Introduction
Founded in 2001 by Mr. William Akudike, Universal Clear Vision Limited (UCV) is a company that focusses on production and distribution of eye care products, under the Uni-Eye brand. The business is run by two independent divisions: the UCV Manufacturing Division that makes eye care items, and the UCV Retail & Clinic Division, which in charge of prescription glasses sales and consultations. Universal clean vison (UCV) has a reputation for selling high-quality goods and services, but it has several problems with the financial planning and control processes, especially when it comes to cost control, transfer pricing, and strategic decision making. These three problems have made it more difficult for the business to maximise shareholder wealth, which is its the UCV main objective.
To increase UCV’s success and profitability, I will be analysing the current financial systems and making recommendations for improvements. There are three parts in this assignment. The first one will be the Retail & Clinic Division’s adoption and use of an Activity-Based Costing (ABC) system. Second part will be evaluating pricing policy and recommendations will be made to address the concerns of the UCV Manufacturing Division manager. And lastly, I will be conducting a strategic map for the Retail & Clinic Division w, and the use of a Balanced Scorecard (BSC) system will be explored to provide better strategic management information for Mr. Akudike and his team.
2 Introduction to ABC
Activity-Based Costing (ABC) is costing method that assign overhead costs to products or services based on the activities required to produce. Which can be exactly the opposite of traditional costing methods, where it relays on the usage of a single cost driver. Chea (2011).ABC provides a more accurate reflection of the resources used by each product or service, enabling better cost management and decision making. This approach also helps with getting a better cost control and improved decision making by providing a more accurate representation of the resources used by each good or service.Quesado and Silva (2021)
Themain purpose of ABCis to improve cost accuracy by tracking overhead costs to the activities that generate them. This is very useful when it comes to organisations with diverse products or services, where traditional costing methods may lead to cost distortions.Mahal and Hossain (2015), For example, in UCVs Retail & Clinic Division, where services such as clinical consultations and custom lens production contain more than one activity, ABC can provide a clearer picture of the true costs associated with each service. Theprocess of implementing ABC methodincludes Identifying activities and cost drivers as activities are the methods or jobs that use a lot of resources, for example, scheduling appointments, checking lenses, or putting producing eyeglasses.
Cost drivers are the factors that affect how much certain operations cost,Cokins and C?pu?neanu (2010),for example it can include the complexity of lens customisation or the quantity of visits. After that overheads cost are then allocated to each activity based on the resources that are been used, the next step is taking the costs of activities and assigned them to products or services based on their usage of these activities. linking this to UCV when the cost of assembling glasses would be allocated to each pair of glasses based on the time and resources needed.Anton (2022).
As well as that, ABC can help in improving the understanding of overhead costs by breaking them down into small activities, helping managers find areas where they can use cost reduction and optimisation to help the company. An example of this would be UCV analysing the cost of lens inspection and find ways to simplify this process.Liu et al. (2008)
2.2 Applicability of ABC in the Retail Service Sector
Activity Based Costing (ABC) is very suited for the retail service sector, including UCVs Retail & Clinic Division, because of the complexity of the services provided in retail sector. overhead costs normally take a big amount of total costs, of overall expenses in retail, and standard costing method wouldnt be able to accurately reflect the full cost of offering various services.Lo et al. (2014)
ABC focuses on this issue by linking costs to one specific activities, such as customer consultations or lens customisation. The benefits of ABC in the retail sector include better cost allocation for complex services, linking this to UCV where services like clinical consultations and custom lens production have many activities with different resource that they need, making ABC a useful tool for accurate cost allocation and better decision making.Effiong and Akpan (2019).
2.3 How ABC Can Support UCV’s Retail & Clinic Division
ABC can help UCV identify and control overhead costs by linking them to specific activities. For example, by analysing the cost of booking patient appointments, UCV could explore automation or process improvements to reduce costs. by linking overhead costs with specific activities, ABC can assist UCV in finding and managing these expenses. For example, by examining the cost of booking appointments UCV could make improvements to reduce costs.
