Management accounting lec 6 Flashcards
What does economic theory state about the demand of a good
price of a good or service is determined in the market, demand is dependent on price,
in general if price goes down demand goes up
Draw the demand curve
price on y axis, quantity on x axis. straight line with negative gradient
what does the shape of the demand curve depend on
elasticity
what is elasticity
if a change in price leads to a more than proportionate change in quantity demanded then demand is said to be elastic
decrease in revenue»_space; increase in revenue
what types of product have elastic demand
products which can be swapped or subsituted for a similar product
increasing the price on coffee
some customers price sensitive, reduction in price would not draw them back, changed their habits
customers who remained not price sensitive (inelastic demand), price increased stayed loyal as coffee was a necessity for them
what does economic theory state about the supply of a good
supply of a good or service is dependent on price
for most goods, the higher the price the greater the supply
draw the supply curve
straight line from the origin
price on y, quantity on x
How do you find market price or equilibrium price
it is where the supply curve and demand curve meet
supply = demand
do you have to accept market price
competitive market with large number of buyers and seller with similar products YES
luxury items/premium product NO
few competitors or monopoly NO
brand reputation NO
absorption costing is used to
generate a product cost
absorption method of costing
add to the product cost a markup to cover non manufacturing costs and the return the business wants
what is the issue with absorption costing
done via arbitary process, if allocation can lead to some products being overcosted and others undercosted - out of line with market. may lead to inventory surplus or business achieving lower return than required
how does marginal costing work
calculate direct cost of a product and apply suitable mark to cover all overheads and allow for profits (needs to be realistic to be competitive)
what is it financially to do
price a product just to cover direct costs
what is the cost plus approach to pricing
company does not expect brand loyalty or operate premium pricing,
price rises are due to new feature and technical improvements leading to increased costs
issue with cost plus approach
hard to do consistently at less than gross profit margin
what is target pricing
market for product analysed and price is established, acceptable profit margin is determined and then cost which the product must be produced is calculated
issue with target pricing and how to resolve
price established is lower than current cost to produce/supply, cost reduction programmes and reengineering, increase volume or lower quality/reduced specification
how to arrive at price, target pricing
segmental analysis and branding
market mapping - future dimensions of market place, customer segments and target most attractive
look at quality and functions/specification volumes design and position of brand in market
target pricing mainstream segment
price will determine specification, horsepower, engine capacity, speed and safety features
target pricing high end segment pricing
premium price for a bran if awareness of bran, perceived quality of product, uniqueness of product, social image, corporate social responsibility
life cycle analysis
sales price initially high, new product new market,
market price is high draw competitors unless process or product can be protected
as more product supplied the price will fall, eventually innovation will be overtaken
why do life cycle analysis over cost plus pricing
cost plus not relevant, lot of early investment before launch for research and development - need to be recouped
initial production costs per unit will be high
