CU-MCOM-SEM-IV-Strategic Cost Management-Second Draft

UNIT - 7: COST PRICING STRUCTURE 7.0 Learning Objectives 7.1 Introduction 7.2 Monopoly Pricing vs Competitive Pricing 7.3 Bottom Line Pricing 7.3.1 Advantages of Bottom Line Pricing 7.3.2 Disadvantages of Bottom Line Pricing 7.4 Summary 7.5 Keywords 7.6 Learning Activity 7.7 Unit End Questions 7.8 References 7.0LEARNING OBJECTIVES After studying this unit, you will be able to:  Explain the meaning of Monopoly pricing  Outline the price an output in short run.  Discuss the meaning of Competitive pricing.  List out the advantages of Bottom line pricing.  Discuss the disadvantages of bottom line pricing. 7.1INTRODUCTION In this Unit, we will learn Monopoly and competition are two fundamental features of economic markets. Monopoly and competition are terms that describe certain complex relationships between enterprises in an industry. A monopoly is normally a supplier's exclusive control of a market for a product or service for which there is no substitute. 101 CU IDOL SELF LEARNING MATERIAL (SLM)

7.2 MONOPOLY PRICING VS COMPETITIVE PRICING Monopoly Pricing: In a market for a specific product or service, a monopoly indicates that there is only one seller. There are barriers in place that hinder new players from entering the market. Other companies may not be able to earn a profit because the cost of creating items is too high. As a result, one vendor has complete control over the market. The company has elasticity in establishing the pricing charged for goods or services since it controls the supply of the product. The main purpose of monopolies is to maximize profits. The demand for products or services determines the market price. The monopoly tries to establish the highest possible price while still being able to sell all of the commodities produced. To maximize profits, a monopoly must decide the optimal amount of output. Consumers cannot simply switch their product for a comparable one from a local source, giving monopolies an edge over alternative market systems in establishing prices. Example: 1. Electricity doesn’t have any other substitute. 2. Pharmaceutical drug provision. MONOPOLY: Monopoly is a market condition in which there is only one seller of a specific commodity or service. (b) There is no competition. (c) There are no close replacements available. (d) The ability to influence price. Price determination: (1) Substitute firms selling identical items enter the market, resulting in monopolistic competition due to product differentiation by sellers. (2) Because the number of rivals can only grow so far, the monopolistic situation's excess earnings attract new competition. Because of price competition with close replacements, this will have a long-term effect on surplus profits, which will tend to shrink. 102 CU IDOL SELF LEARNING MATERIAL (SLM)

(3) As a result, the price will be determined as follows: (a) Short -Run Optimal Price: In the short term, the individual Firm will continue to produce as long as extra units increase revenue more than they increase cost. It will come to a halt when increasing output increases cost more than revenue. As a result, the Optimal Price is set at the output level where Marginal Revenue equals Marginal Cost. (b) Long-Run Optimal Price: Because a large number of replacements will be accessible in the long run, the Average Revenue curve will be more elastic. As a result, equilibrium is reached when firms receive typical earnings. Only when Average Revenue equals a veroce Cost are profits regular. COMPETITIVE: The following conditions define pure / perfect competition: (a) A high number of buyers and sellers. (b) Product that is homogeneous. (c) Firms have unrestricted admission and exit. (b) Thorough understanding of Purchasers and Sellers' pricing and quantity requirements. (e) Market Segmentation is lacking. (f) Transportation costs are not incurred. (g) Factors of production are perfectly mobile. Price Determination: 1. Under pure competition, a firm has no pricing policy of its own and must accept the market price. It can sell all of its production at this price if it wants to. 2. The Firm is unable to sell anything for a higher price. 3. The firm's selection is based on the amount of goods to be sold, not on the price. 4. As long as the Firm's Marginal Cost is less than or equal to its Selling Price, it can continue to produce. Increases in output will add to revenue until the Marginal Cost equals price, at which time they will add to cost. Price and output determination in Short Run 103 CU IDOL SELF LEARNING MATERIAL (SLM)

In monopolistic competition, each firm has a certain amount of monopoly power, which means that each firm can determine its own price. Because the products are comparable but not identical, there will never be a single price, but rather a group of prices representing the tastes and preferences of consumers for distinct products. In this situation, the firm's product price is determined by its cost function, demand, and aim, as well as any applicable government laws. Because there are numerous firms offering identical products in the market, the firm's output is little in comparison to the total quantity sold, and its price and output decisions go unnoticed. As a result, each firm operates autonomously, and when marginal revenue equals marginal cost, the firm maximizes profit or minimizes loss for a given demand curve, marginal revenue curve, and cost curve. The firm's earnings are maximized when an output of Q is produced and sold at a price of P. Fig 7.1 Price and output determination in Short Run 104 CU IDOL SELF LEARNING MATERIAL (SLM)

A company may or may not make money in the short term. The firm, which is profitable, is depicted in the diagram. The firm's equilibrium point, designated by point A, is at price P and quantity Q. The economic profit is expressed as area PAQR in this case. The difference between this and the monopoly situation is that here the entry barriers are minimal or non- existent, attracting new enterprises to enter. As long as there are profits, new entries will continue to come in. When new firms compete for the super normal profit, the market will reach equilibrium, and no new firms will be drawn to the market. Competitive Pricing: Competitive pricing is when you establish the price of your products or services depending on the prices set by your nearest competitors. When the product is homogeneous and the market is extremely competitive, this rule applies. Because company examines market prices rather than examining their own expenses, competitive pricing is also known as market- oriented pricing. A business that decides to adopt a competitive pricing strategy has three options: Low Cost: The items or services are less expensive than those offered by competitors. If you can make things in volume, which cuts production costs, you can use this pricing strategy. High Price: The items or services are more expensive than those offered by competitors. If you offer extra features and benefits in your products and services that your competitors don't, you can use this pricing strategy. Price Matching: The prices of the items or services are the same as those supplied by competitors. The product features remain mostly unchanged, but the emphasis turns to product quality. Customers will instinctively choose you if you can give a higher-quality product at the same price. Example: Maaza and Slice are a famous example of a competitor-based pricing strategy. Both brands compete against each other in terms of price, quality, and features, and their prices are similar, however Slice is somewhat less expensive on average than Maaza 105 CU IDOL SELF LEARNING MATERIAL (SLM)

. Fig 7.2 Competitive Pricing 7.3 BOTTOM LINE PRICING The bottom price approach is a pricing method that calculates the selling price of a product or service by adding the product's expenses to the profit margin. While utilizing the Bottom Price, businesses must be certain of the cost allocation of their products or services. A bottom-up method is also employed in corporate sales, marketing, and other areas. When calculating the selling price of a product, every business must consider a variety of things such as office supplies, marketing expenditures, labour, raw materials, and much more. The bottom pricing strategy will take into account all direct and indirect costs. Businesses must calculate their expected profit and add it to the cost of the costs. The price at which your product or service is sold is determined by the outcome. 106 CU IDOL SELF LEARNING MATERIAL (SLM)

