Cost Plus Mark Up Pricing Accounting Essay

The demand of study to understand the jobs faced by Manac plc for accomplishing the aim of estimated net income. This is a serious state of affairs where direction of Manac plc should understand and analyse the cardinal strategic direction accounting theoretical accounts and constructs ; which may impact to determinations made with respect to merchandises ‘ cost and monetary value, in which the important issue is monetary value ; it must be ashore by the features of the market and clients ; you choose to function. Manac plc. Presently uses traditional direction accounting constructs such as standard costing and soaking up bing methods as a portion of its attack to strategic direction accounting. The grounds for the company non to accomplish mark budgeted net income may be that merchandises have non been priced accurately every bit good as the discrepancies with respect to gross revenues, stuff cost, labour cost, other variable cost and fixed over caput cost have been occurred. The intent of this study is to how the manac plc will increase the net income but it is rather hard. In this facet, the intent of this study is to specify and explicate all the construct of manac plc company which is the most of import portion for company concern and besides cost and monetary value of the merchandise ‘s. Harmonizing to this paper there should take attention of all variable and construct which is really of import. the manac plc study covering parts in this analysis.

An analysis of theoretical accounts and constructs impacting the pricing determination taken by the company.

We will write a custom essay sample on
Cost Plus Mark Up Pricing Accounting Essay
or any similar topic only for you
Order now

The function of standard costing and discrepancy analysis in direction accounting.

The advantages and disadvantages of presenting an Activity Based Costing system to replace the current Absorption Costing system


The scene of a monetary value for a merchandise is one of the most of import determinations. A alteration in monetary value non merely straight affects gross

but has major effects on other determinations. If monetary value is lowered, for illustration,

so gross revenues is most likely to increase. Therefore, extra production is needed with

all its attender demands refering stuff, labour and overhead. Any pupil

who has completed a class in rules of economic sciences understands that the theory

of monetary value is at the centre of economic idea.

In direction accounting, the analysis of monetary value is non as about complex or

mathematically sophisticated as in economic theory. The premises in direction

accounting are much simpler and more practical oriented.

The focal point of this chapter will be on the followers:

1. Review of some basic economic basicss

2. Pricing utilizing cost-volume-profit analysis

3. The particular offer determination

Manac plc ‘ chief aim is to gain net incomes. To remain in the concern a company ‘s direction wants to increase profitableness, therefore it is of import to find how their determinations will impact net incomes. Net incomes depend on several factors, including selling monetary values, volume, and costs

The two basic constituents that affect merchandise pricing are costs of industry and competition in selling. Pricing determinations must take into consideration assorted factors such as the production cost, selling or selling cost, and administrative cost. In add-on, companies must besides take into history the merchandising monetary value other rivals are offering for the same merchandise

Pricing determination

Pricing determination is decisive and complicated if the monetary values of our goods are set excessively high, clients will non purchase our merchandise and will take the merchandises of other companies alternatively. But if the monetary values are set excessively low, our cost will non be covered and therefore we will be losing money. The job the company has now may be attributed to pricing determination, so foremost I will present two determination devising theoretical accounts along with a broad scope of constructs refering pricing determinations.

When doing pricing determinations, many factors have to be taken into consideration. Basic economic constructs provide an of import foundation for cardinal pricing schemes.

When doing pricing determinations, many factors have to be taken into consideration. Basic economic constructs provide an of import foundation for cardinal pricing schemes. Then some certain psychological monetary value constructs should be taken into consideration. At last, the determination shaper should understand the mechanics of doing pricing computations.

Pricing Decision Analysis

Problem lies on the divergence between mark net incomes and selling monetary value, it varies as the addition of gross revenues and lessening of gross revenues volume. Therefore, transporting out right pricing determinations are of critical importance. For Manac operates merchandise fabrication and gross revenues, it is as a character of a monetary value compositor. Common factors such as cost information, merchandise measure, and period of selling merchandise.

Pricing Policies

The manac plc Managers should get down puting monetary values during the development phase as portion of strategic pricing to avoid launching merchandises or services that can non prolong profitable monetary values in the market. This attack to pricing enables companies to either tantrum costs to monetary values or bit merchandises or services that can non be generated cost-effectively. Through systematic pricing policies and schemes, the manac plc can harvest greater net incomes and addition or support their market portions. pricing policy will mention how a the manac plc sets the monetary values of its merchandises and services based on costs, value, demand, and competition. Pricing scheme, and every bit good, refers to utilizations pricing to accomplish its strategic ends, such as offering lower monetary values to increase gross revenues volume or higher monetary values to diminish backlog.

