Its primary purpose is to facilitate managers in decision making. The concern at that time was that manufacturers were granting lower prices to large customers, and the purpose of the Clayton Act was to encourage competition among retailers by allowing small retailers to buy merchandise at the same price as large retailers. The discussion of cost categories and cost terminology has been rewritten and refined. Applying techniques of differential costing, absorption costing, marginal costing, and management accounting provides useful data to the management to aid in their decision-making. The Supreme Court then interpreted economic theory as indicating that predatory pricing does not work. This price range determines in practice the degrees of freedom existing in pricing decision making.
Managerial Accounting, the Business Organization, and Professional Ethics 2. Long-term and Short-term Planning 3. Decision-making Accounting A business problem can be solved by choosing any one of the best and most profitable alternative. In less competitive markets, products are differentiated and managers have some discretion in setting prices. However, fixed cost should be taken into account in determining the profit margin to be added to variable costs to arrive at the selling price. However, in reality, demand of a product is influenced by many factors such as product quality, packaging, advertising and promotion, after-sales service etc.
Identifying Relevant Costs The first step is to determine which costs are relevant to the decision and which are not. Most firms use full cost information while setting long-run pricing decisions. They are not ment for resale. Raising of funds through debt is cheaper because of tax benefits. Cost Accounting presents cost data in product wise, process wise, department wise, branch wise and the like. Cost: Cost is the third major factor.
Unfortunately, the opposite is more distressing. To the extent that overhead is allocated to the cost-plus contracts, the contractor will be reimbursed for those overhead costs. The different pricing methods include: cost-based pricing, value-based pricing, and competition-based pricing. Customer life cycle costs focus on the total costs incurred by a customer to acquire and use a product or service until it is replaced. When the researcher is employed by a university, which is often the case, these indirect costs can include general and administrative expenses that sometimes appear far removed from the researcher and department that receives the grant. The Clayton Act of 1914 elaborated on the Sherman Act, and made price discrimination illegal.
In the entertainment industry, actors and writers sometimes sign contracts that provide them a percentage of the profits from a movie or television show. Life cycle budgeting is related closely to target pricing and target costing. Accounting is a business language. Journal may not reveal whether one customer is a debtor or creditor. Also, a higher profit margin can be added to marginal cost which may work as a long term selling price even for normal sales. After a certain period, if we want to know whether a particular account is showing a debit or credit balance it becomes very difficult, so the ledger is designed to accommodate the various accounts maintained by a trader. Business firms can encounter situations where they are faced with the opportunity of bidding for a one-time special order in competition with other suppliers.
In this setting, service departments might view demand as relatively inelastic, when in fact, user departments might be surprisingly creative in finding either less costly external service providers, or alternative in-house solutions. It is prepared after the trading and profit and loss accounts have been complied and closed. Ledger: As stated above, all transactions, irrespective of their nature, are recorded in the journal in a chronological order. In these situations, the sales price might be based on cost of production. Contingent Liabilities: These are not the real liabilities. Marginal cost approach helps a business firm to enter into new markets easily, to increase its competitive position in the existing markets, to survive during trade depressions, to utilise spare available capacity, to dispose off surplus or obsolete stock, to make profitable special order decisions. Should the company accept the special order, provided that the customer has agreed to pay the variable selling expenses in addition to the price of the product? Workers: In our country, workers are entitled to payment of bonus which depends the size of profit earned.
If a firm is unable to generate sufficient revenues to cover the long run costs of all its products and its business sustaining costs, then it will make losses and will not be able to survive. Marginal Cost Plus Pricing: This method, also known as contribution approach, uses only variable costs as the basis for pricing. The discussion in the preceding sections has focused on how pricing decisions are influenced by the cost of the product, actions of competitors and the extent to which customers value the product. Also, pricing can be done more quickly. Net profit represents the excess of gross profit plus other revenue incomes over sales expense including sales costs and other expenses.
Credit transactions give rise to debtor and creditor relationship. Pricing strategies for new products include penetration pricing and price skimming. Usage of scarce resources h. Ignoring the elasticity of demand, and setting the sales price based on cost of production such as full cost plus 30% is generally a really bad idea. Economic Approach to Pricing : In many cases, cost information is of vital importance in pricing decisions. Those products which constitute 20% of the total products may require a different pricing strategy. Presenting the basics up-front: The core concepts and principles are explained in the first few chapters and are then revisited, where applicable, at more complex levels throughout the remainder of the text.