Strategic Management Accounting: Production Plan and Pricing Methods

This report provides an analysis of strategic management accounting, focusing on production plans and transfer pricing methods for Gemini plc. It evaluates the production plan that maximizes weekly profit, considering machine hour limitations and overtime options. The report also explains market-based and full-cost transfer pricing methods, detailing their benefits and limitations with examples. Market-based pricing is defined as setting prices based on market value, promoting efficiency and competition. Full-cost pricing, or absorption costing, incorporates all fixed and variable costs, ensuring long-term sustainability. The analysis includes a profit statement, calculations for additional costs, and factors influencing strategic product rates, offering insights into effective cost management and revenue generation. Desklib provides access to this report and a wealth of study resources for students.

STRATEGIC
MANAGEMENT
ACCOUNTING
PROFESSIONAL

Table of Contents
INTRODUCTION ..........................................................................................................................3
TASK...............................................................................................................................................3
Q1. a) State the production plan that will help in increasing the weekly profit of Gemini plc
and prepare statement which highlights profit earned with the help of project plan.............3
b) One suggestion which would help to improve number of hours worked using existing
machinery by working overtime. ..........................................................................................5
Q3. Explain two transfer pricing method. State its benefits and limitations as well..............5
CONCLUSION .............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
The report prepared below explains how productions plans would work as a helping hand
in increasing the weekly revenue of Gemini plc company. It would also provide an idea about
how transfer pricing work that explains evaluation of performance during a certain period of time
and what are possible uses of market based transfer pricing which takes into account price which
has to be paid between different departments. Full cost transfer pricing can be explained as
pricing that includes all costs from variable till fixed costs. It is a summation of all costs incurred
during the production of product and how can they be covered and minimized as well. It helps to
have an idea about how market analysis work and how it can be useful for proper and better
functioning of a business. It helps business to understand what could be the benefits of such
transfer pricing and how it can affect company in long run (Chao, 2019).
TASK
Q1. a) State the production plan that will help in increasing the weekly profit of Gemini plc and
prepare statement which highlights profit earned with the help of project plan.
Contribution per unit = Sales price – Variable costs
Variable costs = Direct materials + Direct labour + Variable overhead
Product A
£
B
£
C
£
D
£
Selling price 28 34 45 46
Less: Variable
cost per unit
Direct materials -6 -7 -9 -7
Direct labour -5 -5 -10 -10
Variable
overhead
-3 -3 -6 -6
Contribution per
unit
14 19 20 23

Maximum machine hours per week = 2000hrs and they highlight limitation factor. For
organisation four product are required :
Product A – Demand per week * Machine hours = 200*4 = 800mch
Product B – Demand per week * Machine hours = 180*3 = 540mch
Product C – Demand per week * Machine hours = 250*4 = 1000mch
Product D – Demand per week* Machine hours = 100*5 = 500mch
Total machine hours needed = 2840
Product A B C D
Contribution 14 19 20 23
Machine hours 4 3 4 5
Contribution per
machine hour
3.5 6.33 5 4.6
Ranking 4 1 2 3
Relatively products which possess higher probability of profit are product B, C and product D.
Thus it is suggested that business must focus on producing such products at first place (Verčič,
and Špoljarić, 2020).
Profit statement for the production plan
Product Quantity units Machine hours Contribution
B 180 540 3.42
C 250 1000 5
D 92 460 2.12
Less: Fixed overhead -8
Net profit 2.54
Working note:

 The fixed overhead observed is at 8 per labour hour and the budget labour hours are 1000
per week, thus fixed overhead = 1000*8 = 8.00
 The left machine hours for product D is 460, thus company has the capacity to produce
92 units rather than 100 (Carayannis, 2018).
b) One suggestion which would help to improve number of hours worked using existing
machinery by working overtime.
If the business is planning to achieve the demand for the week it must produce 200 units
of commodity A and additional 8 units for commodity D. A increase of 50% will be observed in
direct and variable overhead.
Profit statement for the product plan with the overtime for the additional stocks
Product Unit
contribution
Shortfall in
sales
Additional Revised units Net profit
A 14 200 4 10 2
D 23 80 8 15 120
Total profit 2.12
Working:
Additional cost per unit = 50% (Direct labour + Variable overhead)
Revised unit contribution = Unit contribution – Additional cost
Net profit = Revised unit contribution * Number of units
Based on recorded results it can be concluded that Gemini plc must work overtime for meeting
its financial and production related goals & objectives ( Esmaeilpour, 2020).
Q3. Explain two transfer pricing method. State its benefits and limitations as well.
Transfer pricing: It can be explained as nominal value at which products are transferred
and services are being rendered among different departments in a organisation. In organisations
where revenue or profit are generated, it is likely to be transfer of stock or services and the
internal transfer will lead to hurdles in transfer pricing. It is helpful in assessment of performance
of different departments. Transfer prices are useful mainly for departments which are engaged in
selling and buying of products. Stock that are manufactured and produced by buying department
and offered for sale in open market is defined as final product.

