Strategic Management Accounting: the reasons for the lower than expected profits of Manac Plc - Essay Example

?Strategic Management Accounting Table of Contents Table of Contents 2 Introduction 3 Standard Costing & Absorption Costing 4 Models & Concepts Affecting Pricing Decisions 5 Transfer Pricing Strategy 6 Cost-Plus Pricing Strategy 7 Parity Pricing Strategy 7 Second Market Pricing Strategy 8 Low Price Supplier Strategy 9 Complementary Product Pricing 9 The Role of Standard Costing & Variance Analysis in Management Accounting 10 Importance & Limitations of Variance Analysis 11 Advantages and Disadvantage of Activity Based Costing System Instead of Absorption Costing System 11 Conclusion 13 References 14 Introduction Strategic Management Accounting (SMA) refers to the prerequisites and the investigation of facts related to management accounting regarding a particular business along with its contenders. This form of accounting proves to be greatly advantageous as it helps in the formulation and the examination of the business related strategy. For quite several years, the concept of SMA was supported to be a prospective field of growth which was capable of improving the upcoming contribution towards the management accounting. SMA was defined to be the condition of factual information for the reason of encouraging strategic decisions taken in an organisation (Collier, 2003). With regard to this particular decision, it could be stated that the condition relating to the nature of the information which encourages the vital decisions that contributes towards the long-term success of an organisation could be stated to be the function of SMA. The vital decisions entail the implementation of costing information which is activity-based with the objective of offering data associated with the product mix and the introduction as well as rejection of decisions. It has been also stated that the methods related to strategic accounting were structured to provide encouragement to the competitive strategy related to an organisation on the whole. In this study, the reasons for the lower than expected profits of Manac Plc would analysed with the help of models and concepts affecting pricing decisions (Drury, 2007). Standard Costing & Absorption Costing Standard costing has been referred to be a tool of management which is put to use by the organisations for enhancing numerous chief management processes. The chief processes related to management include comprehending and ascertaining the unit costs for products, determining the costs as well as prices, accounting incomes, anticipated earnings or inputs and costs, preparing a structure for resource contributions like direct labour and direct materials and managing the discrepancies related to performance. There are various steps involved in the process of standard costing. The process initially ascertains the standard unit costs. This is attained with the help of evaluating extensively the contributions and the methods that are considered to be necessary for the production of a single unit (Vallely, 2011). Standard costing even aids in ascertaining the sales price for each individual unit. It assists in setting up financial plans for usually a year and these plans are then generally divided into further shorter plans. This helps in managing the financial plans efficiently. It takes into concern the real expenditures and the earnings for every individual management cycle for the short-term. It structures a statement related to the operations which merges the real and the planned expenses or incomes for each year. The identified differences are then reported to be variances. After the identification of the variances, the causes triggering the incidence of noteworthy variances are being assessed. This facilitates in recognising and finding a solution for management behaviours considered necessary for the rectification of the unfavourable variances and at the same time heighten the positive variances. After this endeavours are made for the reason of applying and checking the consequences related to the management behaviours (Vallely, 2011). Absorption Costing is based on the fact that the complete expenses related to the manufacturing of the product that is the variable as well as the fixed expenses needs to be attached to the prices of the products (Lal & Srivastava, 2008). These expenses are later coordinated with the proceeds generated from the sales during the period of selling goods (Vanderbeck, 2009). The principles associated with the form of absorption costing require to be applied at the time of structuring financial statements which are made for external reasons (Hoare, 2011). Models & Concepts Affecting Pricing Decisions The pricing decisions undertaken by an organisation has been considered to pose a direct consequence on the income generated from the business operations and thus has been always considered to be of vital importance. Irrespective of the product as well as the industry, a price that is appropriately developed facilitates an organisation to explicitly take into concern the worth represented in their respective products. This further helps the organisation to create a competitive edge for itself in the given market. The decisions related to pricing have been stated to be quite complicated and frequently tentative owing to the doubts related to the present altering environment. Fast alterations in the field of information systems, abundance of product varieties and technological progress have been attributed to be some of the factors that are taken into concern while building pricing strategies (Forman & Hunt). It needs to be mentioned in this context that the degree of complication has been believed to increase further in instances when endeavours are made to build pricing strategies by the managers based on an international perspective. With the intention of functioning in numerous markets, the international organisations have been observed to deal with an increased degree of complication and a collection of active environmental emergencies. This particular collection tends to amplify the difficulty related to uncertainty of decisions for the managers. It is required to mention in this regard that there are certain models as well as concepts or rather strategies which influence the pricing decisions of the organisations. The various models and concepts of pricing strategies have been discussed below (Forman & Hunt). Transfer