Strategic Management Accounting - Coursework Example

Abstract Businesses have to look towards determining the correct cost so that the correct prices can be determined as it will increase the chance of the product or services being accepted by the consumer. The different models and techniques presents the different methods through which correct cost can be estimated. This requires that organization look towards using a method where they determine the cost based on standard costing method and look towards identifying the variances. Incorporating the variance will help to reduce the gaps and ensure that the business is able to estimate the profits correctly. In addition to it using Activity Based Costing will ensure better determination of the cost which will thereby ensure that the business is able to determine the correct price and ensure proper mechanism in estimating cost. Table of Contents Introduction 3 Pricing Decisions 3 Usefulness of Pricing Decisions 4 Standard Costing & Variance Analysis 6 Limitations of Variance Analysis 7 Activity Based Costing 8 Difference between Activity Based Costing & Absorption Costing 9 Advantages & Disadvantages of Activity Based Costing 11 Conclusion 13 References 15 Appendix 16 Introduction Organizations in this competitive world have to look towards adopting corrective strategies associated with pricing and cost estimation. This are the basic requirements as being able to ensure the cost correctly will ensure that the business is able to charge a correct price which includes the profits that the business wants to make. This will also correspond towards developing a system through which the business will be able to identify the different inputs based on which the price and cost has to be estimated. This will help to ensure that the price matches the competitor and will help in correct estimation of the prices. This paper thereby looks towards presenting the manner in which the different models and concepts are used in determining the pricing strategy and the importance it has; the manner in which standard costing and variance costing has an effect on the cost estimation method and their contribution in determining the profits and; lastly it looks towards comparing activity based costing with absorption costing so that the business is able to find out the manner in which the costing method proves beneficial for the business. This thereby ensures that the paper presents a complete framework based on which the manner in which different costing method helps to understand the manner in which the business will be able to grow and ensure productivity is provided. Pricing Decision Businesses have to look towards taking pricing decisions based on different factors as being able to determine the correct price of the product or services increases the chances of it being accepted by the people. While looking towards determining the price it is important that the pricing mechanism which is used is based on the cost that has to be incurred in developing the product or services (Forbis & Mehta, 2000). This requires that the correct cost is estimated by ensuring that all factors which account for cost is included. This will help to gauge the efficiency of the system and will help to determine the manner in which the price has to be determined. While looking to determine the price the business has to ensure that the correct costing methods are used in estimating cost and the cost ascertainment should be such that it matches the competitors pricing method so that customers are able to get the correct price and based on it are able to compare the product or services. This will help to increase the importance of pricing and will ensure that the pricing decisions taken by the business is determined on different factors. This will ensure that the pricing decisions ensure competitive pricing and using the different techniques which are aimed at ensuring corrective pricing will ensure maximum efficiency for the business. Usefulness of Pricing Decision There are different models and theories which have been developed to ascertain the price of a product or services. This have been developed based on different factors which look towards ensuring that while estimating the price the cost which has to be incurred is considered. Along with it the price that will charged as profit for the business will be determined so that based on it the business will be able to determine the price that has to be charged (Brucks, Zeithaml & Naylor, 2000). Some of the method which looks towards determining the price is cost plus margin which is the simplest method where the cost for a product or service is ascertained and a percentage of profit are added to it to determine the price. This is the simplest method and helps to evaluate the price of the product in the simplest manner. Businesses also look towards using a method where cost is ascertained through different costing methods like standard costing, activity based costing, absorption costing and so on. This mechanism helps to determine the cost that is incurred on a product or services and based on it the business looks towards ascertaining the cost for a product or services (Ulaga & Chacour, 2001). The pricing decisions helps to ensure the different strategies that will go towards selling the product and making the people know about the product or services. This helps to ensure that the pricing is based on the market fundamentals and the price is ascertained through a mechanism which ensures that there are little or no mistakes (Flint & Woodruff, 2001). This thereby ensures that the pricing strategy helps to provide the maximum benefit and provides the required path and guidance through which correct estimation is possible. It is also important that the models and price determination strategy is chosen by the business themselves based on there business model and the one which fits their requirements. This will help to gauge the efficiency of the system and will also ensure that the pricing decisions are not taken based on what others in the market do but is based upon their business requirements. This will thereby help to ensure that the cost estimation and the price that will be charged for a product or services is correctly estimated and will help to ensure that the business decisions revolving the price points are correct. This will prove beneficial to the business as by doing so the business will be able to ensure that they charge the correct price and help to provide the customers with the correct price points. This will ensure that the company is able to develop a positive image in the mind of the consumer and will be able to ensure that they are able to charge correct price for their services (Simpson, Siguaw & Baker, 2001). Standard Costing & Variance Analysis Standard Costing & Variance Analysis helps to determine the manner in which the industry has performed and is a measure which is used to find