Kim operates a bakery which specializes in making different kind of bread and related products such as cakes and pies. The business has been struggling in the recent months and is either making losses or very small profit in last few months. He is of the view that main problem with the business is the pricing of different products.
Problem with pricing of different products
The major problem for the bakery is to price all the individual products that the company has on offer. Since the resource estimate for each of the products are not well defined, there are chances of over pricing one product and underpricing the other. He determines using his objective thought process what is the probable value of the product and that is how they set the pricing of the product. Kim has identified that there is a need to identify the actual product cost and then put up a margin above it which will insure that not a single product is sold in loss. If this strategy is implemented properly then there won’t be any issue with the pricing of the product. It has been seen historically in any business if one can identify the costing of the product in the right manner and is able to charge the mark up on the costing to the customer, the business won’t see any losses (Beguer?a, 2014).
As we can see from the various aspects of costs in the bakery, there are some which qualifies as fixed costs and some which qualifies as Variable costs to the product. The fixed cost is something which is recovered over a period of time, while variable cost of the costs of goods sold need to be recovered in the raw pricing of the product. In this case rent, bakery equipment, insurance policy are fixed costs and that is something which needs to be recovered from the contribution margin (Beguer?a, 2014). While the other costs such as costs of raw material, electricity, heating, advertisement, and staff cost are variable costs. These set of costs need to be recovered within the pricing. The main difficulty which Kim has in determining the costs are the fact that what cost goes to which product line. As seen in the case Kim has different product lines and hence what aspects of the cost goes to which head is very important to determine.
The pricing model in this case which Kim wants to implement is pricing recovery model. Under this model the business intends to recover all aspects of the cost and make sure that all cost heads are built into the price. This kind of model works well into a manufacturing system as each aspect of cost is very well defined. However in case of service of complex inputs into the product it becomes very difficult to determine the exact price of the product.
Advice for Kim
It is advisable to Kim that he breaks down all fine inputs which goes into final product preparation. This will help in drilling down the exact cost of the product. It is very important that product has all possible inputs on pricing. This is the reason why Kim should work on determining all critical aspects of the business and then map out which resource is going into which production unit. This will finally help in mapping all aspects of the business and then do proper costing exercise.
Budgeting is one of the most critical exercise and it is very important that all organizations adhere to it in all possible details. This is one annual exercise which if performed in details helps out individuals in meeting all requirements of the organization. Budgeting tends to become the benchmark for an organization to follow. Budgeting is a very important process in the whole business system. The budgets are generally created at the start of financial year or may be at the end of the previous financial year. Lot of historic information is used and then the same is mapped on the current market situation. Budgets stand to become the benchmark which the business need to follow throughout the year and report to the management of the company. The budgets are generally approved by the board of the company and are used to compare the actual performance of the company vis-?-vis the budget. The performance assessment of the business involves lot of analysis and one should see what are the possible targets or benchmark with which one compares the actual numbers. In preparation of the budget all targets that the business wants to achieve or can achieve are built into the budget. This is then used actively by the business and then the same is mapped with all other aspects of the business. It is expected that from any business house that they will detail out all aspects of the business in the form of numbers. This numbers are driven by different business function heads who articulate the expected revenue numbers. This revenue numbers are function of business situation, historical revenue numbers, market share of the business and the possible strategy and the resultant growth in the coming year. The modern day businesses thrives on the budget and the management derives lot of its strategy based on the budget. The budgeting numbers help in distributing targets to the line manager. The line manager then tends to take it to the whole sales team who are responsible for actual sales. On the other side there are people involved who are responsible for proper cost management. The expenses of the company ideally should not cross the budgeted figures. This is where people who are responsible for expenses need to monitor using the budget all the expenses. Any variances that can occur under this category now need to be reported and approved by the management. The budget tends to a good benchmark vis-?-vis which business compares itself. All the variances whether revenue or expenses need to be reported to the management who will then explain it to the board.
The variance tracking in businesses vis-?-vis the budget is a very important activity across business houses. The reason for the same is the fact that it helps the business maintain checks and control over its performances and take corrective actions if any. Let us see with an example on how a typical company might consider few business decisions before making a budget.
Some of the key initiatives planned for Company X for Jan17 – Mar18 are and change management procedure may be considered for these:
Marketing – target US market;
Delivery strategy to address global clients other MCO & Covance – shall have clarity once we have the marketing strategy in place;
Upgradation of Product to cloud-based version available across devices with added functionalities;
Encryption of web-hosted db (client data) for website;
Migration to HRMS cloud-based solution – ongoing process of evaluation of vendors from the functional and infosec perspective;
Implementation of a Learning Mgmt Solution for measuring training effectiveness;
Migration to INDas for A/c (external change);
Implementation of GST (external change);
Enhancement of BCP capabilities to include scenario of primary site server & shared drive not accessible for processes run on ICRON network;
Capabilities to operate seamlessly as a multi-locational unit with possibility of setting up a small delivery centre in another city;
Adoption of new technologies like visualization & ..;
Migration to ISO 9001:2015.
So this typical business house need to consider all this inputs as broader perspective before taking a budgeting call. As we can see company intend to take some new expenses in the coming year for better revenue flow, this is where the costing teams need to incorporate all possible expenses and cash outflow from the company. We have now been able to see why budgeting is so important and why all critical inputs totally add up to a lot when making a budget.
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