COST ACCOUNTING

Pricing policy
Pricing Full Cost Pricing Contribution Approach Transfer Pricing ROI Pricing Objectives of Pricing policies

Pricing policy
Pricing Assignment of a selling price to product or service provided by the firm. Pricing Decisions Total or full cost pricing ROI pricing Marginal or Contribution approach Transfer pricing

Total or full cost pricing

Involves the direct cost as well as indirect cost incurred by overall company which are allocated to products.

Total or full cost pricing

Direct material Direct Labour Factory O/H Fixed Variable Total manufacturing cost Non- Manuf O/H Fixed Variable Total Cost Add: Profit margin(25% on total cost) Selling Price 100 50 75 25

100 250

50 0

50 300

Advantage
Simple to operate Standardized and can be easily delegated Reasonable rate of return Helps to predict the price of competitive firms Important to industries considering fixed costs Stable pricing policy

Disadvantage
Ignores demand and competition Arbitrary distribution of fixed cost Volume or capacity base is important Inadequate to shield the firm from loss absorption costing system

Marginal or Contribution approach

Variable costs are the basis for the pricing. Fixed cost is not added to the product service or contract Fixed cost is considered to determine the profit margin then added to variable cost to arrive at selling price

Positive aspects
Helps to entry in to new businesses Improves the competitive position Battles the trade depressions Utilizes the spare available capacity Dispose off surplus and obsolete stock.

Negative aspects
Doubtful recovery of the fixed cost Increase in marginal cost pricing will dissatisfy the customers

Transfer Pricing
A transfer price is that notional value a which goods and services are transferred between divisions in a decentralized organization.

Precautions to be taken in T.Pricing.

T.Price should help to measure the accurate measurement of profitability. T.Price should motivate the divisional managers and it should be in the interest of the organization. Divisional authority and autonomy is preserved Objectives of divisional manager should be compatible to objectives of the company.

Methods of transfer pricing

Cost based prices (Variable cost, Actual cost, full cost plus profit,
Standard full cost, opportunity cost )

Market based prices ( Open market, market price-cost savings on

inter group sale, variable cost + proportion of contribution earned on final sale.

Negotiated Prices: (negotiation between divisional managers with

the assistance of top management)