Target Costing and Cost Analysis for Pricing Decisions CHAPTER 15 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution.

Slides:



Advertisements
Similar presentations
Chapter 18 Pricing Concepts
Advertisements

Pricing Decisions and Cost Management
Target Costing and Cost Analysis for Pricing Decisions
Pricing Decisions and Cost Management
 Copyright 1999 Prentice Hall 10-1 Chapter 10 Pricing Products: Pricing Considerations and Approaches PRINCIPLES OF MARKETING Eighth Edition Philip Kotler.
CHAPTER 8 PRICING Study Objectives
9 - 1 ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton Chapter 9 Relevant Information and.
Accounting Information, Relevant Costs, and Decision Making
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-2 ARRIVING AT THE FINAL PRICE C HAPTER.
Acct 2220 – Chapter 3 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of.
Principles of Marketing
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Relevant Information and Decision.
Learning Goals Identify and define the internal factors affecting a firm’s pricing decisions Identify and define the external factors affecting pricing.
© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Steps in setting price.
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
Pricing Decisions EMBA 5411 Budgeting and Pricing.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license.
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Introduction.
Fundamentals of Cost Analysis for Decision Making Chapter 4 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.
The Pricing Decision and Customer Profitability Analysis
1 Copyright © 2008 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under.
Pricing Strategy …critical marketing mix variable actually produces revenue shortest term marketing mix variable relates directly to microeconomics supply.
Prepared by Debby Bloom-Hill CMA, CFM. CHAPTER 8 Pricing Decisions, Analyzing Customer Profitability, and Activity-Based Pricing Slide 8-2.
1 Bruce Bowhill University of Portsmouth ISBN: © 2008 John Wiley & Sons Ltd.
Variable Costing and Performance Reporting
PowerPoint Presentation by Charlie Cook The University of West Alabama Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
19-1 HANSEN & MOWEN Cost Management ACCOUNTING AND CONTROL.
Pricing and Profitability Analysis
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith.
Chapter 20 Pricing and product mix decisions
PRICE PLANNING AND STRATEGY
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
Chapter 11 Pricing and Credit Strategies Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 1 Pricing and Credit Strategies.
Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press Chapter 13 Price Determination.
25 Pricing Decisions, Including Target Costing and Transfer Pricing
Objectives Understand the internal factors affecting a firm’s pricing decisions. Understand the external factors affecting pricing decisions, including.
Copyright © 2003 Pearson Education Canada Inc. Slide Chapter 12 Pricing Decisions, Product Profitability Decisions, and Cost Management.
Chapter 17 Pricing and product mix decisions. Major influences on pricing decisions §Customer demand and reactions §Competitor behaviour §Costs l price.
1 1 Chapter 9 Pricing: Understanding and Capturing Customer Value.
Copyright © Houghton Mifflin Company. All rights reserved.1 Financial & Managerial Accounting 2002e Belverd E. Needles, Jr. Marian Powers Susan Crosson.
Pricing Decisions and Cost Management
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin Marketing Management, 8e Chapter Eleven Pricing Strategy Key Words / Outline.
PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright.
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin ARRIVING AT THE FINAL PRICE 14 C HAPTER.
Chapter 5 Strategic Planning Regarding Operating Processes Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.
COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. Cengage Learning and.
Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides.
Professor Chip Besio Cox School of Business Southern Methodist University.
Target Cost –Price Determined by Market Target Selling Price- Cost Plus Pricing Time and Material Pricing Transfer Pricing *Negotiated *Cost-based.
Accounting for Executives Week 8 6/5/2010 (Fri) Lecture 8.
Target Costing and Cost Analysis for Pricing Decisions
© John Wiley & Sons, 2005 Chapter 13: Joint Management of Revenues and Costs Eldenburg & Wolcott’s Cost Management, 1eSlide # 1 Cost Management Measuring,
Pricing Strategy.  Focus on the value of your product / service delivers  Value = perceived benefits Price Know your competitor Reward staff for sales.
18-1 Pricing and Profitability Analysis Basic Pricing Concepts Price Elasticity of Demand Measured as the percentage change in quantity divided.
© John Wiley & Sons, 2011 Chapter 13: Strategic Pricing and Cost Management Eldenburg & Wolcott’s Cost Management, 2e Slide # 1 Cost Management Measuring,
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler Introduction.
5 - 1 Chapter 5 Relevant Information and Decision Making: Marketing Decisions.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Pricing Decisions and Cost Management Chapter 12.
Chapter 10- slide 1 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Chapter Ten Pricing Concepts Understanding and Capturing Customer.
Pricing and product mix decisions
Prepared by Debby Bloom-Hill CMA, CFM
11 Pricing Decisions, Including Target Costing and Transfer Pricing
Chapter 8: Selecting an appropriate price level
Price strategy: Pricing Methods
© 2017 by McGraw-Hill Education
Relevant Information and Decision Making: Marketing Decisions
Managerial Accounting 2002e
© 2017 by McGraw-Hill Education
Target Costing and Cost Analysis for Pricing Decisions
Presentation transcript:

