Professional Documents
Culture Documents
PATIL UNIVERSITY
COST ACCOUNTING
ASSIGNMENT
ON
RAJEEV MEHRA – 33
SACHIN SALUNKE – 37
A.B. NITIN – 47
AKSHAYA IYER – 48
IRAM USMANI – 49
SUMY THOMAS – 50
RONAK GALA – 51
ABRAHAM JEYRAJ – 52
SHRADHA KAMAT – 53
MANISHA DASAN – 57
VISHAL LALZARE – 35
1. INTRODUCTION.
2. WHEN CAN WE USE COST ANALYSIS.
3. WHY IS COST ANALYSIS IMPORTANT.
4. PRICING DECISIONS.
5. MAJOR INFLUENCES ON PRICING DECISIONS.
6. ECONOMIC PROFIT MAXIMISING MODEL.
7. ROLE OF ACCOUNTING PRODUCT COSTS IN PRICING.
8. DETERMINING THE MARKUP.
9. OTHER ISSUES.
10.ABC ELIMINATES DISTORTION.
11.LEGAL LIMITATIONS.
12.PRIMARY DATA OF THE COMPANY.
13.DESCRIPTION ABOUT THE PRODUCT.
14.QUESTIONAIRE.
15.BIBLIOGRAPHY.
Cost Analysis and Pricing Decisions
Introduction
Cost analysis is an economic evaluation technique that involves the systematic
collection, categorization, and analysis of
Cost analysis allows researchers to achieve cost minimization for the programs
under consideration (with the goal to identify the least costly method to obtain a
certain level of output).
Cost analysis can also be used together with effectiveness assessment techniques
within the framework of three types of economic evaluation:
• cost-effectiveness analysis,
• cost-benefit analysis, or
• Cost-utility analysis.
1. numerous buyers and sellers can enter and withdraw from the
market at no cost,
2. all buyers are identical,
3. all buyers possess the same relevant information, and
4. The goods and services traded are the same.
Micro-Costing
Micro-costing is a more precise method than is using cost-to-charge ratios but it is
also more complex and time-consuming. Micro-costing involves identifying and
determining a value for the resources actually consumed to produce the good or
service.
Surveys
A survey can be used to estimate a person's willingness to pay (WTP) or how
much they would need to be paid to give up something.
Note
Regardless of the nature of the resource or the method that is used to assess its
value, be conscious of and consider all aspects of the true cost of a resource. For
example:
Assessing Efficiency
A program is considered efficient when the maximum amount of output (i.e., cases
treated or persons screened) is produced from the given level of inputs (i.e.,
resources).
Cost analysis makes it possible to assess the efficiency of programs by
Accountability
Cost analysis involves tracking expenses, which allows us to know how the funds
are spent and whether they are spent as intended.
Assessing Equity
Cost analysis can indicate whether a program spends more resources per capita in
urban areas than in rural areas and whether the difference is the result of allocation
mechanisms or of differences in need.
The time frame and analytic horizon diagram below illustrates a time frame with a
much longer analytic horizon.
Time frame and analytic horizon
7. Choosing a Format
Depending on the availability of data and resources, we can choose to use one of
three formats:
Pricing Decisions.
The pricing decision is a critical one for most marketers, yet the amount of
attention given to this key area is often much less than is given to other marketing
decisions. One reason for the lack of attention is that many believe price setting is
a mechanical process requiring the marketer to utilize financial tools, such as
spreadsheets, to build their case for setting price levels. While financial tools are
widely used to assist in setting price, marketers must consider many other factors
when arriving at the price for which their product will sell.
Internal Factors - When setting price, marketers must take into consideration
several factors which are the result of company decisions and actions. To a
large extent these factors are controllable by the company and, if necessary,
can be altered. However, while the organization may have control over these
factors making a quick change is not always realistic. For instance, product
pricing may depend heavily on the productivity of a manufacturing facility
(e.g., how much can be produced within a certain period of time). The
marketer knows that increasing productivity can reduce the cost of producing
each product and thus allow the marketer to potentially lower the product’s
price. But increasing productivity may require major changes at the
manufacturing facility that will take time (not to mention be costly) and will
not translate into lower price products for a considerable period of time.
External Factors - There are a number of influencing factors which are not
controlled by the company but will impact pricing decisions. Understanding
these factors requires the marketer conduct research to monitor what is
happening in each market the company serves since the effect of these factors
can vary by market.
A. Consumer demand influences: Consumer demand is a major
influence on all aspects of the operations. Consideration is given to
the price that customers are willing to pay, the quality desired, and
any accompanying trade-offs. Companies routinely use market
research and test marketing to gain such information.
B. Consider competitors’ strategies: A company cannot set prices
without considering the products and pricing strategies of competitors.
C. Costs’ importance is industry specific: Costs are a factor in the
pricing process, more in some industries than in others. In agriculture,
for example, grain and meat prices are market-driven. In many other
cases (gasoline and automobiles), prices are set by adding a markup to
cost. Generally speaking, prices are set by considering both cost and
market influences.
