Management Accounting: Analysis of Pricing, Costing, and Investments

This essay provides a comprehensive analysis of key management accounting concepts. It evaluates the relationship between markup, margin, and contribution in pricing policies, discusses issues around target pricing and costing methods, and compares investment options like ARR, payback period, NPV, and IRR. Furthermore, the essay assesses the effectiveness of value chain analysis in enhancing organizational competitiveness by minimizing costs and maximizing profitability. The discussion highlights the importance of considering both the advantages and limitations of each technique for effective decision-making in a business context. Desklib is a platform where you can find similar solved assignments and study resources.

Running head: MANAGEMENT ACCOUNTING
Management Accounting
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Evaluating the relationship between mark up and margin and contributions in firms
reviewing pricing policies
Pricing policy is considered to be one essential measure, which is used by
organisation for increasing their profitability, while maintaining the level of income from
operations. Furthermore, the calculation of mark-up pricing, margin and contribution helps in
improving the level of income from sales, which could raise the level of profits from
operations. In addition, the mark up price is the additional percentage on the costs, which is
added by the company to determine the overall price for the particular product. On the other
hand, margin of a product is calculated by deducting the total revenue with total cost of
making the product (Hukka and Katko 2015). Moreover, contribution is calculated for
determining the level of profits after deducting the variable expenses. Hence, there is a
significant relationship between mark-up, margin, and contribution in a firm for reviewing
the pricing policies. Furthermore, the pricing strategy mainly allows the organisation to
determine the price level of a particular product for wholesale and retail. This determination
allows the organisation to make adequate decision regarding the pricing structure of their
product (Campiglio 2016).
Companies with the pricing policy is able to determine the wholesale pricing and
retail pricing structure of their product, which help them make distribution decisions. The
pricing method has three distinguish methods, which are cost-plus pricing, price based on
demand & cost, and price set in relation to market alone. Moreover, the evaluation also helps
in detecting the level of pricing, which could be conducted for particular products (Baranzini
et al. 2017). Hence, the margin measure is used in the pricing policy for determining selling
price for the retail section of the organisation. Hence, the management is able to detect the
level of prices, which needs to be sold by the retailers. Furthermore, with the use of margin
organisation is able to detect the cost incurred by the company for producing the product,

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which is essential in determining gross profit margin of the company. Lastly, the contribution
method allows the company to understand the level of variable cost incurred in their
operations to complete the production process. Therefore, with the use of pricing policies
companies are able to determine the accurate selling price for their product, which could
maintain the level of competition in the market (Cannon and Hillebrandt 2016).
Issue around target pricing and costing
Companies conduct Target pricing to estimate the price level, which could increase
competitiveness within the operations of the organisation. In addition, the use of target
pricing allows the organisation to determine the maximum cost, which a product could have
after adding the standard profit margin. Target pricing method has mainly allowed the
company to determine the revenue, which could be generated from the product and level of
profits that might be obtained after the completion of the process (Cooper 2017). Moreover,
the target pricing method has certain issues, which are depicted as follows.
The method of target pricing increases the issue of quality and increases low focus on
quality, as the organisation is focused on constraining the cost on particular level regardless
of the product quality. Hence, it could be considered a major problem for the organisation, as
product development is focused on pricing and not on the actual quality of the product.
Therefore, it could be detected that the target pricing structure has certain issues, which needs
to be dealt by the organisation before implement it in the production function (Nagle and
Muller 2017).
The targeting pricing system select the current competitive price for the product,
which deducts the profit margin and determines the level of expenses for each product and
indicating restrains on expenses. The measure relevant increases the restrain on expenses
conducted on the particular project by the company and forces the organisation to minimise

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cost on particular product. This measure also compels the organisation to cut down on
spending on the expense of the quality, which is needed by the organisation. Hence, the target
pricing measure might not allow the organisation to improve its operational capability, as it
focuses on expenses, while producing the final product (Langfield-Smith et al. 2017).
Target costing method is considered to be one of the measure, where the cost of the
product needs to be at the predesigned level. In addition, the predesigned measure might help
in adjusting the costing level, which could help in raising the level of profits from operations.
The fixation of the cost incurred in production directly has impact on the product quality and
profitability of the organisation. There are certain limitations that could be identified from the
operation, which could have an impact on product quality (Weygandt, Kimmel and Kieso
2015). The issues in adoption of target costing method are depicted as follows.
The use of targeting costing does not allow the organisation to determine the level of
profits, which could be generated from sales of the product and increases the change of loss
in profits. The management only aims in reducing the cost of the product but is not able to
detect the level of competitive pricing that is present in the current market. Hence, decline in
profit will directly have an impact on performance of the organisation, as the company only
aims in targeting certain level of expenses over the period of time. This increases the chance
of loss in profits over the period of time, as the management is not focused in improve their
competitive pricing.
The company with the use of target costing measure directly halts the level of
expenses, which could be conducted on certain products, while increasing the stagnation in
expenses. Hence, the focus of the management is cost centric, where the organisation is not
able to improve the level of quality for increasing demand of the product. Hence, the