Target Costing and Cost Analysis for Pricing Decisions CHAPTER 15 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Major Influences on Pricing Decisions Pricing Decisions Political, legal, and image issues CompetitorsCosts Customer demand 15-2

How Are Prices Set? Costs Market Forces Prices are determined by the market, subject to costs that must be covered in the long run. Prices are based on costs, subject to reactions of customers and competitors. 15-3

Economic Profit-Maximizing Pricing Firms usually have flexibility in setting prices. The quantity sold usually declines as the price is increased. 15-4

Total Revenue Curve Total revenue Curve is increasing throughout its range, but at a declining rate Dollars Quantity sold per month 15-5

Total Cost Curve Dollars Quantity made per month Total cost increases at a declining rate Total cost increases at an increasing rate 15-6

Quantity made per month Marginal Cost Curve Marginal cost Dollars per unit Quantity where marginal cost begins to increase c 15-7

Determining the Profit-Maximizing Price and Quantity Total revenue Dollars Total cost Total profit at the profit-maximizing quantity and price, q* and p*. Quantity made and sold per month q* 15-8

Role of Accounting Product Costs in Pricing Sophisticated decision model and information requirements Simplified decision model and information requirements Optimal DecisionsSuboptimal Decisions Economic pricing modelCost-based pricing Marginal-cost and marginal-revenue data Accounting product- cost data More costlyLess costly The best approach, in terms of costs and benefits, typically lies between the extremes. Exh

Cost-Plus Pricing Price = cost + (markup percentage × cost) Variable manufacturing cost? Full-absorption manufacturing cost? Total cost, including selling and administrative? Total variable cost, including selling and administrative? 15-10

Cost-Plus Pricing - Example Variable mfg. cost$ 400 Fixed mfg. cost 250 Full-absorption mfg. cost$ 650 Variable S & A cost 50 Fixed S & A cost 100 Total cost$ 800 We will use this unit cost information to illustrate the relationship between cost and markup necessary to achieve the desired unit sales price of $

Cost-Plus Pricing - Example Variable mfg. cost$ 400 Fixed mfg. cost 250 Full-absorption mfg. cost$ 650 Variable S & A cost 50 Fixed S & A cost 100 Total cost$ 800 Price = cost + (markup percentage × cost) Price = $400 + (131.25% × $400) = $925 Markup on variable manufacturing cost

Cost-Plus Pricing - Example Variable mfg. cost$ 400 Fixed mfg. cost 250 Full-absorption mfg. cost$ 650 Variable S & A cost 50 Fixed S & A cost 100 Total cost$ 800 Price = cost + (markup percentage × cost) Price = $450 + (105.56% × $450) = $925 Markup on total var. cost As cost base increases, the required markup percentage declines

Cost-Plus Pricing - Example Variable mfg. cost$ 400 Fixed mfg. cost 250 Full-absorption mfg. cost$ 650 Variable S & A cost 50 Fixed S & A cost 100 Total cost$ 800 Price = cost + (markup percentage × cost) Price = $650 + (42.31% × $650) = $925 Markup on full mfg. cost As cost base increases, the required markup percentage declines

