Variable costs of production are materials, labour, bought-in components, etc. Adding together the variable cost, fixed cost and profit per unit gives the selling price.It is interesting to see how companies determine a competitive price. But the market is not the least bit interested in cost.In the end the actual profit per unit will be the critical factor.
Similarly running costs of the organization (rent, rates, energy, maintenance, together with management and administrative costs) are totalled and divided by the number of units to be sold to provide the fixed cost per unit. In other words, using costs as a basis for calculating prices needs altering by considering what customers want and what they are prepared to pay if maximum profit is to be achieved.
Despite the fact that it is a simple way of calculating price, it is an inferior method of setting prices.This approach is much used by companies producing a large range of products because it allows a complex situation to be subjected to disciplined control using standard accounting methods.
The first problem is that it assumes that costs are the thing which cause people to buy. A development of the cost-plus approach to setting prices is to use cost 'standards' based on management accounting systems.Finally the profit required is added in on a per unit basis.Then if the fixed costs are down then the selling prices go down as well as selling price.Using the standard cost system, full cost accounting, full cost pricing, or whatever name is used, in this method, fixed costs are treated on a percentage basis.
Similarly running costs of the organization (rent, rates, energy, maintenance, together with management and administrative costs) are totalled and divided by the number of units to be sold to provide the fixed cost per unit. In other words, using costs as a basis for calculating prices needs altering by considering what customers want and what they are prepared to pay if maximum profit is to be achieved.
Despite the fact that it is a simple way of calculating price, it is an inferior method of setting prices.This approach is much used by companies producing a large range of products because it allows a complex situation to be subjected to disciplined control using standard accounting methods.
The first problem is that it assumes that costs are the thing which cause people to buy. A development of the cost-plus approach to setting prices is to use cost 'standards' based on management accounting systems.Finally the profit required is added in on a per unit basis.Then if the fixed costs are down then the selling prices go down as well as selling price.Using the standard cost system, full cost accounting, full cost pricing, or whatever name is used, in this method, fixed costs are treated on a percentage basis.
