Page 257 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes 4. Break-even pricing;

5. Minimum pricing
13.3.1 Full Cost Pricing

Full Cost Pricing is a traditional method of pricing a product. It has following features:
1. Most commonly used method;
2. Prices are set by adding a percentage of profi t (either a mark up or a margin) to the total
cost of the product;
3. Consistent with the absorption costing technique;
4. Commonly used by wholesalers, retailers, construction contractors, services, government
contractors.

Full Cost Pricing is useful in situation where:

1. Products are made based on specification by the customers;

2. Main objective is to make profit after considering fixed costs of the business;

3. The costs are difficult to estimate in advance;

4. Expected demand at different price levels is difficult to estimate.
Example: Let’s look at Product A:
Production cost as follows:
Variable cost-material $1.50

Variable cost-labor $1.50
Total variable cost $3.00
Fixed cost $3.00
(excludes administrative and selling overheads)

Required 50% mark up on total production cost.
For Full-Cost Plus Pricing:company wants Product A to at least cover its total production
cost.
Full Cost Pricing has many advantages. A few of them are as under:

1. Easy and simple to understand;
2. Pricing decisions become standardized;
3. Adopts a conservative approach that in the long run to at least ensure the recovery of fi xed
cost of a business;
Total cost = $ 3.00 + $ 3.00 = $ 6.00
50% on total/full cost = 50% × $ 6.00 = $ 3.00
Hence, Selling price = $ 6.00 + $ 3.00 = $ 9.00 per unit.
By pricing at $ 9.00, the

4. Difficult of estimating demands can be avoided.

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