Page 23 - MA - May 2017
P. 23
products and services wherein the or services. and making the product viable.
overhead was apportioned based on The present methodology adopted
the activities involved. This major for determination of cost did not
invention has resulted in the new permit to consider these items for What could be done if the reduction
fixation of price and hence shaking the reasons that they are purely of cost reached irreducible
the entire market of the various financial in nature. While making minimum
goods as well as services. in-depth If the cost reduction has reached
to irreducible minimum, the
alternative way has to increase
the selling price of the products
or services to the maximum
possible level subject to absorption
of demand of the product or
services in the market. Even at the
maximum possible selling price, if
the products or services leads to loss,
there is no alternative way except to
discontinue the product or services.
The proposed method facilitates
the identification of the loss
making products and to take
various measures on cost reduction
of the loss making products
and also re-fixing of the prices
analysis it is of the products if required, by
found that the expenditure incorporating the purely financial
incurred or apportionment made items by appropriating by using
Necessity of were met from the profit earned the activity based method and also
considering Purely by the various commodities sold considering the dynamics of supply
Financial items or services rendered by the entity. and demand of the produces in the
Traditionally it was believed that As an example, the apportionment market. The objective of the new
certain items are necessarily to be made to general reserve created method is to demonstrate how
excluded for the determination of might have met from the profits much maximum money could be
cost of product as well as services. earned by the products and services. earned either by reducing the cost
As an example, the profit or losses These purely financial items or re-fixing the selling price at the
arising on sale of fixed assets are were no doubt, not at all required optimum level and also to take
treated as purely financial in nature for the determination of cost, but decision on the discontinuance of
and not included in determination it has to be considered for taking the products, if the loss incurred
of the cost. Advertisement, various decisions such as pricing could not prevented by either of the
preliminary expenses, Share of the commodities sold or services methods.
transfer fee, interest received on rendered and also to identify the
bank deposits, dividend, brokerage, areas of cost reduction Proposed Model
discount and commission received The money generated, which The following model will assist
are never to be considered for has direct nexus with the not only the identification of the
costing of goods or services. The products and services and have non-profitable products but also
appropriation of profits for specific re-appropriated into general reserve suggest the ways for preventing
purposes such income tax paid, and apportionment to taxes etc are loss generated by such products
dividend paid, and transfer to necessarily to be reconsidered for or services in order to improve the
reserve was also not considered for the determination of profitability of overall profitability of the entity.
the determination of cost of goods products or services for segregating The various steps involved in the
www.icmai.in May 2017 l The Management Accountant 23