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Pricing is a key indicator of business efficiency, as it affects the cost of production of the enterprise, to realize production in the form of revenue that affect the amount of revenue of the enterprise and finally it is important indicators for creation of profit in the enterprise that it consist of difference between revenues and expenses of the enterprise. In this article we will discuss methods of pricing for the selected product and we will examine the impact on economic efficiency of the enterprise. We will use various methods such as the method of pricing single division; Activity based costing, Target costing and point out the importance of the pricing methodology for the selected enterprise. Calculation methods are very important for profit creation in the business. New product must accept requirements of customer and price of the new product must be acceptable for customer. The price of new product is very important for business because it create costs and important for production processes. Price of new product TOP ZONE 200 must accept requirements of customer, competitive price and production costs. At the same time this price must bring competitive advantage and added value for the enterprise.
Content may be subject to copyright.
Procedia Economics and Finance 34 ( 2015 ) 149 – 155
Available online at www.sciencedirect.com
2212-5671 © 2015 Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
Peer-review under responsibility of the Organizing Committee of BEM2015
doi: 10.1016/S2212-5671(15)01613-5
ScienceDirect
Business Economics and Management 2015 Conference, BEM2015
Comparison of Methods for pricing of the Product and its impact on
economic Efficiency of Enterprise
Katarína Teplickáa
*
aassoc.prof. of Management and Economy,Technical university of Košice, Letná 9, 042 00 Košice,Slovakia
Abstract
Pricing is a key indicator of business efficiency, as it affects the cost of production of the enterprise, to realize production in the
form of revenue that affect the amount of revenue of the enterprise and finally it is important indicators for creation of profit in
the enterprise that it consist of difference between revenues and expenses of the enterprise. In this article we will discuss methods
of pricing for the selected product and we will examine the impact on economic efficiency of the enterprise. We will use various
methods such as the method of pricing single division; Activity based costing, Target costing and point out the importance of the
pricing methodology for the selected enterprise. Calculation methods are very important for profit creation in the business. New
product must accept requirements of customer and price of the new product must be acceptable for customer. The price of new
product is very important for business because it create costs and important for production processes. Price of new product TOP
ZONE 200 must accept requirements of customer, competitive price and production costs. At the same time this price must bring
competitive advantage and added value for the enterprise.
© 2016 The Authors. Published by Elsevier B.V.
Peer-review under responsibility of the Organizing Committee of BEM2015.
Keywords: price, calculated methods, target costing, activity based costing, efficiency.
1. Introduction
The calculation of product is today very important and the calculation is necessary in term of customer requests and
customer needs. Today most companies need to keep competitive capabilities two principle factors - better quality
* Corresponding author. Tel.: +421556022997.
E-mail address: katarina.teplicka@tuke.sk
© 2015 Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
Peer-review under responsibility of the Organizing Committee of BEM2015
150 Katarína Teplic / Procedia Economics and Finance 34 ( 2015 ) 149 – 155
and lower price (Sarokolaee et al., 2012). By the creation of calculation is important to accept quality of product and
to value price of product following the quality. Today customers influence price of product by specifications of
product and producers, businessmen must to adapt price of product to customer requirements.
This reason is stimulus to change creation of calculation and to use new modern methods of calculation for
example activity based costing, target costing, kaizen costing and job costing, inventory costing (Baharudin, Jusoh,
2015). Utilization of these methods in companies brings some specifics. These methods produce better evidence of
costs and price of product but they are very difficult to introduce in praxis. Very important role in companies brings
implementation of a price management system (Zengin, 2010). Integral part of calculation creation is knowledge
management. Knowledge management will be orientated to know everything about customer and needs of
customers, market specifications and possibilities how to be competitive, something about competition and her
strategy in area of calculation and many companies adopt concurrent new product development processes and target
costing is a cost control method for this access (Gopalakrishnan et al., 2015).
Under conditions of increasing competition and continuing downward pressure on product prices is the cost
management activities, which must be thoroughly overhauled and cost management becomes part of the
management tools that companies use to ensure economic efficiency and cost management (Meghabber, 2015).
Costs such as basic economic category affecting the operating result is in many cases the subject of barriers to
business, and may also cause out of business, leading to bankruptcy or bankruptcy and liquidation of enterprises.
Cost management in many companies is not systematic and that is why the question of the introduction of cost
controls as a tool for effective decision making, planning and cost management is very important and necessary.
Enterprises to improve business conditions require a systematic, process instruments with which they manage their
cash flow, which is also reflected in cost categories.
2. Material and Methods
We will use these methods of calculation of product paving stone TOP ZONE 200 in this paper (fig.1): method
of pricing single division, activity based costing, target costing.
Fig. 1. Paving stone - Top zone TZ 200.
Method of pricing single division is very easy and the most usefully in praxis. The basis of this method is to
count all costs of production of the product and dividing the quantity of products. By these methods is very
important to use information about costs of cost management system. Cost controlling is new approach for cost
management system (Šatanová & Potkány, 2004). Change of costing means a rational view of cost accounting and
using a lot of costing techniques. Cost information is important for managerial decisions and for achieving economic
efficiency (Cinquini, L., 2015). Cost accounting is now part of business information systems (Rajnoha, 2013). This
method requires very effective system of costs. This system must contain evidence, planning, analysis of costs,
evaluate of costs, calculation, accounting, control of costs. Disadvantages of this method are in the allocation of all
business costs for manufactured products which do not relate to the production (Potkány& Hitka, 2009).