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stagnation of the expenses leads to low product quality and hamper the competitive edge of
the organisation (Cooper 2017).
Comparing and contrasting the different investment options including ARR, payback period,
NPV and IRR
There are different types of investment appraisal techniques, which could be used in
selecting the accurate investment projects. In addition, the evaluation of investment appraisal
technique mainly helps in detecting the level of profits, which could be generated from
operations. Companies use the investment appraisal techniques for detecting the financial
viability of the project and by how much it could increase their financial performance in the
long-run. The investment appraisal techniques directly allow the organisation to detect the
time value of money and account for the inflation, which can have negative impact on future
cash inflows (Baum and Crosby 2014).
The accounting rate of return, payback period, net present value, and internal rate of
return are one of the major components of investment appraisal techniques, which allow
organisations to understand the financial viability of a project. Hence, companies with the
help of the above-mentioned techniques are able to segregate different projects on the basis of
return and risk involved in the investments. The major comparison between the above-
mentioned techniques is that it is used for detecting the financial viability of a project.
Companies use the above investment appraisal techniques together to understand the
financial progress that it could make in future. The above 4 investment appraisal techniques
are most useful when utilise together for analysing a particular project, as it portrays the
actual financial capability of the cash inflows to support future growth of the organisation (Li
and Trutnevyte 2017).

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However, there are certain contrast between the accounting rate of return, payback
period, net present value and internal rate of return calculations, which are used for
investment appraisal purposes. The calculations are relatively focused on a particular field to
determine whether the organisation needs to select the project for improving the profitability
in future. The calculation of accounting rate of return relatively indicates the average rate of
return, which is determined from the cash flows of the project. Therefore, it could be assumed
that with the accounting rate of return organisations are able to determine the percentage
return that is generated from a particular project and help in detecting the project with the
highest rate of return. Nevertheless, the major loopholes of the accounting rate of return are
that it does not account for the concept of time value of money, which increases its
unreliability (Lokman et al. 2017).
Moreover, the evaluation of Net present value directly indicates the process, where
time value of money is calculated, which could help in detecting the level of Profits that
could be generated from different projects. However, net present value is one of the major
investment appraisal techniques that could allow organisations to detect time value of money.
Nevertheless, it does not allow the organisation to evaluate projects with two different value
and investment capital, which restricts the organisation to detect the financial viability of the
projects. The use of Payback period method is relatively helpful for the organisation to
understand whether the oral project will recover the investment amount during its life. This
information is relatively necessary for the organisation to make adequate investment
decisions on particular project.
However, payback period does not accommodate the use of time value of money,
which relatively reduces its significance on detecting adequate financial project for
investment. Lastly, with the use of internal rate of return the organisation is able to identify
the overall returns that could be generated from the particular project. This relatively helps in

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detecting whether the organisation would eventually increase profits overtime. Nevertheless,
the evaluation does not accommodate for time value of money, which directly reduces the
capability of the company to identify overall form value that will increase in future (Upton et
al. 2015).
Evaluating the effectiveness of value chain analysis
Value chain analysis is relatively and adequate measure that is used by organisation to
look onto each and every step to create adequate product for the production process
(Samsatli, Samsatli and Shah 2015). Moreover, with the help of value chain analysis
organisations are able to deliver maximum value for the least possible total cost of the
product. This eventually helps in maximizing the profitability conditions and improves their
capability to generate higher rate of return from investment. Value chain analysis has the
relevant advantages, which allows organisations to maximize the profit from the production
process by reducing the expenses on cost of goods sold. In this context, Gereffi and
Fernandez-Stark (2016) stated that companies with the help of value chain analysis are able
to detect the activity, which is incurring the highest cost and aim to maximise its efficiency.
The activities of the value chain analysis are inbound logistics, operations, outbound
Logistics, services, market and sales. This activity is relatively allowed the value chain
analysis to identify relevant expenses and income that could be generated from the
production of the particular product. The primary aim of value chain analysis is to strengthen
the competitiveness of the organisation by minimising the overall cost involved in the
production of the product. This primary goal relatively allows the organisation to improve its
competitiveness and generate adequate revenue to support operations. Moreover, the analysis
of the above 5 chain activities relatively allow the organisation to cut down on extra expenses
and maximize the level of pricing which could be developed for increasing the

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competitiveness in the market. On the contrary, Mudambi and Puck (2016) argued that
companies with maximum activities are not able to detect the actual process, while reducing
the efficiency of the value chain analysis to minimise expenses of the production system.
With the help of value chain, analysis organisations are relatively able to select the
level of activities, whose overall efficiency could be increased to minimise the expenses and
maximize profitability from operations. However, the major disadvantage for conducting the
value chain analysis is the different type of evaluation that has been conducted, which
contradict with the overall strategy and vision of the organisation. Therefore, organisation
sometimes lose sight of how the activities are related to each other, which increases the
problem of the value chain analysis to minimise the expenses incurred in the production
process (El-Sayed et al. 2015).

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