Transcript Document

• Cost-plus Pricing
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Cost accounting Lean accounting
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Lean Accounting does not require the
traditional management accounting
methods like standard costing,
activity-based costing, variance
reporting, cost-plus pricing, complex
transactional control systems, and
untimely & confusing financial
reports
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Cost Cost estimation
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Cost-plus pricing, is where the price equals cost
plus a percentage of overhead or profit margin.
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Pricing - Elements of pricing
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How to set the price?: (fixed pricing,
cost-plus pricing, demand-based or
value-based pricing, rate of return
pricing, or competitor indexing)
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Retail - Retail pricing
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The pricing technique used by most
retailers is cost-plus pricing. This
involves adding a markup amount (or
percentage) to the retailer's cost.
Another common technique is
suggested retail pricing. This simply
involves charging the amount
suggested by the manufacturer and
usually printed on the product by the
manufacturer.
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Retailer - Retail pricing
The pricing technique used by most
retailers is cost-plus pricing. This involves
adding a markup (business)|markup
amount (or percentage) to the retailer's
cost. Another common technique is
suggested retail price|suggested retail
pricing. This simply involves charging the
amount suggested by the manufacturer
and usually printed on the product
(business)|product by the manufacturer.
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Management consulting - Revenue model
Traditionally, the consulting industry
charged on a Cost-plus pricing|time and
materials basis, billing for staff consultants
based upon the hours worked plus out-ofpocket expenses such as travel costs
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Production, costs, and pricing - Concepts
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***cost-plus pricing
with elasticity
considerations
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Steve Keen - Critique of neoclassical theory of the firm
Keen's work (as opposed to his
popularization) has also focused on
refuting the neoclassical theory of the
firm, which argues that firms will set
marginal revenue equal to marginal
cost. Keen notes that empirical research
finds real firms set price well above
marginal cost: they charge a Markup
(business)|markup, often cost-plus
pricing; compare fellow post-Keynesian
Alfred Eichner, who also argued for
markup pricing.
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List of marketing topics - Pricing
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** Cost-plus pricing
with elasticity
considerations
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Shopping - Pricing and negotiation
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The pricing technique used by most retailers
is cost-plus pricing. This involves adding a
markup (business)|markup amount (or
percentage) to the retailers' cost. Another
common technique is suggested retail
price|manufacturers suggested list pricing.
This simply involves charging the amount
suggested by the manufacturer and usually
printed on the product (business)|product by
the manufacturer.
https://store.theartofservice.com/the-cost-plus-pricing-toolkit.html
Lean accounting - Introduction
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Lean Accounting does not require the
traditional management accounting
methods like standard costing, activitybased costing, variance reporting, costplus pricing, complex transactional
control systems, and untimely
confusing financial reports
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Lean accounting - Value-based pricing
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This approach is in stark contrast to many
traditional companies that calculate their
prices using the Cost-plus pricing|costplus method
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Cost-plus pricing
'Cost-plus pricing' is a pricing
strategies|pricing strategy that is used to
maximize the rates of return of companies.
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Cost-plus pricing
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Firms may achieve profit maximization by
increasing their production until their
marginal revenue equals their marginal
cost, then charging a price determined by
the demand curve. In practice, most firms
use either value-based pricing or cost-plus
pricing. Cost-plus pricing is also known as
mark-up pricing where cost + mark-up =
selling price.
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Cost-plus pricing
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There are several variations of cost-plus
pricing, but the most common method is to
calculate the cost of the product, then add
a percentage of the cost as markup
(business)|markup. This approach sets
prices that cover the cost of production
and provide sufficient profit margin for the
firm to reach its target rate of return. It also
provides a way for companies to calculate
how much profit they will make.
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Cost-plus pricing
Cost-plus pricing is often used on
government contracts (cost-plus
contracts) and has been criticized as
promoting wasteful expenditures in the
form of direct costs, indirect costs, and
fixed costs whether related to the
production and sale of the product or
service or not. These costs are converted
to per-unit costs for the product; then a
predetermined percentage of these costs
is added to provide a profit margin.
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Cost-plus pricing
Therefore, cost-plus pricing is often
considered the most rational approach to
maximizing profits due to the ease of its
calculation and lack of any additional
information
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Cost-plus pricing - Mechanics of cost-plus pricing
In cost-plus pricing we use quantity to
calculate price and price determines
quantity. To avoid this problem, a quantity
is assumed. This rate of output is based
on some percentage of the firm's capacity.
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Cost-plus pricing - Reasons for wide use
Firms vary greatly in size, product
range, product characteristics, and so
on. Firms also face different degrees
of competition in markets for their
products. Therefore, a clear
explanation cannot be given for the
widespread use of cost-plus pricing.
However the following points explain
why this approach is widely used:
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Cost-plus pricing - Reasons for wide use
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* This approach reduces the cost of
decision-making. Firms preferring
stability use cost-plus pricing as a
guide for pricing products in an
uncertain market where knowledge is
incomplete.
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Cost-plus pricing - Reasons for wide use
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* Firms are never too sure about the
shape of their demand curve, nor are
they very sure about the probable
response to any price change. It
becomes risky for a firm to move away
from cost-plus pricing.
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Cost-plus pricing - Reasons for wide use
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* Unknown reaction of rivals to the set
price is a major uncertainty. When
product and production process are
similar, competitive stability is
achieved by using cost-plus pricing.
This competitive stability is achieved
by setting a price likely to yield
acceptable returns to other members
of the industry.
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Cost-plus pricing - Usefulness
Cost-plus pricing is
especially useful in the
following cases:
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Cost-plus pricing - Usefulness
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* One buyer, many sellers: cost-plus
pricing is useful in cases like
monopsony buying. In this situation,
the buyers have enough knowledge
about supply chain|suppliers' costs.
Thus, they may make the product
themselves if they do not agree with
the offered prices. The relevant cost
would be the cost which a buying
company would incur if it made the
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Cost-plus pricing - Disadvantages
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* Calculation of costs is complex and
depends on asset valuation, thus
offering scope for disguising what
may essentially be value-based
pricing as cost-plus pricing
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Cost-plus pricing - Cost-plus pricing and economic theory
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Cost-plus pricing is based on
average costs and not marginal
costs
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Cost-plus pricing - Cost-plus pricing and economic theory
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If the mark-up over cost is based on
demand, cost-plus pricing may not be
inconsistent with profit maximization.
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Target pricing
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In the traditional cost-plus pricing method,
materials, labor and overhead costs are
measured and a desired profit is added to
determine the selling price.
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Value-based pricing
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The approach is most successful when
products are sold based on emotions
(fashion), in niche markets, in shortages
(e.g. drinks at open air festival at a hot
summer day) or for indispensable addons (e.g. printer cartridges, headsets for
cell phones). Goods that are very
intensely traded (e.g. oil and other
commodities) or that are sold to highly
sophisticated customers in large
markets (e.g. automotive industry)
usually are sold using cost-plus pricing.
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William C. Durant - General Motors
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Durant and Samuel McLaughlin of Canada
signed a 15-year contract to build Buick
powertrains at Cost-plus pricing|cost plus;
they were called McLaughlin until 1942
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