BTEC Extended Diploma in Business
Unit 7 CREDIT 10
1 of 2
Explain two methods that compnay uses to to cost a product
Evaluate the break even analysis
The two methods that organisation uses to cost a product and determine it’s at any given level are Absorption cost and Margin cost.
Absorption costing means that all of the manufacturing costs are absorbed by the units produced. In other words the cost of a finished unit in inventory will include direct materials, direct labour, and both variable and fixed manufacturing overhead. As a result, absorption costing is also referred to as full costing or the full absorption method.
On the other hand absorption costing is often contrasted with variable costing or direct costing. Under variable or direct costing, the fixed manufacturing overhead costs are not allocated or assigned to the products manufactured. Variable costing is often useful for management’s decision-making. However, absorption costing is required for external financial reporting and for income tax reporting.
Also absorption cost is a method for appraising or valuing an organisation’s total inventory by including all the manufacturing costs incurred to produce those goods. Absorption costing is different from all the other costing methods because it takes into account fixed manufacturing overhead which includes expenses such as factory rent, utilities etc.
It is hard to factor in the fixed manufacturing overhead expenses into calculating the per unit price of goods, therefore other methods such as Variable Costing do not take it into account. One drawback of absorption costing is that managers can increase production levels without taking into account total sales in whether there is enough demand for all the goods they are producing.
Cost of the margin is defined as the cost of one more or one less unit produced besides existing level of production. Also margin cost is defined as the technique of presenting cost data wherein variable costs and fixed costs are shown separately for managerial decision-making.
On the other hand marginal cost is the change in total cost that arises when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good. If the good being produced is infinitely divisible, so the size of a marginal cost will change with volume, as a non-linear and non-proportional cost function.
In general terms, marginal cost at each level of production includes any additional costs required to produce the next unit. If producing additional vehicles requires, for example, building a new factory, the marginal cost of those extra vehicles includes the cost of the new factory. In practice, the analysis is segregated into short and long-run cases, and over the longest run, all costs are marginal. At each level of production and time period being considered, marginal costs include all costs that vary with the level of production, and other costs are considered fixed costs.
Penetration pricing is a marketing strategy that involves the use of highly competitive pricing to introduce a new product to consumers, or to introduce an older product into a new market. The idea behind this type of pricing technique is to entice consumers to try the product, find they like it, and increase their desire to keep using the product.
One the product is established in the market and has built up a certain amount of market share, the penetration pricing is abandoned for a price structure that is still competitive, but provides a higher profit margin for the manufacturer.
The main idea of penetration pricing is...
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