LUNAR INTERNATIONAL COLLEGE SCHOOL OF BUSINESS

DEPARTMENT OF BUSINESS ADMINISTRATION

MANAGEMENT THEORY AND PRACTICE

ACCOUNTING SYSTEM & PRICING STRATEGY OF AL- KEMER FLOUR

FACTORY

GROUP ASSIGNMENT

NAME ID

1. AbebaAsheber GSR/0066/14

2. ArareAbdisa GSR/0500/14

3.Meron

Submission Date: - January 9, 2022

Submitted to: - Tadesse Demeke (PhD)

Table of Contents
Acknowledgment......................................................................................................................ii
Abstract....................................................................................................................................iii
Introduction..............................................................................................................................1
About the Company.................................................................................................................1
Accounting system and pricing strategy................................................................................2
Objectives of the Paper............................................................................................................8
Methodology.............................................................................................................................8
Accounting system and pricing decision of a company........................................................8
Accounting system....................................................................................................................8
Pricing strategy.......................................................................................................................10
Conclusion...............................................................................................................................13
Reference.................................................................................................................................14

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Acknowledgment

First of all, we would like to give glory to our Almighty God for his helping us. Next, we
would like to thank all the employees and office managers of the Al Kemer Flour factory
who helped us in any way to construct this paper.

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Abstract

The study was conducted on accounting system & pricing decisions of Al-kmr Flour
factory . This study is conducted to assess the organiazational accounting system
implemented in the organization. The study covers detail about the organization, how the
company is designed, the strength and weakeness of the stated company.

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Introduction

About the Company

Al-kemer flour Factory Company was established in accordance with the commercial
code of Ethiopia of 1960 and registered with the ministry of Trade & Industry of Federal
Democratic Republic of Ethiopia on 17 sene 1994 E.C.The paid up capital of the
company is Birr 2,520,000 denominated in to 2,520 shares with a par value of 10,000
each. TheCompany is located in oromiya region at Burayu mariam, around yetebaberut
oil. The factory is one competitive company in the flour manufacturing sector.

The major products of the factory are Flour.Wheat flour is an attractive food item used
for domestic as well as food factories for making biscuits and Pasta. It is prepared by
eliminating the germ and the embryo part from various branny outer coverage of
wheat.The company has equipped with new and modern one major production linePingle
Machine Which is made by Chine and has a daily attainable production capacity of 300
Quintals.The Pingle machine is produced 82 ton per day.Also the machine is produced 4-
6 ton per hour. The company has 42 employees under its roof. To meet customer’s
satisfaction the Company is able to produce 24 hrs and deliver to wholesaler and bakery
housed customer with its own transportation system in Addis Ababa and other local
areas.

Vision

Al-kemer flour factory plc produces competitive Flour, products which satisfy our
customer expectation and need to be well known flour factory in Africa.

Mission

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To be a flour factory having updated technology and skilled man power and purchasing
raw material with reasonable price and produce quality flour which satisfy costumer need
and become competitive in the internal and international market.

To expand from flour to biscuit, macaroni & pasta.

To satisfy customers with a good quality product

Accounting system and pricing strategy

Manufacturing companies have many options when choosing a manufacturing accounting
system. While some systems are more suited for internal decision making, others are made for
external financial reporting. Understanding how some of the most prevalent manufacturing
accounting systems work can help you make sure you choose the right one for your small
business.

Job Order Costing: For companies that manufacture many types of products, or make products
in batches, job order costing is the most likely accounting system to use. Under job order costing,
small-business owners trace materials and labor costs directly to products. That is, the company
records how many hours of labor and how many units of materials are used to make the product,
multiplies these figures by the cost per unit and tracks the cost by job. Overhead costs, those
costs that cannot be easily traced to individual products, are then allocated to products.

Process Costing: Process costing is used by companies that continuously produce a few
homogenous products. For example, an orange juice manufacturer, a gravel mine and a maple
syrup bottler would all be likely to use process costing. Under a process costing system, costs are
aggregated within departments, with each department being treated like a job in a job order
costing system. For example, an orange juice company may have juicing, bottling and labeling
departments. In a process costing system, the materials and labor costs of juicing would be
aggregated in the juicing department accounts. This would be combined with allocated overhead
costs related to juicing before transferring the entire balance to the bottling department accounts.
Here, the costs already incurred would be added to labor, materials and allocated overheads from
the bottling department. This process continues until the product is finished.

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Activity Based Costing: Activity based costing is an accounting system often used by
manufacturers to improve decision making. Unlike job order costing and process costing
systems, activity based costing systems only assign costs to products that are related to
manufacturing activities. For example, even though costs of heating and cooling the factory are
necessary for production and would be included as overhead costs in a job order or process
costing system, these costs would not be assigned to products in an activity based costing
system. In addition, nonmanufacturing costs that are related to manufacturing activities, such as
customer support costs and selling costs, are assigned to products in an activity based costing
system. Many small-business owners believe that this type of costing system allows them to
make more sound decisions, because more relevant costs are accounted for and nonrelevant costs
are not.