Pricing Strategy Transfer Pricing Strategy has been stated to be the kind of strategy that is adopted when the Multinational Corporations (MNCs) intend to sell their goods to their own respective branches existing in various countries. The transfer prices have been stated to differ among the branches or rather the divisions on the basis of variables, for instance, the rates of taxes. This implies that an increased rate of income tax in the MNCs home country would mean reduced transfer prices originating from the actual or parent country to their respective foreign divisions. The market prices are believed to be demanded in a condition when the rates of taxation are perceived to be not much positive with regard to the receiving branches. The concept of transfer pricing has been expected to be adopted when its application would be favourably associated with their dependency on the internal elements related to decision making with regard to establishing prices (Forman & Hunt). Cost-Plus Pricing Strategy Cost-Plus Pricing Strategy has been referred to be the most common form of pricing concept that is extensively used. This kind of pricing plan has been considered to be quite significant in ascertaining the prices for industrial products that are intended to be exported, particularly in such situations when organisations start exporting for the reason of protecting against the vagueness associated with the market. Therefore, at the time of penetrating the market of the other countries initially, it becomes simple to set the price on the basis of the presently available precise information and internal data related to cost. The adoption of the pricing plan based on cost is done by the managers for the purpose of keeping away from risks. Therefore, it could be referred that this concept would be applied in an instance when the expenses associated with the collection of information regarding the requirements of the market go beyond the revenue earned with the help of the profits reaped from this particular pricing approach. This specific approach or pricing plan has been observed to take into consideration the supply aspect rather than the demand one. The implementation or application of this kind of a pricing plan has been stated to be favourably associated with the dependency on the internal aspects related to the process of taking decisions regarding determining the prices (Forman & Hunt). Parity Pricing Strategy Parity Pricing Strategy is undertaken by an organisation while ascertaining the prices for its products in such a range which would appear to be suitable and would be acknowledged by the majority of the purchasers. The concept of parity pricing is believed to be implemented by such organisations which suffer from a decreased market share as well as a lesser degree of control on the industry it operates in. Organisations favouring this concept do so instead of demanding a higher amount of price for the reason of fearing that the competitors of the organisations could attain a noteworthy benefit in terms of quantity sales as well as witness savings in expenses. This kind of a pricing concept adopted by the managers would depict a favourable association of the plan with the dependency on the external aspects related to taking decisions regarding determining prices (Forman & Hunt). Second Market Pricing Strategy The concept of ‘second market pricing’ has been referred to as a plan where various prices are demanded on the basis of different international markets. This particular concept has been considered to be feasible in a condition when degree of difference of the price among the various markets has been observed not to surpass the transaction expenses related to product arbitraging from a specific market to the other. Therefore, owing to this reason this concept of pricing needs to be implemented with prudence. In case the prevailing disparities in the prices between the various markets are observed to be quite high then there develops a chance of emergence of other parallel markets. The rise of such corresponding markets would not prove to be advantageous as this would bring down the overall profitability factor. The adoption and the application of this kind of a pricing plan by the managers would imply a favourable association of this plan with the dependency on the external aspects of taking decisions regarding determining prices (Forman & Hunt). Low Price Supplier Strategy Organisations adopting and implementing low price supplier strategy has been believed to be inclined to take on one amongst the stated generic strategies by Michael Porter. In order to determine the efficacy of this concept of pricing, certain conditions need to be in the expected order. The initial condition implies that the suppliers providing at less prices requires to be present in such a market where the alterations in the prices could not be easily tracked by the other competitors. Secondly, such suppliers need to hold such places in the market which would prevent the competitors from successfully striking back against those suppliers. For instance, the competence of a particular competitor to strike back would become restricted if the organisation has been already manufacturing to its utmost capacity and does not command a position where it can boost its existing capacity. Thirdly, the enthusiasm or intention of striking back by the competitors needs to be low. In certain instances, the chances of striking back have been observed to be limited with the help of governmental regulations (Forman & Hunt). Complementary Product Pricing Complementary Product Pricing has been considered to be quite suitable for those products whose costs related to switching are perceived to be comparatively high. The stimulus for organisations to adopt this concept is to improve the engagement of the customers with the unique product to an extent which would trigger the probability of buying of the products as well as the supplies in increased numbers. This enables the organisations to earn higher amount of profits quite frequently. Thus, the benefit associated with organisations adopting this kind of a concept of pricing is that with the help of demanding a decreased amount of price in case of the fundamental products, they comprehend the advantages of higher amount of profits with the help of selling complementary products as well as supplies (Forman & Hunt). The Role of Standard Costing & Variance Analysis in Management