Managing Financial Principles
Added on 2021-06-14
21 Pages5662 Words15 Views
|
|
|
Running head: MANAGING FINANCIAL PRINCIPLESManaging Financial PrinciplesName of the Student:Name of the University:Author’s Note:
MANAGING FINANCIAL PRINCIPLES1Task 1Classification of CostsThe assessment considers the business of Arnhold holding ltd which is engaged in thebusiness of supplying of decorative materials which are us3d in homes and residential properties.The company is engaged in production of titles and other interior decorating materials which areused in residential properties. The business classifies the costs of the business for the purpose ofon the basis of the products which are produced by the business (Parker and Bryan 2017). Thecompany computes the costs of the business on the basis of the product which is produced by thebusiness (Fullerton, Kennedy and Widener 2013). The cost of sales of the business is shown tobe $ 70,703,000 which is shown to be more which is made up of material costs, labour costs andoverhead costs of the business. The case study is considered for the business. The managementof the company follows absorption costing techniques for the purpose of recording the costs ofthe business and also ensure that the costs of the business can be used for the purpose ofestimating the selling price of the business. The case which is shown in the assessment is relatedto the business of Arnhold holding ltd which is engaged in the business of materials and otheroperations such as materials for bathrooms operations. The operating expenses of the businessfor the year is shown to have increased which is due to the increase in the operations of thebusiness.The costs which are incurred in a business environment can be effectively classified onbasis of various factors which are classification on the basis of nature of the product, processwhich is followed by the business (Tappura et al. 2013). Another basis of classification is thatthe decision of the management and the production process which is applied by the business
MANAGING FINANCIAL PRINCIPLES2plays a vital role on the basis of the cost classification of the business. The costs of a businesscan be classified on the basis of the criteria which is shown below:1.Nature of Expenses: The costs of the business can be classified on the basis the nature ofexpenses such as labour costs, material costs and overhead costs.2.Cost Object Relation: The costs of a business can be classified on the basis of whetherthe costs are direct or indirect in nature.3.Cost Related to Functions: In some businesses the costs of the business are recognizedon the basis of the functions which are performed by the business during the period (Daleand Plunkett 2017). The common functions of the business are sales, marketing,production and operations.4.Production Process: The type of production process which is followed by businesswhich can be batch process, contract process, joint process.The business of Arnhold holding ltd utilizes all the concepts for the purpose of classificationof costs. The costs of the business are segregated on the basis of direct and indirect costs and alsoon the basis of how much labour, materials and overheads are incurred by the business for thepurpose of producing the final product. The costs are also segregated on the basis of theoperations of various departments such as production, sales, marketing.Measurement of the CostsAs per the business conditions and nature of operations of the business, Arnhold holdingltd is engaged in the business of producing decorative materials which are used in buildings andresidential property. The company is engaged in the business of producing multiple products andtherefore needs to maintain the costs of different products under the same method of costing.
MANAGING FINANCIAL PRINCIPLES3Therefore, it is apparent that traditional system of costing is not appropriate for measuring andrecording the costs of the business.The best course of option which is available to the management is to select activity-basedcosting technique which can effectively relate the costs of the business with the differentactivities which are undertaken by the business. The multiple products which are offered by thebusiness can be suitably measured using activity-based costing technique which is considered tobe most suitable in cases where the business has multiple products to offer to the customers(Mohd, Yazid and Muhammad Aizzat 2017). The technique allows the business to allocate costson basis of activity which is undertaken by the business and thereby makes the presentation ofcosts of the business more accurate in nature.Role of Costs in Pricing DecisionsThe costs of a business play a vital role in various decision-making process of thebusiness. One such area where decisions are taken considering the costs of the business is thepricing decisions area. The prices of the products include both the cost component which thebusiness has incurred in making the product and also profit component which is the gains of thebusiness. The costs which are considered contains both fixed and variable costs of the business.Variable costs can be defined as the costs which changes as the volume of productionincreases or decreases. Such costs are not constant in nature and can be controlled to an extent bythe efforts of the management. The fixed costs of the business are constant in nature and have tobe undertaken by the management even if production of the business is nil. When price of aproduct is set, the business first considers to recover the fixed costs of the business and then thevariable costs as variable costs can be controlled and even be reduced by the management. In
MANAGING FINANCIAL PRINCIPLES4some cases, as well management uses breakeven analysis to compute the costs of the business(Hilton and Platt 2013). The breakeven analysis is a technique which allows the business theminimum sales amount which is required by the business to cover all the costs of the business.This is known as a no profit, no loss situationTherefore, the costs of the business play an important role in determining the selling priceof the product which is to be offered by the business. The cost of the business needs to berecovered for a business or the business will not be able to carry on its operations.The business which is considered can make improvements in cost and pricing structure ofthe business by following cost-based pricing strategy which allow the management of thecompany to exactly know how much cost needs to be covered and also the profits which thebusiness needs to generate over the costs of the business.Reduction of CostsThe costs of the business can be reduced effectively by following costs reductionstrategies which allow a business to reduce its variable costs to some extent and thereby increasethe profitability of the business. The business of Arnhold holding ltd needs to consider the samewhile determining the prices of the products which are to be offered to the general public. Theprocess which can be recommended to the management of Arnhold holding ltd for the purpose ofreducing the costs of the business are listed below in details:1.Focus on more profitable products: The focus of the management of the companyshould be on products which deliver highest gross profit margin in comparison to otherproducts of the business. In the case of Arnhold holding ltd, the business has multiple
MANAGING FINANCIAL PRINCIPLES5products and therefore the management needs to focus on that product which providesthem with maximum profitability. This can reduce the costs of the business significantly.2.Monitoring and Control: Another important measure for reducing the costs of thebusiness is related to exercise of effective monitoring and control of the costs of thebusiness (Estampe et al. 2013). This would result in reduction of costs which areavoidable in nature and also the costs which are unproductive to the mainline activities ofthe business. This will also help the management of the company to keep track of thecash inflow and outflow of the business and also look into the activities and efficienciesof the employees of the business.3.Setting up new technologies or equipment: The management of the company can makeimprovement in their technological level or even introduce new equipment in thebusiness which will require one-time investment and reduce the costs of the businessfrom next year onwards. The costs of the business generally decrease when a superiormodel of equipment or technology is applied by the management of the business as theoverall efficiency of the business increases.Usefulness of Activity Based CostingActivity based costing practices requires a business to effectively measures the costs ofthe business on the basis of the activities which are followed by the business. The method is arecently developed method and is gaining popularity in business sector due to its advantages ithas over the traditional costing system of a business (Kaplan 2014). As per the situation ofArnhold holding ltd, the company is engaged in production of multiple products which arenecessary for meeting the production requirements of the business during the period. The overallusefulness of Activity based costing in a business are shown below in details:
End of preview
Want to access all the pages? Upload your documents or become a member.
Related Documents