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Level 5 Management Accounting > Lecture 6 > Flashcards

Lecture 6 Flashcards

1
Q

What are some key factors at how companies arrive at pricing decisions

A

Some key factors for consumers arriving at pricing decisions are:
- Cost based pricing
- Market based pricing
- Value based pricing

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2
Q

What is cost based pricing

A

Cost based pricing is where the company calculates the costs then adds some more on so that all costs are covered and profit is made

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3
Q

What do companies do when using market-based pricing

A

When using market based pricing companies look at market conditions and competitor analysis

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4
Q

What is competitor analysis

A

Competitor analysis is where companies assess the prices of competitors offering similar products or services

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5
Q

How can supply and demand impact pricing decisions

A

In periods of high demand prices may increase

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6
Q

What is value based pricing

A

Value based pricing is when companies price products based on the perceived value of the customer

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7
Q

What is targeted pricing

A

Targeted pricing is where companies charge different prices for different market segments based on their ability to pay or their needs

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8
Q

What is psychological pricing

A

Prices are often set at psychological thresholds, like $9.99 instead of $10

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9
Q

What do companies do to prices in times of inflation

A

In times of inflation businesses may raise prices to maintain their profit margins as the cost of raw materials, labour, and overhead increases

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10
Q

What do companies do to prices in times of deflation

A

With deflation companies may reduce prices to make the product more affordable

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11
Q

What might happen to consumer spending during times of high interest rates

A

When interest rates are high, consumer spending may decrease as borrowing becomes more expensive

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12
Q

What can rising income levels lead to

A

When consumer incomes are rising, people may be willing to pay higher prices for goods and services

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13
Q

What can advancements in technology do to price

A

Advances in technology can lower production costs, allowing businesses to reduce prices while maintaining profitability

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14
Q

How can taxes and tariffs affect price

A

Government-imposed taxes, import duties, or tariffs can affect the cost of production or importing goods, which may result in price increases

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15
Q

How can price controls impact price

A

In some industries, government regulations may impose price controls, such as caps on essential goods to protect consumers from excessively high prices

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16
Q

What is cost plus pricing

A

Cost plus pricing refers to setting the selling price of a product by adding a fixed percentage to the cost of producing or acquiring the product

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17
Q

How does cost plus pricing work

A

Cost plus pricing works as:
- The business calculates the cost to produce or acquire the product
- Then, it adds a markup percentage to that cost to determine the final selling price

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18
Q

What is the formula for cost plus pricing

A

SellingPrice=CostofProduction+(MarkupPercentage × CostofProduction)

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19
Q

What are the advantages of cost-plus pricing

A

Advantages of cost plus pricing is:
- Simple and straightforward to calculate
- Ensures that all costs are covered and a profit margin is achieved

20
Q

What are the disadvantages of cost plus pricing

A

Disadvantages of cost plus pricing are:
- Does not take into account competitive pricing or customer demand
- The markup is fixed, regardless of market conditions

21
Q

What is target costing

A

Target costing is a pricing strategy that involves determining the desired profit margin and competitive price first, and then working backward to identify the maximum allowable cost for production

22
Q

What is target cost focused in controlling

A

Target costing is focused on controlling costs to meet a predetermined price and profit goal

23
Q

How does target costing work

A

Target costing works:
- The company starts by setting a target price based on market research, competitive pricing, or customer expectations
- From this, it subtracts the desired profit margin to calculate the target cost

24
Q

Target cost =

A

TargetCost=TargetPrice−DesiredProfitMargin

25
Q

What are the advantages of target costing

A

Advantages of target costing are:
- Focuses on market-driven pricing, which is competitive and customer-oriented
- Helps businesses control costs and improve efficiency

26
Q

What are the disadvantages of target costing

A

Disadvantages of target costing are:
- Requires careful cost management and often drives companies to innovate to meet cost targets
- If costs exceed the target, businesses may need to adjust their design or processes to reduce costs

27
Q

What are the different approaches to cost-plus pricing and target costing

A
  • Cost plus pricing starts with the production cost and adds a fixed margin.
  • Targeting cost starts with the target price and works backward to determine the maximum cost
28
Q

What does measuring consumer profitability involve

A

Measuring consumer profitability involves evaluating the revenue and costs associated with individual customers to determine how profitable they are for the business

29
Q

What does measuring consumer profitability help companies understand

A

Measuring consumer profitability helps companies understand which customers provide the most value and where resources should be allocated

30
Q

Total revenue from customers =

A

TotalRevenuefromCustomer = PriceofEachPurchase × QuantityPurchased

31
Q

What are some examples of direct costs

A

Direct costs can include:
- COGS
- Customer Acquisition Costs
- Customer Service Costs
- Shipping and Handling Costs

32
Q

What are Customer Acquisition Costs

A

Customer Acquisition Costs (CAC): The costs associated with marketing, advertising, and sales efforts to acquire the customer

33
Q

What are customer service costs

A

Customer Service Costs: The cost of servicing the customer

34
Q

What type of cost is Account Management Costs

A

Account Management Costs is an indirect cost

35
Q

What are Account Management Costs

A

Account Management Costs: If the customer requires dedicated resources

36
Q

TotalCostsforCustomer=

A

TotalCostsforCustomer = COGS + CAC + ServiceCosts + ShippingCosts + AllocatedOverhead

37
Q

Customer profitability =

A

CustomerProfitability = TotalRevenuefromCustomer − TotalCostsforCustomer

38
Q

What can you group with customer profitability analysis

A

After calculating individual customer profitability, you can use Customer Profitability Analysis (CPA) to group customers based on their profitability levels

39
Q

What is the customer lifetime value

A

Customer Lifetime Value (CLV), which estimates the total revenue a customer will generate over their entire relationship with the company, minus the costs incurred to serve them

40
Q

CLV =

A

CLV = (AverageRevenueperCustomerperPeriod) × CustomerLifetime(inperiods) − TotalCoststoServetheCustomer

41
Q

What does CLV factor in

A

CLV factors in:
- Retention Rate
- Gross Margin
- Discount Rate

42
Q

What four categories can businesses segment there customers into

A

Businesses segment there customers into:
- Stars
- Cash Cows
- Problem Children
- Dogs

43
Q

What are star customers like

A

Stars (High Profitability): These customers generate a lot of revenue and require reasonable or minimal service cost

44
Q

What are cash cow customers like

A

Cash Cows (High Revenue, Low Cost): These customers generate significant revenue but require low servicing costs

45
Q

what are problem children customers like

A

Problem Children (Low Profitability): These customers may cost more to service than they bring in, requiring intervention to reduce costs or improve sales

46
Q

What are dog customers like

A

Dogs (Unprofitable): These customers should be reconsidered or possibly let go if they don’t contribute enough to justify the costs

Level 5 Management Accounting (8 decks)

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