Cost-Plus Pricing - Example Variable mfg. cost$ 400 Fixed mfg. cost 250 Full-absorption mfg. cost$ 650 Variable S & A cost 50 Fixed S & A cost 100 Total cost$ 800 Price = cost + (markup percentage × cost) Price = $800 + (15.63% × $800) = $925 Markup on total cost As cost base increases, the required markup percentage declines

Absorption-Cost Pricing Formulas Advantages Price covers all costs. Perceived as equitable. Comparison with competitors. Absorption cost used for external reporting. Disadvantages Full-absorption unit price obscures the distinction between variable and fixed costs

Variable-Cost Pricing Formulas Advantages Does not obscure cost behavior patterns. Does not require fixed cost allocations. More useful for managers. Disadvantage Fixed costs may be overlooked in pricing decisions, resulting in prices that are too low to cover total costs

Determining the Markup: Return-on-Investment Pricing Solve for the markup percentage that will yield the desired return on investment

Price = cost + (markup percentage × cost) Price = $400 + (131.25% × $400) = $925 Recall the example using a percent markup on variable manufacturing cost. Determining the Markup: Return-on-Investment Pricing Let’s solve for the percent markup. Invested capital is $300,000, the desired ROI is 20 percent, and annual sales volume is 480 units

Determining the Markup: Return-on-Investment Pricing ROI = Income Invested Capital 20% = Income $300,000 Income = 20% × $300,000 Income = $60,000 Step 1: Solve for the income that will result in an ROI of 20 percent

Determining the Markup: Return-on-Investment Pricing Step 2: Recall the unit cost information below. Solve for the unit sales price necessary to result in an income of $60,000. Variable mfg. cost$ 400 Fixed mfg. cost 250 Full-absorption mfg. cost$ 650 Variable S & A cost 50 Fixed S & A cost 100 Total cost$

Determining the Markup: Return-on-Investment Pricing 480 units × (Unit sales price - $800 unit cost) = $60,000 Unit sales price - $800 unit cost = $60, units Unit sales price - $800 unit cost = $125 per unit 480 units × (Unit profit margin) = $60,000 Unit sales price = $925 Step 2: Solve for the unit sales price necessary to result in an income of $60,

Determining the Markup: Return-on-Investment Pricing Markup percentage Unit sales price - Unit variable cost Unit variable cost Step 3: Compute the markup percentage on the $400 variable manufacturing cost. = Markup percentage $925 per unit - $400 per unit $400 per unit = Markup percentage = percent 15-23

Strategic Pricing of New Products Uncertainties make pricing difficult. Production costs. Market acceptance. Pricing Strategies: Skimming – initial price is high with intent to gradually lower the price to appeal to a broader market. Market Penetration – initial price is low with intent to quickly gain market share

Target Costing Market research determines the price at which a new product will sell. Management computes a manufacturing cost that will provide an acceptable profit margin. Engineers and cost analysts design a product that can be made for the allowable cost

Target Costing Key principles of target costing Price led costing Focus on the customer Focus on product design Focus on process design Cross-functional teams Life-cycle costs Value-chain orientation 15-26

Time and Material Pricing Price is the sum of labor and material charges. Used by construction companies, printers, and professional service firms

Time and Material Pricing Time charges: Total labor hours required Hourly labor cost + Overhead cost per labor hour + Hourly charge to provide profit margin × Material Charges: Total material cost incurred + Overhead per dollar of material cost × Total material cost incurred 15-28

Competitive Bidding High bid price Low probability of winning bid High profit if winning bid Low bid price High probability of winning bid Low profit if winning bid 15-29

Competitive Bidding Guidelines for Bidding Bidder has excess capacity l Low bid price l Any bid price in excess of incremental costs of job will contribute to fixed costs and profit. Bidder has no excess capacity l High bid price l Bid price should be full cost plus normal profit margin as winning bid will displace existing work

Legal Restrictions On Setting Prices Price discrimination Predatory pricing 15-31

End of Chapter 15 What is the right price? 15-32