PRICING DECISIONS AND COST MANAGEMENT
The three major influences on pricing decisions are
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.
Two examples of pricing decisions with a short-run focus:
Pricing for a one-time-only special order with no long-term implications.
Adjusting product mix and volume in a competitive market.
Activity-based costing helps managers in pricing decisions in two ways.
It gives managers more accurate product-cost information for making pricing decisions.
It helps managers to manage costs during value engineering by identifying the costimpact
of eliminating, reducing, or changing various activities.
Two alternative starting points for long-run pricing decisions are
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?”
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
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.
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.
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
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.