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ACC 305 Costing And Pricing Issues For Australian Freight Transport Company

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Question:

Analyse the issues or problems (in a given scenario) using management accounting techniques and tools, and formulate recommended solutions.
 
 

Answer:

Memorandum 

Memo to: Board of Directors

Company: Jayde Transport

From: ABC Consultancy Firm

Subject: Discussion of costing and pricing policies

Date: 09/01/2018

As per the discussions which were held in the meeting the company Jayde Transport needs to revise the current pricing strategy and also introduce a proper costing procedure which can improve the business’s profits. Jayde Transport is an Australian Freight Transport Company is engaged in the service sector business of transportation by rail and road which involves interstate transport services, wharf cartage and various goods transport which includes warehousing and distribution of the same. The company operates in Australia and is considered to be a reliable service provider in Australia. The analysis and recommendations of ABC Consultancy firm which are applicable to Jayde transport business are given below in point form:

Most of the organisations involved in service sector follow operating costing method for computation of costs. In this method cost are allocated by identifying the cost units which are most suitable for the business, for example in a transport business the cost unit normally is time or passenger/km or goods/km. The first major problem that any service providing business faces is to correctly identifying the cost unit which will be measuring standards for the costs and pricing techniques. Secondly there is a problem of taking into consideration of all factors from where cost arises. In a production line of business it is easy to identify each and every cost items but in a transport company a certain rate has to be ascertained on the basis of which calculations can be made distance wise. Thirdly there may be more than one cost units available for a service providing business which may cause confusion which cost unit to consider, for eg in a transport business there is passenger or goods per distanced travelled and there is a another one which is on a time basis maybe hourly basis.

In case of Jayde transport they compute their costs on the basis of distance covered and goods weight also comes into consideration. In case of transportation services provided to passengers then the calculations is done on the basis of the distance which is travelled by per passengers. The difficulties that the business faces is in identifying the proper cost unit which can be selected for the purpose of cost computations and determining the price that is to be charged.  Another difficulty which arises in the calculations of cost is that the problem of identifying the different areas where costs are incurred. The service sectors are different from production business which has inventory costs and such costs can be divided into direct material and direct labour costs. However this is not applicable in case of service providing businesses. 

 

As per the analysis of cost and pricing structure of Jayde Transports, ABC consultancy firm can suggest the application of Activity Based Costing (ABC method) can bring about improved results in cost and pricing structure of the business. Activity based costing is a technique which identifies particular activities in an organisation and then allocate the cost of the activity on the resources on the basis of consumption of the resources by that particular activity. The activities of the business are classified into categories which are Category A, Category B and Category C respectively. In such a way business can chose which activity is profitable and which are less profitable. This is significant in the service sectors as the method measures the profitability on the basis of activities and ranks them accordingly. As direct material and labour costs are not so much applicable in a service sector business, therefore the main cost components are absent. However these businesses do need to have an correct cost figure which they will incur in a business in order to plan the price for the services and ensure that profit is being earned. The common things which a service must need to find out is which services are profitable and where should be the focus of the business and the basis of setting prices of various services. Jayde Transport should adopt the Activity Based costing techniques which would then identify each activity and then rank the activities to identify which activity or service is earning the company the maximum percentage of profits. The company can then ensure that maximum of the resources and costs which are incurred by the company are directed towards the services which are earning the company maximum amount of profits in a rank order wise. Activity Based Costing has become increasingly important for companies who have more competitors. Since ABC is really about cost management, using it allows service companies to reduce and control their costs in order to make correct pricing and other decisions, and to increase their profitability. As for the pricing technique the company should apply cost plus pricing technique. In this method the prices are calculated on the basis of costs. The cost figure as obtained by the company is added with a certain percentage of profit which the management decides. The percentage of profit which is to be added is entirely up to the judgement of the management.

ABC consultancxy firm can provide Jayde Transport with the following recommendation:

Jayde Transport should incorporate Activity Based Costing technique in their costing structure in order to make the costing process more effective

The company should follow cost plus pricing techniques and charge the clients on the basis of distance travelled or on the weight of the goods which is being transported.

The company need to ensure that the costs are directed towards the services which earns the company maximum amount of revenues.

ABC consultancy firm has previously incorporated such a strategy in another service sector firm and the firm is performing well with the new cost system implemented in their process. ABC consultancy firm would like to offer the same services to the management of Jayde Transports and the company can rest assured that the company will notice significant changes in their cost and pricing structure if the company accepts the services of ABC consultancy firm. 

 

Reference

Dong, J., Liu, C. and Lin, Z., 2014. Charging infrastructure planning for promoting battery electric vehicles: An activity-based approach using multiday travel data. Transportation Research Part C: Emerging Technologies38, pp.44-55.

Emblemsvåg, J. and Bras, B., 2012. Activity-based cost and environmental management: a different approach to ISO 14000 compliance. Springer Science & Business Media.

Tsai, W.H., Lee, K.C., Liu, J.Y., Lin, H.L., Chou, Y.W. and Lin, S.J., 2012. A mixed activity-based costing decision model for green airline fleet planning under the constraints of the European Union Emissions Trading Scheme. Energy39(1), pp.218-226.

Schulze, M., Seuring, S. and Ewering, C., 2012. Applying activity-based costing in a supply chain environment. International Journal of Production Economics135(2), pp.716-725.

Nagle, T.T., Hogan, J. and Zale, J., 2016. The Strategy and Tactics of Pricing: New International Edition. Routledge.

Liozu, S.M. and Hinterhuber, A., 2013. Pricing orientation, pricing capabilities, and firm performance. Management Decision51(3), pp.594-614.

Dee, P., Hanslow, K. and Phamduc, T., 2014. Measuring the cost of barriers to trade in services. In Services Trade Reform: Making Sense of It (pp. 97-123).

Enderwick, P. and Enderwick, P., 2013. Some economics of service-sector multinational enterprises. Multinational Service Firms,(London and New York, NY: Routledge, 1989), pp.3-34.

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