Strategic Management Accounting: Discount Measures, Inventory Control

This report delves into strategic management accounting (SMA), focusing on data analysis for business strategy development. It explores alternative discount measures to boost sales and reduce working capital requirements while minimizing potential profit reduction. The report critically evaluates various inventory management and control methods for improved cash flow and profitability. Additionally, it covers two transfer pricing methods, analyzing their advantages and disadvantages with numerical examples. Key areas include bundled discounts, prepayment discounts, free shipping, value-added offers, customer loyalty rewards, just-in-time inventory, ABC inventory management, economic order quantity, bulk shipment, backordering, consignment, and inventory cycle counting.

STRATEGIC
MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................3
Question 2........................................................................................................................................3
(a).................................................................................................................................................3
(b).................................................................................................................................................5
Question 3........................................................................................................................................7
Transfer pricing methods-............................................................................................................7
CONCLUSION..............................................................................................................................11
REFERENCES................................................................................................................................1

INTRODUCTION
Strategic Management Accounting (SMA) is a process of provision and analysis of data of
management accounting of a business along with its competitors, for the use of developing and
monitoring business strategy. The various techniques of strategic management accounting are
available to companies with the help of which they can manage and control inventories. Not only
that the various measure of customer discount offering is also available to companies which they
have to adopt in order to boost sales, increase profitability and decrease working capital
requirement. This report will cover the alternative measure to offering discount to customers in
reducing working capital requirement and minimizing potential reduction in profitability.
Further, the report will critically evaluate the various methods adopted in order to manage &
control inventories along with the improving cash flow and profit in a business. In addition to
this, the report will also cover the two methods of transfer pricing and explain the both. Lastly,
the advantage and disadvantage of both the method are critically analysed along with the
coverage of numerical example.
Question 2
(a)
The alternative measures of discounts which the companies can offer to its customer in order to
boost sales and reduce working capital requirement along with minimal potential reduction in
profitability:
Bundled Discounts: This is a measure which state that companies have to provide discounts to
its customers on its bundle products. This helps the companies in increasing their number of
items sold via offering the products in bundle and kits. It is found out in a research that, this
measure will increase average order value of the company. It is one of the best way to highlight
the value of products to its customers which are high in price. However, sometime because of the
discount over products, the profit margin of products is highly get affected (Rashid, Ali and
Hossain, 2020). Thus, it is advisable to companies that they should bundled high profit margin
and low profit margin products together. This will encourage customers to try other products as
well along with their own preference products.

Prepayment discounts: This is a discount offering measure in which companies allow discounts
to its debtors whose payment are received earlier. This is basically adopted by hospitality
industry in the form that the hotels will allow discount to their customers who pay them full
amount at the time of bookings. However, it is important for the other companies to understand
that this type of measure highly leads to reduction in profitability. So, in order to overcome this,
the companies should offer this discounts on expensive items only. For example, Tesco company
uses prepayment discount option for its business customers only rather than individual customers
(Petera, Wagner and Šoljaková, 2020). Hence, it is basically a great option for B2B businesses
where the discounts will be offer on expensive items such as furniture, gold & diamond jewellery
and designer clothing’s. The impact of which profitability will not reduce highly and working
capital requirement will reduce.
Free Shipping: This is also one of the measure of discount offering to customers with the help
of which the requirement of working capital reduces and profitability increases. It is because this
measure does not reduce the price of any of its products rather than they will provide doorstep
delivery to its customers at free of shipping cost. In this option, the companies need to provide
free delivery service to its customers on its each order. However, sometime the cost of
transportation incur by company is higher than the profit they earn from each order. Thus, it is
important for the company to understand that they should provide free delivery offers to those
customers who buy products above certain limits (Krutova and et.al., 2020).
Value added offers: This measure state that company need to offer discounted price to its
customers as it is potentially reducing the profitability of the company. Thus, as per this
customer offer measure the company can value added items to its customers such as free gifts,
exchange for their purchase, vouchers for next shopping etc. This is basically one of the best
option to attract customers and boost sales without huge decrease in profitability. On the other
hand, it is critically evaluated that most of the value added offers can be complementary items
where the company can provide its slow moving goods to customer as free items in order to
increase customer retention rate (Emiaso and Egbunike, 2018). With the increased retention rate
of customers, the profitability will also increase along with reduce working capital requirement.
Customer Royalty reward: This is another or alternative measure of discount customer offer
which does not affect the profitability of customers and the requirement of working capital get
decrease. For example, the company can provide its loyal customer special service such as free

