The Importance Of Costs In The Pricing Strategy Accounting Essay

The Importance Of Costs In The Pricing Strategy Accounting EssayIt is in truth important for companies to develop a good price strategy as it than permits them to earn good profit margin on its product or services and at the identical beat making it appealing to the customers. Pricing strategies argon very important comparisont of business and different organisation sp demise large sum of specie and effort to devise effective and efficient pricing strategies.Following ar different types of pricing strategies that different business organisations subroutine in order to draw customers and at the same time to earn profitCompetition PricingPsychological PricingCost establish PricingPrice Skimming.Absorption wooThe formula that is used by different organisations to calculate the equipment casualty isSelling price. = Cost + profitCost based pricingOne of the strategies is cost based pricing. This strategy involves first the calculation of the fixed cost and the inconsistent cost of the specific product or service that is offered by an organisation. Once the congeries cost is calculated than the profit margin is added to each unit i.e. it can 5%, 7% or 9%. The cost based pricing strategy is very efficient strategy as it covers all the costs related to product and service and it alike covers the desired profit.Although this strategy looks very simple and easy to use and managers only leave to do some financial calculations in order to de full termine the price of the product or service that is being delivered. plainly the paradox with this strategy is that it doesnt consider the external factors such as market or the competition that also have massive impact on pricing. But as this strategy is very old and the organisation only has to process the internal information to calculate the price thats why it is very universal. The organisation can also justify the prices that have been allocated on the basis of their cost and also prove that the price is th e sum of the total cost and the profit.Absorption cost principlesAbsorption be is some other cost technique that is widely used it involves the allocation of all the costs that have been incurred by the business organisation to each of its product or the service they offer. This strategy enables them to estimate whether the product will incur profit in future or not. During the cost allocation process some assumptions be also made as some costs atomic number 18 fixed and some are variable which depend on the level of production.When absorption be clay is used the profit that are reported by the organisation depend on the level of production and the level of sales by the firm, this is delinquent to the fact the fixed manufacturing overhead is absorbed in the value of work in progress goods and also in the finished goods. But if at the end of the accounting point in time the stock is not sold out than the fixed manufacturing overhead cost is transferred to the next halt.Mar ginal costing principlesMarginal costing is another significant costing strategy. This strategy grants importance to the behavioural characteristics of the costs. The two elements of the cost are first separated i.e. variable cost in which the cost per unit is same and the total cost changes depending on the level of production and the second element is fixed cost in which the total cost is same regardless of level of production. It is not very easy to separate fixed and variable costs, the organisation simplify the information to do this and sometimes it is not very accurate. But this costing strategy is very helpful for business organisations to perform different activities such as decision making and petty term planning. In this costing system the variable cost is subtracted from the sales revenue to calculate the contribution margin of each product i.e. the amount each product has contributed to cover the total fixed cost that business organisation has sustained. And then the fixed cost is subtracted from the contribution margin as fixed cost is treated as period cost and then the net profit is found.1.2 Design a costing system for use within an governance.The world was hit by the recession in 2007. Now it is been more than six years but still many countries are not able to get rid of it and most of the countries are face up the after effects. The economy has been badly affected by the recession. And indeed business organisations are also giving more attention to the financial aspects of the firm. The business organisations are trying to be prepared for such kind of disasters by using various accounting tools that helps them to closely evaluate their performance whether it is financial or guidance performance. This also helps them to identify various opportunities. According to Datar et.al (2008) business organisations are giving more attention to cost accounting these days in order to make their financial as well as their strategic decisions. The c osting system enables the organisation to easily record the expenses that have been incurred or will be incurred in future. But the other financial