Pizza Hut is the best current example of a bottom-up sales method. “30 minutes or free” is a new promotion from Pizza Hut. This ensures that if the pizza is delivered after 30 minutes of the order being placed, the consumer will receive a free pizza. Despite the fact that sales are dependent on the food and the deal made, the company's revenue is dependent on the delivery agent, who must deliver the pizza within 30 minutes. Fig 7.3 Bottom Line Pricing 7.3.1 Advantages of Bottom Line Pricing: 1. Predict profits- One of the main benefits of the lowest pricing is that it allows businesses to forecast profits from product or service sales. Because the selling price of a product or service is controlled by the profit margin, you can easily predict how much profit you will make and adjust your figures. However, businesses must ensure that their product or service meets sales targets in order to generate the expected profit. 107 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Employee Engagement — one of the advantages of the low-cost strategy is employee engagement. Because employee pay is directly tied to product or service sales, it will interest employees with the product/service and drive more sales. This will keep personnel on board and sales moving forward. When a product or service generates high levels of engagement and satisfaction from the bottom level, it will keep the company alive for the long term and generate revenues. 7.3.2 Disadvantages of Bottom Line Pricing: 1. Early investment — Just like any other firm, entrepreneurs must make an initial investment to get their venture started. However, if they intend to use the bottom-up strategy, they must ensure that the product or service can generate sufficient sales and profit. If the desired sales are not achieved, the company may suffer a loss. 2. Making sales - For the lowest pricing, it's critical to make sales according to the plan. As previously said, a significant investment is made in product development; yet, if the expected sales figures are not met, the company may suffer a setback. Especially, when the company is providing a customer incentive, such as a free product. As a result, before implementing the cheapest price plan, the company must first determine whether it is possible. 7.4 SUMMARY  The main purpose of monopolies is to maximize profits.  The items or services are less expensive than those offered by competitors are low cost.  The bottom price approach is a pricing method that calculates the selling price of a product or service by adding the product's expenses to the profit margin 7.5 KEYWORDS  Entrepreneur- a person who starts a business or several firms in the hopes of making a profit.  Competitive- Having do with or being defined by competition.  Monopolistic- referring to a person or company that has sole possession or control of a commodity or service's supply or commerce.  Alternative :( of 1 or extra things) to be had as every otheropportunity or choice. 108 CU IDOL SELF LEARNING MATERIAL (SLM)

 Optimal: quality or maximum favorable; optimum 7.6 LEARNING ACTIVITY 1. What is Monopoly Pricing? ___________________________________________________________________________ ___________________________________________________________________________ 2. What is Competitive Pricing? ___________________________________________________________________________ ___________________________________________________________________________ 7.7 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define Bottom Line Pricing. 2. Explain Price Matching. 3. Difference between Low Cost and High Price. 4. What are the disadvantages of Bottom Line Pricing? 5. Explain the advantages of Bottom Line Pricing. Long Questions 1. Differentiate between Monopoly Pricing and Competitive Pricing. 2. Explain the advantages and disadvantages of Bottom Line Pricing. 3. DiscussPrice and output determination in Short Run with diagram. 4. Explain Monopoly Pricing in detail. 5. What is Competitive Pricing? Explain the 3 options of competitive pricing strategy. B. Multiple Choice Questions 1. ………………is a pricing method that calculates the selling price of a product or service by adding the product's expenses to the profit margin. a. Bottom price approach b. Competitive pricing 109 CU IDOL SELF LEARNING MATERIAL (SLM)

c. Monopoly pricing d. None of these 2. Items or services are more expensive than those offered by competitors are…………… a. Low price b. High Price c. Price matching d. None of these 3. Items or services are less expensive are ………….. a. Low price b. High Price c. Price matching d. None of these 4. The main purpose of monopoly's is to ………..profits a. minimise b. maximize c. both minimises and maximise d. None of these 5. ……………….. Pricingdepends on the prices set by your nearest competitors. a. Competitive b. Bottom Line c. Penetration d. Value Based Answers 1-a, 2-b, 3-a, 4-b, 5-a 110 CU IDOL SELF LEARNING MATERIAL (SLM)

7.8 REFERENCES References book  Aswathappa, K. (2002). Human Resource Management. New Delhi: Tata McGraw- Hill.  Dessler, G. (2012). Human Resource Management. New Delhi: Prentice-Hall of India.  Rao, V.S.P. (2002). Human Resource Management: Text and cases. New Delhi: Excel Books.  Decenzo, A. & Robbins P Stephen. (2012). Personnel/Human Resource Management. New Delhi: Prentice-Hall of India.  Ivancevich, M John. (2014). Human Resource Management. New Delhi: Tata McGraw-Hill. Textbook references  Mamoria, C.B. (2002). Personnel Management. Mumbai: Himalaya Publishing House.  Dipak Kumar Bhattacharyya, Human Resource Management, Excel Books.  French, W.L. (1990), Human Resource Management, 4th ed., Houghton Miffin, Boston.  H.J. Bernardin, Human Resource Management, Tata McGraw Hill, New Delhi, 2004. Website  http://www.slideshare.net/sreenath.s/evolution-of-hrm  www.articlesbase.com/training-articles/evolution-of-human-resource- management- 1294285.html  http://www.oppapers.com/subjects/different-kinds-of-approaches-to-hrm- page1.html 111 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 8: COSTING OF SERVICE SECTOR STRUCTURE 8.0 Learning Objectives 8.1 Introduction 8.2 Meaning and Features of Service Sector Costing 8.3 Methods of Costing in Service Sector. 8.4 Pricing in Service Sector 8.5 Performance Measurement 8.5.1 Benefits of effective performance measurement 8.5.2 Steps in Development of an effective performance measurement system 8.6 Summary 8.7 Keywords 8.8 Learning Activity 8.9 Unit End Questions 8.10 References 8.0LEARNING OBJECTIVES After studying this unit, you will be able to:  Explain the meaning and concept of Service sector.  Outline the various methods used in Cost for Service sector.  Discuss the pricing in service sector 8.1INTRODUCTION In this Unit, we will be able to grasp and appreciate the intricacies involved in service sector costing after completing this chapter. You will obtain an understanding of the various methodologies used by service sector firms to determine their unit costs by reading this chapter. 112 CU IDOL SELF LEARNING MATERIAL (SLM)

8.2 MEANING AND FEATURES OF SERVICE SECTOR COSTING The determination of the overall operational cost incurred on each unit of the intangible product is referred to as service costing or operating costing. These intangible products or services can take the shape of internal services provided by businesses as part of their supporting activities for the production of items. Alternatively, external services that are offered to customers as a substantial product by service sector organizations.Because every service organization must determine its business overheads, service costing is an important subject. Its purpose is to ensure that items, i.e. services, are priced fairly and that fixed and variable expenses are kept under control. Less Working Capital Intangible Cost per Items unit Service is Collection both of Cost Data unique and standard Fig 8.1 Features of Service Costing Features of Service Costing 1. Intangible Items: Service costing is concerned with the operational costs of products that do not have a physical form but meet the requirements and desires of customers. 113 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Collection of Cost Data: Cost sheet, invoices payables, daily log sheet, and other documents are used to collect cost data for product service costing. 3. Service is both unique and standard: Such organisations provide specialised and exclusive services. 4. Less Working Capital: Because the direct cost of raw materials and other direct expenses is relatively low, service costing requires less working capital. 5. Cost per Unit: In service costing, the cost per unit is primarily calculated. The cost unit is established by the sort of service industry in which the company operates, and it varies from company to company. For example, in goods transportation, it is measured in ‘tonne-miles,' whereas in boilers, it is measured in ‘per cubic centimetre-litre.' 8.3 METHODS OF COSTING IN SERVICE SECTOR Companies in the service industry, like those in the manufacturing sector, use one of the two main costing methods to assign costs to services. These are the following: 1. Job costing approach: In this method, the cost of a certain service is calculated by allocating expenses to different identifiable services. Job costing is utilised in the service sector, such as accounting firms and advertising campaigns. Activity Based costing models can be used to assign indirect costs (overheads). Features: (a) It is a Costing for a Specific Order. (b) The project is completed or a product is created to meet the order's precise Requirements. It could be a single unit or a group of comparable units. (c) It is concerned with the cost of a single task or batch, independent of how long it takes to generate it; however it is usually for short periods of time. (d) At the end of each job's completion, costs are collected. (e) Each job's expenses are calculated by adding supplies, labour, and overheads. (f) Only prime cost elements are traceable, and overheads are allotted to each work on an appropriate basis; nevertheless, selecting an appropriate technique of absorption of overheads to particular jobs can be challenging at times. Example: 114 CU IDOL SELF LEARNING MATERIAL (SLM)

