Importance of cost classification in pricing strategy. Essay

The monetary value of the stuff or stuffs from which a merchandise is prepared is called direct stuff. In this undertaking it would include,

Passenger car on purchase of basic natural stuff.

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Direct Labor:

That portion of the mill rewards which is utile in quality and which may be applied consecutive to the merchandise or to the fabrication process, is called direct labour. In this undertaking the direct labour would include,

Wagess of secret agents in the film editing section.

Direct disbursal:

Any other cost or outgo which is related and which may be charged straight to a work, order or point, is called direct disbursal charge. In this undertaking the direct disbursal would include,

Royalty collectible on figure of units of its concluding merchandise produced.

Indirect Production Overheads:

All cost related which process, other than direct labour and direct stuffs, are measured production operating expenses. It is besides known as mill operating expense or mill load. In this undertaking the indirect production operating expense would include,

Lubricant for run uping machine.

Performing Right Society charge for music broadcast throughout the mill.

Wagess of shopkeeper in stuff shop.

Wagess of fork lift driver who handle natural stuffs.

Wagess of security guard.

Research and Development Cost:

An country where advanced work carryout on a efficient footing in order to increase cognition, civilization or it could be anything. In this undertaking the research and development cost would include,

Developing a new merchandise in the research lab.

Selling and distribution Cost:

Selling overhead consist the cost incur in promoting gross revenues and keeping consumers. Distribution overheads consist the cost of the process which starts with doing the full merchandise available for send off and coatings with doing the clean returned empty bundles available for reuse. In this undertaking the merchandising and distribution cost would include,

Market research undertaken prior to a new merchandise launch.

Road revenue enhancement on bringing vehicles.

Parcel sent to clients.

Cost of advertisement merchandises on telecasting.

Cost of painting advertisement mottos on bringing new waves.

Administration Cost:

Administration cost is normally allocated to merchandise, either as a fraction on production cost or as a fraction on transition cost. In this undertaking the disposal cost would include,

Floppy discs for general office computing machine.

Telephone rental plus metered calls.

Chief comptroller ‘s wage.

Audit fee.

Maintenance contract for general office photocopying machine.

Finance Cost:

Any fee or cost for an add-on of recognition is called finance cost. In this undertaking the finance cost would include,

Interest on bank overdraft.

ALTERNATIVE METHOD OF PRICING.

There are three methods of pricing, which are FIFO ( First-In-First-Out ) , LIFO 9Last-In-First-Out ) and Average Price method.

First-In-First-Out ( FIFO ) Method:

The point or merchandise purchased first to be sold foremost, so the shutting stock assumed late purchased.

Purchased

Sold

Balance

Date

Unit of measurements

Unit of measurement Cost ?

Entire Cost

Unit of measurements

Unit of measurement Cost ?

Entire Cost

Unit of measurements

Unit of measurement Cost ?

Entire Cost

1 January

500

1

500

1 July

500

2

1,000

31 December

500

1

500

500

2

1,000

Last-In-First-Out ( LIFO ) Method:

The point or merchandise purchased last to be sold foremost,

Purchased

Sold

Balance

Date

Unit of measurements

Unit of measurement Cost ?

Entire Cost

Unit of measurements

Unit of measurement Cost ?

Entire Cost

Unit of measurements

Unit of measurement Cost ?

Entire Cost

1 January

500

1

500

1 July

500

2

1,000

31 December

500

2

1,000

500

1

500

Average Price Method:

The cost of goods sold and the cost of shuting stock are house by utilizing an mean cost of all goods available for sale during the period.

Average Unit Cost = Cost of Goods available for sale ?1,500

No of units available for sale 1,000

Average Cost = ?1.5

Purchased

Sold

Balance

Date

Unit of measurements

Unit of measurement Cost ?

Entire Cost

Unit of measurements

Unit of measurement Cost ?

Entire Cost

Unit of measurements

Unit of measurement Cost ?

Entire Cost

1 January

500

1

500

1 July

500

2

1,000

31 December

500

1.5

750

500

1.5

750

Impact of each alternate method on net income

Number of units sold at 31st December = 500

Selling Price per unit = ? 2.4

Entire Sale Price = ? 1,200

Different Impacts from the 3 methods:

First in first out:

Selling monetary value – Cost = Net income

?1,200 – ?500 = ?700

The impact from this method is that it increases net income because stock that may be few old ages old is used to bear down the cost of goods sold. IncreasingA net income is good for the company and for balance sheet.

Last in first out:

Selling monetary value – Cost = Net income

?1,200 – ?1,000 = ?200

The impact from this method is that it decreased net income it is non a good index for company proprietors. The income is less because cost of goods sold is higher.

Average:

Selling monetary value – Cost = Net income

?1,200 – ?750 = ?450

The impact from this method is that it do consequences thatA bead someplace between FIFO and LIFO. It will non demo excessively much income and do n’t demo less income.

The merchandising monetary value is ? 2.4 per unit, so the LIFO method provides a sensible estimate of replacing cost which is ?2.

Reding Rajeev the advantages of the Pricing methods:

FIFO ( First In First out ) :

The advantage of the FIFO method Pricing is that it is taken straight from stock study and characterizes existent costs. Low or high bill monetary values do non straiten following material pricings as happen when mean monetary value methods are used. It is accepted and recommended by the Bureau of Internal Revenue.

