...Running head: COSTING AND PRICING DECISIONS Costing and Pricing Decisions Cost Allocations Cost allocation is the process of assigning the indirect costs of producing a product. These indirect costs may be shared by multiple products. This is where cost allocation comes into play. Indirect costs can be allocated to products, services and departments. Cost allocation allows a company to calculate fully cost of their products. This provides them the ability to price products accurately. Three common costs that need to be considered when allocating costs include joint costs, sunk costs and opportunity costs (Jiambalvo, 2007). Joint Costs When at least two products come out of a common input they are considered joint products. Joint costs are the costs of the common input that is put into the joint products. An example of joint products would be the various types of fuels that are made from crude oil (Jiambalvo, 2007). Joint costs are commonly found in extractive, agricultural and chemical industries. They are also found in industries where different types or grades of the same product are made. It is very vital that the system used to cost the products incorporates the consumption of resources by product. If this is not done properly costs will be unclear and unprofitable products are likely to be produced (Tunes, Nyrud & Eikens, 2008). Horngren et al., 2006 wrote about four methods used for the allocation of joint costs. These Four methods are sales...
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...Activity-Based Costing and Predatory Pricing: The Case of the Petroleum Retail Industry DISCUSSION QUESTIONS: 1. What are product-cost subsidizations? When excessive costs are charged to high-volume products while insufficient costs are charged to low-volume products. One example of how this occurs is when product-costing is based on labor-hours. Products that are produced infrequently will typically require less annual man-hours when compared to major products. Calculating the costs of several products based on a traditional volume-based costing system ignores other costs that are not related to volume. These costs may be engineering, set-up time, material costs, or other variables. 2. What are possible consequences of product-cost subsidizations? When prices are based on cost, product-cost subsidization can lead to increased demand for undercosted and underpriced low-volume products, which are probably being sold at unprofitable prices. Conversely, companies experience reduced customer demand for overcosted, overpriced high-volume products and services. State and federal laws have been enacted against predatory pricing, which is the selling of products below cost as a deliberate action to drive out the competition. Alternatively, products may appear to be priced below cost because of the use of unrealistic, unit-based traditional costing systems, which results in the appearance of predatory pricing where it does not exist. 3. List alternative approaches...
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...fishing tackles, sporting goods and refreshments. Apart from boat storage which will only operates during winter and boat construction which will not operates in the winter, other profit centres that she has will continually run for all over the season. Hence, this is a good opportunity for Sarah to make a profit. Marine world is not something new for Sarah. Her vast experience while servicing in the Navy could help her steer the business to a good shape. However, lack of knowledge in managing the business entity will limit her capability in producing the good result as desired. Thus, she has to consider and being advised to apply a simple accounting technique in determining the costing and pricing mechanism of her new acquired company. As a newcomer, it is important to know how to set a costing structure to make sure that the business will produce a good return to her. We would...
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...concepts to decision making process 2 1.1Explaining the importance of costs in pricing strategy 2 1.2 Designing costing and pricing system 2 1.3 Recommending proposal 4 Task 2 Application of forecasting techniques 5 2.1 Forecasting Techniques 5 2.2 Sources of Funds for the Expansion of ABZ Ltd 6 Task 3 Participating in the Budgeting Process 10 3.1 Selecting appropriate budgetary targets 10 3.2 Preparing Master Budget 11 3.3 Comparing Actual expenditure and income with master budget 12 3.4 Impact of Lack Budget Monitoring Process Policy 12 4.1 Process in Managing Cost Reduction 14 4.2 Potential for the Use of Activity-Based Costing (ABC) 15 5.1 Applying financial appraisal methods 16 5.2 Evaluating and recommending suitable project 16 5.3 Reporting appropriate strategic investment decision 18 Task 5 Interpreting Financial Statements 18 6.1 Analyzing Financial Statements 18 6.2 Applying Financial ratios 18 6.3 Recommending Strategic portfolio management 20 References 21 Task 1: Applying costs concepts to decision making process 1.1Explaining the importance of costs in pricing strategy Cost can be looked upon as one of the most important elements of the process of taking pricing decisions and implementation of pricing strategies. Particularly, companies that adopt cost based pricing strategy, utilizes manufacturing and production costs as the basis of pricing (Brag, 2001). Cost considerations on the part of a company aids in fixing a price...
