Ok update as I seem to have managed to get this working. The key for me was to follow all the instructions from @SuperFromND at the top of this post.

Once complete, when i tried to load the game i got "No config found for system mugen" and I was sent back to emulation station.

I eventually ended up editing my etc/emulationstation/es_systems.cfg file as per the below

Replace

<command>/opt/retropie/supplementary/runcommand/runcommand.sh 0 SYS mugen %ROM%</command>

with

<command>/opt/retropie/supplementary/runcommand/runcommand.sh 0 PORT mugen %ROM%</command>

Restart emulation station and to my amazement - it worked!