ABC can show the profitability of different products, such as Uni-Eye lenses versus other brands. This information can help with making decisions and which products to promote or to stop producing.(Harkonen, Mustonen, & Hannila, 2019)ABC can also help UCV understand which customer sectors are most beneficial for the company. For example, customers who can purchase high-margin products and services or if they require fewer resources for consultations could be find and targeted for marketing.Petersen and Kumar (2014)
moreover,ABC can also give insights into the costs linked with different suppliers. For example, if an external supplier who produces lenses, charges higher prices but reduces the cost of customisation, ABC can benefit UCV when it comes to evaluate whether the additional cost is justified.
ABC finally can help UCV to get more accurate and good prices by reflecting the true cost of each service. Linking this to UCV is, the cost of custom lens production could be incorporated into the pricing of premium services, ensuring that UCV remains profitable while offering value to customers.
2.4 Challenges of implementing ABC into UCV
As we have discussed previously using activity-Based Costing (ABC) gives UCV a powerful advantage to get to the deeper insights into costs and improve decision-making, However, for UCV to fully adapt ABC in their system. The company will be faced with some challenges for a medium-sized company like UCV, the financial problems that comes with implementing ABC will make the company feel overwhelming and sometimes difficult to manage. Reyhanoglu (2004). ABC needs a lot of resources as well as time, money, and effort to identify activities, gather data, and assign costs accurately. These costs can be very overwhelming, especially for a company like UCV as it must balance innovation with financial responsibility. Quesado and Silva (2021).
The difficulty of locating the right cost drivers for each activity makes more harder for UCV to operate as its a service-oriented business, where operations are separated and complex, this task can sometimes feel like navigating a maze without a map. Quesado and Silva (2021).
Another main disadvantage is the human factor, as employees may resist the changes. Even when change is good, it can make people uncomfortable. Employees might worry that ABC could disrupt their work routines, change their responsibilities, or even put their jobs at risk. (Organizational Change: 8 Reasons Why People Resist Change, 2024)
If these problems are ignored and unknowledge, it can lead to hidden challenges that will make the implementation processes more difficult. To prevent these problems UCV should handle the shift with care and clear communication. It should provide training to employees to make them up to date with the new ABC process. Training will include explaining the reasons why the chose ABC for the company and what will the company benefit from using it, not only how it works but why its important can help employees feel more comfortable and supportive of the change.
UCV can introduce ABC by starting small with a trial run in one department just to test the system. This lets UCV show the benefits of ABC in a practical way and improve the process before implementing the processes companywide. By doing this, UCV can turn challenges into chances for growth, teamwork, and success.
Activity-Based Costing (ABC)offers a lot of benefits for UCVs Retail & Clinic Division, specifically in improving cost management, product and customer profitability analysis, supplier evaluation, and pricing decisions. By perfectly allocating overhead costs to specific activities, ABC can provide a clearer picture of the true cost of services, giving them the ability to make more informed decision-making. While the implementation of ABC may cause challenges, the benefits that can come with it, is more far outweigh the negative part, making it a valuable tool for UCVs financial planning and control
Task (b): Transfer Pricing
3.1 Introduction to Transfer Pricing
Transfer pricing is when the pricing of goods, services, or intangible assets transferred between divisions of the same organisation.(Members of the UN Tax Committees Subcommittee on Practical Transfer Pricing Issues & UN Tax Committees Subcommittee on Practical Transfer Pricing Issues, n.d.). In organisations with multiple divisions, for example UCV, transfer pricing plays a very important role in finding out how costs and profits are allocated across different units. However, the main purpose of transfer pricing is to ensure that each division is fairly compensated for its work while aligning their goals with the overall objectives of the organisation. Effective transfer pricing systems help organisations achieve a lot of goals such as profit maximisation, cost control, and performance evaluation. For UCV, which works with two independent divisions (Manufacturing and Retail & Clinic), transfer pricing is very important for them for keep balance between the divisions and ensuring that both contribute to the companys overarching goal of shareholder wealth maximisation.Mohammed (2021)
3.2 Current Transfer Pricing Policy at UCV
UCVs current transfer pricing policy sets thetransfer price at themarginalcost of production. Which it means that the UCV Manufacturing Division sells the products to the Retail & Clinic Division at a price that covers only the variable costs of production, without any markup for profit. It means the company cannot earn a profit, this demotivates managers and can lead to inefficiencies.While this policy can help the Retail & Clinic Division by keeping costs low, it can damage the manufacturing division.
