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As the role of financial director of Manac plc, the answer for Company problem will include the 3 following topics These 3 topics are: + The models and concepts affecting the pricing decision taken by organizations, critically reflecting upon their usefulness + The role of standard costing and variance analysis in management accounting, as well as value and limitations of variance analysis + Advantages and disadvantages of introducing an Activity Based Costing system to replace the current Absorption Costing system
Manac Plc is a multinational company which produces and sells a range of standard electrical goods. As a part of its approach to strategic management accounting, the firm apply two methods which are standard costing and absorption costing. However, the company’s expectation for its budgeted target profits is not qualified. The company’s profit is lower than the expected profit. It is found out that the real reason for this problem is more complex than the managing director’s perspective. Therefore, from the financial director’s perspective, this report will help the manager to identify the problem.
The elastic demand often identified when the products are luxury or have a lot of substitutes on the market. On the other hand. Demand of a product can be elastic or inelastic (Appendix Ia). and Jenkins. However. critically reflecting upon their usefulness According to Strategic Management Accounting course book. the role of economic theory is to “assist in determining pricing decisions of a firm by looking at the demand for the product and also what level of output the firm should produce”. To be more specific. the elastic demand mean the quantity demanded is opposite with the price.CONTENT I. Elastic demand means “price increase (decrease) of a certain percent lower (raises) the quantity demanded by more than that percentage”. To understand the concept of elasticity can assist management with pricing decision. If inelastic demand exists. for the elastic demand . whereas the common products are in the situation of elastic demand. • Models and concepts affecting the pricing decisions taken by Manac Economic theory Plc. the company should increase the product’s price since revenues will increase and total cost will reduce. If the price increases (decreases) then the customer’s demand will be decreased (increased). Sawyer. inelastic demand illustrates the situation in which the price change does not have great affect to the consumers’ demand. According to Jackson.
situation. On the other hand. p. (Jackson. it is necessary for Manac plc. since their product ranges are standard electrical goods. Target cost = Target price – Target profit In the case of Manac plc. functional products are also included in their product line. the pricing decision is not necessary to cover the cost. 2009. applied for price takers who have little influence on their product’s price or a company who plan to set price for marketing goals. value engineering is applied in this situation. the cost for such product lines often higher than usual. By applying this method. Therefore. increase in price will bring decrease to revenue. In order to reconcile between cost and product function and still reach the target cost. For functional product. and decrease in price will bring increase in revenue. Sawyer. the company can estimate the target cost. the decision for product’s price aim to cover cost and generate products. it is suggested that inelastic demand concept is applied in this situation and the company should increase the price. if the company aim for some marketing goals. in order to adjust to get to the target profit. to find out at what level should the company increase the price to is important. In the price taker’s situation. but to focus mostly on achieving the company’s planned. The company will analyze the product’s . However. For Manac plc Company. and Jenkins.to have a clear view of pricing method • Pricing method: Target pricing is one of the useful approaches. the company’s products focus mainly in the electrical goods. 472). Therefore.
If the price is set too high. Sawyer. the cost-plus pricing allows managers to determine the selling price by adding desire mark up with the product’s base cost. in the situation where total variable cost is considered. (Appendix Ib) Selling price = Base cost + (Mark-up% x Base cost) To calculate the target selling price. The cost-plus pricing method allow managers to forecast rival’s price. If the company can put its influence on the market price. Cost-plus pricing. products are manufactured with most of the costs are determined. Manac plc will become price taker. one of the biggest disadvantages of this method it its rejection of satisfying customers’ demand. mark up is “sufficient to cover costs not included in the base cost plus a desired profit”. According to Jackson. on the other hand. There must be an adjustment for Manac plc’s product price to help the company compete effectively in the market. Each base cost will lead to different setting for selling price. and Jenkins. After researching. the company may lose their customers to the competitors. the company is considered as price setter. However. on the other hand is a useful tool for price setter Company. However. fixed manufacturing cost. • Manac plc case Manac plc is a multinational company. the company . 2009. as well as ensure the that the company’s price remain stable.function that they want to add. as well as the cost for each qualified function. To be more specific. so either Manac can be either price setter or price taker (Appendix Ic). fixed selling and administrative cost and desired profit should be covered. For instance. if the markets are competitive and there are a lot of competitors exist. it is important for the company to identify the base cost. if the price is too low.
