Cost Plus, Target, Life Cycle Costing Flashcards
What is Cost Plus Pricing?
A pricing strategy where a fixed percentage or set amount (markup) is added to the production cost to determine the selling price of a product.
What are the benefits of Cost Plus Pricing?
- Simplicity in calculation
- Guaranteed coverage of production costs plus a profit margin
- Easy justification of the price to customers
What are the main issues related to cost plus pricing?
- Lack of incentive for cost efficiency
- Potential for pricing products too high or low
- Possible customer resistance in competitive markets
How does cost-plus pricing affect cost efficiency?
Cost plus pricing can reduce the incentive to lower costs since the markup ensures profit is proportional to the costs, potentially leading to higher overall costs.
How does cost plus pricing impact market competitiveness?
If prices set by cost-plus pricing are above market levels, it can make products less competitive , whereas pricing too low can cause losses, both affecting the company’s market position.
What is Target Costing?
Pricing method used to reverse-engineer the product development process, setting cost targets based on a competitive market price and desired profit margins.
Why was Target Costing developed?
To enhance competitiveness by determining the life cycle cost of a product from the design stage, ensuring it meets both cost constraints and quality expectations in competitive markets.
What are the key steps in the Target Costing Process?
- Conducting market research
- Determining target selling price
- Calculating desired profit margin
- Designing the product to fit the target cost
- Managing costs throughout the product development cycle
How do you calculate the Target Cost?
Target Cost = Target selling price - desires profit margin
What role does target costing play in product development?
Ensures that products are designed, engineered, and manufactured to meet specific cost targets while delivering the desired value to customers, crucial for maintaining competitive advantage and profitability.
What does life cycle costing entail?
Involves estimating the total cost of ownership of a product throughout its life cycle, from design to disposal, helping businesses manage costs effectively over lifespan of a product.
What is the purpose of Kaizen Costing?
Used to achieve continuous incremental cost reductions during the manufacturing phase of a product, enhancing efficiency and reducing waste.
What are the four classes of quality costs?
- Prevention costs
- Appraisal costs
- Internal failure costs
- External failure costs
How do you prepare a quality cost report?
- Categorise costs into the 4 categories
- Calculate each category’s total and percentage of overall quality costs
- Analyse trends and areas for improvement
What are the benefits of using life cycle costing?
- Helps make more informed decisions by understanding all costs associated with a product over its lifetime
- Potentially leading to significant cost saving and better product pricing strategies
