8/22/2016

CaseDiscussionSummary|LiveCaseDiscussion|AC102xCourseware|edX

IIMBx: AC102x Management Accounting for Decision Making

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Dear All,

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I am happy to inform that we had a good number of participants registering

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Pre-Course Survey
Lisas Confusion in
Mini-bar item
pricing
Live Case
Discussion

for the webinar and actively participated in the discussion. For the benet
of everyone, I am summarizing our discussion below.
We started our discussion with a summary of case facts. RK Forging is a
prot making company and currently operating at 62% capacity. The
marketing department of RK Forging with great diculty got an order from
a new customer. The order requires Rs. 1.50 million initial investments in
addition to material and 72 machine hours. The customer initially places an
order of 1000 units and agreed to place another 2000 units if the price and
quality are good but there is no commitment. At the time of pricing the
order, the marketing department and Accounting department disagree on
how to treat the initial investment of Rs. 1.50 million.
department wants to include only

1/3rd

Marketing

of Rs. 1.50 million whereas

Accountant argues the entire Rs. 1.50 million should be charged to the rst
order. The outcome of these two pricing scheme is Accountant price is
more by 40% of marketing department price.

Marketing Dept

Accounting Dept

Material

500000

500000

Production Overhead [20000 x 72

1440000

1440000

Product Cost

500000

1500000

Total Cost

2440000

3440000

Mark-up @ 16.28%*

397209

560000

Sale Value

2837209

4000000

1000

1000

hours)

Quantity

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Selling price per unit

2837

Difference in price (in %)

4000
40.98%

*Mark-up workings
Sales

100

Prot

14

Cost

86

Mark-up = Prot/Cost = 14/86

16.28%

With 41% difference in price, marketing department feels that we will not
get the order and hence loose an opportunity to increase the market share
and capacity utilization.
Having understood the core issue, we raised a fundamental question.
What should be our pricing policy? To recover cost or acquire new
customer and business?
Of the 60 participants, many supported the view of recovering the cost,
some supported the view of acquiring new business and others feel that
our policy should be somewhere in between the two. The middle of path
approach is bit dangerous and it would be impractical for an organization
to discuss each and every issue and take decision. We decided to discuss
and build a policy that act as a guideline for pricing decision. This course is
on how accounting information is useful for decision making.
Then I posed a different question to the group: Are we going to incur a loss
if we go by marketing department pricing? What cost items are relevant for
the current decision making?

Material: Yes, it is relevant because we need to buy material for the order.
Product initial investment: Yes, it is relevant because we are going to
spend. On this, we are with the accounting department.

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Production Overhead: Are we going to incur additional overhead cost? We

opened up this issue for discussion. What are the items that go into the
machine center overhead expenses? Prominent items are depreciation,
maintenance, insurance, etc. These are not likely to increase whether we
do this order or not. Most of these items are xed. Then the question is:
are we doing the right thing in considering this cost for pricing?
While some participants quickly said we should not consider but many
others were not convinced. Then the question is: are we going to save this
cost (Rs. 1.440 million) by not taking up the order? The answer is No. We
have already loaded the overhead to all our existing customer.
The real issue is not on whether to consider the initial investment in
pricing. We should consider. The core issue is whether to consider the
production overhead and our answer is we should not consider the same.
Let us rework our price with this understanding.

Material

Marketing

Accounting

Relevant Cost

500000

500000

500000

1440000

1440000

500000

1500000

1500000

2440000

3440000

2000000

397209

560000

325581

2837209

4000000

2325581

Quantity

1000

1000

1000

Selling price per unit

2837

4000

2326

Production Overhead [20000 x 72

hours)
Product Cost
Total Cost
Mark-up @ 16.28%
Sale Value

The price is still lower than what marketing department wants. Of course,
marketing department will not quote such low price and will try to
maximize the price but they get enough space for negotiation with a oor
price of Rs. 2326 per unit.

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So what should be our pricing policy?

We should use a principle of INCREMENTAL COST or RELEVANT COST
approach in pricing such special orders.
The case highlights a simple point Tanya and Siddharth representing two
functions are debating on an issue which is not the core issue. Both are
missed out another cost item which is Production Overhead. It is xed and
not relevant for pricing a special order.
Many participants said they got some new insights. I hope after reading
this you also benet. Some of them said it confusing and probably this note
will be helpful.
I suggest the following:
Stay on the course and we are going to discuss many more simple but
useful things for managers. Management is science of commonsense and
often we miss it out.
Join with us for the next case discussion, most likely next Saturday. We
will nd out convenient time since many of you are outside India.
Tell your colleagues and friends about the course and ask them to join
and benet.
Start thinking about upgrading the course registrationas veried
learner!!
Rate the course so that it will be useful for others who are looking for
feedback before signing up.

I am excited to reach out thousands of you through this technology and

share few things that I know on the subject.
Best wishes,
M S Narasimhan (MSN)

All Rights Reserved

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