the company’s manager will run the management by exception process. Through the process. Standard costing is a useful and reliable method that will help the manager to compare the standard cost with the actual cost. in order to identify the reason for any variances. the price setter and price taker are also related to company’s short run and long run policies. and the company should add up value to attract customers. page 168). which work well with different strategies. The role of standard costing and variance analysis in management accounting.can not cover their cost and make loss. The customers still choose Manac’s products since the company add up more value like the company’s guarantee on each product line. (Appendix Id) II. Manac’s electric socket is £5 while the China products is only £1. although in the market. For example.” (APC309. To be more specific. often found in conjunction with budgetary control. It is suggested that the price adjustment process should be taken in consideration carefully. standard cost is a “pre-determined cost of manufacturing a single unit or a number of products units. If any of the significant variances are found. Strategic Management Accounting. value and limitations of variance analysis • The Role of Standard Costing and Variance Analysis Standard costing is “a type of control system. In the case of Manac Plc. 2009). Unit 7. the managers will devote his time to investigate and analyze the situation in which the gaps between .5.” (Administrator of Accounting for management.
The next period’s operation is carried out and the cycle is then beginning again from the first step. production.b). as well as the corrective action to fix the problem. Besides. • Value and limitation of variance analysis Variance analysis is a valuable method since it can help the manager to measure the company’s performance. Sawyers. The variances raise a lot of question: “Why did this variance happen? Why is this variance larger than it was for the last period? Etc. it is the company mission to analyze the variance. There are 2 methods that can help the manager to identify significant variances easily which are: Variances’ based and Statistical Control Chart. and Jenkins. the variances analysis is also . and manufacturing costs are higher or lower than planned” (Jackson. p. the accounting department will prepare the standard cost performance report. The basic approach to identify and solve any problem of significant variances is exploited in the variance analysis cycle (Appendix II. the significant variance will be investigated in order to find the root cause. At the beginning of this cycle.a) After identifying the variances. the manager will know “whether sales. It helps the company to analyze any differences between budgeted and actual performance easily so that the firm can solve any occurred problem. in which they will highlight the variances and what should have occurred according to the standard. 370). as well as manage to generate profit. It is suggested that Manac plc should apply the Statistical Control Chart method so that the company can identify and evaluate the problem efficiency (Appendix II.” After that.actual results differ significantly from planned result. Through the variance analysis process.
processes or products” (The Chartered Institute of Management Accountants – CIMA. the company should take in consideration other information such as employer’s performance. especially to identify the significant variance. Manac plc is still working with the absorption costing system. The absorption costing system is “the practice of charging all costs. as well as business’s performance of the company. Since Manac Plc is a big and multinational company. The last limitation of this method is that to apply only the variance analysis is not enough to measure the whole performance. (Appendix II. Hence.c) III. both variable and fixed. Besides the time consuming problem. there are some limitations when the board of director decides to apply this method to Manac Plc. there should be some policies to check and ensure the accuracy of the information. The information is collected through many channels before gathering and being checked by the manager. • Advantages and disadvantages of introducing an Activity Based The current costing system Costing system to replace the current system Until now. it is time consuming to analyze the variance. Therefore. the information needed to analyze variance such as standard and actual price of materials will be hard and take time to collect.considered as “the company’s compass” to know whether the business is going on the right direction to the planned budgeted or not. machinery’s issue when evaluating the company’s performance as a whole. For instance. to operations. the accuracy of collected information is another issue that the company need to consider. Any of the wrong information will bring trouble to company’s decision. However. United Kingdom). .
the cost is still taken into account. Manac plc plan to differentiation and customize its products to compete against other competitors in the electrical market. . which mean the company can not cover their actual cost and make loss in their business. Unit 9). Over cost a product will lead to higher selling price lead to less competitive with other rivals. it “is not helpful for managerial decision making process” (Management Accounting. In this situation. the company has unused office in the building. For example. The decision making process will base on the fact that whether the business is generating profit or not. they find out that their business is not profitable. 2011. when the boards of directors take in consideration whether the company gain profit or not. when Manac plc apply absorption costing system. The cost of the building is fixed cost. Manac plc can have a clear picture of all the cost included in the unit price. it may cause the cost-subsidization problem: Over cost and Under cost for some products. and their cost is higher than their extra revenue. the absorption costing system is not also accommodating well with the company’s current strategies. Apart from the reason of its inutility in some cases. since absorption costing system will include both variable and fixed cost.Although when apply this system. it may affect the decision making process in some situation and lead to the wrong decision. the fixed cost is irrelevant and creates inaccuracy information that may confuse the manager’s decision making. If the company keeps using the old system. whereas under cost a product will lead to lower selling price. so whether the office is used or not. Debarshi Bhattacharyya. However. Later on.
