Fixation of selling price of a product is, no doubt, one of the most significant factors in modern management.

It becomes necessary for various purposes, like, under normal circumstances of the interest; at trade depression, accepting additional order etc.

Under normal conditions, according to Financial Accounting technique, the selling price of the product must cover the total cost plus a certain margin of profit. But, under Marginal Costing technique, the price must equal the marginal cost plus a certain amount which depends on the nature, variety, demand and supply, policy pricing and other related factors.

Needless to mention that, if the selling price of the product is fixed at Marginal Cost, the amount of loss will be the amount of fixed overheads and the amount of loss will be same or lower if the production is suspended or closed down.

That is why selling in all the periods/loss must be higher than Marginal Cost. In this regard we should remember that it would be easier for us if profitability of a product is known while fixation of selling price.

Illustration:

X Ltd. has an average P/V ratio of 50%. The Marginal Cost of a product is estimated at Rs. 30. What will be the amount of selling price?

Solution:

If selling price is Rs. 100, Variable Cost will be Rs. 50 i.e., contribution will be Rs. 50.

Thus, P/V Ratio = C/S = Rs. 50/Rs.100 = ½ or 50%

So, the selling price which have a marginal cost of Rs. 60 should be:

100 /50 x Rs. 30 = Rs. 60

Alternatively

P/V Ratio = S – V/S

or,.

Variable Cost/Sales = 50/100

Selling Price will be = Variable Cost/sales = Rs. 30/50%= Rs. 60

Management accounting involves collecting, analyzing, and reporting information about the operations and finances of a business. These reports are generally directed to the managers of a business, rather than to any external entities, such as shareholders or lenders. The functions of management accounting include:

• Margin Analysis: Determining the amount of profit or cash flow that a business generates from a specific product, product line, customer, store, or region.
• Break even Analysis: Calculating the mix of contribution margin and unit volume at which a business exactly breaks even, which is useful for determining price points for products and services.
• Constraint Analysis: Understanding where the primary bottlenecks are in a company, and how they impact the ability of the business to earn revenues and profits.
• Target Costing: Assisting in the design of new products by accumulating the costs of new designs, comparing them to target cost levels, and reporting this information to management.
• Inventory Valuation: Determining the direct costs of cost of goods sold and inventory items, as well as allocating overhead costs to these items.
• Trend Analysis: Reviewing the trend line of various costs incurred to see if there are any unusual variances from the long-term pattern, and reporting the reasons for these changes to management.
• Transaction Analysis: After spotting a variance through trend analysis, a person engaged in managerial accounting might dive deeper into the underlying information and examine individual transactions, in order to understand exactly what caused the variance. This information is then aggregated into a report to management.
• Capital Budgeting Analysis: Examining proposals to acquire fixed assets, both to determine if they are needed, and what the appropriate form of financing may be with which to acquire them.

1. Preparation of Organization Manual

The organization manual contains the duties, powers, scope and responsibilities of each executive in an organization. Moreover, it indicates the means and line of communication between the executives. This prevents the overlapping of functions.

2. Appointment and Training of Employees

Right candidates should be appointed and suitable training should be provided to them. If so, they can perform their work independently very effectively.

3. Preparation of Various Forms and Reports

The top management can design various forms and decide the contents of reports according to the needs of managerial decision making. The main objective of preparing various forms and reports is avoiding “Bureaucratization”.

4. Classification and Codification of Accounts

The financial accounting information is classified and codified for effective analysis and interpretation. The accounts are classified on the basis of nature of accounts. The codification accounts facilitate for easy identification of accounts.

5. Setting up of Cost Centres

There is a need of setting up of cost centre, profit centre, investment centre and budget centre. If so, only relevant information is collected and analysed in relation to each of them.

6. Integration of Cost and Financial Data

Both cost accounting data and financial accounting data are used in the management accounting. Hence, there is a need of suitable system to integrate both cost accounts and financial accounts. It avoids duplication of data. The integration system should be accurate and reliable.

7. Introducing Management Accounting Techniques

The needs of one business organization is differing from another. The top management can introduce various management accounting techniques on the needs of organization and practicability.

