• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Allocation of indirect production costs.

Extracts from this document...


4099111 - allocation of indirect production costs Setting the right price for a product is really crucial: too high, and customers will meet their own needs; too low, and suppliers won't get paid for the value they are delivering and the effort that went into it. How can suppliers figure out the right premium and the pricing model that will suit their customers? Many otherwise rigorously run companies are disconcertingly lax about pricing. Although a 1 percent improvement in price yields bigger gains in operating profit than a similar improvement in variable costs, fixed costs, or volumes - almost 8 percent on average across the S&P 1000 - companies often base prices on the anecdotal observations of a few vocal sales-people or product managers. However, we see that the demand for effective methods and systems of accounting for activity within an organization is always growing, therefore, it makes sense that companies would want to implement practices which will benefit the structure and performance of their organization. This was the case in regards to the evolution of the concept known as activity-based costing, or ABC. In order for management to know the basis behind this costing system, which appeared on the scene during the 1980's, they must first become familiarized with the general concept of ABC compared to a traditional costing system. ...read more.


(Hicks, 1999). Finally, the traditional cost system compared to the ABC system tends to incorporate predetermined rates used based on budget while ABC focuses on capacity (Foster, 1991). Overall, the similarities between the two systems are to be somewhat expected but as indicated above, the differences between the two systems prove to be quite significant. Consequently, it is these differences that will have the greatest impact upon crucial decisions made by management because the assumptions made by an ABC system will illustrate operations, which prove to be beneficial and detrimental to the performance of a company while these factors may pass through a traditional system unnoticed. The adoption of technology has affected all areas of accounting and extensive applications have also been developed for organizations using an activity based costing system. These applications help simplify and translate into a better ability to control costs, provide more precise information to a widening group of decision-makers, and link the enterprise with its customers, suppliers and partners. Also, Executives are concerned with financial application integration rather than cross-functional applications such as manufacturing, financial and human resources. Having managerial and financial information systems integrated gives businesses a greater ability to analyze the data as well as streamlining accounting practices. With increased automation, production information can be collected in a central database and the data can be applied to cost pools in real time. ...read more.


A change in pricing is a major enterprise for any organization; it can't be achieved overnight. Companies accustomed to anecdotal approaches may resist. For these reasons, it might be wise to form a specific group to make pricing recommendations and monitor the impact of price changes. With the support of the sales organization and senior management, the group could put forward pricing suggestions even in the face of opposition. By closely monitoring the impact of price changes, the group would be alert to the need for midstream adjustments. To the extent that the organization must evolve over time from a sales-and-technology orientation to a focus on pricing and the bottom line, the pricing group could be the agent of that transformation. Of course, the leader of the group shouldn't report to anyone directly affected by its recommendations, even if that person - for example, the vice president of marketing or finance - would otherwise be a logical choice. Moreover, a clear succession plan should be developed to get high-caliber people, especially from sales, to work in a somewhat isolated pricing group. They ought to understand that there will be no negative political repercussions if they want to return to sales or move up the corporate ladder, for by necessity if they want to return to sales or move up the corporate ladder, for by necessity such a group will often irritate the senior people in a company. Finally, pricing can be a key lever of profitability. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level ICT in Business section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level ICT in Business essays

  1. I have selected a nursery because there is high demand in the UK as ...

    There is a market for new comers such as: Saplings: 3 Nurseries Kindercare: 2 Nurseries The Birrell Collection: 5 Nurseries. These new comers have relatively small market share. Although demand is high and therefore they too could expand a lot more.

  2. Develop my understanding regarding the production of accounts and their use for business decision ...

    This can also lead to higher profit. Sources of Finance. Businesses need money to start up and run their operations. One way of getting this money is for the business to attract capital - where another business or individual puts money into the business in return for a share of the ownership.

  1. kanthal - accounting

    The most attractive feature of the new system is its ability to capture the cost associated with non-stock orders. For example, country customer # S005 (from case exhibit 6) shows a profit margin of -42%. Further analysis reveals that this specific order incurred additional stock-out costs since 'finished wire' was out of stock.

  2. Activity Based Costing

    Figure 2 shows that the companies which have successfully adopted ABC, 54% are using ABC for at least somewhat decision making within the company. But at the other end of the scale it shows that a minor percentage (2%)

  1. unit10 final account

    When Tesco has chosen their location because: 1. The cost relative to other potential sites. Tesco must compare purchase price of alternative sites, consider whether renting would be more effective and compare the level of business rate in each location.

  2. The Use of Geographical Information Systems (GIS) And International Technology Transfer by Non-Governmental ...

    This project goal was to allow countries in Southern Africa sufficient time to respond in the event food shortages or worse famine (Wright, 1994 in mather1997). FEWS used data from surveys climatologically information and predictions, crop prices and other information in an attempt to anticipate shortfalls in food production.

  1. Amazon.com, Inc.

    Single computer system which sometimes experience downtime 0.02 2 0.04 Do not have a redundant computer system, if there is a breakdown, it might lose its ability to service its customers 0.04 2 0.08 Amazon does not have a mission statement 0.04 2 0.08 Increasing number of distribution centers, but

  2. The history behind the Boots.

    right people are hired for the job that are in appropriate situations to fulfill vacancies. On the other hand however the firing is just as important. If staff are not pulling their weight or are incapable of carrying out the jobs they are meant to they may be fired.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work