The Importance Of Costs In The Pricing Strategy Accounting Essay

The Importance Of embody In The Pricing Strategy Accounting EssayIt is very(prenominal)(prenominal) essential for companies to bring forth a good set dodge as it than permits them to fix good mathematical functionfulness margin on its product or run and at the com scoreable clipping making it appealing to the customers. Pricing strategies be very serious part of occupation and varied brass section extend large conglutination of money and effort to devise effective and high-octane pricing strategies.Following atomic number 18 different types of pricing strategies that different phone line system of ruless use in order to attract customers and at the same time to earn inter internetCompetition PricingPsychological Pricing greet base PricingPrice Skimming.Absorption addressThe formula that is utilize by different validations to calculate the damage is selling price. = Cost + profitCost ground pricingOne of the strategies is appeal found pricing. This sch ema involves archetypal the calculation of the persistent constitute and the variable star salute of the limited product or do that is offered by an constitution. Once the total embody is calculated than the profit margin is added to each unit i.e. it raft 5%, 7% or 9%. The cost based pricing strategy is very efficient strategy as it crossbreeds all the cost associate to product and service and it also covers the desired profit.Although this strategy looks very wide-eyed and easy to use and managers only have to do rough fiscal calculations in order to de margeine the price of the product or service that is being delivered. But the problem with this strategy is that it doesnt consider the external factors much(prenominal) as market or the competition that also have grand impact on pricing. But as this strategy is very senile and the organisation only has to process the internal information to calculate the price thats why it is very popular. The organisation can als o justify the prices that have been allocated on the basis of their cost and also prove that the price is the sum of the total cost and the profit.Absorption cost principlesAbsorption costing is some some other costing technique that is widely used it involves the allocation of all the cost 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 make profit in future or non. During the cost allocation process some assumptions atomic number 18 also made as some costs be fixed and some atomic number 18 variable which depend on the take aim of production.When absorption costing system is used the profit that ar describe by the organisation depend on the level of production and the level of sales by the theatre, this is due to the fact the fixed manufacturing overhead is captive in the apprize of work in progress goods and also in the finished goods. But if at the end of the accounting point the timeworn is not sold out than the fixed manufacturing overhead cost is transferred to the following period.Marginal costing principlesMarginal costing is other significant costing strategy. This strategy contributes importance to the behavioural characteristics of the costs. The two genes of the cost atomic number 18 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 no matter 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 blameless. But this costing strategy is very helpful for business organisations to achieve different activities much(prenominal) as decision making and short confines planning. In this costing system the variable cost is subtracted from the sales taxation to calculate the contribution margin of each product i.e. the sum 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 inwardly an administration.The world was hit by the recession in 2007. Now it is been to a greater extent than six stratums but still m all countries ar not able to get rid of it and most of the countries atomic number 18 go about the later on effects. The economy has been badly affected by the recession. And therefore business organisations be also giving more attention to the financial aspects of the firm. The business organisations atomic number 18 trying to be prep atomic number 18d for such kind of disasters by using various accounting tools that helps them to closely evaluate their performance whether it is financial or manageme nt 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 costing 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 resource management and does not give the accurate cost of the business activities. in that respect are different costing systems some of them are mentioned above but the three costing systems that are gaining more attention are very popular among business organisations areActivities-Based cost SystemAbsorption Costing SystemDirect Costing SystemTESCO is a multinational grocery store with millions of turn-over every 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. Therefore the best costing system for TESCO is bodily process based costing or ABC system. According to Dekker (2003) the fundamental principle of the activity based costing revolves around value chain analysis and merged cost evaluation and the sales information that is associated with the supply chain of the organisation.TESCO requires the main(prenominal) costing hub rather than small different departments. It has more than 30,000 products and therefore it is very difficult to keep track 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 situation due to overhead cost allocation. Activity based costing system has two divers slew based and non-volume based. The most fit costing system for TESCO is activity based costing as it helps the o rganisation 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 policy should be used by TESCO. This strategy helps the firm to pin down the price 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 competitors 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 fewer competitors in the market than the response of the competitor is very important part of this pricing strategy. Because if this is the case 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 policy the companies can comparatively quickly set their prices and as this strategy does not require accurate market data therefore it requires very little effort to take on it out. Competitive pricing 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 convey 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, commonplace 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%. every the ridiculous items will be same.Income tax will be 25%.nonage interest in earning and earning from 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 nub REVENUE64,539.067,766.0Cost Of Goods Sold (cogs)59,278.02%60,464.0GROSS PROFIT5,261.07,302.0Selling General Admin