WEEK 3  Price may be used to position the brand as

1.1 What is STRATEGIC PRICING? HIGH-QUALITY product

One of the most powerful strategies
available to any professional service firm is pricing. 2. Instrument of Competition
Regardless of the service, the reputation of the  One of the important parts of competition.
provider, the sophistication of the buyer, the quality  Prices offer a way to quickly attack
of the service or any other aspect of a firm's competitor.
position in the marketplace, price plays a significant  Price strategy is always related to
role in a client's decision to purchase a service. competition, whether firms use a higher,
And, of all the factors affecting profitability (price, lower or equal price.
utilization, leverage and margin), price is the only
3. Improving Financial Performance
one that does not have a directly adverse impact on
 Prices and costs determine financial
some other fac when it is increased. As a result,
performance.
small adjustments in price have a m effect on net
 Pricing Strategies directly impact on Firms'
profit. In fact, it is hard to envision a firm trying to
Financial Statements, both in shirt and long
create strategic direction without answering three
run.
basic pricing questions: How you charge for your
services? How do you set your prices? What is  Revenue and Cost need to be considered in
your pricing strategy? selecting pricing strategies.
 Role of Pricing

1.2 HOW DO YOU CHARGE FOR YOUR 4. Marketing program considerations

SERVICES?  Prices may substitute for selling efforts,
 If you want to know how to determine advertising and sales promotion.
pricing for a service, add together your  Prices may be used to reinforce the
total costs and multiply it by your activates in the marketing- mentioned
desired profit margin percentage. Then, above
add that amount to your costs.  Management evaluates the prices to
 Pro tip: Consider your costs, the market, Competitive Positioning, probable buyer
your perceived value, and time invested to reactions, financial requirements.
come up with a fair profit margin.
1.5 Five factors to consider when pricing
1.3 What is a PRICE? products or services
 The amount of money charged for a product Nothing can cause confusion and doubt in a
or service. business like pricing your products and services.
 Price is the only element in the marketing While you don't want to charge less than you are
mix that produces revenue; all other worth, you also don't want to price yourself out of
elements represent costs the market, so how do you know if your price is
right? Whether you are starting out or starting over,
Customer Perceptions of Value Price
here are five factors to consider when pricing your
Understanding how much value consumers products and services.
place on the benefits they receive from the product
and setting a price that captures that value. 1. Costs
1.4 Role of Pricing First and foremost you need to be financially
informed. Before you set your pricing, work out the
1. Signal to Buyer
costs involved with running your business. These
 Prices offer a fast and direct way of
include your fixed costs (the expenses that will
communicating with the buyer
come in every month regardless of sales) and your
 Prices are visible to the buyer
direct costs (the expenses you incur by producing
 Prices provide the basis for comparison and delivering your products and services).
between with brands
2. Customers
Know what your customers want from your 1.6 Determining Specific Prices and Policies
products and services. Are they driven by the
cheapest price or by the value they receive? What
part does price play in their purchase decision?

Also look at what you are selling, are your

current customers buying high- end or low-end
products and services? This information will help
you determine if your price is right, what level of
service or inclusions you should be offering and
lastly if you are targeting the right market. It may be
that you need to change your market to make your
business more profitable. A. Determining Specific Prices:
It is necessary to either assign a specific
3. Positioning price to each product item or to provide a method
Once you understand your customer, you for computing price for a particular buyer seller
need to look at your positioning. Where do you transaction. Many methods and techniques are
want to be in the marketplace? Do you want to be available for calculating price.
the most expensive, luxurious, high-end brand in
your industry, the cheapest, beat it by 10% brand or 1. Cost-based pricing:
somewhere in the middle? Once you have decided,
Cost based pricing are two parts
you will start to get an idea of your ideal pricing
a) Cost plus Pricing
4. Competitors b) Break even pricing
This is one of the key times you can give
yourself permission to do a little competitor a) Cost plus pricing:
snooping. What are they charging for different  Mark-up pricing is an item by adding a
products and services? What inclusions and level standard increase to the product's cost.
of service are they offering for those prices? What
b) Break even pricing:
customers are they attracting with their pricing?
And how are they positioned in the marketplace?  Break even pricing is setting price to break
The answers to these questions will give you an even on the costs of making and marketing
industry benchmark for your pricing. a product or setting price to make a target
profit.
5. Profit
2. Demand oriented Pricing:
One of the most important questions
business owners neglect to ask themselves is,  Demand oriented pricing is based on the
"How much profit do I want to make?" They tend to level of demand for a product. The buyer is
look at what others charge and then pull a figure the frame of reference for these methods.
out of the air to be competitive without giving One popular method is estimating the value
consideration to how much profit the want and of the buyer. The objective is to determine
need. how much the buyer is willing to pay for the
product based on its contribution to the
While you may be in business for the
buyer's needs or wants. Recall our earlier
passion and to add value to the lives of others, you
discussion of estimating value provided to
also need to add value to your own. So give careful
the customer.
consideration to what your time is worth.
3. Competition based pricing:
 Pricing decisions are always affected by
competitors' prices and their potential
actions. In going rate pricing, the firm bases others have list prices that give no indication of
its price largely on competitor's prices. actual selling prices.
Sealed bid pricing forces the company to
set prices based on what they think the 4. Product life cycle pricing - Some companies
competition will charge. have policies to guide pricing decisions over the life
cycle of the product. Depending on its stage in the
B. Establishing Pricing Policy and Structure: product life cycle, the price of a particular product
or an entire line may be based on market share,
1. Pricing Policy- A pricing policy may include profitability, cash flow or other objectives.
consideration of discounts, allowances, returns and
other operating guidelines. The policy serves as the
basis for implementing and managing the pricing
strategy. The policy may be in written form although
many companies operate without formal pricing
policies.

