Models And Concepts Affecting The Pricing Decision Accounting Essay

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Undertake pricing decisions. One of the key problems faced by companies is the disparities between real as well as perceived prices in relation to the target customers. The price decision is not just the decision on unit price of a product but it also includes "conditions of use "which needs to be followed. "Multidimensional pricing recognising complex pricing is essential in today's environment which includes differential pricing for various customer segments tailor made in tandem with packages as well as festival times "Gijsbrechts, E. (1993).

Models and concepts affecting the pricing decision

Company has always viewed pricing as part of its marketing mix but it needs to take a more strong view putting price at the forefront of all activities of the firm. 'Pricing is the moment of truth-all marketing focus in the pricing decision' Corey cited in Nagle and Holden (1995) supports this argument. Price is different from other elements of marketing mix as it contributes to the success of this marketing mix As Nagle and Holden(1995) tells 'If effective product development, promotion, and distribution sow the seeds of business success, effective pricing is the harvest.' Flexibility is another aspect related to pricing, price should not be irreversible. Another key aspect which needs to be considered is reactions from customers as well as competitors, also some price changes often generates a faster reaction which also needs to be considered. For relatively smaller multinationals like our correct pricing can be a case of life and death, pricing is an art as well as science now a day the concept is more into strategic pricing. Recognizing the key needs of pricing is important for managerial staff to

Undertake pricing decisions. One of the key problems faced by companies is the disparities between real as well as perceived prices in relation to the target customers. The price decision is not just the decision on unit price of a product but it also includes "conditions of use "which needs to be followed Monroe, K. (1990). Multidimensional pricing means recognising complex pricing is essential in today's environment which includes differential pricing for various customer segments tailor made in tandem with packages as well as festival times. Company has always viewed pricing as part of its marketing mix but it needs to take a more strong view putting price at the forefront of all activities of the firm. 'Pricing is the moment of truth-all marketing becomes to focus in the pricing decision' Corey cited in Nagle and Holden (1995) supports this argument. Price is different from other elements of marketing mix as it contributes to the success of these marketing mix As Nagle and Holden (1995) tells 'If effective product development, Promotion, and distribution sow the seeds of business

Success, effective pricing is the harvest.' Flexibility is another aspect related to pricing price should not be irreversible Monroe, K. (1990). Another key aspect which needs to be considered is reactions from customers as well as competitors, also price changes often generates a faster reaction which also needs to be considered. For relatively smaller multinationals like our correct pricing can be a case of life and death, pricing is an art as well as science now a day the concept is more into strategic pricing.

Analysis of the environment affecting price

INTERNAL ENVIRONMENT:

company objectives,

strategies, costs

EXTERNAL ENVIRONMENT:

Customers

Competitors

channel environment

legal environment

PRICE DETERMINATION

Pricing objectives

Pricing strategy

Price structure and level

Price tactics

Sources: Morris and Calantone (1990); Nagle and Holden

(1995).

One of the key aspect which needs to be taken care is that price should be consistent with objectives of our company and our marketing policy. Company activities can be said as general long terms of the company to which all its activities are directed including pricing (Nagle and Holden 1995: 10). The effectiveness as well as efficiency of the pricing strategies is determined by level of integration with organisational strategy and should be in tandem with elements of other marketing mix, the price should not be allowed to evolve but should be strategically developed . During time when product, communication, and distribution are developed an understanding of the price should be there. As other elements of the marketing mix also have a synergetic effect on the customers reaction, there is clear evidence that communication as well as distribution strategies employed can impact the customers perception of the product Kaul ans Wittink '(1995) tells there is a positive correlation between advertisement spending and price customers are ready to pay. In this context our company needs to spend less on traditional advertising and spend more on other channels this can help improve customer's perspective. The design, of the point of purchase image, ambient, and design factors has also an influence on customer's perspective of price of a product. . Blattberg' (et al. 1995). Quality of the product is another aspect which affects pricing decisions; managerial decisions on pricing should be marketing mix and should develop strategies to further strengthen it through communication, distribution as well as product strategies. Nagle and Holden (1995) say management's lack of understanding of the marketing mix is one of the key aspects which lead to wrong pricing decisions. Cost is another key factor in pricing decisions providing a line of control of acceptable prices. The role of costs in pricing decisions can be sometimes complex. If you look to the cost involved in our company we can find cost can be further classified as direct cost /indirect cost / fixed cost / variable cost how this is transferred to the customer depends on the policies of the company. To reduce our cost we need to not just concentrate on production but should study all multitude of associated functions , especially when selling internationally due to insurance, special packaging, warehousing requirement cost as well as price goes high. Keegan (1995: 514) refers to this as price escalation. The role off price as a key element in the inter pricing of products ,dynamics of cost, cost allocation to other partners , as well as policies developed by the company, beyond this cost is still a significant and should be understood in complete. Cost of developing a pricing programme has hindered our company in adopting a complex price model but as the benefits are more this needs to be considered. A core issue in pricing decisions is its impact on the demand / sales volume, the classical economic theory "demand function is negatively sloped, indicating that the number of units sold is inversely related to price... The Strength of the relationship between demanded volume and price-the customers' price sensitivity-is usually measured by the price elasticity. The price elasticity is the relative change in demand (sales) resulting from a relative change in the unit price of the product ". Price sensitivity is another factor which influences pricing , for some products target customers may be unaffected by changes in prices, example customers of luxury products , Parker and Neelamegham (1997) in various stages of life cycle of a product the price sensitivity will also change, increasing or decreasing as per circumstances, this needs to be included as part of price decisions. Another key factor which influence our pricing decisions are industrial customers, as they are providing regular orders they have some power which needs to counted in price decisions. They are often more knowledgeable and are less price sensitive but they have their budget constraints. Although economic theory states demand as well as price as corner stone's of customer decisions new study show that " consumer price knowledge, perception, and evaluation uncover

