Cost Accounting Principles - Case Study Example

Introduction Hadika plc of late has expanded by leaps and bounds on a multi-site scale operations with its bases spread to U.K. and other overseas markets wherein it has maintained its market leader position right from the inception. In lieu to this, the company has also invested heavily on automating its processes last year to cope up with the competition. However, with an overall gloom and recessionary fears in the market, it is high time that we look into certain important policy matters failing which, it may not be able to restore its previous market leadership position which in return would hamper the growth of the company. For this purpose, necessary policy changes have to be taken after considering the following points: Similarities & Differences of Management Accounting (MA) & Financial Accounting (FA): Similarities: Both the FA and MA are prepared to using the operating information of the Business Enterprise to avoid incurrence of higher data collection costs. The reporting systems are designed in accordance to the Generally Accepted Accounting Principles (GAAP) to provide objectivity and avoid subjective inferences. Differences: Parties of interest: The FA statements are prepared for providing external information to the major stakeholders of the organization while MA system is designed to provide information to the management internally. Performance Analysis: FA provides the aggregate picture of the organization while MA system segregates the data and gives a detailed analysis of the different management actions taken up. Data inputs: While FA presents past monetary records, MA analyzes those records for taking up present and future management action. Management of Money: FA reports only the monetary aspects of the organization while MA takes interest even in the non-monetary aspects like technical innovations, money value changes etc. for deciding on actions like replacing an asset or affecting an insurance policy strategically. Reporting periods: FA is reported periodically on a quarterly basis. However, MA may require data on a shorter interval basis say a week, fortnight etc so that decisions based on these factors could be taken up on a speedy manner. Nature & Precision: FA reporting is slow but more precise in nature that it serves the principle of objectivity. MA though requires objective information inscribes certain subjective information which gives room for arbitrariness given the short duration. Legality: FA reporting is compulsory but MA systems may or may not be installed by the organization legally. However, it is being observed that for any organization to be successful on a large scale basis, implementing MA systems would always prove to be beneficial. In short, if FA provides information about the movement of the business in the past, MA provides the way in which the business has to plan its future moves. In this process, a management accountant plays a vital role that he performs the following functions: Providing important and relevant Data Data compilation, co-ordination and modification to suit the purpose. Data analysis and interpretation Developing effective Communicating means to disburse the information gathered. Performing Control activities to ascertain cost cutting and profit maximization measures. Qualitative information usage pertaining to both monetary and non-monetary aspects of a particular job is analyzed before taking any decision. (Athma. P, 2004). Having understood about the basic guidelines of MA, Hadika plc, to maintain its market share even in the present global crisis will have to give a re-look to its present pricing policy which has to be arrived at after taking into consideration, the following cost classifications: Marginal Cost: The aggregate of all the variable costs incurred in the production so that every increase in the units of production is commensurate to the increase to the cost incurred for the production of such unit. Expenditure incurred Cost: Only the costs which are monetarily incurred during the production activity are included to arrive at the cost of the product. Cost differentials: The estimated change in costs because of the change in production is differential in nature viz. higher for higher volumes of production and vice versa. Sunk Costs: Irrecoverable costs are called sunk costs and are to be ignored while evaluating future projects. Cost of Opportunity: It is the alternative income which Hadika plc could have earned had it deployed its resources into some other use like the rent receivable on the factory premises had they been let out instead of motor car production have to be considered while arriving at the variable cost figure under management accounting system. Notional Costs: These costs are not incurred monetarily but are considered while arriving at the cost like the interest on the capital provided by the proprietor etc. Cost of Replacement: The assets have to be valued not on the purchase value but on the cost to be incurred in case of replacement of such an asset. Avoidable and unavoidable costs: These costs are considered to understand the reduction in the cost in case a particular department or product are discontinued. For instance, Salary of a clerk cannot be avoided even if a particular product line is discontinued. (Jain & Narang, 2006). After arriving at the pricing policy taking into the above cost classifications, management of sales which in short implies delivering value to the customer at a profit has to be undertaken and communicated effectively which is in sharp contrast to the traditional process wherein the products were made for sale. The difference can be better depicted in the figures below: Sequence of Traditional Processes: Product Making Product Selling Delivery Sequence through Value Creation: Value Choice Providing Value Value Communication Strategic Marketing Tactical Marketing Under Value Choice, we give importance for : 1. Customer Segmentation 2. Focusing Market Selection 3. Positioning of Value. Under Providing Value, the targeted objectives are: 1. Product Development 2. Service Development 3. Pricing 4. Sourcing Making. 