8. Setting up of Budgetary Control System

Every organization should prepare the budgets in order to achieve its objectives economically and efficiently. Hence, the management should establish suitable budgetary control system. Moreover, the proposed system should be flexible and accommodate the changes in future.

9. Using of Operations Research Techniques

Every business is running under fast changing economic, political and social environment. Everyday number of new types of problems may be encountered by the management. The Operations Research Techniques are highly useful to cope with the emerging problems.

10. Formulating Standard Costing Techniques

The top management can fix the standard for every business activity relating to cost and revenue. If so, the actual performance can be used to measure the deviations from the standard. Thus, standards are fixed at all levels. The standard should be one which can be adopted by a normal employee.

Management accounting is an important tool of management. Hence, it serves the management in many ways. Even though, the management accounting has some limitations or disadvantages. They are briefly explained below:

Limitations or disadvantages of management accounting

1. Based on Financial and Cost Records

Both financial and cost accounting information are used in the management accounting system. The accuracy and validity of management account is largely based on the accuracy if financial and cost records maintained. These records determine the Strength and weakness of management accounting.

2. Personal Bias

The analysis and interpretation of financial statements are fully depending upon the capability of the analyst and interpreter. Hence, personal prejudices and bias of an individual can affect the objectivity and effectiveness of the conclusions and recommendations.

3. Lack of Knowledge and Understanding of the Related Subjects

Financial accounting, cost accounting, statistics, economics, psychology and sociology are the related subjects of management accounting. The organization can derive more benefits of management accounting if the management accountant has thorough knowledge over related subjects. If not so, the success of management accounting system is questionable.

4. Provides only Data

Under management accounting system, many alternatives are developed to solve a problem and submitted before the management. Out of the many alternatives available, the management can select any one of alternatives or even discard all of them. Hence, management accounting can only provide data and not prescribe any course of action.

5. Preference to Intuitive Decision Making

Scientific decisions can be taken with the help of using management accounting techniques. But, majority of the management accountant and top level executives prefer their past experience and intuition in making business decisions. The reason is that an intuitive decision making is very simple and easy.

6. Management Accounting is only a Tool

The management accountant is using the management accounting system as a tool to give advice and facilitate the management for decision making. The actual decisions, their implementation and follow up action are the prerogative of the management.

7. Continuity and Participation

The decisions are taken by the management. Their implementation is vested in the hands of management accountant. The continuous efforts of management accountant and full participation of all levels of management are necessary for successful operation of management accounting system.

8. Broad Based Scope

The scope of management accounting is very wide since it considers both monetary and non-monetary transactions of the business organization. The limited knowledge and experience of the management accountant can lead to prepare the data unreliable and undependable.

9. Costly Installation

The cost of installation of management accounting system is very high. Hence, a small business organization can not bear the cost of such installation. Moreover, the utility of this system is restricted only to big and complex organizations.

10. Resistance to Change

The installation of management accounting system brings some changes in the organizational set up and accounting practice. The personnel concerned may resist such changes unless they are getting confidence.

11. Evolutionary State

Management accounting is a recent development discipline. The utility of management accounting is depend upon the intelligent interpretation of the data available for managerial use. Hence, it is presumed that the management accounting stands in evolutionary stage.

12. Unquantifiable Variables

Management accounting seeks to interpret and evaluate an objective historical event on record in terms of money. But, in practice, the business organization is facing many problems which cannot be exposed.

