Modern Approach to Product Pricing and Costing
As we know the world of industrial production has undergone various significant reorganizations and changes. Most of it is now characterized by:
Capital-intensive and machine-paced production
Machines are at the heart of much production, including both the manufacture of goods and the rendering of services. Most labour supports the efforts of machines, for example, technically maintaining them. Also, machines often dictate the pace of production.
A high level of indirect costs relative to direct costs
Modern businesses tend to have very high depreciation, servicing and power costs. There are also high costs of personnel and staff welfare, which were scarcely envisaged in the early days of industrial. Production. At the same time, there are very low (sometimes no) direct labour costs. Although direct material cost often remains an important element of total cost, more efficient production methods lead to less waste and, therefore, to a lower total material cost, again tending to make indirect cost (overheads) more dominant.
A highly competitive international market
Production, much of it highly sophisticated, is carried out worldwide. Transport, including fast airfreight, is relatively cheap. Fax, the telephone and, particularly, the internet ensure that potential customers can quickly and cheaply find the prices of a range of suppliers. Markets now tend to be highly price competitive. Customers increasingly demand products custom made to their own requirements. This means that businesses need to know their product costs with a greater degree of accuracy than historically has been the case. Businesses also need to take a considered and informed approach to pricing their output.
In the UK, as in many developed countries, service industries now dominate the economy, employing the great majority of the workforce and producing most of the value of productive output. Though there are many self-employed individuals supplying services, many service providers are vast businesses such as banks, insurance companies and cinema operators. For most of these larger service providers, the activities very closely resemble modern manufacturing activity. They too are characterized by high capital intensity, overheads dominating direct costs and a competitive international market.
- Tradional Approach to Product Costing and Pricing
The traditional, and still widely used, approach to job costing and product pricing developed when the notion of trying to determine the cost of industrial production first emerged. This was around the time of the UK Industrial Revolution when indust