Management Accounting Flashcards
Discuss the problem of using absorption costing as a basis of pricing decisions
-The allocation of overheads is an arbitrary process.
-If price is based on cost and the costs do not contain an appropriate level of overheads, sales price may be less than competitors and all products will be sold but profit margins will be low.
-If price is based on costs and costs contain too great a percentage of overheads, the price will be higher than the market price and goods may be unsold
Why are administration and distribution costs not included in the product costs?
They come under period costs. The product cost is used for inventory valuation. Any unsold products are carried forward as an asset to the next accounting period.
Discuss how the price of the houses will be determined indicating the influence the construction company can have on the sales price.
The price of homes will be governed by demand and supply and to find the market price the construction company can look online with local estate agents to compare. The company will also need to take account of costs: cost of land, and building materials
A company has anticipated there will be a high demand for the product which will be protected by a 5 year patent.
Discuss how the new product should be priced.
The product should be priced using life cycle costing.
On launch a high price can be charged as it will be a prestige product with high levels of demand and limited supply pushing the price up.
If no new technology comes along and the product remains unique and/or fashionable, high prices may be maintained even if production is increased.
How do you calculate selling price given variable cost-based pricing, applying a standard mark up of 36%.
(total costs - overheads) * 1.36
Describe contributions
Sales or Revenue - variable costs
If contribution is positive it contributes, first, to covering fixed costs, and second, to profit
Describe cost and management accounting
Can be used by managers for decision-making and control of the business.
What is the most appropriate basis for apportioning the costs of running the factory canteen?
Number of factory employees
