Pricing and Costing Methods Essay

Organizations today more than of all time before must guarantee that they cut down costs every bit good. as the clip used to avail merchandises and services to the market. Since planning every bit good as the appraisal of costs are critical to concerns it is of import that organisations chose the best pricing and bing techniques. ( Seonen. 2006 ) . The deduction here is that the cardinal end of any concern concern is to minimise its costs of operation while maximising its returns to the stockholders.

In order to accomplish this. there is demand to set in topographic point the best pricing policies every bit good as the most appropriate costing techniques. This paper will try to analyze the assorted costing every bit good as pricing methods that are available for usage by concern organisations. Traditional costs estimation methods like fringy and soaking up costing will be looked at. Equally the newer bing method. the activity based costing will be discussed alongside other pricing methods. ( Seonen. 2006 ) Pricing Methods Average cost pricing One illustration of pricing methods is the mean cost pricing.

Average cost pricing as a cost method involves the computation of mean costs per unit. To obtain this. the entire cost of goods available for sale is divided by the entire units available for sale. The leaden mean attack is applied to all the shutting stock lists. ( Duffie. 1992 ) The disadvantage with this method is the fact that it ignores the effects of cost additions every bit good as lessenings. This is normally due to the fact that cost of shuting stock list calculated under this class is normally affected the monetary values paid in the full twelvemonth every bit good as the cost of the gap stock.

The method therefore ignores more recent costs which are more dependable in income finding and determination devising. Pricing methods Cost plus pricing: this is one of the pricing methods where by the monetary value for a given merchandise or service is the amount of the existent cost of the merchandise or service plus a net income border. This method of pricing is largely used as an interim contractual step. ( Lintner 1965 ) The major advantage of this method is that it’s easy to cipher and necessitate small information in calculating the undertaking costs and therefore largely used in pricing authorities contracts.

The other manus this method has come under crisp unfavorable judgment for promoting uneconomical outgos in authorities contracts coupled by corruptness. The other pricing method is the option pricing method that is normally used in the motor vehicle industry. ( Birge. 1997 ) option pricing method is fundamentally where by an organisation monetary values its merchandises in a manner that it provides a basal monetary value for its merchandises which in most instances is ever low to pull clients who upon sing the shop find other merchandise accoutrements that can be purchased and added to the merchandise.

For illustration most vehicle fabrication companies will supply a basal monetary value for their autos and utilize their salesrooms to market other merchandise parts like the auto music systems. dismaies e. t. c. Capital plus pricing theoretical account ( CAPM ) is another pricing attack that can be used in the fiscal sector. ( Lintner 1965. pp. 12-39 ) it fundamentally based on the investors ability to put in many other foreparts ( divest ) without extra costs. this attack is advantageous in that any future hard currency flows can easy be monitored with merely cognizing the investings correlativity with the market. market hazard premium every bit good as the hazard free rates.

Comparable uncontrolled monetary value method ( CUP ) . this is a method that seeks to set up the ALP. through comparing the controlled and the uncontrolled dealing in relation to the plus or service that has been transferred. ( Duffie. 1992 ) this method is largely used in proviso of loan by fiscal establishments as good by other organisations that sell intangibles.

Resale monetary value method. this is a method that seeks to measure the procedure of activities performed or done instead than the eventual end product ( merchandise ) ( Lintner. 1965. pp. 2-37 ) its commonly used in cases where the reseller do non add any meaningful value to the finished merchandise and no physical alterations are made on the merchandise. the eventual resale monetary value is determined by the resale monetary value of a trade good so deducting the gross net income border achieved from the resale every bit good as all the disbursals incurred. before geting at the resale monetary value of the trade good

Bid pricing: This is a method of pricing that is normally used in the stock exchange markets. it fundamentally involve the several clients puting commands or monetary values they would wish to buy the stocks of portions. and with the purchasers and the Sellerss. with the highest bidder buying the belongings. monetary value motions at times in the stock market ever leads to the uncertainness in the market monetary values. ( Sharpe. 1964. p. 425-442 )

