Importance of cost classification in pricing strategy.

Published:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

The price of the material or materials from which a product is prepared is called direct material. In this task it would include,

Carriage on purchase of basic raw material.

Direct Labor:

That part of the factory wages which is useful in quality and which may be applied straight to the product or to the manufacturing procedure, is called direct labor. In this task the direct labor would include,

Wages of operatives in the cutting department.

Direct expense:

Any other cost or expenditure which is related and which may be charged directly to a work, order or item, is called direct expense charge. In this task the direct expense would include,

Royalty payable on number of units of its final product produced.

Indirect Production Overheads:

All cost related which procedure, other than direct labor and direct materials, are measured production overheads. It is also known as factory overhead or factory burden. In this task the indirect production overhead would include,

Lubricant for sewing machine.

Performing Right Society charge for music broadcast throughout the factory.

Wages of storekeeper in material store.

Wages of fork lift driver who handle raw materials.

Wages of security guard.

Research and Development Cost:

An area where innovative work carryout on a efficient basis in order to increase knowledge, culture or it could be anything. In this task the research and development cost would include,

Developing a new product in the laboratory.

Selling and distribution Cost:

Selling overhead comprise the cost incur in encouraging sales and maintaining consumers. Distribution overheads comprise the cost of the procedure which starts with making the full product available for send off and finishes with making the clean returned empty packages available for reuse. In this task the selling and distribution cost would include,

Market research undertaken prior to a new product launch.

Road tax on delivery vehicles.

Parcel sent to customers.

Cost of advertising products on television.

Cost of painting advertising slogans on delivery vans.

Administration Cost:

Administration cost is usually allocated to product, either as a fraction on production cost or as a fraction on conversion cost. In this task the administration cost would include,

Floppy disks for general office computer.

Telephone rental plus metered calls.

Chief accountant's salary.

Audit fee.

Maintenance contract for general office photocopying machine.

Finance Cost:

Any fee or cost for an addition of credit is called finance cost. In this task the finance cost would include,

Interest on bank overdraft.

ALTERNATIVE METHOD OF PRICING.

There are three methods of pricing, which are FIFO (First-In-First-Out), LIFO 9Last-In-First-Out) and Average Price method.

First-In-First-Out (FIFO) Method:

The item or product purchased first to be sold first, so the closing stock assumed recently purchased.

Purchased

Sold

Balance

Date

Units

Unit Cost £

Total Cost

Units

Unit Cost £

Total Cost

Units

Unit Cost £

Total Cost

1 January

500

1

500

1 July

500

2

1,000

31 December

500

1

500

500

2

1,000

Last-In-First-Out (LIFO) Method:

The item or product purchased last to be sold first,

Purchased

Sold

Balance

Date

Units

Unit Cost £

Total Cost

Units

Unit Cost £

Total Cost

Units

Unit Cost £

Total Cost

1 January

500

1

500

1 July

500

2

1,000

31 December

500

2

1,000

500

1

500

Average Price Method:

The cost of goods sold and the cost of closing stock are firm by using an average cost of all goods available for sale during the period.

Average Unit Cost = Cost of Goods available for sale £1,500

No of units available for sale 1,000

Average Cost = £1.5

Purchased

Sold

Balance

Date

Units

Unit Cost £

Total Cost

Units

Unit Cost £

Total Cost

Units

Unit Cost £

Total Cost

1 January

500

1

500

1 July

500

2

1,000

31 December

500

1.5

750

500

1.5

750

Impact of each alternative method on profit

Number of units sold at 31st December = 500

Selling Price per unit = £ 2.4

Total Sale Price = £ 1,200

Different Impacts from the 3 methods:

FIFO:

Selling price - Cost = Profit

£1,200 - £500 = £700

The impact from this method is that it increases net income because stock that may be few years old is used to charge the cost of goods sold. Increasing net income is good for the company and for balance sheet.

LIFO:

Selling price - Cost = Profit

£1,200 - £1,000 = £200

The impact from this method is that it decreased net income it is not a good indicator for company owners. The income is less because cost of goods sold is higher.

Average:

Selling price - Cost = Profit

£1,200 - £750 = £450

The impact from this method is that it make results that drop somewhere between FIFO and LIFO. It will not show too much income and don't show less income.

The selling price is £ 2.4 per unit, so the LIFO method provides a reasonable approximation of replacement cost which is £2.

Advising Rajeev the advantages of the Pricing methods:

FIFO (First In First out):

The advantage of the FIFO method Pricing is that it is taken directly from stock report and characterizes actual costs. Low or high invoice prices do not distress following material pricings as happen when average price methods are used. It is accepted and recommended by the Bureau of Internal Revenue.

LIFO (Last in First Out):

It is accepted and recommended to its associate by the following trade association. American petroleum institute, committee of controllers institute of America etc; as a sound method of costing sales and of formative stock in certain dedicated industries.

Average pricing method:

It is a cost method and supplies an average cost, which is of better concern to some officials in costing production than is an actual cost. An average cost have a tendency to narrow the severe prices, the trend upwards or downwards is more slow, as compare with a stair step type of increase or decline when prices are taken from the actual invoices under the FIFO method.

Major Problems:

FIFO (First in First Out):

It is boring to manage. It make too much of profit at the time of increasing prices, because closing stock is prized at more recent prices. It makes evaluation of job costs excessive as similar jobs are debited with materials at different rates. A regular price is not support on actual price acquire, and therefore is not pragmatic. Ease and convenience are lost when there is so much change in the prices of materials.

