Unit 5

Management Accounting

Student name

id

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Contents
Introduction................................................................................................................................3

Section 1.....................................................................................................................................4

Managerial accounting and its evaluation..............................................................................4

The relationship between management accounting and financial accounting.......................5

Different types of Management accounting system and advantages.....................................6

Different types of management accounting report and Integration.......................................8

Presenting financial information............................................................................................9

Application of management accounting techniques and its range.......................................10

Section 2...................................................................................................................................12

Planning tools of Management Accounting and application...............................................12

The advantages and disadvantages of different types of planning tools used for budgetary
control..................................................................................................................................14

The use of different planning tools and their application for preparing and forecasting
budgets.................................................................................................................................15

Compare ways in which organizations could use management accounting to respond to

financial problems................................................................................................................16

The comparing theory and tools between Rolls-Royce and Land Rover.............................17

Responding to financial problems........................................................................................18

Financial governance.......................................................................................................18

Management accountant skill...........................................................................................18

Conclusion................................................................................................................................19

Referencs..................................................................................................................................20

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Introduction
The classification of accounting that assists managers in making decisions and analysing
management is called management accounting. Management accounting converts collected
data into specialised information using certain methods and techniques to make the data
usable. Cost determination and cost control are the two main purposes of cost accounting.
Other objectives in cost accounting are also to determine the cost of production, pricing and
efficiency. This report gives a clear idea of the purpose and goals of Rolls Royce. The report
will show how efficiently assets and liabilities are being managed can also be determined by
ration analysis. It can be determined how the techniques and tools to gather information for
their management work.

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Section 1
Managerial accounting and its evaluation
The classification of accounting that assists managers in making decisions and analysing
management is called management accounting. The matching concept was developed from
1920 to 1950 with an emphasis on controlling financial costs. Shortly after this, from 1951 to
1980, the use of information became more dependent on the development, planning and
control of management, through which the journey of management accounting began
(Căpușneanu et al. 2020.)

Thus, management accounting is used to present the internal information of the organisation
to the managers. The origin of management accounting is to help managers in managing the
organisation. Nowadays the work of management has become so complex and extensive that
managers are increasingly relying on management accounting (Pedroso and Gomes, 2020.)

Collection of data and modification: As a book of data analysis, the first task of
management accounting is to create a database by collecting basic data from different
sources. Details prepared by financial and production cost accounting are one of the sources
of data collection. Financial and non-financial data is also collected from various reports
prepared by the managers. Management accounting converts collected data into specialised
information using certain methods and techniques to make the data usable (Fadjar and
Sardjudin, 2020.)

Planning and forecasting: In the near future, management sets different goals for which the
organisation will reach. Planning and forecasting are essential to meet business objectives.
One of the main functions of management accounting is to assist management in formulating
short-term and long-term plans and forecasting.

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The relationship between management accounting and financial accounting
Financial accounting Management accounting
Financial accounting is the accounting that Management accounting is designed to help
is created to determine the amount of profit managers make decisions by providing the
and loss of an organisation and its financial organisation's policy-making, planning, and
condition (Urakova, 2021.) regulatory information (Lee, 2020.)
In this case past financial data is used and In this case, both past and future financial
possible future data is excluded. and non-financial data are used.
Financial accounting is in no way dependent Management accounting is largely
on management accounting (Warren, Jonick dependent on financial accounting.
and Schneider, 2020.)

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Different types of Management accounting system and advantages
Management accounting has been divided into several parts according to the type of work
with the evolution of time (Olczak and Roberts, 2020.)

Cost Inventory
accounting management

price-
Job costing
optimising

Figure-1.1: Different types of Management accounting system (own designed)

Cost accounting: Cost accounting is the method of accounting which provides information
on the expenses required for the proper control and management of the manager, including
the correct recording, analysis and distribution of expenses for the pricing of manufactured
goods or services. Cost determination and cost control are the two main purposes of cost
accounting. Other objectives in cost accounting are also to determine the cost of production,
pricing and efficiency. Cost accounting helps management in determining the standard cost
of a product by providing information on various expenses (Madhuri,2020). It is also possible
for Rolls Royce to prevent many types of internal fraud by keeping accurate accounts of raw
materials and labour. Cost accounting helps the organisation to take necessary steps to
increase its production by identifying its profitable products and reduce the production of
non-profit products (Olczak and Roberts, 2020.).

