Business Report on Pricing and Cost Control
Scenario:
Aspect Limited is a newly established manufacturing business that plans to make and offer a range of products to customers. It anticipates that some of those will be unique, customised products made to customers’ specific requirements. However, others in the planned product range will be like those currently offered by larger and more established competitors.
The management team at Aspect Limited is considering their approach to setting selling prices for the business’s products and how they may be able to control costs and is interested in finding out about the following:
• Cost-plus pricing
• Target costing
Required
critically compares each of these two approaches, explaining the differences between them in terms of how they may be used to assist in:
1. setting selling prices
2. controlling costs
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substantial questions
What challenges are managers likely to face when making decisions that can help to manage and control the activities?
What type of information might be useful in guiding them? What non-financial information might they benefit from?
What are the challenges associated with calculating product costs?
Why might an organisation wish to establish the costs of the different products it produces?
How might its market position for a particular product influence the pricing approach it may adopt?
How does target costing differ from cost-plus pricing, in terms of how selling prices are set?
How can relevant costs and benefits associate with a decision be identified? And how might these be quantified and evaluated?
Key subjects:
Qualities of information:
1. Relevance, Objectivity (unbiased)
2. Comparability
3. Verifiability
4. Timeliness
5. Understandability
Activity Based Costing (ABC), and how it adopts a more refined approach
Cost Plus Pricing and Target Costing
Decisions (setting selling prices, controlling costs)
Cost Benefit Analysis
One of the References:
• Atrill, P. & McLaney, E., (2021) Management Accounting for Decision Makers, 10th Edition (Chapter 1, 4, 5)