D. Firms conscious of other factors: Firms are also conscious of
political, legal, and image-related issues when setting prices. Price
discrimination, regulatory agencies, and concerns about reputation are
often a factor.
Economic and political climate and trend and likely changes in them in
future.
1. raw materials
2. labor
3. indirect expenses/overhead
Cost accounting has long been used to help managers understand the costs of
running a business. Modern cost accounting originated during the industrial
revolution, when the complexities of running a large scale business led to the
development of systems for recording and tracking costs to help business owners
and managers make decisions.
In the early industrial age, most of the costs incurred by a business were what
modern accountants call "variable costs" because they varied directly with the
amount of production. Money was spent on labor, raw materials, power to run a
factory, etc. in direct proportion to production. Managers could simply total the
variable costs for a product and use this as a rough guide for decision-making
processes.
Some costs tend to remain the same even during busy periods, unlike variable
costs, which rise and fall with volume of work. Over time, the importance of these
"fixed costs" has become more important to managers. Examples of fixed costs
include the depreciation of plant and equipment, and the cost of departments such
as maintenance, tooling, production control, purchasing, quality control, storage
and handling, plant supervision and engineering. In the early twentieth century,
these costs were of little importance to most businesses. However, in the twenty-
first century, these costs are often more important than the variable cost of a
product, and allocating them to a broad range of products can lead to bad decision
making. Managers must understand fixed costs in order to make decisions about
products and pricing.
For example: A company produced railway coaches and had only one product. To
make each coach, the company needed to purchase $60 of raw materials and
components, and pay 6 laborers $40 each. Therefore, total variable cost for each
coach was $300. Knowing that making a coach required spending $300, managers
knew they couldn't sell below that price without losing money on each coach. Any
price above $300 became a contribution to the fixed costs of the company. If the
fixed costs were, say, $1000 per month for rent, insurance and owner's salary, the
company could therefore sell 5 coaches per month for a total of $3000 (priced at
$600 each), or 10 coaches for a total of $4500 (priced at $450 each), and make a
profit of $500 in both cases.
Elements of cost
A. Direct material
2. Labor
A. Direct labor
3. Overhead
A. Indirect material
B. Indirect labor
(In some companies, machine cost is segregated from overhead and reported as a
separate element)
They are grouped further based on their functions as,
Monthly Demand 15 40
Coaches Produced 40 34
Streetcars Produced 0 15
Markup refers to the percentage of an item's cost that a retailer adds when
reselling it to customers. The higher the markup, the more the retailer will profit. In
order to calculate the amount of a markup, you need to know the retail price and
actual cost of the item. The markup is usually reported as a percentage.
Difficulty:
HOW TO CALCULATE A MARK UP
o 1Determine the cost to produce or acquire the product that you are
selling. For example, if you are determining the markup for a table,
you may check your purchase invoice to see that it cost you $300 to
buy wholesale.
o 2Divide the selling price of the item by the cost of the item. For
example, if you sold the table for $330 and you bought it for $300,
you would divide $330 by $300 to get "1.1."
o 3Subtract "1" from the result in the step above to calculate the markup
expressed as a decimal. Continuing the example, you would subtract
"1" from "1.1" to get "0.1."
o 4Multiply the markup expressed as a decimal by 100 to change the
markup to a percent. Finishing this example, you would multiply
"0.1" by 100 to get 10 percent, which is the amount of your markup.
Companies can calculate markup by determining cost of the product and profit
desired.
To calculate the markup on a product, your company needs to know the cost of the
item. This can be the expense to produce it or the cost to buy it wholesale. The
markup is the price above the cost that your company charges to sell the product.
The markup will be the profit on the sale of each item.
Difficulty:Instructions
o 1Determine the cost of the product and the percent of profit that your
company wants to make on each sale. For example, you produce
widgets for $3 a piece. You want to make 150 percent profit on each
sale. If you convert the percentage to decimal form, then 150 percent
equals 1.50.
o 2Add 100 percent to the percent of the profit that the company wants
to make on each sale, as determined in the step above. This represents
the cost to produce the product. In decimal form, one hundred percent
equals one. In the example, one plus 1.50 equals 2.50. Alternatively,
you could write this in its percentage form as 100 percent plus 150
percent equals 250 percent.
o 3Multiply the cost of the product by the number calculated in Step
Two. In the example, $3 times 2.50 equals a selling price of $7.50.
Alternatively, this can be expressed as $3 times 250 percent equals a
selling price of $7.50.
o 4Subtract the selling price from the cost of the product to determine
the markup. In the example, $7.50 minus $3 equals a $4.50 markup.
B. Then use target profit: The target profit is then employed to derive
the markup percentage for the company’s pricing policy:
A. Labor & materials marked up: Time and materials pricing is used
by home builders, print shops, repair shops, consultants, and other
similar "job-oriented" businesses. The cost of labor and materials used
on a job is marked up by a factor to cover the overhead and desired
profit margin. The overhead charges and profit margin are often
"buried" in the labor rate.