Inventory management: Inventory management is the proper management of Rolls Royce's

unsold and unused products. Proper management of unused products becomes very important
as the organisation does not sell its purchased products immediately. Otherwise Rolls Royce
will face loss due to inefficient management. Inventory valuation has a much greater impact

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on determining the financial results and financial condition of a business. The cost of goods
sold is determined by adding the opening inventory to the purchase and subtracting the
ending inventory. Thus accurately evaluating stocked products is crucial to determine the cost
of actual sold product. Also determining a business's actual profit depends on inventory
valuation. Inventory management of Rolls Royce is responsible for determining the correct
income tax and determining the financial condition of the business.

Job costing: When an organisation such as Rolls Royce starts manufacturing products
according to the order and demand for its customers and determines the cost of each order
according to that order, it is called job costing. Since each order is recorded as a separate one,
the cost of production is determined by analysing the costs of different sectors separately.
Tenders can be issued very easily as the cost is pre-determined. There is no standard for jobs,
meaning each job is considered a separate non-standard job. Job Costing makes it very easy
to accept profitable projects and decide to exclude non-profit projects. The system is also
playing a very effective role in pricing products and determining profits of Rolls Royce
separately.

Price optimising: Price optimising system is a process of determining the exact price of a
manufactured product. In this method, all the possible costs of a product in Rolls Royce are
determined through various analyses based on the previous information, thus making it easier
to determine the exact price of the question. Prices are determined by considering the changes
in the demand and price of the product. This is why this classification helps a lot in setting
the right price and making more profit for Rolls Royce.

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Different types of management accounting report and Integration

Production Budget
Cost sheet
cost report reports

Figure 1.2 Different types of management accounting report and Integration

Cost sheet: Manufacturing companies such as Rolls Royce usually create cost sheets at the
end of the financial year showing the cost of the materials used in production as part of their
financial statements. However, if Rolls Royce needs, the expenditure statement can be made
monthly, quarterly, any time of the year (AREAS, 2018.). The cost sheet may be for the
entire organisation or for any one expenditure centre as required by the management.

Production cost report: It records the type of raw material required for production and all
related operational costs. It is often considered as a summary of the manufacturer of the
products. Here all the costs associated with the product are recorded.

Budget reports: These reports give a clear idea of the purpose and goals of Rolls Royce.
Such reports are also prepared to implement different types of policies and to coordinate
between different departments (Grytsay and Havran, 2020.).

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Presenting financial information
When the information generated by management accounting becomes complicated, many
kinds of problems have to be faced (Alsharari, N.M., 2019.). Since managers of Rolls Royce
make decisions using such information, the relevance and adequacy of all accounts must be
accurate for them. If the information of management accounting is vague and irrelevant, the
managers will make a mistake in making a decision. In this case, the organisation will face a
big loss (Grytsay and Havran, 2020.)

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Application of management accounting techniques and its range
The sum of money paid to produce goods or services is called cost. Cost for Rolls Royce is a
type of expense that has occurred or will be levied on a specific object or activity. Based on
the behaviour of the expenses, the expenses of Rolls Royce Company can be divided into two
parts (Kasasbeh, 2018.).

Variable cost: As the amount of production increases and decreases at a proportional rate, it
is called variable expenditure. Rolls Royce's variable cost components are raw materials,
wages, fuel, energy, direct costs, sales commissions, and so on. These costs are divided into
different categories according to the amount of production of Rolls Royce (AREAS, 2018.).

Fixed cost: Expenditure that does not increase or decrease to a certain level as the amount of
production increases or decreases is called fixed expenditure. In the case of Rolls-Royce,
such costs are not affected by the unit of production. The company divides the costs into
different parts according to the management decision (Pradhan, Swain and Dash 2018.).

Standard costing: Standard costing is the cost that is determined in advance for the future
cost of producing a product. Rolls-Royce usually considers past experience, current skills,
and future dynamics. The rates of raw materials, labour and indirect costs per unit are pre-
determined (de Araújo Wanderley, 2019.).

