Cheatography

# Pricing Cheat Sheet (DRAFT) by Mely

Target Costing and other costing methods

This is a draft cheat sheet. It is a work in progress and is not finished yet.

### Pricing

 Price should cover costs + profit margin In compet­itive market, price determined by supply and demand Target Cost = Market Price - Desired Profit

### Target Costing Steps

 1 - Find Market Niche 2 - Find Target Price 3 - Determine Target Cost 4 - Assemble team to design product & meet target

### Target Costing / Other Methods

 Target Costing Other costing Methods Price set by market Price set by firm Cost is residual after price + profit margin Price is residual after cost + profit margin Cost control is key

### Total Cost-Plus Pricing

 When there is little or no compet­ition Cost base = DL + DM + OH + S&A Calcul­ation: - Markup % = Desired ROI Unit / Cost Base - Target Selling Price = Cost Base + Markup x Cost Base - Selling Price = Cost Base Unit + Desired ROI Unit Advantage: - Easy to calculate Disadv­antage: - Does not consider demand side - FC Unit vary with volume change - Lower sales volume = Higher price

### Variable Cost-Plus Pricing

 Cost base = DL + DM + VOH + VS&A Calcul­ation: - Markup % = (Desired ROI Unit + FOH + FS&E) / Cost Base - Target Selling Price = Cost Base + Markup x Cost Base Advantage: - Help management decision maker - Variable cost unit doesn't vary with volume Disadv­antage: - Price may be set too low - Requires higher markup %

### Absorption Cost-Plus Pricing

 Cost base = DL + DM + OH Calcul­ation: - Markup % = (Desired ROI Unit + S&A) / Cost Base - Target Selling Price = Cost Base + Markup x Cost Base

### Time-a­nd-­Mat­erial Pricing

 Cost-plus pricing variation with 2 rates: - One for DL (labour + benefits) - One for DM (material + handling costs) Widely used in services Calcul­ation: - Labor Hourly Charge = (Wages+OH) / Hours - Material Loading Charge = (Estimated purcha­sing, receiv­ing.../­Es­timated cost of part) + Desired Profit Margin on materials Job Charge= Labor + Material + Material Loading

### Transfer Pricing for Internal Sales

 Vertically Integrated Companies Minimum Transfer Price = VC Unit + Opport­unity Cost Transfer price policy object­ives: - Promote Goal Congruence - Maintain divisional autonomy - Provide accurate perfor­mance evaluation No excess capacity: - Lost CM is opport­unity cost of transfer Excess capacity: - No opport­unity cost

### Other Techniques for Transfer Price

 Negotiated transfer price: - Agreement between division - Concep­tually best method - Problems: Mistrust, different pricing strategy btw divisions Cost-based transfer price: (most used) - Cost incurred by the producing division as cost base - Based on VC or VC+ FC - Can result in improper transfer prices, easy to use Market­-based transfer price: - Based on actual market prices - Considered best approach - Can lead to bad decisions if excess capacity