out the actual cost. Standard Costing is defined as a method which aims at identifying the standard cost which has to be incurred for a particular product or services and then comparing the actual performance with the standard so that the difference between the variance can be found out and based on it strategies can be developed to ensure that the variances are controlled and correct cost is estimated. Standard Costing is thereby used for project which require the same task to be done again and again as it looks towards working on a predetermined standards so that correct cost estimation and benefits can be identified (Hilton, Michael & Setto, 2000). Standard Costing & Variance Analysis thereby looks towards ensuring that the required standards are developed which can be achieved and should not be skewed either side. The standards should be such that the can be attained as it will thereby ensure that the efforts of the employees are directed in the right direction. While determining the standards it is important that the different heads contribute towards it like the Production head, Sales Head, Procurement Head and so on. This will help to develop the correct standards and will ensure that Standard Costing & Variance Analysis is able to contribute positively in the field of management accounting. This will also require increase role of cost accountants as they will help to determine the cost correctly and will thereby ensure that the correct pattern and strategy is developed based on which management accountants are able to take correct decisions (Blocher, Chen, Lin, 2000). The field of management accountancy can look towards ensuring that correct and proper standards are being developed based on it and decisions are taken which will help to ensure that the correct price and cost can be determined. This will help to ensure that the entire process of looking towards finding out the gaps that exist and looking towards filling those through variance analysis will help to understand the actual cost and will thereby help to determine the manner in which efficiency is achieved. Limitation of Variance Analysis Variance Analysis might look as a system which helps to find out the gaps by comparing the standards and the actual performance and looking towards developing strategies through which the gaps which exist within the system can be filled. This should thereby look towards ensuring that better cost is ascertained which will finally get reflected in the final profits. This might not be the case in reality as the variance analysis is based on the current factors which are constantly evolving. The standards have been developed based on the prevailing conditions at the time the standards were set. There could also be a probability that a slight leverage might have been kept to ensure slight changes but when the variance is huge it could be due to different environmental factors as a result of which the actual profit and cost estimation might be wrong. This might result in giving an incorrect picture regarding the profits (Iwarere, 2000). This has made it important that organizations look towards understanding the evolving business environment and have to look towards making changes in the standards as having a static standard will make the management get incorrect profits and findings which will thereby have an effect on the total business outcome. In addition to it the variance analysis is based on the actual situation and changes which have been undergone. This will require that the cost accountant and the management identify those changes and looks towards making ramifications so that the cost ascertainment is better. This will help to ensure that the business is able to look towards correct estimation of the cost (Lucey, 2003). In addition to it variance analysis doesn’t always looks futile for profit estimation because it identifies the gap and it is not necessary that the gap can be attributed to the profit which has been lost due to the fact that the actual cost is more than the anticipated cost. This could be due to several factors which have resulted in the findings to be presented differently. This will require that variance is not looked at estimated profits but should be otherwise looked as a step or direction working on which the overall profits and cost estimation becomes better so that based on it the correct profits for the business can be ascertained in a better way. This will help to take care of the evolving environment and keeping that in mind a better strategy is developed through which cost estimation becomes correct and proper. Activity Based Costing Activity Based Costing (ABC) is a method of costing which helps to estimate the cost by dividing the entire cost structure into smaller quantifiable work units so that proper cost estimation can be done. The entire work in broken down into smaller activities and the break down should be such that it is possible to ascertain the cost for each activity. The cost estimate under this method includes all activities like labor, materials, equipments, subcontracting cost and any other cost that is associated with the project (Dunn, 2010). This method of costing helps to estimate the cost in a better way in comparison to the absorption costing method where the total cost is divided or apportioned over all units irrespective of the consumption and usage thereby making the cost estimation to be unevenly distributed and doesn’t help to find the actual cost. The appendix highlights the manner in which difference in cost estimation arises when different method is used. It is seen that absorption costing provides the cast of Alpha to be $144.3, Beta to be $175.225 and Gamma to be $183.3. Using the Activity Based Costing the changes in the cost is seen as Alpha $143, Beta $172 and Gamma $195. It shows wide spread differentiation in the cost estimation which makes it important that Manac Plc looks towards using Activity Based Costing for estimating the cost correctly. Difference between Activity Based Costing & Absorption Costing The manner in which cost is ascertained in both Activity Based Costing & Absorption Costing shows widespread differences in estimating the cost and some of the major differences being witnessed under both the methods are as Absorption costing method assumes that all the materials are consumed evenly by all the units and doesn’t give importance to the units which consume more of a particular resource in comparison to other resources. Activity Based Costing on the other hand looks towards identifying the units that have consumed the resources and based on it cost is ascertained which helps to ensure that the cost are accurate and correct (Jan, 2000) Activity Based Costing gives relevance to different levels which results in the production of goods and services which thereby ensures that the cost is divided among the different levels whereas traditional costing method looks at dividing