Variable Costing: Because of the way that accounting standards treat certain overhead costs,
when companies produce more goods than are sold, causing inventory to increase, net income
becomes artificially inflated. Variable costing is a technique that managers use to remove this
effect from net income. By excluding overhead costs that do not vary as production levels
change, managers are able to compare profit levels as inventory balances fluctuate across years.
While this method is not allowed for external financial reporting, it can be valuable for internal
decision making.

Pricing Strategy

A business can use a variety of pricing strategies when selling a product or service. To determine
the most effective pricing strategy for a company, senior executives need to first identify the
company's pricing position, pricing segment, pricing capability and their competitive pricing
reaction strategy. Pricing strategies and tactics vary from company to company, and also differ
across countries, cultures, industries and over time, with the maturing of industries and markets
and changes in wider economic conditions.

Pricing strategies determine the price companies set for their products. The price can be set to
maximize profitability for each unit sold or from the market overall. It can also be used to defend
an existing market from new entrants, to increase market share within a market or to enter a new
market. Pricing strategies can bring both competitive advantages and disadvantages to its firm

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and often dictate the success or failure of a business; thus, it is crucial to choose the right
strategy.

Some pricing models

Absorption pricing: Method of pricing in which all costs are recovered. The price of the
product includes the variable cost of each item plus a proportionate amount of the fixed costs.

Contribution margin-based pricing: Contribution margin-based pricing maximizes the profit

derived from an individual product, based on the difference between the product's price and
variable costs (the product's contribution margin per unit), and on one's assumptions regarding
the relationship between the product's price and the number of units that can be sold at that price.

Cost plus pricing: Cost plus pricing is a cost-based method for setting the prices of goods and
services. Under this approach, the direct material cost, direct labor cost, and overhead costs for a
product are added up and added to a markup percentage (to create a profit margin) in order to
derive the price of the product.

Creaming or skimming: Price skimming occurs when goods are priced higher so that fewer
sales are needed to break even. Selling a product at a high price, sacrificing high sales to gain a
high profit is therefore "skimming" the market. Skimming is usually employed to reimburse the
cost of investment of the original research into the product: commonly used in electronic markets
when a new range, such as DVD players, are firstly sold at a high price. This strategy is often
used to target "early adopters" of a product or service. Early adopters generally have a relatively
lower price sensitivity—this can be attributed to: their need for the product outweighing their
need to economize; a greater understanding of the product's value; or simply having a higher
disposable income.

This strategy is employed only for a limited duration to recover most of the investment made to
build the product. To gain further market share, a seller must use other pricing tactics such as
economy or penetration. This method can have some setbacks as it could leave the product at a
high price against the competition.

Decoy pricing: Method of pricing where the seller offers at least three products, and where two
of them have a similar or equal price. The two products with the similar prices should be the

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most expensive ones, and one of the two should be less attractive than the other. This strategy
will make people compare the options with similar prices; as a result, sales of the more attractive
high-priced item will increase.

Differential pricing: Differential pricing occurs when firms set various prices for the same
product depending on their consumer's portfolio, geographic areas, demographic segments and
the intensity of competition in the region.

Double ticketing: A form of deceptive pricing strategy that sells a product at the higher of two
prices communicated to the consumer on, accompanying, or promoting the product.

High-low pricing: Methods of services offered by the organization are regularly priced higher
than competitors, but through promotions, advertisements, and or coupons, lower prices are
offered on key items. The lower promotional prices designed to bring customers to the
organization where the customer is offered the promotional product as well as the regular higher
priced products.

Keystone pricing: A retail pricing strategy where retail price is set at double the wholesale
price. For example, if a cost of a product for a retailer is £100, then the sale price would be £200.
In a competitive industry, it is often not recommended to use keystone pricing as a pricing
strategy due to its relatively high profit margin and the fact that other variables need to be taken
into account.

Limit pricing: A limit price is the price set by a monopolist to discourage economic entry into a
market. The limit price is the price that the entrant would face upon entering as long as the
incumbent firm did not decrease output. The limit price is often lower than the average cost of
production or just low enough to make entering not profitable. The quantity produced by the
incumbent firm to act as a deterrent to entry is usually larger than would be optimal for a
monopolist, but might still produce higher economic profits than would be earned under perfect
competition.

The problem with limit pricing as a strategy is that once the entrant has entered the market, the
quantity used as a threat to deter entry is no longer the incumbent firm's best response. This
means that for limit pricing to be an effective deterrent to entry, the threat must in some way be

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made credible. A way to achieve this is for the incumbent firm to constrain itself to produce a
certain quantity whether entry occurs or not. An example of this would be if the firm signed a
union contract to employ a certain (high) level of labor for a long period of time. In this strategy
price of the product becomes the limit according to budget.

