The models and concepts affecting the pricing decisions taken by organisations, critically reflecting upon their usefulness (maximum mark 33%). ii. The role of standard costing and variance analysis...

Management Accounting
Management Accounting 1
Management Accounting
Management Accounting 2
Management Accounting
Executive Summary
The company Manac plc, is the company which produces and sells a range of standard electrical
goods, is not able to meet its standards of budgeted target profits. The management is of the
opinion that the major reason for this is less sales because of inco
ect pricing of the products.
Although, this is one of the reasons but there are other reasons as well which has lowered the
expected profits. These may vary from the pricing decisions chosen for the product being
manufactured and sold, the variances of actual cost, price and quantity of the product
manufactured and sold from the standards set down in respect of same, and the after effects of
the absorption costing system being used in place of the activity based costing system.
Models and Concepts affecting the pricing decision taken by organization:
The pricing of the product is highly dependent on different factors like the pricing objective, the
environment, the demand of the product and cost consideration of the company. The company
has to focus on setting the price, of the product in such a way that it covers the cost of the
product and is able to earn reasonable profit against the same. For this the organization need to
focus on understanding the environment in which it operates. As the company deals with the
electrical product, the company is considered to be a price taker, as the price of the product is
highly dependent on the demand and the supply of the product.
Factors affecting the cost of the product:
Pricing Objective: Manac plc, is an organization that produces and sells a range of standard
electric goods. The main objective of the organization is to gain market share and to achieve a
target rate of return. So with this objective the organization needs to focus on setting the price as
per these objectives.
Environment: Electrical goods are highly vulnerable to the market demand and technology, the
company needs to be innovative in designing the electrical products with focus on the changing
Management Accounting 3
needs of the market. Being into global market, the company has to focus on the environment and
market forces, with a strong focus on the changing needs and demand of the consumers.
Demand: With the changing needs and demand of the consumers, the need of electrical goods
have increased, the consumers are demanding energy saving products. With this the company
should focus on estimating the price of the product as per the demand of the consumers.
Cost Consideration: The Company needs to consider the variable as well as fixed cost incu
ed
to manufacture the product. Apart from this the company also need to analyze it short term as
well as long term perspective and goal of the company.
Pricing Model:
There are different pricing model which can be chosen by the company as per the need and
demand of the organization.
Target Costing: The price of the electrical products is highly dependent on the demand and
supply of the product in the market. The company need to analyze the target profit which it needs
to acquire on the product sold, so accordingly the company should focus on estimating its desired
profit and then set the target cost of the product accordingly.
Target cost = Market price – Desired Profit
Cost plus pricing: The company can also decide on the mark up price on the cost of the product.
So as to derive at the target pricing the product the company needs to establish a cost base and
then a particular mark-up percentage on the cost base of the product.
Variable cost pricing: The other model of determining the price of the product is based on
variable cost of the product which is related to fixed cost per unit consumption.
Considering the above models the company should focus on determining the price of the product
on the basis of target market pricing, the company should set a desired profit which they want to
earn and accordingly allocate the price on the standard product.
Standard Costing and Variance Analysis:
Management Accounting 4
Standard Costs are the predetermined cost of the product. The analysis of the standard cost is
highly based on the inputs of different persons from different departments who are basically
esponsible for determining the cost and quantities of the product. The standard costing is
asically set by accumulating the historical cost of the particular product along with the analysis
of how costs responds to the change in activity level of the product.
The company should strongly focus on continuously reviewing the cost, so as to make it the
asis of evaluating the performance of the organization.
Variance Analysis:
Differences between actual and standard input prices or quantities are called variances. A
variance is said to be favorable when actual input costs or quantities are less than standard.
When actual input costs or quantities exceed the standard, the variance is said to be unfavorable..
When operations are going along as planned, actual costs and profit are typically close to the
udgeted amounts. However, significant departures from planned operations appear as
significant cost variances. Managers investigate these variances to determine their cause, if
possible, and take co
ective action when indicated. An important consideration in deciding
when to investigate the causes of a variance is the manager’s view of the controllability of the
cost item. A manager is more likely to investigate a variance for a cost that someone in the
organization can control than a variance for a cost that cannot be controlled. For example, there
might be little point to investigating a materials-price variance if the organization has no control
over the price. Cost variances are caused by many factors. For example, a direct-labor efficiency
variance could be caused by inexperienced employees, employee inefficiency, poor-quality raw
materials, poorly maintained machinery, or an intentional work slowdown due to employee
grievances. In addition to these substantive reasons, there are purely random causes of variances.
People are not robots, and they are not perfectly consistent in their work habits. Random
fluctuations in direct-labor efficiency variances can be caused by factors such as employee
illnesses, sleep deprivation, workers experimenting with different production methods, or simply
andom fatigue. Ideally, managers are able to sort out the randomly caused variances from those
with substantive and controllable underlying causes.
Management Accounting 5
The total variance for any particular cost component is refe
ed to as the budget variance because
it represents the difference between budgeted cost and actual cost. The budget variance is caused
y two factors: the difference between the standard and actual quantity of the input, and the
difference between the standard and actual unit cost of the input. Even if the same individual
were responsible for both quantity and price, it would be desirable to
eak the budget variance
into the quantity variance and the cost per unit of input variance. However, since different
managers are usually responsible for each component of the total variance, it is essential to
separate the two components so that each manager can take the appropriate action to eliminate
unfavorable variances or capture those that are favorable.
Usually, if the net total of all of the favorable and unfavorable variances is not significant
elative to the total of all production costs incu
ed during the period, the net variance will be
included with cost of goods sold in the income statement. Since standard costs were used in
valuing inventories during the period, standard costs were also released to cost of goods sold;
classifying the net variance with this amount has the effect of reporting cost of goods sold at the
actual cost of making those items. If the net variance is significant relative to total production
costs, it may be allocated between inventories and cost of goods sold in proportion to the
standard costs included in these accounts. On the other hand, if the standards represent cu
ently
attainable targets, then a net unfavorable variance can be interpreted as the cost of production
inefficiencies that should be recognized as a cost of the cu
ent period. If this is the case, none of
the net variance should be assigned to inventory because doing so results in postponing the
income statement recognition of the inefficiencies until the product is sold. A net variance that is
favorable would indicate that the standards were too loose, and so it would be appropriate to
allocate the variance between inventory and cost of goods sold. In any event, the financial
statements and explanatory notes are not likely to contain any reference to the standard cost
system or accounting for variances because disclosures about these details...