Lecture 3 Flashcards
What is the Cost-plus approach?
Selling price = Full/Marginal cost per unit * (1 + mark-up percentage)
What are some benefits of cost-plus pricing?
If sales volume is met, the required profit will be made. It is cheap. Can be understood by customers for when costs rise so will prices.
What is a key problem with cost-plus pricing related to apportioning costs?
Apportioning costs is complex and can lead to over or under pricing relative to competition.
What is a limitation of the markup percentage in cost-plus pricing?
It can be arbitrary and may not reflect what customers are actually willing to pay.
What is manufacturing cost-plus pricing?
It adds a margin to manufacturing costs to cover overheads and provide profit, with the advantage of being consistent with stock valuation figures.
Why is it unrealistic to assume companies are price-makers in cost-plus pricing?
Cost-plus assumes prices are set solely based on costs, ignoring market demand and competition.
How can cost-plus pricing encourage inflation?
Increased costs automatically lead to increased prices unless productivity rises, quality decreases, or the minimum order size increases.
When is traditional absorption costing appropriate, and what are its limitations?
Long-term decision-making but is unlikely to produce accurate results due to modern cost structure changes.
What is the main focus of target costing?
It is a marketing-led approach that determines what the market will pay for a product, subtracts the desired margin to find the target cost, and designs the product to fit this cost structure.
When should target costing be used?
When the selling price of a product is dictated by competition or customer willingness to pay rather than internal costs.
Is target costing more appropriate for short or long product life cycles?
Short
Where does target costing focus on reducing costs?
During the research, development, and engineering cycle.
Target Cost = ?
Competitive Price - Desired Profit
What is the primary objective of Life Cycle Costing (LCC)?
To manage and understand costs across all stages of a product’s life, including design, development, manufacturing, marketing, distribution, maintenance, and disposal.
How does Life Cycle Costing (LCC) provide insights into product costs?
It produces a cost profile of the product or service over its anticipated life span, though its value decreases for costs projected further into the future.
