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Summary P1 Unit 7 Management Accounting
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Distinction Achieved in Unit 7 D*D*D overall
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Neil Patel 40068068 Unit 7 P1P1: Explain how an organisation can cost a product and determine its
price at any activity level
Dear Mr Victor Lakhani,
I am writing this letter today to explain the elements of costs that affects your
footwear business. A few examples of the elements of costs that i will be talking
about is: variable costs, fixed costs, semi-variable costs, direct costs and indirect
costs. The importance of being able to know your costs and how to measure them
and potentially minimise them in any aspect is vital for businesses such as yours and
helps you save extra money for example when paying for material, labour, electricity
etc... during each month.
Variable Costs is a periodic cost that varies in step with the output or the sales
revenue of a company. Variable costs include raw material, energy usage, labor,
distribution costs, etc. Companies with high variable costs are significantly different
from those with high fixed costs.Putting that into context of your own business, if the
shoe laces of 1 shoe costs £1, then the total cost of 10 shoes would amount to £10.
A fixed cost is a cost that does not change over the short-term, even if a business
experiences changes in its sales volume or other activity levels. These costs can not
be avoided and must be paid in order for an essential part of the business to be
running efficiently This type of cost tends to instead be associated with a period of
time, such as a rent payment in exchange for a month of occupancy, or a salary
payment in exchange for two weeks of services by an employee. Fixed costs that
may apply to you are things such as salaries, rent, interest and insurance. These are
necessities that must be paid and your budget must be influenced upon the amount
of expenses you have planned too. Another method of costs would be a semi-
variable cost, this means certain costs are fixed for a range of activity and may
change for different activity levels. For example, rent expense for a production facility
may be £1,000 per month.There are alternate methods of costs such as the direct
and indirect costs. A direct cost is a method of expense that can be identified
alongside a specific activity or product. Indirect costs are costs that are not directly
accountable to a cost object. Indirect costs may be either fixed or variable. These
costs may include the cost of labour and manager’s salary. Cost based pricing is the
easiest way to calculate what a product should be priced at as it appears in two
forms which is: full cost pricing and direct-cost pricing. Cost-based pricing uses
manufacturing or production costs as its basis for pricing. Cost based pricing is a
method which uses a fixed percentage of the total cost including profits is added to
the cost of production to finalise a price.
Kind Regards, Neil Patel
Demand-based pricing,is any pricing method that uses consumer demand - based
on a value.
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