Management Accounting Analysis: Cost-Plus Pricing and ABP Impact

This report provides a comprehensive analysis of management accounting principles, focusing on the services rendered by distributors to manufacturers and hospitals, and the evolution of distribution practices. It evaluates the impact of cost-plus pricing on various stakeholders and examines the effects of activity-based pricing (ABP) on customer behavior. The report delves into the pricing matrix, cost structures, and the challenges associated with ABP implementation, including obstacles and potential risks. It identifies which types of customers are likely to adopt ABP first and assesses the ease with which competitors can adopt ABP. Furthermore, the report includes a numerical example based on Owens & Minor, analyzing cost drivers and profitability to illustrate the practical application of these concepts. Finally, it provides a detailed breakdown of costs and profitability, comparing different pricing models and their effects on the business.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
What are the services rendered by the distributor to manufacturers and hospitals?..............1
How has the nature of distribution changed over time?.........................................................1
What is the value-added by O&M?........................................................................................1
Evaluate the impact cost-plus pricing has on distributors, customers and suppliers..............2
What effect will ABP have on customer behaviour?.............................................................2
Explain Exhibit 5. How does the pricing matrix work?.........................................................2
How do the costs in Exhibit 5 correspond to the costs shown in the customer profitability
statement in Exhibit 4?...........................................................................................................3
Why doesn’t the matrix comprise all the costs shown in Exhibit 4?......................................3
What are the obstacles to successful implementation of ABP at Ideal? How would you
address these obstacles?.........................................................................................................3
What type of customer will adopt ABP first?........................................................................3
How difficult or easy is it for O&M’s rivals to adopt ABP?..................................................3
What are the risks associated with ABP for Owens & Minor?..............................................3
Work through the Owens and Minor numerical example posted on Blackboard by filling in
the template provided.............................................................................................................4
REFERENCES...........................................................................................................................5

What are the services rendered by the distributor to manufacturers and hospitals?
There are various services offered by distributors to both the parties such as
manufacturers and hospitals to retain these parties in growing their business. There are two
hospitals in the current case are Alpha and beta hospital to which the distributor will provide
all the services to steal the attention of all the external users. Different services offer by the
distributor includes procurement services which come under the logistics segment of an
entity. Logistic and supply department of the business concern plays a significant role in an
entity to deliver all the quality oriented services to retain most of the customers with the firm
for long span of time. Procurement service provided by the distributor includes warehousing
for storing all the products sold by the distributor to the firm. Procurement costs incurred by
an entity can get reduces by using just in time method in which distributor can deliver the
product directly to the customers without storing in the warehouses which, in turn, saves the
money of an entity.
Another services offered by the distributor to the manufacturer and hospital is label all
their medical products to reflect the hospital name and pharmaceutical firm’s names on the
products. With the help of labels on the products, an individual can use the medicine or
medical equipment by following the instructions mention on the label along with the expiry
date of the product.
How has the nature of distribution changed over time?
Both the hospital Alpha and beta hospital has similar business operation as they
changed their performance evaluation method from customer profitability statement to
activity based pricing approach. Basic difference among both these technique is that margin
has decided in customer profitability on the basis of total costs but in activity based, margin
has decided on the distributor discounts.1
What is the value-added by O&M?
Particulars Alpha Beta New Alpha New beta
Net income $-4,222 -$17608.575 -$16773.2 -$21669.33
Sales 150000 150000 150000 300000
Value added -2.81% -11.73% -11.18% -7.22%
1 Gao, J. H. and et.al., 2017.
1

Alpha Beta New Alpha New beta
-14.00%
-12.00%
-10.00%
-8.00%
-6.00%
-4.00%
-2.00%
0.00%
Value added
Evaluate the impact cost-plus pricing has on distributors, customers and suppliers
Impact of cost plus pricing has different perspectives for different parties such as
distributors, customers and suppliers. This pricing is good for distributor as they add their
margin along with the total costs incurred by them to charge final price for the customers. It
is not good for customers as this option will increase the market retail price of the product as
consumers shift to other seller.2 Suppliers has both positive and negative of using this option
in which it is good for showing price margin with the costs and at the same time it is negative
in attracting buyers by charging higher margin.
What effect will ABP have on customer behaviour?
Profit is given higher preferences in the ABP option which is not suitable for the
consumers as they demand for affordable range products with high quality.
Explain Exhibit 5. How does the pricing matrix work?
In this exhibit, changed figures of sales are there which was generated by Alpha and
beta from $150000 to $300000 in beta hospital. Number of orders gets changed from one
year to another as the total number of sales order get decreases in Alpha and increases by
Beta hospital. The effect of pricing matrix has clearly shown in the results of Alpha and Beta.
Sales order has deceases after one year for alpha and increases for beta shows the inclusive of
margin.
2 Rahimi, R. and Kozak, M., 2017.
2