technique limits the business organisations to sales, marketing and human re outset management and does not give the accurate cost of the business activities. in that respect are different costing systems some of them are menti superstard above but the three costing systems that are gaining more attention are very popular among business organisations areActivities-Based Costing SystemAbsorption Costing SystemDirect Costing SystemTESCO is a multinational grocery store with millions of turn-over either year they have been using traditional costing system which is used to cover their huge sales. But now as the competition is increasing in the market due to globalisation and various other factors the number of challenged TESCO is facing is also increasing. in that respectfore the best costing system for TESCO is activity based costing or ABC system. According to Dekker (2003) the fundamental principle of the activity based costing revolves around value chain analysis and integrated cost valuation and the sales information that is associated with the supply chain of the organisation.TESCO requires the main costing hub rather than small different departments. It has more than 30,000 products and therefore it is very difficult to keep address of all of them. Any business firm offering this much number of products cannot keep track of the cost and they can be in difficult piazza due to overhead cost allocation. Activity based costing system has two divers volume based and non-volume based. The most suitable costing system for TESCO is activity based costing as it helps the organisation to get the exact summary of cost of sales.1.3 Propose improvements to the costing and pricing systems used by an organizationThe competition-based pricing polity should be used by TESCO. This strategy helps the firm to finalize the pr ice of the product after analysing the prices set by the other companies that are currently competing in the market. Therefore TESCO should first identify its present foes that are giving it a cut throat competition. Than after calculating the costs of its products TESCO sets the price of each product. The prices are set either higher, lower or exactly the same prices that are offered by competitors. This decision is actually based on how the competitor will respond to the set price. If there are few competitors in the market than the response of the competitor is very important part of this pricing strategy. Because if this is the shell than, when one competitor lowers the price the other competitor will also lower theirs in order to be more competitive.By using this this pricing constitution the companies can relatively quickly set their prices and as this strategy does not require accurate market data therefore it requires very flyspeck effort to carry it out. Competitive pri cing also makes distributors more receptive to a companys products because they are priced within the range the distributor already handles. Furthermore, this pricing policy enables companies to select from a variety of different pricing strategies to achieve their strategic goals. In other words, companies can choose to mark their prices above, below, or on par with their competitors prices and thereby influence customer perceptions of their products.2.1. Apply forecasting techniques to make cost and revenue decisions in an organizationAssumptions for Forecasted Income StatementThe revenues have increased by 5%.The cost of goods sold has increased by 2%The selling, general and admin expenses has been managed to bring down by 3%No further borrowing took place therefore interest expense is sameInterest income, income on equity investment and non-operating income has increased by 1%.All the unusual items will be same.Income value will be 25%.Minority interest in earning and earning f rom discounted operations will be same.NOTE All the figures are rounded off to one decimal place.Currency(Millions of British Pounds)As ofFeb 252012GBP% ChangeFeb 25 2013GBPRevenue64,539.05%67,766.0 heart REVENUE64,539.067,766.0Cost Of Goods Sold (cogs)59,278.02%60,464.0 realize PROFIT5,261.07,302.0Selling General Admin Expenses, Total(1,634.0)(3%)(1,585.0)Total OPERATING EXPENSES(1,634.0)(1,585.0)OPERATING INCOME3,627.05717.0Interest Expense(417.0) equivalent(417.0)Interest Income And Investment Income114.01%115.0NET sake EXPENSE(303.0)(302.0)Income On Equity Investments91.01%92.0 different Non-Operating Income (Expenses)44.01%44.0EBT3,459.05,551.0Impairment Of GoodwillSameGain On Sale Of Assets376.0Same376.0Other ridiculous ItemsSameEBT, INCLUDING UNUSUAL ITEMS3,835.05927.0Income Tax Expense879.0(25%)1482.0Minority Interest In Earnings(8.0)Same(8.0)Earnings From Continuing Operations2,956.04,445.0EARNINGS FROM DISCOUNTINUED OPERATIONS(142.0)Same(142.0)NET INCOME2,806.04,295.0NET INCOME TO COMMON INCLUDING EXTRA ITEMS2,806.04,295.0NET INCOME TO COMMON EXCLUDING EXTRA ITEMS2,948.04,437.0Assumptions for Forecasted balance SheetAll assets will increase by 3% notwithstanding the current assets. Current assets will increase by 5%.All current liabilities will increase by 4%.All long term liabilities will increase