Management of Financial Resources

Management of
Financial resources

Table of Contents
Introduction-................................................................................................................................................3
Question 2-..................................................................................................................................................3
Cost plus pricing-....................................................................................................................................3
Question- 3-.................................................................................................................................................5
Current Ratio-..........................................................................................................................................5
Quick Ratio-............................................................................................................................................6
Debt-to-Equity Ratio-..............................................................................................................................6
Proprietary Ratio-....................................................................................................................................6
Question-4...................................................................................................................................................7
Conclusion-.................................................................................................................................................9
References-..................................................................................................................................................9

Introduction-
Financial resources are very important for an organization. These resources help in functioning
of the business as well as sustainability of the business. For this purpose a system is needed in
organization which helps in managing its financial resources Such as operations and funding. In
this report various questions are discussed related to cost accounting and management
accounting. This report includes various questions related to cost accounting and management
accounting. Cost plus pricing is discussed. Various financial ratios calculation is discussed. Such
as current ratio, quick ratio, debt-equity ratio and proprietary ratio. Financial budget is very
important for every company. Detailed discussion of variance analysis and favorable variances is
done in this report. With the help of this report importance of financial resource management can
be understood.
Question 2-
Cost plus pricing-
It is also known as mark up pricing. It can be defined as determining the cost of the product of a
company and then add up extra charge on that price in order to determine the selling price to
customer. It is very simple cost based strategy. It helps in setting the prices of goods or services.
In order to determine at first add all the costs like direct material cost, direct labor cost and
overheads to determine the cost of the product. It is the cost which company bears in making a
product. After that add up percentage is added to determine the selling price. So, company must
have knowledge of all the business cost so that mark up percentage added accurately. In some
special cases mark up percentage is determined by agreement of the both buyer and seller. There
are 3 steps by which cost plus pricing can be computed-
 Step 1- Determination of total cost should be done which includes fixed cost and variable
cost.
 Step 2- To determine unit cost divide total cost by number of units.
 Step 3- This is the final step. For determining selling price and profit margin of the
product unit cost should be multiplied by mark up percentage.
Let us understand with the help of an example-

Assume that selling price of a product is £1, and £1 includes all types of costs. Company adds a
markup percentage on this cost. This mark up is cost plus pricing. It is also a portion of profit for
company.
Advantages of cost plus pricing-
 Need fewer resources- In this method no detailed market research is required. Business
is always aware about production cost. Business can easily add all the costs like fixed
cost and variable cost. After adding all the costs business can place margin on top of that.
Business should set margin in such a way so that market can bear that. It is a widely used
strategy among businesses.
 Better rate of return- All the costs should be added up accurately. Cost plus pricing
ensures that all the costs are covered and on the basis of that margin should be added in
order to get positive return. There are many additional costs which are not counted and it
results in low margin. If arbitrage margin is increased then business can earn good return.
 Hedging- This techniques help when businesses do not have any idea about customers
perception either customers wants to pay for it or not. Only estimation cost allows
business to push forward at least a starting price to work from as the market and customer
develop.
Problems associated with cost plus pricing-
 Innovation- This strategy is based on the production cost, Business cannot keep low cost
to sell their items. It is budget oriented approach which limits the innovation and
creativity of the business. Business cannot increase the production cost, if production cost
is high then market price of the product will be automatically high. Business does not
know if this product will be doing better in market or not. This is the main reason of
limiting creativity or innovation.
 Orientation of market- This method does not consider the marketability. Businesses do
not think about the target audience while setting the price. May be customers do not find
the product as good value at that point. For example- If price of a product is £40 under
this method, but customers believe that it is £30. In such cases, business cannot achieve
expected sales and profit.