B. Competitive bidding sealed: Competitive bidding requires the
submission of sealed bids in an effort to secure a contract for a project
or product. The higher the bid price, the greater the profit for the
contractor if the contractor gets the job. Of course, a high-priced bid
lowers the probability of being the ultimate selection.
1. Cover variable cost when excess exists: With excess capacity, a firm
should cover a variable costs in its bid price and be willing to settle
for a contribution to fixed costs.
2. No excess capacity consider total costs: If there is no excess
capacity, a firm should attempt to obtain a price in excess of total job
cost.
ABC allows managers to attribute costs to activities and products more accurately
than traditional cost accounting methods. The activities responsible for the costs
can be identified and passed on to users only when the product or service uses the
activity. Some of the advantages ABC offers is an improved means of identifying
high overhead costs per unit and finding ways to reduce the costs.
The way it works is first major activities are identified in the process system. Next
cost pools are created for groups of activities that can be allocated together.
Following this cost drivers are identified. The number of cost drivers used vary
depending on the balance between accuracy and complexity. After determining the
cost drivers, rates are calculated. The rates are then applied to the respective cost
drivers for each product or service that is being considered. The overhead cost per
unit is then derived by dividing the total cost for the product by the total product
units.
Legal limitations:
To get the industry experience of cost analysis in pricing decisions, the company
that our group has choosen is JAIPAN INDUSTRIES LTD. We have focused on
one particular product and its pricing strategies ie. Japan mixer grinder.
Below is a brief introduction about the company and the product which has been
continued with the interview taken of the manager.
Business Type : Exporter / Manufacturer
Year Established 1984
No. Of Employees 35
Bankers BANK OF BARODA
Standard Certification ISO 9000
Products Manufacturing and Household appliances, kitchen appliances, food processors, mixer grinder,
Exporting
hand blender, juicer, iron, sandwich toasters, grill oven toaster, roti make...
JAIPAN has a history that percolates into success but not without the ups and
downs which every corporate that has reached the zenith goes through, teething
problems really, but once the ball was set rolling, we never looked back. Our
corporate mission has been to set up the largest and the best Domestic Appliances
Production in the world, providing the Indian consumer with the best to reduce her
household burden so that she can utilise the time thus saved in the benefit of the
family and thus, the society at large.
In fact, JAIPAN is the only brand with seven different models of mixer grinders
apart from over 100 models and sizes of Greblon coated non-stick cookware. Over
the years, some models and products have been discontinued and newer ones
added to keep the product portfolio fresh and resourceful.
A strong marketing network is the key to any successful business. At the core,
JAIPAN has a team of professionals in Sales and Marketing who work towards set
goals strategised by the men at the helm. Over the years, JAIPAN has developed
an extensive and tangible network of dealers, distributors and sales agents. This
network spread over India makes the products available from Leh to Kanyakumari
and from Punjab to Kolkata.
Today, the Company has a chain of over 5000 dealers who are well connected to
the Head Office in Mumbai. The popularity of JAIPAN products is not restricted to
India alone. The products find ample demand in foreign countries like Bangladesh,
Germany, Mauritius, Muscat, Nepal, Sri Lanka, Switzerland, U.A.E., etc. As a part
of its marketing strategy, JAIPAN has developed a force of After Sales Service
professionals as well. Qualified engineers are at the beck and call of consumers,
who face even the slightest worry with JAIPAN products.
JAIPAN has become synonymous with Quality and has won certificates like ISI
and UL. The products are comparable with the best international brands and
conform to ISI, CE, BSGS and TUV standards. Each of the products is subjected to
a series of rigid quality control tests before it reaches the consumer.
These Mixer Grinder are tested on certain parameters to ensure high performance
without any flaw. Apart from this, we are able in providing customized solutions to
our clients as per their specifications in given time frame. Distinctive Features of
Mixer Grinder: * Elegant design * Compact in size * Durable structure * Efficient
quality * High performance * Weight of about 10 kg * Components with various
blades for different types of cutting and chopping * Comes with additional and
optional attachments such as; Atta Kneader, Coconut Scraper, Citrus Juicer and
Vegetable Cutter Technical Parameters of Mixer Grinder : Capacity - 600grms of
any soaked grains Motor - 150 W Single Phase 960 RPM Voltage - 220 V, AC, 50
Hz. Power Cord - 5 Amps 3 Pin Plug Minimum volume - From 200 grams
onwards
• Pricing vary from product to product. Volume based pricing are given
special discount.
• Yes.. Profits are applied on making their firm more stronger and thus
expanding their business.
9. Do you conduct a market survey before deciding the price of the product?
1. www.alicoskun.net
2. www.answers.com
3. www.uic.edu
4. www.designadvisor.org
5. www.sjsu.edu
6. www.bvwglobal.com
7. www.pricesystems.com