Models and concepts affecting the pricing decision03
Approaches to pricing04
i. Cost–volume–profit analysis05
ii. Cost plus mark-up pricing07
iii. Target rate of return pricing07
Standard costing and Variance analysis08
The role of standard costing and variance analysis12
Limitations of Standard Costing and variance analysis12
Evaluation of Activity Based Costing system13
Advantages of ABC system17
Limitations of ABC system17
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 critical situation where management of Manac plc should understand and evaluate the key strategic management accounting models and concepts which may affect to decisions made with regard to products’ cost and price. Manac plc presently uses traditional management accounting concepts such as standard costing and absorption costing methods as a part of its approach to strategic management accounting. The reasons for the company not to achieve target budgeted profit may be that products have not been priced accurately as well as the variances with regard to sales, material cost, labour cost, other variable cost and fixed over head cost have been occurred. Absorption costing method may also have a significant effect on price of the products where by the company may have reached to a lower profit than expected. Since exact reasons for this situation are more complex, we should critically understand and evaluate the company’s strategic management approach with a range of strategic management accounting models and concepts. Thus, this report covers following areas which the issues of Manac plc are related to. 1. An analysis of models and concepts affecting the pricing decision taken by the company. 2. The role of standard costing and variance analysis in management accounting and its values and limitations. 3. Evaluation as to the introduction of Activity Based Costing system by replacing current Absorption Costing system.
1. Models and concepts affecting the pricing decision taken by the company Pricing decision is very important for a company to exist and expand its products in the market. If the prices of our electrical goods are too high, customers will not buy them and will move to other products sold by other companies. Where as if we set the price of product too low, we will even unable to cover our total cost whereby we may be making a loss. Therefore, we should understand and use models and concepts which affect to pricing decisions so as to increase our profit. One of the reason for Manac plc not to achieve its target budgeted profit is may be that the prices of electrical goods have not been set properly. Therefore, firstly I am going to introduce a few decision making models and concepts concerning pricing decisions. Foundation for the fundamental pricing strategies can be taken through basic economic concepts (Hasty, Reardon, 1999:457). It says that price of a good is determined by its supply and demand curve. So the price, at which quantities of demand and supply of a good are equal, can be considered as price decided by the market. There are many factors which affect to pricing decision of a company which can be categorized into two main groups: * Internal Factors - When a price is set, several factors which occur through company decisions and actions must be taken into consideration. These factors can be controlled and altered by the company to a large extent depending on the situation. Examples: Marketing Objectives, Marketing Strategy, Costs of products etc. * External Factors - There are also a number of external factors which affect to pricing decision of a company. They cannot be controlled by the company but will have a significant impact on pricing...