Financial Report: Costing Methods and Strategies for Santa Cruz Bikes

This report delves into the costing methods and pricing strategies applicable to Santa Cruz Bikes (SCB), a startup company in a competitive market. The analysis begins with an examination of penetration and competition pricing strategies, highlighting their suitability for SCB's market position and competitive landscape. It explores cost reduction strategies, emphasizing their role in enhancing operational efficiency and strategic resource allocation. The report then transitions to activity-based costing (ABC), a method for assigning overhead and indirect costs to related products and services, particularly beneficial for manufacturing industries. It details the assumptions of ABC, its advantages over traditional costing systems, and its application in strategic pricing decisions. The report also provides a comparative analysis of traditional costing versus activity-based costing, highlighting the differences in accuracy, complexity, and their impact on product cost allocation. The conclusion recommends that SCB focus on developing new braking features and maintaining a competitive pricing strategy.

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

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

2Costing Methods of Santa Cruz Bikes
Part A
i. The pricing strategies for a small business is important as it helps to set the standard
of the product or service in the market and it also serves as an important dimension
for the bottom line of the business as well as its competitive edge (De Toni, et al.
2017). The pricing strategies should be chosen based on the demand of the consumers
within the market and based on the supply chain, costs and profit goals of the business
organization. There are various pricing strategies which should be considered based
on the type of the business. These pricing strategies are- penetration pricing strategy,
cost-plus pricing strategy, competitive pricing strategy, price skimming pricing
strategy and value-based pricing strategy (Abrate and Viglia 2016). Therefore, based
on the type of the business of Santa Cruz Bikes (SCB) the pricing strategies of
penetration and competition pricing are best suited for them since this company is a
start-up and has competition in the market.
Penetration Pricing Strategy- The penetration pricing is a pricing strategy which is used
specially by the new entrants of the market. This strategy is used to gain the market share
on a quickly basis by setting the price at a lower level in the initial stages to entice the
customers so that the purchase that particular product (Spann, Fischer and Tellis 2015). It
is common among the new entrants because it helps them to compete in the market place
effectively. The SCB has few competitors in the market and price has been considered as
an easiest way to differentiate the new entrants from the existing companies. This pricing
strategy will assist SCB to capture the market shares, create brand loyalty and make
customers switch from the competitors (Kienzler and Kowalkowski 2017).
Competition Pricing Strategy- When there are few competitors in the market which are
engaged in selling the same product they will not basically compete on price but they

3Costing Methods of Santa Cruz Bikes
will compete to gain more market shares. There are various ways with which this can be
done and this includes marketing and advertising, cost reduction in the supply chain or at
the distribution levels and by maximising profit (Fisher, Gallino and Li 2018). This
pricing strategy is ideally adopted when there are not more than two competitors and in
the case study of SCB mentions about only two of their competitors, Ridgeback and
Treck. Thus, it is a suited pricing strategy for SCB.
ii. The cost reduction strategies have been considered as the effective methods or
principles for increasing the efficiency of the operations. It will help in reduction of
the costs of the operations and which will lead to increase the productivity as well as
strategic resources reallocation (Ruparathna, Hewage and Sadiq 2016). When there is
reduction in the cost of production the business organization can focus on other
strategies like expansion or budget reallocation. The strategies of cost reduction
provide additional benefits like elimination of the wastes, acceleration of the process
and effective utilization of the resources. Moreover, the cost reduction strategies can
be adopted based on various strategies and these strategies are (Nagle and Müller
2017)-
 Management of Supply Chain
 Improvement in the Business Process
 Safety Performance Management
 Shutdowns, Turnarounds and Outages
 Improvement in the Quality
 Management of Corrective and Preventive Action

