Managers must pinpoint costs first before adding

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Unformatted text preview: 600 600 $880 Another example, iis an Italian Printing Co. in Milan that wants to price its s job so that each one generates a margin of 28% of revenues (prices): 28% (14% to cover selling and administrative expenses and 14% for profit. 14% To achieve this margin, the manager uses a pricing formula of 140% 140% times predicted material cost plus $25/hour of production time. The $25/hour later ($25) covers labor and overhead costs of $18/hour. For product $18/hour For with $400 of materials cost and 30 hour of production time, the price 30 would be: would Cost Price Profit Cost Price Profit Material $400 $560 $160 Labor & overhead 540 750 210 Labor 540 750 210 Total $940 $1,310 $370 Total Note that the profit of $370 is approximately 40% (370/940) of the total cost ($940) and 28% of the price (370/1310). Managers must pinpoint costs first, before adding markups than to have a variety of markups already embodied in the “costs’ used as guides for setting selling prices. For example, if materials cost is $1,000 they should be shown on a price quotation guide at $1,000, not at, say, a marked-up $1,400 because that is what the seller hopes to get. Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Target Costing Management must determine both the price it can charge and the expected cost. Both market conditions and actions of management can affect the price and the cost of new product. What management needs is an effective tool to reduce costs without reducing value to the customer. This can be accomplished by target costing. Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Target Costing: is a cost management tool for making cost reduction a key focus throughout the life of a product. Target costing sets a cost before the product is created or even designed. Three ways management may use to reach target costing: Value engineering is a cost­reduction technique, used primarily ring design, that uses information about all value chain functions satisfy customer needs while reducing costs. 2. Kaizen costing is the Japanese word for continuous improvement during manufacturing. Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Successful companies understand the market in which they operate and use the most appropriate p...
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This document was uploaded on 03/02/2014 for the course ACCOUNTING 221 at Alaska Pacific University.

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