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Accounting In Business Outline: 1. Abstract; 2. Pricing systems: 2. 1 Steps to be made before choosing companys pricing method; 2. 2 Types of pricing methods, their advantages and disadvantages: 2. 2. 1 Cost-plus pricing; 2. 2. 2 Target return pricing; 2. 2. 3 Value based pricing. 3. Labour remuneration systems, different types of compensation, their advantages and disadvantages: 3. 1 Base pay method; 3. 2 Pay for performance methods 4. Just-in-Time supplying system: 4. 1 The philosophy of the technique; 4. 2 Advantages; 4. 3 Disadvantages. 5. The traditional budgeting system and its problems in the new market.
Abstract: In the circumstance of constantly changing external environment many companies, using traditional methods of accounting are coming to the conclusion that many of those methods are no longer effective. In todays market only the organizations that focus their attention on fast-changing conditions of environment, trying to adapt to them and searching continuously for new, innovative solutions, have chance to gain the advantage over their competitors. Pricing is one of the most important components of organizations marketing policy because it has a direct influence on product positioning. Furthermore pricing affects other marketing mix elements, such as product attributes, distribution channels and promotion. It is also one of the most difficult questions for companies decide how much to charge for their products or services. Before making decision on which price method suits better to certain company a row of steps should be made: - Develop marketing strategy, including marketing analysis, segmentation, targeting and positioning; - Make main marketing mix decisions: giving precise definition of the product and choosing distribution and promotional tactics; - Demand curve: understand how price affects demand; - Calculate fixed and variable costs related to the product; - analyse external environmental factors, i.
e. legal restrictions, competitors actions etc; - Determine pricing objectives (profit or revenue maximization, quantity maximization, profit margin maximization, quality leadership, partial cost recovery, differentiation, survival, status quo); - Determine pricing based on the results of the steps previously made. There are three main pricing methods: - Cost-plus pricing. It is considered to be a classical method. It is calculated as a sum of companys production cost, including both cost of goods and fixed costs, and a certain profit margin. As long as the costs are calculated correctly and the sales volumes are predicted accurately, the company will always be operating at a profit.
This pricing method is widely used because of the following advantages: It is easy to calculate; it requires a minimum of information; it is easy to administer; it tends to stabilize markets - isolated from demand variations and competitive factors Insures seller against unpredictable, or unexpected later costs ethical advantages From the other hand, a cost-plus pricing has a number of disadvantages: it does not stimulate efficiency; it does not take in consideration the role of consumers, tends to ignore the role of competitors; use of historical accounting costs rather than replacement value; use of standard output level to allocate fixed costs; inclusion of sunk costs rather than just using incremental costs; ignores opportunity costs; contractors are not stimulated to focus on performance because the cost is always covered by the client. - Target return pricing set the price to achieve the target return-on-investment. This pricing method is used almost exclusively by market leaders or monopolists. They start with a rate of return objective and then arrange the price structure in order to achieve these target rates of return. An unusual consequence of this pricing model is that to keep the target rate of return constant, the firm will have to continuously be changing its price as the level of demand changes.
This is a questionable decision. It is seldom a good strategy to increase prices in the face of falling demand. The net result is usually further decrease in demand. That explains why this strategy is used only by market leaders and monopolists. - Value based pricing the price is set based on the value it creates to customers relative to alternative products. According to this method, company sets selling prices on the perceived value to the customer, not only on the actual cost of the product, the market price, competitors prices, or the historical price. The goal of value based pricing is to align price with value delivered.
Price for any individual customer can be customized to reflect the specific value delivered. Value based pricing is dependent on an understanding of how customers measure value, through careful marketing research. If a company manage to prove offering more beneficial products, it gives an advantage to it, so the company may raise the price. But as a negative consequence there is the risk that a higher price will alienate potential customers who are usually used to chose by price. That may also attract new competitors. Now, the experts single out another price method, a so-called psychological pricing.
In this case the price is based on what customer perceives to be fair. Another important component of company activity is staff compensation. Compensation is a payment employees receive in return for their contribution to the organization. The most common forms of compensation are wages, salaries and tips. This is the definition that HR-Guide. com gives to compensation: the methods and practices of maintaining balance between interests of operating the company within the fiscal budget and attracting, developing, retaining, and rewarding high quality staff through wages and salaries which are competitive with the prevailing rates for similar employment in the labor markets.