Those consumers' reactions to price are much less stylized and homogeneous than suggested by traditional microeconomics. Understanding the implications of pricing, therefore, requires consideration not only of factual prices and their sales

Outcomes, but also of how these prices are perceived

And evaluated Dickson and Sawyer (1990) ". Another key element in pricing decisions we should consider is the competitive environment company faces. For a dynamic price decisions not just the rival's prices should be considered but their reactions to price changes should be understood. Price wars always are more beneficial to customers as all companies reduce cost an atmosphere retaliation is not advisable. Marketing channel cost of maintaining chain of supplier, dealers as well as supply chain will influence pricing. Laws as well as culture of the external environment have also influenced our pricing decisions. There are several pricing strategies which can be considered ,discounts are another key aspect of pricing decisions there are several strategies like penetration pricing, experience curve pricing, seasonal discounting, which we can make use in this price trajectory has to be evolved . We also needs to chose whether we need a global / or geographically differentiated approach. There are several pricing methods we can employ main is cost based method, another can be optimization methods where price is calculated numerically. Price adjustments, leasing, new technologies, need for selling excess stock as well as promotions has affected our pricing strategies. In our opinion company needs to concentrate more on retailer strategy as well as international strategy more.

"Profit variance analysis is the process of summarizing what happened to profits during the period to highlight the salient managerial issues. Variance analysis is the formal step leading to determining what corrective actions are called for by management. Thus it is a key link in the management control process. We believe this element is underutilized in many companies because of the lack of a meaningful analytical framework. It is handled by accountants in a way that is too technical" by Vijay Govindarajan and John K. Shank

The analytical framework variance analysis developed by Shank and Churchill [1977]

Understand the critical factors which has a affect on profits

Breakdown of the overall profit variance by these critical factors.

Focus on the profits in relation to each causal factor holding all other factors constant

Make a"peel the onion"` approach Adding more complexity with each layer

Stop the process when newly added newly complexities added donot provide usefull information about causal factors.

Variance analysis involves a simple methodology where results obtained where checked with planned or budgeted figures on a one to one basis, this was termed as phase one thinking, Shank and Churchill provided a phase two thinking in variance analysis, "approach was based on the dual ideas of profit impact as a unifying theme and a multilevel analysis in which complexity was added gradually, one level at a time" Shank and Churchil.

Variance analysis is a key tool for management accounting, it consist of two parts in the first part the overall profit variance is sub divided into casual factors. Secondly these processed data needs to be further merged to evaluate the performance of management. Our accountant's needs to have critical expertise to put together computed pieces to provide a meaningful result, variance analysis is often a managerial function not much computational in nature. The phase one and phase two provide different ideas of a firm's performance in the preliminary stages itself.

.

The judgments using stage one procedure, stage two procedures often differ in the first stage itself. Phase two is more focused on achieving strategic goals and ways which are made use for that. We need to say that a negative variance is not indication of unfavourable performance, positive variance do not guarantee positive performance , the strategic context in which business operates is more important. In our view the organization should use profit variances in liaison with strategic issues. More than just cost analysis strategic analysis is more important from an organizational point of view Shank et al (1988). Variance analysis itself as a tool to understand is less convincing but it should be used more with strategic analysis.

