As opposed to the other alternative costing method called variable costing, every expense is allocated to products manufactured whether or not they are sold. Variable Costing Absorption costing entails allocating fixed overhead costs across all units produced for the period.
A business makes a profit when the price it charges customers for its goods or services exceeds the cost of producing those goods or services. Target costing and cost-plus pricing are two well-recognized methods of managing the relationship between cost and price, but they approach the equation from opposite directions.
Price Consumers often use the terms "cost" and "price" interchangeably, but to a business person, these are fundamentally different concepts.
Price is what your business charges its customers.
Cost is the expense your business incurs to provide the goods or services that customers are paying for. In short, cost is what the business owner pays, price is what the business owner receives, and the larger the difference between the two, the larger the profit.
Cost-Plus Pricing Cost-plus pricing is the simplest and most intuitive method of setting a price. A business adds up the total cost of producing an item, tacks on a markup for its profit, and the result is the selling price.
For example, assume your business makes shoes. Cost-Plus Pros and Cons The primary advantages of the cost-plus method are simplicity and predictability. A key disadvantage is that it sets a price without taking into consideration how that price will affect demand.
The price it sets could be either too low or too high.
A strict cost-plus policy may also discourage efficiency -- or even punish it. Since all costs get passed directly to the customer, there may be no incentive to save money in the production process. At the same time, a business that finds ways to operate more efficiently might wind up passing cost savings to customers in the form of a lower price rather than keeping them as profit, even when those customers are perfectly happy with the price they're paying.
Target Costing While the cost-plus method uses cost to determine price, target costing works the other way around. It uses price to determine cost. In target costing, a business starts by determining how much it wants to charge for a product.
It then subtracts its desired profit from that price to arrive at the maximum cost it can afford to pay to produce that product.
For example, assume again your business makes shoes, and you want to introduce a new line. Target Costing Pros and Cons Target costing recognizes that a business doesn't have total control over pricing; price is limited by what the market will pay. It also encourages -- requires, even -- businesses to operate efficiently.
On the other hand, target costing often requires a business to design its entire production process around meeting the cost. That's a challenge for a small business that doesn't have a dedicated development team.
Target costing can also lead to corner-cutting -- using cheap materials or skimping on workmanship in order to get the cost down to the proper level.Cost accounting is an accounting method that aims to capture a company's costs of production by assessing the input costs of each step of production as well as fixed costs.
Survey How Much Does it Cost to Open a Restaurant? People who want to get into the restaurant business are always asking, "How much does it cost to open a restaurant?".
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Philosophy vs. Techniques: The overall philosophy of Lean, i.e. Continuous Improvement and the Elimination of Waste, is best enforced through constant pressure to reduce inventory and ship on time.
Consider the techniques, listed below, as “tools” in your “Toolbox”. As you lower the inventory, problems will surface. The upside-down world of drug pricing operates with relative immunity to typical economic forces.
Jul 01, · For each of the under-noted transfer pricing methods, discuss the market conditions appropriate for their adoption and their limitations. (i) Market-based transfer prices. Inbound Logistics' glossary of transportation, logistics, supply chain, and international trade terms can help you navigate through confusion and get to the meaning behind industry jargon.