Cost refers to the amount spend in producing a good or even a service. This is the money spend in all departments/fields in order to provide a commodity/service. This includes a summation of operational, general expenses and overhead expenditure. All direct and indirect costs are summed up to come up with the total cost of production.
Price is the money reward in producing a product/service. Price constitutes the sales in an organization’s Income statement. This is what a commodity retails at. Value is a customer’s worth of the product or service. This is what a customer believes he should pay on acquisition of a commodity or after getting a service.
I agree with the notion of value costing in the twenty first century organizations. An example; an Electrician’s cost to fix a music system at a client’s residence is, $10 for travel, $5 for materials and two hours labor at $20. The value of the service to the client, who has not been able to listen to radio broadcasts, is greater than $35, the cost. Therefore the electrician may settle at charging a price of $100.
The price charged should match the value that the customer/client gains from the organization’s product/service. A consideration should also be made on what other organizations in the same industry are charging, due to competition. An organization should therefore consider other players in the industry so that it does not loose its customers and maintains its market value.
... on price and try to create value for the customer by giving them more for less. No matter how good the product or service ... (2009), “Of the customers who register a complaint, between 54% and 70% will do business with the organization again if their complaint ... is resolved. The figure goes up to a staggering 95% if the customer feels the ...
Profit maximization by twenty first century organizations should be subject to;
Benefits: this is the advantage that the customer gains by consuming the product/service. When customers are satisfied, they may be willing to pay more. This caters for the material costs, labor costs and gain/profit for the organization.
Criteria: this is how a commodity/service is reliable and how first the customer receives the service/good.
Value: this is how much the organization’s customers/clients appreciates its benefits to them. The main objective of any organization is profit maximization at low cost. So if customers can pay more for goods/services provided; considering what other organizations are charging, the better for the firm/organization.
(Krishan, Gunasekaran. 2005 vol.20, Iss 4; 337-354)
TYPES OF SITUATIONS APPROPRIATE FOR APPLICATION OF SOME OF THE ‘TRIED AND TRUE’ COSTING METHODS, OF THE TWENTIETH CENTURY:
‘Tried and true’ costing methods are firm specific, but a consideration has to be made on the prices that other firms in the same industry are charging. This ensures that a firm maintains its market value because it does not loose its customers to its competitors. Some of the situations for their application include;
A new firm in the industry will charge a slightly lower price than the rest, in order to attract customers. Existing companies have large customer base than new ones. A new firm may be forced to charge a slightly lower price than the cost incurred. This however may lead to supernormal losses in the Income statement. A firm therefore maintains its competitiveness in the industry.
Fixed costs are expenditures on large volumes of output. They may not be directly attributable to single units. A rough estimate of cost may therefore be calculated, which is based on reality.
Marketing strategy; a firm may introduce a new commodity in the industry and want to market it by selling it at low cost price first, in order to gain some customer base. A little profit margin may be added to the cost of production, after customers have been used to the new product/product. The criteria used by customers in their buying decisions may call for the ‘tried and true’ costing methods. The speed of delivering a product may neither be reliable nor convenient; a customer will therefore want to pay less for the commodity or service.
... to the customers. In CVP analysis, costs are classified as a either variable or fixed. Variable cost per unit refers to the costs which can ... reach break-even or generate a target profit. In general, a decrease in fixed cost lowers the required sales as part of ... costs which are incurred even if the company increase or lessen its level of activity. Sales mix is applicable to business organizations ...
If the value that the customers attach to the commodity/service is less, then the costing method should reflect this. This at times helps in maintaining the existing customers due to high competition.
(Mark 2004 p.12-34)
RELEVANCE OF COST-VOLUME-PROFIT ANAYSIS IN THE TWENTY FIRST CENTURY BUSINESS ORGANIZATION:
Cost-volume-profit analysis is Cost Accounting techniques used by Management Economists/Accountants. The analysis can be applied to make short-term decisions. These short-term decisions assist the firm/organization in achieving its objectives. The model is applicable in sub-optimization in the twenty first century; for an organization to be inline with its Mission statement. It utilizes information available from break even analysis; that is when total costs are equal to total revenue. At this point an organization is operating at no profit or loss.
Management accountants therefore need to make adjustments, so that profit is maximized at low cost. The main object in any business is, profit maximization and maintaining the market value. Organizations work on the volume bought and sold because, cost-volume-profit analysis assumes that units produced equals units that are sold.
Cost-volume-profit analysis gives us the unit contribution, which is a good assessment of an organization’s progress. If the contribution per unit is negative, a company has to work on lowering its variable costs, in order to achieve the long term objective of being a market leader in the industry. A company can set a target income from sales and work on its variable and fixed costs. Operational costs are therefore simplified because the cost of producing every single unit has got to be minimized.
Management accountants use cost-volume-profit analysis to plan for the number of units sold in order to avoid losses, which may be due to the huge costs of production. When more units are bought/produced then sales will be high; this covers the total costs which include both the fixed and the variable costs. Cost accountants come up with elementary instructions that assist in both the short run and long run decision making as per the organization’s goals.
... Organization Analysis Paper (1) It is hard to overestimate the importance of strategic planning for every company and organization. Not only ... strategy. Its budget is oriented towards extracting an immediate profit, when competitiveness is accomplished by the mean of ... Mart managers pursue now pursue expansion strategy at the cost of losing companys economical efficiency.For example, Costco retailing ...