# Full Cost Pricing and Marginal Costing

Topics: Marginal cost, Variable cost, Costs Pages: 5 (1498 words) Published: June 5, 2013
Full Cost Pricing
Selling price arrived at by adding overheads and profit margin to the direct cost per unit of a product. In a manufacturer's overheads computation, less than full capacity utilization of the plant is factored in to allow for fluctuations in the output. The profit margin is computed as a fixed percentage of the average total cost of the product. Pricing - full cost-plus pricing

Full cost plus pricing seeks to set a price that takes into account all relevant costs of production. This could be calculated as follows: Total budgeted factory cost + selling / distribution costs + other overheads + MARK UP ON COST An illustration of applying this method is set out below:

Consider a business with the following costs and volumes for a single product: Fixed costs:
Factory production costs£750,000
Research and development£250,000
Fixed selling costs£550,000
Total fixed costs£1,625,000
Variable costs
Variable cost per unit £8.00
Mark-Up
Mark-up % required35%

Budgeted sale volumes (units)500,000
What should the selling price be on a full cost plus basis?
The total costs of production can be calculated as follows:
Total fixed costs£1,625,000
Total variable costs (£8.00 x 500,000 units)£4,000,000
Total costs£5,625,000
Mark up required on cost (£5,625,000 x 35%)£1,968,750
Total costs (including mark up)£7,593,750
Divided by budgeted production (500,000 units)
= Selling price per unit£15.19
The advantages of using cost plus pricing are:
Easy to calculate
Price increases can be justified when costs rise

One variation of cost-based pricing is to price a product according to its marginal cost. Marginal cost
Marginal cost is the addition to the total cost from producing one more unit of output. Marginal cost focuses on variable or marginal cost (rather than indirect/fixed costs), such as wages and raw material costs. It ignores any...