Management Accounting – Setting Prices

cco Management Accounting tutorial 5 15-3. List and before ample describe 4 major gos on chink decisions Customer fill the demands of nodes argon of paramount importance in all(a) phases of business operations, from the project of a crossroad to the scope of its value. Product-design issues and set considerations are interrelated, so they essential be examined simultaneously. For example, for a mellower quality harvesting you pack higher quality materials which give affect a higher monetary value and needs more fourth dimension and this will lead to a higher set on a carrefour.Also, a manager moldiness non step uplay its result out of the food commercialize worth range. Actions of Competitors companies essential keep an eye on its competitors. If its competitor reduces its set on a product, they capability have to follow suit to avoid losing its commercialize place share. However, one must non follow the actions of its competitors blindly as a f amiliarity has to predict militant reactions to its product-design and set strategy. The company must withal be careful to properly define its product, much(prenominal) that if they amplification the price of the product will the consumers continue acquire the product?Costs some prices are decided almost entirely by market forces. Industries such as agriculture where most products are market-driven. To enhance a pay, farmers must produce at a live below the market price. This is very unsteady as it is not always possible to produce at a price lower than the market price and this will inevitably lead to losses for the farmers. In other industries, prices are set by adding a markup to production cost so managers do have some latitude in find the markup. Therefore, both market forces and cost considerations heavily influence prices.No organization or industry s excessivelyge price its products below their production be indefinitely. And no companys management rear set prices blindly at a cost plus a markup without keeping an eye on the market. Political, Legal and image-related issues managers must adhere to certain laws. The law generally prohibits companies from discriminating among their customers in range prices. It is also forbidden in collusion in price setting surrounded by major unbendables. Political considerations also can be relevant.For example, if the fast(a)s in an industry are perceived by the public as reaping unfairly large breads, in that location may be political pressure on legislators to tax those profits differentially or to deputize in some way to regulate prices Companies also consider their public image in the price-setting process. A fast with a reputation for very high quality products may set the price of a untested product high to be reproducible with its image. 15-11. Write the general recipe for indeterminate pricing, and briefly beg off its uptake. Price = Cost + (Markup % * Cost) 15-12. List the 4 common cost footings apply in undetermined pricing.How can they all result in the uniform price? Variable manu positionuring cost + (Markup % * Variable manufacturing cost) tightness manufacturing cost + (Markup % * Absorption manufacturing cost) jibe cost + (Markup % * Total cost) Total covariant cost + (Markup % * Total varying cost) Several different definitions of cost, each combined with a different markup percentage can result in the same price for a product or service. 15-13. List 4 reasons a lot cited for the widespread use of absorption cost as the cost origin in indeterminate pricing formulas. In the long run, the price must over all be and a normal profit margin.Basing the undetermined formula on only inconsistent costs could abet managers to set in like manner low a price in order to boost sales. This will not happen if managers understand that a variable cost-plus pricing formula requires a higher markup to counterbalance fixed costs and profit. N everthe little, many managers argue that tribe tend to view the costs base in a cost-plus pricing formula as the news report for setting prices. If prices are set too close to variable manufacturing cost, the firm will erupt to cover its fixed costs. Ultimately, such a exercise could result in the failure of the business. Absorption-cost or derive-cost pricing formulas provide a justifiable price that tends to be perceived as equitable by all parties. Consumers generally understand that a company must make a profit on its product or service in order to extend in business. Justifying a price as the total cost of production, sales, and administrative activities, plus a just profit margin, seems reasonable to buyers. When a companys competitors have similar operations and cost structure, cost-plus pricing establish on full costs gives management an idea of how competitors may set prices Absorption-cost teaching is provided by a firms cost accounting system of rules, because i t is required for external financial report under generally accepted accounting principles. Since absorption-cost learning already exists, it is cost-effective to use it for pricing. The alternative would contain preparing specific product-cost entropy specifically for the pricing decision. In a firm with hundreds of products, such data could be expensive to product. 