Job No.70 passes through three departments: E, F, and G. The information is given below regarding this job. Find out the Job Costing for the Job 70. Departments EFG Material issued at job 16,000 2,000 1,000 Direct Labour 2,000 4,000 10,000 Rate of direct labour per hour Sale of Scrap 1 1.5 2 Total overheads 2,000 300 200 20,000 30,000 50,000 Total labour hours 20,000 15,000 80,000 Solution: Job Cost sheet Materials (Less Scrap) Dept E 14,000 Dept F 1,700 Dept G 800 16,500 Direct Wages 2,000 Dept E 2000 @ 1 per hour 115 CU IDOL SELF LEARNING MATERIAL (SLM)

Dept F 4000 @ 1.5 per hour 6,000 28,000 Dept G 10,000 @ 2 per hour 20,000 44,500 Prime Cost Overheads 2,000 10,250 Dept E 2,000 54,750 Dept F 6,250 Dept G Total Cost Department E Total Overheads/Total Labour hours in dept* Labour hours in 20,000/20000*2,0 dept for Job 70 00 Total 2,000 Department F 30,000/60,000*4,0 Total Overheads/Total Labour hours in dept* Labour hours in 00 dept for Job 70 Total 2,000 Department G 50,000/80,000*10, Total Overheads/Total Labour hours in dept* Labour hours in 000 dept for Job 70 6,250 Total 116 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Process Costing Method: The cost of a service is calculated in a process costing system by assigning costs to masses of similar units and then computing unit cost on an average basis. Process costing is used in retail banking, postal delivery, and credit cards, among other things. Features: (1) Until the finished product, items are produced continuously, except when the facility is shut down for repairs. (2) Two or more processes combine to produce the final output. (3) The first process's output provides the raw material for the second, and so on. (4) Each procedure has its own unique characteristics and is pre-determined. (5) Costs are accrued as a result of processes. (6) The products are uniform and consistent. (7) It is impossible to see the difference between finished and unfinished products while they are being processed. (8) Its not uncommon to experience routine losses and waste. Occasionally, aberrant loss is noticed as a result of abnormal situations. (9) Secondary products, also known as point and bye-products, are frequently produced alongside the main product. Types of Process Costing: Companies can use several different process costing methods to determine the total cost incurred before, during, and after production, as well as the total number of units produced. Standard process cost accountingcan be used to simply calculate production costs, andaverage costs are allocated to specific production units,first-in-first-out calculation of unit costs at the beginning and completion. 1. Standard cost Standard cost It refers to the calculation of the cost ofthe production unit rather thanthe actual cost. The actual cost is compared with the total cumulativecost based on the standardcost.The difference between the total cumulativecost and the actual cumulativecost is recorded and recordedin another account, in this case,thedifferenceaccount. 117 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Weighted average: This type of costing processcombines all costs relatedto production and allocates them to the units produced by the company. This type of method may not consider the production time period, andmay be the simplest type of process cost calculation. 3. First-in,first-out: This costing processing method focuses on allocating costs to units according to their productionorder.The products that are produced first are allocatedcostsfirst, and then the first batch of products to be shipped or taken out. Inaddition, first-in first-outallocates one set of costs to products that startedbut not completed inthe previous accounting period, and another set of costs is allocatedto productsthat start in the current accounting period. Steps in Process costing: There are five steps in the process costing method that can be used to allocaterelated costs to inventory because it starts and finishes at the beginning, period, and end of the accounting or production period. Analyze the Inventory Convert inventory costs Calculate applicable cost Calculate the Cost per Unit 118 Designate Costs for complete and incomplete products Fig 8.2Steps in Process costing CU IDOL SELF LEARNING MATERIAL (SLM)

1. Analyze the Inventory: The first step in calculating the cost of the process is to analyze the inventory by evaluating the inventory cost stream. By determining the cost of each production process,the company can determine the amount of inventory that hasbeen posted at the beginning of the period, the amount that hasbeen completed during the accounting period, and the amount of inventorywork in processthat is in inventory. The accounting. Period at the end of the period. 2. Convert inventory costs: The second step in the costing process is to convert any inventory considered work-in- process at the end of the period into an equivalent unit quantity. For example, if a manufacturing company that produces pensdeterminesthat there are 8,400ink cartridges in production at the end of the accounting period, and each of these ink cartridgesis 50% full, then the businesswill consider inventory to beequivalent to 4,200 ink cartridges produced. 3. Calculate applicable cost: Then, after converting any inventory to an equivalent quantity in units of production, calculate the total directand indirect costsaccrued through the manufacturing process. This amount is then applied between the full inventory and the inventory left in process. Both the indirectcost andthe direct cost of production include the initial inventory cost and the current accumulated cost. 4. Calculate the Cost per Unit: Aftercalculating all the costsrelatedto the production process of the WIP inventory and theWIP inventory, calculate the unit cost. This includes the cost of the entire unit and the equivalent of the entire unit at the end of the accounting period. 5. Designate Costs for complete and incomplete products: Finally, divide the cost by assigning the appropriate quantity to the finished product quantity andconsidering the inventory of thework-in-process at the end of the period. 6. Hybrid costing approach: Many businesses employ a costing method that is neither job costing nor process costing. In reality, they employ a hybrid costing system that incorporates features of both job costing and process costing. 119 CU IDOL SELF LEARNING MATERIAL (SLM)

8.4 PRICING IN SERVICE SECTOR There are three main distinctions between customer pricing service and goods and services. In service, price is a crucial indicator of quality. These three distinctions can have a significant impact on the pricing strategies used by businesses to set and administer service prices.The company must set a price for each product. However, determining the price can be done in a variety of methods. 1. Cost-based pricing: Costs arethe maximum price a company can charge. As a result, cost-based pricing entails determining prices based on the product's production, distribution, and sale expenses. A reasonable rate of return is provided to account for efforts and risks in order to achieve a profit. Benefits:  This strategy assures that a business is profitable at all times. However, in order for this to happen, the mark-up must be sufficient to cover all expenses. Additionally, sales should meet or exceed goals.  It is straightforward to comprehend and implement.  This costing method accounts for all production and overhead costs.  Ensures that a company's profit margin remains stable even when costs rise.  This method can also be used to calculate the price of any bespoke product.  Customers can appreciate the reasons for the product pricing if they are aware of the cost.  This strategy aids businesses in bidding on huge projects. 2. Competition-based pricing: Competition-based pricing determines pricing based on the strategies, costs, prices, and market offerings of competitors. Consumers in highly competitive markets will base their assessments of a product's worth on the prices that competitors charge for similar goods and services. Benefits:  You can respond to every action made by your competitor with the help of that intelligence. As a result, you'll be able to better position your company in response to 120 CU IDOL SELF LEARNING MATERIAL (SLM)

