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The requirement of report to understand the problems faced by Manac plc for achieving the objective of estimated profit. This is a serious situation where management of Manac plc should understand and analyze the key strategic management accounting models and concepts; which may affect to decisions made with regard to products' cost and price, in which the significant issue is price; it must be ashore by the characteristics of the market and customers; you choose to serve. Manac plc. Presently uses traditional management accounting concepts such as standard costing and absorption costing methods as a part of its approach to strategic management accounting. The reasons for the company not to achieve target budgeted profit may be that products have not been priced accurately as well as the variances with regard to sales, material cost, labor cost, other variable cost and fixed over head cost have been occurred. The purpose of this report is to how the manac plc will increase the profit but it is quite difficult. In this aspect, the purpose of this report is to define and explain all the concept of manac plc company which is the most important part for company business and also cost and price of the product's. According to this paper there should take care of all variable and concept which is very important. the manac plc report covering parts in this analysis.
An analysis of models and concepts affecting the pricing decision taken by the company.
The role of standard costing and variance analysis in management accounting.
The advantages and disadvantages of introducing an Activity Based Costing system to replace the current Absorption Costing system
The setting of a price for a product is one of the most important decisions. A change in price not only directly affects revenue
but has major consequences on other decisions. If price is lowered, for example,
then sales is most likely to increase. Therefore, additional production is needed with
all its attendant requirements concerning material, labor and overhead. Any student
who has completed a course in principles of economics understands that the theory
of price is at the center of economic thought.
In management accounting, the analysis of price is not as nearly complex or
mathematically sophisticated as in economic theory. The assumptions in management
accounting are much simpler and more practical oriented.
The focus of this chapter will be on the following:
1. Review of some basic economic fundamentals
2. Pricing using cost-volume-profit analysis
3. The special offer decision
Manac plc' main objective is to earn profits. To stay in the business a company 's management wants to increase profitability , thus it is important to determine how their decisions will affect profits . Profits depend on several factors , including selling prices , volume , and costs
The two basic components that affect product pricing are costs of manufacture and competition in selling. Pricing decisions must take into consideration various factors such as the production cost , selling or marketing cost , and administrative cost . In addition , companies must also take into account the selling price other competitors are offering for the same product
Pricing decision is decisive and complicated if the prices of our goods are set too high, customers will not buy our product and will choose the products of other companies instead. But if the prices are set too low, our cost will not be covered and thus we will be losing money. The problem the company has now may be attributed to pricing decision, so firstly I will introduce two decision making models along with a wide range of concepts concerning pricing decisions.
When making pricing decisions, many factors have to be taken into consideration. Basic economic concepts provide an important foundation for fundamental pricing strategies.
When making pricing decisions, many factors have to be taken into consideration. Basic economic concepts provide an important foundation for fundamental pricing strategies. Then some certain psychological price concepts should be taken into consideration. At last , the decision maker should understand the mechanics of making pricing calculations.
Pricing Decision Analysis
Problem lies on the deviation between target profits and selling price, it varies as the increase of sales and decrease of sales volume. Thus, carrying out correct pricing decisions are of vital importance. For Manac operates product manufacturing and sales, it is as a character of a price setter. Common factors such as cost information, product quantity, and period of selling product.
The manac plc Managers should start setting prices during the development stage as part of strategic pricing to avoid launching products or services that cannot sustain profitable prices in the market. This approach to pricing enables companies to either fit costs to prices or scrap products or services that cannot be generated cost-effectively. Through systematic pricing policies and strategies, the manac plc can reap greater profits and increase or defend their market shares. pricing policy will refers how a the manac plc sets the prices of its products and services based on costs, value, demand, and competition. Pricing strategy, and as well, refers to uses pricing to achieve its strategic goals, such as offering lower prices to increase sales volume or higher prices to decrease backlog.
The following sections explain various ways manac plc develop pricing policy and strategy.
Cost Based Pricing
The traditional pricing policy can be summarized by the formula:
Cost + Fixed profit percentage = Selling price.
Cost-based pricing involves the determination of all fixed and variable costs associated with a product or service. After the total costs attributable to the product or service have been determined, managers add a desired profit margin to each unit. The goal of the cost-oriented approach is to cover all costs incurred in producing or delivering products or services and to achieve a targeted level of profit for manac plc.
Value Based Pricing
This approach calls for manac plc managers to query customers and research the market to determine how much they value a product or service. In addition, managers must compare their products or services with those of their competitors to identify their value advantages and disadvantages.
Yet, value-based pricing is not just creating customer satisfaction or making sales because customer satisfaction. This approach to pricing also depends heavily on strong advertising for manac plc. especially for new products or services, in order to communicate the value of products or services to customers and to motivate customers to pay more if necessary for the value provided by these products or services.
Demand Based Pricing
Manac plc Managers will adopt demand-based pricing policies are, like value price's, not fully concerned with costs. Instead, they concentrate on the behavior and characteristics of customers and the quality and characteristics of their products or services. Demand-oriented pricing focuses on the level of demand for a product or service, not on the cost of materials, labor.