1. Difficulty to analyse overhead: Separation of costs into fixed and variable is a difficult problem. In marginal costing, semi-variable or semi-fixed costs are not considered.
2. Time element ignored: Fixed costs and variable costs are different in the short run; but in the long run, all costs are variable. In the long run all costs change at varying levels of operation. When new plants and equipment are introduced, fixed costs and variable costs will vary.
3. Unrealistic assumption: Assumption of sale price will remain the same at different levels of operation. In real life, they may change and give unrealistic results.
4. Difficulty in the fixation of price: Under marginal costing, selling price is fixed on the basis of contribution. In case of cost plus contract, it is very difficult to fix price.
5. Complete information not given: It does not explain the reason for increase in production or sales.
6. Significance lost: In capital-intensive industries, fixed costs occupy major portions in the total cost. But marginal costs cover only variable costs. As such, it loses its significance in capital industries.
7. Problem of variable overheads: Marginal costing overcomes the problem of over and under-absorption of fixed overheads. Yet there is the problem in the case of variable overheads.
8. Sales-oriented: Successful business has to go in a balanced way in respect of selling production functions. But marginal costing is criticised on account of its attaching over- importance to selling function. Thus it is said to be sales-oriented. Production function is given less importance.
9. Unreliable stock valuation: Under marginal costing stock of work-in-progress and finished stock is valued at variable cost only. No portion of fixed cost is added to the value of stocks. Profit determined, under this method, is depressed.
10. Claim for loss of stock: Insurance claim for loss or damage of stock on the basis of such a valuation will be unfavourable to business.
11. Automation: Now-a-days increasing automation is leading to increase in fixed costs. If such increasing fixed costs are ignored, the costing system cannot be effective and depend­able.

Marginal costing, if applied alone, will not be much use, unless it is combined with other techniques like standard costing and budgetary control.

Diversification of Products:

In order to capture a new market or to utilise idle facilities etc., it may so happen that a new product may be introduced in the market together with the existing one. Naturally, the question arises before us whether the same will be a profitable product one.

In this regard it may be mentioned that the new product may be introduced only when the same is capable of contributing something against fixed cost and profit. Fixed cost will not be considered here on the assumption that the same will not increase, i.e., the new product will be produced out of existing resources.

Marginal Costing Application # 3. Selection of Most Profitable Product-Mix:

If any firm produces more than one product it may have to decide in what ratio should the products be produced or sold in order to earn maximum profit. However, the marginal costing techniques help us to a great extent while determining the most profitable product or sales mix.

Contribution under various mix will be determined first. Then the product which gives the highest contribution must be given the highest priority, and vice versa. Similarly, any product which gives negative contribution should be discontinued.

The following illustration will, however, make the principle clear:

Illustration:

The directors of a company are considering sales budget for the next budget period. From the following information you are required to show clearly to management:

(i) The marginal product cost and the contribution per unit;

(ii) The total contribution resulting from each of following sale mixtures;

Sales Mixture:

(a) 100 units of product A and 200 of B

(b) 150 units of product A and 150 of B

(c) 200 units of product A and 100 of B

Recommend which of the sale-mixtures should be adopted.

Solution:

(ii) From the above Comparative Contribution statement, it becomes clear that as P/V Ratio of Product A is higher in comparison with the Product B, Product A is more profitable one. And, as such, the mixtures which consider the maximum number of Product A would be the most profitable one which is proved from the following table:

Sales Mixture (C) i.e., 200 units of Product A and 100 units of Product B will yield highest contribution.

Management Accounting is the presentation of accounting information in such a way as to assist management in the creation of policy and the day-to-day operation of an undertaking. Thus, it relates to the use of accounting data collected with the help of financial accounting and cost accounting for the purpose of policy formulation, planning, control and decision-making by the management.

Management accounting links management with accounting as any accounting information required for taking managerial decisions is the subject matter of management accounting.

Definitions of Management Accounting:

“Management Accounting is concerned with accounting information that is useful to management.” —R.N. Anthony

“Management Accounting is the term used to describe accounting methods, systems and techniques which coupled with special knowledge and ability, assists management in its task of maximising profits or minimising losses. Management Accountancy is the blending together into a coherent whole, financial accounting, cost accountancy and all aspects of financial management.” :Batty

“Management accounting is a system of collection and presentation of relevant economic information relating to an enterprise for planning, controlling and decision-making.” :ICWA of India

“Management accounting is the provision of information required by management for such purposes as formulation of policies, planning and controlling the activities of the enterprise, decision-making on the alternative courses of action, disclosure to those external to the entity (shareholders and others), disclosure to employees and safeguarding of assets.” :CIMA London

Management Accounting is “the application of appropriate techniques and concepts in processing historical and projected economic data of an entity to assist management in establishing plans for reasonable economic objectives and in the making of rational decisions with a view towards these objectives”. :American Accounting Association

From the above it is clear that management accounting uses all techniques of financial accounting, cost accounting and statistics to collect and process data for making it available to management so that it can take decisions in a scientific manner.

