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Table of Contents 1 2 3 4 5 6 8. Introduction. ........................................................................................................ 2 Models and concepts That Affect the pricing decisions. .........................................

3 Standard Costing and Variance Analysis. ............................................................... 6 Activity Based Costing system ............................................................................ 11 Management Accounting: ................................................................................... 12 Conclusion. ........................................................................................................ 14 Reference: .......................................................................................................... 15

1 Introduction. The various types of models and concepts which are used in the strategic management accounting will be discussed in this report. The strategic management accounting is that form of management accounting which has its emphasis on the information which is related to the organization. This information is both the external as well as internal information and the non financial information is also point of focus. Standard costing has its fruits and disadvantages and limitations, these will be part of this report. The report will also highlight the advantages and disadvantages of the management accounting and the key focus area of this subject. This report will focus on Manac Plc, which is a company involved in the wholesale distribution. At the end of the report, the report has been properly concluded.

2 Models and concepts That Affect the pricing decisions. The pricing decision of any organization is very critical decision as the overall performance of the organization depends upon this decision and the competition and customer base is also affected by this decision. The various models of the strategic management accounting are discussed below. These models require information from external and internal sources of the company and also the information of the financial nature and the non financial nature. These models have great impact on the pricing decisions of the company:
Strategic Pricing In the overall marketing mix, price is the most important item that can affect a company's profitability. How to set prices and measure their impact on a company's business model, however, is less clear. Too many times, the focus of pricing is related to short-term competition or internal cost structure. Even if a company analyzes existing market data or collects new market input, this information usually doesn't provide links to profitability and other marketing-mix items. To develop an effective pricing strategy, it's important to first analyze a method of integrating meaningful customer input based on the entire company and competitive offerings within a category. This analysis should examine overall profitability and the trade-offs between the advertising and promotion strategies and allow management to get answers to the following types of questions:

What set of prices will maximize profitability for all company offerings in a category? How can we bundle and price offerings to enhance overall profitability? For branded products, how can we effectively compete with value/generic offerings? How should our offerings and prices change in anticipation of the competition? If market constraints force development of sub optimal short-term strategies, how can we minimize the impact on positioning?

Traditionally, marketing's role in developing pricing strategy has been to understand market acceptance of price changes to new and existing products and services. Through the use of conjoint-type studies, researchers have learned about the trade-offs between brand, price, and features and leveraged customer value to develop pricing strategies. While this is valuable information, these types of research approaches don't do a good job of replicating the complexity of current marketplaces and extracting the real impact of price and price sensitivity. For example, conjoint creates an artificial marketplace that forces competitive offerings to contain similar features and prices, when, in reality, many unique products and services have different features and prices. Conjoint typically underestimates the impact of price and doesn't provide a value of price sensitivity by brand, but rather only in aggregate. Pricing research typically focuses on a customer's preference for a specific offering and reports findings in terms of percentages. Given the lack of a complete set of competitive offerings of all products, services, and prices in the marketplace, it's hard to integrate preference measures to current market conditions and then accurately project changes in the marketing mix, especially in financial terms. This tends to lower the value of research because management can only make decisions on a relative "percentage" basis, rather than on an absolute "profit" basis. To develop a meaningful pricing strategy, researchers must integrate customer input on a complete competitive marketplace with how it interfaces with the distribution channel and variable costs. Many organizations make pricing decisions based on secondary or syndicated data sources, internal costs, or competitive factors. While each of these items needs to be considered, profit potential and product equity can erode significantly with strategies based on these items alone. Some companies get input on customer's willingness to pay from measurements based on observed marketplace behavior. However, such measurements are limited because they only reflect existing product and service characteristics. In addition, observational data doesn't involve controls, so it can be difficult to separate the trends and sensitivities in the observed data from external items like product availability, promotion and advertising for the company, and competitive offerings. While internal costs have a major impact on profitability, not linking them to market input on competitive pricing and customer willingness to pay can affect profits. It's unwise to develop a pricing strategy based on a reaction to

