Pricing

It is evident from the foregoing webpages that there are many factors which are critical to the success of the firm's long-term and short-term plans. For the purpose of discussion, we have been obliged to focus upon these factors independently of each other, so as to examine their salient features more closely. As a result, the reader may have been tempted to forget that the most important point about these factors is not their independence but their inter-dependence. Indeed, successful management control is the activity of harmonizing all the elements operating within the firm.

Managers and accountants attach a great deal of importance to cost control because costs are more susceptible to control than other factors such as sales volume and profits. Cost-volume-profit analysis lies at the centre of short-term planning, but we did say that given the firm's cost structure, price changes could affect both the sales volume and the profit level. How successfully management may be able to improve profits through price changes depends on its knowledge of how the market will react to such changes. Hence, management needs to formulate a pricing policy or strategy which takes into account the likely effects of price changes on the market's demand for the firm's product, so as to plan a level of operation which, given the firm's cost structure, will produce the required profit.

There is also a further dimension to the problem of pricing which the reader will readily appreciate. If the firm formulates a pricing policy which affects its relationship with the market, such a policy has long-term as well as short-term implications. Any alteration in the volume of demand for the firm's products which results directly from its own pricing policy will affect its capital budgeting programme; hence, we may say that the firm's long-range plan should reflect its pricing policy. Thus, short-term changes in that policy should be effected solely for the purpose of providing that degree of flexibility which is essential to effective long-range planning and control.


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Read on: Variable Costing Summary

Accountants are more likely to agree on the nature of measurement if they agree on the purpose of accounting. If the central purpose of accounting is to make possible the periodic matching of costs and revenues, and if the matching principle is the 'nucleus of accounting theory', then clearly the absorption costers are correct in their view. But if, as we argue in this book, the prime objective of accounting is to provide information which is useful for decision making, then the case for variable costing seems to be very strong.

... see: Variable Costing Summary