APPRAISAL OF ACCOUNTANTS’ ROLE IN STRATEGIC PRICING FORMULATION
ABSTRACT
In any flourishing business today, pricing has been their key function. This is so because the rate with which modern business is growing coupled with the worldwide inflationary trends, more dimensions will be added to the problem of pricing. In any market economy where goods and services are traded, pricing is very crucial as the prime mover of trade, for instance, pricing ration out scarce good. This is a rise in price of good indicates that the good is in relative short supply. Pricing can be used to discourage unnecessary pressure on some commodities; this is price serving as a gauge. Price indicate the direction of want and also pricing as a means by which factors of production are awarded and as a result, many professionals in business are beginning to play major roles in pricing decision and strategic pricing formulation. This study was done on the appraisal of accountants’ role in strategic pricing formulation. Its objectives were: (i) to determine the extent to which accountants participate in strategic price formulation; (ii) to find out if accountants are responsible for the computation of a company’s product worth alongside considerations for the company’s cost of capital and owners’ returns; and (iii) to examine the functions of accountants in strategic pricing formulation development. The design of the study was a cross sectional survey. Primary data were only used and were collected from a randomly selected 95 accounting staff of PRODA and JUHEL Pharmaceutical Co. Ltd. Enugu State Nigeria. All the data collected were presented and analyzed using cross-tabulations, frequencies and percentages. Hypotheses were tested through the use of chi-square (X2) and Pearson’s Product Moment Correlation Coefficient (r), which was run on SPSS version 15.0. The study found that accountants significantly participate in strategic pricing formulation. It further found that they (accountants) are responsible for the computation of companies’ product worth alongside considerations for cost of capital and owners’ returns. Finally, the study found that accountants have significant functions/roles that they carry out in strategic pricing formulation. It was however concluded that accountants play chief roles in strategic pricing formulation. They were recommended for constant trainings and development.
CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Pricing is one of the most powerful levers to increase profitability. Studies over the years have shown on average that, a 1% increase in price leads to a 7-8% increase in profits- making optimal pricing more effective than improving volumes or variables and fixed costs (HSB Consulting, 2008). Also, pricing is one of the first, if not the most significant signals a firm sends to the market place about its product, its business and its competitive positioning (Strickland, 2010). According to this author, the pricing may be developed on a product-by-product basis, as a company-wide strategy, or somewhere in between these. Whatever the approach, the price a firm puts on its product tells everyone where the firm is positioning itself viz-a-viz other players and what it believes customers are thinking, feeling or ultimately valuing its products with. Failing on ‘product pricing’ can lead to a failure on the entire market opportunity for a product; failure to connect with customers or a market; and not getting any chance to adjust the price and try again. The reality is that, pricing is more art than science (Strickland, 2010). It requires an understanding of market conditions, customers, and competitive factors that matter most to customers, cost structures and many other elements that relatively few businesses have traditionally included in their pricing process.
When a company develops the right pricing for its products, it will be able to maximize its profits, it will effectively match its product price to each market segments with an ability to attract buyers and retain them once they buy, and the right price will aid the company to match its pricing to its strategic objectives. The strategic objectives translated into the language of pricing are sometimes but not always the same language as used for business and strategic plans. Some of which could be maximize current profits, maximize profit margin, (Per unit profit margin), recover direct costs, break-even (survival, stay-in business), remain status quo: maintain price stability, maintain current growth rate, etc (Strickland, 2010). These are strategic pricing objectives. To formulate or set prices that can help to achieve these objectives, thus the roles of accountants must be clearly understood despite that the responsibility is part of the sales and marketing function which has the best knowledge of current pricing in the marketplace.
Griffin (2008) observes that an optimal or strategic price for a product or service cannot be set or decided without knowing the cost of such product or service. It is however, the role of cost accountants who are primarily concerned with ascertainment of costs. There are many other roles that accountants play in the setting of optimal prices. An appraisal of these roles is the essence of this study.
1.2 STATEMENT OF PROBLEM
Managements of most businesses (small, medium and large) in Nigeria seem not to realize how crucial the roles of accountants are especially when setting prices for strategic purposes. The roles commonly known to many of them are financial functions that relate to the collection, accuracy, recording, analysis and presentation of a business, organization or company’s financial operation. They (i.e some of the managements) sometimes rely on the rule of thumb when setting strategic or optimal prices and do not involve accountants in the setting of the prices. This therefore constitute the problem that this study seeks to solve by finding out if accountants actually play any significant role in the setting of strategic prices.
Except in some accounting texts, a detailed study on the roles of cost accountants have not been researched into let alone their involvement in strategic pricing formulation in Enugu State Nigeria.
It is against this uneven response that this study has been carried out, at least to evaluate the roles of accountants as useful to managements of businesses in Enugu State in strategic pricing formulations.
1.3 OBJECTIVES OF THE STUDY
The main objective of this study is to evaluate the roles of accountants in strategic pricing formulation. The specific objectives for the study are as stated below:
1.4 RESEARCH QUESTIONS
In order to address the above stated objectives, the following research questions were designed for investigation purposes in this study.
1.5 RESEARCH HYPOTHESES
prices.
H1: Accountants play significant roles in the setting of strategic prices.
product worth.
H2: Accountants are responsible for the computation of a company’s
product worth.
iii) H0: Accountants do not have any functional roles in strategic pricing formulation
H3: Accountants have functional roles in strategic pricing formulation.
1.6 SIGNIFICANCE OF THE STUDY
This study is significantly educative; aiming to enlighten managements of businesses that do not seem to appreciate the roles of accountants in the formulation of strategic prices; as well as to equip accounting personnel and students of their need to be strategically thoughtful when choosing their careers in accounting.
1.7 SCOPE OF THE STUDY
This study covered the fundamental roles of accountants in very organization but delimited to their costing roles, products worth determining roles, and their involvement in the development of pricing strategies only. The study was carried out in Enugu State in two manufacturing companies from different industries.
1.8 LIMITATIONS OF THE STUDY
The main limitation of this study was on data collection and collation. Others limitations include:
1.9 DEFINITION OF TERMS
Accounting
This is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are; in part at least, of financial character and interpreting the results thereof. It can also be defined as the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of information.
Accountants
An accountant is one whose professional duty is to record, classify and summarize and report transactions and events in monetary terms for use of management in decision making (Williams, 2001). There are accountants of different categories, such as Cost Accountant, Management Accountant, Forensic Accountant, Financial Accountant, etc. All of whom have their various crucial areas of impacting the smooth running of a business.
Cost Accountant
This is an accountant whose primary role is to ascertain the cost of an activity, event, project, or product for profitability determination purposes.
Financial Accountant
The financial accountant does the recording, classifying and analyzing transactions in monetary terms and in an orderly manner suitable for reporting and use of outsiders and management.
Management Accountant
Responsible for producing annual budgets and five year rolling estimates, quarterly management accounts and ad-hoc reports as required.
Strategic Price
In this study, strategic price is conceptualized to mean a price set to achieve a strategic purpose. It could mean a price set to penetrate into a market (Penetration Strategy); a price set to maintain status quo in a market turbulent environment; or else.
Strategic Pricing
This is the process of setting a purposeful price for a product item.
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