4Costing Methods of Santa Cruz Bikes
The cost reduction strategies also support in the alignment of goals in a strategic manner
and at the same time it also helps in the process of innovation and increase in the market
shares.
Here, in the case study of Santa Cruz Bikes there has been cost reduction in the
manufacturing costs as well as in the selling and administration expenses. However, the
decrease in the manufacturing costs do not include reduction in the new development
costs of brake. This is agreeable at the same time acceptable because it has been found
after conducting a market survey that the customers are willing to pay more for this
option and this new development is also attracting customers. So, SCB should focus on
developing the new braking features of the bikes by allocating more resources and
maintaining a proper strategy of cost reduction. At the same time, it should be kept in
mind that the brand of SCB is not well established therefore the prices of the bikes should
be kept below the prices of the bikes of its competitors. The new target cost which has
been set is recommended as it also maintains a profit margin of 10%.
Part B
Activity based costing (ABC) is a costing method which helps in the assignment of
overhead and the indirect costs to related products and services. The relationship between the
costs, the overhead activities along with manufactured products are recognised with the help
of this method of cost accounting (Mahal and Hossain, 2015). The activity based costing is
mainly used by the manufacturing industries as it helps for enhancing the reliability of the
cost data and helps in the production of true costs as well as better classification of the costs
which are incurred by the business organizations during the process of production (Shepherd
2015). The method of activity based costing is specially used to form a better grasp on the
costs which will help the business enterprises to form the best suited strategy of pricing.

5Costing Methods of Santa Cruz Bikes
Normally, this method of costing is applied in target costing as well as product costing and it
is also used in profitability as well as analysis of customer profitability and also in service
pricing (Al-Qady and El-Helbawy 2016).
The activity costing has a complex nature and it is also costly for implementing in a
business enterprise. On the other hand, it has many benefits like it provides a more accurate
and specific breakup of the indirect costs. This costing method is also more accurate than the
traditional systems of costing but the transition from traditional costing to activity based
costing is not an easy process (Santillana, et al. 2015). The assumptions of the activity based
costing are not similar like that of the traditional based costing systems. The assumptions of
activity based costing include (Ahmed, Mahmood and Islam 2016)-
 The relationship between the cost drivers and cost adjectives are recognised with the
help of this method of costing. Furthermore, the relationship is evaluated after making
the measurement of the cost and performance of the activities which are post related
and the cost objects. The costs which are assigned to activities are based on the
consumption of the resources. On the other hand, the costs which are assigned to the
cost objects are based on activity consumption.
 The activity based costing is mostly concerned with the consumption rather than
spending. Therefore, for the purpose of decreasing the costs the level of spending has
to be different. As ABC is focused more on consumption a change in activity in the
short run will impact on the use of the resources. Moreover, in the long run the
spending can be adjusted in order to align them with the consumption.
 There are various causes for the consumption of resources as well as various ways for
identifying and measuring those activities. These activities provide a link between the
costs of the resources and cost objects. Therefore, the cause and effect relationship is

6Costing Methods of Santa Cruz Bikes
reflected because of these links and this enable multiple pools of cost instead of just
one.
 The activity based cost model is capable of having various cost pools than that of the
traditional cost system as cost pools are homogeneous in nature which means that
each pool should have only one activity.
Therefore, based on these assumptions it can be stated that activity based costing can
be primarily considered as a long-term tool but ABC is found to overlook the predictions of
short run costs.
Both these methods of costing help in the estimation of the overhead costs which are
relatable in the process of production and these overhead costs are assigned to the products
based on a rate of cost-driver rate. Therefore, this is the reason which is why the traditional
systems of costing distorts the costs of the products. In most of the cases the traditional type
of costing system are associated with the assignment of the overhead costs to the products
based on the relative use of the direct labour. Hence, this is the reason behind the inaccurate
reporting of the product costs. However, in the field of accounting, there are differences in
these two methods of costing in the purpose of the allocation of indirect costs to the products.
The basic differences of these two methods of costing lies in accuracy and complexity of
these two methods. The traditional costing helps in the assignment of the overhead costs to
the products on the basis of arbitrary rate of average and this method is more simple and it
lacks accuracy as compared to activity based costing (Monroe, et al. 2016). The traditional
costing systems are engaged in the application of indirect costs to the products on the basis of
predetermined overhead rate and it treat overhead costs as a single pool of indirect costs
unlike the method of activity based costing. At the same time, this method of costing is more
optimal when the comparison between direct costs and indirect costs are lower.

7Costing Methods of Santa Cruz Bikes

8Costing Methods of Santa Cruz Bikes
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9Costing Methods of Santa Cruz Bikes
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