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...organization. Pricing is more than a number on a tag and has many components. Pricing decisions, strategies are complex and involve the decision makers to consider many elements such as the company’s positioning, the company’s brand, the customers, the competition and the marketing environment (Kotler & Keller, 2012). Companies use many methods to determine the prices for products that will generate better revenue. The owner or boss of a small business will often be the ones that determine the pricing strategy but in a big corporation, the pricing strategy will be established by the top management. The divisional, product and line managers of the big corporation use the pricing strategy policies and objectives approved by the top-management team (Kotler & Keller, 2012). Lipman Bottle Company is a bottle distributing company that offers bottle label printing solutions to their customers. Lipman Bottle Company launched its operation in 1909 and had become the leading bottle distribution company in Albany (Anthony, Hawkins, & Merchant, 2011). Over the past two the use of plastic has increased because of its use in manufacturing bottle caps, lids, spray pumps and also because distributors had the technology that allowed them to print directly labels onto bottles, making it convenient and more cost effective for users to purchase both solutions from one vendor. In November 1982, Robert Lipman the vice president of Lipman Bottle Company wanted to develop a pricing strategy that...
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...Strategic Transfer Pricing Author(s): Michael Alles and Srikant Datar Source: Management Science, Vol. 44, No. 4 (Apr., 1998), pp. 451-461 Published by: INFORMS Stable URL: http://www.jstor.org/stable/2634608 . Accessed: 15/08/2011 07:30 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. INFORMS is collaborating with JSTOR to digitize, preserve and extend access to Management Science. http://www.jstor.org Strategic Transfer Pricing Michael Alles * Srikant Datar CBA 4M-202, University of Texas at Austin, Austin, Texas 78712 HarvardBusiness School,Accounting and ControlArea, Soldier'sField, Boston,Massachusetts02163 M\ost research into cost systems has focused on their motivational implications. This paper , takes a different approach, by developing a model where two oligopolistic firms strategically select their cost-based transfer prices. Duopoly models frequently assume that firms game on their choice of prices. Product prices, however, are ultimately based on the firms' transfer prices that communicate manufacturing...
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...global manager must develop systems and policies that address Pricing Decisions Price floor: minimum price Price ceiling: maximum price Optimum prices: function of demand Global Marketing Chapter 11 Must be consistent with global opportunities and constraints Global Marketing - Schrage Basic Pricing Concepts Market Price Strategy Law of One Price would prevail in a truly global market International trade helps keep prices low and low prices keep inflation in check Global markets exist for certain products—integrated circuits, crude oil National markets reflect costs, regulation, demand, competition— beer May make or break your profitability May not be able to use the same strategy Internationally as Domestically Global Marketing - Schrage 11-3 Global Pricing Objectives and Strategies 11-4 Global Marketing - Schrage Market Skimming and Financial Objectives Managers must determine the objectives for the pricing objectives Market skimming Charging a premium price May occur at the introduction stage of product life cycle Unit sales Market share Return on investment They must then develop strategies to achieve those objectives Regain investment in R&D and product development faster Penetration pricing Market skimming Global Marketing - Schrage Global Marketing - Schrage 11-2 11-6 11-5 1 Penetration Pricing and Non-financial Objectives Companion Products Products whose...
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...Contemporary Managerial Accounting Concepts 1. 2. Value Chain a. Just in Time (JIT) b. Total Quality Management (TQM) c. Theory of Constraints 3. 4. 5. 6. 7. 8. 9. Target Costing Kaizen Costing Life Cycle Costing (LCC) Pricing Methods Uses and Limitations of Cost-Based and Market-Based Pricing Factors Affecting Prices Pricing Models for Not-for-Profit Organizations 3 4 5 5 6 7 8 9 10 11 11 Page Chapter Two: Total Quality Management (TQM) – an Introduction and Its Applications Chapter Three: Conclusion Appendix 1: References 12 23 CHAPTER ONE: INTRODUCTION TO CONTEMPORARY MANAGERIAL ACCOUNTING CONCEPTS Over the years, the managerial accounting practices had evolved. From the traditional costing method, many firms now have adopted the contemporary managerial practices to achieve better product costing and manufacturing processes. There are many contemporary managerial accounting in practice, some of them being Value Chain, Just-In-Time (JIT) Manufacturing, Total Quality Management (TQM) and the Theory of Constraints (TOC). All of the mentioned concept will be explained in brief in this chapter. Other than that, Target Costing will also be highlighted in brief. Kaizen Costing, a Japanese concept adapted by the westerners, will also be introduced. This chapter will also touch on life cycle costing (LCC), pricing methods, uses and limitations of cost-based price & market based price, factors affecting prices...