Marginal-cost pricing: In business, the practice of setting the price of a product to equal the
extra cost of producing an extra unit of output. By this policy, a producer charges, for each
product unit sold, only the addition to total cost resulting from materials and direct labor.
Businesses often set prices close to marginal cost during periods of poor sales.

Odd-Even pricing: Odd-Even pricing is often used by sellers to portray their products to be
either cheaper or more expensive than their actual value. Sellers competing for price-sensitive
consumers, will fix their product price to be odd.

Penetration pricing: Penetration pricing includes setting the price low with the goals of
attracting customers and gaining market share. The price will be raised later once this market
share is gained.

A firm that uses a penetration pricing strategy prices a product or a service at a smaller amount
than its usual, long range market price in order to increase more rapid market recognition or to
increase their existing market share. This strategy can sometimes discourage new competitors
from entering a market position if they incorrectly observe the penetration price as a long range
price.

Companies do their pricing in diverse ways. In small companies, prices are often set by the boss.
In large companies, pricing is handled by division and the product line managers. In industries
where pricing is a key influence, pricing departments are set to support others in determining
suitable prices.

Penetration pricing strategy is usually used by firms or businesses who are just entering the
market. In marketing it is a theoretical method that is used to lower the prices of the goods and
services causing high demand for them in the future. This strategy of penetration pricing is vital
and highly recommended to be applied over multiple situations that the firm may face. Such as,
when the production rate of the firm is lower when compared to other firms in the market and

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also sometimes when firms face hardship into releasing their product in the market due to
extremely large rate of competition. In these situations it is appropriate for a firm to use the
penetration strategy to gain consumer attention.

Predatory pricing: Predatory pricing, also known as aggressive pricing (also known as
"undercutting"), intended to drive out competitors from a market. It is illegal in some countries.

Companies or firms that tend to get involved with the strategy of predatory pricing often have the
goal to place restrictions or a barrier for other new businesses from entering the applicable
market. This strategy may contradict anti–trust law, attempting to establish within the market a
monopoly by the imposing company. Predatory pricing mainly occurs during price competitions
in the market as it is easier to obfuscate the act. Using this strategy, in the short term consumers
will benefit and be satisfied with lower cost products. In the long run, firms often will not benefit
as this strategy will continue to be used by other businesses to undercut competitors' margins,
causing an increase in competition within the field and facilitating major losses. This strategy is
dangerous as it could be destructive to a firm in terms of losses and even lead to complete
business failure.

Price discrimination: Price discrimination is the practice of setting a different price for the same
product in different segments to the market. For example, this can be for different classes, such
as ages, or for different opening times.

Price discrimination may improve consumer surplus. When a firm price discriminates, it will sell
up to the point where marginal cost meets the demand curve. There are three conditions needed
for a business to undertake price discrimination, these include:

 Accurately segment the market

 Prevent resale

 Have market power

There are three different types of price discrimination which revolve around the same strategy
and same goal – maximize profit by segmenting the market, and extracting additional consumer
surplus.

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First-degree price discrimination: The business charges every consumer exactly how much they
are willing to pay for the product.

Second-degree price discrimination: The business uses volume discounts which allows buyers to
purchase a higher inventory at a reduced price. While this benefits the high-inventory buyer, it
obviously hurts the low-inventory buyer who is forced to pay a higher price. This buyer may
then be less competitive in the downstream market.

Third-degree price discrimination: This occurs when firms segment the market into high demand
and low demand groups.

Objectives of the Paper

The Objectives of the paper is to discuss the accounting system and pricing strategy of
the Al- kemer flour company:

Methodology
We used a company that we are familiar to and assessed what accounting system &
pricising decisions it uses and if there were any questions we arise we questioned some
employees and office management workers for additional information.

Accounting system and pricing decision of a company

Accounting system
The definition of an accounting system is fairly loose. It applies to any system that allows
company to track the money coming into and out of your business. Essentially,
companies accounting system is how you keep your financial records. Company use it to
log transactions, invoices, bills from vendors, and other income and expenditure.

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Companies accounting system is a repository of raw data that you can draw upon for
financial reporting such as profit and loss statements and balance sheets. These inform
your operational decisions and dictate where you allocate funds to grow your business,
appeal to your target market and appease your stakeholders.
Accounting systems can track and manage all kinds of entries. They generally fall under
the following categories:

 Invoices and revenue

 Expenses

 Liabilities

Accounting systems can track these liabilities as payable values, and automatically
update balances when payments are made.
While there are lots of different types of accounting systems, they all fall into two main
categories single and double entry systems.

