Quiz 15: Target Costing and Cost Analysis for Pricing Decisions
The remark made by the bank president is justified. Though costs play an important and key role in decision making, in some industries prices are determined entirely taking the market forces into consideration. So, a banking company can determine its prices by financial services market. So, to make profits, they have to provide services at a cost below the market price through which losses may occur unavoidably.
• Marginal costs and marginal revenue data can be collected only by a highly developed information system. • So, managerial accountants always try to take the production costs rather than the marginal costs which are very complex. • They take pricing decision based on the combination of economic considerations and information from accounting product cost.
Four major influences that govern the pricing decision are:- • Customer demand • Actions of competitors • Costs • Political, legal and image related issues. Customer Demand The demands of customers are of prime importance at all times of business operation, i.e. from the time a product is designed till the time its price is set. A product design is closely linked to its price. Hence, both these factors should be examined simultaneously. Companies generally get information about product design from market research, customers' surveys, test marketing campaigns, and feedback from sales personnel. Hence, to be successful, the company must provide to its customer, products they want and at a price they perceive to be appropriate. Actions of Competitors Domestic and foreign companies often try to sell their products to the same customers. Hence, the companies must have an eye on their competitors. If a competing firm reduces its price, the company may have to reduce its price so as to maintain its market share. Predicting a Competitor's reactions is very difficult yet very important. The importance of a competitor's actions and reactions should never be undermined while setting up prices. Costs The role of Costs in setting up the prices varies from industry to industry. In certain industries, prices are determined only by market-forces. Example: Agriculture Industry. Sometimes in order to earn profits, firms need to produce at a cost which is lower than the market prices. Prices usually are set up by adding a percentage markup on Costs. In case of public utilities like Electricity, Natural Gas etc however, prices are set up by regulatory agencies. Political, Legal and Image Related Issues : The business environment also plays a large role in price setting mechanism. Sometimes there might be political intervention while setting up the prices. This especially happens when a firm sets up unfairly high prices. In the legal area, managers must adhere to certain laws. The law generally prohibits Companies from discriminating among their customers. Hence, the basic political legal framework has to be considered while setting up the prices.