Management Accounting Report: New Braking System for OMB

This report analyzes a case study of Orange Mount Bikes (OMB), a startup company aiming to gain a competitive advantage by developing a new braking system. The report explores the formation of a cross-functional team comprising professionals from engineering, marketing, accounting, administration, and purchasing. This team is tasked with exploring design alternatives and evaluating product costs. The report delves into the establishment of cost targets, the reduction of manufacturing and non-manufacturing costs, and the benefits and limitations of using target costing for the new braking system. It examines how the team identifies potential areas for cost reduction, including manufacturing, administration, warranty, and distribution. The report also discusses the application of target costing as a management tool for planning and designing activities, focusing on setting pricing strategies and achieving profitability. Furthermore, it highlights the importance of understanding customer needs, competitive scenarios, and the potential for product innovation. The report concludes with recommendations for implementing target costing and the importance of a collaborative approach to new product development.

Running head: MANAGEMENT ACCOUNTING
Management accounting
Name of the student
Name of University
Authors note

1
MANAGEMENT ACCOUNTING
Table of Contents
Introduction:....................................................................................................................................3
Discussion:.......................................................................................................................................3
Part A:..............................................................................................................................................3
Requirement i:.................................................................................................................................3
Requirement ii:................................................................................................................................4
Requirement iii:...............................................................................................................................5
Part B:..............................................................................................................................................5
Benefits of using target costing for newly developed braking system:...........................................6
Limitations of using target costing for newly developed braking system:......................................7
Conclusion and recommendations:..................................................................................................8
References list:.................................................................................................................................9

2
MANAGEMENT ACCOUNTING
Introduction:
The report is prepared by referring to a case study on a startup company manufacturing
bikes of higher quality. Orange mount bikes intend to develop a new braking system to gain
competitive advantage. Estimated pricing of bikes have been set by performing competitors
analysis and thereby maintaining same functionality and quality level. This bike manufacturing
company requires forming a team for managing design of manufacturing process and product.
Opinion of team regarding the cost reduction has been evaluated. Furthermore, limitations and
benefits of using target costing of newly developed braking system have been demonstrated.
Discussion:
Part A:
Requirement i:
The team established by OMB consists of professionals from engineering, marketing,
accounting, administration and purchasing. Such team is required for exploring alternatives as a
part of design process and contributes in evaluation of products based on primary as well as
secondary factors. Development, marketing and project manger team have a proper
understanding of requirements of competitive market place. When designing a new braking
system, it is essential to establish cost targets and team members would help in establishment of
cost target making designs to cost requirements. In order to capture 25% of market share, bikes
with new braking system of OMB should be priced at £ 950. For having 10% share of profit, the
target cost comes to £ 855. Therefore, it is required to team to make necessary reduction in cost.
A sense of commitment to the targeted cost is developed when such product development team

3
MANAGEMENT ACCOUNTING
develops budgeting. Moreover, team reviews bike design and manufacturing processes for new
brake system and they would ascertain any non-value added components and activities for
elimination. Team evaluates that labor cost can be reduced by moving one labor to another bike
production line (Otley 2016). They have analyzed whether costs can be reduced from
manufacturing components. Negotiations in sourcing inputs from suppliers can be done with
supplier. All the reasons discussed above depict the requirement of such team for designing
manufacturing process and product management.
Requirement ii:
The total cost of manufacturing of new braking design is to be reduced by £ 30.
Manufacturing cost of current coat per bike is estimated at £ 760. Targeted manufacturing cost is
set at £ 730. Reducing manufacturing cost is very essential for reducing overall cost and
generating profit. It is so because manufacturing cost is an important component of total cost and
such can be avoided at the initial stage of production. Labor cost can be controlled by reducing
number of labor worked and wages paid to them. Therefore, it would be viable to make reduction
in manufacturing cost for reducing overall cost. Other non-manufacturing cost that team has
agreed to reduce is warranty and support, administration and selling and distribution cost.
However, the reduction in warranty and support cost is considered strategy for reducing overall
cost because new braking system is reliable. Reducing advertising campaigns will also help in
reducing selling and distribution cost (Weygandt et al. 2015). Therefore, it would be viable to
make reduction in non-manufacturing cost for reducing overall cost of production. The idea of
team for cutting down manufacturing as well as non-manufacturing costs would be viable for
achieving targeted cost reduction.

4
MANAGEMENT ACCOUNTING
Requirement iii:
The potential areas identified by established teams for reducing cost are manufacturing,
administration, warranty, support, selling, and distribution. It can be seen from the table that cost
reduction in manufacturing of new braking system is £ 30. Selling and distribution cost per bike
in the current period stood at £ 55. Targeted cost in this area is £ 50 thereby reducing cost for
selling and distribution of new model by £ 5. Cost of providing warranty and support to
customers per bike in the current scenario is £ 35. On other hand, targeted cost reduction for
warranty and support is £ 5 that is at £ 30. Cost incurred in administration for current coat per
bike is recorded at £ 55. Targeted administrative cost reduction for launching new model is £ 45.
Therefore, the cost incurred in administration is to be reduced by £ 10. In the current scenario,
the total cost of prediction for new model is estimated at £ 905. On other hand, team members
have estimated targeted cost to be at £ 855. This is indicative of the fact that in order to acquire
market share and generate profit, there is a need to reduce overall cost for designing new braking
system.
Part B:
Target costing is a method of costing and set of management tool for planning and
designing activities for developing product and provides basis for controlling phases of
operations and ensuring profitability throughout life cycle of products. It is a method of
managing costs by employing a better design and specification process leading overall cost
reduction (Van 2016).