LIFO ( Last in First Out ) :

It is accepted and recommended to its associate by the following trade association. American crude oil institute, commission of accountants institute of America etc ; as a sound method of bing gross revenues and of formative stock in certain dedicated industries.

Average pricing method:

It is a cost method and supplies an mean cost, which is of better concern to some functionaries in bing production than is an existent cost. An mean cost have a inclination to contract the terrible monetary values, the tendency upwards or downwards is more slow, as comparison with a stair measure type of addition or diminution when monetary values are taken from the existent bills under the FIFO method.

Major Problems:

FIFO ( First in First Out ) :

It is tiring to pull off. It do excessively much of net income at the clip of increasing monetary values, because shuting stock is prized at more recent monetary values. It makes rating of occupation costs excessive as similar occupations are debited with stuffs at different rates. A regular monetary value is non back up on existent monetary value get, and hence is non matter-of-fact. Ease and convenience are lost when there is so much alteration in the monetary values of stuffs.

LIFO ( Last in Last Out ) :

It direct to unexpected motion in monetary values. Like FIFO this method besides involves deadening computation with ensuing clerical errors, if the monetary values vary excessively frequently. It is besides non acceptable for Income-tax governments. Matter are non valued in the same order in which the stuffs are issued.

Average Price Method:

It does non cipher shuting stock at current cost and it besides makes verification of shuting stock hard.

LIFO method used by any organisation is non acceptable for the external coverage, the organisations show less income utilizing LIFO method to salvage the Government TAX, in the balance sheet if they will demo less income so they have to pay less revenue enhancement to the authorities. The authorities thinks that they are seting more money in their pocket as they show less net income. Merely FIFO and Average methods are acceptable by authorities.

SALES BUDGET

Gross saless Forecast

8,500

Selling Price per Unit

100

Gross saless required

850,000

PRODUCTION BUDGET

Gross saless Forecast

8,500

Attention deficit disorder: Finished Goods Stock at terminal

1,870

10,370

Less: Finished Goods Stock at start

( 170 )

Production required

10,200

Direct MATERIALS USAGE BUDGET

Material – Angstrom

Material – Bacillus

Entire

Production required

10,200

10,200

Standard stuff use for production

10

5

Direct Materials Use required

102,000

51,000

153,000

Attention deficit disorder: Direct Materials Closing Stock

10,200

163,200

Less: Direct Materials Opening Stock

( 8,500 )

Direct Materials Usuage required

A

A

154,700

Direct MATERIALS PURCHASE BUDGET

Material – Angstrom

Material – Bacillus

Direct stuff required

102,000

51,000

Standard stuff rate per unit

1.80

4

Direct Material Purchase

183,600

204,000

Direct LABOUR BUDGET

Production required

10,200

Standard direct labor use per hr

10

Entire direct labor hours required

102,000

standard direct labor rate per hr

3

Entire direct labor cost required

306,000

FACTORY OVERHEAD BUDGET

Budgeted Variable Operating expense

Indirect Materials

30,600

Indirect labor

30,600

Power

15,300

Care

5,100

Entire Budgeted Variable Overhead

81,600

Budgeted Fixed Overhead

Depreciation

25,000

Supervision

25,000

Power

10,000

Care

11,400

Entire Budgeted Fixed Overhead

71,400

Entire Fixed Overhead Budget

153,000

Selling AND ADMINISTRATION BUDGET

Stationary

1,000

Gross saless – Wages

18,500

Office – Wages

7,000

Committees

15,000

Car Expenses ( Gross saless )

5,500

Ad

20,000

Miscellaneous ( Office )

2,000

Entire Selling and Administration Budget

69,000

CASH BUDGET

One-fourth 1

One-fourth 2

One-fourth 3

One-fourth 4

Opening Cash Balance

8,500

28,500

73,500

105,496

Attention deficit disorder: Grosss from Customer

250,000

300,000

280,000

246,250

Entire Grosss

258,500

328,500

353,500

351,746

Less: Payments

Materials

100,000

120,000

110,000

136,996

Payment for Wagess

100,000

110,000

120,000

161,547

Other Cost & A ; Expenses

30,000

25,000

18,004

3,409

Entire Payments

230,000

255,000

248,004

301,952

Closing Cash Balance

28,500

73,500

105,496

49,794

Measure the demand for disciplinary action to Rajeev.

The disciplinary action for Rajeev is as follows,

Use flexible budgeting techniques

Review maestro budget after each one-fourth

Modify the budget if needed.

P7

Principles of Value Analysis and recommendation to Rajeev refering its application within the company:

Value Analysis is defined as “ A systematic interdisciplinary scrutiny of factors impacting the cost of a merchandise or service in order to invent agencies of accomplishing the specified intent most economically at the needed criterion of quality and dependability ” . ( CIMA Official Terminology )

Value Engineering is besides known as value analysis and it is besides a systematic and function-based attack to bettering the value of merchandise, undertaking, or procedures.

Value analysis or value technology is a prearranged procedure of detecting and introducing the item of how value is created.

It mean at identify and taking redundant costs that do non add value to the merchandise in order to offer better value to the clients.

There are some basic stairss involved in value analysis which are,

Knowing the cost

Determining the maps

Thinking creatively

Measuring options by comparing

Obtaining and entering the facts

The recommendation to Rajeev refering its application within the company is,

Elimination of redundant parts

Substitution with alternate cheaper stuffs

Substitution of specially designed fabrics with standard or fashioned fabrics

Development of alternate cheaper methods of fabrication

Redesigning

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