ROYAL MAIL PLC

Managing Financial Principles

[Name of the Institute]

Managing Financial Principles

Introduction

In this report, we will be discussing regarding the costing techniques and the decision making process through costs and budgets with respect to the Royal Mail Plc. First, a brief introduction regarding the company and their services will be provided. Than we will discuss the importance of costing and apply the concepts of costing to the decision making process within the organization. Than we will provide an assessment of the forecasting techniques and the sources of finance available to the organization. In the end we will provide the budgetary process and procedure within the organization, followed by the conclusion which will contain recommendations of ways the organization can improve their operations management.

Company introduction

Royal Mail is a key component of the social and economic infrastructure of the UK (Royal Mail, 2011, p. 6). The firm provides post, mail and parcel services to different businesses, communities and customers. Operations segment of the business is composed of functions such as General Logistics Systems (GLS), Post Office Ltd. (POL), UK Letters & Parcels and International (UKLPI) and other small scale services including Romec Limited (Royal Mail, 2011, p. 4). During the FY 2011, the firm posted operating profit of amount £ 141m. According to annual report, approximately 59m items are delivered to about 29m customers (business and home) on daily basis (Royal Mail, 2011, p. 6).

LO1 Cost Concepts and Decision Making Process

1.1 - Importance of costs

The most important part of the pricing strategy for an organization is the costs. This is because it is the essential element in deciding and evaluating the profit margins for the product or service offered by the organization. Thus, it is not surprising when we hear 'cost cutting' as large firms tend to increase their profit margins and profits. It can be explained easily through an example. Suppose the prices go up. The firm would increase their prices of the goods or services in order to maintain a profit margin. Whereas, if the costs reduce, the firm could reduce their prices in order to gain a competitive edge over their competitors. Thus, costs are a significant aspect and play a vital role in the pricing strategy implemented by an organization.

1.2 - Costing system within Royal Mail

Royal Mails use the ABC methodology for costing techniques. It is applied to the business unit of Letters, and it includes all the activities like the Letters product provided and the overall expenditure incurred. The figure below demonstrates the ABC model (Royal Mail, 2013, pp. 12-13).

The ABC model that is implemented in the Royal mail Plc is maintained and costs are calculated using the SAP Profitability and Cost management (PCM) software. The design of the model consists of three major steps:

Sourcing Data: data extraction from other systems of business, e.g. payroll, General ledger, the Toll of Extraction Transformation Loading (ETL), and SAP FIM (Financial information management) utilization.

Cost processing: the factual calculation of the data within PCM.

Reporting: the actual costs of products and ...