1. Market based transfer prices: It can be explained as simplest method of transfer
pricing when company has to calculate price that business will be liable to pay between
different departments of the same organisation (Khodamipour, and Badpa, 2018). It
takes in account normal market price which shall be paid if stock is purchased from open
market. Market based transfer pricing is often helpful for measuring value of internal
production related activities. It further helps to improve efficiency, effectiveness of
company which would also motivate employees for internal operations. It also
particularly reflects a positive effect in company when implemented. Market based
transfer pricing can also be defined as competition based strategy. Whereas it is necessary
to consider only those goods which possess similarity in nature and working.
Organisation can introduce price plan as higher or lower when compared to prices of
other products present in the market depending on quality and features of products
offered.
Example: If product offered by company has similar features and quality then companies can
attract more customer by keeping its prices lower than others. The company can also keep its
prices higher than others by adding a unique feature and increasing its prices than other
competitor's already present in market. Market based pricing helps to set prices after having a
thorough analysis of market and setting prices according to demand prevailing in environment. It
will help organisation to grow and expand with the help to shift in demand curve in upward
direction (Lin and et.al, 2018).
For the implementation of Market price some conditions must be considered such as :
 The business must possess decentralisation in company.
 The divisions must have Liberty in decision planning and implementation.
 The functional units of organisation must be fully dependent on each other.
 Must have competitive environment for carrying out transfer based activities in relation
to products.
 Must have accurate, reliable, accessible data and information about market prices set in a
competitive environment.
Factors which contribute to strategic product rates:
 Customer's ability to pay prices set for a product line.
 Features of products which makes it unique in market.

 Market conditions which must be included before placing a product or planning any
strategy.
 Production and distribution expenses which contribute in running a business.
 Variable costs incurred (Makadok, Burton, and Barney, 2018).
 Input and output expenditures.
 Actions and methods which competitor plans.
Benefits of Market based transfer pricing:
1. It is a objective oriented pricing method which involves setting rate of products after
assessment of costs of products which are of similar nature present in market.
2. It is comparatively easy to collect useful data in respect of price, quantity and cost of product
from markets. It helps to evaluate what prices must be set, what amount must be provided to
customer's and what shall be the price of product at which it would be offered to clients.
3. It includes standardised economic techniques which means reliable and accurate data which
would help in decision making.
3. This method is helpful for sustaining in competition and earning revenue. Most businesses use
competitor's as base for setting up competitive prices.
4. It helps to increase sales and generate more revenues with the help of launching products at
lower prices which would help to attract more customer's from market (Marciano, 2020).
5. The products which are launched at higher prices in comparison with other companies
producing same products, the organisation must ensure that it is providing something different
from others which competitor's aren't possessing.
Limitations of Market based transfer pricing:
 Market based pricing doesn't allow to assess if the client is satisfied or not with the
present quality and prices offered. It is difficult for the company to judge taste and
preferences expected on part of customer.
 Prices set in previous days doesn't ensure that it would work in present environment as
well the reason being changing mind set and demand of customer's.
 It might result to be a expensive method due to changes updated according to changing
demands of consumers.
 It is possible that market might record frequent changes in prices of products which
would be a difficult situation to handle.

