INTERNATIONAL BUSINESS

Costing Techniques, Budgeting and Investment Appraisal



Abstract

This report aims to understand costing method that is being used in real life company and to suggest/recommend alternative costing method for the company. For this purpose we have chosen Rolls-Royce Plc. Moreover, we have to identify the company's choice of budgeting system and critically analyse the performance of the budgeting based on this technique. Moreover, we have to consider alternative budgeting options available for the company and identify actions to be taken in response to the budgetary information. Rolls-Royce currently uses job order costing system. However, it is recommended that it can use ABC costing system for better efficiency. Moreover, we have discussed budgeting method of the company and suggested alternative budgeting approach to the company.

Table of Contents

Abstract2

Company overview4

Costing system used in Rolls-Royce4

Alternate Available5

ABC costing System5

The Budget Process in Rolls-Royce6

Alternatives7

Top-down7

Bottom-up8

Top-down/Bottom-up8

Investment Appraisal: JD Printing Ltd9

Recommendation9

References10

Costing Techniques, Budgeting and Investment Appraisal

Company overview

Rolls-Royce plc is the second largest manufacturer of aircraft engines behind General Electric Aircraft Engines and a major supplier of engines for ships. Rolls Royce was nationalized in 1971; the aerospace division was long the largest in the group. The automotive division was separated from the group in 1973 and Rolls-Royce plc was privatized in 1987. Rolls-Royce is the 2nd largest global manufacturers of military aircraft engines. In 2004, military sales accounted for 23% of total sales, 51% civil aerospace, marine activity and the activity 16% Energy 8%. As one of the most powerful brands in the world, Rolls-Royce symbolises a promise to deliver reliability, integrity and innovation to buyers and users (www.rolls-royce.com).

Costing system used in Rolls-Royce

Rolls-Royce Plc uses job order costing system. In Rolls-Royce costs are accumulated individually on a per-job basis. A job is a single unit or group of units identifiable as being produced to distinct customer specifications. At the company, each job is treated as a unique cost entity or cost object. Costs of different jobs are maintained in separate subsidiary ledger accounts and are not added together or commingled in those ledger accounts. To ensure the proper recording of costs, the amounts appearing in the subsidiary ledger accounts are periodically compared with and reconciled to the Work in Process Inventory control account in the general ledger. This reconciliation is indicated by the equality of the assumed ending balances of the subsidiary ledger accounts with the WIP Inventory control account in the company (www.rolls-royce.com).

Alternate Available

ABC costing System

Activity Based Costing (ABC) System serves as an alternate to the company's usual costing system. It provides manager with a helpful tool that aids in making strategic decisions and controls the fixed costs. ABC costing system is especially helpful for decision making that directly affects the capacity of production of a company. In company's traditional costing systems, the basic aim is to value the inventories and cost of goods sold in accordance with the GAPP (Generally Accepted Accounting Principles) whereas in ABC costing system there are two primary cost systems involved. These systems report accounting based data to both internal and external ...