the total cost which thereby makes the cost to be divided unevenly making widespread differences exist in the cost estimation (Han, 2000). Absorption Costing looks towards following an approach which is structured and looks towards dividing the total cost based on the output but Activity Based Costing instead looks towards finding out the units consumed by each unit that is produced and based on it the cost is estimated which helps to ensure that the estimation of cost is correct (Horngren, 2011) This thereby highlights major differences that exist between the activity costing method and absorption costing method which has also been demonstrated through the chart The above chart highlights the differences which exist between the absorption costing method and activity based costing highlighting different areas which has given importance to activity based costing. The above chart also shows that absorption costing method just followed a simple step but Activity Based Costing is more comprehensive and cost ascertainment on the basis of it is sound. This helps to ensure that the cost ascertainment is better and helps to find the accurate and correct cost for the products which will ensure correct price being charged to the customer and will help the business in proper planning for the future. Advantages & Disadvantages of Activity Based Costing Activity Based Costing helps to provide different advantage in comparison to Absorption Costing and is as The estimation of cost is accurate (Cokins, 2009) Estimation of the overhead cost will be accurate (Cokins, 2009) Activity Based Costing provides an opportunity to integrate six sigma techniques which will thereby help organizations to improve their performance (Cokins, 2009) Benchmarking system can be improved which will thereby ensure that the overall efficiency of the system is improved Helps to control waste as it ensures that the organization is able to remove the unwanted process through which wastage is better controlled Understanding and applying the system is simple It helps to identify the areas in the manufacturing process which when improved will help to ensure better performance and will improve the entire process by delivering better services Companies can ensure correct cost estimation based on which launching new products or services will be better as the cost estimation will be correctly ascertained It helps to find out the efficiency of a present product or services and based on it future decision concerning the product or services can be taken which will thereby help to ensure that the overall effectiveness in the process is gained The manner in which activity based costing will benefit the business will ensure that the estimation of profits are better and the business is able to charge the correct price for the products they offer. This will lead towards correct cost estimation which will ensure that the correct price is charged for the product. Despite it there are certain limitations which the business has to encounter while using Activity Based Costing instead of Absorption Costing and are as This method of costing is expensive and cannot be used by small organizations because the cost associated with it will make the benefits looks very small There are complexities associated in the usage of the system as understanding it and applying it in a proper way required special skills Organization will have to take the services of specialist as looking towards using a method will require special knowledge and understanding so that the benefits which are reaped from the system provides the required advantage The process is time consuming and needs to look towards every input and output so that cost is correctly ascertained and the errors in determining the cost is limited Organizations using Activity Based Costing have to look towards making necessary changes so that the strategies to incorporate the new system can be placed which will reap benefits to the business Thus, Activity Based Costing provides different benefits which when worked on will help to estimate the cost better and ensure that the chances of making errors are reduced and will help to improve the overall efficiency of the method through which cost is estimated. Conclusion The paper thereby helps to highlight the manner in which costing system has evolved and ensured its usefulness in pricing decision. This has helped to identify the different factors based on which different costing methods have been applied and shows the manner in which the business through the use of activity based costing will be able to determine the correct cost for the product or services. This thereby ensures differentiation in comparison to the absorption costing method which doesn’t looks towards apportioning cost. This ensures that the entire estimation of the cost is better and helps to determine the overall efficiency by ensuring that steps are developed through which correct cost is estimated by using standards and correct pricing mechanism is determined. This thereby helps to understand the manner in which the business will benefit by using the costing techniques and will be able to ensure that the customers are charged the correct prices. References Brucks, M., Zeithaml, V., & Naylor, G. 2000. Price and brand name as indicators of quality dimensions for consumer durables. Journal of the Academy of Marketing Science, 28(3), 359– 374 Blocher, E., Chen, K. Lin, T. 2000. Cost Management – A Strategic Emphasis. USA, Irwin, McGraw Hill Cokins, G. 2009. Advantages of activity Based Costing. Global Product Marketing Manager, SAS Institute Inc Dunn, A. 2010. Activity Based Costing. Industrial Relation Centre, California Institute of Technology. Retrieved November 9, 2012 from www.irc.caltech.edu Forbis, J. & Mehta, N. 2000. Economic value to the customer. McKinsey Quarterly, 3, 49– 52 Flint, D., & Woodruff, R. 2001. The initiators of changes in customers’ desired value—Results from a theory building study. Industrial Marketing Management, 30, 321– 337 Jan, E. 2000. Activity Based Costing. Retrieved on November 9, 2012 from jan@emblemsvag.com Hilton, R., Michael, W. & Setto, F. 2000. Cost Management Strategies for Business Decisions. Illinois, New York: McGraw-Hill Horngren, C.T. 2011. Cost Accounting: A Managerial Emphasis (1st Australian Edition) Iwarere, H. 2000. Contemporary Managerial Cost Accounting, Egbe: Bhoti International Publishing Ltd Lucey, T. 2003. Management Accounting, 5th Edition, London: Bookpower Simpson, P., Siguaw, J., & Baker, T. 2001. A model of value creation— Supplier behaviors and their impact on reseller-perceived value. Industrial Marketing Management, 30, 119– 134 Ulaga, W., & Chacour, S. 2001. Measuring customer-perceived value in business markets—A prerequisite for marketing strategy and implementation. Industrial Marketing Management, 30, 525– 540 Appendix Calculation of Cost through Absorption & Activity Based Costing Read More