MBA FPX 5010 Assessment 2 Attempt 1 Product Pricing Recommendation
Managerial Vs Financial Accounting
As a financial controller and a sales manager of Pickles Company, this report is based on the analysis of the company’s financial as well as managerial accounting practices. The analysis relates to the sales offer received by the organization Super Deals Store by offering acme price of $9.5 per case that is significantly lower than the normal selling price of the organization. The report will determine the difference between the fixed and variable production costs of the organization and how and will also help the management to get deeper insights into analyzing the benefits of recalculating the costs of pickle production. Finally, the plan will be created for the future to help the management consider the offers made by Super Deals.
Why Some Production Costs are Fixed and Some are Variable
Costs refer to business expenses every organization whether manufacturing or services incur during the time of its operations. Since Pickle is a manufacturing organization, it manufactures products which aim to provide the value for money spent on the purchase of raw materials and selling items to customers. According to Gul (2018), there are two types of business costs associated with organizations such as fixed costs and variable costs. For example, variable costs of the firm can increase or decrease and can remain constant hardly due to changing volume of transactions and how much the company produces and sells. This means that with an increase in the company’s production, variable costs rise and vice versa. Different types of variable costs exist in the organization such as expenses, utility expenses, raw material costs, and salaries and commissions of employees. Whereas, fixed costs are those which do not change with regards to the production of the company and these expenses remain the same. These costs are not associated with the normal or particular activities of company’s business. For example, the company can incur different types of fixed costs such as insurance, depreciation, property taxes, and rent costs. This means that some production costs are fixed and some are variable according to the nature and volume of production that increases or decreased per year.
Benefit of Re-calculating the Cost of Pickle Corporation
The company has received an offer by Super Deals store of producing 2000 more units (cases) at a price of $9.5. Unfortunately, after realizing the current profits from the sales of cases, the company has realized that this price offer is more likely to be declined because of its low potential to earn profits. This means that the price offer received is significantly lower than the actual selling price of $20 per case. Moreover, the accounting data of the company also shows that the current production cost of the organization is $10 per case or unit and it is sold at $20 per case; the company is currently producing 9,000 units lately. However, there is one good news that the organization has a capacity to produce more units up to 12,000 without adding more human resources and buying more equipment to meet the increased production needs. This means that the company can plan to change its costing or pricing method in order to consider starting the production of 12,000 units. The company’s manager also revealed that the current cost per unit is being used for finding out revenues that fails to differentiate between the variable costs and the fixed costs incurred by the company.
Since variable cuss will change with production and the fixed costs will remain the same, for acme Pickle company, there are different items that can constitute its variable costs such as cucumber, spices, vinegar, jars and lids, direct labor costs. However, the fixed costs will constitute the salaries and wages of employees such as line supervisors, the depreciation cost of the factory, the property tax expenses, and the factory insurance expense. Therefore, according to the new plan, the following table shows the re-calculation of the costing to help the organization accept the low price offer of Super Deals (Gardi et al., 2022).
Total Costs of Production
$9.21 per case
Adding total fixed and variable costs of $59000 and $23900 will provide a total of $82900. If we divide this figure by total number of unites 9000 in this case, we get the variable costs such as 59000/9000=$6.555 per unit or case. Similarly, the total cost of product will be calculated by dividing the total of $82900 by 9000 units that amounts to $9.21 per unit. This means that if the company produces 12,000 units to accept the offer of Super Deals, its total production costs will be as follows:
Total cost of production for 12,000 cases: $82900/$12000=$6.9
This means that by using this new method of calculating the costs, the company will be able to earn more profit as follows:
Profit with 9000 cases: 9,000*$20.00 = $180,000
Profit with 12000 cases: 9,000*$20.00 = $180,000
And 2,000*$9.50 = $19,000
The total profit becomes $199,000 for total 12000 units produced compared to profit of $90,000.00 for 9000 units. Therefore, the benefit to the company is the increased profits for 12000 units compared to only 9000 that were earning low profit.
Financial Vs Managerial Accounting
The company follows financial accounting methods; however, financial accounting methods are different from managerial accounting because the later one is a form of accounting that helps the managers and decision makers to form creative judgments after analyzing the real-time financial data. On the other hand, financial accounting is the collection of accounting information that hips accountants to formulate different statements such as the income statement, cash flow statement, and the balance sheet (GAO, 2022). The financial accounting helps more to get an overview of the accounts of the business and the debts and cash in hand; whereas, managerial accounting is more robust to improve the internal processes and decisions of the organization to enhance profits and business plans to achieve a sustainable future. Hence, for looking at the financial position of the organization, external stakeholders will review financial accounting records that follow Generally Accepted Accounting Principles (GAAP) throughout the world. Whereas, using managerial accounting systems, the company will be able to prepare daily, weekly, monthly, or yearly reports based on guidelines and standards to improve the financial situation of the organization.
The Future Strategy or the Plan
The company’s aim is to overcome the weaknesses in its current financial practices and enhance the role of management accounting to achieve superior financial and production outcomes (Belkacem, n.d). The end result of the organization is to maximize the revenues by using managerial accounting principles into daily actions which will help the organization to identify financial objectives and will propel the organization towards sustainability and long-term profitability. This means that using managerial accounting in daily practices and observing weekly and monthly reports will help the organization achieve its financial goals and provide ample data to the managers to make savvy operational/production decisions. Hence, the to produce results for the managers to make better costing decisions, managerial accounting practices are the most suitable in addition to using financial accounting principles and practices in the organization.
Belkacem, B. E. N. A. L. L. A. L., & Mohamed, P. B. Journal of Financial, Accounting and Managerial Studies.
Gao, J. (2022). Research on the Corporate Financial Transformation with Big Data Technologies. International Journal of Progressive Sciences and Technologies, 32(2), 08-12.
Gardi, B., Abdalla Hamza, P., Sabir, B. Y., Mahmood Aziz, H., Sorguli, S., Abdullah, N. N., & Al-Kake, F. (2021). Investigating the effects of financial accounting reports on managerial decision making in small and medium-sized enterprises. Bawan Yassin and Mahmood Aziz, Hassan and Sorguli, Sarhang and Abdullah, Nabaz Nawzad and Al-Kake, farhad, Investigating the Effects of Financial Accounting Reports on Managerial Decision Making in Small and Medium-sized Enterprises (April 28, 2021).
Gul, F. A., Khedmati, M., Lim, E. K., & Navissi, F. (2018). Managerial ability, financial distress, and audit fees. Accounting Horizons, 32(1), 29-51.