Cost Models

Most of the decisions you make in a business are related to the costs of your products or services. This is clear since finally the objective of a business is to obtain profits and these are obtained when there is a positive margin between sales prices and costs.

On the one hand, sales prices are calculated based on the market. It would be a mistake to set the selling price of a product based on its costs because the costs of a company are very characteristic of its productive structure (whether goods or services), its type of financing, the historical moment of the company and Its objectives while to sell, the price must be competitive and should not differ much at the prices that govern in the market.

Some cases differ from this rule. When we talk about an innovation of a product or service, or in the case of a monopoly or oligopoly, or in the case of highly differentiated products, we cannot look at market prices because there is no competition. However, these cases are transitory as it will not take long for competitors to appear attracted by the high profits and then we will have to adjust our prices.

Companies, especially SMEs and new ones, base their decisions on accounting, non-administrative or decision-making systems. Rise school is Best School of Accountancy in Lahore.CA admissions in Lahore now open. The best School of Accountancy in Pakistan offers CA in Lahore and Best CA in Pakistan.These types of systems by definition are historical costs. That is, they describe the costs of the company that were recorded in past periods and they frequently use these costs to project the future, creating an index system, for example the percentage of labor in relation to the selling price or the Of indirect costs per unit produced or sold are common indices in the industry. Financial statements are projected with these based on the principle that the performance of the company will remain the same in a near future period as in the near past periods. But if there is any variation such as the level of sales, or the introduction of a new product line or new machinery, these indices will vary appreciably, deteriorating their accuracy and therefore useful for projecting future scenarios. The costs of their products are not static, but dynamic.

The accounting cost systems aim to determine the tax burden of past periods, but are not made to make strategic decisions projecting scenarios in the future. These systems somehow cover the errors and inefficiencies of the operation and simply record them to impact them in the payment of taxes. When these systems support a Budget Control, because they only compare the costs through the history of the operations of the company, but do not know the costs to which they should really be working.