LIFO (Last in Last Out):

It direct to unexpected movement in prices. Like FIFO this method also involves boring calculation with resulting clerical mistakes, if the prices vary too often. It is also not acceptable for Income-tax authorities. Matter are not valued in the same order in which the materials are issued.

Average Price Method:

It does not calculate closing stock at current cost and it also makes confirmation of closing stock difficult.

LIFO method used by any organization is not acceptable for the external reporting, the organizations show less income using LIFO method to save the Government TAX, in the balance sheet if they will show less income so they have to pay less tax to the government. The government thinks that they are putting more money in their pocket as they show less profit. Only FIFO and Average methods are acceptable by government.

SALES BUDGET

Sales Forecast

8,500

Selling Price per Unit

100

Sales required

850,000

PRODUCTION BUDGET

Sales Forecast

8,500

Add: Finished Goods Stock at end

1,870

10,370

Less: Finished Goods Stock at start

(170)

Production required

10,200

DIRECT MATERIALS USAGE BUDGET

Material - A

Material - B

Total

Production required

10,200

10,200

Standard material usage for production

10

5

Direct Materials Usage required

102,000

51,000

153,000

Add: Direct Materials Closing Stock

10,200

163,200

Less: Direct Materials Opening Stock

(8,500)

Direct Materials Usuage required

 

 

154,700

DIRECT MATERIALS PURCHASE BUDGET

Material - A

Material - B

Direct material required

102,000

51,000

Standard material rate per unit

1.80

4

Direct Material Purchase

183,600

204,000

DIRECT LABOUR BUDGET

Production required

10,200

Standard direct labour usage per hour

10

Total direct labours hours required

102,000

standard direct labour rate per hour

3

Total direct labour cost required

306,000

FACTORY OVERHEAD BUDGET

Budgeted Variable Overhead

Indirect Materials

30,600

Indirect labour

30,600

Power

15,300

Maintenance

5,100

Total Budgeted Variable Overhead

81,600

Budgeted Fixed Overhead

Depreciation

25,000

Supervision

25,000

Power

10,000

Maintenance

11,400

Total Budgeted Fixed Overhead

71,400

Total Fixed Overhead Budget

153,000

SELLING AND ADMINISTRATION BUDGET

Stationary

1,000

Sales - Salaries

18,500

Office - Salaries

7,000

Commissions

15,000

Car Expenses (Sales)

5,500

Advertising

20,000

Miscellaneous (Office)

2,000

Total Selling and Administration Budget

69,000

CASH BUDGET

Quarter 1

Quarter 2

Quarter 3

Quarter 4

Opening Cash Balance

8,500

28,500

73,500

105,496

Add: Receipts from Customer

250,000

300,000

280,000

246,250

Total Receipts

258,500

328,500

353,500

351,746

Less: Payments

Materials

100,000

120,000

110,000

136,996

Payment for Wages

100,000

110,000

120,000

161,547

Other Cost & Expenses

30,000

25,000

18,004

3,409

Total Payments

230,000

255,000

248,004

301,952

Closing Cash Balance

28,500

73,500

105,496

49,794

Evaluate the need for corrective action to Rajeev.

The corrective action for Rajeev is as follows,

Use flexible budgeting techniques

Review master budget after each quarter

Modify the budget if needed.

P7

Principles of Value Analysis and recommendation to Rajeev concerning its application within the company:

Value Analysis is defined as "A systematic interdisciplinary examination of factors affecting the cost of a product or service in order to devise means of achieving the specified purpose most economically at the required standard of quality and reliability". (CIMA Official Terminology)

Value Engineering is also known as value analysis and it is also a systematic and function-based approach to improving the value of product, project, or processes.

Value analysis or value engineering is a prearranged process of discovering and innovating the detail of how value is created.

It mean at identify and removing redundant costs that do not add value to the product in order to offer better value to the customers.

There are some basic steps involved in value analysis which are,

Knowing the cost

Determining the functions

Thinking creatively

Evaluating alternatives by comparison

Obtaining and recording the facts

The recommendation to Rajeev concerning its application within the company is,

Elimination of redundant parts

Substitution with alternative cheaper materials

Substitution of specially designed cloths with standard or fashioned cloths

Development of alternative cheaper methods of manufacturing

Redesigning

Writing Services

Essay Writing
Service

Find out how the very best essay writing service can help you accomplish more and achieve higher marks today.

Assignment Writing Service

From complicated assignments to tricky tasks, our experts can tackle virtually any question thrown at them.

Dissertation Writing Service

A dissertation (also known as a thesis or research project) is probably the most important piece of work for any student! From full dissertations to individual chapters, we’re on hand to support you.

Coursework Writing Service

Our expert qualified writers can help you get your coursework right first time, every time.

Dissertation Proposal Service

The first step to completing a dissertation is to create a proposal that talks about what you wish to do. Our experts can design suitable methodologies - perfect to help you get started with a dissertation.

Report Writing
Service

Reports for any audience. Perfectly structured, professionally written, and tailored to suit your exact requirements.

Essay Skeleton Answer Service

If you’re just looking for some help to get started on an essay, our outline service provides you with a perfect essay plan.

Marking & Proofreading Service

Not sure if your work is hitting the mark? Struggling to get feedback from your lecturer? Our premium marking service was created just for you - get the feedback you deserve now.

Exam Revision
Service

Exams can be one of the most stressful experiences you’ll ever have! Revision is key, and we’re here to help. With custom created revision notes and exam answers, you’ll never feel underprepared again.