Managing Financial Principles and Techniques

In this assessment you will have opportunities to provide evidence against the following criteria. Indicate the page numbers where the evidence can be found. | Criteria reference| To achieve the criteria the evidence must show that the student is able to:| | Task no. | | Evidence| 1| explain the importance of costs in the pricing strategy of an organisation changes | | 1. 1| | Pg. 11| 1| design a costing system for use within an organisation resource| | 1. 2| | Pg. 13| 1| propose improvements to the costing and pricing systems used by an organisation| | 1.

3| | Pg. 15| 2| apply forecasting techniques to make cost and revenue decisions in an organisation| | 2. 1| | | 2| assess the sources of funds available to an organisation for a specific project | | 2. 2| | | 2| select appropriate budgetary targets for an organisation | | 3. 1| | | 3| participate in the creation of a master budget for an organisation | | 3. 2| | | 3| compare actual expenditure and income to the master budget of an organisation| | 3. 3| | | 3| evaluate budgetary monitoring processes in an organisation | | 3.

4| | | 4| Absorption costing and Activity Based costing based on the results explain the importance of costs in the pricing strategy of Quality manufacturers | | 4. 1| | | 4| design a costing system for use within Quality manufacturers for better pricing. | | 4. 2| | | 4| propose improvements to the costing and pricing systems used by.

Quality manufacturers| | 4. 3| | | 5| apply financial appraisal methods to analyse competing investment projects in the public and private sector| | 5. 1| | | 5| make a justified strategic investment decision for an organisation using relevant financial information| | 5. 2| | | 5| report on the appropriateness of a strategic investment decision using information from a post audit appraisal| | 5. 3| | | 5| analyse financial statements to assess the financial viability of an organisation| | 5. 4| | | 6| analyse financial statements to assess the financial viability of an organisation| | 6. 1| | | 6| apply financial ratios to improve the quality of financial information in an organisation’s financial statements | | 6. 2| | |

Learner declaration|

I certify that the work submitted for this assignment is my own and research sources are fully acknowledged. Learner signature: Date: 17-09-2012| FORD MOTOR COMPANY COSTING AND PRICING STRATEGY ASHIF K. A Batch 3 Reg No :1578 Submitted On: 17-08-2012 Submitted to, Anu miss CONTENTS 1. The Ford Motor Company. 2. Cost –definition. 3. Types of Cost. 4. Pricing Strategy of Ford. 5. Costing Methods. 6. Ford Motor Company & Process Costing. 7. Cost Control. 8. Cost reduction. 9. Ford Motor Company:-Improvements in Costing and Pricing. 10. Conclusion. 11. Bibliography. 1. The Ford Motor Company.

Ford Motor Company is an American major in automobile industry since the 19th century itself. From the first of its Model T’s, which were assembled by hand in 1903, to today which includes Aston Martin, Land Rover, Lincoln, and several other products, Ford Motor has been making cars and, more importantly, making huge profit.. The Ford Motor Company is now the world’s fifth largest automaker based on worldwide vehicle sales with its infrastructure at Dearborn, Michigan, a suburb of Detroit,. The competitors of Ford are Toyota, Honda, General Motors, Chrysler, Nissan and Volkswagen.

The day to day success of Ford Motor Company comes from its slow beginnings. When the company was first founded in 1903 by Henry Ford, it only produced a few Model-T’s a day in Detroit. This production involved only groups of two to three men working on each car. By 1913, Ford had all the basic techniques of the assembly-line and mass-production. In fact, Henry Ford was the one to invent the moving assembly line. This production reduced chassis assembly from 12? hours to only a little over two and a half hour. At first, these innovations were not popular and turnover was high.

These methods of production were later called by companies as Fordism. In its early years, when the company focused on quality management, Ford decided to choose finance management as their form of quality management. This included highly efficient factories, high paid workers, and low prices. The company actually had kept a good management for the finance since early development. Ford Motor Co. has been virtually run by the Ford family ever since it was created, and even to this day, the family still has a lot of influence.

