them a
continuous comparison of planned and actual results. It would be demonstrative towards RIO’s
project cast changes which might leverage lower investment and higher outputs.
M1: Evaluation of benefits regarding various management accounting systems with
their applications
The concept of absorption costing would be beneficial for allocating and apportioning fixed
overhead costs. This would make Rio Tinto's managers more aware of their costs services which
are provisioned towards their organisation department. However, it is not eligible for sustaining
any decision making thus hindering any organisational growth Rio Tinto. The system also
subtends to allocation of indirect costs that hold no liabilities regarding any distortion in
operational management and decision making. Here where absorption stays hideous from
financial management in entailed by Rio Tinto.
However, in terms of cash budgets, the primary advantage for Rio Tinto would be through
avoiding debts. It would give Rio the freedom of having spending of the available cash. In case
of any loss, there would not be any hindrance to financial resources of Rio but would top to
project management. However, thefts of cash documents along with other financial resources
stay as a major disadvantage. In case of any non-listing of bills outside the business, there ware
likelihood of having data thefts.
In terms of marginal costing, Rio would be beneficial for having control of their costs along
with having elimination of any existing cost highlighting variance on unit consumptions. RIO,
for example, would be advantageous through having efficient short term planning such as their
restructuring projects. However, Rio Tinto needs to maintain carefulness as marginal costs are
way more beyond accurate data sustaining along with having incremental costs as for having
relevance to data historic.
D1: Critical evaluation of integration of management accounting and reporting
systems
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In terms of management accounting systems, there had been evaluated cash budget, absorption
costing, and marginal costing. In opinion of Johnsen (2015:244), all the methods were with one
common advantage of simplifying financial accounting and thus leverage positive outcomes.
However, existences of internal disadvantages such as absorption costing being disadvantages in
decision making are likely to hamper productivity as well as growth. On contrary, it had been
with advantage of allocating and apportioning fixed overhead costs. Hence, it is suggestive that
accounting systems are with eligibility of sustaining financial management thus use of business
aesthetics along with ensuring sustainability.
In terms of accounting reporting techniques such as variance analysis, cost schedules, and
budgetary control, secondary aspects such as decision making along with having impedance over
financial aesthetics structuring stays on a positive note (Lasyoud et al. 2018:279). On one
direction, there had been seen budgetary controls being effective to create a clear set of aims and
objectives which would be beneficial for a sustaining a structured approach to restructuring. On
another hand, in opinion of Lopez-Valeiras et al. (2015:3479), variance analysis had been
entailing their management over various sorts of actual and budgetary costs regarding their
structuring project. Here the actual target is set to have a defined approach for restructuring
purpose of Rio Tinto thus serving to business growth and sustainability.
LO2
P3: Cost calculation through use of absorption and marginal costing for preparation
of income statement
In light of this context, there had been mentioned various sorts of cost per unit calculation which
had been formulated through use of absorption and marginal costing techniques. Highlighting
such prospects, it can be seen evidence that their existence of similarities among both marginal
and absorption costing techniques. Here the fact supporting such comparison is the similarity
products, however, being with variations in their costing units. This can be contested through
opinions of Malmi (2016:33), due to the fact that both marginal and absorption costing are with
different aspects and different aesthetics for mitigating cost management.
The concept of marginal costing stays more beneficial for handling accounts relating to variable
costs per unit and thus sustains more accuracy in results which is yielded to pursue help in
decision making. In light of this, there are sufficient deductions of fixed costs from the
contribution margin as a whole. The calculation of contribution margin on another direction is
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sustained into calculations by deduction methods. Values of variable expenses are subjected to
deductions from generated revenues or sales. According to McLaren et al. (2016:343), it thus
sustains effectiveness in making referrals to amounts that have been contributed for each of
different products or production units which it would produce.
An example case would be considered beneficial for highlighting the concept through an in-
depth analytical approach. For example, Rio Tinto is with 1000 goods units as an asset. These
1000 units of goods are being sold to sustaining contribution margin which had arrived at a cost
of £1000. Under the concept of marginal costing, there are available only unit’s costs of direct
material, direct labour along with variable overheads. For example, if there is availability of
1000 product units are happened to be sold, and then let's sustain an addition of direct material
cost of £5 along with £3 labour costs. There had been also considered addition of £1 manufacture
overhead costs. Hence upon addition, the final amount results to be £9.
However, situation changes to slightly different tone when switching to absorption costing
technique. The absorption costing technique takes concern for direct material costs with
reference to direct labour costs. However, it stays effective to sustain external financial reporting
along with income taxation reporting. Additionally, it consumes addition of fixed as well as
variable overhead costing. The fixed overhead values are being divided on the basis of per unit
available. In viewpoint of Naranjo-Gil et al. (2016:713), this sustains in form of fact that
marginal costs are found lower than that of absorption costs. In light of this case, there had been
found that the total amount by £2 summing up manufacturing overhead costing along with direct
labour and that of direct material costs. In terms of such, the total absorption costing had been
found to be £11.
In light of this, there had been formulated income statement with reference to both the available
methodologies of absorption as well as marginal costing. However in terms of both the
methodologies, there had been incurred negative prospects. A loss of £1000 had been incurred
from both the results from marginal as well as absorption costing. When consulting to that of
absorption costing, there had been found the production cost to be at a total amount of £11000.