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...IKEA assignment. 1. Value-based pricing is inherent to IKEA's approach because the company's goal is to give a high quality furniture at lower prices. They build the brand accordingly, knowing the customer needs for design, aesthetics and function very well. IKEA targets students, young families, single people with lower to medium income. The company knows that its target market can't afford to spend too much on the furniture yet wants it to be modern. Thus, the company avoids the added cost for the assembly of their furniture, warehouse costs, eliminates the need for a specialized delivery vehicle and their stores promote customer self-service. These strategies allow the company to charge lower prices while maintaining a good value products. 2. I'd say that IKEA uses a good-value pricing strategy. The company offers a quality furniture for a fair price, but I don't think they offer any extra value. IKEA furniture is not luxurious or very innovative, but it has a great balance of quality, functionality and price. The design of their furniture is simple, yet very functional. There is a very limited selection of colors, with usually only 3-5 basic colors available. 3. Target costing pricing approach is when a company seeks to balance quality and functionality with the target cost. It means that the organization like IKEA starts its marketing program with first identifying the price and designs it accordingly from there. IKEA has a research team that works...
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...CHAPTER 1 THE PROBLEM AND ITS BACKGROUND 1.1 Introduction The basic problem of an economic society is to allocate resources among the members of the society so as to maximize the welfare of the society as a whole. To achieve this welfare objective, each resource should be used to perform the functions by which it contributes most efficiently to society. In a market economy, the price system allocates these resources. That is, prices furnish the guideposts that indicate how resources should be used. Prices determine what products and services should be produced and in what amounts. Prices determine how these products and services should be produced. And prices determine for whom the products and services should be produced. Thus prices affect both incomes and spending behavior. For the consumer with a given income level, prices influence what to buy and how much of each product to buy. For business firms, profits are determined by the difference between revenues and costs, with revenues determined by multiplying price per unit sold by the number of units sold. Price changes also play a major role in a market economy. When the quantity demanded for a product or service is greater than the supply available, buyers bid the price up. If costs remain the same per unit sold, the higher price leads to greater profits and an incentive to invest in resources to produce even greater quantities of the product. Thus, the producers are able to bid more for raw material resources, thereby...
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...Individual Paper: Activity-Based Costing Matija Karaula Individual Paper: Activity-Based Costing Sippican Corporation Course: B2B Pricing: Negotiation, Calculation, and Strategy Matija Karaula B2B Pricing: Negotiation, Calculation, and Strategy Individual Paper: Activity-Based Costing 1) Defining the problem The main problem of a Sippican corporation was a low pre-tax operating income (1.8%). To solve that problem, a cause had to be found. Sippican reported gross margins of 35% on valves, 5% on pumps and 38% on flow controllers. After looking at a gross margins of the three product lines, one would think that pumps were an issue to work on, and a main cause for a low operating income, because the pump sales accounted for 47,36% of a total sales in March with just 5% operating margin. However, the method of measuring the product profitability had to be questioned. To be more accurate, the method of assigning the overhead costs to each product line was the reason for inaccurate gross margins of the Sippican´s product lines. Exhibit 1 – Result of a wrong overhead cost assignment Wrong assignment of overhead costs Innacurate product profitability Inappropriate product pricing strategy Lower operating income The method of calculating the manufacturing overhead used by Sippican would be accurate if every of their three product lines was of the same or similar complexity. More complex products require more indirect work so one cannot simply...