The Ford family controls more than 40% of the shareholder votes, and every year there are over 70 family members who show up to shareholder meetings. Bill Ford was the recent family member to have a control over the company as the CEO, but in 2006 he left the control. Now Allen Mullay, former executive with Boeing, is the CEO of the company. In the present stage Ford operates under two business sectors, automotive and financial services. Ford has five automotive representing segments; Ford North America, Ford South America, Ford Europe, Volvo, and Ford Asia Pacific Africa.

Ford Motor Credit Company offers a wide variety of automotive financing products to an through automotive dealers throughout the world. Cost-Definition The Institute of Cost and Management Accountancy (ICMA) , London ,defines the term cost as “the total amount of expenditure incurred on ,or attributable to a given thing. ”It represents the sources that have been or must be sacrificed to attain a particular objective . Every business concern whether it is engaged in the manufacturing of goods ort providing of services, has to incure expenditure on many things . Such expenditure forms the basis of cost ascertainment.

Cost Accounting Cost accounting is the process of recording, classifying, allocating and reporting various costs incurred in the operations of an enterprise . Cost accounting is the recording of the expenses incurred in manufacturing a product and conducting a business in such a manner that the expense are analysed and classified so as to enable the actual cost of any particular process or unit of production or service rendered to be determined with a minimum level of accuracy. The process of ascertaining cost relates to the presentation of statement of cost showing how the cost has been arrived at.

Costing The term costing signifies the “techniques and process of ascertaining costs”. The term “techniques” consists of a “body of principles and rules” by which the cost is ascertained. It is the classification, recording and appropriate allocation of expenditure for the determination of the cost of the product or services. Types of cost There are several types of costs of that a firm may consider relevant under various circumstances. For the purpose of decision making, it is essential to know the fundamental difference between the main cost concepts along with the conditions of use in decision making.

The types are as follows: a) Actual costs and opportunity costs b) Explicit cost and Implicit cost c) Sunk cost and Outlay cost d) Direct cost and Indirect cost e) Total cost, Average cost and Marginal cost f) Normal cost and Abnormal cost g) Replacement cost and Historical cost h) Controllable cost and Uncontrollable cost i) Out of stock and Ordering cost j) Development cost a. Actual costs and opportunity costs Actual costs are the costs which the firm incurs while producing or acquiring a good or service like the cost on raw material, labour, rent, interest etc.

The actual cost is also called outlay cost or acquisition cost or absolute cost. On the other hand opportunity cost or alternative cost is the return from the second best use of the firm’s resources which the firm forgoes in order to avail of the return from the best use of the resources. b. Explicit cost and Implicit cost Explicit costs are those expenses which are actually paid by the firm (paid-out costs). These costs appear in the accounting records of the firm. On the other hand, implicit or imputed costs are theoretical costs in the sense that they go unrecognized by the accounting system.

These costs may be defined as the earnings of those employed resources which belong to -the owner himself. c. Sunk cost and Outlay cost It is the cost incurred in the past and has no effect in the future decision making. For example, when the replacement of an asset is under consideration, the unpredictable value of existing asset is the sunk cost. Outlay costs mean the actual expenditure incurred for producing or acquiring a good or service. These actual expenditures are recorded in the books of account of the business unit, e. g. , wage bill.

These costs are also known as actual costs or absolute costs. d. Direct cost and Indirect cost The direct costs are the ones that have direct relationship with a unit of operation like a product, a process or a department of the firm. In other words, the costs which are directly and definitely identifiable are the direct costs. On the other hand, the indirect or non traceable or common or non-assignable costs are those whose course cannot be easily and definitely traced to a plant, a product, a process or a department. e. Total cost, Average cost and Marginal cost.

Total cost represents the money value of the total resources for production of goods and services by the firm. Average cost is the cost per unit of output, assuming that production of each unit of output incurs the same cost i. e. : Average cost = Total cost /Number of units Marginal costs are the incremental or additional costs incurred when there is additional to the existing out puts of goods and services. Eg. If the total cost increase from Rs. 2000 to Rs. 2100 when production increases from10 units to 11 units, the marginal costs of 11th unit is: Rs 2100 – Rs 2000 = Rs 100.