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Income statement of absorption method

Figure 1.4 Income statement of absorption method (own designed)

Income statement of marginal costing method

Figure 1.5 Income statement of marginal costing method (own designed)

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Section 2
Planning tools of Management Accounting and application.
Rolls-Royce uses some techniques and tools to gather information for their management
work. Management accounting refers to the process by which management accountants are
assisted in performing various tasks such as data analysis, interpretation, information
provisioning, consulting, etc. Not all management needs can be met using a specific strategy.
Multiple techniques are used for this purpose. Some of the important techniques or tools that
are used are discussed below (AREAS, 2018.).

Financial Planning: Rolls-Royce prepares financial plans on how much short-term and long-
term funding is needed and where it will come from. Rolls-Royce financial planning includes
management policies and approaches to policy implementation (Aksom, 2021.).

SWOT analysis on Rolls-Royce

Strength Opportunity
Brand image: the word luxury is always Growing customer spending: customers'
been the final and last word for Rolls- attitude toward spending money is
Royce. They charge premiums for their increasing day by day. They like to spend
brand image. more on ideal transportation options.
Superior design: Rolls-Royce put the top Customization: customers can pay
class design in their luxury car and their anything for the car day want. This creates
engine and build quality is also superior an increasing need for personalized cars,
this could be an opportunity that Rolls-
Royce can easily tap.
Weakness Threats
Evolutionary design: customer prefer Focus on sustainability: now the world is
Rolls-Royce’s for its standard styling and on sustainable transportation options,
design. As Rolls-Royce cars evolved over however sustainable vehicles are costly.
time, various cars look like clones of a Growing costs: Today research has become
single one. more expensive as raw material costs are
Exorbitant pricing: Rolls-Royce cars are one rise as well as fuel costs.
priced so high that it is not affordable for
most of the customers.

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Statement of funds flow and cash flow: Rolls-Royce prepares a cash flow statement to
show the relative differences in working capital between the two accounting years, the
different sources of funding for the current year, and the use of those funds. This statement
helps Rolls-Royce's managers and other information users to know the source and use of
fundraising in a particular year.

Standard costing: Rolls-Royce uses standard costing methods to control its production costs.
In this method, they determine the cost of production before production. Then they compare
the actual cost with the standard cost and analyse the reasons for any deviation. The use of
Standard costing methods increases the efficiency of Rolls-Royce.

Inflation Accounting: Decreasing purchasing power in money during inflation affects the
decision-making process in management. So Rolls-Royce's management accountants use the
accounting method of changing the price level to make the necessary decisions by changing
the historical expenditure to the current price which is more effective for them.

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The advantages and disadvantages of different types of planning tools used for
budgetary control.
Budget Advantage Disadvantage
Sales budget: Rolls-Royce Rolls-Royce's sales budget Sales budget cannot be
prepares a sales budget to helps its Other departments 100% accurate as future
determine the number of to allocate resources events are not certain.
their sales they are going to depending on sales plan, Which can create a future
make. First, they prepare a sales forecast, and other problem for Rolls-Royce
quantitative budget then a factors. It also helps Rolls-
Budget indicating the selling Royce to check on the
price in terms of money. expense of sale.
Rolls-Royce prepares other
budgets based on their sales
budget (Azudin and Mansor,
2018.).
Cash budget: Rolls-Royce Cash budget helps Rolls- Cash budgets may limit the
creates a cash budget to Royce in using their cash amount of debt that Rolls-
track future cash receipts more efficiently. To make Royce creates for it. In the
and estimated costs. Rolls- sure that there is always long run, Rolls-Royce will
Royce formulate this enough money available pay less with cash as it has
important budget after most Rolls-Royce takes care of avoided interest.
of the budget is formulated everything
Production cost budget: by By setting a production cost For Rolls-Royce preparing a
production budget Rolls- budget Rolls-Royce production cost budget could
Royce determines how motivates its employees to be time-consuming and
many single products will be work hard to achieve the costly.
produced. Rolls-Royce goals in a short time and
publishes units in money prepare manner
and turns them into
production costs budgets.

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The use of different planning tools and their application for preparing and forecasting
budgets.
Forecasting budget: By using historical data and current market conditions Rolls-Royce
makes predictions about how much profit they will be able to make in a few months and
years. Rolls-Royce uses this as a financial tool to determine their financial status (Alsharari,
N.M., 2019.). Rolls-Royce prepare forecast to know will they be able to meet or exceed the
expectations from the budget. For getting better results Rolls-Royce creates a range of
forecasts for different outcomes.