 There can be times when organisational divisions which are assigned for setting up of
prices won't agree at same prices (Massarutto, 2020).
2. Full cost transfer prices: It is also known as absorption costing which includes fixed as
well as variable costs. Company has rights for setting up prices at full costs including all
related costs of product. If managers want to examine whether selling department is
generating adequate funds, profits or revenues then they can also add a markup. Full cost
includes all costs whether direct or indirect which relates to particular products or related
services. It is considered best tool for promotion and maintenance of sustainability in
long run. Full cost pricing is a technique which helps to work in a situation where
products are offered on the basis of specific needs and requirements. It thus also helps to
minimize pressure due to competitive environment. This tool also helps to fix prices for
long term which would help to gain revenues after covering all costs and expenses
(Milanovic, Misita, and Komatina, 2020).
Example of Full cost pricing:
XYZ international company is expecting to incur costs stated below in following year:
Total sales and administration costs: $300000, Total production costs: 500000
The company wants to generate revenue of $100000 during that period. XYZ also expects to sell
250000 units of product. On the basis of given information and with the help of full cost pricing
method. XYZ company would calculate price for its product:
Full cost transfer pricing method: (Production cost + Sales cost + markup) / no. of units
Production cost: $5,00,000 , Sales cost : $3,00,000 , Units : 2,50,000.
(500000 + 300000) / 250000 = $3.2 per unit
Factors that contribute in setting prices of a product:
 Cost of product incurred: These factor contribute in setting a price range for products
after calculation of prices which have been incurred. This would help to subtract costs of
the product and set price accordingly which would be affordable for the consumer's as
well.
 Pricing strategy of competitors: It is important for the business to evaluate prices set for
the products by the competitor's present in market. It is important for every company and
business to understand which pricing policy has been adapted by other companies and

how it would help the organisation to understand pricing policies (Mohanty, and
Mohanty, 2018).
 Demand of product prevailing: It will affect the price set by the business for their
products because demand is a factor which affect business in positive as well as negative
way. It is necessary to understand what have been taste, preference and expectations of
targeted audience and how it can be fulfilled in given time frame. If demand has been met
by the business it would help the business to grow in less time than others.
 Government regulation: One of the most important factors which would affect working of
a business would be rules, regulations and policies of government which have been
prevailing. What have been the laws which must be included and kept in account for
better and smooth working of a company. If such factors not handled properly might
affect the functioning of business. It would provide support of government if business
keeps important aspects in mind such as society. It is important for a business to work
according to the wants, needs of society and should not produce products which would be
harmful for the environment (Petri, 2021).
 Financing: It would affect business directly because if it is not having adequate funds
available it is impossible for the company to set prices and carry out operations and
production a well. It is important for every business to have adequate funds available for
the time when it might be facing issues in near future. Finance is important for every
company to place a strong position in market and fight the competition prevailing. It is
important for insuring the goods, for investment purposes and for paying debts as well. It
would affect business the reason being if a business wants to make purchases or
payments it must be having proper financing methods available (Rosyidi, Hapsari, and
Jauhari, 2021).
Benefits of full cost pricing:
1. It provides a clearer picture and more transparency: As observed full cost pricing includes all
types of costs prevailing with the working of company in environment. It provides transparency
in carrying out operations related to costs as well as revenues earned by business over a period of
time. It includes cost such as fixed, variable and marginal too.
2. Helps company to determine price which will be more suitable: It helps organisation to
compare prices set by them with other competitive companies already present in market. It helps

to keep prices competitive with others and increase demand of products in environment.
Business can attract more customer's by lowering its prices in comparison to others and even set
a high price adding new and unique features which would position products different from
already present products.
3. It helps to keep a track record of revenues and profits earned: Including all types of costs and
maintaining a proper record of profit earned by the company will help to assess what has been
spent and what has been earned. It helps to calculate financial position of company in market
(Tajtehranifard and et.al, 2018).
Limitations of full cost pricing:
1. It is a complex activity when business has to find out variation in costs at various levels of
production. It results to be a time consuming and cost incurring process which makes it difficult
for organisation to find out what amount has been spent in which areas.
2. Full cost pricing doesn't include competition: It ignores competition which serves as a
drawback for business in ascertaining how strong it is and what is its brand image in market.
Whether customer's are preferring it over others and where it is lagging behind.
3. It ignores price changes in market done by other companies: It doesn't include price changes
made by other companies which leaves it unaware about surroundings. It doesn't change its
pricing policy according to dynamic environment which serves as a disadvantage in long life
cycle of the business and builds a rigid image of organisation.
4. It is a difficult situation when organisation has to compare product line: It is a very complex
situation when organisation has to evaluate any comparison between products from different
divisions and departments. It is impossible for business to compare success of a particular
product the reason being involving vast operations. It doesn't allow assessment of success
achieved by a company over the years (Valeri, 2021).

