Management Accounting - Setting Prices - 1709 Words

cco Management Accounting Tutorial 5 15-3. List and briefly describe 4 major influences on pricing decisions Customer Demand: the demands of customers are of paramount importance in all phases of business operations, from the design of a product to the setting of its price. Product-design issues and pricing considerations are interrelated, so they must be examined simultaneously. For example, for a higher quality product; you need higher quality materials which will affect a higher cost and needs more time and this will lead to a higher pricing on a product. Also, a manager must not price its product out of the market price range. Actions of Competitors: companies must keep an eye on its competitors. If its competitor reduces its†¦show more content†¦- Absorption-cost or total-cost pricing formulas provide a justifiable price that tends to be perceived as equitable by all parties. Consumers generally understand that a company must make a profit on its product or service in order to remain in business. Justifying a price as the total cost of production, sales, and administrative activities, plus a reasonable profit margin, seems reasonable to buyers. - When a company’s competitors have similar operations and cost structure, cost-plus pricing based on full costs gives management an idea of how competitors may set prices - Absorption-cost information is provided by a firm’s cost accounting system, because it is required for external financial reporting under generally accepted accounting principles. Since absorption-cost information already exists, it is cost-effective to use it for pricing. The alternative would involve preparing special product-cost data specifically for the pricing decision. In a firm with hundreds of products, such data could be expensive to product. 15-14. What is the primary disadvantage of basing the cost-plus pricing formula on absorption cost? The primary disadvantage of absorption-cost or total-cost pricing formulas is that they obscure the cost behavior pattern of the firm. Since absorption-cost and total-cost data include allocated fixed costs, it is not clear from these data how the firm’s total costsShow MoreRelatedWhy Is Positive Accounting Standards?1162 Words   |  5 Pagesand Jerold L. Zimmerman, titled as â€Å"Towards a Positive Theory of Determination of Accounting Standards† published by American Accounting Association. It explores the factors that have been influencing management’s attitudes in lobbying on accounting standards. 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