Thus , marginal costs of nth unit(MCn) is the difference between the total costs of nth unit(TCn) and total costs of (n-1)th unit(TCn-1), i. e. ,MCn=(TCn-TCn-1) Total costs increases throughout at different rates. An average and marginal cost first decline and then rises. A marginal cost rises earlier than average cost. f. Normal cost and Abnormal cost Normal cost is the cost which is normally incurred at a given level of output in the conditions in which that level of output is normally attained. It is the part of cost production.

Whereas abnormal cost is the cost which is abnormally incurred at a given level of output in the condition in which that level of output is normally attained. It is not included in the cost of production but charged to the costing Profit and Loss Account. g. Replacement cost and Historical cost Replacement cost is a cost at which the material identical to be replaced would be purchased at the date of valuation. It is a cost of replacing an asset at any given point of time, either at present or in the future. The historical cost is the actual cost determined after the event.

Historical cost of an asset states the cost of plant ,equipment and materials at the price paid originally for them, while the replacement cost states the cost that the form would have to incur if it wants to replace or acquire the same assets now. h. Controllable cost and Uncontrollable cost Controllable costs are costs which can be influenced by the action of a specified member of an undertaking. The cost can be at least be partly within the control of management. On the other hand uncontrollable costs are costs which may not be influence by the action of a specified member of undertaking.

Such costs are not within the control of the management . fixed payment of rent, payments of managerial salaries etc. are examples. i. Out of stock and ordering cost Out of stock cost take place when a stock shortage occurs and includes loss of sales, loss of good will on account of customers satisfaction, employees ill will etc.. Whereas ordering cost are the costs incurred, each time an order for the purchase of material is placed and are expressed as rupee cost per order and include the cost of getting an item into the firm‘s inventory. j.

Development cost

The additional cost incurred in connection with production of a new product or the manufacture of a product under improved method is called development cost. The extra cost is incurred in the initial stage in such cases is aggregated. Such cost begin with the implementation of the decision of the management either for a new a product or for an improved method and ends with the commencement of formal production of the product. Pricing strategy of Ford As for the Ford Motor Company price is not just a tag, it means to everything for the automotive company, because price is related to Ford’s income, cost revenue, employee benefit and etc.

Price is the only one element of the marketing mix that produces revenue; the other elements produce costs. It is well known that if the price is higher, automatically the demand lowers. As we all known, automotive market is price sensitivity, because automotive is expensive for most customers, customers are fewer prices sensitive to low-cost items. If demand is elastic, sellers will consider lowering the price. A lower price will produce bigger total revenue. As from every business history tells, prices were set by negotiations between buyers and sellers.

But from 21st century onwards companies adopt several pricing strategies that can be used for a certain product or service. The pricing strategies are :- 1. Premium pricing: this strategy is used to keep price and uniqueness high within a product or service. 2. Penetration pricing: in this pricing strategy prices are artificially made low in order to gain market share. 3. Economy pricing: in this particular strategy the cost of marketing and manufacturing are both kept low. 4. Price skimming: here the pricing strategy makes high price for a substantial competitive advantage. 5.

Optional product pricing: in this pricing optional extras are provided as the initial goal to increase customer satisfaction. 6. Captive product pricing: in this strategy companies charge premium prices where the consumer is captured. In the present situation Ford Company is adopting penetration pricing strategy to overcome the competitors and to improve the capacitive utilization. Right now Ford is facing elastic demand and also facing pressure of lower profit margins. Penetration pricing involves the setting of lower, rather than higher prices in order to achieve a large market share.

This strategy only be possible where demand for the product is believed to be highly elastic. According to a study, price is the primary consideration when people buying a car. A successful penetration pricing strategy may lead to large market share and therefore lower the margin cost. Costing Methods By method of costing we mean a system of cost ascertainment and cost accounting suitable for a particular industry. Methods of costing can be broadly divided into.. 1. Specific order costing Specific order costing is applied where the work consists of separate jobs, batches or contracts.