5. Service Distribution. Under Value Communication, the important activities are: 1. Sales Force 2. Promotion of Sales 3. Advertising. While the Value Choice comes under Strategic Marketing, the Value Provision and Communication come under Tactical Marketing. The Japanese have refined this process by following guidelines such as: Continuous collection of customer feedback Continuous efforts of the firm to introduce feasible and valued improvements. Arrangement of Just-in-time supplies through improved logistics. Reduction of set-up time that production has to take place in the least possible time. Quality assurance that there are no flaws in the product and it is of high quality. In this context, it is worthwhile to study the Value Chain analysis comprising of Primary activities which depict the inbound logistics, Operations, Outbound Logistics and the support activities which depict the handling of specialized departments like procurement, development of technology, management of human resources, and infrastructure of the firm. The core business processes also have to be coordinated well to complement the performance of each of the departments. In this connection, the core business processes are: The process of gathering information from the market and acting upon it. The research, development and launching of high quality offerings within the stipulated time and budget. Strategies for defining target markets and identifying new customers. Building and strengthening of customer relationships by understanding their needs and offering value to their requirements. Avoiding the time lag in receiving and acting upon orders by shipping the orders within the deadlines and realizing payments. (Kotler & Keller, 2006). It may be noticed that as all the organizations possess the basic resources to carry on their core businesses, the gimmick to crack the market lies in developing the core competencies in the due course of performing such businesses. In other words, firms have to build up on their competitive advantage in the minds of the customers to attain that distinctive mark of value delivery to them. (Porter, 1985). In the case of Hadika plc, automated processes were developed into its motor cars as a distinctive capability to compete over its rival auto makers. Now, that the first step is already taken, the future action to be taken is to coordinate its primary and support activities and to communicate this value delivery to the customers through effective sales management in which pricing of the product plays an important role. As such, the pricing of the product has to be arrived after keeping into view, the value the product delivers to the customer in comparison to its competitor’s products and prices. The pricing thus arrived should be more than the costs incurred in manufacturing that product which can be arrived by following the management accounting processes. Conclusion: It is observed that whether legally compulsory or not, inclusion of Management Accounting processes into the firm is very important to arrive at the right costs incurred during production of the product. At the same time, the core business processes have to be integrated in such a way that they help in achieving supply chain logistics which can create a value perception into the minds of the customers. The value thus created in the minds of the customers should be more than the price of the product so that the customer gets attracted to buy that product because he is convinced that the product delivers more value than the price it demands. Also, the competitive advantage of that product should be planned in such a way that it cannot be easily imitated by the competitors. At the same time, the price thus arrived should be sufficient enough to cover the cost incurred in the production of that product and also to earn a decent margin of profit. Thus if all the activities of the organization are performed in tandem to one another, and if this value creation is communicated effectively, the firm can gain goodwill and retain as well as attract new customers also. Book References: Athma. P. (2004). Introduction to Management Accounting. Management Accounting and other Branches of Accounting. Advanced Managerial Accounting. Hyderabad. Osmania University. Pgs. 45-64. Jain. S.P. & Narang. K.L. (2006). Cost Analysis, Concepts and Classifications. Cost Accounting Principles & Practice. Hyderabad. Kalyani Publishers. Pgs. I-43. Porter. M. (1985). Value Chain Analysis. Competitive Advantage: Creating and Sustaining Superior Performance. In ed: Kotler. P. & Keller. K.L. (2006). Developing Marketing Strategies and Plans. Marketing Management. New Delhi. Dorling Kindersley (India) Pvt. Ltd. Chapter 2. Pgs. 36-38. Kotler. P. & Keller. K.L. (2006). Developing Marketing Strategies and Plans. Marketing Management. New Delhi. Dorling Kindersley (India) Pvt. Ltd. Chapter 2. Pgs. 34-36. Read More