Single entry systems

Single entry systems are favored by sole traders and micro businesses for their simplicity.
An Excel spreadsheet is a type of single entry system. It tracks rudimentary data such as:

 Date of sale

 Description of item sold

 Cost of item

 VAT on sale

 Payment method

 Business account balance

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Double entry systems
Double entry systems are more complicated and require dedicated software to use. They
provide more complete records and therefore afford a more accurate and granular account
of business finances.

Double entry systems are used by larger businesses to track their finances and generate
reports like expense reports, invoice and payment summaries, and profit and loss
statements.
According to the above definition Al- kemer Flour Company use double entry system.

Pricing strategy

Companies use a pricing strategy to calculate at what price they should sell their product
or service. Pricing strategies generally take into account production, labor and
advertising expenses and then add on a certain percentage so they can make a profit.
There are several different pricing strategies, but the main ones are explained in this
article.
The different types of pricing strategies models as listed under introduction section. The
main pricing strategies are:
 Cost-plus pricing
 Value-based pricing
 Penetration pricing
 Price skimming
 Product life cycle pricing
 Competitive-based pricing
 Temporary discount pricing
 From the above price costing strategy Al- kemer Flour Company applies cost-plus
pricing strategy.

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Cost-plus pricing strategy

The cost-plus pricing strategy is simply calculating the costs for a product or service and
adding a markup.
Cost-plus pricing is a pricing strategy by which the selling price of a product is determined by
adding a specific fixed percentage (a "markup") to the product's unit cost. Essentially, the
markup percentage is a method of generating a particular desired rate of return.[1][2] An
alternative pricing method is value-based pricing.

Cost-plus pricing has often been used for government contracts (cost-plus contracts), and has
been criticized for reducing incentive for suppliers to control direct costs, indirect costs and fixed
costs whether related to the production and sale of the product or service or not.

Companies using this strategy need to record their costs in detail to ensure they have a
comprehensive understanding of their overall costs. [2] This information is necessary to generate
accurate cost estimates.

Cost-plus pricing is especially common for utilities and single-buyer products that are
manufactured to the buyer's specification, such as for military procurement.

The three parts of computing the selling price are computing the total cost, computing the unit
cost, and then adding a markup to generate a selling price (refer to Fig 1).

Step 1: Calculating total cost

Total cost = fixed costs + variable costs

Fixed costs do not generally depend on the number of units, while variable costs do.

Step 2: Calculating unit cost

Unit cost = (total cost/number of units)

Step 3a: Calculating markup price

Markup price = (unit cost * markup percentage)

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The markup is a percentage that is expected to provide an acceptable rate of return to the
manufacturer. [1]

Step 3b: Calculating Selling Price (SP)

Selling Price = unit cost + markup price

Buyers may perceive that cost-plus pricing is reasonable. In some cases, the markup is mutually
agreed upon by buyer and seller. For markets that feature relatively similar production costs,
companies do not have a dominant strategy.[4] Therefore, cost-plus pricing can offer competitive
stability, decreasing the risk of price competition (such as price wars), if all companies adopt
cost-plus pricing. The strategy enables price changes to goods and services relative to increases
or decreases in the product cost which are simple to communicate and justify to customers.[5]
When there is little market intelligence, the use of a cost-plus pricing strategy compensates for
the lack of information by setting prices based on actual costs.[6] This method is generally
adopted by retail companies such as grocery or clothing stores.[5]

Cost-based pricing is a way to induce a seller to accept a contract the costs of which represent a
large fraction of the seller's revenues, or for which costs are uncertain at contract signing, as for
example for research and development.

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Conclusion
Al- kemer flour factory is a very broad and ambitious company. It has great visions and
missions to accomplish in the future. The company uses double entry accounting system
for its accounting system model and Cost-plus pricing strategy to determine the price of
its product.

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Reference
1. Kenton, Will. "How Variable Cost-Plus Pricing Works". Investopedia. Retrieved 2021-
04-26.
2. Carlson, Rosemary. "Defining and Calculating Cost-Plus Pricing". The Balance Small
Business. Retrieved 2021-04-26.
3. Jain, Sudhir (2006). Managerial Economics. Pearson Education. ISBN 978-81-7758-
386-1.
4. Park, Anna (2010). "Price-setting behavior: Insights from Australian firms". RBA.
5. "Cost plus pricing definition". Accounting Tools. Retrieved 2021-04-26.
6. "Pricing - cost-plus strategies | Learn economics". Www.learn-economics.co.uk.
Retrieved 2021-04-26.
7. [1], McKinsey Quarterly, August 2003
8. "Pricing Strategies & Elasticity". Fundamentals of Marketing. 2014-12-16. Retrieved
2021-04-26.
9. http://en.m.wikipedia.org/wiki/Pricing_strategy

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