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thenamehobbs thenamehobbs
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Discuss the terms "cost-plus pricing" and "target costing." What are some advantages and disadvantages of each?
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Managerial Accounting


Edition: 4th
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iammtziammtz
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Cost-plus pricing adds an amount to the cost of the product or service to cover the company's operating costs and contribute to its profit. The "plus" amount is often referred to as a markup, or the difference between the selling price and the cost of the product. Target costing starts with the price customers are willing to pay. This method computes the desired markup and the maximum cost the company can incur to deliver the product at the market price.

An advantage of cost-plus pricing is that it is a simple approach to pricing. A disadvantage of cost-plus pricing is that profit hinges on the company being able to define cost. Thus, it is important to identify the appropriate cost basis in communicating markups. Cost-plus pricing has several flaws. First, the price a customer is willing to pay for a product should represent the value of that product. A markup based on cost does not represent the value to the customer. Also, cost-plus pricing implies that the cost of the seller's operational inefficiencies should be borne by the customer.

An advantage of the target costing method is that, in the planning stage, managers may be able to determine whether or not they should produce a product (whether the market price will provide a desired return.) A disadvantage is that, if the company does not engage in target costing before introducing a new product, the company may not be able to reduce cost enough to provide a desired return.

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thenamehobbs Author
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A week ago
Smart ... Thanks!
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