When we talk about accounting standards, the main thing that comes under them is the accounting report. According to the International Accounting Standards Committee (IASC), accounting reports are documents filled out by brokers that give details and facts about a new client’s financial circumstances and investment objectives. The report may be updated if there are material changes in a client financial position. Based on the report, a client may or may not be deemed eligible for certain types of risky investments such as commodity trading or highly leveraged limited partnership deals.
The second main thing is the framework. According to the Financial Accounting Standards Board in the US, the conceptual framework is the system of fundamentals and objectives that make consistent standards by knowing that the accounting report does not mean the rules but the guidelines. Actually, rules are set in the accounting standards which we can formulate from the framework. But when we face an interpretation conflict, it takes some requirements over the framework.
International Accounting Standards Committee (IASC), http://www.iasb.org
Accounting Standards, Advantages and Disadvantages: Having said that accounting standards are the provider of the rules, conditions and consistency, they may hold some pros and cons while they are being implemented and taken in any company. Efficiency and effectiveness can be gotten through consistency if different organizations apply them than other organizations in their financial transactions. If we ask ourselves about the main reason behind bookkeeping practices, the answer would be that companies with different forms and a wide range of data to be maintained are better than those that have the same data categorized less in the same shape and will face a very big problem in trying to do business together. Hence, the justice and court have standard operations and businesses in fact, should denote all of its operations and transactions. According to Elliot (2009) companies should organize their operations with standard clients, competitors, customers, and suppliers. If we want to issue clear standards of financial accounting, we have to take into account the direction of the economy to establish joint stock companies with large capital. It’s necessary to expand the vision of accounting standards according to communication and delivery of accounting information to lead to the need for that information to let them assess the performance of businesses to make good decisions with regards to their investment. Accounting standards are a very significant practice as it leads to effective corporate governance programs. They also provide a useful mechanism to rebuild the corporate values.
Schipper, K. (2003). Principles-Based Accounting Standards. Accounting Horizons, 17(1), 61-72
The Need for Accounting Standards: The need for accounting standards has been a very important aspect to ensure that comparability, accuracy and transparency are needed for the integration of European financial markets, which is according to the International Accounting Standards Committee (IASC). We need accounting standards to develop the measures of performance in any form of life, whether it is in financial reporting, returns and funds, or even playing a game. Actually, high quality financial reporting is connected with efficient capital markets so as to lead for investment to be well done. If we want the economy to function efficiently, we should have accounting standards because they help us reach our destiny. With accounting standards and good financial reporting, customers can get a clear image about business activities and financial conditions. To make it very clear, I will just mention a small example created by me that will really denote and clarify the real need for accounting standards in any business enterprise. With known and organized accounting standards, when the amount of the net income of Fathiya Company and Abeer Company is 2 million Omani Rials, we are sure that we can make a meaningful comparison. According to Schipper (2003) says that without standards, we cannot get the core aspect of assurance, for instance, whether Fathiya Company is considering the orders of the future as current sales or releasing a big amount of its expenses.
Financial Accounting Standards Board, http://www.fasb.org
Business without Accounting Standards: It was clear that accounting standards are very important to any business. Businesses can do whatever they want to reach certain goals without the need for accounting standards, but not as well as businesses that take accounting standards into account. Without accounting standards, businesses cannot guarantee that they will consider their future list of objectives or will leave some expenses. Furthermore, businesses cannot organize operations with their customers, suppliers and even competitors without applying at least some accounting standards. Moreover, if businesses do not apply accounting standards, they definitely will not be able to structure their business well and will lead to the corporate values to be missed.
Elliot, B. and Elliot, E. “Financial Accounting and Reporting” 13th edition, 2009 Chapters 5 and7
Accounting Standards in Oman and abroad: Oman has prepared the financial statements in accordance with International Accounting standards (IAS), the interpretations which are prepared by the Standing Interpretation Committee of the IASC and the requirements of the Commercial Companies Law of the Sultanate of Oman and the requirements set out in the rules for disclosure issued by the Capital Market Authority of the Sultanate of Oman, the disclosure is inadequate and is a negative phenomenon to a country which wishes to be strengthened further a good economy. Accounting standards in Oman may be
somehow related to the accounting standards outside Oman, because, in some extent, they all come under the International Accounting Standards Committee (IASC).
International Accounting Standards Committee (IASC), http://www.iasb.org
Recommendations and Conclusion: As an accounting student, I recommend all companies in Oman to have a set of accounting standards and reports in order to build a reliable business that can rank them in the top of the list of good companies.
To conclude, we should think of accounting standards as the key of success for different business enterprises. In addition, if companies apply accounting standards well, other companies will look up to them to do business strategies as well as they do.
The Importance Of Costs In The Pricing Strategy Accounting Essay
It is very important for companies to have a good pricing strategy as it than permits them to earn good profit margin on its product or services and at the same time making it appealing to the customers. Pricing strategies are very important part of business and different organisation spend large sum of money and effort to devise effective and efficient pricing strategies.
Following are different types of pricing strategies that different business organisations use in order to attract customers and at the same time to earn profit:
Cost based Pricing;
The formula that is used by different organisations to calculate the price is:
Selling price. = Cost profit
Cost based pricing: One of the strategies is cost based pricing. This strategy involves first the calculation of the fixed cost and the variable cost of the specific product or service that is offered by an organisation. Once the total cost is calculated than the profit margin is added to each unit i.e. it can 5%, 7% or 9%. The cost based pricing strategy is very efficient strategy as it covers all the costs related to product and service and it also covers the desired profit.