However, the marginal costing system had yield an amount of £9000. This proves the above
constraints mentioned above that absorption costing always above the marginal costing.
However, in viewpoint of Rahman (2017:103), it can also be sustained regarding the fact that
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there had been no consideration of fixed costs into account. The calculation had been only in
relevance to direct material, direct labour and overhead costs.
M2: Application of management accounting systems for generation of financial
reporting’s
Few systems of management accounting can be regarded in form of standard costing methods
along with budgeting synergies by Rio Tinto for generation of their financial reporting’s;
Use of standard costing method
The concept of standard costing is sustained to be with objective of using suitable standards in
order to generate revenues and costing of materials through consulting variance analytical
method. The concept of standard is termed to be a predetermined set of quantity that can be
measured within given defined conditions (Rogulenko et al. 2016:4105). There can be managed
comparisons against the results yielded from actual financial performances. Primarily it had been
beneficial for Rio through assigning per unit costs towards value of production through
inventory. It had also been beneficial for controlling overhead costing with measurement of cost
incurrence (Riotinto.com, 2019).
In terms of Rio, there had been found that it had been using techniques of standard costing in
order to search out variances in case of any presence of expenses on a forecasted scenario. There
has also been used concept of variance analysis by Rio for measuring available revenues which
were to be received by Rio. Through use of such contexts, there had been taken the consideration
of income statement which had been prepared by Rio.
Use of budgeting method
Concept of budgeting had been very useful regarding the restricting project of Rio Tinto. The
budget is termed to be a plan which would be helping the organisation to help them prioritise
their spending capabilities along with having their assets managed (Senftlechner & Hiebl,
2015:575). Through use of budgets, Rio Tinto is likely to have its focus over its capital. Through
use of budgeting, Rio is also to have impedance over the incoming potential problems of
finances. It also stays informative regarding the amount of debt that can be obtained from
financers.
D2: Financial report presentation with data interpretation
There had been use of financial reports by Rio Tinto in order to have a track of their expenses or
costs. In addition, use of financial can lead Rio’s business aesthetics to be free from any sort of
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debt aspects. Through use of such, there can be tracking down of company's current assets. In
addition, financial reporting can be considered as an asset for managing liabilities (Silverman,
2018:13). Through use of financial reporting template, there can be explored statements of
financial data. In turn, there can be sustained higher accuracies in gathered data being an
opportunity for improvising organisation's financial efficiencies.
Let's take example of Rio to be preparing an income statement highlighting customer aspect on a
standard note with reference to reports of budgets. There had been also conferred to use of
variance analytics in order to make outlines of ongoing business activities. In terms of standard
cost income statements, there had been outlined the standard cost sins with addition of expenses
and costs (Robinson et al. 2015:11). There had been also inclusion of labour and material costs.
It would be effective or highlighting Rio’s revenue generation along with budget expenses. The
budget reports had been created by each of available departments of Rio thus producing a
consolidating budget form and had been pursued by each of departmental manager.
LO3
P4: Advantages and disadvantages of various planning tools applicable to
management accounting
Budgetary control helps Rio Tinto to fix of goals and make achievements in company.
Some advantages and disadvantages of planning tools of management accounting are:
● Development of Budget Model
Budget model is a main tool in management that helps Rio Tinto to run smoothly. As opined by
Ammar et al. (2017:230), a budget model is made by company executives from taking previous
data such that incoming time organization does not have problem while producing goods and
sufficient raw materials are available in Rio Tinto stock. Main advantages are it focuses on
necessary parts of organization that is, the Rio Tinto financial flow must be smooth and
sufficient so that when organization has problem in finance it can take help from department of
finance and remove financial problem from business.
Disadvantages of budget model in Rio Tinto are the long term development in business that
results in a long waiting process. Rio Tinto risk achieving result is high in budget control as
demands of certain products in market can be low depends on customer satisfaction. This results
in a decrease in revenue in business.
● Development of policies of budget
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Main advantage of policies regarding budget is an important part of business as it helps to
improve flow of cash between various departments within an organization. On another hand, it
can be noticed that in Rio Tinto this planning tool helps to adhere to the mentioned policies and
practices postulated by current budgetary plan of organization.
Disadvantages of this method are if managers do not have skills and innovative ideas they
cannot help Rio Tinto to increase profit revenue in market. Complex language is another
drawback of budgetary planning as it cannot be easily understood by all stakeholders of business.
● Development of budgetary milestone
Advantage of development of budgetary milestone must be considered in order to manage
financial areas within business. Creation of budgetary milestone in Rio Tinto helps to gain
maximum competitive advantages. On another hand, it helps to improve strategic advantages of
a company. Performance of employees can be managed as well as improved with the help of
budgetary calendar.
This technique has a drawback as well and this aspect must be considered by managers of
organizations in order to avoid inconveniences. Sudden changes in financial condition prevent
companies like Rio Tinto to gain maximum revenue from business.
Figure 3: Advantages and Disadvantages of various planning
(Source: Influenced by Ammar et al. 2017)
M3: Analysis of various application of planning tools and their applications
Various methods are used for application of budgetary control in business organization by Rio
Tinto. As said by Bui et al. (2017:24), it helps them to create a budget on finance and stock of
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