The paper "Importance of Costs in the Pricing Strategy of an Organization" is a perfect example of finance and accounting coursework. The cost can be defined as the sum total of expenses incurred, measured in monetary terms used in the production process. There are different types of costs. The costs are dual and include expired costs and unexpired costs, manufacturing and manufacturing costs, and as well-fixed and variables. The costs are either direct or indirect to production. Firms today face altered conditions of competition that are pushing them to compete on the basis of factors other than price and cost competitiveness.
Price affects other marketing mix elements and is related to product positioning. It is influenced by factors both internal and external. Internally, pricing strategy is affected by the organizational system, costs, cost of strategy implementation, and economies of scale and experience effects, amongst others. Management accounting tools require revenue and cost information to help construct decisions. In short-run pricing decisions, marginal costs are vital since the company should be willing to set the prices at any amount in excess of the marginal cost which comprises all variable costs.
These opportunities may occur in case of over-production, a one-time buyer, and a customer outside normal sales channels. In long-run pricing decisions, all fixed costs are very relevant and managers need to know prices are sufficient to well cover the total cost of production and yield profits. Unprofitable products should be faced out though this may depend on the cost of related fixed assets and whether the product is a loss leader. Intermediate-run pricing depend on on-demand elasticity and marginal production cost.
With an unknown demand function, prices can be based on production costs, as the company gathers more information with time. Costing systems The costing system is basically an accounting system that is established within an organization for purposes of monitoring the costs in the organization and providing the management with the necessary information concerning the organization’ s operation and performance (Donald, et al. , 2009). There are many costing systems in use; however, they differ on their application and the nature and needs of the organization in question. These include; process costing, job order costing, batch costing, and activity-based costing systems.
We consider process costing. Organizations like oil refining, chemical processing, pharmaceutical firms, and the like are the best suit to use process costing since they produce large quantities of identical products. The process costing system is a kind of costing system that obtains the product cost by fixing cost to large quantities of identical units. Since these products are produced in a similar way, the unit cost of the product will be determined based on average computation. That is the cost per unit = cost of mass production/total number of units produced. The unit cost of production is vital in the decision-making process as it helps in pricing decisions, inventory calculations, and determination of the product profitability.
Having determined the cost per unit, the management adds its profit margin to establish the selling price per unit of the product. Consider an oil refinery firm that produces thousands of tones of petroleum products, the firm will factor in all the direct costs and indirect costs incurred in the process of producing the products. The direct costs will include all the costs incurred for and can conveniently be identified to the finished product.
Indirect costs include those costs that are incurred for and cannot be conveniently identified with the finished product. They are general and are incurred for the benefit of a number of cost units or cost centers.
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