The assignment – Background information
You are the financial director of a large, fictitious company called Manac plc, which produces and sells a range of standard electrical goods. Production and sales take place across a number of countries. The company uses standard costing and absorption costing as part of its approach to strategic management accounting.
The Board of Directors is concerned that the company is not meeting its budgeted target profits; the managing director takes the simple view that more sales mean more profits and that the products have not been priced to sell in sufficient numbers.
While you are aware that this is a possibility you recognise that the real reason for the lower than expected profits may be more complex. You have therefore decided to conduct a full review of variances to identify those areas which have not met budgeted expectations.
While this review is underway and to improve the board of directors understanding of the issues involved, you have decided to produce a report to the board of directors which addresses the following 3 topics:
i. The models and concepts affecting the pricing decisions taken by organisations, critically reflecting upon their usefulness (maximum mark 33%).
ii. The role of standard costing and variance analysis in management accounting and a critically discussion of the value and limitations of variance analysis as a means of identifying key areas which have contributed to the overall profit figure (maximum mark 33%).
iii. The advantages and disadvantages of introducing an Activity Based Costing system to replace the current Absorption Costing system (maximum mark 34%).
The report should include critical evaluation of the models and concepts proposed outlining their merits and limitations. You may incorporate logical assumptions with regard to the company and use numerical examples to illustrate the models and concepts that you propose to adopt
2. Models and concepts affecting the pricing decisions taken by organisations