Ch12 - CHAPTER 12 PRICING DECISIONS AND COST MANAGEMENT...

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Unformatted text preview: CHAPTER 12 PRICING DECISIONS AND COST MANAGEMENT 12-1 The three major influences on pricing decisions are 1. Customers 2. Competitors 3. Costs 12-2 Not necessarily. For a one-time-only special order, the relevant costs are only those costs that will change as a result of accepting the order. In this case, full product costs will rarely be relevant. It is more likely that full product costs will be relevant costs for long-run pricing decisions. 12-3 Two examples of pricing decisions with a short-run focus: 1. Pricing for a one-time-only special order with no long-term implications. 2. Adjusting product mix and volume in a competitive market. 12-4 Activity-based costing helps managers in pricing decisions in two ways. 1. It gives managers more accurate product-cost information for making pricing decisions. 2. It helps managers to manage costs during value engineering by identifying the costimpact of eliminating, reducing, or changing various activities. 12-5 Two alternative starting points for long-run pricing decisions are 1. Market-based pricing, an important form of which is target pricing. The market-based approach asks, Given what our customers want and how our competitors will react to what we do, what price should we charge? 2. Cost-based pricing which asks, What does it cost us to make this product and, hence, what price should we charge that will recoup our costs and achieve a target return on investment? 12-6 A target cost per unit is the estimated long-run cost per unit of a product (or service) that, when sold at the target price, enables the company to achieve the targeted operating income per unit. 12-7 Value engineering is a systematic evaluation of all aspects of the value-chain business functions, with the objective of reducing costs while satisfying customer needs. Value engineering via improvement in product and process designs is a principal technique that companies use to achieve target costs per unit. 12-8 A value-added cost is a cost that customers perceive as adding value, or utility, to a product or service. Examples are costs of materials, direct labor, tools, and machinery. A nonvalue-added cost is a cost that customers do not perceive as adding value, or utility, to a product or service. Examples of nonvalue-added costs are costs of rework, scrap, expediting, and breakdown maintenance. 12-9 Cost incurrence describes when a resource is consumed (or benefit forgone) to meet a specific objective. Locked-in costs, or designed in costs, are costs that have not yet been incurred but, based on decisions that have already been made, will be incurred in the future. 12-1 12-10 Cost-plus pricing is a pricing approach in which managers add a markup to cost in order to determine price....
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This note was uploaded on 07/21/2011 for the course ACCT 521 taught by Professor Paul during the Spring '11 term at Cleveland State.

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Ch12 - CHAPTER 12 PRICING DECISIONS AND COST MANAGEMENT...

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