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Comm 305: Managerial Accounting > Chapter 9 book: pricing > Flashcards

Chapter 9 book: pricing Flashcards

1
Q

in the long run, what must prices cover?

A

product costs and eventually earn profit

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2
Q

price takers

A

firms or buyers that have no influence on the price individually

it is set by the market

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3
Q

target cost

A

market price - desired profit

includes all product and period costs necessary in order to make and market the product or service

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4
Q

target price

A

the price firms believe would position it in the best positions for its customers

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5
Q

total cost plus pricing

A

setting a product price in function of or relative to the cost to produce this product

determining the cost base and then putting a markup

this determines the target selling price

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6
Q

markup per unit

A

basically profit

selling price - cost = markup

(Desired ROI %) / Units produced = markup

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7
Q

what does the size of the markup depend on?

A

depends on the return the company hopes to generate on the amount it has invested

competitive and market conditions, political and legal issues, and other relevant factors must all be considered

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8
Q

total cost-plus pricing formula to determine the target selling price

A

total unit cost + markup percentage · total uni cost = target selling price

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9
Q

ROI

A

income divided by investment in product tor service

a higher percentage means a greater success in generating profits from the investment

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10
Q

markup percentage

A

Desired ROI per unit / Total Unit cost = Markup percentage

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11
Q

total cost-plus pricing approach main advantage

A

simple to calculate

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12
Q

total cost-plus pricing approach main disadvantage

A

does not consider the demand side

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13
Q

if less units are produced than expected, does the ROI per unit increase or decrease? Does the selling price per unit increase or decrease? why?

A

ROI per unit increases because the fixed costs per unit now increase

selling price per unit increases because of a bigger ROI per unit

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14
Q

if more units are produced than expected, does the ROI per unit increase or decrease? Does the selling price per unit increase or decrease? why?

A

ROI per unit decreases because the fixed costs per unit now decrease

selling price per unit decrease because of a smaller ROI per unit

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15
Q

which is more popular between absorption cost-plus pricing and variable cost-plus pricing?

A

absorption cost-plus pricing

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16
Q

what is excluded in the absorption cost-plus pricing?

A

variable selling and administrative expenses

fixed selling and administrative expenses

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17
Q

what is the first step of the absorption cost-plus pricing?

A

calculating the manufacturing cost per unit

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18
Q

how do you find the markup percentage per unit using the absorption cost-plus pricing?

A

Desired ROI per unit + selling and administrative expenses per unit

=

Markup percentage · Manufacturing cost per unit

Markup percentage = (Desired ROI per unit + selling and administrative expenses per unit) / Manufacturing cost per unit

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19
Q

how do you set the target price using the absorption cost-plus pricing?

A

Manufacturing cost per unit + (Markup percentage · Manufacturing cost per unit)

= Target Selling Price

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20
Q

how do you find the total markup percentage using the absorption cost-plus pricing?

A

(net income + selling and administrative expenses) / COGS

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21
Q

why do most companies use absorption cost-plus pricing? when they decide to use cost-plus pricing?

A
  1. a company’s cost accounting system provides absorption
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22
Q

variable cost-plus pricing

A

cost base consists of all the variable costs associated with a product, including variable selling and administrative expenses

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23
Q

in variable cost-plus pricing, what does the markup cover? why?

A

fixed manufacturing overhead

fixed selling and administrative expenses

the target ROI

because fixed costs are not included in the base

24
Q

steps to do variable cost-plus pricing

A
  1. calculate variable cost per unit
  2. calculate markup percentage

3 target selling price

25
Q

how do you calculate markup percentage per unit under variable cost-plus pricing?

A

Desired ROI + all fixed unit costs = Markup Percentage · all variable unit costs

26
Q

how do you target the selling variable cost-plus pricing?

A

all variable unit costs + Markup Percentage · all variable unit costs = Target selling price

27
Q

how do you calculate overall markup percentage under variable cost-plus pricing?

A

(Net Income + all Fixed costs) / COGS = Markup percentage

28
Q

the major disadvantage with variable cost-plus pricing?

A

managers may set the price too low which will fail to cover fixed costs

in the long run, it will lead to losses

company will reach ROI only if it reaches budgeted sales volume for the period

29
Q

why would managers use variable cost-plus pricing?

