Tables of content Page No Introduction 03 Models and concepts affecting the pricing decision 03 Approaches to pricing 04 i. Cost–volume–profit analysis 05 ii. Cost plus mark-up pricing 07 iii. Target rate of return pricing 07 Standard costing and Variance analysis 08 The role of standard costing and variance analysis 12 Limitations of Standard Costing and variance analysis 12 Evaluation of Activity Based Costing system 13 Advantages of ABC system 17 Limitations of ABC system 17 References 18
Introduction
This report is mainly focusing to understand and analyse the issues involved in Manac plc where by the company is not meeting target budgeted profit. This is a
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Now let us look at some of the decision making models which affect the pricing decisions regarding our electrical goods made by us. At last, we should understand the mechanics of making pricing calculations of our standard electrical goods based on an appropriate model.
Approaches to pricing
There are many approaches to pricing and accounting information can be used for these approaches. They are; i. Cost–volume–profit analysis, ii. Cost-plus pricing, iii. Target rate of return pricing. i. Cost–volume–profit analysis
This method known as CVP analysis is used to develop and understand the relationship between revenue, cost and sales volume. Thus, CVP is concerned with understanding of the relationship between changes in the number of units sold and changes in selling prices and costs. Typical issues that CVP answers are: * Effect on profits of changes in selling price or the volume of sales, * If we incur additional costs, changes that we should make to our selling price or to the volume that we need to sell (P.M. Collier 2003).
CVP can be used as a sensitivity analysis which is an approach to understand as to how changes in one variable (e.g. selling price) affect to other variables (e.g. Sales Volume). Using this analysis which is illustrated bellow, we can have a better understanding of product’s selling price of Manac plc.
Illustration 1
Target Budgeted profit of Manac plc is £100,000 on sales of 20,000 units of
If the cost system reported sales volume and/or price we would be able to conduct an activity analysis to determine an appropriate cost function to determine the best cost driver for each product.
II. Explore the supply and demand conditions for your firm’s product. a) Evaluate trends in demand over time, and explain their impact on the industry and the firm. You should consider including annual sales figures for the product your firm sells. b) Analyze information and data related to the demand and supply for your firm’s product(s) to support your recommendation for the firm’s actions. Remember to
This description makes the marketing expenditures sound like they are a variable cost, since it suggests that they vary with the amount of units sold. However, unlike variable costs, the relationship of marketing costs is not directly proportional to sales, since other factors also influence units sold. Thus, it is not a pure variable cost. However, it is also not a fixed cost, in that there usually is a relationship between marketing expenditures and sales. For CVP purposes, it might best be handled as a mixed cost, having both a fixed and variable
According to, Skills for Business Decisions, “Cost-volume-profit (CVP) analysis examines changes in profits in response to changes in sales volumes, costs, and prices.” (Kimmel P.D. 2009) A company’s profit is the CVP profit equation of Profit = Revenue – Expenses. A Cost-volume-profit (CVP) analysis consists of five basic components that include:
Pricing is a pertinent issue in procurement and acquisition in organizations. Consumers buying the commodities of an entity should get clarity on pricing related issues. There is uncertainty in Pro
In addressing the issue, the following were considered: a sensitivity analysis for potential consumption of different price series, associated revenues and costs, and gross profit from different distribution methods.
Some firms in service industries like repair shops and printing shops prefer to use the time and material pricing to decide the price of products. Under this approach, they need to pay attention to the time and material two parts and determine two pricing rates. The rate is decided by the interaction of demand and supply and by competitive industry environment (Seal, W. and
Businesses – from manufacturing, merchandising and service industries alike – take careful considerations for their costing systems. Setting-up competitive prices in the market can be a result of proper costing methods. Misallocation of costs may lead to incorrect price estimates, continuous production of unprofitable products, and ineffective processing schedules. In this case study, we will discuss the costing methods Zauner Ornaments are currently using and upon conclusion, it will enable us to distinguish the advantages and disadvantages of each costing method.
In vertical analysis, it is easier to see elements as a percentage of Revenue. Between 2011-12, the portion that cost of sales takes in revenue has increased however, there is a bigger deterioration in distribution cost. In 2011, 9.21% of revenue remains as profit but in 2012 this figure decreases to 8.14%. Despite reduction in costs is one of the strategies of Ted Baker(part 1.4), analysis illustrates that costs increase each year.
As is known, pricing is one of the most important steps for business plan which needs good research, calculations and formulations. There are different pricing strategies to put into effect due to the market and product conditions, such as premium pricing, penetration pricing, economy pricing, price skimming(Voice Marketing, 2012). These four pricing strategies are main pricing policies. They form the bases for the exercise. However there are other important approaches to pricing. These pricing strategies are: Psychological pricing, product line
The strategy for setting a product’s price often has to be changed when the product is part of a product mix. In this case, the firm looks for a set of prices that maximizes its profits on the total product mix. Pricing is difficult because the various products have related demand and costs and face different degrees of competition.
Some of the assumptions of CVP as outlined by accountingformanagenment are: selling price is constant regardless of volume change, costs are linear, with multi-products the sales mix is constant, and manufacturing companies inventories do not change (N.D.). Because of the assumptions
The process in which organizations determine what they will obtain in exchange for their products is called pricing. Some significant factors for pricing include Market conditions, competition, market place, cost of production and product quality.
Cost behavior is one of the most important aspect which helps in analyzing the nature and responses of different costs. Generally the cost behavior is breakdown of costs into fixed and variable components. The cost behavior is usually analyzed with the help of CVP analysis. The cost behavior patterns are analyzed by cost-volume-profit analysis, including the calculation of a firm 's break-even point in units and sales dollars.
The cost incurred by the function should be compared with the results accomplished e.g. sales volume achieved, gross margins achieved and net realization made.