Product costing and pricing and Debenham plc

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Debenhams plc was preliminary formed in 1778 as single store, later on it has been re-organized by the time to time and currently the company has established over 167 stores around the world.

Debenhams plc has offered list of products to their customer around the world like women wear, kids wear, men wear, home accessories, health care and own labeled products and renowned brands.[2]

Requirement. a(ii)

The followings are important information which would aid the manager's performance in the routine business.

Day to day operational control .

Product costing and pricing.

Planning and decision making.

Monitoring the performance of the business.

Building and maintaining a competitive advantage.

Day to day operational control .

Managers of the Debenhams plc should know about all products offering with their usage and arising for their consumers.

The managers of Debenhams plc should know the policy/procedures about the inventory management that how to maintain the balanced inventory levels in outlets of Debenhams plc to meet the customer's requirements timely effectively.

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The managers should know about consumer's demand product-wise or lebel-wise to take decision regarding investment on product which could generate profit efficiently.

Product Costing/Pricing .

Product cost and pricing is placed in important area for the success of the business and current economic scenario due to increase in oil prices around the world and increase of cost of capital.

The managers of Debenhams plc may also familiar about costing of product in line of action that what was the purchase price of the product along with associated cost like ordering cost, transaction cost, and carrying cost etc.

No doubt demand and supply is the main tool for the price setting of any product but, costing is the fundamental source for setting price of the product.

Basically, costing and pricing area is not on the portfolio of lower managers of the company, it is on the portfolio of the higher management but basic grounds are prepared by the lower managers of the company for higher management decision makers.

Planning and Decision Making.

Planning is primary function of the management; all decision depends on planning, so managers of the Debenhams plc may also know how to plan to achieve the target of the company timely. Effective planning and decision making is life blood of any company.

Monitoring the business performance.

Managers of Debenhams plc should monitor the business transaction at each level to find out the performance of the company toward set goals for future.

Building and Maintaining a competitive advantage.

Managers can maintain the performance of the business at own level for the competitive advantage of Debenhams plc.

One suitable costing method and three suitable non-costing management accounting methods/techniques are as follows:-

Make or Buy Decision

Through the costing method/technique of make or buy, the Debenhams plc can workout the cost of own bought, private label product by manufacturing at own factory at own sources then compare it with cost of buy decide which method is to be beneficial for company.

Non-costing management accounting technique.

Trend Analysis.

Working Capital Management .

Sale Mix Variance.

Requirement. b

We apply the costing and non-costing into the Debenhams plc:

Costing Method/Technique

Make or Buy Decision effects on Business

Currently, the Debenhams plc is trading on retail products at 100% volume, e.g sales of 80.2% depends upon private labeled products and approx 19% of sales comprised of concessions products.

The Debenhams plc is paying major, portion of their investment on private labeled products. The technique is helpful for the management to critically analyze the saving on investment or loss on investments.

Major portion of Debenhams plc sale depends on own bought sale labeled products this can be opted for management either there is beneficial for the business to establish its own manufacturing setup.

Non-costing management accounting technique.

Trend Analysis

We can elaborate the trend analysis by common size and index analysis into financial statement results of the Debenhams plc.

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Common Size Analysis: An analysis of percentage financial statements where all balance sheet items are divided by total assets and all income statement items are divided by net sales.

Index Analysis: Index analysis of percentage of financial statements where all balance sheet are income statement figure for the base year equal 100 and subsequent financial statement items are expressed as % of their values in the base year.

Working Capital Management

The prime objective of working capital management is to get the balance of current assets and current liabilities right. This is the trade- off between cash flow versus profit. The trade-off between liquidity and profitability and its role in determining a business overall investment in working capital is fundamental. Working capital management leads to balance the level of inventory in the business, it is essential to reduce the inventory levels for two fundamental purposes.

Liquidity: To reduce inventory to lowest possible amount to minimize the level of capital employed to be funded.

Profitability: Ensuring that sufficient inventory is held so that it does not run out and disrupt business.

Keeping inventory level high is expensive owing to :

Purchase cost.

Holding cost.

Storage cost.

Store administration.

Risk of theft.

Sales Mix Variance.

Sale Mix is the essential view to be believed; firstly it is important to know about product wise sale volume to calculate percentage sale of one product/item of the total sales and to compare/analyse sales of each product monthly or weekly for measurement decision accordingly. [3]

Variance- Sales Mix: Sales variance is the variation between the actual sales and the estimated sales, it is used to measure the performance of a sales function actual sales can vary from planned sales.

Sales Mix: The means of sales mix is the reflection of product and the financial management. Sale mix variation can cause of change in consumer demand, which is supportive for the development of new product. It can also support to describe how a product revenue can increase or decrease.

