Pricing no. 2

Question 1

What is the general formula for full cost plus pricing

Answer 1

Cost + (markup percentage x cost) = target selling price

Question 2

What are the steps for Full cost plus pricing

Answer 2

step 1: calculate all variable costs (DM, DL, VMOH, VS&A)
Step2: Calculate fixed cost per unit (FMOH, FS&A)
Step 3: Calculate selling price per unit
VC + FC = total cost + desired ROI = selling price per unit
Step4: calculate markup percentage (desired ROI / Total unit cost - markup percentage
Step 5: total unit cost + (total unit cost x markup%) = target selling price per unit

Question 3

What is the advantage to Full Cost-Plus pricing

Answer 3

simple to calculate

Question 4

what is the disadvantage to Full cost-plus pricing

Answer 4

1. doesn’t consider the demand side (will customer’s pay the price)
2. sales volume is not considered (the lower the sales volume, the higher the price they must charge to reach desired ROI (because fixed costs are spread all items sold) -

Question 5

Describe absorption costing

Answer 5

• consistent with GAAP because it defines the cost base as manufacturing cost
• variable and fixed selling and admin are excluded

Question 6

what are the steps for absorption cost-plus pricing

Answer 6

step 1: calculate manufacturing cost per unit (DM, DL, VMOH, FMOH)
Step 2: Desired ROI per unit + S&A exp. per unit = Markup% x manufacturing cost per unit
Step 3: set Target selling price
(Man. cost per unit + (markup% x Man. Cost per unit) = target selling price

Question 7

What is variable cost plus pricing

Answer 7

includes all VC (variable MOH and VS&A)

- markup must cover fixed Costs and ROI

Question 8

What are the steps for variable cost plus pricing

Answer 8

Step 1: allocate vC per unit 
 (DM, DL, VMOH, VS&A= total VC per unit
Step 2: Calculate markup%
(Deisred ROI + (FMO+ S&A) = MP X VC
Step3 : VC per unit + (Markup% x VC/Unit) = Target selling price

Question 9

What are the disadvantages of using Variable cost pricing

Answer 9

1. may set prices too low and fail to cover their FC
   
   • will lead to losses
2. companies using Variable cost plus pricing must use hither makrups to make sure the prices set will give a fair return

Question 10

for a full cost, absorption cost and variable cost company will reach its ROI ony if what?

Answer 10

only if it reaches its budgeted sales volumne

Question 11

What are some reasons for using variable cost approach

Answer 11

1. based on VC therefore, its more consistent with CVP analysis
2. provides the type of data that managers need for pricing special orders (shows an incremental csot of accepting one more order)
3. avoids arbitrary allocations of common fixed csots (like executive salalry) to individual product lines

Question 12

What is time and material pricing used for

Answer 12

service companies such as professional firms, construction co, repair shops, printers

Question 13

How is pricing calculated in time and material pricing

Answer 13

use 2 price rates

1. labour used on a job
2. material used

Question 14

What is included in labour for time and material

Answer 14

labour includes DL and other employee costs

Question 15

What is included in Materials for time and material

Answer 15

based on cost of Direct parts and materials used and

- materials loading charge for related overhead costs

Question 16

what are the steps for time and material pricing

Answer 16

step 1: calculate per hour labour charge
(DL of employees (hourly , salary fringe benefits)
selling and admin and similar OH
allowance for desired ROI/hr of employee time
(rate chosen may be the same for all employees or it may differ depending on the employee’s classification or level)

step 2: calculate a material loading charge

• invoice price for any materials used and material loading charge
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