The undermentioned subdivisions explain assorted ways manac plc develop pricing policy and scheme.

Cost Based Pricing

The traditional pricing policy can be summarized by the expression:

Cost + Fixed net income per centum = Selling monetary value.

Cost-based pricing involves the finding of all fixed and variable costs associated with a merchandise or service. After the entire costs attributable to the merchandise or service have been determined, directors add a coveted net income border to each unit. The end of the cost-oriented attack is to cover all costs incurred in bring forthing or presenting merchandises or services and to accomplish a targeted degree of net income for manac plc.

Value Based Pricing

This attack calls for manac plc directors to question clients and research the market to find how much they value a merchandise or service. In add-on, directors must compare their merchandises or services with those of their rivals to place their value advantages and disadvantages.

Yet, value-based pricing is non merely making client satisfaction or doing gross revenues because client satisfaction. This attack to pricing besides depends to a great extent on strong advertisement for manac plc. particularly for new merchandises or services, in order to pass on the value of merchandises or services to clients and to actuate clients to pay more if necessary for the value provided by these merchandises or services.

Demand Based Pricing

Manac plc Managers will follow demand-based pricing policies are, like value monetary value ‘s, non to the full concerned with costs. Alternatively, they concentrate on the behaviour and features of clients and the quality and features of their merchandises or services. Demand-oriented pricing focal points on the degree of demand for a merchandise or service, non on the cost of stuffs, labour.

Harmonizing to this pricing policy, the manac plc directors try to find the sum of merchandises or services they can sell at different monetary values. The monetary values are determined by sing the cost estimations at different gross revenues degrees and expected grosss from gross revenues volumes associated with projected monetary values.

The success of this scheme depends on the dependability of demand estimations. Two common options directors have for obtaining accurate estimations are enlisting the aid from either gross revenues representatives or market experts. Directors often ask gross revenues representatives to gauge additions or lessenings in demand stemming from specific additions or lessenings in a merchandise or service ‘s monetary value, since gross revenues representatives by and large are attuned to market tendencies and client demands.

Competition Based Pricing

With a competition-based pricing policy, a company sets its monetary values by finding what other companies viing in the market charge. A company begins developing competition-based monetary values by placing its present rivals. Next, a company assesses its ain merchandise or service. After this measure, a company sets it monetary values higher than, lower than, or on par with the rivals based on the advantages and disadvantages of a company ‘s merchandise or service every bit good as on the expected response by rivals to the set monetary value.

Cost plus mark-up pricing

Cost-plus pricing is a pricing method used by companies to maximise their rate of returns.

The house carry through their aim of net income maximization by increasing their production until fringy gross peers fringy cost, and so bear downing a monetary value which is determined by the demand curve. However, in pattern, most houses use cost-plus pricing, besides known as markup pricing. There are several assortments, but the common yarn is that one first calculates the cost of the merchandise, so adds a proportion of it as markup. Basically, this attack sets monetary values that cover the cost of production and supply adequate net income border to the house to gain its mark rate of return. It is a manner for companies to cipher how much net income they will do. Cost-plus pricing is frequently used on authorities contracts ( cost-plus contracts ) , and has been criticized as advancing uneconomical outgos in the signifier of direct costs, indirect costs, and fixed costs whether related to the production and sale of the merchandise or service or non. These costs are converted to per unit costs for the merchandise and so a preset per centum of these costs is added to supply a net income border.

Cost-plus pricing is used chiefly because it is easy to cipher and requires small information. Information on demand and costs is non easy available, directors have limited cognition every bit far as demand and costs are concerned. This extra information is necessary to bring forth accurate estimations of fringy costs and grosss. However, the procedure of obtaining this extra information is expensive. Therefore, cost-plus pricing is frequently considered the most rational attack in maximising net incomes. This attack relies on arbitrary costs and arbitrary markups.

This method is one of the major methods used in pricing. Mark up on cost screens all non merchandise costs such as, labour, public-service corporations, supplies, involvement disbursal etc.


Cost-volume-profit ( CVP ) , It is a simplified theoretical account, utile for simple direction and for short-term determinations.

CVP analysis expands the usage of information provided by breakeven analysis. A critical portion of CVP analysis is the point where entire grosss equal sum costs ( both fixed and variable costs ) . At this break-even point, a company will see no income or loss. This break-even point can be an initial scrutiny that precedes more elaborate CVP analysis.

