5. State and explain seven factors affect pricing decisions.
6. What is demand? State seven factors that affect quantity demanded.
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ANSWERS TO QUIZ QUESTIONS
Production 8000 6500 7000 7500
Each unit requires 0.35 direct labor hours and direct laborers are paid $12.00 per hour.
Construct the companies direct labor budget.
Department Xs annual direct labor budget
Quarter 1 2 3 4
Production 8000 6500 70
rate of return on investment for a specific volume of production.
Essentially, the selling price is calculated according to the following formula:
Selling price= Target Cost
Target pricing is not useful for companies whose capital inves
> Minimum pricing
This is the price to charge for a job that will be able to cover the incremental costsof producing
and selling the item and the opportunity costof resources consumed in making and selling the
item. This price would leave the firm at a st
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special occasions e.g. Olympics, promotion products, diaries and calendars. With high demand,
the products maybe lowly priced but when it is limited, a market skimming strategy may be
they may be influenced by the state of the economy or actions of the competitors.
4. Initial preparation of budgets
Responsibility accountingsuggests that a manager should be held responsible for those itemsand only
those items-that he actu
The cost plus system tends to ignore the inherent arbitrariness of fixed cost allocation
and absorption procedures and apportionment of capital employed in a multiple product
organization. The levels of activity used in the absorption rate and markups ar
while after the launch, a monopoly and would have a great say to what the price should
be. Their main objective would be maximizing profits.
ii. The company might be launching a product that could already be existent in the market
i.e. they would be follo
in the context of a fixed cost e.g. if a fixed cost can be identified to the production of a single
product and production is stopped, the fixed cost will not be incurred and therefore avoided.
Incremental costs are extra costs incurred as a result of a d
selling price for the product.
Full costplus pricing (absorption) involves the use of conventional techniques to come up
with the total cost for a product to which is added a markup to arrive at the selling price.
Marginal costplus pricing: The principle
is usually responsible for the overall policy relating to the budget program and coordinating the
preparation of the budget itself. The committee, among other things ensures that budgets are
Normally the functional heads present
4.6.3 Stages in the budgeting process
1. Communicating details of the budget policy
Any budgeting decision must be done with reference to the long-term plan of the organization i.e.
budgets are there to facilitate the effectiveness and efficiency of longt
MANAGEMENT ACCOUNTING 154
Homecare ltd is about to launch a new product into the market with a marginal cost of $10 per
unit. A market research to test feasibility of the launch was carried out at a cost of $20000. The
MANAGEMENT ACCOUNTING 170
After this chapter the student will have learnt among, other things, what budgeting is, how it is
used, its advantages and disadvantages and d
in the marketing situation, thus impacting the marketing strategy and the marketing mix.
The product revenue and profits can be plotted as a function of the life-cycle stages as shown in
the graph below:
Product Life Cycle Diagram
MANAGEMENT ACCOUNTING 184
Let us look at an example.
X ltd has the following information with regards to budgeted direct labor hours.
Quarter 1 2 3 4
Labor hours 7000 7200 7500 6800
Variable manufacturing overheads are $3.25 p
The size of mark-up would be altered in a bid to distinguish between different types
of purchasers. Some would qualify for quantity discounts due to bulk purchases while
other who dint will pay the full price. In the long run, the integrity of the system
10000 units of product each year. If ROI is 20%, the mark-up will be calculated as follows.
Mark-up% = (ROI*Investment) + Total costs not included in cost base
cost (cost base)
Annual volume * Unitproduct
= (20% * 300000) + (80000 + 4*20000)
20000 * 22
August 1990. The product will have variable costs of $16 per unit.
Production capacity available for the product is sufficient for 2000 units per annum. Sniwe plc has
made a policy decision to produce to the maximum available capacity during the year to 3
and improvement in profitability.
ii. Market skimming
This approach involves setting a relatively high price stressing the attractions of new features
likely to appeal to those with a genuine interest in the products or associated attractions. This will
Major factors identified are:
Environmental factors such as:
Its degree of predictability
The degree of competition faced in the market
The number of different product in the markets
The degree of hostility exhibited by competition
course and that some re-adjustment is necessary to bring it back on course. It is referred to as
negative since the control action would need to reverse the direction/movement of the system
towards its planned course. This can be shown as follows:
In the introduction stage, the firm seeks to build product awareness and develop a market for
the product. The impact on the marketing mix is as follows:
Product branding and quality level is established and intellectual property
protection such as paten
the objective cash maximizing; if so the selling price should reflect the intention of
When producing a range of different products, affirm is faced with the problem of
setting a selling price to obtain the optimum mix; that which w