Pricing Issues

The whole purpose of having detailed accounts is, therefore, to provide information from which control can be exercised and to be able to provide the earliest possible warning of excess expenditure.

The Integration of Accounts and Material Codes

It is possible to combine the account number with material codes. This is particularly useful where computers are used and can print an analysis of a particular class of goods.

It is most important for the successful running of an organisation that material costs are accurately computed, for the following reasons:

• to ensure that all material expense is recovered during the course of a period, usually 12 months; and • to ensure that jobs that are costed for the purpose of quotation to customers and do not bear unrealistic material costs, making them too low for a reasonable profit margin or high enough to be uncompetitive when selling the finished products.

Before considering pricing methods, you must be quite clear on one point: The purchase price is the net cost incurred to obtain the material delivered to the required location. Starting with the basic price quoted, adjustments have to be made for the following factors:

Discounts

These are allowances made by suppliers to members of a particular trade or given because large quantities are ordered. The “trade” discounts may vary according to quantity. Discounts are usually quoted as a percentage that has to be deducted from the price list.

Transport

Where the cost of transport is not included in the supplier’s price, it must be added on to the supplier’s met price; this may have to include movement within the organisation.

Packaging

Care must be taken to ensure that, where a supplier’s price does not include packaging, an addition to the price must be made. No allowance need be made for returnable packaging, unless the full cost is NOT refunded, but accurate records and quick return of packaging is essential.

Insurance

Where “ex works” prices are quoted and goods are insured in transit at a separate charge, an addition to the basic price must be made.

Duties and Taxes

When duties or taxes are payable on goods, these must be included in the total purchase price. Particular care must be taken on import duties and other levels which may be refundable under certain conditions.

Methods of Pricing Issues

Cost Price

Issues are made using the actual purchase price in one of two ways:

• First-in-first-out, referred to as FIFO. As the name implies, each consignment is priced out at the purchase price of that quantity, the price changing when issues are made from a batch having a different purchase price. • Last-in-first-out, referred to as LIFO. This works in the same way as FIFO but uses the purchase price of the latest consignment as a base. It is rather awkward to work and is very seldom used.

A d v a n t a g e s :

• Very simple to operate, as no calculations are necessary, with the exception of balance totals. • Balances are related to fact therefore no difficulty will be found in reconciliation of accounts. • It is very simple to find the total value of goods in stock, by the addition of balances.

D i s a d v a n t a g e s :

• When prices change frequently, it requires a great deal of clerical effort to keep stock records and price issues. • The comparison of job costing is difficult when prices vary on different issues. • When prices rise or fall there is an equal overvaluation or undervalidation of stock. This may be particularly undesirable when stocks are overvalued, as it becomes necessary to “write off” the excess value.

Standard Price

Issues are made at a fixed price irrespective of actual purchase price or quantity. This standard price is determined by analysis of market prices, future requirements and must be set for a specific period, usually 6 or 12 months. When consignments are received the difference between the purchase price and standard price is credited or debited to a “variance account.” The balance of this account at the end of the financial period is reflected in the Profit and Loss Account as an overhead.

A d v a n t a g e s :

• This is an easy method for pricing issues. • The possibility of error due to changing prices is reduced. • Issues and receipts are priced at a constant rate and it is not necessary to extend financial balances. When such a balance is required, it can be readily obtained by multiplying the physical balance by the standard cost.

• There is less clerical effort in posting entries on stock records. • Job comparison, in terms of material use and manufacturing efficiency, is easier.

D i s a d v a n t a g e s :

• When material prices rise or fall there is an equivalent under or overvalidation of stocks. • Unless the standard price is set with a close degree of accuracy, there will be a danger of losing the profit necessary for the successful running of the business. It is possible that material costs are being overrecovered, but this may well make the organisation unprofitable due to quotations being uncompetitive. • Very careful recording must be carried out to ascertain why differences between standard and actual costs occur, so that future standards may become more accurate.

Average Price

An issue price is arrived at by dividing the total purchase price by the total quantity in stock, giving an average price for each item. When a further delivery is received the total purchase price and quantity must be added to the existing stock balance and value (at average cost), and a new average calculated. This exercise must of course be repeated for every new receipt.

A d v a n t a g e s :

• Each item bears an equal proportion of the total purchase price. • Pricing issues are easier. • Easy to operate when machine accounting is used. • Stock balances when calculated into monetary terms are at cost. • Large or frequent price changes are levelled out.

D i s a d v a n t a g e s :

• Calculations are necessary after every receipt. • Goods returned to stores may be difficult to price. • The difficulty in comparison of job costs due to varying material costs. • The balancing of accounts becomes more difficult.

Market Price (or Replacement Price)

All issues are charged at the current market price at the time of issue.

A d v a n t a g e s :

• It provides a good basis for quotations to customers, because the material content is priced at current rates. • Variations in material costs, with the resulting profit or loss, are shown up in the stores accounts rather than the works account.

D i s a d v a n t a g e s :

• A great deal of work is necessary to maintain a record of current prices. • Stocks are likely to be over- or undervalued.

Selling Price

Issues are priced out at a rate that includes a profit margin, calculated to recover stores costs.

A d v a n t a g e s :

• Stores units become self-supporting because the stores costs are recovered directly from issues and not through overheads. • Profits or losses that occur tend to be standard throughout the organisation, and this often results in discrepancies being noticed more frequently, which

is very often the case wherein different divisions of a large organisation are critical of the prices charged on stock transfers. • The balancing of individual storehouse accounts is made easier.

D i s a d v a n t a g e s :

• Due to profit being included in stock values, the true value of the stock held requires detailed examination of stock records to arrive at the correct figure. • For balance-sheet or tax purposes, the cost price is necessary, and this requires calculation.

General Comments

The choice of pricing method is dependent on the nature of the business and the class of material, many organisations using several systems. The following are typical examples of use:

Cost Price

Used for short-run jobs that are typical in jobbing shops, cost price is commonly used for pricing main equipment, machines, or high-value items and bought-out items that require no processing before despatch to a customer.

Standard Price

Standard price is used where large-scale issues are regularly made, as in the mass production industries or large supply organisations such as County Council Stores or the armed services.

Market Price

Market price is used mainly for raw materials where prices fluctuate, particularly in merchantile organisations dealing in such commodities.