In order to determine the current sales mix, there is need to know the sale for all major/main products, and then calculate the percentage mix. Divide the sales for each product by the total sales.

Requirement. c

The benefits of identified methods/techniques are as follows:

Make or Buy Decision

The benefits of the make or buy decision for the business of Debenhams plc are as follows:

Proposal: The management can replace private label product by the setting the management setup, by the setting up new manufacturing concern the following advantage can be obtained.

Job Creation: No doubt in current economic scenario outsourcing is better than self manufacturing. However, manufacturing setup can generate jobs for the society in this way this can help in corporate social responsibility.

Loan Period: As the loan to Debenhams plc has already been set-off in major portion that why debt facility can be taken for establishment of manufacturing set-up/industry.

Profitability: By establishing of manufacturing setup the profitability of business concern can be raised due to reduction in paying to third party in retailing. Extra cost can be saved which were to be paid.

Quality Assurance: Can be obtained by making self quality control. In own manufacturing concern tight quality control can be maintained.

Trend Analysis

Trend analysis plays as functional testing tool

Trend analysis enables the business to take critical decisions on mergers and acquisitions as well as the ability to develop association and to develop new businesses.

Trend analysis allows management to develop competitive strategies.

Risk of business can be better managed.

Internal and external users can applied trend analysis to determine weakness and strengths.

Working Capital Management

Under the working capital management the following areas are covered.

Inventory Management

Accounts Receivable Management

Cash Flow Management

Inventory Management

The objective of inventory management is to reduce inventory to the lowest possible amount to minimize the level of capital employed to be funded.

Ensuring that sufficient inventory is to hold, so that it does not run out and disrupt the business, so inventory management balancing act between liquidity and profitability, the Debenhams plc by implying inventory management can increase liquidity and profitability at the same time.

Accounts Receivable Management

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Management can establish a credit policy. The optimum level of trade credit extended represents a balance b/f two factors.

Profit improvement from sales obtained by allowing credit.

The cost of credit allowed.

Accounts receivable management is the balancing act between and profitability.

Cash Flow Management

The ability of management is to pay bills as they fall due and take advantage of opportunity minimizing the holding of cash and to invest idle cash into better opportunity. [4]

Conclusion

As we have discussed already management's method/technique to boost up the manager's efficiency for the organization these are beneficial for the business by proper/tight working capital management which can increase profitability and do the best for liquidation position of the company.

By the increase in profitability the EPS of the firm would also be in better position thus the shareholder's wealth would be maximized.

Working capital management gives the incentives for test utilization of cash in other areas.

Trend analysis would be used best in analysis of product wise sale and can make comparison of month wise sale for each product. [5]

Requirement. d

As we have earlier described the management accounting technique which can have limitation while implementation or applications in business activities.

Make or Buy Decision

The objectives of make or buy decision should be used in the best utilization a firm's productive and financial resources. Basically make or buy decision removes limitation for selecting the best

selected alternatives. Make or buy now a day one of the decisive technique is used to take long term objective of the company. Make or buy is the only cost saving decision.

Thus, we can recommend this best management technique which has fool proof and free from any flaw, it should be practiced wisely to attain the objectives of business and do the best for wealth of the shareholders. [6]

Limitation of Trend Analysis

Trend analysis requires getting input data continuously, industry requires a support with environment, and trend analysis has to set grounds for data on daily weekly and on monthly basis to conduct common size or index analysis. Modification of data is perquisite to put up for trend analysis.

Trend analysis can be effectively applied where the user has to be well known about statistical techniques.

Trend analysis can compare a firm's financial ratio over the time, there is need of careful interpretation of segment of financial statements and having the required knowledge is mandatory to do the needful the user of financial statement should also have knowledge about the industry trend changes economy changes and other related issues.

Limitation of Working Capital Limitation

When a firm faces excess working capital it means they have idle funds and their profit may decline and cannot enjoy appropriate rate of return on their investment. These are following areas in which working capital may face limitations:

Bad Debts: may occur in huge amount due to increase in debtors and poor credit policy.

Working capital cause of sufficient funds due to which they have limited relations with banks and other financial institutions.

When a firm has low rate of return they face the value of share may also decline.

Limitation of Sale Mix Variance

Sale mix variance can be used in order to view the sale trend of products for period to period. Sale mix can show variation in sale prospects of the products, however there are number of variation can be seen in given period.

Adversely impact on the effectiveness of the method/technique.

By making a product other areas of company may be affected when outsourcing was in execution the Debenhams plc's management has to focus other core areas of the business activities.

In other words, when Debenhams plc has taken decision about Make or Buy, the loan can be taken to establish the manufacturing setup that priority of the business can be diverted to make repayment of loans.

The success of any organization depends upon to exercise management tools such as controlling and taking timely decisions. By exercising the above stated technique can adversely affected due to lack of time that the management may have.