How do the costs in Exhibit 5 correspond to the costs shown in the customer profitability
statement in Exhibit 4?
Costs in exhibit 5 is corresponds to 4 by making changes in different cost driver such
as sales orders, lines, deliveries, EDI order’s percentage, emergency orders and vendor’s
discounts.
Why doesn’t the matrix comprise all the costs shown in Exhibit 4?
The current matrix contains costs for all the services offered by distributor to
manufacturers and hospitals as Activity based pricing has developed on the basis of services
delivered by the firm.
What are the obstacles to successful implementation of ABP at Ideal? How would you
address these obstacles?
Barriers
 Expensive
 Time consuming
Ways to overcome
 Prioritizing all the expenses incurred in an entity
 Adopt time management approach
What type of customer will adopt ABP first?
Loyal customer will adopt this approach as the consumer trust on the services
provided y the seller.
How difficult or easy is it for O&M’s rivals to adopt ABP?
Rivals of O&M feels difficulty in adopting activity based pricing as adopting this
option contains higher risks.
What are the risks associated with ABP for Owens & Minor?
There are various risks involved in this particular option have given below:
 Fluctuating costs according to different costs drivers
 Decreasing number of sales order
 Stable emergency orders
 Higher costs as compared to net income
3

Work through the Owens and Minor numerical example posted on Blackboard by filling in
the template provided.
Cost Driver Rate Alpha
Volume
Beta
Volume
Alpha
Volume
One-Year
Later
Beta Volume
One-Year
Later
Number of Orders 750 333 400 660
EDI Orders $ 4.5 25% 95% 95% 95%
Non-EDI Orders $ 9.01 75% 5% 5% 5%
Lines $ 0.66 15,000 10,000 11,000 20,000
Deliveries $ 457.58 12 10 7 10
Accounts Receivable 8.64%/yr $300,000 $75,000 $75,000 $150,000
Emergency Orders $ 25 20 10 6 6
Shipping and Handling $ 130 12 10 7 10
Product Sales/month $150,000 $150,000 $150,000 $300,000
Cost Plus Margin $22,500 -- --
ABP Fees -- --
Total Monthly Revenue $172,500 $150000 $150000 $150000
Less :COGS $150,000 $150,000 $150,000 $300,000
Add: Vendor Discounts $4,035 $4035 $4,035 $8,070
Monthly Gross Margin $26,535 $4035 $4035 $8070
EDI Order Costs 4.5 $844 $1423.575 $1710 $2822
Non-EDI Order Costs 9.01 $5,068 $150 $180.2 $297.33
Line Costs 0.66 $9,900 $6600 $7260 $13200
Shipping and Handling 130 $1,560 $1300 $910 $1300
Delivery Cost 457.58 $5,491 $4576 $3204 $4576
Emergency Orders 25 $ 500 $200 $150 $150
Interest 8.64% $2,160 $2160 $2160 $2160
Procurement Direct $1,486 $1486 $1486 $1486
Labeling Direct $1,000 $1000 $1000 $1000
Account Management Direct $ 991 $991 $991 $991
Occupancy Direct $1,007 $1007 $1007 $1007
Group Fees Direct $ 750 $750 $750 $750
Total Monthly Cost $30,757 $21643.575 $20808.2 $29739.33
Net Operating Profit $-4,222 -$17608.575 -$16773.2 -$21669.33
Cost Plus/Equivalent Cost
Plus
15% 15% 15% 15%
4

REFERENCES
Gao, J. H. and et.al., 2017. Variations in the transport, distribution and budget of 210Pb in
sediment over the estuarine and inner shelf areas of the East China Sea due to Changjiang
catchment changes. Journal of Geophysical Research: Earth Surface.
Rahimi, R. and Kozak, M., 2017. Impact of Customer Relationship Management on
Customer Satisfaction: The Case of a Budget Hotel Chain. Journal of Travel & Tourism
Marketing. 34(1). pp.40-51.
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