A

more consistent with volume-profit analysis used to measure the changes in profit with changes in price and volume

provides types of data needed for pricing special orders

avoids arbitrary allocation of common fixed costs

30
Q

time-and-material pricing

A

two pricing rates are put in place: labor used on a job and material used on a job

31
Q

in which industry is time-and-material pricing mostly used?

A

in the service industry

32
Q

what are the steps of time-and-material pricing

A
  1. calculate the per hour labor charge
  2. calculate charge for holding and obtaining material
  3. calculate charges for a particular job
33
Q

in calculating the labor charge under time-and-material pricing, what does the rate per hour of labor include?

A

direct labor costs of the employee

selling, administrative, and similar overhead costs

allowance for desired profit or ROI per hour of employee time

34
Q

in the second step of time-and-material pricing, what does the charge for materials include?

A

invoice price of any materials used on a job

the costs of purchasing, receiving, handling, and storing material

the desired profit margin on materials themselves

35
Q

how is the material loading charge expressed?

A

as a percentage of the total estimated costs of parts and materials over the year

36
Q

how to find the material loading charge percentage?

A
  1. estimating annual costs of purchasing, receiving, handling, and storing material
  2. dividing previous amount by total estimated costs of parts and materials
  3. add desired profit margin on materials themselves
37
Q

under time-and-material pricing, how do you calculate charges for a partial job

A

sum of labour charge, charge for materials, and material loading charge

38
Q

transfer price

A

when companies transfer goods internally from one division to another

39
Q

what are the objectives a firm’s transfer pricing could accomplish?

A

promote goal congruence

maintain divisional autonomy

provide accurate performance evaluation

40
Q

what is the maximum price in transfer pricing that a buying division would pay?

A

determined by market

the price they would pay from another seller

41
Q

what is the minimum price in transfer pricing that a selling division would pay under a scenario where they are at maximum capacity?

A

the variable manufacturing cost per unit + the expected contributed margin

42
Q

goal congruence

A

when buying and selling divisions agree on a price that benefit both

43
Q

what is the minimum price in transfer pricing that a selling division would pay under a scenario where they are at excess capacity?

A

the price must cover at least the variable manufacturing costs

44
Q

three possible approaches in determining a transfer price

A

negotiated transfer price

cost-based transfer price

market based transfer price

45
Q

negotiated transfer price

A

price determined through agreement by division managers

46
Q

are variable costs the same when they are sold internally and externally?

A

nah bruuuv

47
Q

which opportunity cost is higher when the amount of units forgone is higher than the amounts of units transferred internally? how do you calculate it?

A

opportunity cost per unit of units transferred internally is higher than opportunity cost per unit of units foregone

[(Selling Price - Variable Cost) · Units Foregone] / Unites Transferred Internally

= Opportunity cost

48
Q

which opportunity cost is higher when the amount of units forgone is lower than the amounts of units transferred internally? how do you calculate it?

A

opportunity cost per unit of units transferred internally is lower than opportunity cost per unit of units foregone

[(Selling Price - Variable Cost) · Units Foregone] / Unites Transferred Internally

= Opportunity cost

49
Q

cost-based transfer price

A

basing internal transfer price on the costs to produce

either variable costs alone or both variable and fixed costs

markup can be added

50
Q

improper transfer price

A

the cost-based transfer price is wack because although it increases contribution margin for buying division, it leaves the selling division with a contribution margin of 0

it is bad if the company is in max capacity because overall contribution margin will decrease

gyu for company if there is excess capacity because overall contribution margin will increase

51
Q

disadvantage of cost-based transfer price

A

does not reflect true profitability

52
Q

advantage of cost-based transfer price

A

simple to understand

53
Q

market-based transfer prices

A

based on actual market prices of competing goods and services

54
Q

why is a market-based transfer price system consider the best one?

A

objective

provides the proper economic incentives

55
Q

outsourcing

A

buying from other companies the products you need instead if making them yourself

56
Q

globalization effect on different divisions

A

now more than ever, divisions of one single company can be all around the world

Comm 305: Managerial Accounting (32 decks)

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