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Accounting

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Table of Contents
Introduction......................................................................................................................................3
Question 02......................................................................................................................................4
2.1 Evaluating another action for minimizing working capital and increase in profitability......4
2.2 Explaining the appropriate method for gaining efficient control on inventory management
for that particular company..........................................................................................................9
Question 03: Explaining transfer pricing method and its two broadly accepted techniques with
merits and demerits........................................................................................................................12
Conclusion.....................................................................................................................................15
References......................................................................................................................................16

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Introduction
In this report, the strategic management of accounting is discussed broadly. Besides the strategic
definitions, the different techniques that are used in accounting to minimize cost and increase
profit also discussed. After discussing strategic management theories, the pricing method and its
merits and limitations also discussed in another section. Strategic management means analyzing
and evaluating the data of an organization and its competitors in order to minimize cost and
increase profitability by accepting different strategies. The different theories are, given cost by
market, controlling over unproductive resources, evaluating entire life cost, eliminating bar from
the way of achieving the goal, finding out the capability by differencing with other leading
companies, dividing tasks for finding out per unit cost, ordering raw materials in the time of
production. The pricing strategy stands for setting out a price for a product after considering
different factors. There are different strategies in pricing method but in this report, the transfer
pricing theory with its other sub-ordinate theories are also discussed broadly with its advantages
and disadvantages for understanding which pricing theory will give an organization more profit
than applying other theories by minimizing cost.

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Question 02
2.1 Evaluating another action for minimizing working capital and increase in
profitability
After reading the question, there is a problem to find out that minimizing the working capital and
increase the profit by analyzing different theories of strategic management. Strategic
management means to analyze and evaluate the accounting information of a particular
organization and with its other similar organizations for finding out different strategies in order
to gain its ultimate goal to increase profit and minimize the cost of production (Ward, 2016). By
using strategic management techniques, a firm can find out the internal factor like the cost
structure of a particular organization and can make differences with other organizations in order
to get the best strategy for reducing service or product cost for surviving in the competitive
market and achieve its ultimate goal to increase profit.

There are many strategies in strategic management accounting. Those techniques are given
below with their merits and limitations.

Given cost technique: Given cost theory stands for taking a price for a product that is
determined by the market atmosphere (Blocher, 2005). According to this theory, the producer
cannot control the profit that is assigned to the product. The producer is recognized as an entity
that is taken that price which is determined by the conditions of supply and demand in the market
of that certain product (Target Costing, 2015). In order to maximize profit, the producer can only
take control over the production cost of that certain product.

The benefits of this theory are mentioned below:

I. Improving production system

II. Creating a product with considering consumer expectations
III. After a certain time, the skill is improved
IV. Changing the ideas of that company about their product line according to the market
demand
V. In this way, new opportunities will come out and lead the firm to the success

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The backsides of this theory are given below:

I. Long production process

II. Arising questions about the morality of the producer
III. Facing difficulties for workers
IV. For reducing cost, the workers need to perform their tasks continuously and, in this way,
the workers can lose their skills

Controlling unproductive resources: Controlling unproductive resources means avoiding those

costs which do not increase any worth to the firm (Lukina, et, al, 2017). By applying this theory,
the firm can ensure that the firm can resolve the problems that are related to the cost and take an
action for improving the efficiency of operational activities. According to this method, an entity
can minimize the production cost by knowing the problems related to raw materials, labor, tools,
and hiring of employees.

The benefits of this theory are given below:

I. Giving fruitful products according to their needs

II. Implementing the ideas of team working
III. Developing the quality of products
IV. Ensuring a good working atmosphere
V. Avoiding the waste of resources

The backsides of this theory are given below:

I. Giving pressure on workers

II. Needing more skills
III. Changing the working procedure

Evaluating entire life cost theory: Evaluating entire life cost theory means determining the cost
of a product for its life cycle (Farr, 2011). Life cycle means the process of making a product
from an idea to reality and does all the marketing techniques for promoting that product in order

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to make a profit and the withdrawn of that particular product from the market (Life Cycle
Costing | Definition | Benefit | Limitation | - Accountinguide, 2021). By using this theory, a firm
can measure the cost of that product and take different actions to reduce the cost and make the
highest profit from that product.

