Pricing Strategy and Standard Costing: A Competitive Advantage

Pricing strategy is a crucial aspect of business management, and it plays a vital role in achieving competitive advantage. The pricing strategy must be formulated and modified regularly to ensure the firm stays ahead of its competitors. There are various types of pricing strategies, including cost-plus pricing, limit pricing, and dynamic pricing. Standard costing is another important tool for management accounting, as it enables benchmarking and facilitates comparison between actual performance and standard targets. Variances in standard costing help identify deviations from targets, allowing managers to take corrective actions. In this assignment, we have seen various aspects of pricing strategy and standard costing, including the calculation of unit price based on costing method, direct material quantity variance, price variance for materials acquired by a company, and direct labor efficiency and rate variances.

Assignment Task-
Part A.
Part A
Income Statement using Variable Costing
Particulars Amount
Number of Units Sold
£
20,000.00
Sales (20000 Units *66) £ 1,320,000.00
Less: Variable Cost of Goods Sold (Refer the working
note) £ 780,000.00
Less: Variable Marketing Expense (20,000 units * 6) £ 120,000.00
Contribution £ 420,000.00
Less: Fixed Manufacturing Cost £ 4,500,000.00
(25,000 unit*180)
Less: Fixed Marketing Expense
£
60,000.00
Profit / (Loss) -£ 4,140,000.00
Income statement using absorption costing Amount
Particular
Sales (20000 unit *66) £ 1,320,000.00
Less : Cost of Goods Sold (Refer Working Note) £ 4,380,000.00
Less: Marketing Expense (20,000 units * 6) + (60,000) £ 180,000.00
Profit / (Loss) -£ 3,240,000.00
Working Note-
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Calculation of Cost of Goods
Sold
Particulars Absorption Costing Variable costing
Direct Materials
(25,000*12.00)
£
300,000.00
£
300,000.00
Direct labour (25,000*18.00)
£
450,000.00
£
450,000.00
Variable Manufacturing Cost
£
225,000.00
£
225,000.00
(25,000*9.00)
Fixed Manufacturing Cost
£
4,500,000.00 -
(25,000*180)
£
5,475,000.00
£
975,000.00
Add : Opening Stock - -
Less: Closing Stock
£
1,095,000.00
£
195,000.00
(25,000-20,000)
5475000/25,000*5,000
975,000/25,000*5,00
0
Cost of Good Sold
£
4,380,000.00
£
780,000.00
Principles of Management Accounting-
Principles of management accounting are the beliefs that enable strong decision making in the
company. They enable such decision making by providing various future oriented insights of
business and analysis thereof. They were developed with the aim of achieving corporate goals in
a way that is optimal for business. Principles of Management Accounting have been defined by
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various schools of thoughts in different manners. But the rationale behind them remains to
support the objectives of business, improving value of customer, enabling maximum and proper
utilization of resources, implementing proper resources allocation, and improving internal
business process. But since longer times the management accounting principles have been
overshadowed by the principles of financial accounting. This has been a lacuna that restricted the
management accountants to be more effective and provide managers with relevant information
and decision support systems.
Role of Management Accounting and Management Accounting Systems-
Just like there are various schools of its principles, the role of management accounting has also
been defined by various thinkers and school of thoughts. But whichever way one might look at it,
all these different thinking seems to collaborate at the point that management accounting has got
an important role to play within organization. During past, several ‘best methods’ of
management accounting were developed in the early twentieth century as ‘tools’ of the
manufacturer. Further, it was seen as a key factor which helped in coordinating the activities of a
firm over a large geographical area. Various schools also thought management accounting as a
process to create a “governable person”. Thus the management accountant and the management
accounting has a powerful position to influence an organization with its thoughts and discipline.
But unlike the financial information which becomes available widely in a public domain over a
period of time, management accounting information is developed, shared and analyzed in a
responsible manner and fashion.