various strategic moves made by competitors, and you won't lose clients as a result of pricing wars.  The first steps toward dynamic pricing with the competitive pricing strategy, which is a more complex technique that sits atop the competitive pricing strategy. In dynamic pricing, constantly updated rival pricing data can be utilised as a trigger to alter your own rates based on your product assortment's pricing criteria. You'll be able to compete better in the business and optimise revenues with each customer thanks to the capabilities of dynamic pricing.  A competitive pricing strategy entails more than simply lowering your rates. 3. Demand based Pricing: Demand-based pricing is a pricing approach that is based on the customer's demand and the product's perceived worth. This strategy compares the customer's willingness to buy the goods at various prices before deciding on an acceptable price. Based on the perceived value of the service to customers, one of the most acceptable ways for companies to price their services is to base the pricing on the perceived value of the service. 8.5 PERFORMANCE MEASUREMENT A performance measurement is a numerical result of an analysis that shows how successfully an organization is accomplishing its goals. These metrics can be used to assess the performance of a company's accounting, engineering, finance, marketing, materials management, manufacturing, research, and sales divisions, among other departments. TQM and a comprehensive quality organization are built on the foundation of performance measurement. Organizations have traditionally judged performance in some way through financial performance, whether success is defined by profit or failure is measured by liquidation. 8.5.1 Benefits of effective performance measurement In any organization, good performance measurement is essential for effective management. The following are only a few of the advantages of having a good performance measurement system: 1. Decision-making and control are improved: 121 CU IDOL SELF LEARNING MATERIAL (SLM)

Without a thorough understanding of an organization's performance, it is impossible to make the best decisions. Decision support may be improved at all levels of the organisation with a multidimensional performance measuring framework. This includes anything from employee performance judgments to board-level strategic decisions. 2. Strategic planning and goal-setting were aided: The capacity to track performance and progress provides the process of creating strategic plans and objectives meaning. The link between the corporate, management, and operational levels should be emphasised in an efficient performance measurement system. Decision- making, as well as the activities and control that follow, are all in line with the strategy. 3. Improved Communication: Staff and stakeholder understanding and support of strategies and decisions can be improved by participation in goal-setting and results reporting. It also establishes a single language that promotes cross-departmental knowledge sharing. 4. Accountability: Measuring and reporting performance provides decision-makers with a powerful tool for achieving employee and organisational responsibility. When outcomes and outputs are measured against a single standard, these links become evident. This covers government and public accountability for public funds utilised by public sector organisations. 8.5.2 Steps in Development of an effective performance measurement system 1. The business's entire strategy must be connected with the performance measuring system. 2. There must be a system in place for receiving regular feedback and comparing actual results to the original plan as well as the performance metrics itself. 3. The system for measuring performance must be comprehensive. It must take into account a variety of aspects that contribute to the organization's success, including competitive performance, service quality, and innovation. This necessitates the use of a variety of financial and non-financial metrics. 4. The system must be owned and supported by everyone in the company. Top-down implementation is required so that those in charge of strategy development can identify the objectives and develop appropriate top-level measures. These should be passed on to the rest of the company. Other levels within the organisation 122 CU IDOL SELF LEARNING MATERIAL (SLM)

should establish their own measurements in conjunction with the level above, and these should be consistent with the top-level metrics. 5. Measures must be equitable and attainable. When performance measurements are used to award managers, only the factors that they have direct control over should be evaluated. 6. The system, as well as the results reporting, must be straightforward, transparent, and easy to comprehend, especially for non-finance specialists. Prioritization and focus are required so that only the business's strategic key performance indicators are measured. 8.6 SUMMARY  Competition-based pricing determines pricing based on the strategies, costs, prices, and market offerings of competitors.  Demand-based pricing is a pricing approach that is based on the customer's demand and the product's perceived worth.  A performance measurement is a numerical result of an analysis that shows how successfully an organization is accomplishing its goals.  Activity Based costing models can be used to assign indirect costs (overheads). 8.7 KEYWORDS  Accountability: the fact or state of being responsible  Performance: the act or procedure of carrying out a task or function  Hybrid: something created by mixing two distinct elements  Unique: being one of a kind; being unlike anything else  Substantial: regarding the necessities of something. 8.8 LEARNING ACTIVITY 1. What is Cost Based Pricing? ___________________________________________________________________________ ___________________________________________________________________________ 2. What is Demand Based Pricing? 123 CU IDOL SELF LEARNING MATERIAL (SLM)

___________________________________________________________________________ ___________________________________________________________________________ 8.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Explain Service Costing. 2. What is Performance Measurement? 3. Explain Competition based pricing. 4. What is Hybrid Costing? 5. Write a note on Cost Based Pricing. Long Questions 1. What is Service Costing? Explain its features. 2. Discuss the benefits of Performance Measurement. 3. Explain Performance Measurement and the steps involved in the development of an effective performance measurement system. 4. What is Service sector costing? Enumerate the methods used in service sector costing. 5. Discuss the pricing in Service Sector. B. Multiple Choice Questions 1. Activity Based Costing models can be used to assign ………..costs. a. sunk b. direct c. indirect d. historical 2. ……………..models can be used to assign indirect costs. 124 a. Activity Behaviour Challenge b. Activity Behaviour Costing c. Action Based Costing d. Activity Based Costing CU IDOL SELF LEARNING MATERIAL (SLM)

3. ………………..determines pricing based on the strategies, costs, prices, and market offerings of competitors. a. Competition based pricing b. Value based pricing c. Cost Based pricing d. Demand based pricing 4. ……………….. Approach is based on the customer's demand and the product's perceived worth. a. Competition based pricing b. Value based pricing c. Demand based pricing d. Cost Based pricing 5. ……………….. Approach incorporates the features of both job costing and process costing. a. Hybrid b. Value c. Cost d. Price Answers 1-c, 2-d, 3-a, 4-c, 5-a 8.10 REFERENCES References book  Aswathappa, K. (2002). Human Resource Management. New Delhi: Tata McGraw- Hill. 125 CU IDOL SELF LEARNING MATERIAL (SLM)

 Dessler, G. (2012). Human Resource Management. New Delhi: Prentice-Hall of India.  Rao, V.S.P. (2002). Human Resource Management: Text and cases. New Delhi: Excel Books.  Decenzo, A. & Robbins P Stephen. (2012). Personnel/Human Resource Management. New Delhi: Prentice-Hall of India.  Ivancevich, M John. (2014). Human Resource Management. New Delhi: Tata McGraw-Hill. Textbook references  Mamoria, C.B. (2002). Personnel Management. Mumbai: Himalaya Publishing House.  Dipak Kumar Bhattacharyya, Human Resource Management, Excel Books.  French, W.L. (1990), Human Resource Management, 4th ed., Houghton Miffin, Boston.  H.J. Bernardin, Human Resource Management, Tata McGraw Hill, New Delhi, 2004. Website  http://www.slideshare.net/sreenath.s/evolution-of-hrm  www.articlesbase.com/training-articles/evolution-of-human-resource- management- 1294285.html  http://www.oppapers.com/subjects/different-kinds-of-approaches-to-hrm- page1.html 126 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 9: RELEVANTCOST ANALYSIS STRUCTURE 9.0 Learning Objectives 9.1 Introduction 9.2 Meaning and Concept of Relevant Cost Analysis 9.3 Relevant Cost 9.4 Irrelevant Cost 9.5 Summary 9.6 Keywords 9.7 Learning Activity 9.8 Unit End Questions 9.9 References 9.0LEARNING OBJECTIVES After studying this unit, you will be able to:  Discuss the meaning and concept of Relevant Cost analysis  Outline the various Relevant Cost.  Discuss the various Irrelevant Cost 9.1INTRODUCTION In this Unit, we will be able understand how relevant costing is a management accounting toolkit that aids decision-making by managers. The various type of relevant and irrelevant cost. 9.2 MEANING AND CONCEPT OF RELEVANT COST ANALYSIS A relevant cost is one that is particular to a management decision and will alter in the future as a result of that decision. The concept of relevant cost is particularly valuable for removing irrelevant data from a decision-making process. Furthermore, by excluding non-essential expenditures from a choice, management is prevented from focusing on information that may 127 CU IDOL SELF LEARNING MATERIAL (SLM)