The advantages of this theory are given below:

I. Getting all information about the cost and profit of that product
II. Choosing the most profit ensuring product
III. Adding some extra features or qualities of that product for reducing cost
IV. Thinking about a long-term profit
V. Avoiding the unpredictable event of tomorrow

The disadvantages of this theory are given below:

I. Giving no ensure about future earnings and costs

II. In case of changing consumer expectations, the firm can face a huge loss

Eliminating obstacles theory: Eliminating obstacles theory means that eliminating the problems
from the way of achieving the goal of maximizing profit (Blackstone, 2010). According to this
theory, a firm finds out the problems that come to the way in the long term and short-term goal
of that organization and solve those problems in order to achieve success in the competitive
market. By accepting this theory, an entity can ensure that in the near future if any problems
arise then the firm can solve them and go through to the path of achieving the goal of gaining as
much profit.

The benefits of this theory are given below:

I. Increasing in profit
II. Developing a particular arena
III. Developing ability of production workers
IV. Fasting the production cycle
V. Decreasing the wastage of materials

The backsides of this theory are given below

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 I. Facing complexity in maintaining this theory
II. Facing difficulties in achieving the best level of performance
III. Hard to set up this theory
IV. Inappropriate for long term
V. Eliminating some factors not all factors

Finding differences theory: Finding differences theory means identifying gaps between the
capability of an organization and its other competitors in the market in order to achieve a way to
increase a strategy of developing the capability of that particular organization (Moriarty, 2011).
By using this theory, a company compares the procedures, marketing strategies, process of
measuring different tactics with other similar leading companies in order to find out the way of
achieving the goal of surviving in the market and lead the market.

The benefits of this theory are given below:

I. Developing the productivity

II. Propelling the way to innovation of product
III. Encouraging the workers in the way of changing their production line
IV. Minimizing the cost of production by improving skill
V. Helping the organization to think in deep

The backsides of this theory are given below:

I. Not measuring the actual effectiveness of that company

II. Focusing to tell the company about only one failure, not the whole procedure
III. The company needs to follow the way of innovating something new for its entire lifetime
IV. There is a chance of using the wrong technique in the production process
V. Compiling the organization in the stage of the arrogance of best serving industry over the
market

Division of operations theory: Division of operations theory means dividing all tasks and
finding out each performing cost in order to minimize the cost and supply that product to the
market with ensuring good quality (Huynh, 2013). This theory is the combination of different
strategic management techniques like given cost technique, content cost technique, measuring

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the production line technique, and focuses on consumer satisfaction. By applying this theory, an
organization can find out all problems of the production line and divide the whole operational
tasks according to their cost and deliver the product to the market at minimum cost for achieving
the ultimate goal of maximizing profit for that particular organization.

The benefits of this theory are mentioned below:

I. Dividing the cost according to the operations

II. Focusing on the new channel of minimizing cost
III. Eliminating the way of focusing on the high-level management and improving the
efficiency of workers in order to maximize their performance
IV. Helping the organization in order to make the best decision
V. Using the excess ability of employees and casting the firm to the way of reducing the cost
of production

The backsides of this theory are given below:

I. High cost of applying this theory and facing complexities in the time of working
II. Hard to select each cost of operations
III. Inappropriate for low-capital firms
IV. Facing difficulties in the time of implementing this theory

Appropriate use of inventory theory: Appropriate use of inventory theory means ordering raw
materials at the time of production (GE, 2016). By using this theory, a firm can stop the use of
storing more materials than needed to produce products. In this way, the firm can reduce
working capital and maximize profit.

The benefits of this theory are given below:

I. Relatively needs a low place for keeping inventories

II. Helps to reduce the wastage of using excessive materials
III. Appropriate for smaller organizations
IV. Needed low investments for inventories
V. Production failure can be traced easily

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The backsides of this theory are given below:

I. Facing difficulties while taking suddenly order

II. Specific and proper planning required
III. At the time of unwanted disasters, the company can face lacking materials
IV. Facing difficulties in the time of unwanted order of product

After discussing these theories, it comes to mind that the company can adopt the division of
operations theory for minimizing working capital and maximize profit. By using this theory, the
company can identify every unit of production cost and finding out a way of minimizing each
unit’s cost and maximize profit. Applying this theory and giving another product with an actual
product to the customers can achieve customer satisfaction and lead the market in order to reduce
the working capital and improving in the profitability of that organization.

