ACCTING 7014 Management Accounting - Pricing and Costing

Answer

Management Accounting

Evaluating the relationship between mark up and margin and contributions in firms reviewing pricing policies

Pricing policy is considered to be one essential measure, which is used by organisation for increasing their profitability, while maintaining the level of income from operations. Furthermore, the calculation of mark-up pricing, margin and contribution helps in improving the level of income from sales, which could raise the level of profits from operations. In addition, the mark up price is the additional percentage on the costs, which is added by the company to determine the overall price for the particular product. On the other hand, margin of a product is calculated by deducting the total revenue with total cost of making the product (Hukka and Katko 2015). Moreover, contribution is calculated for determining the level of profits after deducting the variable expenses. Hence, there is a significant relationship between mark-up, margin, and contribution in a firm for reviewing the pricing policies. Furthermore, the pricing strategy mainly allows the organisation to determine the price level of a particular product for wholesale and retail. This determination allows the organisation to make adequate decision regarding the pricing structure of their

Companies with the pricing policy is able to determine the wholesale pricing and retail pricing structure of their product, which help them make distribution decisions. The pricing method has three distinguish methods, which are cost-plus pricing, price based on demand & cost, and price set in relation to market alone. Moreover, the evaluation also helps in detecting the level of pricing, which could be conducted for particular products (Baranzini et al. 2017). Hence, the margin measure is used in the pricing policy for determining selling price for the retail section of the organisation. Hence, the management is able to detect the level of prices, which needs to be sold by the retailers. Furthermore, with the use of margin organisation is able to detect the cost incurred by the company for producing the product, which is essential in determining gross profit margin of the company. Lastly, the contribution method allows the company to understand the level of variable cost incurred in their operations to complete the production process. Therefore, with the use of pricing policies companies are able to determine the accurate selling price for their product, which could maintain the level of competition in the market (Cannon and Hillebrandt 2016).

Issue around target pricing and costing

Companies conduct Target pricing to estimate the price level, which could increase competitiveness within the operations of the organisation. In addition, the use of target pricing allows the organisation to determine the maximum cost, which a product could have after adding the standard profit margin. Target pricing method has mainly allowed the company to determine the revenue, which could be generated from the product and level of profits that might be obtained after the completion of the process (Cooper 2017). Moreover, the target pricing method has certain issues, which are depicted as follows.

The method of target pricing increases the issue of quality and increases low focus on quality, as the organisation is focused on constraining the cost on particular level regardless of the product quality. Hence, it could be considered a major problem for the organisation, as product development is focused on pricing and not on the actual quality of the product. Therefore, it could be detected that the target pricing structure has certain issues, which needs to be dealt by the organisation before implement it in the production function (Nagle and Muller 2017).

The targeting pricing system select the current competitive price for the product, which deducts the profit margin and determines the level of expenses for each product and indicating restrains on expenses. The measure relevant increases the restrain on expenses conducted on the particular project by the company and forces the organisation to minimise cost on particular product. This measure also compels the organisation to cut down on spending on the expense of the quality, which is needed by the organisation. Hence, the target pricing measure might not allow the organisation to improve its operational capability, as it focuses on expenses, while producing the final product (Langfield-Smith et al. 2017).

Target costing method is considered to be one of the measure, where the cost of the product needs to be at the predesigned level. In addition, the predesigned measure might help in adjusting the costing level, which could help in raising the level of profits from operations. The fixation of the cost incurred in production directly has impact on the product quality and profitability of the organisation. There are certain limitations that could be identified from the operation, which could have an impact on product quality (Weygandt, Kimmel and Kieso 2015). The issues in adoption of target costing method are depicted as follows.

The use of targeting costing does not allow the organisation to determine the level of profits, which could be generated from sales of the product and increases the change of loss in profits. The management only aims in reducing the cost of the product but is not able to detect the level of competitive pricing that is present in the current market. Hence, decline in profit will directly have an impact on performance of the organisation, as the company only aims in targeting certain level of expenses over the period of time. This increases the chance of loss in profits over the period of time, as the management is not focused in improve their competitive pricing.

