Sample Term Paper on Pricing Decisions and Cost Management

Pricing Decisions and Cost Management

Introduction

Accounting is an important sector in any organization. It is through this department that the firm’s managers compute and make all the financial decisions that directly or indirectly affect the company. Managerial accounting, also called management accounting, refers to the process in which managers identify, analyze, record, and present financial information that the managers use for internal planning controls and decision-making activities of an organization. Managers within a firm use managerial accounting information for planning and controlling issues to do with budgeting, pricing, production, and prices to charge for all the goods and services offers by the firm. Managerial accounting is also applied in decision making procedures as well as measuring performance within the organization. Managerial accounting is divided into different branches as fits many financial obligations in a company. This paper, therefore, is a discussion of the importance of pricing decision-making and cost management as brunches of cost management accounting.

Pricing Decisions

Every organization that take part in the production of goods and services must put a value to it, therefore, pricing is the amount of money that a company charges for the goods and services they offer. Prentice Hall states (2000) that in order to maximize operating income, organizations aim at producing and selling units as longs as the revenue from additional unit exceed the cost of production. This means that organizations need to produce materials and retail the products at a profit to meet the cost of production as well as make more revenue for the company.

A study done by IMA (2012), states that companies must be able to manage cost and prices effectively, in order to survive in the ever-increasing competitive environment. Proper management of prices and costs will ensure that the company monitors their production costs and the prices they charge for their items in order to realize profits and be able to sustain production activities in the firm. The authors also indicate that the long term success of any firm depends on whether the prices charged for goods and services supersedes costs of production, this way the company if able to make a profit. Hence, the formula for calculating profit; Profit = selling price – cost of production holds (IMA, 2012).

The profit accrued from the sales of goods and services of the company perform functions such as providing enough money for funding further growth, delivering adequate returns to investors and financing reinvestments in the organization. It is from the profit that the company also uses for paying its employees and meeting other miscellaneous activities like purchasing machines, ensuring continued research and development in the firm, ensuring marketing activities as well as expanding the operations to other regions (IMA. 2012).

Evidently, pricing decision refers to the collective decisions that a firm makes concerning the amount of prices to charge for its products and services (Hsu, 20016). Even though there is no universal formula for setting prices of goods and services in any organization, it is important for managers to note that pricing decisions are very important and can decide whether a business succeeds or fails. Therefore, when setting prices, the mangers must be keen on the values they place for each commodity bearing in mind that they are most likely to discourage clients if they set very high prices. On the other hand, very low prices pose the risk of making loses and the company may not be able to cover costs (Hsu, 20016).

The outcome of the relationship between demand and supply of a good or service determines the price that the organization will charge for that particular product. Weil, Stickney and Maher (2011) have stated that the three most important factors that influence pricing decisions of an organization are clients, costs and competitors. Customers influence the value of products and services based on the demand they put on the commodities. High demands for products means high supply hence high profits, however, when setting the price for the highly demanded commodities managers must be careful not to over price so that they do not scare clients away from the business. The behavior of clients towards the product of a company is a significant factor that must be considered. Research shows that customer behavior should be considered when valuing goods and services since their behavior change as time goes by and as they encounter many products that from other institutions. Hence pricing an organizations goods and services should be an activity that is constantly monitored in order to maintain and attract more clients through placing fair values (Weil et al., 2011).

Commodities that can affect the prices of products within a given company refer to those goods and services sold or offered by other competitors. In business there will be many competitors who are experts in coming up with substitute goods that also serve to meet client demands at relatively lower prices. Substitute goods can affect prices in one company because they serve the same purpose and are charged at lower values. They will attract more customers hence drawing them from their original company in which they are considered loyal customers. Therefore, it is important for managers to take note of competitors; the substitute product they offer, and carry put a thorough survey on different market prices and finally come up with reasonable prices that will draw more customers to their business.

Costs in any form affect the prices charged for a commodity because they influence supply and demand of the same. High costs of supplying goods and making services is away might ensure that the company is under stocked of being unable to purchase enough products for the firm. Productions costs also affect pricing decisions because firms usually place prices depending on amount of goods and services made and how much it was used for creating the (Guan, Mowen & Hansen, 20017). If the costs of production are high, the company might be force to charge higher prices for the commodities, an action which might greatly affect their operations since higher prices tend to scare clients.

