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ACCY131 Exam > Pricing decisions > Flashcards

Pricing decisions Flashcards

1
Q

What are the two main management approaches that pricing decisions follow?

A

Cost-based approach & Market-based approach.

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2
Q

What is the cost-based approach?

A

Pricing is focused on the cost of producing a product and then adding a mark-up to make a profit.

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3
Q

What is a market-based approach?

A

Pricing decision based on the market factors and customers wants.

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4
Q

What are both approaches influenced by?

A

Costs, customers, competition and legal/political and ethical issues.

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5
Q

How do customers influence pricing decisions?

A

Demand

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6
Q

What is customers’ demand driven by?

A
  1. Product design
  2. Product quality
  3. Product’s carbon footprint
  4. The social values and ethical principles of the company.
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7
Q

What is one way that market competition can influence price-setting?

A

Competition can force companies to lower their prices than anticipated.

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7
Q

What is one way that legal, political and ethical issues can influence price-setting?

A

Businesses are prohibited from engaging in price collusion, among other bad pricing practices.

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8
Q

Cost based price =

A

cost + mark-up

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8
Q

Mark-up =

A

(selling price - cost) ÷ cost

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8
Q

What are the various cost-bases that can be used when applying the cost-base approach?

A
  1. Variable manufacturing cost
  2. Total variable cost (including non-manufacturing variable costs)
  3. Manufacturing costs (includes variable and fixed)
  4. Full cost of the product.
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8
Q

What is the most popular cost-base used in cost-based pricing?

A

Full cost because it is very simple to use and apply and allows for full recovery of production costs

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8
Q

What are market prices determined by?

A

Supply and demand.

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9
Q

What are market prices influenced by?

A

The degree of product differentiation and competition.

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10
Q

What is the price elasticity of demand?

A

The sensitivity of consumer demand to changes in price (as prices increase, demand falls).

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11
Q

What is target pricing?

A

A pricing strategy that helps companies determine the price at which they can sell a product based on market conditions and customer expectations.

12
Q

Which pricing approach is more common and why?

A

Cost-based pricing because prices are calculated from readily available cost data.

13
Q

What is a drawback of cost-based pricing?

A

It ignores customer demand and sales volumes can inappropriately influence price

14
Q

Benefits of market-based pricing:

A

lead to better decisions about sales volumes.

15
Q

What is a drawback of market-based pricing?

A

Difficult to estimate market demand and prices

16
Q

What is peak load pricing?

A

The practice of charging different prices at different times to reduce capacity constraints.

17
Q

What is price skimming?

A

Occurs when a higher price is charged when product or service is first introduced

18
Q

What is penetration pricing?

A

Setting low prices when new products are introduced to increase market share.

19
Q

What is price gouging?

A

The practice of charging a price viewed by customers as too high or unreasonable e.g. taking advantage of a bad situation to make as much money as possible (unethical)

20
Q

What are transfer prices?

A

Prices charged for transactions that take place within an entity.

21
Q

Prices in not-for-profit entities may be variable and based on:

A
  1. variable pricing depending on client’s income (sliding scale)
  2. achieving organisational goals.
22
Q

When would governments intervene in pricing practices?

A
  1. Price discrimination
  2. Predatory pricing
  3. Collusive pricing
  4. Dumping
23
Q

What do plans provide?

A

A benchmark against which future performance can be assessed then the difference is called variance.

24
Q

What is the control phase of operations?

A

Comparing actual performance with plans, and determining the reason for any variance.

25
Q

Plans should provide targets that are:

A

[SMART]
- Specific
- Measurable
- Achievable
- Realistic
- Time-bound

26
Q

What is the accountant’s role in planning?

A

Framing business models e.g. targets, KPI’s, budgets, reports and analysis

27
Q

What are the 5 components of planning?

A
  1. Identifying the problem
  2. Collecting the relevant information
  3. Determining alternative courses of action.
  4. Evaluating alternatives
  5. Making a decisions
28
Q

What is sustainable development?

A

Development that meets the needs of the present world without compromising the ability of future generations to meet their own needs.

29
Q

What pressures might encourage managers to prioritise short-term planning?

A
  1. Short term bonus plans;
  2. Yearly calculation of ‘profit’

ACCY131 Exam (4 decks)

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