Nature of Management Accounting:

• Technique of Selective Nature:

Management Accounting is a technique of selective nature. It takes into consideration only that data from the income statement and position state merit which is relevant and useful to the management. Only that information is communicated to the management which is helpful for taking decisions on various aspects of the business.

• Provides Data and not the Decisions:

The management accountant is not taking any decision by provides data which is helpful to the management in decision-making. It can inform but cannot prescribe. It is just like a map which guides the traveller where he will be if he travels in one direction or another. Much depends on the efficiency and wisdom of the management for utilizing the information provided by the management accountant.

• Concerned with Future:

Management accounting unlike the financial accounting deals with the forecast with the future. It helps in planning the future because decisions are always taken for the future course of action.

• Analysis of Different Variables:

Management accounting helps in analysing the reasons as to why the profit or loss is more or less as compared to the past period. Moreover, it tries to analyse the effect of different variables on the profits and profitability of the concern.

• No Set Formats for Information:

Management accounting will not provide information in a prescribed proforma like that of financial accounting. It provides the information to the management in the form which may be more useful to the management in taking various decisions on the various aspects of the business.

Significance of Management Accounting:

• Decision Making:

Management accounting provides financial and non-financial information that helps managers make decisions regarding the day-to-day operations of a business. It offers insights into cost behavior, cost-volume-profit relationships, and operational efficiency, enabling managers to choose the best courses of action.

• Planning and Budgeting:

It aids in the planning and budgeting process by forecasting revenues, costs, and cash flows. Through careful analysis, management accounting helps in setting realistic budgets and financial plans, aligning them with the organization’s strategic goals.

• Cost Control and Reduction:

Management accounting focuses on the analysis of costs associated with production and operations. By identifying areas where costs can be reduced without sacrificing quality or performance, it helps in enhancing profitability and efficiency.

• Performance Measurement:

It involves the evaluation of the performance of both the organization as a whole and its individual components. Management accounting uses various performance metrics to assess the effectiveness and efficiency of resources used, enabling the identification of areas for improvement.

• Strategic Management:

Management accounting contributes to strategic management by providing information that supports long-term decision-making. It helps in assessing market trends, competitive environments, and internal capabilities, facilitating strategic planning and execution.

• Financial Reporting and Analysis:

Although primarily focused on internal users, management accounting also enhances external financial reporting and analysis by providing detailed insights into the components of financial statements, helping stakeholders understand the financial health and operational efficiency of the business.

• Risk Management:

It plays a vital role in identifying, assessing, and managing risks. By analyzing financial and operational data, management accounting helps in foreseeing potential risks and devising strategies to mitigate them.

• Resource Allocation:

Management accounting assists in the optimal allocation of resources by determining the most profitable products, services, or projects. It uses techniques like marginal costing and capital budgeting to inform these decisions.

• Enhancing Shareholder Value:

Ultimately, the practices and insights provided by management accounting contribute to enhancing shareholder value by improving profitability, optimizing resource use, and ensuring sustainable business growth.

Scope of Management Accounting:

The scope of management accounting is very wide and broad-based. It includes all information which is provided to the management for financial analysis and interpretation of the business operations.

• Financial Accounting:

Financial accounting though provides historical information but is very useful for future planning and financial forecasting. Designing of a proper financial accounting system is a must for obtaining full control and co-ordination of operations of the business.

• Cost Accounting:

It provides various techniques of costing like marginal costing, standard costing, differential and opportunity cost analysis, etc., which play a useful role n t operation and control of the business undertakings.

• Budgeting and Forecasting:

Forecasting on the various aspects of the business is necessary for budgeting. Budgetary control controls the activities of the business through the operations of budget by comparing the actual with the budgeted figures, finding out the deviations, analysing the deviations in order to pinpoint the responsibility and take remedial action so that adverse things may not happen in future.

