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Video of Cost Plus Pricing - Price setter. Cost Accounting and Managerial Accounting. CPA exam BAR. CMA Exam in Costs Accounting course by Farhat Lectures. The # 1 CPA & Accounting Courses channel, video No. 35 free certified online
What is cost-plus pricing and when does a company use it? In this cost accounting lesson for CPA BAR and CMA candidates, Professor Farhat explains cost-plus pricing for a price setter — how a firm with a unique product sets its price by adding a desired markup or return on assets to its full unit cost — and contrasts it with target costing for a price taker. Includes a worked example. Great for cost and managerial accounting students.
Try it free at farhatlectures.com — interactive exercises, lectures, simulations, cases, multiple choice, and AI tools for CPA, CMA, EA and students.
Video Timeline & Key Concepts:
0:00 — Introduction
0:23 — Price setter vs price taker
1:26 — How cost-plus pricing differs from target costing
1:46 — The strategy: full cost plus a desired markup
2:04 — Worked example: pricing tablets with a target return on assets
Frequently Asked Questions:
What is cost-plus pricing?
Cost-plus pricing sets a product’s price by taking its full cost and adding a desired markup or profit margin. It is used when a company can set its own price rather than accept a price dictated by the market.
What is the difference between a price setter and a price taker?
A price setter offers a unique product with little competition and can influence its own price, while a price taker sells in a competitive market where the price is largely dictated by market forces. Cost-plus pricing applies to price setters.
How does cost-plus pricing differ from target costing?
In cost-plus pricing, the company starts with its cost and adds a markup to set the price. In target costing, the market sets the price first, and the company works backward to design a product that can be produced at a cost allowing an acceptable profit.
How do you calculate a cost-plus price?
You determine the full cost of the product, add the desired profit — often based on a target return on assets — and divide by the number of units. The result is a price that covers all costs and provides the intended return.
What are the limitations of cost-plus pricing?
Cost-plus pricing may ignore what customers are willing to pay and how competitors are priced, so a price setter must still keep prices reasonable. It also depends on accurate cost estimates and an appropriate markup.
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