otherwise influence its decision improperly. It is vital to categorize expenditures and revenues in order to determine if they are relevant or irrelevant to the decisions. Expenses and revenues that are influenced by decisions are relevant costs and revenues. Costs and revenues that are irrelevant are those that are not affected or influenced by actions. The costs that should be considered when making decisions are often referred to as \"relevant costs.\" CIMA defines relevant costs as ‘costs appropriate to aiding the making of specific management decisions’. 9.3 RELEVANT COST The following costs are the relevant costs: 1. Differential Cost: A differential cost is the cost difference between two or more decision options, such as two different projects or scenarios. It is irrelevant if the same item with the same amount appears in all choices. A plot of land could be utilised for a shopping mall or an education sector, for example, the plot is unimportant because it will be used in both scenarios. Advantages:  A larger target market is the cornerstone on which every company's marketing strategy is built. The marketing mix is so named because it contains fundamental aspects that are necessary for any firm to attain excellence while also making a profit.  Each company is required to put a specific amount of money into the creation of its goods. That is what we mean when we say \"capital.\" A portion of the budget must also be allocated to transportation and a variety of other expenses. As a result, each company's goal is to pay costs. Differential pricing is the most effective approach to accomplish this. 2. Incremental or Marginal Cost: Differential cost is the cost difference between two independent alternatives, whereas incremental or marginal cost is the cost of manufacturing an additional unit. It could be the expense of admitting another student in the case of a school. Working a first shift is also an example of additional expense it should be highlighted that the two decisions are not mutually exclusive depending on the shift. To make a decision, incremental costs must be weighed against incremental revenues. Advantages: 128 CU IDOL SELF LEARNING MATERIAL (SLM)

 The simplest budgeting method is incremental budgeting. It does not necessitate complex computations because it projects the future budget using the current period's budget. In addition, the budgeting method simply requires a few assumptions. Finally, the method's simplicity saves time for the company's management throughout the budgeting process.  The budgets' reliance on figures from previous periods' budgets guarantees that they stay generally consistent and stable throughout time.  In general, incremental budgeting allocates equal incremental budget changes from one year to the next. As a result, departments within a corporation are not pushed to compete with one another for a larger share of the money.  Because expenses are generally straightforward to forecast, incremental budgeting may also help ensure that funding remains steady over time. This can be beneficial for businesses with long-term projects that require capital. 3. Opportunity Cost: It's the price of a missed chance. Mrs. Ankita quit her work, which paid him $30,000 a month, and enrolled in a university. The monthly tuition for higher education at a university is 20,000 dollars. This would be 50,000 per month for Ankita (20,000 + 30,000). When a company decides to start a specific project, it should not overlook the possibility of pursuing alternative ventures. It should think about I what other options are available? (2) Which of these potential options is the best? Advantages:  One of the key advantages of opportunity costs is that it forces you to contemplate the fact that when you choose between possibilities, you give up something in the one you don't choose. If you go to the grocery shop to buy cheese and butter but only have enough money for one, you must consider the opportunity cost of the item you don't buy. Recognizing this allows you to make better-informed, more cost-effective decisions that maximise your resources.  Another significant advantage of calculating your opportunity cost is that it helps you to compare comparable prices and benefits of various options. Compare the total cost of each option and choose the one that provides the most value for money. 4. Avoidable Cost: 129 CU IDOL SELF LEARNING MATERIAL (SLM)

These are expenditures that can be avoided whole or partially by selecting one option over another. Relevant costs are also Avoidable Cost. 5. Replacement Cost: This is the price at which an asset or material similar to the one being replaced or revalued may be purchased. It's the cost of replacement at today's market pricing, and it's important to consider while making a decision. 6. Imputed Cost: Notional costs, such as notional rent charges and interest on capital for which no interest has been paid, only appear in the Cost Accounts. These are important costs to consider while making a decision. When comparing competing capital investment projects, the imputed interest on capital must be taken into account before a judgement is made on which project is the most profitable. 9.4 IRRELEVANT COST A cost that will not change as a result of a management decision is called an irrelevant cost. The same expense, on the other hand, could be relevant to a different management decision. 1. Sunk Costs: A sunk cost is a cost incurred by an entity that it can no longer recover. Sunk expenses should not be considered when deciding whether or not to continue investing in a project because they are not recoverable. Only relevant costs should be addressed instead. Many managers, however, continue to engage in initiatives due to the large sums already committed in previous times. They don't want to \"lose the investment\" by cutting back on a project that isn't paying off, so they keep pumping money into it. They should rationally consider prior investments to be sunk costs, and hence omit them from consideration when considering whether or not to expand making additional investments. Example: A company invests $1, 00,000 in a research to determine whether its new product would be successful in the market. According to the research, the product will not be profitable. The $1, 00,000 is a sunk expense at this time. Despite the scale of the previous expenditure, the company should not continue to invest in the product project. 2. Committed Cost: A committed cost is an investment that a business organisation has already made and will not be able to recover by any means, as well as responsibilities that the firm has already 130 CU IDOL SELF LEARNING MATERIAL (SLM)

committed to and will not be able to avoid. When analysing firm expenditures for future cuts or asset sales, it's important to know which costs are committed costs. A committed expense is frequently accompanied by a long-term legal commitment. If not, negotiating the cessation of an expense is much easier. Example: If a company spends $80,000 on a computer and then issues a purchase order for $4,000 in maintenance over the next three years, the entire $92,000 is a committed cost because the company has already purchased the computer and has a legal obligation to pay for the upkeep. Because it is highly difficult to terminate a lease agreement, a multi-year property lease arrangement is also a committed cost for the whole life of the lease. 3. Absorption Costing: Absorption costing, often known as \"full costing,\" is a managerial accounting technique for collecting all costs connected with the production of a specific product. This strategy is used to account for direct and indirect expenditures such as direct materials, direct labour, rent, and insurance. 9.5 SUMMARY  The cost considered when making decisions are often referred to as \"relevant costs.\"  Differential cost is the cost difference between two independent alternatives.  Replacement cost is which where an asset or material similar to the one being replaced or revalued may be purchased.  A cost that will not change as a result of a management decision is called an irrelevant cost 9.6 KEYWORDS  Sunk: Money that has already been spent and cannot be recovered is referred to as a sunk cost.  Absorption: It is a managerial accounting technique for collecting all costs connected with the production of a specific product.  Imputed: By inference from the value of the products or processes to which it contributes, it has been assigned to anything.  Influence: the power to shape policy or ensure favourable treatment from someone, especially through status, contacts, or wealth. 131 CU IDOL SELF LEARNING MATERIAL (SLM)