5
MANAGEMENT ACCOUNTING
Benefits of using target costing for newly developed braking system:
 It is a disciplined approach for realizing and determining total cost by anticipating future
selling price and generating desired profitability as the product is produced with specified
functionality. Costing and pricing of products are determined from understanding
customer willingness to pay and customer needs (Bromwich and Scapens 2016).
 Method of target costing is considered most effective in design and development stage of
products. Development of new breaking system can be efficiently done using this
particular method of costing. Since target cost is a method of planning, reducing and
managing cost, it benefits manufacturing concern in setting their pricing strategy for
newly developed product (Malmi 2016).
 The fundamental objective of target costing is to make money from selling product set at
reasonable price, growing, reinvesting and increasing value. Understanding of
competitive scenario and marketing conditions is emphasized under this method.
Requirement of customers is focused in this approach in terms of function, quality, price
and delivery (Lavia and Hiebl 2014). Trade off across the organization regarding the
pricing is addressed and establishes them in early stage of development cycle.
 Target costing make use of management control system for reinforcing and supporting
strategies of manufacturing. For designing right product, this particular method of costing
integrates requirement of suppliers with that of supplier activities. Organizations while
designing new product and using target method costing would be able to ascertain market
opportunities that helps in fixing possible target selling price and meeting the objectives
of profit generation. Moreover, organization can also achieve competitive advantages as
it has the scope of product innovation.

6
MANAGEMENT ACCOUNTING
Limitations of using target costing for newly developed braking system:
 There is likelihood that there can be omission of essential costs under method of target
costing as it has the fundamental objective of controlling costs (Hopper and Bui 2016).
Moreover, accuracy of workings under target cost is difficult.
 Target costing can lead to under or over costing of products as the cost incurred in
manufacturing products can be different (Wouters and Kirchberger 2015). However, this
over and under costing can be eliminated if organization has mechanism for collecting
actual cost of products and comparing them with targeted costs.
 Development process of product can be lengthened to a significant extent because for
designing sufficient low cost products would require a number of design iterations that
would help in meeting margin criteria and target cost. This is commonly witnessed when
project manager is not able to pull the plug on designing of product.
 An organization can experience several finger pointing because target-costing approach
results in deductions of large amount of mandatory costs. For instance, if it were required
to make alteration in production layout for generation of cost savings, industrial staffs
would not be happy (Eldenburg et al. 2016). On other hand, purchase staffs would not be
required to make negotiations in costs for reducing costs. In order to address this
problem, it would be required for industrial staffs to have strong negotiations and
interpersonal skills.
 Target costing depicts that it is a traditional concept of lump sum arrangement and mainly
focuses on saving costs rather than inflating the target (Edmonds et al. 2016). Total
alignment is essential for taking benefits of target costing, as it is a key to the application

7
MANAGEMENT ACCOUNTING
of this particular approach. However, it is difficult to have such alignment in
organizational process. There should be one team having one goal using one approach.
Conclusion and recommendations:
From the analysis of case of Orange mount bikes, it can be inferred that for generating
profits by launching new braking system requires reducing the cost to targeted estimates.
Concerning this, it would be suitable for organization to employ the target costing method for
developing pricing strategy of new model of bikes. However, there are several advantages and
disadvantages of target costing. It would be required by bike manufacturers to have joint
management that have shared objectives and are best for delivering solutions on new product
development project. Nevertheless, OMB would be able to continue concentrate on saving
money and attaining cost certainty. Pooled knowledge, resources, and generation of innovative
thinking from team would help in development of new braking system.

8
MANAGEMENT ACCOUNTING
References list:
Bromwich, M. and Scapens, R.W., 2016. Management accounting research: 25 years
on. Management Accounting Research, 31, pp.1-9.
Edmonds, T.P., Edmonds, C.D., Tsay, B.Y. and Olds, P.R., 2016. Fundamental managerial
accounting concepts. McGraw-Hill Education.
Eldenburg, L.G., Wolcott, S.K., Chen, L.H. and Cook, G., 2016. Cost management: Measuring,
monitoring, and motivating performance. Wiley Global Education.
Hopper, T. and Bui, B., 2016. Has management accounting research been critical?. Management
Accounting Research, 31, pp.10-30.
Lavia López, O. and Hiebl, M.R., 2014. Management accounting in small and medium-sized
enterprises: current knowledge and avenues for further research. Journal of Management
Accounting Research, 27(1), pp.81-119.
Malmi, T., 2016. Managerialist studies in management accounting: 1990–2014. Management
Accounting Research, 31, pp.31-44.
Mitra, A., 2016. Fundamentals of quality control and improvement. John Wiley & Sons.
Otley, D., 2016. The contingency theory of management accounting and control: 1980–
2014. Management accounting research, 31, pp.45-62.
Van der Stede, W.A., 2016. Management accounting in context: Industry, regulation and
informatics. Management Accounting Research, 31, pp.100-102.
Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.

9
MANAGEMENT ACCOUNTING
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John
Wiley & Sons.
Wouters, M. and Kirchberger, M.A., 2015. Customer value propositions as interorganizational
management accounting to support customer collaboration. Industrial Marketing
Management, 46, pp.54-67.