Rolls Royce plc
In this assignment I am going to research Rolls Royce plc, at first I will explain about the nature of the company, I will also identify and state what information may be required to aid managers and then go on to apply four management accounting techniques to Rolls Royce plc and how they would affect the company, in particular the advantages and disadvantages of each.
a) Company Information.
Rolls Royce PLC is the second largest multinational organisation that produces power integrated systems after GE Aviation. Rolls Royce operates in four different types of economic markets which are the civil and defence aerospace market as well as the marine and energy markets. The company makes engines for jets, helicopters, and turboprop aircraft not only do they produce engines but they also install these systems. Rolls Royce PLC has 50,000 engines in service with 500 major airlines.
Rolls Royce PLC is a global company that is known in over 50 countries, the name Rolls Royce comes from the last names of its founders, Henry Royce and Charles rolls. The company was initially formed in 1904 to produce cars and car engines. In 1914 it also produced its first aircraft engine, as the company expanded in 1971 it became a PLC, the company was then split into two and sold to a BMW company that is now known as Rolls Royce motor cars LTD. Rolls Royce PLC retained the right of its trademarks so it can use it to operate in the markets it does.
Rolls Royce has invested a sufficient amount of money into research n development of its products and technology it uses to produce them. It also invests somewhat £300 million a year on capital projects. In recent events Rolls Royce was awarded a contract by the ministry of defence to supply those engines for their aircrafts for the next five years, they also secured more than $1 billion worth of orders from an recent air show.
b) Information required to aid managers.
Managers need to plan ahead they require important information to enable them to run the day to day and future operations of the company. Depending on where your company stands in the economic market and its needs at that particular time it wants to be able to sift through information selecting what is relevant and applying it to the company. Rolls Royce understands how important it is for management data as this coupled with their knowledge and expertise helps them to maximise their operational expertise.
Rolls Royce needs information such as income, expenditure and capital employed to be able to plan and prepare budgets for the future this information is very important to Rolls Royce as for example it can help them to work out any repair costs to engines being produced and how many extra components that maybe needed. Forecast is very important for Rolls Royce, as it can help them predict how many contracts they may receive and what companies to target in certain circumstances for example wars are predicted, this means the demand for military aircrafts will increase this will aid Rolls Royce to keep up with changing economic environments.
Information such as pricing is also very important to Rolls Royce as they are the second largest company supplying engines to the aviation market they need to be able to set prices ahead of their competitors so they can win large contracts to stay in the game.
Feedback from customers is very important not just from the customers Rolls Royce provides to but even to the extent of feedback from the public for example; emirates airlines customers expected more leg room in their planes, not only this the airline through research predicted more first class passengers if there planes where designed with more room and better bathroom facilities for the high class passengers. All this information could help Rolls Royce design and produce larger planes which require larger more complicated engines not only this it could set a new trend of better travel.
2. Management accounting techniques are necessary to run a business effectively. These techniques primarily affect costs and prices within the corporation.
A budget is developed to plan for the future. A company as big as Rolls Royce needs a master budget to predict costs and revenues for the year. Budgets can also be used to control stock levels, predict the amount of staff required on particular projects and how many hours they are required to work. These budgets can be compared with financial statements at the year end to see how consistent they have been in maintaining the budget and targets. Finally, budgets should include funds for investment opportunities, so when these opportunities arise Rolls Royce can take swift action for example Rolls Royce receives an order of 100 engines from an airline to be able to carry out such an order budgeting can help predict how much it may cost to produce these engines not only this but the number of new staff required.
As I mentioned budgets can provide objectives and goals. These can motivate people to perform effectively, especially if the workforce was asked to contribute when the budget was set. Budgets can also force managers to make accurate use of Rolls Royce's capital. Ultimately, Rolls Royce can organise the organisation because the budget affects all departments' not just one due to business activities existing throughout the company.
Budgets can reduce motivation in the workforce at Rolls Royce because staff will be under pressure to maintain targets of the budgets. Effects such as these result in stressful staff which may lead to them taking sick leave. Therefore, Rolls Royce will be short staffed in certain situations. A major issue that may arise due to budgets is that of conflict. Conflict can be good and bad in a workforce. In the case of Rolls Royce there might be departments arguing about unfair resources allocation, which is bad conflict. Therefore, if targets are not met, departments will blame each other and this will result in more conflict and a poor organisational culture. Budgets can encourage managers to overestimate costs so that they are not blamed if there is any overspending. Rolls Royce could lose out on lucrative deals if they do not budget for investment opportunities.
