The recent news from Maruti Suzuki is that the price of Maruti cars will increase from April 2023. The reason for this price rise is cost pressure. The price increases because of demand, cost and inflation. As CMA students read about cost reduction, budget, and market research, they understand this recent news better. Cost strategies and competition analysis are part of the cost accountant job. Cost accountants are subtle in understanding the demand and cost inter-play with inflation. Maruthi Suzuki Company is constantly facing pressure from regulatory changes and inflation. The company authorities mentioned the above statement in a regulatory filing. The company stated that the price increase differs according to the product model. The price hike hit the market in April 2023. The car manufacturing companies are following BSVI emission norms. There is a necessity to attribute self-diagnostic devices to monitor the emission levels of cars. The news spotlighted the need for examining the factors related to inflation. Let us analyse this subject to understand the current cost challenges.
Difference between cost and demand:
Inflation is the economic condition that impacts personal finance, business and investments. In personal finance, the changes are influenced by purchasing power, cost of living, the value of savings, periodical investments, and debts. In business, the changes are related to decreasing cash on hand, increased expenses, lower demand and difficult-to-borrow loans due to high-interest rates. Inflation brings changes in the business climate. Cost accountants use the concepts of market competition, price analysis, cost strategies and budgeting for cost control. The cost has an impact on the sales revenue, price and profit. The following potential points explain the difference between the impact of inflation over cost and demand:
• The demand-related inflation is measured in terms of demand, supply and price. The cost-related inflation is measured in terms of raw materials and labour.
• The demand-related inflation comes from external factors. It is the beginning period of inflation. The cost-related inflation comes from internal factors. The cost-related inflation is marked as a beginning period and continues to impact the financial status for a period. It is difficult to control cost-related inflation. Cost accountants design cost strategies to control cost-related inflation.
• Economic fluctuations and monetary challenges create demand-related inflation. The business community and employees think about cost-related inflation.
• Demand-related inflation happens during the expansion of the economy, overseas growth and government spending. Cost-related inflation is caused because of tax payments, and scarcity of resources and raw materials.
• Demand push inflation affects productivity. Cost-related inflation affects the profit margin and productivity levels.
Impact of demand on prices:
The law of supply explains the relationship between demand and price. If the supply is more than the demand, the price falls. And if the supply is less than the demand, the price rises. If the demand is more than the supply, the price increases. If the demand is lesser than the supply, the price decreases. This concept is called price elasticity. The demand remains static in some cases. In some cases, the demand for a product changes. The law of demand and supply is a general rule. It does not consider the marketing factor, competitive element, and regulatory barriers. In a monopoly market, the law of demand and supply has no usage. To control the demand and supply, the government set high prices. The prices are set as artificially high and low. In this case, the price has influenced by the demand. Here, the law of demand and supply is irrelevant. The demand is created and reduced to control the prices. In the United States, the prices are as per the inflation and deflation pressures. The interest rates and demand rates are raised and lowered as per the economic conditions.
In the industrialised country, the history of price control shows the world that price freezing ends up in the behavioural freeze of big corporations. This behavioural freeze of the customers changes the production and internal structure of the corporations. Some of the price control policies of world countries are given below:
• In India, the government decide the minimum and maximum prices make the products affordable. The price policies are to check the affordability of the product. The agricultural price policies encourage the interest of the farmers and customers.
• In Belgium, the price is monitored by the minister of economic affairs. The pre-indicated prices are used by marketers, not beyond six months. The manufacturers and importers should submit a notice three months before the price hike. The system is dependent on the economic condition. The price legislation in Belgium is confusing as it is not natural.
• In the price mechanism, the France government has changed the traditional approach and implemented competitive ways. The price policy in France is decided for the short and long term depending upon the government’s aim.
• In West Germany, competition policy has been followed. The government controls Monopolistic conduct and mergers. The prices and market structure are taken care of. It is impossible to change the prices that impact the market structure.
• In the USA, the price policies differ as per the turnover. Industries with more than 100 million dollars should get authorization before the price change. Industries with a turnover of fewer than 100 million dollars should notify the government regarding the price rise. In the case of the smallest firms that fall under a 10 million dollar turnover, the appropriate commissions monitor the prices.
Impact of cost on prices:
The wholesale and retail market rates differ for a product. This difference is because the cost of goods sold consists of the value of direct materials and direct labour. The cost recorded by the retailer includes the operating expenses and administration costs. In the case of the online store, the expenses occur from digital maintenance. The cost includes the website cost and other technical costs. The direct cost and the indirect cost together make the cost of a product. The price is the value of the product from the past. Customer purchasing power and market competition decide the price of the product. The difference between the cost and the price is the profit. The sales revenue is the total cost price and selling price.
The manufacturer fixes the price of a product after checking the expenses at different levels, competition and profit margin. The profit margin depends upon the size of the business. The food and stationery businesses have fewer profit margins. The real estate business and transportation businesses have more profit margins. The sales units, customer base and business competition decide the profit margin. A ten per cent profit margin is the less profitable business. A fifty per cent profit margin is a highly profitable business.
Conclusion:
Internal and external factors affect the price of a product. The functioning of the cost and demand over the price explains the need for understanding the underlying conditions. A Cost accountant checks the material cost, labour cost, profit margin and regulations to design the cost strategies.