It is crucial for Rolls-Royce to accurately

forecast cause decision making and
Estimating Accuracy of a Forecast
allocating resources for particular project
depends on it.
Rolls-Royce put more effort and resources
Cost Benefit Analysis
to make the forecast more accurate.
There is a trade-off between the data
involved and the timeline, which needs to be
Timelines of Forecasting
taken care of before starting the forecasting
process.

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Compare ways in which organizations could use management accounting to respond
to financial problems
Management accounting Responding in financial problems
tools
Rolls-Royce uses financial planning for determining capital
requirements both short-term and long-term, they also
Financial planning
regulate financial policies with regards to control cash,
borrowing, and lending.
To understand Rolls-Royce’s position in the market they
compare their financial performance with their competitors
Ratio analysis
by ratio analysis. How efficiently assets and liabilities are
being managed can also be determined by ration analysis.
Rolls-Royce uses budgetary control to define the objectives
Budgetary control of the enterprise also the plans to achieve them. profitability
can be increased by eliminating waste
To provide managers with all the data only which is needed
for their decision making Rolls-Royce uses this method of
Reporting to management
reporting management. On the basis of the report,
instruction is provided to improve the performance

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The comparing theory and tools between Rolls-Royce and Land Rover.
Topic Rolls-Royce Motor Cars Land Rover
Rolls-Royce use benchmarking By using benchmark Land Rover
to set their goal with realistic build infrastructure because proper
time-frames. Help to build an preparation prevents poor
innovation strategy that supports performance. They set
Benchmarking
the company’s overall needs. performance expectation and
Rolls-Royce review the strategy monitor its performance (Roque,
annually (Azudin and Mansor, Alves and Raposo 2019.).
2018.).
To understand how successful To reduce and manage cost Land
Rolls-Royce is at generating a rover use KPI to measure cost
Key
high return, it analyze both effectiveness .to get the best
Performance
gross and net profit margin. performance form the employee,
Indicators
Rolls-Royce calculate CVC to land rover survey employee
(KPI)
evaluate the cost effectiveness satisfaction.
of marketing campaign.
Rolls-Royce use the powerful Land Rover use balance scorecard
framework of balanced as a guide to design the
scorecard to build performance report and
Balanced
communication strategy. It dashboards. It helps Land Rover to
scorecard
helps Rolls-Royce to better monitor the execution of plan
align its organizational structure
with the strategic objectives.
Rolls-Royce use Activity based Land Rover use Activity based
costing to prepare more accurate costing to set accurate price for
budget which shows exactly product. Managers of Land Rover
Activity based
where money is going. it also use ABC in decision making as it
costing
help Rolls-Royce to determine provides more reliable product
which activity is necessary for cost data.
production and which is not

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Responding to financial problems
Financial governance
Rolls-Royce has a very effective financial governance. Rolls-Royce use it for collecting,
managing, monitoring, and controlling financial information. Rolls-Royce also include
tracking their financial transaction, managing performance and controlling data
(Vakhrushina, et al. 2018.).

The application of financial governance in Rolls-Royce Company is huge. It insure Rolls-

Royce’s financial data is correct that's why budgets, plans, models, and forecasts are more
accurate .it also helps Rolls-Royce to identify risky task faster (Cuzdriorean, 2017).

Management accountant skill

Rolls-Royce’s Management accountant must have this skill sets:

(1) Predictive skills: must have the ability to understand the business deeply and predict the
impact of various factors of operations (Fuzi, et al. 2019.).

(2) Proactive in approach: must contribute on Rolls-Royce (Alsharari, N.M., 2019.).

(3) Communication skills: communication skill is very essential for Management

Accountants.

(4) Flexibility: Management Accountants has to play role in various task so if he is not
flexible it would be difficult for them .

(5) Sound Technical Skills: this is an age of technology so it is very essential for
Management Accountants to have sound technical skills (Alvarez, et al. 2021.).

(6) People Management skills: without management skill it is not possible for Management
accountant to survive in organization.