expenditures, Total(1,634.0)(3%)(1,585.0)Total OPERATING write downS(1,634.0)(1,585.0)OPERATING INCOME3,627.05717.0Interest Expense(417.0)Same(417.0)Interest Income And Investment Income114.01%115.0NET INTEREST EXPENSE(303.0)(302.0)Income On justice Investments91.01%92.0 another(prenominal) Non-Operating Income (Expenses)44.01%44.0EBT3,459.05,551.0Impairment Of thanksgivingSameGain On Sale Of Assets376.0Same376.0 Other odd ItemsSameEBT, INCLUDING UNUSUAL ITEMS3,835.05927.0Income revenue enhancement Expense879.0(25%)1482.0Minority Interest In Earnings(8.0)Same(8.0)Earnings From Continuing Operations2,956.04,445.0EARNINGS FROM DISCOUNTINUED trading operations(142.0)Same(142.0)NET INCOME2,806.04,295.0NET INCOME TO unwashed 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% except the current assets. live assets will increase by 5%.All current liabilities will increase by 4%.All long term liabilities will increase by 3.95%. rectitude will increase by 5%.Currency inMillions of British PoundsAs ofFeb 252012GBP% ChangeFeb 25 2013GBPAssetshttp//investing.businessweek.com/ query/images/px.gifhttp//investing.businessweek.com/ look for/images/px.gifhttp//investing.businessweek.com/ interrogation/images/px.gifhttp//investing.businessweek.com/ interrogation/images/px.gifCash And Equivalent s2,305.05%http//investing.businessweek.com/ question/images/px.gifhttp//investing.businessweek.com/ look into/images/px.gifhttp//investing.businessweek.com/ look into/images/px.gifhttp//investing.businessweek.com/ look/images/px.gif2420.25Short-Term Investments1,243.0http//investing.businessweek.com/ investigate/images/px.gifhttp//investing.businessweek.com/ inquiry/images/px.gifhttp//investing.businessweek.com/ seek/images/px.gifhttp//investing.businessweek.com/ inquiry/images/px.gif5%1305.15TOTAL immediate payment AND SHORT TERM INVESTMENTS3,548.0http//investing.businessweek.com/ inquiry/images/px.gifhttp//investing.businessweek.com/ explore/images/px.gifhttp//investing.businessweek.com/ explore/images/px.gifhttp//investing.businessweek.com/ look into/images/px.gif5%3725.4Accounts receivable2,502.0http//investing.businessweek.com/ query/images/px.gifhttp//investing.businessweek.com/ investigate/images/px.gifhttp//investing.businessweek.com/ seek/images/px.gifhttp//investing.bu sinessweek.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 Receivables2,244.0http//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%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.co m/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 contemporary 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 menstruum 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%13506.15 tax income 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%35815.16 salt forth 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/images/px.gif3%-9333.86NET topographic point 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%3552.47 enormous-Term Investments1,949.0http//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/im ages/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/research/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.b usinessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifLIABILITIES faithfulnesshttp//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.bu sinessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gifhttp//investing.businessweek.com/research/images/px.gif4%431.6Current voice Of Long-Term Debt/ bully Lease1,423.0http//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%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//investing.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.gi f3.95%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%27.027 reward Other Post-Retirement Benefits1,872.0http//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%1945.944Deferred Tax indebtedness 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%422.1 surplus 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//invest ing.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/px.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 bills available to an organization for a specific projectThere are two sources of capitalEquity financingRetained earningsPublic stock salePartners surmisal capital companiesCorporationsDebt financingAsset based financingVendor financingCommercial boundsBut 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 maintained earning directly affects the amount of dividend paid to the shareholders. Company can either use its profits as retained ea rnings 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 loanword which will incur purposeless cost. The dividend policy is devised by the directors 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 yea rs. The type of loan extended by the bank depends on the credit history of the company.LeasingThere are two types of parties in a drive agreement i.e. lessee and lessor. Lessor is the person who is the proprietor of the asset and lessee is the person who is willing to use that asset with the payment of indisputable amount of money. The agreement is signed between two parties after which lessee is allowed to use the asset but he has to make certain(a) 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, land furniture, equipment and vehicles and so forth 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 le ase is relatively long in most cases it is the expected life of the asset that is to be leased.FranchisingThis is another attractive source of financing the new business run a risk 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 franchisor gives a near to franchisee to operate its business using the franchisors name but in paying back 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 annual payments are made that is certain percentage of the franchisee profit.3.1 select appropriate cypherary 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 expen ditures. 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 flowcapital investmentThe budget of the organisation of the coming year is based on certain key assumptions that are made about the most likely business conditions of the organisation. This help to take a leak a detailed budget of the organisation which includes monthly sales level, the boilers suit production and also the different expenditures. Business organisations should have flexible budget so that they can easily mould with changing external conditions. For illustration the actual sales can be higher than the expected value so it is important to change the budget and to increase the costs related to to it such as overhead cost, variable cost, labour cost etc.3.2 participate in the creation of a master budget for an organizationSales (in billions)1st tush 33,0002nd pull out 30,0003rd Quarter 32,0004th 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