Although this strategy looks very simple and easy to use and managers only have to do some financial calculations in order to determine the price of the product or service that is being delivered. But the problem with this strategy is that it doesn’t consider the external factors such as market or the competition that also have massive impact on pricing. But as this strategy is very old and the organisation only has to process the internal information to calculate the price that’s why it is very popular. The organisation can also justify the prices that have been allocated on the basis of their cost and also prove that the price is the sum of the total cost and the profit.
Absorption costing principles: Absorption costing is another costing technique that is widely used it involves the allocation of all the costs that have been incurred by the business organisation to each of its product or the service they offer. This strategy enables them to estimate whether the product will make profit in future or not. During the cost allocation process some assumptions are also made as some costs are fixed and some are variable which depend on the level of production.
When absorption costing system is used the profit that are reported by the organisation depend on the level of production and the level of sales by the firm, this is due to the fact the fixed manufacturing overhead is absorbed in the value of work in progress goods and also in the finished goods. But if at the end of the accounting period the stock is not sold out than the fixed manufacturing overhead cost is transferred to the next period.
Marginal costing principles: Marginal costing is another significant costing strategy. This strategy gives importance to the behavioural characteristics of the costs. The two elements of the cost are first separated i.e. variable cost in which the cost per unit is same and the total cost changes depending on the level of production and the second element is fixed cost in which the total cost is same irrespective of level of production. It is not very easy to separate fixed and variable costs, the organisation simplify the information to do this and sometimes it is not very accurate. But this costing strategy is very helpful for business organisations to perform different activities such as decision making and short term planning. In this costing system the variable cost is subtracted from the sales revenue to calculate the contribution margin of each product i.e. the amount each product has contributed to cover the total fixed cost that business organisation has sustained. And then the fixed cost is subtracted from the contribution margin as fixed cost is treated as period cost and then the net profit is found.
1.2 Design a costing system for use within an organization. The world was hit by the recession in 2007. Now it is been more than six years but still many countries are not able to get rid of it and most of the countries are facing the after effects. The economy has been badly affected by the recession. And therefore business organisations are also giving more attention to the financial aspects of the firm. The business organisations are trying to be prepared for such kind of disasters by using various accounting tools that helps them to closely evaluate their performance whether it is financial or management performance. This also helps them to identify various opportunities. According to Datar et.al (2008) business organisations are giving more attention to cost accounting these days in order to make their financial as well as their strategic decisions. The costing system enables the organisation to easily record the expenses that have been incurred or will be incurred in future. But the other financial technique limits the business organisations to sales, marketing and human resource management and does not give the accurate cost of the business activities.
There are different costing systems some of them are mentioned above but the three costing systems that are gaining more attention are very popular among business organisations are:
Activities-Based Costing System
Absorption Costing System
Direct Costing System
TESCO is a multinational grocery store with millions of turn-over every year; they have been using traditional costing system which is used to cover their huge sales. But now as the competition is increasing in the market due to globalisation and various other factors the number of challenged TESCO is facing is also increasing. Therefore the best costing system for TESCO is activity based costing or ABC system. According to Dekker (2003) the fundamental principle of the activity based costing revolves around value chain analysis and integrated cost evaluation and the sales information that is associated with the supply chain of the organisation.
TESCO requires the main costing hub rather than small different departments. It has more than 30,000 products and therefore it is very difficult to keep track of all of them. Any business firm offering this much number of products cannot keep track of the cost and they can be in difficult situation due to overhead cost allocation. Activity based costing system has two divers volume based and non-volume based. The most suitable costing system for TESCO is activity based costing as it helps the organisation to get the exact summary of cost of sales.
1.3 Propose improvements to the costing and pricing systems used by an organization The competition-based pricing policy should be used by TESCO. This strategy helps the firm to finalize the price of the product after analysing the prices set by the other companies that are currently competing in the market. Therefore TESCO should first identify its present competitors that are giving it a cut throat competition. Than after calculating the costs of its products TESCO sets the price of each product. The prices are set either higher, lower or exactly the same prices that are offered by competitors. This decision is actually based on how the competitor will respond to the set price. If there are few competitors in the market than the response of the competitor is very important part of this pricing strategy. Because if this is the case than, when one competitor lowers the price the other competitor will also lower theirs in order to be more competitive.
By using this this pricing policy the companies can relatively quickly set their prices and as this strategy does not require accurate market data therefore it requires very little effort to carry it out. Competitive pricing also makes distributors more receptive to a company’s products because they are priced within the range the distributor already handles. Furthermore, this pricing policy enables companies to select from a variety of different pricing strategies to achieve their strategic goals. In other words, companies can choose to mark their prices above, below, or on par with their competitors’ prices and thereby influence customer perceptions of their products.
2.1. Apply forecasting techniques to make cost and revenue decisions in an organization Assumptions for Forecasted Income Statement:
The revenues have increased by 5%.
The cost of goods sold has increased by 2%
The selling, general and admin expenses has been managed to bring down by 3%
No further borrowing took place therefore interest expense is same
Interest income, income on equity investment and non-operating income has increased by 1%.
All the unusual items will be same.
Income tax will be 25%.
Minority interest in earning and earning from discounted operations will be same.
NOTE: All the figures are rounded off to one decimal place.
Currency (Millions of British Pounds) As of: Feb 25 2012 GBP
% Change Feb 25 2013 GBP
TOTAL REVENUE 64,539.0 67,766.0 Cost Of Goods Sold (cogs)
GROSS PROFIT 5,261.0 7,302.0 Selling General