BE113 Management Accounting II Report: Pricing Strategies and Costing

This report, prepared for the University of Essex's BE113 Management Accounting II course, analyzes the pricing strategies and cost reduction opportunities for Santa Cruz Bikes (SCB), a start-up mountain bike manufacturer. Part A focuses on pricing strategies, considering competitive and cost-plus pricing, and identifies areas for cost reduction, such as manufacturing and overheads. Part B evaluates costing methods, advocating for activity-based costing (ABC) over traditional costing. The report highlights the benefits of ABC, including accurate cost allocation and improved decision-making, especially in identifying and eliminating excessive costs. The report emphasizes the importance of understanding different costing approaches and their impact on pricing decisions, as well as the significance of cost reduction in achieving target costs and maintaining competitiveness in the market. The report uses academic sources to support the analysis and recommendations.

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Management accounting II

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Table of Contents
Part A.........................................................................................................................................3
Introduction............................................................................................................................3
Pricing strategies....................................................................................................................3
Areas of cost reduction...........................................................................................................4
Conclusion..............................................................................................................................4
Part B..........................................................................................................................................5
Introduction............................................................................................................................5
Benefits of activity based costing over traditional costing....................................................5
Conclusion..............................................................................................................................6
References..................................................................................................................................7

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Part A
Introduction
SCB is involved in the bike business and in that there are bikes that are manufactured. There
are various aspects that need to be considered in introducing a new model and all of the
decisions in that respect will be required to be undertaken. In this pricing, the decision is most
important under which the relevant pricing strategy will be used to ascertain the correct price
to be charged. This will be discussed in the report together with the consideration of cost-
reducing areas.
Pricing strategies
In the process of pricing, there are various factors that need to be considered and then the
appropriate strategy will be selected. In the given case also the same is the condition and SCB
will be choosing the best possible method. A discussion for the same is carried below in
which the two most suitable pricing strategies will be identified.
In the current market, there are various competitors who are involved in the market and it is
necessary for the SCB to consider their prices and use the competitive pricing strategy. The
cost of the competitor in the given case is identified at £949 and it will be necessary for the
business to set the price after considering all the aspects in this respect (Chen, Zenou and
Zhou, 2018). This will ensure that SCB is dealing with the market conditions in such a
manner that customers can choose it over other competitors.
Another pricing strategy that can be used by the business is cost-plus pricing. This method is
used to earn a certain amount of profit. In the given case there is a new product that is
involved and due to that, the cost will be ascertained (Guerreiro, Cornachione Jr and Kassai,
2012). There will be consideration of total cost and in that, a certain amount of profits will be
added. That will be added to limit so that the sales can be made at that level and it will be
affordable by the consumers.
There will be a proper decision which will be made in this respect so that the product can be
made successful and business is able to earn the required amount of profit.

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Areas of cost reduction
In the current situation, the cost which is incurred in actual is higher than the target cost and
that is required to be taken into consideration. There is a need to make the improvement and
for that various areas have been determined in which the cost reduction will be made so that
target cost can be attained. It has been identified that manufacturing cost will be reduced by
£30 but it can be noted that there is a difference in the non-variable cost of £20 which can be
reduced. It can reduce the amount to target cost and not below that. It will not be possible for
the business to make a higher reduction and so this area cannot be agreed with in a complete
sense.
Further reduction is identified in other overhead areas in which selling, administration and
warranty are taken into account. There is a reduction which is identified in selling overheads
and they are for the amount of £5. It can be considered as this amount can be saved from the
selling and distribution as the same will not be affecting the quality of the product and will
prove to be of great help for the business.
Another reduction of £10 is identified in administration and in that the support of employees
will be required. It is required that proper administration is ensured as then only the product
will be completed in the required manner and will meet the requirements. It will be difficult
to save this cost as this will be affecting various other areas. The warranty and support will be
required to be provided as this a new product and customers will be requiring the security for
the same. It can be noted from all that it will not be able to save all the costs and these are no
potential areas.
Conclusion
All the important information has been considered and on that basis, there is the
determination of pricing strategies that can be used by the business. The reason due to which
they will be used has also been considered and on that basis, the identification has been made.
The areas which are identified for cost reduction have been determined and the suitability of
them has been ascertained. By this, the complete process is considered and the final options
which are available have been identified.

