Question

Balance scorecard:

Describe the price setting process and its features of a balance scorecard.

How can managers use cost accounting information when setting prices?

Answer 1

SOLUTION :

DEFINITION OF BALANCE SCORECARD :

A balance scorecard is a strategy performance management tool -a semi-standard structured report, that can be used by managers to keep track of the execution of activities by the staff within their control and to monitor the consequences arising from these actions.

THE PRICE SETTING PROCESS :

1. Setting price objectives:

Refers to set the goals of the pricing policy. An organization can have multiple pricing objectives.

Some of the price objectives are discussed as follows:

a. Survival:

Involves the formulation of a short-term price objective to face the fierce competition. The price of a product is reduced to increase sales volume. However, this strategy does not work in the long term as an organization would not be able to cover its costs, thus, profit margin may decrease in future.

b. Quality of a Product:

Affects the price of products. An organization incurs high cost in research and development to improve the quality of a product. Therefore, it covers the research and development cost in the price of the product. Sometimes, the organization raises prices to make customers aware about the improved quality of its products.

2. Estimating the product demand:

Helps in knowing the factors that affect the demand of a product. Some of the important factors can be the prices of products, environmental factors, and income and expectations of customers. There are three things that are studied by the marketers for estimating the demand.

These are discussed as follows:

a. Price Sensitivity:

Affects the demand of a product. If the price of the product rises then the demand falls and vice versa. In this case, the demand may shift to the substitute of the product. A marketer tries to study the price sensitivity of the product for making decisions about the price of the product.

b. Demand Curve:

Implies a statistical tool that shows a relationship between the demand and price of a product. It helps in knowing the demand and price fluctuations of the product.

c. Price Elasticity of Demand:

Refers to a percentage change in the demanded quantity of the product with respect to the percentage change in the price of the product. If the demand of a product changes with the change in price then the demand is said to be elastic. On the other hand, if the demand of a product does not change with the change in price then the demand is said to be inelastic.

3. Analyzing the competitor’s prices:

Influences the decisions of setting the prices of products. The pricing strategies of competitors affect the demand of the product and lead to a loss of market share. Thus, it is clear that the marketers should be careful about the future competition.

FEATURES OF A BALANCE SCORECARD :

1. Better Strategic Planning

The Balanced Scorecard provides a powerful framework for building and communicating strategy. The business management is visualised in a strategy map

7 ) BENEFITS OF A BALANCED SCORECARD

Research has shown that organisations that use a Balanced Scorecard approach tend to outperform organisations without a formal approach to strategic performance management. The key benefits of using a BSC include:

1. Better Strategic Planning

The Balanced Scorecard provides a powerful framework for building and communicating strategy. The business model is visualised in a Strategy Map which helps managers to think about cause-and-effect relationships between the different strategic objectives. The process of creating a Strategy Map ensures that consensus is reached over a set of interrelated strategic objectives. It means that performance outcomes as well as key enablers or drivers of future performance are identified to create a complete picture of the strategy.

2. Improved Strategy Communication & Execution

Having a one page picture

of the strategy allows companies to easily communicate strategy internally and externally. We have known for a long time that a picture is worth a thousand words. This 'plan on a page' facilitates the understanding of the strategy and helps to engage staff and external stakeholders in the delivery and review of the strategy. The thing to remember is that it is difficult for people to help execute a strategy which they don’t fully understand.

3. Better Alignment of Projects and Initiatives

The Balanced Scorecard help organisations map their projects and initiatives to the different strategic objectives, which in turn ensures that the projects and initiatives are tightly focused on delivering the most strategic objectives.

4. Better Management Information

The Balanced Scorecard approach helps organisations design key performance indicators for their various strategic objectives. This ensures that companies are measuring what actually matters. Research shows that companies with a BSC approach tend to report higher quality management information and better decision-making.

5. Improved Performance Reporting

The Balanced Scorecard can be used to guide the design of performance reports and dashboards. This ensures that the management reporting focuses on the most important strategic issues and helps companies monitor the execution of their plan.

6. Better Organisational Alignment

The Balanced Scorecard enables companies to better align their organisational structure with the strategic objectives. In order to execute a plan well, organisations need to ensure that all business units and support functions are working towards the same goals. Cascading the Balanced Scorecard into those units will help to achieve that and link strategy to operations.

7. Better Process Alignment

Well implemented Balanced Scorecards also help to align organisational processes such as budgeting, risk management and analytics with the strategic priorities. This will help to create a truly strategy focused organisation.

HOW CAN MANAGERS USE COST ACCOUNTING INFORMATION WHEN SETTING PRICES :

Cost accounting is a specialized branch of accounting that deals with the classification, recording, and allocation of current costs and prospective costs. In the modern commercial world, it is one of the most important techniques or process for a business. The management of an organization and its workers both greatly benefit from it. Let us see how in the importance of cost accounting.

Let us look at some of the importance of cost accounting to the management of an organization,

1] Classification of Costs

Cost is a very generic term, it needs to be classified to be of further use. Cost accounting involves the recording and classification of such costs.

Some costs are prime cost, direct cost, factory cost, selling cost etc. Such classification allows the management to control the costs and ascertain the profitability of any such processes and activities. It also helps in calculating efficiency.

2] Cost Control

An efficient business focuses on controlling the cost of inventory, labor, and various other overhead costs. Cost accounting allows them to do so.

For example to achieve maximum efficiency in their inventory management the can adopt the EOQ technique which is a costing technique.

Similarly, by analyzing costs of labor and capacity of machinery their efficiency can be improved also. Cost accounting also classifies overheads into fixed, variable or controllable, uncontrollable to achieve cost control.

3] Price Determination

Cost accounting makes the basic distinction between fixed and variable costs. This is then used by management to fix the prices of products, according to the costs of the product.

This allows the management to find the most ideal price for the product or the service, not too high and not too low. Take for example a case where the economy suffers depression.

The businessman has to lower the prices of his products to survive these circumstances. So he can begin by trying to control his variable costs allow him to fix his prices.

4] Fixing of Standards

Organizations use standards to make estimates and budgets for the future. They use these as a basis to measure the actual efficiency of the process or department.

There is an entire branch in cost accounting known as Standard Costing dedicated to this process.

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