A 14907 - Strategic Management Accoun6ng (2018-2019) Session 9 - PowerPoint PPT Presentation

A 14907 - Strategic Management Accoun6ng (2018-2019) Session 9 Pricing Decisions Paul G. Smith B.A., F.C.A

Course Overview 1. Financial Vs Management Accoun4ng 10. Investment Decisions 2. Accoun4ng Principles and Valua4on Criteria – 11. Opera4onal Decisions PGS Current and Fixed Assets 3. Accoun4ng Principles and Valua4on Criteria – 12. Exam Current and Fixed Assets ..Cont’d PT 4. Financial Statement Analysis 13. Target Cos4ng and Life Cycle Cos4ng 5. Performance Measurement and Cost 14. Servi4za4on and Cost Management Accoun4ng 6. Exam 15. Performance Measurement, Sustainability and CSR LS 7. Strategic Management Accoun4ng 16. Voluntary Disclosure and Balanced Scorecard – Case Study 8. Budgets and Performance Management 17. Presenta4on and Discussion of Case Study PGS 9. Pricing Decisions 18. Exam A 14907 Strategic Management Accoun6ng 2

SESSION 9 OBJECTIVES & OVERVIEW A 14907 Strategic Management Accoun6ng 3

Session Objec4ves • At the end of this session, students will be able to: – Recommend appropriate cos6ng methods for pricing. – Assess the poten6al impact of different compe66ve environments on pricing. – Iden6fy appropriate pricing strategies to fit different markets and products/services. A 14907 Strategic Management Accoun6ng 4

Session 9 overview • Cos6ng and pricing – different approaches to cos6ng. • Consumer behaviour and pricing. • Compe6tor behaviour and pricing. • Pricing new products or services. • Product life cycle and pricing. • Special pricing strategies. A 14907 Strategic Management Accoun6ng 5

RECAP PREVIOUS SESSION A 14907 Strategic Management Accoun6ng 6

Summary of Session 8 • Budgets and Performance Measures – Responsibility centres – Standard cos6ng and variance analysis – Performance management in investment centres – Non-financial performance measures – Behavioural aspects and external influences A 14907 Strategic Management Accoun6ng 7

PRICING DECISIONS A 14907 Strategic Management Accoun6ng 8

The pricing decision A 14907 Strategic Management Accoun6ng 9

The pricing decision • The accountant’s perspec4ve : the rela6onship between revenues and costs. The sales price must generate a profit. • The economist’s perspec4ve : the compe66ve environment – different market types have an impact on the ability of a business to control its own pricing. • The marketer’s perspec4ve : how customers react to prices and how pricing should be integrated into the overall marke6ng mix. A 14907 Strategic Management Accoun6ng 10

Cos4ng and pricing • Absorp6on cos6ng and full-cost-plus pricing • Marginal-cost-plus pricing • Ac6vity-based cos6ng and pricing • Life-cycle cos6ng and pricing A 14907 Strategic Management Accoun6ng 11

Absorp4on cos4ng and full- cost-plus pricing • The ‘3 A’s’ of absorp6on cos6ng: – Allocate – Appor6on – Absorb A 14907 Strategic Management Accoun6ng 12

The overhead absorp4on rate (OAR) OAR = Total overhead costs Labour hours worked A 14907 Strategic Management Accoun6ng 13

Mark-up and margin Mark-up = Profit Cost Margin = Profit Price A 14907 Strategic Management Accoun6ng 14

Worked Example SM 1 Grogstore Worked Example A 14907 Strategic Management Accoun6ng 15

Grogstore Grogstore Direct costs $ Materials 2m2 @$3 per m2 6.0 Labour - cudng 15 mins @$14 per hour 3.5 Labour - welding 20 mins @$18 per hour 6.0 Overheads - cudng $3.94 per unit 3.9 Ovetheads - welding $3.41 per unit 3.4 Total Cost 22.8 Cudng Welding Alloca4on key Dept Dept Overheads Allocated $ $ Managers Salaries 25,000 28,000 Direct Appor4oned Property costs 53,667 38,333 (35/60*92,000) (25/60*92,000) Area Admin costs 53,625 89,375 (6/16*143,000) (10/16*143,000) Emplyees Machine costs 9,692 18,308 (9,000/26,000*28,000) (17,000/26,000*28,000) Labor hours 141,984 174,016 Labour hours 9,000 17,000 Overhead Absorb4on Rate (Per hour) 15.78 10.24 Hours required (Minutes) 15 20 OAR per unit 3.94 3.41 Pricing Required Mark up 30% Selling price 29.64 Total cost 22.8 23% Margin 6.8 A 14907 Strategic Management Accoun6ng 16