Based on all of the reason above. In order to design an ABC system. After that. it is necessary for Manac plc to find a replacement system that may work well with the company goal and help the firm to gain the market share. (Appendix IIIa). the indirect costs will be allocated to each department based on its consumption level. all of the cost will be allocated from departments to activities. Strategic Management Accounting. Unit 3. To be more specific in the case of Manac plc. For example. when the manager takes into consideration of building rental. Support overheads are charged to products on the basis of their usage of the factor causing the overheads” (APC309. • The replacement system (Activity Based Costing) It is suggested that the suitable system in Manac plc case is Activity Based Costing system (ABC system). At the very first step. the manager will have to follow 3 steps. approximately 40% of the whole building. the company needs to allocate indirect costs to departments. First of all. page 56). ABC system involves “the identification of the factors which cause the costs of an organization’s major activities. Therefore. For the final step. The product and development department will consume the larger space. the 3 steps will be identified clearly through example below. while other departments such as sales and promotion . there are different departments in the company. the cost will be allocated base on the space that each department consumed (in percentage). the costs which are allocated to activities is being allocated to the cost objects – products.
There are different activities that will happen in each department. the cost will be 15%. • Advantages ABC helps to improve accuracy and utility value of management information. The product and development department will have to design and test the products. The indirect costs are assigned to each activity of each department and depend on the time consuming for each activity. etc. 55% and 5% for fan. cost of each activity is allocated to products. the product and development department will spend 60% of the time to research and upgrade the products. as well as some problem that the manager should take care of. Therefore. administrative department are apportioned 35%. whereas in the Sale and Promotion departments. 30% on testing the products and 10% of the time to finish the products before transferring the products to Sale department.department. thus enabling managers to make better informed decisions at both tactical and strategic levels. 25%. air-conditioned and electrical sockets respectively. 15% of the area respectively. For example. . When comparing the ABC system to absorption costing system. the costs of all the activities that happen in the Product and Development department will be apportioned to each products based on time spent on each of the products line. For the last step. televisions. For instance. they will have to work with promotion campaign in order to bring the company’s image to customers. the ABC system bring out some good advantages that can work well with Manac plc strategies.
the cost for data gathering can be very expensive. These disadvantages are the problem that Manac plc ‘s manager need to carefully look for. The problem may even get worse when the department refuse to provide needed information for the firm to measure the cost. the ABC will help Manac to completely get rid of cross subsidization. the problem which happen when the company apply traditional system since ABC are allocated cost to products level order. Another problem that may cause problem to the company when apply ABC system is the reluctance to change from the company and its staff. ABC also allows all managers to understand and control costs in their area since the costs are all allocated in each department before apportioned to products. Therefore. accountants can now contribute to the organization’s future. .Besides. they can improve the cost estimation since the ABC helps them to identify and understand of cost behavior. Not only is it very labour intensive. the manager can find a better way to improve performance within the company. The cost may also rise if any external consultant are involved in this process. By involvement with ABC. it can also take many hours to extract all the relevant information from the various managers and staffs. Besides. • Disadvantages The first obvious problem when apply ABC system to Manac is that it will take time to identify the cost drivers since the company has to work out with each department managers. Besides. rather than merely reporting on its past.
CONCLUSION It is expected that through this report. the board of directors will have a clear view of the reason for not meeting with the targeted profit of the company. it is suggested that the company should change from the old absorption costing system to activity based costing system in order to help the company improve its performance in the future. which is variance and company’s pricing model. Besides. .
2009. Strategic Management Accounting. Jackson. Roby B.REFERENCES Steven R. United Kingdom . Unknown.accountingformanagement. 1st Ed Administrator of the accounting for management. Management Accounting. Ver 1. Gregory Jenkins.com/standard_costing. 5th Ed. 2011. and J.0. University of Sunderland Debarshi Bhattacharyya. APC309. Managerial Accounting: A focus on Ethical Decision Making. Sawyers. 2009 [accessed on April 08 2012] http://www.htm The Chartered Institute of Management Accountants – CIMA.