On the other hand, costs in any company influence prices because they have direct effect on supplies, this is because most companies are willing to supply larger amounts of goods if the cost relative to prices are reasonably low and they can afford it (Guan et al., 20017). Organizations deal with various types of costs that directly influence prices they charge for their goods and services, hence managers must ensure that they first consider all the types of costs that the company deal with before setting prices on any good or service offered there in.

When coming up with prices for goods and services of a company, the managers must consider their target price which if the value they want to accord for each good and service. They should consider factors such as time horizons for pricing decision making. Factors such long-term price and short term prices should be considered for various types of services and goods offered. Long-term price decisions refer to those prices that are meant to last longer than a year. They are charged depending on the number of goods sold and the quantity of services rendered (Guan et al., 20017). For example, any person buying commodities in large scale will have a reduced price (discount) offered to encourage them to comeback on several occasions. Those who purchase merchandise in small quantities and seek services occasionally also have prices that best suit their capabilities. These are called short-term prices and last only for a year.

Once the target price has been decided, the managers must implement the target value and target amounts for each poroduct. Steps such as manufacturing or developing a product that best suits the needs of potential clients must be considered because it is impossible to put a value for any good that is not yet known. The target value is the price placed on the product as its face value; the managers then come up with an intended cost for each product (Prentice Hall, 2000). This is the amount of money to charged for every unit purchased by customers, the number of units can vary from one to many and the more the number of units the cheaper than those who buy single products or less quantities of the same. The managers should finally carry out value engineering to be able to attain the expected charges. Value engineering refers to the methodical examination of all the factors in the value chain of the operations in the business with the aim of lowering costs while satisfying the needs of clients (IMA, 2012).

Cost Management

Cost management in any business as especially businesses in the current day has become of very important. Managing costs strategically in a company is a factor that managers should consider, as it will enable them to know the types of prices to offer for service they provide in order to maintain longevity and competitiveness and accrue more profits in the organization. A properly designed cost management process elevates the possibility of making good pricing decisions within a company (Shank, 1993). There are many types of costs that managers in a company must consider such as production costs, marketing, advertising, manufacturing, repair and maintenance, research and development as well as the costs for expanding business organizations and paying employees. Proper management of all these cost will ensure that they are rightly met and hence the company will realize profits.

The use of cost management in any form enables the managers to effectively consider factors such as cost behavior, cost feasibility, cost relevance , cost traceability and the factor that drive costs in the firm (Gupta, 2009). They apply the use of traditional methods to trace the cost to its final object in the firm, this way the managers are able to know the amounts that have been used for producing a given merchandise and how its costs have been behaving both un production and profits so as to focus what the costs of the same object will be in future. The managers will be able to offer final views on costs such as drivers consumed, resources used and activities used during cost estimation and cost management procedures.

Studies by Goldbach and Seuring (2002) cost management knowledge enable the company to consider cost leadership and cost differentiation for their products. They state that a firm may be a leader in producing large quantities of product but might not be able to effectively differentiate the cost for their products. For example, they might be producing much but charging less. On the other hand, another firm might be producing less and charging much. At the end of any business day, the most important thing is for a firm to ensure that their costs meet their demand and the demands of customers (Goldbach & Seuring, 2002). Whatever they use as cost must be directly related to their intended goals as well   make it possible for them to achieve all the required cost managerial decisions to ensure growth n the business.

Companies should consider the five important factors of cost management activities in the organization. The managers must be able to estimate capability costs (Saladis & Kerzner, 2010). These costs help managers to simplify and reduce the amount of money to be incurred in funding many other activities in the firm. It is important to be able to reduce costs so that the company can be able to finance their entire project. Cost capabilities make it possible for the managers to consider other things like manpower required to carry out activities in the firm.

In addition, the cost management aspects must offer solution that give easy access to benchmark prices from past accounting information (Saladis & Kerzner, 2010). The cost capability aspects will enable you to identify any variations in performance during the project so that any necessary adjustments can be made. The managers must check if the software that the company uses provides the capability for third parties to introduce and use estimates using methods such as spreadsheets or text files, which are very valuable in any cost management procedures of a company.