The management at the top level and at the middle level of an organization has to study and
analyze the strategic issues that can affect the performance of the business in order to survive in
a competitive environment. The information that the management accounting systems provide
are related to the both internal as well external environment prevailing around the business. This
would help the business managers to relate the firm's strengths and weaknesses to the various
specific opportunities and threats. It is un-debatable that the Management Accounting Systems
would certainly has the capacity to impact and influence the development of Transaction
Memory System. This can be explained with the help of an example, Management Accounting
System may facilitate encoding, storing, and retrieving information for Transaction Memory
System’s development.
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Techniques and methods used in Management Accounting by presenting calculation for an
income statement using variable costing-
Financial Accounting requirements are basically period based reporting mechanisms, that is to
say that it does not differentiate between Fixed costs of production and variable costs of
production. Whereas it is of extreme importance for the management of a company to determine
and know the break-up of costs in fixed and variable. Variable costs are those costs which are
directly related to the level of production. That is they increase when the level of activity
increases and vice versa. Whereas the fixed costs are such costs which are fixed for all levels of
activity that is they won’t change even if the number of units produced are increased or
decreased. While deciding factors like Break Even point, shut down point etc., this bifurcation of
tax is of extreme importance.
How Management Accounting is integrated within an organization-
Gone are those days when management accounting was considered something beyond the reach
of normal business and organizations. The use of management accounting techniques has
increased widely and has become a part of all reporting systems of an organization. Almost all
the Management Information Systems have the reporting structure that includes reports
concerning management accounting. Also those organizations that maintain separate books for
costing purposes rely on management accounting systems for decision making.
Benefits and functions to the organization-
The management accounting helps and assists the organization in all four basic functions of
management that is Planning, Organizing, Controlling and Decision Making. Further there are
numerous benefits which accrue to the organization when it follows management accounting.
There can be seen a reduction in expenses due to better decision making and increase in the
quality of reporting. Further management accounting improves cash flows of business as budgets
are a major part of this and proper budgeting helps in proper management of cash and other
assets.
Part B-
Task 1.
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1. Operating Budget
The budget is a planning tool which helps leaders to plan for future and learn from the past.
Budget planning process involves looking at available resources and dividing up resources in
effective manner. A budget planning is said to be effective when it considers involving careful
thinking to be done about where an organization is and where it wants to reach. Development of
financial plans to support overall goals of the company is also an important step in the budget
planning process. Creating an effective budget can be a daunting task. It final deliverable from
the whole budgeting process is the acceptance of the budgeted goals. One more challenging task
is that the budget so prepared should be such that the employees whose performance will be
appraised using such budget perceive it to be fair and reasonable. The process of creating the
budget with the team is an opportunity to hear the team`s opinions and ideas and to share the
vision of the organization with them. In addition, technology is crucial while creating and
managing a budget. The budget is the map of the strategic plan of the company. When budgets
are implemented in an organization, it provides an effective tool to the management to ensure
that the objectives of the organization as a whole are achieved in the way desired by the owners
of the company. There are many benefits derived from budgeting. It formalizes the coordination
of activities between departments while aligning these activities to the big picture the company`s
strategic plan.
It provide the assignment of decision making responsibilities and enhance management`s
responsibility. It encourage all areas within the business to become more efficient, which rolls up
to a greater efficiency company wide .Using effective budget planning tools and strategies make
a realistic projections about the program financial stability and design strategies for generating
and allocating resources to support the program’s vision and mission. Annual budget are tools
for estimating expense and income. Interim budget report can provide us with a snapshot of the
financial health of our programs; Budgets provide us with useful data for making adjustments,
change and additions to our programs.
2. Pricing Strategy
Pricing Strategy refers to the decision making process that enables an organization to decide and
fix prices of its products. It is also taken as a product development strategy or market making
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strategy of a firm so as to achieve competitive advantage over others. The prices of a business’s
products are set and decided in such a way that it provides it an edge over others keeping in view
the niche marketing focus, product differentiation and cost leadership. There are various kinds of
pricing strategy that a management accountant can follow. Cost plus pricing, limit pricing,
dynamic pricing are all examples of the pricing strategy.