CVP analysis employs the same basic premises as in breakeven analysis. The premises underlying CVP analysis are:

The behaviour of both costs and grosss is additive throughout the relevant scope of activity. ( This premise precludes the construct of volume price reductions on either purchased stuffs or gross revenues. )

Costss can be classified accurately as either fixed or variable.

Changes in activity are the lone factors that affect costs.

All units produced are sold ( there is no stoping finished goods stock list ) .

When a company sells more than one type of merchandise, the gross revenues mix ( the ratio of each merchandise to entire gross revenues ) will stay changeless. In the we found that:

Monetary value additions are non normally a pleasant event for the company that makes them – no 1 wants to state their clients that they are traveling to hold to pay more money for their merchandises. Manac plc. Merely increase its merchandise monetary value when its merchandises are underpriced from the rival ‘s monetary value, but state of affairs is apposite.

Merely typical border can be achieved by take downing its disbursals and cost of production, addition in efficiency and chiefly to follow a comprehensive cost system.

The 2nd manner is to acquire new work. By adding new merchandise line of production and can put mark rate of return pricing and by prolonging running merchandises by Cost-plus pricing theoretical account.

Mention ;

[ Baker, Michael John ( 2001 ) . Selling: Critical Positions on Business and Management. Taylor & A ; Francis. Pp. 237. ISBN 0-415-24988-0 ]

Part 2nd

Harmonizing to the criterion cost the manac plc should be believe to bring forth goods and services Under some regulations and conditions the intent of this system to comparing between the criterion Cost and existent cost which will be the primary benefit, farther more ;

Standard cost

The planned unit cost of the merchandise, constituent or service produced in a period. The standard cost may be determined on a figure of bases. The chief usage of standard costs is in public presentation measuring, control, stock rating and in the constitution of selling monetary values. Standard costs are normally associated with a fabricating company ‘s costs of direct stuff, direct labour, and fabricating operating expense.

This is by and large best suited to administrations with insistent activities. It is likely most relevant to fabricating administrations with insistent production procedures. Standard bing can non be applied easy to non-repetitive activities because there is no clear footing for detecting and entering operations. It is hard to find a clear criterion.

Mention ;

[ 598 A Textbook of Financial C~st and Management Accounting ]

Advantages of standard cost

The followers are the of import advantages of standard costing:

It guides the direction to measure the production public presentation.

It helps the direction in repairing criterions.

Standard costing is utile in explicating production planning and monetary value policies.

It guides as a measurement rod for finding of discrepancies.

It facilitates extinguishing inefficiencies by taking disciplinary steps.

It acts as an effectual tool of cost control.

It helps the direction in taking of import determinations.

It facilitates the rule of “ Management by Exception. ”

Effective cost coverage system is possible.

Restrictions of Standard Costing

Besides all the benefits derived from this system, it has a figure of restrictions which are given below:

Standard costing is expensive and a little concern may non run into the cost.

Due to miss of proficient facets, it is hard to set up criterions.

Standard costing can non be applied in the instance of a- concern where non- standardised merchandises are produced.

Repairing of duty is ‘difficult. Duty can non be fixed in the instance of unmanageable discrepancies.

Frequent alteration is required while deficient staff is incapable of runing this system.

Adverse psychological effects and frequent technological alterations will non be suited for standard costing system.

Discrepancy analysis

Discrepancy analysis is the procedure of calculating the differences between standard costs and existent costs and placing the causes of those differences. In other words The rating of public presentation by agencies of discrepancies, whose timely coverage should maximise the chance for managerial action.

Manac plc should besides analysis of standard cost between the original cost because that is the of import portion of the company to cut down the disbursal or losingss and derive the net income. An analysis of the difference between a standard cost and existent cost is called discrepancy analysis there are some constituents.

Standard Costing ushers as a measurement rod to the direction for finding of “ Discrepancies ” in order to measure the production public presentation. The term “ Discrepancies ” may be defined as the difference between Standard Cost and existent cost for each component of cost incurred during a peculiar period. The term “ Variance Analysis ” may be defined as the procedure of analysing discrepancy by subdividing the entire discrepancy in such a manner that direction can delegate duty for off-Standard Performance. The discrepancy may be favourable discrepancy or unfavourable discrepancy. When the existent public presentation is better than the Standard, it presents “ Favorable Discrepancy. ” Similarly, where existent public presentation is below the criterion it is called as “ Unfavorable Discrepancy. ”

Discrepancy analysis helps to repair the duty so that direction can determine –

( a ) The sum of the discrepancy

( B ) The grounds for the difference between the existent public presentation and budgeted public presentation

( degree Celsius ) The individual responsible for hapless public presentation

( vitamin D ) Remedial actions to be taken

Direct stuff

For this demand material monetary value and stuffs measure discrepancy.