The company should also consider cost management software that can be used by companies in coming up with desirable costs that will lead to cost differentiation and cost leadership. Many organizations are operating in the current day when technology is considered a handy tool in making various decisions in businesses (Saladis & Kerzner, 2010). Therefore, it is important for the managers to use software programs that are easy to utilize and understand. The form of technology should be one that is updated and can do modern day cost management processes without failing the organization.

Cost management procedures are methods that involve accessing, analyzing and reporting financial activities of a company (Shields, Hopwood & Chapman, 2006). Hence, the method chosen by the managers to be used must be one that offers effective reporting methods. Therefore, the cost management instrument of an organization must provide different reporting alternative to the management and the individuals involved in the formulation of the process. The tool must contain intuitive features that can be used for providing reports that enable a manger to modify reports quickly and easily within a specified time.

If making the company report requires some kind of user manual or the aid of an external consultant, then the managers should consider applying a different choice or better still seeking the help of an expert (Shields et al., 2006).  When using platform such as cloud technology, the technicians must ensure secure sharing in the field for clear visibility, which is also necessary when it comes to computing reports.

Cost management decisions are usually considered as major project within the company, the managers need to ensure that their project performance measurement standards that relate to cost management are up to date and running properly (Zander, 2006). As the business manager, it is very important to ensure the cost management projects adhere to the program and is within the stated budget. After that, it is important to have the ability to observe and follow overall cost management status in real time in the business at all time until the cost management and pricing decisions are completed.

The manager must ensure easy accessibility to performance evaluation methods against the firm’s budget, projection, actual calculated costs, and other major indicators are important. Tool of performance measurement allows those involved to sight problems posed by the budget or company programs so that they can take immediate action for correcting and getting the project back on track as soon as possible (Zander, 2006). Therefore, all those individuals involved n the cost management project decision-making must be people who have adequate knowledge of the steps to be taken as well as factors to consider when coming up with costs of a company.

Other costs such as locked in costs should also be considered. Locked in costs  refer to the expenses that have not yet been met, however, they rely on resolutions that have already been taken. They are also costs that will be incurred in the future (designed in costs) (Goldbach & Seuring, 2002). The costs of stock, revenues, depreciation, production, manufacturing and marketing among other things must be considered by managers during cost management procedures. These are some of the avenues that the company use for getting and using money, hence must be carefully considered at all times. Managers must be able to compute the necessary cost and other factors such as operating income I order to know how the prices will be distributed evenly to help cover future activities within the organization (Shields et al., 2006). They must aim at leaving nothing to chance as any slight mistake during cost management process might lead to poor allocation of profits that might cost the firm dearly.

Conclusion

Decision about prices and the management of costs are very important features of any firm. The pricing decision makes it possible for the company to identify and manufacture products and services that best suits their target customers. They will then decide how much of each commodity to be manufactured and what value to charge of each of them. Cost management on the other hand ensures that the managers evaluate all the tools and aspects that will ensure profitability within the organization. It is through cost management that the company can decide to be either a leader or engage in differentiating costs as best suits their operations. Therefore, it is important for any firm to organize its activities well in order to achieve the set target

References

Guan, L., Mowen, M. & Hansen, D. (2001). Cost management: Accounting and control. Belmont, CA: Cengage Learning

Gupta, K. (2009). Cost management: measuring, monitoring and motivating performance. India: Global India Publication

Goldbach, M. & Seuring, S. (2002). Cost management in supply chains. New York, NY: Springer

Hsu, S. (20016). The use of cost information in pricing decisions and cost management strategies. Madison: University of Wisconsin

IMA. (2012). Wiley CMA learning system exam review 2013, financial decision making, online intensive review + test bank. New York, NY: John Willey & Sons

Prentice Hall states (2000). Cost accounting: A managerial emphasis

Saladis, F. & Kerzner, H. (2010). Project management workbook and PMP / CAPM exam study guide. New York, NY: John Willey & Sons

Shank, J. (1993). Strategic cost management: The new tool for competitive advantage. New York, NY: Simon & Schuster

Shields, M., Hopwood, A. & Chapman, C. (2006). Handbook of management accounting research. New York, NY: Elsevier

Weil, R., Stickney, C. and Maher, M. (2011). Managerial accounting: An introduction to concepts, methods and uses. Belmont, CA: Cengage Learning

Zander, M. (2006).Supply Chain Cost Control Using Activity-Based Management. New York, NY: CRC Press