CONCLUSION
From the above prepared it can be concluded that there are many risks and opportunities
prevailing around it such risks can be minimized with the help of proper planning and market
analysis. Pricing of products play a very important role in success journey of a business, it can
attract customer's from the market and tap new opportunities whereas reduce threats from
competitor's by giving some new and unique additional features over others. It can help to cover
market with the help of low pricing as well as different pricing strategies whichever it feels is
more suitable according to the segmenting of customer's and market. This report serve as a guide
to know where it is lagging behind and what could be the effective measures which would help
to achieve certain pre determined goals and objectives. This report would help to be aware of
what is happening in the market, what has been the changes and updates that are to be kept in
mind. There are many factors which affect setting up of market prices as well as cost pricing too
which must be considered for smooth functioning of business and for fighting competition.

REFERENCES
Books and Journals
Carayannis, E., 2018. Strategic management of technological learning. CRC Press.
Chao, H. P., 2019. Incentives for efficient pricing mechanism in markets with non-
convexities. Journal of Regulatory Economics. 56(1). pp.33-58.
Esmaeilpour, H., 2020. Impacts of International Financial Reporting Standards (IFRS) on Tax
Evasion and Tax Avoidance. Journal of Knowledge Accounting. 11(1). pp.1-33.
Khodamipour, A. and Badpa, B., 2018. Comparing the roles of contribution income statement
and value-stream income statement in Strategic performance measurement. Accounting
and Auditing Studies. 7(25). pp.5-20.
Lin and et.al, 2018. Is other comprehensive income reported in the income statement more value
relevant? The role of financial statement presentation. Journal of Accounting, Auditing
& Finance. 33(4). pp.624-646.Chofreh and et.al, 2021. Covid-19 shock: Development
of strategic management framework for global energy. Renewable and Sustainable
Energy Reviews. 139. p.110643.
Makadok, R., Burton, R. and Barney, J., 2018. A practical guide for making theory contributions
in strategic management. Strategic Management Journal. 39(6). pp.1530-1545.
Marciano, A., 2020. How Wicksell became important for Buchanan: a historical account of a
(relatively) slow epiphany. Journal of Public Finance and Public Choice. 35(2). pp.181-
203.
Massarutto, A., 2020. Servant of too many masters: Residential water pricing and the challenge
of sustainability. Utilities Policy. 63. p.101018.
Milanovic, M., Misita, M. and Komatina, N., 2020. Determination of the optimal production
plan by using fuzzy AHP and fuzzy linear programming. Journal of Intelligent & Fuzzy
Systems. 38(4). pp.4315-4325.
Mohanty, A. and Mohanty, S., 2018. The impact of communication and group dynamics on
teamwork effectiveness: The case of service sector organisations. Academy of Strategic
Management Journal. 17(4). pp.1-14.
Petri, F., 2021. Product Markets: Pricing, Capacity, Investment, Imperfect Competition.
In Microeconomics for the Critical Mind (pp. 1021-1114). Springer, Cham.Lee, Y. H.
and Lee, S., 2022. Deep reinforcement learning based scheduling within production
plan in semiconductor fabrication. Expert Systems with Applications. 191. p.116222.
Rosyidi, C. N., Hapsari, S. N. and Jauhari, W. A., 2021. An integrated optimization model of
production plan in a large steel manufacturing company. Journal of Industrial and
Production Engineering. 38(3). pp.186-196.Jeanjean, T., Martinez, I. and Davrinche,
G., 2018. Non-IFRS disclosure and income statement disaggregation. Available at
SSRN 3299353.
Tajtehranifard and et.al, 2018. A path marginal cost approximation algorithm for system optimal
quasi-dynamic traffic assignment. Transportation Research Part C: Emerging
Technologies. 88. pp.91-106.Bjørnenak, T. and Nørreklit, H., 2018. Costing vs.
prediction machines in pricing decisions A Pragmatic Constructivist
approach. Proceedings of Pragmatic Constructivism. 8(1). pp.4-4.
Valeri, M., 2021. Organizational Studies: Implications for the Strategic Management. Springer
Nature.

Verčič, A.T. and Špoljarić, A., 2020. Managing internal communication: How the choice of
channels affects internal communication satisfaction. Public relations review. 46(3).
p.101926.