delivery on each product order without any purchase limit, additional 5% to 10% discount etc.
This is best way to keep their loyal customers happy and satisfied via entering them into loyalty
program (Shi, 2021).
The above mentioned offers and discounts helps the companies to attract customers and
boost sales of products and services. The ultimate outcome of this measures is such that the
companies high popular as well as low popular goods get sold in the market without increase in
cost which leads to higher profitability.
(b)
The various methods that can be adopted by companies to manage and achieve the efficient
control of inventories are as follows:
Just in time inventory: This is basically one of the method with the help of which companies
can effectively manage and control inventories within the organization. As per this method, the
company can order new lots of raw material from the customers at the time when they need it. It
is best for reducing the holding cost of stocks and risk involved with keeping a large amount of
stock in hand (Osim, Umoffong and Goddymkpa, 2020). Also, this method is best for fewer
defective products and improve efficiency. However, on the other hand, this method sometime
increases the cost of production of companies because of the unexpected increase in the price of
raw material. Thus, it is important for the company that they have to opt for this method but also
keep their eye on market prices of raw material.
ABC inventory management: As per this method, the company can able to identify the
inventory that contributed into company profit. This is done by classifying goods into different
tyres. This method basically brings accuracy and reliability in the determination of product cost
via focus on cause and effect relationships. This method identifies the pooling of activity costs
and cost drivers the impact of which excess capacity is identified and further cost will reduce.
However, this method is complex and expensive for the companies to implement because of the
numerous cost pools and different cost drivers (Vale and et.al., 2022). The main disadvantage of
this method is that it requires management to estimate the costs of activity pools which are costly
and sometime outdated that need to be updated regularly.

Economic order quantity: This is also known as EQO which is one of the highly recommended
method with the help of which companies can manage and control its inventories. It is basically
an ideal inventory that company have to order at a single point of time in order to manage
holding and ordering cost of inventory. If the companies want to maintain sufficient inventory
level within their organization than they have to adopt this method. However, it is important for
the company to understand that this method does not consider the seasonal and economic
fluctuation which result into wrong EOQ level. This is best method to increase the ultimate
earning and profitability of business (Al-HASHIMY and Al-hashimy, 2019).
Bulk shipment: This is another method which helps in inventory control, improving cash flow
and increasing profitability of business. This method state that purchasing and shipping raw
material and finished goods in bulk is cheaper for the company. The reduction in cost of direct
material purchase will reduce the cost of production. The ultimate result of which the overall
profitability of the business will improve. In case, if the company products demand is higher
among the consumers, in that case companies should apply this method. The chances of increase
in profitability and improve cash flow is higher in case of this method. Also, bulk shipment
includes fewer shipments and lower shipping costs. However, the risk of capital loss is high in
this method along with increase in holding cost for storing bulk raw material. It is also difficult
for the company to adjust quickly when the demand of goods fluctuates.
Backordering: Another method of inventory control and management which leads to higher
profitability is backordering. This method indicate that company have to make decision on order
taking and receiving payment for the out of stock products. For example, in case if the daily
production capacity of company is 10000 and for that company require raw material of 10000
units. Further, if the company has only 500 units of out of stock than they will place new order
for 500 units only (Biswas, and Akroyd, 2022). It is best for increasing sales and improving cash
flow within the organization. This method is basically flexible for small businesses as it lower
holding cost and overstock risk. But, the disadvantage of this method which have to understand
by companies is higher risk of customer dissatisfaction, lower fulfilment times.
Consignment: This method involves placing order in the hand of retailer by the wholesaler via
retaining the ownership until the product is sold to customers. As per this method, the wholesaler
can manage & control their inventories but it creates issue for the retailer when the goods are not
sold to customers due to demand uncertainty. But the company can opt for consignment method

