Managing Financial Principles and Techniques: Sample Solution

The management accounting use to help the management by providing important information for evaluate and develop the business activity of an organization.

• Preparation of financial accounting statements is necessary as per the legal and government policies.

There are no such obligations for management accounting reports.

• Financial accounting is maintained as per the general & popular accounting standards, such as IFRS, GAAP etc.

There is no such standard for management accounting system.

• Financial accounting reports are prepared in specific formats.

Management accounting does not require any specific formats. It is used to be presented as per the conveniences of the users.

• Financial accounting uses to focus on the historical records and derive the current financial position of the company.

Management accounting delivers the forecasts for the future on the basis of the present financial condition of the organization. 

Pricing is one of the main components of the marketing mix. Every business entity gives great importance on the pricing strategy, as proper pricing helps the business to achieve higher sales and optimum profits. The business entities use to select different pricing strategies according to the nature of its product or service, organizational goal and marketing objectives (Ellickson et al. 2012). 

Types of Pricing Strategy:-

There are several types of pricing strategies, which are discussed below:- 

• Premium Pricing:-

Premium pricing strategy uses to set the price higher than the prices of the competitors. The main objective of this strategy is to earn maximum revenues during the initial period of the product life cycle. It can be effective when the product or service has some unique quality or it is introduced as the first of its kind in the market.

• Penetration Pricing:-

Penetration pricing strategy is adopted for introducing the product in a new market. In this policy, the price is kept relatively lower to capture more market share within short period of time. The company may incur loss in the initial stage, but the strategy uses to be very fruitful in the long run and the company can earn higher profits from higher sales volume.

• Economy Pricing:-

Economy pricing is applicable, where the market is very price sensitive. Therefore, as per this pricing strategy, the prices of the product or services are kept low to create more demands in the market.

• Price Skimming:-

The companies, which acquire competitive advantages in a particular market, use to follow price skimming strategy. Similar to premium pricing, this strategy also fix the price at higher rates so that the company can earn maximum revenue before any competitive company enter in the market.

• Psychological Pricing:-

Psychological pricing method is used to create psychological impact on the consumers mind and attract them towards the product. For example, it has been observed that consumers more prefer to buy the product, which costs Rs.99 rather the same type of product, amounted to Rs.100. Though, economically the difference is just Re.1, but psychologically the difference is much higher. 

Difficulties of Cost Reduction Process:-

Various difficulties, which an organization may face during implementation of any cost reduction process are described below:-

• It reduces the flexibility of the business activity within the organization.
• The organization may face difficulties in process development due to reduced costs.
• The scope of any innovation becomes lesser.
• The organization may suffer from inability of hiring skillful staffs (Li and Liu 2014).

Various Cost Reduction Techniques:-

• Just-in-Time System:-

Just-in-time system suggests that the organization should produce the required products at required quantity by maintaining the required quality within the required time (BARRETTO 2013).

• Target Costing:-

Target Costing system highlights on the production process of the product, by which the company can incur lesser cost and earn maximum profit by selling the product at market-driven price.

• Activity Base Management:-

The activity base management uses to reduce the cost by removing the non-value added business activities and expenses.

• Life Cycle Costing:-

Life Cycle Costing helps the business to estimate the costs of a product for its entire life cycle and also the profit, it may generate over the life cycle period. Thus the company become able to identify the areas where it reduce the costs to earn more profits from the product over its full life span.

• Kaizen Costing:-

Kaizen costing methods prefers to reduce the cost by gradual on-going process through smaller activities rather than implementing larger improvements.

• Business Process Re-Engineering:-

Business process re-engineering focuses on re-engineering or improving the business process or organizational structure, instead of changing it totally. Thus it helps the organization to improve the current condition of the company by incurring lesser cost compared to costs, required for total changes (Bragg et al. 2010).

It has been often observed that many companies suffers from the conflicts aroused, between the finance department and other non-financial department. The main objective of the finance team is to earn high revenues and maximize the profits, Therefore, they often consider many expenses as non-value added expenditures, such as, advertisements, training & development, research expenses etc. It is main source of such conflicts (Coleman et al. 2014). Therefore, the management may follow the solution, mentioned below to end the conflicts:-

• Marketing Costs as Investment:-

The finance personnel may consider the marketing expenses as investment instead of treating it as non-productive expenditures. In that case, the marketing expenses should be included in the investment expenses for determining the Return on Investment (de Gregorio et al. 2012).

• Focus on Single Goal:-

Both the finance and non-finance departments should focus on the single goal and consider its departmental goals as secondary objectives. Then they will work as a composite team.

• Benchmarking:-

There should be a benchmark for all the expenses, incurred by the non-finance teams. If any certain type of expense cross the benchmark, then the respective team will have to provide proper justification, without which the team will be penalized. On the other hand, the teams, who will perform better within the limited expenditures, will be rewarded. 

• Cost as Assets:-

There are some costs, which are incurred for the internal development of the company, such as training & development, research expenses etc. It may not provide results within a certain accounting period, but proves to be very effective over several periods. Therefore, the finance department should treat those costs as assets, which are incurred for future economic growth (Speakman and Rysova 2015). 

Reference List:- 

Li, Q. & Liu, Z. 2014, "An investigation on research and development cost reduction and channel strategies in competing supply chains", International Journal of Industrial Engineering Computations, vol. 5, no. 3, pp. 387-394.

Maricica, M. & Georgeta, V. 2012, "Business Failure Risk Analysis using Financial Ratios", Procedia - Social and Behavioral Sciences, vol. 62, pp. 728-732.

MONEA, M. 2013, "INFORMATION SYSTEM OF THE FINANCIAL ANALYSIS", Annals of the University of Petrosani : Economics, , no. 2, pp. 149-156

Nawaz, M. 2013, "An Insight Into the Two Costing Technique: Absorption Costing and Marginal Costing",BRAND : Broad Research in Accounting, vol. 4, no. 1, pp. 48-61

Omar, N., Sanusi, Z.M., Zulaikha, Johari, A. & Mohamed, I.S. 2014, "Predicting financial stress and earning management using ratio analysis", Advances in Natural and Applied Sciences, vol. 8, no. 8, pp. 183.

Shim, J.K., Siegel, J.G. & Shim, A.I. 2011;2012;,Budgeting Basics and Beyond, 4. Aufl.;4th;4; edn, Wiley, US

Speakman, J. & Rysova, A. 2015, Small Entrepreneur in Fragile and Conflict-Affected Situations, World Bank Publications.