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Conclusion
Management accounting converts collected data into specialised information using certain
methods and techniques to make the data usable. It also assist management in formulating
short-term and long-term plans and forecasting. Manufacturing companies usually create
cost sheets at the end of the financial year showing the cost of the materials. The company
divides the costs into different parts according to the management decision. They also
regulate financial policies with regards to control cash. Communication skill is very essential
for Management Accountants and it helps a company to monitor the execution of plan.

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Referencs
Căpușneanu, S., Topor, D.I., Constantin, D.M.O. and Marin-Pantelescu, A., 2020.
Management accounting in the digital economy: evolution and perspectives. In Improving
business performance through innovation in the digital economy (pp. 156-176). IGI Global.

Fadjar, A. and Sardjudin, K.N., 2020. Factors that Influence Decision Making through the
Application of Management Accounting Information Systems. International Journal of
Psychosocial Rehabilitation, 24(2).

Grytsay, O. and Havran, M., 2020. Accounting and analytical support for formation of
enterprise economic security costs and their controlling process. Economics,
Entrepreneurship, Management, 1 (7), 2020, (1), pp.75-83.

Lee, T.A., 2020. Financial accounting theory. In The Routledge companion to accounting
history (pp. 159-184). Routledge.

Madhuri, M., MANAGEMENT ACCOUNTING AND ITS IMPACT.

Olczak, W. and Roberts, R.W., 2020. Promoting a stronger ethical focus in management
accounting research and practice. In The Routledge Handbook of Accounting Ethics (pp. 186-
203). Routledge.

Pedroso, E. and Gomes, C.F., 2020. –THE ROLE OF MANAGEMENT ACCOUNTING IN

PROMOTING ORGANISATIONAL. Emerging Topics in Management Studies, p.189.

Urakova, M.H., 2021. Management accounting as an enterprise management

tool. International Engineering Journal For Research & Development, 6(ICDSIIL), pp.3-3.

Warren, C.S., Jonick, C. and Schneider, J., 2020. Financial accounting. Cengage Learning.

AREAS, B., 2018. Financial analysis. growth, 30, p.10.

Azudin, A. and Mansor, N., 2018. Management accounting practices of SMEs: The impact of organizational
DNA, business potential and operational technology. Asia Pacific Management Review, 23(3), pp.222-226.

Cuzdriorean, D.D., 2017. The use of management accounting practices by Romanian small and medium-sized
enterprises: A field study. Journal of Accounting and Management Information Systems, 16(2), pp.291-312.

Fuzi, N.M., Habidin, N.F., Janudin, S.E. and Ong, S.Y.Y., 2019. Environmental management accounting
practices, environmental management system and environmental performance for the Malaysian manufacturing
industry. International Journal of Business Excellence, 18(1), pp.120-136.

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Vakhrushina, M.A., Kostyukova, E.I., Tatarinova, M.N., Elchaninova, O.V. and Grishanova, S.V., 2018.
Integrated management accounting in the financial management system. Research Journal of Pharmaceutical,
Biological and Chemical Sciences, 9(3), pp.808-813.

Alvarez, T., Sensini, L., Bello, C. and Vazquez, M., 2021. Management Accounting Practices and Performance
of SMEs in the Hotel Industry: Evidence from an emerging economy. International Journal of Business and
Social Science, 12(2), pp.24-35.

Alsharari, N.M., 2019. Management accounting and organizational change: alternative

perspectives. International Journal of Organizational Analysis.

Pradhan, D., Swain, P.K. and Dash, M., 2018. Effect of management accounting techniques on supply chain and
firm performance: An empirical study. International Journal of Mechanical Engineering and Technology, 9(5),
pp.1049-1057.

de Araújo Wanderley, C., 2019. A process model of management accounting change based on the contributions
of institutional theory. Revista De Educação E Pesquisa Em Contabilidade, 13(4).

Kasasbeh, I., 2018. Problems of Management Accounting Implementation: The Case of Balanced Scorecard
Implementation within Jordanian Commercial Banks. International Journal of Academic Research in
Accounting, Finance and Management Sciences, 8(2), pp.200-207.

Roque, A., Alves, M. and Raposo, M., 2019. The use of management accounting and control systems in the
internationalization strategy: A process approach. IBIMA Business Review, 2019.

Aksom, H., 2021. A THEORY OF INSTITUTIONAL INERTIA. II. MANAGEMENT ACCOUNTING

CHANGE.

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