 Strategy: a plan of action designed to achieve a long-term or overall aim. 9.7 LEARNING ACTIVITY 1. Define Relevant Cost? ___________________________________________________________________________ ___________________________________________________________________________ 2. What is Irrelevant Cost? ___________________________________________________________________________ ___________________________________________________________________________ 9.8 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Explain the concept of Relevant Cost. 2. What are Sunk costs? 3. Write a note on Committed Cost. 4. Explain Incremental cost. 5. Discuss Opportunity Cost with example. Long Questions 1. Define Relevant Cost. What are the different types of relevant Cost? 2. Discuss the various irrelevantcosts. 3. Explain Sunk Cost and Committed Cost. 4. Differentiate between Imputed Cost, Opportunity Cost and Differential Cost. 5. Explain any 2 types of Relevant and Irrelevant Cost. B. Multiple Choice Questions 1. Costs considered when making decisions are often referred to as \"………….cost.” 132 a. sunk b. relevant c. Committed d. absorption CU IDOL SELF LEARNING MATERIAL (SLM)

2. Relevant costs are also …………..Cost a. Avoidable b. Sunk c. Imputed d. Committed 3. Absorption costing, often known as ……….. a. full costing b. partial costing c. historical costing d. service costing 4. ………………… cost is the price missed by chance. a. Competitive cost b. Opportunity Cost c. Demand cost d. Sunk cost 5. A ……………….. Is the cost difference between two or more decision options? a. Hybrid cost b. Value cost c. Sunk Cost d. Differential cost Answers 1-b, 2-a, 3-a, 4-b, 5-a 133 CU IDOL SELF LEARNING MATERIAL (SLM)

9.9 REFERENCES References book  Aswathappa, K. (2002). Human Resource Management. New Delhi: Tata McGraw- Hill.  Dessler, G. (2012). Human Resource Management. New Delhi: Prentice-Hall of India.  Rao, V.S.P. (2002). Human Resource Management: Text and cases. New Delhi: Excel Books.  Decenzo, A. & Robbins P Stephen. (2012). Personnel/Human Resource Management. New Delhi: Prentice-Hall of India.  Ivancevich, M John. (2014). Human Resource Management. New Delhi: Tata McGraw-Hill. Textbook references  Mamoria, C.B. (2002). Personnel Management. Mumbai: Himalaya Publishing House.  Dipak Kumar Bhattacharyya, Human Resource Management, Excel Books.  French, W.L. (1990), Human Resource Management, 4th ed., Houghton Miffin, Boston.  H.J. Bernardin, Human Resource Management, Tata McGraw Hill, New Delhi, 2004. Website  http://www.slideshare.net/sreenath.s/evolution-of-hrm  www.articlesbase.com/training-articles/evolution-of-human-resource- management- 1294285.html  http://www.oppapers.com/subjects/different-kinds-of-approaches-to-hrm- page1.html 134 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 10: COST IMPLICATION STRUCTURE 10.0 Learning Objectives 10.1 Introduction 10.2 Meaning of Fixed Cost 10.3 Situations where Fixed Costs become relevant for decision making 10.4 Implications of Fixed Cost on Decision Making 10.5 Summary 10.6 Keywords 10.7 Learning Activity 10.8 Unit End Questions 10.9 References 10.0LEARNING OBJECTIVES After studying this unit, you will be able to:  Discuss the meaning of Fixed Cost.  Outline the situations where Fixed Costs are involved in decision making.  Explain the Implications of Fixed Cost. 10.1INTRODUCTION In this Unit, we will be able understand the meaning of Fixed Cost. The implications of fixed cost on decision making and how they are involved in the decision making. 10.2 MEANING OF FIXED COST A fixed cost is an expense that remains constant while output volume rises or falls within a certain range. In other words, as long as operations remain within a given size range, fixed costs are locked in. Because fixed costs are not depending on volume or activities, they are less controlled than variable expenses. 135 CU IDOL SELF LEARNING MATERIAL (SLM)

Cash reserves, as well as fixed and variable expenses, must be closely monitored by small- business owners. Even if you have no plans to grow into a multibillion-dollar organization with thousands of workers, your bottom-line operational expenses have an impact on how you leverage your small firm. Traditional accounting techniques employ computations that promote good company practices by lowering fixed expenses. Understanding the implications of this management accounting practice might help you figure out how to design a practical strategy for leveraging your operations to fulfill your company's goals. Examples: 1. Insurance 2. Property Tax 3. Rent 4. Interest These costs are incurred on to provide the physical and human facilities necessary for business operations. These costs are due to contractual obligations and management decisions more than with production, and are expressed in terms of time. For example, rent, property tax, insurance, supervisor's salary, etc. It is incorrect to say that fixed costs will never change. These costs may vary depending on the situation. The fixed term refers to the non-variability related to the relevant scope. To facilitate analysis, fixed costs can be divided into the following categories: a) Commitment costs: These costs are incurred to maintain certain facilities and cannot be eliminated quickly. Management has little to no discretion about this cost, such as rent, insurance, etc. (b) Policy and administration costs: The costs of policies are policies that are incurred for the implementation of a specific management, such as the implementation of developments, housing, etc. These costs are usually discretionary. The administration cost is to ensure the existence of the company's operations, such as employee services. (c) Disposable costs: These have nothing to do with operations and can be controlled by the 136 CU IDOL SELF LEARNING MATERIAL (SLM)

Management. These costs come from special policy decisions, new research, etc., and can be eliminated or reduced to an ideal level at the discretion of the management. (d) Staggered costs: These costs are constant for a given level of production, and then a fixed amount of are added to a higher level of production. 10.3 SITUATIONS WHERE FIXED COSTS BECOME RELEVANT FOR DECISION MAKING Fixed expenses allow you to make business decisions based on known economic data, although accountants disagree about the relevance of this data in operating leverage decision- making. Due to overproduction and inventory stockpiling, the availability of fixed cost information frequently encourages company decisions that lower operating leverage. Small and large businesses alike want to provide a high-quality product at the lowest possible cost per unit, which is usually achieved through increased production. The most successful organizations operate with known fixed costs and the lowest quantity of long-term stored inventory while maintaining the maximum turnover of items. 10.4 IMPLICATIONS OF FIXED COST ON DECISION MAKING 1. When certain Fixed Costs are incurred for a contract, 2. When the Fixed Costs are incremental. 3. When the fixed portion of Semi-Variable Cost rises owing to a change in activity level as a result of contract acceptance. 4 When Fixed Costs can be avoided or are optional, 5. One cost to be incurred instead of another (the cost difference will be crucial for decision- making.) 10.5 SUMMARY  A fixed cost is an expense that remains constant while output volume rises or falls within a certain range.  Cash reserves, as well as fixed and variable expenses, must be closely monitored by small-business owners. 137 CU IDOL SELF LEARNING MATERIAL (SLM)

 Traditional accounting techniques employ computations that promote good company practices by lowering fixed expenses.  Fixed expenses allow you to make business decisions based on known economic data.  The most successful organizations operate with known fixed costs and the lowest quantity of long-term stored inventory while maintaining the maximum turnover of items. 10.6 KEYWORDS  Fixed: A fixed income is not subject to change or fluctuation.  Incremental: pertaining to or suggesting an increase or addition, particularly one of a series on a predetermined scale.  Stockpiling: a mass a significant amount of (goods or materials).  Reserve: a supply of a commodity that is not required right now but is available if needed.  Turnover:the quantity of cash taken via way of means of a commercial enterprise in a selected period. 10.7 LEARNING ACTIVITY 1. Define Fixed Cost? ___________________________________________________________________________ ___________________________________________________________________________ 2. List the examples of Fixed Cost? ___________________________________________________________________________ ___________________________________________________________________________ 10.8 UNIT END QUESTIONS 138 A. Descriptive Questions Short Questions 1. What is Fixed Cost? 2. Write a note on – Fixed cost important for decision making 3. Explain Implications of fixed cost. 4. Write any 5 examples of fixed cost. CU IDOL SELF LEARNING MATERIAL (SLM)

