Report: Costing Methods Analysis for Santa Cruz Bikes

This report examines the optimal costing methods for Santa Cruz Bikes (SCB), a startup bicycle company. It explores penetration and competitive pricing strategies as most suitable for SCB's market entry and competitive landscape. The report delves into cost reduction strategies, emphasizing the importance of improving business processes, quality, and supply chain management to enhance efficiency. It also addresses activity-based costing (ABC) as a method to allocate overhead and indirect costs accurately, highlighting its advantages over traditional costing in providing a more precise understanding of product costs. The analysis considers the balance between cost reduction and investment in product features, such as braking systems, based on customer willingness to pay. Finally, the report contrasts traditional and ABC costing, emphasizing ABC's complexity, accuracy, and ability to provide a more detailed breakdown of indirect costs, supporting better pricing decisions and resource allocation.

Running Head: Methods of Costing for Santa Cruz Bikes
Methods of Costing for Santa Cruz Bikes
Name of the Student
Name of the University
Author Note

1Methods of Costing for Santa Cruz Bikes
Table of Contents
Part A.........................................................................................................................................2
Part B..........................................................................................................................................4
References..................................................................................................................................7

2Methods of Costing for Santa Cruz Bikes
Part A
It is important for every business to have pricing strategies since it helps in the setting
of standard of the products and services in the market. At the same time it serves as an
important dimension which is necessary for the bottom line and the competitive edge of the
business (Abrate and Viglia 2016). The strategies of pricing should be chosen in such a way
so that it meets the demand of the consumers who are prevailing in the market as well as the
supply chain. The profit objectives of an organization should also be taken into consideration
before choosing the pricing strategy. There are different types of pricing strategies and each
strategy is based on the different types of business. The different types of pricing strategy
include- competitive pricing strategy, penetration pricing strategy, cost plus pricing strategy,
value-based pricing strategy and price skimming pricing strategy (Olbrich, Jansen and Hundt,
2017). Based on the type of the business of Santa Cruz Bikes (SCB) the penetration pricing
strategy and the competitive pricing strategies are best suited for this business organization
since this company is a start-up business and has few competitors in the market.
Penetration Pricing Strategy- The penetration pricing strategy is the best suited pricing
strategy for the new entrants of the market. This strategy helps a start-up business to gain the
shares of the market on an instant basis and it also helps to set the price at a lower level
during the initial stages as it entices the customers to purchase the product (Kienzler and
Kowalkowski, 2017). This pricing strategy helps the new entrants to compete in the market in
an effective manner and therefore it is common among the new entrants. The company in the
case study which is named as Santa Cruz Bikes is a start-up business and it has few
competitors in the market. In order to differentiate SCB from its competitors price has been
considered as the easiest way and the penetration pricing strategy will help this company to

3Methods of Costing for Santa Cruz Bikes
capture the shares of the market and will also help to create brand loyalty and switch
customers from the competitors (Spann, Fischer and Tellis, 2015).
Competition Pricing Strategy- The business organizations which are engaged in selling of the
same products are found not to compete with price but they compete to gain more market
shares. This practise is common when there are few competitors in the market and there are
various ways with which for practising this method and the ways are reduction of cost in the
supply chain, advertising and marketing, maximisation of profit in the levels of distribution
(Hinterhuber and Liozu 2017). The competition pricing strategy is ideal when there are two
competitors prevailing in the market and in the case study mentions about the two
competitors of SCB which are Ridgeback and Treck. Therefore, this is another well suited
pricing strategy for SCB.
In order to increase the efficiency of the operations of a business organization the
strategies of cost reduction have been considered as an effective principle. The strategies help
in the reduction of the cost of the operations and ultimately it will help in increasing the
productivity and the reallocation of the resources (Cooper 2017). There are other strategies
which prevail in the business organization like expansion of the budget or reallocation of the
budget and these strategies can be focused when there is reduction in the cost of production.
At the same time, there are other benefits which can be provided from the strategies of cost of
production and these are effective utilization of the resources, elimination of the wastes and
acceleration of the processes. There are various strategies which help in the reduction of cost
and these strategies are (Galpin, Whitttington and Bell 2015)-
 Improvement in the Business Process
 Management of Supply Chain
 Improvement in the Quality

4Methods of Costing for Santa Cruz Bikes
 Safety Performance Management
 Management of Corrective and Preventive Action
 Shutdowns, Turnarounds and Outages
The strategies of cost reduction help in increasing the market shares as well as in the process
of innovation. On the other hand, it helps in the positioning of the business goals in a
strategic manner.
The case study of Santa Cruz Bikes has shown reduction in the cost of manufacturing
as well as in the cost of selling and administration expenses. However, there has been no
reduction in the manufacturing costs which include the cost of the development of the brakes.
There has been no reduction in this manufacturing cost because after conducting a market
survey it has been found that the customers are willing to pay more money on this
development and it is also attracting new customers. Thus, it is agreeable at the same time it
is acceptable. Therefore, focus should be given by SCB on this new braking feature by
allocating more resources and maintaining proper cost reduction strategies. Similarly, the
prices of the bikes are to be kept low, below the prices of the competitors and the new target
cost is recommended as it maintains a profit margin of 10 %.
Part B
The overhead costs and the indirect costs which are related to products and services
are assigned with the help of a costing method which is known as activity based costing
(ABC). This method of cost accounting helps to recognise the relationship between the costs
and the overhead activities along with the manufactured products (Kaplan and Atkinson
2015). The manufacturing industries primarily use the activity based costing because it helps
to enhance the reliability of the cost data and also it helps in the production of the true costs.
This industry also use this method of costing for making a better classification of the costs

