Kế toán, kiểm toán - Chapter 19: Pricing and product mix decisions

Chapter 19Pricing and product mix decisions1Major influences on pricing decisionsMarket positioningProduct costCustomer valueCompetitor behaviourLegal, political and ethical issuesCost forms the lower limit of the price, and customer value the upper limit2Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-Smith3Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithMajor influences on pricing decisionMarket positioningCompanies position themselves in certain markets and this may influence product pricesA firm with a reputation for very high quality and prestigious products may set a high price, consistent with that imageAn overemphasis on price cutting can damage a product’s image, and reduce profitabilitycontinued4Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithMajor influences on pricing decisionsProduct costsIn the long-term firms must produce at a cost below selling priceThe importance of product cost in price setting varies across industryEven when a firm sets a price below cost, it is still important to have an awareness of product costcontinued5Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithMajor influences on pricing decisionsCustomer valueUnderstanding customer value is a critical aspect in price settingThe difference between the value that a customer gains by owning and using a product, and the price paid for the productBusinesses must understand the specific aspects of a product or service that provide value to the customercontinued6Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithMajor influences on pricing decisionsCompetitors' behaviourCompetitors’ behaviour can effect a company’s pricing decisionsWhen considering the reaction of competitors management must take care to define its product and market correctlyPredicting competitors’ reactions to its products and pricing strategy is a difficult but important task for managementcontinued7Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithMajor influences on pricing decisionsLegal, political and ethical issuesManagers must adhere to the laws when setting pricesThe law generally prohibits companies from discriminating between customers in setting pricesPolitical pressures may lead to intervention in the setting of pricesEthical considerations may need to be considered, including deceptive practices8Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithEconomic profit-maximising modelsEconomic model focus on the optimal price and sales quantity that will maximise profitPrice elasticity is the impact on price changes on sales volumeCross elasticity is the extent to which a change in a product’s price can affect the demand for a substitute productcontinued9Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithEconomic profit-maximising modelsDemand is elastic if a price increase has a large negative impact on sales volumeDemand is inelastic if a price change has little or no impact on sales quantity10Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithLimitations of the economic modelDifficult to precisely determine the firm’s demand curve and marginal revenue curveMany factors affect product demandNot valid for all forms of marketsDifficulty of measuring marginal cost—most costing systems are not designed to do this11Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithPricing strategiesValue based pricingWhere customers’ perceptions of the value of the product or service guide the pricingEconomic value pricingSpecifically estimates the costs and benefits experienced by the customer, which extend beyond the initial purchase priceOften used in industrial markets12Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithUsing product costs in pricingProduct costs are used, to some degree, to set pricesDifficult to do thorough market analysis for all products—need quick, straightforward methods to set priceCosts give management a starting pointCost provides a floor below which price cannot be set in the long run 13Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithCost-plus pricingCost-based pricing formulasPrice = cost + (mark-up percentage x cost)Mark-up percentage is dependent on the type of costing usedTwo issuesWhat is the best definition of cost to be used in the cost-plus pricing formula?How is the desired mark-up determined?14Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithProduct costing definitionsAbsorption cost pricing formulasProvide a justifiable price—perceived to be equitable to all partiesUsually provided by a firm’s costing system—cost-effective to use in pricingDisadvantagesObscures the cost behaviour patterns of the firm Not consistent with CVP analysiscontinued15Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithProduct costing definitionsVariable cost pricing formulasDoes not obscure the cost behaviour pattern by unitising fixed costs Variable cost data is useful for short-term pricing decisionsDisadvantages In the long-term prices must be set to cover all costs and a normal profit marginManagers must use high mark-up when using variable cost16Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithDetermining the mark-upReturn on investment pricingSelling price determined by using the required rate of return to determine the mark-up on costAverage investment x target ROI = target profit17Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithMark-up percentage18Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithTime and material pricingCost-plus pricing using separate labour and materials chargesLabour charge includes a charge for labour-related overhead and profit marginMaterial charge includes a charge for material-related overheadcontinued19Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithTime and material pricing20Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithCost-plus pricing: summary and evaluationEffective price setting requires a constant interplay of Market considerationsCost awarenessCost-plus pricing may be used to establish a pricing starting point continued21Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithCost-plus pricing: summary and evaluationCost-plus pricing formulas:Simple Can be applied mechanicallyAllow managers to update prices for multiple productsCan be used with a variety of cost definitions Mark-up percentages should take account of the cost definitions22Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithThe role of ABC in pricingConventional volume-based product costing systems may distort costs between product linesABCMeasures the extent to which each product consumes costs of key support activitiesWill provide more accurate cost figures on which to base prices23Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithStrategic pricing of new productsThe newer the concept of the product, the more difficult the pricing decisionSkimming pricingA high initial product price to reap high short-term profits on a new productOver time, the price will be loweredPenetration pricingA low initial price of a new product to attract market share 24Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithCompetitive biddingTwo or more companies submit sealed bids (or prices) for a product, service or project, to a potential buyerSimilar considerations as for accepting or rejecting a special orderExcess capacityIf price > incremental costs of producing the product, will contributes towards the company’s fixed cost and profitcontinued25Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithCompetitive biddingNo excess capacityIncremental costs still relevantOpportunity costs must be assessedA bid price should cover the opportunity costThe bid price may be higher than when excess capacity existsQualitative and strategic issues need to be considered26Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithLegal restrictions on pricingAustralian Competition and Consumer Commission (ACCC) has power to outlaw the following behavioursPredatory pricingPrice discrimination Resale price maintenance Price-fixing contracts27Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithProduct mix decisionsDetermining the most appropriate range of products to offer to consumersProduct mix decisions are linked to pricing as prices influenceProfitability Customer behaviour and competitors reactions28Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithTactical product mix decisions with limited resourcesTactical product mixUse contribution margin per unit of the scarce resource, not contribution margin per unitConsider implications of the decision on customer behaviour and competitor reactions Limited resources may include floor-space, machine time, raw materials, labour hoursMultiple scarce resources  use linear programming29Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-SmithLong-term product mix decisionsAll relevant costs are considered in the final decisionLoss-making products, firms can choose toIncrease product priceTry to reduce the cost of the productOffer customer incentives Retain the product as it is part of a range Discontinue the product30Copyright  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & HiltonSlides prepared by Kim Langfield-Smith