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Title : Management and Cost Accounting: Professor Cooperberg (Lecture 5, Topic 2 - 04/09/2014)
Description : Management and Cost Accounting: Professor Cooperberg
Lecture #5, Topic #2
Chapter 12: Pricing Decisions and Cost Management
Date: April 9, 2014

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Time Stamps:

1:10 Learning Objectives

1:59 The Five Forces Affect Pricing

2:24 Influences on Supply and Demand

3:39 Strategic Positioning Affects Pricing

4:32 Short-Term Pricing

5:20 Costing and Pricing for the Short Run - Example

8:30 Long-Term Pricing

9:07 Long-Term Pricing Optimization

10:32 Long-Tem Pricing Approaches

11:38 Markets and Pricing

12:49 Costing and Pricing for the Long Run - Example

15:49 Market-Based Pricing

18:03 Target Pricing/Target Costing

19:24 Implementing Target Pricing and Target Costing

20:38 Value Engineering

21:22 Value Engineering Terminology

23:15 Cost Incurrence and Locked-In Costs Graph

24:08 Problems with Value Engineering and Target Costing

25:14 Value Engineering and Target Costing (Forbes)

25:51 Cost-Based (Cost-Plus) Pricing

26:37 Forms of Cost-Plus Pricing

27:19 Common Business Practice

27:56 Cost-Plus Pricing

28:46 Life-Cycle Budgeting and Costing

29:23 Important Considerations for Life-Cycle Budgeting

29:56 Life-Cycle Budgeting

30:00 Other Important Considerations in Pricing Decisions

31:22 The Legal Dimension of Price Setting

Summary of Lecture:

The learning objectives for this chapter are short-run and long-run pricing decisions, target costing, cost incurrence and locked-in costs, cost-plus costing, life-cycle budgeting and costing, non-costs factors in setting price, and anti-trust laws. Influences on supply and demand include customers, competitors/potential entrants/substitutes, and suppliers. Cost leadership is outperforming competitors by producing at the lowest cost, consistent with the quality demanded by the consumer. Differentiation is creating value for the customer through product innovation, product features, customer service, etc. for which the customer is willing to pay. Short-term pricing decisions are made in less than one year, whereas long-term pricing decisions are made in one year or a longer period of time. In short-term pricing many costs are irrelevant, however in long-term pricing, fixed costs are relevant since they can be managed in the long run. Long-term pricing approaches can be cost-based or market-based.

In market-based pricing, competition from lower cost producers limits ability to increase prices, commodity products must turn over quickly, leaving little room to recover from pricing mistakes, and customers demand quality products at reasonable prices. In market-based pricing, one should start with a target price based on customers perceived value, or how competitors will price competing products or services. There are five steps in target pricing/target costing: 1. develop a product that satisfies potential customer needs 2. choose a target price 3. derive a target cost per unit 4. perform cost analysis, and 5. perform value engineering to achieve target cost. Value-added costs if eliminated, would reduce the value to customers. Non-value-added costs if eliminated, would not reduce value to customers. Problems with value engineering and target costing includes employee frustration with failed targets, a cross-functional team may over-engineer to accommodate the wishes of team members, and the risk of organizational conflict.

Cost-based (or cost-plus) pricing adds a markup to the cost base to determine a prospective selling price, usually it is only a starting point in the price-setting process. Forms of cost-plus pricing include setting a target rate of return on investment, and selecting the cost bases for the "cost-plus" calculation. Most firms use full cost for their cost-based pricing basis, because it allows for full recovery of all costs, price stability, and simplicity. Life-cycle budgeting and costing is estimating the revenues and individual value-chain costs attributable to each product. Important considerations for life-cycle budgeting are non-production costs are significant, development period for R&D and design is long and costly, and many costs are locked in at the R&D and design stages, even if R&D and design costs are themselves small. Other important considerations in pricing decisions is price discrimination, and peak-load pricing.

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