The company with the use of target costing measure directly halts the level of expenses, which could be conducted on certain products, while increasing the stagnation in expenses. Hence, the focus of the management is cost centric, where the organisation is not able to improve the level of quality for increasing demand of the product. Hence, the stagnation of the expenses leads to low product quality and hamper the competitive edge of the organisation (Cooper 2017).

Comparing and contrasting the different investment options including ARR, payback period, NPV and IRR

There are different types of investment appraisal techniques, which could be used in selecting the accurate investment projects. In addition, the evaluation of investment appraisal technique mainly helps in detecting the level of profits, which could be generated from operations. Companies use the investment appraisal techniques for detecting the financial viability of the project and by how much it could increase their financial performance in the long-run. The investment appraisal techniques directly allow the organisation to detect the time value of money and account for the inflation, which can have negative impact on future cash inflows (Baum and Crosby 2014).

The accounting rate of return, payback period, net present value, and internal rate of return are one of the major components of investment appraisal techniques, which allow organisations to understand the financial viability of a project. Hence, companies with the help of the above-mentioned techniques are able to segregate different projects on the basis of return and risk involved in the investments. The major comparison between the above-mentioned techniques is that it is used for detecting the financial viability of a project. Companies use the above investment appraisal techniques together to understand the financial progress that it could make in future. The above 4 investment appraisal techniques are most useful when utilise together for analysing a particular project, as it portrays the actual financial capability of the cash inflows to support future growth of the organisation (Li and Trutnevyte 2017).

However, there are certain contrast between the accounting rate of return, payback period, net present value and internal rate of return calculations, which are used for investment appraisal purposes. The calculations are relatively focused on a particular field to determine whether the organisation needs to select the project for improving the profitability in future. The calculation of accounting rate of return relatively indicates the average rate of return, which is determined from the cash flows of the project. Therefore, it could be assumed that with the accounting rate of return organisations are able to determine the percentage return that is generated from a particular project and help in detecting the project with the highest rate of return. Nevertheless, the major loopholes of the accounting rate of return are that it does not account for the concept of time value of money, which increases its unreliability (Lokman et al. 2017).

Moreover, the evaluation of Net present value directly indicates the process, where time value of money is calculated, which could help in detecting the level of Profits that could be generated from different projects. However, net present value is one of the major investment appraisal techniques that could allow organisations to detect time value of money. Nevertheless, it does not allow the organisation to evaluate projects with two different value and investment capital, which restricts the organisation to detect the financial viability of the projects. The use of Payback period method is relatively helpful for the organisation to understand whether the oral project will recover the investment amount during its life. This information is relatively necessary for the organisation to make adequate investment decisions on particular project.

However, payback period does not accommodate the use of time value of money, which relatively reduces its significance on detecting adequate financial project for investment. Lastly, with the use of internal rate of return the organisation is able to identify the overall returns that could be generated from the particular project. This relatively helps in detecting whether the organisation would eventually increase profits overtime. Nevertheless, the evaluation does not accommodate for time value of money, which directly reduces the capability of the company to identify overall form value that will increase in future (Upton et al. 2015).

Evaluating the effectiveness of value chain analysis

Value chain analysis is relatively and adequate measure that is used by organisation to look onto each and every step to create adequate product for the production process (Samsatli, Samsatli and Shah 2015). Moreover, with the help of value chain analysis organisations are able to deliver maximum value for the least possible total cost of the product. This eventually helps in maximizing the profitability conditions and improves their capability to generate higher rate of return from investment. Value chain analysis has the relevant advantages, which allows organisations to maximize the profit from the production process by reducing the expenses on cost of goods sold. In this context, Gereffi and Fernandez-Stark (2016) stated that companies with the help of value chain analysis are able to detect the activity, which is incurring the highest cost and aim to maximise its efficiency.

