Basic Costing Principles

Section 10 Objective 5Apply basic costing principles

• Price is the amount charged for product or service.

• Setting the price of a product or service is a decision owners or manager have to make.

• Costs play an important role in pricing.• The role varies depending on the industry.

Therefore pricing strategies may differ.

Basic Costing Principles applied in Accounting

Basic Costing Principles applied in Accounting

• Types of pricing strategies:– Cost-based pricing(Cost plus pricing/Cost plus mark-up

pricing/mark up pricing)• Is the simplest pricing method. Commonly used with long

term decisions in mind• Is the pricing strategy for setting the prices of goods and

services• The costing principle to be applied is the computation of all

costs go into making the product or service

Basic Costing Principles applied in Accounting

• Advantages of Cost plus pricing– Biggest advantage of this is that the company knows

exactly the amount of expenditure that it has incurred on making a product and therefore they can add profit margin accordingly which helps in achieving the desired revenue for a firm

– It is the simplest method to decide the price for a product because one has just to add up all the cost and then add profit. The latter will give the price for a product.

Basic Costing Principles applied in Accounting

• Since the company is using its own data for deciding cost it is much easier for a company to evaluate the reasons for the increases in expenses and therefore it can take corrective action immediately.

• The elements added together to find cost are:– direct materials, – direct labour and – overheads

Basic Costing Principles applied in Accounting

The formula is: Price= Cost + (Mark-up percentage x cost)

Basic Costing Principles applied in Accounting

Basic Costing Principles applied in Accounting

Go to:https://study.com/academy/lesson/cost-plus-pricing-definition-method-formula-example.html

There are many other links which you may look at and gather more information

Listen to the video to gather information on cost plus pricing for manufacturing and inventory control.

• Types of Pricing strategies:–Absorption-cost pricing:• Absorption pricing is a method used to setting prices

for products or services

• Is used to derive long term price of a produce that is needed in order to pay for all expenses

Basic Costing Principles applied in Accounting

• For this method, the basic costing principle in accounting applied for pricing, includes all of the variable costs, as well as a proportion of all fixed costs

• The formula for this method is:Price = variable cost per unit (total overheads + administrative expenses ÷ number of units produced) + mark up

Basic Costing Principles applied in Accounting

Basic Costing Principles applied in Accounting

• Advantages of Absorption Cost Pricing

– Price set covers both fixed and variable costs– Provides a price that seems fair because it covers all

costs and includes a reasonable margin– Absorption cost information is required for external

financial reporting (it is already available and the setting of prices does not involve any expenditure on the part of the company

Basic Costing Principles applied in Accounting

• Listen to the videos to gather information on absorption cost pricing for manufacturing and inventory control.

• https://www.study.com/academy/lesson/time-and-material-pricing-formula-example.html

There are many other links which you may look at and gather more information

Basic Costing Principles applied in Accounting

– Search the internet for appropriate video tutorials for the following on:

1. how to compute unit cost for each of the method

2. how to apply each of the costing principles in accounting

Basic Costing Principles applied in Accounting