customers leveraging one supplier over another to get the best possible price or a reaction to competitive price changes, internal sales goals, and inventory levels. These factors need to be considered in developing pricing strategies, but these strategies can hurt long-term profitability and product equity if they don't estimate market response and impact on sales channels and profitability. Developing a Model Effective pricing strategy is best developed through a profitability model that incorporates market input on a competitive marketplace, current market conditions, and impact of advertising and promotions. The results from this type of model will give specific direction on which new and existing offerings should be in the marketplace, how they should be packaged and priced, and how marketing investment should be allocated between advertising and promotion. Consider the model of pricing strategy in Exhibit 1. The top half of the exhibit shows the model inputs of the customer and current market levels, and the bottom half represents the marketplace and the items a company has control over to optimize their offering. The overall process is broken down into four basic components: (1) modeling of market input, (2) calibrating model sensitivities to current market, (3) developing contribution measures, and (4) integrating with the overall marketing mix and developing profitability measures. The first step is to develop the market sensitivities associated with price, brand, features, channel, and packaging-shown in the "Modeling of Market Input" section. These sensitivities relate to how the marketplace will react to changes in new and existing company and competitive offerings. Examples of changes that could be tested include the following:

Changing of price for one or more company offerings within a category Branding a new offering with and without the company name Exclusivity of marketing through a single channel vs. all channels Impact of a package offering at different prices Offerings with and without certain features Competitive responses

The next step is calibrating model sensitivities to current market size. This step converts market shares to total dollars in the market by using industry sales from the current market. This is especially important when making pricing decisions in light of total R&D and marketing investments. With the calibration, the measures reported in the market response tool can show the impact on total sales as well as share. Next, contribution measures need to be developed for all company offerings. This is done by integrating direct production costs with sales to determine contribution. Now the market response tool can optimize pricing and packaging strategies based on the total contribution rather than just share or sales. The last step in the model is to tie other marketing-mix items into the market response tool. This step involves developing relationships that relate advertising and marketing expenditures to market levels of awareness and distribution. Also included here are any market or production constraints that need to be considered in developing pricing strategy. This step, along with the step relating to contribution, increases the value of market input because results are stated in direct financial terms and deal with the interaction between pricing and other items in the overall marketing mix.

Measures of Profitability If only market shares are considered, and a new offering completely cannibalizes from the existing company set of products and services, then a decision might be made not to launch. However, if the new offering has a higher profit contribution, then it may be beneficial to launch it. The value of being able to develop strategy based on profit vs. market share is more dramatic when considering a price to charge for a product or service. Implementing the Model Implementation of this approach requires a commitment to the entire process. These models are developed in a highly customized manner and vary across industries. At times, the company and industry information needed to design and implement them aren't readily available. In addition, multiple disciplines need to come together to integrate current market conditions, market sensitivities, and profitability into one model. To overcome these difficulties and develop a model of strategic pricing, it's important to communicate the benefits of this model so everyone shares a similar goal in terms of pricing strategy. Support for the effort must be the organization's top priority. Management must then create an environment that encourages marketing managers, product managers, and finance managers to develop the necessary inputs and to work together to develop the optimum strategies. This is a large mountain to climb, but the benefits of a comprehensive pricing strategy compared to on-going reactive pricing can be tremendous.

3 Standard Costing and Variance Analysis. Standard Costing : This is the practice in which a standard or the expected cost is determined. This cost is then used for making a comparison of the actual cost with the expected cost. The variance is then investigated. The standard cost is determined considering the standard condition and also on the ideal performance. The goals and targets are then determined, the manager of the Manac Plc have to achieve the targets and the goals set out for them. In the standard costing there is budgeted output determination and then the standard cost per unit is then determined. Variance Analysis: The variance analysis is the comparison of the actual cost with the standard cost. When the actual cost data are received , the manager has to compare the actual cost with the standard cost, that has been set out. The investigation of the variance is then done in order to get information of the reasons for the loopholes. Role of the Standard Costing and Variance Analysis: The following are the reasons for the use of standard costing and the variance analysis: Budgeting: The standard costing is always used in the preparation of the budget. This is because on the day of the finalization of the budget, the actual cost cannot be determined. The standard costs that are used within the budget of a period, is used in all the reporting during the budgeted period. Costing of the Inventory: In the perpetual inventory system, the calculation of the period end or the closing balances is very easy, simply by multiplying the units with the standard cost of the items within the inventory. The results of this calculation may be very close to the actual results but these can be estimated before the period and with ease. But this requires the updating of the standard costing frequently. This may be in the case the variation in the actual costs are high. The cost of higher value items should be updated regularly and the lower value items on an occasional basis.