APPENDICES Ia.5% x £9300) = £12601 . The selling and administrative expense is £300 and the desired profit is £3000. £4000 and £1800 respectively.htm Ib.edu/gerth_d/MKT2220000/Lecture_Notes/unit09. Cost-plus pricing Assume that the direct material.5% Selling price = Base cost + (Mark-up% x Base cost) = £9300 + (35.nscc. direct labor and manufacturing overhead are £3500. the cost of good sold (COGS) – base cost in this situation – will be: COGS = £3500 + £4000 + £1800 = £9300 Mark-up con COGS = = 35. Elastic and inelastic demand Source: http://ww2. Therefore.
The only weakness when apply variable cost is that the calculation do not include overhead. Price setter and price taker in Manac plc case. Price setter and price taker Price setter. then it is easier and simple to set price through this method for short run period. Id.0. then Manac plc is playing the role as the price setter. or no impact on their products’ price and setting price based on the market price. Over all. price taker is the one who gain small market share and has little. long run and short run decision If the company has great influence at the market. it is suggested that Manac plc should set price following this formula Price = Variable cost + Mark-up The reason for setting price by the variable cost in this situation is that when the company can control its fixed cost well. Price setter is likely to be the market leader or company with differentiate products line. Ver 1. University of Sunderland are the the one who strong enough to put their influence on the price of the products. it is important to identify whether Manac plc is price setter or price taker to give out right strategy for the company. The product’s price is then set by this formula Price = Cost + Mark-up For short run. the aim of price taker is to sell as much as possible to cover all of their cost. Strategic Management Accounting. Unlike the price setter. On the other hand.Ic. according to APC309. .
To be more detail. as well as efficiency than the marginal cost. However. when the company start manufacturing an electric socket. it can not fully reflect the cost. When calculating base only on marginal cost. However. The price setting process is much faster and giving remarkable help to the company in short run. if there is any inflation happen. If the company play the part as price taker. for the variable cost. it is suggested that the manager should choose standard cost since it can be specified at reliable level. It is more accurate. it is better for the firm to apply full cost instead of marginal cost. it may affect the standard cost of the products and the company may make loss if it do not update the cost permanently. the whole setting price process will be slow down and it is not suggested for Manac to apply that. If Manac plc want to ensure the price setting period. full cost can sum up all of the cost and allocate separately to each products line. The only problem with full cost is that it take time to collect information. On the other hand. the firm can also apply actual cost instead of standard cost. especially needed for company that product focus on electrical goods like Manac plc. the price setting process is suggested to follow the formula Price = full cost + mark-up Or = Marginal cost + mark-up It is said that for long run purpose. For long run. the price setting process should follow this formula Price = Market price + Adjustment . For example. the price is set at £4 and all the other electric socket that use the same material will be allocated to that standard.
the manager can raise the price. where the company will charge higher price to high income group.com/doc/15577259/Chap6Variance-Analysis . it is necessary for the company to put more effort in research & development products. The company can increase the mark-up without worrying of any competitors coming in.The adjustment here will base mostly on the company’s policies. Skimming pricing strategy: for Monopoly policies. If the company have its own competitive advantage. Penetration pricing policy: Penetrate the market. IIa. If not then the price should be decreased in order to compete again other rival on the market + Suggested pricing policies for Manac plc There are 2 suggested policies that Manac plc can apply. To apply this strategy. gain more market share by providing lower price and mass products to the customers. The company can apply this strategy to the products line which is easier to products and essential to the customers. Statiscal control chart http://www.scribd.
IIc. the material price variance is Material price variance = AQ x (AP – SP) = 5000 x (£4.7 per pound – £5 per pound) = £1. 5th edt. IIb. Designing ABC system . Direct Material Variance Assuming that the item purchase is tubes and the quantity that the purchasing department has consumed is 5000 pounds.5.700 pounds x (£4.£3) = £7500 Material price variance = AQ x (AP – SP) = 6. On the chart above.The managers analyse and investigate variances whether they are within or outside the normal fluctuation range. it can be easily noticed that week 4 5 and 9 need to be investigated since it’s too far from the limit. Variance analysis cycle Source: Introduction to Managerial Accounting. Therefore.340 IIIa.5 . The standard price for each pound is £3 while the actual price that reported is £4.
Source: http://www.com/Activity-Based-Costing.html .mrdashboard.
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