Accounting Information or details related to accounting has been considered to be of immense use for an organisation and particularly for its management. It facilitates the management of the particular organisation to come to decisions and also proves to be useful in the process of effective assessment of planning, performance and control. Information related to accounting is believed to be advantageous as it facilitates to ascertain the level of profit, evaluation of the influence or effect of expenses in case of drop in the volume of sales, determining the production efficiency, gauging the segment wise performance and developing gauging methods related to performance for the reason of supporting the employees to contribute towards the success of the organisation (Sivakumar, 2009). All the above mentioned objectives could be attained only with the implementation of a proper system of accounting including an effectual method of standard costing. Implementing the method of standard costing would prove to be advantageous in the process of planning as well as control. While planning, this system of accounting would make available the required information to the management and in the control phase, it would assist in identifying the divergences among the definite compared to the specifications. The calculation and gauging of such divergences would be conducted with the help of variance analysis (Sivakumar, 2009). Importance & Limitations of Variance Analysis Variance analysis has been considered to be quite important for organisations as it helps in recognising the divergences between the estimated or the expected performance and the actual or real performance. This helps an organisation to alter its decisions or plans taking into concern the variances (Sivakumar, 2009). Variance analysis helps an organisation to calculate the divergences and provide reasons for such divergences between the planned and the actual performances on the basis of rate, mix, volume and use. However, it needs to be stated in this context that apart from identifying the divergences it lacks in providing an understanding of the reason of such a divergence by an organisational unit (Young, 2004). The analysis also lacks in determining the significance of the divergence and also offers details regarding the performance that are considered to be highly cumulative which at times prevents from deriving the actual inferences (Anthony & Govindarajan, 2008). Advantages and Disadvantage of Activity Based Costing System Instead of Absorption Costing System The activity based costing system (ABC) has been observed to provide more precise details regarding the costs in an organisation which enables it to take better decisions compared to the absorption costing system. The ABC system facilitates the management of an organisation to come to better decisions in the fields of product line alterations, product pricing and decisions regarding the mix of the product. ABC needs to recognise the activities engaged in the process of production and allocates cost to such activities. This facilitates the management to have an enhanced perception regarding the activities and the costs associated with each. Managers are provided with the advantage of concentrating on enhancing the efficiency with regard to the expensive activities and help them to bring down those costs (Heisinger, 2009). However, the introduction of the ABC system could prove to be expensive to implement. This system also calls for the need of teamwork within the organisation implying that employees would require taking out some time for the reason of helping in the process of ABC. This system also demands quite an amount of time from the accounts department. The expenses related to accounting that would be acquired with the application of this system would prove to be quite high. This system entails the need of unitising the fixed expenses which at times could be deceptive as the fixed expenses are considered to be a huge part related to the overhead expenses (Heisinger, 2009). Conclusion The various concepts that are capable of affecting the pricing decisions in an organisation have been discussed in this study. This discussion would help Manac Plc to select the pricing concept that is best suited for them. The concepts of standard costing and absorption costing have also been discussed along with their importance in an organisation. The significance of standard costing and variance analysis has also been identified which would help the organisation to understand the limitation of the processes in identifying the chief and the vital areas that contribute towards the overall profitability of the organisation. The advantages as well as the disadvantages of introducing a new form of costing system that is the ABC system in comparison to the absorption costing system has also been discussed. This would help the organisation to understand the need and the importance of the new system and the way it would enhance the efficiency of the production process of the organisation. Understanding the importance of the new system would facilitate the organisation to implement this system for the reason of boosting the profitability factor. Therefore, all these issues would assist the considered organisation to identify the reasons behind the decreasing profitability and enable the organisation to enhance it. References Anthony, R. N. & Govindarajan, V., 2008. Management Control Systems. Tata McGraw-Hill Education. Collier, P. M., 2003. Accounting for Managers: Interpreting Accounting Information for Decision-Making. John Wiley and Sons. Drury, C., 2007. Management and Cost Accounting. Cengage Learning EMEA. Forman, H. & Hunt, J. M., 2004. Managing the Influence of Internal and External Determinants on International Industrial Pricing Strategies. Industrial Marketing Management, pp. 133-146. Heisinger, K., 2009. Essentials of Managerial Accounting. Cengage Learning. Hoare, R., 2011. Absorption Costing V’s Marginal Costing. Certified Public Accountants, pp. 1-4. Lal, J. & Srivastava, S., 2008. Cost Accounting. Tata McGraw-Hill Education. Sivakumar, R., 2009. Standard Costing & Variance Analysis. Prime Academy. Vallely, B., 2011. Standard Costing-Objectives and Application. Certified Public Accountants, pp. 1-5. Vanderbeck, E. J., 2009. Principles of Cost Accounting. Cengage Learning. Young, D. W., 2004. Techniques of Management Accounting. Tata McGraw-Hill Education. Read More