I. Standard Costing
Standard costing sets levels of costs and revenues which ought to be achievable when reasonable levels of performance are used, together with efficient working practices, to manufacture a product”. (Harrison, 1998:228) This management technique is very useful for Rolls Royce because they produce their own Engines. This costing method compares predetermined costs of products with actual costs incurred. Rolls Royce can calculate many variances, such as material, labour and overheads. The materials variance will show Rolls Royce how well they use their materials and how cheap they are purchasing materials. E.g. Rolls Royce budget to purchase 10,000kg of materials at £2.00 per kg totalling to £20,000, but really purchase 10,000kg at £1.50 per kg totalling to £15,000, there is a £5000 favourable variance. This means that the purchase price of the materials was cheaper than expected. The labour variance will show the rate being paid to workers, and how efficiently the employees have been working. Finally, the overhead variances will show Rolls Royce the difference between overhead rates charged and budgeted on production.
By setting standards Rolls Royce can identify weaknesses in the manufacturing system. This will allow them to rectify problems and produce effectively. Setting standards will also motivate people to maintain targets. If targets are not being met managers will be encouraged to review methods to reduce costs. This method represents the correct cost of a product and can inspire managers and employees to improve from year to year on saving costs.
To have a well maintained system it will be costly for Rolls Royce but will be worthwhile. Due to prices changing frequently because of inflation, the system will need to be updated frequently which can be time consuming and therefore distracts managers/employees from production. If targets are not achieved, employees can lose motivation and this could affect the performance of the workforce.
One of the most crucial decisions a company must make is the price of a product. Two main features that must be considered when setting a price on a product is the cost and revenue maximisation. There are three pricing methods; cost based pricing, going rate, and pricing policies. There are various methods of applying cost based pricing, but the most relevant for Rolls Royce is considering total costs. This method covers a profit margin and the cost of the product. This is very important to Rolls Royce as they are not the first largest company providing power systems to the aviation market by setting a price which is lower than GE Aviation its competitor they may be able to attract more contracts for example if GE Aviation Sold 20 engines at $20million Rolls Royce could sell the same amount of engines for $19.5 Million helping them achieve more sales and attract more customers.
Rolls Royce can benefit from cost plus pricing by many ways. Firstly, managers can set a mark up to their desire, there is no fixed limit on mark up but it must be reasonable and competitive. Baxter and Oxenfeldt (1961) state, cost plus pricing “offer a means by which plausible prices can be found with ease and speed, no matter how many products the firm handles”. (Drury, 2004:432) Finally, if all firms in the market have similar mark up and cost structures to Rolls Royce, there will be price stability, which is good for customers.
Rolls Royce can benefit from the going rate because customers will buy from them due to their reputation as they operate in four different markets providing power system even though competitors will have the same price. Loss leader pricing is useful for Rolls Royce because when customers are attracted by a low price of aircraft or engine, it is almost certain that consumers will purchase a higher quantity of these systems. This compensates for the low mark up as more items are sold.
The main limitation of cost plus pricing is that the demand for the product is not taken into account. The going rate on products can be difficult to compare with competitors because; some companies might have lower production costs than others.
Using a loss leader strategy to sell items can cause problems if you don't sell all the stock. If this occurs, prices can only be reduced further to clear out remaining stock, which subsequently leads to further losses.
I. Long Term Decisions (Investment Appraisal)
Rolls Royce will need to use investment appraisal techniques to decide whether certain investments will be worthwhile, e.g. supplying 20 Airbus A330 jets to air china. The most convenient method for these examples would be ‘payback'. Payback is, “The time required for the cash inflows from a capital investment project to equal the cash outflows”. (Lucey, 2002:352) E.g. supplying air china 20 airbus A330 jets will cost £500 million, and the turnover is £100 million per year, therefore the payback period is 5 years. This method can also be used to decide between two investments, e.g. supplying Air China 20 Airbus A330 or supplying Singapore airlines 30 airbus A330. Depending on the payback period resulting from projected inflows and outflows, the company can decide which airline to supply too. The best choice will be the one that has the quickest payback period.
Payback is the most simple investment appraisal technique to calculate. This will be good for Rolls Royce when swift decisions are required. This method will be easy to understand at all levels of the company. Another benefit of this method is that it will prevent cash flow problems because money is recovered as soon as possible.
The major limitation of payback is that once the initial investment has been recovered, all future cash flows are ignored. This method also assumes that if the payback period is long the investment will not be successful. Hence, if Rolls Royce decides to supply engines to air china instead of Singapore airlines there will be a gradual payback period, does that mean the investment will not be successful? Finally, this method does not account for time value of money. Therefore, an investment now could be worth more in ten years.
Drury, C (2008) Management and Cost Accounting 7th Edition, Thomson Learning, London,
Harrison, I (1998) The complete A-Z Accounting Handbook, Hodder & Stoughton, London.
Horngren, C, Foster, G and Datar, S (2000) Cost Accounting 10th Edition, Prentice Hall, New Jersey.
Lucey, T (2002) Costing 6th Edition, Continuum, London.
Loss Leader Limitation; http://www.bizhelp24.com/marketing/the-loss-leader-3.html
Benefits and Limitations of Payback http://www.12manage.com/methods_payback_period.html
Limitation of Budgets; http://www.fao.org/docrep/W4343E/w4343e05.htm