2. Pricing Structure - When more than one

product item is involved, management must
determine product mix and line pricing
interrelationships in order to establish price
structure: Pricing structure concerns how individual
items in the line are priced in relation to one
another.

C. Pricing Management:
Pricing strategy is an on-going process
rather than a once a year budgeting activity.
Several principles of pricing management are
outlined in importantly, pricing strategy is an
interrelated process requiring central management
direction and control.
1. Price Segmentation - Price may be used to
appeal to different market segments. For example,
airline prices vary depending on the conditions of
purchase. Different versions of the same basic
product may be offered at different prices to reflect
differences in materials and product features.
2. Value Chain Pricing - The pricing strategies of
sellers in the value chain should include
consideration of the pricing needs of producers and
facilitating firms. These decisions require analysis
of cost and pricing at all value chain levels. If
producer prices to intermediaries are too high,
inadequate margins may discourage intermediaries
from actively promoting the producer's brand.
3. Price Flexibility - Will prices be firm, or will they
be negotiated between buyer and seller? Perhaps
most important, firms should make price flexibility a
policy decision rather than a tactical response.
Some companies' price lists are very rigid while
principles, methods and techniques to the science,
art and practice of cost control and the
ascertainment of profitability. It includes the
WEEK 4 presentation of information derived therefore for the
2.1. Introduction purposes of managerial decision making.
In the initial stages cost accounting was -Wheldon Cost accounting thus provides
merely considered to be a technique for information the to management for decision of all
ascertainment of cost of products or services since sorts. It serves multiple purposes on account of
historical data. In course of time due to competitive which it is generally indistinguishable from
nature of the market, it was realized that management accounting or so- called internal
ascertainment of cost is not as important as accounting. Wilmot has summarized the nature of
controlling costs. cost accounting as "the analyzing, recording,
Hence, cost accounting started to be standardizing, forecasting, comparing, reporting
considered more as a technique for cost control as and recommending" and the role of a cost account
compared to cost ascertainment. Due to as that of "a historian, news agent and prophet".
technological development in all fields, now cost
reduction has also come within the ambit of cost 2.2. Branches of Accounting
accounting. Cost accounting is thus concerned with
recording, classifying and Cost accounting is thus There are branches of accounting:
concerned with recording, classifying and
summarizing costs for determination of costs of a) Financial Accounting: This is called original
products or services, planning, controlling and accounting, which is mainly confined to the
reducing such costs and furnishing of information to preparation of financial statements for the various
management for decision making. concern.

b) Cost Accounting: The process of accounting

Meaning and Definitions of Cost Accounting
for cost which begins with the recording of income
"Cost accounting is a quantitative method and expenditure or the bases on which they are
that accumulates, classifies, summarizes and calculated and ends with the preparation of
interprets information for three major purposes: periodicals statements and reports for ascertaining
(1.) Operational planning and control and controlling cost.
(2.) Special decision
(3.) Product decision. c) Management Accounting: Management
accounting is a distinctive form of resource
management which facilitates management's
According to Charles T. Horngren, "Cost
'decision making' by producing information for
accounting is the process of accounting for costs
managers within an organization.
from the point at which the expenditure is incurred
of committed to the establishment of its ultimate d) Inflation Accounting: This accounting system
relationship with cost units. does not consider the cost constant at every time
In its widest sense, it embraces the because the price of a commodity changes with
preparation of statistical data, the application of time to inflation and decreases the purchasing
cost control methods and the ascertainment of the power of money.
profitability of the activities carried out or planned is
defined as the application of accounting and e) Social Accounting: This deals with the
costing principles, methods and techniques in the application of the double entry system of
ascertainment of costs and the analysis of saving bookkeeping to socio-economic analysis at the
and/or excess as compared with previous preparation, estimation and interpretation of nation
experience or with standards." and international income and balance sheet.
-Institute of Cost and Management
Accountants of London "Cost accounting is defined f) Value -Added Accounting: In this system
as the application of costing and cost accounting income is measured by the alue added by a firm in
a period. It is the difference between the value of
the product and the cost of raw material, stores and reports give a better picture of efficiency, profit
any brought out component used for production. prospectus and capacity.