The classifications of specific order costing are: * Job costing * Batch costing * Contract costing 2. Operation costing Operation costing is applied where standardised goods or services result more or less continuous operations or processes to which costs are charged . the classifications are : * Process costing * Operation costing * Service costing Different methods of costing : a. Job costing ICMA(International Capital Market Association), England defines it as “that form of specific order costing , which is applied where work is undertaken to customer’s specific requirements”.

it is applied in such industries which produced definite articles against individual orders from customers. Each job is separately identified and a job card is prepared for each job for cost accumulation. This method is applicable to printers, machine tool manufactures, general engineering works etc… b. Batch costing A batch may represent a number of small orders passed in batches through the factory. The unit of this cost is a batch for group of identical products . ICMA defines it as, “that form of specific order costing, which applies where similar articles are manufactured in batches either for sale or for use within the undertaking.

In most cases, the costing is similar to job costing “. cost per unit of the product is obtained by dividing the total cost with the number of units produced in the batch. c. Contract costing It is a method of costing applied in such concerns where the job is big and is spread over long periods of time. For each job or contract work, a separate contract account is maintained. This method is used by builders, civil engineering, etc… d. Process costing It is a method of costing applied in such concerns where the process of production is completed distinct stages.

The output of one process is passed to next process till finished product is obtained from the finishing process. cost per unit at the end of each process is obtained on dividing the total cost at the end of the process by the total number of units obtained at the end of the process . This method of costing is applied in concerns such as chemical manufacturing ,oil refining ,paint manufacturing ,glass works ,cement manufacturing , etc. … e. Operation costing This is also known as single or output or unit costing .

The method of costing is applied in such concerns where the process of production is continues and the units produced are identical . This method is applied in industries like, mines ,quarries, brick works, etc.. In all this industries there are natural or standard units of cost . The cost per unit is determined by dividing the total expenditure incurred during a given period by the number of units produced during that period. f. Service costing This is a costing method applied in such industries, which render services as distinct from those which manufacture goods it is applied in transport.

undertakings, power supply companies, hospitals, hotels, municipal services etc. .. This method is used to ascertain the cost of services rendered. g. Multiple costing It means combination of two or more of the above methods of costing. Where a product comprises many assembled parts or components (as in case of motor car) costs have to be ascertained for each component as well as for the finished product for different components, different methods of costing may be used. It is also known as composite costing. This type of costing is applicable to industries producing motor vehicle, aeroplane radio, T.

V. etc. Ford Motor Company & Process costing The Ford motor company follows process costing method since its beginning onwards for cost ascertainment and cost accounting. It is a method of costing applied in such concerns where the process of production is completed distinct stages. The output of one process is passed to next process till finished product is obtained from the finishing process. Cost per unit at the end of each process is obtained on dividing the total cost at the end of the process by the total number of units obtained at the end of the process.

The other area where this method of costing is applied in concerns such as chemical manufacturing ,oil refining ,paint manufacturing ,glass works ,cement manufacturing , etc Utmost attention paid to the process, for making the product first time right. Problems encountered are analyzed, a solution is arrived at through teamwork, an action plan is developed and the implementation results are evaluated. Process is designed with customer requirement in focus. The requirements of the customer are reduced to a specification and specifications to a defined work process so as to focus attention on the customer requirements.

Ford Motor Company had a philosophy of whatever the company produce and provide the customers, they will buy because, and customers do not know what they want. The company was the first to follow an assembly line system which brought a revolution across the industry. But this was past, today automotive industries are full of competitors and customers have many options available with the right price and quality. In order to survive and gain larger market share, Ford must be implementing new pricing strategy. Ford must improve the features of

their products to give more benefit to the customers. Ford should add more varieties in the hybrid cars and should also make penetration in the Asian market. In this aspect Ford has fall behind its competitors. Change is constant in the automotive industry, but there is only one thing never change in order to be successful, that is innovation. Cost control Cost control is defined as “the guidance and regulation by executive action, of cost of operating undertaking”. Cost control plays its part at the discretion of the management, who wish to maintain the cost within a specified limit.

