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Managerial Accounting - compares and contrasts

1. Compare and contrast a cost-plus pricing strategy to a target pricing strategy.

2. Discuss the effects of cost behavior on selection of appropriate cost drivers.

3. What is the basic premise behind activity-based costing systems? What is an activity? Describe how ABC systems work.

4. Describe the budgeting process.

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Managerial Accounting

1. Compare and contrast a cost-plus pricing strategy to a target pricing strategy.
The cost-based pricing approach to pricing involves an analysis of a firm's cost to produce a product, and the addition of a reasonable profit to determine the selling price.
Seller cost will depend on many factors including production methods and product sales volume.
The seller's definition of a reasonable profit will also depend on many factors, including:
Competition;
Objectives of the firm;
Necessary investment; and
Risk involved.
Cost-based Pricing Strategies. How is profit calculated and applied? There are three basic strategies:
Mark-up pricing;
Margin pricing; and
Rate-of-return Pricing.

One way of setting price for a product or service is by using the 'full cost plus pricing', which "seeks to set a price that takes into account all relevant costs of production" (Tutor2U Limited, 2005). The main formula for this would be:
Total budgeted factory cost + selling/distribution costs + other overheads
+ MARK UP ON COST
Budgeted sales volumes

II
Target pricing
In a competitive market, the seller must consider the four "P"s of marketing: price, product, place, and promotion. Firms must develop pricing strategies to accomplish overall marketing objectives based on their assessment of market conditions (e.g., forecasts of supply and demand) and the economic condition of the business entity.
Here the pricing is based on certain price points to earn a specified profit level.
Thus in this there is an Estimation of the cost and potential revenue at different prices, and thus the break-even have to be made, to determine the mark-up
Mark-up = Profit/Cost x 100

www.bized.co.uk/educators/16-19/business/marketing/presentation/pricingstrat.ppt -
Comparision
Thus target pricing is based on achieving a desired level of profit and the cost pricing strategy is more focused on covering the cost. ...

Solution Summary

The solution compares and contrasts cost plus pricing strategies to a target pricing strategy. The effects of cost behavior on selection of appropriate cost drivings is discussed.

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