Production cost
With the due passage of time, RealFood has assumed a strong status in the market. Despite all competition, it crafted a niche for itself in the market. As it is getting huge orders and the products are being sold in health food outlets around the country like About lIfe, Coles, etc it is the need of the hour that the company should flourish itself in the system of cost management. As there are various product range like granola bars, museli bars, chocolate/yogurt it is important that the company should have a proper system of the cost that will enable the classification of costs.
The importance of cost classification is of vital importance to the company at large and considering the case of RealFood, it is more important owing to the products that are being dealt.
Production cost
One of the major steps in the classification of the cost is the classification of the production costs. It is used to ascertain the gross revenue, raw materials needed by the company, wholesale product and direct labour that is directly linked to the cost of production. Capturing such values helps in the classification of the cost and will help the CEO in understanding how much is the costing that the company requires to manufacture a product (Kim, 2008). As seen in the case of RealFood it is difficult to ascertain the exact cost and the pricing is done as per the experience that might not be completely accurate hence, a special emphasis on the cost of the product will lead to better result.
Proper cost classification, when managed by the accounting system of the company, helps the manager to know the need of data that makes up the cost of production is contrary to the material cost for the repair of the production line. Hence, classification of cost helps will help RealFood in understanding the ascertaining the classification of data (Lanen, Anderson & Maher, 2008). When such value is captured it helps in knowing the cost needed to manufacture a product.
It needs to be noted by RealFood that the profit can be enhanced by following either of the two methods that is the reduction and control over the costs or by enhancing the value of sales through the increment in the sales volume or price. Therefore, fixation of selling price is vital for the management of RealFood. The divide of costs into fixed, as well as variable elements, helps the management to undertake the best selling price policy, however, the selling price should not be below the variable cost (Petty et. al, 2012).
Demand-based pricing and Cost-plus pricing
Going by the nature of operations of RealFood, it can be stated that demand-based pricing and competition based pricing can be used. When it comes to demand-based pricing it can be said to be a pricing mechanism where the product prices are finalized as per the demand. If the demand for the product is high then the organization prefers to set higher prices so that the gain can be more (Horngren, 2011). However, if the demand is less, lower prices can be set to drive the customers. In the case of RealFood, there are many products that are related to health and the presence of demand-based pricing will help in setting the prices as per the demand.
The second method that can be used is the cost plus pricing. It is already noted that the manager by experience ascertains the cost of the product. This is done by assessing the ingredients that are being used. Hence, in order to determine the cost, the method of cost-plus pricing can be used in an effective manner. When the price is ascertained, a fixed percentage that is the markup percentage is even added to the total cost. This helps in deriving at the price that will help in yielding profits too (Lanen, Anderson & Maher, 2008). For example, if RealFood is selling a product at $5 then another $1 can be added to know the final price of the product that sums the total amount at $6. This is effective for RealFood in the sense that the company is a food retailing company that sells health-related snacks and food. In this scenario, it needs to be noted that order pertains to different needs. Hence, in the advent of the changing requirement, this method will suffice the best result. Further, the utilization of this method can be effective in case of big order where the
Cost-plus pricing is also known as average cost pricing. This is the most commonly used method in manufacturing organizations (Broad & Crowther, 2001).
Activity-based costing is an important tool when it comes to the ascertainment of costs. It enables the organization to gain sharp insight into the products and knows that are profitable and those not. The life cycle of a product can be known with ease and trace the areas where improvement is needed. Hence, this is highly effective for RealFood as the price can be known with ease (Marsh, 2009).
Activity-based costing
Activity-based costing can be defined as cost price computation and hence the allocation of drivers are done to the cost that is incurred. In this scenario, it is assumed that there is a strong link between the products and the costs that accompany. ABC spots the link between the business activities and the resources required to manage by assignment of the cost to every resource hence projecting the overall expense of the activity. When it comes to real food there are many situations that need to be revealed and with the help of the ABC method, such offerings can be done with ease (Broad & Crowther, 2001). when a value is added to the product, this method is framed in a manner that leads to the more informed decision and projects the pricing mix, investments and change in the overall organization. ABC can, therefore, be commented as a tool that helps in identification and grasp of the cost control followed by an enhancement in the productivity, as well as profits (Needles & Powers, 2013). The introduction of ABC will help RealFood to lessen the total 3% to 5%. When the focus shifts to higher margin and growth products, it is more likely to bring a 5% to 10% increment in the overall revenue.
Hence, an overall analysis of the ABC method gives a vivid description that the method of ABC is highly effective for RealFood as it is directed towards the benefit of the organization as a whole. ABC can, therefore, be said to be an important tool that helps in knowing the various situation that a product undergoes before the completion and the cost that is involved in it (Parrino, Kidwell & Bates, 2012). Hence, the management of RealFood can take the recourse of this method ass it will help in knowing the cost with ease and better pricing decision can be taken in this regard. The overall production cost or the cost of a unit can be known through it and hence, it is highly effective (Larry & Christopher, 2012).
Conclusion
The overall analysis and report sheds light on the fact that strategies of the company reflect their potency. The introduction of ABC is an important tool in the hands of the management that will help the business to flourish. It is helpful when it comes to classification of cost. In all probability, the chosen method will deliver the best result to RealFood.
References
Broad, M., & Crowther, D. (2001). Activity based costing in universities – an inappropriate technique? Journal of Applied Accounting Research, 6(2), 55-89. Available from: https://search.proquest.com/docview/1031187247?accountid=30552
Horngren, C. (2011). Cost accounting. Frenchs Forest, N.S.W.: Pearson Australia.
Kim, L.S. (2008). Activity based costing in universities – An inappropriate technique?. Accounting, Auditing & Accountability Journal. 21(2), 204-228.DOI:10.1108/09513570810854400
Lanen, W. N., Anderson, S & Maher, M. W. (2008). Fundamentals of cost accounting. NY: Hang Loose press.
Larry M. W & Christopher J. S. (2012). Managerial and Cost Accounting. Pearson Press
Marsh, C. (2009). Mastering financial management. Harlow: Financial Times Prentice Hall.
Needles, B.E. & Powers, M. (2013). Principles of Financial Accounting. Financial Accounting Series: Cengage Learning.
Parrino, R, Kidwell, D. and Bates, T. (2012). Fundamentals of corporate finance. Hoboken, NJ: Wiley
Petty, J. W, Titman, S., Keown, A. J., Martin, J. D., Burrow, M. and Nguyen, H. (2012). Financial Management: Principles and Applications, 6th ed. Australia: Pearson Education Australia.
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