Both the techniques are necessary for management accountant.

• Cost Control Procedures:

These procedures are integral part of the management accounting process and includes inventory control, cost control, labour control, budgetary control and variance analysis, etc.

• Reporting:

The management accountant is required to submit reports to the management on the various aspects of the undertaking. While reporting, he may use statistical tools for presentation of information as graphs, charts, pictorial presentation, index numbers and other devices in order to make the information more impressive and intelligent.

• Methods and Procedures:

It includes in its study all those methods and procedures which help the concern to use its resources in the most efficient and economical manner. It undertakes special cost studies and estimations and reports on cost volume profit relationship under changing circumstances.

• Tax Accounting:

It is an integral part of management accounting and includes preparation of income statement, determination of taxable income and filing up the return of income etc.

• Internal Financial Control:

Management accounting includes the internal control methods like internal audit, efficient office management, etc.

• Interpretation:

Management accounting is closely related to the interpretation of financial data to the management and advising them on decision-making.

• Office Services:

The management accountant may be required to maintain and control office services in some organizations. This function includes data processing, reporting on best use of mechanical and electronic devices, communication, etc.

• Evaluating the Performance of the Management:

Management accounting provides methods and techniques for evaluating the performance of the management. It evaluates the performance of the management in the light of the objectives of the organisation. Thus, it helps in the implementation of the principle of management by exception.

Reasons for Replacement of Equipment’s:

Equipment are generally considered for replacement for the following reasons:

(i) Deterioration:

It is the decline in performance due to wear and tear or misalignment indicated by;

(i) Increase in maintenance costs.

(ii) Reduction in product quality and rate of production.

(iii) Increase in labour costs, and

(iv) Loss of operating time due to breakdowns.

(ii) Obsolescence:

Technology is progressing fast, newer and better equipment are being developed and produced every year.

The equipment gets obsolete due to advancement in technology and the unwarranted manufacturing costs arising from such obsolete equipment will:

(i) Reduce profits.

(ii) Impair competition.

(iii) Cause loss in value of machinery.

(iii) Inadequacy:

When the existing equipment becomes inadequate to meet the demand or it is not able to increase the production rate to desired level, the question of replacement arises.

(iv) Working Conditions:

It may be thought of replacing the old equipment and machinery which creates unpleasantness i.e. give rise to unsafe conditions for workers and leads to accidents, making the environment noisy and smoky etc.

(v) Economy:

The existing units/equipment have outlived their effective life and it is not economical to continue with them.

Factors Necessary for Replacement of Equipment:

The factors which necessitate the replacement of machinery and equipment can be classified as:

(i) Technical Factors.

(ii) Financial or Cost Factors.

(iii) Tangible Factors.

(i) Technical Factors:

They tend to consider:

(i) Whether the present equipment has become obsolete due to technological developments,

(ii) If the present equipment is inadequate in meeting increased product demand.

(iii) Whether the present equipment has deteriorated due to wear and tear. It may be indicated by increase in maintenance costs, reduction in product quality, rate of output, and increase in labour cost and down time etc.

(iv) Reduced safety as compared to new machine available/developed.

(v) Can the present equipment provide desired surface finish?

(vi) If the present equipment is polluting or spoiling working condition of the industry.

(vii) Possibility of performing additional operations by new machine.

(viii) Does the present equipment make noise and vibrations and thus causing diversion of the workers.

(ix) How often the present equipment requires maintenance and repairs.

(ii) Financial/Cost Factors:

These are:

(i) High repair and maintenance cost of the existing equipment/machinery).

(ii) Possibility of combining some operations and resulting increase in productivity by challenger (new machine).

(iii) The initial cost of challenger.

(iv) Salvage value of existing equipment and challenger at the end of its useful life.

(v) Improvement in productivity and quality by use of challenger.

(vi) Saving in space by use of new machine.

(vii) Reduction in scrap and waste by use of new machine.

(viii) Down time cost of present machine.

(ix) Reduction in cost of jigs and fixtures by using challenger.

