Cost classification Assignment Help
- Direct cost: The cost which is directly attributable to the product is called as direct cost. The direct costs incurred by the Icon and Upper house are Room rent, Cashier and Receptionist’s salary, Interior decorators fees etc.
- Indirect cost: The cost which is not directly attributable to the product is called as indirect cost. The various indirect costs incurred by the hotels are Wifi charges, Taxi charges, snacks and soft drinks charges and other maintenance charges.
- Fixed costs: Those costs which remain fixed with the change in output and time is called fixed cost. The fixed costs of these hotels are salaries to receptionists and cashier, Interior decorator’s fees, wifi charges, etc.
- Variable costs: Those costs which vary with the change in output and time is called variable cost for the hotel like: Room rent, the more the guests the more will be the room rent, Taxi charges (the more guests come the more they pay taxi charges) etc.
2.2. Computation of cost variables
(a) Calculation of Breakeven level of output:
(b) The total amount of profit made by the souvenir shop last year by selling puppets are:
(c) The no. of puppets to be sold to achieve the profit of £50000 is 22,500 units.
(d) Limitations of CVP analysis
Although CVP analysis helps a lot to the management of the business in various analysis as it is easy to calculate, understandable, gives accuracy, helps management in decision making but still it has some limitations as it works on certain limitations which are not practical and thus, makes it disadvantageous. Certain assumptions of CVP analysis are:
- It works on the assumption that with the change in volume or we can say output there is no change in selling price per unit or variable cost per unit. (but actually due to economy of scale they tend to change).
- The concept of CVP analysis works on the assumption that the fixed cost of aby business does not change with change in time but this concept is correct in short run, in long rung the fixed cost tends to change.
- One of its assumptions is that any company will operate either for the single product or for a particular product mix constantly which is not practical. For example, if we take an example of a restaurant it tends to sell large quantity of hot drinks during winter as compared during summers, which may have different costs associated with them. If any company changes the mixture of products sold frequently or keeps large variety of products, then CVP analysis may not work in that condition (Lucey, 2008).
2.3. Pricing strategies that can be followed by icon and upper house
The various pricing strategies to be followed by the Icon and Upper house hotels may be:
- Penetration Pricing: In such type of pricing strategies, they tend to reduce price of the products and services of the company very low as compared to their competitor so that the large no. of users gets attracted. And later the price is increased once the objective is achieved.
- Premium Pricing: In this strategy they charge a high price for the unique product and services. For e.g such high prices may be charged by Icon and Upper house for luxuries such as cruises, Hotel rooms and flights. They can use this approach where a constitutive competitive advantage exists (Drysdale,2010).
- Price skimming: when the Hotels have a constitutive competitive advantage, they use to charge a high price of their products. However, the advantage is not constitutive. Thus, the high price leads to attract new competitors into the market, and due to increased supply the price necessarily falls.
- Psychological Pricing: This approach is used by Icon and Upper house when the marketer wants the consumer not to respond on rational basis which it mostly tend to but on emotional basis
- Product Line Pricing: When the hotels have a range of product or service for e.g various room rents or products then it charges different prices for different products and services. For example: Room rents : basic room 1000, Luxury room charges: 4000, Suits charge: 12000.
2.4 The various stock and cash controlling methods
The various methods to control stock are:
- Minimum Stock level: This is also known as Re order level. In this we determine a minimum stock level of our stock and an order is placed when the stock reaches that pre determined minimum level of stock.
- Just in Time (JIT): It is one of the system of controlling stock by keeping in the store of the organization only the minimum stock level and thus, reducing the costs. When the stock goes below the minimum level it is ordered from the suppliers, associating risk factor with it of delay in availability of stock. (Lucey, 2008).
- Economic Order Quantity (EOQ): As it is consists of complexities in calculating the EOQ of the companies so, the companies usually used the software to get it calculated. It balances the stock of the companies by determining the correct stock so that they get rescued from holding too much stock and too little stock.
- First in First out: This system of controlling stock makes sure that the stock is properly procured in a systematic manner specifically perishable stock, so that the stock which was firstly purchased by the company is utilized first and can’t be wasted.
The Cash controlling methods are:
- Better internal control A better and stringent internal control system in an organization helps in the control of the most liquid and the easily convertible asset of the company from being stolen or embezzled. (Atrill, 2011).
- Bank reconciliations: Cash balance should always be reconciled with the bank statements so as to create a check on the theft of the cash.
- Voucher system: In this system it is ensured to reduce the doubling of the transactions by checking every aspect of transaction and documenting it to ensure that all payments must be made only once and thus, every transaction the organization have the evidence.
- Electronic funds transfer (EFT): By using the system of EFT an organization behavior tends to increase the usage of its people of PayPal which not only not only helps the people to transfer their funds electronically but also generates evidence which shows the details of when the transaction was made and with whom. It also minimizes the number of people involved in usage of the cash.