2.2 Explaining the appropriate method for gaining efficient control on

inventory management for that particular company
Strategic management means to analyze and evaluate the accounting information of a particular
organization and with its other similar organizations for finding out different strategies in order
to gain its ultimate goal to increase profit and minimize the cost of production. By using strategic
management techniques, a firm can find out the internal factor like the cost structure of a
particular organization and can make differences with other organizations in order to get the best
strategy for reducing service or product cost for surviving in the competitive market and achieve
its ultimate goal to increase profit.

An important part of strategic management is to maintain the inventory of an organization. The

process of maintaining inventory is called inventory management. Inventory management stands
for the process of collecting materials from a supplier, storing materials in the warehouse, giving
the materials to the workers for producing goods, and storing the finished products into the last

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stage of the warehouse (Inventory management, 2005). By applying a good inventory
management technique, a firm can ensure a positive cash flow in its earnings and gain a lot of
profit.

There are two methods of inventory management that can give a company better performance in
their work for achieving their ultimate goal to maintain efficient inventories and achieve positive
cash flow. The two methods are discussed below;

Appropriate use of inventory method: Appropriate use of inventory method means ordering
raw materials at the time of production. By applying this method, a firm can stop the use of
storing more materials than needed to produce products. In this way, the firm can reduce
working capital, make a positive flow in the cash, and increase the profit. According to this
method, a firm can minimize the extra need for inventory and improve its efficiency. For
assigning this method, a firm needs skilled employees, proper machinery, and trustworthy
distributors of supplying raw materials.

The advantages of this method are mentioned below:

I. Relatively needs a low place for keeping inventories

II. Helps to reduce the wastage of using excessive materials
III. Appropriate for smaller organizations
IV. Needed low investments for inventories
V. Production failure can be traced easily

The disadvantages of this method are mentioned below;

I. Facing difficulties while taking suddenly order

II. Specific and proper planning required
III. At the time of unwanted disasters, the company can face lacking materials
IV. Facing difficulties in the time of unwanted order of product

Selecting an appropriate plan for collecting inventories method: Selecting an appropriate

plan for collecting inventories method stands for maintaining an electrical inventory system in
order to improve the production efficiency of that particular business (Business Analysis:
Planning and Management Requirements, 2021). According to this method, a firm needs to

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preplan that at which time the raw materials needed and scheduling the deliveries of raw
materials. For assigning this method, a firm needs to find out three topics such as, collecting
information about which product will be produced, at which time the raw materials needed to
deliver, and lastly at which quantity the raw materials needed for producing that certain product.
Every method has its own advantages and disadvantages, this method is not exceptional from
other methods.

The benefits of this method are given below:

I. Keeping less inventory

II. The minimum cost of storing materials
III. Easily trace the materials
IV. Smoothly maintaining the materials for production

The backsides of this method are explained below:

I. Chances of getting wrong information

II. High maintenance cost
III. Need skillful employees
IV. Need to invest more in acquiring resources
V. Inappropriate for smaller firms

After discussing these two methods, the appropriate use of inventory method is suitable for that
company for maintaining efficient inventory control, gaining positive cash flow, and maximizing
profit as much as the company can get.

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Question 03: Explaining transfer pricing method and its two
broadly accepted techniques with merits and demerits
Pricing strategy means setting up a selling price of a particular product by considering different
factors in order to compete in the market and gain profit (Engelson, 1995). The customer
satisfaction and the profit of a firm depend on the appropriate pricing method. So, while taking
the decision about pricing a product the top-level management has to keep different factors in
their mind. Those factors are each unit’s production cost, each unit’s transportation cost, similar
product market price, customer expectations, each unit’s promotional cost, etc.

There are many methods of pricing strategy. Transfer pricing is one of them. Transfer price is the
price of a product that is charged by shifting materials from one department to another
department (LALL, 2009). Let’s make it clear with an example, Jaguar cars produced different
luxurious cars but it does not produce all pieces of equipment in one factory, for car engines
Jaguar has a subsidiary company named Jaguar Land Rover Engines, when the engines are
transferred from one factory to another factory it contains some additional cost and when this
additional cost add to the final price of the final product that additional price which is included in
the selling price is recognized as the transfer price. There are some merits and demerits of
transferring price strategy that is mentioned below.