Application of the overhead cost: The standard costing is used for the application of the overhead rate into the inventory. Thus instead of waiting for the actual cost pools and then allocating these actual costs, the standard cost is used. There is some adjustment in this predetermined overhead rate to make it closer to the inventory. Formulation of Price: This is also used for the determination of the price. The standard costs are used for the compilation of the forecasted cost of what the requirements of the customers and then the profit margin add to that cost in order to get the price of those requirements. This system also has accounting for the changes that are used in the production cost. Determination of the favorableness of the variation: If the actual expenses are more than the budgeted expenses then this will show an unfavorable variance. The lesser amount of the actual expenses in comparison to the budgeted expenses means that there is the favorable expenses. This also indicates that the expenses are in control. The standard costing is very important for the determination of the favorable and the unfavorable variation in the costs and the expenses. Monitoring and Control: The monitoring and control are very important for the success of any organization.This is why the companies are using the standard costing and the variance analysis. The Manac Plc is also doing the same, first determining the standard cost and then monitoring those costs and expenses by the comparison of those costs with the actual expenses and cost. This also helps with the highlighting those expenses and the products whose cost are highly different from the actual costs. The fluctuation is monitored, the standards are set out. Averaging of the overhead rate for the period. With The use of the standard costing, the overhead rate. Thus during the period there will be the minor fluctuations in the direct cost as well. This is why the companies are using the standard costing in order to minimize the fluctuations in the direct costs and to smooth out the overall variation level. Effective and Economical:This method is very effective in the monitoring of the costs and the other expenses, moreover, this approach is economical as

well, as the expenses are budgeted first and therefore that does not cost much. Systems has standard inputs: Due to the use of the flexible budgets, the inputs into the accounting and bookkeeping systems are standard. Therefore, there are standard recording and not that much variation. This is the advantage of the flexible budgeting system. Value of the standard costing and Variance analysis: The below mentioned are the benefits and the advantages of the variance analysis and the standard costing: The overall efficiency and the effectiveness of the organization will be increased due to the introduction of the standard costing. This is because the standard costing and variance analysis are approaching which will make the costing and the monitoring system of an organization, more efficient by highlighting the flaws and areas which need more attention. This approach will make the costing and monitoring activity of the organization more effective and understandable for all the employees working in the organization. As this approach is simple and easily understandable, it makes the system more effective. The different departments can be given the targets and the responsibility of achieving those targets will also be set out. Thus the responsibility accounting can be effectively applied by the use of the standard costing and the variance analysis The important areas of concern can be paid attention, in order to gain the benefits for the overall business organization. Manac Plc, is using the standard costing and variance analysis in order to focus the are which needs attention and focus of the high management.

Limitations of the standard costing and Variance analysis: These are enlisted below: 8

There needs to be updated of the reports generated from the standard costing. These reports are generated before the accounting period starts or months after the period ends. That is why the information in these reports needed to be updated at the time of using the report. Sometimes it may happen that some of the costs incurred are necessary for the organizations overall operations or effectiveness. These expenses may be higher than the budgets or the standard costs determined. The management may thus only, by looking at the higher fluctuation from the standard expense not cut off those expenses, as these are necessary ones and the variance analysis has nothing to do with such expenses. Therefore in these areas just to meet the targets set out in the budget is of no use and is totally in vain. There are more dependent on the machines these days and less on the labor. So determining the cost on the basis of the labor assuming that the production process is based on this process is of no use. The modern system should use the machine hours for the allocation of the overheads. The variance should be properly investigated and the reasoning should be documented and considered by the higher level of the management of the organization. This will make the variance analysis more effective in contributing towards the organization. While integrating the data, there may be the chance of the misinterpretation of the data. Therefore, while making the variance analysis,it should make sure that the data that has been used in the analysis, is accurate and up to date. There is no involvement of the staff, in the variance analysis. The staff should be kept motivated despite of the fact that the variance is negative. This is done in order to motivate the staff and to keep their morale high and effective. So that they can contribute in controlling the variance which are negative and unfavorable (Blocher and Edward, 2002). 9

There should be flexibility in the variance analysis and the standard costing. Variance analysis is determining the present and the past activities. There is no space in the variance analysis for the future activities. Therefore, it cannot give any idea regarding the future activities of the Manac Plc.

