A Case of BHP Billiton Limited: A Managerial Accounting Analysis 1

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A CASE OF BHP BILLITON LIMITED: A MANAGERIAL ACCOUNTING ANALYSIS

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 A Case of BHP Billiton Limited: A Managerial Accounting Analysis 2

A Case of BHP Billiton Limited: A Managerial Accounting Analysis

Question A
BHP Billiton is an Anglo-Australian company operating in the mining industry. The
company has interests in mining for metals such as iron ore, copper, potash, nickel and
uranium as well as petroleum products like natural gas and petroleum. The company also
mines coal. As such, it is worth noting that BHP has created a name for itself as the best
mining company globally. The company has two offices, one in Melbourne, Australia and the
other one in London, United Kingdom (Vogel, 2014). The company is also listed in two stock
exchange markets, the Australian Securities Exchange and the London Security Exchange.
This is because the BHP Billiton Limited is a result of the 2001 merger between Australian
based Broken Hill Proprietary Limited and the London based Anglo-Dutch Billiton PLC.
The performance of the company has been exemplary over the years. In fact, BHP is
the largest mining company in the world according to 2015 market values. In addition, BHP
is also the fourth largest company in Australia according to revenues. The company reported
an entry of A$ 30.9 billion in 2016 against an operating income of A$ 6.2 billion and a profit
of A$ 6.2 billion in the same year. The profit drivers of the company are commodity prices,
which play a critical role in determining its profitability or losses (Palepu, Healy and Peek,
2013). Similarly, the company’s main risks are environmental, largely associated with the
impact of its mining activities on the environment. The company has its major installations
and operations located in Australia. However, being a global company, it has many other
subsidiaries located in different parts of the world including Algerian gas fields, Brazilian
iron mines, Canadian potash mines, Columbian coal mines, Trinidad and Tobago oil and gas
mines, as well as operations in the US, Mexico, Peru and Chile, among others.
Question B
The mission of the company is to become the company of choice through creation of
sustainable value to employees, shareholders, suppliers, contractors, host communities,
business partners and customers. The company aspires to cause zero harm to the people, the
environment as well as the host community through achievement of leading industry practice.
In this regard, the company observes sound principles of safety governance, business
conduct, as well as social, economic, and environmental activities. The vision of the company
is to create a long-term shareholder value through the discovery acquisition, development and
marketing of natural resources (Coates, 2014). The strategy of the company entails owning an
operating large, long life, low cost, expandable, upstream assets diversified by commodity,
geography and market. In order to achieve these objectives, the company is guided by its
values, which include sustainability, integrity, respect, performance, simplicity, and
accountability.
Question F
Considering the fact that BHP Billiton Limited is a multinational conglomerate, all its
financial statements are consolidated. This means that the financial reports presented in its
annual reports do not reflect the tiny details regarding the expenses and other variables that
affect the contribution margin. For instance, the focus in this case was to prepare a
contribution margin income statement for the year 2016 based on the financial reports
presented by the company. In this case, the variables that would be considered include the
cost of sales, selling and marketing expenses, as well as distribution expenses, all of which
would be considered as mixed costs (Brigham and Ehrhardt, 2013). However, the
consolidated financial statements fail to provide a clear demarcation of each variable, and as
such, it is not easy to establish the exact value of an expense or a cost incurred by the
business. Nonetheless, it is possible to provide a generalized financial account of the
contribution margin income statement of the company as outlined in the table above.
 A Case of BHP Billiton Limited: A Managerial Accounting Analysis 3

According to the 2016 financial statements of the company, BHP Billiton had two
major sources of revenue. These were the sales income as A$ 30,912 and the other incomes
as A$ 444. This gives a total revenue for the year 2016 as A$ 31,356. The variable expenses
are given as A$ 36,591, which comprises of impairment and expenses of A$ 2,104 and
expenses less financial costs of A$ 35,487. The difference of the revenues and the variable
costs gives the contribution margin A$ -6,235. In order to obtain the net income value, we
subtract the fixed costs, in this case the financial expenses, from the contribution margin,
giving a net income of A$ 7,396.
Question G
Considering the fact that the financial statements prepared for BHP Billiton Limited
for the year 2016 are consolidated, it therefore means that the entries made to the income
statement remain the same as used in the contribution margin income statement, not to
mention being limited because the reports provide a generalized account of all the financial
entries. The reason for preparing a consolidated financial statement is because the company
has many subsidiaries located in different parts of the world (Weygandt, Kimmel and Kieso,
2015). Therefore, in order to reduce the confusion that results from analysing all the financial
reports of the company prepared by individual subsidiaries, the company prepares a
consolidated financial statement, which in turn takes care of all the possible entries albeit in a
generalized form.
As presented in the financial statements, the income statement of the company
outlines that the contributing sources of the company were from its revenues, which included
the sales incomes as well as other subsidiary incomes obtained from other sources. The
deductions made to this revenue included the expenses, comprising of both fixed and variable
costs that the company incurred in the process of undertaking its business activities. As a
result, the value of the net income obtained is specific in the sense it provides a clear picture
of the profit or loss made by the company at the end of the fiscal year analysed.
Question H
The process of management accounting is very involving and critical in the sense that
it requires the management to consider a number of issues that are relevant to the financial
performance of the company, in which case, it ensures that the reports are not only relevant,
but also accurate and timely. In order to achieve this, the management accountants must
highlight key features of the financial statements, which include the customer profitability
analysis, the competitor index, the market threshold and control, the taxation policy and rates,
as well as the cost of sales. These five indexes are critical to the financial performance of the
company in the sense that they determine whether the company will make a profit or a loss.
The customer profitability analysis provides a clear analysis of the customer profiling
of the company in the sense that it determines the level of customer loyalty. This is because
customer loyalty in turn determines the profitability of the company in terms of sales
volumes, whereby the higher the number of customers, the higher the sales volume of the
company. In the second perspective, the competitor index determines how much competition
the company faces when doing business in the market, whereby stiff competition would lead
to a meltdown in business activities and diminished profitability. The market threshold
analyzes the portion of the market or industry that the company controls both locally as well
as globally. The taxation policies advices the management of how much of its in income is
likely to be lost through taxation, considering the fact that the company is a multinational
conglomerate with subsidiaries in different parts of the world.
Question I
I. The cost objects identifiable in the 2016 annual report of the company include net finance
costs, the impairment costs, as well as investment costs.
 A Case of BHP Billiton Limited: A Managerial Accounting Analysis 4

