cost12ism_12 - 12-1 CHAPTER 12 PRICING DECISIONS AND COST...

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12-1 CHAPTER 12 PRICING DECISIONS AND COST MANAGEMENT12-1 The three major influences on pricing decisions are 1. Customers 2. Competitors 3. Costs 12-2Not 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. 12-3Two 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 cost impact 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?12-6A 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.12-9No. It is important to distinguish between when costs are locked in and when costs are incurred, because it is difficult to alter or reduce costs that have already been locked in.
12-2 12-10 Cost-plus pricing is a pricing approach in which managers add a markup to cost in order to determine price. 12-11 Cost-plus pricing methods vary depending on the bases used to calculate prices. Examples are (a) variable manufacturing costs; (b) manufacturing function costs; (c) variable product costs; and (d) full product costs.12-12 Two examples where the difference in the costs of two products or services is much smaller than the differences in their prices follow: 1.

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