Home / Summaries / Class notes - Management Accounting 2 / costs-cost-product

Pricing, target costing and Customer profitability analysis

18 important questions on Pricing, target costing and Customer profitability analysis

3 Major influences on pricing decisions

1. Customers (willingness to pay)
2. Competitors
3. Costs

Impact Competition on Pricing decisions

As competition lessens, the key factor affecting pricing decisions is the customer's willingness to pay. Costs and competitors become less important in the pricing decision.

Impact Cost on Pricing decisions

A company must consider costs across all its value-chain business functions (from R&D to Customer service). In computing the costs within these functions that are relevant in a pricing decision, the time horizon of the decision is critical.

One-off special order

Existing fixed manufacturing overhead cost are irrelevant. Because these costs will not change if the special order is accepted. Additional materials procurement and process-changeover salaries for a special order are relevant because these additional fixed manufacturing costs will only be incurred if the special order is accepted.

Alternative long-run pricing approaches

1. market-based
2. cost-based (also referred to as cost-plus)

Both approaches consider customers, competitors, and costs. Only their starting points differ.
In industries where there is more product differentiation, companies have some discretion over prices, products and services. Companies choose prices and product / service features based on the anticipated customer and competitor reactions.

Target cost per unit

The estimated long-run cost per unit of a product / service that, when sold at the target price, enables the company to achieve the target operating profit per unit.
All costs (both variable as fixed) are included, because in the long run, a companies prices and revenue must recover all its costs.

Target cost per unit = Target price - Target operating profit

Note: Target cost per unit is often lower than the existing full product cost per unit. To achieve the target cost per unit and the target operating profit per unit, the company must improve its products and processes.

2 Key concepts in Value engineering / Managing (non)value-added costs

1. Cost incurrence
2. Locked-in costs

Locked-in costs (also Designed-in costs)

Costs that have not yet been incurred but that will be in the future, because of decisions that have already been made.

When costs are not locked in early, cost-reduction activities can be successful up until the time the costs are incurred.

The key to lowering costs could be a better design, improved operational efficiency and productivity.

Indien Locked-in costs = Hoog
- veelaandachtaanontwerp : voorafbeperken!

Indien Locked-in costs = Laag
- veelaandachtvoor operationele efficiency / productiviteit

Advantage in using a cross-functional team

* A cross-functional team can evaluate the impact of design decisions on all value-chain
functions.

Target rate of return on investment

The target operating profit that an organization must earn divided by invested capital.

Full product costs

A company may choose a full product cost base if it is unsure about variable- and fixed-cost distinctions. Full product cost include all costs incurred to sell the product.

Advantages in including fixed cost p/u for pricing decisions

1. Full product cost recovery
    Focus lies on the bare minimum costs needed to recover to continue business
2. Price stability     Limiting the ability of managers to cut prices
3. Simplicity     A detailed analysis of cost behaviour patterns (separating fixed and variable components)
     is not required

Product life cycle

This spans the time from initial R&D to the time at which support to customers is withdrawn.

Cost categories in Life-cycle costing to determine profitability of a new product

1. Research & Development
2. Product Planning
3. Concept Design
4. Customer Service

3 Important benefits to product life-cycle reporting

1. Visibility full set of revenues and costs associated with each product
2. Visibility differences among products (% of total costs) at separate stages
3. Interrelationships among business function cost are highlighted.

+Alle opbrengsten en kosten per product zichtbaar

+Verschillen tussen producten en % kosten in begin van life cycle
+Interrelatie tussen business functies wordt zichtbaar

Customer profitability analysis

Analysis that examines how individual customers, or groupings of customers, differ in their profitability.

Customer cost hierarchy

Categorization of costs related to customers into different cost pools, based on different classes of cost drivers / degrees of difficulty in determining cause-and-effect or benefits received relationships.

Assessing customer value

1. Short-run and long-run customer profitability
2. Likelihood of customer retention
3. Potential for customer growth
4. Increases in overall demand from having well-known customers
5. Ability to learn from customers (source for ideas for new and improved products)

1. Winst per klant in geld
2. Winstgevendheid lange en korte termijn
3. Kans op klantenbinding
4 Groei potentie klant
5. Kansen door gerenommeerde klanten
6. Kans om te leren van klanten
Inkomsten per klant

* omzet
* korting
Kosten per klant

* Unit level
* Batch level
* Customer-sustainingcosts
* Distribution channelcosts
* Corporate-sustainingcosts

The question on the page originate from the summary of the following study material:

Management Accounting 2

View summary

A unique study and practice tool
Never study anything twice again
Get the grades you hope for
100% sure, 100% understanding

Remember faster, study better. Scientifically proven.

Pricing, target costing and Customer profitability analysis

18 important questions on Pricing, target costing and Customer profitability analysis

3 Major influences on pricing decisions

Impact Competition on Pricing decisions

Impact Cost on Pricing decisions

One-off special order

Alternative long-run pricing approaches

Target cost per unit

2 Key concepts in Value engineering / Managing (non)value-added costs

Locked-in costs (also Designed-in costs)

Advantage in using a cross-functional team

Target rate of return on investment

Full product costs

Advantages in including fixed cost p/u for pricing decisions

Product life cycle

Cost categories in Life-cycle costing to determine profitability of a new product

3 Important benefits to product life-cycle reporting

Customer profitability analysis

Customer cost hierarchy

Assessing customer value

Summaries related to Pricing, target costing and Customer profitability analysis

Class notes - Management Accounting 2

Global politics

Essentials of international relations

Williams textbook of endocrinology

Follow Up Engels idioom 4/5 H

International Business

International business

An introduction to geographical information …

Python programming : an introduction to comp…

Applying UML and patterns : an introduction …

Small places, large issues

Learning teaching