II. There are no product costs in the annual report. The reason for this is because the
financial statements provided in the annual report are consolidated, and as such, a
combination of all the costs and expenses incurred by each branch or subsidiary of the
company operating locally or overseas.
III. Since the accounts are consolidated, it is not easy to identify the period costs as incurred
by the company.
IV. BHP Billiton would be in a position to use the cost volume profit analysis within its
business operations, but this would have to be applied in the individual subsidiaries of the
company in order to achieve the desired effectiveness. It would be difficult to apply it to
the consolidated financial statements.
V. The consolidated financial statements of the company are not only comprehensive but
also conclusive. The reports give the income statement, the balance sheet, the statement
of cash flows as well as changes of equity.
VI. From the analysis of the financial statements of BHP Billiton Limited, it is evident that
the company uses a budgetary system to plan and execute its operations.
VII. The budgetary system enables BHP Billiton to plan, coordinate, as well as allocate
resources equitably in all its establishments to ensure maximization of shareholder’s
earnings.
 A Case of BHP Billiton Limited: A Managerial Accounting Analysis 5

Reflexive Summary
Doing the case study report on BHP Billiton has been very informative for me as a
person. It has enabled me to expand my knowledge as well as experience with regard to
managerial accounting and financial accounting. Through the analysis of BHP Billiton
Corporation, I was informed of the many considerations that both managers and accountants
have to put into perspective when preparing consolidated financial statements for the
organization, considering the fact that the company had many foreign subsidiaries across
many parts of the world. Additionally, I also learnt about specific accounting principles and
procedures that need to be followed in analysing the financial performance of a company, not
to mention the evaluation of these analyses in order to deduce the true financial position of
the company from its financial statements.
Some of the specific topics that enlightened my understanding on financial accounting
through the performance of this topic include preparation of income statements. The income
statement, also referred to as the profit and loss account, gives an account of the revenues of
the company as well as the expenses to give the net profit. I also learn the different sources of
revenue for a company as well as the expenses, including fixed and variable expenses.
Another accounting area that I learnt during this assignment was the contribution margin
income statement as well as the budgeted contribution margin income statements. These two
outlined the different sources of revenue of the company compared to the expenses. Lastly, I
also learnt of the key features to observe during management accounting especially when
analyzing the financial reports of the company, such as customer profitability analysis, the
competitor index, the market threshold and control, the taxation policy and rates, as well as
the cost of sales.
 A Case of BHP Billiton Limited: A Managerial Accounting Analysis 6

References List
Palepu, K.G., Healy, P.M. and Peek, E., 2013. Business analysis and valuation: IFRS edition.
Cengage Learning.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice.
Cengage Learning.
Coates IV, J.C., 2014. Cost-Benefit Analysis of Financial Regulation: Case Studies and
Implications. Yale LJ, 124, p.882.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting.
John Wiley & Sons.
Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis.
Cambridge University Press.
 A Case of BHP Billiton Limited: A Managerial Accounting Analysis 7

Appendices
Table 1:
Contribution Margin Income Statement for BHP Billiton Limited for
2016
Revenues
Sales 30,912
Other income 444 31,356
Variable Costs
Expenses less 35,487
financial costs
Impairment and 2,104 (37,591)
expenses
Contribution Margin - 6,235
Fixed Costs
Financial expenses 1,161 (1,161)
Net Income 7,396

Table 2:
Budgeted Contribution Margin Income Statement for BHP Billiton
Limited for 2016
Revenues
Sales 30,912
Other income 444 31,356
Variable Costs
Expenses less 35,487
financial costs
Impairment and 2,104 (37,591)
expenses
Contribution Margin - 6,235
Fixed Costs
Financial expenses 1,161 (1,161)
Net Income 7,396