Marginal Cos6ng • Absorb6on cos6ng not helpful for short-term pricing decisions • Need to understand how costs change with different volumes and product mixes • No rigid rela6onship between product cost and selling price (compe66on, elas6city) • Volume is an important variable A 14907 Strategic Management Accoun6ng 17

Marginal cos6ng Typical ques6ons faced by management: 1. What will it cost to produce an addi6onal 1,000 units of product A? 2. What impact on the company’s profit would an order for an addi6onal 1,500 units of product B? The difficulty with absorb3on cos3ng is that it doesn’t consider the “incremental/marginal cost” of such decisions and includes “sunk” costs in rela3on to volume changes. A 14907 Strategic Management Accoun6ng 18

Marginal Cos6ng Example ABC Company Limited Worksheet A 14907 Strategic Management Accoun6ng 19

Advantages of Marginal Cos6ng • Will op6mize profits in the short-term if opera6ng at normal capacity • Never uncompe66ve due to a high fixed cost structure • More accurate reflec6on of the future • Allows more aggressive pricing policies • Most appropriate for mul6-product, process, market organiza6ons A 14907 Strategic Management Accoun6ng 20

Tradi4onal absorp4on cos4ng A 14907 Strategic Management Accoun6ng 21

Ac4vity-based cos4ng A 14907 Strategic Management Accoun6ng 22

Life-cycle pricing A 14907 Strategic Management Accoun6ng 23

Price elas4city of demand PED = Percentage change in demand Percentage change in price A 14907 Strategic Management Accoun6ng 24

Price inelas4city A 14907 Strategic Management Accoun6ng 25

Price elas4city A 14907 Strategic Management Accoun6ng 26

What determines elas4city? • The rela6ve price of the goods • The price of other goods • Consumer income • Tastes and fashions • Expecta6ons • Obsolescence A 14907 Strategic Management Accoun6ng 27

Four types of market • Perfect compe66on • Monopoly • Monopolis6c compe66on • Oligopoly A 14907 Strategic Management Accoun6ng 28

The marke4ng mix • Price • Product • Promo6on • Place A 14907 Strategic Management Accoun6ng 29

Product posi4oning A 14907 Strategic Management Accoun6ng 30

Price posi4oning strategies A 14907 Strategic Management Accoun6ng 31

The target cos4ng process A 14907 Strategic Management Accoun6ng 32

McKinsey Ar6cle • Turning pricing power into profit: – Provide meaningful transparency into pricing data – Understand what customers really value – Move from sales reps to “value nego6ators” – Provide on-the-job training to build confidence – Change the culture A 14907 Strategic Management Accoun6ng 33

McKinsey ar6cle • How retailers can drive profitability growth through dynamic pricing: – Long-tail module – Elas6city model – KVI model – Compe66ve-response model – Omnichannel module A 14907 Strategic Management Accoun6ng 34

REQUIRED READING AND RESEARCH A 14907 Strategic Management Accoun6ng 35

Required Reading and Research • Reading – required – Accoun6ng and Finance for Managers – Chapter 8 Pricing Decisions • Exercises – Comprehension ques6ons 1 – 8 – Exercises 8.1 -8.3 A 14907 Strategic Management Accoun6ng 36

Summary Session 9 • Cos6ng and pricing – different approaches to cos6ng. • Consumer behaviour and pricing. • Compe6tor behaviour and pricing. • Pricing new products or services. • Product life cycle and pricing. • Special pricing strategies. A 14907 Strategic Management Accoun6ng 37

Valida6on Session 9 • What different cos6ng systems are used in pricing and what are the advantages/ disadvantages of these ? • How is pricing affected by the economic context? (Type of market/Elas6city of demand) • What is the role of pricing in the marke6ng mxix and what different pricing strategies doe companies use? A 14907 Strategic Management Accoun6ng 38

OVERVIEW SESSION 10 A 14907 Strategic Management Accoun6ng 39

Overview Session 10 • Tradi6onal investment appraisal techniques. • The strengths and weaknesses of individual appraisal techniques. • The use and abuse of investment appraisal techniques. • Financial analysis within the overall context of investment planning. • Non-financial factors in investment appraisal. • Alterna6ve strategic approaches to investment appraisal.