The advantages of transferring price strategy are given below:

I. Ensuring low cost for materials

II. Ensuring clearness in dealings between the department
III. Saving the producers from the exploitation of suppliers

The disadvantages of transferring price strategy are mentioned below:

I. Complex procedure
II. Chances of producing below quality products
III. Inappropriate for smaller firms

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There are several techniques of transferring price strategy. Two of them are discussed below
with their merits and demerits.

a) Full cost transfer prices: Full cost transfer price strategy stands for accumulating the cost of
different production line divisions and add some percentage of profit with the accumulated cost
for determining the final price of a certain product (LALL, 2009). By using this pricing
technique, a firm can get the actual cost of different production divisions and sell the product to
the consumers at a low price as they can. By setting the final price of a product at a low margin,
the firm can achieve customer satisfaction and lead the market in order to get more market share
from other market competitors.

The advantages of this pricing strategy are given below:

I. Easily measurable: As mentioned earlier, this method is actually accumulated different

production line costs, in this way a company can easily find out the cost of different
divisions and add a profit margin and deliver the products to the consumers.
II. Probable profit margin: This method is determined the final price of the product by
knowing all the costs of the different production lines. In this way, a firm can predict how
much profit will be added to the product and earn a predictable profit.
III. Having enough information to give clarification: In case of some unwanted situation
comes from different third-party organizations about the price of the final product then
the firm can show the different cost of the production line and proving their innocence.

The disadvantages of this strategy are given below:

I. Avoiding the market strategies: By using this pricing strategy, the firm gets all
materials from it’s subsides and ignore the market information in this way the firm can be
produced product at a high price from the competitors. In this way, the firm cannot
survive in the market.
II. Getting no innovation in the product line: The different production departments do
their work as another department needed, they do not know about the targeted customers
in this way the new innovative product will not be launched and the company cannot lead
in the long term over the market.

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b) Negotiated transfer price strategy: Negotiated transfer price strategy stands by negotiating
between the supplier division and the receiver division (LALL, 2009). By using this strategy, a
firm can get products from its other subsidiaries by the process of negotiation. This strategy is
applicable when there is an ineffective market for goods and services. By applying this pricing
strategy, the division managers negotiate with each other and sometimes the third party helps
them in negotiating.

The advantages of this approach are given below:

I. The encouragement is given by selling division to other production division for reducing
each unit cost of producing product
II. Purchasing materials at a lower price from the suppliers of market
III. As, it’s an internal negotiation process, the division managers have the scope of
discussing with each other for increasing the quality of products.

The disadvantages of this approach are explained below:

I. The divisional managers have secret data about other divisions in this way the managers
can take extra benefits from others in this way the production quality of products can be
decreased.
II. The performance techniques of divisional managers can be decomposed by negotiation
skills.
III. The negotiation process of divisional managers can take a lot of time from them and
sometimes there are some misunderstandings that take place between them.

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Conclusion
In this whole report, the different strategies of strategic management in accounting are discussed
broadly. By discussing those theories or strategies widely, it comes to the end that the division of
operations theory is the best for minimizing the working capital and increasing the profit of a
particular company. On the other hand, the appropriate use of the inventory method is accepted
for maintaining efficient inventory control and give a company a positive cash flow and increase
the profit margin. In the other section, transfer pricing strategy is broadly discussed with its
merits and demerits, and in the last full cost transfer pricing strategy and negotiated transfer
pricing strategy are explained with its benefits and backsides that can be affected a company
very much.

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Moriarty, J., (2011). A theory of benchmarking. Benchmarking: An International Journal, 18(4),

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Lukina, V. and Lukin, D., (2017). The integrated system ""Target-Kaizen-AB costing"" as a
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LALL, S., (2009). TRANSFER-PRICING BY MULTINATIONAL MANUFACTURING

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Blocher, E., (2005). Cost management. 6th ed. Boston: McGraw-Hill/Irwin, pp.455-489.

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