The standard cost can be defined as

'The planned unit cost of the product, component or service produced in a period. The standard cost may be determined on a number of bases. The main use of standard costs is in performance measurement, control, stock valuation and in the establishment of selling prices.' CIMA Official Terminology, (2005). Standard costing is more suited for organisation like ours where activities are repeated, where manufacturing processes are more , in activities which are non repetitive as there is no basis on which performance can be evaluated standard costing cannot be applied , one difficulty regarding standard costing is that it is not easy fix standards . There are two ways in which base cost can be calculated one through studying the old records other through study of the operations mainly material, labour as well as equipment. Standard cost deals more with comparison of actual as well as standards costs; fixed cost imputed for each unit is more notional in nature. Any variation shown do not fully present overspending it may be a result of variation in production levels. What should be concern for us is fixed overhead cost than cost per unit. There for standard costing procedures can assist management but needs to be used wisely as it can lead the top cadre to focus on non issues, as activity-based cost management where focus is on cost (service / back up department ) from where main costs comes. Feedback also needs to be more time based as well as more real, current variance reports are not often appropriate for corrective action. The basic principle associated with standard costing is often sound, the way variances are calculated as well as their interpretation may have to be changes as per changes in production methods and other operations.

Traditional costing methods derives manufacturing overhead , base being the cost drivers volume ( example: hors needed to produce a product), cost driver can be termed as a factor which provides a impulse in generating cost , in activity based costing cost of producing a item is sub divided as per activities needed in producing the item. There is certainly certain advantage in adopting the activity based system it has negatives as well. One of the key weakness traditional costing methods is it fails to recognise associated expenses like administrative expenses , but in reports for shareholders it is essential to provide communication on basis of generally accepted costing system as it provides more accurate figure.

`Activity bases system mostly provide a more 360 degree view of product cost , but in my view it should be more used as supplemental costing system , the key differences comes in the determination of cost drivers. In this we will need to identify each activity related to production and cost of each of this activity will have to be found, this in turn is moved into products developed through this activities. Main advantage of activity bases costing will be Manac plc will be able to understand cost related to customers, products, offered services, distribution networks as well as supply chains more also helping the top management in crucial decision making. This also work effortlessly in Tandem with six sigma as well continuous improvement programs company is implementing, also supports score cards as well as performance management systems enabling cost analysis of value chains This can also be a power full support for decision making .Accuracy is one of the primary advantage of advantage costing while helping to eliminate irrelevant cost . Other positives can be this makes the cost interpretation more accurate for management purposes also helps in bench marking as well as to have a greater understanding of the overhead costs. Implementing this new system will require more resources also staff will need to be further trained, as our funds are limited this can be a disadvantage ,the chance of misinterpretation if done by non experts is high. So when taking decisions which are highly relent like cost decisions related to supply chain, customers then managers should decide which cost is more relevant.

Annual maintenance itself costs more data concerning each activity needs to be collected, checked as well as entered into the system. Managerial staff is more adjusted to traditional method of costing plus they find it more use off it in evaluating the performance. The reports generated through activity based system do not often confirm to the generally accepted accounting principles. In our opinion we need to maintain two systems using activity based approach for more internal management. Huge investments in computerised networks often leading to many bugs may take place before successful implementation can happen. For purposes of external investors the Activity based costing (ABC) might need to readjusted to conform to normal costing methods. Mostly the cost figures in activity costing os derived from interactions with staff which is not objectively proper and auditors can raise objection to the same. The chance of manipulation of data cannot be rules out. For all this matter a formal replacement of existing Absorption costing which is more useful in tracing fixed as well as variable costs to a particular product is not much advisable.

References

.

Yeldon, E. Topsy-turvy world of variances. Accountancy, November

2000, Volume 126, Issue 1287, pp 132-134

Drury, C. (2004). Management and cost accounting. 6th ed. London:

Cengage Learning (formerly Thomson Learning)

Kaplan, R. and Atkinson, A. (1998). Advanced management accounting.

3rd ed. Harlow: FT/ Prentice Hall

Lucey, T. (1996). Costing. 5th ed. Carnforth: Letts Educational

Scarlett, B. (2005). Management accounting performance evaluation,

2006 ed. London: CIMA Publishing

Walker, J. (2006). CIMA learning system fundamentals of management

accounting. London: CIMA Publishing

CIMA Official Terminology. (2005). London: CIMA Publishing

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