Advance Management Accounting Essay Example
Advance Management Accounting
Question 1(see the excel attachment)
If the selling price of the product is decreased by 5% and unit sales volume increase by 15%, then the sales will increase by 9.25%.
Before deciding on whether to outsource a product, there are many factors that need to be considered. Some of these are financial while others are non-financial. Non-financial considerations include;
Competition: health competition and other anti-competitive behaviours are encouraged in any industry. Competition has its positives and draw backs. Competition is said to occur when different firms produce almost similar products (Donald, et al., 2009). This means that if there are many industrial players dealing in the same product, the supply of the product is likely to be high. When the supply of a product is high, the law of supply asserts that the forces of the market will act to bring the price down. Low price of the product is not encouraging to the firm and may result to the firm operating at a loss. Note that the firm may not be in a position to change the forces of the market since it is an exogenous factor. The firm will be forced to adjust itself or it may be wiped out of the market. Apart from Patterson, there are other competitors that offer a similar product at a lower cost. Furthermore, many of the products from the firm that used to be unique to the firm are now facing stiff competition.
Public image: the image of a firm means so much to its business growth. A business is expected to operate in an honourable way even as it pursues its profit objective within the confines of law. It is expected to improve the quality of life in and outside its confines. Since the business is located within a community, it is expected that the firm will provide employment to the people around. This helps the business to be accepted as a social asset within the community. Outsourcing the product will mean that so many employees from the local community will be retrenched. This action will impact negatively on the local community. Laying off employees will ruin the excellent relationship the firm has enjoyed with its employees. It will also not be in line with the mission of the firm of creating employment to the local community.
Quality: the quality of a product is essential as it points to the extent of its demand in the market (Watts & Zimmerman, 1986). If outsourcing the product will lead to compromising on its quality, then the management has to be wary since there are other competitors who offer the same product. A product whose quality is low cannot sell in the market.
Staff: the staff of the company form part of stakeholders. A decision that has a direct impact on them will not be welcome. Outsourcing the product means that some of the staffs will be laid off. This kind of decision will encounter resistance from the staffs. Even those staffs that will be retained will not be motivated to work for the company since they are not assured of their work tenure.
There is several management accounting techniques that would support achieving manufacturing efficiencies. They include;
Activity based costing (ABC) technique: Patterson Manufacturing deals with a range of products. ABC accounting technique will allow Patterson manufacturing to make a determination of the actual cost related to each product it produces without regard to the structure of the firm. This approach will enable Patterson manufacturing to define the firm’s activities in terms of value addition. Therefore, those activities which add value to the firm will be identified. This identification of value adding and non-value adding activities will help the firm to determine where time, money and effort are going into waste and resulting to incurring unnecessary costs. The firm will allocate more of its time, effort, money and other resources to those value addition activities. This will help the firm to achieve manufacturing efficiencies.
Target costing: Patterson manufactures about one hundred products in four categories. Most of these products have a short product life cycle. In order to increase manufacturing efficiencies, the management should put more emphasis on the costs expended at each phase of production. The reduction of the aggregate product cost over its life cycle will meet customers’ demands as well as maximize the profit of the firm (Horngren & Harrison, 2007).
Investment return for Patterson Manufacturing has been declining despite the fact that it has remained profitable. Both the number of newly introduced products and product improvement has fallen. The firm faces substantial competition in the products that were initially unique to the firm.
This report looks at the long term strategy for improving the performance of the business. It also evaluates possible ways of improving the future profitability of your firm.
There are several measures that can be taken to guarantee the future profitability of your firm. Profit can be maximized through two main ways: maximizing the sales revenue or minimizing the total cost (Brownell, 1995).
Sales revenue can be maximized either by reducing the unit selling price or increasing the volume of sales or both (Weygandt, et al., 2009). It is notable that there are other competitors who offer a similar product at a lower cost. By reducing the unit selling price of the product, your firm is able to increase demand for its products. This will have the effect of increased sales volume hence the sales revenue will be high. A firm that has high sales volume is likely to be profitable.
Your firm can also be profitable if it minimizes its total cost. The firm should adopt the ABC approach to determine those activities that do not add value to the firm. These activities should be abandoned as they increase unnecessary cost to the firm.
A firm cannot pay good salaries and other privileges to its employees without reducing its profits. This is the case because such privileges constitute a cost chargeable to the income statement thus reducing profit for the period.
This report recommends that your firm should retrench some of its employees. This will help to reduce the cost charged against the profit made by the firm. It is also recommended in this report that the firm should abandon some of the activities that do not add value to the firm.
Brownell, P., (1995). Research methods in management accounting. Melbourne: Coopers&Lybrand and AAANZ.
Donald, E. et al., (2009). Intermediate Accounting. New Jersey: John Wiley and Sons.
Horngren, C. T., & Harrison, W. T. (2007). Accounting
(7th edition), Upper Saddle River, NJ: Pearson Prentice Hall.
Watts, R. & Zimmerman, J., (1986). Positive Accounting Theory. Englewood Cliffs, NJ: Prentice-Hall.
Weygandt, J. et al., (2009). Managerial Accounting: Tools for Business Decision Making. New York: John Wiley and Sons.
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