5. What are cash reserves? Long Questions 1. Define fixed cost. Explain the implication of fixed cost on decision making. 2. Discuss why fixed costs are important in decision making. 3. Describe the various implication of fixed cost. 4. Enumerate how decision making affects fixed cost. 5. Discuss in what situation will where Fixed Costs become relevant. B. Multiple Choice Questions 1. a ……cost is an expense that remains constant while output volume rises or falls. a. sunk b. relevant c. Committed d. fixed 2. the most successful organizations operate with known ………..costs a. fixed b. variable c. Imputed d. Committed 3. Fixed expenses allow you to make business decisions based on known ………..data. a. economic b. social c. profit d. service 4. …………….costs is not dependent on volume or activities. 139 a. Competitive b. Opportunity CU IDOL SELF LEARNING MATERIAL (SLM)

c. Demand d. fixed 5. ………………… is not the fixed cost. a. Insurance b. Material c. Rent d. Interest Answers 1-d, 2-a, 3-a, 4-d, 5-b 10.9 REFERENCES References book  Aswathappa, K. (2002). Human Resource Management. New Delhi: Tata McGraw- Hill.  Dessler, G. (2012). Human Resource Management. New Delhi: Prentice-Hall of India.  Rao, V.S.P. (2002). Human Resource Management: Text and cases. New Delhi: Excel Books.  Decenzo, A. & Robbins P Stephen. (2012). Personnel/Human Resource Management. New Delhi: Prentice-Hall of India.  Ivancevich, M John. (2014). Human Resource Management. New Delhi: Tata McGraw-Hill. Textbook references  Mamoria, C.B. (2002). Personnel Management. Mumbai: Himalaya Publishing House.  Dipak Kumar Bhattacharyya, Human Resource Management, Excel Books.  French, W.L. (1990), Human Resource Management, 4th ed., Houghton Miffin, Boston.  H.J. Bernardin, Human Resource Management, Tata McGraw Hill, New Delhi, 2004. 140 CU IDOL SELF LEARNING MATERIAL (SLM)

Website  http://www.slideshare.net/sreenath.s/evolution-of-hrm  www.articlesbase.com/training-articles/evolution-of-human-resource- management- 1294285.html  http://www.oppapers.com/subjects/different-kinds-of-approaches-to-hrm- page1.html 141 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 11: PROFITABILITY ANALYSIS STRUCTURE 11.0 Learning Objectives 11.1 Introduction 11.2 Meaning and Concept of Profitability Analysis 11.3 Product profitability analysis 11.4 Segment profitability analysis 11.5 Customer profitability analysis 11.6 Summary 11.7 Keywords 11.8 Learning Activity 11.9 Unit End Questions 11.10 References 11.0LEARNING OBJECTIVES After studying this unit, you will be able to:  Discuss the meaning and concept of Profitability analysis.  Explain profitability analysis with product.  Outline profitability analysis segment wise.  Discuss profitability analysis customer wise. 11.1INTRODUCTION In this Unit, we will be able understand that how Customer Profitability Analysis helps businesses to assess their consumers and determine how beneficial it is to maintain them. 11.2 MEANING AND CONCEPT OF PROFITABILITY ANALYSIS A company's primary goal is to make money. As a result, a business must attract and maintain profitable clients. This is referred to as a profitability or customer profitability 142 CU IDOL SELF LEARNING MATERIAL (SLM)

analysis (CPA). In simple terms, profitability analysis is an examination of a company's costs and revenues to determine whether or not the company is profitable. The main focus of a profitability study is on three criteria. 1. Customer profitability analysis (CPA) is a method of calculating revenue from customers after subtracting all expenditures. 2. Customer product profitability analysis – This equation aids in the calculation of product and customer profitability. 3. Increasing a company's profitability, which improves its competitive edge 4. TQM (Total Quality Management) is a strategy for improving overall quality. 11.3 PRODUCT PROFITABILITY ANALYSIS Product profitability is a tool for calculating the profit of a product you offer on the market. The practice of relating a company's overall profit to the profit of a specific product is known as product profitability analysis. The money left over at the conclusion of an accounting period after subtracting total costs from total revenue is referred to as a company's overall profit. Why do you need to do a product profitability analysis? When a company manufactures, sells, or distributes a product, it's critical to understand the profitability of each unique product because it assists with revenue and business operations decisions. With the information provided by product profitability analysis, a company can:  Targeted marketing methods increase clients' exposure to the most profitable products.  Adjust how they allocate ad money to increase visibility of the most profitable products.  Increase the price of high-demand products and phase out low-profit ones to improve product pricing.  To make place for additional things, bundle a more profitable item with a less profitable item to reduce storage.  To enhance revenue, decide whether to cross-sell or up-sell other products with a profitable offering. 143 CU IDOL SELF LEARNING MATERIAL (SLM)

11.4 SEGMENT PROFITABILITY ANALYSIS Unless it is a not-for-profit organization, all businesses have profit as their primary purpose. In the long run, profitable operations necessitate sound decision-making and performance review. While the income statement serves a variety of functions, it is largely used by management to evaluate performance. The use of the income statement for evaluation purposes can be particularly beneficial when prepared on a segmental basis. Businesses are typically complicated and diverse in nature. It is extremely improbable that a company will only have one product. Single-product enterprises are only found in textbooks to demonstrate certain business fundamentals. Many American businesses have hundreds of items and operate in multiple areas or regions. In today's business world, the vast majority of businesses are likely to be global in scope. Given the large number of products and varied areas of operation, it is doubtful that all of them will be successful over time. Since the early 1900s, the requirement to review profit performance on a segmental basis consistently and regularly has been recognized and practiced. Over a long period of time, two basic approaches to segmental analysis have emerged: (1) the full cost method and (2) the contribution approach. The complete cost approach aims to measure each segment's net income, whereas the contribution approach attempts to assess each segment's segmental contribution. A) Full Cost Approach: Total cost accounting is a cost accounting technique that considers all the costs of producing a single unit of product, whether they are fixed or variable overhead costs. These costs include direct material costs, direct labor costs, and all indirect costs. Another term for total costing is absorption costing. Therefore, this value will be added to the cost of sales of finished products and work in progress. This is different from the variable cost method, which only includes variable overhead. Therefore, according to the total costing method, production costsare made up of the following cost elements: There are two types of expenses from a segmental perspective: (1) direct and (2) indirect. Direct expenses are those of a segment that are incurred as a result of the segment's existence and can thus be reduced by terminating the segment. Indirect expenses, or common expenses as they're commonly known, are those that aren't caused directly by any one section. The main feature of indirect expenses from a segmental perspective is that they must be allocated in order to calculate a segment's net income. 144 CU IDOL SELF LEARNING MATERIAL (SLM)