as it provides variety of benefits to retailers. For example, the consignment method basically
offer wide variety of products range to its customers without binding up capital. The company
can enter on consignment agreement with its supplier or wholesaler. It also decreases the lag
time at the time of restocking products along with that the companies can return the unsold stock
again to wholesaler at no cost. This is one of the best method for reducing inventory holding cost
and increasing potential profit of the company.
Inventory Cycle counting: Lastly, inventory cycle counting is also one of the inventory control
method that have to be adopted by companies to achieve efficient control of inventories and
improving cash flows & profitability. This involves counting of small amount of inventory at a
particular point of time rather than doing entire manual stocktake. It is because conducting and
doing entire manual stocktake or stock counting on single day is quite time consuming and
expensive (Dahal, 2019). But inventory cycle can be easily done by the company without
disrupting its operational function. The most crucial benefit provided by this method to its users
that it helps the companies in lowering the inventory holding cost. However, this method is
unable to provide accurate information of inventory as compared to full stock counting. Also,
this method does not consider the seasonal change and its impact over the availability of raw
material in the market.
Question 3
Transfer pricing methods-
Transfer pricing refers to the practice in which the transactions between a company and its
subsidiaries, or between divisions of the same company in different countries are carried out. It is
basically an accounting and taxation practice that allows for pricing of the product in such
transactions. The methods are as follows- (Mescall and Klassen, 2018.)
(1) Full cost transfer pricing-
In this method of transfer pricing a company sets the transfer price at full cost, also known as
absorption cost. Simply which is the sum of variable and fixed costs per unit. This model
believes that the product which is being transferred from one division must be on its full cost so
the receiver division gets actual cost of it. This method considered entire cost which is occurred
in producing the units of transfer (Chu and Quentin Grafton, 2019.)

Advantages- these are the advantages of this model.
 Considering entire cost of products- in this method for figuring out the transfer pricing
the entire cost of products is taken into consideration. It makes this method favourite
since the transferor division will be charging it on its entire cost which will give clear
picture of their performance.
 Compliance with reporting rules- the reporting rules also prefer such pricing because it
does not leave any element of cost. There is not such addition which is there in cost plus
transfer pricing. Which makes it better in this regard.
 Compliance with Income tax rules- while assessment full cost transfer pricing provides
ease to the assessor since there is no cost element left and even noting additional is added
which fetch clearer picture of the transferred product and while assessment eradicate the
possible troubles.
 Selling division can markup profit- if such product is transferred to the selling division
then they can add profit margin as well. Since the received product is valued on its full
cost which gives them opportunity to markup here.
 Proper picture of value addition- this model helps the receiver division in figuring out
their actual value addition.
Disadvantage-
 It does not ensure goal congruence. By increasing the transfer price above the supplier
division's marginal cost, it promotes decisions by the buying division which reduce
group-wide profitability.
 Defining transfer prices based on full costs increases the problem already present in the
previous method, potentially caused by inaccurate allocation of indirect cost because now
both costs are at stake.
 Because there is no margin from supplier division. Then there would be evaluation bias
of individual performance (Netseva-Porcheva, and Urucheva, 2018. )
Example- There is a company Tesco ltd which is having its two divisions first division makes
seats and then sends it to the second division who processes it for further stage the division is
practising full cost pricing model to decide the transfer pricing of the product.

Division A-
Number of seats produced by division A= 15,000
selling price (to outsiders) = 40
variable cost (per unit) = 22
fixed cost ( per unit) = 17
Division B
cost to buy a seat from an outsider = 40
number of seats needed = 5000
purchase price of seats (per unit) = 39
(2) Cost plus method-
it begins with the cost incurred by the transferee who adds appropriate cost plus mark-up to this
cost to make an appropriate gross profit in the light of the functions they have performed , risks
assumed, assets used and considers other market conditions as well. Since it believes that the
products must be sent on the arm's length prices which brings more rationality in such pricing
system (Altriara, 2020.)
Advantages-
 The method is based on internal costs, it uses the mechanism in which the entire cost of
the transferee division is calculated, and then they add their margin of gross profit. So
ultimately the internal cost of that particular division is taken into focus.
 It brings competitiveness in various divisions because every division will be charging
their profit margin taking rational base which will set competitiveness between or among
the involved divisions.
 Eradicate the problem of performance evaluation of the divisions. Since it shares the
gross profits generated by various divisions so while evaluating their individual
performance it will help to the top management.
Disadvantage-
 There may be a weal link between the level of costs and the market price.