All staff members are paid for doing their job. However, other than providing employees with a base pay companies should consider the possibilities to sustain the employees that perform best. For that purpose organizations often use variable pay. Variable pay is based on the performance of a person and depends on how well that person achieved his or her goals for a considered period of time. Thus, the different types of compensation include: base pay, commissions, overtime pay, bonuses, profit sharing, merit pay, stock options, travel / meal /housing allowance, benefits including (dental, insurance, medical, vacation, leaves, retirement, taxes etc). A company has to make certain decisions concerning benefits and compensations of the staff.
Which kind of compensation system is the most suitable for it? Is compensation tied to responsibilities? Are increases in pay tied to contributions to the company, i. e. , pay-for-performance? Does the company need a graded compensation system? Knowing how much to pay your staff is a delicate balance.
Pay too little, and your staff will feel underpaid and under appreciated and may leave for a practice with a better salary. Pay too much, and you will spend too much of your hard-earned revenue on salary and wages. The traditional way of remuneration is a base pay. On the one part it is rather convenient for enterprise because of its evident vantages: applying to this method the company can easily calculate the cost of labour remuneration.
Moreover, it is easy to administer and requires minimum of information. It is also a way to insure the company against unforeseen later costs. In whole, a base pay remuneration method has the advantages similar to traditional cost-plus pricing method. The negative side of base pay compensation system is that paying employee a fixed amount of money does not encourage him / her to improve, develop his / her abilities and creativity. In fact, this method is good for routine kinds of work where all that an employee must do is follow instructions and do a certain amount of work in certain amount of time. Sometimes companies, basically using base pay remuneration method, add annual bonuses for the staff.
It incites the personnel and the firm continues to keep under control the cost of labour remuneration. Many companies prefer to combine base pay and variable pay. It means that employees are paid a fix wage rate, but in addition to it they receive a pay rise if perform well. In this case the employees have a guarantee that they will be paid the rate but they are also stimulated to perform better in order to be paid more. It is a positive side for company too, because it helps to reveal the best performers, find talented employees, which are capable to make important decisions and make the company profitable. It is also a fairer way to divide revenue: who performs better gets better pay.
Some companies prefer using exclusively variable pay. For example, paying commission. The payment of commission as remuneration for services rendered or products sold is a common way to reward sales people. Payments are calculated on the basis of a percentage of the goods sold. This pay for performance method is beneficial for company because it pays only for certainly done work. Though, it is impossible to make a precise forecast of how much the organization will have to spend on remuneration; it depends on the staff performance and sales, which, in their turn, depend on many external factors.
The employees who only receive a variable pay are strongly motivated, but have no guarantee about their future earnings. Offering monetary compensation in the form of commission alone, or commission in addition to salary rather than simply a fixed salary, is intended to create a strong incentive for employees to invest maximum effort into their work. As far as the organization of companys production process is concerned, there is a choice among different supplying systems, too. The Just-in-Time technique is a relatively new system used by the companies at the cutting edge.
The name Just In Time was first used by Toyota. Originally, it described how material should be produced and delivered in order to arrive "Just In Time" for the next operation. But the one who used the technique for the first time was Ford Motor Company. In 1922 Henry Ford in My Life and Work wrote: "We have found in buying materials that it is not worthwhile to buy for other than immediate needs. We buy only enough to fit into the plan of production, taking into consideration the state of transportation at the time.
If transportation were perfect and an even flow of materials could be assured, it would not be necessary to carry any stock whatsoever. The carloads of raw materials would arrive on schedule and in the planned order and amounts, and go from the railway cars into production. That would save a great deal of money, for it would give a very rapid turnover and thus decrease the amount of money tied up in materials. With bad transportation one has to carry larger stocks. " Later the technique was adopted and publicised by Japanese Toyota Motor Corporation as a part of its Toyota Production System. Due to the lack of land and so production spaces in Japan it is difficult for local factories to keep in warehouses the produced articles and the parts of not finished products. Thus, in the 1950 s Toyota's chief engineer Taiichi Ohno examined accounting assumptions and realized that another method was possible.
The factory could implement JIT which would require it to be made more flexible and reduce the high costs of retooling and thereby reduce the economic lot size to fit the available warehouse space (an economic lot size is the number of identical products that should be produced, given the cost of changing the production process over to another product. ). Carrying the process into parts-storage made it possible to store as little as one part in each assembly station. When a part disappeared, that was used as a signal to produce or order a replacement. The philosophy of JIT is simple - inventory is defined to be waste.
Inventory is seen as incurring costs, or waste, instead of adding value, contrary to traditional accounting. Under this way of working, businesses are encouraged to eliminate inventory that does not compensate for manufacturing issues, and then to constantly improve processes so that less inventory can be kept. In short, the just-in-time inventory system means having the right material, at the right time, at the right place, and in the exact amount without keeping a safety net of inventory. The first experience with JIT system...
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