g) Human Resource Accounting: Human (d) Benefits to the Government: Cost accounting
Resource accounting is the measurement of the to prepare plans for economic development of the
cost and value of people for the organization or it is country, to make policies regarding taxation, excise
the process of identifying and measuring data duty, export price, ceiling granting subsidy etc.
about human resources and communicating this
information to interested parties. (e) Benefits to Consumers/Public: Cost
accounting helps consumers in getting goods of
better quality at a reasonable price.
2.3. Nature
Cost accounting is a practice of cost
control which is as follows: 2.5 Importance of Cost accounting
It gives information and reports to the
(a) Cost accounting is a branch of systematic management in the following ways:
knowledge that is a discipline by itself. It consists of
its own principles, concepts and conventions which (a) Control of Material Cost - Cost of material is a
may vary from industry to industry. major portion of the total cost of a product. It can be
controlled by regular supply of material and spares
(b) Cost accounting is a science and arts both. It for production, maintaining optimum level of funds
is science because it is a body of systematic in stocks of materials and stores.
knowledge relating to a wide variety of subjects and
an art because without the efficiency and (b) Control of Labor Cost: If workers complete
experience of a cost auditor it is not possible to use their work within the specified time cost of labor can
costing techniques efficiently. be controlled.

(c) Control of Overheads: By keeping a strict

2.4. Advantages
check over various overheads such as factory,
A good system of costing is the technique administrative and selling & distribution, this can be
of controlling the expenditure and helps bring the controlled.
economy into production, so it serves the needs of
a large section of people in the following ways. (d) Measuring Efficiency: Cost accounting
provides information regarding standards and
(a) Benefits to the Management: The information actual performance of the concern activity for
revealed by cost accounting aims at mainly measuring efficiency.
assisting the management in decision making and
optimizing profits. Besides this there are certain (e) Budgeting: The preparation of the budget is the
advantages of cost accounting to the management function of the costing department and budgeting is
i.e. it helps in price fixation, in revealing profitable done to ensure that the practicable course of action
and unprofitable activities, idle capacity, in can be chalked out and the actual performance
controlling cost and helps in inventory control. corresponds with the estimated or budgeted
performance.
(b) Benefits to the Employees: Cost accounting
introduces a wage scheme, bonus to the efficient & f) Price Determination: On behalf of cost
sincere employees which in turn increases accounting information, management is enabled to
productivity, profitability and lowering cost. fix remunerative selling prices for various items of
products and services in different circumstances.
(c) Benefits to Creditors: The better management
(g) Expansion: The management may be able to
of finance through cost accounting leads to timely
formulate its approach to expansion based on
debt servicing by the company in the form of
estimates of production of various levels.
repayment of loan and payment of interest. To stay
and grow in competition and for judging soundness
of present and prospective borrower and cost 2.6 Installation of Cost Accounting System
It is essential to undertake a preliminary market and competitors to determine the method of
investigation installing a suitable system of cost costing to be selected.
accounting to know the feasibility of installing a cost
6. Organizational Factors - Size and type of
organization, levels of management, extent of
accounting system such a business.
delegation and responsibility, extent of
departmentalization, availability of modern office
(a) Essential Conditions: The following conditions equipment and number of managerial and
are essential for successful functioning of the supervisory staff are to be considered while
costing system: installing cost accounting.
1. Material control system should be very
efficient. 7. Area of Control - it must be given topmost
3. The methods of wage payment must be priority for exercising control over materials when
sound and well designed. material central occupies significant are of control.
4. The cost report should be printed forms
8. Reporting and Use of Electronic Data
to facilitate quick compilation.
Processing – The reports of cost data must be
5. The cost and financial accounts must be frequent and prompt, while installing a cost
integrated to facilitate reconciliation of profit. accounting system