TheManufacturing Division managerfinds this policyunfairfor two reasons:
Inability to Make a Profit, Since the transfer price only covers marginal costs, the Manufacturing Division cannot generate a profit from inside sales. This weakens the divisions financial performance and limits its ability to invest in efficiency improvements.Meena and Verma (n.d.).Discourages Efficiency and Innovation: Without the opportunity to earn a profit, the Manufacturing Division has very limited motivation to improve or develop new products. This could lead to stagnation and reduce UCVs competitiveness in the long term.(United Nations Conference on Trade and Development, 2005). The current policy creates a misalignment with the goals of the Manufacturing Division and the objectives of UCV, as it focuses on the interests of the Retail & Clinic Division at the expense of the Manufacturing Division.
3.3 Evaluation of the Current Policy
The current transfer pricing policy at UCV have few advantages, in the Retail & Clinic Division. By setting the transfer price at marginal cost, the division benefits from lower input costs.Siddique and Ahmed (2015),This allows it to give more competitive pricing to customers, linking it to UCVs strategy of giving high-quality services at fair rates.Jerab and Mabrouk (2023).As well as that, the marginal cost approach shortens the pricing structure and make it simple, making it very easy to for UCV to implement it and avoiding the complexities that associated with other transfer pricing methods,Ray and Gramlich (2016).This simplified process ensures consistency across transactions.
However, marginal cost also has a lot of clear disadvantages, more importantly for the Manufacturing Sector. Since the division doesnt earn a profit from internal sales, it lacks motivation to improve efficiency or invest in innovation.(GEL Studios, 2024)
This might lead to decisions that are not in the best interest of UCV such as, reducing investment in technologies or lowering production quality which will then affect the company in bad way. As well as that, The Retail & Clinic Division focuses on cutting costs, while the Manufacturing Division aims for profitability, which isnt supported. This misalignment can cause conflicts between the two and hurt UCVs overall performance.
3.4 Recommendations for Improving Transfer Pricing
To address the limitations of the current transfer pricing policy, UCV should consider adopting alternative transfer pricing methods the one Im recommendingMarket Based Transfer Pricing.
Market-Based Transfer Pricingis when setting the transfer price based on the market price of similar products. For example, if the market price for eyecare products is 60 per unit, UCV could use this as the transfer price for its Uni-Eye lenses when selling them to the Retail & Clinic Division. This method will ensure that the transfer price shows the true impact on real-world market, this will make it as fair as possible as well as transparent approach.One of the mainadvantagesof market-based transfer pricing is that it gives fairness by ensuring both divisions are treated with fair,
this approach will motivate the Manufacturing Division to compete with external suppliers, as well as that it will make them improve efficiency and always stay competitive. It also ensures that both divisions align their goals with market conditions, helping them work towards the main objectives of the organisation. Wolff (2007)
However, there are still problems and challenges that comes with that method. For example, Market-Based Transfer Pricing needs access to most reliable and latest data, which sometimes may not be available to use, especially for specialised products like Uni-Eye lenses that have unique features. Without accurate market data, deciding a fair transfer price can be very difficult, and can lead to disagreements between the two divisions. But despite these challenges, market-based transfer still remains a better option for UCV, particularly if the company can prove a reliable target for its products. Chen et al. (2024)
To summarise this, UCVs marginal cost transfer pricing policy Puts the Manufacturing Division at a disadvantage, stopping efficiency and innovation. While it benefits the Retail & Clinic Division with lower costs, it harms the overall performance of the company. UCV should consider market-based, to create a fairer system, and align goals together.