The formulation and modification of the pricing strategy is a continuous exercise. It is not for
once and all rather the prices of the firm have to be assessed on regular intervals and any
modification if needed is done accordingly.
3. Standard Costing
Benchmarks are important for decision making. They are required for facilitating comparison.
These benchmarks are basically the standards set in various costs and other components of
production. The standards that are formed under Standard costing then assist in formulating
budgets for the firm. Standard costing along with its variances is a valuable management tool.
Variances in standard costing initiates triggers that there is some deviation in actual execution of
tasks as against standards. This would prevent the firm from incurring unnecessary losses on
time as such variances would then be addressed by the concerned managers, supervisors,
employees and so on.
The reports generated in standard costing are such that they facilitate direct comparison between
what was set and standard and what is being delivered. The defaulters who deviate from the
target assigned to them can then be either penalized or warned. Even if the variances have arisen
due to change in circumstances with respect to what they were at the time when standards were
prepared and what they are now then the management can change the strategy to be followed to
deal with such circumstances. This can be explained with an example, in a case when there has
been forty percent increase in raw material prices as compared to standards, the reason was
newly imposed restrictions on import of such material by government, the firm may look for
using some other raw material which is available in domestic market at lower prices.
Task 2: Operating Strategy
Cash Flow Budget on Monthly Basis
Particulars Amount
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Opening Cash Balance
£
100.00
Receipts:
Sales
£
292,000.00
Interest on Investment
£
6,000.00
Loan
£
50,000.00
Total (A)
£
348,100.00
Payments:
Shop Rent
£
69,800.00
Payment for bills
£
20,000.00
Payment for Salaries
£
126,000.00
Payment for Stock
£
138,800.00
Paid for Security Equipment
£
50,000.00
Total (B)
£
404,600.00
Closing Balance (A-B)
-£
56,500.00
TASK 3: PRICING STRATEGY
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Statement showing unit price based on costing method
Particulars Amount
Total Direct Cost
£
25,000.00
Fixed Cost
£
10,000.00
Total Cost
£
35,000.00
Add: 33.33% Mark Up on Cost
£
11,665.50
Total Sales (A)
£
46,665.50
Number of units sold (B) 500
Price per unit (A / B)
£
93.33
TASK 4 : STANDARD COSTING
Direct Material Quantity Variance
Actual Units Produced 25,000 units
Standard Quantity of Direct Material per unit 12.00 pounds
Standard Quantity Allowed 300,000 pounds
Standard Quantity Allowed (A) 300,000
Less: Actual Quantity Used (B) 302,000
Difference (A-B) -2,000
x Standard Price of per pound of Direct Material £ 14.00
= Direct Material Quantity Variance Adverse -£ 28,000.00
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Price variance for the material acquired by company
Standard Price for Direct Material per pound (A) £ 14.00
Actual Price for Direct Material per pound (B) £ 14.20
(£ 4,686,000/330,000 pounds)
Difference (A-B) -£ 0.20
x Actual Quantity of Direct Material (pounds) £ 330,000.00
= Direct material price variance Adverse -£ 66,000.00
Direct labour efficiency variance
Actual Units produced 25000
x Standard direct labour hours per unit 2.6
Standard direct labour hours allowed 65,000
Standard Direct Labour hours allowed (A) 65,000
Less: Actual Direct Labour hours used (B) 64,000
Difference (A-B) -1,000
x Standard direct labour rate (per hour) £ 44.00
= Direct labour efficency variance Adverse -£ 44,000.00
Direct labour rate variance
Standard Rate for Direct Labour per hour (A) £ 44.00
Actual rate for direct labour per hour (B) £ 45.00
(£3,200,000*90%/64,000 hours )
Difference (A-B) -£ 1.00
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