Strategic Management Accounting for The Villige Pharmacy

A couple of family friends started their business ‘The Villige Pharmacy’ just over a  year ago and it is now operating successfully. After their first year the local firm of Accountants, Adder and Genie completed their financial accounts and they are now seeking advice on how cost and management accounting could help them with their business. They have come to you asking for help especially in relation to:

- Inventory valuation as this took the Accountants a lot of time and contributed towards their large bill.

- Managing costs, what are fixed costs and how are they different from the pharmacy’s other costs? They had one shop telephone and then got a second but the cost didn’t double and they are now wondering what would be the cost if they got a third extension upstairs.

- They are considering what to do with the top floor of the shop, should they buy it and then expand the business to also sell non-prescription medicines and health products or rent it out as accommodation.

- As they want to manage their business going forward, they ask how you as a Management Accountant can help them achieve their strategy and control their business using budgets.

Anita and Abra give you the following information about their current business and future plans, whilst asking you to explain why Management Accounting would help them:

Task 1

Identify and explain the key concepts of management accounting and how this helps business managers.

Task 2

Evaluate through the use of relevant examples, cost classifications relevant to their high street shop and clear up why it is important to identify costs. They are particularly concerned about direct costs, the advertising costs in the local newspapers and insurance of the shop buildings.

Task 3

As both Anita and Abra have asked for your help with inventory valuation, you decide to show them how a perpetual inventory system and the use of stores ledger accounts would help them with inventory management and valuation, along with determining selling prices. A leading brand of eye drops, shows an opening balance of 324 units valued at £648 the following purchases/receipts and monthly issues/sales:

Required:

a) Show the closing balance using the following methods of stock valuation

i FIFO

ii AVCO

(10 marks)

b) Discuss the advantages and disadvantage of each method            

c)Briefly describe how the ledger card can help management with inventory valuation and sellingprices