Task (c): Strategic Map and Balanced Scorecard (BSC)
4.1 Introduction to the Balanced Scorecard (BSC)
TheBalanced Scorecard (BSC) was created by Kaplan and Norton in 1996, its a tool that gives help to organisations and turn their strategy into goals and performance measures. It has four key points Financial,Customer,Internal Processes, andLearning and Growth. This is good For UCVs Retail & Clinic Division as the BSC can help align goals with performance measures, ensuring the divisions work supports the companys main goal of strengthening shareholder value.Akbarzadeh (2012)
4.2 Strategic Map for UCV’s Retail & Clinic Division
Financial Perspectivedrives the companys mission to increase profitability and shareholder value. Byimproving cost management and optimising pricing strategies that ensures to maximum revenue from high-margin products like Uni-Eye lenses. Additionally,increasing salesthrough high quality services it can improve the companys financial health. These support theCustomer Perspective, where UCV aims to enhance customer satisfaction and loyalty. providinghigh-quality eyecare services, offeringpersonalised customer experiences, and maintainingcompetitive pricing
theInternal Processes Perspectivefocuses on improving service quality. Reducing errors in clinical consultations to ensures customers receive the best care without unnecessary wait times. Finally, theLearning and Growth Perspectiveempowers UCVs employees by investing in their training and adopting advanced technologies. Throughongoing training, staff improve their skills in customer service whileadvanced technologiesfor eye consultations and lens customization enhance service quality and efficiency. By fostering aculture of innovation, UCV encourages employees to propose and implement new ideas, these points will help in creating a motivated, skilled, and workplace, helping UCVs in a long-term growth and success.
4.3 How the BSC Can Improve Strategic Management
The Balanced Scorecard (BSC) can help Mr. William Akudike and his team by connecting their big goals to clear, measurable actions.it make sure that everyone knows what to concentrate on and tracks progress in four key areas:
TheFinancial Perspectivehelps with tracking profitability and cost management by monitoring gross profit margin and cost per unit this will allow UCV to find areas for cost reduction and profits increase. For example, if profitability decreases, the BSC can show whether the issue can prevent rising costs, inefficient processes. Payne and Talbott (2007).
TheCustomer Perspectivefocuses on examining customer satisfaction and market share, this can help UCV measure the competitive position and improve customer loyalty. For example, if customer satisfaction is low, the BSC can find whether the problem is in service quality, product assistance, or pricing. Jackson (2024),
TheInternal Processes Perspectiveidentifies areas for operational improvement by tracking order completion time and error rates. For example, if lens customization takes too long, the BSC can focus on improvements or additional resources. Dubetcky (2024)
Finally, theLearning and Growth Perspectivemake sure theres always improvement by measuring employee training hours, ensuring the workers is ready and have the best skills to deliver excellent quality service
For example, if staff lack training, the BSC can show the need for additional training programs or technology investments. Utomo et al. (2019)
4.4 Challenges of Implementing the BSC
Implementing the Balanced Scorecard (BSC) can bring a lot of benefits for UCV however, the company may face few of noticeable challenges during the process. One of them is selecting the right performance measures, as choosing the right metrics for each perspective can be very difficult, especially if the division doesnt have experience with performance measurement systems in the past. To address this, UCV should make key stakeholders select process and ensure the chosen metrics align with the strategic goals.
Another challenge isemployee resistance to a new change, as employees may see the BSC as a threat to their roles. To fix this, UCV should tell them the benefits of the BSC and provide training to help employees understand how it supports their work.
Additionally,data collection and reportingcan be a problem, specifically in areas like customer satisfaction, where accurate and timely data is needed. UCV can improve this by investing in strong data management systems and launch a clear process for collecting and reporting data. By tackling these challenges, UCV can have a smoother implementation and maximise the benefits of the BSC.(KPI Institute News, 2023)
At the end, the Balanced Scorecard (BSC) is a very powerful tool for UCVs Retail & Clinic Division, helping align strategic goals with performance measures across Financial, Customer, Internal Processes, and Learning & Growth perspectives.
(BSC) can improve customer satisfaction as well as encourage innovation. While challenges like choosing the right metrics and managing resistance to change still exists in this tool, the BSCs benefits far outweigh these negative points. By using the BSC, UCV can position its Retail & Clinic Division for long-term success and always stay competitive.
Conclusion
In conclusion, this assignment has explored key financial and strategic tools, Activity-Based Costing (ABC),Transfer Pricing, and theBalanced Scorecard (BSC), to address the challenges faced by UCVs Retail & Clinic Division. ABC can help with providing accurate cost allocation, enabling better decision-making and profitability analysis.
changing the transfer pricing policy to a market-based approach can align divisional goals and motivate the Manufacturing Division. Finally, the BSC offers a comprehensive frame to align strategic objectives with performance measures, improving efficiency, customer satisfaction, and innovation. By using these recommendations, UCV can enhance financial planning, improve divisional alignment, and achieve the goal maximisation shareholders wealth
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