(b) Essential Factors for Installing a Cost In modern era use of electronic data
Accounting System: The following essential processing equipment and computers has become
factors are to be considered before installing a cost a common practice.
accounting system
Procedure for Installation
1. Nature of Industry -There is no technique or
method of costing that can be applied universally.
The nature of business should be considered while 1. Nature of Business: Nature of the business
applying the costing techniques. of organization Like capacity of plant, nature
of material and labor, and various processes
2. Background of Business Unit -The etc should be considered before installation of
background of a business unit includes its the costing system
existence, position, rate of growth, policy and
philosophy of management. It serves as a basis for 2. Determination of Cost Centers: Nature and
designing the cost accounts in respect of necessity, no. of cost centers required should be
simplicity and investment involved in installing cost decided to control cast
accounts.
3. Determination of Process: Suitable system
3. Selling & Distribution Method -The or process should Be adopted according to
warehousing facility, external transport, market the size of business and nature of product
research and other promotion measures, terms of
sale and promotion of orders from customers are to 4. Nature and Quality of Product: Quality of
be considered about the distribution process. product, time consumed, and process used
eh should be considered while installing a
4. Flexibility and Uniformity - The cost costing system.
accounting system to be installed must be flexible
and uniform in operation and must be capable of 5. Determination of Brent and Way to
adapting to changing conditions and facilitates inter Control: Extent and way to over material
firm comparison among various firms belonging to labor and overhead should be determined.
the same industry.
6. Arrangement for Flow Cost Date: Proper
5. Product Range - Range of products must be arrangement should be made for the
analyzed in terms of size, models, fashions, area of information related to cost.
(c) Contract Costing: It is suitable for the firms
7. Forms: Standardized forms should be used which are engaged in the work of construction of
by all foreman and worker. bridges, roads, buildings etc.

8. Records to be Maintained: Complete and (d) Single or Output Costing: it is used in the
accurate records should be maintained to business where a standard production is turned out
carefully work out. and it is desired to find the cost of a basic unit of
production
2.7 Essential of a Good Cost Accounting (e) Process Costing: It is a method of costing
System used to ascertain the cost of a product which may
A good cost accounting should possess the pass through various processes before completion
following essential features:
(f) Operating Costing: The cast of providing a
1. It should be simple, practical and capable of service is known as operating cost and the
meeting the business concern requirements. methods to certain the cost of such services is
2. Accurate data should be used by the cost known as operating costing.
accounting system; otherwise it may distort
(g) Multiple Costing: In multiple costing a
the output of the system.
combination of two or more methods of costing is
3. To develop a good system of cost accounting,
used in conjunction to determine the cost of the
necessary co-operation: and participation of
final product. This method is used by the industries
executives from various departments of the
where different components are separately
business is needed.
manufactured and subsequently assembled into the
4. The cost of installing and operating the
finished product. For eg. Motor car, Television,
system should be result -oriented.
Ships etc.
5. It should not sacrifice the utility by introducing
unnecessary details.
6. For the introduction of the system a carefully 2.9 Techniques for ascertaining cost
phased program should be prepared by using The following techniques of costing are madly
network analysis. used:
7. Management should have faith in the costing
system and work as helping hand for its a) Uniform Costing: The practice in which
development and success. common methods of costing for different
undertakings in the same Industry are used is
2.8 Methods known as uniform costing.
Depending upon the nature of the business
and the types of its products, numbers of methods b) Historical Costing: In this technique,
of cost ascertainment are used in practice. The ascertainment of cost is done after they have been
methods of costing are as follows incurred but the utility of this technique is limited.

(c) Direct Costing: The practice of charging all

a) Job Costing: In this system the cost of each job direct costs to operations, processes or products
is ascertained separately which is suitable in all leaving all indirect costs to be written off against
cases where work is undertaken on receiving a profits in which they arise are called direct costing.
customer's order, Like a printing press, motor
workshop etc. d) Absorption Costing: In this all costs, both
variable and fixed are charged to production,
b) Batch Costing: It is considered as the extension operations or processes.
of job costing. It represents several small orders
passed through the factory in batch. Each batch e) Marginal Costing: The method of ascertaining
here is treated as a separate unit of cost. marginal cost by differentiating between fixed and
variable costs. This technique is used to ascertain
the effect of changes in volume or type of output
over the profits

f) Standard Costing: The preparation of standard

costs and applying them to measure the variations
from actual cost and analyzing the causes of
variations with a view to maintain maximum
efficiency in production is known as standard
costing

g) Activity Based Costing: ABC is a system that

focuses on activities as fundamental cost objects
and utilizes the cost of these activities as building
blocks or compiling the costs of other cost objects.

2.10. Limitations of Cost Accounting

These are the following reasons for which
cost accounting is criticized by the different
sections of society

a) Not Reliable: Cost Accounting is based on

estimates and so it is not reliable.
b) Failure of the System: Cost Accounting system
has failed to produce desired in many concerns.
Thus, it could be said that this system is at fault
c) Unnecessary: It is not necessary in Business
concern as it involves duplication of work.
d) Inapplicability: Modern methods of cost
accounting are not applicable to every type of
industry
e) Expenses: It is expensive because a double set
of account books must be maintained, and its
introductions involves a considerable amount of
expenditure

2.11 Summary
The techniques and process of accounting
for cut begins with recording of Revenue and
expenditure and the basis on which they are
calculated and it also includes the presentation of
information in the form of periodical statements and
reports for the purpose of managerial decision-
making.

Cost Account are key to economy in

manufacturing and are indispensable to the
intelligent and economical management or the
factory.