Sunday 13 January 2019



A price is the quantity of payment or compensation given by one party to another in return for one unit of goods or services. A value that will purchase a finite quantity, weight, or other measure of a good or service.

Relation of Cost to Price

Every manager should assign a supplier believes supply a fair price. A fair price is the lowest price to ensure a continuous supply of good quality where and whenever required.
Fair Price for a single seller on the one item may be higher than the price is fair for the other substitution items: both the possibility of a "fair price" as far as the buyer is concerned, and the buyer may pay the price of both at the same time.

Meaning of Cost

Defined only direct labor and material costs, and at the depressed business conditions, the seller will probably only cover the amount rather than not sell everything. May mean direct labor and material costs with overhead contribution. If the cost of some items get into the overhead, will this cost you most recently on the actual interest rate, or cost on an average interest rate? The average interest rate might be far from the actual interest rate.

There are two classifications of fees, namely, direct and indirect.

  • Direct costs are usually defined as something specific and accurate attached on the unit of production; that is, direct material, like 10 pounds of steel, or direct labor ¸ like 30 minutes of time on a machine or assembly line.
  • Indirect costs is one that is within the operation of the production plant or process, but normally cannot be connected directly to the various production units.
  • Classification of costs into the category of a variable, Semi variable, and still is in the practice of accounting and is needed for various analysis price/cost relationship means. Most of the direct costs are variable costs as they change directly and proportionately units produced.
  • Semi-variable Costs may change with the number of units produced but some variable and partially fixed. There is generally a flat fee regardless of the number of units produced.

How Suppliers Establish Price

There are two traditional methods i.e. cost approach and market approach.
  • The Cost Approach. Cost approach to pricing stated price was supposed to be a certain amount through direct costs, following a small contribution to cover the indirect costs and overhead and leave a certain margin for profit.
  • The Market Approach. Approach implies that market prices determined by the market and may not be directly related to the cost.

Type of Purchase

Analysis of the cost of the supplier is by no means just based on the price determination. What other uses can be used? A lot of that depends on the type of product purchased. There are seven General classes:
  • Raw Material. This group includes the sensitive commodities, usually referred to as copper, wheat, and crude oil, but also of steel, cement, and others.
  • Special items. This group includes the items and special material for the Organization's product lines and custom orders.
  • Standard production items. This group included several items such as bolts and nuts, some form of commercial steel, valves, and pipes, where prices are stable and the quota based on "price list with some discount".
  • Items of small value. This group includes items from the tiny comparative value expenses from efforts to check the previous prices to buy.
  • Capital goods. The purchase of this item is counted as capital asset and burden through depreciation, rather than be a burden through the purchase or use of time.
  • Services. This category is very broad and includes many types of services, such advertising, auditing, consulting, design, architectural, legal, insurance, etc.
  • Resale. This category is divided into two groups, namely (a) items that were formed in the production of in-house but it had outsourced to suppliers and now brought to refine it. (b) Items sold in the retail sector, such as the clothes sold in department store lines.

The Use of Quotations and Competitive Bidding

Quotations are usually protects when the size of the proposed commitment exceeds the minimum amount of dollars, for example, $1,000.

The first step is to choose a supplier that allow from anyone who submits a quotation is to invoke these, in fact, to do the filtering from source to supply. It is assumed that the bidders had to (1) meet the qualifications to make the appropriate item in question deal with the specifications of the buyer and to send it on an urgent time, (2) sufficiently reliable in ensuring the agreement seriously as a supplier, (3) good enough in ensuring competitive pricing, but (4) does not exceed the required.

Firm Bidding

Reason from the friendly treatment of information offer price is it related to a problem in a practice where all the faces, seller has the naming, that is " firm bidding ". Many companies have a rule to notify the supplier of the original supply that should already be completed and revisions are not permitted in the State share.

Determination of the Most Advantageous Bid

  • bidding analysis sheet, Typically used to prepare an offer from all suppliers and examines each quote, or offer views electronically at the time indeed for an online auction.
  • However, there are some cases in which the lowest bidder may not receive the order. Information received by the buyer to request quote may indicate that companies with a low offer is not reliable. Even the lowest bid may be higher than the buyer trust.

Collusive Bidding

Buyer may also reject all offers if it indicates that the supplier perform collusion with one another. In some cases, major regulations to pursue the Stinger is difficult to determine, but there are several possibilities. The Act allows legal but rarely have eligibility because of the expense, delay, and the uncertainty of outcomes. Another possibility is to find a new source of supply between the inside and outside of the area where buyers are able to purchase material or custom services.

The Problem of Identical Prices

some situations require using the price of identical or parallel when:
  • The price of identical marks the historical motive from behavior of prices.
  • It proves the communication between seller and buyer relating to the price.
  • This is an "artificial" standardization of the product.
  • Identical prices showed in distribution to the buyer in the complexity, highly, or new specification.
  • Deviations from a uniform price becomes a problem the industry widely — the subject of the meeting and organized the sanctions.

Provision for Price Changes

The actual Rules for price changes including a variety of options. These options include guarantee; price decline, price protection clause, escalator clause, etc.

Forward Buying Commodities and

initial purchase (forward buying) is a commitment to buy in anticipation of the need in the future past the current lead time. So, organizations may purchase in advance in anticipation of shortages, strikes, or rising prices.

Forward Buying vs. Speculation

All forward buying involve some risk. In forward buying, purchases are restricted to the known current needs and to estimate the need carefully to a certain period based on experience.
Speculation profit from price movements. At the time the price goes up, the commitment to quantity is exceeded to anticipate needs called speculation. At the time the price down, speculation consist of purchasing detain or reduce the quantity of purchases under the safe limit, and take the risk of exhaustion of supplies when there are orders with high prices, if the anticipated price drop not materialist.

Control of Forward Buying

Safety should be made to ensure that the commitment of the commodities will be maintained within its boundary. Some of the company's development by checking only illustrated: 
  • 1) forward buying should be limited on the hidden that can be used in production at one of leather or of leather where demand is stable. 
  • 2) the daily Conferences between the President, treasure, sales manager, and hide buyer. 
  • 3) an Order for delivery in the future of leather varies in some measurements in agreement with the need to protect companies hide holding. 
  • 4) further Checking is provided by an operating budget. 
  • 5) the final use consist of Checking that a sufficient and reliable information, statistical and otherwise, based on the trend of prices and the market.

The Commodity Exchanges

main function of managing the exchange of commodities is to provide a marketplace that woke up where the pressure supply and demand might operate freely where buyers and sellers bring their sales.


gains from commodity exchange for manufacturing in fact is that they provide an opportunity for the transaction, and also for protection, to a broader, confront price and exchange risks. This can usually be done by hedging.

Hedging Contracts incorporate simultaneous purchases and sales in the two markets are different, which is assumed to operate where the loss would equal the tally on the other side.

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