(x) Effect on consumption of power by replacing the existing machine by new machine.

(iii) Tangible Factors:

These factors involve sociological and humanitarian considerations with far reaching effects:

(i) Like replacing the existing machine which causes unpleasantness (may be noise and smoke pollution) and unsafe working conditions leading to accidents.

(ii) Replacement may cause displacement of workers.

At the time of replacement a well-designed replacement policy should be adopted, rather than considering only the factors pertaining to the particular equipment involved, should compare thoroughly all the existing equipment with its possible replacement.

For the purpose of sound economic comparison all factors should be converted into cost and possible increase in revenue. Break even analysis can be utilized for the purpose of taking replacement decision or selection of investment alternatives.

1. Research your customers and competition

Use market research to analyze your customers and competitors on multiple levels. This will help you evaluate whether the demand for a product/service is real, and whether expanding into a potential new market is worthwhile for your company.

Identify consumers segments that share common characteristics such as age, gender, education, income, occupation, and place of residence, or softer variables such as lifestyle and values. Also consider consumer motivation. What “job” is the customer trying to get done? What barriers may be constraining consumption?

Knowing who your key competitors are and assessing their strengths and weaknesses can also illuminate specific growth strategies and ways to differentiate your products and services.

2. Get a high-level view of the market

However, assessing your customers and competitors is not enough. You also need to obtain a broader understanding of the market as a whole and what the potential of success is in the market. 

Otherwise, your organization could be trapped into thinking that a few percentage points increase is enough, where there is actually much more potential. Market researchers are experts at providing the overall objective picture and can help you step away from intra-company thinking.

When analyzing a market, these high-level questions come into play:

• What is the market size?
• How quickly is the market expanding or contracting?
• How many buyers are there?
• What are the barriers to entry?
• What is the bargaining power of suppliers?
• What is the intensity of the competition?
• Is there a threat of new entrants or substitute products or services?

3. Explore adjacent opportunities

Pursuing adjacent opportunities can also be a winning strategy.

In a five-year study, researchers analyzed the growth and performance of 1,850 corporations. They found that the companies with the most sustained profitable growth had used a systematic, disciplined approach to expand the boundaries of their core business into an adjacent space. Some companies expanded from one geographic market to another, while others applied an existing business model to adjacent segments.

Take Procter & Gamble’s Crest toothpaste brand as an example. In the late 1990s, Crest was floundering, but Procter & Gamble revitalized the brand by moving into two other categories  teeth whitening and brushing with the introduction of Crest Whitestrips and SpinBrush.

The company used the same channels to reach the same customers with the same marketing framework and added more than $200 million of new sales for each new brand in one year.

Keeping your finger on the pulse of a market will help you to maintain a proactive approach and profitably outgrow your rivals by finding ways to expand outside your core business.

4. Understand the business environment factors

Another area to explore is the overall business environment, which can have a profound impact on company performance and the ways industries operate.

The business environment includes factors such as:

• Technological developments
• Government regulations
• Geopolitical shifts
• Economic indicators
• Trade policies
• Social and cultural norms

As an example, companies in the life science and healthcare sectors currently face a number of potential disruptors that contribute to ongoing uncertainty, as noted by market research firm Kalorama Information, including attempts to repeal and replace the Affordable Care Act, health IT policies, and President Trump’s statements about drug pricing.

Other factors impacting markets include Brexit, rising out-of-pocket spending on healthcare, and physician shortages. Any new business opportunity in these sectors will need to be evaluated in the context of these factors and challenges.

5. Find the market research you need fast

Gathering and synthesizing information about all these categories can take significant time, effort, and expertise, but market research reports can give you a helpful leg up.

“Off-the-shelf” reports, such as those available on MarketResearch.com, can supply you with much of the information you need for a comprehensive understanding of the customer, competition, industry, and business environment.

In these reports, you’ll find information on market size, market share, market forecasts, information on regulations, consumer demographics, and much more. In addition, many reports explicitly share analysis on key opportunities for future growth, next-generation product innovation, and emerging marketing strategies.