It is exercised through numerous techniques, such as standard costing, budgetary control, etc. it is to improve e performance or efficiency to achieve the target. An organized and intentional effort to limit the growth of costs within specific accounts. The management practice of putting lock limits on accounts is, in my opinion, an example of cost control. Mandating the reduction of consumption of a supply or utility is an example of cost control. Cost control involves the following: 1. Setting up standards. 2. Finding out differences of actual against standards. 3. Analysing the differences.

4. Taking up corrective measures to eliminate variations. Cost Reduction Cost reduction is concerned with reducing cost. It strives to achieve permanent reduction, and it starts where control ends cost. Cost can be reduced through saving of cost. It is a process used by companies to reduce their cost and increase their profits. Depending on a company’s services or products, the strategies can vary. However, it is important to remember that every decision in the product development process affects cost. Company’s typically launching a new product without focusing too much on cost.

Cost becomes more important when competition increases and price becomes differentiator in the market. The following are the advantages of cost reduction: 1. Increase in productivity. 2. Reasonable price for the customers. 3. Continued employment for the workers. 4. Expected return on capital. 5. Economic use of resources. Ford Motor Company: – Improvements in costing and pricing In the case of pricing strategy, Ford need not go to a change, because using this recently introduced strategy Ford has improved its liquidity rate and lowered its cash burn.

Inorder to implement penetration pricing strategy, Ford studied the market and recognized the need for innovative fuel efficient engines that can hold up the future automotive market and alternative automobiles to meet the consumers and environments needs. As the first step they renamed their Ford Science Research Lab to Ford Research and Innovation Centre. They concentrate on developing, engineering, and manufacturing vehicles that provide flexible fuel technology to include a wide assortment of hybrid and ethanol-fuelled options. Pricing strategies can be changed accordingly as competition demands.

Through the history of ford it is being using process costing, also almost all the companies uses process costing, which may be the apt way of costing the final value of the product. Ford has taken steps to make benefits from restructuring there productions by adopting latest automation techniques. The company has made significant progress in cutting costs with a 1 billion dollar reduction in structural costs in the 3rd quarter and a 4. 6 billion dollar reduction since the beginning of the year. Options for gaining the market share: – * Ford should use the S. M. A. R. T.

guidelines, Specific, Measurable, Attainable, Realistic, and Timely. Ford specific goal using this option would be producing practical small cars to reduce the revenue lost. * Improving the Total Quality Management (TQM),Employee Empowerment and Leadership development creates a happy and comfortable environment where all employees are have job satisfaction and are able to make use of their capabilities and realize their potential which gradually reflects in the market gains. * Ford should work on its new pricing strategy as hard as possible inorder to compete with other companies.

Ford should continue attempts to sell off the Volvo brand The funds from this sale should provide Ford with increased flexibility during the coming year as well as contribute to existing strategic goals. * Rather than concentrating in certain markets the company should take steps to explore new markets such as in China and India. 2. 1 apply forecasting techniques to make cost and revenue decisions in ford motor company It is the process of making statements about events whose actual outcomes have not yet been observed. A company example might estimation of some variable of interest at some specified future data.

Perdition is a similar, but more general term. Both might refer to formal statistical methods employing time series, cross sectional or longitudinal data, or alternatively to less formal judgemental methods. Usage can differ between areas of application: for example in hydrology, the terms forecast and forecasting are sometimes reserved for estimates, such as the number of times floods will occur over a long period. Risk and uncertainty are central to forecasting and prediction; it generally considered good practice to indicate the degree of uncertainty attaching to forecasting.

In any case, the data must be up to date order for the forecast to be as accurate as possible. . 2. 2 assess the sources of funds available to an organisation 1. They make profit by selling a product for more than it costs to produce. This is the most basic source of funds for any company and hopefully the method that bring in the most money. Like individuals. Company can borrow money. This can be done privately through bank loans, or it can be done publicly through a debt issue. The drawback of borrowing money is the interest that must be paid to the lender. 2.