According to this pricing policy, the manac plc managers try to determine the amount of products or services they can sell at different prices. The prices are determined by considering the cost estimates at different sales levels and expected revenues from sales volumes associated with projected prices.
The success of this strategy depends on the reliability of demand estimates. Two common options managers have for obtaining accurate estimates are enlisting the help from either sales representatives or market experts. Managers frequently ask sales representatives to estimate increases or decreases in demand stemming from specific increases or decreases in a product or service's price, since sales representatives generally are attuned to market trends and customer demands.
Competition Based Pricing
With a competition-based pricing policy, a company sets its prices by determining what other companies competing in the market charge. A company begins developing competition-based prices by identifying its present competitors. Next, a company assesses its own product or service. After this step, a company sets it prices higher than, lower than, or on par with the competitors based on the advantages and disadvantages of a company's product or service as well as on the expected response by competitors to the set price.
Cost plus mark-up pricing
Cost-plus pricing is a pricing method used by companies to maximize their rate of returns.
The firm accomplish their objective of profit maximization by increasing their production until marginal revenue equals marginal cost, and then charging a price which is determined by the demand curve. However, in practice, most firms use cost-plus pricing, also known as markup pricing. There are several varieties, but the common thread is that one first calculates the cost of the product, then adds a proportion of it as markup. Basically, this approach sets prices that cover the cost of production and provide enough profit margin to the firm to earn its target rate of return. It is a way for companies to calculate how much profit they will make. Cost-plus pricing is often used on government contracts (cost-plus contracts), and has been criticized as promoting wasteful expenditures in the form of direct costs, indirect costs, and fixed costs whether related to the production and sale of the product or service or not. These costs are converted to per unit costs for the product and then a predetermined percentage of these costs is added to provide a profit margin.
Cost-plus pricing is used primarily because it is easy to calculate and requires little information. Information on demand and costs is not easily available, managers have limited knowledge as far as demand and costs are concerned. This additional information is necessary to generate accurate estimates of marginal costs and revenues. However, the process of obtaining this additional information is expensive. Therefore, cost-plus pricing is often considered the most rational approach in maximizing profits. This approach relies on arbitrary costs and arbitrary markups.
This method is one of the major methods used in pricing. Mark up on cost covers all non product costs such as, labor, utilities, supplies, interest expense etc.
Cost-volume-profit (CVP), It is a simplified model, useful for elementary instruction and for short-run decisions.
CVP analysis expands the use of information provided by breakeven analysis. A critical part of CVP analysis is the point where total revenues equal total costs (both fixed and variable costs). At this break-even point, a company will experience no income or loss. This break-even point can be an initial examination that precedes more detailed CVP analysis.
CVP analysis employs the same basic assumptions as in breakeven analysis. The assumptions underlying CVP analysis are:
The behavior of both costs and revenues is linear throughout the relevant range of activity. (This assumption precludes the concept of volume discounts on either purchased materials or sales.)
Costs can be classified accurately as either fixed or variable.
Changes in activity are the only factors that affect costs.
All units produced are sold (there is no ending finished goods inventory).
When a company sells more than one type of product, the sales mix (the ratio of each product to total sales) will remain constant. In the we found that :
Price increases are not usually a pleasant event for the company that makes them - no one wants to tell their clients that they are going to have to pay more money for their products. Manac plc. Only increase its product price when its products are underpriced from the competitor's price, but situation is apposite.
Only distinctive edge can be achieved by lowering its expenses and cost of production, increase in efficiency and mainly to adopt a comprehensive cost system.
The second way is to get new work. By adding new product line of production and can set target rate of return pricing and by sustaining running products by Cost-plus pricing model.
[Baker, Michael John (2001). Marketing: Critical Perspectives on Business and Management. Taylor & Francis. Pp. 237. ISBN 0-415-24988-0]
According to the standard cost the manac plc should be believe to produce goods and services Under some rules and conditions the purpose of this system to comparison between the standard Cost and actual cost which will be the primary benefit, further more;
The planned unit cost of the product, component or service produced in a period. The standard cost may be determined on a number of bases. The main use of standard costs is in performance measurement, control, stock valuation and in the establishment of selling prices. Standard costs are usually associated with a manufacturing company's costs of direct material, direct labor, and manufacturing overhead.
This is generally best suited to organisations with repetitive activities. It is probably most relevant to manufacturing organisations with repetitive production processes. Standard costing cannot be applied easily to non-repetitive activities because there is no clear basis for observing and recording operations. It is difficult to determine a clear standard.
[598 A Textbook of Financial C~st and Management Accounting]
Advantages of standard cost
The following are the important advantages of standard costing :
It guides the management to evaluate the production performance.
It helps the management in fixing standards.
Standard costing is useful in formulating production planning and price policies.
It guides as a measuring rod for determination of variances.
It facilitates eliminating inefficiencies by taking corrective measures.
It acts as an effective tool of cost control.
It helps the management in taking important decisions.
It facilitates the principle of "Management by Exception."