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Katarína Teplic / Procedia Economics and Finance 34 ( 2015 ) 149 – 155
The second method is activity based costing. This method it means effective way to control costs of product
thought processes and very hard is to identify the activities of production. Activity need cost items for calculated
price of product (Tornberg et.al, 2002). ABC /M system as an enabler to improve the operations decision making
(Gupta et.al, 2003). Methodology of ABC focuses on cost allocation in operational management (Vetráková et al.,
2013). ABC helps to segregate fixed cost, variable cost, overhead cost. The split of cost helps to identify cost
drivers, if achieved. Direct labor and materials are relatively easy to trace directly to products, but it is more difficult
to directly allocate indirect costs to products. Where products use common resources differently, some sort of
weighting is needed in the cost allocation process. The cost driver is a factor that creates or drives the cost of the
activity. ABC has proven its applicability beyond academic discussion. ABC is applicable throughout company
financing, costing and accounting: ABC is a modeling process applicable for full scope as well as for partial views,
ABC helps to identify inefficient products, departments and activities, ABC helps to allocate more resources on
profitable products, departments and activities, ABC helps to control the costs at any per-product-level level and on
a departmental level, ABC helps to find unnecessary costs that may be eliminated, ABC helps fixing the price of a
product or service with any desired analytical resolution (Lapašinskaite, 2005). A report summarizes reasons for
implementing ABC as mere unspecific and mainly for case study purpose: better management, budgeting,
performance measurement, calculating costs more accurately, ensuring product /customer profitability, evaluating
and justifying investments in new technologies, improving product quality via better product and process design,
increasing competitiveness or coping with more competition, management, managing costs, providing behavioral
incentives by creating cost consciousness among employees, responding to an increase in overheads, responding to
increased pressure from regulators, supporting other management innovations such as TQM and JIT systems.
Fig. 2. Algorithm of activity based costing.
The third method is target costing. This method is strategic managerial tool and this method reduces risk of
financial derivatives (Balea, E.C, 2013). Target costing is defined as a structured approach to determine the life
cycle cost at which a proposed product with specified functionality and quality must be produced to generate the
desired level of profitability over its life cycle when sold at its anticipated selling price (Cooper et.al, 1999). Target
cost = target selling price target profit margin. Target costing is method that is implemented in praxis and it is
relevant for manufacturing firms. In service firms is hard to implement this method and the level of implementation
of technique is challenging (Yazdifar, 2012). Target costing plays critical role in managing costs (Meghabber,
2015). This method reduce the cost of new product, guarantee the level of profit, satisfy the level of quality,
demand the price by the market, motivate all employees to achieve profit. Definition of target costing encompasses
the principal concepts: products should be based on an accurate assessment of the wants and needs of customers in
different market segments, and cost targets should be what result after a sustainable profit margin is subtracted from
what customers are willing to pay at the time of product introduction and afterwards. These concepts are supported
by the four basic steps of Target Costing: 1. Define the Product, 2.Set the Price and Cost Targets, 3. Achieve the
Targets. 4. Maintain Competitive Costs. Japanese companies have developed target costing as a response to the
problem of controlling and reducing costs over the product life cycle. Target costing is a system under which a
company plans in advance for the price points, product costs, and margins that it wants to achieve for a new product.
Allocation of activities
Determinants of activities
RESOURCES
Allocation of resources
ACTIVITY
COST OBJECT
Determinants of resources
152 Katarína Teplic / Procedia Economics and Finance 34 ( 2015 ) 149 – 155
If it cannot manufacture a product at these planned levels, then it cancels the design project entirely. With target
costing, a management team has a powerful tool for continually monitoring products from the moment they enter the
design phase and onward throughout their product life cycles. It is considered one of the most important tools for
achieving consistent profitability in a manufacturing environment.
Fig. 3. Algorithm of target costing.
3. Results and Discussion
We prepared price for new product in the firm and we used these methods - method of pricing single division
(table 1), Activity based costing (table 2), Target costing (table 3). We needed a lot of information about costs and
we used cost accounting system in the firm. The first method was simple and based on economic information from
financial accounting. We found the actual costs and quantity of production. Price of product was following:
Table 1. Document of price calculation method of pricing single division (MPSD).
Cost elements
Value ()
Direct material
63,18
Direct labor
9,00
Overhead
5,55
Administrative expenses
5,00
Marketing expenses
5,37
Summary costs
88,10
Profit 5%
4,40
Price of product
92,5
This method accepts all costs of production and profit 5 %. Summary price was 92, 50 € for calculation unit (10 m2).