Direct labour

For this need labour rate ( monetary value ) and labour efficiency ( measure ) discrepancy.

Operating expense

For this demand over caput volume discrepancy and governable overhead discrepancy.

Value and Limitations ofA Standard CostingA andA Variance Analysis

Seasonably, frequent studies that are about right are better than infrequent studies that are really precise but out of day of the month by the clip they are released.

If discrepancies are used as a nine, subsidiaries may be tempted to cover up unfavourable discrepancies or take actions that are non in the best involvement of the company to do certain the discrepancy are favourable.

For the development of the company in good manners the labour measure I the most of import portion and besides the efficiency discrepancy which is the portion of production procedure is labour placed and the other is computation assume that labour is a variable cost.

In some instances a favourable discrepancy can be as bad or worse than an unfavourable discrepancy.

There may be a inclination with standard cost coverage system to stress run intoing the criterions to the exclusion of other of import aims such as maintain and bettering quality on clip bringing and client satisfaction.

To last in the current competitory environment, for this ground the manac plc should concentrate on the tendencies in the criterion cost discrepancies taking for continual betterment instead than merely run intoing the criterions.

Part 3rd

Activity-based costing

Activity-based costing ( ABC ) is a bing methodological analysis that identifies activities in an organisation and delegate the cost of each activity with resources to all merchandises and services harmonizing to the existent ingestion by each. This theoretical account assigns more indirect costs ( overhead ) into direct costs compared to conventional costing theoretical accounts.

Although ( ABC ) has some restrictions, Applicability of ABC is bound to be of required informations gaining control. That drives the prevalence to decelerate procedures in services and disposals, where staff clip consumed per undertaking defines a dominant part of cost. Hence the reported application for production undertakings do non look as a favorized scenario.

Advantages And Disadvantages

In the field of accounting, activity-based costing and traditional costing are two different methods for apportioning indirect ( overhead ) costs to merchandises.

Both methods estimate overhead costs related to production and so delegate these costs to merchandises based on a cost-driver rate. The differences are in the truth and complexness of the two methods. Traditional costing is more simplistic and less accurate than ABC, and typically assigns operating expense costs to merchandises based on an arbitrary norm rate. ABC is more complex and more accurate than traditional costing. This method foremost assigns indirect costs to activities and so assigns the costs to merchandises based on the merchandises ‘ use of the activities.

Activity based bing systems are more accurate than traditional bing systems because they provide a more precise dislocation of indirect costs. However, ABC systems are more complex and more dearly-won to implement. The spring from traditional bing to activity based costing is hard.

Traditional costing systems are simpler and easier to implement than ABC systems. However, traditional costing systems are non every bit accurate as ABC systems. Traditional bing systems can besides ensue in important under-costing and over-costing.

Mention ;

[ Kaplan, Robert S. and Bruns, W. Accounting and Management: A Field Study Perspective ( Harvard Business School Press, 1987 ) ISBN 0-87584-186-4 ]


At the same clip as activity based costing is non a perfect scientific discipline it does offer a sense of fiscal pragmatism to the wider direction procedure. The initial premiss that activity analysis can foreground waste ( non-value adding ) and bureaucratism ( secondary or support activities ) , activity based techniques have been used for straightforward cost decrease, procedure betterment and re-engineering, benchmarking, public presentation measuring and a assortment of related exercisings including activity or precedence based budgeting.

The three coevalss of activity based bing addendum and complement each other and one system should non be considered the replacing of either of the other two. The first coevals focuses on merchandise costing, the 2nd coevals on procedure costing or public presentation rating, and the 3rd coevals on value concatenation bing to be used in strategic analysis. All three use the same activities database ; differences lie in types of linkage and the extent to which informations on activities are to be gathered.

Activity based costing forces the director to look into fixed costs really closely. It therefore helps direction to place countries of inefficiency every bit good as recognize costs which we could hold been conceived fixed but, which are in fact, variable or semi-variable to specific merchandises.


Hi there, would you like to get such a paper? How about receiving a customized one? Check it out