A company can generate money by selling part of itself in the form of share to investors, which is known as equity funding. The benefit of this is that investors do not require interest payment like bondholders do. The drawback is that further profits are divided among all shareholders. 1. In an ideal world, a company would bring in all of its cash simply by selling goods and services for a profit. But as the old saying goes, you have to spend money to make money, and just above every company has to raise funds at some point to develop products and expand into new markets. 3.

1 Define Budget Monitoring and evaluate the Budget Monitoring Processes in an organization. It is a financial plan for the further concerning the revenues and costs of a business. However, a budget is about much more than just financial numbers. Its is the process by which financial control is ex excised within an organisation. Budgets for income/ revenue and expenditure are prepared in advance and then compared with actual performance to establish any variance. The managers are responsible for controllable costs within their budgets and are required to take remedial action if the adverse variances arise and they are considered excessive.

3. 2 What is Zero Based Budgeting? Explain the possibilities of Zero Based budgeting. Definition Method for preparing cash flow budget and operating plans which every year must starts from scratch with no pre- authorized funds. Unlike the traditional budgeting in which past sales and expenditure trends are assumed to contain, ZBB requires each activity to be justified on the basics of cost benefit analysis, assumes that no present commitment exist and there is no balance to be carried forward. By forcing the activities to be ranked according to priority ZBB provides a systematic basis for resource allocation.

3. 3 LILLIPUT, A ONE –PRODUCT MAIL – ORDER FIRM, BUYS IT’S PRODUCT FOR $60 PER UNIT AND SELLS IT FOR $130 PER UNIT. THE SALES STAFF RECEIVES A 10% COMMISSION ON THE SALES OF EACH UNIT. IT’S DECEMBER INCOME STATEMENT ARE AS FOLLOWS. Income statement for month ended December 31, 2011 PARTICULARS| AMOUNT| SalesCost of goods sold| $1300000600000| Gross profit| 700000| Less: ExpensesSales commissionAdvertisingStore rent Administrative salariesDepreciationOther expenses| 13000020000024000400005000012000| Total Expenses| 456000| Net income| $244000|

Management expects December’s results to be prepared in January, February and March of 2012 without any change in strategy. Management, however, has an alternative plan. It believes that unit sales will increase at a rate of 10% each month for the next three months (beginning with January) if the items selling price is reduced to $115 per unit and advertising expenses are increased by 25% and remain at that level for all three months. The cost of its product will remain at $60 per unit, the sales staff will continue to earn a 10% commission, and the remaining expenses will stay the same.

REQUIRED Prepare budgeted income statement for each of the months of January, February and March that show the expected result from implementing the proposed changes. Use a three column format, with one column for each month. INCOME STATEMENT OF LILLIPUT COMPANY PARTICULAR| Dec 2011(amount)| Jan 2012(amount)| Feb 2012(amount)| March 2012(amount)| SalesLess: Cost of goods sold| $1300000600000| 1265000660000| 1391500726000| $ 1530650798600| Gross Profit| 700000| 605000| 665500| 732050|

Less: ExpensesSales commissionsAdvertisingStore RentAdministrative salariesDepreciationOther Expenses| 13000020000024000400005000012000| 12650025000024000400005000012000| 1391502500024000400005000012000| 1530652500024000400005000012000| Total Expenses| 456000| 502500| 515150| 529065| Net Income| $ 244000| 102500| 150350| 202985| Interpretation:- * The income statement of Lilliput Company sales have been increased in every year by 10% and also reduced the selling price from $ 130 to $ 115. * Every month cost of good solid is increased into 50%.

* Gross profit increasing all the months Jan, Feb. and March. * Increase in the advertising expenses by 25%. * Sale staff is continually given 10% commission and the remaining expenses remain the same. * Increasing the total expenses and it seems that the trend is showing an increase. But the increase of the total expense is in diminishing rate. * The net will be income is increasing month by month and the increase in the net profit is in a mounting rate day by day. * By looking into the income statement we can see that the profit of the company is increasing.