Pricing, Budgets, Services, and ABC Flashcards
Pricing types
Value based
Cost based
Competition based
Price elasticity
delta Change in quantity/ delta change in price
Price waterfall
The steps the price goes through from list price to
Cost allocation in general
Cost allocations are economically equivalent to taxes
Increasing cost allocation rates (or taxes) decrease profits reported by the center bearing the costs.
Increasing the cost allocation rate motivates managers to use less of the resources.
The overhead rate is a proxy for externalities that are hard to measure.
overhead rate
The overhead is also known as indirect spend.
The overhead rate is a set at beginning of year based in estimated total overhead costs and estimated volume
examples of overhead costs are:
rent, salaries, utilities, office supplies
Absorption costing
In summary, absorption costing is a method that ensures all production-related costs, whether they are variable or fixed, are allocated to individual products, ensuring that inventory and cost of goods sold reflect the full cost of production.
Criticism of it:
- Incentive to over produce
- Death spiral
- Errors in allocation systems. Volume drivers are imprecise:
- Aggregation, specification and measurement error
Not suitable for management decision of cost-princing
suitable when:
- production is stable
- few items
ABC
- Allocation of costs of resources e.g. a department or cost categories to activity cost pool through a resource driver.
- The activity cost pool is allocated to cost objects via the activity cost driver
Balance score card
Addresses a serious deficiency in traditional management systems: their inability to link a company’s long term strategy with its short term actions
As i combines performance measures. It is more accurate and gives a more whole picture, however it is costly and not effective in acting as a motivator.
Ratcheting
basing next year’s standard of performance on the this years actual performance. Favorable budget variances lead to larger increases than unfavorable variances lead to decreases.
- Disadvantages:
Performance targets usually adjusted upward
Employees reduce output to avoid being held to higher standards in the future
- Possible solutions
Eliminate budget targets
Estimate next years sales
More frequent job rotation
Budget types
- Bottom up
o Adv: the employee feels more included, they know how they can perform, people might perform better because they feel listned too - Top down
o Adv. Less resources, one person is setting the order which might be very efficient - Short and long term
o Short: account for local changes easier to keep track of the budget, might have to make less assumptions - Line-item budgets
o Authorize managers to spend only up to the specified amount on each line item
o Straight forward, we get what we measure
o Dis adv. No budget for expanding unless extra budget. Less flexibility, if one thing is underperforming, then you can’t move budget to other item lines. - Budget lapses
o Unspent funds are not carried over to the next period
o Spend all in fear of not getting the same amount next year - Static vs. flexible budgets
o Varies or not with volume
What are the main functions of business models
1) Defines a serious of activities, that yield a new product or service in such a way that there is net value created
2) Captures value from a portion of those activities for the firm
IHIP
Intangibility: services cannot be tasted or felt before they are bought
Heterogeneity: the quality depends on who provide them
Inseparability: typically produced and consumed simultaneously, often involving interaction between provider and costumer
Perishability: services cannot be stored, which poses challenges when demands fluctuates
Drivers of Servitization
- Economic pressures and mature markets force companies to find new ways to make profits
- Can help sell the original product
- Increased competition
- Costumers demands it
- Exploitation of new technologies/legislation /collaborative opportunities
Challenges of servizitation
- Lack of deep costumer insights
- Costumers unwillingness to collaborate and share vital information
- Service-for-free attitude
- Requires a long term, proactive view on relation development with costumers
- Lack of technical competences
- Limited network competences
- Internal resistance, internal processes inhibiting service delivery
- Trouble scaling/fit with existing business model
- Standardization and direction of processes are difficult to realize
CLV
costumer lifetime value
Factors holding back digitalization
- Very regulated industry
- Very conservative
- Lack of Costumer centric mindset
- Fail to maintain operating model that is needed for digitalization
What budget does and the budgeting process, the measures to make the process smooth
Knowledge: budget communicates key planning assumptions, like product prices,
it sets guidelines for what resources there are available.
performs evaluation: the performance is compared to the budget.
the budget process is lengthy, often involves both bottom-up and top-down approaches. should coordinate actions, however, gaming can hinder this.
Smoother process: longer time intervals, group measures if cooperation is necessary, use of subjectivity, use trade ofs.