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Part B
Introduction
Costing is one of the most important aspects of any business and that shall be completed in
the most appropriate manner. For this, there are various methods that are available and it is
required that proper understanding of them shall be gained. In the given case activity-based
costing is recommended in place of traditional costing and the manner in which this will be
suitable for business will be identified. The manner in which all the issues will be resolved
with this approach will be discussed in an adequate manner.
Benefits of activity-based costing over traditional costing
In the business, there is a need for making the correct decision about the costing and for that
there will be the use of the cots information which is available. There are various expenses
that are involved in relation to several departments that are carrying the operations. All the
overheads will be identified and they shall be allocated in the best possible manner (Ray,
2012). In the given case traditional costing is being used for this purpose and in that the total
cost is calculated by adding all the cost in total.
In this approach, there is no bifurcation that is made and the total cost is considered. There is
the need for cost reduction and in that bifurcation will be required as then only the costs
which are irrelevant or have been incurred in excess will be identified. It has been proposed
in SCB that the activity-based costing shall be involved by which the proper classification
will be made and that will help in dealing with the issues which are being faced (Jones,
2014). In the activity-based costing, there is a proper classification that is made among all the
costs which are involved and by that actual allocation is made which helps in eliminating the
cost which is incurred in excess. There are various drivers that are used to apportion the cost
and by that, the adequate cost is detected which helps in taking the required actions. In this
method, all the processes which are involved are taken into consideration and by that, the cost
for all is considered which is to be performed under traditional costing. In traditional costing,
there is a consideration of the labor or machine hour as the overhead allocation driver and
that is not suitable for all the processes (Dong, Liu and Lin, 2014). Due to this, activity-based
costing is considered in which various processes and their associated drivers are identified.
They are then used to make the required allocation.

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In the given case there are various activities and departments which are involved and for that,
the bifurcation shall be made so that the cost which is considered in total in the present
condition will be taken on the basis of correct usage (Geiszler, Baker and Lippitt, 2017). This
will help in ascertaining the correct cost and by that price will also be set in the best possible
manner. The actual cost which is involved in relation to manufacturing is identified in this
approach and that helps in taking the right decision for further processes.
In the activity cost method, the level of the activity which is involved in the actual position is
considered and not the budgeted ones. By this, the actual position is taken into account and
that helps in making the calculation on such a basis that all the over-allocation which is made
is eliminated. It is identified in SCB that there is a need for cost reduction as the actual cost is
in excess of the target cost. This will be made possible with the help of activity-based costing
as all the processes will be considered and the activities in which there will be the excessive
cost will be eliminated and that will be reduced. There will be a benefit which will be attained
with this as the cost will be saved and then the price will be set accordingly.
Conclusion
The manner in which activity-based costing will be useful in the business has been
ascertained together with the way all the issues of traditional costing are to be eliminated.
There is the involvement of all the challenges which are involved and by that the proper
discussion is made which will be helpful for the business. It has been identified that there will
be the use of various cost drivers in the activity-based costing and by that correct cost,
allocation is made. The actual cost will be determined and that will help in setting the
appropriate price.

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References
Chen, Y.J., Zenou, Y. and Zhou, J. (2018) Competitive pricing strategies in social
networks. The RAND Journal of Economics, 49(3), pp.672-705.
Dong, J., Liu, C. and Lin, Z. (2014) Charging infrastructure planning for promoting battery
electric vehicles: An activity-based approach using multiday travel data. Transportation
Research Part C: Emerging Technologies, 38, pp.44-55.
Geiszler, M., Baker, K. and Lippitt, J. (2017) Variable Activity‐Based Costing and Decision
Making. Journal of Corporate Accounting & Finance, 28(5), pp.45-52.
Guerreiro, R., Cornachione Jr, E.B. and Kassai, C.R. (2012) Determining The'Plus' In Cost-
Plus Pricing: A Time-Based Management Approach. Journal of Applied Management
Accounting Research, 10(1).
Jones, D.J. (2014) Ripken Products: A case for learning activity-based costing. Journal of
Business Case Studies, 10(2), p.137.
Ray, S. (2012) Relevance and applicability of activity-based costing: An appraisal. Journal of
Expert Systems (JES), 1(3), p.7.