CHAPTER 12 PRICING DECISIONS AND COST MANAGEMENT BASES

CHAPTER 12 PRICING DECISIONS AND COST MANAGEMENT

BASES FOR PRICING • COST –FULL COST –VARIABLE COSTS MARKET

PRICING SPECIAL ORDERS • GENERALLY, THE MINIMUM IS TO COVER ALL VARIABLE COSTS • OTHER CONSIDERATIONS ARE AFFECT ON: – OTHER CUSTOMERS – INTERNAL EVALUATIONS

LONG-RUN VS. SHORT-RUN • PRICING DECISIONS VARY BETWEEN THE LONG-RUN AND THE SHORT-RUN • BUT, REMEMBER THAT THE LONGRUN IS SIMPLY AND ACCUMULATION OF SHORT-RUNS

VALUE ADDED CONSIDERATIONS • ONE SHOULD EXAMINE COSTS TO DETERMINE WHETHER THEY ADD VALUE TO THE PRODUCT • FOR EXAMPLE: WE CAN USE A HIGHER QUALITY PLASTIC FOR THE CASES ON OUR COMPUTERS. WOULD THIS ADD VALUE? – IF THE EXPECTED LIFE OF THE CASE IS 10 YEARS – IF THE EXPECTED LIFE OF THE CASE IS 2 YEARS

DON’T LOOK AT VALUE ADDED JUST TO THE PRODUCT BUT TO THE COMPANY AS A WHOLE • DOES THE ACCOUNTANT ADD VALUE?

TARGET COSTING A DIFFERENT WAY TO EXAMINE PRICING RELATIVE TO COSTS

CONVENTIONAL PRICING Cost of Services PRICE

MARKET DRIVEN PRICING MARKET Cost of Services PRICE PROFIT

TARGET COSTING MARKET PROFIT PRICE Cost of Services

TARGET COSTING EXAMPLE MARKET PRICE $400 Cost of Services $50 Contribution Margin $350

CURRENT COST ESTIMATES • Estimated Direct Variable Costs • Cleaning $17 • Utilities 9 • Supplies 8 • Breakfast 11 • Repairs and Maintenance 7 • Total 52

WHAT TO DO