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...slow weekend sales at his restaurants. It was such a hit that Subway introduced the idea to all of its 33,000 outlets, and in 1 year it generated $3.8 billion in sales. One marketing consultant asks, “Is the $5 foot long just a flash in the pan, or is it a function of consumer price points and price elasticity that affect all markets?” What do you think? I think that it is a function of customer price point and elasticity that affects the markets because if the customer can now afford the product the demand for that product will increase. In the case of the Subway people didn’t purchase the product during weekends because it might have been expensive. 2. What does a price represent to the customer? Why is a customer orientation to pricing important? Price is the monetary value of a good or service. It is a measure of what a customer is required to give up in obtaining these goods or services. For an individual, price is a reflection of value. We, as individuals, may tend to pay no more than what we believe the good or service is worth. In the total marketplace, all potential customers evaluate the availability goods and services and therefore establish the demand for each. Value, like beauty, is in the eye of the beholder. When setting price for any good or service, it must involve an analysis of how the market views the value of that product or service. Entrepreneurs must develop a keen sensitivity to the psychological and economic thinking of their customers if they...
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...other measure of a good or service. Customer Value-Based Pricing: is the practice of setting the price of a product or service at its perceived value to the customer. This approach tends to result in very high prices and correspondingly high profits for those companies that can persuade their customers to agree to it. It does not take into account the cost of the product or service, nor existing market prices. Good-Value Pricing: is offering just the right combination of quality and good service at a fair price. Value-Added Pricing: is a pricing strategy that attaches value-added features and services to differentiate a market offering and support higher prices, rather than cutting prices to match competitors. Cost-Based Pricing: A pricing method in which a fixed sum or a percentage of the total cost is added (as income or profit) to the cost of the product to arrive at its selling price. Fixed Costs (Overhead): A periodic cost that remains more or less unchanged irrespective of the output level or sales revenue, such as depreciation, insurance, interest, rent, salaries, and wages. While in practice, all costs vary over time and no cost is a purely fixed cost, the concept of fixed costs is necessary in short term cost accounting. Organizations with high fixed costs are significantly different from those with high variable costs. This difference affects the financial structure of the organization as well as its pricing and profits. The breakeven point in such organizations (in...
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...Chapter 19 – Pricing 1. State three factors that influence the price of fish and chips (3 marks) 1. Target market 2. Location 3. Community 2. Calculate the price charged to the customer if a firm adds a 300% mark up to a product costing £12 (4 marks) If the firm adds 300% it would be 3 lots of 12 because it is the whole of the price. Therefore 12 x 3 is 36. = £36.00 3. Explain why a product retailing at £99.99 is likely to be more appealing than one selling at a price of £100 (4 marks) This is promotional pricing, it is used when a business is trying to gain additional sales or sell old unused stock or services. On an aeroplane they discount the price just to get rid of the last seat, as the plane is going to fly anyway so they might as well get some money from it. It is a very common method of pricing. People perceive the item to be worth much less. 4. Analyse which method of pricing is most likely to be successful to a firm selling a. A plasma television set (4 marks) b. Remaining seats on an aircraft (4 marks) Remaining seats on an aeroplane would fit the method of discounting the price. This is because they want to make as much profit from that flight as possible, if the cost is lower there is more chance it will be sold. If a plasma TV is priced as £90.99, it means its promotional pricing. This is where customers perceive the price to be lower than it actually is and because TV’s are expensive this will help it sell. ...
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...Pricing: Premium Premium pricing A premium pricing strategy involves setting the price of a product higher than similar products. This strategy is sometimes also called skim pricing because it is an attempt to “skim the cream” off the top of the market. It is used to maximize profit in areas where customers are happy to pay more, where there are no substitutes for the product, where there are barriers to entering the market or when the seller cannot save on costs by producing at a high volume. Price-quality signaling Premium pricing can also be used to improve brand identity in a particular market. This is called price-quality signaling, because the high price signals to consumers that the product is high in quality. Some companies use this strategy to give their product an aspirational image. For example, according to BetaNews, Apple now has 91 percent of the market in computers costing $1,000 or more. Thee company has used premium pricing to capture the market for high-end, high-quality computers. Related Reading: Pricing Strategy Analysis Competition Premium pricing is not generally used when there is direct competition for a product. Competition tends to undercut prices and lead to poor sales. For this reason, premium pricing is often a short-term strategy. The longer a company can keep its competitive advantage, the longer it can charge a premium price. Many products start out at premium prices, but the price is cut once competitors appear on the market. Brand awareness ...
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