 The data on mark-up gross margins may not be comparable due to accounting
inconsistencies and other factors. Since there are dozens of different approaches to assess
the margin and it will be based on various assumptions so in case of discrepancy in
assumption or accounting practices the results will be misleading.
 The method is based on actual cost, there may be no incentive for the controlled
manufacturer to control the costs. It will make them reckless and will also lead them to
make more waste.
 It believes in the assumption that the risk factors is lower in the stages of performance.
Then only it will be reflecting the right value being added. But this is not realistic since if
there are different stages of production so every and each division would be facing
different level of risks.
 This method is not suitable for such transactions involving a fully-fledged manufacturer.
It will be hard to establish a profit mark-up that is required to remunerate the
manufacturer (Wibowo, 2021.)
Example- Tesco ltd is having two divisions, it is practising cost plus method for transfer pricing.
The mathematical expressions are as follows-
Division A
variable cost of production(per unit)= 25
fixed cost (per unit) = 5
total cost (per unit) = 25
gross profit = 10
selling / transfer price = 40
Division B
price of product (in market) =40
purchase price from division A = 40
this example is depicting the exact picture that division b is getting the product from division a
on the same price as it is in market (Larasati S, 2018.)

CONCLUSION
After summing up the above information, it is concluded from the report that value added
offers, customer loyalty rewards, free shipping are some of the measures of discount offers with
the help of which the companies can increase its sales without affecting profitability highly.
Further, the report has also concluded the various inventory management methods such as Just in
time, ABC, bulk shipment, EOQ, consignment etc. have to be adopted by the companies in order
to control inventory and improving cash flows. The report has also concluded the two methods of
transfer pricing such as full cost transfer pricing and cost plus method. The advantage and
disadvantage of this method are also concluded in this report along with the practical question.
Lastly, the report has described how this two methods of transfer pricing helps the company in
generating higher profitability.

REFERENCES
Books and journals
Rashid, M. M., Ali, M. M. and Hossain, D. M., 2020. Strategic management accounting
practices: a literature review and opportunity for future research. Asian Journal of
Accounting Research.
Petera, P., Wagner, J. and Šoljaková, L., 2020. Strategic management accounting and strategic
management: The mediating effect of performance evaluation and
rewarding. International Journal of Industrial Engineering and Management. 11(2).
pp.116-132.
Krutova, A. and et.al., 2020. Strategic management accounting as an information basis of
effective management of enterprise activities. Academy of Accounting and Financial
Studies Journal. 24(2). pp.1-8.
Emiaso, D. and Egbunike, A. P., 2018. Strategic management accounting practices and
organizational performance of manufacturing firms in Nigeria. Journal of Accounting
and Financial Management ISSN. 4(1). p.2018.
Shi, W., 2021. Analyzing enterprise asset structure and profitability using cloud computing and
strategic management accounting. PloS one. 16(9). p.e0257826.
Osim, E., Umoffong, N. J. and Goddymkpa, C. P., 2020. Management accounting practices and
the performance of small and medium-sized enterprises in Akwa Ibom State,
Nigeria. Business Perspective Review. 2(2). pp.57-74.
Vale, J. and et.al., 2022. Management Accounting and Control in Higher Education Institutions:
A Systematic Literature Review. Administrative Sciences. 12(1). p.14.
Al-HASHIMY, M.N.H. and Al-hashimy, H. N. H., 2019. Strategic Accounting in the
Profitability of Construction Engineering Projects Management Companies in
Iraq. Journal of Engineering and Applied Sciences. 14(3). pp.941-944.
Biswas, S. S. N. and Akroyd, C., 2022. Management control systems and the strategic
management of innovation. Qualitative Research in Accounting & Management.
Dahal, R. K., 2019. Changing role of management accounting in 21st Century. Review of Public
Administration and Management, 7(3), pp.1-8.
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