Week 10 Flashcards
Define a Fixed cost
A fixed cost means that the total expenditure is unchanged whatever the production volume.
Define a Variable cost
A variable cost means that the total expenditure changes in response to production volume.
Define a Semi-fixed cost
A semi-fixed cost has a fixed element and a variable element.
Define a Step cost
A step cost is fixed within a range of production volume
Define direct and indirect costs
Direct cost: can economically be traced to a single unit of output Indirect cost: cannot economically be traced to a single unit of output
Define a marginal cost
The marginal cost of a product is the incremental amount it would cost to produce one more unit of that product. It only takes into account variable costs. Fixed costs are not attributed to individual products.
Define an Absorption cost
The absorption cost of a product is the cost per unit including overhead costs. Fixed costs are allocated to individual units.
Identify the difference between mark-up and margin pricing
The Mark-up pricing is the method of adding a certain percentage of a markup to the cost of the product to determine the selling price.
In order to apply the mark-up pricing, firstly, the companies must determine the cost of a product and decide on the amount of profit to be earned over and above it and then add that much markup in the cost.
Marginal cost pricing is the practice of setting the price of a product at or slightly above the variable cost to produce it. This approach typically relates to short-term price setting situations. This situation usually arises in one of two circumstances:
- A company has a small amount of remaining unused production capacity available that it wishes to use; or
- A company is unable to sell at a higher price
Define Cost plus and Demand-led pricing
Cost Plus = Cost plus pricing involves adding a markup to the cost of goods and services to arrive at a selling price. Under this approach, you add together the direct material cost, direct labour cost, and overhead costs for a product, and add to it a markup percentage in order to derive the price of the product. Cost-plus pricing can also be used within a customer contract, where the customer reimburses the seller for all costs incurred and also pays a negotiated profit in addition to the costs incurred.
Demand-led = Demand-Led Pricing is a pricing method based on the customer’s demand and the perceived value of the product. In this method, the customer’s responsiveness to purchase the product at different prices is compared and then an acceptable price is set.