Target pricing: This is a method of pricing where concern organisations monetary value their merchandises otherwise establishing on the different market sections that they target with their merchandises. the merchandises may non needfully hold diverse differences to warrant the difference in monetary values but the implicit in thought is to maximise on net income in market sections that can pay higher monetary values for the merchandise as this helps to cover on the lower section. where the merchandise may be priced lower. ( Dominick. 2008. p. )

The basic advantage of this pricing method is that it enables a company to gain higher net incomes without needfully increasing production costs since it’s the same merchandise that is sold to different mark markets. Target pricing is by and large common in the nomadic phone industry where the same appliances with minor alteration are really sold to different mark markets at different monetary values Costing Methods Marginal bing This method besides known as the direct coasting method has the chief feature of bear downing all the fabrication or merchandise costs to the merchandise irrespective of whether the costs are variable or fixed. Lucey. 1993 )

This method is utile in pricing determinations that are short term in nature in finding the least monetary value that can be charged to a merchandise below which losingss will happen. The deduction here is that fringy or direct costing as a traditional costing method suffers from the major drawback of simplism because it tends to use merely the volume of the merchandise. Job costing is the method of bing where the seashore of a merchandise or service is determined by apportioning costs ton a peculiar unit. a batch or even to a batch of the merchandise or service. It is more or less the same as batch costing.

Precisely. occupation bing method is applicable where good and services are produced as a consequence of a series of uninterrupted operations. It is therefore considered a merchandise costing technique in which instance accent is laid on the finding of the cost of a unit merchandise. ( Sobngwi. 2007 ) Absorption bing It has been the pattern of many houses to bear down fabricating operating expenses on the footing of direct costs like direct labor. The technique used tended to differ in footings of inside informations every bit good as allotment bases. Some systems employ a individual base like entire direct cost while others use several bases like direct labor and natural stuffs.

Absorption bing as a method of bing allocates all the costs to the objects of the cost. This normally happen based on direct costs or even physical end product steps. Marginal cost allotments are of import for many managerial determinations like the rating of stock every bit good as computation of net incomes. ( Sobngwi. 2007 ) The method may nevertheless non be really appropriate for merchandise scope determinations since the net net income figure from this technique tends to be unsatisfactory base for merchandise scope determinations. Allotment of disbursals between two sections may be hard.

One section may for illustration have a to the full developed merchandise which could necessitate merely a small development resources while the other section could be in demand of full development. In such a instance spliting the costs will therefore be inaccurate. This has the deduction that there is uncertainness as to whether dropping one merchandise line would take to a decrease of the entire disbursals allocated to that merchandise. ( Bjornlund & A ; Rossini 2005 ) . Activity Based Costing ( ABC ) The activity based costing ( ABC ) was developed as a reaction to the defects of the fringy and soaking up bing methods.

This method gives a description of the activity in operating expense sections which can be recognized by both the departmental directors every bit good being driven by cost factors. The cost factors are normally the features of the merchandises s good as other cost objects. ABC is normally a two measure procedure. First. the costs of similar activities in assorted overhead centres are collected. In this instance the entire direct cost of each section is so charged to each activity based on its usage of entire capacity every bit good as the sum of all the costs of all activities collected from all the sections in activity cost pools. Seonen. 2006 )

Second. the cost thrusts of each cost pool are identified after which cost drivers are quantified and the allotments to merchandise costs derived. ( Seonen. 2006 ) There are normally many assortments of cost drivers to take from in an effort to explicate the costs of an object. The bottom line nevertheless is that they have to be capable of being quantified in footings of both the cost pool every bit good as the cost objects. Decision There is ever need for consistence every bit good as standardisation of the methods of fiscal pricing and bing methods have been recognized. Adam et EL. 2003 )

This has led to the inventions of many sets of guidelines for both economic ratings and costs. In the concluding analysis therefore. fluctuations in cost methods that are normally used in concern organisations have raised many inquiries ensuing into the inability to compare the consequences of assorted bing every bit good as pricing methods. However in order to accomplish both the transferability every bit good be able to generalise consequences there is need to use unvarying cost pricing and appraisal methods in order to minimise any opportunities of fluctuations.