Managerial Accounting Ch.8 Study Guide

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Ch8
Pricing Goods for External Sales
Pricing Objectives: gain market rate of return
Environment: Political reaction to prices patent or copyright protection Demand: Price sensitivity demographics
Cost Considerations: Fixed and variable costs short-run or long-run In the long run, a company must price its product to cover its costs and earn a reasonable profit Most case: Company does not set the prices, competitive market does Price takers: the companies cannot set the price of gasoline by itself; the price of gasoline is set by market forces (the supply of oil and the demand by customers) Ex: farm products or minerals

Other situations:
1. The Company set the prices. (Special order)
2. A company can effectively differentiate its product or service from others. (In competitive market, like coffee) Target cost
The cost that will provide the desired profit on a product when the seller does not control over the product’s price Market Price – Desired Profit = Target Cost
Cost-Plus Price
A process whereby a product’s selling price is determined by adding a markup to cost base. Markup
The amount added to a product’s cost base to determine the product’s selling price. Selling Price – Cost = markup (Profit)
Target selling price
The selling price will provide the desired profit on a product when the seller has the ability to determine the product’s price. Cost + Markup = Target selling price
| Per Unit|
Direct material | $|
Direct labor| $|
Variable manufacturing overhead| $|
Variable selling and administrative expense| $|
Variable cost per unit| $|

| Total Costs| /| Budgeted Volume| =| Cost per unit|
Fixed manufacturing overhead| $| /| $| =| $|
Fixed selling and administrative expense| $| /| $| =| $| Fixed cost per unit| | | | | $|

Return on investment (ROI)
(Desired ROI Percentage * Amount Invested) / Units Produced = Markup Markup (Desired ROI per Unit) / Total Unit Cost = Markup Percentage Total Unit Cost + (Total Unit Cost * Markup Percentage = Target Selling Price per unit Limitations of cost-plus pricing

| Total Costs| /| Budgeted Volume| =| Cost per unit|
Fixed manufacturing overhead| $| /| $| =| $|
Fixed selling and administrative expense| $| /| $| =| $| Fixed cost per unit| | | | | $|

| Per unit|
Variable cost| $|
Fixed cost| $|
Total cost| $|
Desired RIO| $|
Selling price per unit| $|
Variable-Cost Pricing
An approach to pricing that defines the cost base as all variable cost; it excludes both fixed manufacturing and fixed selling and administrative cost. Full-cost pricing
An approach to pricing that defines the cost base as all costs incurred. Pricing Services
Time-and-material pricing
An approach to cost-plus pricing in which the company uses two pricing rates, one for the labor used on a job and anther for the material. The labor rate includes direct labor time and other employee costs. The material charge is based on the cost of the direct parts and materials used and a material loading charge for related overhead costs.

Material loading charge
A charge added to cover the cost of purchasing, receiving, handling, and storing material, plus any desired profit margin on the materials themselves. Budgeted cost:
| Company's name| |
| Budgeted Cost for the Year 20XX|
| Time Charges| Material Loading Charges|
Mechanics' wages and benefits| $| -|
Parts manager's salary and benefits| -| $|
Office employee's salary and benefits| $| $|
Other overhead (supplies, depreciation,| $| $|
property taxes, advertising, utilities)| | |
Total budgeted costs| $| $|

Step 1: Calculate the labor rate
Per Hour| Total Cost| /| Total Hours| =| Per Hour Charge| Hourly labor rate for repairs| | | | | |
Mechanics' wages and benefits| $| /| $| =| $|
Overhead costs| | | | | |
Office employee's salary and benefits| $| /| $| =|...
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