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

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

Feb 15, 2023 134 likes •549 views

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.

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A 14907 - Strategic Management Accoun6ng (2018-2019)

Session 9 Pricing Decisions

Paul G. Smith B.A., F.C.A

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Course Overview

  • 1. Financial Vs Management Accoun4ng
  • 10. Investment Decisions
  • 2. Accoun4ng Principles and Valua4on Criteria –

Current and Fixed Assets

  • 11. Opera4onal Decisions
  • 3. Accoun4ng Principles and Valua4on Criteria –

Current and Fixed Assets ..Cont’d

  • 12. Exam
  • 4. Financial Statement Analysis
  • 13. Target Cos4ng and Life Cycle Cos4ng
  • 5. Performance Measurement and Cost

Accoun4ng

  • 14. Servi4za4on and Cost Management
  • 6. Exam
  • 15. Performance Measurement, Sustainability and CSR
  • 7. Strategic Management Accoun4ng
  • 16. Voluntary Disclosure and Balanced Scorecard – Case Study
  • 8. Budgets and Performance Management
  • 17. Presenta4on and Discussion of Case Study
  • 9. Pricing Decisions
  • 18. Exam

PT PGS LS PGS A 14907 Strategic Management Accoun6ng 2

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SESSION 9 OBJECTIVES & OVERVIEW

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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.

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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.

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RECAP PREVIOUS SESSION

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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

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PRICING DECISIONS

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The pricing decision

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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

  • wn pricing.
  • The marketer’s perspec4ve: how customers

react to prices and how pricing should be integrated into the overall marke6ng mix.

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Cos4ng and pricing

  • Absorp6on cos6ng and full-cost-plus pricing
  • Marginal-cost-plus pricing
  • Ac6vity-based cos6ng and pricing
  • Life-cycle cos6ng and pricing

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Absorp4on cos4ng and full- cost-plus pricing

  • The ‘3 A’s’ of absorp6on cos6ng:

– Allocate – Appor6on – Absorb

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The overhead absorp4on rate (OAR)

OAR = Total overhead costs Labour hours worked

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Mark-up and margin

Mark-up = Profit Cost Margin = Profit Price

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Worked Example

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SM 1 Grogstore Worked Example

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Grogstore

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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 Dept Dept Alloca4on key 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

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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

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Marginal cos6ng

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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

  • f 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.

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Marginal Cos6ng Example

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Worksheet

ABC Company Limited

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Advantages of Marginal Cos6ng

  • Will op6mize profits in the short-term if
  • pera6ng 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

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Tradi4onal absorp4on cos4ng

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Ac4vity-based cos4ng

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Life-cycle pricing

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Price elas4city of demand

PED = Percentage change in demand Percentage change in price

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Price inelas4city

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Price elas4city

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What determines elas4city?

  • The rela6ve price of the goods
  • The price of other goods
  • Consumer income
  • Tastes and fashions
  • Expecta6ons
  • Obsolescence

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Four types of market

  • Perfect compe66on
  • Monopoly
  • Monopolis6c compe66on
  • Oligopoly

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The marke4ng mix

  • Price
  • Product
  • Promo6on
  • Place

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Product posi4oning

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Price posi4oning strategies

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The target cos4ng process

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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

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McKinsey ar6cle

  • How retailers can drive profitability growth

through dynamic pricing:

– Long-tail module – Elas6city model – KVI model – Compe66ve-response model – Omnichannel module

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REQUIRED READING AND RESEARCH

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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

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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.

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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?

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OVERVIEW SESSION 10

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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.