by 3.95%.Equity will increase by 5%.Currency inMillions of British PoundsAs ofFeb 252012GBP% ChangeFeb 25 2013GBPAssetshttp//investing.businessweek.com/ look into/images/px.gifhttp//investing.businessweek.com/ question/images/px.gifhttp//investing.businessweek.com/ seek/images/px.gifhttp//investing.businessweek.com/enquiry/images/px.gifCash And Equivalents2,305.05%http//investing.businessweek.com/ search/images/px.gifhttp//investing.businessweek.com/ look for/images/px.gifhttp//investing.businessweek.com/ investigate/images/px.gifhttp//investing.businessweek.com/ look into/images/px.gif2420.25Short-Term Investments1,243.0http//investing.businessweek.co m/ interrogation/images/px.gifhttp//investing.businessweek.com/ search/images/px.gifhttp//investing.businessweek.com/ investigate/images/px.gifhttp//investing.businessweek.com/ investigate/images/px.gif5%1305.15TOTAL CASH AND SHORT TERM INVESTMENTS3,548.0http//investing.businessweek.com/ seek/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif5%3725.4Accounts Receivable2,502.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif5%2627.1Notes Receivablehttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifOther Receivables2,244.0ht tp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif5%2356.2TOTAL RECEIVABLES4,746.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif5%4983.3Inventory3,598.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif5%3777.9Prepaid Expenses420.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif5%441Other Current Assets551.0http //investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif5%578.55TOTAL CURRENT ASSETS12,863.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif5%13506.15Gross Property Plant And Equipment34,772.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif3%35815.16Accumulated Depreciation-9,062.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/imag es/px.gif3%-9333.86NET PROPERTY PLANT AND EQUIPMENT25,710.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif3%26481.3Goodwill3,449.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif3%3552.47Long-Term Investments1,949.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif3%2007.47Accounts Receivable, Long Term1,901.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp// investing.businessweek.com/research/images/px.gif3%1958.03Loans Receivable, Long Termhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif3%Deferred Tax Assets, Long Term23.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif3%23.69Deferred Charges, Long Term677.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif3%697.31Other Intangibles492.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/rese arch/images/px.gifhttp//investing.businessweek.com/research/images/px.gif3%506.76Other Long-Term Assets3,717.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif3%3828.51TOTAL ASSETS50,781.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif52304.43http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifLIABILITIES EQUITYhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp// investing.businessweek.com/research/images/px.gifAccounts Payable5,971.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif4%6209.84Accrued Expenses2,612.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif4%2716.48Short-Term Borrowings415.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif4%431.6Current Portion Of Long-Term Debt/Capital plight1,423.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessw eek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif4%1479.92Current Portion Of Capital Lease Obligations32.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif4%33.28Current Income Taxes Payable416.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif4%432.64Other Current Liabilities, Total8,412.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif4%8748.48TOTAL CURRENT LIABILITIES19,249.0http//investing.businessweek.com/research/images/px.gifhttp//inves ting.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif4%20018.96Long-Term Debt9,777.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif3.95%10163.19Capital Leases134.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif3.95%139.293Minority Interest26.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif3.95%27.027Pension Other Post-Retirement Benefits1,872.0http//investing.businessweek.c om/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif3.95%1945.944Deferred Tax Liability Non-Current1,160.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif3.95%1205.82Other Non-Current Liabilities788.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif3.95%819.126TOTAL LIABILITIES32,980.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif3.95%34319 .36Common Stock402.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif5%422.1Additional Paid In Capital4,964.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif5%5212.2Retained Earnings12,164.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif5%12772.2exchequer Stock-18.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/p x.gif5%-18.9Comprehensive Income And Other263.