Effective cost reporting system is possible.
Limitations of Standard Costing
Besides all the benefits derived from this system, it has a number of limitations which are given below:
Standard costing is expensive and a small concern may not meet the cost.
Due to lack of technical aspects, it is difficult to establish standards.
Standard costing cannot be applied in the case of a- concern where non- standardized products are produced.
Fixing of responsibility is 'difficult. Responsibility cannot be fixed in the case of uncontrollable variances.
Frequent revision is required while insufficient staff is incapable of operating this system.
Adverse psychological effects and frequent technological changes will not be suitable for standard costing system.
Variance analysis is the process of computing the differences between standard costs and actual costs and identifying the causes of those differences. In other words The evaluation of performance by means of variances, whose timely reporting should maximize the opportunity for managerial action.
Manac plc should also analysis of standard cost between the original cost because that is the important part of the company to reduce the expense or losses and gain the profit. An analysis of the difference between a standard cost and actual cost is called variance analysis there are some components.
Standard Costing guides as a measuring rod to the management for determination of "Variances" in order to evaluate the production performance. The term "Variances" may be defined as the difference between Standard Cost and actual cost for each element of cost incurred during a particular period. The term "Variance Analysis" may be defined as the process of analyzing variance by subdividing the total variance in such a way that management can assign responsibility for off-Standard Performance. The variance may be favorable variance or unfavorable variance. When the actual performance is better than the Standard, it presents "Favorable Variance." Similarly, where actual performance is below the standard it is called as "Unfavorable Variance."
Variance analysis helps to fix the responsibility so that management can ascertain -
(a) The amount of the variance
(b) The reasons for the difference between the actual performance and budgeted performance
(c) The person responsible for poor performance
(d) Remedial actions to be taken
For this need material price and materials quantity variance.
For this need labor rate (price) and labor efficiency (quantity) variance.
For this need over head volume variance and controllable overhead variance.
Value and Limitations ofÂ Standard CostingÂ andÂ Variance Analysis
Timely, frequent reports that are approximately correct are better than infrequent reports that are very precise but out of date by the time they are released.
If variances are used as a club, subordinates may be tempted to cover up unfavorable variances or take actions that are not in the best interest of the company to make sure the variance are favorable.
For the development of the company in good manners the labor quantity I the most important part and also the efficiency variance which is the part of production process is labor placed and the other is computation assume that labor is a variable cost.
In some cases a favorable variance can be as bad or worse than an unfavorable variance.
There may be a tendency with standard cost reporting system to emphasize meeting the standards to the exclusion of other important objectives such as maintain and improving quality on time delivery and customer satisfaction.
To survive in the current competitive environment, for this reason the manac plc should focus on the trends in the standard cost variances aiming for continual improvement rather than just meeting the standards.
Activity-based costing (ABC) is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) into direct costs compared to conventional costing models.
Although (ABC) has some limitations, Applicability of ABC is bound to cost of required data capture. That drives the prevalence to slow processes in services and administrations, where staff time consumed per task defines a dominant portion of cost. Hence the reported application for production tasks do not appear as a favorized scenario.
Advantages And Disadvantages
In the field of accounting, activity-based costing and traditional costing are two different methods for allocating indirect (overhead) costs to products.
Both methods estimate overhead costs related to production and then assign these costs to products based on a cost-driver rate. The differences are in the accuracy and complexity of the two methods. Traditional costing is more simplistic and less accurate than ABC, and typically assigns overhead costs to products based on an arbitrary average rate. ABC is more complex and more accurate than traditional costing. This method first assigns indirect costs to activities and then assigns the costs to products based on the products' usage of the activities.
Activity based costing systems are more accurate than traditional costing systems because they provide a more precise breakdown of indirect costs. However, ABC systems are more complex and more costly to implement. The leap from traditional costing to activity based costing is difficult.
Traditional costing systems are simpler and easier to implement than ABC systems. However, traditional costing systems are not as accurate as ABC systems. Traditional costing systems can also result in significant under-costing and over-costing.
[Kaplan, Robert S. and Bruns, W. Accounting and Management: A Field Study Perspective (Harvard Business School Press, 1987) ISBN 0-87584-186-4]
At the same time as activity based costing is not a perfect science it does offer a sense of financial pragmatism to the wider management process. The initial premise that activity analysis can highlight waste (non-value adding) and bureaucracy (secondary or support activities), activity based techniques have been used for straightforward cost reduction, process improvement and re-engineering, benchmarking, performance measurement and a variety of related exercises including activity or priority based budgeting.
The three generations of activity based costing supplement and complement each other and one system should not be considered the replacement of either of the other two. The first generation focuses on product costing, the second generation on process costing or performance evaluation, and the third generation on value chain costing to be used in strategic analysis. All three use the same activities database; differences lie in types of linkage and the extent to which data on activities are to be gathered.
Activity based costing forces the manager to investigate fixed costs very closely. It therefore helps management to identify areas of inefficiency as well as recognize costs which we could have been conceived fixed but, which are in fact, variable or semi-variable to specific products.