1. Raw materials and direct labor costs are directly related to the production process. The company can directly track your departuretime. They include employee salaries and the cost of raw materials used. 2. Fixed indirect costs remainunchangedandhavenothing to do withoutput. An example is the leasing of production facilities. The company must pay for this, even if it does not produce products. 3. Variable indirect costs are the indirect costs of operating a business. Its value fluctuates with manufacturing activities, for example, the wages of additional workers in the production department. Difference between Full Costing and Variable Costing: Variable cost is an alternative to the total cost method; the difference between the two lies in the treatmentof fixedindirect costs, such as wages and construction rent. Under variable costs, the company does not include fixed indirect costs in its production cost calculations. In other words, this method only confirms the cost that directly affects the production process. In addition, the company charges fixed indirect expenses during the period in which it is incurred. On the contrary,whencalculating the total cost, the company recognizes fixed indirect expenses as expenses when selling goods or services. Therefore, these fixed costs will be attached to the product until it is sold. The choice of thetwo has a considerable impact on the company's financial statements. However, in practice, there is no better way. Some companies find that the variable cost method is more effective, while others prefer the full cost method. The choice of these two cost calculation methods depends on the company's attitude, behavior and management designfor the accurate collection and evaluation of input costs B)Contribution Approach: The main problem with the full cost approach is that it is technically conceivable for a segment to have an operational loss while also contributing positively to net income. In other words, if the unprofitable division is terminated, the company's overall net profitability will suffer. The following are the basic principles of computing segmental contribution: 1. Each segment's contribution is computed separately. There is no attempt to calculate the segment's net income. 2. Each segment's indirect or common expenses are not allocated. 145 CU IDOL SELF LEARNING MATERIAL (SLM)

3. However, in order to arrive at overall business net income, indirect or common expenses are normally deducted from total segmental contribution. 4. If a segment's sales exceed its direct expenses, the segment is termed profitable. 11.5 CUSTOMER PROFITABILITY ANALYSIS CPA is a managerial accounting method for determining the overall profit generated by a customer. A lucrative client is one who makes more money than the expense of acquiring, selling, and serving them. Companies determine the CPA on a customer-by-customer basis or for an entire customer group. When organizations are more focused on their products, departments, and office locations, they frequently lose sight of their clients. As a result, businesses are sometimes forced to endure the cost of keeping unprofitable consumers, which is damaging to their bottom line. CPA helps businesses to assess their consumers and determine how beneficial it is to maintain them. They can decide on the expense of providing them or even whether to keep them or let them go based on this value. 1) Marketing to correct demographic: They can be used for additional operations once the client segmentation according to profit range has been discovered. The characteristics of the most profitable customer group must be documented and utilized in future acquisitions. To attract more of these clients, marketing teams might create campaigns based on those characteristics. Marketers can also evaluate what deals and discounts they can give prospects based on their profitability range. 2) Retention strategy: Companies can tailor their retention strategy for each customer category after identifying those with varying levels of profitability. Companies can afford to provide the finest quality service to clients with the highest profitability. As a result, they will be able to devote more resources to supporting those high-end consumers. 3) Increasing operational effectiveness: It is not always the consumer who is to blame for a customer group's reduced profits. There could be a few problems in the company's internal procedures that are increasing the cost of serving clients. Steps for Customer Profitability analysis: 146 CU IDOL SELF LEARNING MATERIAL (SLM)

1) Customer segmentation: Customer segmentation is the foundation for a profitability analysis. This will vary depending on the industry and the company. It could be demographically based on client age, income, location, and so on. It can also be psychographic, meaning it is based on the requirements, behaviors, values, interests, and attitudes of the client. 2) Attribution of Revenue: After you've segmented your data, you'll need to figure out how much each sector is worth. The total revenue for the year is the sum of all segments. Discounts, fees, and service costs must all be factored in and modified accordingly. 3) Attribution of cost: Determine the cost per segment on an annual basis. Customer costs, service costs, product costs, sales, marketing, and distribution costs will all be included in this category. These costs are frequently concealed and must be added to the cost attribute to establish its value. 11.6 SUMMARY  Profitability analysis is an examination of a company's costs and revenues to determine whether or not the company is profitable.  Product profitability is a tool for calculating the profit of a product you offer on the market.  Direct expenses are those of a segment that are incurred as a result of the segment's existence.  Indirect expenses from a segmental perspective point are that they must be allocated in order to calculate a segment's net income.  CPA is a managerial accounting method for determining the overall profit generated by a customer. 11.7 KEYWORDS  Demographic: Demographic is a term that refers to the structure of a population.  Segment: Separate (anything) into parts or sections.  Analysis: a thorough study of anything complicated in order to comprehend its nature or establish its key characteristics.  Lucrative:generatinganexquisite deal of profit. 147 CU IDOL SELF LEARNING MATERIAL (SLM)

 Attribution: the movement of concerning a first-class or characteristic as function of or possessed throughsomeone or thing. 11.8 LEARNING ACTIVITY 1. Define Profitability analysis? ___________________________________________________________________________ ___________________________________________________________________________ 2. What is Full Cost Approach? ___________________________________________________________________________ ___________________________________________________________________________ 11.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Explain the concept of Profitability analysis. 2. Why do you need to do a product profitability analysis? 3. Difference between Direct and Indirect expenses. 4. Write a note on CPA. 5. What is Retention strategy? Long Questions 1. What is Segment Profitability Analysis? Explain its approach. 2. Discuss Customer Profitability analysis. 3. What Customer Profitability analysis? Explain the Steps for Customer Profitability analysis. 4. Explain Product Profitability Index. 5. Differentiate between Customer Profitability and Segment Profitability. B. Multiple Choice Questions 1. A company's primary goal is to make ……….. 148 a. employee welfare b. pay tax CU IDOL SELF LEARNING MATERIAL (SLM)

c. social work d. money 2. CPA is ………………….. a. Customer Profitability analysis b. Customer Performance analysis c. Customer Performance Achievement d. None of these 3. …………are those of a segment that are incurred as a result of the segment's existence a. Indirect expenses b. Direct expenses c. Both Indirect and Direct expenses d. None of these 4. …………… is a managerial accounting method for determining the overall profit generated by a customer. a. LOC b. CPA c. MBA d. LCC 5. Segmental analysis is divided into …………… approach. a. one b. two c. Three d. Four Answers 149 CU IDOL SELF LEARNING MATERIAL (SLM)

1-d, 2-a, 3-b, 4-b, 5-b 11.10 REFERENCES References book  Aswathappa, K. (2002). Human Resource Management. New Delhi: Tata McGraw- Hill.  Dessler, G. (2012). Human Resource Management. New Delhi: Prentice-Hall of India.  Rao, V.S.P. (2002). Human Resource Management: Text and cases. New Delhi: Excel Books.  Decenzo, A. & Robbins P Stephen. (2012). Personnel/Human Resource Management. New Delhi: Prentice-Hall of India.  Ivancevich, M John. (2014). Human Resource Management. New Delhi: Tata McGraw-Hill. Textbook references  Mamoria, C.B. (2002). Personnel Management. Mumbai: Himalaya Publishing House.  Dipak Kumar Bhattacharyya, Human Resource Management, Excel Books.  French, W.L. (1990), Human Resource Management, 4th ed., Houghton Miffin, Boston.  H.J. Bernardin, Human Resource Management, Tata McGraw Hill, New Delhi, 2004. Website  http://www.slideshare.net/sreenath.s/evolution-of-hrm  www.articlesbase.com/training-articles/evolution-of-human-resource- management- 1294285.html  http://www.oppapers.com/subjects/different-kinds-of-approaches-to-hrm- page1.html 150 CU IDOL SELF LEARNING MATERIAL (SLM)