15-14. What is the immemorial disadvantage of basing the cost-plus pricing formula on absorption cost? The primary disadvantage of absorption-cost or total-cost pricing formulas is hat they unvalued the cost behavior pattern of the firm. Since absorption-cost and total-cost data imply allocated fixed costs, it is not clear from these data how the firms total costs will replace as intensity level changes. Another way of stating this reproof is that absorption-cost data are not consistent with cost-volume-profit abstract. CVP analysis emphasizes the distinction between fixed and variable costs. This get along enables managers to predict the effects of changes in prices and sales volume on profit. Absorption-cost and total-cost selective information obscures the distinction between variable and fixed costs. 5-15. List 3 advantages of pricing based on variable cost Variable-cost data do obscure the cost behavior pattern by unitizing fixed costs and making them appear variable. Thus, variable-cost information is more consistent with cost-volume profit analysis often used by managers to see the profit implications of changes in price and volume Variable-cost data do not require allocation of common fixed costs to individual product lines. Variable-cost data are just now the type of information managers need when facing certain decisions, such as whether to accept a special order.This decision often requires an analysis that separates fixed and variable costs 15-16. Explain the behavioral problem that can result when cost-plus prices are based on variable cost. If the managers perceive the variable cost of a product or service as the floor for the price, they may tend to set the price too low for the firm to cover its fixed costs. Therefore, if variable-cost data are used as the prat for cost-plus pricing, managers must understand the need for higher markups to look that all costs are covered. 15-17. presently explain the concept of return-on-investment pricingA common approach to determine the profit margin in cost-plus pricing is to base profit on the firms pose return on investment 15-18. Explain the articulate price-led costing. can costing sets the pose cost by first determining the price at which a product can be sold in the marketplace. Subtracting the target profit margin from this target price yields the target cost, that is, the cost at which the product must be make. This straightforward, but strategically important, relationship can expressed in the following equationTarget cost = Target price Target profit 15-19. Why is a focus on the custom er such a key principle of target costing? To be successful at target costing, management must listen to the companys customers. Management needs to aggressively seek customer feedback and then the products must be designed to requite customer demand and be sold at a price they are willing to pay. In short, the target costing approach is market driven. 15-25. list the following approaches to pricing new products skimming pricing, acuteness pricing and target costing.Skimming pricing which the sign product price is set high, and short-term profits are reaped on the new product. The initial market will be small, due in part to the high initial price. This pricing approach often is used for unique products, where there are people who must have it whatever the price. As the product gains acceptation and its appeal broadens, the price is lowered gradually. Eventually, the product is priced in range that appeals to several kinds of buyers. Penetration pricing which the initial price is set relatively low. By setting a low price for a new product, the management hopes to penetrate a ew market deeply, quickly gaining a large market share. This pricing approach often is used for products that are of groovy quality, but do not stand out as vastly better than competing products. Target cost where the company first uses market research to determine the price at which a new product can be sold. Given the likely sales price, management computes the cost for which the product must be fabricate in order to provide the firm with the cost for which the product must be manufactured in order to provide the firm with an gratifying profit margin.Finally, the engineers and cost analysts work together to design a product that can be manufactured for the allowable costs. This method is used widely by companies in the development stages of new products. It is projected semipermanent cost that will enable a firm to enter and remain in the market for the product and compete succ essfully with the firms competitors. 15-27. Briefly explain the potential negative consequences in pricing decisions from using a traditional, volume-based product-costing system. Use of a traditional, volume-based product-costing system may result in significant cost distortion among product lines.In many cases, high-volume and relatively simple products are overcosted while low-volume and complex products are undercosted. This results from the fact that high0volume and relatively simple products require proportionately less activity per unit for various manufacturing support activities than do low-volume and complex products, yet a traditional product-costing system, in which all overhead is assigned on the basis of a single unit-level activity like DL hours, it fails to capture the cost implications of product diversity.