For production of paving stone we need to accept direct material. Very important part of product is aggregate,
cement, color mix, plasticizer. Calculation unit is 10 m2. This method also includes the cost of losses and the costs
of packaging and pallets. Traditional method is not motivation of cost reduction. This price was acceptable for firm
and for customers, but not for competition. This method is acceptable for the product price but increases costs of the
firm and it decreases economic efficiency and profit.
cost price
+ profit
actual costing
+ cost of sales
+ production costs
target price
- profit
limit cost of sales
limit of production costs
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Katarína Teplic / Procedia Economics and Finance 34 ( 2015 ) 149 – 155
Activity based costing method is very excellent instrument for evidence. This method allowed us to track
expenses by business processes. High costs are in the processes of stamping, storage, administration, maintenance.
Table 2. Document of price calculation method activity based costing (ABC).
Cost elements
Value ()
Direct material
63,18
Supply
1,26
Stamping
2,79
Drying plant
1,26
Quality control
1,71
Storage
2,27
Administrative
4,20
Maintenance
2,79
Summary costs
79,46
Profit 5%
3,97
Price of product
83,43
These processes must be control. The price of product by this method was 83, 43 € for calculation unit. For
monitoring economic efficiency is important to know, which processes we will reduce in the future. Process of
administrative creates high costs of business and in the future need to look for way to optimize these costs.
Processes as stamping, storage, maintenance create too high costs on calculation unit. Cost reduction is a
prerequisite for achieving acceptable prices for the customer. This method is acceptable for the firm, because it
controls costs of production in all processes. Direct material is the same price as first method because we need the
same material for production. This ABC method is acceptable for the product price, decreases costs on calculation
unit for direct labor, overhead, administrative expenses, marketing expenses; it increases economic efficiency and
profit.
Target costing method is challenging method for implementation. In first step we obtained price of product of
customer trough exploration. We had 50 customers. Price after exploration was 80 € on calculation unit. For that
price we counted profit to calculation unit and we got a target costs to calculation unit. Target costs were 76 €.
These costs have to be obtained for production of product - Paving stone TZ 200. This method refers to the
customer's needs and allows you to reduce the cost of production of the product. Reduction of the costs of the
product to saving resources and we achieve sales of product by margin per unit. Returns have an impact on
economic efficiency and the creation of corporate profit.
Table 3. Document of price calculation method of target costing (TC).
Cost elements
Value ()
Direct material
56,8
Direct labor
7,8
Overhead
4,6
Administrative expenses
4,0
Marketing expenses
2,8
Summary costs
76,00
Profit 5 %
4
Price of product
80
On the principle of comparison calculation methods when determining the price of a new product Paving stone
TOP Zone 200 we concluded that the best price of economic efficiency is price by target costing method (table 4).
154 Katarína Teplic / Procedia Economics and Finance 34 ( 2015 ) 149 – 155
It's the price accepted by the customer, this price of products bring 5% profit to calculation unit and the cost of
producing the product are acceptable for the firm.
Table 4. Comparison of methods.
Cost elements/ Value (eur)
MPSD
ABC
TC
Direct material
63,18
63,18
56,8
Direct labor
9,00
5,43
7,8
Overhead
5,55
4,58
4,6
Administrative expenses
5,00
4,20
4,0
Marketing expenses
5,37
2,07
2,80
Summary costs
88,10
79,46
76,00
Profit 5%
4,40
3,97
4,00
Price of product
92,50
83,43
80,00
Calculated methods of price give very important view on product price. This product TOP ZONE 200 is new
product for the firm and the firm needs to know impact on economic efficiency of the enterprise. We obtain very
important economic index for the enterprise economic efficiency (e). This index defines count: Revenues / Costs.
If this value is more than one is good efficiency. Very good efficiency is by the price of target costing method. This
method is acceptable for the new product TOP ZONE 200.
Table 5. Impact on economic efficiency of the enterprise.
Methods (Volume )
MPSD
ABC
TC
Summary costs
88,10
79,46
76,00
Profit 5%
4,40
3,97
4,00
Price of product (10 m2)
92,50
83,43
80,00
Production costs
88100
79460
76000
Profit
4400
3970
4000
Revenues
92500
83430
80000
Efficiency (e) (Revenues/Costs)
1,049
1,049
1,052
4. Conclusion
Difference of results from traditional calculation, activity based costing and target costing presents (table 4).
Through comparing of various methods could find out reserves in area of costs decreasing by the way it could
satisfy demands of client at the level of target price. Target price is decisive factor not only for client, but also for
the single company, since it presents base for creation of the profit, which is very necessary for survival of the
company. We compare calculating methods at the pricing of product. Calculation of product is very important
nowadays and from the view of clients´ needs and demands satisfaction it is also very necessary. Requirement to
know individual elements, consisted in product’s price, results from demands on quality of given product and
evaluation of product’s price in relation to its quality. In present time customers influence considerably product’s
price by their demands and therefore producers, businessmen must nowadays adapt prices of their products to
demands of customers.
Acknowledgements
This paper is sectional part of project VEGA 1/0669/13 - Proactive crisis management of industrial enterprises
based on the concept of controlling and project VEGA 1/0961/13 - Process management of state government.
155
Katarína Teplic / Procedia Economics and Finance 34 ( 2015 ) 149 – 155
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