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4 Activity Based Costing system Activity Based Costing: This is the system in which the direct costs are allocated to the activities on the basis of the relations of those costs with those activities. Thus with the use of the activity based costing approach the costs reallocated to the activities on the basis of logic. This approach thus makes sense and also makes the allocation of the indirect costs of the product more accurately and systematically. This approach involves the following: Highlighting the activities of the organization Prioritizing those activities. Thus those which are more important will come up and those which are less important will come down the list. The relation between the indirect costs and the activities will be then developed. The indirect cost will be then allocated and distributed to these activities on a priority basis( Baxendale and Sydney. 2003). Reasons for the Use of the Acitivity Based Costing: This approach of the costing is used due to the following reasons: Activities have relation to the indirect costs and therefore the more suitable allocation is based on those activities due to which that cost has been incurred (Baxendale and Jamal. 2003).. It is a logical and simple approach (Byerly, et al. 2003) The costs which are of an indirect nature, especially the manufacturing overheads of the company. Moreover, these manufacturing overheads are no more related to the labor hours or the machine hours. Therefore no other mean of allocating the cost can be suitable than the activity based costing. Benefits of Activity based costing: These are enlisted below: This is easily understandable and easy to use. This Approach is more suitable and scientific in nature. This is because the indirect cost is allocated on the based on the activity for which this cost has been incurred and thus the product cost will have more accurate

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calculation and will represent the true cost of the product (Cardinaels, et al .2004). The overall efficiency of the organization will be increased. This is due to the allocation based on the utilization of the indirect cost. Thus the departments will be more concern about their efficient use and these will try to increase the profitability of the products. The allocation of the resources will be based on the efficiency and effective utilization of the resources will happen (Cokins, 2004). This is a very good monitoring tool and it an be used for the control of the cost. This tool can be used in the monitoring and control process. This will also remove the waste in the organization (Kennett et al, 2007). Pitfalls of Activity based costing: These are enlisted below: This approach requires a lot of the time to be consumed in the highlighting the activities, then prioritize these activities. Then the allocation of these indirect costs of the activities is also another time consuming activity (Zeller et al, 2001). Due to this approach involving the more time so this approach is very costly. This approach is difficult to understand and it is not as easy as it is said.

5 Management Accounting: This involves the management decision making, devising plans and also the performance management systems. This also involves the financial reporting and the 12

control, in order to assist the management for not only, the formulation of the strategy but also the implementation of the strategy of the organization (Van Der Merwe, 2001). The key focus of the Management Accounting: The main point of focus of the management accounting is enlisted below: The field of accounting performs the control function of any business organization using the management accounting (Hilton, 2006). The management accounting is also useful and has focused on the financial management of an organization. The management accounting also does the management of the business assets. The management accounting also does the strategic management of the business. The key focus of the Management Accounting: The advantages of using the management accounting are enlisted below: Controlling the activities of the organization. This field of accounting is very useful in the management of the organization and controlling by the use of budgeting and forecasting. The extravagant costs will be cut off and inefficiencies will be removed (Thomas et al, 2006). Product Pricing is also a very important role of the management accounting. Based on the reports and approaches of the management, the prices of the products are determined. Monitoring of the expenses and costs is also done by the management accounting. The management accounting performs this role by the establishment of the budget and then the variation from the budgets are checked through the comparison with the actual expenses. The variations will be then analyzed to know and to focus on the cutting of the unnecessarily high expenses and costs incurred by the business. Setting out the profit margins for the different products in the product line is also determined through the management accounting. Thus the key focus in this case is the accurate calculation of the product costs and then adding up the margins in that product cost.

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6 Conclusion. From our whole investigation and study that has been made in this report, we have concluded that the standard costing and the variance analysis are very good tools in the determination of the efficiency of an organization. These tools can be very effective in removing the inefficient activities of the organization. This report has also discussed the activity based accounting which is a logical approach and more scientific one in nature. The allocation of the indirect costs under the activity based accounting is more logical and correct one (Anderson et al, 2004). But this approach has also its pitfalls which can also not be ignored. The management accounting is a very important field of the accounting and it has also been discussed in this report. The management accounting is very beneficial in providing and updating the managers of the organization with the correct and up to date information.

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Thomas, Michael, Mackey and James. (2006). Supply Chain Management: Monitoring Strategic Partnering Contract with Activity-Based Measures. Management Accounting Quarterly. 8. 1, 1-10. Van D M, Anton, Keys and David. (2002). The Case for Resource Consumption Accounting. Strategic Finance. 83. 10, 31-37. Wilson R. M. S., (1995), Strategic Management Accounting, in Ashton et al (eds), Issues in Management Accounting, 2nd edition, PHI Englewood Cliffs (NJ). Zeller, Thomas, Kublank, David, and Makris. (2001). How art.com uses ABC to Succeed,.Strategic Finance. 82. 9, 24-31.

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