5Methods of Costing for Santa Cruz Bikes
which have been incurred during the production process by a business entity (Ashworth and
Perera 2015). In order to develop a better grasp on the costs which have been incurred based
on the best suited pricing strategy the method of activity based costing is important.
Similarly, this method of costing is used for the purpose of customer profitability, target
costing and the product costing (Cokins 2015).
The nature of the activity based costing is complex and at the same time it is costly
for implementing them in a business entity but it also has many benefits and these benefits
include specific and proper breakup of the indirect costs. Moreover, if a comparison is made
between the traditional costing and activity based costing then it will be found that the
activity based costing is more accurate and it is also not an easy process like the traditional
costing (Litman 2015). There are various assumptions of activity based costing and these
assumptions include-
 This method of costing helps in the recognition of the relationship between the cost
drivers and the cost adjectives and also it helps in the making of the evaluation of the
measurement of the cost as well as the performance of those activities which are
related to the cost objects. On the other hand, the costs are based on the activity
consumption which are assigned to the cost objects.
 The activity based costing are dependant more on consumption instead of spending.
As a result, the objectives of decreasing the costs as well as their levels of spending
needs to be different. Moreover, the spending can be adjusted in the long run for the
purpose of making an alignment with the consumption
 The activities help in providing a link between the cost objects and the cost of
resources and there are several causes of the consumption of the resources along with

6Methods of Costing for Santa Cruz Bikes
several ways to identify and measure the activities. Therefore, this reflects the cause
and effect relationship.
 There are various cost pools and the methods of activity based costing is capable of
having those different types of cost pools unlike the traditional system of costing. The
nature of the cost pools are homogeneous and hence they can have only one activity.
Thus, based on these assumptions it can be stated that in the long run the activity based
costing should be considered but it has overlooked all the predictions which are likely to
found in the short run costs.
These two methods of costing are useful for making an estimation of the overhead
costs and these overhead costs are relatable with the process of production which are then
assigned to the products on the basis of the rate of the cost-driver. Thus, from here it is
understood that the cost of the products are distorted by the traditional system of costing.
The traditional system of costing is also found to make inaccurate reporting of the product
costs because this costing method is associated with the assigning of the overhead costs to
the products due to the relative use of the direct labour. Therefore, in the field of costing
it has been found that there are differences between the traditional costing and the activity
based costing and the basic difference between the two is found in the complex nature
and accuracy of the methods (Chenhall and Moers 2015). The traditional costing is found
to be more optimal while making the comparisons the direct and indirect costs.

7Methods of Costing for Santa Cruz Bikes
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8Methods of Costing for Santa Cruz Bikes
References
Abrate, G. and Viglia, G., 2016. Strategic and tactical price decisions in hotel revenue
management. Tourism Management, 55, pp.123-132.
Ashworth, A. and Perera, S., 2015. Cost studies of buildings. Routledge.
Chenhall, R.H. and Moers, F., 2015. The role of innovation in the evolution of management
accounting and its integration into management control. Accounting, Organizations and
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Cokins, G., 2015. Measuring and managing customer profitability. Strategic Finance, 96(8),
pp.23-30.
Cooper, R., 2017. Supply chain development for the lean enterprise: interorganizational cost
management. Routledge.
Galpin, T., Whitttington, J.L. and Bell, G., 2015. Is your sustainability strategy sustainable?
Creating a culture of sustainability. Corporate Governance.
Hinterhuber, A. and Liozu, S.M., 2017. Is innovation in pricing your next source of
competitive advantage? 1. In Innovation in Pricing (pp. 11-27). Routledge.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Kienzler, M. and Kowalkowski, C., 2017. Pricing strategy: A review of 22 years of marketing
research. Journal of Business Research, 78, pp.101-110.
Litman, T., 2015. Evaluating public transit benefits and costs. Victoria, BC, Canada: Victoria
Transport Policy Institute.

9Methods of Costing for Santa Cruz Bikes
Olbrich, R., Jansen, H.C. and Hundt, M., 2017. Effects of pricing strategies and product
quality on private label and national brand performance. Journal of Retailing and Consumer
Services, 34, pp.294-301.
Spann, M., Fischer, M. and Tellis, G.J., 2015. Skimming or penetration? Strategic dynamic
pricing for new products. Marketing Science, 34(2), pp.235-249.