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif5%276.15TOTAL COMMON EQUITY17,775.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif5%18663.75TOTAL EQUITY17,801.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif18,701.00TOTAL LIABILITIES AND EQUITY50,781.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing .businessweek.com/research/images/px.gif52304.432.2 Assess the sources of funds available to an organization for a specific projectThere are two sources of capitalEquity backingRetained netPublic stock salePartnersVenture capital companiesCorporationsDebt financingAsset based financingVendor financingCommercial banksBut all of the above sources are not suitable for Tesco. It already has floated its stocks in the market therefore only following few sources of funds available to TescoRetained earningsThe well-kept earning directly affects the amount of dividend paid to the shareholders. Company can either use its profits as retained earnings or reinvest them or they can give it away as dividend. There are different reasons because of which it is better to use retained earnings to finance the new project instead of giving it as dividend such as company does not have to borrow it and then pay interest on the loan which will incur extra cost. The dividend policy is devised by the direc tors and they prefer to use retained earnings as an attractive source of fund.Bank lendingBanks are also another important source of funds these days. They lend money to business organisation and charge interest rate on it. The banks lend short term loans in terms of overdraft and short term loans. An overdraft is given by bank which company has to pay back within the set limits. The interest is charged but at a variable rate. Whereas the short term loan is the loan extended by bank for the period of up to three years. Medium loans are another type of loans that are given by banks for the time period of more than three years. The type of loan extended by the bank depends on the credit history of the company.LeasingThere are two types of parties in a lease agreement i.e. lessee and lessor. Lessor is the person who is the owner of the asset and lessee is the person who is willing to use that asset with the payment of definite amount of money. The agreement is signed between two parti es after which lessee is allowed to use the asset but he has to make certain amount of payments for certain period of time. We can say that lease is another type of rental. There are different types of assets that can be leased out such as building, house, inflict furniture, equipment and vehicles and so on There are two different types of lease operating lease and finance lease. Operating lease is the lease of the equipment for the specified period of time and the lessor has the responsibility of the maintenance of that equipment. The lease period is fairly short. Whereas in finance lease the agreement of lease is relatively long in most cases it is the expect life of the asset that is to be leased.FranchisingThis is another attractive source of financing the new business venture for many business organisations. This method requires less financing for business organisation to expand. Two parties are involved in franchising agreement that is franchisor and franchisee. The franchis or gives a right to franchisee to operate its business using the franchisors name but in return franchisee has to pay certain amount of money. The franchisee has to pay an upfront fee to franchisor that covers the business set up cost and then monthly or per year payments are made that is certain percentage of the franchisee profit.3.1 select appropriate budgetary targets for an organizationThe budgeting is very important and essential part of any organisation as it is similar to financial plan that shows the allocation of the financial funds that are available to an organisation to different expenditures. The main drivers of the budget of any organisation are the mission, vision and objectives of that specific organisation. The budget of the business organisation includes different variablesRevenuesExpensessalesoutputoperating costfixed costprofitscash inclinecapital investmentThe budget of the organisation of the coming year is based on certain key assumptions that are made abou t the most plausibly business conditions of the organisation. This help to produce a detailed budget of the organisation which includes monthly sales level, the overall production and also the different expenditures. Business organisations should have flexible budget so that they can easily mould with changing external conditions. For example the actual sales can be higher than the expect value so it is important to change the budget and to increase the costs related to it such as overhead cost, variable cost, labour cost etc.3.2 participate in the creation of a master budget for an organization sales (in billions)1st Quarter 33,0002nd Quarter 30,0003rd Quarter 32,000quaternary Quarter 36,000Costs (in billions)1st Quarter 29,0002nd Quarter 29,8003rd Quarter 29,9704th Quarter 31,250Selling Expenses (in billions)Variable cost 3% of SalesFixed cost (divided in fo