Management Accounting in Pricing Decisions

Abstract

Pricing is one of the most important decisions made by the management (Skouras, Avlonitis and Indounas 2005). It is an important management tool to achieve the objectives of the organization (Kasper, Helsdingen and Vries 2000, p.627). However, pricing decisions do not rely on any one discipline but follow a highly complex process encompassing many different theoretical aspects such as accounting, economics, and marketing (Hornby and MacLeod 1996). It is simultaneously affected by cost and demand conditions which are not parallel and are difficult to align as an efficient decision supporting the strategic objectives of the firm. If the price of a product is too low, it leads to a high quantity of (demand and) sales but, at the same time, to low markup and profit (profitability). If the price is too high, it gives a high markup on variable cost but may lead to losses due to fixed costs and low demand quantity when sales volume does not exceed the breakeven point. In order to reach a reasonable size (and growth) and profitability, the price must be within a certain range. This price range determines in practice the degrees of freedom existing in pricing decision making. In this range, the price should be set to best support the strategy of the firm.KeywordsMarginal CostManagement AccountPrice DecisionSales RevenuePrice TargetThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.