The activities of the value chain analysis are inbound logistics, operations, outbound Logistics, services, market and sales. This activity is relatively allowed the value chain analysis to identify relevant expenses and income that could be generated from the production of the particular product. The primary aim of value chain analysis is to strengthen the competitiveness of the organisation by minimising the overall cost involved in the production of the product. This primary goal relatively allows the organisation to improve its competitiveness and generate adequate revenue to support operations. Moreover, the analysis of the above 5 chain activities relatively allow the organisation to cut down on extra expenses and maximize the level of pricing which could be developed for increasing the competitiveness in the market. On the contrary, Mudambi and Puck (2016) argued that companies with maximum activities are not able to detect the actual process, while reducing the efficiency of the value chain analysis to minimise expenses of the production system.

With the help of value chain, analysis organisations are relatively able to select the level of activities, whose overall efficiency could be increased to minimise the expenses and maximize profitability from operations. However, the major disadvantage for conducting the value chain analysis is the different type of evaluation that has been conducted, which contradict with the overall strategy and vision of the organisation. Therefore, organisation sometimes lose sight of how the activities are related to each other, which increases the problem of the value chain analysis to minimise the expenses incurred in the production process (El-Sayed et al. 2015).

References:

Baranzini, A., Van den Bergh, J.C., Carattini, S., Howarth, R.B., Padilla, E. and Roca, J., 2017. Carbon pricing in climate policy: seven reasons, complementary instruments, and political economy considerations. Wiley Interdisciplinary Reviews: Climate Change, 8(4), p.e462.

Baum, A.E. and Crosby, N., 2014. Property investment appraisal. John Wiley & Sons.

Campiglio, E., 2016. Beyond carbon pricing: The role of banking and monetary policy in financing the transition to a low-carbon economy. Ecological Economics, 121, pp.220-230.

Cannon, J. and Hillebrandt, P.M. eds., 2016. The management of construction firms: Aspects of theory. Springer.

Cooper, R., 2017. Target costing and value engineering. Routledge.

El-Sayed, A.F.M., Dickson, M.W. and El-Naggar, G.O., 2015. Value chain analysis of the aquaculture feed sector in Egypt. Aquaculture, 437, pp.92-101.

Gereffi, G. and Fernandez-Stark, K., 2016. Global value chain analysis: a primer.

Hukka, J.J. and Katko, T.S., 2015. Appropriate pricing policy needed worldwide for improving water services infrastructure. Journal?American Water Works Association, 107(1), pp.E37-E46.

Langfield-Smith, K., Smith, D., Andon, P., Hilton, R. and Thorne, H., 2017. Management accounting: Information for creating and managing value. McGraw-Hill Education Australia.

Li, F.G. and Trutnevyte, E., 2017. Investment appraisal of cost-optimal and near-optimal pathways for the UK electricity sector transition to 2050. Applied energy, 189, pp.89-109.

Lokman, S., Volker, D., Zijlstra-Vlasveld, M.C., Brouwers, E.P., Boon, B., Beekman, A.T., Smit, F. and Van der Feltz-Cornelis, C.M., 2017. Return-to-work intervention versus usual care for sick-listed employees: health-economic investment appraisal alongside a cluster randomised trial. BMJ open, 7(10), p.e016348.

Mudambi, R. and Puck, J., 2016. A global value chain analysis of the ‘regional strategy’perspective. Journal of Management Studies, 53(6), pp.1076-1093.

Nagle, T.T. and Müller, G., 2017. The strategy and tactics of pricing: A guide to growing more profitably. Routledge.

Samsatli, S., Samsatli, N.J. and Shah, N., 2015. BVCM: a comprehensive and flexible toolkit for whole system biomass value chain analysis and optimisation–mathematical formulation. Applied Energy, 147, pp.131-160.

Upton, J., Murphy, M., De Boer, I.J.M., Koerkamp, P.G., Berentsen, P.B.M. and Shalloo, L., 2015. Investment appraisal of technology innovations on dairy farm electricity consumption. Journal of dairy science, 98(2), pp.898-909.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.